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Partnership Challenges Denial of Charitable Contribution Deduction

OCT. 13, 2020

Toscano Holdings LLC et al. v. Commissioner

DATED OCT. 13, 2020
DOCUMENT ATTRIBUTES

Toscano Holdings LLC et al. v. Commissioner

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

TOSCANO HOLDINGS, LLC
TOSCANO INVESTMENTS, LLC
TAX MATTERS PARTNER
Petitioner.
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226

Toscano Investments, LLC hereby petitions for readjustment of the partnership items set forth by the Commissioner of Internal Revenue ("Respondent") in a Notice of Final Partnership Administrative Adjustment (hereafter the "FPAA") which was dated July 16, 2020, and as the basis for its case alleges as follows:

1. Petitioner. Toscano Investments, LLC (hereafter "Petitioner") is the Tax Matters Partner for Toscano Holdings, LLC.

2. Toscano Holdings, LLC. The FPAA and this Petition relate to Toscano Holdings, LLC (hereafter "Toscano Holdings"), a limited liability company organized and existing under the laws of the State of Tennessee. Toscano Holdings is treated as a partnership for federal income tax purposes. Toscano Holdings maintains its principal place of business in Georgia.

3. The Form 1065 federal income tax return of Toscano for the tax year ending December 31,2016 was timely filed electronically with the Internal Revenue Service.

4. Status of the Petitioner. Petitioner is the Tax Matters Partner of Toscano Holdings,

5.The FPAA. The FPAA (a copy of which is attached hereto and marked "Exhibit A") was mailed to Petitioner on July 16, 2020. The Internal Revenue Service office located in Nashville, Tennessee issued the FPAA.

6. Taxable Year. The FPAA issued to Toscano Holdings was issued for the taxable year ending December 31, 2016 (the "2016 Year").

7. Assignment of Errors. The errors committed by Respondent in the FPAA are as follows:

a. Qualified Contribution Issue. Respondent erred in determining that a charitable contribution deduction in the amount of $28,100,000 for the 2016 Tax Year was not allowed, in whole or in part, on the stated basis that: "You have not established that Toscano Holdings, LLC made a contribution or gift of a conservation easement during the tax year ended December 31, 2016. To the extent you are able to establish that a gift or contribution had been made, you failed to establish that the gift or contribution satisfied all the requirements of I.R.C. §170 and the corresponding Treasury Regulations for deducting a noncash charitable contribution. Accordingly, the charitable contribution claimed on your Return of Partnership Income (Form 1065) is reduced by $28,100,000 for the tax year ended December 31, 2016."

b. Petitioner is unable to respond with more specificity to Respondent's 'contention regarding the Qualified Contribution Issue because Respondent has not identified with specificity which "requirements" under Code1 section 170 were not met, nor the manner in which they were not met.

c. Toscano Holdings and its members satisfied all of the requirements of Code section 170 and the applicable Treasury Regulations necessary to be entitled to a deduction in the amount of at least $28,100,000 for the 2016 Year attributable to its contribution of the qualified conservation easement
described in the FPAA (the "Easement").

d. The Commissioner's failure to identify any deficiencies in the Easement or otherwise identify how
Petitioner failed to comply with Code section 170 makes the FPAA and its corresponding allegations arbitrary and capricious, resulting in an invalid FPAA for the 2016 Year under the Administrative Procedures Act and other relevant law.

e. Valuation Issue. Respondent erred in determining that "[I]f it is determined that all the requirements of I.R.C § 170 had been satisfied for all or any portion of the claimed noncash charitable contribution, you have not established that the value of the contributed property claimed in your Return of Partnership Income (Form 1065) for tax year ended December 31, 2016 was greater than $2,352,663. Accordingly, even if it is established that a noncash charitable contribution is allowable under I.R.C. § 170, the amount of the contribution as claimed on your Return of Partnership Income (Form 1065) for the tax year ended December 31, 2016 is reduced by $25,747,337." This assigned error is referred to herein as the "Valuation Issue."

f. Respondent's determination, with respect to the Valuation Issue, is arbitrary, capricious, and lacks a reasoned basis resulting in an invalid FPAA for the 2016 Year under the Administrative Procedures Act and other relevant law. It is unclear how Respondent supports his position that the 380 acres of real property has a value of only $2,352,663. Respondent has not provided any reliable valuation methodology to support his contention.

