Sale of Ed McMahon’s Home Triggers California Tax for Investor

A real estate investor who bought the Beverly Hills home of late-night television personality Ed McMahon from a foreclosure auction in 2010 is likely to face a higher California income tax bill from his 2012 sale of the property, the Office of Tax Appeals said.

Daniel A. Schryer used a single-member limited liability company to buy the house for $3.9 million after Countrywide Home Loans foreclosed on it. Before the foreclosure, in 2008, Countrywide assigned McMahon’s defaulted mortgages and deed of trust to a different LLC that Schryer managed. He rented the home back to McMahon—sidekick to Tonight Show Host Johnny Carson—and his wife “for personal reasons,” a panel of three administrative law judges said in a non-precedential opinion posted Monday.

Schryer bought the house after Donald J. Trump announced he would rescue McMahon from foreclosure, according to a 2016 Bloomberg News story. Trump negotiated for months over the property without striking a deal. McMahon died in 2009 and his widow, Pam, continued to live in the home.

Schryer didn’t provide the OTA with evidence that he listed the home on the rental market, charged market-rate rent, or had a lease agreement with McMahons, the OTA said. He also didn’t take action when Pam McMahon failed to pay rent but he claimed $890,000 in losses. He wasn’t operating in a businesslike manner, and therefore can’t claim a rental activity loss deduction of about $8,000 the opinion said.

“Given appellant’s expertise as a real estate investor, OTA can only conclude that his failure to take action was a result of his benevolence rather than ineptitude,” the panel said.

The OTA also said the Franchise Tax Board isn’t barred from challenging Schryer’s carryover of a 2011 net operating loss of $686,033 tied to the property into 2012. California lawmakers had suspended deductions for net operating losses from 2008 through 2012.

The panel rejected Schryer’s claim that FTB’s withdrawal of a separate assessment for 2011 blocked the FTB from disallowing the suspended NOL claim in 2012.

The OTA agreed with FTB’s decision to increase the amount of capital loss Schryer can deduct from $318,016 to $469,165. But because that amount is still lower than Schryer’s claimed $860,330, his taxable income increases by $391,166, according to the opinion. In addition, the FTB had previously conceded an accuracy related penalty.

In findings unrelated to McMahon’s Crest Court property, the panel said Schryer, a California resident, must include $15.2 million in capital gain on his 2012 California tax return for his distributive share of proceeds from the sale of an office building in Colorado. He was managing member of an LLC involved in the sale.

The panel rejected Schryer’s argument that including the proceeds in his California taxable income would result in double taxation because he already paid tax on the gain to Colorado. The FTB allowed the other state tax credit of $743,306 reflecting Colorado taxes paid.

The panel ordered the FTB to adjust adjust Schryer’s 2012 tax assessment based on its conclusions.

OTA Administrative Law Judge Huy “Mike” Le issued the opinion in May 2023 with ALJs Ovsep Akopchikyan and Sheriene Anne Ridenour concurring. Le and ALJs Cheryl L. Akin and Amanda Vassigh denied Schryer’s petition to rehear the case in a separate opinion also posted Monday.

Robert J. Fedor represented Schryer.

The case is In re: Appeal of D. Schryer, Cal. Office of Tax Appeals, 19125583, opinion 5/23/23