Reisner v. Comm’r—Strict Liability Penalty for Facade Easement Deduction

In Reisner v. Comm’r, T.C. Memo. 2014-230, the Tax Court held that there is no reasonable cause exception to the gross valuation misstatement penalty for façade easement donation deductions claimed on returns filed after July 25, 2006, even if the deductions are carried forward from a donation made before that date.

Reisner involved a façade easement donated to the National Architectural Trust in 2004 with regard to a townhouse in Brooklyn, New York. On their 2004 joint federal income tax return, the taxpayers claimed a $190,000 federal charitable income tax deduction with regard to the donation. Because of percentage limitations, the taxpayers claimed a deduction of only approximately $80,000 for 2004, and carryover deductions of approximately $86,000 and $24,000 for 2005 and 2006, respectively.

At trial, the parties stipulated that (i) the façade easement had zero value and the IRS properly disallowed the claimed deductions, (ii) the taxpayers had made gross valuation misstatements on their 2004, 2005, and 2006 returns as a result of overvaluing the easement, and (iii) the taxpayers were not liable for the gross valuation misstatement penalty for the deductions claimed on their 2004 and 2005 returns because they satisfied the reasonable cause exception in effect before the Pension Protection Act of 2006 (PPA) made changes to the penalty provisions.

The sole issue at trial was whether the taxpayers were liable for the gross valuation misstatement penalty for the carryover deduction they claimed on their 2006 return, which was filed on April 16, 2007. The Tax Court held that they were, explaining that, in the case of façade easement donation deductions, the PPA eliminated the reasonable cause exception with regard to gross valuation misstatements made on “returns filed after July, 25, 2006.”

The taxpayers argued that imposing the penalty on them for claiming a carryover deduction in 2006 for a donation made in 2004 was not a required construction of the statute, was contrary to congressional intent, and constituted a retroactive imposition of a penalty on conduct that occurred before the effective date of the changes in the penalty provisions. The Tax Court dismissed all three arguments, explaining:

• unlike the changes the PPA made to the qualification requirements for façade easement donations, which are effective for “contributions made after July, 25, 2006,” the provision eliminating the reasonable cause exception for gross valuation misstatements is effective for “returns filed after July 25, 2006;”

• interpreting the PPA as eliminating the reasonable cause exception for carryover deductions claimed on returns filed after the July 25, 2006, effective date is consistent with the operation of longstanding regulations governing the application of the gross valuation misstatement penalty; and

• the court’s holding does not represent retroactive application of the new penalty provisions because taxpayers “reaffirm” their gross valuation misstatements when they file returns after July 25, 2006, and they have the option of not doing so.

For a similar ruling regarding the gross valuation misstatement penalty in the facade easment donation context, see Chandler v. Comm’r, 142 T.C. No. 16 (2014). For charitable contributions of conservation easements encumbering land, the strict liability penalty for gross valuation misstatments applies to returns filed after August 17, 2006. See id. at note 5.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law