Court Denies Conservation Easement Charitable Deduction
Plateau Holdings, LLC, Waterfall Development Manager, LLC, TMP v. Comm’r, T.C. Memo. 2020-93 | June 23, 2020 | Lauber, J. | Dkt. No. 12519-16
Short Summary: Plateau Holdings, LLC (Plateau), a partnership for federal tax purposes, donated conservation easements related to two parcels of real property in Tennessee to Foothills Land Conservancy (Conservancy), a tax-exempt organization. However, eight days before Plateau made this donation, an investor acquired, in an arm’s length transaction, a 98.99% indirect ownership interest in Plateau for less than $6 million. On its 2012 federal income tax return (Form 1065), Plateau claimed a roughly $25.5 million charitable contribution deduction for the donation.
After audit, the IRS issued Plateau’s TMP a notice of final partnership administrative adjustment (FPAA) that disallowed the charitable contribution for donation of real property and determined a 40% gross valuation misstatement penalty under Section 6662(e) and (h).
Key Issue: Whether Plateau: (1) may claim a charitable contribution deduction for the conservation easements; and (2) is liable for the gross valuation misstatement penalty.
- Because the easement deeds fail to satisfy the “protected in perpetuity” requirement (i.e., the Conservancy is not absolutely entitled to a proportionate share of proceeds in the event of a sale following extinguishment of the deed), Plateau is not entitled to a charitable contribution deduction. In addition, because Plateau substantially overvalued the donation of property rights to Conservancy, Plateau is liable for the gross valuation misstatement penalty.
Key Points of Law:
- Section 170(a)(1) allows a deduction for any charitable contribution made within the tax year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property when the gift is made. Reg. § 1.170A-1(c)(1).
- The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Section 170(f)(3)(A). But there is an exception to this rule for a “qualified conservation contribution.” Section 170(f)(3)(B)(iii). Tis exception applies where: (1) the taxpayer makes a contribution of “qualified real property interest,” (2) the donee is a “qualified organization,” and (3) the contribution is “exclusively for conservation purposes.” Section 170(h)(1). Generally, a deduction is allowable for easements if the conservation purpose if “protected in perpetuity.” Section 170(h)(5)(A).
- The rules governing judicial extinguishment appear in Treas. Reg. § 1.170A-14(g)(6). They provide that the donor must agree, when making the gift, that the easement gives rise to a property right in the donee having an FMV “that is at least equal to the proportion value that the . . . [easement] at the time of the gift, bears to the value of the property as a whole at that time.” In the event of a sale following judicial extinguishment of the easement, the donee “must be entitled to a portion of the proceeds at least equal to that proportionate value.” “In effect, the ‘perpetuity’ requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee ‘exclusively for conservation purposes.’” Coal Prop. Holdings, 153 T.C. at 136. The requirements of this regulation “are strictly construed.” Carroll v. Comm’r, 146 T.C. 196, 212 (2016).
- The Code imposes a 40% penalty in the case of any “gross valuation misstatement.” Section 6662(e), (h)(1). A misstatement is “gross” if the value of property claimed on a return is 200% or more of the correct amount. Section 6662(e)(1)(A), (h)(2)(A)(i). In the case of a partnership such as Plateau, “[t]he determination of whether there is a substantial or gross valuation misstatement . . . is made at the entity level.” Reg. § 1.6662-5(h)(1).
- Generally, an accuracy-related penalty under Section 6662 is not imposed if the taxpayer demonstrates “reasonable cause” and shows that he “acted in good faith with respect to . . . [the underpayment].” Section 6664(c)(1). However, this defense is not available “[i]n the case of any underpayment attributable to a . . . gross valuation over statement . . . with respect to charitable deduction property.” Section 6664(c)(3).
- The deduction allowable for a gift of property is generally equal to the FMV of the property when the gift is made. Reg. § 1.170A-1(c)(1). The regulations define FMV as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” Id. Determining the FMV of contributed property entails a factual inquiry. See Estate of DeBie v. Comm’r, 56 T.C. 876, 894 (1971).
- The Tax Court evaluates an expert’s opinion in light of his qualifications and the evidence in the record. See Parker v. Comm’r, 86 T.C. 547, 561 (1986). When experts offer differing estimates of FMV, the Tax Court weighs those estimates by examining (among other things) the factors they considered in reaching their conclusions. See Casey v. Commissioner, 38 T.C. 357, 381 (1962).
- The Tax Court is not bound by an expert opinion that it finds contrary to its judgment. Moreover, the Tax Court may accept an expert’s opinion in its entirety, or may be selective as to the portions it finds reliable. See Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938). The Tax Court may also determine FMV on the basis of its own examination of the record evidence. Silverman v. Comm’r, 538 F.2d 927, 933 (2d Cir. 1976).
- If there is a substantial record of sales of easements comparable to the donated easement, the FMV of the donated easement is generally determined by reference to those sales prices. Reg. § 1.170A-14(h)(3)(i). In the absence of such evidence the FMV of the donated easement “is equal to the difference between the . . . [FMV] of the property it encumbers before the granting of the restriction and the . . . [FMV] of the encumbered property after the granting of the restriction.” Id.
Insight: The IRS has targeted syndicated contribution easements such as the one in Plateau. However, on June 25, 2020, the IRS offered a settlement for those taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions. See IR-2020-130 (June 25, 2020). The settlement, if accepted by the taxpayer, would require a concession of the income tax benefits the taxpayer received from the charitable contribution deduction. In addition, the following requirements would have to be met: (1) all partners must agree to settle and the partnership must pay the full amount of tax, penalties and interest before settlement; (2) partners may deduct the cost of acquiring their partnership interests and pay a reduced penalty of 10% to 20% depending on the ratio of the deduction claimed to partnership investment; and (3) partners who provided services in connection with any syndicated conservation easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with no deduction for costs. Taxpayers eligible for this offer will be notified by letter.