LLC Challenges Denial of Conservation Easement Deduction

LAGUNA MADRE HOLDINGS, LLC,
SEA OATS MANAGEMENT, LLC,
TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER SECTION 6226

Pursuant to Tax Ct. R. 241 Petitioner hereby petitions for readjustment of the partnership items set forth by the Commissioner of Internal Revenue, Respondent, in the Notice of Final Partnership Administrative Adjustment (“FPAA”) dated August 23, 2021.¹ As a basis for this proceeding Petitioner alleges as follows:

1. Petitioner. Petitioner, Sea Oats Management, LLC, (“Sea Oats”) has a mailing address of 1023 State Highway 361, Building C, Suite 218, Port Aransas, Texas 78373.

2. Tax Matters Partner. Sea Oats is the Tax Matters Partner of Laguna Madre Holdings, LLC.

3. Partnership. This petition relates to the partnership Laguna Madre Holdings, LLC (“Laguna Madre”), a limited liability company under the laws of the state of Texas treated as a partnership for federal income tax purposes. Laguna Madre's mailing address is 1023 State Highway 361, Building C, Suite 218, Port Aransas, Texas 78373. Laguna Madre's principal place of business at the time of filing this petition is in the state of Texas.

4. Return. The federal income tax return for the period in controversy was electronically filed with the Internal Revenue Service. The partnership's taxpayer identification number is attached in accordance with Tax Ct. R. 241(a).

5. FPAA. The FPAA, a copy of which is attached, marked as Exhibit A, and redacted in accordance with Tax Ct. R. 27, is dated August 23, 2021.

6. Taxable Year. The FPAA was issued for the taxable year ended December 31, 2017.

7. Assignments of Error. All adjustments and asserted penalties set forth in the FPAA are disputed. The adjustments and asserted penalties present mixed questions of law and fact and are based upon the following errors.

a. Charitable Contribution

i. The Commissioner erred by determining that the noncash charitable contribution deduction in the amount of $13,800,000 for the donation of20.88 acres of real property to Coastal Bend Bays and Estuaries Program, Inc. in 2017 was not allowed.

ii. The Commissioner erred by disallowing the deduction on the basis that “[y]ou have not established that Laguna Madre Holdings, LLC made a noncash charitable contribution during the tax year ended December 31, 2017.”

iii. The Commissioner erred by disregarding the Warranty Gift Deed for $0 consideration between Laguna Madre and Coastal Bend Bays and Estuaries Program, Inc. recorded in Cameron County, Texas on December 29, 2017.

iv. The Commissioner's determination is contrary to indisputable known facts such that it is arbitrary, capricious, and clearly erroneous, resulting in an invalid FPAA.

v. The Commissioner's determination in the FPAA should be stricken as invalid.

vi. The Commissioner should bear the burden of proof in that this specific determination is not invalid.

b. Requirements of Section 170 and the Corresponding Treasury Regulations

i. The Commissioner erred by disallowing the deduction on the basis that “you failed to establish that it satisfied all the all the requirements of I.R.C. § 170 and the corresponding Treasury Regulations for deducting a noncash charitable contribution.”

ii. The Commissioner's determination lacks sufficient explanation of the legal grounds for the adjustment such that Petitioner may identify specific evidence to refute that determination.

iii. The Commissioner's determination lacks specific allegations of fact and/or the application of fact to law such that the proffered determination is arbitrary, capricious, and clearly erroneous, resulting in an invalid FPAA.

iv. The Commissioner's determination lacks specific allegations of fact and/or the application of fact to law to avoid shifting the burden of proof to the Commissioner.

v. The Commissioner erred in determining that Laguna Madre did not make a noncash charitable contribution in the amount of $13,800,000 for its donation of 20.88 acres of real property to a qualified organization in 2017.

vi. The Commissioner erred in determining that Laguna Madre did not satisfy all of the requirements of Section 170 necessary to be entitled to a charitable contribution deduction in the amount of $13,800,000 for its donation of 20.88 acres of real property to a qualified organization in 2017.

vii. The Commissioner erred by reducing Petitioner's 2017 charitable contribution deduction in the amount of $13,800,000 without adequate basis in law or fact.

c. Valuation

i. The Commissioner erred in the FPAA by determining in the alternative that “you have not established the value of the noncash charitable contribution is greater than zero” where Laguna Madre produced a qualified appraisal by a qualified appraiser as required by Section 170 and Treasury Regulation Section 1.170A-13.

ii. The Commissioner erred in disregarding the value of the contributed property interest in the amount of at least $13,800,000, as established by Laguna Madre through the production of a qualified appraisal by a qualified appraiser which conforms to the specific requirements of Section 170 and Treasury Regulation Section 1.170A-13.

