Opinion
20849-17
10-06-2023
ST. ANDREWS PLANTATION, LLC, JOSEPH N. MCDONOUGH, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
David Gustafson Judge
Now pending before the Court is a discovery motion (Doc. 107) filed by petitioner on August 24, 2023, which we rule on in this order, and a related motion (Doc. 113) filed by the Commissioner on September 29, 2023, as to which we here order a response. (Three other motions (Docs. 104, 114, 116) will be addressed in a separate order.)
Background
Deductions and FPAAs
Petitioner claimed charitable contribution deductions for conservation easements in tax years 2011 and 2012. The IRS examined petitioner's tax returns and in July 2017 issued for 2011 a Notice of Final Partnership Administrative Adjustment ("FPAA") that stated:
(1) Charitable Contributions - 50 percent
St. Andrews Plantation LLC claimed a non-cash charitable contribution deduction of $16,475,000.00 in 2011 for the donation of a conservation easement. It is determined that the claimed deduction is not allowed. It has not been established that the claimed deduction meets all of the requirements of Internal Revenue Code Section 170.
Alternatively, if it is determined that the requirements of Internal Revenue Code Section 170 have been satisfied for the claimed non-cash charitable contribution, it has not been established that the value of the contributed property interest exceeded $0.
(2) Accuracy-Related Penalty
It is determined that the underpayment of tax resulting from the adjustment of partnership items herein is attributable to a gross valuation misstatement, as defined by section 6662(h) of the Internal Revenue Code. Accordingly, a 40% addition to tax is imposed on such underpayment by Section 6662(a) and (h) of the Internal Revenue Code.The IRS issued for 2012 an FPAA that was virtually almost identical (but that recounted a claimed deduction of $10,923,500). Thus, both FPAAs addressed "requirements of . . . Section 170", valuation, and penalties.
Petition and answer
Petitioner challenged the FPAA by filing its petition (Doc. 1) in the Tax Court in October 2017. Later that month the Commissioner filed his answer (Doc. 4), asking "that respondent's determination, as set forth in the notice of deficiency, be in all respects approved." In May 2021 the Commissioner was granted leave to file an amended answer (Doc. 54), which stated additional alternative penalties:
If the Court finds that the 40 percent gross valuation misstatement penalty does not apply, however, the 20 percent section 6662(e) substantial valuation misstatement penalty applies. . . . Additionally, the section 6662(c) penalty for negligence or disregard of rules and regulations, and the section 6662(d) penalty for substantial understatement of tax apply.
Partial summary judgment granted and vacated
The parties filed motions (Docs. 17, 20) for partial summary judgment on various issues, which the Court granted in part in November 2020 (see Doc. 37). However, in Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), the Court of Appeals for the Eleventh Circuit (the Court of Appeals that would have venue for an appeal in this case) reversed our opinion in T.C. Memo. 2020-89. In the instant case, this required our vacating the previous grant of partial summary judgment. (See Doc. 87.) The Commissioner filed another motion for partial summary judgment (Doc. 61), which the Court denied (see Doc. 92).
Unspecified contentions
We held a telephone conference with counsel for both parties for the purpose of discussing a routine and schedule for further proceedings. Petitioner complained (and we sympathized) that the Commissioner had not disclosed all his contentions in support of his position. We noted that the above-quoted FPAAs upon which this case is based explain the reason for the IRS's disallowance of the charitable contribution deductions at issue in this case very summarily. (The FPAA cites section 170, which is well over 10,000 words long, to say nothing of the regulations promulgated thereunder; and the FPAA raises the issue of valuation.) We also noted that the Commissioner's answer gives no further light on his contentions under section 170. We stated our assumption that the vaguely worded FPAA might be a sufficient predicate for the Commissioner to rely in this case on any issue that arises under section 170, but we insisted that a litigant must disclose his contentions on a schedule that fairly permits his opponent to prepare for trial. We agreed with petitioner that its trial preparation had been stymied by the Commissioner's non-specificity.
Contention interrogatory
We therefore stated during the telephone conference that we would give the Commissioner a deadline for disclosing his intended contentions. As a means for creating an occasion for him to do so, we ordered (see Doc. 92) "that petitioner may propound to respondent a contention interrogatory asking the Commissioner to specify each and every specific issue on which the Commissioner may rely at trial to argue that the disallowance of the charitable contribution deduction should be sustained, to which the response shall be due April 28, 2023". We also set a deadline for formal discovery requests (due May 31, 2023, with responses due no later than June 30, 2023) and motions to compel (due July 28, 2023). Petitioner served an interrogatory that requested:
Please identify all factual and legal bases under Internal Revenue Code ("IRC") Section 170 for Respondent's position that Petitioner is not entitled to the charitable contribution deduction attributable to the Conservation Easement Donation as Petitioner claimed . . . .
On April 28, 2023, the Commissioner served this response:
The burden of proving entitlement to the claimed charitable donation deduction is on Petitioner, not on Respondent. [Citations omitted.]
Discovery in this case is ongoing, and without waiving the right to raise additional positions depending on discovery, Respondent notes that Petitioner has not established at least (1) that the appraisers for the Appraisals were qualified appraisers under I.R.C. § 170(f)(11)(E)(ii) and (iii) and Treas. Reg. § 1.170A-13(c)(5); (2) that the Appraisals were qualified appraisals under I.R.C. § 170(f)(11)(E)(i) and Treas. Reg. § 1.170A-13(c)(3); (3) that Form 8283 satisfied the requirements of Treas. Reg. § 1.170A-13(c)(4); and (4) that the amount of any allowable contributions is not reduced under I.R.C. § 170(e)(1) because the donated property was inventory.
