On March 17, 2022, the Tax Court issued a Memorandum Opinion in the case of Pickens Decorative Stone LLC v. Commissioner (T.C. Memo. 2022-22). The primary issues presented in Pickens Decorative Stone LLC v. Commissioner were (1) whether the taxpayer was entitled to qualified charitable contribution deduction for claimed easement, and (2) whether the IRS revenue agent secured timely supervisory approval from supervisor, as required for imposition of accuracy-related penalties due to substantial understatement of tax.
Background to Pickens Decorative Stone LLC v. Commissioner
This is a syndicated conservation easement case. The IRS disallowed the charitable contribution deduction claimed for the easement by Pickens Decorative Stone LLC and determined penalties. In a motion for summary judgment, the IRS contended that the deduction was properly disallowed because the easement’s conservation purpose was not “protected in perpetuity.” Separately, the IRS argued that it complied with the requirements of IRC § 6751(b)(1) by securing timely supervisory approval of the penalties.
Pickens is a Georgia limited liability company (LLC) organized in December 2015. Pickens is treated as a partnership for Federal income tax purposes. In December 2015 Barnes Land & Investments, LLC (BLI), purchased a 163-acre tract in Pickens County, Georgia, for $490,010. On December 22, 2015, BLI contributed this land to Pickens. On December 29, 2016, after Pickens solicited investors through a private placement memorandum, it granted to the Foothills Land Conservancy (Foothills) a conservation easement over most of the property.
Pickens timely filed Form 1065, U.S. Return of Partnership Income, for its 2016 tax year. On that return it claimed a charitable contribution deduction of $24,700,000 for the donation of the conservation easement.
The easement deed recites the conservation purposes and generally prohibits commercial or residential development. But it reserved certain rights to Pickens, including the rights to engage in forestry and recreational activities such as hiking, camping, hunting, fishing, and horseback riding. In connection with these recreational activities, Pickens reserved the right to build fences, bridges, and trails. Pickens also reserved the right to construct barns, sheds, and facilities “for the generation of renewable electrical power.”
Critically, however, Pickens did not reserve unconditional rights.
Paragraph 4 of the deed prohibits Pickens from engaging in any activity that would be “inconsistent with the purpose of th[e] Easement (including the Conservation Purposes).” To ensure that Pickens’s exercise of a reserved right would not impair any conservation purpose, paragraph 6 requires Pickens to seek Foothills’s prior consent. If Foothills did not respond to such a request within 30 days, Foothills would be deemed to have granted approval “EXCEPT WHERE the requested action is clearly prohibited by the terms of th[e] Easement or would result in an adverse effect on the Conservation Purposes.” If Foothills subsequently determined that a conservation purpose was at risk, it could (under certain circumstances) take “immediate action to prevent or mitigate” damage.
The Audit in Pickens Decorative Stone LLC v. Commissioner
The IRS selected Pickens’s return for examination and in July 2019 assigned the case to Revenue Agent (RA) Beverly Parker. In April 2020, as the examination neared completion, RA Parker recommended assertion of penalties against Pickens under IRC § 6662 and IRC § 6662A. Her recommendations were set forth in a civil penalty approval form. Supervisory RA Adam Wooten digitally signed the approval form on April 21, 2020, as the “immediate supervisor…of the individual who made the initial determination of the penalties.” Mr. Wooten also signed RA Parker’s case activity record as her group manager and noted that he “completed [the] case review.”
On July 9, 2020, RA Parker mailed the petitioner a packet of documents including Form 4605-A, Examination Changes, and Form 886-A, Explanation of Items, which set forth her proposed adjustments and penalty recommendations. One month later, on August 21, 2020, the IRS issued the petitioner a notice of final partnership administrative adjustment (FPAA) disallowing the charitable contribution deduction and determining penalties. The petitioner timely petitioned the Tax Court for readjustment of the partnership items.
Protected in Perpetuity
The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” But there is an exception for a “qualified conservation contribution.” For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.”
The regulations set forth detailed rules for determining whether this “protected in perpetuity” requirement is met. Of importance here are the rules governing the “[p]rotection of conservation purpose where [the] taxpayer reserves certain rights.” If a donor reserves rights on the land underlying an easement, the donor must provide the donee with certain documentation (e.g., surveys, maps, and aerial photographs) before effecting the donation.
“[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.” 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” if necessary. 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.”
Editor’s Note: On December 19, 2021, the Eleventh Circuit Court of Appeals (to which Pickens Decorative Stone LLC v. Commissioner is appealable) struck down Treas. Reg. § 1.170A-14(g)(6) in the case of Hewitt v. Commissioner. In striking down the regulation, the Eleventh Circuit held that the Treasury Department did not comply with the notice-and-comment requirements of the Administrative Procedure Act when promulgating the “judicial extinguishment” regulation.
