Partnership Challenges Denial of $24 Million Charitable Deduction

a. Qualified Contribution Issue. Respondent erred in determining that a charitable contribution deduction in the amount of $24,418,000 for the 2015 Year was not allowed, in whole or in part, on the stated basis that: "You have not established that you made a contribution or gift of a conservation easement during the tax year ended December 31, 2015. To the extent you are able to establish that a gift or contribution had been made, you failed to establish that the gift or contribution satisfied all the requirements of IRC Section 170 and the corresponding Treasury Regulations for deducting a noncash charitable contribution. Accordingly, the charitable contribution claimed on your Return of Partnership Income (Form 1065), is reduced by $24,388,000 for the tax year ended December 31, 2015."

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. Ivey Branch 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 $24,388,000 for the 2015 Year attributable to its 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 makes the FPAA and its corresponding allegations arbitrary and capricious, resulting in an invalid FPAA for the 2015 Year under the Administrative Procedures Act and other relevant law.

e. Valuation Issue. Respondent erred in determining that "Even if it is determined that all the requirements of IRC Section 170 had been satisfied for all or any portion of the claimed noncash charitable contribution, you have not established that the. value of the contributed property claimed in your Return of Partnership Income (Form 1065) for tax year ended December 31, 2015 was greater than $42,000." 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 2015 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. Ivey Branch has established, through a qualified appraisal and other evidence, the value of the Easement to be at least $24,388,000.

i. Gross Valuation Misstatement Penalty Issue. Respondent erred by determining that "the underpayments of tax resulting from the adjustments of partnership items are attributable to a gross valuation misstatement. It is therefore determined that a 40% penalty shall be imposed on the portion of any underpayments attributable to the gross valuation misstatement as provided by IRC Sections 6662(a), 6662(b)(3), 6662(e), and 6662(h), upon completion of the TEFRA proceeding."

j. The Easement was not overvalued by Ivey Branch, nor was there an underpayment of tax.

k. Respondent has provided neither a basis for determining that the charitable contribution was overvalued nor 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 underpayments of tax resulting from the adjustments of partnership items are attributable to the substantial valuation misstatement as provided by IRC Sections 6662(a), 6662(b)(3), and 6662(e) and that a 20% penalty shall be imposed upon completion of the TEFRA proceedings. It is further determined that any underpayment of tax from the adjustments of partnership items are attributable to a tax avoidance transaction for which no substantial authority has been established for the position taken, and for which there was no showing of reasonable belief by the partnership or its partners that the position taken was more likely than not the correct treatment of the tax avoidance, transaction and related transactions. Therefore, all of the underpayments of tax resulting from those adjustments of partnership items are attributable to (1) substantial understatements of income tax or (2) negligence or disregard of rules or regulations as provided by IRC Sections 6662(a), 6662(b)(1) and 6662(b)(2). There has not been a showing by the partnership or any of its partners that there was reasonable cause for any of the resulting underpayments, that the partnership or any of its partners acted in good faith, or that any other exceptions to the penalty apply. It is therefore determined that, if any portion of underpayments are not attributable to a gross or substantial valuation over statement, there shall be imposed a 20% penalty on such portion of the underpayment."

m. Listed Transaction Penalty Issue. Respondent erred by determining "that the underpayments of tax resulting. from the adjustments of partnership items are attributable to a listed and thus reportable transaction under IRC section 6707A(c). Accordingly, a 20% penalty will be imposed under IRC Section 6662A, coordinated with other penalties as required under section 6662A(e)."

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

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

a. Ivey Branch Holdings, LLC. Ivey Branch is a limited liability company formed under the laws of the State of Georgia. Ivey Branch is treated as a partnership for federal income tax purposes.

b. Tax Return. Ivey Branch timely filed its Form 1065 federal income tax return for the 2015 Year. The partnership tax return contained all required attachments and information, including a properly completed Form 8283.

c. Property. During the 2015 Year, Ivey Branch owned approximately 141.1 acres of real property in Jefferson County, Georgia (the "Ivey Branch Property").

d. Easement Donation. On or about December 30, 2015, Ivey Branch made a legally effective donation of a conservation easement (the "Easement") over all 141.1 acres of the Ivey Branch Property (the "Easement Property") by executing a Deed of Conservation Easement (the "Easement Deed").

e. The Easement Deed was properly recorded in Jefferson County, Georgia on December 30, 2015 (the "Easement Date").

f. The Easement encumbers certain economically and ecologically valuable areas located within the Ivey Branch Property.

g. Donee. The Easement was donated to Foothills Land Conservancy ("FLC"). FLC 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.

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

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

j. FLC. has made annual inspections of the Easement to ensure compliance with the terms of the Easement Deed.

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

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

m. 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.

n. 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.

o. 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 mining kaolin clay.

p. 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 Ivey Branch relinquished its right to mine the Easement Property in perpetuity.

q. 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.

r. Respondent has made no independent determination that the Easement failed to preserve any one, much less all four, of the conservation purposes described in Code section 170(h)(4).

s. 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 Appraiser"). The Qualified Appraiser was, at the time of the Appraisal, a "qualified appraiser" as defined in Treasury regulation section 1.170A-13(c)(5).

t. Appraisal. The Appraisal performed by the Qualified Appraiser 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).

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

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

w. Ivey Branch satisfied all other requirements necessary to be entitled to a charitable deduction for the donation of the Easement, as reported on its Form 10.65 for 2015.

x. Pursuant to Code section 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Easement because Ivey Branch has produced credible evidence establishing that it is entitled to a charitable contribution deduction for the Easement in the amount claimed on its income tax return for the 2015 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.