Seventeen Seventy Sherman Street, LLC v. Commissioner

US Tax Court, T.C. Memo 2014-124. June 19, 2014: quid pro quo for historic conservation easement not fully valued; deduction denied.

The claim by Seventeen Seventy Sherman Street, LLC (Petitioner) for a charitable deduction for a conservation easement it granted to a charitable organization was denied by the IRS. The Petitioner conceded that the grant of the easement was part of a quid pro quo transaction, but said the value of the easement was greater than the consideration the Petitioner received in return, and that excess value should be eligible for a deduction. The tax court upheld the IRS denial because it found that the Petitioner failed to identify or value a part of the consideration it received in the transaction.  The court held that when a taxpayer grants a conservation easement as part of a quid pro quo transaction and fails to identify or value all of the consideration received in the transaction, the taxpayer is not entitled to any charitable contribution deduction with for the grant of easement.

The Petitioner needed planning board approval (a PUD 545) to proceed with its project. As part of that process, it obtained the recommendation of the Community Planning and Development Agency (CPDA) to approve a variance. In response to the CPDA’s position that it would not recommend approval unless the Petitioner committed to granting interior and exterior conservation easements, the Petitioner agreed in a development agreement with the city to grant the conservation easements to a charity if the city approved certain changes to the property. The Petitioner conceded that the development agreement was part of a quid pro quo arrangement, and therefore the value of the CPDA recommendation should be included in determining whether the contribution of the easements had value in excess of what the Petitioner received in return for granting them.  But they argued that the Planning Board was so independent that it was doubtful the CPDA recommendation “would have any influence over the Planning Board or any real value to the recipient of the recommendation.” Therefore the Petitioner did not place any value on the CPDA recommendation.

The tax court said it should have valued the CPDA action. It concluded that the Petitioner itself “highly valued” the CPDA recommendation when seeking it, that the Planning Board would likely follow CPDA’s recommendation, and therefore the CPDA’s recommendation had to be be valued as part of the Petitioner’s quid pro quo exchange. Because the Petitioner did not value that recommendation in evaluating the quid pro quo, it did not meet its burden of proving that the grant of the conservation easement (assuming it was charitable) exceeded the consideration the Petitioner received in return.

The court had to review the valuation of the easement to determine whether to impose a 40% a gross valuation misstatement penalty on the Petitioner. In doing the review the court disagreed with the IRS position that local regulations on the property had already effectively restricted the exterior of the property as much as the conservation easement. Instead the court found that the exterior easement did have value. Accordingly, the court said the IRS failed to meet its burden of proof on the penalty question and therefore no penalty could be imposed.

The court agreed with the IRS that a 20% penalty should be imposed for underpayment of tax due to negligence or disregard of rules or regulations.  It found the IRS met its burden of proof on this point and had shown that the Petitioner sought the contribution deduction based on a valuation without any adjustment for the consideration it received in exchange for the easements. Because the Petitioner hadn’t made “a reasonable attempt to ascertain the correctness of the charitable contribution deduction” the penalty was warranted.

The decision is available at http://www.ustaxcourt.gov/InOpHistoric/SeventeenSeventyShermanSt.LLC.Memo.Marvel.TCM.WPD.pdf.

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