In Defense Of Conservation Easement Charitable Deductions

I've written quite a few posts about conservation easements.  Those posts highlight the sampling problem that my blogging faces.  The transactions that end up in Tax Court are not necessarily representative.  Thus I may have given the impression that the whole field is full of scoundrels.  So I am really pleased to present this guest post from Rex Linville who is a Land Conservation Officer for the Piedmont Environmental Council.

Thanks for your coverage over the past few years of a variety of different Tax Court cases related to conservation easement donation.  There has certainly been a recent increase in these types of cases and since 2005, there have been more than 70 opinions related to the federal income tax deduction claimed for conservation easement donations under Section § 170(h) of the Internal Revenue Code.  These opinions have addressed a variety of issues ranging from the fundamental qualification of the donation as a “conservation easement”, to the valuation of the donation, and to other technical compliance issues.

Looking exclusively at these cases, an outside observer could conclude that conservation easements create the potential for a tax “scam” that is lining the pockets of landowners with unwarranted charitable gift deductions.  As a professional land conservation staff member working directly with landowners who have decided to preserve and protected the land they love I can confidently say that this body of case law does not represent the land conservation movement as a whole.  

The truth is that these 70 plus cases represent a very small minority of land conservation activities across the nation. There are more than 1,700 land trust working at the local level to preserve wildlife habitat area, ecosystems that produce clean water and air, scenic rural landscapes and recreation areas, historic sites such as civil war battlefields, and productive agricultural and forestry resources that supply our nation with food and timber. 

Working within their own community these groups have harnessed local enthusiasm and voluntary action to permanently preserve and protect as much as one million acres per year. Since the 1970's, there have been tens of thousands of conservation easements donated on tens of millions of acres to conservation groups across the nation.  The cases brought by the IRS and state tax departments represent far less than 1 percent of the donations that happen in even one year. 

 More importantly, the land trust community has been working hard to raise the bar and increase the quality and robust nature of the private voluntary land conservation work being done in America.  It is important to us that our conservation activities are done in a professional and sustainable manner. These cases have provided useful a road map for what not to do and have helped shed light on where land trusts should look for abuse.  The lessons learned from the case law are vital to the future success of land conservation.

Toward that same goal of increasing quality, at the national level, the land trust Alliance established an Accreditation Commission that graduated the first class of accredited land trusts in 2008.  Since then, the Commission has awarded accreditation to over 300 land trusts that meet national standards for excellence, uphold the public trust, and ensure that conservation efforts are permanent. Accreditation is not a one-time action; it fosters continuous improvement as land trusts maintain their accredited status by applying for renewal every five years.

At the local level, land trusts such as The Piedmont Environmental Council (PEC) are offering continuing legal education workshops for legal and tax practitioners who are advising landowners on conservation easement donations.  For example, on June 29^th PEC is hosting a workshop with presentations from IRS attorneys, legal scholars, and a US Tax Court Judge as a way or improving the quality and compliance of conservation easement donations in our service area.

If you want to learn more about what you can do to help preserve land in your own community you can find a local land trust through the “Find A Land Trust” web page of the land trust Alliance: http://findalandtrust.org/

W. Rex Linville, Land Conservation Officer
Piedmont Environmental Council
410 E. Water St, Suite 700
Charlottesville, VA 22902
Work: (434) 977-2033
Cell: (434) 466-8843
Web: www.pecva.org

Twitter: @RexLinville

Rex Linville has a B.S. in Finance from Virginia Tech and an M.S. in Forestry from Colorado State University.  He has worked as a land conservation officer with the Piedmont Environmental Council in Virginia for the past 10 years and prior to that worked for the Eastern Shore Land Conservancy in Maryland. During this time has worked with landowners and partner organizations on a wide range of conservation transactions and has been involved in conservation policy initiatives at the state and federal level.

Donating TriBeCa Facade Easement Is Like Renouncing Your Super Powers

Originally published on forbes.com.

If you have property that you would like to be preserved in its present form, there is nothing so close to a free lunch as the donation of an easement.  Out in the country, you will call it a conservation easement.  In the big city it is a facade easement.  In either case the principle is the same.  You could make a freaking fortune turning your cow pasture into the site for a Walmart or your historic brownstone into a McDonalds, but you give up that right to a bunch of nosy do-gooder not for profit types, along with a cash donation (That is why it is "close" to a free lunch.) who will make sure you or your heirs do not yield to that temptation.  For that you get a charitable deduction.  As with any charitable donation of property, there is a valuation issue.  That is what they were arguing about in a recent Tax Court case - Loren Dunlap, et ux., et al. v.Commissioner, TC Memo 2012-126 .

There were several parties in the case because the facade easement was on the Cobblestone Loft Condominium in the Tribeca North Historic district in Manhattan.  TriBeCa is short for triangle below Canal Street in case you are wondering.  Here I am sixty years old and learning about another little corner of Manhattan.  According to Forbes TriBeCa 10013 is the seventh most expensive zip code in the country.  At any rate, the facade easement donation to the National Architectural Trust (since renamed Trust for Architectural Easements) was approved by the board of the condominium association and then the resulting deduction of $8,171,000 (12% of the pre-easement value) was apportioned among the owners of the units and parking spaces.  Another blogger with more persistence than I noted that the people involved in this case represent less than 20% of the total.  The other 80+% may have gotten their deductions, settled or not taken a deduction in the first place.  We are unlikely to ever know.

There are a number of requirements that need to be met for an easement deduction to stand up.  One is that the organization receiving the easement be committed to enforcing it and capable.  The Tax Court seemed a little concerned about that:

A review of NAT's financial data also appears to show an organization more concerned with making money for SMS (a for-profit entity which employed many of the people who were held out to third parties as working for NAT and which was owned by the same two people who founded NAT and worked as directors and presidents of NAT) than monitoring and enforcing the terms of the facade easements it held. From 2002 to 2006 NAT paid the following amounts to SMS: $483,456, $5.5 million, $5.8 million, $2.6 million, and $181,154, respectively.  From 2001 to 2003 NAT paid the following amounts in monitoring photography expenses: less than $553, less than $7,629, and $900, respectively. From 2004 to 2007 NAT spent the following amounts on total monitoring expenses: $13,345, $12,113, $56,585, and $115,884, respectively. At the end of years 2001 to 2007 NAT held approximately the following number of easements: 18, 86, 320, 570, 650, 750, and 800, respectively.

The Tax Court did not have to go delving much further into that and other technical aspects, because it concluded that the easement was not worth anything at all.  It seems rather odd, since these folks paid NAT over half a million dollars to keep an eye on their building so they didn't mess with the facade or tear it down and build a parking garage.  At least according to the Tax Court NAT did not really add anything to protections that are already in place.  The City has a Landmark Preservations Commission:

The LPC has over 60 staff members performing a variety of duties. Four of the full-time staff members are dedicated specifically to enforcement of LPC regulations. While LPC staff do not perform annual monitoring visits of the 26,000 historic properties covered by LPC regulations, staff members do pay visits to or review photographs of properties for a variety of other purposes. During such visits or reviews staff members may notice a violation of LPC regulations and act on it.

Cobblestone is a historic property subject to LPC regulations. In addition, Cobblestone also has a “sound, first-class condition” designation under LPC regulations. This special designation applied to approximately 150 of the 26,000 properties subject to LPC regulations and results in designated properties' being subject to a higher standard of preservation than the normal LPC standard. The “sound, first-class condition” designation applies to a property in perpetuity.

If the Cobblestone owners tried to mess with their building facade, there would be plenty of people in the neighborhood who would rat them out to the Landmark Preservations Commission for free.  They don't need people flying up from Washington to do it.

 The case has almost exactly the same facts as 1982 East LLC which was another Manhattan historic facade donated to NAT that had no value due to already existing restrictions.  Somewhat more entertaining were Boltar LLC where the appraiser came up with a hypothetical development that would not fit on the property and Esgar Corporation which involved a fantasy gravel mine.

