Tax Litigation: Tax Court Denies Conservation Easement Deduction

For landowners, donating a conservation easement is a way to protect places they love. It’s also a major financial decision.  Done right the tax incentives may offset some of that loss in property value, making conservation a viable option for more landowners.  However, done wrong, the IRS may reign down on the transaction to deny the deduction as an abusive tax transaction.

In a recent case, the United States Tax Court ruled a limited liability company (LLC) was not entitled to charitable contribution deduction because the conservation purpose of the easement was not "protected in perpetuity" as required by Code Sec. 170(h)(5)(A). The taxpayer had donated a conservation easement to a qualified charitable organization. The easement deed provided that, if the property were sold following judicial extinguishment of the easement, the donee organization would receive a share of the proceeds, "after the satisfaction of prior claims," determined by a formula.

The easement did not satisfy the requirements of Reg. §1.170A-14(g)(6) because the portion of the proceeds to which the donee was entitled was improperly reduced by amounts paid in satisfaction of prior claims against the taxpayer. Further, the amounts inuring to the taxpayer were attributable to (i) appreciation in the value of improvements existing when the easement was granted; and (ii) the fair market value of any improvements the taxpayer subsequently made to the property, followed.


The taxpayer’s attempted use of a saving clause to reform the deed to comply with the regulation was not valid because the savings clause provided for a future event that altered the tax consequences of a conveyance and was therefore, declined to be enforced by the court. In addition, the taxpayer argued that Reg. §1.170A-14(g)(6) was ambiguous and that the text on which it relied did not constitute an impermissible saving clause but rather set forth a permitted interpretation provision. However, this argument was rejected because the regulation was unambiguous on its face as it plainly required that the charitable grantee be guaranteed to receive its full proportionate share of the sale proceeds, upon a sale following judicial extinguishment of the easement. Therefore, the IRS's motion for partial summary judgment was granted.


While the conservation easement transaction can sometimes be more difficult to attack, highly technically rules exist giving the IRS more ammo to find a reason to disregard and deny the perceived tax benefits.

Anyone considering a conservation easement donation or already involved in one should have the transaction reviewed by an independent tax attorney with experience in this area of law.  Contact Joseph P. Wilson at 949-397-2292 or wilson@wilsontaxlaw.com.  Mr. Wilson represents clients throughout California and the Globe, involving local, state, federal and international civil tax disputes and tax litigation and criminal tax defense. Mr. Wilson is the Managing Shareholder at Wilson Tax Law Group, APLC, former Member of the Executive Committee of the Taxation Section, California Lawyers’ Association, a former IRS Attorney, a former Assistant United States Attorney, and a former Tax Attorney, California Franchise Tax Board.

Wilson Tax Law Group, APLC is an Orange County law firm specializing in Federal and State tax audits, internal compliance, FBAR, offshore bank account disclosures, and criminal tax, including appeals, trials, and collections. The Los Angeles and San Francisco Daily Journals have named Wilson Tax Law Group, APLC as one of the “Top 20 Boutique Firms in California”.

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Tax Flash : Summary of 2019 Property Tax Changes

This is a summary of 2019 legislation affecting property taxes issued by the BOE on December 4, 2019. All bills become effective January 1, 2020, unless otherwise specified.



AB 46 (Carillo), Chapter 9


Among others, amends section 253 of the Revenue and Taxation Code.

Veterans' Exemption. Replaces mental illness terms with more culturally sensitive terms and replaces gender references with gender neutral references.



AB 587 (Friedman), Chapter 657


Adds section 65852.26 of the Government Code.

Sale of Accessory Dwelling Unit. Allows an accessory dwelling unit to be sold or conveyed separately from the primary residence to a qualified buyer if all of the following are met:




  • The property was built or developed by a qualified nonprofit corporation receiving the welfare exemption;




  • A recorded contract exists that imposes an enforceable restriction upon the sale that ensures the property will be preserved for affordable housing for 45 years for owner-occupied housing;




  • The property is held pursuant to a recorded tenancy in common agreement; and




  • A grant deed is recorded, and a Preliminary Change of Ownership Report filed with the the grant deed.



AB 608 (Petrie-Norris), Chapter 92, effective July 12, 2019


Amends section 155.20 of the Revenue and Taxation Code.

Low Value Exemption. For a five-year period beginning with the January 1, 2020 lien date, the $50,000 limit that a county board of supervisors may exempt from property tax under a “low value” ordinance applies to any possessory interest. In addition, once a low value ordinance is enacted or amended, the assessor may choose how to administer the low value exemption, without specific authorization from the county board of supervisors. [1]



AB 872 (Aguiar-Curry), Chapter 685, effective October 9, 2019


Amends section 62 of the Revenue and Taxation Code.

Change in Ownership Exclusion for Transfer of Corporation Stock. Provides a change in ownership exclusion for a transfer of stock from a parent to a child in a qualified corporation that owns qualified real property, provided that the transfer is due to the death of the parent. A “qualified corporation” is a corporation that was created between March 1, 1975 and November 6, 1986, and has had parents and their children as the only stockholders. “Qualified property” is a parcel of land that contains the principal residence of the parents prior to their death and that has been the continuous place of residence of a child of those parents since the creation of the qualified corporation. The qualified property must have an adjusted base year value of $1 million or less.



