Partnership Challenges Denial of Charitable Contribution Deduction

a. Respondent erred in asserting any adjustment for any amount;

b. Respondent erred in asserting an adjustment to “charitable contributions” in the amount of $30,330,000;

c. Respondent erred by failing to describe any specific factual, tax or legal basis for disallowing Nautical Hill's charitable contribution deduction;

d. Respondent erred by asserting that Nautical Hill did not establish that it made a non-cash charitable contribution;

e. Respondent erred by asserting that Nautical Hill did not establish that its non-cash charitable contribution satisfied all the requirements of Section 170;

f. Respondent erred by asserting that Nautical Hill did not establish the value of the non-cash charitable contribution;

g. Respondent erred in asserting penalties based on, alternatively, gross valuation misstatement pursuant to Section 6662(h), a reportable transaction understatement pursuant to Section 6662A, negligence or disregard of rules and regulations pursuant to Section 6662(c), substantial understatement of income tax pursuant to Section 6662(d), or substantial valuation misstatement pursuant to Section 6662(e); and

h. Respondent erred in asserting that Nautical Hill and its partners failed to exercise reasonable cause or other defenses to the alleged penalties.

a. Nautical Hill was a partnership for federal tax purposes in 2016.

b. Petitioner owned one percent of the profit, loss, and capital of Nautical Hill on December 31, 2016.

c. Nautical Hill amended its Operating Agreement on December 28, 2015 (“Amended Operating Agreement”).

d. The Amended Operating Agreement of Nautical Hill named Petitioner as Manager of Nautical Hill.

e. The Amended Operating Agreement provided Petitioner with exclusive authority to make the management decisions for Nautical Hill.

f. Nautical Hill designated Petitioner as TMP on its 2016 Form 1065.

g. Nautical Hill's designation of Petitioner as TMP complies with the Internal Revenue Code and related regulations.

h. Nautical Hill meets the net worth criteria described in Section 7430(c)(4)(A)(ii).

i. At all relevant times. Nautical Hill owned 85.02 acres in Lincoln County, Oregon (“Property”).

j. The Property is approximately 45 miles from Corvallis, Oregon.

k. The Property is approximately 125 miles from Portland, Oregon.

l. The Property includes approximately one-half mile of unpaved trails open for public use.

m. As of December 28, 2016, Nautical Hill had owned the Property for more than one year.

n. Nautical Hill performed due diligence on various potential development options related to the property.

o. Nautical Hill hired a land surveying company licensed in Oregon to prepare a survey of the Property (“Survey”).

p. Nautical Hill hired land planners to prepare a Conceptual Master Plan for a proposed development on the Property (“Master Plan”).

q. Nautical Hill hired consultants to prepare a Market Research Study for a proposed development on the Property (“Market Study”).

r. Nautical Hill hired consultants to prepare a Preliminary ADR and Occupancy Analysis for a proposed development on the Property (“Occupancy Study”).

s. On December 28, 2016, Nautical Hill donated a Deed and Declaration of Restrictive Covenants (“Deed”) to the North American Land Trust (“NALT”).

t. The Deed conserved 60.82 acres of the 85.05 total acres (“Conservation Easement”).

u. NALT was a “qualified organization” for purposes of Section 170 and the underlying regulations as of December 28, 2016.

v. NALT was an “eligible donee” for purposes of Section 170 and the underlying regulations as of December 28, 2016.

w. The Property was not subject to a mortgage as of December 28, 2016.

x. Nautical Hill did not reserve to anyone any right to income from the Conservation Easement, or to the possession of the Conservation Easement, or to designate the person having such income or possession.

y. Nautical Hill did not earmark the Conservation Easement for a particular use.

z. Nautical Hill did not contribute the Conservation Easement to NALT in a bargain sale.

aa. Nautical Hill did not receive any consideration from NALT in exchange for the contribution of the Conservation Easement.

aa. Nautical Hill did not receive any consideration from any other party in exchange for the contribution of the Conservation Easement to NALT.

ab. The Deed was recorded with the Lincoln County Clerk on December 28, 2016.

ac. The Deed identifies various conservation purposes.

ad. Then Deed indicates that the Conservation Easement will preserve the Property for outdoor recreation by, or the education of, the general public.

ae. The Deed indicates that the Conservation Easement will protect a relatively natural habitat of fish, wildlife, plants, or similar ecosystems.

af. The Deed indicates that the Conservation Easement will preserve open space (including farmland and forestland) pursuant to a clearly delineated federal, state, or local governmental policy, and will yield a significant public benefit.

