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Players in Conservation Easement Transaction to Be Deposed

APR. 15, 2022

Oconee Landing Property LLC et al. v. Commissioner

DATED APR. 15, 2022
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Oconee Landing Property LLC et al. v. Commissioner

OCONEE LANDING PROPERTY, LLC, OCONEE LANDING INVESTORS, LLC, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

Docket No. 11814-19.

ORDER

This is a syndicated conservation easement case. On March 18, 2022, respondent filed two Motions to Compel the Taking of Depositions. Respondent seeks the opportunity to depose James Freeman and Ricky Novak. These individuals allegedly helped structure the syndicated easement transaction. We will grant the Motions.1

Background

This case involves a charitable contribution deduction claimed by Oconee Landing Property, LLC (Oconee), for a conservation easement. The real estate at issue is a 355-acre tract of land located in Greene County, Georgia. The property was acquired by James Reynolds and Mercer Reynolds in November 2003. In 2014 the Reynoldses caused the property to be contributed, in exchange for membership interests, to Carey Station, LLC, a newly formed limited liability company. By Order served November 8, 2021, we granted respondent's motions to compel the taking of depositions of the Reynoldses. Mercer Reynolds was deposed on January 14, 2022; respondent has been unable to depose James Reynolds due to medical issues.

In May 2015 the Reynoldses signed an engagement letter on behalf of Carey Station to arrange a syndicated conservation easement transaction. They hired James Freeman and Ricky Novak of Strategic Capital Partners, LLC (SCP), to do this. Messrs. Freeman and Novak arranged a syndicated conservation easement transaction for the property at issue in this case, as well as for two adjacent properties (collectively, the Oconee properties). The Oconee properties were originally components of a larger tract.

After engaging Messrs. Freeman and Novak, the Reynoldses instructed them to “handle the engagement of the appraisers.” Messrs. Freeman and Novak hired Thomas Wingard and Martin Van Sant to perform the appraisals. By Order served November 24, 2021, we granted respondent's motions to compel the taking of depositions of Messrs. Wingard and Van Sant. Mr. Wingard was deposed on February 11, 2022; when asked about the syndicated transaction, he invoked the Fifth Amendment.

In November 2015, before Messrs. Wingard and Van Sant had completed their appraisals, SCP allegedly informed a representative of the Reynoldses that the easements proposed for the three Oconee properties would be valued at $52,873,765. On December 3, 2015, Messrs. Wingard and Van Sant issued a “restricted appraisal report” concluding that the three proposed easements were worth $50,390,000 in the aggregate, with the easement at issue in this case being valued at $20,670,000.

Six days later, SCP solicited investors for the syndicated transaction through a private placement memorandum. That memorandum relied on Messrs. Wingard's and Van Sant's $20,670,000 valuation for the easement at issue in this case. SCP received commitments from 24 individual investors. The investors collectively invested $4,655,000, hoping to secure passed-through charitable contribution deductions approaching 4 ½ times their investment.

On December 21, 2015, Carey Station contributed the property to Oconee in exchange for a 99% membership interest in Oconee. Two days later, petitioner purchased from Carey Station a 97% interest in Oconee for $2,440,000. Eight days later, on December 31, 2015, Oconee granted to the Georgia Alabama Land Trust a conservation easement over the property. Oconee at that point was owned 97% by petitioner, 2% by Carey Station, and 1% by another related entity.

Oconee filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it valued the property (before placement of the easement) at $21,200,000, and it claimed a charitable contribution deduction of $20,670,000 for the donation of the easement. It attached to the return a copy of a final appraisal report, dated April 7, 2016, prepared by Messrs. Wingard and Van Sant.

The IRS selected Oconee's return for examination. Following examination of that return the IRS issued petitioner, on April 4, 2019, a notice of final partnership administrative adjustment (FPAA) disallowing the charitable contribution deduction in full. The FPAA alternatively determined that, if any deduction were allowable, Oconee had not “established that the value of the contributed property . . . was greater than $1,420,560.” The IRS also determined a 40% “gross valuation misstatement” penalty under section 6662(h) and (in the alternative) a 20% accuracy-related penalty under other Code provisions.

During informal discovery respondent contacted Messrs. Novak and Freeman, requesting that they participate in informal interviews. This request was rejected. On March 2, 2022, respondent served Messrs. Novak and Freeman with notices of deposition and subpoenas. When they objected, respondent moved to compel the taking of depositions. Petitioner and Messrs. Novak and Freeman filed oppositions to those Motions on April 8, 2022.2

Discussion

Rule 74(c) provides that the taking of a deposition of a non-party witness is an extraordinary method of discovery. Such depositions may be utilized when the testimony sought is relevant and not privileged and “cannot be obtained through informal consultation or communication.” Rules 70(b), 74(c)(1).

Although Messrs. Novak and Freeman are “third parties” in a technical sense, they are no strangers to this case. In May 2015 they were hired to arrange the syndicated conservation easement transaction and were instructed to “handle the engagement of the appraisers.” In so doing they engaged Messrs. Wingard and Van Sant to perform appraisals. But before Messrs. Wingard and Van Sant had completed their work, Messrs. Novak and Freeman allegedly told the Reynoldses' representative that the total value of the three Oconee easements would be $52,873,765. Shortly thereafter Messrs. Wingard and Van Sant issued a restricted appraisal report concluding that the three Oconee easements were worth $50,390,000. This appraisal was within 5% of the Novak/Freeman estimate.

