Recent Tax Court Conservation Easement Decision Demonstrates Continued IRS Enforcement Efforts and Penalty Defenses

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Recent Tax Court Conservation Easement Decision Demonstrates Continued IRS Enforcement Efforts and Penalty Defenses

The Tax Court’s recent decision in Sells shows that the IRS is continuing to aggressively pursue conservation easement deductions where it believes the transaction is overly aggressive.  However, the case also demonstrates potential defenses against proposed penalties.

Sells v. Comm’r, T.C. Memo. 2021-12,  January 28, 2021 | Holmes, J. | Dkt. Nos. 6267-12, 6801-12, 6835-12, 6836-12, 6837-12, 6838-12, 19246-12, 13553-13

Short SummaryIn August 2002, Burnish Bush Farms, LLC was formed with eight members—each a 12.5% owner.  Later, Mr. and Mrs. Moses sold mountainous land to Burnish Bush for $1.4 million.  In 2003, Burnish Bush deeded a conservation easement on the acres that it owned to Chattoawah Open Land Trust, Inc.  The conservation deed contained various provisions, including an extinguishment-proceeds clause.

Burnish Bush filed a Form 1065, U.S. Return of Partnership Income.  Attached to the Form 1065 was Form 8283, Noncash Charitable Contributions.  On page 2 of this form Burnish Bush reported the donation of the conservation easement to COLT as a noncash charitable contribution with a value of less than $5.4 million.  Burnish Bush attached a “qualified appraisal” to the return.  The IRS audited the return, disallowed the charitable contribution, and proposed penalties.

Key Issues: Whether the taxpayers are entitled to a charitable conservation easement deduction and whether they are liable for penalties?

Primary Holdings:  The taxpayers are not entitled to the charitable conservation easement deductions.  Moreover, with respect to some taxpayers, the IRS failed to comply with Section 6751(b) with respect to certain proposed penalties—accordingly, those penalties are waived.  Moreover, some taxpayers are not liable for penalties due to reasonable cause.

Key Points of Law:

InsightThe decision in Sells shows that the IRS will continue to aggressively go after perceived, abusive conservation easement deductions.  It also shows the potential use of Section 6751(b) as a defense against proposed penalties.

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