Hewitt was a remand of a 2020 Tax Court memorandum opinion written by Judge Goeke. In the appellate opinion, the court specifically held that the Treasury Regulation, which establishes the value of the donor and the donee’s respective proportionate interests upon the judicial extinguishment of a “perpetual” conservation easement for purposes of the charitable contribution deduction, and which prohibited the subtraction of the value of post-donation improvements to easement property from proceeds allocated to the donor and the donee in the event of extinguishment, was arbitrary and capricious due to the Treasury Department’s failure to comply with APA’s procedural requirements.
Although the Treasury Department stated it had considered “all comments” in promulgating the regulation, the Treasury Department failed to respond to relevant and significant comments from conservancies as to the effect of post-donation improvements on the proceeds subsequent to extinguishment, which could thwart purpose of regulation and related Code provision. Further, the court held that the “revisions” made by the Treasury Department to the regulation in “response” to such comments were simply “clarifications” in response to other comments expressing uncertainty about meaning of regulation, rather than any actual, substantive changes.
Hewitt was followed by the Sixth Circuit’s decision, which affirmed the full Tax Court opinion of Oakbrook Land Holdings, LLC v. Commissioner, in which Judge Lauber denied the taxpayer’s conservation easement deduction on the basis that the proportionate value of the easement violated the perpetuity requirements of Treas. Reg. § 1.170A-14(g)(6). We discuss the Hewitt and Oakbrook cases much more thoroughly in this article.
Meanwhile, Back at the Perpetuity Ranch
In Pickens Decorative Stone LLC v. Commissioner, the IRS did not contend that the easement deed explicitly violates any of the regulatory requirements mentioned above. Rather, the IRS faults the deed for including a “deemed consent” provision, which allegedly renders Foothills “powerless to prevent [an] inconsistent use” if it does not respond to a request from Pickens within 30 days. According to the IRS, an easement deed with a “deemed consent” provision cannot satisfy the “protected in perpetuity” requirement because the donee is stripped of its “perpetual right to prevent uses of the property that are inconsistent with the…conservation purposes.”
Pickens replies that the deed “does not confer an unconditional right” but rather allows Pickens to exercise only those rights that would be consistent with the conservation purposes. As Pickens notes, paragraph 6(b) prohibits it, notwithstanding any “deemed consent,” from engaging in any activity that “would result in an adverse effect on the Conservation Purposes in any material respect.” It further contends that, if Foothills subsequently concluded that Pickens’s action threatened a conservation purpose, Foothills could seek to “enjoin [the] violation” and “require restoration of the Property” to the status quo ante.
On the basis of the record that currently exists, Pickens seems to have the stronger argument regarding the proper construction of the deed. However, in a case such as this, the Tax Court did not think the “deemed consent” issue can be decided as a matter of law.
Foothills may be deemed to have consented to the exercise of certain rights, but only if it has failed to respond to notices from Pickens over a period of time. Foothills’ internal procedures and past practice may shed light on whether this is likely to happen. In any event, the question whether the exercise of a right to which consent is deemed given would impair any conservation purpose presents factual questions ill-suited to summary adjudication. For these reasons, the Tax Court concluded that the better course of action was to deny the IRS’s motion for summary judgment on this point.
IRC § 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 such as this, supervisory approval generally must be obtained before the IRS issues a Notice of Final Partnership Audit Adjustment (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.
The joint Stipulation of Facts includes a copy of the civil penalty approval form by which RA Parker recommended assertion of penalties against Pickens. RA Parker’s group manager, Mr. Wooten, signed the approval form on April 21, 2020, as her “immediate supervisor.” RA Parker’s case activity record—also included in the joint stipulation—shows that Mr. Wooten supervised her during the Pickens examination. The Tax Court, thus, concluded that Mr. Wooten was RA Parker’s “immediate supervisor” for purposes of IRC § 6751(b)(1).
General Public Announcement not a Formal Communication
The definite decision to assert penalties was communicated to Pickens in the FPAA. The petitioner concedes that, “[u]nder normal circumstances,” Mr. Wooten’s approval would be regarded as timely under section 6751(b)(1). However, the petitioner notes that the IRS in 2017 had issued a public notice advising that participants in syndicated easement transactions risked certain penalties. Petitioner asserts that Notice 2017-10 and related IRS pronouncements “constitute[d] The IRS’s formal communication of his unequivocal intent to assert all penalties in all [syndicated easement] transactions.”
The Tax Court was not persuaded.
The Tax Court has repeatedly held that an examining agent need only secure supervisory approval “before the first formal communication to the taxpayer of penalties.” The Tax Court’s inquiry thus “turns on the timing of the IRS communication to the taxpayer against whom the penalties are being asserted.”
