The Tax Court Rejects Another Bullshit SCE's Valuation Claim and Imposes Gross Valuation Misstatement Penalty (10/22/26)

Today, the Tax Court (Chief Judge Urda) decided another Syndicated Conservation Easement (“SCE”) of the bullshit genre rejecting the gross overvaluation claim and applying the gross overvaluation penalty. Lontrac Enterprises, LLC v. Commissioner, T.C. Memo. 2026-108 (T.C. No. 272-18 at # 343; GS [to come]. The Court sums the case up in the introduction which I copy and paste (Slip Op. 1-2; omitting the footnote; bold face supplied by JAT):

In a situation resembling the movie Groundhog Day, we once again consider a syndicated conservation easement transaction featuring the same old moves: Investors paid into a partnership for the promise of tax benefits exceeding three times each dollar invested; the partnership granted a conservation easement to a land trust and claimed a cartoonish charitable contribution deduction under section 170;1 and the promoters of the easement strategy pocketed millions of dollars in fees. This case stands apart only for the sheer audacity of the numbers involved—the partnership here claimed a deduction of $74.5 million for an easement (i.e., a restriction on use) on property that had been sitting on the market for years, failing to find a buyer willing to pay $2.9 million. The stratospheric number was based on the claim that the property was suddenly very valuable as a mine although the rocks underlying the purported mining strategy were visible to the naked eye and the area was well mapped by the U.S. Geological Survey (USGS). Of course, the idea of mining was chimerical, simply a way to get at a wholly unmerited tax deduction.

          The Internal Revenue Service (IRS) disallowed the deduction and asserted a 40% penalty for gross valuation misstatement under section 6662(h). For the reasons explained below, we find that the value of the easement was $500,000, and the deduction is limited to that amount. We further find that the value of the easement was grossly overstated such that the 40% penalty applies.

That is pretty much the broad overview of the opinion with details ad nauseum supporting these conclusions. Here are a few more points from the opinion that I thought worthy of calling to readers attention; in the discussion below, I refer to the plaintiff as the "Shelter"):

1. The Shelter raised the standard burden of proof arguments under § 7491 hoping to impose the burden of persuasion on the IRS and prevail as to any fact issue in which the Court is in equipoise under the preponderance of the evidence standard. The Court gave (Slip Op. 14-15) a standard (but not the only possible response) that the Court was not in equipoise (evidentiary tie) and therefore decided the relevant facts by a preponderance of the evidence. (See, however, ¶ 4 below.)

A digression. I have just slipped in the equipoise term I prefer for evidentiary tie where the default rule is to hold against the bearer of the burden of persuasion. Equipoise is often used to describe the point (I think more properly range) in the spectrum where a court is unable to determine the fact on the preponderance of the evidence. I asked ChatGPT Plus about that issue; here is ChatGPT Plus’ answer. (Note that, apparently because ChatGPT Plus has learned so much about me, it extends the discussion at the end of the response to cover equipoise in statutory interpretation: “In statutory interpretation, by contrast, a court confronting interpretive equipoise may have no comparably explicit default rule.” Of course, Chevron supplied a default rule prior to Loper Bright, but Loper Bright offers no tie-breaker default rule in statutory interpretive equipoise, so it is not hard to imagine courts deciding on their own policy preferences or some arbitrary tie-breaker like the proverbial coin flip.)

2. The Court declined (Slip Op. 17-19) to apply a standard negative inference that applies when a potential witness with relevant information declines to testify by invoking the Fifth Amendment privilege. The issue was whether an appraiser was a “qualified appraiser” meeting the standard required for a reporting position of the grossly inflated valuation. Discussions of that issue, as here, often move to the Second Circuit’s opinion in LiButti v. United States, 107 F.3d 110 (2d Cir. 1997) which the Eleventh Circuit adopted in Coquina Invs. v. TD Bank, N.A., 760 F.3d 1300, 1310–11 (11th Cir. 2014). I plan to add something on this holding in a footnote to the 2027 Practitioner Edition of the Federal Tax Procedure Book. The only reference to negative inference I now have is in the 2026 edition p. 386 n. 1639 as follows:

For use of a negative inference from assert ion of t he Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214, at *6,*14-*15, & *24.

I surmise that the Court’s refusal to apply the negative inference rule may have been influenced that, in its claimed state of not being in interpretive equipoise, rejection of the negative inference was not outcome determinative.

