Palmolive Bldg. Investors, LLC v. Comm'r
| Decision Date | 10 October 2017 |
| Docket Number | 149 T.C. No. 18,Docket No. 23444-14. |
| Parties | PALMOLIVE BUILDING INVESTORS, LLC, DK PALMOLIVE BUILDING INVESTORS PARTICIPANTS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
In 2004 partnership PB transferred a facade easement by executing an easement deed in favor of a qualified organization. The easement deed places restrictions on PB and its successors with respect to the facade easement and the building. PB's building was subject to two mortgages, but before executing the easement deed, PB obtained ostensible mortgage subordination agreements from its mortgagee banks. However, the easement deed provides that in the event the facade easement is extinguished through a judicial proceeding, the mortgagee banks will have claims prior to that of the donee organization to any proceeds received from the condemnation proceedings, until the mortgage is satisfied. PB claimed a charitable contribution deduction for 2004 for the facade easement contribution.
In a notice of final partnership administrative adjustment issued to PB, R disallowed PB's claimed charitable contribution deduction for the donation of the facade easement and also determined that PB is liable for a gross valuation misstatement penalty under I.R.C. sec. 6662(h) and (a) or alternatively for a substantial understatement of income tax, negligence or disregard of rules or regulations, or a substantial valuation misstatement penalty under I.R.C. sec. 6662(a) and (b)(1), (2), or (3). DK, PB's TMP, filed a petition in this Court challenging these determinations, and R filed a motion for partial summary judgment under Rule 121.
R argues that the easement deed does not satisfy the perpetuity requirements of I.R.C. sec. 170 and 26 C.F.R. sec. 1.170A-14(g)(6)(ii), Income Tax Regs., because it provides the mortgagees with prior claims to extinguishment proceeds in preference to the donee. PB argues the contrary, citing Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), aff'g in part, vacating in part, and remanding in part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010). Alternatively, PB argues that if the easement deed does otherwise violate the perpetuity requirement of I.R.C. sec. 170 and the regulation, the easement deed contains a saving clause that will retroactively reform the deed to comply with the perpetuity requirements of sec. 1.170A-14(g)(6)(ii).
Held: In this case, presumably appealable to the U.S. Court of Appeals for the Seventh Circuit, we are not bound by the opinion of the U.S. Court of Appeals for the First Circuit in Kaufman v. Shulman, see Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), and we will follow Kaufman v. Commissioner; we will not follow Kaufman v. Shulman.
Held, further, PB's easement deed fails to satisfy the "in perpetuity" requirement of I.R.C. sec. 170(h)(5) because, first, the mortgages on the building were not fully subordinated to the easement as required by sec. 1.170A-14(g)(2), and, second, because the donee was not guaranteed to receive the share of proceeds mandated by sec. 1.170A-14(g)(6)(ii) in the event that the easement was extinguished and the donor subsequently conveyed the property and received proceeds for it. Thus, the facade easement contribution was not a qualified conservation contribution under I.R.C. sec. 170(h), and PB is not entitled to a charitable contribution deduction.
Held, further, the defects in the easement deed are not cured by a provision that purports to retroactively amend the deed, because the requirements of I.R.C. sec. 170 must be satisfied at the time of the gift.
Jeffrey H. Paravano and Michelle M. Hervey, for petitioner.
David A. Lee, Thomas F. Harriman, Elizabeth Y. Williams, and Robert J. Basso, for respondent.
CONTENTS
Background ........................................................ 6
The property and the charitable donation ........................... 6
The mortgage and its "subordination" .............................. 7
The Deed .................................................... 9
The IRS's examination, the FPAA, and the petition .................. 14
Discussion ........................................................ 14
APPENDIX ....................................................... 43
OPINION
GUSTAFSON, Judge:
On July 28, 2014, the Internal Revenue Service ("IRS") issued a notice of final partnership administrative adjustment ("FPAA") for the taxable year ending December 31, 2004, to DK Palmolive Building Investors Participants, LLC, the tax matters partner ("TMP") for Palmolive Building Investors, LLC ("Palmolive"). This case is a TEFRA partnership-level action based on a petition filed by the TMP pursuant to section 6226.1 At issue is Palmolive's entitlement to a charitable contribution deduction for its donation of a facade easement. Now before the Court is a motion for partial summary judgment filed by petitioner and a cross-motion for partial summary judgment filed by respondent, the Commissioner of the IRS. These cross-motions present the question whether Palmolive's easement deed satisfied the perpetuity requirements of section 170(h)(5) and 26 C.F.R. section 1.170A-14(g)(2) and (6), Income Tax Regs.2 As explained below, we will deny Palmolive's motion for partial summaryjudgment and grant the Commissioner's cross-motion for partial summary judgment.
Background
The property and the charitable donation
Palmolive owns the Palmolive Building on North Michigan Avenue in Chicago, Illinois (the "building"), which it acquired for approximately $58.5 million in May 2001.3 On December 21, 2004, Palmolive executed an easement deed (called a "Conservation Right"; hereinafter referred to as "the Deed") in favor of the Landmarks Preservation Council of Illinois ("LPCI" or "donee"), an Illinois not-for-profit corporation and a qualified organization within the meaningof section 170(h)(3); and Palmolive filed the Deed with the Cook County Recorder of Deeds.
The stated purpose of the Deed is to preserve the exterior perimeter walls of the building's facade (called "the protected elements").4 The Deed (quoted below) obligates Palmolive and any subsequent owner of the building to maintain in perpetuity the protected elements of the building. The Deed prohibits Palmolive from demolishing, removing, or altering the protected elements, from making any horizontal or vertical expansion of the building, and from performing any chemical cleaning or sandblasting of the protected elements without LPCI's permission.
The mortgage and its "subordination"
At the time of the execution of the Deed, two mortgages encumbered the building, one owed to Corus Bank, N.A. ("Corus"), and the other to the National Electrical Benefit Fund ("NEBF").5 Each mortgage had an outstanding balance ofapproximately $55.6 million as of December 21, 2004. Both the Corus mortgage and the NEBF mortgage6 obliged Palmolive to maintain insurance on the entire property (including the facade) and granted to the mortgagees Palmolive's right to insurance proceeds.7
Before executing the Deed with LPCI (and in accordance with Palmolive's undertaking in paragraph 20 of the Deed, quoted below), Palmolive secured an ostensible agreement from both lenders to subordinate their mortgages in the property to LPCI's rights to enforce the purposes of the easement. Corus's "Mortgage Subordination" states:
CORUS BANK, N.A. hereby acknowledges and agrees that it is the mortgagee and/or secured party under those mortgages and security documents (collectively, the "Security Documents") described on Appendix I (CORUS) to this Mortgage Subordination, and that it hereby subordinates each and every of such Security Documents to this Conservation Right, as provided in, and subject to the terms, conditions and limitations of Paragraph 20 hereof. [Emphasis added.8]
The NEBF subordination consists of identical wording, other than referring to NEBF rather than Corus. Thus, the nature and extent of the mortgagees' "subordination" is limited by paragraph 20 of the Deed.
Palmolive asserts (and the Commissioner has not disputed) that when Corus first made the loan in 2003 the building had been valued at approximately $190 million. On the basis of an appraisal, Palmolive asserts (and we assume, for purposes of the Commissioner's...
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