Government Denied Summary Judgment in Conservation Easement Case

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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

DOMA Doomed by Estate Tax Refund Claim

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us-supreme-courtThe United States Supreme Court has struck down the Defense of Marriage Act (DOMA) as an unconstitutional violation of the “equal liberty” protections of the 5th Amendment.

The dispute in U.S. v. Windsor began when Edie Windsor filed a claim for refund of estate taxes paid after the death of her same-sex spouse, Thea Spyer. Though the court makes little mention of the $353,053 refund claim in its historic opinion, the high court’s ruling affirmed the Second Circuit Court of Appeals’ decision to award the refund.

Read the entire opinion here:
U.S. v. Windsor, Docket No. 12-307 (U.S.S.C. June 26, 2013)

Tax Court: Side Letter Invalidates Facade Easement Donation

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tread_HDIn a division opinion that reflects the increasingly technical aspects of defending conservation easement cases, the Tax Court has disallowed deductions for the contribution of cash and a façade easement to a qualified organization.  The charitable contributions were disallowed because the donee issued a “side letter” promising to refund cash contributions and rescind the easement over the donor’s property if the donation was “disallowed” by the Internal Revenue Service.

The taxpayers donated a façade easement over their home in the Treadwell Farms Historic District on the Upper East Side of Manhattan. They obtained a qualified appraisal and took deductions based on their cash contributions and the value of the donated easement. The entire transaction was covered by the side letter. The IRS disallowed the deductions for the cash and easement donations and imposed penalties. The taxpayers petitioned the Tax Court.

The case was submitted to the Court without trial on stipulated facts. The Court found that the promises in the comfort letter made the gifts conditional and thus incomplete for purposes of the deduction. It found that the possibility that the IRS would disallow the contributions was not “so remote as to be negligible” – a standard imposed under the regulations governing the deductibility of conservation easements. The Court noted IRS administrative guidance issued prior to the donation announcing increased scrutiny of somewhat similar transactions and the donee organization’s “standard policy” to refund contributions for challenged transactions as evidence that an IRS disallowance was not “so remote as to be negligible.” The Court did not address the penalties, reserving that issue for future proceedings.

Read the entire opinion here:
Graev v. Commissioner, 140 T.C. No. 17 (2013)

Worker Classification Settlement – Is Now the Time?

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IRS_logoIn December 2012, the IRS revised the Voluntary Classification Settlement Program (VCSP) that provides partial relief from federal employment taxes for eligible taxpayers that agree to treat workers as employees prospectively. The updated program relaxes the eligibility requirements and reduces the total tax exposure for participating employers.

The revised standards were accompanied by a special incentive program – Temporary Eligibility Expansion – which considerably relaxed the eligibility standards.

The incentive period for the Expanded Eligibility expires on June 30, 2013.

One enticing aspect of the temporary program is a waiver of the requirement that the employer/business have filed Forms 1099 for its workers for the last three years. In many instances, employers are not only treating workers as independent contractors but also not filing the required Forms 1099 for those workers. Those were the facts of the recent Kurek case where the taxpayer was hit with taxes, interest and penalties for payments to over 30 workers in just one year.

A taxpayer entering the Expanded Eligibility program:

  • pays 25% of the employment tax due for reclassified workers for the most recent tax year;
  • pays a reduced penalty based on a graduated scale; and
  • is not subject to an employment tax audit for those workers for prior years.

The Expanded Eligibility is also available for businesses already selected for or under an employment tax audit – a situation not covered by the standard program.

If you or your taxpayer is currently under an employment tax audit and facing potential exposure for misclassified employees then the Expanded Eligibility VCSP may be the solution. Those taxpayers have until the end of this month to enter the program and avoid certain interest charges and almost certain penalties.

Just Getting Back? The IRS Asked Me to Remind You

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soldiers-return_789349iI know you just got back, but the IRS still wants to see that tax return.

Taxpayers who were in military or naval service outside the United States or Puerto Rico (sorry, Fort Buchanan) on April 15 receive an automatic extension of two months to file 2012 returns (no extension filing required). However, the deadline for filing that return is now right around the corner.

Since June 15 falls on a Saturday this year, eligible taxpayers will have until June 17 to file. Remember that the IRS will be closed on Friday, June 14 so it will be unable to accept or acknowledge receipt of electronically-filed returns on that day.

