Upton Sinclair has nothing on Judge David Gustafson, who is running his own packing plant, and providing fresh examples of the Texas Maxim.

Here’s Rock Creek Property Holdings, LLC, Rock Creek Land Manager, LLC, Tax Matters Partner, Docket No. 5599-17, filed 2/10/20. It’s another iteration of the failed proportion at extinguishment. Once again, the 501(c)(3) would be short-changed on any appreciation of the property on extinguishment of the conservation easement.

“Rock Creek Holdings (like the petitioner in Railroad Holdings) advances the same arguments about the text of the deed, arguing that because the donee is entitled to ‘at least’ an amount, the donee ‘is not limited to that amount.’ (Doc. 13 at 19). But, as we have explained, a provision that the donee is not necessarily ‘limited to that [deficient] amount’ is insufficient, because the donee must be entitled to the full amount. A deed that provides for the donee a share of proceeds that may be less than the minimum cannot comply by adding ‘at least’ to its deficient formula. The defect cannot be cured by part D of article VI, which purports to resolve any ambiguities in the conservation easement in favor of its validity. See Railroad Holdings, LLC v. Commissioner, at *17-*18. Even if we assumed ambiguity in the paragraphs regarding extinguishment, a cure to the validity of the deed of easement does not cure the non-deductibility of the contribution, and construing part D as a saving clause would render it unenforceable. Id. at *18 (‘A donor cannot reserve in an easement deed a right that section 170(h) does not permit * * * but then save his charitable contribution by mentioning the rule he has violated and calling for that rule to kick in and save the day if his violation subsequently comes to light.’).” Order, at pp. 7-8.

For Railroad Holdings, see my blogpost “The Old Texas Maxim,” 2/5/20.

But the point here is that Aiken, who had inherited various parcels of Georgia scrub land ”… had effectively received about $1.2 million for the entire property in September 2013; and Rock Creek Holdings claimed that the easement on the property was worth about $7.9 million three months later in December 2013.” Order, at p. 5.

Once again, the fate of the hogs is as heretofore stated.

I just the other day stressed the importance of appraisals when valuation is in play. An appraisal, even if it barely slides under the tag, is the blocker to IRS’ summary J motion, and gives the petitioner a chance to settle based on litigation risk, or a possible judicial mix-and-match after the trial.

But to get there, clear out the non-essentials, the law stuff that summary J can resolve. And sweat your expert. The valuation report must clear the bar.

Brannan Sand & Gravel Co., LLC, J. Curtis Marvel, Tax Matters Partner, Docket No. 27474-16, filed 2/7/20, gives me a fine opportunity to second-guess the Gravel Gang’s strategy in going with Rule 122 stipulated facts. The Gravel Gang claimed a $200K charitable for water storage rights; IRS said that doesn’t qualify for Section 170 treatment, or any other provision.

Judge Mary Ann (S.E.C. = “She Eschews Cognomens”) Cohen has a heavy lift.

“Upon review of the briefs of the parties, it appears that they dispute complicated issues, including but not limited to: whether certain materials attached to the partnership return constituted a qualified appraisal of the property donated; whether other technical requirements concerning the contents of a return reporting a charitable deduction (on Form 8283) were satisfied; whether the claimed contribution was part of a quid pro quo transaction; or whether the transaction should be treated as a bargain sale so that part of the value of the property is treated as a deductible contribution. These issues are made more difficult because of the relatively unusual property involved, that is, water storage rights.” Order, at p. 1.

But Judge Mary Ann (S.E.C.) Cohen is not wanting heavy lifts. Rule 122 doesn’t shift burden of proof, what constitutes proof, or what happens if the party with the burden drops the same. And Rule 149(b) lets her toss any party with burden of proof on an issue who adduces no proof of same.

