Conservation Easement Syndicate Gets A Big Windfall From the Backdated Document Mess

We have previously blogged about the big mess at Chief Counsel’s Office regarding a penalty authorization form, a supervisor’s required signature for which was backdated in an effort to save a $15.2 million valuation penalty.  IRC 6751 requires supervisor approval before assessing penalties against taxpayers.  But the Revenue Agent forgot to get that approval.  When told to fix it in a roundabout way, the revenue agent added a date several months earlier than the date of actual signature to the form.  Chief Counsel successfully argued for the penalty anyway without telling taxpayer or the Tax Court judge that the form had been backdated.  The Service has been playing hardball for a while with conservation easements because the syndicates have overvaluation habits.  They then dole out deductions via partnership allocations that are themselves notoriously difficult to police.  The tax sheltering effect is multiplied and hard to regulate because valuing open space is subjective, and then partnership allocations are incredibly porous in the sense that they stop only the most obvious and egregious abuse.   Its a double whammy.  So anyway, when it came to light via metadata and that Chief Counsel had unintentionally, but negligently, presented fake news to the Court, Taxpayers filed a motion for reconsideration, Chief Counsel conceded error and payment of fees, and the Tax Court reversed its prior ruing imposing penalties.  The Court also shook a very stern finger at the IRS, calling the mistake reckless enough as to almost constitute constructive intent to lie.  That pretty much confirmed that the government should forget about the penalties.  

Well it looks like the cringe-inducing episode is almost over the poor and the dejected litigators in Chief Counsel’s office can soon have a beer and start telling the hilarious war story.  Last Thursday, Chief Counsel announced that the case had been settled.  I had hoped, because I am a law and order type of guy, that the blunder would not defeat the penalties. But that hope was dashed, and probably rightly so if I am being honest, when the government put up the white flag by way of a Motion for Continuance announcing settlement.  Here are the key statement from the motion:

7. Respondent emphasizes the following: The Internal Revenue Service (IRS) is committed to fairness, candor, and transparency in its interactions with taxpayers and the courts. Holding itself to the highest standards of integrity is critical to maintaining confidence in the agency’s work and enabling it to carry out its mission on the taxpayers’ behalf.  Consistent with those goals, and in light of all the circumstances here, the IRS does not intend to continue pursuing penalties in this case. It has also undertaken an ongoing review of syndicated conservation easement cases to ensure that the evidentiary record about supervisory approval is properly presented and that the agency pursues or continues to pursue penalties only where appropriate.

8. On August 31 and September 1, 2023, the parties held conference calls during which the parties engaged in meaningful settlement discussions. The parties have reached a basis for settlement of all issues before the Court. 

So its all over but the crying.  Except that now every other conservation easement syndicate litigating the Service’s denial and assessment of penalties is going to discover chief counsel to death.

darryll k. jones