Partnership Challenges Denial of Charitable Contribution Deduction

ELLIS ROAD PROPERTY, LLC,
CAPITAL CONSERVATION B PARTNFRS II LLC
TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

Pursuant to Tax Ct. R. 241 Petitioner hereby petitions for readjustment of the partnership items set forth set forth by the Commissioner of Internal Revenue, Respondent, in the Notice of Final Partnership Administrative Adjustment ("FPAA") dated July 8, 2020.¹ As a basis for this proceeding Petitioner alleges as follows:

1. Petitioner. Petitioner, Capital Conservation Partners II, LLC, ("CCP II") has a mailing address of, 7000 Central Parkway, Suite 1100, Atlanta, Georgia 30328.

2. Tax Matters Partner. CCP II is the Tax Matters Partner of Ellis Road Property, LLC.

3. Partnership. This petition relates to the partnership Ellis Road Property, LLC ("Ellis"), a limited liability company under the laws of the state of Georgia treated as a partnership for federal income tax purposes. Ellis's mailing address is 7000 Central Parkway, Suite 1100, Atlanta, Georgia 30328. Ellis's primary 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 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 July 8, 2020.

6. Taxable Year. The FPAA was issued for the taxable year ended December 31, 2016.

7. Assignments of Error. All of the proposed adjustments and asserted penalties in the FPAA are in dispute. The disputed adjustments and asserted penalties set forth in the FPAA 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 $19,945,000 for the donation of a qualified conservation contribution in the form of a conservation easement over 200 acres of real property to Oconee River Land Trust, Inc. in 2016 was not allowed.

ii. The Commissioner erred by disallowing the deduction on the basis that "[y]ou have not established that Ellis Road Property, LLC made a noncash charitable contribution during the year ended December 31, 2016."

iii. The Commissioner erred by disallowing the deduction on the basis that "you failed to establish that [the noncash charitable contribution] 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 Ellis did not make a noncash charitable contribution in the amount of $19,945,000 for its qualified conservation contribution in 2016.

viii. The Commissioner erred in determining that Ellis did not satisfy all of the requirements of Section 170 necessary to be entitled to a charitable contribution deduction in the amount of $19,945,000 for its qualified conservation contribution in 2016.

ix. The Commissioner erred in disregarding the value of the contributed property in the amount of at least $19,945,000 as established by Ellis 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 2016 charitable contribution deduction in the amount of $19,945,000 without adequate basis in law or fact.

b. 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. The Commissioner erred by asserting in the alternative that the penalties defined under Section 6662(h) applicable to adjusted partnership items "will be asserted at the investor level" in contravention of the plain language of Section 6221.

iii. 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.

iv. The Commissioner failed to comply with Section 6751(b)(1) in asserting the gross valuation misstatement penalty for the 2016 year because the initial determination of the assessment of the gross valuation misstatement penalty was not properly approved in writing.

c. 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 under Section 6662(b)(3), as defined under Section 6662(e), such that a 20% addition to tax may apply.

ii. The Commissioner erred by asserting in the alternative that the penalties defined under Section 6662(e) applicable to adjusted partnership items "will be asserted at the investor level" in contravention of the plain language of Section 6221.

iii. 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 in Section 6662(e), is arbitrary, capricious, and clearly erroneous.

iv. The Commissioner failed to comply with Section 6751(b)(1) in asserting the substantial valuation misstatement penalty for the 2016 year because the initial determination of the assessment of the substantial valuation misstatement penalty was not properly approved in writing.

d. Substantial Understatement of Income Tax Penalty

i. The Commissioner erred by asserting 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. The Commissioner erred by asserting in the alternative that the penalties defined under Section 6662(d) applicable to adjusted partnership items "will be asserted at the investor level" in contravention of the plain language of Section 6221.

