By Deborah M. Beers, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
Pollard v. Comr., T.C. Memo 2013-38 (2/6/13)
The question of what constitutes a "charitable contribution" for purposes of §170 has evolved over time. Some courts have incorporated the test enunciated by the Supreme Court in Comr. v. Duberstein,1 a case involving whether the transfer of an automobile in exchange for services rendered by a non-employee should be taxable income (as opposed to a non-taxable gift) to the recipient. In concluding that the transfer in question was income, and not therefore a gift, the Supreme Court stated that the defining characteristic of a gift is that it springs from "detached and disinterested generosity," proceeding "out of affection, respect, admiration, charity or like impulses."2 In that regard, the most critical consideration is the transferor's subjective intention, which can be difficult in some circumstances to gauge.
More recently, the courts and the IRS, have tended, in the context of §170, to apply a "quid pro quo" test, which relies less on subjective intent, and more on objective facts and circumstances (from which intent can sometimes be inferred) to determine the existence and amount of a charitable contribution. Thus, Regs. §1.170A-1(h)(1) provides that:No part of a payment that a taxpayer makes to or for the use of [a qualified charitable] organization … that is in consideration for … goods or services … is a contribution or gift within the meaning of section 170(c) unless the taxpayer-
Intends to make a payment in an amount that exceeds the fair market value of the goods or services; and
Makes a payment in an amount that exceeds the fair market value of the goods or services.
The burden is usually on the taxpayer to prove and substantiate the existence and amount of a charitable contribution.
Pollard v. Comr. illustrates the application of the quid pro quo test to the contribution of a conservation easement.
Taxpayer claimed a charitable contribution deduction and carryforwards under §170(h) ("qualified conservation contribution") for taxable years 2003, 2004, 2005, 2006, and 2007 for granting a conservation easement to Boulder County, Colorado, in 2003. The easement placed a variety of limitations on the use of taxpayer's property that purported to protect the land's natural beauty and rural character. It related to the use of 67.51 acres of farmland on which taxpayer was seeking a subdivision exemption from the Boulder County zoning ordinances in order to build a second residence.
While taxpayer's subdivision exemption application initially was denied, it was eventually approved after further hearings and after taxpayer executed, at the behest of the Boulder County land use commissioners a certain "Agreement to Make Gift," pursuant to which taxpayer committed to granting two conservation easements to Boulder County. The gift agreement committed taxpayer to grant a conservation easement on a part of the property before December 31, 2001 (first conservation easement), and a second conservation easement on all of taxpayer's property after January 1, 2003, but before January 31, 2003 (second conservation easement). Both the gift agreement and the first conservation easement were recorded with the Boulder County Clerk on December 20, 2001, and taxpayer claimed a charitable contribution deduction with respect to the first conservation easement on his 2001 federal income tax return.
"Concurrent with the recording of the gift agreement and the first conservation easement, Boulder County recorded Resolution 2001-52 and the `Pollard Subdivision Exemption Plat', which depicted the split of taxpayer's property into a 65.78-acre parcel (parcel 1) and a 1.73-acre parcel (parcel 2). Pursuant to Resolution 2001-52, taxpayer was granted permission to construct a single residential family home not to exceed 4,200 square feet on parcel 1."
On December 11, 2002, the Boulder County Land Use Department wrote a letter to taxpayer reminding him that he was required to submit the second conservation easement for review and recordation as soon as possible after January 1, 2003, but before January 31, 2003, in accordance with the gift agreement and Resolution 2001-52. Thereafter, taxpayer submitted the second conservation easement to Boulder County, and it was recorded with the Boulder County Clerk on February 10, 2003. The second easement superseded the first and applied to both lots constituting the entire 67.91 acre property.
Taxpayer engaged an experienced certified general appraiser, to prepare an appraisal report with respect to the valuation of the property and the corresponding reduction of property value following taxpayer's grant of the second conservation easement. Taxpayer's appraiser determined that the value of the property before the easement grant was $1,617,500 and that after the grant of the second conservation easement the value of the property was $567,650. Thus, in the appraiser's opinion, the value of the second conservation easement was $1,049,850. Taxpayer reported this amount on his 2003 income tax return. Taxpayer filed a partially complete (it was not signed by the donee, as required) Form 8283 (Noncash Charitable Contributions) with his return.
The government's appraiser determined that the value of the unencumbered property was $1,938,000 and that after the grant of the second conservation easement, the value of the property was $1,810,000. Thus, the government asserted that the value of the second conservation easement was $128,000.