SB 196 (Beall), Chapter 669


Amends sections 75.11, 402.1, and 532 of, and adds and repeals section 214.18 of, the Revenue and Taxation Code.

Community Land Trust – Land Use Restriction. Creates a rebuttable presumption, retroactive to September 27, 2016, that the sales price of a dwelling or unit includes the leased land on which the dwelling or unit is located.


Community Land Trust – Welfare Exemption. Until January 1, 2025, extends the welfare exemption to property owned by a community land trust intended to be developed into homes to be sold to low- or moderate-income households with a 99-year land lease or rental housing available to low-income households. Recaptures the property taxes if the community land trust does not commence housing construction on the property within five years.



SB 527 (Caballero), Chapter 273


Amends sections 51201 and 51231 of the Government Code.

Williamson Act Compatible Use. Provides that an agricultural commodity includes cultivated industrial hemp. Allows a local agency's rule on the administration of agricultural preserves to provide that commercial cultivation of cannabis may constitute an agricultural or compatible use.



SB 780 (Governance and Finance Committee), Chapter 329


Among others, amends section 72 of the Revenue and Taxation Code.

Building Permits. Expands the existing requirement to send the county assessor copies of all building permits to any entity authorized to issue a building permit.



SB 791 (Governance and Finance Committee), Chapter 333, effective September 20, 2019


Amends section 441 of, amends and adds section 1152 of, adds sections 1153.5 and 1157 to, and repeals section 1153 of, the Revenue and Taxation Code.

Valuation of Certificated Aircraft. Changes the method to calculate California's share of total aircraft value owned by commercial air carriers for property tax purposes and re-establishes streamlined administrative procedures for counties and air carriers.



VETOED BILLS


AB 885 Governor did not approve adding a definition of “substantially equivalent” for new construction exclusion of property damaged or destroyed by misfortune or calamity.


SB 294 Governor did not approve an increase in welfare exemption cap for lower income households.


These bills may be viewed from the California State Legislature's website at http://leginfo.legislature.ca.gov/#. The Board of Equalization's bill analyses may be viewed from our website at http://www.boe.ca.gov/app/proptax-leg-analyses.aspx?year=2019-2020.


If you have any questions regarding the application of these measures, please contact the Wilson Tax Law Group at 949-397-2292.

IRS Criminal Investigation releases Fiscal Year 2019 Annual Report; celebrates 100 years





IR- 2019-199


Internal Revenue Service: Criminal Investigations Division (CID): 2019 annual report




IR-2019-199


WASHINGTON — The Internal Revenue Service today released the Criminal Investigation Division's (CI) annual report , highlighting significant successes and criminal enforcement actions taken in fiscal year 2019. The report also commemorates CI's 100th year anniversary as a law enforcement agency.


“CI is critical to the overall enforcement efforts of the IRS in pursuing its Mission in a fair, impartial, diligent and, where appropriate, tenacious manner.” said IRS Commissioner Chuck Rettig. “The Fiscal Year 2019 Annual Report summarizes various CI activities throughout the year but vastly understates the importance of CI to the overall IRS mission. CI supports the efforts of compliant taxpayers by visibly demonstrating the risks of noncompliance thereby helping otherwise honest taxpayers stay honest and compliant.”


Key focuses of CI in fiscal year 2019 included cybercrimes, with an emphasis on virtual and crypto currencies, traditional tax investigations, international tax enforcement, employment tax, refund fraud and tax-related identity theft. Other areas of emphasis included public corruption, corporate fraud and money laundering.


“We are working smarter using data analytics to augment good old-fashioned police work and find those cases that have the biggest impact on tax administration,” said Don Fort, Chief of CI. “We are leading the world in our ability to trace virtual currency in financial investigations while still working our bread and butter tax enforcement mission areas.”


CI initiated 2,485 cases in fiscal year 2019, applying approximately 75 percent of its time to tax related investigations. The number of CI special agents dropped to 2,009 by the end of fiscal year 2019, which is the lowest level since the early 1970's. Consequently, CI has increased its usage of data analytics and strengthened its international partnerships to assist in finding the most-impactful cases.


CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. CI achieved a conviction rate of 91.2 percent in fiscal year 2019, which is among the highest of all federal law enforcement agencies. The high conviction rate reflects the thoroughness of CI investigations and the high caliber of CI agents. CI is routinely called upon by prosecutors across the country to lead financial investigations on a wide variety of financial crimes.


“While we have published an annual report since 1920 to highlight our successes during the past year, this particular year had special meaning as we celebrated our 100th anniversary as a law enforcement agency,” Fort said. “Honor the Badge, Preserve the Legacy, Master Your Craft, Inspire the Future. These are the guiding principles that IRS Criminal Investigation lives by and that 2019 was defined by.”


The 2019 report is interactive, summarizes a wide variety of CI activity during the year and features examples of cases from each field office on a wide range of financial crimes. The federal fiscal year begins Oct. 1 and ends on Sept. 30.



Tax Alert- California Excludes PPP Loan from Income but Disallows Necessary and Ordinary Business Expenses

California "will not tax" forgiven Paycheck Protection Program (PPP) loan amounts. For tax years beginning on and after January 1,...