Partnership Seeks Readjustment of Conservation Easement Items

LM BASS AGGREGATES LLC, GH MANAGER LLC, TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS
UNDER CODE SECTION 6226¹

PETITIONER, GH MANAGER LLC, HEREBY PETITIONS this Court as Tax Matters Partner (“TMP”) for LM Bass Aggregates LLC (“LM Bass”) for the tax period ending December 31, 2015 to dispute the Notice of Final Partnership Administrative Adjustment, dated August 6, 2021 (“FPAA”), pertaining to the 2015 Form 1065 (U.S. Return of Partnership Income) for LM Bass.²

The core issue in this case is whether LM Bass is entitled to the claimed charitable contribution deductions for its donations of a conservation easement on and the fee simple interest in real property located in Polk County, Florida.

In enacting Section 170(h), Congress provided for a charitable tax deduction related to contributions of certain conservation easements to land trusts. In so doing, Congress recognized that “conservation . . . ultimately boil(s) down to rewarding the private landowner who conserves the public interest.”³ On its December 31, 2015, Form 1065, LM Bass reported a $17,350,000 non-cash charitable deduction related to the conservation easement contribution, which among other things prohibited the property from being used for mining.

The 1RS has determined that the value of the conservation easement is worth nothing. In stark contrast, the $17,350,000 non-cash charitable deduction reported by LM Bass was based on the analysis of (i) a qualified mining engineer, (ii) a qualified appraiser with 35 years of experience, and (iii) a second appraiser, with over 10 years of experience in commercial real estate appraising.

Upon examination, the IRS determined that the “property is not a unique habitat, for the area,” and that “[t]here are no endangered plant or animal species found on the property.”⁴ Contrary to Respondent's contentions, the property at issue has substantial conservation value.⁵ The U.S. Fish & Wildlife Service has proposed removing 23 species, many of which were found only in the Southeastern United States, from the Federal Lists of Endangered and Threatened Wildlife and Plants due to extinction caused by climate change and habitat extinction.⁶ In a press release, the U.S. Fish & Wildlife Service urged private landowners and others to take steps “to enhance wildlife habitat and improve biodiversity” through the conservation of land.⁷ On the conserved property, qualified environmental experts have identified at least ten different rare, threatened, or endangered species (“RTEs”).⁸ Further, using methodology adopted by virtually every federal department or agency with environmental responsibility, qualified environmental economists conservatively calculate the net present value (“NPV”) of the public interest benefits in the conservation to current and future generations to be at least $264,236,770.

As the basis for its case, Petitioner alleges as follows:

I. The Petitioner, GH Manager LLC, is a Georgia domestic limited liability company having its principal place of business at 4355 Cobb Parkway, Suite J555, Atlanta, GA 30339.

II. LM Bass's current mailing address is 4355 Cobb Parkway, Suite J555, Atlanta, GA 30339 and its principal place of business is in Florida.

III. LM Bass is a Florida limited liability company.

IV. LM Bass is classified as a partnership for federal tax purposes.

V. Petitioner is the TMP for LM Bass with respect to its 2015 Form 1065.

VI. LM Bass's taxpayer identification number is set forth in the Statement of Taxpayer Identification Number, which is attached to this Petition.

VII. Petitioner is filing this Petition within the 90-day period set forth in Section 6226(a) in its capacity as TMP of LM Bass.

VIII. The Internal Revenue Service located in Cincinnati, Ohio issued an FPAA relating to LM Bass's 2015 Form 1065 on August 6, 2021, a copy of which is attached hereto as Exhibit A and which has been redacted pursuant to Tax Court Rule 27.

IX. Respondent made the following adjustments in the FPAA:

1. Disallowance of the $17,350,000 non-cash charitable contribution deduction pursuant to Section 170(h).

2. Disallowance of the $450,000 non-cash charitable contribution deduction pursuant to Section 170.

3. Assertion of the 75 percent fraud penalty pursuant to Section 6663.

4. As alternatives to the 75-percent penalty:

i. Assertion of the 40 percent gross valuation misstatement penalty pursuant to Section 6662(h).

ii. Assertion of the 20 percent reportable transaction understatement penalty pursuant to Section 6662A.

iii. Assertion of the 20 percent understatement penalty pursuant to Section 6662(c), (d), and (e).

