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Johnson v. Commissioner (T.C. Memo. 2020-79)

On June 8, 2020, the Tax Court issued a Memorandum Opinion in the case of Johnson v. Commissioner (T.C. Memo. 2020-79). The issues before the court in Johnson were (1) whether the petitioner is entitled to deduct certain expenses on his Schedules F (Profit or Loss from Farming) for the years in issue; and (2) the valuation of a conservation easement.

Driving Between Two Places of Business Deductible (if One is Not Your House)

Generally, expenses that a taxpayer incurs in commuting between his home and his place of business are personal and nondeductible. See Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946); Heuer v. Commissioner, 32 T.C. 947, 951 (1959), aff’d per curiam, 283 F.2d 865 (5th Cir. 1960); Treas. Reg. § 1.162-2(e); Treas. Reg. § 1.262-1(b)(5). However, expenses incurred for traveling between two or more places of business may be deductible as ordinary and necessary business expenses under IRC § 162, but only if incurred for business reasons. Steinhort v. Commissioner, 335 F.2d 496, 503-04 (5th Cir. 1964), aff’g and remanding T.C. Memo. 1962-233; Heuer v. Commissioner, 32 T.C. at 953; Fausner v. Commissioner, 55 T.C. 620 (1971).

If, however, one of the places of business is the taxpayer’s residence, the residence must be the taxpayer’s principal place of business for the trade or business the taxpayer conducts at those other locations. See Strohmaier v. Commissioner, 113 T.C. 106 (1999); Curphey v. Commissioner, 73 T.C. 766, 777-78 (1980); Beale v. Commissioner, T.C. Memo. 2000-158, *5-*6. A taxpayer may not deduct expenses for traveling between his residence and his employment merely because he conducted a second business at home. Mazzotta v. Commissioner, 57 T.C. 427, 429 (1971), aff’d, 467 F.2d 943 (2d Cir. 1972).

The Mullet Deductions – Business in the Front (Deductible); Party in the Back (Not so Much)

If property is used for both business and other purposes, then the portion of the property’s cost that is attributable to the business use is eligible for expensing under IRC § 179, but only if more than 50% of the property’s use is for business purposes. See Treas. Reg. § 1.179-1(d). Likewise, to claim a depreciation deduction under IRC § 280F, the taxpayer must also prove that the business use exceeds 50%. See IRC § 280F(b); Whalley v. Commissioner, T.C. Memo. 1996-533, *9. Under both IRC § 179 and IRC § 280F, taxpayers must also meet the heightened substantiation requirements of IRC § 274(d) to prove the business use of property. See Singh v. Commissioner, T.C. Memo. 2009-36, *1.

Justifying the Mullet Deductions

A taxpayer may meet the heightened substantiation requirements of IRC § 274(d) to prove the business use of property by providing adequate records or statements (written or oral) and other corroborative evidence showing that he incurred the expense. Treas. Reg. § 1.274-5T(c)(2)(i) (adequate records); Treas. Reg. § 1.274-5T(c)(3)(i) (corroborative evidence). Adequate records include an account book, a log, or similar record and documentary evidence which together are sufficient to establish each element with respect to an expenditure. Treas. Reg. § 1.274-5T(c)(2)(i).

Without adequate records, a taxpayer may still substantiate expenses with sufficiently detailed written or oral statements and other corroborative evidence showing that he incurred the expense. Treas. Reg. § 1.274-5T(c)(3)(i); see also Freeman v. Commissioner, T.C. Memo. 2009-213, *6-*7. A contemporaneous log is not technically required, but corroborative evidence to support a taxpayer’s reconstruction must have a “high degree of probative value” so as to “elevate such statement” to the level of credibility of a contemporaneous record. Treas. Reg. § 1.274-5T(c)(1); Freeman, T.C. Memo. 2009-213 at *7.

The Tax Court notes that without appropriate substantiation under IRC § 274, it will not be able determine which expenses were incurred for a business purpose as required under IRC § 162. See Rutz v. Commissioner, 66 T.C. 879, 882-886 (1976); Longino v. Commissioner, T.C. Memo. 2013-80, aff’d, 593 F. App’x 965 (11th Cir. 2014); Olagunju v. Commissioner, T.C. Memo. 2012-119. Similarly, without appropriate substantiation under IRC § 274, the Tax Court will not be able to determine whether the business use of a piece of property exceeded 50% of its total use for purposes of the IRC § 179 and IRC § 280F (mullet) deductions for expensing and depreciation, respectively. See Barmes v. Commissioner, T.C. Memo. 2000-254, *4. Thus, the Tax Court tells us, allowing such deductions without evidence that would allow us to make these determinations would amount to “unguided largesse.”* See Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

*Author’s Note: I know absolutely nothing about Judge John R. Brown, other than he authored the opinion in the 1957 case of Williams v. United States, which affirmed a lower court decision authored by a prominent Louisiana jurist named Herbert W. Christenberry, who I also know nothing about, other than his penchant for beignets and dedication to the humble chicory root. Of this one thing, I am sure. Both men wore monocles, and as one or the other penned the phrase “unguided largesse,” said monocle was adjusted with pride and satisfaction. Bully! the judge thought to himself. That much I do know.

