In a division opinion that reflects the increasingly technical aspects of defending conservation easement cases, the Tax Court has disallowed deductions for the contribution of cash and a façade easement to a qualified organization. The charitable contributions were disallowed because the donee issued a "side letter" promising to refund cash contributions and rescind the easement over the donor's property if the donation was "disallowed" by the Internal Revenue Service.
The taxpayers donated a façade easement over their home in the Treadwell Farms Historic District on the Upper East Side of Manhattan. They obtained a qualified appraisal and took deductions based on their cash contributions and the value of the donated easement. The entire transaction was covered by the side letter. The IRS disallowed the deductions for the cash and easement donations and imposed penalties. The taxpayers petitioned the Tax Court.
The case was submitted to the Court without trial on stipulated facts. The Court found that the promises in the comfort letter made the gifts conditional and thus incomplete for purposes of the deduction. It found that the possibility that the IRS would disallow the contributions was not "so remote as to be negligible" - a standard imposed under the regulations governing the deductibility of conservation easements. The Court noted IRS administrative guidance issued prior to the donation announcing increased scrutiny of somewhat similar transactions and the donee organization's "standard policy" to refund contributions for challenged transactions as evidence that an IRS disallowance was not "so remote as to be negligible." The Court did not address the penalties, reserving that issue for future proceedings.
Read the entire opinion here:Graev v. Commissioner, 140 T.C. No. 17 (2013)
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