Attorney-at-Law

“HOW GREEN WAS MY VALLEY”

In Uncategorized on 04/27/2016 at 16:49

Until He Got Creative

Douglas G. Carroll, III and Deirdre M. Smith get a full-dress T. C., 146 T. C. 13, filed 4/27/16, as their  conservation easement on the family farm in the Green Spring Valley National Register Historic District gets blown up, notwithstanding that the donees were both qualified organizations, and the easement deed didn’t fall foul of most of the various pitfalls which such are heir to.

Judge Ruwe goes to great lengths to explain how Doug played by the rules. True, Doug didn’t reduce his claimed deduction by the interests of his minor children in the property held in their UGMA trusts, but as Judge Ruwe doesn’t need to discuss the admittedly qualified appraisal, that’s by-the-bye.

No, Doug comes unglued at Reg. 1.170A-14(g)(6)(ii), which I’m sure y’all can recite from memory. What, no? Well, that’s the perpetuity kicker I’ve blogged many a time and oft.

Here’s Doug’s problem. He didn’t use the magic language that the contribution “gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time’.”

Doug’s drafter (presumably his real estate attorney who “does not answer tax questions or give tax advice”, 146 T. C. 13, at p. 6, footnote 5) puts this in instead: “The granting of this Conservation Easement gives rise to a property right, immediately vested in Grantees, with a fair market value equal to the ratio of the value of this Conservation Easement on the effective date of this grant to the value of the Protected Property without deduction for the value of the Conservation Easement on the effective date of this grant.  The value on the effective date of this grant shall be the deduction for federal income tax purposes allowable by reason of this grant, pursuant to Section 170(h) of the Code.  The parties shall include the ratio of those values with the Baseline Determination and shall amend such values, if necessary, to reflect any final determination thereof by the Internal Revenue Service or a court of competent jurisdiction.” 146 T. C. 13, at p. 12.

So if IRS blows off the deduction, and wins in court, says Judge Ruwe, and the easement tanks, then the donees get nothing.

Doug tries to counter with our old friends the Kaufmans, but all First Circuit said was that the aim of the statute and regulations was to prevent a windfall to the donors if the easement fell through, so that if a mortgagee got in ahead of the donees , that was OK. See my blogpost “’A Joy Forever?’ – Maybe Not,” 7/20/12.

Here there is no mortgagee or supervening party.

Doug then claims Maryland law (the property was in Maryland) lets one of his donees get in ahead of him no matter what. Yes, says Judge Ruwe, if there’s an eminent domain proceeding, and then only as to one of the donees. But your easement can flop otherwise than by eminent domain, and even in eminent domain only one donee gets the boodle.

Looks like Doug is facing a substantial understatement, and maybe even a substantial overvaluation, chop.

But IRS blows it.

“Respondent [IRS] did not determine an accuracy-related penalty under section 6662(e) or (h) in the notice of deficiency or in his answer.  In his pretrial memorandum respondent asserts that petitioners are liable for substantial and/or gross valuation misstatement penalties.  Respondent also indicates in his pretrial memorandum that he anticipates making a motion that the pleadings conform to the facts to increase the accuracy-related penalty from 20% to 40%; however, respondent never filed such motion.

“Rule 41(a) provides that, when more than 30 days have passed after an answer has been served, ‘a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires.’  Whether a party may amend his pleading lies within the sound discretion of the Court.  In determining whether to allow a proposed amendment, the Court must consider, among other things, whether an excuse for the delay exists and whether the opposing party would suffer unfair surprise, substantial inconvenience, or other prejudice. The Court looks with disfavor on untimely requests for amendment that, if granted, would prejudice the other party. “ 146 T. C. 13, at pp. 47-48.  (Footnote and citations omitted).

If you claim you’re going to do something, do it.

“Respondent has not explained his delay in asserting the section 6662(e) and (h) penalties.  In his pretrial memorandum respondent indicates that he anticipates filing a motion to amend the pleadings to assert the substantial and/or gross valuation misstatement penalties.  Without further explanation respondent argues in his pretrial memorandum that petitioners are liable for substantial and/or gross valuation misstatement penalties.  However, at no time did respondent file a motion with this Court requesting leave to amend his answer as required by our Rules.  Accordingly, we will not consider respondent’s assertion of substantial and/or gross valuation misstatement penalties under section 6662(e) or (h).” 146 T. C. 13, at pp. 48-49.

But Doug does get the 5-and-10 chop for understatement. He did the tax planning for the easement agreement his own self, consulted with nobody, was experienced in the area, and was a highly-educated medical doctor. And his attorney, you’ll remember, “does not answer tax-related questions or give tax advice.” 146 T. C. 13, at p. 46.

He who has himself for a lawyer….

 

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