Maybe Not, But They’d Better Pay Their Taxes

That’s the lesson for Martin Olive, courtesy of Judge Diane Kroupa, in 139 T. C. 2, filed 8/2/12. And Judge Kroupa does a judicial double reverse backflip worthy of Olympic gold, in the tradition of The Great Dissenter, Judge Mark Holmes, by allowing ol’ Marty more costs of goods sold than IRS allowed him, notwithstanding that he was dealing a Federally-designated controlled substance.

To tie in with the Bob Dylan 1966 hit “Rainy Day Woman #12 and 35”, alluded to in the title of this blogpost, Marty was pushing pot, but it was OK by California law. He was selling pursuant to the California Compassionate Use Act of 1996 (CCUA), codified at Cal. Health & Safety Code sec. 11362.5 (West 2007), 139 T.C. 2, at p. 2. This beneficent statute allows persons certified by licensed health care practitioners, and their caregivers, to obtain cannibis sativa and similar plantlife to alleviate their symptoms.

Marty specialized in vaporware. No, not imaginary software announced by giant outfits to stifle innovation, but which never hit the market. Marty vaporized the boo, so the sick, sore and lame might more easily ingest its analgesic properties. He was one of fifty licensed grass pushers, once he remembered to get his license.

Marty provided atmosphere as well as vapor. “He established the Vapor Room so that its patrons, almost all of whom were recipients (including some with terminal diseases such as cancer or HIV/AIDs) could socialize and purchase and consume medical marijuana there.

“Petitioner designed the Vapor Room with a comfortable lounge-like, community center atmosphere, placing couches, chairs and tables throughout the premises. He placed vaporizers, games, books and art supplies on the premises for patrons to use at their desire. He set up a jewelry-store-like glass counter with a cash register on top and jars of the Vapor Room’s medical marijuana inventory displayed underneath and behind the counter.” 139 T. C. 2, at pp. 5-6.

We should have had Marty around when we were in college, eh? Maybe not; only joking, IRS, OPR and Departmental Disciplinary Committee.

Unfortunately, public benefactor Marty underreported income and claimed deductions for his grassroots operation. But Section 280E prohibits any deductions for expenses paid or incurred in trafficking substances illegal under Federal law, including, but without in any way limiting the generality of the foregoing as the high-priced lawyers say, Mother Mary (in case you wondered who, or rather what, was the star of the Beatles 1970 hit “Let It Be”).

However, in a retail sales operation, which concededly Marty was running, cost of goods sold is not a deduction, but an adjustment to gross receipts necessary to calculate gross income. Notwithstanding the foregoing, Judge Kroupa calls it a deduction, even though it isn’t.

Based on extrapolated evidence of Marty’s witnesses, with all of whose testimony Judge Kroupa had issues, she nevertheless gave Marty a Cohan break and gave him some more costs of goods sold than IRS would allow.

Marty escapes some accuracy penalties because the law was unsettled at the time when he took deductions leading to part of his understatement of tax due, but not thereafter when he took others, so a Rule 155 will sort that out.

Judge Kroupa obviously has Chief Justice of the Supreme Court in her future. It’s not a deduction, but it is.

A former law partner, now deceased, gave me this valuable advice more than 30 years ago. I should follow it, but I can’t in this instance; my frustrations got the better of me, again.

What sparked this blogpost is Robert L. Bernard and Diolinda B. Abilheira, T. C. Memo. 2012-221, filed 8/1/12. On its face, it’s a routine unreported income (IRA distributions) case, not really worth mentioning, except Robert L. is a former Assistant U. S. Attorney, retired on account of disability (and who, by the way, is still listed as actively practicing law by the Texas State Bar on its website).

So Robert L. is automatically eligible for admission to practice before the Tax Court, without taking the gut-busting examination members of other professions, trades, businesses or callings are obliged to take to secure that privilege, notwithstanding the clear Congressional mandate in Section 7452 (see my blogpost “A Book and a Modest Proposal”, 5/22/12).

