DocketNumber: Docket No. 29632-09
Citation Numbers: 2012 T.C. Memo. 345, 104 T.C.M. 755, 2012 Tax Ct. Memo LEXIS 347
Judges: MORRISON
Filed Date: 12/17/2012
Status: Non-Precedential
Modified Date: 4/18/2021
Decision will be entered for respondent.
MORRISON,
Minnick and Lienhart *348 resided in Idaho at the time they filed their petition.
On January 25, 2005, U.S. Bank recorded a mortgage on the 74-acre parcel of land.
On September 5, 2006, the Board of Ada County Commissioners permitted Minnick to subdivide the land into seven single-family residential lots.
On September 7, 2006, Minnick granted a conservation easement on the land to the charitable organization Land Trust of Treasure Valley, Inc. (the "Land Trust"). The terms of the easement prohibited Minnick and any subsequent owner from building on or altering the portions of the land outside the areas designated *347 as "building envelopes" for each lot. The portions of the land thus restricted by the easement constituted 80% of the 74-acre parcel. The conservation easement stated: "Grantor [i.e. Minnick] warrants that * * * [he] owns the Property in fee simple and has conveyed it to no other person, and that there are no outstanding mortgages, tax liens, encumbrances, or other interests in the Property that have not been expressly subordinated to the Easement." Contrary to this warranty provision, U.S. Bank's mortgage was not then subordinated to the conservation easement. The conservation easement also provided *349 that Minnick and the Land Trust could amend the terms of the easement if circumstances arose under which an amendment would be "appropriate".
When Minnick and Lienhart filed their original 2006 income-tax return, they did not claim a charitable-contribution deduction for the grant of the conservation easement. Minnick had not yet received a written appraisal of the easement.
On or about December 26, 2007, Minnick and Lienhart filed an amended income-tax return for 2006. On the amended return, they reported that the value of the easement was $941,000. This value was taken from an appraisal by G. Joseph Corlett, who had been hired by Minnick. The amended return reported that the charitable-contribution deduction for the grant of the easement was limited to *348 $389,517 for 2006. The amended return was prepared by Bruce Stratton, a certified public accountant (C.P.A.). Both Stratton and Minnick intended that Corlett's appraisal be attached to the amended return for 2006, but for some reason the amended return the IRS received did not have the appraisal attached to it. Minnick never asked Stratton whether he was entitled to the $941,000 deduction, and Stratton did not tell him that he was. *350 Minnick had worked for a few months as a lawyer near the beginning of his career, spending some time in tax law. He later went into the building-supply business. Lienhart was uninvolved in determining whether the conservation easement gave rise to a charitable-contribution deduction.
On their 2007 and 2008 returns Minnick and Lienhart claimed carryover charitable-contribution deductions of $148,977 and $402,506, respectively, for the 2006 grant of the conservation easement.
The IRS issued the notice of deficiency on September 17, 2009. The reason given by the notice of deficiency for disallowing the carryover deductions was lack of documentation of the value of the contribution. The IRS no longer challenges the deductions for lack of documentation.
On December 14, 2009, Minnick and Leinhart timely filed a petition with this Court.
*349 On September 12, 2011, Minnick and U.S. Bank executed an agreement under which U.S. Bank subordinated its mortgage to the conservation easement. The effect of this subordination agreement is that the conservation easement will remain in force if U.S. Bank becomes the owner of the land by foreclosure.
The IRS's September 19, 2011 pretrial memorandum asserted that *351 no carryover charitable-contribution deductions should be allowed for the grant of the conservation easement. It asserted the following reasons: (1) the grant of the conservation easement was a condition of receiving permission from the county to subdivide the land; (2) the conservation easement was not protected in perpetuity because (a) the terms of the easement allowed Minnick and the Land Trust to amend the easement by agreement, (b) U.S. Bank's mortgage on the land was not subordinated at the time of the grant, and (c) the easement failed to provide for the allocation of proceeds to the Land Trust in the event the easement was extinguished; (3) Minnick and Lienhart's deduction for the contribution of the easement is limited to the basis allocated to the easement; and (4) the easement was overvalued.
