Government Denied Summary Judgment in Conservation Easement Case

white-cloud-wilderness-idahoThe 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

4th Circuit: District Court Abused Discretion by Allowing Evidence of CPA’s Personal Tax Situation in Tax Shelter Promoter Case

The Fourth Circuit Court of Appeals vacated portions of a jury’s findings, including imposition of a $2.6 million penalty, because the District Court allowed the introduction of evidence of the defendant CPA’s personal tax situation (he didn’t file returns) during the penalty phase of the trial.

The Fourth Circuit held that the District Court abused its discretion by permitting the evidence into the record over the defendant’s objection. The Court of Appeals further held that the personal tax information was not relevant to the tax shelter promotion penalty in question and the effect of allowing it into evidence was highly prejudicial. The lower court’s error was not harmless.

The appellate court concluded that the evidence “bears all the indicia of garden-variety “bad acts” evidence with no other purpose than to emotionally inflame the jury against the defendant.”

Read the opinion here:
Nagy v. U.S., No. 10-2072 (4th Cir. Mar. 29, 2013)

Today: Supreme Court to Hear Arguments in DOMA Tax Case

Seal_of_the_United_States_Supreme_Court.svgToday, the United States Supreme Court will hear arguments about the Constitutional rights of homosexual couples courtesy of the Internal Revenue Code.

The Court may rule on a variety of grounds in United States v. Windsor including standing (was the couple’s marriage recognized under New York law) and the proper Constitutional standard (does Intermediate Scrutiny apply to homosexuals) but the case started with a tax return.

Edie Windsor and Thea Spyer were New York residents and a couple for over 40 years. In 2007, they were married in Canada where same-sex marriage was legal. Upon Thea’s death, Edie filed a federal estate tax return, Form 706. Thea’s estate paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC §2056(a) – a benefit routinely applied to married couples of different sexes. Edie filed a claim for refund of the estate taxes paid. When that claim for refund was denied she filed suit in federal district court.

The refund denial was reversed by the U.S. District Court for the Southern District of New York and the Second Circuit Court of Appeals. Read opinions published in those cases here and here.

Whether not the Supreme Court issues a sweeping or narrow opinion on the rights of homosexuals, there is little question that the tax code touches everyone. After all, that’s where this case started.

District Court Decision Prevents IRS from Regulating Certain Tax Return Preparers

Income-Tax-Preparation_Rialto-CA-92376_13253.11185131
UPDATE: On February 20, 2013, the Department of Justice Tax Division filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia Circuit appealing the District Court’s ruling.

In a surprising decision, the U.S. District Court for the District of Columbia found in favor of three plaintiffs who challenged the Internal Revenue Service’s ability to govern tax return preparers pursuant to regulations issued in 2011. The 2011 regulations required, among other things, registration with the IRS and use of a registration number when preparing returns known as the PTIN (Preparer Tax Identification Number). The 2011 rules were based on 31 U.S.C. § 330 – a statute which the court noted was originally promulgated in 1884.

That statute gives the Department of Treasury the authority to regulate people who “practice” before it. As an agency of the Department of Treasury, the IRS is within the purview of the statute. The question that captured the District Court was whether tax return preparers were “practicing” before the IRS, and thus the Department, when they prepare and sign tax returns on behalf of others. It found that they were not and thus the IRS could not regulate them under the authority granted by the statute.

The District Court granted the plaintiff’s motion on summary judgment and also entered a permanent injunction preventing the IRS from enforcing the 2011 tax return preparer rules. The IRS responded to the court’s ruling on January 22, 2013 with an announcement on its website acknowledging that those tax return preparers specifically covered by the registration and reporting rules were no longer required to comply.

The case and the injunction does not apply to enrolled agents, CPAs, or attorneys. These individuals are still subject to the rules for practice before the IRS. Though the injunction is permanent, expect to see more action on this issue from the Department of Treasury and/or the IRS.

Read the entire opinion here:
Loving v. Internal Revenue Service, No. 12-385 (January 18, 2013, DC D.C.)

District Court: Estate Tax Marital Deduction Triggers Unconstitutional Ruling on DOMA

In a case that begin with a claim for a refund of estate taxes paid, Judge Barbara S. Jones of the Southern District of New York ruled that the Defense of Marriage Act (DOMA) is unconstitutional under the Equal Protection Clause of the 5th Amendment.

Edie Windsor and Thea Spyer were a couple for over 40 years and in 2007 were married in Canada where same-sex marriage was legal. Their marriage was later recognized in their home state of New York. Upon Thea’s death, Edie paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC Section 2056(a) – a benefit routinely applied to married couples of different sexes. Edie filed a claim for refund of the estate taxes on the grounds that DOMA denied her equal protection under the law as protected by the 5th Amendment to United States Constitution.