X. Petitioner disputes all proposed adjustments in the FPAA.

XI. Respondent erred in his determinations reflected in the FPAA for the following reasons:

1. The donation of the conservation easement achieved the following valid conservation purposes, defined by Section 170(h)(4):

i. The protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem, and/or

ii. The preservation of open space (including farmland and forest land) where such preservation will yield a significant public benefit and is (I) for the scenic enjoyment of the general public, or (II) pursuant to a clearly delineated Federal, State, or local governmental conservation policy.

2. No permitted use listed in the Deed of Conservation Easement conflicts with any of the valid conservation purposes achieved by the donation of the easement.

3. The fair market value of the conservation easement at the time of donation was not less than $17,350,000.

4. The fair market value of the non-cash donation of the fee simple interest at the time of donation was not less than $450,000.

5. Respondent erred in asserting penalties based on civil fraud pursuant to Section 6663, 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

6. Respondent erred in asserting that LM Bass and its partners failed to exercise reasonable cause or establish other defenses to the alleged penalties.

XII. Based on information and belief, the facts, and mixed points of fact and law, upon which Petitioner relies include, but are not limited to, the following:

General

1. LM Bass was classified as a partnership for federal tax purposes on December 31, 2015.

2. Petitioner owned 0.01 percent of the profit, loss, and capital of LM Bass on December 31, 2015.

3. LM Bass Partners LLC owned 95.99 percent of the profit, loss, and capital of LM Bass on December 31, 2015.

4. AHP #2, LLC owned 3 percent of the profit, loss, and capital of LM Bass on December 31, 2015.

5. Ambit Funding Advisor I, LLC owned 1 percent of the profit, loss, and capital of LM Bass on December 31, 2015.

6. Petitioner was appointed manager of LM Bass on December 10, 2015.

7. On December 31, 2015, Petitioner was the general partner of LM Bass for purposes of Section 6231(a)(7).

8. LM Bass's designation of Petitioner as TMP complies with the Internal Revenue Code and related Treasury Regulations.

9. LM Bass meets the net worth criteria described in Section 7430(c)(4)(A)(ii).

Property Background

10. As of December 21, 2015, LM Bass owned approximately 130.1 acres of real property located in Polk County, Florida (the “Property”).

11. LM Bass acquired the Property as a capital contribution by Special Warranty Deed dated December 3, 2015.

12. The Property is treated as long-term capital gain property pursuant to Sections 723 and 1223(2).

13. The Property is located in an area with significant limestone reserves.

14. The Property is located in a region in central Florida that contains the largest known deposits of phosphate in the United States.

Property & Mining Due Diligence

15. LM Bass, recognizing the potential of developing the Property as a limestone mine, undertook certain due diligence to evaluate the feasibility of doing so.

16. LM Bass hired a professional land surveyor licensed in Florida to prepare a survey of the Property (the “Survey”).

17. LM Bass hired an experienced geologist (the “Geotechnical Engineer”), to re-evaluate the property using a prior drilling and sampling program, which involved analyzing over 80 core samples from the Property and the area surrounding the Property, and laboratory testing that evaluated the chemical composition and engineering properties of the rock core samples.

18. As a part of the engagement, the Geotechnical Engineer prepared a report titled “A Geologic Report on the approximately 130.1 acre LM Bass Aggregates LLC property in Polk County, Florida” (the “Geotechnical Report”).

19. The Geotechnical Report contains results from various tests to evaluate the chemical composition and engineering properties of the rock core samples conducted by laboratories certified by the Florida Department of Transportation.

20. The Geotechnical Report concludes that nearly all of the samples tested from the drilling program passed Florida Department of Transportation specifications for road construction and road base material.

21. LM Bass hired a professional mining engineering firm (the “Mining Engineer”), to analyze the Geotechnical Report and determine the feasibility for operating a limestone quarry on the Property.

22. The Mining Engineer possessed the following qualifications: (i) Master of Science degree in Mining Engineering; (ii) Master of Business Administration degree; (iii) Licensed as a Registered Professional Engineer in 11 states, including Florida; (iv) Registered Founding Member of the Society for Mining, Metallurgy and Exploration; and (v) Licensed Member of the National Society for Professional Engineers.

23. In 2015, the Mining Engineer possessed over 35 years of mining engineering experience and assisted mine operators with setting up and obtaining permits for over 100 mines nationwide.

