Investors v. Comm'r
| Decision Date | 15 June 2017 |
| Docket Number | Docket No. 29483-14.,T.C. Memo. 2017-115 |
| Parties | TEN TWENTY SIX INVESTORS, DOUGLAS OLIVER, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Kathleen M. Pakenham, Clint E. Massengill, and Adriana L. Wirtz, for petitioner.
Michael D. Wilder, for respondent.
THORNTON, Judge: This case is before us on respondent's motion for partial summary judgment, which asserts that Ten Twenty Six Investors is not entitled to a section 1701 deduction for 2004 for the donation of a facade easement.2
Ten Twenty Six Investors is a New York State limited partnership subject to the uniform partnership audit and litigation rules enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982. Throughout 2004 it owned a 10-story warehouse in New York City (warehouse). The warehouse, built in 1928, was designed by Cass Gilbert, who also designed the Woolworth Building and the United States Supreme Court Building.
On December 21, 2004, the partnership executed an easement deed (deed) granting a facade easement (easement) on the warehouse to National Architectural Trust, Inc. (NAT). The deed is titled "Conservation Deed of Easement" and references itself as such repeatedly throughout the document. A representative of NAT accepted and signed the deed on December 30, 2004. Not until December14, 2006, however, did NAT cause the deed to be recorded in the Office of the City Register of the City of New York.
On its 2004 Form 1065, U.S. Return of Partnership Income, the partnership claimed deductions under section 170 of $11,355,000 for a noncash charitable contribution of the easement (consistent with an appraisal the partnership had obtained) and of $531,975 for a cash charitable contribution to NAT.3
The Commissioner issued a timely notice of final partnership administrative adjustment for the partnership's 2004 taxable year, disallowing the noncash charitable contribution deduction and $510,975 of the cash charitable contribution deduction and determining a 40% gross valuation misstatement penalty under section 6662(a) and (h) or, alternatively, a 20% penalty under section 6662(a) and (b)(1), (2), or (3).
Petitioner Douglas Oliver filed a timely petition on behalf of the partnership, and respondent moved for partial summary judgment as to the noncash charitable contribution deduction. Petitioner cross-moved for partialsummary judgment regarding the 40% gross valuation misstatement penalty under section 6662(a) and (h).4
The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we view the factual materials and inferences drawn from them in the light most favorable to the nonmoving party. See Sundstrand v. Commissioner, 98 T.C. at 520.
The moving party bears the burden of showing that there is no genuine dispute of material fact. Id. Where the moving party properly makes and supports a motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of such party's pleading," but must set forth specific facts, by affidavit or otherwise, showing that there is a genuine dispute for trial. Rule 121(d).
A taxpayer is generally allowed a deduction for any charitable contribution made during the taxable year. Sec. 170(a)(1). Although a taxpayer is generally not allowed a charitable contribution deduction for a gift of property consisting of less than an entire interest in that property, there is an exception for donation of a "qualified conservation contribution". See sec. 170(f)(3)(A), (B)(iii).
A qualified conservation contribution is a contribution (1) of a "qualified real property interest" (2) to a "qualified organization" (3) "exclusively for conservation purposes." Sec. 170(h)(1). Section 170(h)(2) defines "qualified real property interest" as "any of the following interests in real property":
The easement at issue in this case is not a section 170(h)(2)(A) or (B) interest. Therefore, to be a qualified real property interest the easement must be granted in perpetuity under section 170(h)(2)(C).
Section 170(h)(5)(A) provides a separate and distinct perpetuity requirement. See Belk v. Commissioner, 140 T.C. 1, 12 (2013), aff'd, 774 F.3d 221 (4th Cir. 2014). It provides that "[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity."
Additionally, section 1.170A-14(g)(1), Income Tax Regs., provides:
In the case of any donation under this section, any interest in the property retained by the donor (and the donor's successors in interest) must be subject to legally enforceable restrictions (for example, by recordation in the land records of the jurisdiction in which the property is located) that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation. * * *
In a Federal tax controversy State law controls the determination of a taxpayer's interest in property while the tax consequences are determined under Federal law. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985) ("In the application of a [F]ederal revenue act, [S]tate law controls in determining the nature of the legal interest which the taxpayer had in the property[.]" (quoting Aquilino v. United States, 363 U.S. 509, 513 (1960)); United States v. Mitchell, 403 U.S. 190, 197 (1971) ("[S]tate law creates legal interests, but [Federal law] determines when and how they shall be taxed." (quoting Burnet v. Harmel, 287 U.S. 103, 110 (1932)); Woods v. Commissioner, 137 T.C. 159, 162 (2011). Therefore, New York State law determines whatever interest may have been conveyed pursuant to the agreement between the partnership and NAT, and Federal law determines the tax consequences.
Respondent also argues that a conservation easement has no legal effect until it is recorded. Respondent points to NYECL sec. 49-0305(4) (McKinney Supp. 2017), which provides: "An instrument for the purpose of creating, conveying, modifying or terminating a conservation easement shall not be effective unless recorded." On this basis respondent argues that the warehouse was not subject to legally enforceable restrictions, as required by section 1.170A-14(g)(1), Income Tax Regs., at any time in 2004, and that therefore thepartnership is not entitled to a deduction for 2004 attributable to donation of the easement.
In response petitioner argues that the easement is not a conservation easement because the definition of conservation easement requires that the restriction be "created under * * * the provisions of this title", NYECL sec. 49-0303(1), and the deed did not reference title 49 of the NYECL nor did the partnership intend to create the easement under that title. More fundamentally, petitioner points to NYECL sec. 49-0309 (McKinney 2008), which provides: "This title shall not affect any interests or rights in real property which are not conservation easements, and shall not affect the rights of owners to convey any interests in real property which they could now create under existing law without reference to the terms of this title."
Petitioner argues that--whether or not the easement is also a conservation easement--the just-quoted language of NYECL sec. 49-0309 allows owners of property to convey any interest that could have been conveyed before title 49 was enacted. Petitioner contends that by delivery of the deed of easement to NAT, one such common law interest was created--namely, a restrictive covenant. Restrictive covenants are generally effective in New York upon delivery of a valid deed. N.Y. Real Prop. Law sec. 244 (McKinney 2006).
This Court addressed substantially identical facts and arguments in Zarlengo v. Commissioner, T.C. Memo. 2014-161. Just as in the present case, in 2004 the taxpayer in Zarlengo delivered a deed of easement to NAT which was intended to grant an easement on a building in New York. NAT failed to record the deed until a later year. The deed in Zarlengo and the deed in this case are nearly identical in all relevant respects. In Zarlengo we found that the deed was effective on the date it was recorded, not the date it was delivered. See also Rothman v. Commissioner, T.C. Memo. 2012-163 (), supplemented by T.C. Memo. 2012-218.
Moreover, petitioner's arguments have recently been addressed at length in Mecox Partners LP v. United States, 117 A.F.T.R.2d (RIA) 2016-593, 2016 WL 398216, at *5-*7 (S.D.N.Y. 2016), which also involves facts nearly identical to those in this case. In 2004 the plaintiff in Mecox delivered to NAT a deed of easement (which was nearly identical to the deed in this case) intended to grant a facade easement on a building in New York. NAT failed to record the deed until a later year. The District Court found that the deed was not...
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