Menu
Tax Notes logo

Partnership Challenges Denial of $26 Million Charitable Deduction

JUL. 10, 2020

Morgan Run Partners LLC et al. v. Commissioner

DATED JUL. 10, 2020
DOCUMENT ATTRIBUTES

Morgan Run Partners LLC et al. v. Commissioner

MORGAN RUN PARTNERS OVERFLOW MARKETING TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226

PETITIONER HEREBY PETITIONS for a readjustment of the partnership items set forth by the Commissioner of Internal Revenue (“Respondent”) in the Notice of Final Partnership Administrative Adjustment dated January 10, 2020 (hereinafter “FPAA”) issued to Morgan Run Partners, LLC or the taxable year ending December 31, 2016. As the basis for its case. Petitioner alleges as follows:

1. Petitioner Overflow Marketing, LLC is the Tax Matters Partner (“TMP”) for Morgan Run Partners, LLC.

2. The partnership is Morgan Run Partners, LLC (“Partnership”), whose current address and principal place of business is P.O. Box 430223, Birmingham, Alabama 35243.

3. The FPAA was purportedly mailed to the TMP on January 10, 2020 by the Legacy Technical Services Territory Manager in Nashville, Tennessee. A copy of the FPAA is attached as Exhibit A.

4. The FPAA asserts adjustments in the form of a charitable contribution deduction disallowance in the amount of $26,000,000.

5. All of the proposed adjustments on the grounds stated in the FPAA are in dispute. In the FPAA, Respondent has erred, inter alia, with respect to the following:

a. Respondent erred in determining that the Partnership did not make a contribution or gift of a conservation easement during the tax year ending December 31, 2016.

b. Respondent erred in determining that the Partnership failed to establish that the gift or contribution satisfied all the requirements of Section 1701 and the corresponding Treasury Regulations for deducting a noncash charitable contribution.

c. Respondent erred in disallowing the Partnership's charitable contribution deduction in the amount of $26,000,000 for the 2016 tax year.

d. Respondent's FPAA does not meet the notice requirements of Section 7522(a) because it fails to adequately describe the basis for the adjustment to the Partnership's tax return. Petitioner is unable to respond to the FPAA with any specificity because Respondent does not state which requirements of Section 170 or the corresponding Treasury Regulations that he alleges Petitioner did not meet.

e. The Partnership and its members satisfied all of the requirements of Section 170 and the applicable Treasury Regulations required to be entitled to a charitable contribution deduction for the donation of a conservation easement in the amount of at least $26,000,000 for the 2016 tax year.

f. Respondent's failure to identify the specific requirements of Section 170 and the applicable Treasury Regulations that Petitioner allegedly failed to meet make the FPAA and its allegations arbitrary and capricious, resulting in an invalid FPAA for the 2016 tax year under the Administrative Procedures Act and other relevant law.

g. Respondent erred in determining, alternatively, that if the Partnership met all the requirements of Section 170, the value of the contributed property interest was not more than $989,357.

h. Respondent's determination that the value of the conservation easement donation is not greater than $989,357 is arbitrary, capricious and without basis in fact or law.

i. The Partnership established through a qualified appraisal and other evidence that value of the conservation easement donation is at least $26,000,000.

j. Respondent erred in determining that the Partnership is liable for the 40 percent gross valuation misstatement penalty under Sections 6662(a), 6662(b)(3), 6662(e), and 6662(h) for the 2016 tax year.

k. The Partnership did not overvalue the conservation easement donation.

l. Respondent failed to provide adequate basis to support his assertion that the conservation easement was overvalued.

m. Respondent erred in determining, alternatively, that the Partnership is liable for the 20 percent penalty under Sections 6662(a), 6662(b)(3), and 6662(e) for a substantial valuation misstatement for the 2016 tax year.

n. The Partnership did not overvalue the conservation easement donation.

o. The Partnership had reasonable cause for any alleged underpayment.

p. The Partnership hired a qualified appraiser, obtained a qualified appraisal, and made a good faith investigation into the value of the conservation easement.

