Thursday, March 20, 2014
Mountanos v. Commissioner Revisited – Conservation Easement Donor Not Permitted to Avoid Gross Valuation Misstatement
In Mountanos v. Commissioner, T.C. Memo. 2014-38 (Mountanos II), the Tax Court denied the taxpayer’s motions to reconsider, vacate, or revise its opinion in Mountanos v. Commissioner, T.C. Memo. 2013-138 (Mountanos I).
In Mountanos I, the Tax Court sustained the IRS’s disallowance of deductions claimed for the donation of a conservation easement encumbering 882 acres of undeveloped land in Lake County, California. As discussed in an earlier post, the court held that the taxpayer failed to prove that the highest and best use of the land changed as a result of the donation of the easement and, thus, failed to prove the easement had any value. The court also found that the taxpayer was liable for a gross valuation misstatement penalty under IRC § 6662(h).
In Mountanos II, the taxpayer asked the court to consider the alternative grounds on which the IRS had argued for disallowance of the deductions in Mountanos I—namely that the taxpayer failed to obtain a “contemporaneous written acknowledgment” from the donee as required under IRC § 170(f)(8) and failed to obtain a “qualified appraisal” as required under Treasury Regulation § 1.170A-13(c). The Tax Court did not address those alternative grounds in Mountanos I because it disallowed the deductions in their entirety on valuation grounds. Asking the court to consider the alternative grounds for disallowance in Mountanos II was, noted the court, “a calculated maneuver to avoid the accuracy-related penalty.”
In asking the Tax Court to consider the alternative grounds for disallowance in Mountanos II, the taxpayer relied on two cases in which the 9th Circuit Court of Appeals held that an overvaluation penalty may not be imposed when there is some other ground for disallowing a deduction. The IRS argued that those cases were distinguishable, and the Tax Court agreed. The court explained that the taxpayers in the 9th Circuit cases had stipulated that the deductions at issue were unlawful on grounds other than valuation, and the taxpayer in Mountanos had not so stipulated. The court noted in a footnote that the taxpayer in Mountanos was “attempting to take two bites at the same apple”—i.e., argue valuation and then later seek a redetermination on non-valuation grounds to avoid the gross valuation misstatement penalty. The court also noted in another footnote that the continuing viability of the line of cases on which the taxpayer relied is in question due to the U.S. Supreme Court’s recent opinion in United States v. Woods, 134 S. Ct. 557 (2013), which contains reasoning on the penalty issue that is in conflict with the reasoning in the 9th Circuit cases.
In Mountanos II the taxpayer further argued that the Tax Court should address the alternative disallowance grounds because it would save the court from having to revisit those issues if the case is appealed and the 9th Circuit remands the case. The Tax Court also dismissed this argument. The court explained that addressing the alternative disallowance grounds would have no impact on its disposition of the case as it had already resolved the case on valuation grounds. Resolving moot issues would be tantamount to rending an advisory opinion, which the court refused to do.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law