24. The Mining Engineer prepared a report titled “Technical Due Diligence Business Plan” for the Property (the “Mining Business Plan”).

25. The Mining Business Plan concludes that the Property contains Proven Mineral Reserves of approximately 6.775 million tons of limestone.

26. The Mining Business Plan concludes that the limestone from the core samples met Florida Department of Transportation standards and requirements for road construction materials, including road base material.

27. The Mining Business Plan concludes that it was reasonably probable that a mining operation on the Property could obtain all necessary Florida permits for a limestone quarry within six to twelve months.

28. The Mining Business Plan concludes that developing and operating a limestone quarry on the Property was “viable in the given market.”

29. The Mining Business Plan projects a net present value (“NPV”) of approximately $18,099 million for a limestone quarry on the Property.

Baseline Documentation Report

30. Recognizing the potential conservation values of the Property, LM Bass hired Atlantic Coast Conservancy, Inc. (“ACC”) to undertake certain diligence to investigate and confirm the Property's conservation values pursuant to a Conservation Easement Project Proposal, dated November 11, 2015.

31. ACC is a Georgia corporation that was a federal tax-exempt organization under Section 501(c)(3) at all times during 2015.

32. ACC visited the Property to assess the conservation values and prepare a “Baseline Documentation Report.”

33. ACC memorialized its findings in a Baseline Documentation Report, dated December 22, 2015, which documented the current physical condition and status of the Property and identified the conservation values.

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

35. The Baseline Documentation Report contains numerous photographs taken at various locations on the Property.

36. The Baseline Documentation Report indicates that the Property in its present state is undeveloped and “possesses significant wildlife, forest, agricultural, scenic vistas, open space, aquatic, and plant habitat features” and is “predominantly composed of a native dry prairie interspersed with isolated freshwater marsh areas being utilized as agricultural pastures on Southwestern Florida Flatwoods subregion areas of the Southern Coastal Plain ecoregion leading to a first-order freshwater stream (Sandy Gully). . . .”

37. The Baseline Documentation Report concludes that conserving the Property would protect a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.

38. The Baseline Documentation Report concludes that conserving the Property would result in multiple significant public benefits, including the preservation of open space (including farmland and forest land) where such preservation is pursuant to a clearly delineated federal, state, or local governmental conservation policy and where such preservation is for the scenic enjoyment for the general public.

Member Vote

39. The members of LM Bass considered the following options: (i) hold the Property for long-term investment, (ii) lease the Property to a third-party mining company, (iii) operate the Property as a mine, or (iv) conserve the Property.

40. The members of LM Bass voted to conserve the Property in perpetuity by granting a conservation easement on the Property (the “Conservation Easement”) and donating the fee simple interest in the Property (the “Fee Simple Interest”).

Donation of Conservation Easement

41. On December 22, 2015, LM Bass granted a Deed of Conservation Easement (the “Deed”) encumbering approximately 130.1 acres of the Property in favor of ACC.

42. ACC was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of December 22, 2015.

43. ACC was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of December 22, 2015.

44. The Property was not subject to a mortgage as of December 22, 2015.

45. The Conservation Easement was a “qualified real property interest” for purposes of Section 170 and the Treasury Regulations thereunder.

46. LM Bass did not contribute the Conservation Easement to ACC in a bargain sale.

47. LM Bass did not receive any consideration from ACC in exchange for donating the Conservation Easement.

48. LM Bass did not receive any consideration from any other party in exchange for donating the Conservation Easement to ACC.

Deed of Conservation Easement

49. The Deed was recorded with the Clerk of the Court for Polk County, Florida on December 29, 2015.

50. The Deed identifies various conservation purposes.

51. The Deed indicates that the Conservation Easement will protect a relatively natural habitat.

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

53. The Deed protects the Property as a relatively natural habitat, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(ii).

54. 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).

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

56. The Deed indicates that the exclusive purpose of the Conservation Easement is to (i) protect the conservation values in perpetuity, (ii) ensure that the Property will remain forever predominantly in its natural condition, (iii) prevent any use of the Property that will impair or interfere with the conservation values of the Property, and (iv) retain land or water areas predominantly in their existing, natural, vegetative, hydrologic, scenic, open or wooded condition, and to retain such areas as suitable habitat for fish, plants, or wildlife in accordance with Section 704.06, Florida Statutes.

