Easement Deduction Toppled Because of Extinguishment Provision; No Penalties

• Date: 01 September 2020
• Published date: 01 September 2020
• DOI: http://doi.org/10.1002/npc.30762

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 September 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

The TE/GE Division is said to acknowledge that its

scoring methods “are limited because it does not utilize

modern data practices.”

The report includes a detailed summary of the TE/GE

examination structure within the IRS and of the exami-

nation-selection processes. (See the article beginning on

p. 6.) [27.6(b)] ◆

EASEMENT DEDUCTION

TOPPLED BECAUSE OF

EXTINGUISHMENT PROVISION;

NO PENALTIES

In what is now the sixth recent decision on the point,

the US Tax Court, by opinion dated June 17, held that a

claimed charitable deduction for a gift of a conservation

easement is not allowable because the easement deed

contains a defective judicial extinguishment clause (He-

witt v. Commissioner). This opinion is thus not notable

for that finding.

Not surprisingly, the government sought imposition

of accuracy-related penalties on the donor in the form

of the 40-percent gross valuation misstatement penalty

(IRC § 6662(h)) and, alternatively, the 20-percent pen-

alty for negligence or disregard of rules or regulations

and substantial understatements of income tax (IRC §

6662(a), (b)(1), (2)). As to the first of these penalties

and ascertainment as to whether fair market value was

overstated (by at least 200 percent), often a court will

consider expert opinions; that happened in this case.

Unusually, however, the court also relied on the testi-

mony of the donor, which the court found “credible,”

“helpful,” “reliable,” and “persuasive.”

As to the 20-percent penalty, courts may excuse the

penalty if there was reasonable cause and good faith,

if there was reasonable reliance on professional advice.

While that was found in this case, the court was also

impressed with the donor’s credibility and sincerity. The

court even excused the failure to provide the information

about basis on the Form 1023 (cf. Blau v. Commissioner

(summarized in the August 2019 issue)). Rarely has a

fact witness performed so well and been so positively

recognized by a court. [9.7] ◆

OTHER EASEMENT GIFT

LITIGATION

• The US Court of Appeals for the Sixth Circuit, on

June 17, declined to provide a full-court hearing

of its decision that a deemed-approval clause in a

contribution agreement that accorded the donee a

45-day window in which to prevent certain changes

to a façade easement arrangement was a violation of

the in-perpetuity requirement (Hoffman Properties II,

LP v. Commissioner). The decision of the three-judge

panel on the point is summarized in the July 2020

issue. [9.7]

• June 23 brought three more opinions from the Tax

Court concerning defective judicial extinguishment

clauses in easement deeds involving charitable con-

tributions (see the previous article) (Plateau Holdings,

LLC v. Commissioner; Lumpkin One Five Six, LLC v.

Commissioner; Lumpkin HC, LLC v. Commissioner).

One of these cases (Plateau Holdings) nicely

illustrates application of accuracy-related penalties

in this context, involving gross valuation misstate-

ments, where a misstatement is gross if the value

of property claimed on a return is 200 percent or

more of the correct amount (IRC § 6662(e)(1)(A), (h)

(2)(A)(i)). This case involves charitable gifts of two

conservation easements, with the donor claiming a

charitable deduction of approximately $25.5 million.

The determination as to whether there is a valuation

misstatement is made on a “property-by-property

basis” (Reg. § 1.6662-5(f)(1)). The court found that

the value claimed by the donor for one easement is

852 percent of its correct value; the other claimed

value is 1,031 percent of its correct value.

• July 9 witnessed four more of these opinions (Village

at Effingham, LLC v. Commissioner; Riverside Place,

LLC v. Commissioner; Maple Landing, LLC v. Com-

missioner; Englewood Place, LLC v. Commissioner),

followed by another on July 13 (Smith Lake, LLC v.

Commissioner). [9.7] ◆

SUPREME COURT UPDATE

• The US Supreme Court, on July 8, upheld the Trump

administration’s regulations providing exceptions to

the contraceptive mandate enacted as part of the

Patient Protection and Affordable Care Act (Little

Sisters of the Poor v. Pennsylvania). This decision

(7-2) is essentially predicated on the fact that the

act authorizes government regulators to create

these exemptions; the administration’s exceptions

are broader than those promulgated by the Obama

administration. The Court’s majority wrote that the

“plain language of the statute clearly allows” the

creation of “preventive care standards as well as the

religious and moral exemptions.”

• The Court, also on July 8, reiterated and expanded

the ministerial exception to employment discrimina-

tion laws, articulated by the Court in 2012 (opinion

summarized in the March 2012 issue), by applying

the exception to teachers employed by religious

schools (Our Lady of Guadalupe School v. Morris-

sey-Berru; St. James School v. Darryl Biel). The Court’s