Plateau Holdings, LLC, Waterfall Development Manager, LLC, Tax Matters Partner

• Court: United States Tax Court
• Decided: November 30, 2021
• Docket: 12519-16
• Status: Unpublished

Opinion

T.C. Memo. 2021-133

UNITED STATES TAX COURT

PLATEAU HOLDINGS, LLC, WATERFALL DEVELOPMENT MANAGER, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12519-16. Filed November 30, 2021.

Christopher S. Rizek and Scott D. Michel, for petitioner.

Shannon E. Craft, Rebeccah L. Bower, and John T. Arthur, for respondent.

MEMORANDUM OPINION

LAUBER, Judge: 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, Plateau Hold-

Served 11/30/21 -2-

[*2] ings, LLC v. Commissioner (Plateau I), T.C. Memo. 2020-93, 119 T.C.M.

(CCH) 1619, disallowing the deduction in full because the judicial extinguishment

clauses of the easement deeds did not protect the conservation purpose in

perpetuity. See sec. 170(h)(5)(A); sec. 1.170A-14(g)(6), Income Tax Regs.1

We determined in Plateau I, 119 T.C.M. (CCH) at 1627, that the correct

value of the easements was $2,691,200 and that a 40% penalty applied to the por-

tion of the underpayment that resulted from Plateau’s gross overvaluation of the

easements. See sec. 6662(e), (h). The overvaluation was $22,757,800, i.e., the dif-

ference between the value Plateau improperly claimed ($25,449,000) and the cor-

rect value of the easements ($2,691,200).

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 under-

payment, i.e., the portion of the underpayment that was not attributable to a valua-

tion 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

Unless otherwise indicated, all section references are to the Internal Reve- 1

nue Code (Code) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. -3-

[*3] 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

Plateau I we did not decide whether the 20% accuracy-related penalty applied to

this portion of the underpayment. See Plateau I, 119 T.C.M. (CCH) at 1626 n.14.

After considering supplemental briefing from the parties, we resolve this question

in petitioner’s favor, concluding that Plateau had reasonable cause and acted in

good faith with respect to the claimed charitable contribution deduction corre-

sponding to the correct value of the easements.

Background

We incorporate by reference our findings of fact in Plateau I, 119 T.C.M.

(CCH) at 1619-1624.

Discussion

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 “sub-

stantial understatement of income tax.” Sec. 6662(a) and (b)(1) and (2). Negli-

gence is the “failure to make a reasonable attempt to comply with the * * *

[Code],” and disregard includes “careless, reckless, or intentional disregard.” -4-

[*4] 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. See Oakbrook Land

Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, 119 T.C.M. (CCH) 1351,

1360.

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 applicability of the

penalty for negligence or substantial understatement of income tax. Dynamo

Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 233 (2018).

Petitioner contends that the 20% penalty should not apply because Plateau

had reasonable cause and acted in good faith when claiming a charitable contribu-

tion deduction. See sec. 6664(c)(1), sec. 1.6664-4(a), Income Tax Regs. “Reason-

able cause” is determined on a case-by-case basis, taking into account all pertinent

facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. One circum-

stance that may indicate reasonable cause is an honest misunderstanding of fact or -5-

[*5] law that is reasonable in the light of all of the facts and circumstances,

including the experience, knowledge, and education of the taxpayer. Ibid.

In Plateau I we held that Plateau was ineligible for a charitable contribution

deduction because the conservation purpose underlying the easements was not pro-

tected in perpetuity. See sec. 170(h)(5)(A); sec. 1.170A-14(g)(6), Income Tax

Regs. That was chiefly because the deeds provided, in the event of a future judi-

cial extinguishment of the easements, that the donee’s proportionate share of the

sale proceeds would be reduced by an impermissible carve-out for donor improve-

ments. See Plateau I, 119 T.C.M. (CCH) at 1624-1625.

The easement deeds were prepared by Mark Jendrek, an attorney for the do-

nee, Foothills Land Conservancy (Conservancy). Both Mr. Jendrek and the Con-

servancy had considerable experience in drafting easement deeds, and the deeds in

this case were modeled after others shared through an alliance of land trusts. Al-

though Mr. Jendrek was not Plateau’s lawyer, Plateau could reasonably have be-

lieved 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 extinguish-

ment 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 -6-

[*6] December 2012) and filed its return (in April 2013). See, e.g., PBBM-Rose

Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018) (affirming a bench

opinion of this Court); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126,

130-131 (2019); see also Plateau I, 119 T.C.M. (CCH) at 1624 (describing the

judicial extinguishment clauses in this case as essentially identical to those in Coal

Prop. Holdings, which also involved a contribution to the Conservancy). 2

The information available to Mr. Jendrek and Plateau in December 2012 ar-

guably 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. See Priv. Ltr. Rul. 200836014 (Sept. 5, 2008) (discussing

an easement deed that reduced the donee’s proceeds by the value of the donor’s

permissible improvements). The record in this case does not show that anyone as-

sociated with Plateau subjectively relied on this PLR when executing the easement

deeds or preparing its 2012 partnership return. But the PLR does provide some ob-

2 The bench opinion issued by this Court in PBBM-Rose Hill, Ltd., which ap- pears to have been the first judicial opinion to address judicial extinguishment clauses of this sort, ruled that the 20% penalty was inapplicable to the lower tranche of the underpayment. PBBM-Rose Hill, Ltd. v. Commissioner, T.C. Dkt. No. 26096-14, at 29-30 (Sept. 9, 2016) (bench opinion). -7-

[*7] jective support for the reasonableness of Plateau’s position. See Sells v.

Commissioner, T.C. Memo. 2021-12, at *37-*40; Oakbrook Land Holdings, 119

T.C.M. (CCH) at 1361; sec. 1.6662-4(d)(3)(iii), Income Tax Regs. (stating that

PLRs may constitute “authority” in determining whether the taxpayer has

“substantial authority” for its return position).

For these reasons, we conclude that the 20% penalty should not apply be-

cause Plateau had reasonable cause and acted in good faith when claiming a charit-

able contribution deduction, at least with respect to its claim of a deduction corre-

sponding to the correct value of the easements. To implement the foregoing,

Decision will be entered under

Rule 155.