Two recent tax court decisions highlight the need for compliance-oriented planning in taxation matters. These two cases illustrate that small details make all the difference — often, all the clever planning in the world fails when you overlook an important rule.
As we cautioned in previous articles about the dangers associated with entering into syndicated conservation easement transactions (CE) or microcaptive insurance transactions (captives) in our current enforcement environment, tax planning is somewhat of a race between clever ideas raised by bright people and regulators seeking to anticipate and head off the planners. These two decisions in the last month point out the importance of compliance planning.
Tax Court Requires Specificity in Planning
In Carter v. Commissioner, the 2011 donation of 500 acres of coastal Georgia to a land trust failed because the land was not preserved in perpetuity. Without commenting on whether the land trust was a charity capable of receiving the land as part of its charitable purpose, the court focused its analysis on the retained rights of the donor partnership.
Dover Hall Plantation, LLC (Dover), donated 500 acres to the North American Land Trust (NALT), but retained the right to build 11 single-family dwellings in specified building areas, the locations of which were to be determined and subject to NALT’s approval.
Despite Dover’s argument that the building areas were just for family usage, neither the easement deed nor valuation report of the property restricted the building of residences to donors and their family. Contrary to assumption, the court (and the code) took no issue with the inclusion of Dover’s development rights. The problem lay with the lack of specificity.
The court cited case law that retention of limited development rights in specified portions of property need not preclude the donor from claiming a deduction for the contribution. However, under similar case law, if the boundaries are not specifically fixed at the outset, retained retention rights may violate the requirements under IRC § 170(h).
At its heart, the lack of specificity in the easement deed led to the disallowance of the contribution. The court held that indeterminate boundaries meant that there could be no defined parcel of property that is subject to a perpetual use restriction.
This seems like a pretty harsh outcome for failing to specify the portions of land for development. The tax court has held similarly in cases where donors have attempted to reserve the right to “plug and play” with adjoining and contiguous parcels of land in a donation. Perhaps a better solution would have been to donate 22 fewer acres with no reservation of rights and develop the non-donated property however they wanted.
The only bright spot in the decision was the determination that the IRS had failed to follow its own penalty process. The revenue agent sent the penalty letters without first obtaining supervisory approval. Specificity and following the instructions cuts both ways.
If you have participated in a CE or captive and are concerned that the specifics of your transaction may have holes and you want a review, contact Cantley Dietrich today. We will do a compliance review of your documentation and find out what your options may be in light of these recent court decisions.