Substantial Compliance Returns for the Charitable Contribution of Real Property

pni0802clayexploreIn a division opinion, the U.S. Tax Court reestablished the prospect of substantial compliance for taxpayers who claim charitable contribution deductions that require an appraisal. Three partners in a LLC sold property to Arizona’s Maricopa Flood Control District (you may have heard of Maricopa here) for less than fair market value. After obtaining two separate appraisals, the taxpayers claimed a charitable contribution on the difference between the lesser of the two valuations and the sale price.

The IRS disallowed the deductions on the grounds that: the appraiser was not qualified; there was not a detailed description of the property; there was no statement that the appraisal was for income tax purposes; the valuation date was not the date of the contribution; and the appraisers’ definition of fair market value did not match that of the regulations. The IRS also argued that the value of the property was less than the sales price.

The government lost on every count. The court rejected the IRS’s nit pick approach to each of the appraisal documentation requirements – including the government’s argument that the Form 8283 did not include the signatures of both appraisers even though the form only has one signature line for an appraiser. The Court found that the difference of 11 to 21 days between the valuation date and the contribution date should not matter without “any significant event that would obviously affect the value of the property.” The Court also found that there are no magic words to fulfill the requirement that the appraisal state that it is for income tax purposes and that “for filing with the IRS” constituted substantial compliance with the regulation. With regard to each alleged violation of the charitable contribution regulations, the Court found that the taxpayers’ were in substantial compliance.

Finally, the Court rejected the valuation by the government’s expert which was based on “unreasonable assumptions” and adopted the appraisal presented by the taxpayers’ expert at trial (which was more than claimed on the original returns).

Read the opinion here: Cave Buttes, LLC v. Commissioner

IRS issues AOD on Home Mortgage Interest Deduction Debt Limits

View More: http://aimeeburchard.pass.us/tinyhomeIf you happened to read our article on individual debt limitations for the home mortgage interest deduction, you may be interested to know that the IRS issued an Acquiescence on Decision last week to the Ninth Circuit’s ruling in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015).

IRS AOD 2016-02

Anyone for Tennis? Technical Foot Faults & the Conservation Easement Tax Deduction

TennisBallOnCourtWe just wrapped up the 2016 Wimbledon fortnight. Andy Murray took the Men’s bracket while the Williams sisters are once again making news.

We found the rules that govern the grass courts can be instructive in understanding the outcome of several recent conservation easement tax cases. We put together our thoughts for the new issue of the Bloomberg BNA Real Estate Journal. Most of the article discusses the surprising decisions being reached by the courts but we do manage to reference the ITF, the USTA, Serena Williams and one of Eric Clapton’s old bands.

You can see the article here: Anyone for Tennis? Technical Foot Faults & the Conservation Easement Tax Deduction

Understanding the Conservation Easement Tax Deduction (or Strawberry Fields Forever)

We’ve covered developments in the litigation of conversation and facade easement cases here for some time now.  We’ve recently taken that experience, added a little historical perspective, and put it together for an article in the Federal Lawyer.  (Yes, we mention the Beatles too).

Check it out here:  Understanding the Conservation Easement Tax Deduction (or Strawberry Fields Forever)

Congratulations Villanova

imgresWe congratulate Coach Jay Wright and the Villanova Wildcat Basketball Team on their 2016 NCAA Basketball National Championship.

We have two Villanova alumni here at Asbury Law Firm and our immediate families add two more Villanova degrees. We also have two dogs named for our respective Philly experiences.

Villanova is the source of some of our greatest friends, mentors, and memories. We are honored to be associated in some small way with this team and its historic victory.

V for Villanova, V for Victory!

Through a Glass Darkly: Sophy, Voss and Interpretation of the Internal Revenue Code

We’ve been away from the blog for a bit while we have focused our efforts on more traditional publications. If you’re up for an article about the home mortgage interest deduction that includes references to the bible, the Rolling Stones, the Tax Reform Act of 1986, the National Center for Lesbian Rights, Long Beach Island and Josh Ritter, then you might like what we recently published in BNA Tax Management Memorandum.

Download a copy here: Through a Glass Darkly: Sophy, Voss and Interpretation of the Internal Revenue Code 

Marijuana Dispensary’s Deductions go Up in Smoke

Medical-Marijuana-SymbolIn an opinion that would make Willie Nelson shake his head, the Tax Court held that a taxpayer was not entitled to deduct business expenses related to his “Health Care” business (read: medical marijuana dispensary).  The Court also disallowed the taxpayer’s cost of goods sold (COGS) and casualty loss for items seized during the Drug Enforcement Administration’s (DEA) raid of his dispensary in 2007.

