Tuesday, June 25, 2013
In Graev v. Commissioner, 140 T.C. No. 17 (June 24, 2013), the Tax Court sustained the IRS’s disallowance of deductions claimed with regard to the donation to the National Architectural Trust (NAT) in 2004 of both a façade easement valued at $990,000 and an accompanying $99,000 cash endowment. NAT had written a side letter to Mr. Graev, the donor, promising that, if the deduction for the easement is disallowed, NAT would “promptly refund [Mr. Graev’s] entire cash endowment contribution and join with [him] to immediately remove the facade conservation easement from the property’s title.” The Tax Court found that the gifts were conditional and, at the time they were made, the possibility they would be “defeated” was not so remote as to be negligible.
In explaining its holding, the Tax Court noted that IRC § 170 and the corresponding Treasury Regulations provide instructions and limitations that, at least in part, ensure that a donor will be able to deduct only what the donee organization actually receives. Three such limitations effectively provide that no deduction for a charitable contribution will be allowed unless, on the date of the contribution, the possibility that the donee’s interest in the contribution would be defeated is “so remote as to be negligible.” See Treasury Regulation § 1.170A-1(e) (pertaining to conditional gifts); § 1.170A-7 (pertaining to partial interest gifts); § 1.170A-14(g)(3) (pertaining to gifts of conservation easements).
Based on the specific facts in Graev, the court found that, on the date of the contributions, the possibility the IRS would disallow the easement deductions and NAT would return the cash to Mr. Graev and remove the easement (i.e., the gifts would be defeated) was not so remote as to be negligible. The facts the court found persuasive included the IRS’s announced intention to scrutinize deductions for facade easement donations; Mr. Graevs’ insistence that NAT issue the side letter; NAT’s practice of issuing side letters, the very essence of which “implies a non-negligible risk;” and NAT’s incentive to honor its promises in the side letter so as not to undermine its reputation and impair its ability to obtain future contributions.
The Tax Court specifically declined to address the hypothetical circumstance in which a “hyper-cautious” donor conditions his gift on non-disallowance where the possibility of disallowance is so remote as to be negligible. However, the standard for finding that the possibility of defeat of a conditional gift is so remote as to be negligible is very high. The court explained:
In prior cases, we have defined “so remote as to be negligible” as “‘a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction.’”… Stated differently, it is “a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance.”
In Graev, the Tax Court noted: “the mere fact that he required the side letter is strong evidence that, at the time of Mr. Graev’s contribution, the risk that his corresponding deductions might be disallowed could not be (and was not) ‘ignored with reasonable safety in undertaking a serious business transaction.’” Obtaining the side letter also indicated that Mr. Graev did not disregard the chance of disallowance "as so highly improbable and remote as to be lacking in reason and substance." Accordingly, the mere fact of obtaining a side letter such as that at issue in Graev might be deemed a tripwire that destroys deductibility.
Graev is the latest in a series of cases in which deductions for façade easement donations to NAT have been disallowed on a variety of grounds. See Herman v. Commissioner, T.C. Memo. 2009-205; 1982 East LLC v. Commissioner, T.C. Memo. 2011-84; Friedberg v. Commissioner, T.C. Memo. 2011-238; Dunlap v. Commissioner, T.C. Memo. 2012-126; Rothman v. Commissioner, T.C. Memo. 2012-218; Scheidelman v. Commissioner, T.C. Memo. 2013-18. See also Kaufman v. Shulman, 687 F.3d. 21 (1st Cir. 2012)(remanding to the Tax Court on the issue of valuation and noting that, because of local historic preservation laws, the Tax Court might well find that the façade easement donated to NAT was worth little or nothing). NAT also was the subject of a 2011 Department of Justice lawsuit alleging that NAT was engaged in abusive practices. The suit settled with NAT denying the allegations but agreeing to a permanent injunction prohibiting it from engaging in the practices.