I will not catalogue Robert L.’s sins, except briefly: treating IRA distributions as sales of property taxable at capital gains rates, underreporting rents, interest, social security receipts and dividends. Then Robert L. engages in a protracted wrangle over whether his case is to be treated as a small claim (Section 7463).

Judge Cohen: “Petitioners continue to argue that this case qualifies for section 7463 status because the deficiency (ignoring the penalty) is less than $50,000 and their computations show that they do not owe taxes on certain of the distributions, thus bringing the total in dispute to less than $50,000. Petitioner, although trained as a lawyer, stated that they would give up their right to appeal in order to avoid having rules of evidence strictly applied. They apparently assume–erroneously–that relaxed rules of procedure and evidence under Rule 174(b) relieve them of the necessity of timely and appropriate evidence and arguments based on applicable law. Rule 174(b), however, refers to consistency with ‘orderly procedure’ and requires evidence that has ‘probative value’. In any event, this case is governed by procedures and rules applicable to cases not eligible for an election under section 7463.” T. C. Memo. 2012-221, at pp. 5-6.

You can read the rest for yourself. It isn’t pretty.

Isn’t it time to revisit Rule 200?

 Or, How He Outsmarted Himself

There’s the old story of the two sailors on a life raft in World War II, after their ship had been torpedoed. One says to the other, “Could have saved ourselves a lot of trouble if we’d jumped overboard the first night out.”

That’s one of two lessons for Michael Craig Worsham, taught by Judge Goeke,  in T. C. Memo. 2012-219, filed 7/31/12.

The second is that if a little learning is a dangerous thing, too much learning is even more dangerous. Mike’s got academic credentials by the bushelbasketful–“ a bachelor of science in chemistry, a master of science in civil engineering and a juris doctor from the University of Baltimore School of Law.” T. C. Memo. 2012-219, at pp. 3.

Before entering law school, “(H)e moved to Maryland in 1993 to work for the U.S. Army Environmental Center at Aberdeen Proving Ground. Over the next several years he attended law school at night, was sworn in as a member of the Maryland bar in 1998, and left the army in 2001 to start a solo law practice from his home. Petitioner’s practice was not in the area of tax, and he did not take any tax courses in law school.” T. C. Memo. 2012-219, at p. 3. Too bad, Mike, you should have done. If you think education is expensive, try ignorance. But you did that.

Mike filed income tax returns and paid tax when due for every tax year from 1989 through and including 2004, but skipped every year thereafter, claiming he found, “without looking for it”, reasons why he didn’t owe tax. Needless to say, his “reasons” were the good old tax-protester jive. Judge Goeke wasn’t buying.

IRS prepared a SFR for Mike for 2006, a year when his law practice brought in $193K gross and paid him $118K net. But the SFR only showed about $6K in tax and about a grand in additions to tax (non-filing and non-paying).

Mike petitions Tax Court. Bad mistake, dude, because IRS subpoenas his bank accounts, find much loot, and amends its answer to Mike’s petition to allege a deficiency ten times greater than earlier deficiency, plus fraud penalties.

Mike moves to dismiss his case, and writes to his bank, stating “(B)ecause I am dismissing this case, the Subpoena issued by the IRS to M&T Bank should no longer be valid, and M&T Bank should not be required to respond by producing copies of my account records.” T. C. Memo. 2012-219, at p. 7.

Judge Goeke finds this maneuver less than funny. “Shortly after he mailed this letter to M&T Bank, we denied petitioner’s motion to dismiss.” T. C. Memo. 2012-219, at p. 7.

I’ll spare you the next eighteen pages of Judge Goeke’s deconstruction of Mike and his unsought brilliant discovery. It’s our old friend Crain revisited for the hundredth time. “Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984), which stated: ‘We perceive no need to refute these arguments with somber reasoning and copious citation of precedent’. T. C. Memo. 2012-219, at p. 11.

And our other old chum, Scott F. Wnuck, in 136 T.C. 24, filed 5/31/11. “Addressing frivolous tax-protester arguments: (1) wastes the limited resources of the Court; (2) delays the assessment of tax; and (3) risks dignifying such arguments or suggesting that they have some colorable merit.” T. C. Memo. 2012-219, at p. 10.  (Citation omitted.) See my blogpost “One’ll Get You Five”, 5/31/11.

