SCOTUS Reports

Tag: Graev v. Commissioner

  • Graev v. Commissioner, 147 T.C. No. 16 (2016): Procedural Requirements for Penalty Assessments

    Graev v. Commissioner, 147 T. C. No. 16, 2016 U. S. Tax Ct. LEXIS 33 (U. S. Tax Ct. 2016) (including reporter, court, and year)

    In Graev v. Commissioner, the U. S. Tax Court ruled that the IRS’s inclusion of a 20% accuracy-related penalty in a notice of deficiency complied with statutory requirements, despite the absence of written supervisory approval for the initial determination of the penalty. The court held that the penalty’s assessment would be premature to consider without an actual assessment, and affirmed the penalty on grounds of substantial understatement of income tax, while reversing the 40% valuation misstatement penalty. This case underscores the importance of procedural compliance in tax penalty assessments and impacts the IRS’s practices in asserting penalties.

    Parties

    Lawrence G. Graev and Lorna Graev, the petitioners, were the taxpayers who challenged the IRS’s determination of tax deficiencies and penalties. The respondent was the Commissioner of Internal Revenue, representing the IRS. The Graevs filed their petition in the U. S. Tax Court, contesting the IRS’s notice of deficiency issued on September 22, 2008, which determined deficiencies in their 2004 and 2005 tax returns.

    Facts

    In 2004, Lawrence Graev purchased property in New York City and donated a facade conservation easement to the National Architectural Trust (NAT). The Graevs claimed charitable contribution deductions on their 2004 and 2005 tax returns for this donation. The IRS, after examining the returns, determined deficiencies and assessed both a 40% gross valuation misstatement penalty under section 6662(h) and an alternative 20% accuracy-related penalty under section 6662(a). The IRS’s examining agent obtained approval for the 40% penalty but not the 20% penalty, which was later suggested by a Chief Counsel attorney and included in the notice of deficiency without further approval. The Graevs challenged the penalties, asserting that the IRS failed to comply with the supervisory approval requirement under section 6751(b).

    Procedural History

    The IRS issued a notice of deficiency to the Graevs on September 22, 2008, which included both the 40% and 20% penalties. The Graevs timely filed a petition with the U. S. Tax Court on December 19, 2008. The IRS later conceded the 40% penalty but maintained the alternative 20% penalty. The Tax Court issued an opinion in Graev I, sustaining the disallowance of the charitable contribution deductions. The court then addressed the procedural requirements for the 20% penalty in the current case, focusing on compliance with sections 6751(a) and 6751(b).

    Issue(s)

    Whether the IRS’s notice of deficiency complied with the requirement under section 6751(a) to include a computation of the 20% penalty?

    Whether the IRS’s failure to obtain written supervisory approval for the initial determination of the 20% penalty under section 6751(b) barred its assessment?

    Whether the Graevs were liable for the 20% accuracy-related penalty under section 6662(a) due to a substantial understatement of income tax?

    Rule(s) of Law

    Section 6751(a) requires the IRS to include with each notice of penalty information with respect to the name of the penalty, the section of the Code under which the penalty is imposed, and a computation of the penalty.

    Section 6751(b)(1) prohibits the assessment of any penalty unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination or a higher level official designated by the Secretary.

    Section 6662(a) imposes a 20% accuracy-related penalty on any portion of an underpayment of tax due to negligence or substantial understatement of income tax.

    Holding

    The Tax Court held that the IRS’s notice of deficiency complied with section 6751(a) by including the 20% penalty as an alternative with a computation, albeit reduced to zero to avoid stacking with the 40% penalty. The court also held that the issue of compliance with section 6751(b)(1) was premature since no penalty had yet been assessed. Finally, the court sustained the 20% accuracy-related penalty under section 6662(a) on the basis of the Graevs’ substantial understatement of income tax.

    Reasoning

    The court reasoned that the notice of deficiency clearly informed the Graevs of the 20% penalty and its computation, satisfying section 6751(a). Regarding section 6751(b)(1), the court found that the statute requires written supervisory approval before the assessment is made, which had not occurred at the time of the case. The court rejected the Graevs’ argument that the lack of approval invalidated the penalty, citing that the statute does not specify a consequence for noncompliance and that the Graevs were not prejudiced by the lack of approval. On the merits of the 20% penalty, the court found that the Graevs had a substantial understatement of income tax due to disallowed charitable contribution deductions and that they failed to establish reasonable cause, substantial authority, or adequate disclosure to avoid the penalty.

