LLC Challenges Denial of Conservation Easement Deduction

RISING ROCK PARTNERS, LLC, ROBERT SCHILL, 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 June 24, 2021.¹ As a basis for this proceeding Petitioner alleges as follows:

1. Petitioner. Petitioner, Robert Schill, LLC, (“RS, LLC”) has a mailing address of 1750 Highway 160 West, Suite 101 #246, Fort Mill, South Carolina 29708.

2. Tax Matters Partner. RS, LLC is the Tax Matters Partner of Rising Rock Partners, LLC.

3. Partnership. This petition relates to the partnership Rising Rock Partners, LLC (“Rising Rock”), a limited liability company under the laws of the state of Georgia treated as a partnership for federal income tax purposes. Rising Rock’s mailing address is 1750 Highway 160 West, Suite 101 #246, Fort Mill, South Carolina 29708. Rising Rock’s principal place of business at the time of filing this petition is in the state of Georgia.

4. Return. The federal income tax return for the period in controversy was filed electronically 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 June 24, 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. Qualified Conservation Contribution

i. The Commissioner erred by determining that the charitable contribution deduction in the amount of $12,765,000 for the donation of a qualified conservation contribution in the form of a conservation easement over 226.014 acres of real property to Oconee River Land Trust, Inc. in 2017 is not allowed.

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

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

iv. 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.

v. 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.

vi. 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.

vii. The Commissioner erred in determining that Rising Rock did not make a noncash charitable contribution in the amount of $12,765,000 for its qualified conservation contribution in 2017.

viii. The Commissioner erred in determining that Rising Rock did not satisfy all the requirements of Section 170 necessary to be entitled to a charitable contribution deduction in the amount of $12,765,000 for its qualified conservation contribution in 2017.

ix. The Commissioner erred in disregarding the value of the contributed property in the amount of at least $12,765,000 as established by Rising Rock through the production of a qualified appraisal by a qualified appraiser which conforms to the specific requirements of Section 170 and Treasury Regulation Sections 1.170A-13 and 1.170A-14.

x. The Commissioner erred by reducing Petitioner’s 2017 charitable contribution deduction in the amount of $12,765,000 without adequate basis in law or fact.

b. 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” where Rising Rock produced a qualified appraisal by a qualified appraiser as required by Section 170 and Treasury Regulation Sections 1.170A-13 and 1.170A-14.

ii. The Commissioner erred in disregarding the value of the contributed property interest in the amount of at least $12,765,000, as established by Rising Rock through the production of a qualified appraisal by a qualified appraiser which conforms to the specific requirements of Section 170 and Treasury Regulation Sections 1.170A-13 and 1.170A-14.

iii. 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.

iv. 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.

v. 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.

vi. 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 $12,765,000.

vii. The Commissioner erred by reducing Petitioner’s 2017 charitable contribution deduction in the amount of $12,765,000 without adequate basis in law or fact.

c. 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 Section 6662(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.

d. 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 erred by asserting penalties under Section 6662A based on the application of Notice 2017-10. The assertion is arbitrary, capricious, not in accordance with the law, in excess of statutory authority, short of statutory right, and without observance of procedure required by law.

iii. The Commissioner erred by asserting that the adjustments to partnership items are attributable to a listed transaction resulting 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.

e. 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.

f. 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 of income tax penalty for the 2017 tax year because the initial determination of the substantial understatement of income tax penalty was not properly approved in writing.

g. 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.

h. 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, RS, LLC, is a Georgia limited liability company with a principal place of business in Georgia. RS, LLC is the Tax Matters Partner of Rising Rock.

ii. Rising Rock is a Georgia limited liability company treated as a partnership for federal income tax purposes.

b. U.S. Return of Partnership Income

i. Rising Rock 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. Rising Rock attached Form 8886, Reportable Transaction Disclosure Statement, to its 2017 Tax Return.

iii. Rising Rock attached Form 8283, Noncash Charitable Contributions, to its 2017 Tax Return.

iv. Rising Rock reported its cost or adjusted basis of $951,075 in the donated property on Form 8283, Section B, Part I, Line 5, Row A, Column (f).

v. Rising Rock attached a qualified appraisal to its 2017 Tax Return.

vi. Rising Rock attached a contemporaneous written acknowledgement for its noncash donation dated December 27, 2017, to its 2017 Tax Return.