“In the interest of judicial economy, the Court may decide a dispositive issue without addressing all of the issues and arguments presented by the parties. If one issue is dispositive, an opinion’s discussion of other issues is dictum. This maybe an appropriate case for application of Rule 149(b) to decide that the partnership is not entitled to the $200,000 charitable contribution deduction claimed because petitioner has failed to prove the fair market value of the water storage rights transferred.” Order, at p. 4.

The valuation here has some real problems.

“The ‘valuation opinion’ is based on the author’s experience as a litigator and purportedly comparable transactions indicating a price per acre-foot of $3,500 to $4,000. He gives no indication that he is familiar with the details of the interrelated transactions entered into by the partnership or why he would choose the high end of the range for the water storage rights here in issue. There are inadequate explanations of whether the identified transactions involved a willing buyer and a willing seller and thus are an indication of fair market value. In other words, there is no comparison to the comparables except by general geographic area.

“The parties argue about the qualifications of the author of the opinion to provide an appraisal. However, whether or not he is qualified with respect to the property in issue, there are serious questions about the reliability or admissibility of his opinion in the absence of an adequate discussion of the specific circumstances in which the water storage rights were donated. Respondent criticizes the opinion at length in contending that it does not constitute a ‘qualified appraisal’. Whether or not a qualified appraisal, the valuation opinion has not been received as evidence and might not qualify if offered at trial. Expert opinions that disregard relevant facts affecting valuation are rejected.” Order, at p. 3.

And if one issue is dispositive (like the valuation is worthless) then the others need not be resolved, as such resolutions are dictum.

So let the parties “…show cause, if any they have, why the remaining issue in this case should not be decided against petitioner and in favor of respondent under Rule 149(b), Tax Court Rules of Practice and Procedure, by reason of petitioner’s failure to present evidence in support of the charitable deduction claimed on the partnership’s 2010 return.” Order, at p. 4.

Note- There are lots of cases (the historic building easement cases) where appraisals, even if not of the best, pass muster. I’ve blogged a number of those. Make sure you have them in your memo of law files, because this is the latest countergambit.

Edited to add, 2/14/20: I don’t wish to belabor the point, but Judge Holmes didn’t toss IRS’ expert witness even when he lied under oath; he said “Only when an expert report becomes absurd or ‘so far beyond the realm of usefulness’ does bias make an expert report inadmissible. See Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 335-36 (2011).” See my blogpost “He Lied – So What?” 9/29/17. Take away the expert here, and IRS wins by suppression of petitioner’s only witness, in a matter that everyone admits is at least a “relatively unusual property involved.”

Taishoff says let the witness testify, face a solid cross-examination, and toss his testimony thereafter if worthless.

Edited to add, 10/23/20: Brannan stiped to dropping the $200K water storage deduction a couple weeks ago (hi, Judge Holmes). But the stip shows over $80 million in total deductions were on the table, so why bother with a trial?  

Tax Court doesn’t have one, and isn’t likely to have one any time soon. Self-represented blowers can’t use a LITC, but some of them sure need some kind of help.

Ashraf Elsayed, Docket No. 12413-19W, filed 2/6/20, which I’m blogging late because I went to the opening of the Met’s new production of Agrippina, is one such. The opera was a lot more fun than plowing through 135 undesignated orders. Yet I got more views on a day when I didn’t post than any day this February when I did; go figure.

Howbeit, Ashraf wants a more definite statement from IRS in its answer, because Ashraf is confused. He says IRS responds to paragraphs 1 to 5, which aren’t in his petition.

Ch J Maurice B (“Mighty Mo”) Foley says Ashraf used the Tax Court form petition (in part), so there are numbered paragraphs.

Besides, “(W)e also note that, pursuant to Rule 37(b), Tax Court Rules of Practice and Procedure, petitioner’s reply need only address the material allegations contained in respondent’s answer, rather than every paragraph of the answer.” Order, at p. 1.

Judge, are you entirely certain Ashraf can figure out what is a material allegation? In the last fifty-three (count ‘em, fifty-three) years, I’ve come across a couple lawyers (hi, Judge Holmes; the “hi” is for the partitive genitive drop. I know you know material allegations.) who’ve had trouble with that concept.