The taxpayers were allowed deductions for the cash contributions to NAT and were not hit with penalties.  The penalty discussion is worth paying attention to.  The  people they relied on did not testify at trial so the Tax Court did not consider them:

Although we do not make an adverse inference from petitioners' failure to have someone from Herrick Feinstein testify, we do not believe petitioners have proven that their reliance on Herrick Feinstein's opinion letter was reasonable. Petitioners provided no evidence concerning the fact that Mr. Russo did not sign the opinion letter or that the opinion letter appears to have been written after July 2004 (given that the opinion letter cites a document not released until that month), a point after which many of petitioners had already filed their 2003 tax returns claiming a deduction resulting from the facade easement donation. We also note that petitioners apparently made no inquiries into Herrick Feinstein's qualifications to represent Cobblestone. We find petitioners have not proven that their reliance on Herrick Feinstein's advice was reasonable,

 That led to a lengthy discussion about adequate disclosure.  It is worth reading the whole thing, but here is the point I noted: 

Respondent first argues the Forms 8283 are not sufficient because petitioners did not complete all portions. However, the Instructions for Form 8283 indicate that the only portions of the form petitioners did not complete (regarding the donor's cost or basis in the donated property, the date the donor acquired the property, and how the donor acquired the property) are not absolutely necessary. The instructions notify the taxpayer that these portions may be left blank if the taxpayer has reasonable cause and attaches an explanation to the return. Instructions for Form 8283 (Rev. 1998). Although petitioners did not demonstrate reasonable cause or attach explanations, we do not believe the portions of Forms 8283 petitioners left blank are necessary to substantially comply with the Instructions.

The Tax Court cut the taxpayers a break, but there was really no excuse for not filling out the 8283 thoroughly given the exposure that the return had.  You should always read the instructions, but sometimes it is more important than others.

You can follow me on twitter @peterreillycpa.

How to Screw Up an Easement Deduction

Originally published on Passive Activities and Other Oxymorons on May 26th, 2011.
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Randall A. Schrimsher, et ux. v. Commissioner, TC Memo 2011-071
Boltar, L.L.C., et al. v. Commissioner, 136 T.C. No. 14
Gordon Kaufman, et ux. v. Commissioner, 136 T.C. No. 13
1982 East, LLC, et al. v. Commissioner, TC Memo 2011-84

Several years ago I remember hearing ads on the radio encouraging me to donate my used car to charity rather than sell or trade it.  The reasoning was that it might be worth many thousands of dollars more as a tax deduction.  Being a seasoned tax professional I thought there was a flaw in there somewhere.  The practice was pervasive enough that the Code was actually amended to the effect that a charitable contribution of a motor vehicle was limited to the amount that the charity received for selling it.  People who own historic buildings or open land have been presented with a similar prospect.  Why take all the risk of trying to develop your property when the donation of a conservation easement that will be valued based on a hypothetical development can yield you so much more ? I recently did a post on an organization, established to accept conservations easements, that lost its exempt status.  In the last few months there have been several conservation easement cases (including historical facades).  They did not go well for the taxpayers.

Randall A. Schrimsher, et ux. v. Commissioner, TC Memo 2011-071




This was a case of poor execution.

On December 30, 2004, Randall A. Schrimsher (petitioner) executed a document entitled "Preservation and Conservation Easement Agreement" (the agreement) granting a facade easement to the Alabama Historical Commission (the commission). The facade easement is with respect to property in Huntsville, Alabama, commonly known as the "Times Building". The agreement states in relevant part: for and in consideration of the sum of TEN DOLLARS, plus other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor [petitioner] does hereby irrevocably GRANT, BARGAIN, SELL, AND CONVEY unto the Grantee [the commission], its successors and assigns, a preservation and conservation easement to have and hold in perpetuity *** .

On Form 8283, Noncash Charitable Contributions, attached to their 2004 joint Federal income tax return, petitioners listed the appraised fair market value of the facade easement as $705,000. Petitioners' "Appraisal Summary" on the Form 8283 omitted various required items of information; in addition, it was not signed or dated by the donor, the appraiser, or any representative of the donee.Petitioners did not attach to their tax return any written appraisal of the facade easement

Without expressly alluding to the language that respondent has termed boilerplate, petitioners argue that the "clear and unambiguous" merger clause signifies that the agreement was the "entire agreement", and consequently "it is apparent" that no cash or compensation was exchanged between petitioners and the commission. Thus, petitioners seem to suggest that the consideration recited in the deed ($10 plus other good and valuable consideration) was fictitious. And indeed it might have been.

The only statement in the agreement concerning consideration is the statement that the commission provided consideration of $10 plus other good and valuable consideration. Whether or not it be considered boilerplate and whether or not it be considered in conjunction with the merger clause, this statement does not indicate that the commission provided no goods or services.

Conclusion For the reasons explained above, we conclude and hold that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law disallowing the disputed deductions for petitioners' failure to obtain a contemporaneous written acknowledgment of the facade easement. In the light of this conclusion, it is unnecessary to address respondent's alternative contention that petitioners failed to satisfy the requirements of section 170(f)(11).

That's a nice looking facade and I'm glad it is being preserved.  It is a shame that the deduction was lost due to seemingly elementary errors.  The donation is supposed to be for no consideration and the charity is supposed to explicitly state that in its acknowledgement.  The instructions for Form 8283 are fairly explicit.  For a deduction of $705,000 a little effort would seem to be reasonable.

Boltar, L.L.C., et al. v. Commissioner, 136 T.C. No. 14



The essence of an easement donation is that the property is not worth as much with the easement as without it.  The cases can become dueling expert cases.  In this one the Tax Court determined that the taxpayer's experts had gone so far into being advocates that their evidence deserved no consideration.

Held, further, P's experts failed to apply the correct legal standard by failing to determine the value of the donated easement by the before and after valuation method, failed to value contiguous parcels owned by a partnership, and assumed development that was not feasible on the subject property. R's motion to exclude P's report and expert testimony is granted.

In the reply brief, respondent aptly summarizes the deficiencies of the Integra experts' analysis as: failure: to properly apply the before and after methodology, to value all of petitioner's contiguous landholdings, to take into consideration zoning restraints and density limitations and to take into consideration the pre-existing conservation easements. As a result, the Integra Experts saw nothing wrong with a hypothetical development project that could not fit on the land they purportedly valued, was not economically feasible to construct and would not be legally permissible to be built in the foreseeable future. Respondent asserts that petitioner has departed from the legal standard to be applied in determining the highest and best use of property and instead determined a value “based on whatever use generates the largest profit, apparently without regard to whether such use is needed or likely to be needed in the reasonably foreseeable future.”

In most cases, as in this one, there is no dispute about the qualifications of the appraisers. The problem is created by their willingness to use their resumes and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, contrary to their professional obligations.

As the above cases illustrate, the same rules apply regardless of which party offers the unreliable evidence. Justice is frequently portrayed as blindfolded to symbolize impartiality, but we need not blindly admit absurd expert opinions. For these reasons, excluding unreliable and irrelevant evidence, rather than receiving it “for what it is worth” and then rejecting it or giving it no weight, serves several purposes.

In this case, in the view of the trial Judge, the expert report is so far beyond the realm of usefulness that admission is inappropriate and exclusion serves salutary purposes.

In support of the argument that the 174-unit condominium project assumed by the Integra report could not be physically placed on the subject property, respondent points out that the site plan for the proposal assumes 10 acres, whereas the subject property was only 8 acres, and the Integra experts ignored the effect of a preexisting 50-foot-wide utility easement for a gas pipeline across the property. As a result, respondent argues, at least 4 of the 29 hypothetical buildings, each containing 6 units, could not be constructed. Petitioner's only response is a bald and unpersuasive assertion that the project “will fit, it just won't fit as drawn” on the site plan.

