JAMES M. POLLARD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22950-09
UNITED STATES TAX COURT
Filed February 6, 2013
T.C. Memo. 2013-38
JACOBS, Judge
Sara Jo Barkley, Tamara L. Kotzker, Robert A. Varra, Luke D. Ortner, and Courtney L. Frola, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: The controversy in this case involves respondent‘s disallowance of a charitable contribution deduction and carryforwards which petitioner claimed on his Federal income tax returns for 2003, 2004, 2005, 2006,
Respondent issued two notices of deficiency, one for 2003 and 2004, dated July 7, 2009, and another for 2005, 2006, and 2007, dated June 30, 2009, determining income tax deficiencies and accuracy-related penalties in the following amounts:
| Year | Deficiency | Penalty |
|---|---|---|
| 2003 | $73,942 | $14,788 |
| 2004 | 30,815 | 6,163 |
| 2005 | 25,863 | 5,173 |
| 29,414 | 5,883 | |
| 2007 | 57,448 | 11,490 |
In his amendment to answer, as an alternative to the 20%
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. We incorporate by reference the stipulation of facts, the supplemental stipulation of facts, and the attached exhibits. Petitioner resided in Colorado when he filed his petition.
On November 12, 1998, petitioner purchased a 67.51-acre parcel of farmland in Boulder County, Colorado, from Kevin Hanley for $1,100,000. Mr. Hanley had purchased the property from David and Olivia Carter on December 21, 1994.
Petitioner engaged Gene Allen, a land use consultant working in Boulder County, to assist him in his dealings with the county.2 Mr. Allen investigated several possible solutions to petitioner‘s problem. Ultimately Mr. Allen determined that petitioner had two options. The first option was to renew a Nonurban Planned Unit Development (NUPUD) proposal that the Carters had made when they owned of the property.3 The Carters did not pursue their NUPUD
Petitioner decided to pursue the second option. In either December 2000 or January 2001, petitioner filed an application with the Land Use Department for a subdivision exemption to subdivide the property into two lots. On January 16, 2001, Mr. Allen mailed a letter to the Boulder County Board of Commissioners summarizing petitioner‘s subdivision exemption request. The letter described the property, its use as agricultural land, and petitioner‘s subdivision and building plan. The letter also explained why petitioner believed his request for a subdivision exemption should be approved. At this juncture, Mr. Allen did not raise the possibility of encumbering petitioner‘s property with a conservation easement.
Following several meetings with Boulder County officials, none of whom were tax professionals, Mr. Allen modified petitioner‘s subdivision exemption request in a letter to the Boulder County Board of Commissioners dated January 30, 2001. In the letter Mr. Allen raised the possibility of encumbering petitioner‘s property with a conservation easement.
As stated before, the Pollard family intends to continue the use of the property for farming purposes. Accordingly, the application of
a Conservation Easement will be given serious consideration, particularly on that area of the farm lying east of the Feeder Canal. Obviously, they will want to look at any conditions which might accompany the plans for Conservation Easement designation. These conditions and any possible financial considerations may be discussed while the application is in process. I believe that an agreement with reasonable conditions can be reached.
A public hearing with respect to petitioner‘s request was scheduled for March 20, 2001. In preparation for the hearing, the county‘s Land Use Department staff prepared a memorandum regarding petitioner‘s subdivision exemption request. After discussing the attributes of the property and the Carters’ previous, but abandoned, NUPUD proposal, the report concluded that because of the property‘s size, it did not qualify for the NUPUD program.
The Land Use Department staff recommended that petitioner‘s exemption request be denied. The memorandum stated:
The Land Use staff finds that the application request can meet the general criteria for a subdivision exemption, as noted above. However, there are no specific criteria for lot splits in the Land Use Code. Therefore, the Land Use staff cannot recommend approval of this Exemption request.
The memorandum further stated “that there would be a benefit to the county if the applicant grants a conservation easement for the property.” The memorandum concluded that if the Boulder County Board of Commissioners chose to disregard
The applicant/owner shall dedicate a conservation easement to Boulder County for the subject property * * *. The conservation easement shall be reviewed and approved by County staff prior to recording the exemption plat documents.
