IRS Fraud Penalties, TEFRA, and Conservation Easements

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

A recent IRS Chief Counsel Memorandum addresses the issue of how the IRS determines the applicability of the civil fraud penalty in a TEFRA examination of a partnership involved in a syndicated conservation easement case.  As we have discussed in multiple Insight posts, the IRS has prioritized enforcement efforts focused on syndicated conservation easements.  See also Charitable Conservation Easements Remain Under Attack—The Latest IRS Data and Senate Finance Committee Releases Conservation Easement Data.

IRS Chief Counsel’s office provided the following position on the assertion of fraud penalties in the TEFRA context:

Under TEFRA, the IRS determines the applicability of the civil fraud penalty at the partnership level and then the penalty is directly assessed on the partners of the partnership through a notice of computational adjustment.


Section 170(f)(3)(B)(iii) of the Internal Revenue Code allows a deduction for a qualified conservation contribution. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. I.R.C. § 170(h)(1)-(5).

The Law

Section 6663(a) imposes a penalty equal to 75% of the portion of any underpayment which is attributable to fraud. In any proceeding involving the issue of whether a taxpayer has been guilty of fraud, the IRS has the burden of proving fraud and must do so by clear and convincing evidence.

Under TEFRA, the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item shall be determined at the partnership level.  As a result, the IRS”s position, as announced in the recent CCM, is that “the fraud penalty under section 6663(a), as it relates to fraud on the partnership return, must be determined at the partnership level, even if there are partner-level determinations that may need to subsequently be made.”

The Service went on to further elaborate on its position as follows:

If fraud is established at the partnership level, then all partners will be liable for the fraud penalty on any underpayments of tax resulting from the adjustments to partnership items that are attributable to fraud (assuming the IRS can establish that the partner has an actual underpayment and assuming there are no partner-level defenses). In addition, if the IRS can also establish that an individual partner has an additional underpayment (unrelated to the adjustments to the partnership items that are attributable to fraud) for the same taxable year, that additional underpayment may be treated as attributable to fraud and subject to the section 6663(a) penalty. See I.R.C. § 6663(b).

. . .

In a claim under section 6230(c), the applicability of the penalty determined at the partnership level is conclusive, and the partners may only raise partner-level defenses as to why the penalty should not be imposed. I.R.C. § 6230(c)(4). With respect to the fraud penalty on the partnership items that are attributable to fraud, this includes a reasonable cause defense. See I.R.C. § 6664(c)(1). With respect to the fraud penalty that may be applied to additional underpayments (unrelated to the adjustments to the partnership items that are attributable to fraud) for the same year, the taxpayer may avoid the penalty by establishing (by a preponderance of the evidence) that the additional underpayments are not attributable to fraud. See I.R.C. § 6663(b).

When it comes to partnerships, fraud is generally determined by conduct that occurred at the partnership level. See Arbitrage Trading, LLC v. United States, 108 Fed. Cl. 588, 608 (2013) (citing “the legislative intent that penalties be applied to partnership conduct in partnership-level proceedings”); Tigers Eye Trading v. Comm’r, 138 T.C. ); H.R. Rept. 105–148, at 594 (1997), 1997–4 C.B. (Vol.1) 319, 915–916. For purposes of penalties, the “partnership conduct,” including the partnership’s intent, is determined by looking to the conduct and intent of those managing the partnership. See Jade Trading, LLC v. United States, 81 Fed. Cl. 173, 176-77 (2008) (looking to the conduct of the managing member to determine whether the partnership acted negligent).

For more on conservation easements, see:


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