On November 30, 2021, the Tax Court issued a Memorandum Opinion in the case of Plateau Holdings LLC v. Commissioner (T.C. Memo. 2021-133). The primary issue presented in Plateau Holdings LLC was whether the 20% accuracy-related penalty applied to the portion of the underpayment not attributable to a valuation misstatement, that is, to the portion of the underpayment resulting from the Tax Court’s conclusion that the petitioner was not entitled to a charitable contribution deduction corresponding to the correct value of the easements.
Procedural Background to Plateau Holdings LLC
This case involves a charitable contribution deduction claimed by Plateau Holdings, LLC (Plateau), for conservation easements. On its 2012 Federal income tax return Plateau claimed a deduction of $25,449,000 for the donation of the easements. On June 23, 2020, the Tax Court issued an opinion, Plateau Holdings, LLC v. Commissioner (Plateau I), T.C. Memo. 2020-93, disallowing the deduction in full because the judicial extinguishment clauses of the easement deeds did not protect the conservation purpose in perpetuity.[1]
The Tax Court determined that the correct value of the easements was $2,691,200 and that a 40% penalty applied to the portion of the underpayment that resulted from Plateau’s gross overvaluation of the easements.[2] The overvaluation was $22,757,800, and the 40% penalty was $9,103,120.
The IRS now seeks a 20% penalty for negligence or a substantial understatement of tax. This penalty would apply to the portion of the underpayment that was not attributable to a valuation misstatement—in other words, to the portion of the underpayment resulting from the Tax Court’s conclusion that Plateau is not entitled to a charitable contribution deduction of $2,691,200, corresponding to the correct value of the easements.
The disallowance of this deduction resulted solely from the Tax Court’s determination that the easement deeds failed to protect the conservation purpose in perpetuity. In the earlier case, the Tax Court did not decide whether the 20% accuracy-related penalty applied to this portion of the underpayment. However, the Tax Court ultimately concluded that Plateau had reasonable cause and acted in good faith with respect to the claimed charitable contribution deduction corresponding to the correct value of the easements. Thus, the 20% accuracy-related penalty was not appropriate.
The Accuracy-Related Penalty
The Code imposes a penalty where “any portion of an underpayment of tax” is attributable to negligence or disregard of rules or regulations or to a substantial understatement of income tax.[3] Negligence is the failure to make a reasonable attempt to comply with the Code, and disregard includes careless, reckless, or intentional disregard.[4] An understatement of income tax is “substantial” if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return.[5]
In the case of a partnership, a penalty under IRC § 6662 applies when the partnership takes a return position that is negligent or that might create a substantial understatement of tax at the partner level.[6] The determination of an “underpayment” within the meaning of IRC § 6662(a) cannot be made at the partnership level, because partnerships do not pay tax. However, the Tax Court can determine at the partnership level the applicability of the penalty for negligence or substantial understatement of income tax.[7]
The petitioner contends that the 20% penalty should not apply because it had reasonable cause and acted in good faith when claiming a charitable contribution deduction.[8] “Reasonable cause” under IRC § 6664 is determined on a case-by-case basis, taking into account all pertinent facts and circumstances.[9] One circumstance that may indicate reasonable cause is an honest misunderstanding of fact or law that is reasonable in the light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.[10]
In the earlier decision, the Tax Court held that Plateau was ineligible for a charitable contribution deduction because the conservation purpose underlying the easements was not protected in perpetuity.[11] That was chiefly because the deeds provided, in the event of a future judicial extinguishment of the easements, that the donee’s proportionate share of the sale proceeds would be reduced by an impermissible carve-out for donor improvements.
The easement deeds were prepared by an attorney for the donee, Foothills Land Conservancy (Conservancy). Both the attorney and the Conservancy had considerable experience in drafting easement deeds, and the deeds in this case were modeled after others shared through an alliance of land trusts. Although he was not Plateau’s lawyer, Plateau could reasonably have believed that the attorney drafted the easements in a manner that was intended to comply with the regulations and to protect the Conservancy’s interests.
When Plateau filed its 2012 return, the validity of such judicial extinguishment clauses had not been tested in litigation. All of the judicial opinions that have found such clauses wanting were issued well after Plateau executed the deeds (in December 2012) and filed its return (in April 2013).[12]
In 2008 the IRS had issued a private letter ruling (PLR) suggesting that a clause of this sort would not necessarily prevent the allowance of a charitable contribution deduction,[13] and the PLR does provide some objective support for the reasonableness of Plateau’s position.[14] As a consequence, the Tax Court found that the 20% penalty should not apply because Plateau had reasonable cause and acted in good faith when claiming a charitable contribution deduction, at least with respect to its claim of a deduction corresponding to the correct value of the easements.
(T.C. Memo. 2021-133) Plateau Holdings LLC v. Commissioner
Footnotes:
- See Treas. Reg. § 170(h)(5)(A); Treas. Reg. § 1.170A-14(g)(6). ↑
- See IRC § 6662(e), (h). ↑
- IRC § 6662(a), (b)(1), (b)(2). ↑
- IRC § 6662(c). ↑
- IRC § 6662(d)(1)(A). ↑
- See Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54. ↑
- Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 233 (2018). ↑
- See IRC § 6664(c)(1); Treas. Reg. § 1.6664-4(a). ↑
- Treas. Reg. § 1.6664-4(b)(1). ↑
- Id. ↑
- See IRC § 170(h)(5)(A); Treas. Reg. § 1.170A-14(g)(6). ↑
- See, e.g., PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018) (affirming a bench opinion of this Court); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 130-31 (2019). ↑
- See Priv. Ltr. Rul. 200836014 (Sept. 5, 2008) (discussing an easement deed that reduced the donee’s proceeds by the value of the donor’s permissible improvements). ↑
- See Sells v. Commissioner, T.C. Memo. 2021-12, at *37-*40; Treas. Reg. § 1.6662-4(d)(3)(iii) (stating that PLRs may constitute “authority” in determining whether the taxpayer has “substantial authority” for its return position). ↑
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