Partnership Challenges Charitable Deduction Denial in Tax Court

a. Qualified Contribution Issue. Respondent erred in determining that a charitable contribution deduction in the amount of $22, 626, 000 for the 2014 Year was not allowed, in whole or in part, on the stated basis that: "It has not been established that that claimed deduction meets all of the requirements if Internal Revenue Code Section 170.” This assigned error is referred to herein as the "Qualified Contribution Issue."

b. Petitioner is unable to respond with more specificity to Respondent's contention regarding the Qualified Contribution Issue because Respondent has not identified with specificity which "requirements" under Code¹ section 170 were not met or the manner in which they were not met.

c. Big Hill and its members satisfied all of the requirements of Code section 170 and the applicable Treasury regulations necessary to be entitled to a deduction in the amount of at least $22,626,000 for the 2014 Year attributable to Big Hill's contribution of the qualified conservation easement described in the FPAA (the "Easement").

d. The Commissioner's failure to identify any deficiencies in the Easement or otherwise identify how Petitioner failed to comply with Code section 170 make the FPAA and its corresponding allegations arbitrary and capricious, resulting in an invalid FPAA for the 2014 Year under the Administrative Procedures Act and other relevant law.

e. Valuation Issue. Respondent erred in determining that, "it has not been established that the value of the contributed property interest exceeded $0." This assigned error is referred to herein as the "Valuation Issue."

f. Respondent's determination with respect to the Valuation Issue is arbitrary, capricious, and lacks a reasoned basis resulting in an invalid FPAA for the 2014 Year under the Administrative Procedures Act and other relevant law.

g. Respondent has failed to support what he determined the value of the Easement to be or the basis for that determination. There is no indication in the FPAA why the Commissioner determined the Easement to have no value.

h. Big Hill has established, through a qualified appraisal and other evidence, the value of the Easement to be at least $22,626,000.

i. Gross Valuation Misstatement Penalty Issue. Respondent erred by determining that "the underpayment of tax resulting from the adjustment of partnership items herein is attributable to a gross valuation misstatement, as defined by section 6662(h) of Internal Revenue Code. Accordingly, a 40% addition to tax is imposed on such underpayment by Section 6662(a) and (h) of the Internal Revenue Code."

j. The Easement was not overvalued by Big Hill, nor was there an underpayment of tax.

k. Respondent has provided no basis for determining the charitable contribution was overvalued or any indication of what Respondent determined the value of the contribution to be.

l. Alternative Penalty Issue. Respondent erred by determining, in the alternative, "that the underpayment of tax resulting from the adjustment of partnership items herein is not attributable to a gross valuation misstatement, it is determined that the underpayment is attributable to (1) a substantial valuation misstatement, as defined by section 6662(e) of the Internal Revenue Code; or (2) negligence or disregard of rules or regulations, as defined by section 6662(c) of the Internal Revenue Code; or (3) a substantial understatement of income tax, as defined by section 6662(d) of the Internal Revenue Code. Accordingly, a 20% addition to tax is imposed on such underpayment as provided by Section 6662(a) and (b) of the Internal Revenue Code."

m. There was neither an underpayment of tax nor a valuation misstatement by Big Hill. Moreover, any alleged underpayment would be the result of "reasonable cause." Big Hill obtained a qualified appraisal and made a good-faith investigation of the value of the Easement. Moreover, Big Hill and its members relied on competent advisors.

n. Respondent has not complied with Code section 6751(b)(1) with respect to asserting the relevant accuracy related and other penalties.

a. Big Hill Partners, LLC. Big Hill is a limited liability company formed under the laws of the State of North Carolina. Big Hill is treated as a partnership for federal income tax purposes.

b. Tax Return. Big Hill timely filed its Form 1065 federal income tax return for the 2014 Year. The partnership tax return contained all required attachments and information, including a properly completed Form 8283.

c. Property. During the 2014 Year, Big Hill owned approximately 96.71 acres of real property in Chatham County, North Carolina (the "Big Hill Property").