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

58. The Baseline Documentation Report documents the specific conservation values of the Property.

59. The Deed provides ACC the rights to preserve and protect the conservation values of the Property in perpetuity.

60. The Deed permits ACC 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.

61. The Deed prohibits LM Bass and all future owners from exploration or extraction of minerals, oil, gas, or other hydrocarbons, soils, sands, gravel, rock, or other materials on or below the surface of the Property.

62. The restrictions on the use of the Property stated in the Deed are binding on LM Bass and all future owners of the Property in perpetuity.

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

Contemporaneous Written Acknowledgement of Conservation Easement

64. ACC provided a letter to LM Bass dated December 22, 2015, acknowledging receipt of the donation of the Conservation Easement (the “Conservation Easement Donation Acknowledgment Letter”).

65. The Conservation Easement Donation Acknowledgment Letter confirms that ACC did not provide any goods or services in exchange for the donation of the Conservation Easement.

66. The Conservation Easement Donation Acknowledgment Letter constitutes a “contemporaneous written acknowledgement” for purposes of Section 170 and the Treasury Regulations thereunder.

Donation of Fee Simple Interest

67. On December 28, 2015, LM Bass donated the Fee Simple Interest via Special Warranty Deed to Atlantic Coast Conservancy Properties, LLC (“ACC Properties”).

68. The Special Warranty Deed was recorded with the Clerk of Court of Polk County, Florida on December 30, 2015.

69. ACC Properties is a wholly owned subsidiary of ACC that is treated as a disregarded entity for federal income tax purposes.

70. ACC Properties was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of December 28, 2015.

71. ACC Properties was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of December 28, 2015.

72. The Property was not subject to a mortgage as of December 28, 2015.

73. LM Bass did not contribute the Fee Simple Interest to ACC Properties in a bargain sale.

74. LM Bass did not receive any consideration from ACC Properties in exchange for donating the Fee Simple Interest.

75. LM Bass did not receive any consideration from any other party in exchange for donating the Fee Simple Interest to ACC Properties.

Contemporaneous Written Acknowledgement of Fee Simple Interest

76. ACC Properties provided a letter to LM Bass, dated December 28, 2015, acknowledging receipt of the donation of the Fee Simple Interest (the “Fee Simple Donation Acknowledgment Letter”).

77. The Fee Simple Donation Acknowledgment Letter confirms that ACC Properties did not provide any goods or services in exchange for the donation of the Fee Simple Interest.

78. The Fee Simple Donation Acknowledgment Letter constitutes a “contemporaneous written acknowledgement” for purposes of Section 170 and the Treasury Regulations thereunder.

Qualified Appraiser for Conservation Easement

79. A qualified, licensed, MAI appraiser⁹ with over 35 years of experience appraising land and conservation easements (the “Appraiser”) prepared an “Appraisal Report” dated March 29, 2016 (the “Easement Appraisal”) to determine the fair market value (“FMV”) of the Conservation Easement.

80. The Appraiser has local knowledge and experience in preparing appraisals related to conservation easements.

81. The Appraiser was not a direct partner of LM Bass.

82. The Appraiser was not an indirect partner of LM Bass.

83. The 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.

84. The Appraiser was not a party to the transaction in which LM Bass acquired the Property.

85. The Appraiser was not the donee of the Conservation Easement.

86. The Appraiser was not an employee of (i) LM Bass, (ii) a direct partner of LM Bass, (iii) an indirect partner of LM Bass, (iv) a party to the transaction in which LM Bass acquired the Property, (v) ACC, or (vi) Petitioner.

87. The Appraiser was not “related” under Section 267(b) to any of the persons described immediately above.

88. The Appraiser performed a majority of his appraisals in 2015 for parties other than LM Bass.

89. The Appraiser was a “qualified appraiser,” as defined by Section 170 and the Treasury Regulations thereunder, for the donation of the Conservation Easement.

Qualified Appraisal of Conservation Easement

90. The Easement Appraisal is dated March 29, 2015.

91. The Appraiser dated the Easement Appraisal before the extended deadline for LM Bass to file its 2015 Form 1065 on which it claimed the charitable deduction related to the donation of the Conservation Easement.

