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Archive for July 17th, 2012

Cliché as it may sound, it’s better to be lucky than good. Just ask the shareholders of CMT, the S corporation that conveyed a conservation easement valued at $5.4 million to Wetlands America Trust, Inc. (WAT),  yet very nearly lost its charitable contribution deduction for failure to properly substantiate the contribution.

After the conveyance of the conservation easement, CMT received a letter from WAT acknowledging the $5.4M value of the contribution; however, the letter failed to address whether CMT had received any goods or services from WAT in exchange for the conservation easement.

On the conservation deed that was conveyed from CMT to WAT, however, there was included the following language:

NOW, THEREFORE, the Grantor, in consideration of the foregoing recitations and of the mutual covenants, terms, conditions and restrictions hereinunder set forth and as an absolute and unconditional gift, subject to all matters of record, does hereby freely give, grant, bargain, donate and convey unto the Grantee, and its successors and assigns, the Easement over the Protected Property subject to the covenants, conditions and restrictions hereinafter set forth which will run with the land and burden the Protected Property in perpetuity.

The deed also contained a detailed description of the conservation easement’s restrictions, WAT’s rights pursuant to the easement, and the rights reserved to CMT. Additionally, the conservation deed included a description of the property on which CMT placed the conservation easement and was signed by WAT during 2004. 

On its 2004 tax return, CMT deducted the $5.4M value of the conservation easement as a charitable contribution. The IRS denied the deduction, arguing that CMT had failed to adequately substantiate the contribution pursuant to I.R.C. § 170(f)(8).

As a reminder, a charitable contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee organization. Section 170(f)(8)(B) provides that the contemporaneous written acknowledgment must include the following information:

(i) The amount of cash and a description (but not value) of any property other than cash contributed 

(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i)

(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) * *  

In its initial argument, CMT maintained that the letter of acknowledgement received from WAT met the substantiation requirements of I.R.C. § 170(f)(8). The Tax Court held otherwise, however, noting that the letter failed to address whether CMT had received any goods or services in exchange for its contribution.

On the verge of losing its $5.4M deduction courtesy of a drafting oversight, CMT was bailed out by the fastidiousness of the transferred deed, as the Tax Court concluded that the deed, while not a formal letter of acknowledgement, contained all of the necessary substantiation information:

The conservation deed was signed by a representative from WAT, provided a detailed description of the property and the conservation easement, and was contemporaneous with the contribution. Additionally, the conservation deed in the instant case states that the conservation easement is an unconditional gift, recites no consideration received in exchange for it, and stipulates that the conservation deed constitutes the entire agreement between the parties with respect to the contribution of the conservation easement. Consequently, we conclude that…the conservation deed in the instant case satisfies the substantiation requirements of section 170(f)(8).

http://www.ustaxcourt.gov/InOpHistoric/AverytMemo.TCM.WPD.pdf

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Dwight Timothy Grandy ain’t paying your damned income taxes, and he dares you to try and make him. Push the issue, and he’s got an arsenal of ironclad legal arguments defending his right to not pay taxes at the ready, included but not limited to the following:

  • He does not have a residence,
  • He is not a citizen of the United States,
  • He does not reside in a Federal area,
  • He is a citizen of the sovereign nation Dwight Timothy Grandy’s Mini-Mart and Country,*
  • The United States is located in the District of Columbia,
  • He is not an officer or employee of the Government, and therefore does not owe Federal income tax.
  • Wages are not income.

*may not have happened.

Logical as those reasons may seem, the IRS failed to be swayed. They required Grandy to file his federal returns for the years 2002-2007, which accomplished little more than giving this protesting Picasso a palate on which to paint more awesomeness.  

  • While he reported wages on the Forms 1040EZ, he put them between brackets to signify a negative balance, and reported “0” taxes owed. His stated reason at the trial for reporting his wages between brackets was that “the United States has abandoned the constitutional money substance, gold and silver. They instead use credit hypothecated upon my work product, so it’s a lien on the public socialist trust. So a lien by definition is a negative.”
  • Grady printed at the bottom of the first page of each Form 1040EZ “Corporate Excise Tax Return”.  His stated reason for writing “corporate excise tax return” was “Because the congressional and Supreme Court case law states by defining income that it all stems from the 1909 corporate excise tax. It was reaffirmed after 1913 as a statutory extension of the corporate excise tax.”
  • He signed his returns, “Dwight Timothy Grandy does not spell his name in all CAPITOL [sic] letters or he is a corporate entity”.

When the IRS continued to push the issue, Grandy fought back at his oppressors, suing the IRS, the revenue agent who audited his returns, and yes, even the Tax Court judge, alleging that they were “working for foreign agents, have violated the original organic contract and compact known as the Constitution for the united states of America.”

Grady’s legal brief, which sought a paltry $62,700,000 as compensation for his troubles, contained the following attack on the audit process, which I’ve copied and pasted into my firm’s standard response letter for use in future exams:

Michael J. Cummings made, uttered or possesses a counterfeited security of a State or a political subdivision thereof or of an organization, or made, uttered, or possesses a forged security of a State or political subdivision thereof or of an organization, with intent to deceive. The counterfeited security is ‘evidence of indebtedness’ which, in a broad sense, may mean anything that is due and owing which would include a duty, obligation or right of action. No duty, obligation, or right of action exists against the plaintiffs’ property. The defendant is aware that no duty, obligation, or right of action exists and is therefore intent on counterfeiting the security. * * * Michael J. Cummings has committed all the causes of action in this action at law.

Ultimately, the Tax Court held Grandy liable for the full amount of assessed deficiencies and tacked on a $3,000 “frivolous argument” penalty under I.R.C. § 6673 for good measure. As of press time, no word was available on the outcome of the $62 million dollar lawsuit, but Grandy remains hopeful.

http://www.ustaxcourt.gov/InOpHistoric/GrandyMemo.TCM.WPD.pdf

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