So Mike’s intelligence and education, with or without income tax courses, and his prior history of taxpaying, establish he knew he had to file. So now to establish fraud: besides other matters discussed in the opinion, Mike’s attempt at cleverness by seeking to dismiss his petition when he hears that IRS is looking for his bank records backfires big time. Judge Goeke “…we also note that after learning of the subpoenas duces tecum issued to his banks petitioner filed a motion to dismiss, seeking to have his case dismissed without prejudice. After filing the motion to dismiss, petitioner mailed a letter to one bank in which he stated: ‘Because I am dismissing this case, the Subpoena issued by the IRS to M&T Bank should no longer be valid, and M&T Bank should not be required to respond by producing copies of my account records.’ Essentially, once petitioner knew respondent was about to discover the true amount of income he received during 2006 he sought to avoid the consequences by paying only the smaller deficiency and additions to tax originally determined by respondent. We believe these facts are evidence that petitioner was more concerned with trying to conceal the true amount of income he received than with presenting good-faith (but misguided) arguments regarding his Federal tax liability and duty to file a Federal tax return.” T. C. Memo. 2012-219, at p. 20.

Clear and convincing, so Mike gets the fraud penalty.

But Mike gets a first-timer’s bye on the Section 6673 frivolity penalties.

Mike, you should have taken the income tax course. Or better still, just paid the man the seven grand.

No, not another chapter of David Brian Smith and His Electric Back Scrubber from my blogpost of 7/19/12. This time Treasury and IRS are offering to do the washing, as the proposed FATCA reciprocal and non-reciprocal infoshare treaties were rolled out.

School is out at Tax Court today, so just a few words on offshoring money. Nothing wrong with that; Mr Romney and every US taxpayer is at liberty to have accounts in any and every port or haven anywhere in the world or outer space.

All one need do is check the right boxes (7a and 7b) and fill in the blanks on Form 1040 Schedule B , pay your taxes, file your Form 90.22-1 and Form 8938 (in different places with different information required, and different due dates; see my blogposts “Frequently Asked Questions”, 7/22/11, and “Let Us All Have the Same Story”, 10/7/2011), and all’s right with the world (or at least with IRS and DOJ).

And take a peek at my blogpost “What Not To Say”, 11/3/11.

So Treasury has made deals with various countries to swap the skinny on their dodgers, if they’ll do likewise with ours. Holding hands and issuing a joint communiqué yesterday, France, Germany, Italy, Spain, the United Kingdom and the United States solemnly undertook to “work towards common reporting and due diligence standards to support a move to a more global system to most effectively combat tax evasion while minimising compliance burdens.”

“‘Tis a consummation devoutly to be wished”, as a certain figure in the Danish government remarked four hundred or so years ago.

But I saw some missing names from the reciprocators–like the Bahamas, Switzerland, the Cayman Islands, Gibraltar, and the Cook Islands, among others. I wonder when they will join the happy throng and, as the late great Blue Eyes exhorted, start spreadin’ the news.

And “can’t be deduced from first principles.” Some might rephrase the foregoing to read “can’t be deduced from any principles whatever.” This is the lesson for Charles Grant Beech and Elizabeth A. Beech, in an eponymous Summary Op throwaway, T.C. Sum. Op. 2012-74, filed 7/26/12.

Elizabeth A. got money from Momma’s IRA when Momma died. So this is yet another IRA busted play, where the beneficiary, who is not the decedent’s spouse, gets the distribution in hand on decedent’s death, and puts the money into his or her own IRA within 60 days. Of course, that triggers income eo instante. Not spouse, no rollover, says Section 408(d)(3)(C).

One can, of course, do a trustee-to-trustee, a financial forward pass whereby the beneficiary never puts paw to money. Caselaw and a Rev. Rul., cited in the decision, so provide. But Elizabeth A. got the check in hand, so game over.

IRS “professionally and honorably”, in Judge Holmes’ phrase, concedes the accuracy penalty.