92. The Appraiser signed and dated the Easement Appraisal.

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

94. The Easement Appraisal contains a detailed legal description of the Conservation Easement.

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

96. The Easement Appraisal states that LM Bass donated the Conservation Easement to ACC on December 22, 2015.

97. The Easement Appraisal contains the name, address, appraiser certification license number, and the social security number of the Appraiser.

98. The Easement Appraisal contains the name, address, and taxpayer identification number of the appraisal company.

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

100. The Easement Appraisal contains a statement that it was prepared for LM Bass's potential use regarding the preparation and filing of federal income tax returns.

101. The Easement Appraisal states that it was prepared in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”).

102. The Easement Appraisal provides the basis for the conclusions by the Appraiser regarding the FMV of the Conservation Easement.

103. The Easement Appraisal indicates that the Appraiser based the FMV of the Conservation Easement on market conditions at the time of the donation of the Conservation Easement.

104. The Easement Appraisal concludes that the highest and best use (“HBU”) for the Property, before the donation of the Conservation Easement, was limestone mining (the “Before-Donation-HBU”).

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

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

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

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

109. The Easement Appraisal concludes that the FMV of the Property before LM Bass donated the Conservation Easement was $17,800,000.

110. The Easement Appraisal concludes that the FMV of the Property after LM Bass donated the Conservation Easement was $450,000.

111. The Easement Appraisal concludes that the FMV of the Conservation Easement was $17,350,000.

112. The Easement Appraisal concludes that the FMV of the Conservation Easement does not enhance the value of any other property owned by LM Bass or any person related to LM Bass.

113. In determining the FMV of the Property before the donation of the Conservation Easement, the Appraiser considered both the sales-comparison approach and the income approach.

114. To determine the FMV of the Property before the donation of the Conservation Easement under the sales-comparison approach, the Appraiser analyzed five recent sales or listings of properties.

115. Under the sales-comparison approach, the Appraiser determined that the FMV of the Property before the donation of the Conservation Easement was approximately $17,560,000.

116. To determine the FMV of the Property before the donation of the Conservation Easement, under the income approach, the Appraiser used the discounted cash flow (“DCF”) method related to the extraction and sale of the limestone reserves on the Property.

117. The DCF method is an acceptable appraisal method for valuing real property that contains a significant amount of underlying mineral reserves.

118. Under the income approach, the Appraiser determined that the FMV of the Property before the donation of the Conservation Easement was $18,070,000.

119. The Appraiser concluded that the sales-comparison approach was less reliable due to significant differences in the location, physical characteristics, and varying resources of the comparable properties.

120. In concluding that FMV of the Property before the donation of the Conservation Easement was $17,800,000, the Appraiser determined that the income approach was the better indicator of value and gave more weight to that approach.

121. The Easement Appraisal concludes that the HBU of the Property after the donation of the Conservation Easement was agriculture, forestry, recreational use, and public enjoyment (the “After-Donation-HBU”).

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

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

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

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

126. To determine the FMV of the Property after the donation of the Conservation Easement, the Appraiser used a sales-comparison approach and analyzed (i) properties encumbered with conservation easements through the United States Department of Agriculture's Natural Resources Conservation Services program, and (ii) six sales of properties encumbered with conservation easements.

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

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

129. The Easement Appraisal was a “qualified appraisal,” as defined by Section 170 and the Treasury Regulations thereunder.

Qualified Appraiser for Fee Simple Interest Donation

130. The Appraiser prepared another “Appraisal Report” dated March 29, 2016 (the “Fee Simple Appraisal”) to determine the FMV of the Fee Simple Interest donated to ACC Properties.

131. The Appraiser was not a direct partner of LM Bass.

132. The Appraiser was not an indirect partner of LM Bass.

133. The Appraiser did not claim, report, or otherwise take a deduction under Section 170 or any other tax provision for the donation of the Fee Simple Interest.

134. The Appraiser was not a party to the transaction in which LM Bass acquired the Fee Simple Interest in the Property.

135. The Appraiser was not the donee of the Fee Simple Interest.

136. The Appraiser was not an employee of (i) LM Bass, (ii) a direct partner of LM Bass, (iii) an indirect partner of LM Bass, (iv) a party to the transaction in which LM Bass acquired the Property, (v) ACC Properties, or (vi) Petitioner.