The automatic extension also applies to taxpayers who were living outside the U.S. or Puerto Rico on April 15 and also have a primary place of business or workplace outside the U.S. or Puerto Rico (like those guys in the movie Cocktail).

For service members and taxpayers still not ready to file a complete return, filing a Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, will give you additional time to empty the shoebox, sort the receipts, and get that return in without penalty.

There, I managed to work the Navy and Tom Cruise into the same post without mentioning that 1980s film about the jets.

Value Matters, Even as Tax Court Denies Conservation Easement Deduction

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Autosave-File vom d-lab2/3 der AgfaPhoto GmbHAlthough disappointing to the petitioning taxpayer, yesterday’s Tax Court opinion in Mountanos v. Commissioner is of some relief to practitioners and counsel who follow conservation easement cases closely. Recent decisions in the Tax Court (Belk, Averyt) and the Courts of Appeals (Kaufman, Scheidelman) have turned on technical aspects of the Treasury regulations that govern the deductibility of these charitable contributions.

Mountanos, instead, is a “traditional” conservation easement case in that the validity of the donation, documentation and recordation of the easement were not at issue. We note, however, that the government did argue that the taxpayers did not acquire a “contemporaneous written acknowledgment” from the donee organization or a “qualified appraisal” as required under the applicable statute and regulations but the court did not address these arguments.

Rather this case turned entirely on the value attributed to the taxpayer’s donation of an 882 acre tract of undeveloped land in north central California. The taxpayer’s valuation was based on the before and after approach. Using that method, where the “before” value is based on the highest and best use of the property, the taxpayer’s $4.6 million valuation was based on use of the property as part vineyard and part residential development. The “after” valuation – that is, after the restrictive easement was imposed – was based entirely on recreational use (such as deer hunting).

Judge Kroupa was not persuaded that a 287 acre vineyard “was a legally permissible, physically possible and economically feasible use of the ranch.” The taxpayer’s restricted access to the property (across Federally controlled parkland) and lack of access to proper irrigation made the likelihood of a viable vineyard slim, even if it could have been economically viable (which the court found equally unlikely).

The proposed use of the property for residential development was no more impressive to the court. The entire parcel was subject to a contract with the county, governed by a state statute (the Williamson Act), that forbade residential development – even before the conservation easement donation had been made. The taxpayers did not put on evidence to convince the court that the state law restrictions would not apply if the taxpayer indeed tried to pursue residential development. Accordingly, the court concluded that the taxpayers failed to show that “the conservation easement had any value.”

The court also sustained the 40% gross valuation overstatement penalty asserted against the taxpayers. It is unclear whether the taxpayers put forth a reasonable cause defense to the penalty or not but the court noted that such a defense does not apply “in the case of a gross valuation overstatement with respect to property for which a charitable contribution deduction was claimed under section 170. Sec. 6664(c)(3).”

This was unquestionably a bad result for the taxpayers but still an encouraging note for taxpayers who have made carefully executed and fairly valued conservation or facade easements – you should at least have a day in court.

Read the opinion here:
Mountanos v. Commissioner, TC Memo 2013-138

See You on Tuesday: IRS Furloughs Impact Certain Filing Deadlines & Services

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Image = Sign = Closed Please Call Again
UPDATE 7/17/2013: The IRS has announced that it is canceling the furlough day scheduled for Monday, July 22, 2013 mentioned below. 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.

The IRS will be closed tomorrow. It is the first of five previously announced furlough days for the IRS brought on by federal budget cuts. While there may be some at the IRS who just want to get away, the long weekend may impact taxpayers facing certain deadlines. The IRS has issued the following guidance which applies to all five scheduled furlough days.

Filing Deadlines Unaffected

  • The furlough days are not considered federal holidays, so the shutdown will have no impact on any tax-filing deadlines.
  • The only tax payment deadlines coinciding with any of the furlough days relate to employment and excise tax deposits made by business taxpayers. These deposits must be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS), which will operate as usual.
  • However, the IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down.

Deadlines to Produce Documents Extended

  • Where the last day for responding to an IRS request falls on a furlough day, the taxpayer will have until the next business day.  
    • For example, if the last day to respond is tomorrow, the taxpayer will have until Tuesday, May 28 to comply (Monday is Memorial Day).
  • This next business day extension applies to:
    • administrative summonses,
    • documents requests for an examination, review or compliance check, and
    • document requests related to a collection matter.

