Tax Court in Brief | Thompson v. Commissioner | Conservation Easements: Donor Improvement Carve-Outs and Supervisory Approval for Valuation Penalties

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Tax Litigation:  The Week of July 18th, 2022, through July 22nd, 2022

Thompson v. Commissioner, T.C. Memo. 2022-80 | July 20, 2022 |Lauber | Dkt. 8792-20.

Short Summary:

Petitioner made a conservation easement donation and claimed charitable contribution deductions. The IRS disallowed the deductions and asserted accuracy-related penalties (I.R.C. § 6662(a)). The Petitioner timely field for redetermination. In its Answer, the Commissioner asserted additional penalties for valuation misstatements (I.R.C. § 6662(e), (h)) and later filed for summary judgment.

Key Issues:

The court evaluated whether there was a genuine of material fact that:

  • The IRS properly disallowed the deductions because the easement’s conservation purpose was not “protected in perpetuity” consistent with I.R.C. § 170(h)(5)(A); and
  • The IRS secured supervisory approval of the penalties consistent with I.R.C. § 6751(b)(1).

Protection in Perpetuity.

The Commissioner argued that the deed of easement improperly carved-out proceeds for “donor improvements” from a hypothetical sale of the property in the event the easement is extinguished.


Petitioner argued that the Commissioner failed to authenticate penalty approval forms and a sworn declaration. Therefore, he asserted the IRS would have to prove prior written approval at trial and that its personnel should be subject to cross-examination. Additionally, the Petitioner contended that prior written approval of the valuation penalties was ineffective because the relevant personnel lacked “real estate expertise” and failed to consult with a property valuation expert.

Primary Holdings:

  • The Commissioner did not prove as a matter of law that the deed failed to protect the easement’s conservation purpose in perpetuity. A prior Tax Court ruling supported the Commissioner’s contention, but the Tax Court was bound by contradictory case law from the Eleventh Circuit.
  • There was no genuine issue of material fact whether the IRS complied with prior supervisory approval requirement. The penalty approval forms and the supervisor’s declaration were sufficient proof. Prior written supervisory approval for valuation penalties generally do not require explanation of assessments or comprehensive depth. Further, no appraisal was necessary because the Petitioner’s own deductions presupposed a nearly 900% increase in value in just over a year, which the Court implied was not credible. Further, Petitioner failed to introduce a genuine issue of material fact because Petitioner did not allege that IRS communicated with him regarding the penalties prior to assessment of the penalties.

Key Points of Law

  • Generally, deductions are not allowed for charitable contributions that donate less than the taxpayer’s entire interest in the property. I.R.C. § 170(f)(3)(A). However, deductions for a “qualified conservation contribution” of an easement are allowed if the conservation purpose is “protected in perpetuity.” I.R.C. § 170(f)(3)(B)(iii), I.R.C. § 170 (h)(1), (h)(1)(C), (h)(5)(A)
  • After extinguishment of an easement by a judicial proceeding, a conservation purpose may be protected in perpetuity if the easement deed establishes that the charitable grantee will receive from a sale of the property a share of the proceeds at least equal to the proportionate value of the easement (and if the proceeds are used for a purpose consistent with the original gift). See Reg. § 1.170A-14(g)(6).
  • In Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 137–40 (2019), the Tax Court held “that a deed of easement failed to satisfy these requirements where the donee’s share of post-extinguishment sale proceeds was improperly reduced by carve-outs for donor improvements.”
  • Contradicting Coal Property Holdings, LLC, the Eleventh Circuit held in Hewitt v. Commissioner, that the Commissioner’s interpretation of §1.170A-14(g)(6)(ii) is invalid under the Administrative Procedure Act for being arbitrary and capricious in disallowing the subtraction of the value of post-donation improvements. 21 F.4th 1336, 1353 (11th Cir. 2021), rev’g and remanding T.C. Memo. 2020-89.
  • The Tax Court is obligated to follow the law established by the court of appeals with jurisdiction over an appeal of the case under consideration. See Golsen v. Commissioner, 54 T.C. 742, 756–57 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).
  • IRS records and declarations from the appropriate IRS officers are sufficient to make determinations on summary judgment regarding prior written supervisory approval. See, e.g., Sand Inv. Co., 157 T.C. at 137–44; Morgan Run Partners, LLC v. Commissioner, T.C. Memo. 2022-61; Long Branch Land, LLC v. Commissioner, T.C. Memo. 2022-2.
  • The written supervisory approval requirement does not require any demonstration of depth or comprehensiveness of the review. Belair Woods LLC v. Commissioner, 154 T.C. 1, 14–15 (2020).


  • Conservation easements are under considerable scrutiny by the IRS. As we suggested in our review of Corning Place Ohio, LLC v. Commissioner, “taxpayers seeking deductions for noncash charitable contributions in the form of conservation easements should take due care to ‘cross the t’s and dot the i’s’ in the conveyances themselves as well as in the tax returns in which the charitable deduction is requested.”
  • Before taking an aggressive tax position, or one that differs from an IRS interpretation of a regulation, taxpayers and their counsel should carefully review opinions of both the Tax Court and the relevant U.S. court of appeals. Additionally, taxpayers would be wise to establish a reserve for potential penalties.
  • The IRS can raise new issues in deficiency litigation. Consequently, taxpayers should consider whether they have exposure to additional assessments prior to filing of an appeal, which may heighten the scrutiny applied to their return.

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