Reilly Method Of Air Conservation

[Salvador Baltimore]

Asthe founder and director of Klima International, she focuses on social science research and methods to empower and enable communities to build and sustain adaptive resilience as they define it. For the past twenty years, Jess has led and worked with diverse teams and projects in the Americas, Europe, and Africa to balance development with natural resource conservation and human well-being.

Michelle Reilly is the Fish and Wildlife Service Representative at the Arthur Carhart Wilderness Training Center. Michelle started with the Center in 2018 and came from an Ecological Services Field office where she served as an Endangered Species Biologist and the Strategic Habitat Conservation Coordinator. Michelle has worked on cooperative grants and agreements with Oregon State University and the Conservation Biology Institute to investigate landscape-level impacts and connectivity for species of conservation concern. Michelle holds a M.Sc. in Environmental Science and Policy from John's Hopkins University and a Ph.D. from Northern Arizona University. Her graduate work emphasized multi-species conservation research with close agency collaboration. Her dissertation research investigated the effects of non-motorized recreation on mammals in national and state parks, regional wilderness areas, and county and regional open space reserves. From 2016-2017, she served as a visiting professor at New Mexico Highlands University and taught quantitative methods and wildlife ecology courses while conducting research in wildlife behavioral ecology.

This article is not about the criminal prosecution, though its author represented the lead defendant at trial.[1] Rather, this article explores opinions from courts explaining how raw, undeveloped land donated for a qualifying conservation purpose may be valued using the subdivision method when HBU is established to be a residential subdivision.[2]

As more and more taxpayers began claiming the charitable donation deduction in the context of conservation easement transactions, these same authorities became the subject of civil tax filings and controversies. Naturally, cautious practitioners looked to the Tax Courts for guidance.

For context, when the Peter J. Reilly article came out on or around September 3, 2020, SCETs were under widespread scrutiny as potential vehicles for fraud and abuse.[6] Thus, it was somewhat easy to criticize SCET participants with the benefit of hindsight and the momentum of an impending crusade against SCETs.

Mr. Reilly was absolutely correct about several points in his article.[7] Among them, industry participants relied upon Kiva Dunes for the proposition that HBU could be calculated appropriately based on a hypothetical use (e.g., a residential subdivision) even though that was not the actual or intended use for the property under the income approach to valuation.[8] So, what did Kiva Dunes actually say?

From there, the Tax Court goes through a very fact-specific discounted cashflow analysis en route to its conclusions that although the taxpayers overstated the deduction and underpaid taxes, the taxpayers had reasonable cause for the underpayment and acted in good faith. Id. at *23-25. Therefore, the taxpayers were not liable for substantial valuation misstatement or underpayment penalties. Id.

It remains to be seen whether DOJ-Tax will continue its aggressive investigation and enforcement, which has produced mixed results.[11] However, there is no question valuation will be critical in resolving all remaining SCET cases now under civil audit or pending in Tax Court where taxpayers had generally fared well until more recently.[12]

If we are being honest, Kiva Dunes and its progeny say exactly what SCET participants thought these cases said, and the participants were justified in relying on all of those cases. They would still be justified in relying on those cases today but for the passage of the new law by Congress, because that legislative action is what finally changed the landscape surrounding valuation methodology in SCETs through the imposition of strict limits on the basis multiplier that qualifies for the deduction.

[1] At the outset, the author extends his most sincere gratitude to Emma Sammons for her invaluable assistance in preparing this article for publication. Ms. Sammons is presently a 3L at Emory University School of Law, where she is a Notes & Comments Editor on the Emory International Law Review, and candidate for J.D. in May 2024. Upon completion of the Georgia Bar Exam, she will continue her law practice as an associate at Berman Fink Van Horn P.C., where she clerked during the summer of 2023.

[3] Reference is made to the 1980 sports comedy film Caddyshack starring Chevy Chase (playing Ty Webb), Rodney Dangerfield (playing Al Czervik), Ted Knight (playing Judge Smails), and Bill Murray (playing Carl Spackler). Coincidentally, 1980 was the same year the conservation easement donation tax deduction vehicle became permanent as a part of new I.R.C. Section 170(h) pursuant to the Tax Treatment Extension Act of 1980, Pub. L. 96-541, 94 Stat. 3205 (1980).