This case was tried in Boise, Idaho, on October 4, 2011. At trial, the IRS moved to amend its answer. The Court took the motion under advisement. On January 5, 2012, the Court granted the motion, allowing the IRS to amend its *350 answer to assert that the claimed deductions are not permitted because the requirements of
A contribution of a conservation easement is deductible only if the requirements of
Minnick and Lienhart argue that the September 2011 subordination agreement with U.S. Bank satisfies the subordination requirement in the regulation. The argument is unavailing. In
Minnick and Lienhart argue that
Minnick and Lienhart argue that
Minnick and Lienhart also contend that there was only *358 a remote possibility that Minnick would default on the U.S. Bank loan. But we held in
The value of the conservation easement is not deductible as a charitable contribution because Minnick and Lienhart failed to meet the subordination requirement set forth in the regulation. We therefore need not reach the IRS's alternative arguments for denying the deduction, i.e. that the easement did not serve conservation purposes, that the conservation easement was not protected in perpetuity because it could be amended by agreement of Minnick and the Land Trust, that the Land Trust would not receive a proportionate share of the proceeds if the easement was extinguished, and that any charitable deduction is limited to the amount of basis of the land allocated to the easement.
Under
The IRS had initially determined that, on account of its disallowance of Minnick and Lienhart's carryover charitable-contribution deductions for the grant of the conservation easement to the Land Trust, they underpaid the tax required to be *361 shown on their 2007 and 2008 returns and were (1) liable for the accuracy-related penalty on one or more of three grounds (negligence, substantial understatement of income tax, or substantial valuation misstatement), and (2) liable for the
Negligence, for
The IRS contends that Minnick and Lienhart were negligent because they should have known that a deduction would not be allowed for an easement to which U.S. Bank's mortgage was not subordinated. Minnick and Lienhart respond that Minnick followed a model conservation-easement form given to him by the Land Trust, that Minnick discussed with his C.P.A. the legal requirements for a conservation easement, and that he hired an expert appraiser to appraise the conservation easement. Minnick also contends that he should not be held to the standard of an experienced tax attorney because he worked only for a few months as an attorney and that he spent only a fraction of his time practicing tax law.
*359 It is true that Minnick's experience as a lawyer did not include substantial tax work. He worked as a lawyer for only nine months, during which only a portion of his work involved tax law. After that he operated a business selling building supplies. 2 It is against this background that his efforts should be evaluated. *363 His wife Lienhart was uninvolved in determining whether the conservation easement gave rise to a charitable-contribution deduction.
In determining whether the grant of the conservation easement gave rise to a charitable-contribution deduction, Minnick did not exercise reasonable care. He did not seek to subordinate U.S. Bank's mortgage to the conservation easement until 2011. His failure to comply with the subordination requirement found in the regulation appears to stem from his failure to solicit advice from his C.P.A. about the deductibility of the conservation easement, and the failure of the C.P.A. to give such advice. The C.P.A. explained to Minnick that the value of a conservation easement is deductible under the Code. However, he did not tell Minnick that the particular conservation easement Minnick granted to the Land Trust was *360 deductible. 3 In the absence of such advice, Minnick could not have reasonably relied on the C.P.A. when he claimed a deduction for the conservation-easement contribution. *364 Minnick should have been alerted by the warranty provision in the conservation easement that there might be a problem with the lack of subordination. The easement contained a warranty from Minnick that there was no unsubordinated mortgage on the land. It is true that the form Minnick used to grant the easement was a "model", but that does not matter. This model easement form was not suited to Minnick's particular parcel of land.
Although Minnick hired an appraiser to determine the value of the property, this does not contstitute reasonable cause to avoid imposition of the accuracy-related penalty. The appraiser's job was to determine the value of the conservation easement, not to determine *365 whether other requirements for deducting the *361 contribution of the easement—for example, the subordination requirement—had been met.
