Designated Orders: A Mixed Bag – Easements and Common Issues (11/26/18 to 11/30/18)

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William Schmidt of Legal Services of Kansas brings us this weeks designated orders. The orders this week contain a lot of meat. Two of the orders deal with expert witnesses and problems with those witnesses. In one case the IRS seeks to exclude a petitioner’s expert because the expert is a promoter of tax schemes rather than a true expert and in another case petitioner seeks to exclude respondent’s expert because the expert destroyed the material he thought was not relevant to his expert opinion. Many other matters, particularly regarding conservation easements, deserve attention in these orders as well. Keith

The week of November 26 to 30, 2018 had seven designated orders. The week was a mixed bag. Some orders focused on less common issues like charitable contributions of easements, while other orders looked at routine deficiency or Collection Due Process issues.

Easement Issues, Part One

Docket No. 29176-14, George A. Valanos & Frederica A. Valanos v. C.I.R., available here.

To begin with, this designated order is 30 pages. Most designated orders do not reach a page count in the double digits so it is a rarity to find one this long. As a result, there are multiple items to discuss that I will be summarizing.

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The petitioners asked the Court to determine whether the IRS improperly denied their non-cash charitable contribution deduction for a conservation easement in tax years 2005 to 2007. The IRS filed a motion for partial summary judgment that the Court denies. The sole issue stated for decision is whether the petitioners’ conservation easement deed of gift satisfied the perpetuity requirements of IRC section 170(h)(5) and 26 C.F.R. sections 1.170A-14(g)(2) and (6). Because of the genuine dispute as to material facts, Rule 121(b), and a lack of clarity and specificity in the parties’ contentions of law, the Court denied the IRS motion for partial summary judgment.

For background, the order discusses the subject property, the mortgages affecting the subject property and the conservation easement, the subordination agreements, the conservation easement, the petitioners’ tax returns and charitable deduction disallowance, and the Tax Court proceedings.

Of note is that the recalculations of petitioners’ tax liabilities resulted in deficiencies of $192,486 for 2005, $153,742 for 2006, and $104,662 for 2007. The IRS also determined that the petitioners were liable for gross valuation misstatement penalties under section 6662(h) or, in the alternative, section 6662(a). On September 3, 2014, the IRS issued a notice of deficiency, and the petitioners timely mailed their petition to Tax Court.

The Commissioner moved for partial summary judgment on the grounds that the Greater Atlantic Bank subordination was defective and therefore the conservation easement did not meet the requirements for the charitable contribution deduction. The IRS appeared to initially concede any issue with the Wells Fargo deed of trust.

After the parties fully responded to the motion for partial summary judgment, the Court issued its opinion in Palmolive Bldg. Investors, LLC v. Commissioner, 149 T.C. ___ (Oct. 10, 2017), (discussed below). The Court issued an order that invited the parties to file supplemental memoranda addressing the implications for this case.

In its supplemental filings, the IRS arguments are that similar to the Palmolive subordinations, the Greater Atlantic Bank and Wells Fargo subordinations failed to adequately meet the requirements of subordination of the lenders’ interests in insurance proceedings. The IRS reiterated the Greater Atlantic Bank argument but added the argument that the Wells Fargo subordination did not meet requirements because it did not use the term “subordinate.”

The petitioners responded with arguments that the conservation easement and subordination agreements are valid, all section 170 requirements are satisfied, and they are entitled to all the deductions taken on their original returns.

In the discussion, the order begins with general principles and reviews the principles of summary judgment, conservation easements under section 170(h), the perpetuity requirement of 26 C.F.R. section 1.170A-14(g) (broken down into mortgage subordination and extinguishment proceedings), the relation of federal taxation and state law property rights, real property ownership and mortgage theory (looking at sections on real property ownership, legal interests and equitable interests, and mortgage theory), and District of Columbia’s real property law (with this section looking at mortgages in the District of Columbia, deeds in the District of Columbia, and conveyances of personal property in the District of Columbia).

Next in the discussion is the parties’ contentions, broken down between the Greater Atlantic Bank deeds of trust and their subordination agreement, and the Wells Fargo deed of trust and its subordination agreement.

Third in the discussion is the analysis portion. The first part of the analysis begins by stating that factual disputes are not resolved under Rule 121.

Next is that Section 1.170A-14(g)(2) requires subordination of mortgages. This second part includes sections on the need for attention to local law, Greater Atlantic Bank’s subordination agreement and the Wells Fargo subordination. The Greater Atlantic Bank subordination agreement section looks at the sufficiency of one general subordination agreement for two deeds of trust, the undated subordination agreement, and compliance with District of Columbia law’s recording and other requirements (broken down further into application of state-equivalent real estate law and recording requirements – validity as to third parties). The Wells Fargo subordination looks at the failure to use the verb “subordinate” and subordination or conveyance of an executory interest.

The third part of the analysis looks at the Section 1.170A-14(g)(b) requirement that the donee receive a proportionate share of extinguishment proceeds. This is broken down further to look at Greater Atlantic Bank’s subordination as to proceeds and Wells Fargo’s subordination as to proceeds.

The fourth part of the analysis turns to mortgage theory in light of conservation easements.

The order then turns to unanswered questions. The Court provides a list of nineteen unanswered questions, stating that thorough answers to these questions would allow the Court to analyze the parties’ respective arguments and reach a conclusion of the issues discussed within the order.

In the conclusion, the Court states disputes of fact exist and that the statements from both parties need further explanation and citations to legal authority.

