Things that Make You Go Hmmm: Tax Court Orders Partnership to Explain Over 480% Increase in Value in 3 Days to Avoid 40% Penalty in Conservation Easement Dispute

By Anthony P. Daddino on June 17, 2020

If Tax Court Judge Lauber’s June 15, 2020 order is any indication, the Tax Court has grown tired of syndicated conservation easement cases.

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:

(1) Does petitioner dispute that the transaction by which [the partner] purchased a 98.99% interest in Coal Holdings for $32.5 million on October 14, 2013, was an arm's-length transaction?

(2) If petitioner disputes the arm's-length nature of that transaction, on what specific facts does petitioner rely?

(3) If the October 14 transaction was an arm's-length transaction, does petitioner dispute that it provides conclusive evidence that the FMV of the property on that date was approximately $33 million?

(4) If petitioner disputes that proposition, on what specific facts does petitioner rely?

(5) If the entire property was worth about $33 million on October 14, 2013, on what specific facts does petitioner rely to urge that the Property increased in value by at least $44.75 million during the ensuing three days?

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 adaddino@meadowscollier.com.