The March 20, 2001, hearing was held before Commissioners Jana Mendez, Ronald K. Stewart, and Paul Danish. All three commissioners insisted that petitioner grant a conservation easement in favor of Boulder County before they would grant a subdivision exemption. Mr. Allen, representing petitioner, stated that petitioner was willing to grant a conservation easement on a relatively small portion of the property without any cost to Boulder County. The commissioners considered this proposal to be insufficient. Commissioner Stewart stated that the exemption request would be worth approving only if the conservation easement encumbered the entire property. He noted that if the Boulder County Board of Commissioners approved petitioner‘s request for a subdivision exemption, petitioner would be receiving a benefit that no one else receives. Thus, Commissioner Stewart believed there needed to be some public benefit for the county‘s granting the requested subdivision exemption. At the hearing petitioner
Commissioner Mendez observed that petitioner would not be granting the conservation easement gratuitously since he would be receiving an increase in building density beyond that allowed by the Land Use Code. Mr. Allen agreed with this observation.
Commissioner Stewart observed that petitioner could receive certain tax benefits if a conservation easement were to be granted voluntarily and not as part of a subdivision exemption request. Commissioner Mendez suggested petitioner explore the financial and tax benefits of granting a conservation easement to the county.6
Petitioner replied to the commissioners’ observations and suggestion with an oblique inquiry as to whether by granting a conservation easement, the Boulder County Board of Commissioners might be more agreeable to permitting a larger
A second public hearing regarding petitioner‘s exemption request was held on April 24, 2001, with Commissioners Mendez, Danish, and Stewart present. The commissioners stated that they had visited the property and that they had no objection to the construction of the new dwelling. But because there would be an increase in building density greater than that allowed by the Land Use Code, the commissioners felt that it was crucial for petitioner to convey a conservation easement to Boulder County. Commissioner Mendez emphasized that a voluntary contribution of a conservation easement would be the preferable way to proceed because of the potential tax consequences to petitioner. Mr. Allen stated that petitioner would be willing to voluntarily contribute to Boulder County a conservation easement encumbering the entire property. Petitioner‘s agreement to granting a conservation easement to Boulder County was “the icing on the cake” that helped convince the county commissioners to approve petitioner‘s request. On June 21, 2001, the county commissioners adopted Resolution 2001-52, approving petitioner‘s request for a subdivision exemption. The resolution made the subdivision exemption subject to a modified version of the conditions set forth in the Land Use Department‘s staff‘s recommendations. One of the modifications
Boulder County recognizes the Applicant‘s commitment to dedicate a conservation easement to Boulder County for the Subject Property (including the two building lots approved herein, as agreed to by the Applicant). The conservation easement shall be reviewed and approved by County staff prior to recording the exemption plat documents.
Resolution 2001-52 also stated that any development of the property was subject to Land Use Code requirements.
The adoption of Resolution 2001-52 did not complete the subdivision exemption process. To complete the process, Resolution 2001-52, as well as the subdivision exemption plat, had to be filed with the Boulder County Clerk. Testifying at the trial of this case, Dale Case, the Director of Land Use, Boulder County Land Use Department, stated that had petitioner not met the Land Use Department‘s staff recommendations, including the requirement that he grant a conservation easement in favor of Boulder County, then following the usual procedure of the county, in all likelihood the resolution and the subdivision exemption plat would not have been recorded.
In furtherance of petitioner‘s agreement to grant a conservation easement to the county, on December 13, 2001, petitioner and Boulder County entered into an
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 petitioner‘s property into a 65.78-acre parcel (parcel one) and a 1.73-acre parcel (parcel 2). Pursuant to Resolution 2001-52, petitioner was granted permission to construct a single residential family home not to exceed 4,200 square feet on parcel 1.
On December 11, 2002, Greg Oxenfeld of the Boulder County Land Use Department wrote a letter to petitioner 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, petitioner submitted the second conservation easement to Boulder County, and it was recorded with the Boulder County Clerk on February 10, 2003. But before recording of the second conservation easement, on January 24, 2003, petitioner executed a deed
The second conservation easement superseded and replaced the first conservation easement, encumbering the entire 67.51 acres of the property (i.e., both parcel 1 and parcel 2). The second conservation easement restricted the use and development of the property to that allowed pursuant to Resolution 2001-52. The second conservation easement document stated that
Prior to the recordation of this Easement, Grantor shall obtain the written and notarized agreement of any existing senior mortgagee or lienholder in Parcel Two to subordinate their interest in Parcel Two to the County‘s rights to retain and enforce this Easement for the purposes described herein.