In addition to the greatly reduced valuation, the government challenged taxpayer's deduction on several grounds, asserting: (1) the second conservation easement was not a charitable contribution or gift as required by §170(c) in that it was part of a quid pro quo arrangement by which taxpayer granted the conservation easement in exchange for the granting of his subdivision exemption request by Boulder County; (2) taxpayer failed to acquire a contemporaneous written acknowledgment from the donee organization (i.e., Boulder County) as required by §170(f)(8)(A); (3) taxpayer's appraisal was not a "qualified appraisal;" and (4) the value of the easement as determined in taxpayer's appraisal was overstated.
The Tax Court, in a memorandum opinion, determined that the conservation easement taxpayer granted to Boulder County was a quid pro quo exchange for Boulder County's granting taxpayer's subdivision exemption request. Thus, the grant of the easement does not qualify as charitable contribution or gift pursuant to §170(a). Hence, the court determined that it need not address any of the other grounds asserted in disallowing taxpayer the claimed charitable contribution deduction.
The Court noted that, [i]n ascertaining whether a given payment was made with the expectation of any quid pro quo, courts as well as the Commissioner examine the external features of the transaction in question. This avoids the need to conduct an imprecise inquiry into the motivations of individual taxpayers. … If it is understood that the taxpayer's contribution will not pass to the recipient unless the taxpayer receives a specific benefit in return, and if the taxpayer cannot receive such benefit unless he makes the required contribution, then the transaction does not qualify for the section 170 charitable contribution deduction.
In this case, the court stated, "[t]he external features of the transaction … demonstrate that taxpayer's granting of both the first and second conservation easements to Boulder County was part of a quid pro quo exchange for Boulder County's approving his subdivision exemption request." Taxpayer had, in effect, used the conservation easement as a "bargaining chip" to secure his subdivision exemption.
The government has asserted, in the alternative, both the 20% §6662(a) penalty for a "substantial valuation misstatement," and the 40% penalty for a "gross valuation misstatement" pursuant to §6662(h) for all years involved.
Section 6662 imposes an accuracy-related penalty of 20% on an underpayment of tax attributable to, inter alia, (1) negligence or disregard of rules or regulations; (2) any substantial understatement of income tax; or (3) any substantial valuation misstatement. If any part of the underpayment is attributable to a gross valuation misstatement, the penalty is increased from 20% to 40%. Only one accuracy-related penalty may be imposed with respect to any given portion of an underpayment, even if that portion is attributable to more than one of the type misconduct.
In this case, the court determined that although a "gross valuation misstatement" had occurred (in that taxpayer's valuation of the property was 400% or more of the correct amount, as determined by the government), the taxpayer had obtained a "qualified appraisal" of the and had made a good-faith investigation of the value of the contributed property. Therefore, the court held that taxpayer satisfied the §6664(c)(2) "reasonable cause exception" for underpayments related to the §6662(h) gross valuation misstatement penalty.
It nevertheless applied the "substantial understatement" penalty that applies when an understatement exceeds the greater of 10% of the tax required to be shown on the income tax return or $5,000. The court found that the taxpayer had not acted with reasonable cause and good faith for purposes of this section because he did not satisfy the three-prong test for reliance on professional advice. To satisfy the three-prong test: (1) the adviser must be a competent professional who had sufficient experience to justify the reliance; (2) the taxpayer must provide necessary and accurate information to the adviser; and (3) the taxpayer must actually rely in good faith on the adviser's judgment. Taxpayer did not meet these requirements because "all of the parties involved in the second conservation easement understood that the easement was contributed for the express purpose of encouraging Boulder County to grant taxpayer a subdivision exemption. Indeed, [the court continued] it would be unreasonable for us to believe that anyone involved in this transaction (i.e., taxpayer, his advisers, and the county commissioners) believed that there was an unrequited contribution."
In addition, none of the individuals that taxpayer relied upon in connection with his grant of the second conservation easement to Boulder County were tax professionals. Their expertise was in other areas (such as land use). Taxpayer's accountant, the CPA who prepared his returns, did not testify on taxpayer's behalf, a fact from which the court drew a negative inference.
For more information, in the Tax Management Portfolios, see Kirschten & Freitag, 863 T.M., Charitable Contributions: Income Tax Aspects, and in Tax Practice Series, see ¶2390, Charitable Contributions: Requirements for Deduction, and ¶2395, Charitable Contributions: Substantiation Requirements.
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