ag. The Deed indicates that the Conservation Easement will preserve open space (including farmland and forestland) for the scenic enjoyment of the general public, and will yield a significant public benefit.

ah. The Deed preserves the Property for outdoor recreation by, or the education of, the general public, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(i).

ai. The Deed protects the Property as a relatively natural habitat of fish, wildlife, plants, or similar ecosystem, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(ii).

aj. The Deed protects the Property as an open space (including farmland and forestland), where such preservation is pursuant to a clearly delineated federal, state, or local governmental policy, and will yield a significant public benefit, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(iii)(II).

ak. The Deed protects the Property as an open space (including farmland and forestland), where such preservation is for the scenic enjoyment of the general public local and will yield a significant public benefit, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(iii)(I).

al. The Deed describes the purposes of the Conservation Easement as protecting the conservation values of the Property in perpetuity, ensuring that the Property will remain forever predominantly in its natural condition, and preventing any use of the Property that will impair or interfere with the conservation values of the Property.

am. The Deed identifies the specific conservation values of the Property.

an. The Baseline Report identifies the specific conservation values of the Property.

ao. The Deed granted NALT the right to preserve and protect the conservation values in perpetuity.

ap. The Deed imposed on NALT the duty to preserve and protect the conservation values in perpetuity.

aq. The Deed granted NALT the right to enter the Property at reasonable times, to inspect the Property, to monitor compliance with the Deed, and to enforce the purposes of the Conservation Easement.

ar. The Deed prohibits Nautical Hill and all future owners of the Property from filling, excavating, dredging, mining, drilling, or removing topsoil, sand, gravel, rock, peat, gas, oil, coal, other minerals, or materials.

as. The restrictions on the use of the Property stated in the Deed are binding on Nautical Hill and all future owners of the Property in perpetuity.

at. The Deed granted NALT an immediately vested right to a proportionate share of any proceeds that may result from a sale, exchange, or involuntary conversion of the Property, if the Conservation Easement is extinguished in future legal proceedings.

au. The Deed provides a formula for calculating NALT's proportionate share of extinguishment proceeds that fully complies with the requirements of Treas. Reg. § 1.170A-14(g)(6)(ii).

av. A biologist prepared the Baseline Report.

aw. The Baseline Report was completed before Nautical Hill donated the Conservation Easement to NALT.

ax. The Baseline Report documented the conservation values of the Property, as well as the physical condition of the Property, at the time of the donation of the Conservation Easement.

ay. The Baseline Report concluded that the Property consists of freshwater forested/shrub Wetland habitat and riverine habitat.

az. The Baseline Report concluded that the Property provides views of the City of Newport, Yaquina Bay Bridge, Yaquina River Inlet, Yaquina Headland, and the Yaquina Head Outstanding Natural Area, which is managed by the U.S Bureau of Land Management.

ba. The Baseline Report contains numerous maps covering the Property, including U.S. Geological Survey topographic maps and aerial photographs.

bb. The Baseline Report contains photographs taken at various locations on the Property.

bc. A licensed and certified general appraiser (“Appraiser”) prepared the “Appraisal Report For 60.82 Acres of Land New River Parkway North Side of US Highway 1010 Newport Lincoln County, Oregon” (“Easement Appraisal”).

bd. Appraiser held himself out to the public as an appraiser.

be. Appraiser performed appraisals on a regular basis.

bf. Appraiser was not a direct partner of Nautical Hill.

bg. Appraiser was not an indirect partner of Nautical Hill.

bh. Appraiser did not claim, report, or otherwise take a deduction under Section 170 or any other tax provision for the donation of the Conservation Easement.

bi. Appraiser was not a party to the transaction in which Nautical Hill acquired the Property.

bj. Appraiser was not the donee of the Conservation Easement.

bk. Appraiser was not an employee of (i) Nautical Hill, (ii) a direct partner of Nautical Hill, (iii) an indirect partner of Nautical Hill, (iv) a party to the transaction in which Nautical Hill acquired the Property, (v) NALT, or (vi) Petitioner.

bl. Appraiser was not “related” under Section 2670?) to any of the persons described immediately above.

bm. Appraiser performed a majority of his appraisals in 2016 for parties other than Nautical Hill.

bn. Appraiser was a “qualified appraiser,” as that term is defined under Section 170 and the underlying regulations.

bo. Nautical Hill provided Appraiser with copies of the Survey, Master Plan, Market Study, and Occupancy Study.

