Tax Court (Judge Lauber) Strikes Down Another Bullshit Tax Shelter Not Defending It's Return Reporting Valuation (3/30/26)

In Hancock County Land Acquisitions, LLC v. Commissioner, T.C. Memo. 2026-28, TC here at # 232 and GS here, Judge Lauber shot down another bullshit SCE shelter. Judge Lauber explains in summary in the introduction (pp. 1-3 of the opinion) in a straight-forward way, so I will just cut and paste that portion of the opinion (providing my own bold-face of key parts, with one footnote omitted) and will thereafter make some comments:

LAUBER, Judge: This is a syndicated conservation easement (SCE) case with a familiar fact pattern. In August 2016 Hancock County Land Acquisitions, LLC (HCLA), granted a conservation easement over a 236-acre parcel of land in rural Mississippi. This parcel was part of a 1,698-acre tract that had changed hands three times during the previous 13 years for prices as low as $895 and $2,356 per acre.1 On its 2016 Form 1065, U.S. Return of Partnership Income, HCLA claimed a charitable contribution deduction for the easement on the theory that the [*2] “before value” of the 236-acre parcel—that is, its value before being encumbered by the easement—was $180,177,000, or $763,462 per acre. That figure was calculated as the discounted cashflow (DCF) that supposedly could be derived from constructing and operating a hypothetical sand and gravel (S&G) mining business on the property.

          To its credit, Southeastern Argive Investments, LLC (Argive), petitioner in this case, did not seek to defend that outlandish valuation at trial. Rather, petitioner sought to derive a “before value” for the 236-acre parcel from the amount investors paid to acquire a 97% interest in Argive, or from the amount Argive paid to acquire a 97% interest in HCLA, which owned the land. The “total capital raise” from the investor offering was $23,374,575, and roughly 78% of that amount, or $18,247,575, was paid to the owner of the 236-acre parcel. Petitioner contends that the offering was an arm’s-length transaction close in time to—indeed, just six weeks before—the date the easement was granted (valuation date), and that this transaction constitutes the best evidence of the fair market value (FMV) of the land. While not disclaiming a higher value, petitioner contends that the “before value” of the land (making adjustments for minority interests) was at least $18,634,933, or $78,962 per acre.

          We reject this argument. The investors were not purchasing land; in substance, they were purchasing tax deductions. Each investor was promised a charitable contribution tax deduction of $7,477 for every $1,000 invested. As a result, the amount they paid for their partnership interests was (roughly speaking) the aggregate amount of the promised tax deduction divided by 7.477. Neither the investors nor Argive negotiated at arm’s length over the value of the land; the offering was not priced by reference to the value of the land; and the amount the investors paid had nothing to do with the value of the land. Petitioner produced no credible evidence that the investors expressed any view about what percentage of the offering proceeds should be paid to the land-owner under arm’s-length standards. We find that the sole focus of their concern was the magnitude of the tax deduction. That number would be the same regardless of how much the landowner was paid for the land.

          The trial revealed abundant evidence about sales of land in or near Hancock County during 2012–2016. The land conveyed in many of these sales was actually being mined (or had significant mining potential) and was otherwise comparable to the 236-acre parcel. Most of these transactions occurred at prices ranging from $1,731 per acre to $8,000 per acre. This evidence convinced us that no rational buyer, acting at [*3] arm’s length with reasonable knowledge of the relevant facts, would have paid $78,962 per acre for the 236-acre parcel on August 2, 2016, the valuation date.

          Employing the comparable sales method, and giving some weight to a pair of sales that occurred after the valuation date, we find that the “before value” of the 236-acre parcel was $2,360,000, or $10,000 per acre, Subtracting from that figure the “after value” the parties have stipulated ($177,000), we hold that HCLA is entitled to a charitable contribution tax deduction of $2,183,000.

          Besides the charitable contribution deduction, HCLA claimed on its 2016 return business expense deductions of $6,128,493, of which about $3.29 million remains in dispute. The largest of these items is an insurance premium of $1,688,944 paid for a “tax loss” policy that insured the investors against the risk that the Internal Revenue Service (IRS) would disallow the deduction claimed for the easement contribution. We hold that this outlay was not an “ordinary and necessary” expense of the partnership under section 162(a). We find that petitioner has likewise failed to substantiate most of the other claimed deductions as legitimate expenses actually incurred in the conduct of HCLA’s business.

          Finally, we conclude that HCLA is liable for a 40% penalty for gross valuation misstatement with respect to the underpayment of tax attributable to claiming a charitable contribution deduction in excess of $2,183,000. See § 6662(a), (h). We hold that HCLA is liable for a 20% accuracy-related penalty with respect to the portion of the underpayment attributable to the other disallowed deductions. See § 6662(a), (b)(2).