Frequent readers know that when possible we like to note interesting procedural aspects of the cases we feature here and this cases qualifies in two aspects. First, was the question of the parties. The case was filed in November of 2010. In February of 2011, Attorney General Eric Holder announced that the Department of Justice would not defend the constitutionality of DOMA. Given that DOJ would no longer defend the suit, the Bipartisan Legal Advisory Group (BLAG) of the U.S. House of Representatives moved to intervene under F.R.C.P. 24 and defend the matter in the place of the Department of Justice. The group’s order was granted. Thus, the parties to the final order were Ms. Windsor as plaintiff and BLAG as defendant-intervenor.

The second interesting procedural note before the court was Edie’s standing to bring the suit. Standing generally requires three elements: (1) an injury in fact, (2) a causal connection between the defendant and the injury, and (3) a means of remedy within the power of the court. The defendant-intervenor argued that Ms. Windsor did not satisfy the second of these elements. The court disagreed noting the State of New York’s recognition of Edie and Thea’s marriage at the time of death as a factor in its finding.

On the ultimate question, the District Court granted Ms. Windsor’s motion on summary judgment ruling that section 3 of DOMA was unconstitutional because it failed to establish a rational basis for advancing a legitimate government under the Equal Protection Clause. The court ordered a that Edie’s refund claim be paid with interest.

Read the entire opinion here:
Windsor v. U.S., No. 10-cv-08435 (SDNY June 6, 2012)

District Court: Colorado Use Tax is Unconstitutional

In an unusual ruling from a U.S. District Court on a state tax matter, the U.S. District Court for the District of Colorado has struck down as unconstitutional a Colorado statute requiring out-of-state retailers to file information reports on sales made to Colorado customers for which no Colorado sales or use tax was collected. The District Court claimed jurisdiction to hear the claim under 28 USC 1331 (federal question) and gave standing to the Direct Marketing Association (DMA) on behalf of their members who businesses and organizations market products directly to consumers via catalogs, magazine and newspaper advertisements.

On motions for summary judgment, the DMA argued that the Colorado’s use tax reporting requirement discriminates against interstate commerce and places an undue burden on interstate commerce both of which violate the dormant commerce clause of the United State Constitution. The DMA sought a declaratory judgment finding that the Colorado statute was unconstitutional and an injunction preventing enforcement of the statute’s requirements.

The district court, in an order by Judge Blackburn, ruled in favor of the DMA on both claims finding that the Colorado act discriminated against interstate commerce and placed an undue burden on interstate commerce. The court granted both the declaratory and injunctive relief sought by the DMA.

Read the court’s order here:
Direct Marketing Assoc. v. Huber, No. 10-cv-10546-REB-CBS (D.C. Colo., March 30, 2012)

U.S. District Court: California Must Turn Over Real Estate Information to the IRS

The U.S. District Court for the Eastern District of California has issued an order allowing the Internal Revenue Service to serve a John Doe Summons on the California State Board of Equalization. A John Doe Summons is defined by Section 7609(f) of the Internal Revenue Code and is used by the IRS to gather information from a third party about a class or group of taxpayers suspected of not complying with the internal revenue laws. It is called a John Doe Summons because the IRS doesn’t know the specific names of the alleged violators but is seeking to identify them through the summons process. John Doe Summons have been used to implicate taxpayers in domestic and international tax-advantaged transactions with banks like Wachovia, HSBC and UBS.

In this particular matter, the Internal Revenue Service is seeking information about the transfer of real estate between family members for less than full value. The IRS believes that such transfers are being used to avoid Federal Gift Tax liabilities. The investigation is most likely to affect decedents who passed away in 2010 or before and whose final Federal Estate Tax Return has not yet been filed or is still subject to audit because the lifetime gift tax exclusion for those years was only $1 million. The lifetime exclusion for 2011 and 2012 is more a robust $5 million dollars. Nonetheless, a Federal Gift Tax Return, Form 709, is required in any year which a gift of more than $13,000 is made. Failure to file a gift tax return is subject to a Section 6651 penalty.

The IRS targeted the California State Board of Equalization because it receives records of all California real property transfers to ensure compliance with Proposition 13, the well known California voter initiative which limits annual property tax assessment increases. The judge found that the IRS satisfied the technical requirements to serve the summons and ordered enforcement. The California BOE likely will be turning over the records at the beginning of the new year and you can expect the IRS to start initiating examinations based on what it collects sometime on 2012.

Read the order and memorandum here:
In the Matter of the Tax Liabilities of John Does, No. 2:10-mc-00130-MCE-EFB, (E.D. CA, December 15, 2011)