January 31, 2023

Volume XIII, Number 31

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January 31, 2023

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January 30, 2023

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Big Win for Investors Facing Listed Transaction Penalties for Conservation Easements

On November 9, 2022, in a 15-2 decision, the Tax Court held that the IRS improperly issued Notice 2017-10 in Green Valley Investors, LLCet al. v. Commissioner of Internal Revenue, 159 T.C. No. 5. The Notice designated “syndicated” conservation easements as “listed transactions,” or a potential tax-avoidance schemes. Once a transaction is designated as a listed transaction, taxpayers and their advisors are obligated to provide the IRS with information and documentation related to the transaction and may be subject to additional accuracy-related penalties in IRS enforcement actions.

The Green Valley Investors decision evaluated a combined four cases arising from related syndicated conservation easements. In 2011, Bobby A. Branch and Elizabeth N. Branch bought over six hundred acres of land in North Carolina. Mr. Branch contributed portions of the land to four partnerships and created private placement offerings for investors to buy interest in each partnership in 2014 and 2015. The partnerships then donated conservation easements on the land, resulting in noncash charitable deductions for each investor based on the amount of their investment. Regarding each partnership, the IRS disallowed these deductions, totaling over $90 million, and issued accuracy-related penalties under Internal Revenue Code, Section 6662.

Mr. Branch, on behalf of each partnership, challenged this determination in Tax Court, in which he argued, in part, that the IRS improperly issued Notice 2017-10 without complying with the administrative requirements of the Administrative Procedures Act (“APA”). Under the APA, when agencies issue legislative rules, they are required to formally issue a notice of proposed rulemaking and provide the public with the opportunity to comment before issuing a final rule. The Tax Court held that the IRS did not comply with the requirements of the APA when issuing Notice 2017-10 and as such the penalties imposed against Green Valley Investors stemming from the notice were improperly assessed under an invalid legislative rule. Although the jurisdiction of the Tax Court only extends to the particular taxpayers before the Court, the Tax Court in its decision clearly stated that it intends to apply its holding to all similarly situated taxpayers who come before the Court in the future.

Conservation easement deductions were not subject to the additional penalty under Section 6662A until late 2016, when the IRS issued Notice 2017-10. Section 6662A penalties apply where “a taxpayer has a reportable transaction understatement for any taxable year” and adds a 20 percent accuracy-related penalty. Once syndicated conservative easements were designated as listed transactions, taxpayers were also required to file Form 8886, Reportable Transaction Disclosure Statements, with their federal income tax returns and any amended return that they filed. Taxpayers filing Form 8886 in relation to a conservation easement are required to provide the IRS with a narrative including the nature of the transaction, the individuals or entities involved including the appraiser of the land, and the name of the donee who accepted the conservation easement donation. While the IRS stated in the instructions to Form 8886 that “[t]he fact that a transaction must be reported on this form does not mean the tax benefits from the transaction will be disallowed,” the IRS has continued to target these transactions, often disallowing the vast majority, if not all, of the claimed deduction amount. Now, the IRS will have to determine whether to re-designate syndicated conservation easements as listed transactions and how to adjust ongoing enforcement efforts in light of this most recent decision.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XII, Number 320
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About this Author

William J. Sanders, Polsinelli PC, Limited Liability Company Matters Lawyer, Tax matters Attorney
Shareholder, Practice Chair

Through over 30 years of practicing law, Bill Sanders has developed broad tax experience in corporate, partnership, limited liability company, complex business transactions, and workout and bankruptcy issues.

As chairman of the firm’s tax practice group and a licensed CPA in Missouri, Bill’s clients range from Fortune 100 companies to family-owned and tax-exempt organizations.

He regularly represents clients nationwide before the Internal Revenue Service at all levels including audits, the Appeals Division and...

816.360.4240
Lauren P. DeSantis-Then, Polsinelli, government defense investigations lawyer, securities fraud attorney
Shareholder

Lauren is a problem solver who concentrates her practice in the areas of government contracts, construction, and Public-Private Partnerships (P3s). She handles complex protests of federal procurements, with recent experience that includes successfully defending bid protests at the U.S. Government Accountability Office (GAO) contesting pre-award solicitations that were not properly set aside for Small Business Concerns. Further, she litigates large contractual disputes and negotiates P3 deals.

In addition, Lauren has an extensive background...

202.626.8323
Alexandra G. Brooks Government Investigations Attorney Polsinelli Law Firm
Associate

Working with experienced Polsinelli attorneys in the Government Investigations practice, Alexandra Brooks diligently seeks to find practical solutions to complex matters involving white collar criminal defense and internal investigations. Her practice focuses on helping clients respond to all types of government investigations based on alleged violations of various civil, criminal and administrative laws. Prior to joining the firm, Alexandra practiced as an attorney with a complex litigation firm on both class and mass actions. She also served as a legal intern for a...

202-777-8981
Erika L. Colangelo New York Tax Attorney Polsinelli
Associate

Erika Colangelo is an Associate at Polsinelli's New York City office. She represents individuals and businesses in all stages of dispute and controversy with the Internal Revenue Service, New York State Department of Taxation Finance, New York State Department of Labor, and New York City Department of Finance, including in audits, collection matters, administrative appeals and tax litigation in courts and tribunals such as the United States Tax Court and the New York State Division of Tax Appeals. Erika uses her tax controversy experience to prepare and negotiate offers...

631-379-6991
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