This week, the Tax Court took a red pen to over $100 million in conservation easement deductions. Spoiler: the numbers didn’t add up. Three cases, same theme—taxpayers dreamed big; the evidence didn’t. Meanwhile, someone tried to run a business without keeping receipts (always a classic), and a federal Court told the IRS it can use AI, but not hide everything behind a black box.
Tax Court reduces $74.5 million conservation easement deduction to $500,000
Lontrac Enterprises, LLC v. Commissioner, T.C. Memo. 2026-108
The Tax Court reduced a $74.5 million conservation easement deduction to $500,000. Why? The taxpayer said the land could be a granite quarry. The Court said, "Show me the rocks, show me the buyers, show me the money.” None of that showed up. The IRS didn’t even fight the easement itself—just the fantasy valuation. Result: a 40% penalty for dreaming too big.
Why It Matters:
A qualifying conservation easement does not establish its claimed value.
Hypothetical development or mining potential requires credible evidence.
Gross valuation misstatements can trigger a 40% penalty.
Takeaway: You can’t appraise your way from wishful thinking to $74.5 million.
Tax Court denies $39.4 million in historic easement deductions and upholds penalties
Del Monte LLC and Continental Downtown Properties, LLC v. Commissioner, T.C. Memo. 2026-107
Two partnerships tried to claim $39.4 million in deductions for historic preservation easements. The Tax Court said no. The deeds didn’t actually protect the charity’s interests, which is sort of the point. For penalty math, the court said the easements were worth $750,000, not $39 million. That’s a rounding error if you’re an optimist. Result: 40% penalties for the big numbers, 20% for the rest. Some cash contributions survived.
Why It Matters:
Easement deeds must satisfy the statutory perpetuity requirements.
Valuation cannot cure defects in the donated property interest.
Penalty calculations can require valuations even when deductions are entirely disallowed.
Takeaway: A bad deed and a bad number—double fail.
Tax Court cuts Watson Lake and Meadow Lake easement deductions and upholds 40% penalties
Watson Lake Investments, LLC and Meadow Lake Investments, LLC v. Commissioner, T.C. Memo. 2026-106
Watson Lake and Meadow Lake partnerships aimed high on their easement deductions. The Tax Court brought them back to earth: it allowed $115,300 and $208,500, not the millions they hoped for. Their pitch? Future development. The court’s response: show me the demand, show me the rezoning. Neither materialized. Another 40% penalty for the collection.
Why It Matters:
Development projections must reflect reasonably probable uses.
Recent property transactions and comparable sales can outweigh speculative appraisals.
§6664(c)(3) generally bars reasonable-cause relief for gross valuation misstatements involving charitable contribution property.
Takeaway: Drawing up a development plan doesn’t make your land worth millions.
Tax Court denies additional daycare expense deductions and upholds tax penalties
Robin D. Newton v. Commissioner, Docket No. 37691-21, nonprecedential bench opinion
A daycare operator tried for more Schedule C deductions. The Tax Court wasn’t buying it. Some expenses got through after the IRS saw the paperwork in court, but the rest? No receipts, no deduction. Add in a late-filing penalty and accuracy penalties for good measure. The final bill is still being tallied.
Why It Matters:
Receipts must establish the specific expenses being deducted.
Producing records during litigation can support concessions, but does not guarantee additional deductions.
Inadequate records can support negligence penalties when the IRS satisfies applicable approval requirements.
Takeaway: Saving receipts is step one. Proving what they’re for is step two.
Court protects IRS AI audit methods but requires justification for withholding entire records
Tax Analysts v. Internal Revenue Service, No. 25-cv-1409 (D.D.C.)
A federal court said the IRS can keep its AI audit-selection secrets under FOIA. But if the IRS wants to withhold entire documents, it needs a better excuse than ‘just because.’ The Court let the agency protect its methods, but told it to justify any blanket redactions.
Why It Matters:
FOIA protects qualifying law enforcement techniques from disclosure.
Agencies must still evaluate whether they can release nonexempt information.
The decision distinguishes legitimate enforcement secrecy from blanket withholding without support.
Takeaway: The IRS can keep its AI playbook secret, but it can’t just say ‘trust us.’
Overall Takeaway
Three conservation easement cases, same punchline: you can’t conjure property value out of optimism. Even if your donation ticks the technical boxes, the numbers still have to survive a reality check.
The other two cases flip the script. Taxpayers have to prove their deductions. When pushed, the IRS has to prove its secrecy is legit.