The Tax Court denied the taxpayers’ deduction for the donation of a conservation easement where the taxpayer granted the easement pursuant to negotiations with a local zoning authority for approval of a subdivision exemption.
The deductibility of conservation easement donations is drawn from the general rule allowing the deduction of charitable contributions under IRC §170. Charitable contributions must be freely given, i.e., a gift, to qualify for the deduction. If the contribution is made in exchange for a specific benefit, i.e., a quid pro quo, then it does not qualify for the deduction.
The Tax Court found that the taxpayer’s donation of the easement was not a gift because it was “part of a quid pro quo exchange for Boulder County’s approving his subdivision exemption request.” The court also approved the application of the 20% substantial understatement penalty under IRC §6662(b)(2) against the taxpayer. The court denied the taxpayer’s reasonable cause argument to avoid the penalty, specifically noting the lack of testimony from the CPA who prepared the returns and invoking the “Wichita Terminal rule” to find for the government. The Wichita Terminal rule is drawn from a 67 year-old Tax Court case and generally provides that when a litigant fails to produce the testimony of a person that might be expected to testify, that failure gives rise to a presumption that the testimony would be unfavorable to the litigant’s case.
While the taxpayer lost on the 20% penalty, the court did reject the government’s argument for the 40% gross valuation penalty under IRC §6662(h)(2). In support of its position the commissioner alleged that the appraisal:
(1) was made more than 60 days before the grant of the second conservation easement; (2) does not describe the property; (3) does not contain the expected date of contribution; (4) does not contain the terms of the second conservation easement; (5) does not include the appraised fair market value of the second conservation easement on the expected date of contribution; and (6) does not provide the method of valuation Mr. Roberts used in that the report does not adequately identify the highest and best use of the property.
The taxpayer urged that the penalty did not apply under the exception provided in IRC §6664(c)(2) because the taxpayer obtained a “qualified appraisal” from a “qualified appraiser” and made a good faith investigation of the value of the property before making the donation. The court sided with the taxpayer and rejected the government’s arguments. The court voiced its particular concern with the government’s claim that the appraisal was not qualified because did not provide a method of valuation. The court noted that the appraisal specifically identified the well-established “before and after” valuation method and repeated, though without citation, the same concerns expressed by the Second Circuit Court of Appeals in Scheidleman v. Commissioner, that is, that the government’s claim really was directed at the reliability of the report and not its validity or “qualification”.
Read the entire opinion here:
Pollard v. Commissioner, T.C. Memo 2013-38