Deadline Extensions Do Not Apply to the Courts

  • Petitions with the U.S. Tax Court are Still Due if you received a
    • Statutory Notice of Deficiency,
    • Final Partnership Administrative Adjustments,
    • Final Determination following a Collection Due Process Hearing, or
    • Other notice with a deadline for seeking Tax Court review (e.g., innocent spouse relief, interest abatement).
  • Refund Claim Complaints in U.S. District Court are Still Due
    • However, check to see if the local court is on furlough and has issued guidance.

The Internet Might Be Open and We Might Take Your Call

  • Some, but not all, online and automated phone tools will continue to function on furlough days.
  • The following online and phone tools will be available
    • Withholding Calculator,
    • Order A Transcript,
    • EITC Assistant,
    • Interactive Tax Assistant,
    • PTIN system for tax professionals,
    • Tele-Tax, and the
    • Online Look-up Tool for repaying the first-time homebuyer credit.
  • The following services will not be available:
    • Where’s My Refund?
    • Online Payment Agreement.

(SNL) IRS Scandal (Weekend) Update

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We have stood by while the IRS has taken shots from both the right and the left in recent days. The 501(c)(4) targeting situation will certainly yield changes for the IRS – how broad and how meaningful are yet to be seen. We may have more to say when we see what really comes of it all.

In the meantime, folks are lining up to take a bit of stuffing out of the IRS. This one is too good to let pass. Amy Poehler is a family favorite and we recommended her Thursday night gig if you haven’t checked it out before. Here she is with Seth Myers in a return to Weekend Update.

Supreme Court Allows Foreign Tax Credits for U.K. Windfall Tax

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us-supreme-courtThe U.S. Supreme Court has resolved a split in the circuits on the U.S. tax treatment of U.K. windfall tax payments made by U.S. utilities. In a unanimous opinion authored by Justice Thomas, the Court held that the windfall tax qualified as a “creditable tax” for U.S. foreign tax credit purposes. The result is that the appellant here, PPL, and Entergy, who had the companion case, will be able to take a credit against their U.S. income taxes for the amounts paid to the United Kingdom.

The central issue was whether the U.K. tax was a tax on income, the general standard for creditable foreign taxes. The ultimate decision was a bit more nuanced and scholars surely will continue to debate the issue including the algebra (don’t see that often in the tax world) and the potential distinction between the regulatory phrase “in the U.S. sense” and Justice Thomas’ phrase “if enacted in the U.S.”

Practitioners, being the practical folks that they are, will look to expand the decision for the benefit of other clients that may have paid taxes similar to the windfall tax but not received the benefit of foreign tax credits against their U.S. income.

This is what happens when the Supreme Court issues a tax opinion. There will be more to come, as the estate tax case that may decide the fate of DOMA has been heard and likely will be decided this year and another tax case (on overpayment penalties) is being briefed for the Supremes right now. Expect a decision in the latter case, U.S. v. Woods, sometime in 2014.

Read the PPL opinion here:
PPL Corp. v. Commissioner, Docket No. 12-43 (U.S.S.C. May 20, 2013)

Tax Court: Challenge to Underlying Liability Does Not Extend Period for CDP Appeal

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In a rare division opinion supplementing a previous division opinion, the Tax Court offers a primer on the definition of “deficiency” and its meaning for jurisdictional purposes. This opinion is not for the meek of heart nor for those not ready to tackle the nuance of Tax Court jurisdiction.

In response to a motion to certify an interlocutory appeal, Judge Joseph Gale lays out the statutory requirements for the court’s jurisdiction over deficiencies as well as collection actions. He also discusses the statutory grounds for variances in the 30-day response required for collection due process review (e.g., innocent spouse relief, interest abatement) and other non-deficiency actions (e.g., employment taxes, frivolous return penalties) in U.S. Tax Court.

The court did not certify the interlocutory appeal and affirmed the proposition that a challenge to the “underlying tax liability” in a collection due process hearing does not extend the period in which to file a petition for review with the Tax Court.

Read the entire opinion here:
Gray v. Commissioner (Gray II), 140 T.C. No. 9 (2013)