Or, Taxes Are Forever

The battling Kaufmans are back, the First Circuit Court of Appeals weighing in on the façade on Rutland Square (see my blogpost “A Joy Forever”, 4/4/11). This is the ongoing saga of Gordo and Lorna. You can read all about it in Kaufman v. Commissioner, Case 11-2017, 7/19/12.

You’ll remember IRS got summary judgment because Lorna’s mortgagee insisted upon getting first dibs on casualty insurance proceeds and condemnation (eminent domain) awards. Gordo and Lorna yell “foul!”, and run up to Boston, where Judge Boudin, assisted by Judges Lipiz and Chief Lynch, lend a sympathetic ear.

Now judicial gymnastics are always fun, and Judge Boudin has a really good one here (I wonder what The Judge Who Writes Like a Human Being, The Great Dissenter in Tax Court, Judge Holmes, would call this contortion).

First, the offending language from the subordination agreement: “The Mortgagee/Lender and its assignees shall have a prior claim to all insurance proceeds as a result of any casualty, hazard or accident occurring to or about the Property and all proceeds of condemnation, and shall be entitled to same in preference to Grantee until the Mortgage is paid off and discharged, notwithstanding that the Mortgage is subordinate in priority to the [Preservation Restriction] Agreement.” Decision, at p. 6.

Now Judge Boudin: “Certainly the IRS has good reason to assure that the Kaufmans could not recapture the value of what they gave up by granting the easement in order to get the deduction; but the Kaufmans had no power to make the mortgage-holding bank give up its own protection against fire or condemnation and, more striking, no power to defeat tax liens that the city might use to reach the same insurance proceeds–tax liens being superior to most prior claims, including in Massachusetts the claims of the mortgage holder.” Decision, at pp. 11-12. (Citations and footnote omitted.)

Therefore, says Judge Boudin (and presumably his two non-dissenting colleagues), the essential paragraph g(6) “entitlement” language (26 C.F.R. § 1.170A-14(g)(6)(ii) should be limited to the grantor (taxpayer) getting money ahead of the 501(c)(3) grantee, not a mortgagee or anyone else.

So summary judgment is off the table. The appraisal and the Form 8283 are not “doomed”, although IRS would have it so; they substantially comply. Thus, back to Tax Court for a trial on the true diminution of value of the Rutland Square townhouse caused by the granting of the easement.

Lest Gordo and Lorna get too elated, Judge Boudin gives them a thorn: “When the Kaufmans donated the easement, their home was already subject to South End Landmark District rules that severely restrict the alterations that property owners can make to the exteriors of historic buildings in the neighborhood. These rules provide that ‘[a]ll proposed changes or alterations’ to ‘all elements of [the] facade, . . . the front yard . . . and the portions of roofs that are visible from public streets’ will be ‘subject to review by the local landmark district commission. S. End Landmark Dist., Standards and Criteria 2 (rev. Apr. 27, 1999).

“Under the Standards and Criteria, property owners of South End buildings have an obligation to retain and repair the original steps, stairs, railings, balustrades, balconies, entryways, transoms, sidelights, exterior walls, windows, roofs, and front-yard fences (along with certain ‘other features’); and, when the damaged elements are beyond repair, property owners may only replace them with elements that look like the originals. Id. at 2-6. Given these pre-existing legal obligations the Tax Court might well find on remand that the Kaufmans’ easement was worth little or nothing.” Decision, at pp. 21-22.

And the substantial understatement due to overvaluation penalties remain, says Judge Boudin, “(I)f taxpayers still do not get the message….” Decision, at p. 25.