Judge Gustafson orders that the IRS motion for partial summary judgment is denied. The facts assumed in the order are not findings for trial, and each party must be prepared to prove the relevant facts. No later than December 21, 2018, the parties must file a joint status report (or separate reports if that is not expedient) with their recommendations as to further proceedings in this case.

Takeaway: If you want to experience the complexity of the discussion, issues and questions in this case, I recommend you click the link above. This order dives deeply into an examination of the interaction between various areas of law, such as property (subordination agreements, mortgages, and conservation easements) and tax (charitable contribution deductions) while balancing the intersection of federal law and District of Columbia law.

Easement Issues, Part Two: The Palmolive Orders

Docket No. 23444-14, Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner v. C.I.R.

The Tax Court issued an opinion in this case, 149 T.C. No. 18 (Oct. 10, 2017), holding that Palmolive is not entitled to a charitable contribution deduction for the contribution of a façade easement because of their failure to comply with certain requirements of IRC section 170. It is still at issue regarding Palmolive’s liability for IRS penalties asserted, which is set for trial commencing January 22, 2019, in Chicago, Illinois.

  • Order 1 available here. The IRS filed a motion for leave to file a second amendment to their answer, where they would supplement the answer with an allegation that Palmolive’s appraiser was a “promoter” and therefore not a qualified appraiser. The Court grants the motion for leave to amend, but the IRS needs to transmit a detailed written statement of the facts on which it will rely at trial to support its contention he was a “promoter.” Palmolive’s assertions in their opposition are deemed to be requests for admission for the IRS to respond to under Rule 90.
  • Order 2 available here. Palmolive filed a motion for summary judgment and the IRS filed their own motion for partial summary judgment in response. In a conference call with the parties, Judge Gustafson explained his expectations as to how he is likely to rule on the issues raised in the motions. He suggested that Palmolive “might wish to forego further filings on the motions and instead use its time to prepare for trial.” Palmolive’s counsel stated there would be no further filing on the issues 2 to 4, but would file a reply as to issue 1. The judge stated he expects to grant the IRS motion on issue 4, regarding the IRS written supervisory approval of the initial determination of penalties in compliance with IRC section 6751(b), but that the order or opinion might not be issued until soon before trial. The parties are to prepare for trial on the assumption that issue 4 will not be a subject of trial. Note: there was a subsequent designated order on issue 1 that will potentially be addressed in another blog post that is available here. Spoiler alert: Palmolive loses on issue 1.

Takeaway: This is a case with multiple filings and has complexity. One takeaway from these orders is that when the judge tells you not to do something it is in your best interest to comply.

Motion to Strike

Docket No. 14214-18, Pierre L. Broquedis v. C.I.R. (Order here).

It is not often that we see a Motion to Strike in a Tax Court case. Here, Petitioner states paragraphs and exhibits in Respondent’s answer are false or not concise statements of the facts upon which Respondent relies.

The Court cites Tax Court Rule 52, where the Court may order stricken from any pleading any redundant, immaterial, impertinent, frivolous, or scandalous matter. The Court states that motions to strike are not favored by federal courts. Matters will not be stricken from a pleading unless it is clear that it can have no possible bearing on the subject matter of the litigation. Additionally, a motion to strike will not be granted unless there is a showing of prejudice to the moving party.

The Court concludes the allegations and exhibits bear a relationship to the issues in the case. Also, petitioner failed to show that he would be materially prejudiced by a denial of his motion to strike. The Court then ordered to deny the motion to strike.

Takeaway: Since the Court states that motions to strike are not favored by federal courts, they should be avoided. While Rule 52 spells out the Court’s ability to order material stricken, this case illustrates that there are rare circumstances when the Court will grant such an order.

The Numbers Don’t Match

Docket No. 7737-18, Kelle C. Hickam & Nancy Hickam v. C.I.R. (Order here). Petitioners filed their petition with 6 numbered statements in their paragraph 5. Respondent filed an answer, admitting to certain paragraphs in the petition. Petitioners, thinking that the IRS partially conceded the case, submitted a motion for partial summary judgment. The Court states: “Petitioners, however, appear to believe that respondent’s numbered paragraphs in his answer refer to their numbered responses in the petition’s paragraph 5. They do not. Respondent’s paragraphs in his answer refer to the numbered paragraphs on the petition.” Since there are genuine disputes of material fact, the Court denied the motion.

Takeaway: While I understand that court documents are not always easy to understand, it would have been wise for these unrepresented petitioners to talk about the pleadings with someone who is familiar with court procedure. It should be a simple step to match the paragraphs between the Petitioner’s petition and the Respondent’s answer. The IRS is not going to concede material issues when they file an Answer. You’re not going to get that lucky.

Miscellaneous Short Items

  • Supervisor Conspiracy – Docket No. 15255-16SL, Robert L. Robinson v. C.I.R. (Order and Decision here). The petitioner mentions that his supervisor obstructed/impeded his payments and that there was a conspiracy. Otherwise, this looks to be a routine Collection Due Process case, granting the IRS motion for summary judgment because they followed routine procedures.
  • Materials Destroyed – Docket No. 20942-16, Donald L. Bren v. C.I.R. (Order here). Petitioner filed a motion in limine to exclude from evidence the report of respondent’s expert, Robert Shea Purdue, because he deliberately discarded documents and deleted electronic records investigated but disregarded in reaching the conclusions set forth in his report. The Court granted that motion.

 

 

William Schmidt About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the Kansas City Tax Clinic, the Legal Aid of Western Missouri Low Income Taxpayer Clinic and the Kansas Low Income Taxpayer Clinic. He records and edits a tax podcast called Tax Justice Warriors.

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