In RERI Holdings I, LLC v. Comm’r, RERI contributed a successor membership interest (SMI) in a single member LLC to a university and valued the contribution by appraising the value of a hypothetical remainder interest in the LLC’s sole asset, real property subject to a triple net lease. The Tax Court denied the IRS summary judgment on both of two issues: (1) whether the 7520 tables were applied correctly to the valuation of the SMI interest and (2) whether the appraisal of the SMI was “qualified” under section 170.
The IRS failed to show that the SMI did not meet the “preservation and protection” requirements in the 7520 regulations. The risk of the property being further encumbered or foreclosed due to a default on the current lease was not certain to risk the future possession and enjoyment of the SMI.
Not enough facts were provided to determine whether a two-year hold-sell restriction on the university was a “meaningful restriction” on the SMI that would disqualify use of the 7520 tables. Also unresolved was whether the application of the 7520 tables to the hypothetical remainder interest in the real property instead of to the SMI was an “unrealistic and unreasonable fair market value standard” of valuation given the disparity in values between RERI’s appraisal and the amount the SMI had been valued in other transactions.
The appraisal of the remainder interest in the property instead of the SMI does not automatically disqualify the appraisal from being “qualified.” Disqualification would only be justified if RERI’s appraisal omitted a restriction that could adversely impact the value of the SMI. While not including the hold-sale requirement or other aspects of the lease may affect the accuracy of the appraisal, it is still “qualified.” Further, while a qualified appraisal must include all significant terms of an agreement this does not include details of third party agreements like mortgages etc.
Posted by Ryan Moore, Associate Editor, Wealth Strategies Journal