c. Property

i. Rising Rock owned approximately 251.014 acres of property located in Meriwether County, Georgia in 2017 (the “Rising Rock Property”).

ii. The Rising Rock Property contains high priority natural habitats under the Georgia State Wildlife Action Plan, such as Oak-Hickory-Pine Forest, Bottomland Hardwood Forest, Canebrakes, and Streams.

iii. The Rising Rock Property is located in the Middle Chattahoochee-Lake Harding Watershed, Hydrologic Unit Code (“HUC”) 03130001.

iv. Segments of the Middle Chattahoochee-Lake Harding Watershed are designated as high priority watersheds by the Georgia Department of Natural Resources.

v. The 2015 Georgia State Wildlife Action Plan identified high priority watersheds to protect the presence of rare aquatic species.

vi. The presence of critical habitat for a species under the U.S. Endangered Species Act was among the criteria used to determine high priority watersheds.

vii. The Rising Rock Property contains approximately 15,600 feet of perennial and intermittent streams.

viii. Freshwater Forested Wetlands and Shrub Wetlands attenuate the two major perennial stream systems on the Rising Rock Property, as designated by the U.S. Fish and Wildlife Service’s National Wetlands Inventory.

ix. The Rising Rock Property contains approximately 138 acres of land classified as Farmland of Statewide Importance and 45 acres of Prime Farmland designated by the United States Department of Agriculture Natural Resources Conservation Service.

x. The Rising Rock Property provides scenic views from Ogletree Road.

d. Qualified Conservation Contribution

i. On December 19, 2017, Rising Rock donated a conservation easement over 226.014 acres of the Rising Rock Property by executing a Deed of Conservation Easement (the “Easement Deed”).

ii. The Easement Deed was properly recorded in Meriwether County, Georgia on December 21, 2017.

iii. The Easement Deed encumbered economically and ecologically valuable areas within the Rising Rock Property (the “Easement Property”).

e. Donee

i. The Easement Property was donated to Oconee River Land Trust, Inc. (“Oconee River”). Oconee River 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)(1)(A)(vi).

ii. Oconee River was a “qualified organization” authorized to receive deductible conservation easements pursuant to Section 170(h)(1)(B) throughout the period from January 1, 2017, through December 31, 2017.

iii. Oconee River has the expertise and resources to monitor the Easement Property and enforce the terms of the Easement Deed. Oconee River declared its intent to monitor and enforce the rights granted to it under the Easement Deed.

iv. Oconee River sent Rising Rock a letter acknowledging the donation of the Easement Property in compliance with Section 170(f)(8).

v. Oconee River has ensured compliance with the Easement Deed since it was granted.

f. Baseline Documentation

i. In connection with the donation of the Easement Property, Samuel W. Breyfogle, a qualified individual working for or under the direction of Oconee River, prepared and issued a baseline documentation report (the “Baseline Report”) to Rising Rock.

ii. The Baseline Report contains an evaluation of certain conservation values and purposes present within the Easement Property protected by the Easement Deed.

iii. The Baseline Report documents the condition of the Easement Property contemporaneous with the grant of the Easement Deed and identifies various conservation values present within the Easement Property.

g. Conservation Purpose

i. The Easement Property meets at least one of the four conservation purposes required under Section 170(h)(4)(A) and Treasury Regulation Section 1.170A-14(d).

ii. The Easement Property provides for the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.

iii. The Easement Property provides for the preservation of open space, where such preservation is pursuant to a delineated governmental conservation policy which will yield a significant public benefit.

iv. The Easement Property provides for the preservation of open space, where such preservation is for the scenic enjoyment of the general public which will yield a significant public benefit.

v. The Easement Property contains Oak-Hickory-Pine Forest, Bottomland Hardwood Forest, Canebrakes, and Streams, each of which is listed as a High Priority Habitat in the Piedmont Ecoregion of Georgia by the Georgia Department of Natural Resources.

vi. The Easement Property includes high priority streams, high priority watersheds, and high priority habitats.

vii. The Easement Property contains streams, plant, and wildlife habitat in the Middle Chattahoochee-Lake Harding Watershed, segments of which are designated as high priority habitats under the Georgia State Wildlife Action Plan.