d. Easement Donation. On or about December 30, 2014, Big Hill made a legally effective donation of a conservation easement (the "Easement") over 96.71 acres of the Big Hill Property by executing a Deed of Conservation Easement (the "Easement Deed").

e. The Easement Deed was properly recorded in Chatham County, North Carolina on December 31, 2014 (the "Easement Date").

f. The Easement encumbers certain economically and ecologically valuable lands that comprise the Big Hill Property.

g. Easement Deed. The Easement Deed. is a legally enforceable restriction that restricts the use of the Big Hill Property in perpetuity and prevents use of the retained interest inconsistent with the conservation purpose.

h. Donee. The Easement was donated to the Triangle Land Conservancy, Inc. ("TLC"). TLC has at all relevant times been recognized by the Internal Revenue Service as a publicly supported, Code section 501(c)(3) charitable organization, as described in Code sections 509(a) (1) and 170(b) (1) (A) (vi), and received a determination letter to that effect from the Commissioner.

i. TLC was at all relevant times a "qualified organization" authorized to receive (deductible conservation easements pursuant to Code section 170(h)(1)(B).

j. TLC has the experience and means to monitor and enforce the Easement. TLC has expressed the intent to monitor and enforce its rights under the Easement Deed.

k. TLC has made annual inspections of the Easement to ensure compliance with the terms of the Easement Deed.

l. Petitioner received a letter acknowledging the donation of the Easement in compliance with Code section 170(f)(8).

m. The Easement Deed Conveys to TLC the right to enforce the terms of the Easement Deed and to protect the conservation purposes in perpetuity.

n. Baseline Documentation. In connection with the donation of the Easement, qualified individuals issued a baseline report and accompanying documentation (the "Baseline Report") for the Easement.

o. The Baseline Report contains an evaluation of certain conservation values and purposes protected by the Easement. The Baseline Report documents the condition of the Easement Property at the time of the Easement grant and describes several of the conservation values present within the Easement Property.

p. Highest and Best Use. The highest and best economical use of the Easement Property immediately preceding the Easement grant was for operation of a quarry for mineral extraction and mining.

q. Once the Easement was placed upon the Easement Property, the highest and best use of the property changed dramatically. The property could no longer be economically developed because Big Hill relinquished its right to mine the Easement Property in perpetuity.

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

s. Respondent has made no independent determination that the Easement failed to preserve one of the conservation purposes described in Code section 170(h)(4).

t. Appraiser. The appraisal of the value of the Easement (the "Appraisal") was performed by Martin H. Van Sant, SRA and Thomas F. Wingard, MAI, SRA of Van Sant & Wingard, LLC (the "Qualified Appraisers"). The Qualified Appraisers were, at the time of the Appraisal, "qualified appraisers" as defined in Treasury regulation section 1.170A-13(c)(5).

u. Appraisal. The Appraisal performed by the Qualified Appraisers and used as a basis for the charitable deduction taken for the donation of the Easement was a "qualified appraisal" under Treasury regulation section 1.170A-13(c)(3).

v. Respondent has Qualified Appraisers were not Appraisal was not a qualified regulation section 1.170A-13(c) made no determination that the qualified appraisers or that the appraisal, as defined in Treasury (3) or (c) (5).

w. The Appraisal correctly determined the value of the Easement donated by Big Hill. Big Hill and its members reasonably relied upon the Appraisal in establishing the amount of the charitable contribution deduction. Big Hill's reliance was reasonable and in good faith, and Big Hill made an independent investigation of the value of the Easement.

x. Big Hill satisfied all other requirements necessary to be entitled to a charitable deduction for the donation of the Easement, as reported on its Form 1065 for 2014.

y. Pursuant to Code section 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Easement because Big Hill has produced credible evidence establishing it is entitled to a charitable contribution deduction for the Easement in the amount claimed on its income tax return for the 2014 Year, and has otherwise maintained all records, cooperated with Respondent at all levels of the audit process and complied with all requirements of the Internal Revenue Code and Treasury regulations.