First Surrender In IRS War On Abusive Conservation Deductions

In the wake of last week’s damning report from the Senate Finance Committee, the IRS is crowing over the first opponent to throw in the towel in a Tax Court brawl over a syndicated conservation easement based on the IRS offer that was publicized in IR-2020-30 on June 25, 2020.

Deduction Already Denied

The first taxpayer to accept the settlement is Coal Property Holdings LLC (CPH). CPH had lost its deduction in an opinion from Judge Albert Lauber on October 28, 2019.

“The easement did not guarantee that Foothills Land Conservancy would receive a proportionate share of the proceeds in the event of a judicial extinguishment of the easement.

Judge Lauber’s strict construing of the regulation indicates that the sales proceeds in the event of extinguishment need to be in the ratio established on the date of the gift, roughly 97%. The language in the actual easement allows for adjustments to the percentage based on prior claims and appreciation attributable to improvements.”

Penalties Not Settled

That leaves the matter of penalties still open, which hinges on valuation. CPH had claimed a deduction of $155 million for its donation of an easement on 3,713 acres in Campbell County in Eastern Tennessee. CPH had recently acquired the land for $32.5 million.

Reading between the lines of Judge Lauber’s June 15, 2020 order, things were not looking good for CPH.

“On October 14, 2013, the Property appears to have been Coal Holdings’ only significant asset. Ownership of Coal Holdings was thus a reasonable proxy for ownership of the Property. On that date LCV Fund XII purchased a 98.99% interest in Coal Holdings for $32.5 million. If that was an arm’s-length transaction, the FMV of a 98.99% interest in the Property would appear to have been $32.5 million. Grossing up that figure to account for the minority interest would seem to produce a value of about $32.83 million for a 100% interest in the Property.

Coal Holdings donated the easement three days later, on October 17, 2013. On its tax return it claimed that the easement—representing only a partial interest in the Property—was worth $155.5 million on that date. If the Property was worth roughly $33 million three days earlier, petitioner will have to prove that the Property appreciated in value by at least $44.75 million in three days in order to avoid the “gross valuation misstatement” penalty.” (Emphasis added)

The Deal

The deal that CPH was offered along with other taxpayers with docketed cases is a pretty sweet compared to what Judge Lauber seems to have in store for them. CPH is facing total disallowance of the $155 million deduction, which should be worth around $55 million in tax and a 40% penalty on top of that and interest since April 2014.

Under the deal, investor partners can write off the cost of the investment and the penalty is 10% to 20%. It varies based on the ratio of the deduction to cost. According to the decision, there is actually only one investment partner named Paul Viera Jr. There is someone by that name who runs an investment company with $25 billion in assets under management, but I have been unable to confirm that is the same person and have not heard back from the attorneys.

At any rate, making the deal in this case is a lot easier since the offer requires that all partners agree.

Is It Too Good A Deal?

I think there is an argument that Paul Viera Jr. may be getting too good a deal. We don’t know exactly what the general partner interests are, but you can be pretty well assured that somebody with the resources to put over $40 million into the deal and the need for shelter on over $310 million in adjusted gross income had some sharp legal representation.

So it is reasonable to think that when the dust settles he will be owning 3,700 acres of forested hill country land. Of course. we don’t know how much that is worth. The after value in the litigation was only $5 million, but that might have not been that reliable. If we assume that the disappointing results of the litigation might motivate the sponsors to hand back some of their profit, Mr. Viera’s cost for that land might be somewhat lower.

And under the terms of the deal, he gets to expense his acquisition cost of $40 million. That is as good a deal, possibly better, than he would have gotten had he bought the land and given the entire interest to Foothills Land Conservancy. The land as is will likely be his and over five square miles of forest with lots of wildlife – deer, elk, wild turkeys and more – seems like a very nice thing to own.

The Happy Ending Part

Campbell County has the distinction of having formed the first Tennessee unit to serve in the Union Army – Company B of the 1st Tennessee Infantry. The easement protects more than 1% of the land area of the county. The Foothills Land Conservancy received the easement.

I spoke with Bill Clabough, executive director of Foothills. He was somewhat diffident about my enthusiasm for East Tennessee’s Union leaning. Tennessee is known as the Volunteer State, but the reference is to either the Mexican War or the War of 1812, not the Late Unpleasantness.

He and I had discussed the beautiful property before and he assured me that the elk and the deer and the wild turkeys are undisturbed by the outcome of the litigation. They remain protected. Mr. Clabough had invited me to visit the property on my tour of the country, but that got a little disrupted by Covid-19. He assured me that my concern about unexploded ordnance from the property’s use as an artillery range during World War II was misguided.

About Judge Lauber

There was an intriguing detail in Jacob Dean’s biographical article about Judge Lauber that I have long meant to follow up on.

Judge Lauber attended a Jesuit high school in New York City, and it was there that he first started to study Latin and Greek. His studies of the classics continued throughout his undergraduate and graduate education, and as a result, he became a self-described “very careful reader of text.” He sees these studies as a formative experience that has colored his judicial attitude.

I have finally confirmed that of the four possibilities, the New York City Jesuit high school that Judge Lauber attended was Xavier High School on West 16th century. The late Supreme Court Justice Antonin Scalia also noted for his textualism, also attended Xavier, as did I. Scalia, however, graduated from Xavier when dinosaurs roamed the earth, while Judge Lauber was a senior when I was a freshman.

The other peculiar thing about Xavier beyond the opportunity to take both Latin and Greek and a modern language was that you also studied military science and were a member of a JROTC regiment.

I had to find out whether Judge Lauber was one of the lofty, remote cadet officers with Sam Browne belt and saber or one of the seniors in the “private’s club” who would be standing next to a freshman, all of whom were privates, in the ranks. If you want to know, look out for my upcoming piece on the education of a Tax Court judge.