This case involves a charitable contribution deduction claimed by Plateau Holdings, LLC (Plateau), for conservation easements. On its 2012 Federal income tax return Plateau claimed a deduction of $25,449,000 for the donation of the easements. On June 23, 2020, we issued an opinion,
We determined in
The Internal Revenue Service (IRS) also seeks a 20% penalty for negligence or a substantial understatement of tax under section 6662(a) and (b)(1) and (2). This penalty would apply to what might be called the "lower tranche" of the underpayment, i.e., the portion of the underpayment that was not attributable to a valuation misstatement. The 20% penalty would apply, in other words, to the portion of the underpayment resulting from our conclusion that Plateau is not entitled to a charitable contribution deduction of $2,691,200, corresponding to the correct value of the easements.
The disallowance of this deduction resulted solely from our determination that the easement deeds failed to protect the conservation purpose in perpetuity. In
We incorporate by reference our findings of fact in
The Code imposes a penalty where "any portion of an underpayment of tax" is attributable to "[n]egligence or disregard of rules or regulations" or to a "substantial understatement of income tax." Sec. 6662(a) and (b)(1) and (2). Negligence is the "failure to make a reasonable attempt to comply with the * * * [Code]," and disregard includes "careless, reckless, or intentional disregard." Sec. 6662(c). An understatement of income tax is "substantial" if it exceeds the greater of $5,000 or "10 percent of the tax required to be shown on the return." Sec. 6662(d)(1)(A). In the case of a partnership, a penalty under section 6662 applies when the partnership takes a return position that is negligent or that might create a substantial understatement of tax at the partner level.
The determination of an "underpayment" within the meaning of section 6662(a) cannot be made at the partnership level, because partnerships do not pay tax. However, we can determine at the partnership level the
Petitioner contends that the 20% penalty should not apply because Plateau had reasonable cause and acted in good faith when claiming a charitable contribution deduction.
The easement deeds were prepared by Mark Jendrek, an attorney for the donee, Foothills Land Conservancy (Conservancy). Both Mr. Jendrek and the Conservancy had considerable experience in drafting easement deeds, and the deeds in this case were modeled after others shared through an alliance of land trusts. Although Mr. Jendrek was not Plateau's lawyer, Plateau could reasonably have believed that he drafted the easements in a manner that was intended to comply with the regulations and to protect the Conservancy's interests.
When Plateau filed its 2012 return, the validity of such judicial extinguishment clauses had not been tested in litigation. All of the judicial opinions that have found such clauses wanting were issued well after Plateau executed the deeds (in December 2012) and filed its return (in April 2013).
The information available to Mr. Jendrek and Plateau in December 2012 arguably supported the acceptability of judicial extinguishment clauses resembling those here. In 2008 the IRS had issued a private letter ruling (PLR) suggesting that a clause of this sort would not necessarily prevent the allowance of a charitable contribution deduction.
For these reasons, we conclude that the 20% penalty should not apply because Plateau had reasonable cause and acted in good faith when claiming a charitable contribution deduction, at least with respect to its claim of a deduction corresponding to the correct value of the easements. To implement the foregoing,