3. One of the claims the Shelter made was that mining of certain minerals was economically feasible and supported its grossly overstated valuation. The Court rejected (Slip Op. 34-36) those claims, noting in part that the Shelter’s low costs of mining were “laughable.” In this context, I infer that "laughable" is a euphemism for bullshit. Indeed, in summoning up on the relevant feasibility of mining operations, the Court says (Slip Op. 37):

To recap, we are presented with no testing of the subsurface rock on the Lontrac property, fantastical production estimates based on faulty assumptions about what type of rock was present and how it would be transported, and cost estimates unworthy of opening a lemonade stand. The record contains no credible evidence that any particular mineral existed on the property in “commercially exploitable amounts” or that, as of December 2014, “a market exist[ed] for the mineral that would justify its extraction in the reasonably foreseeable future.” See 69.1 Acres of Land, 942 F.2d at 292; see also Whitehurst, 337 F.2d at 771–72 (“[L]and having a sand or gravel content may not be valued on the basis of conjectural future demand for it. There must be some objective support for the future demand, including volume and duration.”).

          Consequently, the evidence does not establish that the Lontrac property was “adaptable” as a metagreywacke quarry, nor was such a quarry “needed or likely to be needed in the reasonably near future” at the time the easement was granted.

I threw in the last paragraph to introduce the word metagreywacke which I presume is some specific variant of greywacke. See Wikipedia page here on Greywacke, which seems to cover it (in a ballpark sense).

4. The Court then makes its final calculation of the value of the contributed easement as follows:

D. Conclusion as to Easement Value

          Having concluded that the value of the Lontrac property before the easement was $1.1 million, we next proceed to the value of the property after the easement donation. Mr. Hayter determined a value of $712,000, while Mr. Ball determined a value of $600,000. As a lower “after” value results in a higher value for the easement, we will deem the Commissioner to have conceded that the Lontrac property’s after value was $600,000.

          Applying the before-and-after method, we find that the value of the Lontrac easement was $500,000 (i.e., $1.1 million minus $600,000)

Digression: Going off on another tangent that I have, please focus on how the court determined the after value. The Court, despite earlier claiming that it decided fact issues based on a preponderance of the evidence, apparently did not actually find that value by a preponderance of the evidence, but deemed that the IRS “conceded” that value because it came from one of the IRS experts and was better for the Shelter (produced a higher contribution value). As I argue in an article, Courts should find within the range of equipoise at the end that disfavors the party bearing the burden (in this case the Shelter). John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020), here. I won’t go further into that concern.

5. The Court then easily decides the gross overvaluation penalty which is a no fault penalty when the valuation claimed on the return is 200% or more of the correct valuation. One thing that caught my eye is Slip Op. 45 n. 19 (bold-face supplied by JAT):

19 Under Golsen v. Commissioner, 54 T.C. 742, 756–57 (1970), aff’d, 445 F.2d 85 (10th Cir. 1971), we follow a court of appeals’ decision that “is squarely in point” when an appeal from our decision would lie to that court of appeals.

I don’t recall that I have ever attempted to go behind the “squarely in point” concept quoted here. There must be some learning out that about what “squarely in point” means in the Golsen context. I may have to look into that.

6. The Court then in a footnote (Slip Op. 46 n. 20) says:

20 Given how much of this Court’s time and resources are already consumed adjudicating syndicated conservation easement cases, we caution litigants not to waste more of this Court’s time with arguments that are foreclosed by governing law.

Really, why is it necessary to caution on this issue? Judge Buch authored a marvelous opinion making this point without a sideswipe in a footnote. See Tax Court Rejects a Bullshit Tax Shelter False Valuation Claim with Warning of Sanctions for Taxpayers, their Counsel, and Expert Witness Proffering the Bullshit (Federal Tax Procedure Blog 7/16/25; 9/10/25), here. Indeed, I don’t understand why the caution should be limited to arguments foreclosed by governing law. Why should it not apply the gross overvaluations the shelter (generic shelter) and its lawyers present to the Tax Court. Good practitioners (if really good) should know when their proffered valuations are bullshit and should suffer the consequences of shoveling bullshit into the courtroom and wasting everyone’s time. At least that is my opinion. I am not a judge.

Added 10/22/26 9:30pm: Here is a way to think about penalizing bullshit valuations wasting court time. We know that Congress thinks bullshit gross overvaluations (200%) should be subject to no fault penalty when presented on a tax return. How about a penalty for gross overvaluations presented in courts where experts are testifying under oath and lawyers, who are after all officers of the court, should only be presenting cases in good faith. The same 200% threshold for a no fault penalty should apply. Then, taxpayers and promoters would be less inclined to waste everyone's time.

Another thought I have had is whether the Tax Court could encourage or force some type of baseball arbitration. I suspect that the Tax Court may stealthily do something like that anyway because, in the stinkiest cases, the Tax Court moves to or close to the IRS valuation. One could infer the Tax Court in the case discussed above achieved some type of baseball arbitration result. Maybe the Tax Court is de facto sending a message that taxpayers, their promoters, and their counsel should get real and perhaps salvage something. In conjunction with the penalty I mention above, I suspect most of the cases would never go to trial.