Opinion
32930-21
08-27-2024
STONE LOCK DISTRICT HOLDINGS INVESTORS, LLC, THE CORDISH FAMILY I, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler Judge.
This case is calendared for trial at a special trial session of the Court, beginning on September 16, 2024, in Dallas, Texas. On May 28, 2024, petitioner filed a Motion in Limine to Exclude Extrinsic Evidence Related to Donation Agreement (Motion in Limine), along with a Declaration of Port Telles in support thereof. On July 1, 2024, respondent filed his Objection to the Motion in Limine, along with a Declaration of Jennifer Cusmir in support thereof. On July 19, 2024, petitioner filed its Reply to Objection to Motion in Limine.
Having considered the parties arguments, the Court is now prepared to rule on petitioner's Motion in Limine, which we deny for the reasons set forth below.
Background
I. Summary of facts
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding petitioner's Motion in Limine and not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd, 17 F.3d 965 (7th Cir. 1994).
The Stone Lock Development (Stone Lock) comprises 200 acres of undeveloped land located on the north and south side of the Port of Sacramento Deep Water Channel and is located within the City of West Sacramento, California. Following a nationwide selection process, the West Sacramento Redevelopment Agency (Agency) selected the Cordish Companies as the master developer for Stone Lock in 2007, whereafter the parties entered into an exclusive negotiating agreement. In March of 2011, the Agency entered into an Option Agreement (Option) with the Sacramento-Yolo Port District (Port) that would enable the Port to purchase Stone Lock. In part, a condition for executing the Option was that the Port and the City enter into a development agreement. On January 16, 2012, the Port executed an Assignment Agreement whereby the Port assigned its contractual rights under the Option to Stone Lock District Holdings Investors, LLC (SLDH), an affiliate of the Cordish Companies. Then, the State of California dissolved local redevelopment agencies, which included the Agency, and the City became the successor agency, subject to an oversight board.
This empowered Martin Tuttle, as the CEO of the Port of West Sacramento, now the successor agency, to terminate the Assignment Agreement, an action he took on October 6, 2014. In his written notice to SLDH of this action, Mr. Tuttle demanded that SLDH reassign the Option back to the Port. The parties entered into a Standstill Agreement whereby the contractual rights under the Option and Assignment Agreement were tolled for a period subsequently extended to March 2, 2015, as the parties explored whether SLDH could donate the Option beyond the agreed-to standstill period. In the interim, SLDH and the Port executed a "Donation Agreement." Pursuant to the Donation Agreement, "SLDH agreed to donate the Option to the Port, provided certain conditions were satisfied by the Port." The relevant conditions here reside in the text of Article 8.1 and 8.2, which provide for a mutual release of claims between the parties.
On December 8, 2015, the Port executed the Donation Agreement Closing Certificate, completing SLDH's donation of the Option to the Port. Subsequently, SLDH claimed on its Form 1065, U.S. Return of Partnership Income, a charitable contribution deduction for its donation of the Option to the Port on the basis of the appraisal it received. The Donation Agreement required the Port to submit to SLDH a completed Form 8283, Noncash Charitable Contributions. On Form 8283, SLDH attached an appraisal from Ryan Hlubb that placed the fair market value of the undeveloped land comprising Stone Lock at $57,590,000.
On October 18, 2021, respondent issued petitioner a notice of final partnership administrative adjustment (FPAA), disallowing a charitable contribution deduction of $57,214,617, claimed by SLDH, for its donation of the Option to the Port. SLDH is a limited liability company (LLC) treated as a partnership under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71, for federal income tax purposes; petitioner, The Cordish Family I, LLC, is its tax matters partner.
Before its repeal TEFRA governed the tax treatment and audit procedures for many partnerships, including SLDH.
In its Petition filed December 6, 2021, petitioner disputes respondent's adjustment of its claimed charitable contribution deduction for taxable year 2015.
Petitioner reported a charitable contribution deduction totaling $57,214,617, a sum petitioner contends reflects the fair market value of the Option it donated to the Port. Respondent disallowed the claimed charitable contribution deduction on the basis that the "deduction of $57,214,617 shown on [petitioner's] return is not allowed because the fair market value of the property rights did not exceed the amount paid for the property [and accordingly was reduced by the same sum]." Respondent also asserted that SLDH is liable for a 40% accuracy-related penalty under section 6662(a) and (h) for a gross valuation misstatement.
On February 4, 2022, respondent filed his Answer and on May 1, 2024, he filed a Motion for Leave to File First Amendment to Answer, which this Court granted on May 3, 2024. In his First Amendment to Answer, respondent raised alternative legal theories as the basis for denying the claimed charitable contribution deduction. Namely, "that the purported non-cash charitable contribution does not qualify as a charitable contribution pursuant to I.R.C. § 170, but, instead, was the culmination of an arms-length negotiation to resolve a legal dispute and lacked the requisite charitable intent" under the stated provision of the Code.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times.
