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 here. 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. Added 10/24/26 4:30pm: I just posted on the "squarely in point issue by update to a prior blog: On the Tax Court's Golsen Rule (Federal Tax Procedure Blog 12/3/23; 10/24/26), here.
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.
Added 10/23/26 4:45pm:
Further on the notion of baseball arbitration, today I was reading the opinion in Transupport, Inc. v. United States, (Fed. Cl. No. 25-352 Opinion and Order 10/25/26) (CFC here, TN here, GS [to come]). The Court describes a prior Tax Court opinion involving that taxpayer where a key fact in dispute was the value of inventory. The relevant part of the opinion is:
The Tax Court concluded that Transupport had significantly understated its inventory values through a methodology that “consistently led to incorrect results.” Transupport II, 2016 WL 6900913, at *7. Transupport and the IRS each provided analysis and expert testimony on the extent of Transupport’s underpayment. Id. at *6. Although the Tax Court expressed skepticism about the IRS’s valuation, the court determined that the IRS’s valuation “result[ed] in a more reasonable conclusion [than Transupport’s valuation] as to the beginning and ending inventories.” Id. at *13. The Tax Court therefore used the IRS’s valuation to calculate Transupport’s underpayment liability. Id. The IRS, and therefore the Tax Court, estimated that Transupport’s ending inventory value for 2008 was $27,674,497. Id. That was an order of magnitude more than Transupport’s estimate, which was $2,662,956. Id. at *6.
The Tax court opinion, Transupport II, is Transupport, Inc. v. Commissioner, T.C. Memo. 2016-216, GS here. The relevant portion of the opinion (at *39) is at the conclusion of the adjustment merits immediately before discussion of the penalty:
The unreliability of petitioner's claimed deductions for costs of goods sold was shown by the evidence that establishes that the inventory balances petitioner reported on its returns and financial statements were grossly understated, so that the reporting and methodology 1petitioner adopted did not accurately reflect income. Petitioner has not proven any other amount between the $100 million inventory of nonobsolete items it claimed for 2007 and the substantially lower amounts determined by respondent. Respondent's determination results in a more reasonable conclusion as to the value of beginning and ending inventories for 2006, 2007, and 2008 and will be sustained.
Rather, as described, it said that the IRS valuations were "more reasonable" than the taxpayer's valuations and therefore controlled. I speculate that the author of the opinion, Judge Cohen, likely would not say that is what she did, but that is my reading of her description of what she did. If that is what she did, then this is a stealth use of the baseball arbitration concept that may be in play sub silentio in some valuation cases, such as the recent spate of decided cases involving SCE valuations where the Shelter claims outrageous valuations and the Court gravitates to the IRS valuation which is far more reasonable. Perhaps that is the natural outcome because the Shelter’s aggressive valuation claims supported by suspect expert testimony leaves in the record the only credible expert testimony for the IRS. In other words, the record is bare of any other valuation (except for such adjustments to the IRS valuations as the Court derived from cross examination).
See also John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389, 425-427 (2020) (SSRN here), discussing Kohler v. United States, 468 F.3d 1032 (7th Cir. 2006) as follows:
3. Kohler v. United States
In Kohler v. United States, a tax refund suit, the parties fought over a valuation issue. The government’s valuation proffered at trial—$19.5 million—was simplistic and clearly excessive, at least according to Judge Posner writing for the panel in his inimitable fashion of bringing pure logic to the task.118 The taxpayer’s valuation proffered at trial—$11.1 million—was clearly too low. The record offered no persuasive evidence as to a point in between these two erroneous extremes nor did the record indicate whether, if there were a range of equipoise, what that range might have been. In traditional refund suit theory, requiring the taxpayer to show not only that the Service erred but also the amount of the refund to which the taxpayer is entitled, this lacuna should have required a judgment of no refund. Nonetheless, apparently perceiving the government’s erroneous position as more outrageous than the taxpayer’s erroneous position,119 Judge Posner side-stepped the traditional refund theory by declaring the assessment to be a “naked assessment . . . without any foundation whatsoever.”120 Where the Service’s valuation is plainly excessive even in a refund suit, the taxpayer has no burden beyond showing that the Service’s claim is excessive. The Service loses. Judge Posner concluded his opinion: “The Service could have justified a more modest estimate yet one well above $11.1 million, but clinging stubbornly to its untenable valuation it suggested no alternative to $19.5 million. It played all or nothing, lost all, so gets nothing.”121 So, the taxpayer won—even though the [*426] taxpayer’s affirmative proof at trial was not persuasive or even credible—simply because the government was more off base than the taxpayer.