g. Respondent has failed to support the basis for his determination of the value of the Easement. There is no factual indication in the FPAA why the Commissioner determined the Easement to have a value of $2,352, 663. Respondent has not articulated a reasonable basis for his determination, which is arbitrary and capricious.

h. Toscano Holdings has established, through a qualified appraisal and other evidence, the value of the Easement to be at least $28,100,000.

i. Gross Valuation Misstatement Penalty Issue. Respondent erred when he determined "that the underpayments of tax resulting from the adjustment of partnership items are attributable to a gross valuation misstatement. It is therefore determined that a 40% penalty shall be imposed on the portion of the underpayments attributable to the gross valuation misstatement as provided by I.R.C §§6662(a),6662(b)(3), 6662 (e), and 6662(h) upon completion of the TEFRA proceeding and that the remaining underpayments of tax result from a reportable transaction understatement under I.R.C. § 6662A, or, in the alternative, negligence/a substantial understatement under I.R.C. § 6662(a)."

j. The Easement was not overvalued by Toscano Holdings, nor was there an underpayment of tax.

k. Respondent has not provided a basis for determining that the charitable contribution was overvalued.

l. Conversely, Toscano. Holdings has established through a qualified appraisal and other evidence that the value of the Easement is at least $28,100,000. Toscano Holdings reasonably relied upon competent advisors and acted in good-faith by making an independent, investigation into the value of the Easement.

m. Alternative Penalty Issue. Respondent erred when he determined in the alternative, "that the underpayments of tax resulting from the adjustment of partnership items are attributable to the substantial valuation misstatement as provided by I.R.C. §§ 6662(a), 6662(b)(3), and 6662(e) and that a 20% penalty shall be imposed upon completion of the TEFRA proceedings and that the remaining underpayments of tax result from a reportable transaction understatement under I.R.C. § 6662A, or, in the alternative, negligence/a substantial understatement under I.R.C. § 6662(a)."

n. There was neither an underpayment of tax nor a valuation misstatement by Toscano Holdings. Moreover, any alleged underpayment would be the result of "reasonable cause." Toscano Holdings obtained a qualified appraisal and made a good-faith investigation of the value of the Easement. Moreover, Toscano Holdings and its members relied on competent advisors.

o. Respondent has not complied with Code section 6751(b)(1) with respect to asserting accuracy-related and other penalties.

p. Tax Avoidance Transaction Penalty. Respondent erred when he determined "that any underpayment of tax from the adjustments of partnership items are attributable to a tax avoidance transaction for which no substantial authority has been established for the position taken, and for which there was no showing of reasonable belief by the partnership or its partners that the position taken was more likely than not the correct treatment of the tax avoidance transaction and related transactions. Therefore, all of the underpayments of tax resulting from those adjustments of partnership items are attributable to (1) substantial understatements of income tax or (2) negligence or disregarded rules or regulations as provided by I.R.C. §§ 6662(a), 6662(b)(1), and 6662(b)(2). There has not been a showing by the partnership or any of its partners that there was reasonable cause for any of the resulting underpayments, that the partnership or any of its partners acted in good faith, or that any other exceptions to the penalty apply. It is therefore determined that, if any portion of underpayments are not attributable to a gross or substantial valuation overstatement, there shall be imposed a 20% penalty on such portion of the underpayment."

q. Toscano Holdings did not engage in a "tax avoidance transaction." Respondent has failed to identify why the contribution of the Easement constituted a "tax avoidance transaction." Such deductions have been reviewed, and condoned, by IRS examiners, appeals officers, IRS counsel, and the Courts. The law has not changed in the interim. There was neither an underpayment of tax nor a valuation misstatement by Toscano Holdings. Moreover, any alleged underpayment would be the result of "reasonable cause." Moreover, Toscano Holdings and its members relied on competent advisors.

r. Respondent has not complied with Code section 6751(b)(1) with respect to asserting accuracy-related and other penalties.

s. Listed Transaction Penalty. Respondent erred when he "determined that the underpayments of tax from the adjustments of. partnership items are attributable to a reportable transaction under I.R.C. §670,7A(c). Accordingly, a 20% penalty will be imposed under I.R.C. §6662A, coordinated with other penalties as required under I.R.C. §6662A(e)."

