A revenue agent’s report reached a ranch outside Wagon Mound this summer. It disallowed the family’s deduction for a December 2023 conservation easement and proposed a 75 percent fraud penalty, with 40 percent in the alternative. The gift also earned a New Mexico land conservation credit, partly sold already. Their first question: will a jury hear the fraud charge?
Santa Fe investors in syndicated easement partnerships get similar letters. The jury answer for both comes from Silver Moss Properties, a 2025 Tax Court opinion, but what the IRS is attacking matters more.
What is the IRS attacking in a New Mexico conservation easement audit?
Most audits I see attack perpetuity, value, or both. Under 26 U.S.C. § 170(h), the restriction must be “granted in perpetuity” and its conservation purpose “protected in perpetuity.” In Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015), a Colorado ranch easement failed because the lender had not subordinated its mortgage at the time of the gift, as Treas. Reg. § 1.170A-14(g)(2) requires. Ranches with land loans share that exposure unless the lender signed first.
The proceeds clause is unsettled. Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), held the extinguishment-proceeds rule in § 1.170A-14(g)(6)(ii) procedurally invalid; Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), upheld it. In Valley Park Ranch, LLC v. Commissioner, 162 T.C. No. 6 (2024), an Oklahoma case headed for the Tenth Circuit, the Tax Court followed Hewitt, but the parties settled in September 2026, so the Tenth Circuit remains silent.
Can the IRS make a syndicated conservation easement penalty stick at 75 percent?
Under 26 U.S.C. § 6663, fraud costs 75 percent of the underpayment, and proving any portion fraudulent taints the rest unless the taxpayer rebuts it. The government bears the burden under 26 U.S.C. § 7454(a), by clear and convincing evidence.
In North Donald LA Property, LLC v. Commissioner, T.C. Memo. 2026-19, a partnership claimed $115,391,000 for an easement the court valued at $175,824, yet fraud failed because the return disclosed the deal; a return that says “please audit me” leaves the IRS “an uphill battle.” For passive investors, the managers’ conduct was what counted.
Claiming 200 percent or more of correct value is a gross valuation misstatement carrying 40 percent under 26 U.S.C. § 6662(h), and § 6664(c)(3) bars a reasonable-cause defense for charitable property. These penalties generally need written supervisory approval under 26 U.S.C. § 6751(b), so ask for the form early.
For partnership gifts after December 29, 2022, § 170(h)(7) denies the deduction outright above 2.5 times the partners’ basis (absent a three-year holding or family partnership), triggering an automatic 40 percent penalty. Regulations effective October 8, 2024 (T.D. 10007) made syndicated easements listed transactions, replacing Notice 2017-10 going forward; nondisclosure keeps the year open under § 6501(c)(10).
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Is there a jury trial in Tax Court for a fraud penalty after Silver Moss?
No. In Silver Moss Properties, LLC v. Commissioner, 165 T.C. 37 (2025), Judge Pugh’s reviewed opinion, with no dissent, gave two reasons. Suits against the United States fall outside the Seventh Amendment unless the government consents, and Congress never provided juries in partnership proceedings. And revenue collection, penalties included, is a “public right” Congress may leave to judges, as Helvering v. Mitchell, 303 U.S. 391 (1938), held for the fraud penalty’s ancestor. SEC v. Jarkesy, 144 S. Ct. 2117 (2024), involved fraud on private investors; § 6663 targets fraud on the Treasury.
Silver Moss is a TEFRA partnership case about Florida land, and the opinion decided only the jury motion. The deduction itself remains open; the court denied an immediate appeal and set trial for April 19, 2027. Any appeal goes to the Fifth Circuit because the partnership was in Mississippi.
Later, Riddle Aggregates, LLC v. Commissioner, 165 T.C. No. 12 (2025), extended the reasoning to accuracy penalties, and the Supreme Court denied certiorari on the jury question in Hirsch v. United States Tax Court, No. 25-739, on June 22, 2026. In Norcave Properties, L.L.C. v. IRS, No. 25-30542 (5th Cir. Aug. 21, 2026), a partnership’s pre-payment jury suit was dismissed under the Anti-Injunction Act. I found no Tenth Circuit ruling on the jury question.
Should a New Mexico taxpayer pay first and ask for a jury in Albuquerque?
A rancher owning the land personally has 90 days after a notice of deficiency under 26 U.S.C. § 6213(a) to petition the Tax Court, which tries cases in Albuquerque before any payment, with appeal to the Tenth Circuit under 26 U.S.C. § 7482(b)(1)(A). A jury requires full payment (Flora v. United States, 362 U.S. 145 (1960)), a refund claim (§ 7422(a)), a six-month wait (§ 6532(a)(1)), and suit in the District of New Mexico, where 28 U.S.C. § 2402 allows a jury on request.
Partnerships differ. Since 2018, penalties are decided at the partnership level (26 U.S.C. § 6221(a)) and collected as an imputed underpayment at the top rate (§ 6225). A district court or Court of Federal Claims petition under § 6234 requires a deposit, and no forum offers a jury there. A 45-day push-out election under § 6226 moves adjustments to partners; Norcave hinted that may open an individual forum, but no court has said a jury follows.
