In Uncategorized on 10/25/2012 at 22:26

Tax Court just can’t get enough of those Section 170(h) cases, the delivery system for unguided Congressional largesse to the scenic and the historic. Yesterday it was Whitehouse Hotel Limited Partners (see my blogpost “Chipping Away the Facade – Part Deux”, 10/24/12). Now it’s Charles R. Irby and Irene Irby, et al., 139 T. C. 14, filed 10/25/12.

The Irby clan were members of an LLC that made bargain sales of wide-open Colorado spaces to Colorado Open Lands (COL), a 501(c)(3) that qualifies under Section 170(h)(3); bargain sales are below-market sales, in this case to charities. The portion of the purchase price paid by the charity results in gain to the seller, the below-market portion is a contribution (see Reg. Sec. 1.170A-4(c)(2)(ii)).

IRS claims the grant wasn’t protected in perpetuity, because government agencies that funded COL’s purchase are entitled to recapture out of the award if the land is condemned and the easement extinguished, so that all proceeds won’t go to COL in such event. But see my blogpost “’A Joy Forever?’ – Maybe Not”, 7/20/12. IRS also claims that the appraisal wasn’t qualified because it didn’t state it was made for income tax purposes. Finally, IRS claims there wasn’t a contemporaneous written acknowledgment of the gift from COL.

IRS loses all the way.

Judge Jacobs cites Kaufman v. Shulman, 687 F.3d 21, 26 (1st Cir. 2012): “paragraph (g)(6) appears designed in case of extinguishment both (1) to prevent taxpayers from reaping a windfall if the property is destroyed or condemned and they get the proceeds from insurance or condemnation and (2) to assure that the donee organization can use its proportionate share of the proceeds to advance the cause of historic preservation elsewhere.”

COL gets its share of proceeds after the government funders (all Section 170(c)(1) entities and all dedicated to preservation) get repaid. Thus no windfall to the Irbys, or diversion of funds from conservation purposes.

As to the appraisal: “Section 1.170A-13(c)(3)(ii), Income Tax Regs., provides that a qualified appraisal must include 11 categories of information to be a valid qualified appraisal. Respondent [IRS] challenges only one such category; respondent asserts that the appraisal petitioners rely upon does not meet the requirement of section 1.170A-13(c)(3)(ii)(G), Income Tax Regs., that the appraisal contain ‘A statement that the appraisal was prepared for income tax purposes’. Respondent argues that the appraisal and addenda to appraisal Mr. Butler drafted do not include such a statement and consequently they are unreliable because there is no assurance that Mr. Butler applied the proper standards of care to ensure that the reports conformed to Internal Revenue Service (IRS) standards.” 139 T. C. 14, at pp. 25-26. (Footnote omitted).

Judge Jacobs tosses out this far-fetched argument: “…the appraisal report in this case included all of the required information either in the appraisal or in the appraisal summaries attached to petitioners’ respective returns–it included a discussion of the purpose of the transaction (i.e., that the purpose of the appraisal was to value the donation of a conservation easement pursuant to the terms of section 170(h))…; it stated that fair market valuation was to be used in determining the value of the property; and Form 8283 was properly filed with petitioners’ respective returns. The IRS has not provided to the public a specific form for the tax purpose statement, and respondent has not proffered any instance where a suboptimal tax purpose statement, by itself, invalidated an otherwise qualified appraisal.” 139 T. C. 14, at p. 27 (Footnote omitted).

Finally, as to the contemporaneous acknowledgment by the donee, the Irbys introduce correspondence with COL and the funders, signed agreements and deeds, and the settlement statement for the transfers. IRS says that no single document satisfies Section 170(f)(8) acknowledgment. Judge Jacobs: “However, respondent does not assert, and we have found no authority to indicate, that the contemporaneous written acknowledgment may not be made up of a series of documents. We thus find that, collectively, the documents petitioners provided constitute a contemporaneous written acknowledgment.” 139 T. C. 14, at p. 31.

Takeaway–Do it right, and you get the deduction.

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