Tax Court Reasserts Position on Conservation Easements

Posted on July 26, 2013 by admin

Opining on a motion for reconsideration, the Tax Court has reaffirmed the circumstances under which a conservation easement might be extinguished without violating the regulatory requirement that the donation be made in perpetuity. Asked to account for an intervening change in the law based on First Circuit Court of Appeals’ decision in Kaufman v. Shulman, the Court declined to change its earlier decision in Carpenter v. Commissioner, T.C. Memo. 2012-1.

In the matter under reconsideration, the parties reserved the right to extinguish the conservation easement by mutual agreement. Under those circumstances, the donee organization would have received its proportionate share of the proceeds following removal of the easement. The taxpayers argued that these circumstances met the in perpetuity “safe harbor” under Treas. Reg. Sec. 1.170A- 14(g)(6)(i) for terminated conservation easements.

The Court disagreed and emphasized that “extinguishment by judicial proceedings is necessary” to satisfy the regulation and that a proportionate share reserved for the donee organization is not an adequate substitute for guaranteeing the donation in perpetuity. The Court also reminded the taxpayers that in cases appealable to Federal Courts of Appeals that had not ruled on the issue – as was the case here – the First Circuit’s decision is not binding on the Tax Court.

Read the entire opinion here:
Carpenter v. Commissioner, T.C. Memo. 2013-172

Tax Court Reminder: Hours Alone Do Not Turn a Hobby into a Business

Posted on July 23, 2013 by admin

One of my best friends emailed me yesterday. He’s up for partner at one of the largest law firms in the world. He has dedicated many hours to the practice of law since our days together as law clerks at the Tax Court.

However, the key to partnership in the modern practice of law requires more than substantial legal skill – it takes a business plan. He has been asked to write one and I have no doubt that it will be thorough, detailed and realistic. That is, it will be the product of the same skills that have made him a great lawyer already. When he is invited into the partnership of his firm, which I am confident that he will be, I know that he will be expected to execute on that business plan, and I know that he will. After all, the objective of a law firm is to provide excellent legal services and make a profit while doing it.

Yesterday, the Tax Court issued a fairly lengthy Summary Opinion reminding us that the same standard applies to every business. A Summary Opinion is not a legal precedent and cannot be cited for authority, but Craig v. Commissioner amply shows that lengthy hours and dedicated labor alone are not enough to turn an activity into a business. The opinion is instructive for those who might be unsure about the right standard. There must be a plan to make money – and some profits along the way won’t hurt either.

Ms. Craig worked 25-40 hours per week as a real estate agent. She worked 25-30 more hours per week attending to her several horses – an activity for which she claimed losses for the tax years in question. She also worked part time preparing tax returns for H&R Block. The IRS denied Ms. Craig’s losses from the horse breeding activity and she challenged the Commissioner’s determinations by filing a pro se petition in Tax Court.

The Tax Court accepted the fact that Ms. Craig dedicated many hours a week to cleaning stalls, feeding, grooming, training, and otherwise caring for her horses. It did not, however, accept the fact that Ms. Craig engaged in any of those efforts with “an actual and honest objective of making a profit.”

Notable was Ms. Craig’s business plan for the horse-breeding activity. It was prepared in early 2011, months after the IRS began its examination of Ms. Craig’s tax returns, and listed a total of 10 items (all of which are reproduced in the Court’s opinion). From the time the business plan was written until the date of trial in November 2012, Ms. Craig had accomplished only one item on the business plan (she finished training one horse for handling).

Neither the concise and late-breaking business plan nor the lackadaisical approach to execution helped Ms. Craig’s case. It also didn’t help that she also didn’t maintain a separate bank account for the alleged horse breeding business, instead preferring to run expenses through her personal checking account, and reported gross receipts from the business in only one of seven years ($950 of revenue, not even profit). All of these factors contributed to the Court’s conclusion that Ms. Craig’s horse activities were a hobby and not a business. The Court also sustained a 20% accuracy-related penalty against Ms. Craig. A timely-written and well-executed business plan might not have changed the outcome of Ms. Craig’s case, but it certainly wouldn’t have hurt.