Respondent contends that amending his initial Answer to raise "alternative legal theories" is necessitated by information he uncovered through review of "the extensive discovery provided by petitioner and . . . his own investigation." To that end, respondent argues that SLDH lacked charitable or donative intent regarding its charitable contribution and "submits that as consideration for entering into the alleged Donation Agreement, the purported donee/municipality agreed to release and discharge petitioner from all claims, damages, compensation, and demands related to the matter."
II. Legal Background
A. Parol Evidence Rule
The parol evidence rule provides for "in the absence of fraud, duress, mutual mistake, or something of the kind, the exclusion of extrinsic evidence, oral or written, where the parties have reduced their agreement to an integrated writing." Estate of Craft v. Commissioner, 68 T.C. 249, 259 (1977), aff'd, 608 F.2d 240 (5th Cir. 1979) (quoting 4 Williston, Contracts, sec. 631, p. 949 (3d ed. 1961)). Further, "it is well recognized that . . . the rule is one of substantive law and not one of evidence." Id. at 262. Moreover, "[i]n the field of taxation, administrators of the laws and the courts are concerned with substance and realities, and formal written documents are not rigidly binding." Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 255 (1939).
In many cases before this Court, either petitioner or respondent has attempted to introduce extrinsic evidence relating to a disputed will, trust, or contract, and the other party has objected to the admissibility of such evidence based on the parol evidence rule. In a number of these cases, however, we have held that, because respondent was not a party to the instrument involved, neither he nor petitioner may successfully rely on the rule to exclude extrinsic evidence offered by the other. Coven v. Commissioner, 66 T.C. 295, 306 (1976); Graphic Press, Inc. v. Commissioner, 60 T.C. 674, 681 (1973), rev'd on another issue 523 F.2d 585 (9th Cir. 1975); Seay v. Commissioner, 58 T.C. 32, 39 (1972); Estate of O'Brien v. Commissioner, 57 T.C. 27, 30-31 (1971); Brown v. Commissioner, 52 T.C. 50, 60 (1969); Schmitz v. Commissioner, 51 T.C. 306, 317 (1968), aff'd sub nom. Throndson v. Commissioner, 457 F.2d 1022 (9th Cir. 1972); Poole v. Commissioner, 46 T.C. 392, 406 (1966); Nichols v. Commissioner, 43 T.C. 135, 145 (1964); Lacy v. Commissioner, 39 T.C. 1100, 1104 (1963), aff'd, 341 F.2d 54 (10th Cir. 1965); Estate of Holtz v. Commissioner, 38 T.C. 37, 41 (1962); Harrison v. Commissioner, 17 T.C. 1350, 1357 (1952); Haverty Realty & Investment Co. v. Commissioner, 3 T.C. 161, 167 (1944).
In a different line of cases, we have held that we should look to the relevant state's parol evidence rule in deciding whether or not to exclude extrinsic evidence that bears on the disputed rights and interests under the instrument. In the State of California, the parol evidence rule is embodied in Code of Civil Procedure section 1856, which states that "[t]erms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement." Cal. Civ. Proc. Code § 1856(a) (West 2014).
When past cases before us were not concerned with ownership of the property interest but with the true reasons for and behind its receipt by the owner, we advised that our continued liberal admission of extrinsic evidence is required in order that we base our decisions on the substance of the documents before us rather than their form. E.g., Graphic Press, Inc. v. Commissioner, supra; Seay v. Commissioner, supra; Schmitz v. Commissioner, supra; Nichols v. Commissioner, supra; Lacy v. Commissioner, supra.
III. Summary of the Parties Arguments
In the Motion in Limine, petitioner makes two central arguments. First, petitioner argues that precedent of this Court instructs that the parol evidence rule adopted by the State of California guide our determination of whether to admit the extrinsic evidence sought by respondent. And second, that following this guidance counsels in favor of excluding the extrinsic evidence proffered by respondent on admissibility grounds. That is, since the Donation Agreement constitutes an unambiguous, fully-integrated contract, the parol evidence rule as adopted by California operates as a bar to the admission of extrinsic evidence-that is, evidence outside of the plain language of the text-and, so the argument runs, respondent cannot defeat charitable intent by reference to evidence beyond the four corners of the Donation Agreement. In short, petitioner contends that, since the Donation Agreement constituted an integrated writing, the parol evidence rule operates to preclude respondent from introducing extrinsic evidence that might bear upon the SLDH's charitable intent.