We determine that the underpayments of tax for 2007 and 2008 resulting from the disallowance of the charitable deduction carryovers were due to negligence. We need not determine whether the underpayments were also due to substantial understatements of income tax.
In contending that they have a good-faith-and-reasonable-cause defense, Minnick and Lienhart reiterate the steps that Minnick took to determine that he was entitled to a deduction, i.e., using the model form for granting an easement, hiring an appraiser, and consulting a C.P.A. They also contend that Minnick's failure to secure a subordination agreement was inadvertent. This was one of the reasons the taxpayer in
We hold that Minnick and Lienhart are liable for the accuracy-related penalties. The penalty amounts for which they are liable are equal to 20% of the underpayments attributable to the carryover charitable-contribution deductions, or half the penalty amounts that were calculated in the notice of deficiency using a 40% rate. Therefore, the amounts for which Minnick and Lienhart are liable are $8,461.05 for 2007 and $28,175.40 for 2008.
The parties executed a stipulation of facts stating that all exhibits attached to the stipulation "may be accepted as authentic" and "are incorporated in this stipulation and made a part hereof; provided, however, that either party has the right to object to the admission of any such * * * exhibits in evidence on the grounds of materiality *367 and relevancy". The parties agree that the stipulation did not waive hearsay objections to the attached exhibits. Among the documents attached to the stipulation were Exhibits 9-J, 10-J, 11-J, 14-J through 34-J, and 41- *363 R, 42-R, 43-R, and 45-R. 4 At the beginning of the trial Minnick and Lienhart objected to these documents on the ground that they were relevant to IRS theories that had not been asserted in the notice of deficiency. The Court took the objections under advisement. The Court later allowed the IRS to amend its answer to assert these theories. As we describe, Minnick and Lienhart also objected to Exhibits 41-R, 42-R, 43-R, and 45-R on grounds other than relevancy. Exhibits 41-R, 42-R, 43-R, and 45-R are appraisals of the land by Sam Langston for U.S. Bank, dated February 7, 2006, June 3, 2008, April 8, 2009, and August 1, 2011, respectively. Minnick and Lienhart objected to these exhibits on hearsay grounds. They also objected that the exhibits are in substance expert reports and that they were not exchanged under
Minnick and Lienhart's relevancy objections lost their force when the Court permitted the IRS to amend its answer to assert its new theories. However, we agree with Minnick and Lienhart that Langston's opinion on the value of the conservation easement, which is reflected in Exhibits 41-R, 42-R, 43-R, and 45-R, should not serve as the basis for our decision. For it to do so would contravene
In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.
*365 To reflect the foregoing,
1. The operation of the cy pres doctrine has been summarized as follows: If property is given in trust to be applied to a particularIf property is given in trust to be applied to a particular charitable purpose, and it is or becomes impossible or impracticable or illegal to carry out the particular purpose, and if the settlor manifested a more general intention to devote the property to charitable purposes, the trust will not fail but the court will direct the application of the property to some charitable purpose which falls within the general charitable intention of the settlor.
Thus, the cy pres doctrine allows the property owned by a trust to be directed to a use different from that directed by the instrument that established the trust. The doctrine does not expand the property interests owned by the trust. Thus, it is difficult to see how the cy pres doctrine, if it somehow governed the easement on Minnick's land, would defeat U.S. Bank's mortgage on the same land.↩
2. Minnick was also a politician—he served a term in the U.S. House of Representatives from January 2009 to January 2011—but the details of his political career are not in the record.↩
3. Note the C.P.A.'s careful response to the following question from Minnick and Lienhart's counsel: Q Did you advise Mr. Minnick as to whether the conservation easement was deductible or not? A I advised him that a conservation easement, the donation of a conservation easement is deductible as a charitable contribution, and is specifically provided for in the code.
We infer that the C.P.A. declined to tell Minnick the grant of the particular easement was deductible and that Minnick should have recognized this.↩
4. Minnick and Lienhart objected to Exhibit "44-R" during trial. There is not a 44-R. There is a 43-R and a 44-J. They really meant to object to Exhibit 43-R.↩