Property Tax Case Reveals IRS Probe
Expert Appraiser for Town Discloses Internal Revenue Service Investigation of Herring Creek Farm Transaction
By IAN FEIN
BOSTON - The expert appraiser hired by West Tisbury assessors revealed during cross-examination this week that the federal Internal Revenue Service is investigating the 2001 Herring Creek Farm real estate transaction in Edgartown and an ensuing charitable tax deduction that was based largely on his appraisal of the property.
The Herring Creek Farm transaction was also the subject of an investigation by the U.S. Senate Finance Committee after a May 2003 series of articles published by The Washington Post raised serious questions about certain real estate transactions involving The Nature Conservancy.
The senate finance committee and Internal Revenue Service (IRS) investigations surfaced during testimony from the town's key witness in a complex hearing before the Massachusetts Appellate Tax Board, where West Tisbury resident William W. Graham is challenging his property tax assessments for fiscal years 2003 and 2004. Mr. Graham paid the town more than a half-million dollars in property taxes for those years.
The Graham case against West Tisbury assessors rests on an argument that the town's system of land valuations and property tax assessments is fundamentally flawed. Revelations about the IRS investigation and the senate finance committee probe were intended by Graham attorneys to undercut the credibility of the town's principal appraiser witness.
According to the June 2005 senate finance committee report, submitted as evidence by attorneys for Mr. Graham, the Herring Creek Farm appraisal conducted in 2001 by Kenneth J. Croft - the appraiser hired by West Tisbury assessors last year to value property owned by Mr. Graham - was substantially higher than an independent appraisal obtained by The Nature Conservancy. Neither appraisal had been previously made public.
"[The Nature Conservancy] obtained an independent, professional appraisal, dated as of July 17, 2001, indicating a total value of the land that was purchased at $64 million," the finance committee report states. "Sellers' appraisal was for $78 million for the same land."
Mr. Croft, who works for Coleman & Sons Appraisal Group, said he conducted the sellers' appraisal as well as a number of other assignments for former Herring Creek Farm owners Neil and Monte Wallace between 1990 and 2001.
The Nature Conservancy in 2001 purchased the entire 220-acre Herring Creek Farm property from the Wallace brothers for $64 million. The senate finance committee report said that the transaction "involved numerous parties . . . and what appear to have been circular flows of millions of dollars between the Wallace family members and [The Nature Conservancy]."
Mr. Croft testified this week that the Wallace brothers intended to take a charitable tax deduction for the difference between the Croft appraised value and the so-called "bargain sale" price to The Nature Conservancy - namely, a difference of $14 million.
Mr. Croft said attorneys for the Wallace brothers have since informed him that the tax deduction is under investigation by the IRS. Mr. Croft testified that three or four IRS agents met with him and his boss, Martin J. Coleman, to discuss the Wallace deduction and their appraisal.
"Did you know what the Wallaces were going to do with the appraisal?" tax board chairman Anne Foley, who is presiding over the Graham hearing, asked Mr. Croft.
"Yes," Mr. Croft replied. "It was to be used in disposition for tax purposes."
Mr. Graham's attorney, Richard Wulsin, was more blunt with his questions: "Did the Wallaces pressure you in any way to come up with a high value for the purposes of this transaction?" he asked.
"No," Mr. Croft replied.
Hired by West Tisbury assessors for the tax board hearing, Mr. Croft valued the 235 acres owned by Mr. Graham at Mohu off Lambert's Cove Road at $64.5 million - significantly higher than the $51 million figure town assessors used during the time period in question. Mr. Graham chose not to provide an appraisal of his property during the tax board hearing.
The U.S. senate finance committee report also led to an exchange between Chairman Foley and attorney Ellen Hutchinson, who is representing the West Tisbury assessors. When Mr. Wulsin first introduced a section of the report as evidence, Ms. Hutchinson objected to it as hearsay.
Chairman Foley quietly laughed.
"This is classic hearsay," Ms. Hutchinson argued. "It doesn't matter who authored it - whether Joe Smith or the U.S. Senate Finance Committee - it's hearsay."
Chairman Foley picked up a book previously entered as evidence as a reference manual for appraisers.
"Was this hearsay?" Chairman Foley asked.
Ms. Hutchinson said a foundation had been laid that the book was an authoritative document for appraisers.
"And is the senate finance committee not an authoritative body of the U.S. Congress?" Chairman Foley asked.
"I don't believe it is," Ms. Hutchinson replied.
"Then I think judicial notice can be taken to that effect," Chairman Foley said before overruling Ms. Hutchinson's objection.
During the two days of cross-examination, Mr. Wulsin took Mr. Croft through his appraisal report and raised a number of questions about possible inconsistencies in the analysis and comparable sale properties Mr. Croft used to value the seven properties owned by Mr. Graham.
The cross-examination is expected to resume Monday in what will be the 33rd day of the hearing, the longest and costliest residential property tax appeal in the history of the commonwealth. Mr. Croft is the final witness in the West Tisbury assessors' defense of the case. Attorneys for Mr. Graham are expected to call two or three rebuttal witnesses after the assessors rest their case.
Mr. Croft also testified about the most recent sale in the north shore neighborhood of West Tisbury. Last Monday a brother of Dirk Ziff purchased two lots east of Paul's Point totaling 9.7 acres for $18.5 million. Town assessors valued the two lots this year at just over $16 million.
The property abuts two waterfront lots purchased by Mr. Ziff and his other brother in recent years. Mr. Ziff also jointly owns another adjacent waterfront lot to the west. All of the previous purchases were for more than $10 million.
Mr. Croft said the most recent Ziff sale supported his opinions about the value of Mr. Graham's lots and the desirability of the Paul's Point neighborhood.
Chairman Foley asked whether the most recent sale also supported an argument posed by Mr. Graham and his attorneys that the Ziff purchases are not representative of the overall market.
"Given this pattern of abutting properties by the Ziff family, as you add on each purchase, does it make you question their arms-length nature?" she asked. "It is a family acquiring a chain of properties - the fourth in five years."
Mr. Croft testified that he deemed the transactions arms-length because the buyers and sellers were neither related nor under any duress.
Chairman Foley asked whether the fact that the most recent sale property was not advertised on an open market made Mr. Croft question its validity as a market indicator.
"Any rational seller would have to feel the amount they got off market was at or more than they could have got on the market," Chairman Foley said. "So if this seller was willing to sell the property not going through the market system, then must the seller feel the price met - if not exceeded - what they could have gotten on the market?"
"I think they got market value in this transaction," Mr. Croft said.
"Or better than?" Chairman Foley suggested.
Mr. Wulsin pointed out that the third Ziff brother did not make an offer on the nearby - but not abutting - eight-acre waterfront property owned by Ellen and Timothy Guiney and advertised on the open market at $10.5 million, below its assessed value. Mr. Wulsin asked Mr. Croft if the Ziffs were not more inclined to buy certain properties because they abut properties owned by other family members.
"Could be," Mr. Croft replied.
Mr. Wulsin also questioned Mr. Croft about a conversation he had earlier this week with the attorney for the sellers of the most recent Ziff property purchase.
"Did he say anything about the motivation of the buyer? Did he suggest to you that the buyer may have paid more than the property was worth to be next to his brother?" Mr. Wulsin asked.
"He might have," Mr. Croft answered.