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Sunday March 29, 2020

Washington News

Washington Hotline

IRS launches Identity Theft Central

On February 3, 2020, the IRS launched Identity Theft Central on IRS.gov. The new web page is designed to improve online access to information on identity theft and data security protection.

Identity Theft Central provides resources to taxpayers on how to protect themselves from identity theft. Under the Security Summit taskforce, the IRS has been working in partnership with state tax agencies and tax preparation companies to increase taxpayer protections.

The Security Summit partnership was established in 2015 and has made substantial progress in the fight against tax-related identity theft. The Identity Theft Central web page was created as part of this effort to provide a central location for information on ID theft, scams and schemes.

Tax-related identity theft occurs when someone uses stolen personal information, including a Social Security number, to file a tax return and claim a fraudulent refund. If a taxpayer suspects he or she may be a victim of identity theft, the IRS instructs the taxpayer to continue to pay taxes and file tax returns.

There are several potential signs of identity theft:
  • You receive a letter from the IRS about a tax return that you did not file.
  • You are unable to e-file your tax return because of a duplicate Social Security number.
  • You get a tax transcript in the mail that you did not request.
  • You get an IRS notice that an online account has been created for you.
  • You get an IRS notice that you owe additional tax or that you have had collection actions taken against you for a year you did not file a tax return.
If you are a victim of identity theft, you should take several protective actions:
  • Respond immediately to any IRS notice by calling the number provided.
  • If your e-filed return is rejected because of a duplicate filing under your Social Security number, or if the IRS instructs you to do so, complete IRS Form 14039, Identity Theft Affidavit.
  • Visit IdentityTheft.gov for steps you should take right away to protect yourself and your financial accounts.
  • If you e-file your tax return and get a message telling you that a dependent on your return has been claimed on another tax return, or if you receive an IRS Notice CP87A, you will need to provide additional proof to the IRS to claim that dependent.

$16 Million LLC Conservation Easement Deduction Denied


In Railroad Holdings LLC et al. v. Commissioner; No. 11838-16; T.C. Memo. 2020-22 (2020), the Tax Court denied a $16 million conservation easement charitable deduction.

Railroad Holdings LLC (RH) is a South Carolina limited liability company. In 2016, it held 452 acres of South Carolina land previously acquired in 2012 for $4 million. The tax matters partner for RH is Railroad Land Manager LLC (RLM).

On December 26, 2012, RH deeded a conservation easement on a 452 acre parcel to the Southeast Regional Land Conservancy, Inc. (SERLC), a qualified conservation nonprofit. RH obtained a "before and after" appraisal and claimed a $16 million charitable conservation easement tax deduction. The IRS denied the deduction and claimed the deed failed to fulfill the Section 170(h)(5)(A) "protected in perpetuity" requirement.

The deed stated, "This conservation easement gives rise to a real property right and interest immediately invested in SERLC. For purposes of this conservation easement, the fair market value of SERLC's right and interest (which value shall remain constant) shall be equal to the difference between (a) the fair market value of the conservation area as if not burdened by this conservation easement and (b) the fair market value of the conservation area burdened by this conservation easement, as such values are determined as of the date of this conservation easement."

The deed noted that upon voluntary or involuntary conversion, SERLC would receive an amount "at least equal to the fair market value" of the easement.

The deed also included a savings clause. It stated, "If any provision in this conservation easement is found to be ambiguous, an interpretation consistent with its conservation purposes that would render the provision valid should be favored over any interpretation that would render it invalid."

The Tax Court noted that a conservation easement must be granted and protected in perpetuity. It stated, "Under Section 170(h)(2)(C), a 'qualified real property interest' includes an interest in real property that is a restriction granted in perpetuity on the use of the real property. Section 170(h)(5)(A) provides that a contribution is not treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity."

Reg.1.170A–14(g)(6)(ii) states, "For a deduction to be allowed under this section, at the time of the gift, the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole."

The conservation easement deed creates a fixed value for SERLC. If the property doubles in value before an involuntary conversion, SERLC still receives the fixed original value.

The taxpayer raised three arguments. Under the deed, the involuntary conversion value must be at least equal to the fair market value, the donee intended the deed to qualify for a deduction and the savings clause protects the deduction.

The Tax Court held the "fair market value" clause did not override the formula that fixed the benefit to the nonprofit. The intent of SERLC does not change the deed. Finally, as a matter of public policy, under the rationale of Belk v. Commissioner, 774 F.3d 221, 229 (4th Cir. 2014), aff'g 140 T.C. 1 (2013), the savings clause is not sufficient.

The Court concluded, "A donor cannot reserve in an easement deed a right that Section 170(h) does not permit (such as a right to more than his share of extinguishment proceeds) but then save his charitable contribution by mentioning the rule he has violated and calling for that rule to kick in and save the day if his violation subsequently comes to light."

The conservation easement charitable deduction of $16 million was denied.

Development Rights Preclude Conservation Easement Deduction


In Nathaniel A. Carter et ux. et al. v. Commissioner; No. 23621-15; No. 23647-15; T.C. Memo. 2020-21 (2020), the Tax Court held that retained development rights conflicted with the Section 170(h)(2) "perpetual restrictions requirement." The conservation easement charitable deduction was denied, but the penalties were not applicable.

In 2011, Dover Hall Plantation LLC (DHP) owned a 5,245–acre tract of land in Georgia. DHP deeded a conservation easement on 500 acres of land to North American Land Trust (NALT), a qualified conservation nonprofit. The deed stated "The conservation purposes are (1) the preservation of a relatively natural habitat of fish, wildlife, or plants, or similar ethical system and (2) preservation of the covered property as an open space that will provide a significant public benefit by (A) providing scenic enjoyment to the general public, and (B) advancing a clearly delineated governmental conservation policy."

However, the deed permitted the construction of 11 single–family homes on 2 acre lots. The locations for the future lots were subject to approval by (NALT). The DHP partners obtained a "before and after" appraisal and reported charitable deductions on their 2011 tax returns. The IRS denied the deductions and assessed over $4 million in taxes and $1 million in gross valuation misstatement penalties.

The Tax Court noted the conservation easement deduction is permitted only if it is both restricted and protected in perpetuity. See Belk v. Commissioner, 774 F.3d 221, 229 (4th Cir. 2014), aff'g 140 T.C. 1 (2013), The IRS contended the failure to specify the building lot locations was similar to Pine Mountain Pres., LLLP v. Commissioner, 151 T.C. 247 (2018) and precluded a deduction.

In Belk, the Fourth Circuit emphasized that "the plain terms of Section 170(h)(2) conclude that a perpetual use restriction must attach to a defined parcel of real property, rather than simply some or any (or interchangeable parcels of) real property."

The right to select the lot locations after the easement was created conflicts with the defined property requirements of the statute. DHP maintained that the external boundaries are maintained and the locations of the 11 single–family dwellings would not impair the conservation purposes. However, the Tax Court noted, "The retention of rights to build in indeterminate areas can violate the perpetual restriction requirement even if it complies with the perpetual protection requirement (because, for example, the donee must approve each building location after determining that the achievement of conservation purposes would not be materially impaired)."

While the deduction was denied, the revenue agent's supervisor approved the penalties 11 days after the initial letters to DHP. Because penalties must be approved by a supervisor prior to the issuance of letters to taxpayers under section under Section 6751(b)(1), the penalties were not valid.


Published February 7, 2020
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