Mecox Partners LP v. United States
| Decision Date | 01 February 2016 |
| Docket Number | 11 Civ. 8157 (ER) |
| Parties | MECOX PARTNERS LP, by and through LLOYD GOLDMAN, a Partner Other than the Tax Matters Partner, Plaintiff, v. UNITED STATES OF AMERICA, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Ramos, D.J.:
This action stems from a non-cash charitable gift deduction taken by Mecox Partners LP ("Mecox") on its 2004 United States Partnership Tax Return. On December 13, 2004, Mecox and a non-profit entity named the National Architectural Trust (the "NAT") executed a document that purported to convey an "Open Space and Architectural Façade Conservation Easement" from Mecox to the NAT. By its terms, the easement would preserve, in perpetuity, the façade of a certified historic structure owned by Mecox. Mecox claimed a deduction of $2.21 million for the donated easement as a "qualified conservation contribution" made in tax year 2004. The IRS disallowed the claimed deduction in full. On November 10, 2015, Mecox filed this action seeking, inter alia, judicial review of the IRS's refusal to recognize the deduction. The Government now moves for partial summary judgment that the IRS properly disallowed the deduction. For the reasons stated herein, the Government's motion is GRANTED.
The Internal Revenue Code (the "Code") generally allows a taxpayer to take a deduction for any "charitable contribution" made within the same tax year. 26 U.S.C. § 170(a)(1). A "charitable contribution" includes a gift of property, which is made to a charitable organization without the expectation of receiving adequate consideration. See Hernandez v. Commissioner, 490 U.S. 680, 690 (1989); see also 26 C.F.R. §§ 1.170A-1(h)(1), (2). Although a taxpayer is ordinarily not allowed to take a deduction for a gift of property consisting of less than the entire interest in that property, an exception is made for a "qualified conservation contribution." See 26 U.S.C. §§ 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) which is made "exclusively for conservation purposes." 26 U.S.C. § 170(h)(1); 26 C.F.R. § 1.170A-14(a). In order for a qualified conservation contribution to be made "exclusively for conservation purposes," the contribution must be "protected in perpetuity." 26 U.S.C. § 170(h)(5)(A). Federal regulations elaborate on what it means for a conservation purpose to be protected "in perpetuity":
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.
26 C.F.R. § 1.170A-14(g)(1) (emphasis added).
Generally, a contribution is considered to have been made for tax purposes in the year that it is delivered. See 26 C.F.R. § 1.170A-1(b) ()
The allowed deduction amount for a qualified conservation contribution is its fair market value at the time of the contribution. 26 C.F.R. § 1.170A-14(h)(3)(i). A deduction claimed for a contribution of property valued at more than $5,000 is generally denied unless the taxpayer meets certain substantiation requirements mandated by the Code, including, inter alia, that the taxpayer obtain a "qualified appraisal of the property." 26 U.S.C. §§ 170(f)(11)(A), (C). A "qualified appraisal" is defined as an "appraisal document" prepared by a "qualified appraiser" no earlier than 60 days before the contribution date of the appraised property and no later than the extended due date of the tax return claiming the deduction. 26 C.F.R. § 1.170A-13(c)(3)(i).
Mecox is a limited partnership which since 1991 has owned the building located at 1 Jane Street, New York, New York (the "Property"). Defendant's Local Civil Rule 56.1 Statement of Material Facts ("Def. 56.1"), Doc. 32, ¶ 1; Plaintiff's Response to Defendant's Local Civil Rule 56.1 Statement of Material Facts, Doc. 34-2, ¶ 16. On November 29, 2004, the United States Department of the Interior designated the Property as a "certified historic structure" that contributes to the significance of the Greenwich Village Historic District, in which the Property is located. Def. 56.1 ¶ 2.
