The case is Coal Property Holdings, LLC v. Commissioner, Tax Court Docket No. 27778-16. Like many other cases before it, the partnership had already lost the charitable deduction due to a technical defect in the conservation easement deed. The issue lingering before the Tax Court is penalties, specifically the 40% penalty.
As summarized in Judge Lauber’s order linked here, on October 14, 2013, a 98.99% interest in the partnership was sold for $32.5 million. At that point, the only significant asset of the partnership was real property that would later be subject to the easement. Three days later, the partnership conveyed a conservation easement over the property to a land trust. The partnership claimed a deduction of $155 million, based on a “before” value of $160.5 million and “after” value of $5M. Although the deduction had previously been disallowed, Judge Lauber correctly noted that the “value of the easement is relevant for purposes of determining whether [the partnership] is liable for the 40% gross valuation penalty,” which applies if the value of the property claimed on the return is 200% or more of the correct amount. By the judge’s calculations, if the value of the easement did not exceed $77.75M, then the partnership was liable for the 40% penalty.
In what can be described as pointed, cringe-inducing, or merciless - depending on your perspective, Judge Lauber ordered the partnership to answer the following questions:
Taxpayers and their advisors would be well-served to pose these same questions before any contemplated investment in a syndicated conservation easement deal.
If you have any questions about this blog post or any other tax-related matter, please do not hesitate to contact me at (214) 749-2464 or firstname.lastname@example.org.