Petitioner did not subordinate the deed of trust to the second conservation Easement. Rather, petitioner informed the mortgage company of the existence of the second conservation easement.
Petitioner engaged Franklin Roberts, 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 petitioner‘s grant of the second conservation easement. Mr. Roberts prepared an appraisal report, dated January 15, 2003, with respect to the valuation of the property as of December 30, 2002, approximately one month before the second conservation
Respondent introduced an appraisal report by his expert, Gregory Berry. Mr. Berry opined 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, Mr. Berry opined that the value of the second conservation easement was $128,000.
Petitioner timely filed his 2003 Federal income tax return. Attached to his return was a Form 8283, Noncash Charitable Contributions, reporting a noncash charitable contribution of $1,049,850 arising from petitioner‘s grant of the second conservation easement. Because of the limitations of
No representative of Boulder County signed the donee portion of the Form 8283 attached to petitioner‘s 2003 Federal income tax return. Rather, petitioner attached an email addressed to him from a legal assistant at the law firm of Grant, Grant & Gorian LLP. In that email the legal assistant stated:
The previous information we have used if Boulder County will not sign the donee portion of Form 8283 is as follows: The IRS states in it‘s [sic] instructions to Form 8283 that if it is impossible to obtain the Donee‘s signature on the Appraisal Summary, the deduction will not be disallowed if a detailed explanation is attached to Form 8283 as to why it is impossible to obtain a signature on page 2 of Form 8283 by a responsible person for the Donee.
On Form 8283 where the donee signature is requested, the tax payer should write in “See Statement Attached“. Attached is a sample Statement in a word format. In addition you will need to attach copies of documentation verifying the transfer as well as a copy of the Appraisal summary.
Petitioner did not attach the recommended statement to his 2003 Federal income tax return.
I. Introduction
Respondent challenges petitioner‘s deduction on several grounds, asserting: (1) the second conservation easement was not a charitable contribution or gift as required by
II. Deductibility of the Conservation Easement
that Congress intended to differentiate between unrequited payments to qualified recipients and payments made to such recipients in return for goods or services. Only the former were deemed deductible. The House and Senate Reports on the 1954 tax bill, for example, both define “gifts” as payments “made with no expectation of a financial return commensurate with the amount of the gift.”
In determining whether a payment is a contribution or a gift, the relevant inquiry is whether the transaction in which the payment is involved is structured as a quid pro quo exchange. Hernandez v. Commissioner, 490 U.S. at 701-702. In 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. Id. at 690-691; Christiansen v. Commissioner, 843 F.2d at 420. 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
The external features of the transaction herein demonstrate that petitioner‘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
Petitioner argues that no quid pro quo arrangement existed. He asserts that the approval of his subdivision exemption request “was virtually guaranteed” and therefore there was no need for any such arrangement. Petitioner further argues that the property previously had two residences on it and the Boulder County Board of Commissioners had previously given preliminary approval to a sketch plan for four building lots on the property. Moreover, petitioner points out that the Land Use Code sections governing subdivision exemptions do not require an applicant to grant a conservation easement. Finally, petitioner notes that all of the documents relating to the granting of the second conservation easement refer to it as a gift. We are not persuaded by petitioner‘s arguments.
Petitioner‘s subdivision exemption request was far from being “virtually guaranteed“; we are of the opinion that it had little chance of being granted without petitioner‘s promise to grant a conservation easement to Boulder County. Indeed, the Land Use staff recommended that the subdivision exemption request be rejected unless petitioner granted a conservation easement. Further, the commissioners were unanimous in their insistence that petitioner grant a
Although the property previously had two dwellings, petitioner presented no evidence as to whether those dwellings were legally constructed or whether there were special circumstances surrounding their construction. And we are mindful that, as Mr. Allen noted, petitioner did not qualify for the NUPUD program, thus closing that avenue as a possibility.10 Nor was petitioner entitled to construct two residences on the property as a matter of right, which is the reason he began his efforts to acquire a subdivision exemption from Boulder County.