    Disposition

    The court sustained the 20% accuracy-related penalty under section 6662(a) and entered a decision under Rule 155, reflecting the holdings in both Graev I and the current case.

    Significance/Impact

    This case is significant for clarifying the procedural requirements for penalty assessments under sections 6751(a) and 6751(b). It impacts IRS practices by emphasizing the necessity of written supervisory approval before assessment and the importance of including penalty computations in notices of deficiency. The decision also underscores the importance of taxpayers’ compliance with disclosure and substantiation requirements to avoid accuracy-related penalties. The case has been influential in subsequent litigation concerning the IRS’s procedural compliance with penalty assessments.

  • Lawrence G. Graev and Lorna Graev v. Commissioner of Internal Revenue, 140 T.C. 377 (2013): Conditional Charitable Contribution Deductions

    Lawrence G. Graev and Lorna Graev v. Commissioner of Internal Revenue, 140 T. C. 377 (U. S. Tax Court 2013)

    In Graev v. Commissioner, the U. S. Tax Court disallowed the taxpayers’ charitable contribution deductions for a facade easement and cash donation to a charity, ruling that the contributions were conditional and thus non-deductible. The court found that the charity’s promise to return the contributions if the IRS disallowed the deductions created a non-negligible risk that the charity would not retain the donations, violating the requirement that charitable gifts be unconditional to qualify for a tax deduction. This decision highlights the importance of ensuring that charitable contributions are not contingent on favorable tax treatment.

    Parties

    Lawrence G. Graev and Lorna Graev, Petitioners, v. Commissioner of Internal Revenue, Respondent.

    Facts

    In 2004, Lawrence Graev purchased a property in a historic district in New York City for $4. 3 million. The property was listed on the National Register of Historic Places. Graev donated a facade conservation easement and cash to the National Architectural Trust (NAT), a charitable organization dedicated to preserving historic architecture. Before the donation, NAT issued a side letter to Graev promising to refund the cash donation and remove the easement if the IRS disallowed the charitable contribution deductions. Graev claimed deductions for the cash and easement donations on his 2004 and 2005 tax returns. The IRS disallowed these deductions, asserting that the side letter made the contributions conditional gifts, not deductible under I. R. C. sec. 170.

    Procedural History

    The IRS issued a notice of deficiency to Graev for the tax years 2004 and 2005, disallowing the charitable contribution deductions and determining deficiencies in tax. Graev petitioned the U. S. Tax Court for redetermination of the deficiencies. The case was submitted fully stipulated under Tax Court Rule 122, reflecting the parties’ agreement that the relevant facts could be presented without a trial. The Tax Court held that the Graevs’ charitable contribution deductions were not allowed because the possibility that the deductions would be disallowed and the contributions returned was not “so remote as to be negligible. “

    Issue(s)

    Whether the Graevs’ charitable contribution deductions for the facade easement and cash donation to NAT should be disallowed because the contributions were conditional gifts under I. R. C. sec. 170 and the corresponding Treasury Regulations?

    Rule(s) of Law

    Under I. R. C. sec. 170 and 26 C. F. R. secs. 1. 170A-1(e), 1. 170A-7(a)(3), and 1. 170A-14(g)(3), a charitable contribution deduction is allowable only if the gift is unconditional. If an interest in property passes to charity on the date of the gift but could be defeated by a subsequent event, the deduction is allowable only if the possibility of the event’s occurrence is “so remote as to be negligible. “

    Holding

    The Tax Court held that the Graevs’ charitable contribution deductions for the facade easement and cash donation were not allowable because the contributions were conditional gifts. The court determined that the possibility that the IRS would disallow the deductions and NAT would return the contributions was not “so remote as to be negligible,” thus failing to meet the requirements of the applicable regulations.

    Reasoning

    The court analyzed the side letter’s impact on the contributions, concluding that it created a non-negligible risk that the contributions would be returned if the deductions were disallowed. The court rejected the taxpayers’ arguments that the side letter was unenforceable under New York law and a nullity under federal tax law, finding that NAT had the ability to honor its promises to return the contributions. The court considered the increased IRS scrutiny of easement contributions, as evidenced by IRS Notice 2004-41, and the taxpayers’ awareness of this scrutiny as factors indicating that the risk of disallowance was not negligible. The court also noted that the side letter was an inducing cause for Graev to make the contributions, further supporting its conclusion that the contributions were conditional.

    Disposition

    The Tax Court disallowed the Graevs’ charitable contribution deductions for the facade easement and cash donation, upholding the IRS’s determination of deficiencies in tax for the years 2004 and 2005.

