The Tax Court in Brief October 31 – November 6, 2020
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.
The Week of October 31 – November 6, 2020
- Glade Creek Partners, LLC, Sequatchie Holdings, LLC, TMP v. Comm’r, T.C. Memo. 2020-148
- Leith v. Comm’r, T.C. Memo. 2020-149
Glade Creek Partners, LLC, Sequatchie Holdings, LLC, TMP v. Comm’r, T.C. Memo. 2020-148
Short Summary: In 2012, Glade Creek Partners, LLC (Glade Creek) donated a conservation easement on 1,313 acres of undeveloped real estate in Bledsoe County, Tennessee. It claimed a $17.5 million charitable contribution deduction for its 2012 short tax year period. The IRS challenged the charitable contribution deduction and sought penalties.
Key Issue: Whether Glade Creek is entitled to the charitable contribution deduction under the technical requirements of Section 170 and whether Glade Creek is liable for a 40% gross valuation misstatement penalty under Section 6662(e) and (h) or alternatively the 20% valuation penalty under Section 6662(b)(3).
- Glade Creed is not entitled to a full conservation easement deduction because the easement’s conservation purposes are not protected in perpetuity. However, Glade Creek is entitled to a cash charitable contribution deduction of $35,077. In addition, Glade Creek is liable for a 20% accuracy-related penalty for a substantial valuation misstatement for any claimed charitable contribution deduction in excess of $8,876,771.
Key Points of Law:
- Section 170(a)(1) allows taxpayers to deduct charitable contributions made within the tax year. If the taxpayer makes a charitable contribution of property other than money, the deduction is generally equal to the donated property’s fair market value at the time of the donation. Reg. § 1.170A-1(c)(1). Generally, a taxpayer is not entitled to deduct the donation of “an interest in property which consists of less than the taxpayer’s entire interest.” Sec. 170(f)(3)(A). However, an exception is made for a contribution of a partial interest in property that constitutes a “qualified conservation contribution.” Id. subpara. (B)(iii). The exception applies where: (1) the taxpayer donates a “qualified real property interest,” (2) the donee is “a qualified organization,” and (3) the contribution is “exclusively for conservation purposes.” Id. subsec. (h)(1). The donation must satisfy all three requirements. Irby v. Comm’r, 139 T.C. 371, 379 (2012).
- A contribution is “exclusively for conservation purposes” if its conservation purpose is “protected in perpetuity.” 170(h)(5)(A). The regulations interpreting section 170(h)(5) recognize that “a subsequent unexpected change in the conditions surrounding the property . . . can make impossible or impractical the continued use of the property for conservation purposes.” Treas. Reg. § 1.170A-14(g)(6)(i).
- The Regulations further provide a way for the perpetuity requirement to be deemed satisfied: “The conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the donee uses its share of the “proceeds . . . from a subsequent sale or exchange of the property . . . in a manner consistent with the conservation purposes of the original contribution.”
- The plain text of Treas. Reg. § 1.170A-14(g)(6)(ii) requires the donee to receive a proportionate share of the extinguishment proceeds and does not permit the value of any posteasement improvements to be subtracted out before determining the donee’s share. Coal Prop. Holdings, LLC v. Comm’r, 153 T.C. 126, 139 (2019); Oakbrook Land Holdings, LLC v. Comm’r, T.C. Memo. 2020-54.
- Ordinarily, a charitable contribution is made when its delivery is effected. Reg. § 1.170A-1(b). When delivery is effected through an agent acting on behalf of the donee or donor, the critical question is whether the donor has relinquished dominion and control. Fakiris v. Comm’r, T.C. Memo. 2017-126.
- If the transfer of the charitable contribution depends on the performance of some act or the happening of a precedent event to become effective, the taxpayer is not entitled to a charitable contribution deduction unless the possibility that the condition will not occur is so remote as to be negligible. Reg. § 1.170A-1(e). Thus, a condition that is so remote as to be negligible is immaterial and does not preclude a finding that a transfer of control to the donor occurred for purposes of the deductibility of the charitable contribution. Id. A condition is so remote as to be negligible where “every dictate of reason would justify an intelligent person in disregarding [it] as so highly improbable and remote as to be lacking in reason and substance.” Briggs v. Comm’r, 72 T.C. 646, 657 (1979), aff’d without published opinion, 665 F.2d 1051 (9thCir. 1981).
- Taxpayers who meet the technical requirements for a charitable contribution of a conservation easement may deduct the easement’s fair market value . Treas. Reg. § 1.170A-1(c)(1). A taxpayer makes a gross valuation misstatement when it claims a value for the donated property that is 200% or more of the correct amount. 6662(h). Reasonable cause is not available as a defense to the gross valuation misstatement penalty for the deduction of donated property but is a defense to the alternative penalties respondent asserts. Sec. 6664(c)(3).