Motion for protective order
On August 24, 2023, petitioner filed a motion (Doc. 107) for a protective order, asking us to "limit both discovery and trial to the four issues Respondent identified: qualified appraiser, [2] qualified appraisal, [3] the Forms 8283, and [4] inventory." On August 25, 2023, we issued an order that stated:
Petitioner has filed a motion (Doc. 107) for a protective order affecting discovery in this case. . . . The Commissioner's interrogatory response stated four issues (see Doc. 107, Ex. A), which would seem to define the universe of issues as to which discovery should be proceeding. (It would appear that the Commissioner is not pursuing the valuation issue stated in the FPAA.) It is
ORDERED that no later than September 15, 2023, the Commissioner shall file a response to the motion for protective order; and no later than September 29, 2023, petitioner shall file a reply.
The Commissioner filed a response (Doc. 112) that argues that petitioner's interrogatory (unlike the Court's order permitting the interrogatory) "does not ask Respondent to identify every issue for trial." (Emphasis added.) The Commissioner insists that in his interrogatory response he had "reserved the right to raise additional positions depending on discovery", and he observes "that discovery was ongoing in April and is presently ongoing with motions to compel due on September 29, 2023." The Commissioner thus seems to argue that he is free to raise additional (unspecified) issues, but he specifically defends his right to press only two additional issues not specified in his response-i.e., valuation of the easement donation and penalties (issues that had been expressly stated in the FPAAs).
Motion to compel
In his recent motion to compel (Doc. 113) the Commissioner alleges that he has served discovery requests seeking information from petitioner as to the valuation of the property and penalties (in particular, section 6751(b) compliance and "reasonable cause"). Petitioner evidently takes the position that valuation and penalties, not specified as issues in the Commissioner's interrogatory response, are not issues in the case and therefore and not proper subjects of discovery.
Discussion
Not every contention that the IRS will eventually make at trial in support of its determination must be elaborated in the IRS's FPAA. But at trial the Commissioner may not surprise the petitioner with his particular contentions. There are scores of contentions that the Commissioner might raise to defeat a deduction or to support a penalty. Does the Commissioner deny that the donation really happened? that petitioner owned the donated property? that the donee was a qualified charitable organization? To prepare for trial, the petitioner-who will generally bear the burden of proof-is entitled to know what is in dispute, and the Court is obliged and empowered to assure that the parties disclose their contentions on a reasonable schedule.
In this case, we determined that the proper schedule for pretrial preparation involved the Commissioner's disclosing his contentions by April 28, 2023, and we ordered that by that date he must respond to an interrogatory asking him to "specify each and every specific issue on which the Commissioner may rely at trial to argue that the disallowance of the charitable contribution deduction should be sustained". He served a response, but in it he claimed to reserve "the right to raise additional positions depending on discovery". He had no such "right" that he could reserve. He had instead an obligation to comply with the deadline in our order. Therefore, we agree in principle with the general proposition behind petitioner's motion: The Commissioner was obliged to state his contentions and should be precluded from raising new contentions that he did not state.
As to "disallowance of the charitable contribution deduction" (the specific subject of our order), the Commissioner's response listed four contentions and did not list valuation. As to penalty, the response was silent. Petitioner therefore asks us to preclude the Commissioner from conducting discovery on-and from making contentions at trial concerning-valuation, penalties, and any other issue not among the four listed in his discovery response.
As to valuation and penalties, we will not grant the motion but will allow the Commissioner to conduct discovery and maintain his contentions. Although his interrogatory response did not list penalties, that was a subject that, strictly speaking, was outside our order and outside petitioner's interrogatory, both of which addressed only the deduction. The Commissioner has not been coy about penalties. They were determined in the FPAA and were expressly pleaded in detail in his amended answer. They remain issues in this case.
As to valuation, though it does indeed relate to the "deduction" as to which we ordered him to disclose his contentions and therefore should have been listed in his response, this is an issue that has been front and center in this case from its inception. Valuation is expressly stated in the FPAA as grounds for disallowance of the deduction and as grounds for enhanced penalties. Valuation is expressly pleaded in the amended answer as grounds for enhanced penalties. Our order requiring the interrogatory response stated that the defect in the IRS's disclosures to date was "[a]s to issues other than valuation", and it is understandable if the Commissioner inferred that valuation was a given and need not be repeated.
We see no prejudice to petitioner from the Commissioner's being allowed to proceed on valuation and penalties and will deny petitioner's motion to that extent.
However, we deny the Commissioner's claimed general "right to raise additional positions depending on discovery". After the deadline we imposed, he has no such right. We will grant petitioner's motion and will preclude the Commissioner from raising (or conducting discovery on) issues other than valuation, penalties, and the four contentions listed in his interrogatory response (i.e., lack of qualified appraiser, lack of qualified appraisal, inadequate Form 8283, and inventory character).
As to the Commissioner's motion to compel, we have not yet heard from petitioner, but it does appear that, consistent with the position in its motion for protective order, petitioner has declined to produce information on valuation and penalties because petitioner considers those issues out of bounds. Because we are ordering here that those issues are properly in the case, petitioner's response to the motion (and, if appropriate, its revised discovery responses) should take this order into account.
To give effect to the foregoing, it is
ORDERED that the motion for protective order (Doc. 107) is denied in part, in that the Commissioner may maintain his positions as to valuation and penalties, which are issues properly in this case, but is otherwise granted, in that the Commissioner is precluded from conducting discovery on and pressing positions as to issues other than valuation, penalties, and the four contentions listed in his interrogatory response (i.e., lack of qualified appraiser, lack of qualified appraisal, inadequate Form 8283, and inventory character). It is further
ORDERED that, no later than November 3, 2023, petitioner shall file a response to the Commissioner's motion to compel (Doc. 113), and that, no later than November 17, 2023, the Commissioner shall file a reply.