Elizabeth A. argues substantial compliance, but that avails her not. STJ Dean: “The Court cannot find that petitioners substantially complied with section 408(d)(3)(A)(i) because section 408(d)(3)(C) expressly denies rollover treatment to an inherited IRA. ’Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles. * * * The Code’s lines are arbitrary. * * * Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries.’ Kim v. Commissioner, 679 F.3d 623, 625-626 (7th Cir. 2012), aff’g T.C. Dkt. No. 11902-10 (May 20, 2011) (bench opinion).”

See my blogposts “Ignorance is Bliss?” 11/10/11, and “A Long Dry Spell”, 11/22/11.

So I’ll repeat what I said last November 22: “(W)hat a monumental trap for the unwary has been created by the rollover and distribution rules in the pension and retirement fruit salad in the 400s of the Code.”

Fans of great opera will remember the confrontation between Tosca and Scarpia, when Tosca asks the price of the life of her lover, Cavaradossi. “How much?” asks Tosca. Scarpia echoes her question, “How much?” “The price,” she replies.

That’s the question for Bernard R. Shepherd and Desiree Shepherd, T. C. Memo. 2012-212, filed 7/24/12. And the answer is that Bernie and Desiree can’t prove the price, so they must include in their income the relief of indebtedness they received from Capital One. So the answer to Capital One’s oft-reiterated question “What’s in your wallet?” is, according to Judge Ruwe, “Less than they thought they had.”

In the year at issue, Cap One scrubbed some credit card debt Bernie and Desiree had racked up with what Cap One had placed in their wallets. Bernie and Desiree failed to include on their joint Form 1040 the amount shown on the Form 1099-C Cap One sent them.

SNOD issues.

Bernie and Desiree claim they were insolvent, and schedule assets and liabilities, with all but three of which IRS agrees. They disagree about the values of Bernie and Desiree’s beach house, their principal residence, and Bernie’s pension with the State of New Jersey.

Burden of proof is on Bernie and Desiree, specifically the excess of liabilities over assets immediately before the cancellation.

Bernie and Desiree introduce real estate tax bills, but those are found wanting, because New Jersey notoriously low-balls the real estate tax assessments on homes, and also because no method of valuation is stated on the bills. Neither is the litigation settlement Bernie wangled with the municipality for the beach house proof of value, because (a) again it states no method of valuation and (b) it’s for a period three years after the cancellation, not immediately before.

Sound familiar? See my blogpost “Method to His Madness?”, posted 6/18/12. Method of valuation is essential.

Bernie claims he prepared comparables, prices of houses similar to his in the same neighborhood sold at around the same time: “At trial Mr. Shepherd testified that in his opinion the value of the beach house immediately before the discharge was approximately $340,000. Mr. Shepherd’s valuation testimony was allegedly based on comparable sales that he assembled for the purpose of a property tax appeal.” T. C. Memo. 2012-212, at p. 7. But Bernie never put the comparables in evidence nor did he describe them; worse, he never stated when he derived them, whether “immediately before” or at some other time.

As for their principal residence, Bernie and Desiree do no better. They have an “exterior broker price opinion/appraisal” from the mortgagee, Chase Bank, but don’t tell Judge Ruwe that an “exterior broker price opinion/appraisal” is a drive-by shooting from the hip of a real estate broker, who never sees the inside of the house, and anyway, that’s from years after the cancellation, and after the judicially-noticed meltdown in the housing market. And the real estate tax bills they proffer for their home are as disregarded as the ones for their beach house.

Judge Ruwe: “The tax bill does not describe the property in detail nor the methodology used in determining the tax value. As we noted earlier, a value placed upon property for local taxation purposes is not determinative of fair market value of the property for Federal income tax purposes in the absence of evidence of the method used in arriving at that valuation.

“Furthermore, in New Jersey the assessed value of property is generally not equivalent to the fair market value of the property.  See City of Passaic v. Passaic Cnty. Bd. Of Taxation, 113 A.2d 753, 756 (1955) (“There has been general agreement for over a century that individual property valuations and assessments have been and are marred by the grossest inequities.”). In fact, the statutory framework for property assessments in New Jersey specifically contemplates that the assessed value of a property for tax purposes will not be equivalent to the fair market value of the property.” T. C. Memo. 2012-212, at pp. 10-11 (Citations omitted.)

