The IRS has attempted to expand its regulatory power by regulating those who prepare or assist in preparing tax returns. The courts have stifled these efforts. The recent United States v. Zak, No. 1:18-cv-05774 (N.D. Ga. 2019) case provides an example where the IRS attempted to regulate the conduct of those who merely assist a tax appraiser for alleged wrongdoing by the appraiser.
Facts & Procedural History
The parties in this case organized and sold conservation easements. As noted in the court opinion, conservation easements like the ones described in the court case carry out Congress’ intent to preserve land. The investors are rewarded with charitable deductions for this purpose.
The parties in this case seem to have followed all of the rules–all but one. This case involves appraisals that, according to the government’s view, valued properties too high. The government argued that the parties used overstated appraisals to generate $2 billion of charitable deductions for taxpayers.
The government brought the case to impose tax promoter penalties, appraiser penalties, etc. against the parties who organized the charitable conservation easements. This included imposing appraiser penalties on the appraiser’s assistant, which is the subject of this post.
About Conservation Easement Disputes
Charitable conservation easements are investments that are typically set up by syndication who sell the investments to those who want charitable deductions. There is nothing new about this arrangement.
The IRS and state tax authorities have imposed rigorous reporting and disclosure requirements for taxpayers who participate in charitable conservation easements (and on those who provide tax advice for the easements). This reporting and disclosure ensures that the IRS and states are fully aware of every charitable conservation easement.
This allows the tax authorities to scrutinize the tax returns that report conservation easements. And the tax authorities do just that. The IRS and state tax authorities have a track record of challenging tax deductions stemming from conservation easements. There have been a growing number of court cases that chronicle these disputes.
The value of the underlying assets are usually at the center of these disputes. This case is an example. In this case, the court opinion describes the benefits of one of the conservation easements as a “$4.76 [tax deduction] per $1.00 invested.” So, if a taxpayer is subject to a 35% tax rate, if they spend $1.00, they would save $1.66 in taxes. That is not a bad return on investment. But according to the government’s view, this was only possible given the overstated valuation.
About the Tax Appraiser Penalty
This brings us back to the tax appraiser penalty imposed in this case.
The appraiser penalty is imposed on those who prepare overstated appraisals when they know (or should have known that) the appraisals would be used to report a position on a tax return.
Naturally, this penalty could apply to the actual appraiser. But what about the appraiser’s assistant? The IRS imposed the penalty on the assistant in this case. Is the appraiser’s assistant an appraiser for purposes of this penalty?
The assistant’s job duties are described as follows:
the assistant “is a conservation manager, consultant, and project manager who assists in the planning and execution of conservation easement donations and conservation easement syndicates.” The Government says that Zak provides “a number of services” in her role as conservation manager, “including: providing guidance in planning of ownership structure, negotiating agreements with land trusts and appraisers, assisting in the highest and best use determination, recommending legal counsel for legal and tax review, and managing the preparation and distribution of required IRS tax forms.”
Do these activities rise to the level of being an appraiser? One doesn’t need to be a tax attorney to answer this question. The facts provide the answer. The court noted that:
The Government repeatedly alleges that Zak “assisted” in the appraisals or “reviewed” the statements provided by Clark or other appraisers, but it does not provide any specific factual allegations as to how that qualifies her for liability as an appraiser under the statute.
Thus, the court concluded that the assistant was not an appraiser.
Why it Matters
This is an important topic as the same concepts govern the corresponding tax return preparer penalties. If an assistant to an appraiser is subject to appraisal penalties, it would seem that an assistant to a tax return preparer could be subject to tax return preparer penalties. This could allow the IRS to regulate a number of people whose conduct does not add to the substance of the tax position or its reporting.
The IRS has attempted to regulate those who assist taxpayers in preparing and filing tax returns. The Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) case made the tax news several years ago. That case involved regulations requiring all federal tax return preparers to submit to registration, competency testing, and continuing education. The court in Loving concluded that the IRS did not have the authority to impose these requirements.
The present case is consistent with Loving. This case is another example of the IRS trying to regulate those who are not subject to its oversight.