In Plateau Holdings LLC v. Commissioner, the U.S. Tax Court found in favor of taxpayer and did not uphold an accuracy-related negligence penalty because it found the taxpayer had reasonable cause and good faith to rely upon information available at that time and the drafting of its easement deeds by an experienced attorney. 1

Facts

This case arises out of the Tax Court’s earlier decision that found Plateau Holdings LLC ineligible for a charitable contribution deduction for conservation easements because the conservation purpose underlying the easements was not protected in perpetuity, in accordance with Section 170(h)(5)(A) and Income Tax Regs section 1.170A-14(g)(6). The Court based its reasoning on a provision in the easement deeds that reduced the donee’s proportionate share of the sale proceeds by an impermissible carve-out for donor improvements if there were ever a judicial extinguishment of the easements.

In 2012, Plateau Holdings LLC claimed a Federal income tax deduction of $25,449,000 for the donation of the easements. Six years later, in 2020, the Tax Court disallowed the deduction and issued a 40% penalty to the portion of the underpayment attributable to Plateau Holdings’ gross overvaluation of the easements.

The Internal Revenue Service now seeks an additional 20% penalty for negligence due to Plateau Holdings’ substantial understatement of tax under Section 6662(a) and (b)(1) and (2). This penalty would apply to the portion of the underpayment resulting from the Tax Court’s decision in the earlier case that Plateau Holdings is not entitled to a charitable contribution deduction.

Analysis

At issue is whether Plateau Holdings had reasonable cause and acted in good faith when claiming the charitable contribution deduction corresponding to the correct value of the easements.

The taxpayer is subject to penalty where “any portion of an underpayment of tax” is attributable to “negligence or disregard of rules or regulations” or to a “substantial understatement of income tax.” Negligence is the “failure to make a reasonable attempt to comply with the Internal Revenue Code.” ‘Disregard’ includes “careless, reckless, or intentional disregard.”

“Reasonable cause” is determined on a case-by-case basis, taking into account all pertinent facts and circumstances.

The easement deeds at the center of this matter were prepared by an attorney for the donee. Both the attorney and the donee had substantial experience with drafting easement deeds, and the deeds were modeled after other commonly-shared deeds among such professionals. Here, the Tax Court found that it was reasonable for Plateau Holdings to believe that the drafting attorney intended to comply with applicable regulations and protect the donee’s interests. Furthermore, when Plateau Holdings filed its 2012 return, judicial extinguishment clauses resembling the clauses in Plateau Holdings’ deeds were found to be acceptable in the allowance of a charitable contribution deduction. They had not yet been tested in litigation. A Private Letter Ruling issued in 2008 provided objective support for the reasonableness of Plateau Holdings’ position. Private Letter Rulings may constitute “authority” in determining whether a taxpayer has “substantial authority” for a position taken on a return.

Comment

The Tax Court’s decision that the 20% penalty should not apply because Plateau Holdings had reasonable cause and acted in good faith when claiming a charitable contribution deduction is based upon Plateau Holdings’ reasonable reliance on the drafter of the deeds and the legal authority and information available at the time of drafting.

Frank Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or [email protected].