Among the issues the Court may need to address in this case are: (1) the proper valuation of the easement; (2) whether Messrs. Wingard and Van Sant are “qualified appraisers,” § 170(f)(11)(E)(ii); (3) whether the appraisal attached to Oconee's 2015 return was a “qualified appraisal,” § 170(f)(11)(E)(i); and (4) whether Oconee can show good-faith reliance on professional advice as a basis for a “reasonable cause” defense to certain penalties, see § 6664(c).

It seems clear that Messrs. Novak and Freeman possess relevant, non-privileged information relating to one or more of these issues. On the valuation question, it may be relevant (a) whether any prior appraisals of the property were brought to their attention before they offered their own estimate; (b) if so, when those appraisals were made and what values they showed; (c) whether Messrs. Novak and Freeman communicated their estimate to Messrs. Wingard and Van Sant before the latter completed their appraisals; and (d) whether Messrs. Novak and Freeman informed Messrs. Wingard and Van Sant that petitioner had purchased a 97% interest in Oconee for only $2,440,000 on December 23, 2015. The answers to these questions could also affect the determination whether Oconee relied on Messrs. Wingard's and Van Sant's valuation conclusions in good faith. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002) (citing as relevant whether “the taxpayer provided necessary and accurate information to the adviser” and “actually relied in good faith on the adviser's judgment”).

Although the “qualified appraiser” and “qualified appraisal” inquiries are governed largely by objective factors, other facts may be relevant. An individual is not a “qualified appraiser” with respect to a particular transaction “if the donor had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property.” Treas. Reg. § 1.170A-13(c)(5)(ii). This may be true (for example) if “the donor and the appraiser make an agreement concerning the amount at which the property will be valued and the donor knows that such amount exceeds the fair market value of the property.” Ibid. Communications that Messrs. Novak and Freeman may have had with Messrs. Wingard and Van Sant may shed light on this question. For example, it would be relevant whether they shared their November 2015 estimate with Messrs. Wingard and Van Sant before the appraisal was completed.

Respondent should be permitted to depose Messrs. Novak and Freeman in order to discover facts that may be relevant to these inquiries. Both individuals may be called (by one or both parties) as witnesses at trial. Depositions may assist respondent in obtaining knowledge of relevant facts — in advance of trial — that are currently in the possession of (and known only to) petitioner and its agents. See P.T. & L Constr. Co. v. Commissioner, 63 T.C. 404, 414 (1974) (stating that “the basic purpose of discovery is to reduce surprise [at trial] by providing a means for the parties to obtain knowledge of all the relevant facts”).

Petitioner objects to the Motions to Compel, contending that respondent has made insufficient efforts to obtain the needed information by informal means. But respondent was unable to obtain much of this information from petitioner during informal discovery. When respondent's counsel requested that Messrs. Novak and Freeman participate in informal interviews, they refused. And although they offered to prepare written responses to certain questions, respondent was justified in believing that this exercise would have limited utility, given that his prior efforts to obtain the relevant information were fruitless. Cf. Zaentz v. Commissioner, 73 T.C. 469, 474 (1979) (noting that a party has “a duty to make reasonable inquiry of his agents before responding [to discovery requests]”).

Petitioner argues that respondent should not be permitted to take further depositions given that we have already allowed him to take four. We might normally be disinclined to allow additional depositions under such circumstances. But two of the four depositions we previously allowed were essentially washouts, and a third yielded little information. James Reynolds, who was most familiar with the syndicated easement transaction, was too ill to be deposed. Mercer Reynolds was deposed, but he alleged that he had virtually no involvement in the transaction. And Mr. Wingard invoked the Fifth Amendment during his deposition.

Messrs. Novak and Freeman advance similar arguments, but also urge that respondent is seeking their testimony to learn about other syndicated easement transactions that they allegedly helped organize and promote. They accordingly request that, if they must be deposed, their depositions be limited in scope. We agree that their depositions should be limited to the facts of this case (which include facts relating to all three Oconee properties). Respondent may not use the depositions to ask Messrs. Novak and Freeman about other, unrelated transactions in which they may have been involved.

Upon due consideration, it is

ORDERED that respondent's Motions to Compel the Taking of Depositions, filed March 18, 2022, at docket entries 145 and 146, are granted in that respondent may take the depositions of James Freeman and Ricky Novak via Zoomgov on the date proposed by respondent, or at another time and date as may be mutually agreed upon. The depositions shall be limited to the facts of this case (which include facts relating to all three Oconee properties). It is further

ORDERED that petitioner's Objection to Motion to Compel, filed April 8, 2022, at docket entry 154, is stricken from the record as duplicative. It is further

ORDERED that, in addition to regular service, the Clerk shall serve a copy of this Order on counsel for James Freeman and Ricky Novak as follows:

Abraham N.M. Shashy, Jr. and John G. Green
King & Spalding LLP
1700 Pennsylvania Avenue, N.W.
Suite 900
Washington, D.C. 20006

(Signed) Albert G. Lauber
Judge

FOOTNOTES

1 Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 Petitioner filed duplicate copies of its objection, one at docket entry 153 and the other at docket entry 154.

END FOOTNOTES

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