Although the Integra experts determined that sales of comparable land nearby were occurring at approximately $12,000 an acre, their conclusion would assign a value of approximately $400,000 per acre to the subject property. Additional factual errors made by the Integra report authors undermine the reliability of their conclusions and demonstrate the lack of sanity in their result. If the report and their testimony were admitted into evidence, we would decide that their opinions were not credible. The assertion that the Eased Parcel had a fair market value exceeding $3.3 million on December 29, 2003, before donation of the easement, i.e., that it would attract a hypothetical purchaser and exchange hands at that price, defies reason and common sense. That conclusion is certainly inconsistent with the objective evidence in this case.

People expect to make money when they buy land to develop it.  A lot of that profit is not inherent in the land, but rather a return on the risk and the skill of the developer.  The valuation of a conservation easement needs to account for that reality.

Gordon Kaufman, et ux. v. Commissioner, 136 T.C. No. 13

This was a follow-up on a previous decision and had a lot going on.  The main thing I noted was that even though they were denied a deduction for the easement, they were still entitled to deduct some of their out of pocket cash contributions that were related to the easement.

While the parties have wrestled over the value of the facade easement, given our disposition of the facade easement contribution issue on legal grounds, that is not a question of fact we must decide. Moreover, respondent does not claim that the cash payments were in consideration for NAT's facilitation of a sham transfer. Seeing no benefit to Lorna Kaufman other than facilitation of her contribution of the facade easement (which we discuss in the next paragraph) and an increased charitable contribution deduction, we shall not deny petitioners' deduction of the cash payments on the ground that the application required a “donor endowment” to accompany the contribution of facade easement.


1982 East, LLC, et al. v. Commissioner, TC Memo 2011-84



This case concerns a facade easement donated to the National Architectural Trust.  I wanted to give you a link, but I am not sure that what appears to be the succesor organization really is so you will have to do your own research.  The deduction failed on two grounds.  The first is highly technical.  Basically if the building burns down then the charity that had the easement should get a proporionate part of the insurance proceeds:

 it was clear under operative lender agreement that bank would retain “prior claim” to all condemnation and ins. proceeds “in preference” to donee org. until mortgage was satisfied and thus, at any time preceding mortgage's repayment, there existed possibility that bank could deprive donee org. of value that should have otherwise been dedicated to conservation purposes.

The other is more of, I hate to say it, common sense one.  The building is in the Metropolitan Museum of Art historic district.  If you tried to make any changes to it, regardless of any easements, there are lots of people who would make your life miserable.  So the partnership granting a facade easement is a little like me renouncing my super powers.

The taxpayer does get some points for good execution though:

We agree with petitioner that Mr. Asser made a reasonable attempt to comply with the Internal Revenue Code and that he acted in good faith. We understand that Kaufman I is the first time that a court has considered the effect of a mortgage on a contribution of an easement claimed to be a qualified conservation contribution. That interpretation of the relevant regulation was not published until more than 4 years after Mr. Asser filed the 2004 return. We do not believe that the regulations interpreting the perpetuity requirement of section 170(h)(5) are so crystal clear and unambiguous as to make the imposition of the accuracy-related penalty appropriate. We also find that Mr. Asser acted in good faith by securing three separate appraisals of the donated property and disclosing the contribution of that property on LLC's 2004 return. See Rolfs v. Commissioner, 135 T.C. 471 (2010). Accordingly, in the light of all of the facts and circumstances, we find that Mr. Asser acted reasonably and in good faith and hold that LLC is not liable for an accuracy-related penalty under section 6662(a).

Conservation easements including facade easements are a good tool.  The lessons here are to not stint on execution and be reasonable on the appraisal.

Conservation Easesments A New Field For Villainy

Originally published on Passive Activities and Other Oxymorons on May 18th, 2011.
____________________________________________________________________________
Private Letter Ruling 201110020

Sometimes I've contemplated go over to the dark side.  I've made it this far with a chaotic good alignment so its probably not going to happen.  In the event I do, though, I have two resolutions one of which I can only try for but the latter I guarantee.  The first is that my villainy will be so subtly masterful that no one will ever realize it has happened.  In the unlikely event that someone does get wind of it I will not gloatingly explain it all to them before I dispatch them thereby giving them a chance to turn the tables on me.  The other resolution is that my villainy will not in anyway involve religion, charity or exempt organizations.  It is very bad to manipulate people through their fear and greed but to use their higher aspirations is beyond despicable.

This disinclination to mix charitable endeavors with scamming caused me to miss some of the potential in conservation easements.  I remember talking to one of my clients who deals in land and asking him what it really meant to own 10,000 acres of land somewhere.  What is that you really have ?  His answer was "a bundle of rights".  Included in that bundle is the right to do some level of developing subject to local zoning.  This might be a valuable right or it might not.  If the property is already at its "highest and best use", which in appraiser speak is the use that gives you the greatest economic return then your development rights are of negligible value.

The "highest and best use" might be best for the owners bank balance but not for the rest of us.  It's handy to have a CVS every mile or so as you are driving along in case you have to suddenly fill a prescription or desperately need a bottle of Mountain Dew, but its also nice to have some bucolic scenery and places for the birds to nest and there's all that global warming stuff people are worrying about, which is where conservation easements come in.  A property owner gives up development rights and gets a charitable deduction.  In addition the value of the property is reduced which could have a favorable effect on real estate, gift and estate taxes.  For someone who really wants the property to remain unchanged, it's about as close to a free lunch as you can get.

Of course it is not entirely free.  A fundamental law of taxation that I have discovered is that any reasonably complex tax matter involving significant dollars, regardless of whatever else it might be, is a white collar jobs program.  Here is an estimate of the costs of doing a conservation easement.  Palmer Land Trust comes up with $40,000 to $60,000 all in.  That seems a little on the high side but I haven't shopped around.  The interesting question is to whom is it that you give the conservation easement.  Putting aside all the tax goodies, the goal is that the property not be developed after you have gone.  It is up to the donee organization to enforce the restriction.  So obviously it can't be just anybody.  The regulations address the issue:

To be considered an eligible donee under this section, an organization must be a qualified organization, have a commitment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions.

Probably The Nature Conservancy would do the trick.  ORG, the nameless organization in the PLR was trying to break into the field.  Apparently the motives of ORG's Founder/President were not exclusively concerned with preserving nature.

When asked about resources to enforce easements the answer was:

Easements are monitored, but the ability to legally enforce easements is done by sending a copy of the deed is sent to the planning department. This in effect flags the property.

There is no special fund or account containing funds that are allocated to enforcement of easements.

Also ORG had other things going on besides conservation:

CO-1 website (i.e., website) and the limited liability company known as the CO-2 (hereinafter sometimes referred to as the "CO-2"). The CO-2, which advertises approximately 510 acres of land for sale on the website, uses potential conservation easement donations as a selling point and it lists the same contact information for the CO-2 (i.e., contact name, address, telephone number and email address) that ORG provided to the IRS for ORG.

ORG was able to provide its donors with a fairly convenient one-stop shopping type of service.
The normal procedure for accepting easements includes President's judgment call on whether or not to proceed and/or accept a conservation easement. The board of directors approves or disapproves recommendations that are made by President. President is compensated as an independent consultant to the donors. He is responsible for paying the appraiser. The donors are responsible for the consulting fees that are paid to President.

The Board was fine with this arrangement:

The institution has no paid employees. In addition to being the President of the Institute, President supports himself as a consultant on, among other subjects and endeavors, conservation easements. The Board grants to President the authority, acting in his capacity as an independent consultant, to perform work which he negotiates separately with grantors of conservation easements to the Institute. This work includes assisting in the valuation of the properties consistent with professional guidelines and as long as he does not act as the principle appraiser.