[7] This article is not intended as an attack on Mr. Reilly or the myriad of other critics and commentators who wrote similar articles, nor does this author suggest that the negative publicity surrounding SCETs was necessarily unfounded. This article merely explores the circumstances surrounding the reliance by professionals in the industry on judicial authorities that supported the actions they took vis--vis the conservation easement charitable deduction vehicle.

[9] Notably, the IRS also circulates an audit guide to revenue agents that sanctions this method. See, e.g., Internal Revenue Serv., Conservation Easement Audit Technique Guide (rev. date Jan. 21, 2021) (available at -pdf/p5464.pdf) (last visited Apr. 1, 2024). There was at least one earlier version circulated with a revision date in 2012.

[13] This article does not constitute legal advice. What positions have a reasonable basis in the law is a fact-specific inquiry subject to interpretation by the IRS. A reasonable basis may be derived from one or more tax authorities, including the Internal Revenue Code, Treasury Regulations, Revenue Rulings and Procedures, Tax Treaties, Court Cases, Congressional Intent via Committee Reports, Private Letter Rulings, Actions on Decisions and General Counsel Memorandum, IRS announcements and notices, and IRS press releases. Thus, a taxpayer should consult with tax professionals based on their own unique facts and circumstances.

The full Tax Court in one of its regular decisions (Green Valley Investors LLC) has dealt a blow against the IRS in its struggle with abusive syndicated conservation easements. A key IRS move in the fight was Notice 2017-10 which made certain syndicated conservation easement transactions "listed transactions".

The reporting regime that listed transactions are subject to is so intimidating and the penalties so nasty that they inspired Reilly's Fourteenth Law of Tax Planning - If something is a listed transaction, just don't do it. Of course, the listing requirement was not enough to stop the syndicated conservation easement (SCE) industry. Thanks to the Green Valley decision, Notice 2017-10 may no longer be a problem as the Tax Court ruled that the IRS did not jump through the right hoops in issuing it.

The APA provides that for certain regulatory actions federal agencies need to go through a "notice-and-comment" process. It is a three step process. The agency must issue a general notice of proposed rulemaking. Then it must allow interested persons to participate. And finally when it issues the ultimate rule, there must be a concise and general statement of its purpose.

Not every rule is subject to the "notice-and-comment" process. The IRS thought that calling shenanigans on investors getting to deduct more than 2.5 times their investment as a charitable deduction for a partial interest in a recently acquired property was not such a rule. It turns out that the judges on the Tax Court mostly think IRS was wrong. Two judges dissented. To get a feel for the arguments take a look at IRS Loses Battle In War On Conservation Easements by Guinevere Moore on Forbes.com. It is all very lawyerly.

This is not the first time that APA has been used against the IRS in the conservation easement fight. In the Hewitt decision in the Eleventh Circuit nearly a year ago the court invalidated a regulation interpreting the perpetuity requirement. In the Court's opinion Treasury had not given sufficient consideration to a comment submitted by the New York Land Conservancy.

That was some really sharp lawyering to get a regulation that had been in force for over thirty years blown up, because one of the comments on it had not been adequately addressed. They have not convinced the Tax Court and the Sixth Circuit and the Oakbrook Land Holdings decision has created a circuit split. An appeal to the Supreme Court on Oakbrook was filed last month. Still given that a lot of the action in the SCE arena is in Eleventh Circuit territory, Hewitt was a big win for the industry.

Last month I covered another case that is being cited as a taxpayer win - Champions Retreat. The Tax Court had originally agreed with the IRS that there was not enough of a conservation purpose, but the Eleventh Circuit showing an affection for squirrels and the scenic enjoyment of boaters did not agree. So they had the valuation fight in Tax Court, which the tax press seems to have generally scored as a taxpayer win.

They have a good argument. The original contribution deduction was $10,427,435 and the IRS wanted to allow $20,000. Judge Pugh relying mainly on the taxpayer's appraiser allowed $7,834.091. Nonetheless, my back of the envelope computations indicated that whatever gain the investors had from the deal may have been wiped out from the adjustment. When they get their assessments they might not feel like winners.

Still most of the deduction was allowed. And once again it appears that IRS was out lawyered. As Bryan Camp explains in Lesson From The Tax Court: Fake It Till You Make It, the taxpayer's expert was not the best, but the IRS expert was worse. Reminds one of the joke about two people being chased by a bear. You don't have to be faster than the bear. You just need to be faster than the other guy.

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