In December 2004, Mecox and a non-profit entity called the National Architectural Trust (the "NAT") executed a document entitled "Conservation Deed of Easement" (the "Deed of Easement"). Id. ¶ 3. The Deed of Easement purports to grant an "Open Space and Architectural Façade Conservation Easement" (the "Easement") on the Property to the NAT. Id. ¶ 4; Ex. 1 at 2.2 According to the Deed of Easement, the Easement is "exclusively for conservationpurposes," and states that Mecox shall not make "any alteration, construction or remodeling of existing exterior improvements on the Protected Façade(s)" of the Property or place any "signs or markers that would materially alter or change the appearance of the Protected Façade" without first obtaining the NAT's "express written consent." Def. 56.1 ¶ 5; Ex. 1 at 2-3. The Deed was signed by Lloyd Goldman on behalf of Mecox on December 13, 2004, and by James Kearns on behalf of the NAT on December 21, 2004. Def. 56.1 ¶ 6; Ex. 1 at 7. However, the Deed of Easement was not recorded with the New York City Department of Finance, Office of the City Register until the following calendar year, on November 17, 2005. Def. 56.1 ¶ 7.
On July 12, 2005, Mecox filed with the IRS a United States Partnership Tax Return ("Form 1065") for tax year 2004. Id. ¶ 8. The Form 1065 included an appraisal report prepared by Jerome Haims Realty, Inc., dated June 13, 2005, which stated that the value of the Easement as of November 1, 2004 was $2.21 million. Id. ¶¶ 9-10. Accordingly, the Form 1065 claimed a deduction of $2.21 million in tax year 2004 for the donated Easement as a "qualified conservation contribution," as defined in the Code. Id. ¶ 11. The Form 1065 also deducted a noncash charitable contribution of $37,700 for legal and appraisal fees that Mecox spent in connection with the Easement donation. Id. ¶ 12.
Approximately six years later, on June 16, 2011, the IRS issued a Notice of Final Partnership Administrative Adjustment ("FPAA").3 Id. ¶ 13. Therein, the IRS disallowed both the claimed deduction of $2.21 million for the claimed qualified conservation contribution and the $37,700 deduction for legal and appraisal fees. Id. The IRS also charged Mecox with a 40%accuracy-related penalty under 26 U.S.C. § 6662(h), or in the alternative, a 20% accuracy-related penalty under 26 U.S.C. § 6662(a) and (b). Id. ¶ 14.
On November 10, 2011, Mecox filed the instant lawsuit pursuant to 26 U.S.C. § 6226(b), seeking judicial review of the IRS's adjustments of Mecox's 2004 Form 1065. See generally Doc. 1. Specifically, Mecox contends that the FPAA issued by the IRS was erroneous because: (1) the IRS mistakenly determined that the federal requirements for making a "qualified conservation contribution" were not met in 2004; (2) the IRS erroneously concluded that Mecox had not established the claimed $2.21 million value of the Deed of Easement; (3) the IRS erred when it concluded that the claimed $37,700 deduction for Mecox's legal and appraisal fees were not deductible; and (4) the IRS erred when it asserted an accuracy-related penalty of 40% under 26 U.S.C. § 6662(h), or in the alternative, a 20% penalty under 26 U.S.C. § 6662) and (b). Id. ¶¶ 26-30.
On April 17, 2015, the Government moved for partial summary judgment with respect to Mecox's contention that the IRS erred in finding that the requirements for making a "qualified conservation contribution" were not met in 2004. See generally Doc. 30. Specifically, the Government asserts that the Easement contribution was not made until the Deed of Easement was recorded the following year, on November 17, 2005. Id. at 1-2. Furthermore, because the necessary appraisal of the Easement was conducted on June 13, 2005, it was not conducted within 60 days of the contribution date, as mandated by treasury regulation 26 C.F.R. § 1.170A-13(c)(3)(i). Id. ¶ 2.
On May 15, 2015, Mecox filed its opposition, asserting that the contribution date was in fact the date that the executed Deed of Easement was delivered to the NAT, on December 21, 2004. See generally Doc. 34. The Government filed a reply on June 5, 2015. Doc. 37.
Summary judgment may be granted when it is shown that there is "no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986) (same). "When ruling on a summary judgment motion, the district court must construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant." Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 780 (2d Cir. 2003). A party seeking summary judgment bears the burden of establishing that no genuine issue of material fact exists. See Atl. Mut. Ins. Co. v. CSX Lines, L.L.C., 432 F.3d 428, 433 (2d Cir. 2005).
As a matter of law, Mecox did not make a "qualified conservation contribution" in 2004, because the Conservation Deed of Easement was not effective until it was recorded on November 17, 2005.
In a federal tax controversy, state law governs the taxpayer's interest in the property while federal law determines the tax consequences of that interest. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985) ...
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