So without reliable values for their home and the beach house, Bernie and Desiree are out, but Judge Ruwe goes on to examine Bernie’s pension, as apparently both Bernie and IRS spent a lot of time on that issue. Even though exempt from execution by creditors under State law, pensions are still assets. Bernie took out a loan from the pension fund before the cancellation, that he was paying back currently, and listed the loan as a liability, but didn’t list his credit balance with the pension fund as an asset. That’s a no-no, and beside, Bernie could have withdrawn up to 50% of his credited portion of the pension plan via loans (he could have more than one at a time outstanding). So Bernie’s credit balance with the pension fund must be more than the loan he had outstanding immediately prior to cancellation.

Bernie and Desiree, you’re solvent, so pick up the cancellation.

Not Quite

Here’s a T.C. full-dress treatment leading off 139 T.C., Leah M. Carlebach and Uriel Fried, 139 T.C. 1, filed 7/19/12. See also Daniel Stern and Reizel Stern, T.C. Memo. 2012-204, filed 7/19/12, which follows Carlebach.

Leah was a U. S. citizen, Uriel wasn’t; Dan was a U. S. citizen, Reizel wasn’t. They did, however, obey the Biblical injunction to “be fruitful, and multiply, and fill the earth”. The two couples also had in common that each claimed that their numerous kids were “derivative” U. S. citizens via their respective parent’s citizenship.

That triggers child, additional child, and child care credits, and dependents’ exemptions.

Except it doesn’t, because in the years at issue the said offspring weren’t certified. There are only two ways to be a U.S. citizen: be born here (14th Amendment to Constitution), or be naturalized.

Now a 2000 Federal statute made it possible for children of one U. S. parent to be certified as a U. S. citizen, and that’s a “derivative” citizenship, but to get the brass ring, you have to ride the carousel of 8 USC§1433. And that’s what IRS put into Regulation 1.152-(2)(a)(1).

Leah claims the regulation is invalid, and that as long as the child is at some time a U.S. citizen, she gets the credits and exemptions. But Judge Halpern makes short work of that. Tax years are twelve-month periods. So far as possible one’s tax status must be settled in the particular tax year.

The kids weren’t certified until after the years at issue. So no exemptions or credits.

But Leah does get the penalties. And so does Dan.

 Or, Taxes Are Forever

The battling Kaufmans are back, the First Circuit Court of Appeals weighing in on the façade on Rutland Square (see my blogpost “A Joy Forever”, 4/4/11). This is the ongoing saga of Gordo and Lorna. You can read all about it in Kaufman v. Commissioner, Case 11-2017, 7/19/12.

You’ll remember IRS got summary judgment because Lorna’s mortgagee insisted upon getting first dibs on casualty insurance proceeds and condemnation (eminent domain) awards. Gordo and Lorna yell “foul!”, and run up to Boston, where Judge Boudin, assisted by Judges Lipiz and Chief Lynch, lend a sympathetic ear.

Now judicial gymnastics are always fun, and Judge Boudin has a really good one here (I wonder what The Judge Who Writes Like a Human Being, The Great Dissenter in Tax Court, Judge Holmes, would call this contortion).

First, the offending language from the subordination agreement: “The Mortgagee/Lender and its assignees shall have a prior claim to all insurance proceeds as a result of any casualty, hazard or accident occurring to or about the Property and all proceeds of condemnation, and shall be entitled to same in preference to Grantee until the Mortgage is paid off and discharged, notwithstanding that the Mortgage is subordinate in priority to the [Preservation Restriction] Agreement.” Decision, at p. 6.

Now Judge Boudin: “Certainly the IRS has good reason to assure that the Kaufmans could not recapture the value of what they gave up by granting the easement in order to get the deduction; but the Kaufmans had no power to make the mortgage-holding bank give up its own protection against fire or condemnation and, more striking, no power to defeat tax liens that the city might use to reach the same insurance proceeds–tax liens being superior to most prior claims, including in Massachusetts the claims of the mortgage holder.” Decision, at pp. 11-12. (Citations and footnote omitted.)