137. The Appraiser was not “related” under Section 267(b) to any of the persons described immediately above.

138. The Appraiser performed a majority of his appraisals in 2015 for parties other than LM Bass.

139. The Appraiser was a “qualified appraiser,” as defined by Section 170 and the Treasury Regulations thereunder, for the donation of the Fee Simple Interest.

Qualified Appraisal for Fee Simple Interest Donation

140. The Fee Simple Appraisal is dated March 29, 2016.

141. The Appraiser dated the Fee Simple Appraisal before the extended deadline for LM Bass to file its 2015 Form 1065 on which it claimed the charitable deduction related to the donation of the Fee Simple Interest.

142. The Appraiser signed and dated the Fee Simple Appraisal.

143. The Fee Simple Appraisal contains a detailed legal description of the Property.

144. The Fee Simple Appraisal contains a description of the physical condition of the Property.

145. The Fee Simple Appraisal states that LM Bass donated the Fee Simple Interest to ACC Properties on December 30, 2015, which was the date that the Special Warranty Deed was recorded in the real property records.

146. The Fee Simple Appraisal contains the name, address, appraiser certification license number, and the social security number of the Appraiser.

147. The Fee Simple Appraisal contains the name, address, and taxpayer identification number of the appraisal company.

148. The Fee Simple Appraisal contains a list of the qualifications of the Appraiser, including his background, experience, education, and membership in professional associations.

149. The Fee Simple Appraisal contains a statement that it was prepared for LM Bass's potential use regarding the preparation and filing of federal income tax returns.

150. The Fee Simple Appraisal states that it was prepared in accordance with USPAP.

151. The Fee Simple Appraisal provides the basis for the conclusions by the Appraiser regarding the FMV of the Fee Simple Interest.

152. The Fee Simple Appraisal indicates that the Appraiser based the FMV of the Fee Simple Interest on market conditions at the time of the donation of the Fee Simple Interest.

153. The Fee Simple Appraisal concludes that the FMV of the Fee Simple Interest in the Property, as subject to the Conservation Easement, was $450,000.

154. To determine the FMV of the Fee Simple Interest, the Appraiser used the sales-comparison method and analyzed (i) properties encumbered with conservation easements through the United States Department of Agriculture's Natural Resources Conservation Services program, and (ii) six sales of comparable properties encumbered with conservation easements.

155. The fee charged by the Appraiser for preparation of the Fee Simple Appraisal was not based on a percentage of the appraised value of the Fee Simple Interest.

156. The fee charged by the Appraiser for preparation of the Fee Simple Appraisal was not based on a percentage of the amount allowable as a charitable deduction under Section 170.

157. The Fee Simple Appraisal was a “qualified appraisal,” as defined by Section 170 and the Treasury Regulations thereunder.

Second Conservation Easement Appraisal Report

158. LM Bass engaged a second appraisal firm to value the Conservation Easement (the “Second Easement Appraisal Report”).

159. The Second Easement Appraisal Report was prepared under the appraisal standards set out by USPAP in place on March 30, 2016.

160. The Second Easement Appraisal Report described the Property, the condition of the Property, the Conservation Easement, and included a copy of the Deed of Conservation Easement in the addenda.

161. The Second Easement Appraisal Report included the date of contribution; the name, address and taxpayer identification number of the appraiser; the appraiser's qualifications; and a statement that it was prepared for income tax purposes.

162. The Second Easement Appraisal Report contains extensive discussion about the method of valuation and the specific basis for such valuation.

163. The Second Easement Appraisal Report reported a FMV for the Conservation Easement of $17,890,000.

Second Fee Simple Appraisal Report

164. LM Bass engaged a second appraisal firm to value the Fee Simple Interest (the “Second Fee Simple Appraisal Report”).

165. The Second Fee Simple Appraisal Report was prepared under the appraisal standards set out by USPAP in place on March 30, 2016.

166. The Second Fee Simple Appraisal Report described the Property, the condition of the Property, the Conservation Easement, and included a copy of the Deed of Conservation Easement in the addenda.

167. The Second Fee Simple Appraisal Report included the date of contribution; the name, address and taxpayer identification number of the appraiser; the appraiser's qualifications; and a statement that it was prepared for income tax purposes.

168. The Second Fee Simple Appraisal Report contains extensive discussion about the method of valuation and the specific basis for such valuation.

