Tax Court Upholds Service’s Sledgehammer: Denies $20.7 Million Conservation Easement Deduction
In a 78-page opinion issued yesterday, the Tax Court upheld the Service’s sledge-hammering of a conservation easement deduction for lack of a “qualified appraisal” and because the land with respect to the conservation easement was not a capital asset. And a 40% penalty and then a 20% penalty, to boot. Sounds like the Service and the Tax Court just ain’t having it anymore with these syndicated conservation easements.
We hold that Oconee is entitled to a charitable contribution deduction of zero for 2015, for two independently sufficient reasons. First, it failed to secure and attach to its return a “qualified appraisal” of the contributed property. See § 170(f)(11)(D). Second, the property on which the easement was granted was “ordinary income property” in Oconee’s hands, so that any charitable contribution deduction would be limited to its basis. See § 170(e)(1). Because Oconee failed to prove that its basis exceeded zero, its contribution is limited to zero. With regard to penalties, we find that the FMV of the easement was less than $5 million. Because the value claimed on Oconee’s return exceeded the FMV of the easement by more than 400%, it is liable for the 40% gross valuation misstatement penalty. See § 6662(a), (h). Finally, we hold that Oconee is liable for a 20% penalty on the portion of the underpayment not attributable to the valuation misstatement.
The facts reported in the opinion pretty much describe a huge planning and tax strategy blunder, seized upon by an agency and a court pretty sick and tired of conservation easements. The Service even argued that there was no donative intent because the whole transaction was motivated by the availability of a tax deduction. The donors weren’t sufficiently altruistic, the Service argued, because they were doing it solely for the tax deduction. The Court wisely rejected that argument; a big purpose of deductions is to encourage the false altruism in the first place. Ain’t no such thing as true altruism. Anyway, the appraisers had all the credentials and the paperwork seemed in order. But the Service and Tax Court, through a questionable and winding road of related party attribution and constructive notice said the appraisers should have known better.
Respondent agrees that Messrs. Wingard and Van Sant met these general requirements at the time they prepared the final appraisal in April 2016. However, respondent contends that Messrs. Wingard and Van Sant were not qualified appraisers by virtue of the “Exception” set forth in Treasury Regulation § 1.170A-13(c)(5)(ii). It provides that an individual is not a qualified appraiser with respect to a particular donation “if the donor had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property.” This will be true, for example, if “the donor and the appraiser make an agreement concerning the amount at which the property will be valued and the donor knows that such amount exceeds the fair market value of the property.” Ibid. The “knowledge” requirement in Treasury Regulation § 1.170A13(c)(5)(ii) implicates the donor’s actual and/or constructive knowledge. See Dunlap v. Commissioner, T.C. Memo. 2012-126, 103 T.C.M. (CCH) 1689, 1708 (considering whether the information the donor knew or should have known would cause a reasonable person to believe that the appraiser would falsely overstate the value of an easement).
In gauging a partnership’s “knowledge” for this purpose, we look to the knowledge of the person(s) with ultimate authority to manage the partnership. The Reynoldses (through intervening entities) were the ultimate managers of Oconee and Oconee Investors. Thus, in determining what facts were “known” by Oconee, we must determine what facts were known—actually or constructively—by the Reynoldses. During 2013–2015 the Reynoldses persistently marketed the Parent Tract to prospective buyers. In 2013 they offered the Parent Tract to TPA for $7.9 million, but TPA rejected that offer. The Reynoldses then commissioned a new DCF analysis valuing the Parent Tract at $6.7 million; according to Mr. Denbow, $6.7 million “became the new asking price.” In September 2013 the Reynoldses offered the Parent Tract to TPA at $6.7 million, but TPA again declined. During 2015 the Reynoldses authorized Mr. Baker to sell the entire Parent Tract at $7.7 million. Only one prospective buyer expressed interest, and no deal was consummated. On the basis of these facts, we conclude that the Reynoldses knew that the Parent Tract in 2015 was worth considerably less than $10 million. They may have believed that the property had considerable intrinsic value and might ultimately be developed into the Reynoldsboro of their dreams. But they were shrewd, experienced, and highly sophisticated real estate developers. Whatever the property’s future potential, they knew that, as of late 2015, the current market value of the Parent Tract was considerably less than $10 million.
Pigs turn into hogs I guess.
darryll k. jones