Therefore, says Judge Boudin (and presumably his two non-dissenting colleagues), the essential paragraph g(6) “entitlement” language (26 C.F.R. § 1.170A-14(g)(6)(ii) should be limited to the grantor (taxpayer) getting money ahead of the 501(c)(3) grantee, not a mortgagee or anyone else.

So summary judgment is off the table. The appraisal and the Form 8283 are not “doomed”, although IRS would have it so; they substantially comply. Thus, back to Tax Court for a trial on the true diminution of value of the Rutland Square townhouse caused by the granting of the easement.

Lest Gordo and Lorna get too elated, Judge Boudin gives them a thorn: “When the Kaufmans donated the easement, their home was already subject to South End Landmark District rules that severely restrict the alterations that property owners can make to the exteriors of historic buildings in the neighborhood. These rules provide that ‘[a]ll proposed changes or alterations’ to ‘all elements of [the] facade, . . . the front yard . . . and the portions of roofs that are visible from public streets’ will be ‘subject to review by the local landmark district commission. S. End Landmark Dist., Standards and Criteria 2 (rev. Apr. 27, 1999).

“Under the Standards and Criteria, property owners of South End buildings have an obligation to retain and repair the original steps, stairs, railings, balustrades, balconies, entryways, transoms, sidelights, exterior walls, windows, roofs, and front-yard fences (along with certain ‘other features’); and, when the damaged elements are beyond repair, property owners may only replace them with elements that look like the originals. Id. at 2-6. Given these pre-existing legal obligations the Tax Court might well find on remand that the Kaufmans’ easement was worth little or nothing.” Decision, at pp. 21-22.

And the substantial understatement due to overvaluation penalties remain, says Judge Boudin, “(I)f taxpayers still do not get the message….” Decision, at p. 25.

 And You Can Get a Bigger Deduction

That’s the story of David Brian Smith, T.C. Sum. Op. 2012-71, filed 7/18/12, “just sayin’”.

Dave invented an electric back-washer that attached by suction to shower stall walls, for the benefit of  “only the lonely” who had no one to wash their backs for them. These unfortunates were at risk of dislocating shoulders, etc., in the pursuit of cleanliness. Dave diligently pursued his invention, working in his friend’s workshop and driving his own truck only on business. But Dave was stymied twice by the weight of the necessary electric motor, which made his device more useful for scrubbing ankles as it crashed to the shower stall floor.

Finally, like Dustin Hoffman, in the classic “The Graduate”, he found the magic word–“Plastics”. He hired an expert and paid his expenses to check out plastic injection moldings for a lightweight version of his idea.

Dave was diligent and active and tried hard. Finally, he discovered that, while an all-plastic version would do the job, he hadn’t the capital to bring his dream to fruition, and so the Great Unwashed must remain so–at least as to their backs.

IRS nails Dave for a couple of non-reportings, not at issue here, that result in $2700 in additional tax. IRS doesn’t question Dave’s $5600 Schedule C manufacturing loss and neither does Tax Court.

But post-petition (Tax Court petition, that is), Dave files a 1040X claiming additional Schedule C manufacturing deductions, and proffers documents to substantiate same. IRS tells Dave to go scrub his back, they won’t wash, and they’re not buying his documents.

But Judge Gerber decides Dave’s documents will wash. “Respondent (IRS) did not question whether petitioner (Dave) was engaged in a business activity or whether he was entitled to a loss. We therefore limit our inquiry to whether petitioner has shown entitlement to deduct amounts in excess of those he originally reported. After reviewing petitioner’s documentary evidence and testimony we have concluded that petitioner is entitled to deduct amounts in excess of those originally claimed. At trial petitioner provided documentation and testimony that supported amounts in excess of the amounts respondent permitted. The documents presented in Court were likely the same as or similar to those presented during the administrative process. The difference is that petitioner was able to provide documentation for expenses which, in the aggregate, exceeded the amounts respondent allowed.” T.C. Sum. Op. 2012-71, at pp. 5-6. (Footnote omitted).

