A class action claim filed by real estate appraisers who contended they suffered damages as a result of IRS investigations into taxpayers abusing syndicated conservation easements was dismissed by a Georgia federal court. The IRS maintains that abusive syndicated conservation easements are often used to generate inflated and unwarranted tax deductions and includes them in their annual “Dirty Dozen” list of tax scams.

The U.S. District Court for the Northern District of Georgia’s order on Benson v. IRS, No. 2:21-CV-00074-SCJ (N.D. Ga., 2022), dismissed the appraisers’ case May 6 due to their failure to properly serve the government and IRS staff. The appraisers claimed they had all been assessed penalties, faced threats of penalties or been subjected to demands for documents that were already in the IRS’s control.

The claim seeking class action status was brought by Denis Benson, Jeff Fletcher and Thomas Spears, who said they provided appraisal services in conjunction with the conservation of land and resources “through partnerships which have elected to extinguish development rights forever by donating restrictive conservation easements on real property to a qualified charitable organization.”

Promoters offered large returns on investments

Section 170(f)(3)(B)(iii) of the Internal Revenue Code lets taxpayer deduct qualified conservation contributions of a real property interest to a qualified organization or exclusively for conservation purposes. However, the court said the IRS has found that some promoters are syndicating conservation easement transactions that based on claims the easements give investors the opportunity to claim charitable contribution deductions that are significantly larger than the amounts invested. In some cases, the transactions can generate inflated deductions of more than $10 million.

The court provided a brief history of the IRS’s increased scrutiny of conservation easement appraisals that began in 2012. It said that in 2014 and 2015, the IRS audited conservation easement appraisals and routinely found the claimed easements were of zero value. In 2016 the IRS announced that it set up a task force to audit every syndicated conservation easement and in November 2019 announced that it was significantly increasing enforcement actions.

Claims brought against IRS and agents

According to the court, the plaintiffs made five claims against the IRS and its agents (collectively, the IRS). They claimed the IRS:

1. Violated the Administrative Procedures Act and failed to abide by executive orders requiring transparency when drafting and issuing guidance. The plaintiffs maintained that they were harmed by the IRS’s unauthorized expansion of regulatory powers in its administrative review of syndicated conservation easements.

2. Violated the statutory rights of appraisers by engaging in a conspiracy to deprive taxpayers of their qualified conservation easements

3. Engaged in a conspiracy to intimidate or threaten appraisal witnesses with overly broad summonses and unlawful penalties. The plaintiffs alleged that the IRS’s actions were designed to intimidate assessors and prevent them from testifying in legal proceedings.

4. Systematically discriminated against the plaintiffs because of their status as appraisers, took action to chill their rights and deprived them of their right to conduct appraisals for charitable donations

5. Violated the Eighth Amendment to the U.S. Constitution because the IRS’s actions constitute cruel and unusual punishment in the form of excessive and unwarranted penalties

The IRS responded by asking the court to dismiss the plaintiffs’ claims because they failed to timely serve either the U.S. government or the individual defendants employed by the IRS. The IRS also claimed the plaintiffs were not entitled to injunctive relief, that the IRS had the discretion to investigate syndicated conservation easements, that the plaintiffs were not members of a protected class, and other reasons.

Court finds defendants weren’t properly served

The court chose to dismiss the plaintiffs’ case due to their failure to timely serve the proper defendants and did not address any of the plaintiffs’ other claims in its decision. It noted that Rule 4 of the Federal Rules of Civil Procedure states that the plaintiffs are responsible for having the summons and complaint served within 90 days of the complaint being filed. Rule 4(m) says that the court must dismiss a case if the plaintiff does not serve the defendant within the specified time, unless the court finds good cause of an extension.

To serve the U.S. government, the rules state that the summons must be delivered to the U.S. Attorney’s Office for the district where the case was filed and the U.S. attorney general. The court found the plaintiffs sent a copy of the summons to the civil process clerk for the U.S. Attorney’s Office for the Northern District of Georgia 139 days after their complaint was filed. It added that there was no evidence the plaintiffs served the U.S. attorney general.

Finally, the court found the plaintiffs failed to properly serve the IRS agent defendants.

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