iii. The Commissioner's determination in the FPAA fails to identify or explain the methodology used to establish that the value of the contributed property does not exceed $0.

iv. The Commissioner's determination in the FPAA lacks specific allegations of fact and/or application of fact to law such that the proffered determination is arbitrary, capricious, and clearly erroneous, resulting in an invalid FPAA.

v. The Commissioner erred in the FPAA by further determining in the alternative that “you have not established that the value of the noncash charitable contribution should not be limited to the basis” where Laguna Madre produced a qualified appraisal by a qualified appraiser as required by Section 170 and Treasury Regulation Section 1.170A-13.

vi. The Commissioner's determination in the FPAA alternatively fails to identify or explain the methodology used to establish that the value of the contributed property does not exceed $2,100,000.

vii. The Commissioner's determination in the FPAA does not identify or apply a methodology to relevant facts such that the proffered determination is arbitrary, capricious, and clearly erroneous, resulting in an invalid FPAA.

viii. The Commissioner's determination in the FPAA lacks specific allegations of fact to avoid shifting the burden of production to the Commissioner to establish that the value of the contributed property is not $13,800,000.

ix. The Commissioner erred by reducing Petitioner's 2017 charitable contribution deduction in the amount of $13,800,000 without adequate basis in law or fact.

d. Fee Simple Noncash Contribution

i. The Commissioner erred in the FPAA by asserting in the alternative that “you have not established the value of the noncash charitable contribution was more than $0 for the conservation easement contribution.”

ii. The Commissioner erred in the FPAA by asserting that the noncash charitable contribution made by Laguna Madre was a conservation easement contribution.

iii. The Commissioner erred by disregarding the Warranty Gift Deed for $0 consideration between Laguna Madre and Coastal Bend Bays and Estuaries Program, Inc., recorded in Cameron County, Texas on December 29, 2017.

iv. The Commissioner's determination lacks specific allegations of fact and/or the application of fact to law such that the proffered determination is arbitrary, capricious, and clearly erroneous, resulting in an invalid FPAA.

v. The Commissioner's assertion regarding the partnership's noncash charitable contribution is legally and factually incorrect in determining that the noncash charitable contribution was a conservation easement contribution.

e. Gross Valuation Misstatement Penalty

i. The Commissioner erred by asserting that the underpayment of tax resulting from the adjustment of partnership items is attributable to a gross valuation misstatement under Section 6662(a), as defined in Section 6662(h), such that a 40% addition to tax may apply.

ii. Where the Commissioner has made no determination of value in this FPAA, the assertion of the gross valuation misstatement penalty under Section6662(a), as defined in Section 6662(h), is arbitrary, capricious, and clearly erroneous.

iii. The Commissioner failed to comply with Section 6751(b)(1) in asserting the gross valuation misstatement penalty for the 2017 tax year because the initial determination of the gross valuation misstatement penalty was not properly approved in writing.

f. Reportable Transaction Understatement Penalty

i. The Commissioner erred by asserting that the adjustments to partnership items are attributable to a listed transaction under Section 6707A(c).

ii. The Commissioner's assertion of penalties under Section 6662A, based on the application of Notice 2017-10, is arbitrary, capricious, not in accordance with the law, in excess of statutory authority, short of statutory right, without observance of procedure required by law, unsupported by substantial evidence, and unwarranted by the facts subject to the de novo review of this court.

iii. The Commissioner erred by asserting that the underpayments of tax resulting from adjustments to partnership items are attributable to a listed transaction result in a reportable transaction understatement such that a 20% addition to tax under Section 6662A may apply.

iv. The Commissioner failed to comply with Section 6751(b)(1) in asserting the reportable transaction understatement penalty for the 2017 tax year because the initial determination of the reportable transaction understatement penalty was not properly approved in writing.

g. Substantial Valuation Misstatement Penalty

i. The Commissioner erred by asserting in the alternative that the underpayment of tax resulting from the adjustment of partnership items is attributable to a substantial valuation misstatement penalty under Section 6662(b)(3), as defined under Section 6662(e), such that a 20% addition to tax may apply.

ii. Where the Commissioner has made no determination of value in this FPAA, the assertion of the substantial valuation misstatement penalty under Section 6662(b)(3), as defined under Section 6662(e), is arbitrary, capricious, and clearly erroneous.

iii. The Commissioner failed to comply with Section 6751(b)(1) in asserting the substantial valuation misstatement penalty for the 2017 tax year because the initial determination of the substantial valuation misstatement penalty was not properly approved in writing.

h. Substantial Understatement of Income Tax Penalty

i. The Commissioner erred by asserting in the alternative that the underpayment of tax resulting from the adjustment of partnership items is attributable to a substantial understatement of income tax under Section 6662(b)(2), as defined under Section 6662(d), such that a 20% addition to tax may apply.