169. The Second Fee Simple Appraisal Report reported a FMV for the Fee Simple Interest of $325,000.

Filings with Respondent

170. LM Bass timely filed its 2015 Form 1065.

171. The 2015 Form 1065 reports, among other items, (i) the donation of the Conservation Easement to ACC, and (ii) the donation of the Fee Simple Interest to ACC Properties.

172. Schedule K (Partner's Distributive Share Items) to the 2015 Form 1065 shows, among other items, charitable contributions of $17,805,000 related to the donation of the Conservation Easement, the donation of the Fee Simple Interest, and a cash donation.

173. LM Bass attached the Easement Appraisal to its timely filed 2015 Form 1065.

174. LM Bass attached the Fee Simple Appraisal to its timely filed 2015 Form 1065.

175. LM Bass maintained all records required with respect to the 2015 Form 1065.

Form 8283 for Donation of the Conservation Easement

176. LM Bass attached Form 8283 (Noncash Charitable Contributions) to its 2015 Form 1065 to report the donation of the Conservation Easement to ACC.

177. Form 8283 contains all the information required by Treas. Reg. § 1.170A-13(c)(4) with respect to the donation of the Conservation Easement.

178. Form 8283 reports the FMV of the Conservation Easement.

179. Form 8283 reports LM Bass's adjusted basis in the Property.

180. Form 8283 reports the manner by which LM Bass obtained the Property.

181. Form 8283 reports the date on which LM Bass obtained the Property.

182. Dr. Robert Keller, CEO of ACC, signed and dated the Form 8283 on behalf of ACC.

183. The Appraiser signed and dated the Form 8283.

184. Form 8283 contains the name and taxpayer identification number of LM Bass.

185. Form 8283 contains the name, address, and taxpayer identification number of ACC.

186. Form 8283 identifies the date on which ACC received the donation.

187. Form 8283 indicates that LM Bass donated the Conservation Easement to ACC.

188. Form 8283 contains the name of the Appraiser.

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

190. Form 8283 contains a certification by the 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.

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

Form 8283 for Donation of the Fee Simple Interest

192. LM Bass also attached Form 8283 to its 2015 Form 1065 to report the donation of the Fee Simple Interest to ACC Properties.

193. Form 8283 contains all the information required by Treas. Reg. § 1.170A-13(c)(4) with respect to the donation of the Fee Simple Interest.

194. Form 8283 reports the FMV of the Fee Simple Interest.

195. Form 8283 reports LM Bass's adjusted basis in the Property.

196. Form 8283 reports the manner by which LM Bass obtained the Property.

197. Form 8283 reports the date on which LM Bass obtained the Property.

198. Dr. Robert Keller, CEO of ACC Properties, signed and dated the Form 8283 on behalf of ACC Properties.

199. The Appraiser signed and dated Form 8283.

200. Form 8283 contains the name and taxpayer identification number of LM Bass.

201. Form 8283 contains the name, address, and taxpayer identification number of ACC Properties.

202. Form 8283 identifies the date on which ACC Properties received the donation.

203. Form 8283 indicates that LM Bass donated the Fee Simple Interest to ACC Properties.

204. Form 8283 contains the name of the Appraiser.

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

206. Form 8283 contains a certification by the 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.

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

IRS Notice 2017-10

208. Following the donation of the Conservation Easement at issue, Respondent released an advance copy of Notice 2017-10 on December 23, 2016,¹⁰ which identified donations such as that undertaken by LM Bass as listed transactions.

209. Notice 2017-10 was not published in the Federal Register and did not provide the public with an opportunity to provide comments thereon. Nor did Notice 2017-10 include any finding of good cause that notice and public comment procedures were impracticable, unnecessary, or contrary to the public interest.

210. LM Bass submitted a Form 8886, fully disclosing its donations of the Conservation Easement and the Fee Simple Interest by mailing a completed Form 8886 to Respondent's Office of Tax Shelter Analysis.

History of the Tax Dispute

211. LM Bass maintained all records required with respect to the 2015 Form 1065.

212. LM Bass cooperated with Respondent during the audit.

213. LM Bass cooperated with all requests by Respondent for information, documents, site visits, and meetings during the audit.

