149 T.C. No. 18
Tax Ct.2017Background
- Palmolive Building Investors, LLC (through Facade LLC) granted a recorded facade conservation easement to Landmarks Preservation Council of Illinois (LPCI) on December 21, 2004; donor claimed a $33.41 million charitable contribution deduction for 2004.
- The building was encumbered by two large mortgages (Corus and NEBF) and insured; mortgage documents expressly granted mortgagees priority to insurance and condemnation proceeds and broad security interests in the property.
- Palmolive obtained contemporaneous subordination letters from the mortgagees that referenced the Deed but the Deed itself preserved mortgagees’ prior claims to insurance/condemnation proceeds until mortgages were paid off and required mortgagee consent to any deemed amendment that would materially affect mortgagee rights.
- The IRS issued an FPAA disallowing the charitable contribution deduction, asserting the Deed failed the perpetuity requirements of I.R.C. §170(h) and Treas. Reg. §1.170A-14(g), and asserted related penalties; the TMP petitioned to challenge the FPAA in Tax Court.
- Tax Court addressed on cross-motions for partial summary judgment whether the Deed met the perpetuity/subordination and extinguishment-proceeds requirements of §170(h) and the regulations, and whether a “saving” clause could retroactively cure defects.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether mortgagees actually subordinated rights under Treas. Reg. §1.170A-14(g)(2) | Palmolive: contemporaneous subordination documents + Deed language prevent mortgagee extinguishment and satisfy §1.170A-14(g)(2) | Commissioner: Deed preserves mortgagees’ prior claims to proceeds and insurance, so there was no true subordination of mortgagees’ rights | Held: No. The mortgagees did not actually subordinate; Deed gives mortgagees prior claims and thus fails §1.170A-14(g)(2) |
| Whether donee was entitled to a property right to a proportionate share of proceeds after judicial extinguishment (Treas. Reg. §1.170A-14(g)(6)(ii)) | Palmolive: Deed’s provisions and appraisals satisfy donee’s entitlement; follows First Circuit in Kaufman v. Shulman that "entitled" need not beat all third-party claims | Commissioner: Deed excludes mortgagees’ preferential claims from net proceeds and thus denies donee an absolute entitlement to proportionate proceeds required by the regulation | Held: No. Deed conditions donee’s share on mortgage payoff and excludes mortgagee claims, violating §1.170A-14(g)(6)(ii); donee not guaranteed proportionate proceeds |
| Whether paragraph (g)(3) (remote contingency) cures §(g)(2)/(g)(6) defects | Palmolive: risks (e.g., destruction) are so remote as to be negligible under §1.170A-14(g)(3) | Commissioner: §(g)(3) does not excuse failure to meet the explicit requirements for mortgages and proceeds in §§(g)(2)/(g)(6) | Held: §(g)(3) does not excuse noncompliance; the contingencies were foreseeable and explicitly addressed, so they are not "so remote" |
| Whether the Deed’s saving/supposed automatic amendment clause can retroactively cure defects | Palmolive: Paragraph 19(e) deems amendments to conform to regulations; mortgagee consent clause is irrelevant because donor had equity | Commissioner: Savings clause cannot retroactively create required rights at time of gift; condition subsequent not enforceable to satisfy §170 timing | Held: No. Requirements of §170 must be met at the time of the gift; the saving clause cannot retroactively reform the Deed to comply |
Key Cases Cited
- Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) (First Circuit construed "entitled" in Treas. Reg. §1.170A-14(g)(6)(ii) more narrowly against IRS reading)
- Kaufman v. Commissioner, 136 T.C. 294 (T.C. 2011) (Tax Court held donee must have absolute entitlement to proportionate proceeds under the regulation)
- Kaufman v. Commissioner, 134 T.C. 182 (T.C. 2010) (earlier Tax Court opinion applying the extinguishment/proceeds requirements)
- Golsen v. Commissioner, 54 T.C. 742 (T.C. 1970) (Tax Court follows controlling appellate precedent only when appeal lies to that court)
- Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014) (savings-clause and related timing principles regarding tax consequences)