Opinion
11676-20
03-18-2022
Mill Road 36 Henry, LLC, MR36 Manager, LLC, Tax Matters Partner Petitioner v. Commissioner of Internal Revenue Respondent
ORDER
David Gustafson Judge
Trial in this case will begin March 21, 2022. The principal issues in this case are (a) a deduction claimed by petitioner for a charitable contribution of a conservation easement on a portion of property that it allegedly owned, and (b) penalty on any understatement that would result from disallowing the deduction. In his pretrial memorandum filed March 7, 2022 (Doc. 46), the Commissioner raises multiple grounds for disallowing the deduction, many of them fact-intensive (involving issues such as valuation) and requiring expert witnesses and substantial trial time. If the Commissioner prevails as to the first issue (the deduction), then the second issue is penalty, the quantum of which may turn on the value of the easement alleged to have been contributed as compared to the claimed value of that easement. However, the Commissioner's pretrial memorandum also includes (at 18-19) this contention:
On August 28, 2015, Mill 125 and Benwood conveyed 39.68 acres of real property (including the CE Parcel) to an entity called "Mill Road 36 Henry LLC." That entity, however, did not exist until December 10, 2015, when Partnership was organized as a limited liability company under the laws of the state of Georgia. A limited liability company is formed by delivering articles of organization to Georgia's Secretary of State and is not formed until the articles of organization become effective. O.C.G.A. secs. 14-11-203; Milk v. Total Pay and HR Solutions, Inc., 634 S.E.2d 208 n.4 (Ga.App. 2006).
When property purports to be conveyed to an entity that does not exist, the property transfer is void.24/ Am. Jur. Deeds sec. 21; Davis v. Hollingsworth, 38 S.E. 827 (Ga. 1901) ("It is a well-established principle of law that a deed to an immediate estate in land made to a person not in esse is absolutely void."). Partnership never obtained legal title to the CE Parcel, yet through the easement deed purported to convey rights it did not own. TBL Licensing LLC v. Comm'r, 158 T.C. 1 (slip op. p.45) (2022). Because Partnership did not own the property, the easement to SCT is invalid as a matter of law.
24/ No state court in Georgia appears to have decided this question although an analysis of [sic] by the Court of Appeals of Minnesota is instructive. See Stone v. Jetmar Props., LLC, 733 N.W.2d 480, 486 (Minn.App. 2007) (analyzing that under state law, deeds cannot be delivered to nonexistent entities, whether natural or legal (recognizing that a deed cannot be delivered to a deceased grantee or to a later-formed corporation)).
To our perception, the petitioner's pretrial memorandum filed March 7, 2022 (Doc. 45), does not address this contention, either factually or legally.
If it is true as a matter of fact that Partnership did not exist at the time of the deed purporting to convey the underlying property to Partnership (see Stip. paras. 2, 19), and if it is correct as a matter of law that a deed purporting to convey property to a non-existent entity is void, then it would seem that this issue would be largely decisive of the case--without needing to reach questions of value or anything else. Under those assumptions, Partnership would not be entitled to a deduction (since it would not have owned the property from which it purported to convey the easement); and the amount of the claimed deduction (as compared to the zero value of the actual contribution) would have exceeded the threshold of a "gross valuation misstatement", thereby invoking the higher (40%) penalty. See sec. 6662(b)(3), (e)(1)(A), (h)(1). This would leave only petitioner's contention of "reasonable cause" under section 6664(c).
It would therefore seem logical to address this issue as early as possible. It is therefore
ORDERED that the parties shall be prepared to discuss this issue when the case is called on March 21, 2022, and to help the Court determine an orderly schedule for addressing this issue.