The IRS is vigorously litigating cases involving conservation easements they believe are abusive. One such case was Plateau Holdings, LLC v. Comm’r, T.C. Memo 2020-93 (Plateau I). In that case the Tax Court denied the entire deduction claimed based on a determination that the $25,449,000 value claimed was actually $2,691,200. A 40 percent penalty applied to the overvaluation amount (i.e. $22,757,800). In a subsequent action, Plateau Holdings, LLC v. Comm’r, T.C. Memo 2021-133 (Plateau II), the IRS also sought a 20 percent penalty for negligence on the lower valuation amount denied because the easement deed failed to protect the conservation purpose in perpetuity. However, the taxpayer wasn’t required to pay the 20 percent penalty because the Tax Court concluded they were entitled to a defense against that penalty for acting with reasonable cause and in good faith.
Reasonable cause and acting in good faith is a defense to many penalties assessed by the IRS under a variety of circumstances. Even instances that are not a primary or current focus of IRS enforcement efforts – like conservation easements. Reasonable cause is determined on a case-by-case basis after consideration of all the relevant facts and circumstances. Essentially, the question is whether the taxpayer acted reasonably given the facts and circumstances and their own personal knowledge experience, and education. In Plateau II, the Tax Court found that the easement deeds involved were prepared by an outside attorney with “considerable experience in drafting easement deeds” and the taxpayer could “reasonably believe” that the deeds were properly drafted. Also, the cases deciding that such deed language was problematic were all decided well after the Plateau deeds were executed. Further, the IRS had issued a Private Letter Ruling (PLR) in 2008, prior to the 2012 actions involved, indicating that such language would not necessarily be fatal to the easement. This particular fact is interesting because the Tax Court notes that there was no evidence to show that anyone relied on the PLR. However, the Tax Court notes that it was still “objective support for the reasonableness” of the position.
All taxpayers facing penalties where reasonable cause and good faith is a defense need to consider their own facts and circumstances. However, having an independent advisor unconnected to the transaction involved is helpful. Also if, like here, there is an honest misunderstanding of fact or law in a complex area that supports the defense. Finally, even if the taxpayer didn’t affirmatively rely on legal support or other information doesn’t mean it can’t be used to “objectively” show the reasonableness of relying on the position. This case supports using those resources in the defense, even if not actually considered. Paying additional taxes is painful enough without adding penalties to the amount owed when reasonable steps were taken.