I'm a pretty easy going guy but there are three things that outrage me besides chiseling with not for profits- thinking that "imply" and "infer" can be used interchangeably, not distinguishing between "i.e." and "e.g." and confusing "principle" with "principal".


There were some other things.  President donated his car to ORG, but ORG had been paying the car expenses before the donation.  ORG paid President consulting fees but did not issue 1099 until audit commenced.  The extent of the one-stop shopping benefits really takes the cake, though:

ORG has demonstrated that it lacks commitment to protect the conservation easements. For example, during the years under examination, ORG accommodated a property owner whose land was subject to a conservation easement and casement restrictions. ORG worked with the property owner to modify the easement restrictions which allowed the property to be further developed in violation of its exempt purposes. Also, President, the President of ORG, benefited financially from this transaction by receiving a consulting fee for assisting with the amendment transaction. This consulting fee was not reported by ORG as income until the IRS initiated its examination.

You pay President to get ORG to accept your conservation easement so that you can get the tax benefits.  It turns out that you went a little overboard with the easements and you want to do something that violates them.  Pay President and ORG and they will modify them for you.  Is this a great country or what ?

That should be enough but the IRS continues to pile it on:

ORG has stated in writing that it monitors the easements it holds on an annual basis. ORG has also stated that President is the sole official who performs the monitoring duties. ORO relies on city and county entities to provide advance warning on easement infringements. The government contends that it is virtually impossible for one person to annually monitor (in one month's time) a total of 35 easements with an average affected area of % acres each. ORG was asked to provide documentation and substantiation of the monitoring activities that were performed by President and it was asked to provide

President's qualifications to perform such monitoring activities. To date, ORG has failed to provide the requested information and documentation. The government contends that ORG is not monitoring the conservation easements on a regular basis, if at all. Additionally, ORG lacks the resources and the staff to monitor the conservation easements and to defend the restrictions if called upon to do so.
Moreover, as a consequence of ORG's failure to determine whether each easement serves a conservation purpose, ORG's subsequent monitoring activities (such as they arc) also fail to serve any conservation purpose.

ORG made a campaign contribution in the amount of $$ to a mayoral race in City of during 20XX. During an interview with the President, President, he confirmed that ORG had made previous political campaign contributions.

The contribution that ORG made to the mayoral race is strictly prohibited by I.R.C. § 501(cX3) which prohibits participation in, or intervention in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for office.


ORG is not giving up the ship.

TAXPAYER'S POSITION

The following are specific areas of disagreement with the taxpayer as stated in the response received by the IRS on April 1, 20XX: * ORG disagrees with the government contention that the organization was liable for filing Forms 990 for the years of 20XX and 20XX because the organization's monetary receipts were below SS. * ORG contends that it provided organization documents shortly after the initial interview via mail. * ORG provided several corrections pertaining to the responses to questions during the initial interview. The corrections can be read in the correspondence dated April 1, 2030C. * ORG provided clarification to responses provided to the IRS on July 1, 20XX. * ORG contends that it provided the examining agent records which illustrate that the organization monitored its easements for infringements. * ORG provides in its response that many of the casement donations accepted concern wetlands and therefore meets the Code § 170(h) requirements of a conservation purpose. * ORG disagrees with the IRS position that it's Founder (President) has not been able to demonstrate that he has sufficient experience and expertise in dealing with conservation related issues.

ORG provides in its response several examples of President's experience in this field. * ORG disagrees with the IRS position that it acted for private benefit when it amended a conservation easement deed at the request of the owner. * ORG disagrees with the IRS position that it acted for private benefit of it its founder by allowing the founder to be compensated as a "private consultant" to many of its conservation easement donors. * ORG disagrees with the IRS position that it allowed inurement to President in form of payments and compensation. * ORG disagrees with the IRS position that it made a political campaign contribution. * ORG disagrees with the IRS conclusion that its exempt status should be revoked due to a failure to operate for an exempt purpose

I don't know if we will be reading about this in a Tax Court decision in a couple of years.  We can only hope.

Creative College Funding Plan Fails

Originally published on Passive Activities and Other Oxymorons on May 4th, 2011.
____________________________________________________________________________
SETTY GUNDANNA AND PRABHAVATHI KATTA VIRALAM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE 136 T.C. No. 8

Their are certain types of tax chiselling that I find particularly perniscious.  Anything involving exempt organizations that is at all shady always disturbs me.  Sometimes the humorous element mitigates the offense.  Like the regular church goer who always drops a couple of Benjamins in the plate or the fellow who started an exempt organization to distribute his own sperm.  (The Darwinian implications of his plan are rather frightening.  Imagine the world slowly being taken over by the descendents of a group of women disinclined to collect sperm in the traditional manner and that one guy.)

Dr. Setty Gundanna Viralam's scheme had no such redeeming quality, not even originality:

In 1998 P-H transferred stocks and cash to X, an organization described in I.R.C. sec. 501(c) that was not a private foundation. X sent P-H acknowledgment letters for the stock transfers which stated that no goods or services were provided for the “donation” of the stocks. X sold the stocks in 1998. X maintained a segregated account for P-H in its records, reflecting the stocks and cash received, the proceeds from the sales of the stocks and their reinvestment, the dividends and interest generated by the assets in the account, and the disbursements from the account in subsequent years.


Promotional materials provided to P-H by X represented that P-H would be able to direct the distribution of the funds in the account for purported charitable purposes, including student loans and as compensation for the performance of charitable services by P-H or members of his family. P-H anticipated at the time of the transfers of the stocks to X that account funds could be used for student loans to his children. Ps claimed a charitable contribution deduction on their 1998 Federal income tax return equal to the fair market value of the stocks and the cash transferred to X.

(P-H must stand for "Petitioner-Husband" i.e. Dr. Viralam.The spouse is Prabhavathi Katta Viralam.)  Here is the part of the case that I found the most amazing:

Petitioner Setty Gundanna Viralam (petitioner) owned a 50-percent interest in a medical practice, which he sold in 1998 for $2,262,500, generating a taxable gain of $2,261,750 in that year.

The only Florida physician that I could find by that name is a pediatrician.  A sale of a pediatric practice for over $4,000,000 is truly astounding.  I suspect that there is an interesting story behind that story.  Frequently, medical practices have little or no fair market value. Note that Dr. Viralam's basis was $750.00.

Dr. Viralam began getting some financial planning ideas from a company called xelan (There seems to be a difference of opinion about whether it is supposed to be capitalized.)  To those enamored of more traditional sounding names it was also referred to as Economic Association of Health Professionals, Inc.  I thought the more exotic name had to have some sort of of Greek origin (Xenophon, xenophobia), but it is actually an invented word:

`x', the individual's savings required to finance lifestyle costs through life expectancy, with 'elan' the French word meaning a lifestyle of personal freedom.” 

I wasn't able to confirm that definition of 'elan' instead getting:

elan - ardor: a feeling of strong eagerness (usually in favor of a person or cause); "they were imbued with a revolutionary ardor"; "he felt a kind of religious zeal"

elan - dash: distinctive and stylish elegance; "he wooed her with the confident dash of a cavalry officer"

elan - enthusiastic and assured vigor and liveliness; "a performance of great elan and sophistication"

I have a pretty good bs detector and the name alone is enough to elevate its reading.  I don't give myself bs detecting points when I have the benefit of hindsight, though.

At any rate the plan sounded pretty neat:

Donors and their family members may work for and be compensated by their family public charities for good works (teaching, research, or providing pro bono services) they perform on behalf of their family public charities. *** The Financial Education Program also explained with reference to Foundation accounts that Your family then is the advisor to that fund as to the way the money is invested. And the growth on the invested money accrues tax deferred. Anytime you want to you could take the money out of your family public charity and pay yourself compensation to do good works. The Foundation also offered Foundation account holders a student loan program whereby Foundation account funds could be disbursed as loans for college and graduate school tuition and related expenses. The program's terms further provided that the loans could be repaid (with interest) either through repayments generally commencing 5 years after graduation or by the recipient's providing charitable services for designated periods. A xelan financial counselor wrote petitioner in April 1998 recommending that he “Establish a Foundation account for charitable giving, income tax reduction planning, estate tax reduction, educational funding, and future retirement planning.”

