Carroll v. Comm'r

• Decision Date: 27 April 2016
• Docket Number: 146 T.C. No. 13,Docket No. 5445-13.
• Parties: DOUGLAS G. CARROLL, III AND DEIRDRE M. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

DOUGLAS G. CARROLL, III AND DEIRDRE M. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

146 T.C. No. 13

Docket No. 5445-13.

UNITED STATES TAX COURT

April 27, 2016

In 2005 Ps contributed a conservation easement on a parcel of land to two qualified organizations. Ps' conservation easement provides that, in the event that the conservation purpose is extinguished because of an unexpected change in circumstances surrounding the donated property, the donee organizations are entitled to a proportionate share of extinguishment proceeds at least equal to (1) the amount allowable as a deduction for Federal income tax purposes over (2) the fair market value of the property at the time of the contribution. Ps claimed a charitable contribution deduction on their 2005 Federal income tax return and carried forward the remaining deduction to their taxable years 2006, 2007, and 2008.

I.R.C. sec. 170(h) allows a deduction for a "qualified conservation contribution." A qualified conservation contribution requires that the contribution be exclusively for conservation purposes. I.R.C. sec. 170(h)(1)(C). For a contribution to be made exclusively for conservation purposes, the conservation purpose must be protected in perpetuity. I.R.C. sec. 170(h)(5)(A).

Sec. 1.170A-14(g)(6)(ii), Income Tax Regs., provides that the conservation purpose of a contribution is not protected in perpetuity unless the contribution "gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. * * * Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction".

Held: Ps' easement provides that the value of the contribution for purposes of determining the donees' rights to extinguishment proceeds is the amount of Ps' allowable deductions rather than the fair market value of the easement and therefore does not comply with the requirements of sec. 1.170A-14(g)(6), Income Tax Regs. The conservation purpose is not protected in perpetuity as required by I.R.C. sec. 170(h)(5)(A).

Held, further, Ps are liable for accuracy-related penalties under I.R.C. sec. 6662.

Scott A. Schwartzberg, David J. Polashuk, and William J. Marchica, for petitioners.

Michael A. Raiken, Elizabeth C. Mourges, and Nancy M. Gilmore, for respondent.

RUWE, Judge: Respondent determined deficiencies in petitioners' Federal income tax and accuracy-related penalties as follows:

Year

Deficiency

Accuracy-related penalty

sec. 6662

2006

$57,768

$11,553.60

2007

103,771

20,754.20

2008

17,777

3,555.40

After concessions,¹ the issues remaining for decision are: (1) whether petitioners are entitled to carryforward charitable contribution deductions for the taxable years 2006, 2007, and 2008 (years in issue) from their 2005 contribution of a conservation easement to the Maryland Environmental Trust (MET) and the Land Preservation Trust, Inc. (LPT), and (2) whether petitioners are liable for accuracy-related penalties under section 6662(a) for the years in issue.²

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.³

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulation of facts, the second supplemental stipulation of facts, the stipulation of settled issues, and the attached exhibits are incorporated herein by this reference.

Petitioners resided in Maryland when they filed their petition.

On June 1, 1985, petitioner Douglas G. Carroll III (Dr. Carroll) became the sole owner of approximately 25.8533 acres of land on Greenspring Valley Road in Lutherville, Maryland (subject property).⁴ The subject property consists of two parcels, primarily of open pastureland and woodland, and is part of the GreenSpring Valley National Register Historic District. The first parcel (parcel 1) was approximately 3.92 acres, and the second parcel (parcel 2) was approximately 21.83 acres. The diagram below illustrates the layout of the two parcels.

Image materials not available for display.

The subject property is zoned RC-2, Agricultural, which is a restrictive type of zoning established to foster and protect agriculture in appropriate areas of Baltimore County, Maryland, and permits a maximum of two development rights on each parcel from 2 to 100 acres. On parcel 1 is a two-story residence which serves as the primary residence for Dr. Carroll and his family (Carroll residence), and on parcel 2 was an approximately 1,000-square-foot tenant house (tenant house) where a farmhand resides. Four properties adjacent to the subject property are encumbered by conservation easements held by either MET or the Maryland Agricultural Land Preservation Foundation (MALPF).

