The action involves RERI Holdings I, LLC (RERI). On its 2003 income tax return RERI reported a charitable contribution of property worth $33,019,000. Respondent determined that RERI overstated the value of the contribution by $29,119,000.”
Hawthorne bought California real estate for $42,350,000. Technically, that real estate is in an LLC named RS Hawthorne LLC (Hawthorne), which in turn is owned by RS Hawthorne Holdings LLC (Holdings).
Holdings in turn is owned by Red Sea Tech I (Red Sea).
Red Sea created two types of ownership:
First, ownership for a period of time (technically a “term of years,” abbreviated TOYS).
Second, a future and successor interest that would not even come into existence until 2021. Let’s call this a “successor” member interest, or SMI.
QUESTION: Why a delayed ownership interest? There was a great lease on the California real estate, and 2021 had significance under that lease.
RERI was formed.
RERI bought the SMI for $2,950,000.
RERI donated the SMI to the University of Michigan.
A key player here is Stephen Ross, a billionaire and the principal investor in RERI. He had pledged to donate $5 million to the University of Michigan.
Ross had RERI donate the SMI.
The University agreed to hold the SMI for two years, at least, before selling.
RERI hired a valuation expert who determined it was worth almost $33 million. This expert argued that the lease on the property – and its reliable series of payments – allowed him to use certain IRS actuarial tables in arriving at fair market value (the approximately $33 million).
REALITY CHECK: This thing sells twice for a total of approximately $5 million but generates tax deductions of approximately $63 million.
OBSERVATION: Right there, folks, is why the attorneys created this Frankenstein. They needed to “separate” the interests so they could get to the tables.