T.C. Memo. 2000-157
UNITED STATES TAX COURT
JAMES H. JAPHET, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
JAMES H. JAPHET ENTERPRISES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 6509-98, 6510-98. Filed May 15, 2000.
A. Chris Heinrichs, for petitioners.
Gerald L. Brantley, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined deficiencies in
petitioners’ income tax as follows:1
1
These cases were consolidated for trial, briefing, and
opinion.
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James H. Japhet
Year Deficiency
1993 $13,636
James H. Japhet Enterprises, Inc.
FYE Oct. 31 Deficiency
1993 $13,429
The sole issue for decision is whether the fair market value
of an apartment building petitioner James H. Japhet Enterprises,
Inc., sold to its sole shareholder, petitioner James H. Japhet,
on August 10, 1993, was $106,000, as petitioners contend;
$139,900, as respondent contends; or some other amount. We hold
that it was $106,000. As a result of our holding, we conclude
that petitioner James H. Japhet did not receive a constructive
dividend in 1993 on the sale of the apartment building, and that
petitioner James H. Japhet Enterprises, Inc., recognized no gain
in fiscal year 1993 on that sale.
References to petitioner are to James H. Japhet. References
to petitioner corporation are to James H. Japhet Enterprises,
Inc. Section references are to the Internal Revenue Code in
effect during the year in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioner and Petitioner Corporation
Petitioner resided in San Antonio, Texas, when he filed his
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petition in these cases. Petitioner corporation had its
principal place of business in San Antonio, Texas, during the
year in issue and when it filed the petition. Petitioner is (and
was in the year in issue) the president of petitioner
corporation.
Petitioner incorporated petitioner corporation in Texas on
November 1, 1977. Petitioner corporation uses the accrual method
of accounting. Petitioner corporation has primarily been
involved in the construction and sale of residential real estate
since it was formed.
B. Petitioner Corporation’s Sale of the Apartment Building to
Petitioner
On August 10, 1993, petitioner corporation sold petitioner a
four-unit apartment building (the apartment building) located at
7519 Windsor Oaks, San Antonio, Texas, for $105,465. Petitioner
corporation’s adjusted tax basis in the building was $105,465 on
the date of sale. The sale price of the apartment building
equaled its value on petitioner corporation’s books, computed as
follows:
Building costs $126,668
Land costs + 8,224
Less depreciation (29,427)
Net book value 105,465
Petitioner corporation built the apartment building in 1985.
It has two apartments with three bedrooms and two baths, and two
apartments with two bedrooms and one bath. Its exterior walls
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are about 19-percent brick.
OPINION
A. The Fair Market Value of the Apartment Building
We must decide the fair market value of the apartment
building transferred by petitioner corporation to petitioner on
August 10, 1993. Fair market value is the price at which the
property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to sell and
both having reasonable knowledge of the relevant facts. See
United States v. Cartwright, 411 U.S. 546, 551 (1973); Propstra
v. United States, 680 F.2d 1248, 1251 (9th Cir. 1982); sec.
20.2031-1(b), Estate Tax Regs.; sec. 25.2512-1, Gift Tax Regs.
Respondent contends that the fair market value of the apartment
building was $139,900 on August 10, 1993. Petitioners contend
that the fair market value was $106,000.
B. Expert Witnesses
Both parties relied on expert witnesses. We may accept or
reject expert testimony according to our own judgment, and we may
be selective in deciding what parts of an expert’s opinion, if
any, we accept. See Helvering v. National Grocery Co., 304 U.S.
282, 295 (1938); Parker v. Commissioner, 86 T.C. 547, 562 (1986).
Martyn C. Glen (Glen) and Jack L. Wolff (Wolff) testified for
petitioners. Edwin A. Kurek (Kurek) testified for respondent.
The experts agreed that the comparable sales method was the best
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method for estimating the value of the apartment building. Glen
and Kurek each used 7600 Windsor Oaks and 7592 Windsor Oaks as
comparable properties. Glen also used 7518 Windsor Oaks as a
comparable property. The sales dates and sales prices of the
three comparable properties, and the sales date of the apartment
building at issue, were as follows:
Property Sales date and price
Comparable sales
7600 Windsor Oaks May 1993–-$140,670
7592 Windsor Oaks May 1993–-$139,660
7518 Windsor Oaks Feb. 1993-–$63,000
Apartment building at issue
7519 Windsor Oaks Aug. 10, 1993–-$105,465
The opinions of petitioners’ and respondent’s experts and
the positions of the parties as to the value of the apartment
building at issue on August 10, 1993, are as follows:
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Comparable Income Cost method Estimated
sales method method value
1
Petitioners’ -- -- -- $106,000
returns,
petitions,
and brief
Deficiency
notices and -- -- -- 139,900
answers
Petitioners’ $106,000 $104,390 $106,403 106,000
expert Glen
Respondent’s 139,900 138,700 147,000 139,900
expert Kurek
1
Petitioners reported on their returns and asserted in the
petitions that the fair market value of the apartment building
was $105,465. On brief, they contend that its value was
$106,000.