The Gift Deed

On November 14, 2005, Dr. Carroll sent (via facsimile) a handwritten letter to Attorney David Haile⁵ requesting that Mr. Haile draft a deed transferring ownership of the subject property from Dr. Carroll to (1) Dr. Carroll, (2) Dr. Carroll's wife (Ms. Smith), and (3) petitioners' three minor children, as tenants in common. In his letter to Mr. Haile, Dr. Carroll instructs, in pertinent part:

If it is possible not to define the % interests, that would be preferable. But they could be defined as the "maximum % interest allowed under the UGMA[]" or some equivalent language.

It is my intent to create conservation easements on this property & then form a [sic] LLC or family partnership that further defines the interests & restrictions.

On November 22, 2005, Dr. Carroll executed a deed (gift deed) transferring his interest in the subject property to (1) himself, (2) Ms. Smith, and (3) himself as custodian for each of petitioners' three minor children under the Maryland Uniform Transfer to Minors Act, as tenants in common.⁶ The gift deed does not provide specific ownership percentages transferred to Dr. Carroll, Ms. Smith, orpetitioners' three minor children. On November 29, 2005, the gift deed was recorded in the land records for Baltimore County, Maryland.

Lot Line Adjustment

On September 20, 2005, Dr. Carroll sent a letter to the Baltimore County Agricultural Land Preservation Advisory Board (BCALPAB) requesting a lot line adjustment for the subject property. Dr. Carroll's request was to change the lot line dividing parcels 1 and 2 to create one 18-acre parcel and one 7.8-acre parcel. On October 19, 2005, BCALPAB recommended that parcel 1 be at least 20 acres. On December 7, 2005, Dr. Carroll sent (via facsimile) a letter dated October 20, 2005, to BCALPAB proposing a new lot line adjustment. The letter proposed to create one 20.93-acre lot and one 4.8-acre lot. On December 13, 2005, BCALPAB met and recommended approval of Dr. Carroll's December 7, 2005, request for a lot line adjustment. Following the lot line adjustment, both the Carroll residence and the tenant house were located on parcel 1. The diagram below illustrates the layout of the two parcels following the lot line adjustment.

Image materials not available for display.

Deed of Conservation Easement

On December 15, 2005, petitioners and Dr. Carroll as custodian of petitioners' three minor children executed a deed of conservation easement (conservation easement) for no consideration on parcel 1 of the subject property in favor of MET⁷ and LPT⁸ as joint easement holders.⁹ Respondent concedes thatboth MET and LPT are qualified organizations as defined in section 170(h)(3). The terms of the conservation easement provide that it was executed to "maintain the significant conservation features * * * and the dominant scenic, cultural, rural, agricultural, woodland and wetland characteristics of the Property, and to prevent the use or development of the Property for any purpose or in any manner that would conflict with these features and characteristics and the maintenance of the Property in its open-space condition." Article I of the conservation easement provides:

This Conservation Easement shall be perpetual. It is an easement in gross and as such is inheritable and assignable in accordance with Article VI and runs with the land as an incorporeal interest in the Property, enforceable with respect to the Property by Grantees against Grantors and their personal representatives, heirs, successors and assigns.

Article II of the conservation easement sets forth activities that are restricted and/or prohibited on the encumbered property. Article II authorizes the Carroll residence to remain on the subject property and limits the tenant house to 2,000 square feet. Any construction or work contemplated by petitioners must be approved in advance by MET and LPT and "[s]uch approval shall be granted or denied based on the Grantees' opinion as to whether or not the proposed location conforms with the conservation values listed in Exhibit B".

Article III of the conservation easement authorizes MET and LPT to "enter the Property at reasonable times for the purpose of inspecting the Property to determine whether the Grantors are complying with the Terms of this Conservation Easement". In the event that petitioners are found to be in breach of the terms of the conservation easement, Article III authorizes MET and LPT to (1) institute a lawsuit to enforce the terms of the conservation easement or (2) require that the subject property be restored promptly pursuant to the conservation easement.

Exhibit B attached to the conservation easement...