In Uncategorized on 06/24/2013 at 17:11

Not only are knowledge and sophistication dangerous, but when you know enough to get a money-back guarantee in case your tax maneuver craters, you can’t claim that there was a “non-negligible risk” that the deal would unwind. That’s Judge Gustafson’s less-than-obliging lesson for Lawrence G. Graev and Lorna Graev, in 140 T. C. 17, filed 6/24/13.

It’s another façade easement case. I’ve blogged so many of these that I won’t cite to them here.

Larry was canny; when he bought his historic New York property and was approached by easement-vendor National Architectural Trust (NAT), he “…sent an email to NAT explaining a concern that had arisen:

“‘My accountants have referred me to Notice 2004-41 * * * issued by the IRS on June 30, 2004, in which the IRS has indicated that it will, in ‘appropriate cases’, disallow charitable deductions to organizations that promote conservation easements and may impose penalties and excise taxes on the taxpayer. They have not advised me to abandon this idea, but they have advised me to be very cautious. What are your thoughts especially as it relates to the side letter, etc.’

“(The ‘side letter’ to which Mr. Graev referred was NAT’s comfort letter assuring that it would refund a contribution in the event that the favorable tax results anticipated from a contribution were not achieved.)” 140 T. C. 17, at p. 8.

Moreover, “(O)n his tax returns Mr. Graev listed his occupation as ‘attorney’, and we infer that he is an individual of above-average sophistication who, with the help of his accountants, was capable of identifying tax risks. We find that Mr. Graev did in fact identify non-negligible risks regarding the deductibility of facade easements, as evidenced by his … email and subsequent dealings with NAT.” 140 T. C. 17, at pp. 8-9.

NAT claimed it was SOP for them to give back whatever cash the servient tenant (that’s the owner of the property burdened by the easement, and not a bit player from “Fifty Shares of Grey”) gave them to enforce the easement, get the documentation recorded, etc., if IRS torpedoed the Section 170 façade easement deduction. Moreover, NAT would enter into a recordable revocation of the easement.

IRS claims this made the whole deal conditional, and therefore the thing of beauty was not a joy forever. There is a “non-negligible risk” that the easement would dissolve, the cash get repaid and everything revert to status quo ante.

In simplest terms, “26 C.F.R. section 1.170A-1(e) clarifies that principle: no deduction for a charitable contribution that is subject to a condition (regardless of what the condition might be) is allowable, unless on the date of the contribution the possibility that a charity’s interest in the contribution ‘would be defeated’ is ‘negligible’.” 140 T. C. 17, at p. 22. The charity must keep the donated property; any possibility of defeasance must be “negligible”.

Larry claims the condition argument is “new matter”, as to which IRS has burden of proof, but here there are no disputed facts, so burden of proof is irrelevant.

And Larry knew there was a real risk; he asked his accountants and he insisted upon the “side letter”, giving him his money back and his property free and clear of the easement, if IRS blew up the deal.

Larry claims his valuation of the easement was reasonable, and for this case that isn’t an issue, but there are other ways a façade easement deduction can be blown up other than valuation.

However that may be, “(T)he mere fact that he required the side letter is strong evidence that, at the time of Mr. Graev’s contribution, the risk that his corresponding deductions might be disallowed could not be (and was not) ‘ignored with reasonable safety in undertaking a serious business transaction.’ 885 Inv. Co. v. Commissioner, 95 T.C. at 161.

“Mr. Graev was not alone in his assessment of the risk of disallowance. NAT considered it ‘standard Trust policy’ to return a cash contribution to the extent a deduction therefor was disallowed by the IRS. In numerous instances NAT issued ‘comfort letters’ assuring donors of this policy. The very essence of a comfort letter implies a non-negligible risk; and the author uses the letter to induce the recipient to enter into a transaction.” 140 T. C. 17, at p. 34.

Larry’s arguments under New York Environmental Conservation Law and under Federal tax law avail him not. Whatever the law says, there remains a non-negligible possibility that IRS will blow up the deal and NAT will honor their commitments in the side letter.

Beware of the money-back guarantee.


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