The popularity of the conservation easement donation deduction guarantees lots of cases for Tax Court. Here it comes again, in today’s solitary Memorandum, Walter C. Minnick and A.K. Lienhart, 2012 T. C. Memo. 345, filed 12/17/12, Judge Morrison wading through another. But while lacking in legal novelty, the story has its moments.

Here the issue of the 40% substantial overvaluation of Wally’s gift to the Land Trust of Treasure Valley, Inc. (Treasure Valley lies outside Boise, ID) goes away, because Wally’s gift didn’t comply with the regulations. As we saw in BLAK Investments, if the deduction is disallowed on grounds other than the valuation, the valuation is irrelevant. See my blogpost “It’s A Sham”, 9/25/12.

Wally’s deduction comes unglued because the 74-acre parcel of Treasure Valley that Wally donated, 80% of which was subject to the easement, was encumbered by an unsubordinated mortgage, which Wally only got subordinated two years after IRS dropped the SNOD on Wally.

Wally claimed he was misled by the form of grant of easement he got from the Treasure Valley treasurers, in which he warranted that the land was unencumbered when in fact it wasn’t, and that the bank would have gladly subordinated. But a bank officer testified it wouldn’t, and the bank made Wally pay down the principal of the mortgage to get the subordination.

Wally tries to distinguish his case from Ramona Mitchell (see my blogpost “Subordinate or You Lose”, 4/4/12), but fails. He claims the Idaho version of the Uniform Conservation Easement Act would have protected the charitable use. Maybe, says Judge Morrison, but what it would have protected is whatever was left after the bank got its money out. And here there was not even the partial subordination, such as Gordo and Lorna Kaufman got; see my blogposts “A Joy Forever”, 4/4/11, and “‘A Joy Forever’? – Maybe Not”, 7/20/12. But it might behoove Wally to appeal and see if the Ninth Circuit buys the rationale of the First Circuit in Kaufman v. Shulman, 687 F.3d 21 (2012).

Seeking to avoid penalties, Wally claims he “should not be held to the standard of an experienced tax attorney because he worked only for a few months as an attorney and that he spent only a fraction of his time practicing tax law.” 2012 T. C. Memo. 345, at p. 14. He claims he asked his CPA about the conservation easement, and had an expert appraiser do the appraisal. And he used the Treasure Valley model form.

No dice, says Judge Morrison.

All the CPA told Wally was conservation easements give rise to deductions. “However, he did not tell Minnick that the particular conservation easement Minnick granted to the Land Trust was deductible. In the absence of such advice, Minnick could not have reasonably relied on the C.P.A. when he claimed a deduction for the conservation easement contribution. Minnick should have been alerted by the warranty provision in the conservation easement that there might be a problem with the lack of subordination. The easement contained a warranty from Minnick that there was no unsubordinated mortgage on the land. It is true that the form Minnick used to grant the easement was a ‘model’, but that does not matter. This model easement form was not suited to Minnick’s particular parcel of land.” 2012 T. C. Memo. 345, at pp. 15-16. (Footnote omitted.)

The omitted footnote is well worth reading, as it shows a fine example of what sailors call “scuttlin’ up to winnard”. “Note the C.P.A.’s careful response to the following question from Minnick and Lienhart’s counsel:

“Q Did you advise Mr. Minnick as to whether the conservation easement was deductible or not?

“A I advised him that a conservation easement, the donation of a conservation easement is deductible as a charitable contribution, and is specifically provided for in the code.

“We infer that the C.P.A. declined to tell Minnick the grant of the particular easement was deductible and that Minnick should have recognized this.” 2012 T. C. Memo. 345, at p. 16, footnote 3.

And the appraiser was qualified to provide an expert opinion of the easement’s value, not the deductibility or otherwise thereof.

So negligence penalty for Wally.

Footnote- Apparently Wally served one term in the United States House of Representatives. That explains much.