FOURTH CIRCUIT INVALIDATES HUGE TAX
[Posted December 16, 2014]
What’s the biggest itemized deduction you’ve ever taken on your taxes? Ten
thousand bucks? Thirty? A hundred? Many taxpayers are concerned about listing
large deductions for fear that they’ll turn into audit magnets. But the
taxpayers in Belk v. Commissioner
felt no compunction about claiming a charitable deduction of ten million dollars on their 2004
through 2006 returns.
The donation was in-kind: a
conservation easement prohibiting development of 184 acres near Charlotte, North
Carolina. It would help you to know that the property
was already improved, in one of the best ways possible – a golf course. The
course was surrounded by homes, against which the easement didn’t apply.
The easement contained a
provision that allowed the owners to swap out parcels of the covered area, as
long as they substituted adjacent areas of equal or greater acreage and value.
Thus, the easement would never cover less than 184 acres, though it might encompass
more. Finally, a savings clause provided that if any land swap caused the
transaction not to comply with the laws permitting tax deductions, that swap
would be invalidated.
I’m neither a tax lawyer nor
a transactional lawyer, but I recognize that one or more attorneys with those
specialties must have put considerable effort into crafting the easement in
this way, in an effort to fend off Uncle Sam. But as I hinted above, a
deduction that large is likely to inspire scrutiny sooner or later. In the Belks’
case, it came in 2009 in the form of a deficiency notice from the IRS
I’ll do the math for you.
Assuming – as I think is safe – that the taxpayers are in the 38% bracket, they
now owe about $4 million in principal, plus penalty, plus several years in
interest, all to a creditor who is not widely known for forgiving indebtedness.
The taxpayers sought relief
in Tax Court, but got none. Today, in a published opinion, the Fourth Circuit
affirms. The primary fault with the donation lies in the swap-out provision.
Because land can be withdrawn from the easement pretty much at will, and other
land substituted, this arrangement conflicts with the Tax Code’s definition of
a “qualified conservation contribution.” That phrase, in turn, incorporates the
following definition of a “qualified real property interest”: “a restriction
(granted in perpetuity) on the use which may be made of the real property.”
Since I’m a grammar geek, I
should point out the misuse of the word which
in that definition; it should be that.
But really, the operative word – the multi-million-dollar-decisive word – in
this definition is the. Because the
restriction has to cover “the real
property,” a swap-out provision means that you can never pin down what,
exactly, has been donated in perpetuity. Accordingly, this easement doesn’t
qualify for the deduction.
But what about that savings
clause? Doesn’t that reinstate the original boundaries of the easement? Alas
for Mr. and Mrs. Taxpayer, no; this would be a condition subsequent that merely
attempts to circumvent taxation. The court finds that this is in effect an
attempt to rewrite the easement for tax-avoidance purposes, and concludes,
“This we will not do.”
I’ve heard of cases where,
as the saying goes, “a man’s life hangs on a comma.” Here, the use of a
definite article – the – is the
decisive factor in a multi-million-dollar appeal.
VIRGINIA LOSES AN APPELLATE PIONEER
[Posted November 24, 2014] Virginia Lawyers Weekly is reporting the
death of Fairfax Circuit Court Judge R. Terrence Ney today. Before he was Judge
Ney, Terry Ney was an outstanding appellate lawyer. If you own a copy of the
Virginia CLE book, Appellate Practice –
Virginia and Federal Courts, you have a wonderful example of his expertise
in our field; he’s listed as the editor of the Fifth Edition, which rests
comfortably on the small bookcase that is always within easy reach of my office
Judge Ney served as a
Distinguished Adjunct Professor at George
School of Law, where he taught, naturally enough,
Appellate Practice and Procedure.
Ten years ago, when I set
out to create a purely appellate practice, there was no appellate bar in Virginia. There were no
established appellate practices on which I could pattern my efforts. I kept
hearing that there was this guy up in northern Virginia named Terry Ney who had
been a terrific appellate lawyer, but he had been made a judge a few years
earlier – he was elevated to the Fairfax Circuit bench in 1999 – so that avenue
was closed. That left me to feel my way around in the dark for a while.
