Tax Court Judge Lauber Denies Petitioner Motion for Summary Judgment Rejecting Fraud Penalties in Allegedly Abusive SCE Case; Some Background (4/14/24)

In North Donald LA Property LLC et al. v. Commissioner (Order T.C. Dkt. 24703-21 #140 4/10/24), TA here and TC Dkt here*, a syndicated conservation easement (“SCE”) case, the Court (Judge Lauber) denied the petitioner’s motion for partial summary judgment. 

* This is an order and not an opinion of the Court. Hence there is no direct access to the Court’s order. Access through the Court (as opposed to a third party provider) is by using the Court website to access the docket entries for Case # 24703-21 and going to the particular docket entry (in this case entry 140 dated 4/10/24). Here there is a third party provider, Tax Analysts on its public site sponsored by Deloitte. I take this opportunity to state my appreciation to Tax Analysts and Deloitte for providing this service.

Judge Lauber opens (slip op. 1):

On February 16, 2024, petitioner filed a Motion for Partial Summary Judgment seeking a ruling that the civil fraud penalty, as a matter of law, does not apply because respondent has not alleged facts showing that NDLA “intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.” Memorandum in Support of Motion for Partial Summary Judgment at 7 (quoting Parks v. Commissioner, 94 T.C. 654, 661 (1990)). In essence, petitioner contends that respondent cannot carry his burden of proving fraud by clear and convincing evidence because NDLA disclosed on its tax return the facts relating to the conservation easement transaction. Finding that there exist genuine disputes of material fact regarding the possible application of the fraud penalty, we will deny the Motion.

Judge Lauber starts the discussion of the facts as follows:

Sixty West, LLC (Sixty West), was a promoter of syndicated conservation easement transactions.n3 In March 2016 Reserve at Welsh, LLC (Welsh), an entity controlled by Sixty West, purchased 3,324 acres of land in Jefferson Davis Parish, Louisiana (Parent Tract). Sixty West allegedly purchased the Parent Tract for use in multiple syndicated transactions that would generate large charitable contribution tax deductions for investors. The total purchase price for the Parent Tract was $9,888,008, or $2,975 per acre.
   n3 “Promoter” is a loaded term in the syndicated conservation easement space because of the penalty imposed on “promoters” by section 6700(a). In this Order we use the term “promoter” in its ordinary sense, making no determination as to whether Sixty West was a “promoter” within the meaning of section 6700(a), a question that is not before us.

Judge Lauber’s recitation of the rest of the relevant facts then follows a recognizable pattern for those who have watched abusive SCE cases. Setting aside technical foot-faults, the core common pattern is the substantial overvaluations of the donated easements. Based upon the appraisal  of a frequent appraiser in abusive SCE cases (Claud Clark III), NDLA claimed a donation of $115,391,000 for a portion of the property originally purchased. (Order slip op. 2.) That contribution claim was based upon a “’before value’ of the property of $116,303,000, or $471,4561 per acre. Subtracting from the sum an “after value” of $912,000, Mr. Clark asserted that the easement was worth $115,391,000.’” (Slip op. 2-8.)

Timely disclosure Forms were filed as follows (Slip op. 30):

• Form 8283, Non-Cash Charitable Contributions, filed by petitioner, listing the “‘donor's cost or adjusted basis’ as $804,232 and the ‘appraised fair market value’ of the easement as $115,391,000.” This of course is a common pattern when disclosures are made or, if not made, when a court makes the determinations.
• With its return, NDLA file a Form 8886, Reportable Transaction Disclosure Statement, “pursuant to IRS Notice 2017-10, 2017-4 I.R.B. 544.”
• A law firm that had served as “material advisor” filed Form 8918, Material Advisor Disclosure Statement, with the Office of Tax Shelter Analysis, providing “essentially the same information as the Form 8886 filed by NDLA.”

There is no indication that the audit leading to the case was triggered by one or more of the disclosures, but I feel certain that it was. And, given some of the foot-fault claims (particularly backdating of key documents), I am a bit surprised that the disclosures were made because they would certainly lead to audit. Oh well.

Judge Lauber moves to the “Discussion,” covering first (Slip op. 3) the Summary Judgment Standard. Judge Lauber then covers (Slip Op. 3-4) the requirements for the fraud penalty, including (i) that direct proof of fraud is rarely available because it requires finding of the taxpayer’s intent and (ii) the badges of fraud developed in the cases.

Judge Lauber then rejects petitioner’s reliance on Mill Road 36 Henry, LLC v. Commissioner, T.C. Memo. 2023-19 (2023) where the Court, in an SCE case after one-week trial disallowed the claimed charitable deduction and imposed the 40% gross overvaluation penalty. The Mill Road court however rejected the civil fraud penalty, relying in significant part on the (Slip Op. 4-5): 

“express disclosure on its tax return of the principal facts about the easement contribution.” Id. at *59. We found that the taxpayer “had strictly complied with the [statutory] substantiation and reporting requirements . . . by attaching to its return a Form 8283 that confessed the disparity between its very low basis [in the subject property] and the very high claimed value of the easement.” Ibid. The value claimed for the easement was “20 times the reported basis.” Ibid. We noted that Form 8886 had been properly filed, disclosing the transaction to the IRS, and reporting that the value claimed for the easement exceeded the taxpayer's basis by $8,518,437. Ibid. We likewise concluded that the taxpayer had attached to its return a “qualified appraisal” by a “qualified appraiser.” Id. at *42-45. We found no evidence that the donor “had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property,” which would have stripped the appraiser of his “qualified” status. See Treas. Reg. §1.170A-13(c)(5)(ii).