Petitioner appears to have treated the granting of a conservation easement as a bargaining chip. At the first hearing, petitioner offered a conservation easement over part of the property. When this proposal was not accepted, he agreed, in principle, to grant an easement to Boulder County encumbering the whole property. At the second hearing, petitioner again offered to grant a conservation
We are mindful, as petitioner points out, that the Land Use Code does not require the grant of a conservation easement before a subdivision exemption request is granted. And we note that Commissioner Stewart wrote a letter to petitioner on May 1, 2008, stating that to the best of his recollection, he did not require petitioner to grant a conservation easement in exchange for the subdivision exemption. But the statements of the Boulder County Board of Commissioners during the course of the two public hearings were such that we are of the opinion the Commissioners would not have been inclined to grant petitioner‘s subdivision exemption request had he not granted a conservation easement to the county. Moreover, the fact that Resolution 2001-52 and the Pollard Subdivision Exemption Plat were not recorded until after petitioner executed the gift agreement, in which he granted the second conservation easement, buttress our conclusion that the two transactions were connected. In sum, petitioner did not convey the second conservation easement for detached and disinterested motives but rather to secure a personal benefit. Consequently, we sustain respondent‘s determination that petitioner‘s grant to Boulder County of the second conservation
III. Penalties
A. Introduction
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.
B. Gross Valuation Misstatement
Respondent asserts that there is a gross valuation misstatement for each of petitioner‘s tax years. Respondent raised this argument in his amendment to answer; consequently respondent bears the burden of proof. See Rule 142(a). A gross valuation misstatement occurs if the value or adjusted basis of the property
Petitioner reported the value of the second conservation easement to be $1,049,850 on his 2003 income tax return. This amount exceeds 400% of the value (i.e., $128,000) now asserted by respondent.
Pursuant to
Respondent asserts that Mr. Roberts’ appraisal report (1) was made more than 60 days before the grant of the second conservation easement; (2) does not describe the property; (3) does not contain the expected date of contribution; (4) does not contain the terms of the second conservation easement; (5) does not include the appraised fair market value of the second conservation easement on the expected date of contribution; and (6) does not provide the method of valuation Mr. Roberts used in that the report does not adequately identify the highest and best use of the property. We have reviewed Mr. Roberts’ appraisal; and on the basis of our review of the appraisal report as described supra p. 15, we find that the appraisal report complies with the requirements of
We are especially concerned with respondent‘s assertion that the appraisal report is defective because it did not identify the method of valuation Mr. Roberts used. Respondent‘s argues that Mr. Roberts unrealistically assumed that the property could be subdivided into four parcels and if the valuation is based on an unrealistic assumption, there is no method of valuation. We disagree with
We further find that petitioner, in addition to obtaining Mr. Roberts’ appraisal, made a good-faith investigation of the value of the contributed property. Indeed, petitioner credibly testified that he consulted with Mr. Allen, reviewed the Boulder County Web site to determine the value of comparable farms, and after doing so was of the opinion that Mr. Roberts’ value was conservative.
C. Substantial Understatement of Income Tax
A
In general, the accuracy-related penalty does not apply to any portion of an underpayment of tax if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith.
Respondent has met his burden of production with respect to the section 6662(a) substantial understatement penalty. As demonstrated supra, petitioner had substantial understatements of income tax for his 2003, 2004, 2005, 2006, and 2007 tax years because the contribution of the second conservation easement did not meet the requirements of section 170 (i.e., it was part of a quid pro quo arrangement).
None of the individuals that petitioner relied upon in connection with his grant of the second conservation easement to Boulder County were tax professionals. Mr. Allen was an expert in land use, not taxation. Petitioner‘s attorney, Cameron Grant, did not practice in the area of tax. And the Boulder County officials with whom petitioner consulted, e.g., the county commissioners and Barbara Andrews, the Boulder County attorney, did not provide him with dispassionate tax advice; rather, their goal was to complete the donation of the second conservation easement to Boulder County.
Petitioner‘s income tax returns were prepared by a C.P.A., but the record is devoid of any evidence that the C.P.A. knew that the conveyance of the second
Decision will be entered
for respondent with respect to the
deficiencies in income tax and the
section 6662(a) substantial
understatement penalties for 2003,
2004, 2005, 2006, and 2007 and for
petitioner with respect to the section
6662(h) gross valuation misstatement
penalties for the aforementioned years.