Valuing the Conservation Easement

Farmer Johnson, Theron to his friends, and the petitioner to you and me, heard about a newfangled thingamajiggy called a “conservation easement” from one of his sharecroppers one day as the two were threshing wheat and shooting the shit, as farmers and sharecroppers are wont to do. Farmer Johnson was intrigued, laid down his scythe, and asked to hear more about this new invention that would turn his unplowable lands, which were home to the rare leopard frog (not making it up), into gold. The sharecropper obliged.

In general, a taxpayer may not claim a deduction for a charitable contribution of property consisting of less than the taxpayer’s entire interest in the property. See IRC § 170(f)(3). A taxpayer may deduct the value of a contribution of a partial interest in property, however, if the contribution constitutes a “qualified conservation contribution.” See IRC § 170(f)(3)(B)(iii).

The IRS, to the shock of everyone involved, conceded that the easement in the Johnson case was a “qualified conservation contribution,” but the IRS did dispute its value and therefore the amount of Farmer Johnson’s deduction. The parties agreed that the easement’s fair market value should be determined by calculating the difference between the ranch’s fair market value before and after petitioner granted the easement. See Treas. Reg. § 1.170A-14(h)(3)(i); see also Symington v. Commissioner, 87 T.C. 892, 895 (1986); Hilborn v. Commissioner, 85 T.C. 677, 688-690 (1985).

Both parties offered experts, who offered divergent opinions as to the FMV of the easement. The Tax Court then explained its methodology of evaluating the qualifications of the expert and the other evidence on record, determining how best to weigh the experts’ conclusions based on the factors they considered in reaching their conclusions, and finally how the Tax Court is like a honey badger, and if they don’t like the numbers that the “experts” come up with, they’ll just make one up themselves. Tax Court doesn’t care. Parker v. Commissioner, 86 T.C. 547, 561 (1986) (evaluation of qualifications of experts); Casey v. Commissioner, 38 T.C. 357, 381 (1962) (weighing estimates by examining factors used to reach conclusions); Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938) (Tax Court-qua-honey badger); Parker, 86 T.C. at 561-62 (same); Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285 (what to do when the so-called “experts” couldn’t agree about the value of a five-dollar bill).

Highest and Best Use of Property – A Starting Point

In deciding the easement’s fair market value (or the FMV of any property, for that matter), the Tax Court first took into account the property’s highest and best use. See Symington, 87 T.C. at 896; Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986); Treas. Reg. § 1.170A-14(h)(3)(i); Treas. Reg. § 1.170A-14(h)(3)(ii). A property’s highest and best use also is the highest and most profitable use for which it is adaptable and needed or likely to be needed in the reasonably near future. Olson v. United States, 292 U.S. 246, 255 (1934); Hilborn, 85 T.C. at 689.

Comparable Sales as a Metric

“Comparables,” that is to say examples of comparable sales of properties similar to but not exactly alike to the property at issue, may be used as a metric to evaluate the FMV of a property with regard to a conservation easement. See Griffin v. Commissioner, T.C. Memo. 1989-130, aff’d, 911 F.2d 1124 (5th Cir. 1990); Losch v. Commissioner, T.C. Memo. 1988-230. The validity of this metric depends on the choice of “comparables” and, as importantly, the expert’s adjustments to the valuation of the property at issue to account for differences between the comparable and the property itself. Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19-20 (1979); Talkington v. Commissioner, T.C. Memo. 1998-412, *9; Estate of Spruill v. Commissioner, 88 T.C. 1197, 1229, n.24 (1987); Butler v. Commissioner, T.C. Memo. 2012-72, *16.

If the expert believes that the subject property is more valuable, he will adjust the value higher, as appropriate. The opposite is true as well, if the comparable is “superior in some fashion” to the subject property. Talkington, *9, n.8. Because of the subjective nature of this analysis, the Tax Court is skeptical of relying on it as the sole basis for establishing the underlying property’s FMV. See Crimi v. Commissioner, T.C. Memo. 2013-51, at *54-*58.

(T.C. Memo. 2020-79) Johnson v. Commissioner

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