Buckelew Farm, LLC v. Comm’r, T.C. Memo 2024-52; 2024
The U.S. Tax Court, in this case, allowed a charitable deduction that the IRS had disallowed despite the fact that the conservation purpose was not preserved into perpetuity following a circuit ruling invalidating the regulation. The amount of the deduction was determined to be the difference between the before and after value of the property. The Tax Court also determined that a penalty for gross misstatement of value (IRC Sec. 6662) applied.
This case involved a noncash charitable contribution deduction claimed in 2013. The IRS disallowed the deduction by Buckelew Farm LLC “for its grant to the Southeast Regional Land Conservancy, Inc. (SERLC), of a perpetual conservation easement over approximately 1,545.79 acres of real property located in Jones County, Georgia.” In addition, the IRS asked for, alternatively, imposition of a gross misstatement of value penalty under Sec. 6662.
Findings of fact.
Subject property. The opinion provided a summary of the subject property to set the stage for the opinions the Tax Court will make. Conservation easement transaction. James M. Adams III was the designated representative of the Tax Matters Partner. Adams became aware that the subject property might be for sale in 2012. Adams approached Messrs. Klesko and Smoltz (former Atlanta Braves players) and discussed a purchase price plan of $6 million for the property, which included the use of a conservation easement. “Mr. Adams is willing to extend the $6 million offer because of the ‘value of the potential tax deductions and tax credits.’” An upscale residential community would be built on the land minus the land conservation easement.
In 2013, Adams engaged Dale Hayter Jr., a Georgia licensed appraiser and an MAI, with experience in conservation easement appraisals. “Hayter concluded that the highest and best use of the Subject Property before the granting of the conservation easement was the ‘development of a 307 lot hunting and conservation oriented residential community.’” He used the income method, using the subdivision method, for his appraisal. Before consideration of the easement, Hayter determined a value of $50,480,000.
Value after granting of the conservation easement. Use of the easement property after granting will be severely limited. Hayter used the comparable sales method to determine the value of the property after the easement, using similar land parcels with similar easements. He estimated the amount of a potential deduction of $47,570,000.
Grant of easement. “The conservation easement deed was dated December 20, 2023, and purports to show that Big K Farms voluntarily granted to SERLC15 a conservation easement over approximately 1,545.79 acres on the Subject Property in perpetuity to protect the conservation values, which refer to natural open space and scenic and educational values.”
Partnership return. On its 2013 partnership tax return, a deduction for the value of the easement was claimed at $47,605,000. Hayter signed the attached form 8283. On March 30, 2017, the IRS issued an FPAA1disallowing the easement charitable contribution deduction on the basis that “[i]t has not been established that all the requirements of I.R.C. §170 and the corresponding Treasury Regulations have been satisfied for the claimed noncash charitable contribution.” The IRS also determined a 40% accuracy-related penalty (Sec. 6663) or, in the alternative, a 20% penalty for substantial valuation misstatement under Sec. 6662.
Expert testimony: petitioner’s experts.
Dale Hayter Jr. The Tax Court determined the petitioner’s valuation expert to be a percipient witness. His report was discussed above. Belinda Sward. Presented as an expert in real estate marketing and recognized as such, Ms. Sward’s report concluded that the subject property “has the characteristics, developer experience and location proximate to Metro Atlanta to be successfully developed for a sportsman resort/sporting community or some variation.” Her report relied on information from 2014 and subsequent and thus was of no assistance to the Tax Court relative to the 2013 deduction. It relied too much on hindsight.
The IRS’ experts.
Zac Ryan. The IRS offered Zac Ryan as its valuation expert and to rebut Hayter’s report. He is an MAI and a licensed general appraiser in Georgia, Florida, and South Carolina. The Tax Court recognized him as an expert in the fields of real estate valuation and appraisal review. He performed a fair market value appraisal of the easement as of Dec. 20, 2013, using only the comparable sales method of other land parcels in a before-and-after valuation to determine the value of the easement.
Unlike Hayter, Ryan determined the highest and best use to be “continued timber production, possible agriculture, recreation (primarily hunting and fishing), and extremely low-density residential use in conjunction with long-term speculative investment for alternative uses.” Ryan determined that the subject property had a before-easement value of $7,395,000. Ryan reviewed 12 comparable properties, focusing on two in particular, for the before value and added four properties to the 12 to determine the after value. “Mr. Ryan noted that the various restrictions imposed on the Subject Property as a result of granting the conservation easement reduced the property’s use potential from that in the ‘before’ situation and placed it at a marketable disadvantage in the ‘after’ situation.” He determined an after value to be $2,800,000 for a net deduction of $4,595,000 ($7,395,000 – $2,800,000).
Raymond Krasinski. Engaged by the IRS to review Hayter’s 2013 for compliance with USPAP, Krasinski is an MAI and a general review senior. Krasinski concluded that there were significant errors in Hayter’s appraisal and it did not comply with USPAP, listing a number of violations including use of an improper method (DCF). As a result, Hayter’s appraisal vastly overstated the value of the easement.
Steven Hastings. The IRS engaged Hastings to analyze and review Sward’s retrospective market analysis report and the DCF analysis in Hayter’s 2013 report. Forming his conclusions “on the basis of alleged errors and methodological problems,” Hastings concluded that the development was not feasible or viable nor would be financeable. Hastings also concluded that Sward’s retrospective market analysis was unhelpful in determining whether the proposed development was feasible.
Opinion.
Burden of proof. The taxpayer bore the burden of proving that the commissioner’s determinations were erroneous and bore the burden of proving that the contribution deduction was allowable and the value of the easement. “In order to establish its entitlement to the charitable contribution deduction at issue, petitioner must show (1) that the Partnership made a qualifying contribution, (2) that it satisfied (or is excused from) the substantiation requirements for such a contribution, and (3) the value of the contribution.”