An IRS announcement directed to the public at large cannot constitute “the first formal communication to the taxpayer of penalties.” Moreover, because the IRS did not select Pickens’s return for examination until July 2019, it could not possibly have “determined” any penalties against Pickens in 2017. The “initial determination” of a penalty occurs when the IRS makes “an unequivocal decision to assert penalties.” Simply put, the IRS could not have made an unequivocal decision to assert penalties against Pickens before reviewing its return to determine if there existed an “understatement.”
Assuming arguendo that supervisory approval was timely, petitioner contends that Mr. Wooten “did not have the information necessary to personally approve penalties.” Petitioner asserts that Mr. Wooten signed the penalty approval form before RA Parker transmitted certain documents to the “penalty team.” According to petitioner, this creates a dispute of fact as to whether Mr. Wooten meaningfully re-viewed RA Parker’s recommendations before supplying his approval.
According to Judge Lauber, who authored the opinion in Pickens Decorative Stone LLC v. Commissioner, the petitioner “misapprehends the requirements of IRC § 6751(b).” That provision is captioned “Approval of Assessment,” not “Explanation of Assessment.” As the Tax Court has said before: “The written supervisory approval requirement…requires just that: written supervisory approval.”
The Tax Court has also repeatedly rejected any suggestion that a penalty approval form must “demonstrate the depth or comprehensiveness of the supervisor’s review.” Thus, a “group manager’s signature on the Civil Penalty Approval Form is sufficient to satisfy the statutory requirements.”
The record confirms that RA Parker secured timely supervisory approval from Mr. Wooten. The petitioner offered no evidence to controvert this fact. Quite the contrary: Petitioner has stipulated that the copies of the case activity record and penalty approval form, as executed by Mr. Wooten, are “true and accurate.”
There being no genuine dispute of material fact on this point, the Tax Court granted the IRS’s motion for summary judgment with respect to penalty approval.
Footnotes to Pickens Decorative Stone LLC v. Commissioner:
- See § 170(h)(5)(A). ↑
- IRC § 170(f)(3)(A). ↑
- IRC § 170(f)(3)(B)(iii), (h)(1). ↑
- IRC § 170(h)(1)(C), (5)(A); see TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1362 (11th Cir. 2021); PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 201 (5th Cir. 2018). ↑
- See Treas. Reg. § 1.170A-14(g)(5); see also Treas. Reg. § 1.170A-14(g)(1). ↑
- See Treas. Reg. § 1.170A-14(g)(5)(i). ↑
- See Treas. Reg. § 1.170A-14(g)(5)(ii). ↑
- Id. ↑
- See Treas. Reg. § 1.170A-14(g)(5)(i). ↑
- 21 F.4th 1336 (11th Cir. 2021), rev’g and remanding T.C. Memo. 2020-89. ↑
- Hewitt v. Commissioner, T.C. Memo. 2020-89. ↑
- 28 F.4th 700 (2022), aff’g 154 T.C. 180 (2020). ↑
- Cf. Hoffman Props. II, LP v. Commissioner, 956 F.3d 832, 834 (6th Cir. 2020) (holding that a deemed consent provision impaired the conservation purpose where the donor could exercise rights “in a manner contrary to” regulations promulgated by the Secretary of the Interior). ↑
- See Glade Creek Partners, LLC v. Commissioner, T.C. Memo. 2020-148, n.9 (considering a “deemed consent” provision nonproblematic in such circumstances). ↑
- See Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 83 (2019). ↑
- See Frost v. Commissioner, 154 T.C. 23, 35 (2020). ↑
- See Sand Inv. Co. v. Commissioner, 157 T.C. No. 11, slip op. at 11 (Nov. 23, 2021) (holding that the “immediate supervisor” is “the person who supervises the agent’s substantive work on an examination”). ↑
- See IRS Notice 2017-10 (classifying “syndicated conservation easement transactions” as reportable transactions subject to penalties). ↑
- Frost, 154 T.C. at 32 (emphasis added); see Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020) (holding that an “initial determination” is embodied in the document by which the IRS “formally notifies the taxpayer … [of its] unequivocal decision to assert penalties”). ↑
- Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125, at *16. ↑
- Id. ↑
- See Belair Woods, 154 T.C. at 15. ↑
- See Thompson v. Commissioner, 155 T.C. 87, 92 (2020) (holding than an IRS communication did not reflect an “initial determination” where it did not notify the taxpayers that the IRS exam team “had completed its work”). ↑
- Raifman v. Commissioner, T.C. Memo. 2018-101. ↑
- Belair Woods, 154 T.C. at 17. ↑
- Id. ↑