## Facts

- Several taxpayers were partners in Whitney Farms, a partnership formed to hold real estate investments.
- In 1968, certain partners acquired unimproved real property for $548,000, paying minimal cash and giving a large nonrecourse note secured by a deed of trust; the property was later contributed to the partnership subject to the debt.
- The property totaled 931.66 acres in Placer County, California, split into a west tract and an east tract; most of the land was zoned agricultural/residential, except a roughly 75-acre portion of the east tract zoned for industrial uses.
- On December 28, 1973, Whitney Farms donated the entire parcel to Pitzer College, a qualified charitable organization, and the charity took the property subject to the outstanding nonrecourse debt (about $544,584).
- Taxpayers obtained appraisals valuing the property at $1,420,000 and claimed charitable-contribution deductions equal to the appraised value minus the mortgage, allocated among partners by partnership interests.
- The IRS determined deficiencies, disputing the fair market value and asserting the transfer was a part sale/part gift under I.R.C. § 1011(b) because the charity took the property subject to the nonrecourse debt.

## Issues

1. Whether the Tax Court’s fair market valuation of the donated property was clearly erroneous in light of evidence concerning zoning and development potential.
2. For valuation, what information the hypothetical willing buyer and willing seller are presumed to know about facts affecting the property’s value.
3. Whether, and how, I.R.C. § 1011(b) applies to a charitable transfer of property encumbered by nonrecourse debt, including the proper computation of gain and the allowable charitable deduction.

## Decision

- The Ninth Circuit affirmed the Tax Court’s valuation determination in substantial part, holding it was largely supported by the record and not clearly erroneous, while requiring limited adjustments on aspects of development potential.
- The court held that, for fair market value, the hypothetical willing buyer and seller are presumed to have reasonable knowledge of relevant facts affecting value.
- The court held that transferring property to a charity subject to nonrecourse debt is treated, to the extent of the debt, as a sale under I.R.C. § 1011(b), with the excess value treated as a charitable gift.
- The Ninth Circuit affirmed in part and reversed in part the Tax Court’s gain computation and remanded for recomputation of tax liabilities consistent with its opinion.

## Legal Principles

- Fair market value is the price a willing buyer and willing seller would agree to, neither under compulsion, and both presumed to have reasonable knowledge of relevant facts affecting value.
- Tax Court valuation findings are factual determinations reviewed for clear error on appeal.
- Potential rezoning or development may affect value if reasonably probable and knowable as of the valuation date; valuation may reject assumptions of broad rezoning unsupported by the record.
- A charitable transfer of property subject to nonrecourse debt is treated as part sale (amount realized equal to the debt) and part gift (fair market value in excess of the debt) under I.R.C. § 1011(b), requiring basis allocation and gain computation for the sale component.

## Conclusion

The Ninth Circuit largely upheld the Tax Court’s valuation of donated land and reaffirmed that fair market value assumes a hypothetical buyer and seller with reasonable knowledge of relevant facts, while also holding that donating property subject to nonrecourse debt constitutes a bargain transaction—part sale up to the debt and part gift above it—requiring recalculation of gain and deductions under I.R.C. § 1011(b).


Ebben v. Comm’r, 783 F.2d 906 (9th Cir. 1986)