t. There was neither an underpayment of tax nor a valuation misstatement by Toscano Holdings. Any alleged underpayment would be the result of "reasonable cause." Toscano Holdings and its members relied on competent advisors and substantial authority exists for the position taken on its Tax Return for the 2016 year.

u. Other Deductions. Respondent erred when he determined, "for the tax year ended December 31, 2016, you claimed a deduction of $511,585 as 'Other deductions'. You have not established that Toscano Holdings, LLC, has paid or incurred this expense as an ordinary and necessary business expense per I.R.C. §162(a). Accordingly, 'Other deductions' claimed on Page 1, Line 20 of your Return of Partnership Income (Form 1065) for the tax year ended December 31, 2016 is reduced by $511,560."

v. Toscano Holdings and its members satisfied all the requirements of Code section 162(a) necessary to be entitled to a deduction in the amount of at least $511,585 for the 2016 Year attributable to "Other deductions."

w. Petitioner is unable to respond with more specificity as Respondent has not provided any basis for how he determined the value of the "Other deductions" taken, or why he determined that the claimed deductions were not ordinary and necessary business expenses.

X. Secondary "Other deductions." Respondent likewise erred when he determined "for the tax year ended December 31, 2015 you claimed a deduction of $1,484,052 as 'Other deductions'. As a result of our examination, it has been determined a portion of the claimed expense is not allowable as it is considered a nondeductible syndication expense within the meaning of I.R.C. § 709. In addition, you have not established that Toscano Holdings, LLC has paid or incurred this expense as an ordinary and necessary busines expense per I.R.C. §162(a) and the expense has not been fully substantiated per I.R.C. § 5001. Accordingly, 'Other deductions' claimed on Schedule K, Line 13d of your Return of Partnership Income (Form 1055) for the tax year ended December 31, 2016 is reduced by $1,479,252."

y. Toscano Holdings and its members satisfied all the requirements of Code section 162(a) necessary to be entitled to a deduction in the amount of at least $1,484,052 for the 2016 Year attributable to "Other deductions."

z. Petitioner is unable to respond with specificity as the FPAA is devoid of any factual explanation of Respondent's determination. Respondent has not provided any specific basis for why he determined the value of the "Other deductions" in Schedule K, Line 13d to be only $4,800. Respondent has provided no factual basis for why he determined the claimed deductions to be a "nondeductible syndication expense." Petitioner substantiated its deductions throughout the course of the IRS's examinations of its tax returns.

aa. Respondent's failure to support his determination makes the FPAA and the corresponding allegations arbitrary and capricious resulting in an invalid FPAA for the 2016 year under the Administrative Procedures Act and other relevant law.

8. Facts. The facts upon which Petitioner relies for the foregoing assignments of error and its case are as follows:

a. Toscano Holdings, LLC. Toscano Holdings is a limited liability company formed under the laws of the State of Tennessee. Toscano Holdings is treated, as a partnership for federal income tax purposes.

b. Tax Return. Toscano Holdings timely filed its Form 1065 federal income tax return for the 2016 Year. The partnership tax return contained all required attachments and information, including a properly completed Form 8283.

c. Property. During the 2016 Year, Toscano Holdings owned approximately 380 acres of real property in Roane County, Tennessee (the "Toscano Property").

d. Easement Donation. On or about December 29, 2016, Toscano Holdings made a legally effective donation of a conservation easement (the "Easement") over all 380 acres of the property (the "Toscano Property") by executing a Deed of Conservation Easement (the "Easement Deed").

e. The Easement Deed was properly recorded in Roane County, Tennessee on December 30,2016. It is recorded in Book 1596, Page(s) 198-247 of the Roane County, Tennessee Register of Deeds.

f. The Easement encumbers certain economically and ecologically valuable areas located within the Toscano Property.

g. Donee. The Easement was donated to Foothills Land Conservancy ("Foothills"). Foothills has at all relevant times been recognized by the Internal Revenue Service as a publicly supported. Code section 501(c)(3) charitable organization, as described in Code sections 509(a)(1) and 170(b)(1)(A)(vi), and received a determination letter to that effect from Respondent.

h. Foothills was at all relevant times a "qualified organization" authorized to receive deductible conservation easements pursuant to Code section 170(h)(1)(B).

i. Foothills has the experience and means to monitor and enforce the Easement. Foothills has expressed the intent to monitor and enforce its rights under the Easement Deed.