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

iv. The Commissioner failed to comply with Section 6751(b)(1) in asserting the substantial understatement of income penalty for the 2016 year because the initial determination of the assessment of the substantial understatement of income penalty was not properly approved in writing.

e. Accuracy-Related Penalties

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 or regulations under Section 6662(b)(1), as defined under Section 6662(c), such that a 20% addition to tax may apply.

ii. The Commissioner erred by asserting in the alternative that the penalties defined under Section 6662(c) applicable to adjusted partnership items "will be asserted at the investor level" in contravention of the plain language of Section 6221.

iii. The Commissioner failed to comply with Section 6751(b)(1) in asserting the accuracy-related penalty for the 2016 year because the initial determination of the assessment of the accuracy-related penalty was not properly approved in writing.

f. 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.

g. Reportable Transaction Understatement Penalty

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

ii. The Commissioner erred by asserting that the underpayment of tax resulting from the adjustment of partnership items is attributable to a listed transaction resulting in a reportable transaction understatement such that a 20% addition to tax under Section 6662A may apply.

iii. The Commissioner erred by asserting in the alternative that penalties under Section 6662A applicable to adjusted partnership items "will be asserted at the investor level" in contravention of the plain language of Section 6221.

iv. The Commissioner failed to comply with Section 6751(b)(1) in asserting the reportable transaction understatement penalty for the 2016 year because the initial determination of the assessment of the reportable transaction understatement penalty was not properly approved in writing.

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

a. Parties

i. Petitioner, CCP II, is a Georgia limited liability company with a principal place of business in Georgia. CCP II is the Tax Matters Partner of Ellis.

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

iii. Ellis is a bona fide partnership in the business of investing in real estate.

b. Tax Return

Ellis timely filed its federal income tax return, Form 1065, U.S. Return of Partnership Income, for the tax year ended December 31,2016("2016 Return"), including all required attachments and information.

c. Property

i. Ellis owned 210 acres of property located in Spalding County, Georgia in 2016 (the "Ellis Property").

ii. The Ellis Property contains high priority natural habitats under the Georgia State Wildlife Action Plan (SWAP), such as Oak-Hickory-Pine Forest, Streams, Mesic Hardwood Forest, and Bottomland Hardwood Forest.

iii. The Ellis Property is located in the Upper Flint River Watershed, Hydrologic Unit Code ("HUC") 03130005.

iv. Two tributaries of Shoal Creek transect the property at a length of approximately 6,200 feet.

v. Shoal Creek flows into the Flint River and then into the greater Apalachicola-Chattahoochee-Flint River Basin.

vi. The Flint River and Apalachicola-Chattahoochee-Flint River Basin are designated as high priority watersheds by the Georgia Department of Natural Resources.

vii. High priority watersheds identified under the 2015 Georgia State Wildlife Action Plan were selected to protect the presence of rare aquatic species.

viii. 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.

d. Qualified Conservation Contribution

i. In December 2016, Ellis donated a conservation easement over 200 acres of the Ellis Property by executing a Deed of Conservation Easement (the "Easement Deed").

ii. The Easement Deed was properly recorded in Spalding County, Georgia on December 15, 2016.

iii. The Easement Deed encumbered economically and ecologically valuable areas within the Ellis 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 at all relevant times a "qualified organization" authorized to receive deductible conservation easements pursuant to Section 170(h)(1)(B).

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 Ellis 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, qualified individuals working for or under the direction of Oconee River prepared and issued a baseline report (the "Baseline Report") to Ellis.

ii. The Baseline Report contains an evaluation of certain conservation values and purposes present with 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. Highest and Best Use

i. potential highest and best economical use of the Ellis Property immediately preceding the grant of the Easement Deed was for surface mining.

ii. The highest and best use of the Ellis Property dramatically changed following the grant of the Easement Deed, as it could no longer be used for surface mining, or any other development.

h. 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 plant, or similar ecosystem.

