Contracts and the Court, Designated Orders November 16 – 21, 2020, Part I

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Changes made during transition to the Tax Court’s new website prevent us from easily linking to the orders discussed in this post, but if you are interested in seeing an order you can search the case’s docket number on the Court’s website to find it.

Almost every area of law requires some knowledge of the tax code, especially contract law, and many of the orders designated during the week of November 16th demonstrate that. Summary judgment is not appropriate when a genuine dispute of a material fact exists, so can a genuine dispute exist when a case involves a legal writing, such as contract, deed, or agreement? The validity of the legal writing is not being questioned in any of these cases, but the Court reviews the legal writings to determine whether summary judgment is appropriate.

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Conservation Easement Deeds

The Court has been reviewing conservation easement deeds for perpetuity requirement violations for a while now and has been consistently granting summary judgment in favor of respondent. But the tides may be changing, in Docket No. 20849-17, St. Andrews Plantation, LLC v. CIR, the Court denies respondent’s summary judgment motion on this issue.

As we’ve seen and blogged about before, the deed in this case contains the “forbidden language” which fails to guarantee the donee its proportionate share of proceeds if the conservation easement is extinguished. This violates the perpetuity requirement and causes the donor organization to lose its charitable contribution deduction. For background information the posts here and here are most helpful.

So why isn’t this case another slam-dunk for respondent? According to the Court, “the deed in this case is different than the deeds in other cases,” because the “deeds in other cases contemplated future improvements that had obvious value.”

The language in the deed at issue in this case only permits maintenance of existing modest improvements, which consist entirely of a forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate.

Unlike the more elaborate improvement possibilities in other cases (such as, natural gas wells, cell phone towers and additional structures) the options available in the deed in this case could not increase the fair market value of the subject property, or any increase would be de minimis. As a result, the improvements clause would not necessarily cause the donee organization to receive less than its proportionate share of proceeds in the event the property was sold following judicial extinguishment of the easement.

In Docket No. 14179-17, 901 South Broadway Limited Partnership, Standard Development, LLC v. CIR. The Court reviews the language of a deed for a façade easement and denies the IRS’s summary judgment motion while taking petitioner’s motion under consideration.

A façade easement it involves a different analysis for when it has a conservation purpose which is found in section 170(h)(4)(B) and requires that the building be listed in the National Register or be certified as having historic significance. Further section 170(h)(4)(C)(ii) requires non-National Register buildings to meet two additional requirements regarding preservation of the building’s exterior and “prohibits any change in the exterior of the building which is inconsistent with [its] historical character…”

Respondent argues that language in the deed related to the second additional requirement violates the perpetuity requirement. The deed requires the grantor to obtain prior express written approval from the grantee before it can make any changes to the building’s exterior, however, if the grantee fails respond to the request within 30 days the request is deemed approved (the “deemed approval provision”). Respondent argues that this means the grantor can make changes inconsistent with the building’s historical character if the grantee fails to respond.

But in a later section of the deed, the grantor is specifically prohibited from making any changes inconsistent the building’s historical character (the “prohibition provision”).

Both petitioner and respondent make arguments based on the deed’s construction, conflicting clauses, and the effect under California law, but the Court steps in to say none of that is necessary. The Court does not see any conflict between the deemed approval provision and the prohibition provision, because the prohibition provision limits both parties from permitting or making changes that are inconsistent with the building’s historical character so the grantee cannot be deemed to approve any request which it lacks the authority to approve.

Another order was designated in this case asking questions of respondent and setting a pre-trial conference for January 6, 2021. During the conference, IRS conveyed that they have abandoned the argument that the deed violates the perpetuity requirement argument, but they identified new issues under section 170(f) which the parties are working to resolve. 

Divorce and Separation Agreements

In Docket No. 13901-17, Redleaf v. CIR, the Court had to review the language in a divorce agreement to determine whether allocations made to petitioner were alimony or property settlements. Although the Court outlined the steps it must take when reviewing divorce agreements for characterization questions, the language in the agreement itself (referring to the allocations as “property settlement,” “division of assets,” “property division,” etc.) influenced the Court’s decision to grant summary judgment to petitioner.

In Docket No. 20452-18S, Valente v. CIR, the Court to review the terms of a separation agreement to determine whether payments made to petitioner were alimony or child support. In this case, an enrolled agent either didn’t understand, or didn’t follow, the separation agreement’s terms when he prepared petitioner’s tax return and treated a portion of what should have been alimony as child support because it produced a better result for her children’s college financial aid application. The Court determined there was nothing in the language of the separation agreement that would have allowed the alimony payments to be treated as child support payments and decided for respondent.

Contracts related to Research and Experimentation Credits

In Docket No. 7805-16, Meyer, Borgman & Johnson, Inc. v. CIR, the Court looks petitioner’s contracts to determine whether research was “funded” as defined in section 41(d)(4)(H). If the research was funded by petitioner’s clients, then petitioner is ineligible for the research credit.

The regulations instruct that “all agreements (not only research contracts) entered into between the taxpayers performing the research and other persons shall be considered in determine the extent to which research is funded,” and “amounts payable under any agreement that are contingent on the success of the research and thus considered to be paid for the product or result of the research are not treated as funding.”

The Court entertains many of petitioner’s arguments, but ultimately looks to the contracts and finds that none of them expressly make payments contingent on the success of petitioner’s research. Use of express terms have been identified as important in the case law that exists in this area. As a result, it finds there are no genuine issues of material fact and grants summary judgment to respondent.

The designated order in Consolidated Docket No. 27268-13, 27390-13, 27371-13, 27373-13, 27374-13, 27375-13, Tangle, et. al. v. CIR, also involved the research credit, but for the question of whether the qualified research tests were met and Section 41 exclusions avoided. Since it didn’t involve a contract, I don’t discuss it in detail.

Other Orders Not Discussed

There were three orders designated during the week of October 19-23, 2020:

Docket No. 2018-17L, Means v. CIR, petitioner’s case for very old tax years was dismissed after a lengthy history of non-compliance with Court orders.

Docket No. 25934-17, Tobin v. CIR, the Court grants IRS’s protective order requesting that they not be required to respond to petitioner’s request for admissions which perpetuate frivolous arguments.  

Docket No. 19697, Kalivas v. CIR, the Court denies petitioner’s motion for leave to file an amendment to petition because he failed to comply with the Court’s order, rules and more.

About Samantha Galvin

Samantha Galvin is an Associate Professor of the Practice of Taxation and the Director of the Low Income Taxpayer Clinic (LITC) at the University of Denver. Professor Galvin has been teaching full-time at the University of Denver since October of 2013 and teaches courses in tax controversy representation, individual income tax, and tax research and writing. In the LITC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues.

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