Qualified conservation contribution. The (IRS) statute provided an exception to the deductibility of a partial interest in property for a “qualified conservation contribution” defined to be the contribution of a “qualified real property interest” to a “qualified organization” “exclusively for conservation purposes.” SERLC was agreed to be a qualified organization. Under section 170(h)(2)(C), a “qualified real property interest” included “a restriction (granted in perpetuity) on the use which may be made of the real property.” The partnership granted to SERLC a perpetual conservation easement in approximately 1,549.79 acres of the subject property. The Tax Court determined that the subject property qualified as a real property interest under section 170(h)(2)(C). The Tax Court also agreed to follow the decision of the 11th Circuit, which held the Treasury Regulation § 1.170A 14(g)(6)(ii) relating to provisions of extinguishment proceeds was invalid.
Donative intent. “Congress long ago decided to incentivize charitable contributions by allowing deductions for those contributions, and it would be improper for us to deny a deduction to a donor simply because he has received a tax benefit in exchange.” The partnership therefore had the proper donative intent.
Compliance with the substantiation requirements. Whether Mr. Hayter was a qualified appraiser. The IRS argued that the “knowledge regulation” should disqualify Hayter as a qualified appraiser. It said, in part, “[a]n 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.” There was no evidence of any agreement between Adams and Hayter regarding the value of the property. Hayter testified that he “never enter[s] into an appraisal with a predetermined value,” that the market determined “what the fair market value is,” and that he stood by the valuation opinion reflected in his report.
In addition to the specific requirements (noted in the opinion), the appraisal report provided sufficient information for the IRS to evaluate the claimed deduction and deal with overvaluation. (Hewitt v. Commissioner) The Tax Court agreed with the petitioner that the 2013 Hayter appraisal met the requirements of for a qualified appraisal. However, the respondent attempted to disqualify the appraisal as not complying with USPAP, which the Tax Court addressed.
“Section 170(f)(11)(E)(i)(II) specifies, in relevant part, that a qualified appraisal must be ‘conducted by a qualified appraiser in accordance with generally accepted appraisal standards.’” According to Treasury Department guidance, the appraisal will meet the requirements if, for example, “the appraisal is consistent with the substance and principles of [USPAP].” (Notice 2006-96, § 3.02(2), 2006-2 C.B. at 902.) (Editor’s note: This case demonstrates once again that an appraisal does not have to comply with USPAP directly in order to be a qualified appraisal. It must be consistent with the substance and principles of USPAP, an important distinction.)
The IRS said, in Hayter’s report, “his departures from USPAP are significant, serious, and seemingly intentionally designed to create a report simply to justify the value hoped by the Partnership.” The petitioner argued that Mr. Hayter’s 2013 appraisal “substantially complies with appraisal standards because it allowed respondent to properly understand and monitor the claimed contribution.” The Tax Court agreed with the petitioner’s arguments. Full compliance with USPAP was not the full measure of reliability. (Whitehouse Hotel Ltd. P’ship v. Commissioner) (Editor’s Note: See above editor’s note.) The Tax Court concurred with Krasinski’s expert report that Hayter’s appraisal lacked full compliance with USPAP.
“[H]owever, we find these failures go more to the credibility and weight of the appraisal and not to whether the appraisal complies with generally accepted appraisal standards.” The Tax Court found that Hayter’s appraisal was a qualified appraisal.
Valuation of the conservation easement donation. The amount of a charitable contribution was equal to the fair market value of the property at the date of donation. If there were a substantial number of comparable donated easements, the fair market value of the easement was based on the prices of those sales. If such were not available, then “the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.”
The petitioner’s expert, Hayter, used a DCF to determine the before and after value. His value of the easement was $47,570,000. The respondent’s expert, Ryan, used a comparable sales approach and valued the easement at $4,595,000. The large disparity was a result of the difference in the determination of the highest and best use each expert determined as well as the comparable sales used. Both experts essentially agreed on the after value of the property at approximately $2,750,000. The dispute revolved around the before value of the property.
Before value. To determine the fair market value, it was first necessary to determine the highest and best use (HBU). Hayter determined that the highest and best use before the grant of the conservation easement was the “development of a 307 lot hunting and conservation oriented residential community,” while Ryan determined the highest and best use to be “continued timber production, possible agriculture, recreation (primarily hunting and fishing), and extremely low-density residential use in conjunction with long-term speculative investment for alternative uses.”
The Tax Court declined to accept Hayter’s HBU and did accept the HBU Ryan determined for the following reasons:
- Hayter made an unreasonable assumption that the property would be rezoned to fit the proposed development and whether the proposed development was feasible and financeable;
- The Tax Court did not deem Hayter’s comparable sales used in developing his cash flows comparable, whereas the comparable sales Ryan used, 12 in total, were considered appropriate, and “we find it unlikely that the Subject Property would have been developed in accordance with the proposed development plan and that the probability of development at the selling price of $50,480,000 is firmly planted somewhere in the realm of fantasy”;
- The Tax Court adopted Ryan’s value of $7,595,000; and
- The sales history of the property was indicative of its true value. Big K partnership paid $6 million for a 99% interest in 2013, which verified Ryan’s value.
Charitable contribution amount. The Tax Court held that the contribution amount was $4,595,000, which was the difference between the before value of $7,595,000 and the after value of $2,800,000.
Penalties. The Tax Court declined to assess a penalty under Sec. 6663, Civil Fraud penalty, since it did not find an intentional act to conceal the actual transaction. However, the Tax Court did find a 40% penalty for gross misstatement of value under Sec. 6662 based on the relative amounts of the claimed deduction of $47,570,000 versus the allowed deduction of $4,595,000.
1. Final partnership administrative adjustment.