Judge Lauber then (Slip op. 4) distinguishes Mill Road because it followed a full trial. The case was thus not authority that petitioner here was entitled to judgment without the trial. 

Judge Lauber then discusses (Slip Op. 5-8) various badges of fraud and related items (false documents) that the IRS alleges will be proved at trial to show fraud.

Judge Lauber then concludes that the state of the record does not permit petitioner’s motion for summary judgment.

This is just another setting for what appears on its face (assuming the IRS can prove its claims) a standard, likely abusive, SCE case. As Judge Buch noted in his concurring opinion in Valley Park Ranch, LLC v. Commissioner, 162 T.C. ___ No. 6, slip op. 31-33 (2024), GS here, SCE cases are clogging up the Tax Court dockets with a reported 750 cases (citing Armando Gomez & Roland Barral, It's High Time to Clear Out the Tax Court's Easement Backlog, 179 Tax Notes Fed. 251 (2023)) and creating uncertainty rather than clarity. The usual Achilles heel in these SCEs is the valuation which can require substantial pretrial and trial costs and time, so it is not surprising that the IRS will attempt to find one or more procedural foot faults to avoid the cost of a trial over valuation.

Of course, valuation issues are prototypical of the type of issues that should be settled by reasonable parties. But with the stakes involving not only the charitable deduction (and interest) but the 20%, 40%, or 75% penalties (also with interest) settling is pretty dicey. Reasonable well-advised taxpayers would likely settle these cases for the tax and interest on the tax, but the penalties often make settlement not achievable. In most of the cases I have seen, well-advised and reasonable taxpayers might even settle for the 20% penalty, but when a higher amount of penalty is involved, they figure they may as well roll the dice in the hopes that results like Mill Road can be achieved. (The IRS does underwrite the cost of the fight via deduction of legal and related fees.)

I decided to look back over the docket entries here in North Donald to see what else has gone on in the case, originally filed in 1921. 

In North Donald LA Property LLC et al. v. Commissioner (Order T.C. Dkt. 24703-21 #52 10/14/22), Judge Lauber rejected petitioner’s claim that the IRS could not issue a trial document subpoena returnable at a hearing date prior to the trial. I recall that there was some thought that trial documents subpoenas could not require return with the documents before the opening of the trial docket when the case was to be tried, but Judge Lauber summarily dismissed petitioner’s argument:

Petitioner’s arguments are baseless. This Court is statutorily authorized to order the production of documents “at any designated place of hearing.” I.R.C. § 7456(a). Petitioner cites no authority to support its position that a party cannot be subpoenaed to produce documents at a pre-trial hearing, and there is none. Petitioner asserts that a remote subpoena hearing is “procedurally improper” because neither party has requested a remote trial. This argument is illogical: This Court’s authority to conduct a remote hearing (or to convene a conference call) is not affected by whether the trial itself will be conducted in person or remotely.

For more than two years the Court has been holding regular document subpoena hearings, conducted remotely via Zoomgov, for the convenience of the parties and the subpoenaed person. Petitioner asserts that “the [COVID] pandemic is over, and any procedures that were needed during that time are no longer necessary.” It is up to the Court, not petitioner, [*2] to decide what procedures are necessary or desirable for the efficient conduct of the Court’s mission.

In North Donald LA Property, LLC v. Commissioner, T.C. Memo. 2023-50, GS here and TC Dkt 70 4/18/23), Judge Lauber rejected the IRS foot-fault claim that the “in perpetuity” requirement had not been met because the record, particularly an affidavit of a member of the original transferring family addressed the deed language that was ambiguous, was inconclusive on summary judgment. Judge Lauber also rejected the petitioner’s argument that IRS had not obtained timely written supervisor approval under § 6751(b).

In North Donald LA Property LLC et al. v. Commissioner (Order T.C. Dkt. 24703-21 #76 5/17/23), Judge Lauber rejected petitioner’s motion to compel production of documents over which the IRS asserted attorney-client privilege. Judge Lauber reasoned that the limited disclosure of the IRS attorney’s participation in the § 6751(b) approval was not a waiver requiring opening up the attorney’s documents. Judge Lauber also rejected petitioner’s claim that privilege logs were inadequate and sustained the IRS’s assertion of § 6103 to withhold other taxpayer information.

Lots of action already in this case. The docket entries are now up to 141, with some more to come before the trial in September 2024. My sense is that trial does not look too good for the petitioner and its taxpayer investors. Perhaps the only real issue that might be in play is the civil fraud penalty because of the clear and convincing standard of proof the IRS must bear.