- The fair market value of property is the price at which it would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Reg. § 1.170A-1(c)(2). When there is a substantial record of sales of comparable properties, we determine the donated property’s fair market value on the basis of the sales price of those comparables. Treas. Reg. § 1.170A-14(h)(3)(i). Because sales of conservation easements are rare, the regulations authorize the use of a before and after valuation method to value easements. Id. Under the before and after method, the easement’s fair market value is the difference between the fair market value of the property unencumbered by the easement (before value) and its fair market value after the easement’s grant (after value). Id. When the donor owns additional property unencumbered by the easement, the deduction is decreased for any enhancement to the value of the unencumbered property as a result of the easement. Treas. Reg. § 1.170A-14(h)(3)(i).
- An appraiser may use the comparable sales method or another accepted method to estimate the before and after values. Hilborn v. Comm’r, 85 T.C. at 689. Comparables must be similar in nature to the donated property and sold in arm’s-length transactions within a reasonable time of the donation. Wolfsen Land & Cattle Co. v. Comm’r, 72 T.C. 1, 19 (1979). It is appropriate to adjust the sale price of a comparable to account for differences in the sale date and the size or other features of the property.
- The Tax Court relies on expert opinions to assist it with the determination of fair market value. R. Evid. 702. The Tax Court evaluates expert opinions in the light of the experts’ demonstrated qualifications, the factors they considered to reach their conclusions, and all other evidence in the record. See Parker v. Comm’r, 86 T.C. 547, 561 (1986). It is not bound by an expert opinion and may accept or reject the testimony, in part or in its entirety, in the exercise of the Tax Court’s sound judgment. Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938).
- The fair market value of land is generally determined on the basis of its highest and best use. Hilborn v. Comm’r, 85 T.C. at 689-90. The highest and best use is “the highest and most profitable use for which property is adaptable and needed or likely to be needed in the reasonably near future.” Olson v. U.S., 292 U.S. 246, 255 (1934). Whether the owner has put the property to such use or intends to do so is not determinative. Stanley Works & Subs. v. Comm’r, 87 T.C. 389, 400 (1986). Highest and best use is a question of fact and requires an objective assessment of the likelihood that the donated property would be put to such use. at 408.
- A taxpayer makes a substantial valuation misstatement if the claimed if the claimed value is more than 150% but less than 200% of the correct amount. See 6662(b)(3). However, the penalty may be abated for reasonable cause. Sec. 6664(c)(3). Reasonable cause and good faith determinations are made on a case-by-case basis taking into account all pertinent facts and circumstances. Treas. Reg. § 1.6664-4(b)(1). Generally, the most important factor is the taxpayer’s efforts in assessing its proper tax liability. Id.
- In the context of a valuation penalty, taxpayers can establish reasonable cause on the basis of their reasonable reliance on a qualified appraisal by a qualified appraiser and their own good faith with respect to the valuation. Reg. § 1.6664-4(h). A taxpayer may also rely on professional advice as a defense if: (1) the taxpayer reasonably believed that the professional is competent and has sufficient expertise; (2) the adviser has all necessary and accurate information; and (3) the taxpayer actually relied on the advice in good faith. Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 98-99 (2000), aff’d, 299 F.3d 221 (3rd Cir. 2002). In general, reliance on a promoter is not reasonable or in good faith and is not a defense to an accuracy-related penalty. Mortensen v. Comm’r, 440 F.3d 375, 387 (6th Cir. 2006). With respect to adjustments to amounts reported by an LLC, reasonable cause is determined by examining the actions of the managing member. Stobie Creek Invs., LLC v. U.S., 608 F.3d 1366, 1380-81 (Fed. Cir. 2010).
Insight: Freeman Law has extensively covered the ongoing conservation easement saga between taxpayers and the IRS. Conservation Easement Deductions: A Primer on Key Provisions; Another Attack on Conservation Easements; Settling Conservation Easement Penalties: The IRS and Some New Insights. The Glade Creek decision continues to show that the saga will continue.
Leith v. Comm’r, T.C. Memo. 2020-149
Short Summary: The taxpayer sought innocent spouse relief from the joint tax liabilities of her husband for the tax years 2010-2013. The IRS granted relief, and the taxpayer-husband intervened, opposing relief.
Key Issue: Whether the taxpayer is entitled to innocent spouse relief under Section 6015(f).
- The taxpayer is entitled to relief under Section 6015(f) to the extent of the tax items attributable to taxpayer-husband for 2010-2013.
Key Points of Law:
- The Tax Court is a court of limited jurisdiction and can exercise its jurisdiction only to the extent provided by Congress. 7442; Judge v. Comm’r, 88 T.C. 1175, 1180-1181 (1987). With respect to claims for relief from joint and several liability, the Court has three jurisdictional bases for reviewing a claim: (1) as an affirmative defense in a deficiency redetermination proceeding pursuant to Section 6213(a); (2) as a stand-alone petition pursuant to Section 6015(e) where the Commissioner has issued a final determination denying the requesting spouse’s claim for relief or the Commissioner has failed to rule on the claim within 6 months of filing; and (3) in the context of a petition for review of a lien or levy action pursuant to Section 6320(c) or 6330(d). See secs. 6015(e); 6213, 6214, 6320(c), 6330(c)(2)(A)(i); Maier v. Comm’r, 119 T.C. 267, 270 (2002), aff’d, 360 F.3d 361 (2d Cir. 2004).
