Fourth Circuit: IRS Has Repealed Conservation Easement Deduction With Vengeful Audits and Hyper-technicality

I told you earlier this year that the Tax Court has had just about enough of conservation easement deduction cases.  Another Court has chimed in with the same sentiment. During an argument last week in Brooks v. Commissioner (right click and open in a separate window to see timer), a case involving a seriously ridiculous overvaluation of a conservation easement, Fourth Circuit Judges questioned whether the Service’s incessant audits have not effectively — and by administrative tyranny — repealed the entire deduction. 

At around the 18:32 mark Judge Wilkerson says that the Services’ policy of auditing conservation easement deduction claimants with such “vengeance” amounts to an administrative repeal of the deduction.  He complains that the aggressive auditing “essentially nullifies the conservation easement contribution deduction.”  The Service responds by admitting that transactions easily abused are indeed subject to higher scrutiny but that taxpayers just need to do it right.  To which another judge remarked that the regulations were filled with seemingly non-substantive distinctions and requirements; he complains that the “hyper-technicality” with which the Service applies those regulations effectively forecloses the deduction.  And that this applies even when the taxpayer is non-abusive because taxpayers know that the Service is going to audit even well-meaning taxpayers forever. 

I suppose what the judges are really saying is that the Service’s approach to conservation easement deductions is unnecessarily adding insurmountable administrative costs to a deduction it hates but that Congress endorses.  All with the goal of repealing the deduction by making it too expensive.  The taxpayer is probably going to lose this case, but I betcha there will be language in the opinion — if there is one — chastising the Service too.  

darryll k. jones