Tax Court Upholds Ruling on Deductions for Conservative Easements

The U.S. tax court recently upheld penalties assessed against a Georgia partnership for a tax deduction related to a conservation easement. Anyone who received tax benefits as a result of a conservative easement donation must be aware of this recent court decision.

At issue in the court case was a law which specifies that in order for an IRS employee to assess a fee or fine, they must first obtain written approval from their immediate supervisor (or another higher-level official designated by the Secretary of the Treasury).

Court finds that the IRS complied with rules under section 6751 in assessing penalty.

The ruling, which was the result of a divided opinion, determined that the firm was notified appropriately, despite an initial communication that lacked the required supervisory approval.

The case against Belair Woods, LLC, was for a $4.778 million donation it made to the Georgia Land Trust and claimed as a tax-deductible charitable donation.

The IRS informed investors in a 2016 notice that they would be looking carefully at these donations after discovering cases of deductions being taken for conservation easement donations that were more than the value of the actual property.

At issue in this case, however, was whether the IRS followed its rules requiring an IRS employee who identifies potential tax deduction irregularities to seek a supervisor’s approval before assessing a penalty or fine.

Belair Woods was first notified in 2012 that the IRS was examining the conservation easement deduction. But the IRS argued that this initial contact was only a summary report and invitation to Blair Woods to open a discussion on the matter, not an official notification of a penalty and therefore not requiring supervisory approval.

Judge Albert G. Lauber, along with seven others who joined him in the majority opinion, agreed that a subsequent IRS communication to Blair Woods in 2015 was actually the first official notification of a penalty, and it met the requirements for supervisor approval. The ruling was split almost evenly though, with several judges disagreeing that the IRS met the requirements because they failed to obtain necessary supervisor approval on the 2012 communication.

Section 6751 was originally enacted during the IRS Restructuring and Reform Act of 1998. But it did not receive much attention in the courts until a 2017 ruling that clarified the requirements for written approval to assess a penalty. This ruling found that the supervisor’s approval must come at the time the IRS sends notification of deficiency or at the time they assert the penalty.

In addition, the case specified that the burden is on the IRS to prove compliance with the written approval requirement.

In a December 2019 statement following the court’s ruling, the IRS confirmed that it will continue to pursue those who use a conservation easement to claim a tax benefit in situations in which that land valuation is far above the actual value of the easement donation.

If you have questions about conservation easement donations you made in the past for which you claimed a tax deduction or about how to provide the IRS necessary compliance documents prior to the April 15 deadline, call Cantley Dietrich today.