I really wish that this worked.  There are physicians I know who would actually squirrel away a significant portion of their income in a plan this so that they would be able to pay themselves to work with Medecins Sans Frontieres.  Using the money to make student loans to your own kids is definitely over the top, though.

As part of the package Dr. Viralam received an attorney's opinion:

After establishing his Foundation account, petitioner received a letter from the law firm of Conner and Winters, legal counsel to the Foundation. The letter expressed an opinion that it was more likely than not that a contributor would be entitled to a deduction for a charitable contribution to the Foundation. The letter represented that the opinion expressed therein was based on an examination of the Foundation's certificate of incorporation, its bylaws, resolutions of its board of directors, and representations made to the Commissioner of Internal Revenue in connection with the Foundation's application for recognition of section 501(c)(3) tax-exempt status. However, the letter stated that Conner and Winters had not examined any documents pertaining to, and would not render an opinion as to the tax effect of, any of several programs of the Foundation, including “donor advised distributions”, “educational loans”, and “charitable service [performed by a donor] for the Foundation”. The letter expressly disclaimed any opinion on the tax effect of “any specific charitable or other activity of the Foundation or any donor with respect to the Foundation”.

Here is my version of the letter:

Dear Dr. Viralam

The IRS has not revoked the 501(c)(3) status of this organization - yet.  So if you give it money, its probably deductible.  We will certainly not stick our neck out on all the really neat parts of the plan that the snake oil salesmen told you about.  Caveat emptor.

As far as I can tell the whole xelan thing was shut down in 2005.  What is at stake in this case though are charitable contributions for 1998 and gain from the sale of the donated property. As it worked out the largest use of the account's funds was student loans to Dr. Viralan's son, Vinay. I doubt that perfect execution would have salvaged this plan, but execution was less than perfect :

On July 6, 2001, Vinay executed documents with respect to the $17,247 loan for his tuition and expenses at the University of Pennsylvania. The documents included a “Commitment Agreement” (commitment agreement) and an “Education Expense Repayment Agreement” (repayment agreement).

In the commitment agreement Vinay agreed to participate in the Foundation's “Educational Funding Program” and, in return for receiving educational loans from the Foundation, to provide 2,000 hours of charitable work for the Foundation for each year of educational expenses advanced. The commitment agreement stated that if Vinay did not undertake sufficient charitable work to repay the educational expenses advanced, he would repay the Foundation all educational expenses advanced that were not reduced by charitable services, together with interest according to the terms of the repayment agreement. Finally, the commitment agreement stated that “the student will provide regular reports, at least annually, of his or her progress in the course of study and intended work, as well as, his or her plan to meet the obligations of the Agreement.”
...............................
The Foundation's approval of petitioner's son as a student loan beneficiary was perfunctory. The Foundation sent petitioner a distribution request form on which the approval for a student loan for Vinay had already been signed by a Foundation official before petitioner executed the form. There is no evidence that the Foundation reviewed Vinay's qualifications or otherwise exercised any independent judgment in selecting him for a student loan. In the circumstances, it is obvious that the selection of Vinay as a beneficiary of the Foundation's student loan program arose from his relationship to petitioner and as a result of petitioner's direction.

................
Although the commitment agreement required Vinay to provide an annual report, there is no evidence that he did so.

..................
On September 16, 2003, respondent issued petitioners a notice of deficiency for 1998 disallowing their claimed charitable contribution deduction for the transfers of stocks (and cash  ) to the Foundation and determining an accuracy-related penalty. Eleven days earlier, petitioner arranged for an entity he and Vinay controlled to pay the Foundation $70,300, the total of the distributions to the University of Pennsylvania on Vinay's behalf from petitioner's Foundation account.  This payment was credited to petitioner's Foundation account. The Foundation thereupon waived all interest that had accrued under the terms of the repayment agreement and returned the commitment agreement and repayment agreement to Vinay marked “paid in full”, along with a letter confirming that the $70,300 payment had fulfilled Vinay's obligation to the Foundation.

So on to the penalties.

We find that petitioners were negligent because petitioner failed to make a reasonable attempt to ascertain the correctness of a deduction which would seem to a reasonable or prudent person to be “too good to be true” under the circumstances. A reasonable or prudent person would have perceived as “too good to be true” a deduction for a supposed charitable contribution where the amounts deducted could be used to fund student loans for his own children. The same is true with respect to the avoidance of capital gains taxes on the sales of stocks where the proceeds remained under petitioner's control for use by his children. To the extent petitioner ascertained the validity of the charitable deduction or capital gains exclusion from xelan's employees or its printed materials, there was an obvious conflict of interest on the part of persons promoting xelan's programs.

What about that great legal letter ?

Thus, while the letter specifically identified the student loan program petitioner contemplated using, it expressly refrained from offering any opinion concerning the tax effects of participation in the program and confined itself merely to describing certain features of the program. If anything, the Conner and Winters letter should have put a professionally educated person such as petitioner on notice that further inquiry was warranted concerning the student loan program.

It will be interesting to see if there are more xelan cases coming.

OK 2010 This is Really Goodbye

Originally published on Passive Activities and Other Oxymorons on February 21st, 2011.
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In  a previous post,  I explained the need for occasional purges of material that does not transform itself into a full length post.  Now I'll explain the Amazon ads.  All hope of them being a means of monetizing has vanished.  They are purely decorative.  The only thing my readers, who apparently now number in the scores (If you have trouble remembering what a score is here is a little trick.  Remember "Four score and seven years ago".  Now subtract the year of the Declaration of Independence from the year of the Battle of Gettysburg.  Then subtract seven.  Then divide by four.  Piece of cake.). do is come to the site.  I have a little gadget next to where I type the blog and I can search Amazon and then click to move the link and image into the blog.  I thought I would see what I got with Goodbye and up comes one of my favorite books.  It's very short and I read it from time to time to cheer myself up.

As the title indicates this is the last of the 2010 material.  I would have gotten it in sooner, but it got pushed aside by two much more interesting recent developments.  One was about mercenaries and the other was about breasts.  So how was blog housekeeping going to compete? With no further fanfare here is the last of 2010:

Private Letter Ruling 201051024

This was a ruling on exempt status.  Exempt status ruling are a fairly rich source of tax humor, although it will be a while before somebody tops Free Fertility Foundation.  I'm not inclined to mock this particular effort, although it does provide a slightly heightened reading on my bs detector.

You were incorporated under the nonprofit laws of the state of M on x. According to your Articles of Incorporation your purpose is to advance the religious beliefs, cultural traditions and lifestyles of four N churches (the "churches") by providing loans and other assistance for real estate purchases and other farm and business related purchases to members of the churches; to encourage savings and thrift and continue to be committed to Christian principles of operation by providing investment and borrowing opportunities to enhance economic social and spiritual well being of the N Brotherhood; and to operate exclusively for charitable, religious or educational purposes.

Investors are limited to residents of M who are members of the churches. Eligible individuals meeting the minimum-investment requirement ($10,000), up to a maximum of 25 new investors annually (to comply with the requirements for exemption from the security laws of the state of M), will be accepted on a first-come, first-serve basis. 


You state that both your lending and borrowing activities will support your exempt purpose of advancing your religious beliefs, cultural traditions and lifestyles of the churches. You represent that central to your religious doctrine is a belief (i) in Biblical financial truths, including brotherly financial aid, responsibility for stability in family finances, the collective responsibility for all members of the church for each other's well being and personal stewardship and (ii) that deacons of your churches are called by God to oversee and, where applicable, alleviate the financial hardship of their church's members. You state that all of these principles lead to the rejection of laws that permit or facilitate the avoidance of responsibility, such as bankruptcy and insolvency laws.