- Statements in briefs do not constitute evidence. Rule 143(c); Evans v. Comm’r, 48 T.C. 704, 709 (1967), aff’d per curiam, 413 F.2d 1047 (9th 1969).
- Reopening the record for the submission of additional evidence lies within the Court’s discretion. Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331 (1971).
- Generally, married taxpayers may elect to file a joint Federal income tax return. 6013(a). If a joint return is made, the tax is computed on the spouses’ aggregate income, and each spouse is fully responsible for the accuracy of the return and is jointly and severally liable for the entire amount of tax shown on the return or found to be owing. Sec. 6013(d)(3); Butler v. Comm’r, 114 T.C. 276, 282 (2000). Nevertheless, under certain circumstances, a spouse who has made a joint return may seek relief from joint and several liability under procedures set forth in section 6015. Section 6015 provides a spouse with three alternatives: (1) full or partial relief under subsection (b), (2) proportionate relief under subsection (c), and (3) if relief is not available under subsection (b) or (c), equitable relief under subsection (f).
- If the IRS evaluates the taxpayer’s entitlement to relief from joint and several liability under all three alternatives, the Tax Court has the jurisdiction to do the same. 6015(e)(1). In doing so, the court applies a de novo standard and scope of review. See Porter v. Comm’r, 132 T.C. 203, 210 (2009). The taxpayer generally bears the burden of proving that she is entitled to relief under section 6015. Rule 142(a); Porter v. Comm’r, 132 T.C. at 210.
- To qualify for relief under section 6015(b), the requesting spouse must establish: (1) a joint return was filed; (2) there was an understatement of tax attributable to erroneous items of the nonrequesting spouse; (3) at the time of signing the return, the requesting spouse did not know and had no reason to know of the understatement; (4) taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for the deficiency in tax attributable to the understatement; and (5) the requesting spouse sought relief within 2 years of the first collection activity relating to the liability. 6015(b)(1). These conditions are stated in the conjunctive, and the taxpayer must satisfy all five in order to be awarded relief. See Alt v. Comm’r, 119 T.C. at 313. Accordingly, the failure of a taxpayer to satisfy any one of the elements precludes relief. Id.
- Section 6015(c) permits the requesting spouse to seek relief from joint and several liability and elect to allocate a deficiency to the nonrequesting spouse if the following conditions are met: (1) a joint return was filed; (2) at the time of the election, the requesting spouse was separated or divorced from the nonrequesting spouse or was not a member of the same household as the nonrequesting spouse at any time during the 12-month period on the date of the request for relief; (3) the requesting spouse sought relief within 2 years of the first collection activity relating to the liability; and (4) the requesting spouse did not have actual knowledge, at the time of signing the joint return, of the item giving rise to the deficiency. 6015(c)(3).
- Subsections (b) and (c) of Section 6015 only apply in the case of “an understatement of tax” or “any deficiency” in tax, and do not apply in the case of underpayments of tax reported on joint tax returns. 6015(b)(1)(B); Hopkins v. Comm’r, 121 T.C. 73, 88 (2003).
- As directed by section 6015(f), the Commissioner has prescribed procedures to determine whether a requesting spouse is entitled to equitable relief from joint and several liability. Those procedures are set forth in Rev. Proc. 2013-34, sec. 4. Although the Court considers those procedures when reviewing the Commissioner’s determination, the Court is not bound by them. See Pullins v. Comm’r, 136 T.C. 432, 438, 439 (2011). The Court’s determination ultimately rests on the evaluation of all the facts and circumstances. Porter v. Comm’r, 132 T.C. at 210.
- Pursuant to the revenue procedure, the IRS conducts a multistep analysis when determining whether a requesting spouse is entitled to equitable relief under section 6015(f). See Rev. Proc. 2013-34, sec. 4. The requirements for relief under the revenue procedure are categorized as threshold or mandatory requirements, streamlined elements, and equitable factors. A requesting spouse must satisfy each threshold requirement to be considered for relief. If the requesting spouse meets the threshold requirements, the IRS will grant equitable relief if the requesting spouse meets each streamlined element. Otherwise, the IRS will determine whether equitable relief is appropriate by evaluating the equitable factors.
- The requesting spouse must meet seven threshold requirements to be considered for relief under section 6015(f). Proc. 2013-34, sec. 4.01. Those requirements are: (1) the requesting spouse filed a joint return for the tax year for which relief is sought; (2) relief is not available to the requesting spouse under section 6015(b) or (c); (3) the claim for relief is timely filed; (4) no assets were transferred between the spouses as part of a fraudulent scheme; (5) the nonrequesting spouse did not transfer disqualified assets to the requesting spouse; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the nonrequesting spouse. Rev. Proc. 2013-34.
Insight: The Leith decision serves as a good reminder to taxpayers of the usefulness of requesting innocent spouse relief on equitable grounds under Section 6015(f).
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