A Georgia partnership is contesting the IRS’s denial of a $180 million conservation easement deduction in Tax Court and claiming in a district court that the agency improperly denied it access to the Independent Office of Appeals.
In a Tax Court petition filed October 19 in Hancock County Land Acquisitions LLC v. Commissioner, the partnership contended that the IRS failed to provide an adequate explanation for disallowing the deduction.
The petition follows the July 25 filing of a complaint in the U.S. District Court for the Northern District of Georgia asserting that the IRS’s refusal to send the case to Appeals violated the Taxpayer First Act provisions granting taxpayers the right to an administrative appeal.
The filings add to the large volume of easement-related disputes now being fought in the courts following the IRS’s increased efforts to crack down on perceived abuse of the section 170 charitable contribution rules. Over three dozen petitions have been filed in the Tax Court since July, which practitioners have said is just the tip of the iceberg. With the filing in Hancock, the amount of denied easement deductions contested in a three-month period is more than $839 million.
Taxpayers are also challenging the validity of reg. section 1.170A-14(g)(6), which sets out the judicial extinguishment requirements for conservation easement donations, and Notice 2017-10, 2017-4 IRB 544, which designated syndicated easement deals as listed transactions.
Deduction Disallowed
According to Hancock’s Tax Court petition, the partnership donated an easement of more than 236 acres in Mississippi to Atlantic Coast Conservancy Inc. in August 2016.
The petition says the property is within the Pearl River bottomlands and contains reserves of construction-grade gravel and “frac sand” — the type of sand used by energy companies in the hydraulic fracturing process. It added that in 2016, there was an active frac sand mining operation adjacent to the property and multiple sand and gravel quarries operating within a 10-mile radius.
Two mineral assessments conducted by outside parties determined that the mineral resources on the property had a net present value of $194 million and $169 million, respectively, the petition says.
Hancock’s 2016 return claimed a charitable contribution deduction of $180.2 million for the easement donation. An appraisal was attached to the return concluding that the mining of frac sand, construction sand, and construction gravel would have produced the “highest and best use” of the property before the easement was granted.
The appraiser used a discounted cash flow analysis in determining the fair market value of the property’s mineral reserves before the easement donation, the petition says. It says that to arrive at the property’s FMV after the donation, the appraiser analyzed 17 sales of comparable properties encumbered by conservation easements.
In a July 23 notice of final partnership administrative adjustment, the IRS said it was disallowing the deduction because Hancock hadn’t established that the donation met all the requirements of section 170. The notice asserted that the partnership was liable for a 40 percent gross valuation misstatement penalty or, alternatively, a 20 percent substantial valuation misstatement penalty. It also asserted accuracy-related penalties, a substantial understatement of income tax penalty, and a reportable transaction penalty.
Access to Appeals
The district court complaint reveals that the partnership’s 2016 return was selected for audit in July 2018. In May 2019, with the statutory period for assessing and collecting taxes due to expire in September 2020, the revenue agent handling the exam requested that Hancock extend the statute of limitations for an additional 12 months to give the agency enough time to develop and review the facts concerning donation.
At the time of the agent’s request, the partnership had concerns about extending the statute of limitations, the complaint says. Hancock’s attorneys sent a letter to the IRS in June 2019 stating that it was willing to extend the statute if the extension were solely for the purpose of allowing the case to be reviewed by Appeals.
The IRS faxed a response in August 2019 stating that to be sent to Appeals, a case must have 20 months remaining on the statute of limitations when it is closed by the exam division. The IRS’s response further said that if Hancock didn’t agree to extend the statute, the case would be closed and an FPAA would be issued, thereby precluding the partnership from going to Appeals. Hancock’s attorneys verbally informed the revenue agent that the partnership wouldn’t agree to extend the statute.
After revisiting the extension request in April 2020, Hancock determined that there wasn’t enough time remaining on the statute of limitations for the case to be reviewed by Appeals. The partnership decided to sign the Form 872-P previously issued by the IRS extending the assessment period to September 2021. The form was sent to the IRS April 3, along with a letter requesting that the agency issue an exam report so the partnership could file a protest letter and address matters with Appeals. The letter also acknowledged the IRS’s 20-month statute of limitations requirement for allowing cases to be reviewed by Appeals and said it would execute a revised Form 872-P further extending the assessment period if necessary.
