Graev v. Comm'r

• Decision Date: 30 November 2016
• Docket Number: 147 T.C. No. 16,Docket No. 30638-08.
• Parties: LAWRENCE G. GRAEV AND LORNA GRAEV, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

LAWRENCE G. GRAEV AND LORNA GRAEV, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

147 T.C. No. 16

Docket No. 30638-08.

UNITED STATES TAX COURT

November 30, 2016

Ps claimed on their 2004 income tax return a charitable contribution deduction for the donation of a facade easement to NAT and claimed on their 2005 return a carryover of a portion of that deduction. R's examining agent determined to disallow Ps' claimed charitable contribution deductions and also determined that Ps were liable for the 40% gross valuation misstatement penalty under I.R.C. sec. 6662(h). He prepared a penalty approval form for which he obtained written approval from his immediate supervisor, and on that form only the 40% penalty under I.R.C. sec. 6662(h) was asserted. He prepared a notice of deficiency that included the 40% penalty; but before the notice was issued, a Chief Counsel attorney reviewed a draft of the notice. Through a memorandum approved by his supervisor, the attorney advised that an alternative 20% penalty under I.R.C. sec. 6662(a) should be added to the notice. The notice of deficiency was then revised to include the 20% I.R.C. sec. 6662(a) accuracy-related penalty (setting out the calculation to yield a zero 20% penalty to avoid stacking with the 40% penalty) and was issued as revised (but with no further approval from the examining agent's supervisor). In this litigation R concedes liability for the 40% penalty but continues to assert the alternative 20% penalty as a nonzero amount.

Ps contend that R failed to comply with the requirements of I.R.C. sec. 6751 as to the alternative 20% penalty--i.e., that a computation of the penalty be included in the notice of deficiency, I.R.C. sec. 6751(a), and that the "initial determination of * * * [the] assessment" of the penalty be "personally approved (in writing) by the immediate supervisor * * * or such higher level official as the Secretary may designate", I.R.C. sec. 6751(b)(1)--and that these failures bar the assessment of that 20% penalty.

Held: The notice of deficiency complied with I.R.C. sec. 6751(a).

Held, further, because R has not yet assessed any 20% penalty, Ps' argument that R failed to comply with I.R.C. sec. 6751(b)(1) is premature.

Held, further, the 20% accuracy-related penalty for a substantial understatement of income tax is sustained for 2004 and 2005.

Frank Agostino, Brian D. Burton, Jeremy M. Klausner, and Lawrence A. Sannicandro, for petitioners.

Shawna A. Early, for respondent.

OPINION

THORNTON, Judge: Pursuant to section 6212(a),¹ respondent determined deficiencies in tax for petitioners, Lawrence and Lorna Graev, of $237,481 for 2004 and $412,620 for 2005, resulting from the disallowance of charitable contribution deductions the Graevs claimed for those years. Respondent also determined that Mr. and Mrs. Graev are liable for accuracy-related penalties of 40% under section 6662(h) and alternatively of 20% under section 6662(a) for 2004 and 2005. (We hereafter sometimes refer to these as the 40% penalty and the 20% penalty.)

Mr. and Mrs. Graev petitioned this Court, pursuant to section 6213(a), to redetermine these deficiencies and penalties. Pursuant to the parties' stipulation, the 40% penalty is no longer at issue, but the alternative 20% penalty remains in dispute. On June 24, 2013, the Court issued an Opinion sustaining respondent's disallowance of the charitable contribution deductions. See Graev v. Commissioner (Graev I), 140 T.C. 377 (2013).

Now we must decide whether the Graevs are liable for the 20% penalty. This inquiry involves threshold issues as to whether respondent failed to include a computation of the 20% penalty in the notice of deficiency, as required by section 6751(a), and whether respondent is barred from assessing this penalty because of a lack of proper written approval for assessment of the penalty, as required by section 6751(b)(1). We hold that the notice of deficiency complied with section 6751(a) and that petitioners' argument that respondent failed to comply with section 6751(b) is premature. Concluding that petitioners have failed to show reasonable cause and good faith under section 6664(c), substantial authority under section 6662(d)(2)(B)(i), or adequate disclosure and reasonable basis for the return position under section 6662(d)(2)(B)(ii), we hold that petitioners are liable for the 20% penalty for an underpayment attributable to a substantial understatement of income tax for each year.