Dave doesn’t get the Section 179 deduction he claims, and his cellphone documentation fails the Section 274 test. So he only gets another $2900 of deductions, rather than the $7900 he was claiming.

But he did get something, so it’s off to a Rule 155 powwow for Dave.

Takeaway–Even if you can’t substantiate at audit, keep looking for paper. It might turn up in the wash.

Another scenic easement case, not involving a façade but rather woodland wild, Gayle O. Averyt and Margaret F. Averyt, et al., T. C. Memo. 2012-198, filed 7/16/12.

Gayle and Maggie and the “al”s, via their LLC, gave about 1070 acres of wet South Carolina to the Wetlands America Trust,  Inc., a wholly-owned 501(c)(3) sub of Ducks Unlimited, Inc., via an easement to keep same forever wild and ducky.

The deed of gift (or easement) was drafted by someone who bothered to read Section 170(f)(8), the $250 misunderstanding provision. Here’s how a habendum clause should be drafted: “NOW, THEREFORE, the Grantor, in consideration of the foregoing recitations and of the mutual covenants, terms, conditions and restrictions hereinunder set forth and as an absolute and unconditional gift, subject to all matters of record, does hereby freely give, grant, bargain, donate and convey unto the Grantee, and its successors and assigns, the Easement over the Protected Property subject to the covenants, conditions and restrictions hereinafter set forth which will run with the land and burden the Protected Property in perpetuity.” T. C. Memo. 2012-198, at p. 4. And both the LLC and Wetlands signed the deed.

Of course, neither Wetlands nor Ducks give any of the LLC, or Gayle, or Maggie, or any of the “al”s the usual “no goods or services furnished in exchange” letter required by Section 170(f)(8)(a). The LLC passed the deduction for the easement on to Gayle, Maggie and the “al”s, and avoided TEFRA since the LLC was treated as a small partnership (under ten members, no pass-through members). And the FMV of the easement doesn’t seem to be an issue in this Rule 121 summary judgment case.

The letters Wetlands sent are indeed held defective, but Gayle and Maggie argue that the deed does the deed, and they don’t need no stinkin’ letters.

Judge Wells: “Respondent (IRS) contends that the instant case is more analogous to Schrimsher v. Commissioner, T.C. Memo. 2011-71, in which the Court held that the taxpayers’ contribution of a conservation easement was not deductible because the taxpayers did not receive a contemporaneous written acknowledgment from the donee organization. In Schrimsher, the deed recited as consideration ‘the sum of TEN DOLLARS, plus other good and valuable consideration’. Because that deed included no description and good faith estimate of the value of the ‘other good and valuable consideration’, the Court concluded that it failed to satisfy section 170(f)(8)(B)(ii) and (iii). However, we conclude that the instant case is distinguishable from Schrimsher because the conservation deed in the instant case states that the contribution of the conservation easement is made “in consideration of the foregoing recitations and of the mutual covenants, terms, conditions, and restrictions hereinunder set forth”, which include recitations of the property’s conservation value but include no consideration of any value besides the preservation of the property, states that the easement is an “absolute and unconditional gift”, and provides that the conservation deed constitutes the entire agreement between the parties regarding the contribution of the conservation easement. Accordingly, we reject respondent’s argument.” T. C. Memo. 2012-198, at pp. 13-14.

Barring the neologism “hereinunder”, an obvious conflation (or should I say “smoosh”?) of the words “herein” and “hereunder”, this is how to draft a deed.

Note to dirt lawyers: Please don’t use boilerplate printed real estate forms for making a conservation easement. The old “ten dollars and other good and valuable consideration” bargain and sale deed form, available at dime-store prices, might be good enough for a routine single-family house sale, but not for a big-time transaction with heavy-duty tax deductions on the table. Read the IRC; draft your language with great care. Have both grantor and grantee sign the deed. Use a proper integration clause. And remember Schrimsher, where somebody’s lawyer used a dime-store form and blew up their client.