The Tax Court in Brief – March 14th – March 18th, 2022

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Tax Litigation: The Week of March 14, 2022, through March 18, 2022

Pickens Decorative Stone, LLC v. Comm'r, T.C. Memo. 2022-22 | March 17, 2022?|Lauber, J. | Dkt. No. 13614-20


Short Summary: This case involves a syndicated conservation easement scheme. In 2015, an entity purchased 163 acres for $490,010 and contributed it to Pickens Decorative Stone, LLC ("Pickens"), a partnership for Federal income tax purposes. Pickens, after soliciting investors through a private placement memorandum, granted to Foothills Land Conservancy a conservation easement over most of the property. The easement deed recites conservation purposes, but it reserved a number of rights-of-use to Pickens. The deed required Pickens to notify Foothills of any use that was not consistent with the conservation purposes, and, if Foothills did not timely object, it would be deemed to have consented to such inconsistent and non-conservation uses. Pickens claimed a charitable contribution deductions of $24,700,000 for the donation of the conservation easement. The IRS disallowed the deduction, believing that the easement's conservation purpose was not "protected in perpetuity" as required by 26 U.S.C. § 170(h)(5)(A). The IRS sought a summary judgment on that issue as well as on the issue of authority of an IRS supervisor to approve penalties.

Primary Holdings:

  • If a deed of a conservation easement (1) contains a procedure designed to put the holder of the easement on notice of uses of the property that may be inconsistent with the conservation purposes and (2) also contains a procedure where the holder of the easement may, absent proper and timely objection to such notice, be deemed to have consented to inconsistent uses, then the "deemed consent" provision may cause the easement contribution to fail on the "in perpetuity" requirement for a qualified contribution of a conservation easement.
  • In determining whether a "deemed consent" provision destroys the "in perpetuity" requirement, the courts consider the actual language in the deed as well as the easement holder's internal procedures and past practices to enforce its conservation easement rights. The facts underlying those latter considerations had not been developed, and thus, summary judgment on the issue could not be granted.

Key Points of Law:

  • The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Relief in a summary judgment proceeding may be granted when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law.
  • Section 170 sets the rules for the deductibility of charitable contributions, and there are regulations that go into much greater detail. See  Reg. § 1.170A-13. Those regulations distinguish between cash and noncash contributions. See id.
  • One type of noncash charitable contribution is the donation of a partial interest in real estate. The Code generally disallows a charitable contribution deduction for a gift of real property that consists of less than the taxpayer's entire interest in such property. But, there is an exception for the donation of conservation easements. See  26 U.S.C. § 170(f)(3)(A)-(B)(iii).
  • A qualified conservation contribution is a contribution: (A) of a qualified real property interest; (B) to a qualified organization; (C) exclusively for conservation purposes. A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. See id.  at § 170(h)(1), (5)(A).
  • If a donor reserves rights on the land underlying an easement, the donor must provide the donee with appropriate documentation before effecting the donation. See  Reg. § 1.170A-14(g)(5)(i). "[T]he donor must agree to notify the donee, in writing, before exercising any reserved right . . . which may have an adverse impact on the conservation interests . . . ." Id. at § 1.170A-14(g)(5)(ii). And the deed of easement must authorize "the donee to enter the property at reasonable times for the purpose of inspecting the property . . . [and] to enforce the conservation restrictions by appropriate legal proceedings[.]". Id. These requirements are "designed to protect the conservation interests associated with the property . . . [that] could be adversely affected by the exercise of the reserved rights." Id. at § 1.170A-14(g)(5)(i).
  • Section 6751(b)(1) provides that "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination."
  • In a TEFRA case, supervisory approval generally must be obtained before the IRS issues an FPAA to the partnership. If supervisory approval is obtained by that date, the partnership must establish that the approval was untimely, i.e., "that there was a formal communication of the penalty before the proffered approval" was secured. An examining agent need only secure supervisory approval before the first formal communication to the taxpayer of penalties. The "initial determination" of a penalty occurs when the IRS makes an unequivocal decision to assert penalties.

Insights: Conservation easements, especially syndicated conservation easements, are under scrutiny by the IRS. Taxpayers seeking to deduct noncash charitable contributions in the form of conservation easements should take due care to "cross the t's and dot the i's" in the conveyances themselves as well as in the tax returns in which the charitable deduction is requested. Where a grantor reserves certain rights of use to the property deeded as a conservation easement, then the holder of the conservation easement should have, maintain, and adopt policies, procedures, and practices designed to enforce the conservation purposes of the grant. Otherwise, the IRS may deem a sham (and thus, disallow the claimed charitable contribution deduction) the proposed dedication for conservation purposes "in perpetuity".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.