bp. In addition. Appraiser performed independent due diligence related to potential residential development of the Property.

bq. The Easement Appraisal was dated December 29, 2016.

br. The Easement Appraisal was completed before the deadline for Nautical Hill to file its 2016 Form 1065.

bs. The Appraiser signed and dated the Easement Appraisal.

bt. The Easement Appraisal contains a detailed legal description of the Property.

bu. The Easement Appraisal contains a description of the Conservation Easement.

bv. The Easement Appraisal contains a description of the physical condition of the Property.

bw. The Easement Appraisal states that the date of contribution of the Conservation Easement to NALT was December 28, 2016.

bx. The Easement Appraisal contains the name, address, appraiser certification license number of the Appraiser, and contains the name, address, and taxpayer identification number of the appraisal company.

by. The Easement Appraisal contains a list of the qualifications of the Appraiser, including his background, experience, education, and memberships in professional appraisal associations.

bz. The Easement Appraisal contains a statement that it was being prepared for income tax purposes.

ca. The Easement Appraisal provides the basis for the conclusions by Appraiser regarding the fair market value (“FMV”) of the Conservation Easement.

cb. The Easement Appraisal states that the FMV of the Property was based on market conditions as of December 28, 2016.

cc. The Easement Appraisal concludes that the FMV of the Property, before donation of the Conservation Easement, was $34,370,000.

cd. The Easement Appraisal concludes that the FMV of the Property, after donation of the Conservation Easement, was $4,040,000.

ce. The Easement Appraisal concludes that the FMV of the Conservation Easement was $30,330,000.

cf. The Easement Appraisal concludes that the FMV of the Conservation Easement, taking into account any enhancement or lack of enhancement to other property owned by Nautical Hill, was $30,330,000.

cg. The Easement Appraisal concludes that the highest and best use (“HBU”) of the Property, before the donation of the Conservation Easement, was residential development (“Before-Donation-HBU”).

ch. The Easement Appraisal concludes that the Before-Donation-HBU was legally permissible.

ci. The Easement Appraisal concludes that the Before-Donation-HBU was physically possible.

cj. The Easement Appraisal concludes that the Before-Donation-HBU was financially feasible.

ck. The Easement Appraisal concludes the Before-Donation-HBU was maximally productive.

cl. In determining the FMV of the Property before the donation of the Conservation Easement, as stated in the Easement Appraisal, Appraiser used the income capitalization approach.

cm. In determining the FMV of the Property before the donation of the Conservation Easement, as stated in the Easement Appraisal, Appraiser determined that using a sales comparison approach was inappropriate due to the lack of comparable land sale data.

cn. In determining the FMV of the Property before the donation of the Conservation Easement under the income method, Appraiser utilized a discounted cash flow (“DCF”) analysis.

co. The Easement Appraisal concludes that the HBU of the Property, after the donation of the Conservation Easement, was passive recreation, public enjoyment scenic views, and protection of a relatively natural habitat (“After-Donation-HBU”).

cp. The Easement Appraisal concludes that the After-Donation-HBU was legally permissible.

cq. The Easement Appraisal concludes that the After-Donation-HBU was physically possible.

cr. The Easement Appraisal concludes that the After-Donation-HBU was financially feasible.

cs. The Easement Appraisal concludes that the After-Donation-HBU was maximally productive.

ct. In determining the FMV of the Property after the donation of the Conservation Easement, as stated in the Easement Appraisal, Appraiser used the sales comparison approach.

cu. In determining the FMV of the Property after the donation of the Conservation Easement under the sales comparison approach, Appraiser analyzed data from the U.S. Department of Agriculture's National Resources Conservation Service program.

cv. In determining the FMV of the Property after the donation of the Conservation Easement under the sales comparison approach, Appraiser analyzed five sales of comparable properties encumbered by Conservation Easements.

cw. The appraisal fee charged by the Appraiser for the preparation of the Easement Appraisal was not based on a percentage of the appraised value of the Conservation Easement.

cx. The appraisal fee charged by the Appraiser for the preparation of the Easement Appraisal was not based on a percentage of the amount allowable as a charitable contribution deduction under Section 170.

cy. The Easement Appraisal was a “qualified appraisal,” as that term is defined in Section 170 and the underlying regulations.

cz. NALT issued a letter to Nautical Hill dated January 10, 2017, acknowledging receipt of the donation of the Conservation Easement (“Acknowledgment Letter”).