Once again I refer to an old Texas maxim, that derails the conservation easement of Railroad Holdings, LLC, Railroad Land Manager, LLC, Tax Matters Partner, 2020 T. C. Memo. 22, filed 2/5/20. More about that maxim later.

And that Obliging Jurist, Judge David Gustafson, decides that the Railroaders break down where the Coalholders did. See my blogpost “Diamonds Are Forever,” 10/28/19.

The Railroaders’ extinguishment clause, the track on which these syndicated piracies derail, provides in this case that the 501(c)(3) protector gets only the FMV of the easement as of the date of granting, not the proportionate share of the proceeds at the date of extinguishment. It’s a fixed ceiling, not a moveable one.

Judge Gustafson: “Though the deed incorporates from the regulation the phrase ‘proportionate value’, the deed does not create a proportion or fraction that represents the donee’s share of the property right, and hence a corresponding fraction of proceeds to which the donee is perpetually entitled.  See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 205-206 (5th Cir. 2018).  Rather, the deed determines instead a ‘proportionate value * * * at the time of the gift’- meaning a dollar value that ‘shall remain constant’– and guarantees only that ‘constant’ amount (i.e., that fixed dollar amount) for the donee.  The defect can be illustrated as follows:

“If the easement contributed by Railroad Holdings’ deed were, at the time of the contribution, worth 10% of the value of a $10 million property, then the ‘proportionate value’ of the easement (as the deed uses that term) would be $1 million, and that dollar value–rather than the fraction of value it did represent- ‘shall remain constant’.  Thus, if a court extinguished the easement many years later after the property had appreciated to $20 million, the donee’s share of extinguishment proceeds would be not 10% of $20 million (i.e., the fractional share represented by $2 million) but rather the ‘constant’ $1 million.  The regulation requires that the donee ‘must be entitled to a portion of the proceeds at least equal to that proportionate value” (in this example, 10% of $20 million, or $2 million), 26 C.F.R. sec. 1.170A-14(g)(6)(ii), but Railroad Holdings’ deed would give the donee only ‘at least’ a constant 10% of the $10 million value ‘as of the date of’ the contribution, or $1 million.” 2020 T. C. Memo. 22, at pp. 11-12.

As for Rose Hill, see my blogposts “Thanks a Lot, Judge,” 10/11/16, and “Chop Early, Chop Often,” 2/28/19.

The “at least” language in the easement deed is no saver, because the “at least” amount is constant, and ignores future appreciation.

And what the 501(c)(3) says was intended is irrelevant, because it’s what the donor said that counts, not what the donee thought.

The “broad construction” clause relates to conservation purpose, not conservation protection.

Finally, and here’s the core: “A donor cannot reserve in an easement deed a right that section 170(h) does not permit (such as a right to more than his share of extinguishment proceeds) but then save his charitable contribution by mentioning the rule he has violated and calling for that rule to kick in and save the day if his violation subsequently comes to light.” 2020 T. C. Memo. 22, at p. 18.

Now for the old Texas maxim. All these cases come unglued over an event that is singularly unlikely to arise, at least during the relevant tax years, if not the lifetimes, of the taxpayers, namely and to wit, extinguishment.

The most likely of the unlikely chances of extinguishment is exercise of eminent domain. But the chances of any governmental authority spending tax dollars to buy up the servient boondocks is minimal to the point of extinction. Even if it happens, the donors are still in the game for fighting over the whack-up of the condemnation proceeds.

So why try to grab more, if all that does is take off the table the one issue that summary J can’t resolve? I mean the valuation question, the dueling appraisals. There’s always a chance to settle when numbers are at issue, or to get a mix-and-match between your appraisers and IRS’ on the trial. But fiddle with fancy extinguishment language, and IRS has summary J, so you never get to argue valuation.

Taishoff says invoking savings clauses and fancy-pants arithmetical lawyerbabble to try grabbing a few utterly hypothetical, speculative bucks is nonsense.

