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By Laura Mahoney
Nov. 18 — Actor Rob Lowe and his wife, Sheryl Berkoff, scored a partial victory from the State Board of Equalization in their dispute over taxable gain on the $25 million sale in 2005 of a “trophy home” they built in an exclusive area of Santa Barbara, Calif.
Appearing before the five-member elected board, Lowe and Berkoff argued that the basis in their home in Montecito, Calif., was $13.5 million, while the Franchise Tax Board said it was closer to $7 million. The board voted 5-0 on Nov. 17 to set the basis at $11.36 million on a motion from Member Diane Harkey (R).
The approved basis, which Harkey reached by adding up the purchase price, expenses and fees, landscaping and construction costs, means Lowe and Berkoff had more gain on the $25 million sale than the $10.1 million they reported on their original federal tax return, but less than the FTB alleged.
The $714,686 in tax that the FTB said the Lowes owed, based on their underreported gain on the sale of the home, will be reduced to reflect the adjusted basis amount. The FTB also agreed to drop a $178,671 penalty for failure to furnish information in a case that was largely based on estimates because many original records weren't available.
At the start of the two-hour hearing, Lowe said he and his wife were unable to provide all documentation for the amounts they spent on the extensive project that began in 1998, partly because records were lost when his former accountant suffered a computer crash in 2002.
He argued that it would be impossible to build such a trophy home, featured in Architectural Digest magazine in July 2001, for “anything close” to what the FTB was claiming and pointed out that the IRS didn't question his basis numbers.
“Respectfully, I am not a liar,” said Lowe, known for movies such as “St. Elmo's Fire” and “Wayne's World,” and roles on TV shows “The West Wing,” “Parks and Recreation” and, currently, “The Grinder.” “We ask you to accept our return as filed.”
FTB Tax Counsel Sonia Woodruff told the board that the case wouldn't be coming before them if Lowe and Berkoff spent the amount of money they claimed and had the documents to prove it. Much of the documentation provided was duplicative, meaning the basis amount asserted by Lowe and Berkoff counted some of the same expenses multiple times.
“Six million dollars changed hands without a trace,” Woodruff said. “This case is not about whether the appellants built a high-end, beautiful home. Nobody disputes that.”
Before voting on the case, the board members heard conflicting arguments from Woodruff and the couple's attorney, Mark Bernsley, about which appraisals, reports, attestations and estimates most accurately reflected the costs Lowe and Berkoff incurred in building the home.
The home was built in the style of an old English manor house, with a separate pool house, conservatory and meticulously landscaped gardens, according to the SBOE Appeals Division summary of the case prepared for the board members.
Bernsley, an attorney in Woodland Hills, Calif., told Bloomberg BNA in a Nov. 18 e-mail that his clients are weighing their options.
“The board essentially agreed with the validity of the Lowes' return,” Bernsley said. “We are examining the details of the ruling and weighing future options.”
The decision will become final after the board approves a written decision within 120 days. Because more than $500,000 was at issue in the case, the SBOE is required to issue a written decision that includes a statement of the legal issues presented, applicable law, analysis and disposition of the case and the names of the members who concur.
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