However, the revenue agent informed Hancock in a May 1 letter that the IRS wouldn’t accept the signed Form 872-P because its attorneys had verbally informed her in August 2019 that it didn’t agree to a statute extension. The agent’s letter also noted that the signed form extended the statute of limitations by only 18 months, which wasn’t enough time for Appeals to accept the case.
Taxpayer Rights Violated
Hancock’s complaint argues that the revenue agent’s concern that 18 months was an insufficient amount of time to transfer the case to Appeals “was unfounded and an unjustified reason to deny Plaintiff’s statutory right to a review by the Appeals Office.”
According to the complaint, the IRS’s statement that 20 months is needed on the statute of limitations for a case to go to Appeals isn’t based on any statutory, regulatory, judicial, or other published guidance and “is actually contradicted by information published on Defendant’s own website which provides that 12 months, not 20 months, is the amount of time that must remain on the statute of limitations.”
The complaint pointed out that the partnership’s April 3 letter transmitting the signed Form 872-P expressly stated that it “would be glad to execute” another form providing more time for assessment and collection.
The partnership argued that the IRS’s refusal to countersign the Form 872-P violated section 7803(e)(4), the provision enacted under the Taxpayer First Act stating that Appeals’ resolution process “shall be generally available to all taxpayers.”
The IRS’s decision to deprive Hancock access to Appeals is “an intentional and unnecessary abuse of taxpayer rights and one of many examples of the Defendants’ failure to adhere to the Code, its own regulations, or the written directives of the executive office in its effort to eliminate the ability of syndicated entities to make qualified donations of conservation easements,” the complaint says.
The partnership asked the district court to issue a declaratory judgment stating that it has a statutory right to have its case reviewed by Appeals and that the IRS’s refusal to grant that right is a violation of its right to due process. The partnership also requested that the court order the IRS to countersign the Form 872-P and refer the case to Appeals.
The due date for the Justice Department’s answer is November 16.
More to It?
It’s unclear whether the IRS’s position on the 20-month statute of limitations requirement is based on section 4.46.5.12 of the Internal Revenue Manual. That provision states that a minimum of 365 days must remain on the statute when an unagreed case is received in Appeals. For returns filed under the 1982 Tax Equity and Fiscal Responsibility Act, 600 days must remain, it says.
Matthew T. Journy, one of Hancock’s attorneys, told Tax Notes that the IRM isn’t legal authority. “The IRS did not cite or otherwise identify that section of the IRM, or any other guidance, as the basis for its position regarding the ‘requirement’ for having at least 600 days on the statute of limitations in order to send a case to Appeals,” he said.
Journy said the inconsistency in the information used internally by the IRS and the guidance made available to the public on the IRS website “is one of the many problems of the IRS’s current enforcement strategy that make it difficult for taxpayers to know what information can be relied upon when attempting to comply with the IRS’s desired practices.”
There is no dispute that taxpayers must abide by the law, Journy said. “However, based on the IRS’s blatant abuse and disregard for the taxpayer’s statutorily guaranteed rights, there does appear to be a conflict as to whether the IRS is also required to abide by the law,” he said. “At the end of the day, we are simply asking the court to tell the IRS that it too must comply with the law.”
According to Frank Agostino of Agostino & Associates PC, there may be more to the dispute than the court filings let on.
Agostino said he believes that section 7803(e)(4) — read together with sections 7803(a)(3)(D) (“the right to challenge the position of the Internal Revenue Service and be heard”) and 7803(a)(3)(F) (“the right to appeal a decision of the Internal Revenue Service in an independent forum”) — creates the right to an Appeals conference. But section 7803 doesn’t extend the statute of limitations, he noted.
“Whatever the [statute of limitations], generally, the IRS and the taxpayer enter into a section 6501(c)(4) agreement to extend the [statute] so that the taxpayer can take advantage of the right to an Appeals conference,” Agostino said. “Thus, whether the period is 12 months or 20 months does not appear to be the real issue here.”
In Hancock County Land Acquisitions LLC v. Commissioner, Dkt. No. 12385-20, the petitioner is represented by attorneys from Chamberlain, Hrdlicka, White, Williams & Aughtry. In Hancock County Land Acquisitions LLC v. United States, No. 1:20-cv-03096 (N.D. Ga. 2020), the plaintiff is represented by Journy, S. Fenn Little Jr., and James Wingfield.