Although you were initially funded by contributions from founding board members and received a church offering from each of the churches, you do not plan to engage in further fundraising activities. Your primary method of raising capital will be interest bearing loans from investors. Your sole source of income will be interest charged to borrowers. You plan to use the spread between the interest rates paid to investors and those charged to borrowers to pay all necessary future expenses.

The organization did not qualify for exempt status.

Articles 4(a) and (b) of your Articles of Incorporation states that you were formed to provide investment and borrowing opportunities. Providing investment and borrowing opportunities to members is not an exempt purpose described in section 501(c)(3).


Your primary purpose is to operate a trade or business, a lending institution which directly competes with commercial lending institutions. Your business practices are consistent with those of the industry in general. You will be funded by capital from investors. Your method of determining fees is similar to the method used by commercial lending institutions.

The minor mystery in this is what the organization expected to gain by its exempt status since it was planning on just breaking even and would not be getting charitable contributions.  It may be there was some state law benefit.  In my recent post on exempt organizations I note one that was trying to qualify so it could get a liquor license.  Presumably that was not the plan with this one.

I'm not much of a scriptural scholar, but I'd like to know where the stuff about bankruptcy comes from.  I think there is more in there about forgiving debts.

Humphrey E. Igberaese v. Commissioner, TC Memo 2010-284

This is really a run of the mill substantiation case. It concerns a host of deductions including charity.

Cash Charitable Contributions Igberaese asserts that he contributed $200 to his church in cash every week of the year, for a total of $10,400. He said that when he was in town, he would attend church and would personally donate the $200 to the church. He said that when he would be out of town, he would provide the cash to other church members in sealed envelopes to take to the church for him. He said he did not recall, even approximately, how often he provided the cash to other church members to donate for him. Nor did he remember the names of any of these members. He presented a printout of a computer spreadsheet consisting of the name of the church, the date of each contribution (each Sunday of the year), the amount of each contribution ($200), and the yearly total ($10,400). He testified that he made each entry around the time of that week's contribution.

Putting aside the formal substantiation requirements for charitable contributions, I'd advise people like Mr.Igberaeseke to work on their stories a little better.  I don't have personal acquaintance with tax court judges, but I believe I've learned a bit about them from reading their opinions for the last thirty years.  Among the things that I have surmised is that they are not idiots and that they live in the same world that I do.  Some of them probably go to church and will therefore know that people who drop cash in the collection plate mostly still think that George Washington is our holiest president.  If the ushers know who's face is on a C note, it is not from experience gained counting the collection

We do not find the evidence Igberaese introduced to be credible. As we discuss in connection with each deduction, Igberaese presented little beyond his own unpersuasive testimony and self-created documentation to corroborate his series of implausible deductions. Several of his explanations for the absence of further corroboration were also implausible.

We are similarly skeptical of Igberaese's documentary evidence, which shows little more than that he has written down his implausible assertions

Trout Ranch, LLC, et al. v. Commissioner, TC Memo 2010-283

This was a dueling expert case.  The Trout Ranch had donated a conservation easement.  The partnerships expert indicated that it was worth 2.1 million.  He based the valuation on other easements sold in the area. The Tax Court was not greatly impressed :

 In essence, in all three cases the conservation easements all but eliminated residential development. In stark contrast, the Trout Ranch CE restricted development from at least 40 residential lots to 22 lots (a reduction in potential development of 45 percent). We are simply not convinced that the value of a conservation easement that restricts development to at most one residential lot sheds any light on the value of a conservation easement that allows as many as 22 residential lots.

The Service had originally wanted to allow $485,000, but when it came to trial they decided to reduce that to 0.  I mean, what the heck, why not say the property was worth more with the easement and have them pick up income ?  The switch led to some fancy burden of proof discussion, which the Court indicated didn't matter because they were able to determine the true value.

The Tax Court came in at $560,000.  We know that is the right answer, because its what the Tax Court said.  The case is worth reading if you are interested in valuation issues.  It's not great for my purposes as I couldn't find any good quotes.

Richard A. Frimml, et ux. v. Commissioner, TC Summary Opinion 2010-176


My tentative title for this was "Paint Your Horses".  It is a hobby loss (Section 183) case.  The IRS seems to be firmly convinced that people take care of animals much larger than themselves that appear to defecate copiously for fun.  Go figure.  The couple was raising American Paint Horses.  The Tax Court ruled that they were in fact trying to make money.

Petitioners' knowledge at trial was extensive as it related to breeding and artificially inseminating Paint horses. Their knowledge included the genetics, the mechanics and the financial aspects of breeding.  Even the horses aren't having any fun.

The worst thing about people who win hobby loss cases around horse breeding is that the Tax Court gives them extra points for heartlessness.

Petitioners made many business decisions regarding the purchase, care and sale of a number of Paint horses for their horse activity. Petitioners paid extensive amounts to care for Special when he was injured. On the other hand, petitioners decided to put down a 2-year-old foal that hurt her leg in a fence accident because the cost to heal her exceeded the projected price in selling her.

In case you are wondering what was so special about "Special".

They have identified semen production by Special as a potential future source of revenue.

This case is similar to that of Johnny L. Dennis TCM 2010-216 which I gave a brief mention.  Besides doing a cost benefit analysis on the vet bills, the other thing that they have in common was not riding the horses themselves.

U.S. v. RUTH, JR., Cite as 106 AFTR 2d 2010-7443

The decision itself is about criminal procedural issues which are not of great interest to me.  If you have an interest in such things check out Jack Townsend's blog.  I read cases like this because the story behind the story is often interesting.

The conduct at issue began while Ruth and Pilkey were incarcerated at the Federal Correctional Institution in Fort Dix, New Jersey. The defendants submitted tax returns to the IRS claiming refunds in the names of fellow inmates for wages never earned and giving addresses where the inmates never lived. These inmates fell into three groups: (1) those who were aware of the fraud, (2) those who were not aware of the fraud and had instead provided their personal information in order to receive legal assistance from Ruth and Pilkey, and (3) those who testified they did not know the defendants. Ruth and Pilkey were able to avoid having to submit W-2 forms by misrepresenting that fellow prisoners were working at companies that had gone bankrupt. As part of the scheme, defendants obtained employer identification numbers for these bankrupt companies. To avoid detection by prison authorities, defendants enclosed envelopes addressed to the IRS within large envelopes sent to collaborators outside of prison. Defendants had the tax returns sent to mail-forwarding services who would then deliver the returns to their collaborators.

I became interested in accounting in part from reading stories about epic frauds.  I doubt anybody will ever top Alfredo Reis.  Read the book about him if you don't believe me.  He convinced the British bank note printing company that printed the money issued by the Bank of Portugal that he worked for the bank and got them to print money for him.  He used the money to buy stock in the Bank of Portugal which was the only entity that could prosecute counterfeiting.  These fellow aren't in the same league, but given the adverse conditions they were working under (being in prison and all), they really achieved a lot.  Of course you might expect that the IRS computers would catch them eventually.  That's not exactly the way it turned out.

Defendants' scheme resulted in the IRS issuing refunds of tens of thousands of dollars. Eventually the IRS became suspicious of returns filed by persons in federal custody using the same type of form and listing the same employers and addresses. In May 2004, an inmate came forward who informed prison officials about the fraudulent tax scheme. Based on this information, prison officials searched the lockers of several inmates, including Ruth and Pilkey, and recovered records and material used to file the fraudulent tax returns.

So that is it for 2010.  Goodbye 2010.