The maxim: “Pigs git fat, hogs git et.” See my blogpost “Cullifer’s Travails,” 10/8/14.

I have a regular (but not labeled as such) subset of this my blog, entitled “those who need it won’t read it, and those who read it don’t need it.” I just found a perfect example to add in Ginell Turner, Docket No. 19191-19, filed 2/5/20.

Ginell petitioned her SNOD three (count ‘em, three) months late, claiming she petitioned as soon as she got the SNOD. She claims she changed her address from DC to IL a year before IRS sent the SNOD, notifying her DC landlord, her DC school, and the DC post office.

IRS claims the last address they had was the DC address on Ginell’s previous tax return. She filed her next return timely with the new IL address, but it wasn’t processed until two weeks after they’d sent the SNOD, so the address on her previous return was the last known address.

Ch J Maurice B (“Mighty Mo”) Foley: “Generally, change of address information that a taxpayer provides to a third party, such as a payor or another government agency, is not clear and concise notification of a different address for purposes of determining that taxpayer’s last known address. Sec. 301.6212-2(b)(1) of the regulations. However, section 62122(b)(2)(I) of the regulations provides that the IRS will update taxpayer addresses maintained in IRS records by referring to data accumulated and maintained in the United States Postal Service National Change of Address (USPS NCOA) database. Section 301.6212-2(b)(2)(I) of the regulations then elaborates that a taxpayer’s address on IRS records will be updated to reflect the information in the NCOA database only if the taxpayer’s name and last known address in IRS records match the taxpayer’s name and old mailing address contained in the NCOA database. If the address maintained in IRS records is updated based on information obtained from the NCOA database, that address will be the taxpayer’s last known address until the taxpayer files a return with a different address or the taxpayer provides the IRS with clear and concise notification of a change of address. Sec. 301. 62122(b)(2)(ii) of the regulations. The taxpayer has the burden of proving that the notice of deficiency was not sent to her or his last known address.” Order, at p. 2.

So, how does the petitioner carry that burden?

I submit by producing a copy (or an acknowledgement from USPS of receipt) of USPS Form 3575, “Official Mail Forwarding Change of Address Form.” Hopefully it has the right date. I have the acknowledgement from my last change of address almost two years ago.

Had Ginell saved the slip, she might have saved the day.

No opinions or designated hitters issued today from The Glasshouse on Second Street, N.W. Rather, we have 300+ plus orders.

But I do see that Ch J Maurice B (“Mighty Mo”) Foley is giving the recalcitrant nonpayers and defective petitioners two tries at complying with the law and rules in most of the 200+ want-of-jurisdiction tosses he’s dishing out today.

I’m pleased to note that the quick kicks, which I formerly lamented in my blogpost “Four Days in October,” 10/26/18, are a thing of the past.

But No Boss Hoss

Nathaniel A. Carter and Stella C. Carter, 2020 T. C. Memo. 21, filed 2/3/20, had a “Swiss cheese” conservation easement permitting the building of eleven (count ‘em, eleven) homes at various undisclosed locations on the old plantation in Glynn County, GA. While the 501(c)(3) beneficiary of this easement in gross is OK, the Swiss cheesery fails the Pine Mountain test, for which see my blogpost “Perpetually Swiss,” 12/27/18.

“Regardless of whether building houses on each of 11 two-acre lots would impair conservation purposes in the easement area as a whole, it would impede the achievement of those purposes within each building area.  Pine Mountain establishes that the building of a single family home on a given site does not preserve the site itself as an open space or protect natural habitats or similar ecosystems within the site.  Petitioners’ argument might establish their easement’s compliance with section 170(h)(5)’s perpetual protection requirement; it does not establish compliance with section 170(h)(2)’s perpetual restriction requirement, as interpreted by Pine Mountain.” 2020 T. C. Memo. 21, at p. 21.