 JAT Comments:

1. Most important, I think, is the petitioner’s not defending the initial valuation claimed for the return reporting, which was a gross overvaluation. I think this suggests that parties and their counsel are getting the message that they should not continue to bullshit by blowing smoke in the litigation process. 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.

2. The ubiquitous Claud Clark III, chief of the bullshit appraisal fueling many SCE bullshit valuation return reporting, makes an appearance (pp. 14-19, 25-29, 35. 37-38, 48), as the appraiser supporting the return reporting position that the petitioner didn’t even bother to defend in the litigation and, of course, did not testify at trial. Mr. Clark has been a frequent player in bullshit SCE valuations. See here.

3. I was interested in the discussion of the “[section] 170(h) tax risk insurance policy.” From the opinion (p. 17, 40-41, with my bold-face to indicate interesting parts):

           Argive elected to devote a portion of the capital raise to purchase a “[section] 170(h) tax risk insurance policy” from Alliant Insurance Services, Inc. (Alliant). According to Mr. Kelley, this policy was intended to pay out if, “for any reason, the deduction was disallowed, and the members [of Argive] would sustain a loss.” He said the partnership paid for this policy because “most investors wanted it” and “it made them feel good.” Petitioner submitted a copy of an invoice from Alliant, but petitioner failed to introduce into the record a copy of the actual insurance policy. Argive paid a premium of $1,688,944 to Alliant.n4
   n4 Webb Creek paid an additional $20,000 to Alliant by check, but the record does not reveal the purpose for that payment. Petitioner has conceded the nondeductibility of this $20,000 payment, and we discuss it no further.

[ * * * *

A. Insurance Expense

          The largest expense HCLA reported was the $1,688,944 insurance premium paid to Alliant for the “section 170(h) tax risk insurance policy.” According to Mr. Kelley, this policy was expected to pay out if, “for any reason, the deduction was disallowed, and the members [of Argive] would sustain a loss.” Petitioner did not submit a copy of the actual insurance policy into evidence, so it is not possible for the Court to determine what (if any) other conditions—in addition to the IRS’s disallowance of the charitable contribution deduction—may have affected Alliant’s payment obligation under the policy.

          In its Posttrial Brief petitioner contends that the insurance was necessary “to protect Hancock’s business from risks, such as tax audits and challenges.” The risk of an IRS audit, petitioner says, is “inherent in the conservation easement space.” By protecting against this risk, petitioner insists that the insurance expense was an “ordinary and necessary expense” of Hancock’s business.

          We disagree. The policy was purchased by HCLA, a passthrough partnership that had (and could have) no tax liability of its own. The deduction attributable to the easement was passed through ratably to the investors who owned membership interests in Argive, and they claimed charitable contribution deductions on their individual income tax returns. The tax risk against which Alliant insured was thus a tax risk borne by the partners in their individual capacities.n11
   n11 Petitioner cannot plausibly analogize the Alliant policy to a directors and officers (D&O) insurance policy of the sort that business entities routinely maintain. D&O policies protect corporate officers from liability for acts they perform in their capacity as corporate officers. Because petitioner failed to submit a copy of the insurance policy into the record, there is no evidence that the Alliant policy provided insurance protection to anyone apart from the investor-partners in their individual capacities.

           Mr. Kelley acknowledged as much when he testified that the Alliant policy was intended to pay out if, “for any reason, the deduction was disallowed, and the members [of Argive] would sustain a loss.” The insurance “covered the members,” he said, “because the deduction would flow through to the members.” According to Mr. Kelley, the partnership purchased this policy because “most investors wanted it” and “it made them feel good.” The insurance expense was incurred to protect the partners in their individual capacities against a tax loss. Because this [*41] expense was not an “ordinary and necessary” expense of the partnership’s business, it was not a deductible expense under section 162.n12
   n12 Respondent advanced an alternative argument against the deductibility of the Alliant insurance premium. Because the insurance was designed to reimburse partners in the event their deductions were disallowed, respondent contends that Argive in effect claimed an impermissible deduction for Federal income tax. See § 275(a)(1); Mali v. Commissioner, T.C. Memo. 2011-121, 101 T.C.M. (CCH) 1595, 1598. Because we sustain disallowance of the deduction for the reasons stated in the text, we need not reach respondent’s alternative argument. 

Alliant's web page for its tax insurance product (current offering which may or may not be the same as discussed in the opinion) is here.