Judge James S (“Big Jim”) Halpern is just the man to deal with insubordination in the ranks. The Tax Court website says  Judge Big Jim is a Colonel in the Army Reserve. Now he confronts the insubordination of mortgagees when it comes to knicking casualty insurance proceeds in 901 South Broadway Limited Partnership, Standard Development, LLC, Tax Matters Partner, 2021 T. C. Memo. 132, filed 11/23/21*.

The 901s were gearing up for trial, with hot-and-cold running experts to tussle over valuation of the historic façade, when Judge Big Jim said it might be cheaper to deal with insubordination rather than spend big bucks on said experts. See my blogpost “The Rule Against Perpetuities,” 7/23/21.

There are three (count ’em, three) mortgagees, and five (count ’em, five) lenders, and they all used the Model Historic Preservation and Conservation Easement published by the National Trust for Historic Preservation, which of course gives Lenders first dibs on insurance and condemnation proceeds. 2021 T. C Memo. 132, at pp. 11-13.

As we expect, there’s much procedural argy-bargy, the 901s claiming IRS ambushed them with insubordination, and IRS saying that was in from the getgo. Judge Big Jim goes with IRS.

The 901s claim there are a “myriad of fact issues” requiring trial, but when push comes to cliché have only four (count ’em, four) legal issues.

First, the 901s read the assignment of leases and rents provision in the Model Easement to encompass insurance and condemnation proceeds, except it doesn’t.

Second, Gordo and Lorna Kaufman’s win in 1 Cir gets Golsenized, as the 901s are appealable to 9 Cir. See my blogpost “A Joy Forever”? – Maybe Not,” 7/20/12.

Third, since the 901s didn’t put in the mortgages (called “deeds of trust” in CA, because mortgages there are conveyances, not liens as they are here in NY, but there’s no real difference, and Judge Big Jim says so, 2021 T. C. Memo. 132, at p. 22, footnote 5.), so the CA “good faith and fair dealing” standard for mortgagee behavior isn’t clear.

Finally, there’s the usual assault on the Proceeds Regulation.

Judge Big Jim trawls through the Model Easement, finding the mortgagees come out ahead in condemnation and casualty proceeds. CA gives mortgagees discretion, albeit to be used in good faith, where our NY Real Property Law makes casualty insurance proceeds trust funds to be used for restoration.  

Neither condemnation nor casualty is “so remote as to be negligible.” The 901s have a building in a major metro area, where casualties to buildings are not uncommon.

Taishoff says this is in contrast to conservation easements on boondock land, with minimal, if any, improvements; insurance is not the issue, condemnation is.

In short, “If under any circumstances that have at least a material chance of occurrence the Lenders would have a priority right over the [501(c)(3)] to insurance or condemnation proceeds that the Lenders did not agree to subordinate to the [501(c)(3)], the requirement of section 1.170A-14(g)(2), Income Tax Regs., as interpreted in Palmolive Bldg. Inv’rs, would be violated. The number of circumstances in which the Lenders would not have a priority right would be of no moment.” 2021 T. C. Memo. 132, at p. 46. (Emphasis by the Court.)

For the Palmolive story, see my blogpost “Palmolive Washes Out, 12/4/20.

The 901s claim Judge Big Jim ambushed them and took over the case, preventing their trusty attorneys from advocating for their client.

“In evaluating a party’s arguments on an issue put before a court, that court might well identify deficiencies not raised by the other party. Doing so would not take the court beyond its proper adjudicatory role. That is particularly so in a case in which the court’s statutory jurisdiction is as broad as that granted by section 6226(f) (or section 6214(a)).

“Petitioner seems to think that its task was limited to advancing arguments more persuasive than those advanced by respondent, expecting us to ignore any deficiencies in its position not brought to our attention by respondent. Petitioner misunderstands both its role and ours. Petitioner must convince us that its position is correct. See Sineneng-Smith, 590 U.S. at ___, 140 S. Ct. at 1581 (observing that ‘a court is not hidebound by the precise arguments of counsel’). 2021 T. C. Memo. 132, at p. 65.

In short, summary J for IRS.

*901 S B’way LP 2021 T C Memo 132 11 23 21