Patrick Urda of the United States Tax Court dives into the technicalities of charitable contributions of property in Janet R. Braen et.al. It is about deduction for a bargain sale of land to a municipal government. As is usual, the story behind the story is probably more interesting than the tax issues. Several dockets are covered in the opinion as it involves a charitable contribution by an S corporation owned by a family that has been quarrying to provide the material to build the infrastructure of Northern New Jersey since 1904. You can learn about the fascinating history of Braen Stone in this video.
I find the story that the founder won his first quarry as payment on a gambling debt irresistible, but I’m here to tell you the tax story.
The Land In Ramapo
In 1998 Braen Commercial Holdigs Corp (Holdings) acquired a 505-acre plot of land in the Town of Ramapo, NY. Ramapo is on the border of New Jersey. The Palisades Interstate Parkway goes through a portion of it. The plan was to develop a granite quarry. Holdings had optioned the property for $3,500,000 in 1996.
Depending on traffic you can drive to Times Square from Ramapo in as little as an hour. This is not an area of the country where it is easy to get permits to do anything, so I’m thinking a quarry might be extra challenging. What followed the purchase was years of delay and litigation. There were a lot of community concerns, but when it came to getting a mining permit the biggest issues were local water sources and timber rattlesnakes. Timber rattlesnakes are an endangered species
There was a 2004 zoning change that was part of the litigation. Finally there was a settlement in 2010 in which Holdings sold the town 425.5 acres of the parcel for $5,250,000.
The Deduction
Here we must allude to Reilly’s Fourth Law of Tax Planning – Execution isn’t everything, but it’s a lot. This is not an example of good execution.
“The property sale closed on September 29, 2010. Before the closing, Holdings’ certified public accountant, Rachel Votto, advised that a Ramapo representative would need to sign Form 8283, Noncash Charitable Contributions, so that Holdings might claim a charitable contribution deduction. Holdings accordingly sent Ramapo a Form 8283, which was blank except for the phrase “see attached qualified appraisal report” in the “description of donated property” section. Although no appraisal was attached, Ramapo’s then city manager signed Form 8283 at closing.”
Of course they are trying to get a complicated deal with a lot of moving parts done. Follow-through on the charitable contribution tax compliance was probably not on the front burner at that point. When it came to doing the 2010 tax return for Holdings, they brought in RSM McGladrey. You have heard of the Big 4. Well McGladrey is currently number 5.
In April 2011 McGladrey submitted a request for a prefiling agreement with the IRS with “questions for determination”. One question was whether Holdings had the requisite donative intent and that the value of the transferred property was $26,245,000. I have to confess I was today years old when I first learned about the Pre-Filing Agreement Program. This is a level of execution I have never aspired to.
In the process of preparing for the prefiling agreement it was determined that the blank signed 8283 was probably not up to snuff, So they put in a request to the town to “provide and acknowledgment that [Holdings] sold the lots to the Town for the stated price and that no other goods or services was [sic] provided for the sale”. (Really appreciate Judge Urda’s attention to grammar with the “[sic]”.) The attorney for the town revised the statement to make it clear that “it wasn’t just a purchase of property, it was a purchase of property as part of the negotiated settlement of the lawsuit”. There are times when I really don’t appreciate extra thoroughness.
That got the IRS interested in questions about the rezoning and mineral values and whether the appraisals were qualified. The IRS withdrew from considering the issues in the PFA request.
The return as filed had a complicated story about the deduction. It asserted a value of over $17 million which made for a bargain sale of over $12 million. The valuation included mineral value. Holdings only claimed a deduction of $5,222,000 to avoid a dispute over valuation and exposure to gross valuation misstatement penalty. The individual returns claimed each shareholder’s proportionate share of the deduction. There were unsigned and in some entirely blank Forms 8283 attached. The instructions say that the corporation is supposed to give a copy of its 8283 to the shareholder and they are supposed to attach it to the individual return.
The Opinion
The corporate return for 2010 was audited by the IRS. Ms. Votto handled it so I guess the trial of the not quite Big 4 McGladrey was over. The opinion has some discussion about how the penalties were arrived at. At the end of the day there were deficiency notices and petitions to Tax Court.
It ends up not being that complicated. When you take a deduction for a bargain sale you have to consider everything that you received not just the cash. In figuring the deduction Holdings did not put a valuation on the zoning change that it received that was an integral part of the settlement. They argued that they were entitled to the change and would have won on the litigation, but that did not wash.
The other problem was with the contemporaneous written acknowledgment. Even though there was an allusion to the litigation there was not an explicit enough statement of that being something that was received. Failure to have a good contemporaneous written acknowledgement means no deduction.
Judge Urda still had to address valuation in order to determine whether there would be substantial underpayments. He threw out the valuation based on the minerals, because of the obstacles to permitting. That left residential use and the value ended up at $5.845,000 which makes for a substantial misstatement compare to the $10,472,000 claimed as the value of the property sold.
The Braens got nowhere in arguments against the penalties for reasonable cause and issues with supervisory approval.
The Pre-Filing Agreement Program
I’ve gotten over my embarrassment about not knowing about the Pre-Filing Agreement Program. According to the Fact Sheet on the program, there were only 20 filings from 2019-2022. The user fee to participate in the program is $181,500. It was much less back in 2010. I did a search and determined that this case is the first time that the Tax Court has ever mentioned the program in an opinion, which I guess makes sense given that the point of the program is to avoid the need to go to Tax Court. Based on how this case turned out, I’m thinking I am unlikely to ever recommend to somebody that they should try it, but it is always good to learn something new.
Other Coverage
Bryan Camp has Lesson From The Tax Court: Size Does Not Matter on the TaxProf Blog.
“Lesson I see in the case is this: even a big bargain sale to a charity requires donative intent. Without a donative intent, there is no §170 deduction, no matter how big the bargain. Intent is determined by objective facts surrounding the transaction. Here, those facts showed that the taxpayers’ intent was not to be charitable; their intent was to settle a lawsuit they had filed against the town.”
Lew Taishoff covered one of the procedural steps on the case in 2021 with DISCOVERY TOHUBOHU. He initially took it as a conservation easement case, but later corrected his error. He also covered the opinion with SETTLE YOUR CASE AND SETTLE YOUR HASH.
“I won’t go into the battling appraisals, except to state that Excelsiorland boondockery takes second place to no one, certainly not Dixieland boondockery.”
“Of course, notwithstanding a couple CPAs in attendance (hi, Judge Holmes), Janet and the als get the Form 8283 wrong, and the post-event Contemporaneous Written Acknowledgement from the town attorney spills the beans on the settlement.
Quid pro quo means no deduction. “
Read the full article here