q. Respondent erred in determining that the Partnership items are attributable to a tax avoidance transaction for which no substantial authority has been established for the position taken, and for which there was no showing of reasonable belief by the partnership or its partners that the position taken was more likely than not the correct treatment of the tax avoidance transaction and related transactions.

r. Respondent erred in determining, alternatively, that the Partnership and its partners are liable for an underpayment of tax attributable to 1) substantial understatements of income tax or 2) negligence or disregard of rules or regulations as defined in Sections 6662(a), 6662(b)(1), and 6662(b)(2).

s. The Partnership and its partners relied on competent advisors, acted in good faith, and made a good faith investigation of the conservation easement donation.

t. Respondent erred in asserting that there were underpayments of tax from the adjustments of partnership items attributable to a reportable transaction under Section 6707A(c).

u. Respondent erred in determining,alternatively, that the Partnership is liable for the 20 percent reportable transaction penalty under Section 6662A for the 2016 tax year.

v. Respondent knows that he will not be successful on the merits in this case, and that he will not be able to show that Petitioner is liable for the gross valuation misstatement penalty, so he also seeks to assert the Section 6662A penalty.

w. The Section 6662A penalty only applies if Respondent cannot prove the gross valuation misstatement penalty, the substantial valuation misstatement penalty, the substantial understatement penalty, or the accuracy-related penalty.

x. The Partnership and its members complied with all of the requirements of Section 170(h) in making the charitable contribution of the conservation easement.

y. The Partnership timely submitted a Form 8886, Reportable Transaction Disclosure Statement, to the Internal Revenue Service for the Partnership's 2016 conservation easement donation.

z. IRS Notice 2017-10 violates Executive Orders 13891 and 13892.

aa. Respondent issued Notice 2017-10 on December 23, 2017, after the Partnership donated the conservation easement.

bb. Respondent has not complied with Section 6751(b) in asserting penalties for the 2016 tax year.

6. The facts upon which Petitioner relies are, inter alia, as follows:

a. Partnership. The Partnership was formed on May 16, 2016 as a limited liability company under the laws of Alabama.

b. The Partnership acquired approximately 232.37 acres of real property in Jefferson County, Alabama from Greenwood Partners, LLC on December 20, 2016 (the “Property”).

c. On December 20, 2016, the Partnership donated a conservation easement to National Farmer's Trust, Inc. (“NFT”) on the Property.

d. The Conservation Easement and Declaration of Restrictions and Covenants was recorded in Jefferson County, Alabama on December 20, 2016 (the “Conservation Deed”).

e. The Conservation Deed is a legally enforceable deed that restricts the use of the Property in perpetuity and prevents use of the retained interest inconsistent with its conservation purpose.

f. Tax Return. The Partnership timely filed its Form 1065, U.S. Return of Partnership Income, for the 2016 tax year (“Partnership Tax Return”).

g. The Partnership Tax Return included all required information and attachments.

h. The Partnership Tax Return attached a properly completed Form 8283.

i. The Partnership Tax Return reported a charitable contribution deduction for the donation of a conservation easement in the amount of $26,000,000, pursuant to the qualified appraisal (the “Conservation Easement”).

j. Donee. NFT is a tax exempt public charity under Section 501(c)(3), as described in Sections 509(a)(1) and 170(b)(1)(A)(vi).

k. NFT was at all relevant times a qualified organization under Section 170(h)(3) and eligible to receive deductible conservation easements pursuant to Section 170(h)(1)(B).

l. NFT has the experience and means to monitor and enforce the Conservation Easement.

m. Petitioner received a letter acknowledging the donation of the Conservation Easement in compliance with Section 170(f)(8).

n. The Conservation Deed conveys to NFT the right to enforce the terms of the Conservation Deed and to protect the conservation purposes in perpetuity.

o. Baseline Report. In connection with the donation of the Conservation Easement, qualified individual(s) issued a baseline report and accompanying documentation (the“Baseline Report”) for the Conservation Easement.

p. The Baseline Report contains an evaluation of certain conservation values and purposes protected by the Conservation Easement.

q. The Baseline Report documents the condition of the Property at the time of the donation and lists several of the conservation values present within the Conservation Easement.

