Overbreadth of IRS Regulations Part 4
My series on IRS overreach continues. In the first part, I divulged a short introduction to taxation and showed how onerous taxes forced the colonists into the war of independence. In the second article, I presented the Shellito case as proof that the IRS is the worst abuser of the tax code. Of course, it is quite concerning that the federal agency (IRS) responsible for implementing the tax code is often guilty of disallowing tax deductions that have been the subject of established law for decades. I am offended by the IRS’ ignorance or indifference to the tax code and the abundant tax deductions willfully imposed by Congress.
Last month, I couldn’t ignore the euphemistically “Inflation Reduction Act of 2022”, which contains no measures to limit inflation, but notoriously authorizes the funding and hiring of 87,000 new IRS employees, which almost doubles the bureaucratic juggernaut. An agency not known for service or customer service is already training and arming new auditors to scare every middle-class American. President Biden’s promise that people earning less than $400,000 a year will not be affected by new tax laws has been proven false.
In Part 4, I will present another case where the IRS took a position contrary to the tax code. Again, justice only prevailed at the federal appeals level! The United States Court of Appeals for the 11th Circuit (#19-11795) in Pine Mountain Preserve, LLLP v. IRS overturned the tax court’s decision and ruled 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’ve paved paradise And set up a parking lot.” I believe the vast majority of Americans and Congress believe 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 a national park. But this option has drawbacks. By acquiring land, they must eject the current residents, which has its own political and economic consequences. And it has to pay for the upkeep of another federal park, which includes building access roads, parking lots, restrooms, etc., and ongoing 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 providing tax relief. Section 170 of the tax code was enacted in 1980 expressly for this purpose.
Basically, a conservation easement (CE) is a permanent covenant on a piece of land. A CE limits the future development of the property. In exchange for limiting the use of their land, the owner receives a deduction for charitable contributions equal to the difference between the current value of the land and the future value of the land (if it was developed). This is an expertise by an expert.
However, the IRS has noticed that this often results in a robust tax deduction. Instead of going after the few bad actors (which exist in every industry), they have decided to ignore the tax breaks that have been around for 40 years and suddenly declare them “illegal tax avoidance schemes”.
As a result, the Department of Justice (presumably at the request of the IRS) filed a lawsuit to end abusive conservation easement tax schemes, on December 19, 2018, against several developers, the first named of which was Nancy Zack. The DOJ filing mentions the following: 1) “grossly overstated valuations”, 2) “fraudulent CE shelters”, 3) “deliberately false valuations”, 4) “aggressive trades marketed by unscrupulous advisors”, 5) “unions lack economic substance,” and 6) “tax benefits were false or fraudulent.”
I discovered this tax-saving strategy in 2014 during a seminar organized by the American Institute of Certified Tax Planners (AICTP). I have discussed this with some clients every year since. Last month, I attended another seminar organized by the AICTP. One of the workshops recommended ECs as viable and useful tax planning options, even though they are under the control of the IRS.
Let me tie this together for you. Congress passed a law in 1980 that encouraged people via tax relief to permanently preserve the natural beauty of this country, area by area. The IRS decided the tax breaks were too big. Instead of prosecuting a few bad actors, they persuaded the DOJ to file charges against several “promoters”.
Pine Mountain Preserve did everything right. Yet they were audited and lost the audit. Then they lost in IRS appeals, and they lost in tax court. Finally, the tax court’s decision was overturned by the 11th Circuit Court of Appeals because Section 170 is settled law. Would they have had to spend nearly a million dollars in legal fees to get approval for a Congressional deduction through the tax code 40 years ago? Why doesn’t the IRS understand or follow the tax code?
In May 2021, I received a letter from Nancy Zak advising me that on April 12, she had agreed to a settlement regarding this matter. She expressly denied any wrongdoing or admission of liability regarding the government’s lawsuit. She just wanted her life back. In exchange for her leaving that industry, she “settled the case to avoid the continued expense, burden, and disruption of prolonged litigation.”
Unfortunately, this clarifies another tool of the gigantic tyrant known as the IRS. They have virtually unlimited resources to oppose you, even if they don’t have the tax code on their side. You have to agree to pay the tax they claim to owe or else they will charge you many times that amount in legal fees for a Pyrrhic win.