Court of Appeals reaffirms Stephen Ross, associates overstated property value

Friday, May 24, 2019 - 2:51pm

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Design by Kathryn Halverson

On Friday morning, the U.S. Court of Appeals upheld the judgement in a case involving alleged tax evasion by Stephen M. Ross, University of Michigan alum and benefactor for whom the Ross School of Business and Stephen M. Ross Academic Center are named. Ross and business partners are accused of overstating the value of property donated to the University in a charitable tax deduction by the Internal Revenue Service.

In the case, the billionaire and real estate developer, along with a group of business associates, donated property — a Southern California building which housed a data center — to the University to fulfill a gift. The University then resold the property for almost $2 million in cash to satisfy the gift requirement, and the $2 million eventually grew to $5 million.  

Though the property was appraised in 2017 for $3.4 million, Ross and his affiliates claimed a charitable tax deduction of $33 million, meaning they claimed the property was worth nearly $30 million more than its real value. The IRS uncovered this claim and has since imposed a 40% penalty for underpayment of tax — a penalty upheld by the Court of Appeals.

The University has contended its innocence in this situation. In 2017, University spokesman Rick Fitzgerald said the University was not found at fault, and he said Friday afternoon the University has no change in comment.

During the course of this case, which dates back more than a decade, neither the Internal Revenue Service nor the U.S. Tax Court found any fault with the university’s receipt or handling of this donation from Stephen Ross, Fitzgerald wrote. University officials were called as potential witnesses, but in June 2015 were released prior to testifying, as the parties determined that university officials had nothing to add to the case.

Fitzgerald affirmed the transaction of the property was reviewed by tax experts and legal counsel.

Ronald Katz, Ross’ former tax accountant, and Harold Levine, a lawyer who helped with the donation, were charged with felony obstruction and tax evasion respectively, though both cases are unrelated to Ross’ current legal situation.  

Ross and his partners, listed under RERI Holdings, faced their latest loss in the case Friday when the Court of Appeals upheld the prior judgement of the Tax Court.

In the court opinion filed by Senior Circuit Judge Douglas Ginsburg, he wrote corporate arrangements and transactions involved in the case are complicated. Ginsburg laid out the facts of the case in his 33-page opinion, and wrote, with these facts in mind, the decision of the Tax Court is affirmed.

“RERI Holdings, LLC (RERI) claimed a charitable contribution deduction of $33 million on its 2003 federal tax return,” Ginsburg wrote. “The Internal Revenue Service determined that RERI was not entitled to this deduction and imposed a 40% penalty for underpayment of tax. RERI unsuccessfully challenged both rulings before the Tax Court, and now appeals to this court on a variety of grounds. For the reasons set forth below, we affirm the judgment of the Tax Court.”

Court documents submitted by the IRS name Ross as RERI’s “largest partner.”

Ross said at the tax trial in June 2015 he did not look at the logistics of the deal as it is outside of his expertise in real estate development, the Detroit Free Press reported in 2017. Ross said tax advantages as part of deals were not abnormal in his line of business and he heavily relied on Katz’s knowledge.

“Once I agreed to do the deal, (Katz) showed me and described the transaction, he followed through and handled all the arrangements,” Ross said at the trial. “It was brought to my attention it would be a good time to give a gift based on the fact that there would be a sizable deduction and that it would be (to) the University of Michigan.”