da. The Acknowledgment Letter also confirms Nautical Hill's donation of stewardship/endowment funds of $60,000.

db. The Acknowledgement Letter confirms that NALT did not provide any goods or services in exchange for the donation of the Conservation Easement.

dc. The Acknowledgement Letter confirms that NALT did not provide any goods or services in exchange for the donation of the stewardship/endowment funds of $60,000.

dd. The Acknowledgement Letter was a “contemporaneous written acknowledgement” for purposes of Section 170 and the underlying regulations.

de. Nautical Hill timely filed its 2016 Form 1065.

df. The 2016 Form 1065 reports, among other items, the donation of the Conservation Easement to NALT.

dg. Schedule K (Partner's Distributive Share Items) of the 2016 Form 1065 reports, among other items, total charitable contributions of $30,390,000 related to the donation of the Conservation Easement and stewardship/endowment funds to NALT.

dh. Statement 3 to the 2016 Form 1065 indicates that the total charitable contributions of $30,390,000 were comprised of (i) a non-cash charitable contribution of $30,330,000 (i.e., the Conservation Easement), and (ii) cash charitable contributions of $60,000 (i.e., stewardship/endowment funds.)

di. Nautical Hill attached the Easement Appraisal to the 2016 Form 1065.

dj. Nautical Hill attached a Form 8283 (Noncash Charitable Contributions) to the 2016 Form 1065.

dk. Nautical Hill attached immediately after Form 8283 a document titled “2016 Form 8283 Addendum.”

dl. Form 8283 and the “2016 Form 8283 Addendum” contain all the information required by Treas. Reg. § 1.170A-13(c)(4) with respect to the donation of the Conservation Easement.

dm. Form 8283 indicates that Nautical Hill made a qualified conservation contribution with a value of $30,330,000 to NALT.

dn. Form 8283 reports the adjusted basis of Nautical Hill in the Property.

do. Form 8283 reports the manner by which Nautical Hill obtained the Property.

dp. Form 8283 reports the date on which Nautical Hill obtained the Property.

dq. The President of NALT signed and dated Form 8283.

dr. Appraiser signed and dated Form 8283.

ds. Form 8283 contains the name and taxpayer identification number of Nautical Hill.

dt. Form 8283 contains the name, address, and taxpayer identification number of NALT.

du. Form 8283 identifies the date on which NALT received the donation as December 28, 2016.

dv. Form 8283 contains the name of Appraiser.

dw. Form 8283 contains the name, address, and tax identification number of the appraisal company.

dx. Form 8283 contains a certification by Appraiser stating that (i) he performed appraisals on a regular basis, (ii) he was qualified to make appraisals of the type of property being valued, (iii) the fee charged for the appraisal was not based on a percentage of the appraised property value, (iv) he was not one of the persons described in Treas. Reg. § 1.170A-13(c)(5)(iv), (v) he understood that an intentionally false or fraudulent overstatement of the value of the property may subject him to a civil penalty under Section 6701, and (vi) he was not barred from presenting evidence or testimony by the Office of Professional Responsibility.

dy. The statements by Appraiser in Form 8283 described immediately above were accurate.

dz. The “2016 Form 8283 Addendum” contains a detailed statement of conservation purposes.

ea. Nautical Hill maintained all records required with respect to the 2016 Form 1065.

eb. Nautical Hill cooperated with Respondent during the audit.

ec. Nautical Hill cooperated with requests by Respondent for information, documents, meetings, site visits, and interviews during the audit.

ed. Nautical Hill timely responded to each Information Document Request that Respondent issued during the audit.

ee. Respondent never issued a Summons to Nautical Hill during the audit.

ef. Respondent never issued a Formal Document Request to Nautical Hill during the audit.

eg. Representatives of Nautical Hill provided a tour of the Property to Respondent during the audit.

eh. Nautical Hill properly reported a cash charitable contribution of $60,000 on its 2016 Form 1065.

ei. The FPAA allowed a charitable contribution of $60,000.

ej. The FPAA asserts an adjustment for “charitable contributions” (i.e., donation of the Conservation Easement) of $30,330,000.

ek. The FPAA describes the basis for asserting the $30,330,000 adjustment as “[y]ou have not established that Nautical Hill Holdings, LLC made a noncash charitable contribution during the tax year ended December 31, 2016.”

el. The FPAA also describes the basis for asserting the adjustment of $30,330,000 as “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.”

em. The FPAA does not describe any specific facts, legal theories, tax theories, or analysis for asserting the adjustment of $30,330,000.