r. Conservation Purpose. The Conservation Easement meets at least one of the four conservation purposes required under Section 170(h)(4)(A) and Treas. Reg. § 1.170A-14(d), as documented by the Baseline Report, the Conservation Deed, and the attributes of the Property.

s. Respondent has made no determination that the Conservation Easement failed to preserve any one of the four conservation purposes described in Section 170(h)(4).

t. Appraisal. The appraisal of the values of the Conservation Easement (“Appraisal”) was performed by Ronald S. Foster, MAI.

u. Mr. Foster was, at the time of the Appraisal, a “qualified appraiser” as described in Treas. Reg. § 1.170A-13(c)(5) (the “Qualified Appraiser”).

v. The Qualified Appraiser concluded the highest and best use of the Property before the donation of the Conservation Easement to be mixed-use development, including single-family lots, townhouse units, senior living, and commercial.

w. The Qualified Appraiser concluded the highest and best use of the Property after the donation of the Conservation Easement to be passive outdoor recreation, such as bird watching, hiking, camping, biking, and horseback riding.

x. The Qualified Appraiser determined the value of the Conservation Easement to be $26,000,000, using the before and after method pursuant to Treas. Reg. § 1.170A-14(h)(3).

y. The effective date of the Appraisal was December 10, 2016.

z. The Appraisal performed by the Qualified Appraiser, and used as a basis for the charitable contribution deduction taken by the Partnership for the donation of the Conservation Easement, was a “qualified appraisal” as defined in Treas. Reg. § 1.170A-13(c)(3).

aa. Respondent has made no determination that the Qualified Appraiser was not a qualified appraiser as defined in Treas. Reg. § 1.170A-13(c)(5).

bb. Respondent has made no determination that the Appraisal was not a qualified appraisal, as defined in Treas. Reg. § 1.170A-13(c)(3).

cc. The Appraisal correctly determined the value of the Conservation Easement donated by the Partnership.

dd. Reliance on Experts. The Partnership reasonably relied on the Appraisal in establishing the value of the Conservation Easement and the amount of the charitable contribution deduction.

ee. The Partnership's reliance was reasonable and in good faith, and the Partnership made an independent investigation of the value of the Conservation Easement.

ff. The Partnership provided all of the necessary information to a Certified Public Accountant (“CPA”) and believed the CPA prepared an accurate tax return.

gg. The Partnership reasonably relied on the CPA to prepare an accurate tax return.

hh. The Partnership satisfied all other requirements necessary to be entitled to a charitable contribution deduction for the donation of the Conservation Easement, as reported on its Partnership Tax Return for the 2016 tax year.

ii. Pursuant to Section 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Conservation Easement because the Partnership has produced credible evidence establishing it is entitled to a charitable contribution deduction for the Conservation Easement in the amount of $26,000,000 for the 2016 tax year, and has otherwise maintained all records, cooperated with Respondent in all phases of the examination process, and complied with all requirements of the Internal Revenue Code and Treasury Regulations.

WHEREFORE, Petitioner prays the Court:

(i) Dismiss the FPAA as invalid

(ii) Determine that the Partnership Tax Return is accurate as filed for the 2016 tax year;

(iii) Determine the amount of the charitable contribution deduction to have been properly deducted in the amount claimed on the Partnership Tax Return for the 2016 tax year;

(iv) Determine that Respondent bears the burden of proof as to all issues; and

(v) Grant such other and further relief as it deems appropriate.

Respectfully submitted this 16th day of March, 2020.

ADMITTED

Vivian D. Hoard
Tax Court Bar No. HV0055
Counsel for Petitioner
Fox Rothschild, LLP
999 Peachtree Street NE, Suite 1500
Atlanta, GA 30309
(404) 870-3772
vhoard@foxrothschild.com

ADMITTED

R. Brian Gardner, III
Tax Court Bar No. GR0812
Counsel for Petitioner
Fox Rothschild, LLP
999 Peachtree Street NE, Suite 1500
Atlanta, GA 30309
(404) 870-3773
bgardner@foxrothschild.com

FOOTNOTES

1All references to “Section” or “I.R.C.” means the Internal Revenue Code of 1986, as amended.

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID