Partnership Challenges Denial of Conservation Easement Deduction

GRAY MARE FARMS, LLC
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION

Petitioner Gray Mare Farms, LLC (“Petitioner”) hereby petitions for a redetermination of the disallowance of a charitable contribution tax deduction against income tax for the tax year ending December 31, 2016. As a basis for this proceeding. Petitioner alleges as follows:

A. Petitioner.

1. Petitioner is a resident of the State of South Carolina with an address of 1075 Edgefield Highway, North Augusta, South Carolina 29841. Petitioner's taxpayer identification number is provided on Form 4 filed herewith.

2. Petitioner timely filed a Form 1065 U.S. Return of Partnership Income (the “Return”) for 2016 with the Internal Revenue Service Center in Atlanta, Georgia.

B. Notice of Deficiency.

3. The Commissioner of Internal Revenue's (“Respondent”) Notice of Final Partnership Administrative Adjustment (the “Notice”) giving rise to this Petition is dated January 10, 2020. A true and correct copy of the Notice is attached hereto and incorporated herein at Exhibit “A”.

C. Amount in Dispute.

4. Respondent's Notice disallows Petitioner's charitable contribution of $1,800,000.00 in connection with Petitioner's gift of a conservation easement, claiming that Petitioner failed to establish that the gift satisfies the requirements of Section 170 of the Internal Revenue Code of 1986, as amended (the “Code”), and related Treasury Regulations.

5. Alternatively, the Notice claims that, even if Petitioner establishes that the gift of its conservation easement satisfies the requirements of Code Section 170 and related Treasury Regulations, Petitioner has failed to establish that the value of conservation easement is greater than zero (0).

6. Finally, the Notice states that certain penalties should be asserted against Petitioner at the partner level, to wit: (i) penalties under Code Section 6662(h) for Gross Valuation Misstatement; (ii) penalties under Code Section 6662(e) for Substantial Valuation Misstatement; and (iii) penalties under Code Sections 6662(b)(2) and 6662(d) for Substantial Understatement of Tax.

D. Assignments of Error.

7. Respondent's disallowance of the charitable contribution deduction claimed on Petitioner's Return is in error.

E. Supporting Facts.

8. Petitioner delivered a Deed of Conservation Easement (the “Easement”) to The Central Savannah River Land Trust, Inc. (“Land Trust”) as to approximately 279.89 acres of land (the “Property”) located in Aiken County, South Carolina.

9. The Land Trust is a nonprofit corporation incorporated in the State of Georgia that is a charitable organization qualified under Code Section 501(c)(3). The Land Trust has been in operation since 2001 and protects in excess of 9,000 acres of land in Georgia and South Carolina.

10. The Land Trust accepted delivery of the Easement and contemporaneously provided Petitioner with a Gift Acknowledgment Letter acknowledging acceptance of the Easement.

11. The Land Trust performed a baseline study of the Property in connection with the gift of the Easement, which baseline study described the condition of the Property at the time of the Easement and the reasons for which it was worthy of protection. The Land Trust has made multiple inspections of the Property since the date of the Easement.

12. Petitioner timely filed its Return with the Internal Revenue Service in the Atlanta, Georgia Office in which it claimed a charitable deduction under Code Section 170 in connection with the gift of the Easement.

13. Along with its Return, Petitioner filed a copy of the Easement and a copy of the Land Trust's baseline report. Petitioner also filed a completed Form 8283 — Noncash Charitable Contributions and submitted copy of a qualified appraisal of the Easement prepared by a qualified appraiser.

14. Finally, Petitioner filed a Form 8886 — Reportable Transaction Disclosure Statement with its Return to disclose the gift of the Easement as a reportable transaction. Notice 2009-55, 2009-31 LR.B. 170.

15. All filing requirements have been accomplished for the year of the gift of the Easement and for all subsequent years.

F. Applicable Law.

16. Taxpayers are allowed a deduction for charitable contributions made in a taxable year. I.R.C. § 170(a)(1); Treas. Reg. § 1.170A-1(a). A charitable contribution is a contribution or gift to or for the use of an organization that meets the requirements set out in Code Section 170(c). Id.