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

iv. The Easement Property contains Oak-Hickory-Pine Forest, Bottomland Hardwood Forest, Mesic Hardwood Forest, and Streams, which are listed as a High Priority Habitat in the Piedmont Ecoregion of Georgia by the Georgia Department of Natural Resources and the State Wildlife Action Plan.

v. The Easement Property includes two tributaries of Shoal Creek, which flow into the Flint River and the Apalachicola-Chattahoochee-Flint River Basin, a high priority watershed designated by the Georgia State Wildlife Action Plan.

vi. The Easement Property maintains a forested and open pastoral viewshed for the public along Ellis Road, a well-traveled paved road.

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

i. Qualified Appraiser

i. Clayton M. Weibel, MAI, of Weibel & Associates, Inc., performed the appraisal of values of the Easement 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).

j. Qualified Appraisal

i. The appraisal of value performed by Mr. Weibel and used as the basis for the charitable contribution deduction taken for the qualified conservation contribution of the Easement Deed 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 potential highest and best use value of the easement property before contribution of the conservation easement to be $20,550,000 pursuant to Treasury Regulation Section 1.170A-14(h)(3)(ii).

iii. Mr. Weibel determined the potential highest and best use value of the easement property after contribution of the conservation easement to be $600,000 pursuant to Treasury Regulation Section 1.170A-14(h)(3)(ii).

iv. Mr. Weibel determined the value of the conservation easement to be $19,945,000 using the before and after method pursuant to Treasury Regulation Section 1.170A-14(h)(3).

v. The appraisal performed by Mr. Weibel accurately determined the value of the Easement Property at the time of the donation to Oconee River.

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

vii. The appraisal performed by Mr. Weibel 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. CCP II and Ellis reasonably relied upon the appraisal of value performed by Mr. Weibel in establishing the amount of the charitable contribution deduction for the qualified conservation contribution reported on the 2016 Tax Return. CCP II and Ellis's reliance on Mr. Weibel was reasonable and in good faith.

ix. CCP II and Ellis made an independent investigation of the value of the Easement Property.

x. Ellis and its partners satisfied all other requirements necessary to be entitled to a charitable contribution deduction in the amount of $19,945,000 for the donation of the Easement Property in the 2016 tax year.

k. Valuation

i. The Commissioner's FPAA makes no determination of value of the noncash charitable contribution of the qualified conservation contribution donated by Ellis.

ii. The Commissioner's FPAA concedes that the value of the noncash charitable contribution of the qualified conservation contribution as reported by Ellis is accurate, correct and true.

l. Reliance on Experts

i. CCP II and Ellis reasonably relied on the Qualified Appraisal in establishing the value of the Easement Property and the amount of the charitable contribution deduction.

ii. CCP II and Ellis provided all of the necessary information to its Certified Public Accountant ("CPA") and believed the CPA prepared an accurate return.

iii. CCP II and Ellis reasonably relied on its CPA to prepare an accurate tax return.

m. Assertion of Penalties

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

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

iii. Ellis timely submitted a 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 Ellis 2016 tax return other than those specifically described in paragraphs 7.a. through 7.g. or those specifically identified in the FPAA dated July 8, 2020.

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 and the value of the qualified conservation contribution because Ellis 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 2016 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 2016 Ellis tax return are erroneous, unreasonable, arbitrary, and capricious and that this FPAA is invalid.

Petitioner further prays that this Court determine that Ellis is entitled to a charitable contribution deduction from the donation of a qualified conservation contribution in the amount of $19,945,000 for the 2016 tax year.

Petitioner further prays that this Court determine that the Commissioner bears the burden of proof to establish through specific evidence that Ellis 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 that the value of the Easement Property is not $19,945,000.

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

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

ADMITTED

Dated: October 6, 2020

Anson H. Ashbury, Esq.
anson@ashburylawfirm.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 Avenue
Suite 515
Decatur, Georgia 30030
P: (404) 382-9942
F: (404) 565-1103