Visiting the Committees

• Publication year: 2019

Visiting the Committees

Commentary and Updates by the Committees

COMPENSATION AND BENEFITS COMMITTEE

The Compensation and Benefits Committee provides a forum for members of the Taxation Section to learn and discuss issues relating to executive compensation, tax-qualified retirement plans, and health and welfare benefit arrangements. Membership in the Committee is open to employee benefit practitioners and Taxation Section members, and the participation of members of the Labor and Employment Law Section is encouraged. The Committee strives to include in discussions high-level members of the Internal Revenue Service, U.S. Department of Labor Employee Benefits Security Administration, and California Franchise Tax Board.

Committee Activities

The Compensation and Benefits Committee schedules quarterly conference calls for all members interested in the topics that affect compensation and benefits. Members interested in participating, providing comments, or for more information regarding upcoming meetings and events should contact the Committee Chair, Colleen Hart, at chart@proskauer.com.

CORPORATE AND PASS-THROUGH ENTITIES COMMITTEE

The Corporate and Pass-Through Entities Committee focuses on issues faced by corporate taxpayers and provides opportunities for practitioners and corporate tax counsel to maintain a level of expertise in the field of corporate tax law, expand their professional contacts, and serve the profession, the public and the legal system. Membership in the Committee offers practitioners information on developments with respect to corporate and business tax and a greater voice on developments in such legislation.

Committee Activities

Normally, the Committee holds quarterly meetings via teleconference and interested members of the Tax Section are welcome to participate. In addition, members and other interested parties are welcome to submit articles for Quick Points on Corporate and/or Pass-through topics of general interest to the members of the Taxation Section. For more information regarding upcoming meetings and events should contact the Committee Co-Chairs, Michael R. Laisné at michael.laisne@ftb.ca.gov, or Cameron Hess at (916) 920-5286 or chess@wkblaw.com.

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Quick Point

Tax Shelter Proliferates Despite Designation as Listed Transaction; IRS Targets Abusive Syndicated Conservation Easements as Part of New Compliance Campaign

Abusive syndicated conservation easements are causing waves in the charitable sector and drawing increasing ire from the IRS. The IRS has estimated that aggregate deductions from such easements total approximately $20 billion. Data released this year shows that short-term syndication investors are claiming, on average, federal tax deductions valued at 5.58% of their original investment.

The IRS is ramping up enforcement efforts against syndicated easements, first issuing Notice 2017-10 on December 23, 2016, and a follow-up Notice 2017-29 on May 1, 2017. The IRS Notices provide that certain syndicated easements are listed transactions, which requires participants and advisers to self-report the potentially risky transaction to the IRS and thereby invite audit scrutiny.

Since these shelter promotions are proliferating across the country despite the Notices, on September 14, 2018, the IRS announced that syndicated easements comprise one of its five new compliance campaigns for the Large Business and International Division, indicating that LB&I will focus substantial resources on these transactions. A good example of a syndicated easement challenge by the IRS can be found with the recent Tax Court case, Belair Woods, LLC v. Commissioner, T.C. Memo 2018-159 (Sept. 20, 2018).

Counsel beware: even while the government increases scrutiny, promoters are still profiting off of "selling" tax deductions based on unrealistic, if not wholly fantastical, assumptions of value. The taxpayer-investor is left holding the bag upon audit. Be very cautious if you or your clients are approached by a promoter selling inflated tax deductions for conservation easements.

— Misti Schmidt, San Francisco

ESTATE AND GIFT TAX COMMITTEE

The Estate and Gift Tax Committee is comprised of attorneys throughout the State of California who devote a significant portion of their practice to understanding the evolving areas of estate and gift tax planning, drafting, compliance, and controversy work. One of the primary functions of the Committee is to provide valuable, informative, high quality continuing education programs on behalf of the Taxation Section.

If you are interested in becoming a member or submitting a topic on which to speak or write, please contact the Estate and Gift Tax Committee Chair, Alison Merino, at (408) 293-3616 or amerino@rpllawfirm.com, or Vice Chair, Abby Feinman, at (310) 788-4722, abby.feinman@kattenlaw.com.

Committee Activities

The Committee holds meetings at least quarterly via teleconference. We also welcome any member or other interested party who would like to write on a topic-to submit a brief article for Quick Points. This article can be any estate and gift topic of general interest to the members of the Taxation Section. Also, if you are interested in speaking at an event, or have a topic that you believe would be of interest to the members, we welcome input.