The taxpayer resided in California and owned two medical marijuana dispensaries in 2007 operating under the name Alternative Herbal Health Services (“AHHS”).  AHHS sold various strands of marijuana, pre-rolled marijuana joints, and edible food items prepared with marijuana.  It did not sell any pipes, papers, or vaporizers, however they were made available to customers to medicate on site.  AHHS provided several educational activities to its customers at no charge including “loading, grinding, and packing marijuana for customers’ use of bongs, pipes and vaporizers.”  On January 11, 2007 the DEA searched the taxpayer’s dispensary in West Hollywood and seized marijuana, food items suspected to contain marijuana, and marijuana plants.

The taxpayer had a very short record retention policy, as his typical practice was to shred all sales and inventory records at the end of the day or by the next day.  When it came time to prepare his 2007 tax return, the taxpayer gave the numbers to his attorney who then gave them to his tax return preparer.  The Schedule C for his 2007 tax return reported a “Health Care” business with $1,700,000 in gross receipts and $1,429,614 in COGS and $194,094 in expenses.  The taxpayer included $600,000 attributable to the value of the marijuana seized by the DEA in his gross receipts and COGS entries for 2007.  All of the gross receipts and expenses reported on the taxpayer’s 2007 return were from the sale or expenses associated with AHHS’s marijuana or marijuana edibles.  After three amended answers, the IRS asserted a tax deficiency of $1,047,743 and assessed a $209,549 accuracy-related penalty under section 6662(a) for the 2007 tax year.

Under IRC § 280E a taxpayer may not deduct any amount paid or incurred in carrying on a trade or business if such trade or business consists of trafficking controlled substances which is prohibited by Federal law or the law of any state in which the trade or business is conducted.  The Court relied on its own decision in Californians Helping To Alleviate Med. Problems, Inc. (CHAMP) v. Commissioner, 128 T.C. 173 (2007) and the U.S. Supreme Court’s decision in Gonzales v. Raich, 545 U.S. 1 (2005) to determine that the taxpayer was trafficking in a controlled substance within the meaning of IRC § 280E.

However, Judge Goeke distinguished this case from CHAMP, where a potion of the taxpayer’s operating expenses were allowed because the taxpayer’s activities included those unrelated to the sale or distribution of marijuana.  In this case, the taxpayer provided no evidence that AHHS sold any non-marijuana-related items.

The Court also disallowed the taxpayer’s IRC § 165 casualty loss deduction and denied his characterization of the marijuana seized by the DEA as COGS in 2007.  The Court found that characterizing the marijuana seized by the DEA as COGS was difficult the taxpayer’s record retention policy left little substantiation for the value of items seized.  Even if he had been able to provide substantiation the product could not be considered COGS because was confiscated and, in fact, was not sold.  When the smoke cleared, Jude Goeke unsurprisingly upheld the accuracy-related penalty under IRC § 6662(a).

Read the full opinion here: Beck v. Commissioner, T.C. Memo. 2015-149.

 

Georgia DOR Releases Guidance for Same-Sex Couples Filing in Georgia

On July 14, 2015, the Georgia Department of Revenue (“DOR”) released tax return filing guidance guidance for same-sex couples in response to the U.S. Supreme Court’s decision in Obergefell v. Hodges, 576 U.S. ___ (2015) which required states to license and recognize same-sex marriage. The Georgia DOR now will recognize same-sex marriage in the same way it recognizes marriages of opposite-sex couples. The Georgia DOR will recognize all marriages where the marriage license was issued in Georgia and all marriages lawfully licensed and performed out of state.Unknown

The guidance is important for Georgia same-sex couples that were married in a state legally recognizing marriage before 2015. Before the July 14 guidance, those couples were required to file Georgia individual income tax returns as if they were single – despite being required to adopt a federal filing status as married (either jointly or separately). Married same-sex Georgia couples who have not yet filed their 2014 Georgia income tax return may now file under the same rules that apply to legally married opposite-sex couples. If a legally married same-sex couple has already filed their 2014 return, they are permitted to file an amended return under the same rules that applied to legally married opposite-sex couples in 2014.

Georgia same-sex couples that were legally married in another state prior to 2014 are permitted to file amended Georgia income tax returns under the rules that applied for the tax years in question to lawfully married opposite-sex couples. Under O.C.G.A. § 48-2-35(c)(1)(A) a claim for refund be filed within three years of the later of the date of payment of the tax to the Georgia DOR or the due date (including any extensions granted) for filing the original return for that period.

Read the Georgia DOR guidance here.

Avengers Assemble: Tax Court Takes on Marvel’s Tax Attributes

It’s really hard to not take the opportunity to blog about the world’s greatest superhero franchise. Despite the tag line, this case might be better described as Avengers Disassemble, because that’s what Marvel wanted to do with its tax attributes following the bankruptcy of four members of its consolidated group in 1998.

3964_2891The case was decided on cross motions for summary judgment. With no facts in dispute, the question boiled down to whether the consolidated net operating loss (CNOL) to be reduced under section 108(b)(2)(A) is the entire CNOL (single-entity approach) or an allocable portion of the CNOL (separate-entity approach). To put it in cinematic speak, should the Avengers superpowers be considered assembled or individually? Before going further, it should be noted that subsequently issued regulations would address this question should it happen today and application of the holding is limited to similarly situated taxpayers in pre-2005 tax periods (though that doesn’t solve the Marvel movie rankings).