My view: a Mora County family might do well with jurors on fraud, but everything must be paid first, and the Tax Court’s recent easement fraud rulings have not been harsh. The firm’s post on Tax Court versus a refund suit walks through that choice.
Does an IRS valuation cut affect the New Mexico land conservation tax credit?
The Land Conservation Incentives Act, NMSA 1978, § 75-9-1 et seq., supports a credit under NMSA 1978, § 7-2-18.10 (corporations use § 7-2A-8.9) of 50 percent of value, capped at $250,000 for gifts since 2008, with a 20-year carryover. The Energy, Minerals and Natural Resources Department certifies the gift, and the credit may be sold once, in blocks of at least $10,000. A 2026 bill to raise it to 80 percent and $2,000,000, House Bill 186, died.
The credit is independent of the federal deduction but rests on the same appraisal. The statute has no recapture language, and I found no authority on whether the Taxation and Revenue Department would revisit a credit after an IRS value cut, so it is an open risk. Because of the cap, the amount changes only if value falls below $500,000 or the gift fails the state’s own perpetuity requirement.
New Mexico starts from federal adjusted gross income and itemized deductions (NMSA 1978, § 7-2-2), and NMSA 1978, § 7-1-13 requires reporting final federal adjustments within 180 days (90 for an audited partnership). But § 7-2-18.10(J) already strips the federal deduction from New Mexico itemized deductions for credit claimants, so on my reading losing it federally should not raise New Mexico taxable income. And in Esgar Corp. v. Commissioner, 744 F.3d 648 (10th Cir. 2014), which also upheld a farmland valuation, Colorado credits sold within weeks produced short-term capital gain.
How do the numbers work for a Mora County ranch easement?
Hypothetical figures only. A couple with a $600,000 basis in 2,400 Mora County acres gives an easement appraised at $3,000,000 in December 2023. Ranching is over half their gross income and the land stays in grazing, so § 170(b)(1)(E)(iv) raises their limit from 50 to 100 percent of their contribution base. On income near $200,000, they deduct about that much yearly and carry the rest forward up to 15 years. Basis does not cap a long-held gift, but had an investor LLC paid $600,000 in 2022 and donated in 2024, § 170(h)(7) would deny all of it, since $3,000,000 exceeds 2.5 times basis. New Mexico’s credit is 50 percent of $3,000,000, capped at $250,000.
Now the IRS values the easement at $900,000. The claim is 333 percent of that, past the 200 percent line. If the lost $2,100,000 would have sheltered income taxed at 24 percent, that is about $504,000 of tax over the carryforward years. The 40 percent penalty would be $201,600; fraud, if proven, $378,000. Since the first $900,000 stays allowed, early years may show no underpayment. The state credit stays at $250,000; half of $900,000 still exceeds the cap.
| Penalty | Trigger | Rate | Key defense or burden |
|---|---|---|---|
| Gross valuation, § 6662(h) | Value claimed 200% or more of correct | 40% | No reasonable cause for charitable property |
| Syndicated disallowance, § 170(h)(7) | Post-2022 partnership gift over 2.5 times basis | 40% | No reasonable cause; no supervisory approval needed |
| Civil fraud, § 6663 | Intent to evade | 75% | IRS proves by clear and convincing evidence |
| Appraiser, § 6695A | Appraisal produces a misstatement | Greater of 10% or $1,000, capped at 125% of fee | Value more likely than not correct |
Frequently Asked Questions
Is a Tax Court jury trial ever available?
No. Silver Moss held that neither the Seventh Amendment nor any statute provides a Tax Court jury, even on a fraud penalty. A jury requires a district court refund suit after full payment.
Does an inflated appraisal automatically mean a fraud penalty?
No. The IRS must prove intent by clear and convincing evidence, and in North Donald full disclosure defeated fraud despite a huge overvaluation. The 40 percent valuation penalty still applied.
Will New Mexico take back my land conservation credit if the IRS wins?
The statute has no recapture provision, and I found no authority either way. Under the $250,000 cap, a federal value cut often leaves the amount unchanged.
What changed for syndicated conservation easements after 2022?
Since December 29, 2022, § 170(h)(7) denies partnership deductions above 2.5 times the partners’ basis, with a 40 percent penalty. Regulations effective October 8, 2024 made these deals listed transactions.
Has the Tenth Circuit ruled on conservation easements?
Yes. Mitchell (unsubordinated mortgage) and Esgar (valuation and credit sales) both went against Colorado landowners. It has not ruled on the proceeds regulation or on jury rights for tax penalties.
How North Star Law Firm Can Help
North Star Law Firm handles IRS audit defense and Tax Court litigation for landowners and investors, including penalty challenges built on supervisory approval and the fraud burden.
Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico. The firm works alongside New Mexico-licensed counsel on state-law questions. If an easement audit report or penalty letter has arrived, contact North Star Law Firm.