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INCOME AND OTHER TAXES COMMITTEE

The Income and Other Taxes Committee provides an outlet for its members to actively participate in the Taxation Section with respect to issues relating primarily to federal income taxation. The Committee's mission is to: (i) promote dialogue and maintain the expertise of its members through the annual provision of continuing education with respect to recent developments on various income (and other) tax issues; and (ii) provide a networking forum for members to expand their professional contacts.

Committee Activities

The Income and Other Taxes Committee has been actively involved in submitting comment letters to the IRS and Treasury regarding proposed regulations, including proposed regulations for tax return preparer due diligence penalties under Code Section 6695(g), and the landmark Code Section 199A Qualified Business Income Deduction proposed regulations and would like to encourage all members of the CLA Taxation Section to participate in responding to future IRS and Treasury requests for comments on proposed regulations, as a means of potentially shaping and influencing final regulations in a meaningful and constructive way.

Please contact the Committee Chair, Brian Katusian, at Katusian@scmv.com, for information on joining the Income and Other Taxes Committee or participating in future Income and Other Taxes Committee submissions and projects.

Quick Points

Fifth Circuit Denies $15 Million Golf Course Conservation Easement Deduction

The IRS prevailed on appeal from the Tax Court to the Fifth Circuit in PBBM-Rose Hill, et al. v. Commissioner, No. 17-60276 (5th Cir. Aug. 14, 2018). In PBBM, the taxpayer claimed a $15 million deduction for a conservation easement on about 234 acres, which consisted of a 27-hole golf course, donated to the North American Land Trust ("NALT"). The Fifth Circuit disallowed the deduction, holding that the easement did not meet the perpetuity requirement of I.R.C. § 170(h)(5)(A). The Fifth Circuit also upheld a 40% gross valuation misstatement penalty under I.R.C. § 6662(h)(1).

The Fifth Circuit disagreed with the Tax Court's finding that the easement did not protect any of the conservation purposes under I.R.C. § 170(h)(4)(A)(i)—(iii), holding instead that the easement protected the conservation purpose of preserving land for outdoor recreation by the general public.

However, the court agreed that the easement did not meet the perpetuity requirement. In reaching this conclusion, the court found that the easement ran afoul of the extinguishment regulation (Treas. Reg. § 1.170A-14(g)(6)). The extinguish-ment regulation provides, in relevant part that if the restrictions are extinguished by judicial proceeding, all of the proceeds from a subsequent sale or exchange of the property must be used by the donee organization in a manner consistent with conservation purposes.

The easement in PBBM provided that in the event of an extinguishment, NALT would be entitled to a portion of the proceeds of the sale after a reduction for the "amount attributable to improvements constructed upon the Conservation Area pursuant to" the reserved rights (if any). The Fifth Circuit found that this provision was in contravention of the extinguishment regulation because NALT would not receive the amount required by the extinguishment regulation in some circumstances. This opinion is potentially far-reaching because many conservation easements contain identical or similar language regarding extinguishment.

Finally, the court upheld the 40% gross valuation misstatement penalty. The taxpayer claimed a deduction based on a value in excess of $15 million, the court found that the value was substantially lower at $100,000.

— Matthew Carlson, Mather

Seventh Circuit Sustains Deficiency and Penalties in Excess of $500 Million

In Exelon Corporation v. Commissioner, Nos. 17-2964, 17-2965 (7th Cir. Oct. 3, 2018), the Seventh Circuit sustained large deficiencies and penalties related to an I.R.C. § 1031 exchange. In 1999, Exelon sold its fossil-fuel power plants for $4.8 billion, over $2 billion more than expected. Exelon used $2.35 billion of the proceeds to update its nuclear plants and infrastructure and was left with about $2.45 billion to invest.

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Exelon sought strategies to reduce or defer its large gain. PricewaterhouseCooopers (PwC) proposed that Exelon could defer tax liability on the gain by executing an I.R.C. § 1031 like-kind exchange. Exelon entered into six sale-leaseback transactions as part of this strategy. In each transaction, Exelon leased an out-of-state power plant from a tax-exempt entity for a period longer than the plant's estimated remaining useful life. Exelon then...