Tax Court Backs IRS Land Deal Penalties

The U.S. Tax Court upheld three proposed IRS penalties over land conservation deductions on procedural grounds in a strongly divided opinion.

The Jan. 6 ruling involved a $4,778,000 charitable deduction taken by Belair Woods LLC for a donation to the Georgia Land Trust. The company claimed the deduction for donating a conservation easement under Section 170(h)(3).

The IRS has its eye on syndicated conservation easement details, highlighting the transactions in a Jan. 6 report, as one of the three types of tax shelters it is most concerned about.

The Belair Woods ruling offers some clarity on the U.S. Tax Court’s views on when procedural requirements for assessing penalties set in, though the ruling drew two different dissents.

The question in the case was whether the IRS complied with a requirement under tax code Section 6751(b)(1) to obtain an immediate supervisor’s approval for the initial determination of a penalty.

Penalties First Mentioned in 2012

The IRS in 2012 prepared a summary report that proposed to deny Belair Woods’ claimed deduction and impose penalties. The proposed penalties were either a 40% penalty under tax code Section 6662(h) for grossly overvaluing the easement or penalties under Sections 6662(c) and (d) for negligence and substantially understating income tax.

The IRS Appeals Office, in a 2017 notice, made the same penalty determinations but also added a further alternative to the gross overvaluation penalty in the form of a Section 6662(e) penalty for substantial valuation misstatement.

Belair unsuccessfully argued that supervisor approval of the penalties, which wasn’t given until 2014, was actually required when the IRS sent the 2012 letter inviting discussion on the summary report.

“But the summary report did not notify petitioner of a definite decision to assert penalties,” Judge Albert G. Lauber wrote in the opinion.

Lauber instead concluded that the initial determination of a penalty assessment was made when the IRS formally notified Belair of a definite decision to assess penalties in a 2015 letter. Three of the penalties assessed met that standard, the court majority concluded.

Lauber was joined in his opinion by seven other Tax Court judges.

Judge Richard T. Morrison concurred separately, agreeing as to what constituted the initial determination but disagreeing with “any suggestion in the opinion of the Court” that an initial penalty determination may only be made through formal written communication notifying a taxpayer of a definite decision.

Judge David Gustafson, in a dissent joined by six judges, argued that the majority “veered away” from Congress’ intent by holding that supervisor approval is only needed if the IRS is informing a taxpayer of a final penalty determination by the Examination Division.

“The opinion that the Court adopts today misconstrues the statute in a manner that frustrates and even contradicts its purpose,” Gustafson wrote.

Judge L. Paige Marvel, in a separate dissent joined by three other judges, argued that the IRS didn’t meet the requirements for assessing any penalties because the initial determination came via an earlier letter that didn’t have supervisory approval.

Requests for comment weren’t immediately returned.

The case is Belair Woods, LLC v. Comm’r, T.C., No. 19493-17, 1/6/20.