C. Petitioners’ Experts
1. Wolff
Wolff appraised the apartment building in August 1991 for
NCNB Bank for refinancing purposes. He estimated that its fair
market value was $85,000. He used 7527 Windsor Oaks as a
comparable property. 7527 Windsor Oaks had the same size and
number of rental units as the apartment building and was sold in
January 1991 for $79,000. Wolff testified that the value of the
apartment building could reasonably have increased to $106,000 in
1993.
2. Glen
Glen inspected the apartment building in May 1997. He
estimated that its fair market value was $106,000 as of August
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10, 1993.
Glen estimated that 7600 Windsor Oaks and 7592 Windsor Oaks
were worth more than the apartment building because, for example,
the buildings at 7600 Windsor Oaks and 7592 Windsor Oaks both had
exterior lighting and a separate, offstreet parking lot with
designated parking spaces, and each had a two-door communal
entry, which offers more security for tenants. In contrast, the
apartment building did not have exterior lighting, had one door
to each of its four units, had nose-in parking off the street,
and had a significantly smaller parking area than did the parking
lots of 7600 Windsor Oaks and 7592 Windsor Oaks. Glen also said
that 7600 Windsor Oaks and 7592 Windsor Oaks were worth more
because they had larger living areas, two of their four rental
units were larger than the rental units in the apartment
building, they were 2 years newer than the apartment building,
and they had assumable financing.
Glen testified that the average increase in residential
property values in San Antonio from 1991 to 1993 was 21 percent.
Based on Wolff’s estimate that the apartment building was worth
$85,000 in 1991, and Glen’s estimate that it was worth $106,000
in 1993, the value of the apartment building increased by 24.7
percent. This is consistent with Glen’s valuation of the
apartment building.
Glen estimated that 7518 Windsor Oaks was worth less than
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the apartment building because 7518 Windsor Oaks had 2,768 square
feet and the apartment building had 4,409 square feet, a
difference of 37 percent.
D. Respondent’s Expert--Kurek
Kurek estimated that the fair market value of the apartment
building was $139,900 as of August 10, 1993. He inspected the
property in May 1996 and March 1999.
Kurek testified that 7592 Windsor Oaks and 7600 Windsor Oaks
were so similar to the apartment building that no adjustments to
their prices were needed. He testified that the greater
aesthetic appeal of the apartment building, as compared to the
boxlike appearance of 7600 Windsor Oaks and 7592 Windsor Oaks,
offsets the amount of any adjustment for the smaller amount of
exterior brick and the smaller area for parking. Kurek also said
that 7518 Windsor Oaks was not comparable to the apartment
building because it was only about half the size of the apartment
building.
E. Analysis
We find that Glen’s and Wolff’s analysis is more reasonable
than Kurek’s. Glen estimated that the apartment building at
issue was worth substantially more than 7518 Windsor Oaks, which
sold for $63,000, because the apartment building at issue was
larger. He estimated that it was worth substantially less than
7600 Windsor Oaks and 7592 Windsor Oaks because the apartment
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building was inferior to those buildings in several ways. We
believe Glen reasonably adjusted for the differences between the
comparable properties and the apartment building. We disagree
with Kurek’s estimate because he did not adequately consider
those differences, and because he did not use 7518 Windsor Oaks
as a comparable. Wolff’s report is helpful because he estimated
in 1991 that the apartment building was worth $85,000, and he
testified that it could reasonably have increased in value to
$106,000 in 1993.
Respondent contends that Glen’s use of 7518 Windsor Oaks as
a comparable property caused him to undervalue the apartment
building. We disagree that the properties are not comparable.
The apartment building and 7518 Windsor Oaks were both built in
1985 and are of identical construction. 7518 Windsor Oaks, 7600
Windsor Oaks, 7592 Windsor Oaks, and the apartment building each
have four residential apartments. 7518 Windsor Oaks is much
smaller, but Glen considerated that difference in estimating the
value of the apartment building. Properties need not be the same
size to be used as comparables.2
Glen subtracted 10 percent from his estimate of the value of
the apartment building compared to 7600 Windsor Oaks and 7592
2
Wolff testified that properties may not be comparable if
they vary greatly in size, but he did not state an opinion on
whether 7518 Windsor Oaks and the apartment building were
comparable.
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Windsor Oaks to take into account the fact that those buildings
had assumable financing. Respondent contends that Glen
undervalued the apartment building because Glen did not compute
whether an assumption would be more advantageous than a
conventional mortgage, and because Glen did not know the interest
rates on the assumable notes on the 7600 Windsor Oaks and 7592
Windsor Oaks properties. We disagree. Glen explained that an
assumable mortgage increases the value of a building since a
buyer need not qualify for a mortgage, incur substantial closing
costs, or provide as large a downpayment as the buyer would if
the property had a conventional mortgage. There is nothing
persuasive in the record to the contrary. Thus, we accept Glen’s
analysis on this point.
Respondent contends that Glen’s appraisal was defective
because he did not estimate how much it would cost to conform the
apartment building to the comparable properties. We disagree.
The purpose of an appraisal is to estimate the value of a
property, not to determine the cost of conforming it to a
comparable property.
Based on the foregoing,
Decisions will be entered
for petitioners.