Palmolive Building Investors v. Commissioner of Internal Revenue: Tax Court Holds Partnership Not Entitled to Charitable Contribution Deduction

In Palmolive Building  Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partners v. Commissioner of Internal Revenue, the Tax Court ruled that a partnership was not entitled to a charitable contribution deduction for a façade easement on a building since the contribution did not meet perpetuity requirements and because the defects in the deed are not cured by a savings clause to amend the partnership. The Tax Court’s summary of the opinion reads as follows:

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. 1.170A14(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.

See the full opinion at Palmolive Building  Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partners v. Commissioner of Internal Revenue No. 12051-15. (September 2017).

Posted by Quinton Weinstein, Associate Editor, Wealth Strategies Journal