In Uncategorized on 09/20/2018 at 18:20

It’s been nearly a year since I last animadverted to Herman Melville’s classic tragedy, but Belair Woods, LLC, Effingham Managers, LLC, Tax Matters Partner, 2018 T. C. Memo. 159, filed 9/20/18, brings to mind the melancholy refrain of the immortal scrivener.

It’s yet another scenic easement. My colleague Mr Peter Reilly CPA was blogging about the recent Champion Retreat opinion (see my blogpost “Not Endangered – Except the Benderdinker,” 9/10/18). There’s lots of these scenic easement dodges, but political considerations raise their heads, so I’ll forbear to comment further.

The Belairs sent in the Form 8283 with appraisal attached. So far, so good. But one number is missing, and thereby hangs the cliché.

“In particular, Belair did not disclose on that form, as was required, the ‘cost or adjusted basis’ of the property that was the subject of the contribution. Petitioner contends that Belair strictly or substantially complied with that requirement or, alternatively, had reasonable cause for failing to meet it.” 2018 T. C. 159, at p. 2.

The deal was originally going to be a housing development, but the 2008 Meltdown put paid to that. So to set up the big tax break and put it in play, the Belairs went to “Forever Forests, LLC (Forever Forests), a consulting firm specializing in structuring conservation easements to maximize tax benefits for donors.” 2018 T. C. Memo. 159, at p. 4.

The Forever Foresters so massaged the deal that what the Belairs bought at $2.7K per acre in 2007 was suddenly worth $33.7K per acre by 12/30/09.

But the cost or adjusted basis never made it into the appraisal or the Form 8283.

“Belair contacted Forever Forests about preparing the Form 8283, specifically with reference to reporting its ‘cost or adjusted basis.’  Forever Forests relayed advice that it had received in 2008 from Baker Donelson, a law firm.  At Forever Forest’s request, an attorney at that firm had reviewed the instructions to Form 8283 and concluded that ‘[i]t should not be necessary to include the basis in formation * * * if you attach an explanation to Form 8283 providing a reasonable cause for why it is not included.’  He further stated that ‘a reasonable cause for not including basis information should be that the basis of the property is not taken into consideration when computing the amount of the deduction’.” 2018 T. C. Memo. 159, at p. 7.

So that’s what the Belairs tell IRS, plus they have a 12-month holding period, so it’s a capital gain.

Well, Judge Albert G (“Scholar Al”) Lauber is not amused.

“Belair did not report its cost basis as the regulation requires and as Form 8283 directs.  And the explanation Belair attached to that form, far from showing that it was unable to provide this information, simply asserted that the information was not necessary.  In effect, Belair asserted that taxpayers are free to ignore the requirement that they report cost basis.  Asserting that one may ignore a requirement does not constitute strict compliance with it.” 2018 T. C. Memo. 159, at pp. 11-12.

Belair isn’t doing so great, but now they put in their entry for the Taishoff “Best Excuse” no-prize sweepstakes.

“Petitioner contends Belair had reasonable cause for omitting basis information because it did not know what basis to report.  On the facts here, petitioner says, the term ‘basis’ might refer to any of the following: (1) the cost of the parent tract, (2) the cost of the conserved portion of the parent tract, (3) the adjusted basis of the conserved portion minus the homesite parcels, or (4) the basis of the easement itself, which petitioner says is zero.  Because the term ‘basis’ in the context of a conservation easement is supposedly ambiguous, petitioner contends that Belair had reasonable cause for not supplying basis information.” 2018 T. C. Memo. 159, at p. 12.

But the Belairs didn’t mention this in the attachment to the Form 8283. The Belairs counter that Reg. 1.170A-13(c)(4)(iv)(H) says they don’t lose the deduction if they furnish the information to IRS on request, and they did. Three years later, at the audit.

Judge Lauber is definitely not amused.

“Belair supplied the required information three years after its return was filed and only upon learning the outcome of the IRS examination.  The regulations create a prophylactic rule designed to provide the IRS with information to help it decide whether to commence an examination.  This requirement would be meaningless if a taxpayer could cure noncompliance after the examination was completed.” 2018 T. C. Memo. 159, at p. 14.

Sort’a like getting the Boss Hoss sign-off after the tax has been assessed on the trial, Judge?

“When a taxpayer claims a charitable contribution deduction for recently purchased property, a wide gap between cost basis and claimed value raises a red flag suggesting that the return merits examination. Unless the taxpayer complies with the regulatory requirement that he disclose his cost basis and the date and manner of acquiring the property, the Commissioner will be deprived of an essential tool that Congress intended him to have.” 2018 T. C. Memo. 159, at p. 17.

The Belairs says IRS could wade through their return to find the basis. Another nonstarter.

“Specifically, petitioner contends that Belair supplied information from which its cost basis could be derived in one or more of the following attachments to its Form 1065:  (1) Schedule L, Balance Sheets per Books, (2) Schedule M-1, Reconciliation of Income (Loss) Per Books With Income (Loss) Per Return, (3) a section 743(b) election and calculation sheet, and (4) the attached appraisal, which included a history of the parent tract.

“We are not persuaded.  The regulations require that ‘an appraisal summary shall include’ information concerning basis.  Sec. 1.170A-13(c)(4)(ii)(E), Income Tax Regs.  The explicit disclosure of basis on Form 8283 is essential in alerting the Commissioner as to whether (and to what extent) further investigation is needed.” 2018 T. C. Memo. 159, at pp. 19-20.

“The IRS reviews millions of returns each year for audit potential, and the disclosure of cost basis on the Form 8283 itself is necessary to make this process manageable.  Revenue agents cannot be required to sift through dozens or hundreds of pages of complex returns looking for clues about what the taxpayer’s cost basis might be.” 2018 T. C. Memo. 159, at p. 20.

The Belairs claim they relied on the Forever Foresters and their lawyer. But it’s a fact question how expert the Forever Foresters were, what the Belairs told them and whether the Belairs relied in good faith.

Takeaway- “I would prefer not to” works only in literature.

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