Background

The parties submitted the penalty issues fully stipulated pursuant to Rule 122, reflecting their agreement that the relevant facts could be presented without a trial. Our Opinion in Graev I provides a detailed factual background of the Graevs' contribution of a facade easement to the National Architectural Trust (NAT). Therefore we will discuss only briefly the contribution of the easement and will discuss in more detail additional facts relevant to petitioners' defenses to the 20% penalty.

The Property

In 1999 Mr. Graev purchased property in a historic preservation district in New York, New York, for $4.3 million. The property is listed on the National Register of Historic Places. On December 17, 2004, Mr. Graev executed documents donating a facade conservation easement to NAT. Petitioners received an extension of time to file their 2004 Federal income tax return until October 15, 2005; in their timely filed 2004 Form 1040, U.S. Individual Income Tax Return, petitioners claimed a charitable contribution deduction for this easement donation.

NAT's Solicitation

In the summer of 2004 a representative from NAT contacted Mr. Graev regarding a potential easement donation to NAT. Mr. Graev became aware that he had a neighbor who had contributed a facade easement to NAT and who had received from NAT a "side letter" that promised return of contributions if deductions were disallowed. Mr. Graev evidently expressed to NAT an interest in making an easement contribution like his neighbor's, but on September 15, 2004, he sent an email to NAT explaining a concern that had arisen:

My accountants have referred me to Notice 2004-41 * * * issued by the IRS on June 30, 2004, in which the IRS has indicated that it will, in "appropriate cases", disallow charitable deductions to organizations that promote conservation easements and may impose penalties and excise taxes on the taxpayer. They have not advised me to abandon this idea, but they have advised me to be very cautious. What are your thoughts especially as it relates to the side letter, etc.

(The "side letter" to which Mr. Graev referred was NAT's comfort letter indicating that it would refund a contribution in the event that the favorable tax results anticipated from a contribution were not achieved.) As stated in Graev I, 140 T.C at 381-382: "On his tax returns Mr. Graev listed his occupation as 'attorney', and we infer that he is an individual of above-average sophistication who, with the help of his accountants, was capable of identifying tax risks. We find that Mr. Graev did in fact identify non-negligible risks regarding the deductibility of facade easements, as evidenced by his September 15 email and subsequent dealings with NAT."²

In response to Mr. Graev's concerns, NAT sent him an email dated September 16, 2004, stating:

The IRS notices to which you refer were prompted by recently exposed improprieties at the Nature Conservancy, the nation's largest land conservation easement holding organization. The practice the IRS is concerned with here is when a non-profit acquires property,puts an easement on it and sells it for a reduced price plus a tax deductible charitable contribution. * * *

It is important to distinguish between these activities, which certainly warrant scrutiny, and those engaged in by the National Architectural Trust. * * * We have been in contact with the IRS since the notices were issued and, based upon our discussion with them, have no reason to expect that we or any of the donations we have received (easement or cash) will be reviewed.

Thus far not a single donation made to the Trust has been disallowed by the IRS (400+ in New York City alone). * * *

Our attorneys at Venable in Washington DC have analyzed the form and substance of cash donations made to us in connection with facade conservation easement donations and have concluded that they met the tests that would qualify them as tax-deductible. * * * I would be glad to fax you a copy of this opinion letter should you wish to read it.

With respect to the side letter, we don't believe they compromise the tax-deductibility of cash donations in the present tax year * * *. However, we do not believe this would be the case with a legal agreement that explicitly made the cash donation contingent on the survival of the deduction.

There is no record of Mr. Graev's requesting the Venable opinion letter. We find that he neither requested it nor attempted to rely upon it to support his claimed charitable contribution deductions.

On September 20, 2004, Mr. Graev executed a facade conservation easement application to NAT, stating on its cover that "[he] will also be looking for the NAT to issue the 'side' letter we discussed (similar to the one being issued to my neighbor across the street)". On the bottom of the first page of the application, NAT italicized the last sentence: "The National Architectural Trust recommends that you seek professional advice to assess the specific legal and tax considerations of making your easement donation."

The Side Letter

An internal email message dated September 23, 2004, from a NAT representative to NAT's president, indicated that a representative had "discussed with * * * [Mr. Graev the] potential deductibility issues related to placing any contingencies on the cash donation. * * * [Mr. Graev] understands the risk and would like to receive the * * * [side letter]." The side letter was sent on September 24, 2004. In pertinent part, it read:

1. In the event the IRS challenges the

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