PAOO Reaches 100 - Merry Christmas

Originally published on Passive Activities and Other Oxymorons on December 25, 2010. Blogging about your own blog represents the height of self-absorption, so I more or less only do it at "century" marks now.
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For I was hungry and you gave me food, I was thirsty and you gave me drink, I was a stranger and you welcomed me,  I was naked and you clothed me, I was sick and you visited me, I was in prison and you came to me.’  Then the righteous will answer him, saying, ‘Lord, when did we see you hungry and feed you, or thirsty and give you drink?  And when did we see you a stranger and welcome you, or naked and clothe you?  And when did we see you sick or in prison and visit you?’  And the King will answer them, ‘Truly, I say to you, as you did it to one of the least of these my brothers, you did it to me

I've got three posts scheduled for next week, but as I was poking around.  I realized that the next post to go up will make 100 published posts.  From the reports that I  get from Google I can safely say that my readership can be numbered in the scores.  I am grateful to each and every one of you.  I realize that most of you are not clicking on the ads, because you are afraid that the flood of revenue might motivate me to quit my day job.  Don't be concerned, it is the furthest thing from my thoughts.  You can click in peace.

My goal in this blog is to highlight tax developments either because they are interesting, practical or funny.  I am most pleased when I highlight something that has otherwise been largely overlooked.   I feel particularly pleased when I do a google search and find that PAOO is near the top.  Here are some to try:

PMTA 2010-058

parsonage second home

does land need to have business purpose to be part of flp  (make bottom of page 1 on this one - not an elegant query, but somebody used it and found me)

Early in December I shared with you what the greatest hits have been.  There has not been much change except for my post on people who have been strongly encouraged to get out of the tax preparation business moving into the top five.

I took down most of the non-tax posts I made early in the blog (the ones taken down do not count as part of the 100), but I left a couple.  One in particular is timely for the Christmas season.  I have heard that things are working out well for the homeless fellow that my friend "James" helped out back in May.  I should no longer do even simple math in my head, but I'm taking a chance here and saying that it is only 82 days to St. Patrick's Day.  In some circles, this is thought to be a holiday to be celebrated by drinking to excess.  A nascent movement known as San Patricios Against Hunger stands for the proposition that Americans of Irish descent are more than likely descended from famine refugees and that they should celebrate the holiday by donating to hunger fighting charities.

I haven't commented at length on the recent tax compromise and probably won't.  I did mention a peculiar opportunity with respect to the generation skipping tax that requires action this week.  My other observation is that with respect to income taxes things have been pretty much left intact, which means that general principles of tax planning are back in full effect.  One of the general rules is to accelerate deductions (This was much more significant when money actually earned interest).  People were holding back on this thinking that rates would be higher next year.  So first thing tomorrow get out your check book or its electronic equivalent and make some charitable contributions.  Now because of the material I work with this blog will often teach you more about what not to do.  If you want to get a tax deduction don't give to an organization that has had its exempt status revoked like the Free Fertility Foundation.  Also, although I think its a wonderful thing to invite homeless people to lunch and its probably quite rewarding to watch the ushers gasp when you drop a couple of C Notes in the collection plate as was the habit of Hardy Ray Murphy, you won't get any deductions. (Buy the homeless guys lunch anyway).  So on a more positive note I'll suggest a couple of qualified organizations that will provide you with a proper acknowledgement.

I divide my practice between Central Massachusetts and Central Florida.  The two regions seem to be at peace with one another.  A Unitarian minister from Worcester once led a regiment that occupied Jacksonville, but many of the men in Thomas Wentworth Higginson's First South Carolina Volunteers were native to Florida.  I don't like basketball so I really don't need to get passionate about either the Celtics or the Magic.  I am however passionate about supporting two charities Grace Medical Home which is a marvelous model of how to provide medical care to the working poor and Jeremiah's Inn which provides substance abuse recovery and runs a neighborhood food pantry.  Moving beyond the local I would recommend Just Detention International, the only human rights organization devoted exclusively to ending sexual abuse of prisoners.  It happens that I am the longest serving board member of JDI and the only current member recruited by Stephen Donaldson.  I hope you will consider those three as you are making out your checks this week.

So Merry Christmas.  And be sure to not shoot your eye out.

The Powder To Blow It Away

Theodore R. Rolfs, et ux. v. Commissioner, 135 T.C. No. 24

This was originally published on PAOO on November 14th, 2010.

We few, we happy few, we band of brothers — joined in the serious business of keeping our food, shelter, clothing and loved ones from combining with oxygen.

As the writer of an award winning blog that has attracted possibly scores of readers, it is to be expected that I will know some celebrities. One of them is the noted science fiction author, John Sundman. What is really impressive about John is that even though he is as advanced in age as I am, he is still a volunteer firefighter. He has given me a great deal of encouragement, so coming on a case touching, however, lightly on firefighting I decided to acknowledge his support.

Theodore Rolfs purchased some lakefront property in 1996. For some time, he pondered exactly what he wanted to do with it. Then his mother-in-law suggested that he build a residence on it to her specifications and exchange it for her residence. He decided that was a good idea and began planning accordingly. There was, however, already a residence on the property. Originally built in 1900, the existing structure could not be made mother-in-law worthy. Mr. Rolfe determined that it would cost him about $10,000 to have it torn down. Then he came up with a better idea.

He wrote to Gary Wieczorek, who was chief of police and also of the volunteer fire department of the Village of Chenequa, where the house was located :

As we have discussed, I would like to donate our house located at 5192 [2] Oakland Road in the Village of Chenequa to the Fire and Police departments of the Village for training and eventually demolition. This letter shall serve as an acknowledgment that it is my intention to donate the house for such purposes. The house is available immediately. If any further approvals are needed please contact me.



Chief Wieczorek had a clear understanding that his department was not the recipient of a new recreational facility. He understood that the house was to be used exclusively for training purposes and that Mr. Rolfs expected that it would be burned down sometime in the first half of 1998. Matters developed in accordance with Mr. Rolf's expectations :

Sometime shortly before February 18, 1998, the Chenequa Police Department used the lake house for a training exercise. On February 18, 1998, the VFD conducted an initial training exercise at the lake house. On February 21, 1998, 11 days after petitioner's letter donating the lake house, the VFD conducted a second training exercise and burned the structure to the ground.


The firefighter training exercises at the lake house allowed the VFD to satisfy monthly training requirements imposed under Wisconsin State law. Chief Wieczorek believed the firefighter training exercises conducted at the lake house were superior to the training exercises otherwise available to the VFD.

Mr. Rolf arranged for an appraisal of his property. The appraiser did a valuation of the property with and without the structure that after standing nearly century went out in a blaze of glory to the edification of the Chenequa Volunteer Fire Department. The appraiser determined that the value of Mr. Rolf's property had declined from $655,000 to $579,000. Accordingly he claimed a charitable contribution of $76,000.

The IRS denied the charitable contribution and asserted a 20% accuracy related penalty. Mr. Rolf filed a petition to Tax Court now claiming a deduction of $235,250, the appraiser's estimate of the reproduction cost of the house. The Service responded by switching to a 40% gross valuation penalty.

The IRS got testimony from a professional "house mover", who indicated that it would have cost on the order of $100,000 to relocate the structure. Given its relatively modest nature and the high cost of land in the vicinity there would not have been anyone willing to pay to relocate it. They also brought on someone from the State of Wisconsin responsible for knocking down houses to make roads who reiterated that this was not the type of house that could be moved somewhere else.

In the end the tax court ruled that Mr. Rolfs was not entitled to a deduction since he had received a "quid pro quo" in the form of the removal of the structure that could not be brought up to mother-in-law standards. Since he had diligently followed all reporting procedures and a similar deduction had been allowed in Scharf v. Commissioner no penalties were assessed.

