Pesky v. U.S. – Deduction for Conservation Easement Donation Not Fraudulent
On or around September 29, 1993, the Peskys and The NatureConservancy (TNC) entered into a series of agreements relating to a certainparcel of property located in Ketchum, Idaho (the Ketchum Property), which wasadjacent to property TNC owned (the Hemingway Property).
Pursuant to the Assignment Agreement, the Peskys paid $50,000to TNC and agreed to limit the height of structures on the Ketchum Property totwenty-five feet and TNC (i) assigned an option to purchase the KetchumProperty for $1.6 million to the Peskys, (ii) agreed to grant the Peskys aneasement over the Hemingway Property to provide access to the Ketchum Property,and (iii) agreed to support the Peskys’ application for driveway approval withthe City of Ketchum and the County in which the properties were located.
Pursuant to the Pledge Agreement, the Peskys agreed to pay$400,000 to TNC for a new office building and convey to TNC at a later date all rights to develop or improve the Ketchum Property except for onesingle-family residence. The parties also agreed that the Pledge Agreementwould be kept confidential.
The Peskys exercised the option and purchasedthe Ketchum Property for $1.6 million on the same day, September 29, 1993. A few months later, the Peskys marketed theproperty for a price between $6.5 and $9.5 million. They also requested thelocal planning commission’s approval of the driveway over the HemingwayProperty and TNC allegedly supported this request.
More than eight years later, around March 7, 2002, thePeskys granted TNC a conservation easement limiting development on the KetchumProperty to one single-family residence and a guest house. Five days later, thePeskys sold the Ketchum Property for approximately $6.9 million.
The Peskys claimed charitable income tax deductions for the$3 million appraised value of the conservation easement on their 2002, 2003 and2004 tax returns. The IRS issued a notice of deficiency and the Pesky’s paidthe assessments and brought suit in District Court seeking recovery of theassessments.
Fraud Penalty
In Pesky v. United States, 2013 WL 97752 (D. Idaho, Jan. 7,2013) (Pesky I), the District Court held that the government adequately pled acounterclaim for a civil fraud penalty under IRC § 6663based on the Peskys’ allegedly fraudulently claimed charitable deduction forthe conveyance of the easement. The court did not determine that the Peskyswere liable for the fraud penalty; it decided only that the case could proceedon the merits.
In Pesky II, in an opinion authored by the same Judge who wrote the Pesky I opinion, the District Court addressed the fraud issue onits merits. The court explained that “fraud is intentional wrongdoing on the partof the taxpayer with the specific intent to avoid a tax known to be owing,” and that the government must prove fraud by clear and convincing evidence.
The government rested its fraud counterclaim on Mr. Pesky’salleged role in failing to disclose or provide a copy of the Pledge Agreementto the IRS and City of Ketchum officials. The District Court found, however,that the primary actors regarding nondisclosure of the Pledge Agreement to theIRS were Mr. Pesky’s attorneys and those attorneys “had good faith reasons fortheir decisions, separate from any intent to conceal the Pledge Agreement fromthe IRS.” The court found similarly with regard to the decision to limitdisclosure of the agreement to the City of Ketchum. Accordingly, even assumingMr. Pesky had agreed with his attorneys’ decision regarding nondisclosure ofthe Pledge Agreement, the court could not conclude that a reasonable jury couldfind it “highly likely” that Mr. Pesky’s deduction was due to fraud. Becausethe government did not produce sufficient evidence to meet its heightenedburden of showing fraud by clear and convincing evidence, the court granted Mr.Pesky’s motion for summary judgment on the fraudpenalty issue.
Other Issues
In Pesky II the government also moved for summary judgmenton a number of issues relating to whether Peskys are entitled to a deductionfor the conveyance of the conservation easement.
Quid Pro Quo
The government first contended that the easement conveyancewas part of a larger quid pro quo transaction between the Peskys and TNC andthat the parties attempted to mask the nature of the transaction by (i)breaking it into multiple documents, (ii) keeping the Pledge Agreement secret,and (iii) recording the easement long after TNC had conferred the benefits ofthe Assignment Agreement on the Peskys.
The District Court found that, while the government hadproduced evidence that the conservation easement was part of a quid pro quotransaction, that evidence was not so convincing as to compel summary judgmentin its favor. The court explained that,“[l]ooking to the external features of how the transaction was structured,there is a genuine issue of material fact as to whether the Peskys provided theConservation Easement ‘without the receipt or expectation of receipt ofadequate consideration.’” In other words, the court found that there was agenuine issue of material fact as to whether the Assignment Agreement andPledge Agreement were separate transactions or one integratedtransaction. Accordingly, the court denied both parties’ motions for summaryjudgment on this issue.
Contemporaneous Written Acknowledgement
The government next argued that Mr. Pesky failed to disclosethe goods and services TNC had provided in consideration for the conservationeasement in a contemporaneous written acknowledgment as required by IRC § 170(f)(8)(B)(ii). TNC had sent the Peskys acontemporaneous written acknowledgment in connection with the conservationeasement conveyance stating that TNC “provided no goods or services in exchangefor [the] gift.” The government did not object to the form or timing of thisletter. Rather, the government’s “claim appear[ed] to rely on the court findingthat a good or service was received in consideration for the ConservationEasement.”
Because the court determined that a genuine issue ofmaterial fact exists as to whether TNC provided any goods or services inexchange for the Conservation Easement (i.e., as to whether the PledgeAgreement was separate from the Assignment Agreement), the courtdenied the government’s motion for summary judgment on this issue.
Qualified Appraisal
The government also argued that the conservation easementwas not appraised in accordance with the requirements of Treasury Regulation §1.170A-13(c)(3)(ii) and, thus, the deductions should be disallowed. The court noted, however, that pursuant toIRC § 170(f)(11)(A)(ii)(II), a deduction will not be denied for failure to meet theregulatory requirements if it is shown that such failure “is due toreasonable cause and not to willful neglect.” The court determined that“whether the Peskys are excused from the requirements regarding submission of aqualified appraisal due to reasonable cause is a genuine issue of materialfact.” Accordingly, the government’s motion for summary judgment on this groundwas also denied.
While the issue of fraud was decided in Mr. Pesky’s favor,the other issues addressed in Pesky II may be decided on their merits in futurelitigation.
NAMcL