Read the entire opinion here:
Craig v. Commissioner, T.C. Summary Opinion 2013-58

Good News? IRS Will Be Open on July 22nd

Posted on July 17, 2013 by admin

It’s probably good news for IRS employees happy to regain an extra day of pay, less good for those who booked a flight to the islands for the long weekend.

The IRS announced yesterday that it is canceling the furlough day originally scheduled for Monday, July 22, 2013. According to the press release “the IRS will be open for taxpayers that day as scheduled.” Presumably all functions and services will be available. The press release indicates that the IRS also may cancel the scheduled August 30, 2013 furlough day but a firm decision has not been made.

Government Denied Summary Judgment in Conservation Easement Case

Posted on July 15, 2013 by admin

The U.S. District Court for the District of Idaho recently rejected the government’s pre-trial motion for summary judgment on the validity of a conservation easement donation, setting the stage for a trial on the facts of the transaction.

The District Court’s order and decision provides another ray of hope for Alan Pesky’s efforts to preserve his charitable contribution deduction for the conservation easement donation he made in 2002. Mr. Pesky has already been through a series of pre-trial motions. While this decision should have him headed for trial on the merits of the tax deductions for his donation, as we note below, the government has lobbed yet another missive over the transom.

The facts of the Pesky case are complicated but not necessarily unusual among high-net worth individuals with substantial real estate holdings who find themselves approached about a conservation easement donation. In stark summary, Alan Pesky was approached by The Nature Conservancy (TNC) to acquire a parcel over which a conservation easement ultimately was granted to TNC. The acquisition involved a series of negotiations and collateral agreements which may or may not prove to be relevant in sustaining the deduction.

When the donation was complete, Mr. Pesky deducted a portion of the conservation easement donation on his 2002 tax return and carried forward the remainder on his 2003 and 2004 returns. The government has challenged the charitable deductions for all three years but had to assert fraud for the 2002 tax year because it failed to issue a notice of deficiency within the three-year statute of limitations. The government made additional assertions of fraud which were addressed in this order (and elsewhere).

This case is a fine example of the Government’s recent approach to conservation easement litigation. The government wants to win early dismissal of these cases on pre-trials motions without allowing an examination of the facts and is willing to renew and recycle arguments that have failed before and been flat out rejected in other Federal circuits.

The government moved for summary judgment based on three primary arguments. The first argument was that the conservation easement was part of a larger quid pro quo transaction between the taxpayers and TNC. This argument has been considered in this context by the Tax Court in at least one reported decision but under substantially different facts than these. Considering the factors that might influence a jury on this question, the U.S. District Court ruled that a genuine issue of material fact remained for consideration at trial and denied the government’s motion.

The government’s second argument was that there was no contemporaneous written acknowledgement of goods and services received. Though the government conceded the existence of such an acknowledgment, its argument was an extension of the quid pro quo position, i.e., that there was no charitable intent. The court also rejected the argument based on the potential for a genuine issue of material fact. One might argue though that the taxpayer should prevail based on the substantial compliance doctrine adopted in Simmons v. Commissioner, T.C. Memo 2009-208 aff’d. 646 F.3d 6 (D.C. Cir. 2011).

Finally, the government argued that donation should fail because the Pesky’s property appraisal did not meet the standard for a qualified appraisal standard in the regulations. Again, the District Court leaned on potential for a genuine issue of material facts to deny the government’s motion. Given the minimum threshold standard for a qualified appraisal set forth by the Second Circuit Court of Appeals in Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012), the taxpayers should also prevail on this issue.

In all events, the court rejected all three of the government’s arguments. The persistence of the government, however, should not be denied. Despite the court’s rejection of their positions just last Monday, the government had already filed a motion for reconsideration of the order on Friday requesting that the court take yet another look at these well-worn arguments. The Pesky’s might yet have their day in court, but not before they cross a few more hurdles the government intends to through in the way.

Read the Order Denying the Government’s Motion for Summary Judgement here:
Pesky Order 7.8.13

Read the Government’s Motion for Reconsideration here:
Pesky Motion for Reconsideration 7.12.13