Ya Still Gotta Do an Appraisal Joust

It’s been suggested that the extinguishment torpedo sinks the overvalued conservation easement without the need for “lengthy and expensive trials,” and therefore IRS should use same liberally (in a non-political sense, of course).

Well, that doesn’t happen in Glade Creek Partners, LLC, Sequatchie Holdings, LLC, Tax Matters Partner, 2020 T. C. Memo. 148, filed 11/2/20. Yes, the fixed-price ex-value of improvements clause in the deed sinks Glade Creek crew; the Coalholders, PBBM-Rose Hill, and Oakbrook are all in on the play. If you don’t know who they are, you’ve come late to the party, so check out the cites Judge Goeke gives you as set forth at 2020 T. C. Memo. 148, at p. 25, in the paragraph immediately preceding the following.

“The deed improperly subtracts any value attributable to posteasement improvements from the extinguishment proceeds before determining the Conservancy’s share. It does not properly allocate extinguishment proceeds to the Conservancy in accordance with the proceeds regulation. The proceeds regulation is not satisfied, and the easement’s conservation purposes are not protected in perpetuity. Glade Creek is not entitled to the easement deduction.”  2020 T.C. Memo. 148, at p. 25.

OK, so march out the Glade Creek crew, right? Except.

IRS wants the 40% excessive overvaluation chop. The Glade Creek crew syndicated a $17.5 million conservation easement deduction, plus a $35K charitable to the 501(c)(3) protector, preserver and defender of same. IRS nixes the whole, but the IRS appraiser gets shredded on the stand.

His appraisal “was nothin’ much before, an’ rather less than ’arf o’ that be’ind,” as a much finer writer than I put it. IRS’ appraiser’s “after” value uses a 10-yr old CA article. His “before” used a couple logging sites (hi, Judge Holmes), not homes, such as the predecessors to the Glade Creek crew were building before The Black ’08.

The Glade Creek crew had two (count ’em, two) appraisers, who both did a much better job, but still came in north of $16 million. Judge Goeke decides that residential development is the highest and best use. So he does a cost-benefit analysis that shows if he retires from Tax Court, he has a great future as cost estimator for a national homebuilder. He does an analysis of builder’s profit margin worth reading, 2020 T. C. Memo. 148, at pp. 49-52.

Judge Goeke concludes the easement, if properly drafted (which it wasn’t), would be worth north of $8 million. So the Glade Creek crew only gets the 20% overvaluation chop, not 40%. And IRS conceded any misstatement chop, so the 20% only applies to the overstatement above $8 million.

But they do get the $35K charitable to the 501(c)(3). That got paid in escrow at closing, but only got to the 501(c)(3) the next January. IRS says there must be unconditional delivery for a deduction to be taken. “Ordinarily, a charitable contribution is made when its delivery is effected. Sec. 1.170A-1(b), Income Tax Regs. When delivery is effected through an agent acting on behalf of the donee or donor, the critical question is whether the donor has relinquished dominion and control.” 2020 T. C. Memo. 148, at p. 26 (Citation omitted).

Enter our old chum, Reg. Sec. 1.170A-1(e), “so remote as to be negligible.” But IRS says the escrow agreement never got into the record, so must infer that it would show there were conditions.

“Under the circumstances of this case, we find such an inference unwarranted. Ministerial escrow tasks are generally not considered substantial limitations or restrictions on a taxpayer’s receipt of funds and are not conditions precedent of the type that precludes the transfer of control. The chance that the settlement agent would not pay the escrowed funds to the Conservancy was so remote as to be negligible. Once the funds were deposited into escrow, they were not under Glade Creek’s control. Glade Creek had directed their payment to the Conservancy and could no longer use or redirect the funds. We find that Glade Creek is entitled to deduct the $35,077 donation for [year at issue].” 2020 T. C. Memo. 148, at p. 28.

Judge, I’ve been escrowee enough times to know that no condition is “so remote as to be negligible,” especially where I would be liable for any erroneous payment. I once had to track some beneficiary down years after the closing to get fifteen grand out of my former firm’s escrow account, so we could settle up what was due to each of us when I left. They weren’t wrong, and neither was I.