Mountanos v. Commissioner—9th Circuit Affirmed Tax Court’s Denial of Conservation Easement Donation Deductions and Imposition of Penalties

Mountanos involved a landowner who donated a conservation easement with respect to undeveloped land in Lake County, California, in 2005. The landowner reported that the easement had a value of $4.69 million, claimed a federal charitable income tax deduction of $1.3 million on his 2005 income tax return, and claimed the remaining $3.39 million in the form of carryover deductions on his 2006, 2007, and 2008 returns.  

In Mountanos v. Comm’r, T.C. Memo. 2013-138 (Mountanos I), the Tax Court sustained the IRS’s disallowance of the carryover deductions, finding that the taxpayer failed to prove that the highest and best use of the land changed as a result of the donation and, thus, that the easement had any value. The statute of limitations had apparently run on the landowner’s 2005 return. The Tax Court also found that the taxpayer was liable for strict liability gross valuation misstatement penalties under IRC § 6662(h).

In Mountanos v. Comm’r, T.C. Memo. 2014-38 (Mountanos II), the Tax Court denied the taxpayer’s motions to reconsider, vacate, or revise its opinion in Mountanos I. Asking the court to consider alternative (non valuation) grounds for denying the deduction in Mountanos II was, said the Tax Court, “a calculated maneuver to avoid the accuracy-related penalty.”

In a short (just over 3-page) unpublished opinion, Mountanos v. Comm’r, No. 14-71580 (9^th Cir., June 1, 2016) (Mountanos III), the Ninth Circuit affirmed the Tax Court’s holding that the landowner (i) was not eligible for the carryover deductions claimed on his 2006, 2007, and 2008 income tax returns and (ii) was liable for a strict liability gross valuation misstatement penalty with regard to each return. The Ninth Circuit explained that, even if the Tax Court erred in failing to assign some non-zero value to the potential to subdivide the property into seven separately salable parcels, the error was harmless because the evidence indicated the easement had a value of no more than $210,000, which was far less than the $1.3 million the landowner claimed as a deduction on his 2005 return. In addition, even if the easement had a value of up to $210,000, the landowner remained subject to gross valuation misstatement penalties because the value he reported on his income tax returns for the easement ($4.69 million) was more than four times (400%) of that value. Finally, the Ninth Circuit rejected the landowner’s argument that not allowing him to raise the reasonable cause defense for his gross valuation misstatements on his 2006, 2007, and 2008 returns constituted an improper retroactive application of the strict liability penalty, which was enacted as part of the Pension Protection Act of 2006. Citing Chandler v. Comm’r, 142 T.C. 279 (2014), the Ninth Circuit explained that the landowner had “reaffirmed” his gross valuation misstatement with respect to the easement on the returns in which he claimed the carryover deductions.  

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law