Tag Archives: Penalties

Tax Court: Donation of Conservation Easement Upheld

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The Tax Court affirmed the proposition that a conservation easement is still a Congressionally sanctioned charitable contribution under IRC §170(h). Conservation easements and the corresponding charitable contribution deduction for the donation of such easements have been a topic of heightened scrutiny by the IRS in recent years. So much so, that we might have forgotten that there is a legitimate basis in public policy for this deduction.

In Butler v. Commissioner, the IRS sought to disallow deductions related to conservation easements that protected thousands of acres of undeveloped rural property and impose penalties upon the donors who made the contribution. The Tax Court, however, found for the taxpayers on the validity of the qualified conservation contributions, made some adjustments to the valuation of the properties based on the testimony of several experts, and dismissed the penalties.

For those interested in the mechanics of tax litigation, Butler is instructive on two additional points. First, the petitioners prevailed in shifting the burden of proof to the government on select issues under Section 7491(a) – a feat more often considered than accomplished. Second, the court ruled on the admissibility of an expert report prepared by an expert who died before the trial began. Petitioners sought to have the deceased expert’s report admitted as evidence of fair market value, invoking alternative exceptions to the hearsay rule under Federal Rules of Evidence 804(b)(1) and 807. The court denied petitioners’ requests but admitted the report for the limited purpose of establishing reasonable cause to avoid penalties under Section 6664.

Read the opinion here:
Butler v. Commissioner, T.C. Memo. 2012-72

Tax Court: Historical Easement Denied, Cash Contributions Allowed

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The Tax Court, in a memorandum opinion by Judge Goeke, found that the donation of a facade easement of a Tribeca condo building for historical preservation purposes did not meet the requirements of IRC Section 170(h) as a qualifying charitable contribution. The court found that the petitioners failed to establish a value in the easement sufficient to support the claimed deduction.

The court did allow cash contributions made by some condo owners to the National Architectural Trust, the beneficiary of the easement, as deductible charitable contributions. The court also declined to assess accuracy-related penalties against the condo owners, finding that they established reasonable cause for their positions under IRC Section 6664(c).

Read the entire opinion here:
Dunlap v. Commissioner, T.C. Memo. 2012-126.

2nd Circuit: District Court Reversed, Banks Not Partners in Castle Harbour, Penalties Imposed

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Is this the last hurrah for GE Capital’s Castle Harbour transaction?

The story of GE Capital’s sophisticated tax deal with two Dutch banks finally may have come to a conclusion. In 1993, two Dutch banks, ING Bank N.V. and Rabo Merchant Bank N.V., purchased an interest in Castle Harbour LLC, a partnership in which TIFD III-E, Inc., a subsidiary of General Electric Capital Corp., served as the tax-matters partner. In short, Castle Harbour allowed GE to refinance a fleet of fully depreciated aircraft, allocate the taxable income from that fleet to its tax indifferent foreign partners (the banks) while preserving the economic benefits of the income for itself. Shifting the tax burden on the operating income to the foreign banks saved the GE subsidiary more than $60 million in U.S. taxes.

The IRS challenged the transaction in 2001 when it issued two Final Partnership Administrative Adjustments (FPAAs) against the tax-matters partner, TIFD III-E. The IRS alleged that the banks were not partners in Castle Harbour LLC. Litigation ensued. After a bench trial, the District Court for the District of Connecticut ruled in favor of the taxpayers finding that the banks were partners for tax purposes. The Second Circuit rejected the District Court’s finding and held that the partners did satisfy the totality of the circumstances test under Commissioner v. Culbertson, 337 U.S. 733 (1949). It then remanded the case to the District Court to address the taxpayer’s secondary argument, undecided in the first trial, that the partners qualified as partners under IRC Section 704(e). The District Court again found for the taxpayers and further determined that there was substantial authority for the taxpayer’s positions, thus the penalties asserted by the IRS did not apply.

In the this opinion, the Second Circuit has again rejected the District Court’s findings. The Court of Appeals held that the lower court erred and found that the banks did not have a capital interest in the partnership, as required by 704(e), and therefore were not partners. The appellate court further determined that the taxpayer did not offer substantial authority for its position and upheld the government’s penalty.

Given the determinations made by the Court of Appeals, it is hard to see how the taxpayers might establish grounds for a writ of certiorari. They have 90 days from the date of the order to file that petition.

Read the opinion here.
TIFD III-E, Inc. v. United States, Docket No. 10-70-cv (2nd Cir. January 24, 2012)

5th Circuit: Rejects Taxpayer Appeal of Distressed Asset Transaction

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The Fifth Circuit affirmed the decision of the District Court (Northern District of Texas) denying the tax losses of Texas banker D. Andrew Beal. The Court of Appeals affirmed the lower court’s finding that the partnership through which the losses were generated was a sham and that the losses should be disallowed. However, the Circuit Court also affirmed the trial court’s determination that penalties should not be allowed.

Read the opinion here:
Southgate Master Fund v. US.

Tax Court: Penalties Apply for Taxpayer Who Does Not Show Reliance on Tax Advice

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In a reviewed opinion, the Tax Court has found that a sophisticated taxpayer (i.e., a hedge fund manager) could not avoid penalties by relying on the reasonable cause defense under Sec. 6664(c)(1) where the taxpayer presented no evidence that the omitted income was because he relied on advice given by the tax return preparer.

Read the opinion here:
Woodsum v. Commissioner, 136 T.C. No. 29 (2011)

Tax Court: Reliance on VP of Tax is Not Reasonable Cause to Avoid Penalties

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The Tax Court finds that a consolidated group of companies which hired a former outside consultant (both a CPA and an Attorney) as their Vice President of Taxes was subject to penalties under Section 6664 on unreported personal holding company tax for the tax years in which he was their in-house advisor. The taxpayer was able to rely upon the reasonable cause exception from penalties for the tax year in which the same consultant was an independent paid provider.

Read the opinion here:
7 W Enterprises v. Commissioner, 136 T.C. No. 26 (2011)