214. LM Bass responded to each Information Document Request that Respondent issued to LM Bass during the audit.

215. Representatives of LM Bass provided a tour of the Property to Respondent during the audit.

Contents of FPAA

216. The FPAA does not describe any specific facts, legal theories, tax theories, or analysis for asserting the adjustments of $17,350,000 and $450,000 to the 2015 Form 1065.

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

218. Respondent relied only on his own employees in making the determinations set forth in the FPAA.

219. Respondent did not commission any independent environmental, ecological, real estate, scientific, mining, financial, economic, engineering, valuation or other professionals in making the determinations set forth in the FPAA.

Compliance Efforts

220. LM Bass complied with Section 170 and the Treasury Regulations thereunder with respect to the donation of the Conservation Easement.

221. LM Bass complied with Section 170 and the Treasury Regulations thereunder with respect to the donation of the Fee Simple Interest.

222. In claiming the charitable deductions related to the donation of the Conservation Easement on its 2015 Form 1065, LM Bass relied on the Survey, Geotechnical Report, Mining Business Plan, Easement Appraisal, Fee Simple Appraisal, Second Easement Appraisal Report, Second Fee Simple Appraisal Report, Deed of Conservation Easement, Baseline Documentation Report, and all sources cited in such documents.

223. LM Bass reasonably relied on the Survey, Geotechnical Report, Mining Business Plan, Easement Appraisal, Fee Simple Appraisal, Second Easement Appraisal Report, Second Fee Simple Appraisal Report, Deed of Conservation Easement, Baseline Documentation Report, and all sources cited in such documents.

224. LM Bass reasonably relied on the qualified, independent, informed professionals who prepared the Survey, Geotechnical Report, Mining Business Plan, Easement Appraisal, Fee Simple Appraisal, Second Easement Appraisal Report, Second Fee Simple Appraisal Report, Deed of Conservation Easement, and Baseline Documentation Report.

XIII. The contents of the FPAA, particularly the allegation that the non-cash charitable deductions related to the donations of the Conservation Easement and the Fee Simple Interest should be $0, are erroneous, unreasonable, arbitrary, and capricious.

XIV. Respondent published Notice 2017-10 after LM Bass made the charitable contributions at issue in this case and after LM Bass timely filed the 2015 Form 1065 reporting those charitable contributions. Respondent issued Notice 2017-10 without adhering to the notice-and-comment procedures under the Administrative Procedure Act, 5 U.S.C. § 551 et seq. Respondent's assertion of penalties under Section 6662A, based on the retroactive application of Notice 2017-10, without the required notice-and-comment procedures is unlawful and “without observance of procedure required by law.” 5 U.S.C. § 706(2)(D). Further, Respondent's assertion of Section 6662A penalties based on Notice 2017-10 with retroactive effect after the donation was made and reported on a timely filed tax return violates the United States Constitution. As a result, Respondent's assertion of penalties under Section 6662A is invalid.

XV. Respondent bears the burden of proof as to all matters.

WHEREFORE, Petitioner requests that the Tax Court:

(i) Determine that the 2015 Form 1065 is accurate as filed;

(ii) Determine that there are no adjustments, penalties, additions to tax, or other amounts with respect to the 2015 Form 1065;

(iii) Determine that imposition of a penalty under Section 6662A violates the Administrative Procedure Act and the United States Constitution;

(iv) If warranted by the evidence at trial, determine that LM Bass undervalued the Conservation Easement and/or the Fee Simple Interest and increase the amount of the non-cash charitable donation deductions for 2015 accordingly;

(v) Determine that Respondent has the burden of proof on all issues; and

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

Date: November 2, 2021

Respectfully submitted,

Michael Todd Welty
Tax Court Bar No. WM0494
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 301-4791
Facsimile: (678) 840-3481
E-mail: todd@toddweltypc.com

Andrew Steigleder
Tax Court Bar No. SA0856
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 793-5402
E-mail: andy@toddweltypc.com

Kevin Johnson
Tax Court Bar No. JK0059
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 835-1601
E-mail: kevin@toddweltypc.com

Lyle Tress
Tax Court Bar No. PL0222
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 301-4791
E-mail: lyle@toddweltypc.com

Macdonald A. Norman
Tax Court Bar No. NM0188
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 239-2064
E-mail: mac@toddweltypc.com

COUNSEL FOR PETITIONER