All in all, the satisfaction of helping the fire department should have been enough for Mr. Rolfs, winning on the deduction would have been icing on the cake. Samuel Johnson said "Every man thinks meanly of himself for not having been a soldier, or not having been at sea." Firefighting had not developed as a profession in his time or I am sure the would have added it. So I will close with a second quotation this one from an office worker's tribute to firefighters :
And when we met them on the stairs
They said we were too slow.
"Get out! Get out!" they yelled at us -
"The whole thing's going to go"
They didn't have to tell us twice -
We'd seen the world on fire.
We kept on running down the stairs
While they kept climbing higher

The collection of unidentified quotations continues to expand. A hint on the leading one is the fictional character also had a great deal of admiration for infantrymen.

Time To Purge The Draft Posts

This was originally published on PAOO on November 12th, 2010.

In case you have ever wondered what the secret is to having a tax blog with conceivably scores of readers, who rarely click on ads, here is how I do it. Whenever I get a chance I scan all the primary source federal tax stuff I have that is available to me through RIA. Federal court decisions, private letter rulings, revenue procedures, chief counsel advice, program manager technical assistance, etc. etc. If something looks promising, I copy it into a draft post. I then work on which ever one the spirit moves me to whenever I get a chance. I've committed to publishing posts on Monday, Wednesday and Friday and have kept up pretty well. The draft posts accumulate at a faster rate than three per week. There are ones that I find kind of interesting, but just don't seem to be able to expand on to have something worth saying.

So in order to keep my draft posts from being cluttered with material that is going stale, I'm going to do a bit of a purge. However, when I first looked at these things, I thought there was something worth sharing, so I at least want to mention them. Once I have done that I will delete them which will make me feel more pressure when I am scanning new stuff, because I am always worried about running out. You can rescue any of these embryonic posts from oblivion by posting a comment.

Martha A. Olson v. Commissioner, TC Summary Opinion 2010-96 is a classic tax court summary opinion, the reality TV of the system. The taxpayers were trying to deduct expenses from a business that they had run several years before. They explained why they hadn't reported the business (a pay day loan operation) in the years it actually operated as follows:

Petitioner did not believe that she needed to report anything from the Checkrite business on the 1996 and 1997 returns because, in her view, she reinvested all the income back into the business; i.e., as customers would make payments against their outstanding liabilities, petitioner would collect the payments and then make additional loans to new or existing customers.

I thought that was kind of amusing and was going to title the post "Consider Taking Accounting 101"

Estate of Marie J. Jensen, et al. v. Commissioner, TC Memo 2010-182 is a valuation case. In valuing a C corporation that owned a moribund summer camp, there was a substantial discount allowed for the potential corporate income taxes on a sale of the property. I gave it a brief mention in my post on purging earnings and profits, since I believe their income tax problem might have been somewhat more manageable than they either thought or at least let on. I haven't felt inspired to give it a full treatment though.


PLR 201016053 is an example of something that is incredibly interesting if you are a total tax geek and rather difficult to make meaningful for a normal human being. Here is the headnote:
:
Self-created customer relationships are severable and distinct asset from acquired customer relationships such that any gain with respect to sale of self-created customer relationships won't be subject to Code Sec. 1245; recapture as result of amortization deductions claimed with respect to acquired customer relationships

I swear if they ever have a machine to test for tax geekiness where they attach and insert all sorts of devices that monitor your reactions and then flash things on the screen that will be one of the things they use. If you just had a WOW - That's really interesting, you are a total tax geek (Maybe some sort of highly specialized business broker just to be open to other possibilities. ). If you just had a WTF (That stands for What The ?) you are a normal human being.

Gordon Kaufman, et ux. v. Commissioner, 134 T.C. No. 9 was about a charitable contribution of a facade easement. The IRS was granted summary judgement on the issue of a deduction for the easement because the property was mortgaged, but it was not granted summary judgement on the issue of the cash contribution that the taxpayers made as part of the deal or their reliance on their accountant to be relieved of penalties. Who knows ? Maybe this case will be back on those two issues.


Gregory J. Bahas, et ux. v. Commissioner, TC Summary Opinion 2010-115 is about the real estate professional exception to the passive activity loss rules. I gave it a brief mention in one of my other posts on that topic. The interesting thing is that I think there is a mistake in it:

Mrs. Bahas misconstrues section 469. Because petitioners did not elect to aggregate their real estate rental activities, pursuant to section 469(c)(7)(A) petitioners must treat each of these interests in the rental real estate as if it were a separate activity. See sec. 469(c)(7)(A)(ii). Thus, Mrs. Bahas is required to establish that she worked for more than 750 hours each year with respect to each of the three rental properties. But, petitioners presented no documents or other evidence with respect to the number of hours Mrs. Bahas worked managing the three rental properties in question. Indeed, the parties stipulated that “petitioners spent less than 750 hours managing the rental properties” in question.

Absent the election, I don't think you need 750 hours in each of the properties. I think you would just have to materially participate in each of the properties. At any rate, I'm beginning to wonder if the actual real estate professionals are beginning to regret that they lobbied for this relief given the number of amateurs that it ends up attracting. Regardless I've probably said enough about Bahas.

Well I guess those five are enough for this post. I still have a decent backlog. If nothing interesting comes out between now and January, I'll be out of material. Not very likely.

Credit Card Rebates May Yield Charitable Deductions

This was originally published on PAOO on August 16th, 2010.

If you have been lying awake nights worried about whether you have to report your credit card rebates as gross income, relief has finally arrived. Unfortunately, if you really were lying awake worrying about the credit card rebates, you actually have some other sort of problem and will commence worrying about something else.  Maybe you will manage to slip in one good nights sleep, though,  now that I am telling you all about PLR 201027015.

The ruling has two holdings and also a little bonus if you are the treasurer of a struggling not-for-profit.  The ruling must have been requested by a credit card company on behalf of its customers.  And you probably thought all along they weren't really doing anything to earn that usurious interest and those maddening fees.  Don't you feel mean sprited now.  Well, neither do I, but they took the trouble to invest a couple of seconds worth of their interest income in getting this ruling, so we should all pay attention.

Someone who gets this particular credit card can choose to either receive a cash rebate or have the rebate donated to charity.  The first part of the ruling is that, regardless of which choice you make, you do not have gross income,  The rebate is deemed to be a purchase price adjustment.  Presumably if you charged something deductible, you should be getting a smaller deduction, but they don't get into it.  It is interesting (to me anyway) to note that if receiving the rebate were gross income, then diverting it to charity would not necessarily avoid the gross income.  

The next part, which is intuitively obvious only if you think in double entry, is that you are entitled to a charitable deduction if you let the rebate go to charity.  Imagine you put a $2,000 big screen TV on your credit card.  The $20 rebate instead of going to you went to Free Fertility Inc (before its exempt status was pulled See my post of July 15),  What if instead of that process you had found a big screen TV that cost $2,000, but realized that if you spent all that money on the TV, you wouldn't be able to fulfill your desire to be charitable to would be mothers.  So you hunted high and low until you found one that you could get for $1,980 and managed to mail the check before their exempt status was revoked.  Well then you would have a $20 charitable deduction.  So the credit card company saved you a lot of trouble,  The least you can do is take a few years to pay off that TV so they can collect a few thousand dollars in interest from you.

The other neat thing in the ruling is a recommended acknowledgement to be sent by the charitable organization :

Dear Contributor:


This letter is to acknowledge your contribution made to the __________, an organization described in section 501(c)(3) of the Internal Revenue Code and qualified to receive contributions deductible for federal income tax purposes, provided the contribution is made exclusively for charitable purposes.




We appreciate your contribution of $_______ made in calendar year ____ and wish to confirm for you that no goods or services were provided to you in consideration, in whole or in part, for your contribution.


Sincerely, __________________


I will sometimes see organizations sending out acknowledgements that do not meet the substantiation guidelines of the regulations.  They are not being nice to their donors when they do that and they are indicating, at least to me, that there is at least one area where they are not on the ball.  So now you have a handy template that is IRS approved.  And you can thank a nameless credit card company.