viii. The Easement Property has approximately 45 acres of land classified as Prime Farmland and approximately 138 acres classified as Farmland of Statewide Importance by the United States Department of Agriculture Natural Resources Conservation Service.

ix. The Commissioner has made no determination that the conservation easement of the Easement Property did not meet any of the four conservation purposes described in Section 170(h)(4).

h. Qualified Appraiser

i. Dale W. Hayter, Jr., MAI, AI-GRS, of Independent Appraisals, LLC performed the appraisal of values of the Easement Property.

ii. Mr. Hayter 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 1.170 A-13(c)(5).

i. Highest and Best Use

i. The highest and best economical use of the Rising Rock Property immediately preceding the grant of the Easement Deed was for development of a granite aggregate quarry.

ii. The highest and best use of the Rising Rock Property dramatically changed following the grant of the Easement Deed, as it could no longer be used for mining granite.

j. Qualified Appraisal

i. The appraisal of value performed by Mr. Hayter and used as the basis for the charitable contribution deduction taken for the qualified conservation contribution of the Easement Property 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. There was no substantial record of marketplace sales of conservation easements available to use as a meaningful or valid comparison to the Easement Property.

iii. Mr. Hayter determined the potential highest and best use value of the Rising Rock Property before contribution of the conservation easement to be $13,095,000 pursuant to Treasury Regulation Section 1.170A-14(h)(3)(h).

iv. Mr. Hayter determined the potential highest and best use value of the Rising Rock Property after contribution of the conservation easement to be $330,000 pursuant to Treasury Regulation Section 1.170A-14(h)(3)(h).

v. Mr. Hayter determined the value of the conservation easement to be $12,765,000 using the before and after method pursuant to Treasury Regulation Section 1.170A-14(h)(3).

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

vii. The appraisal performed by Mr. Hayter accurately determined the value of the Easement Property in accordance with the applicable Treasury Regulations at the time of the donation to Oconee River.

viii. RS, LLC and Rising Rock reasonably relied upon the appraisal of values performed by Mr. Hayter in establishing the amount of the charitable contribution deduction for the qualified conservation contribution reported on the Rising Rock 2017 Tax Return.

ix. RS, LLC and Rising Rock’s reliance on Mr. Hayter was reasonable and in good faith.

k. Valuation

i. The Commissioner’s FPAA makes no determination of value of the noncash charitable contribution of the qualified conservation contribution donated by Rising Rock.

ii. The Commissioner’s FPAA does not identify an applicable method of valuation for determining the value of the noncash charitable contribution.

iii. The Commissioner’s FPAA alleges no factual basis for the determination of value of the noncash charitable contribution.

l. Reliance on Experts

i. RS, LLC and Rising Rock reasonably relied on the Qualified Appraisal in establishing the value of the Easement Property and the amount of the charitable contribution deduction.

ii. RS, LLC and Rising Rock provided all of the necessary information to its Certified Public Accountant (“CPA”) and believed the CPA prepared an accurate tax return.

iii. RS, LLC and Rising Rock reasonably relied on its CPA to prepare an accurate tax return.

m. Assertion of Penalties

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

ii. 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.

iii. Rising Rock and its partners relied on competent advisors, acted in good faith, and made a good faith investigation of the donation of the Easement Property.

iv. Rising Rock timely submitted Form 8886, Reportable Transaction Disclosure Statement, to the Commissioner for the donation of the Easement Property.

n. The Commissioner has made no other adjustments, determinations, disallowances, or assessments to the Rising Rock 2017 Tax Return other than those specifically described in paragraphs 7.a. through 7.h. or those specifically identified in the FPAA dated June 24, 2021.

9. Burden of Proof.

a. 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.

b. The burden of proof should be shifted to the Commissioner under Section 7491 as to both the deductibility of the qualified conservation contribution and value of the Easement Property because Rising Rock has produced credible evidence establishing that it is entitled to a charitable contribution deduction for the donation of the Easement 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 Rising Rock Tax Return are erroneous, unreasonable, arbitrary, and capricious and that this FPAA is invalid.

Petitioner further prays that this Court determine that Rising Rock is entitled to a noncash charitable contribution deduction in the amount of $12,765,000 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 Rising Rock 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 Easement Property does not exceed $0.

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 Rising Rock 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: September 21, 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

Ethan J. Vernon, Esq.
ethan@asburylawfirm.com
Tax Court Bar No. VE0070

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