The Tax Court in Brief November 22 – November 26, 2021
Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.
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Tax Litigation: The Week of November 22 – November 26, 2021
- 901 S. Broadway v. Comm’r, No. 14179-17, T.C. Mom 2021-132 | November 23, 2021 | Halpern
- Sand Inv. Co. v. Comm’r; 157 T.C. Memo. 11, 2021 | November 23, 2021 Lauber, J. | Dkt. No. 7307-19
Tax Court Case:
November 23, 2021 | Halpern | Dkt. No. 14179-17
Short Summary: This case focuses on a fairly narrow provision of § 170 of the Internal Revenue Code – namely § 170(h)(5)(A) – which requires, for a contribution to be considered a “qualified conservation contribution” under § 170(f)(3)(B)(iii), that such contribution be “exclusively for conservation purposes.” The Court ultimately found that the requirement was not satisfied because the conservation purpose was not “protected in perpetuity”.
- Whether a partnership’s contribution of a façade easement on a building to the Lost Angeles Conservancy was entitled to a deduction under I.R.C. § 170;
- Whether, in determining issue (1), the conservation purposes of the gift to the Conservancy were protected in perpetuity, as required by § 170(h)(5)(A), where deed of trust provisions gave lenders superior rights to insurance proceeds in the case of certain events.
Facts and Primary Holdings:
- The taxpayer – 901 S. Broadway (“Taxpayer”) – contributed a façade easement on a building at, appropriately, 901 South Broadway Avenue, Los Angeles, California.
- When the partnership granted the easement to the Conservancy, the underlying property was subject to five deeds of trust securing loans made to the partnership.
- Virtually all of the deeds of trust identically included a provision that granted the Lender rights to apply insurance proceeds to its indebtedness – rights that were superior to those of the Conservancy in any such proceeds.
- On its Form 1065 for tax year 2007, the Taxpayer claimed a deduction in the amount of $20,010,000 for its contribution to the Conservancy.
- A Final Partnership Administrative Adjustment (“FPAA”) denied the deduction on the grounds that the contribution did not satisfy all of the requirements of I.R.C. § 170 related to “qualified conservation contributions.”
- The Court agreed with the IRS and denied the Taxpayer’s deduction, finding that the contribution did not satisfy the requirement that the conservation purpose be protected in perpetuity.
Key Points of Law:
- R.C. § 170(c) defines the term “charitable contribution” to mean “a contribution or gift to or for the use of” a specified organization.
- As a general rule, a taxpayer is not allowed a deduction for a contribution of part of the taxpayer’s interest in property. See R.C. § 170(f)(3).
- That general rule does not apply to a “qualified conservation contribution.” R.C. §170(f)(3)(B)(iii).
- R.C. § 170(h)(1) defines “qualified conservation contribution” to mean a contribution:
- Of a qualified real property interest;
- To a qualified organization;
- Exclusively for conservation purposes
- The term “qualified real property interest” includes “a restriction (granted in perpetuity) on the use which may be made of . . . real property.” R.C. § 170(h)(2)(C).
- Under § 170(h)(5)(A), the contribution of a qualified real property interest will not be treated as having been made exclusively for conservation purposes “unless the conservation purpose is protected in perpetuity.”
- When property covered by a conservation easement is subject to one or more mortgages, satisfaction of § 170(h)(5)(A) requires that the mortgagees’ rights in the property be subordinated to those of the done – here, the Conservancy.
- Section 1.170A-14 (g)(2), Income Tax Regs., provides that “no deduction will be permitted under this section for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.
- Retention by a lender of a priority right in insurance proceeds, in preference to the Conservancy, to secure satisfaction of its loan from the proceeds of insurance policies covering the property, violated the perpetuity requirement.
Insight: Many rights to tax deductions – particularly charitable deductions – are subject to multiple, detailed restrictions that must be closely adhered to. This case presents just one narrow, but stark, reminder that failure to adhere to all such restrictions can lead to the denial of a deduction. Undoubtedly, those effecting the contribution did so with the expectation of a substantial tax deduction – one that ultimately did not materialize.
Tax Court Case:
November 23, 2021 Lauber, J. | Dkt. No. 7307-19
Short Summary: Taxpayer challenged examination determination and assessment of accuracy-based penalties on the grounds that the initial determination of a penalty assessment was not approved by the “immediate supervisor” of the person making that determination, as required by section 6751(b)(1). The revenue agent (RA) was supervised by her team manager (TM1); during the examination, RA was promoted and transferred to a different team with a different team manager (TM2). The question posed: who was the agent’s “immediate supervisor” for this examination? Interpreting the “immediate supervisor” practically, the court rejected the taxpayer’s arguments. For example, the taxpayer argued that revenue agent (RA) “immediate supervisor” should be determined by looking at an organization chart. The court observed that “formalistic interpretation does not align with the statutory context (penalty approval) or with Congress’ intent. Put simply, the person who approves time off is not necessarily the person who should be approving penalty determinations. The person who actually supervises the agent’s work during the examination–including ‘the development of all penalty issues,’ IRM pt. 22.214.171.124.2(1)–is the person to whom Congress is most logically viewed as having entrusted this responsibility.”
Key Issues: How to interpret “immediate supervisor” for purposes of section 6751(b)(1), which does define this term. Nor does the IRS employ the term uniformly.
Primary Holdings: For purposes of I.R.C. sec. 6751(b)(1), the “immediate supervisor” is the individual who directly supervises the examining agent’s work in an examination. The team manager who oversaw the agent’s work throughout the case that “immediate supervisor.” Because that manager timely approved the agent’s penalty determinations, the requirements of I.R.C. sec. 6751(b)(1) were satisfied.
Key Points of Law:
Section 6751(b)(1) provides that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.” In a TEFRA case such as this, supervisory approval generally must be obtained before the FPAA is issued to the partnership. If supervisory approval was obtained by that date, the partnership must establish that the approval was untimely, i.e., “that there was a formal communication of the penalty before the proffered approval” was secured.
Insight: When in doubt, take the belt-and-suspenders approach. Whether because of the uncertainty of the term “immediate supervisor” or because of the uncertainty caused by staff reassignments, the reviewing agent took the prudent course. As the court observed: The Supplemental Civil Penalty Approval Form lists “the ‘examiner’ as RA Cooper and the ‘examiner’s immediate supervisor” as “Gregory P. Burris/William H. Wilson.’ And the form includes three signature lines: one for the ‘examiner’ (where RA Cooper signed); one for the ‘case & issue supervisor’ (where Mr. Burris signed); and one for the ‘immediate supervisor’ (where Mr. Wilson signed). Because of the ever-changing landscape created by evolving judicial interpretations of this ambiguous statute, RA Cooper evidently took a belt-and-suspenders approach. We decline to penalize her for doing more than the statute required.”
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