Tag Archives: Charitable Contribution

Conservation Easement Deduction Denied as Quid Pro Quo for Subdivision Approval

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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

1st Circuit Vacates Tax Court on Historical Facade Conservation Easement

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In a case that has been followed closely by many interested parties, the First Circuit Court of Appeals ruled in favor of the taxpayers and the validity of their charitable contribution of an historical façade conservation easement in Kaufman v. Shulman. The 1st Circuit vacated the Tax Court’s legal ruling on partial summary judgment and remanded the matter for further findings on the questions of penalties and valuation.

The taxpayers in Kaufman owned an approximately 150 year-old row house in the historic district of South End in Boston. The home reflected mid-nineteenth century architecture and included a unique Venetian-Gothic style façade. In 2003, the taxpayers executed a “Preservation Restriction Agreement” donating an easement over the property to a qualified charitable organization for the purpose of protecting and preserving the historical features of the home. On the advice of the donee, the taxpayers obtained an appraisal of the contribution from an experienced appraiser who valued the easement at $220,800. The taxpayers took deductions on their 2003 and 2004 tax returns for the value of the donated easement, subject to the limits of IRC Sec. 170(b)(1)(E).

The property was subject to a mortgage when the taxpayers made the donation. The taxpayers obtained an agreement from the lender subordinating certain of the mortgage-holder’s rights in the property to the donee in accordance with the regulations governing the charitable donation of conservation easements. The agreement included several restrictive clauses, one of which became the focus of the Tax Court’s determination and the 1st Circuit’s ruling. That clause read as follows:

The Mortgagee/Lender and its assignees shall have a prior claim to all insurance proceeds as a result of any casualty, hazard or accident occurring to or about the Property and all proceeds of condemnation, and shall be entitled to same in preference to Grantee until the Mortgage is paid off and discharged, notwithstanding that the Mortgage is subordinate in priority to the [Preservation Restriction] Agreement.

Following an examination of their 2003 and 2004 returns, the IRS issued a notice of deficiency to the Kaufmans disallowing the deductions for the charitable contribution of the easement. The IRS maintained that the donation did not meet the regulatory requirements of Section 170(h). The taxpayers petitioned the U.S. Tax Court.

The Tax Court, in a division opinion by Judge Halpern, ruled for the IRS on a motion for partial summary judgment. Kaufman v. Commissioner, 134 T.C. 182 (2010). The Tax Court held that the conservation easement as executed failed to satisfy the requirement of Treas. Reg. Sec. 1.170A-14(g)(6). The Tax Court’s position on summary judgment, as summarized by the First Circuit, was that

although the Kaufmans in the Preservation Restriction Agreement governing 19 Rutland Square granted the Trust an entitlement to a proportionate share of post-extinguishment proceeds, thus seemingly complying with the regulation, the lender agreement executed by Washington Mutual undercut this commitment–and so defeated the deduction–by stipulating that “[t]he Mortgagee/Lender and its assignees shall have a prior claim to all insurance proceeds . . . and all proceeds of condemnation, and shall be entitled to same in preference to Grantee until the Mortgage is paid off and discharged.”

Even though the Tax Court decided for the government “entirely” on the basis of Treas. Reg. Sec. 1.170A-14(g)(6), the Court of Appeals also addressed paragraphs (g)(1) (perpetuity), (g)(2) (remote events), and g(3) (subordination) of the regulation in its opinion. The First Circuit observed that the IRS’s arguments in support of the Tax Court’s decision under g(6) would “appear to doom practically all donations of easements, which is surely contrary to the purpose of Congress.” The appellate court continued that it “cannot find reasonable an impromptu reading [of a regulation] that is not compelled and would defeat the purpose of the statute, as we think is the case here.” So on the big issue in the case, whether the mortgage subordination clause that granted the lender a prior claim to insurance and condemnation proceeds defeated the deduction, the First Circuit vacated the Tax Court’s legal conclusion.

The First Circuit made clear that it did not rest its decision on either the application of paragraphs (g)(3), addressing the defeasance of the deduction by remote future events, or (g)(2) which the taxpayers argued would have upheld the subordination agreement regardless of the extinguishment provision. This caveat seems to preserve the Tax Court’s recent opinion in Mitchell v. Commissioner from the scope of this ruling.