ii. Where the Commissioner has made no determination of value in this FPAA, the assertion of the substantial understatement of income tax penalty under Section 6662(b)(2), as defined under Section 6662(d), is arbitrary, capricious, and clearly erroneous.

iii. The Commissioner failed to comply with Section 6751(b)(1) in asserting the substantial understatement penalty for the 2017 tax year because the initial determination of the substantial understatement penalty was not properly approved in writing.

i. Accuracy-Related Penalty

i. The Commissioner erred by asserting in the alternative that the underpayment of tax resulting from the adjustment of partnership items is attributable to negligence or disregard of rules and regulations under Section 6662(b)(1), as defined under Section 6662(c), such that a 20% addition to tax may apply.

ii. The Commissioner failed to comply with Section 6751(b)(1) in asserting the accuracy-related penalty for the 2017 tax year because the initial determination of the accuracy-related penalty was not properly approved in writing.

j. Reasonable Cause or Any Other Defense

i. The Commissioner erred by asserting that neither the partnership nor its partners have made a showing of reasonable cause or any other defense to the asserted penalties.

ii. The Commissioner erred by asserting that the partners did not make a showing of reasonable cause or any other defense to penalties in contravention of the plain language of Section 6221.

iii. The Commissioner's assertion regarding the partnership's reasonable cause or any other defense is legally and factually insufficient to avoid the Commissioner's burden of proof regarding penalties in this de novo proceeding.

8. Facts. Petitioner relies on the following facts as the basis of Petitioner's case.

a. Parties

i. Petitioner, Sea Oats, is a Florida limited liability company with a principal place of business in Texas. Sea Oats is the Tax Matters Partner of Laguna Madre.

ii. Laguna Madre is a Texas limited liability company treated as a partnership for federal income tax purposes.

b. U.S. Return of Partnership Income

i. Laguna Madre timely filed its federal income tax return, Form 1065, U.S. Return of Partnership Income, for the tax year ended December 31, 2017 (“2017 Tax Return”), including all required attachments and information.

ii. Laguna Madre attached Form 8886, Reportable Transaction Disclosure Statement, to its 2017 Tax Return.

iii. Laguna Madre attached Form 8283, Noncash Charitable Contributions, to its 2017 Tax Return.

iv. Laguna Madre attached a qualified appraisal for the noncash charitable contribution to its 2017 Tax Return.

c. Property

i. Laguna Madre owned 31.56 acres of property located in Cameron County, Texas in 2017 (the “Laguna Madre Property”).

ii. The Laguna Madre Property is located in Cameron County, Texas.

d. Charitable Contribution

i. On December 29, 2017, Laguna Madre donated 20.88 acres of the Laguna Madre Property (the “Donated Property”) to Coastal Bend Bays and Estuaries Program, Inc. in fee simple by executing a Warranty Gift Deed for $0 consideration.

ii. The Warranty Gift Deed was properly recorded in Cameron County, Texas on December 29, 2017.

e. Donee

i. The Donated Property was donated to Coastal Bend Bays and Estuaries Program, Inc. (“Coastal Bend”). Coastal Bend was at all times recognized by the Internal Revenue Service as a publicly supported, Section 501(c)(3) charitable organization as described in Sections 509(a)(1) and 170(b)(l)(A)(vi).

ii. Coastal Bend was at all relevant times a “qualified organization” authorized to receive deductible charitable contributions pursuant to Section 170.

iii. Coastal Bend sent Laguna Madre a letter acknowledging the donation of the Donated Property in compliance with Section 170(f)(8).

f. Qualified Appraiser

i. Clayton M. Weibel, MAI, of Weibel and Associates, Inc. performed the appraisal of values of the Donated Property.

ii. Mr. Weibel was, at the time of the appraisal, a “qualified appraiser” as that term is defined in Section 170(f)(11)(E) and Treasury Regulation Section 1.170A-13(c)(5).

g. Qualified Appraisal

i. The appraisal of value performed by Mr. Weibel and used as the basis for the charitable contribution deduction was a “qualified appraisal” as that term is defined under Section 170(f)(11)(E) or Treasury Regulation Section 1.170A-13(c)(3).

ii. Mr. Weibel determined the highest and best use of the Donated Property was for multi-family residential development.

iii. Mr. Weibel determined the fair market value of the Donated Property to be $13,800,000 using the Sales Comparison Approach and the Income Approach pursuant to the applicable Uniform Standards of Professional Appraisal Practice (USPAP) standards.

iv. The appraisal prepared by Mr. Weibel accurately determined the value of the Donated Property in accordance with the applicable Treasury Regulations at the time of the donation to Coastal Bend.

v. Sea Oats and Laguna Madre reasonably relied upon the appraisal of value performed by Mr. Weibel in establishing the amount of the charitable contribution reported on the Laguna Madre 2017 Tax Return.