17. A taxpayer may claim a deduction under Code Section 170 for the contribution of a “qualified conservation contribution”. I.R.C. § 170(f)(3)(B)(iii); Treas. Reg. § 1-170A-7(a)(5).

18. A “qualified conservation contribution” is defined as a contribution of a “qualified real property interest” to a “qualified organization”, made exclusively for “conservation purposes”. I.R.C. § 170(h)(1).

19. A “qualified real property interest” is an “easement or other real property that under state law has attributes similar to an easement.” I.R.C. § 170(h)(2)).

20. A “qualified organization” includes a qualified, tax-exempt 501(c)(3) charitable organization, which must generally be in the land conservation field or have a mission of land conservation.” I.R.C. § 170(h)(3).

21. “Conservation purposes” include: (i) the preservation of land for outdoor recreation or education for substantial and regular use for the public; and (ii) the preservation of open space, including farmland and forestland, where such preservation is for the scenic enjoyment of the general public or is pursuant to a clearly delineated governmental conservation policy and will yield a significant public benefit. I.R.C. § 170(h)(4).

22. Treasury Regulations provide that a taxpayer may retain certain “reserved rights” in property subject to a conservation easement and still make a “qualified conservation contribution” for which a deduction may be claimed. Treas. Reg. § 1.170A-14(b)(2). The Internal Revenue Service, in its Conservation Easement Audit Techniques Guide, further states:

Taxpayers are permitted to reserve some development rights on a portion of the property, such as construction of additional homes or structures, installation of utilities, and building of fences or roads, provided that the conservation purposes are protected. Depending on the facts and circumstances, retention of these rights may result in disallowance [of the charitable contribution tax deduction related to the easement].

Internal Revenue Service, Conservation Easement Audit Techniques Guide (Rev. 11/4/2016), Page 63.

G. Analysis and Conclusion.

23. In this matter. Respondent issued the Notice to Petitioner disallowing its tax deduction claim of $1,800,000.00, stating, in conclusory fashion with no supporting facts, that Petitioner's gift of the Easement failed to satisfy the requirements of Code Section 170. Respondent's allegation is in error.

24. Petitioner's gift of the Easement to the Land Trust constituted a “qualified conservation contribution” that satisfied all requirements of Code Section 170(h)(1).

25. The Easement conveyed an easement interest in the Property to the Land Trust exclusively to protect, in perpetuity, certain conservation values associated with the Property. See Easement Art. I and II.

26. The terms of the Easement set forth significant, perpetual restrictions on the uses of, and the activities which may be conducted on, the Property, whether by Petitioner, the Land Trust, or third parties. See Easement Art. III.

27. The Land Trust was a “qualified organization” and an “eligible done” of the Easement. I.R.C. § 170(h)(1); and see Easement Recital F.

28. As an alternative allegation, but one that is similarly conclusory and unsupported by any facts. Respondent's Notice claims that, even if Petitioner establishes that its conservation easement gift satisfies the requirements of Code Section 170, Petitioner has failed to establish that the value of conservation easement is greater than zero (0). Respondent's allegation is in error.

29. With Petitioner's Return, Petitioner submitted a Form 8283 — Noncash Charitable Contributions form signed by a qualified appraiser who had prepared a qualified appraisal, a copy of which was provided with Petitioner's Return. The appraisal valued the Easement at $1,800,000.00.

30. Finally, Respondent's Notice alleges, again in conclusory fashion with no supporting facts that penalties should be asserted against Petitioner for: (i) Code Section 6662(h) for Gross Valuation Misstatement; (ii) penalties under Code Section 6662(e) for Substantial Valuation Misstatement; and (iii) penalties under Code Sections 6662(b)(2) and 6662(d) for Substantial Understatement of Tax.

31. As Respondent's Notice completely failed to cite any facts whatsoever to support its substantive claims that Petitioner's Easement did not satisfy Code Section 170 or, alternatively, that Petitioner failed to demonstrate that the Easement's value was greater than zero (0), Respondent's argument for the assertion of penalties against Petitioner is, similarly, without merit.

WHEREFORE, Plaintiff prays that this Court may try this case, determine that there are no deficiencies in income tax and no penalties, and grant such other and further relief as this Court may deem fit and proper.

Dated: April 3, 2020

Joel Presley, Tax Matters Partner