The appellate panel also addressed the “in perpetuity” requirement of Treas. Reg. Sec. 1.170A-14(g)(1) and the language in the agreement stating that “nothing herein contained shall be construed to limit the [Trust's] right to give its consent (e.g., to changes in the façade) or to abandon some or all of its rights hereunder.” The First Circuit noted its agreement with the D.C. Circuit who decided the same issue in Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) and added that the question was not whether the paragraph was a reasonable interpretation of the underlying statute, Sec. 170(h)(5), but whether the IRS’s interpretation of the regulation was reasonable. The court concluded that the regulation did not support the IRS’s stringent view.

Read the entire opinion here:
Kaufman v. Shulman, Docket No. 11-2017P-01A (1st Cir., July 19, 2012)

Tax Court: Deed Is Substantiation of Conservation Easement Donation

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The Tax Court continues to define the limits on the charitable donation of conservation easements while the IRS maintains its frontal assault on these transactions. In Averyt v. Commissioner, the Tax Court considered respondent’s motion for summary judgment and petitioner’s cross-motion for partial summary judgment on the question of whether or not the timely recorded deed of conservation easement satisfied the substantiation requirements of IRC Sec. 170(f)(8).

IRC Sec. 170(f)(8) generally requires that a charitable contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee organization. A written acknowledgement must include

(i) the amount of cash and a description (but not value) of any property other than cash contributed; (ii) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property; and (iii) a description and good faith estimate of the value of any goods or services.

The IRS argued that, as a matter of law, the taxpayers had not met the substantiation requirements of Section 170(f)(8). The taxpayers argued that the conservation deed was a contemporaneous written acknowledgment of the charitable contribution that satisfied Section 170(f)(8).

The Commissioner relied on Schrimsher v. Commissioner, T.C. Memo. 2011-71, where the court held that the contribution of a conservation easement was not deductible because the taxpayers did not receive a contemporaneous written acknowledgment from the donee organization. The taxpayers in Schrimsher relied on the conservation deed as evidence that the donee acknowledged the donation. The deed recited consideration of “the sum of TEN DOLLARS, plus other good and valuable consideration.” The Court held that the deed did not meet two of the three requirements of Section 170(f)(8) because it did not describe the property donated or provide a good faith estimate of its value.

The deed recorded in this case, however, recited consideration more particularly. The conservation easement in Averyt was granted “in consideration of the foregoing recitations and of the mutual covenants, terms, conditions, and restrictions hereinunder set forth.” The Court found that the deed language in this case compared favorably with the deed in Simmons v. Commissioner, T.C. Memo. 2009-208, aff’d, 646 F.3d 6 (D.C. Cir. 2011) where the Court held that the deed satisfied the Sec. 170(f)(8) substantiation requirements. Accordingly, the Court found that the deed in this case met all of the requirements of Section 170(f)(8) including the provision that no goods or services were received in exchange for the donation.

The Court granted petitioner’s motion for partial summary judgment. The Court also determined that material questions of fact remained with regard to the other issues in dispute, so a trial may be forthcoming to determine those facts.

Read the opinion here:
Averyt v. Commissioner, TC Memo. 2012-198

Tax Court: No Deduction for Burning Down the House

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The Tax Court held that taxpayers who allowed local firefighters to conduct training exercises in a house they owned, which included burning the house to the ground, could not deduct the value of the destroyed structure as a charitable contribution under Section 170.

Taxpayers purchased a property in Vienna, Virginia with the intent of tearing down the existing structure and building a new home on it. Rather than simply tearing the existing house down the taxpayers allowed the Fairfax County Fire and Rescue Department to burn the house down as part of a training exercise. Before allowing the fire department to destroy the house, the taxpayers hired an outside appraisal firm to value the property with the then-existing structure. The taxpayers deducted approximately one half of the appraised value of the property as a non-cash charitable deduction. The IRS disallowed the deduction under examination and imposed accuracy-related penalties.

The court held that the taxpayers only gave the fire department a license to use the house and did not convey a property interest in the property. Since the taxpayers donated only the use of the property, it only constituted a partial property interest and therefore did not meet the requirements of Section 170(f)(3). Despite disallowing the deduction in full, the court refused to impose penalties.

Read the entire opinion here:
Patel v. Commissioner, 138 T.C. No. 23 (2012)

Please note that the opinion made no mention of the Talking Heads or their music. Compare U.S. v. Abner, 825 F.2d 835 (5th Cir. 1987).

Fifth Circuit Vacates Tax Court on Donation of Historical Facade Easement

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The Fifth Circuit Court of Appeals vacated the Tax Court’s valuation of an historic façade easement for charitable contribution purposes and remanded for further findings.

Whitehouse Hotel Limited Partnership v. Commissioner, Docket No. 09-60085 (5th Circuit August 10, 2010)