vi. Sea Oats and Laguna Madre's reliance on Mr. Weibel was reasonable and in good faith.

vii. Sea Oats and Laguna Madre made an independent investigation of the value of the Donated Property.

viii. Laguna Madre and its partners satisfied all other requirements necessary to be entitled to a charitable contribution deduction in the amount of $13,800,000 for the donation of the Donated Property in the 2017 tax year.

h. Reliance on Experts

i. Sea Oats and Laguna Madre reasonably relied on the Qualified Appraisal in establishing the value of the Donated Property and the amount of the charitable contribution deduction.

ii. Sea Oats and Laguna Madre provided all of the necessary information to its Certified Public Accountant (“CPA”) and believed the CPA prepared an accurate return.

iii. Sea Oats and Laguna Madre reasonably relied on its CPA to prepare an accurate tax return.

i. Assertion of Penalties

i. Petitioner did not engage in a reportable transaction as defined by Notice 2017-10 or any other regulation, notice, or announcement.

ii. Notice 2017-10 was issued without complying with the notice and comment procedures required under the Administrative Procedure Act, 5 U.S.C. Section 551, et seq.

iii. The Section 6662A penalty only applies if the Commissioner cannot prove the gross valuation misstatement penalty, the substantial valuation misstatement penalty, the substantial understatement of income tax penalty, or the accuracy-related penalty.

iv. Laguna Madre and its partners relied on competent advisors, acted in good faith, and made a good faith investigation of the donation of the Donated Property.

v. Laguna Madre timely submitted Form 8886, Reportable Transaction Disclosure Statement, to the Commissioner for the donation of the Donated Property.

j. The Commissioner has made no other adjustments, determinations, disallowances, or assessments to the Laguna Madre 2017 Tax Return other than those specifically described in paragraphs 7.a. through 7.j. or those specifically identified in the FPAA dated August 23, 2021.

9. Burden of Proof

a. The burden of proof should be shifted to the Commissioner as to the donation of a noncash charitable contribution as that determination is contrary to indisputable known facts.

b. The burden of proof should be shifted to the Commissioner as to the valuation under Tax Ct. R. 142(a)(1) because no such determination is made in the Commissioner's FPAA.

c. The burden of proof should be shifted to the Commissioner under Section 7491 as to both the deductibility of noncash charitable contribution and the value of the Donated Property because Laguna Madre has produced credible evidence establishing that it is entitled to a charitable contribution deduction for the donation of the Donated Property in the amount claimed on its 2017 Tax Return and has otherwise maintained all records, cooperated with the Commissioner at all levels of the examination process, and complied with all requirements of the Internal Revenue Code and Treasury Regulations.

WHEREFORE, Petitioner prays that this Court determine that the adjustments to partnership items asserted by the Commissioner for the 2017 Laguna Madre Tax Return are erroneous, unreasonable, arbitrary, and capricious and that this FPAA is invalid.

Petitioner prays that this Court determine that a noncash charitable contribution occurred on December 29, 2017, with the execution of the Warranty Gift Deed recorded in Cameron County, Texas for $0 consideration.

Petitioner further prays that this Court determine that Laguna Madre is entitled to a noncash charitable contribution deduction from the donation of the Donated Property in the amount of $13,800,000 for the 2017 tax year.

Petitioner further prays that this Court determine that the Commissioner bears the burden of proof to establish through specific evidence that Laguna Madre has failed to meet any requirement of Section 170.

Petitioner further prays that this Court determine that the Commissioner bears the burden of proof to establish through specific evidence that the value of the Donated Property does not exceed $0.

Petitioner further prays that this Court determine that the Commissioner bears the burden of proof to establish through specific evidence that the value of the Donated Property does not exceed $2,100,000.

Petitioner further prays that this Court determine that the Petitioner did not donate a “conservation easement.”

Petitioner further prays that this Court determine that the penalties asserted in the FPAA do not apply.

Petitioner further prays that this Court determine that Laguna Madre acted in good faith and exercised reasonable care in reasonable reliance upon its professional advisors with regard to the 2017 tax year.

Petitioner further prays that this Court grant Petitioner such other and further relief to which it may be entitled.

Dated: October 1, 2021

Anson H. Asbury, Esq.
anson@asburylawfirm.com
Tax Court Bar No. AA0255

R. Brian Gardner III, Esq.
brian@asburylawfirm.com
Tax Court Bar No. GR0812

Andrew R Vazques, Esq.
andrew@asburylawfirm.com
Tax Court Bar No. VA0117

Counsel for Petitioner
Asbury Law Firm
315 W. Ponce de Leon Ave.
Suite 515
Decatur, Georgia 30030
P: (404) 382-9942
F: (404) 565-1103