Grossly Overvalued Conservation Easement Disallowed in Full and Gross Valuation Misstatement Penalty Applied (2/24/24)

In Oconee Landing Property, LLC v. Commissioner, T.C. Memo. 2024-25 (2/21/24), GS here, the Court (Judge Lauber) denied the charitable contribution deduction because

• the allegedly relied upon appraisers were not “qualified appraisers” because the petitioners knew the property was worth only a fraction of the appraisers’ opined values (Slip Op. 39-48; and
• the property was “ordinary income property” in the hands of the promoters and that character carried over to the partnership, thus limiting the charitable deduction to the promoters basis. Petitioner supplied “no evidence” of that basis. (Slip Op. 48-57.)

Further, the Court held that, although entitled to no deduction, the Court still had to determine the value of the contributed easement to determine whether the valuation misstatement penalties applied. § 6662(a), (b)(3). The penalties are 20% if the valuation is substantial—i.e., 150% or more of the correct value--and 40% if the valuation is gross—200% or more of the correct value. (Slip Op. 74, citing § 6662(h) and § 6662(h)(2)(A)(i), respectively.) The value of the easement claimed on the return was $20.67 million but the value determined “was no greater than $4,972,002, thus the claimed value “exceeded the correct value by 416%.” (Slip Op. 74-75.)

In support of the first holding (not qualified appraisers), the Court said (Slip Op. pp. 45-46):

A person who achieves an advance agreement with an appraiser that property will be overvalued—knowing that it is being overvalued—cannot establish good faith reliance on professional advice that the appraisal is acceptable. n14

But there is more in the indicated footnote, the Court said (Slip Op. 46):

   n14 In its opening post-trial brief petitioner asserted that the regulations governing qualified appraisals and qualified appraisers “did not go through a proper notice-and-comment process and are, therefore, invalid.” That assertion occupied a single sentence; petitioner supplied no argument in support of that assertion, stating that “the Court need not reach that issue in this case.” And in its post-trial Answering Brief petitioner did not mention any challenge to the validity of Treasury Regulation § 1.170A-13(c)(5)(ii), or any other provision of the regulations, based on the Administrative Procedure Act (APA). Under these circumstances, petitioner has not properly presented or preserved an APA challenge to any regulation discussed in this Opinion.

The Petitioners were apparently feinting at invoking Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), which held that, with respect to another requirement of the 1980s regulation, the IRS had not properly considered and addressed a material comment, thus invalidating that requirement. But that requires proof, as made in Hewitt, that material comments were made and not addressed in the 1980s regulation. In any event, the holding in Hewitt is in substantial question because, based on briefing and oral argument in Corner Post v. Board of Governors of the Federal Reserve System (Sup. Ct. Case No. 22-1008), such procedural challenges are subject to the 6-year statute of limitations in 28 U.S.C. §2401(a). See Oral Argument in Corner Post on Whether Procedural Challenges to Regulations Are Subject to § 2401(a)’s Six-Year Statute of Limitations (Federal Tax Procedure Blog 2/21/24), here.

In summary, the petitioner and the flow-through taxpayers struck out.

I finally note that, in promoting the adventure/misadventure, the promoters offered marketing material touting a 4:1 tax write-off and alleging that they “had successfully closed 62 conservation easement projects” and “had never been audited by the IRS.” I have no idea whether that was just sales exaggeration (itself possibly bullshit) or accurate, and there is no indication whether those 62 instances  (if they exist) were now outside the statute of limitations. The name of the game for bullshit tax shelters is to hide the ball and hope that they can win the audit lottery. Probably many, if not most, such bullshit shelters over the years have succeeded in hiding the ball.