failed conservation easement donation, 11th Cir case

There has been a lot of activity re conservation easements over the last few years. The IRS has made a killing. At the end of 2021, there was an 11th Cir case that went in the taxpayer’s favor. I want to summarize a couple of cases, explain my situation, and see if I’m right regarding my client’s options.

In 2019, LLC made a donation of a conservation easement, followed by a sale of the property and termination of the LLC. The LLC’s CPA sent many pages of documents for me to attach to the individual returns to meet the IRS’s requirements for claiming the deduction. There was a problem in the language. It failed the proceeds regulation, Reg. 1.170A-14(g)(6)(ii). Professionals who blew it put a lot of pressure on me to turn a blind eye. Ultimately, the LLC’s CPA reissued the LLC return, not claiming the deduction. The 1040s did not claim the deduction. I prepared gift tax returns, reporting the taxable gift, less $15,000 per donee, another downside to conservation easements that fail to meet the requirements of the regulations.

At the time that my clients and I were vetting these issues, there was no case law, regulations, or other guidance to support claiming the deduction. Instead, we had a regulation and lots of case law to say that the donation was not deductible. Since then, the 11th Circuit reversed the Tax Court on a case.

Oakbrook Land Holdings LLC, (2020) TC Memo 2020-54 was the first case that challenged the validity of the regulation. Hewitt v. Commissioner, T.C. Memo, 2020-89 also challenged the validity of the regulation. The Tax Court ruled for the IRS in both cases.

Hewitt appealed. The 11th Circuit reversed the Tax Court, saying that APA procedures were not properly followed since the IRS did not specifically respond to a few comments. Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), rev'g and remanding T.C. Memo, 2020-89.

After Hewiit won, Oakbrook appealed to the 6th Circuit. Taxpayer lost. There was one dissent regarding the APA issue, but that judge said he agreed with the outcome due to another issue.

Taxpayers in the 11th Circuit now have a path to success, as seen in Thompson v. Comm'r, T.C. Memo. 2022-80. The rest of us are bound by the regulation and the large body of cases on this issue.

Back to my client. The LLC and the land at issue are in the 7th Circuit. The individuals are in the 9th Circuit, although I don’t think that is relevant. The 2019 returns were filed around 7/1/2020. Is this correct:

The taxpayer victories in the 11th Circuit do not provide a path for the individuals to claim the deduction on amended returns. If either case were to be appealed to the Supreme Court, at that point, I believe I could file protective refund claims. The returns would have to include disclosure of a deduction claimed that is inconsistent with the K-1. The LLC was a BBA LLC, so an amended return is not allowed. The appeal and filing of the returns would have to happen by 7/1/2023.

Even though the issue would not be appealable to the 11th circuit, couldn't you still use the ruling in evaluating substantial authority under the following regulation, even if you don't have access to the "safe harbor" of the second sentence?

Reg. 1.6662-4(d)(3)(iv)(B) Taxpayer's jurisdiction. The applicability of court cases to the taxpayer by reason of the taxpayer's residence in a particular jurisdiction is not taken into account in determining whether there is substantial authority for the tax treatment of an item. Notwithstanding the preceding sentence, there is substantial authority for the tax treatment of an item if the treatment is supported by controlling precedent of a United States Court of Appeals to which the taxpayer has a right of appeal with respect to the item.

Could you file with an 8275-R, if necessary?

Thanks for the reply. I don’t see how I get to substantial authority if I can’t appeal to the 11th Circuit since part of determining whether we have substantial authority is evaluating all of the guidance and determining the chances of success. Working against my client is an enormous amount of case law and the regulation.

I agree Form 8275-R is an option, theoretically. The client is pretty risk-adverse. I think the only remedy that would be acceptable would be the protective refund claim, if a case were appealed to the SC by the deadline.

JAD,

In regards to these conservation easements, can you explain to me how a partner has sufficient enough outside basis to take a deduction that is 4x their contribution?

https://www.taxnotes.com/research/feder ... re-of/dgyk

A court of appeals opinion may not get you to more-likely-than-not, but it is obviously substantial authority.