I’ll always regret that I
never got the chance to sit down with Judge Ney to get his take on the
development of the appellate bar, and on how things nowadays differ from how
they were when he led an uncrowded field. He was a real pioneer for the several
dozen of us who are now grateful that we’ve been able to follow in his
PROGRAMMING ADVISORY, LEGISLATIVE NEWS,
A QUICK NOTE ON REHEARINGS
[Posted November 11, 2014]
I’ll be away from the keyboard for the rest of the week starting on Thursday,
as I’ll be attending the ABA’s appellate summit
in Dallas. This
is one of the few occasions in the year when I amass a substantial number of
MCLE credits without having to prepare written materials. The summit is a
priceless opportunity to see appellate practitioners from other states, and to
learn from top-notch faculty members from across the nation.
Meanwhile, the General
Assembly met in special session yesterday, in part to select three new
appellate jurists. The Supreme Court will need a new member to replace Chief
Justice Cynthia Kinser, who’s retiring at the end of the year, while the Court
of Appeals will need to replace retiring Chief Judge Walter Felton and Judge
Bob Frank. Those two retirements also will be effective December 31.
Despite much negotiation,
the House and Senate Republican caucuses were unable to reach a comprehensive
accord, so while several new trial-court judges were elected yesterday, the
appellate benches will await another special session or the regular session in
January. I assume that both chambers will want to fill the slots before the
calendar turns, both because it keeps the courts at full strength and because
they’ll want to get this out of the way before the upcoming short session.
Finally, I’ve received two
completely separate inquiries in the past two days, each containing the same
misconception. Both queries relate to petitions for rehearing under Rule 5:20,
which contains the following directive in paragraph (a):
to incorporate facts or arguments from the petition for appeal are prohibited.
Both of my callers felt that
this meant they had to make different arguments in a petition for rehearing
than had been set out in the petition for appeal. That isn’t the thrust of the sentence.
It prohibits incorporation by reference, not repetition of previous arguments.
If you think your petition for appeal was perfectly crafted, you don’t have to
start over; you can effectively refile it, subject to the much shorter page
limit, of course.
I’ve covered rehearings
comprehensively in an earlier essay, so I won’t duplicate that here. But while
taking a new briefing approach on rehearing might be a good tactical decision,
it isn’t mandated by the rules.
APPELLATE COURTS’ HOLIDAY
[Posted November 10, 2014]
As the autumn and winter holidays approach, here’s your annual summary of the
clerk’s offices’ closing schedules, along with the usual reminders how those
closings will affect your deadlines.
The Supreme Court and Court
of Appeals of Virginia and the Fourth Circuit will all be closed tomorrow for
I don’t have information yet
on the Fourth beyond tomorrow, but the schedules for the state courts are
indeed available. For Thanksgiving, the SCV and CAV will close at noon on
Wednesday, November 26, and will remain closed all day November 27 and 28. Both
courts will close again – all day – on December 24, 25, and 26. And they’ll
close at noon on December 31 and will remain closed January 1 and 2, 2015.
The rules for those closures
are straightforward. On each of the dates mentioned above, if you have a
pleading, brief, or other filing that’s due in the appellate-court clerk’s
office, then your deadline is extended by operation of law to the next business
day. If you have a filing due the day before Thanksgiving, you don’t have to
scramble to get it in before noon; you can file it Monday.
Now the usual caveat: These
extensions, as I note above, apply to filings that are due in the appellate-court clerk’s office. Some
appeal-related filings are done in the trial-court
clerk’s office. Notices of appeal, transcripts, and appeal bonds are notable –
and jurisdictional – examples. For those documents, you must ascertain if your
local clerk’s office will be closed. It’s a safe bet that that court will be
closed on Thanksgiving or Christmas Day, but the “shoulder dates” might vary,
and if your court remains open that day, you
do not get the extension. Do yourself a favor and pick up the phone, just
Of course, if you wait until
the deadline day to file, you’re living on the edge anyway. File a day or two
early, and save yourself the heartache.