en. The FPAA does not describe any specific facts, legal theories, tax theories, or analysis for possible defenses and/or exceptions to penalties asserted.

eo. The Form 886-A (Explanation of Items) attached to the FPAA consists of just one page.

ep. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the Conservation Easement does not constitute a “qualified real property interest” for purposes of Section 170.

eq. The FPAA does not describe as a basis for the adjustment of $30,330,000 that NALT was not a “qualified organization” for purposes of Section 170.

er. The FPAA does not describe as a basis for the adjustment of $30,330,000 that NALT was not an “eligible donee” for purposes of Section 170.

es. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the Conservation Easement fails to meet any one of the “conservation purpose” requirements of Section 170(h)(4)(A).

et. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the restrictions found in the Deed are not enforceable and/or not binding on current and future owners of the Property in perpetuity.

eu. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the conservation purposes of the Conservation Easement are not protected in perpetuity.

ev. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the Baseline Report fails to adequately document the physical condition of the Property at the time of the donation of the Conservation Easement.

ew. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the Easement Appraisal was not a “qualified appraisal.”

ex. The FPAA does not describe as a basis for the adjustment of $30,330,000 that Appraiser was not a “qualified appraiser.”

ey. The FPAA does not describe as a basis for the adjustment of $30,330,000 that Appraiser failed to use acceptable appraisal standards or methods in preparing the Easement Appraisal.

ez. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the Form 8283 was late, incomplete, or inaccurate.

fa. The FPAA does not describe as a basis for the adjustment of $30,330,000 that the “2016 Form 8283 Addendum” was late, incomplete, or inaccurate.

fb. The FPAA does not propose any federal income tax adjustment to the 2016 Form 1065 filed by Nautical Hill, other than disallowance of the non-cash charitable contribution deduction related to the Conservation Easement.

fc. The FPAA does not propose any adjustment to the basis in the Property reported by Nautical Hill in the 2016 Form 1065.

fd. The FPAA does not propose to change any method of accounting utilized by Nautical Hill and reflected in the 2016 Form 1065.

fe. The penalties asserted in the FPAA do not meet the requirements of Section 6751(b).

ff. Thomas C. McCaughey (“IRS Appraiser”) was assigned to the examination of Nautical Hill and its 2016 Form 1065.

fg. Respondent relied on the IRS Appraiser to prepare a review of the Easement Appraisal.

fh. The IRS Appraiser did not have prior knowledge or experience appraising property in Lincoln County, Oregon.

fi. Respondent never hired an outside, independent biologist, forester, environmental scientist, zoologist, hydrologist, or other type of conservation expert to determine whether the Conservation Easement donation satisfied the “conservation purpose” requirements of Section 170(h)(4)(A).

fj. Respondent did not rely on any party, other than the IRS Appraiser, to make any determination regarding whether the Easement Appraisal was a qualified appraisal.

fk. Respondent did not rely on any party, other than the IRS Appraiser, to make any determination regarding whether the Easement Appraisal complied with the Uniform Standards of Professional Appraisal Practice.

fl. Respondent only relied on his own employees in making all proposed adjustments in the FPAA.

fm. Nautical Hill fully complied with Section 170 and the underlying regulations with respect to the donation of the Conservation Easement.

fn. Nautical Hill substantially complied with Section 170 and the underlying regulations with respect to the donation of the Conservation Easement.

fo. In claiming the charitable deductions related to the Conservation Easement donation on its 2016 Form 1065, Nautical Hill relied on the Survey, Master Plan, Market Study, Occupancy Study, Baseline Report, Easement Appraisal, and Deed.

fp. Nautical Hill reasonably relied on the Survey, Master Plan, Market Study, Occupancy Study, Baseline Report, Easement Appraisal, and Deed.

fq. Nautical Hill reasonably relied on the professionals who prepared the Survey, Master Plan, Market Study, Occupancy Study, Baseline Report, Easement Appraisal, and Deed.

fr. The professionals who prepared the Survey, Master Plan, Market Study, Occupancy Study, Baseline Report, Easement Appraisal, and Deed were qualified, independent, and informed.

(i) Determine that the 2016 Form 1065 is accurate as filed;

(ii) Determine that there are no adjustments, penalties, additions to tax, or other amounts with respect to the 2016 Form 1065;

(iii) If warranted by the evidence presented at trial, determine that Nautical Hill undervalued the Conservation Easement and increase the amount of the non-cash charitable donation deduction for 2016 accordingly;

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

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