n118 Kohler, 468 F.3d at 1035–36. The Davis rule of thumb (from United States v. Davis, 370 U.S. 65 (1962)) that what is paid is the value for something otherwise incapable of valuation was inapt under the facts of the case as perceived by Judge Posner.
n119 This perhaps was a sub silentio variation of the baseball arbitration/decision method.
n120 Kohler, 468 F.3d at 1036 (citing Janis, 428 U.S. at 440, and Helvering v. Taylor).
n121 Id. at 1037.
But, let us test what Judge Posner said. Let us say that the Service asserted an $18 million valuation in Kohler, with at least some modicum of evidence for that amount. Then, at trial, the trier of fact finds that the taxpayer’s proffered valuation of $11.1 million is too low, that the Service’s proffered valuation of $18 million is too high, that the real valuation is somewhere in between, but that the evidence is so inconclusive that it does not permit the trier of fact to pick the in-between point (or even range) by a preponderance of the evidence. (This is an extreme and highly unlikely example, but assume it for purposes of analysis.) Would or could Judge Posner have applied the naked assessment side-step to shut the Service out? Would not the Service then have prevailed under the standard formulation of the burden of proof in a refund suit—no basis to quantify an amount of refund beyond the amount based on the Service’s reasonable value of $18 million if the evidence does not show that the refund is due? Is not Kohler just a specific adaptation in a litigation context of the adage that “bulls make money, bears make money, pigs get slaughtered?”
Kohler does help in discussing the warp and woof of the burden-of-proof theory in tax cases, but the circumstances will rarely be present in the real world. At a trial on a valuation issue, even if the Service’s original assessment is excessive, the Service is unlikely to rest on an excessive valuation and will propose a reasonable—or at least a somewhat reasonable—valuation in order to maintain credibility before the court. So, in the above example, even if the Service’s original assessment was based on a $19.5 million value, if at trial the Service admitted that the value did not exceed $18 million and offered some basis for $18 million, the court would not reject the Service’s proposed valuation simply because of its admission that the original $19.5 million valuation was excessive.122 Rather, the $18 million would become the relevant valuation, and the above analysis would apply because, even if wrong, the Service’s position was not arbitrary. In burden-of-proof terms, if $18 million were at the upper end of the range, the taxpayer would bear the risk of nonpersuasion [*427] as to any amount less than $18 million. In other words, it appears that the Tax Division’s attorney in Kohler simply botched it and suffered the consequences of irritating Judge Posner in the process.
n122 See Silverman v. Commissioner, 538 F.2d 927, 930 (2d Cir. 1976) (in which the Service made a partial concession in the taxpayer’s favor and the court concluded that the burden of proof remains on the taxpayer as to the unconceded adjustments, citing Tax Court Rule 142(a)(1) that imposes the burden on the taxpayer except with respect to a new matters, increases in the deficiency, and affirmative defenses); Cavallaro III, 842 F.3d at 21–22 (quoting Silverman to conclude that “[t]he taxpayer does not carry his burden of showing the determination invalid simply by pointing to the fact that the Commissioner has reduced his original deficiency claim prior to trial”); see also Transupport, Inc. v. Commissioner, 112 T.C.M. (CCH) 580, 2016 T.C.M. (RIA) ¶ 2016-216 (holding that, if, at trial, the Service seeks to increase its valuation from the amount in the notice of deficiency, the Service will have the burden of proof). I am not sure that Transupport is correct unless the increase is so significant as to constitute new matter; simple recalibration for trial should not constitute a new matter whether down or up.
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