    Significance/Impact

    The Graev decision underscores the importance of ensuring that charitable contributions are not contingent on favorable tax treatment to qualify for a deduction. It highlights the need for donors and charities to structure their transactions to avoid creating non-negligible risks of the charity’s divestment of the donated property. The case has implications for the validity of “comfort letters” or side agreements in charitable giving, as such agreements may render contributions conditional and non-deductible. Subsequent cases have cited Graev in analyzing the permissibility of conditional charitable contributions, reinforcing its doctrinal importance in the area of tax law concerning charitable deductions.

  • Graev v. Commissioner, 140 T.C. No. 17 (2013): Conditional Gifts and Charitable Contribution Deductions

    Graev v. Commissioner, 140 T. C. No. 17 (U. S. Tax Court 2013)

    In Graev v. Commissioner, the U. S. Tax Court ruled that charitable contributions of cash and a facade conservation easement were not deductible due to a side letter that made the gifts conditional. The court held that the possibility of the IRS disallowing the deductions and the charity returning the contributions was not negligible, thus violating IRS regulations. This decision underscores the importance of ensuring charitable gifts are unconditional to qualify for tax deductions, impacting how donors and charities structure such transactions.

    Parties

    Lawrence G. Graev and Lorna Graev, petitioners, challenged the Commissioner of Internal Revenue, respondent, in the U. S. Tax Court, seeking a redetermination of deficiencies in tax and penalties assessed for the tax years 2004 and 2005.

    Facts

    Lawrence Graev contributed cash and a facade conservation easement to the National Architectural Trust (NAT), a charitable organization. Before the contribution, NAT, at Graev’s request, issued a side letter promising to refund the cash contribution and remove the easement from the property’s title if the IRS disallowed the charitable contribution deductions. Graev claimed deductions for the cash and easement donations on his tax returns. The IRS contended that the side letter made these contributions conditional gifts, which are not deductible under I. R. C. § 170 because the likelihood of divestiture was not negligible.

    Procedural History

    The IRS issued a notice of deficiency to the Graevs, disallowing their charitable contribution deductions for 2004 and 2005 and determining additional tax liabilities and penalties. The Graevs petitioned the U. S. Tax Court for a redetermination of these deficiencies and penalties. The case was submitted fully stipulated under Tax Court Rule 122, with the burden of proof remaining on the taxpayer. The Tax Court considered only the conditional gift issue at this stage.

    Issue(s)

    Whether the deductions for the Graevs’ charitable contributions of cash and a facade conservation easement to NAT should be disallowed because they were conditional gifts?

    Rule(s) of Law

    Under I. R. C. § 170 and 26 C. F. R. §§ 1. 170A-1(e), 1. 170A-7(a)(3), and 1. 170A-14(g)(3), a charitable contribution deduction is not allowed if, at the time of the gift, the possibility that the charitable interest would be defeated by a subsequent event is not “so remote as to be negligible. “

    Holding

    The Tax Court held that the Graevs’ charitable contribution deductions were not allowed because the possibility that the IRS would disallow the deductions and NAT would return the contributions was not “so remote as to be negligible,” as required by the applicable regulations.

    Reasoning

    The court’s reasoning focused on the non-negligible risk of IRS disallowance due to heightened scrutiny of easement contributions, as evidenced by IRS Notice 2004-41 and the Graevs’ own awareness of this risk. The court found that the side letter issued by NAT, promising to refund the cash and remove the easement in case of disallowance, created a condition that could defeat NAT’s interest in the contributions. The court rejected the Graevs’ arguments that the side letter was unenforceable under New York law and a nullity under federal tax law, finding that NAT had the ability to honor its promise to abandon the easement as per the recorded deed. The court also emphasized that the possibility of NAT voluntarily returning the contributions was non-negligible, given NAT’s promises and the context of its solicitations.

    Disposition

    The Tax Court disallowed the Graevs’ charitable contribution deductions for the cash and easement contributions and upheld the IRS’s determination of deficiencies in tax for the years 2004 and 2005.

    Significance/Impact

    The decision in Graev v. Commissioner has significant implications for the structuring of charitable contributions, particularly those involving conservation easements. It reaffirms the IRS’s position that conditional gifts, where the charity’s interest may be defeated by a non-negligible subsequent event, are not deductible. This ruling may lead to increased scrutiny of side letters and similar arrangements in charitable giving, affecting how donors and charities approach such transactions. The case also highlights the importance of ensuring that charitable contributions are unconditional to qualify for tax deductions, impacting future tax planning and compliance efforts.