j. Foothills has made annual inspections of the Easement to ensure compliance with the terms of the Easement Deed.

k. Petitioner received a letter acknowledging the donation of the Easement in compliance with Code section 170(f)(8).

l. The Easement Deed conveys to Foothills the right to enforce the terms of the Easement Deed and to protect the conservation purposes in perpetuity.

m. Baseline Documentation. In connection with the donation of the Easement, qualified individuals issued a baseline report and accompanying documentation (the "Baseline Report") for the Toscano Property.

n. The Baseline Report contains an evaluation of certain conservation values and purposes protected by the Easement. The Baseline Report documents the condition of the Toscano Property at the time of the Easement grant and describes several of the conservation values present within the Toscano Property.

o. Highest and Best Use. The highest and best economical use of the Toscano Property immediately preceding the Easement grant was for mixed-use residential property.

p. Once the Easement was placed upon the Toscano Property, the highest and best use of the property changed dramatically. The Toscano Property could no longer be economically developed because Toscano Holdings relinquished its right to develop the Toscano Property in perpetuity.

q. Conservation Purpose. The Easement meets at least one of the four conservation purposes required under Code section 170(h)(4)(A) and Treasury regulation section 1.170A-14(d), as documented by the Baseline Report, the Easement Deed, and the attributes of the Toscano Property.

r. Respondent has made no independent determination that the Easement failed to preserve any single, much less all four, of the conservation purposes described in Code section 170(h)(4).

s. Appraiser. The appraisal of the value of the Easement (the "Appraisal") was performed by Clayton M. Weibel, MAI of Weibel & Associates, Inc., (the "Qualified Appraiser"). The Qualified Appraiser was, at the time of the Appraisal, a "qualified appraiser" as defined in Treasury regulation section 1.170A-13(c)(5). In addition, a review appraisal was performed by Kenneth A. Pettay, of Alpha and Omega Services LLC.

t. Appraisal.The Appraisal performed by the Qualified Appraiser and used as a basis for the charitable deduction taken for the donation of the Easement was a "qualified appraisal" under Treasury regulation section 1.170A-13(c)(3).

u. Respondent has made no determination that the Qualified Appraiser was not a qualified appraiser or that the Appraisal was not a qualified appraisal, as defined in Treasury regulation section 1.170A-13(c)(3) or (c)(5).

v. The Appraisal correctly determined the value of the Easement donated by Toscano Holdings. Toscano Holdings and its members reasonably relied upon the Appraisal in establishing the amount of the charitable contribution deduction. Toscano Holdings's reliance was reasonable and in good faith, and Toscano Holdings made an independent investigation of the value of the Easement.

w. Toscano Holdings satisfied all other requirements necessary to be entitled to a charitable deduction for the donation of the Easement, as reported on its Form 1065 for 2016.

x. Pursuant to Code section 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Easement because Toscano Holdings has produced credible evidence establishing that it is entitled to a charitable contribution deduction for the Easement in the amount claimed on its income tax return for the 2016 Year, and has otherwise maintained all records, cooperated with Respondent at all levels of the audit process and complied with all requirements of the Internal Revenue Code and Treasury regulations.

WHEREFORE, Petitioner prays that the Court dismisses the FPAA as invalid or otherwise readjusts the partnership items consisting of the charitable contribution deduction for the Easement and determines the amount of the deduction to have been properly deducted in the amount claimed. Petitioner further prays that the Court shifts the burden of proof to Respondent and determines that the Commissioner erred by: (1) reducing the noncash charitable contribution of Toscano Holdings for the 2016 Year, (2) disallowing the "Other deductions" claimed by Toscano Holdings, and (3) determining the application of accuracy-related and other penalties against Toscano Holdings for the 2016 Year.

Dated: October 8, 2020.

ADMITED

David M. Wooldridge
Tax Court Bar No. WD0364

ADMITED

Gregory P. Rhodes
Tax Court Bar No. RG0309

ADMITED

Michelle Abroms Levin
Tax Court Bar No. AM0309

Counsel for Petitioner

Sirote & Permutt, P.C.
P.O. Box 55727
Birmingham, Alabama 35255-5727
Telephone:205-930-5219
Facsimile:205-212-3814

 

FOOTNOTES

1All references to "Code" mean the Internal Revenue Code of 1986 as amended.

END FOOTNOTES

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