And Judge James S (“Big Jim”) Halpern says mox nix that the Carters and their partner Ralph claim the homesites will be developed only for them and their families, not for commercial sale. The deed of easement doesn’t say that, and anyway, a home is a home, regardless who lives there.

And even though 5 Cir shot down Tax Court in Bosque, (see my blogpost above-cited), the Carters are Golsenized to 11 Cir.

But the RA on this case fired off Letters 5153 and his Revenue Agent’s Report (RAR) before getting the Boss Hoss Section 6751(b) sign-off.

“That the RARs were sent with Letters 5153 rather than 30-day letters appears to have been attributable solely to petitioners’ unwillingness to provide Appeals sufficient time to consider their cases.  Under the circumstances, the absence of 30-day letters did not indicate a lack of formality or finality in Agent Dickerson’s determination.” 2020 T. C. Memo. 21, at p. 30.

A Letter 5153 is a transmittal for the RAR, telling the addressee to pay up, talk about payment plans, or extend IRS’ time to assess tax to let Appeals have a whack; but if the addressee does nothing by a date certain, IRS will give them a SNOD at no extra charge.

That’s enough for Judge Big Jim. That the Boss Hoss signed off eleven (count ‘em, eleven) days later doesn’t help. So substantial valuation misstatement chops go by the board.

A Rule 155 beancount is just that: an arithmetic show-and-tell where IRS and petitioner each do the numbers, proffer the correct arithmetical solution, and nothing else.

Judge Pugh holds the parties to their stipulated issues, and refuses to consider anything not pled, proven or stiped, in Manatt’s Enterprises, Ltd., Docket No. 17908-17, filed 2/3/20.

Manatt petitioned the SNOD denying their NOL carryforward and certain management fees they paid and received.

Now Manatt want to throw in a Section 199 DPAD, an increased State tax deduction, and a dividends received deduction (which depends upon the outcome of another case).

As for wild-carding in matters in a Rule 155, see my blogpost “Non-Virgin and Non-Deductible,” 2/4/19. There is no after-party in Tax Court, just a clean-up.

IRS and Manatt stiped to “…all correlative adjustments that arise from the other adjustments set forth herein.” Order, at p. 2. And they also agreed that the stip settled everything in the SNOD and the petition.

Judge Pugh: “Petitioner does not ask us to set aside or modify the stipulation. Rather, petitioner asks us to interpret the word ‘correlative’ in the stipulation to include the additional adjustments it asserts are appropriate. Respondent counters that none of the additional adjustments petitioner requests are correlative, but instead are new issues that were never raised in the petition or at any point in this proceeding until respondent sent petitioner the proposed decision. Consequently, respondent argues, these issues are deemed conceded.” Order, at p. 3.

And because Manatt may have mentioned DPAD in an attachment to its return doesn’t matter if they never stated it in the return proper nor petitioned disallowance. “The fact that petitioner may have included information on a form attached to its tax returns that respondent could use to determine the section 199 deduction petitioner now is asserting does not make the section 199 deduction purely computational. Petitioner never claimed a section 199 deduction in either tax year so there is no indication respondent accepted or scrutinized the information on those forms. Moreover, petitioner’s tax returns are merely statements of its position; they do not constitute substantiation.” Order, at p. 5.

And the dividends received deduction depends upon whether the payout in the other case came from E&P. Judge Pugh isn’t going to wait for that omelet to heat up.

Once again there falls the shadow of my mantra: Stipulate, Don’t Capitulate.

Off-Topic, but Unique

Today, February 2, 2020, is absolutely unique. Its like will not appear for another thousand and ten (count ‘em, one thousand and ten) years, wherefore I salute it with an invocation from my long-gone youth.

Today is 02/02/2020, a perfect palindrome. Moreover, it remains a perfect palindrome whether one writes this date American-style (month first, date second, as February 2) or Continental-style (date first, month second, as 2 February). It’s 02/02/2020, either way.

The last such date was January 1, 1010, 01/01/1010.

The next will occur (assuming anyone is here to note the date) on March 3 (or 3 March), 3030.