Dist. Court, D. Idaho, No. CIV. 1:10-186 WBS, July 8, 2013: Conservation easement deduction fraud penalty dismissed, other issues go to trial.
This decision is on motions for summary judgment (to decide the issues in question without proceeding to a trial about them) in the dispute between the IRS and the Peskys about whether, in light of various agreements and transactions between the Peskys and The Nature Conservancy (TNC), the Peskys were entitled to a charitable contribution tax deduction for a conservation easement the Peskys granted to TNC in 2002 on land in Idaho, and the IRS properly assessed a 75% penalty for fraud.
The IRS refused Pesky’s claim for a qualified conservation contribution tax deduction and assessed a deficiency and penalty, alleging that the grant of easement was a quid pro quo for benefits the Peskys received from TNC. The Peskys paid the deficiency and sued the US in 2010 for a refund of both. In Pesky I, this same court decided questions about the admissibility of certain evidence. In Pesky II, this court refused to dismiss an IRS claim for a 75% penalty for conservation easement tax fraud. The PLD post on Pesky II described relevant facts of the Pesky-TNC transactions.
The court, repeating well known standards, said it would grant a motion for summary judgment only if the moving party establishes the absence of a genuine issue of material fact by presenting evidence that negates an essential element of the non-moving party’s case or by demonstrating that the non-moving party cannot produce evidence to support an essential element upon which the non-moving party will bear the burden of proof at trial. The evidence presented has to be viewed in the light most favorable to the non-moving party and the court has to draw “all justifiable inferences” in favor of the non-moving party. If there is a genuine issue of material fact that remains, the issue can’t be decided by summary judgment and must go to trial for resolution.
The motions for summary judgment now were the following:
1. Quid Pro Quo: Each party moved to dismiss based on whether the conservation easement was a quid pro quo transaction with TNC; the IRS claimed it was, the Peskys said it wasn’t. The court recited the general precedent that there is no charitable contribution unless the taxpayer transfers money or property “without adequate consideration.” The transfer does not qualify as a deductible contribution if there is an understanding that the taxpayer’s money or property won’t go to the charitable organization unless the taxpayer “receives a specific benefit in return, and where the taxpayer cannot receive the benefit unless he pays the required price…” (i.e., there is a quid pro quo for the contribution).
Weighing the evidence presented to it, the court denied both parties’ motions for summary judgment based on the quid pro quo issue. The key facts had to do with whether a certain Assignment Agreement between Pesky and TNC (see the description in Pesky II) could be seen as a stand-alone and self-contained transaction or was so tied to the Peskys’ Pledge Agreement with TNC and the conservation easement to TNC as to constitute a quid pro quo. The court found that there is a genuine issue of material fact whether the two Pesky-TNC transactions were separate enough that the easement was given without consideration from TNC, meaning the issue should go to trial.
2. Contemporaneous Written Acknowledgement: The IRS claimed the Peskys failed to provide an acknowledgment (required by Internal Revenue Code § 170(f)(8)(B) and related regulations) that they received goods and services from TNC in exchange for the conservation easement. The IRS’ motion for summary judgment on this issue was also denied. The court said finding for the IRS required finding that a good or service was received in consideration for the conservation easement, and because there is a genuine issue of material fact whether there was a quid pro quo, the court could not make the necessary finding. Accordingly, that issue also goes to trial. The court noted , “Neither party cites a case in which a court decided at summary judgment whether or not a deduction under § 170 was disallowed as a matter of law due to receipt of substantial benefit, and the Ninth Circuit has upheld jury instructions when the district court conducted a jury trial on the issue.”
3. Qualified Appraisal: The IRS claimed the Pesky appraisal was not a qualified appraisal under Treasury Regulations § 1.170A-13(c)(3)(ii) because it did not consider the likelihood of development of property the Peskys could acquire under the agreements with TNC which the IRS claimed were part of the quid pro quo arrangement and because the appraisal did not factor in the terms of those agreements. The court denied summary judgment on this issue too, saying that even if the court were to find the appraisal deficient, a genuine issue of material fact exists as to whether the Peskys should be excused from those requirements under the “reasonable cause” exception of the Code §170(f)(11)(A)(ii)(II).
4. 75% Fraud Penalties: Pesky moved to dismiss the IRS’s claim for a 75% penalty for fraud under 26 U.S.C. § 6663(a) in Pesky’s claimed deduction for the conservation easement. (The IRS asked for summary judgment about the accuracy penalty, but the fraud penalty.) The court granted Pesky’s motion. Pesky’s alleged fraud was in not disclosing to the IRS one of the agreements other than the conservation easement with the intent to conceal the alleged quid pro quo. The cited standard to establish liability for the civil fraud penalty is “the Government must establish: (1) a knowing falsehood; (2) an intent to evade taxes; and (3) an underpayment of tax.” The court also noted that to find fraud, the court must find that it “highly probable” to have happened, a higher standard of proof than “a preponderance of the evidence.” The court said the evidence showed the decision not to disclose the agreements was primarily made by Pesky’s attorneys, not Pesky and it appears that the attorneys had good faith reasons for their decisions, separate from any intent to conceal the agreement from the IRS. The court wrote, “Viewing all evidence in the light most favor the United States, the court cannot conclude that a reasonable juror could find it ‘highly likely’ that Alan Pesky’s deduction of the Conservation Easement was due to fraud.”
The decision is not yet available on the web other than by searching Google Scholar © for, e.g., “Pesky v. US, Dist. Court, D. Idaho July 2013” but note that there is a companion decision, issued the same date by the same court and judge under the same docket number, addressing other charitable deductions claimed by the Peskys.