At the time of the bankruptcies, Marvel’s entire consolidated group had a net operating loss of $187,154,680. The bankrupt entities had COD income of $171,462,463. Marvel had to reduce its consolidated NOL under IRC §108(b)(2)(A) to account for the COD income excluded in bankruptcy. Marvel allocated its consolidated NOLs according to the lesser of (1) each member’s excluded COD income or (2) each member’s allocable share of CNOL. Under Marvel’s allocation method, the NOLs were reduced by $89,566,469 resulting in a carryover CNOL of $71,186,863. The NOL was reported and reduced by offsetting income in subsequent years.

At the beginning of 2003, the Marvel claimed a remaining NOL carryforward of $47,424,026. The IRS denied application of the NOL carryforward in 2003 and 2004 on the theory that the 1998 tax attribute reduction of the NOLs should have been determined on a consolidated basis instead of a separate entity basis. Under the IRS theory the consolidated NOL of $187,154,680 would have been reduced by the total COD income of the bankrupt subsidiaries ($171,462,463) and there would be no remaining NOL to carryforward at the beginning of 2003. Marvel disagreed and petitioned the Tax Court. For a technical discussion of NOL carryforwards in a consolidated group, please check out Tony Nitti’s great post on this case.

In a detailed opinion that is somewhat less exciting than almost any Marvel Enterprises cinematic event (except maybe this one), the Court sided with the Assembled Avengers and applied an interpretation of the Supreme Court’s opinion in United Dominion Indus., Inc. v. United States, 532 U.S. 822 (2001), which supported the government’s consolidated group/single entity theory. Marvel lost this battle but the superheroes will be back again next year.

Read the full opinion here, while I step out for some popcorn.

All images and character references are to properties of Marvel Enterprises, LLC.

Timing is Everything in Easement Donations, or Is It?

“There is a tide in the affairs of men which when taken at the flood leads on to fortune.”

William Shakespeare

Shakespeare understood the importance of timing to success. Apparently, the Tax Court holds a similar view when it comes to charitable donations of conservation easements.

life_is_all_about_timing_481189800This is our third post on the Tax Court’s opinion in Bosque Canyon Ranch. The memorandum decision isn’t necessarily an important case; it didn’t establish any new precedents for the Court. However, there is quite a bit about modern conservation easements packed into a fairly short opinion, which gives us an opportunity to unpack some of what is there.

Today, we look at the Court’s conclusion that the property transfers between the two Bosque Canyon limited partnerships and their partners were disguised sales. (Click here for a more detailed case summary.)

A transfer of partnership property to a partner within two years of a cash (or other) contribution by that partner is presumed to be a disguised sale under IRC §707. The Bosque Canyon partnerships received cash and transferred property to partners within a two year window. That timing is not in question.

The presumption in IRC §707 may be refuted by facts and circumstances showing that the transfer did not constitute a sale. Treas. Reg. §1.707-3(b)(2) suggests 10 circumstances when a sale might be present. The Court identified five of those factors in its opinion.

  • the timing and amount of the distributions to the limited partners were determinable with reasonable certainty at the time the partnerships accepted the limited partners’ payments;
  • the limited partners had legally enforceable rights, pursuant to the LP agreements, to receive their Homesite parcels and the appurtenant rights;
  • the transactions effectuated exchanges of the benefits and burdens of ownership relating to the Homesite parcels;
  • the distributions to the partners were disproportionately large in relation to the limited partners’ interests in partnership profits; and
  • the limited partners received their Homesite parcels in fee simple without an obligation to return them to the partnerships.

When the transfers between the partnership and partners are not simultaneous, an additional rule provides that a disguised sale occurs only if “the subsequent transfer is not dependent on the entrepreneurial risks of partnership operations.” Treas. Reg. §1.707-3(b)(1)(ii). The timing of the transfers was not in dispute either. They were not simultaneous.

The timing issue, however, came in the context of entrepreneurial risk. The taxpayers argued that the limited partners’ contributions would be at risk if the anticipated conservation easements were not granted. The Court rejected this argument based on the timing of the easement grants. Unfortunately, the conservation easements for both partnerships were granted before the limited partnership agreements were executed. The Court found that the payments were not subject to the entrepreneurial risks of the partnership because the easements were secured before the partnerships were formed. In the case of Bosque Canyon Ranch I, the easement was granted just two days before the agreement execution, prompting us to recall Maxwell Smart’s famous line.

Given the Court’s determination on entrepreneurial risk, there was no need to parse the specific facts and circumstances of these transfers, or whether the five factors identified by the court were enough to warrant disguised sale treatment. It leaves open the question whether similar, or even slightly different, facts and circumstances would be sufficient to find a disguised sale. We don’t know. But with time, and another case, there’s a fair chance we will.