Tame Your Taxes: IRS regulatory overreach, Part 4
My series on IRS overreach continues. In Part 1, I disclosed a short tax primer and showed how onerous taxes forced the colonists into the War for Independence. In the second article, I presented the Shellito case as evidence that the IRS is the worst abuser of the tax code. Obviously, it is quite concerning that the federal agency (IRS) tasked with the implementation of the tax code is often guilty of denying tax deductions that have been settled law for decades. I am offended by the IRS’s ignorance of or indifference to the tax code and the abundant tax deductions purposely placed by Congress.
Last month, I couldn’t ignore the euphemistically named “Inflation Reduction Act of 2022,” which contains no measures to limit inflation, but notoriously authorizes funding and hiring of 87,000 new IRS employees, which nearly doubles the bureaucratic behemoth. An agency not known for its service or customer care is already training and arming new auditors to put every middle-class American in fear. President Biden’s promise that people earning less than $400,000 per year will not be impacted by new tax laws has been certified as untrue.
In Part 4, I will present another case where the IRS took a stance that was contrary to the tax code. Again, justice only prevailed at the federal appeals level! The U.S. Court of Appeals for the 11th Circuit (No. 19-11795) in the Pine Mountain Preserve, LLLP vs. IRS case reversed the tax court’s ruling and found in favor of the taxpayer. This case involved a conservation easement.
Joni Mitchell’s classic song "Big Yellow Taxi" laments the danger of progress: “They paved paradise And put up a parking lot.” I believe the vast majority of Americans and Congress think it is important to save the natural beauty of our great country for future generations.
The government basically had two choices. They can acquire land and make it into a national park. But this option has downsides. In acquiring land, they must boot off the current residents, which has its own political and economic consequences. And it must pay for maintenance of another federal park, which includes constructing access roads, parking lots, restrooms, etc., and continuous staffing.
The other method to conserve and preserve nature for the enjoyment of future generations of Americans is to motivate taxpayers to do it themselves by offering a tax break. Tax code section 170 was passed in 1980 expressly for this purpose.
Basically, a conservation easement (CE) is a permanent restrictive covenant on a tract of land. A CE restricts future development of the property. In exchange for limiting the use of his land, the landowner receives a charitable contribution deduction for the difference between the current value of the land and the future value of the land (if it were developed). This involves an appraisal by an expert.
However, the IRS noticed that this often results in a robust tax deduction. Instead of going after the few bad actors (that exist in every industry), they decided to ignore the tax breaks that have existed for 40 years and suddenly declare them “illegal tax avoidance schemes.”
Accordingly, the Department of Justice (presumably at the behest of the IRS) filed a lawsuit to shut down abusive conservation easement tax schemes, on Dec. 19, 2018, against several promoters, of which the first named was Nancy Zak. The DOJ filing mentions the following: 1) “grossly overvalued appraisals,” 2) “fraudulent CE shelters,” 3) “willfully false valuations,” 4) "aggressive transactions marketed by unscrupulous advisors,” 5) “syndicates lack economic substance,” and 6) “tax benefits were false or fraudulent.”
I discovered this tax savings strategy in 2014 during a seminar hosted by the American Institute of Certified Tax Planners (AICTP). I have discussed it with certain clients every year since. Last month, I attended another seminar hosted by the AICTP. One of the workshops recommended CEs as viable and valuable tax planning options, even though under IRS scrutiny.
Let me tie this together for you. Congress passed a law in 1980 that encouraged people via a tax break to permanently conserve the natural beauty of this country, tract by tract. The IRS decided that the tax breaks were too big. Instead of pursuing a few bad actors, they persuaded the DOJ for file a suit against several “promoters.”
Pine Mountain Preserve did everything right. Yet, they got audited and lost the audit. Then they lost in IRS appeals, and they lost in tax court. Finally, the tax court ruling was overturned by the 11th Circuit Court of Appeals, because Section 170 is established law. Should they have had to spend nearly $1 million in legal fees to obtain permission to take a deduction that was granted by Congress via the tax code 40 years ago? Why does the IRS not understand or respect the tax code?
In May 2021, I received a letter from Nancy Zak informing me that on April 12 she had agreed to a settlement regarding this case. She expressly denied any wrongdoing or admission of liability regarding the government’s suit. She simply wanted her life back. In exchange for leaving this industry, she “settled the case to avoid the continued expense, burden, and disruption of protracted litigation.”
Unfortunately, this clarifies another tool of the gigantic bully known as the IRS. They have virtually unlimited resources to bring against you, even if they don’t have the tax code on their side. You must agree to pay the tax they claim you owe, or they will make you pay many times that amount in legal fees for a pyrrhic victory.
This article originally appeared on Columbia Daily Tribune: Tame Your Taxes: IRS Regulatory Overreach, Part 4
