In an NTU analysis published late last year, we took serious issue with an ongoing campaign of unjustified IRS attacks on conservation easement donations and the implications for taxpayers’ rights. Among the troubling IRS positions we noted was that the IRS was taking issue with “amendment clauses” in easement agreements, which allow both parties, by mutual consent, to make prudent adjustments that ensure evolving realities are taken into account for preserving land in perpetuity.
These types of amendment clauses have long been common in conservation easement donations, so the IRS position on this one matter could eliminate many, if not most, conservation easement deductions from past years. The larger concern for the entire taxpayer community is obvious: if the IRS can effectively wipe out a deduction that Congress has created, enhanced, and affirmed for decades, simply by bullying its way through court and administrative edicts, everyone who files a tax return and plays by the rules is at risk.
There is some good news on this front. The Tax Court has just soundly rejected the IRS blanket attack on conservation easement amendment clauses. In the case of Pine Mountain Preserve v. Commissioner, the court wrote:
Respondent’s [IRS’s] argument would apparently prevent the donor of any easement from qualifying for a charitable contribution deduction under section 170(h) if the easement permitted amendments. We find no support for that argument in the statute, the regulations, the decided cases, or the legislative policy underlying the statute.
While any taxpayer win in the Tax Court is normally cause for celebration, it isn’t very often that the court so bluntly declares an IRS position absolutely baseless. “The interesting thing about this is just how extreme a position it was for the IRS to take,” said David Wooldridge, an attorney at Sirote & Permutt, who was involved in the case. “We had to go all the way to tax court to prove that the IRS was off base. I don’t know if they’re going to give up the issue yet; for all I know, they may appeal that one, but I hope not.”
“If they appeal that one, then you will know that they just want to kill easements altogether,” Wooldridge said. “It’s a weird position.”
If a taxpayer had claimed a tax benefit with the same lack of support in statute, regulations, case law, or legislative policy, the IRS would have imposed significant penalties. Unfortunately, the tax law doesn’t provide for the same kinds of penalties for the IRS when it takes unsupported positions – so law-abiding taxpayers typically have to bear the costly burdens of audit defense and litigation just to beat back an argument the IRS never should have made in the first place. Even the chances of recovering attorney fees (much less damages) are rare for taxpayers, as we explained in testimony before Congress in 2016.
Make no mistake, however – even taxpayers who have no direct connection to these cases are left with little recourse either. When the IRS takes such an indefensible stance in court, it is not only wasting time but also wasting money from an agency budget that taxpayers across the country already had to fund.
We hope Congress and IRS Commissioner Rettig will use this Tax Court rejection as an opportunity to review how such an unsupported and unfair position could have made it through what we presume are various levels of IRS review before being wielded against a taxpayer in court. The Tax Court’s slap against the IRS also argues for a careful review of the other unjustified attacks against conservation easement donations we pointed out in our analysis. The IRS, and its auditors and lawyers, have an obligation to follow the law – not simply make up new law.