Other Conservation Easement Litigation

• Date: 01 August 2020
• Published date: 01 August 2020
• DOI: http://doi.org/10.1002/npc.30755

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 August 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

concluded that the regulation’s “proportionate value”

and “donor improvement” approaches are not arbitrary

or capricious. Also, the age of the regulation was held

to give weight to this presumption of reasonableness,

with the court observing that the regulation has never

been amended over its 34 years of existence, although

the charitable deduction section has been amended over

30 times. (The court cited the public law section of every

amendment.)

A dissent opens by stating that “[o]ur holding today

will likely deny any charitable deduction to hundreds or

thousands of taxpayers who donated the conservation

easements that protect perhaps millions of acres.” It

added that “[t]his is the second time we’ve taken an ax to

entire forests of these deductions” (see, e.g., the October

2017 and March 2019 issues). The essence of the dissent’s

view is that the court majority held that the “Treasury

Department gets to ignore basic principles of administra-

tive law that require an agency to give reasoned responses

to all significant comments in a rulemaking proceeding.”

The dissent explored in considerable detail the comments

submitted in connection with the proposed easement reg-

ulations, concluding that Treasury’s response amounted to

the “chirping of crickets.” The dissent takes the position

that Treasury’s failure to respond to relevant significant

comments is a violation of the Administrative Procedure

Act and that the regulation may be substantively invalid

because Treasury is relying on post hoc rationalizations

to defend its decision-making. It concludes by expressing

the “fear that our efforts to clear cut and brush hog our

way out of the volume of conservation-easement cases

we have to deal with has left us a field far stumpier than

when we began.”

Twelve judges were in the majority (one partially).

There were four concurrences (two partial) and one dis-

sent. The four opinions in Oakbrook occupy 172 pages;

the dissent accounted for 47 of these pages.] ◆

COMMERCIALITY DOCTRINE

DERAILS ILLEGAL DRUG

MITIGATION EFFORTS

A nonprofit organization was formed to address the

pressing problem of organized theft and fraud that sup-

ports opioid and heroin addiction. It facilitates collabo-

ration among consumers, participating retailers, and law

enforcement agencies engaged in the investigation of

organized retail crime by providing innovative software

support for drug theft reduction. Its programs include

data analytics to reduce theft, a return fraud initiative,

and drug epidemic mitigation. The goal of this entity “is

to make an important contribution to the effort to stem

the flow of illegal drugs and the addiction that drives the

demand for illegal drugs.”

One would think that this organization qualifies as

a tax-exempt charitable entity because it is promoting

health and lessening the burdens of government. But

one would be wrong in this regard, at least according

to the IRS. Once again, absurd application of the com-

merciality doctrine is invoked, with the IRS characterizing

this case as that of an organization that is merely pro-

viding a “service for a fee to retail stores,” which (stated

that way) is not a charitable undertaking (Priv. Ltr. Rul.

202021026). More specifically, the IRS’s position is that

this organization’s primary activity is the “provision of

retail theft prevention and mitigation services to retail

businesses for a fee.” The services this organization pro-

vides are dismissed as “ordinary commercial activities.”

Provision of these services is, of course, a means to a

larger end, which is combatting the opioid and heroin epi-

demics. The IRS’s position that public charities must abjure

fee-for-service arrangements is wrong as a matter of law

(see IRC § 509(a)(2)). This application (expansion) of the

commerciality doctrine warrants correction. [4.9(a)]] ◆

ADDITIONAL FILING

DEADLINE EXTENSIONS

Various extensions by the IRS of filing due dates in

the tax-exempt organizations context to July 15 are

summarized in the June 2020 issue. Two more of these

extensions have been announced (Notice 2020-35).

The annual electronic notification (Form 990-N) filing

deadline has been so extended. Also so postponed is the

time to commence a declaratory judgment action (IRC §

7428) in the US District Court for the District of Columbia

and the Court of Federal Claims. An extension of time to

file such an action in the US Tax Court was provided in

prior guidance (Notice 2020-23). [28.2(a)(iv)] ] ◆

OTHER CONSERVATION

EASEMENT LITIGATION

• A company contributed a water storage easement to

a public charity, claiming a $200,000 charitable con-

tribution deduction. A Form 8283 was attached to

the appropriate tax return but it has, in the words of

the US Tax Court, “multiple omissions.” In rejecting

a defense of substantial compliance, the court wrote

that the donor’s “compliance can best be described

as slipshod.” Accompanying the appraisal summary

was a letter from a lawyer (a litigator) opining as to

the value of the donated property. Aside from the

fact that this individual is not a qualified appraiser,

the court noted that the letter does not discuss the

method of valuation or the “specific basis” for deter-

mining the fair market value of the property, does