U.S. Dist. Court, D. Idaho, No. Civ. 1:10-186 WBS, January 7, 2013: Refuses to dismiss IRS claim for 75% penalty for conservation easement tax fraud.
The Peskys were denied a charitable deduction from income tax for the grant of a conservation easement to The Nature Conservancy (TNC) on land owned by the Peskys, and the IRS imposed a deficiency penalty. The Peskys paid the deficiency and the penalty and then sued the U.S. seeking a refund. The U.S. filed counterclaims for a 75% civil fraud penalties under Treasury Regulations § 6663(a) due to “conservation easement fraud” (and Schedule C expense fraud). In the current matter, the Peskys asked the Court to dismiss the counterclaims.
The U.S. alleged that the grant to TNC of the conservation easement on a certain parcel of land (the Ketchum Property), along with a cash contribution, pursuant to a Pledge Agreement was a quid pro quo for TNC granting the Peskys an option to buy the Ketchum Property under an Assignment Agreement, and claimed that the Peskys committed tax fraud by structuring these agreements with the intent to hide the connection of the two grants and by in fact trying to hide this connection from the IRS and trying to hide the Pledge Agreement.
The Court wasn’t deciding whether to impose the penalties, only whether the U.S. complaint could go to trial for a decision on the merits. The Peskys’ motion to dismiss comes under Federal Rule of Civil Procedure 12(b)(6), under which the Court would have to accept the allegations in the government’s complaint as true and “draw all reasonable inferences in favor of the [government]”. The standard by which the Court said the U.S. complaint could survive such a motion is if the complaint states “only enough facts to state a claim to relief that is plausible on its face” but “[w]here a complaint pleads facts that are `merely consistent with’ a defendant’s liability, it `stops short of the line between possibility and plausibility of entitlement to relief.’”
The Court then had to look at the elements of establishing fraud to decide if the government’s case met the plausibility standard if the facts alleged by the government were accepted as true. It defined fraud (citing other cases) as the “intentional wrongdoing on the part of the taxpayer with the specific intent to avoid a tax known to be owing,” and said that to establish liability for the civil fraud penalty, “the Government must establish: (1) a knowing falsehood; (2) an intent to evade taxes; and (3) an underpayment of tax.”
The Court found that the government had pled sufficient allegations to allow the fraud claim to proceed. Among the allegation of the government that the Court weighed were: the existence of the two agreements; certain memoranda titled “Nature Conservancy Transaction” that the Peskys knew of prior to their tax filing that said that both agreements “were drafted around the same time … [and] discuss the terms of the [agreements] in the same memoranda…”; that the Pledge Agreement said that it “arises out of” and is “integral with” the Assignment Agreement; “the minutes from a zoning board meeting [that] include a statement from Mark Elsbree, a TNC employee, that TNC ‘had agreed to grant Mr. Pesky a reformed easement, conditioned upon the fact that he can build one house (and one guest house) there’”; the Mr. Pesky’s initial refusal, through his attorney, to share the Pledge Agreement and other documents with the IRS; and Mr. Pesky’s claim of “a near total lack of recall as to anything related to the Pledge Agreement” when first questioned about it by the IRS. The Court found that the government had more than met an even higher standard than usually required (a “9(b) standard”) by pleading “facts of particular misconduct … so that the Peskys can adequately defend against the charge.” (A 2011 court decision about admitting certain evidence the IRS sought was previously reported in the Digest.)
Accordingly, the Court did not dismiss the United States’ counterclaim for fraud penalties related to the conservation easement deduction. The Court dismissed the government’s second counterclaim about business expense deductions, however, finding its pleadings “conspicuously devoid of factual allegations”.
The decision can be found at http://www.leagle.com/xmlresult.aspx?page=6&xmldoc=In%20FDCO%2020130108B93.XML&docbase=CsLwAr3-2007-Curr&SizeDisp=7.