In his Objection to Motion in Limine, respondent counters that petitioner's assertion that this Court can look no further than the four corners of the Donation Agreement to determine an essential element of section 170 constitutes a "misapplication of the parol evidence rule." In place of California's parol evidence rule, respondent avers that the guiding standard for donative intent is section 170, the related Treasury Regulations, and precedential tax court rulings. In so doing, respondent contends that, notwithstanding whether the evidence respondent seeks to have admitted is extrinsic to the Donative Agreement, said evidence is admissible because it speaks to whether petitioner's agreement satisfies an essential element of section 170; namely, the charitable-intent requirement. Respondent argues that whether the agreement was structured as a quid pro quo, and therefore fails to meet the requirements of the statute, is a question of fact for the Court to determine.
Respondent argues that petitioner lacked the requisite donative intent under section 170(c) because petitioner's charitable contribution was structured as a quid pro quo: in exchange for its donation of the Option to the Port, SLDH was released from potential liability arising out of prior contractual arrangements. Accordingly, respondent asserts that "the donation agreement is more accurately a release by the petitioner/donor and respondent/donee of their respective claims against each other."
IV. Analysis
A. Parol Evidence Rule
The question we must address here is whether the parol evidence rule operates as an evidentiary bar to what respondent can introduce at trial in order to show that the Donation Agreement was structured as a quid pro quo and therefore lacked donative intent under section 170.
In cases before this Court concerned not "with ownership of the property interest but with the true reasons for and behind its receipt by the owner," Estate of Craft v. Commissioner, 68 T.C. 249, 263 (1977), the prevailing wisdom has been that "because respondent is not a party to the instrument involved, neither he nor petitioner may successfully rely on the rule to exclude extrinsic evidence offered by the other." Id. at 260. Since the line of cases where the Court has deviated from this approach predominately falls in the context of interpreting wills and trusts, we think the traditional approach is more appropriate in the present case. Id. Further, this approach squares with the historical thrust behind the parol evidence rule: "to protect the rights of one of the parties to the written instrument who is seeking to uphold the instrument" against the other parties thereto. Id. Here, the IRS is not a party to the contract and, accordingly, the rule should not bar him from introducing extrinsic evidence at trial to prove an essential requirement of petitioner's claimed deduction.
B. Quid Pro Quo "The sine qua non of a charitable contribution is a transfer of money or property without adequate consideration." United States v. Am. Bar Endowment, 477 U.S. 105, 118 (1986). If a transaction with a charity "is structured as a quid pro quo exchange"-i.e., if the taxpayer receives property or services equal in value to what he conveyed-there is no "contribution or gift" within the meaning of the statute. Hernandez v. Commissioner, 490 U.S. 680, 701-02 (1989).
In assessing whether a transaction constitutes a "quid pro quo exchange," we give most weight to the external features of the transaction, avoiding imprecise inquiries into taxpayers' subjective motivations. See id. at 690-91; Christiansen v. Commissioner, 843 F.2d 418, 420 (10th Cir. 1988). "If it is understood that the property will not pass to the charitable recipient unless the taxpayer receives a specific benefit, and if the taxpayer cannot garner that benefit unless he makes the required 'contribution,' the transfer does not qualify the taxpayer for a deduction under section 170." Costello v. Commissioner, T.C. Memo. 2015-87, 109 T.C.M. (CCH) 1441, 1448; see Christiansen v. Commissioner, 843 F.2d at 420-21; Graham v. Commissioner, 822 F.2d 844, 849 (9th Cir. 1987), aff'g 83 T.C. 575 (1984), aff'd sub nom. Hernandez v. Commissioner, 490 U.S. 680. However, if the benefit received is merely incidental to a charitable purpose, then a deduction is allowable. See McGrady v. Commissioner, T.C. Memo. 2016-233, 112 T.C.M. (CCH) 688, 694 (citing McLennan v. United States, 24 Cl. Ct. 102, 107 (1991), aff'd, 994 F.2d 839 (Fed. Cir. 1993)).
In determining the presence of a quid pro quo, the Supreme Court instructs that we should look to the structure of the agreement. See Hernandez v. Commissioner, 490 U.S. at 701-02 ("The relevant inquiry in determining whether a payment is a "contribution or gift" under § 170 is . . . whether the transaction in which the payment is involved is structured as a quid pro quo exchange."). While petitioner insists that this look-to-the-structure framework counsels in favor of excluding extrinsic evidence here, a peek under the hood of its assertion appears to suggest such a quid pro quo structure: "Article 8 of the Donation Agreement reflects the parties' mutual agreement that any claims against one another would be released and waived pursuant to the donation. This agreement does not reflect a 'requirement' that SLDH donate the Option to the Port, but rather it is a result of SLDH's decision to donate the Option." Regardless, the existence of a quid pro quo is a question of fact and the extrinsic evidence respondent seeks to admit will aid the Court in reaching that determination.
Upon due consideration of the foregoing, it is
ORDERED that petitioner's Motion in Limine to Exclude Extrinsic Evidence Related to Donation Agreement, filed on May 28, 2024, is denied.