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LLC Challenges Denial of Conservation Easement Deduction

OCT. 20, 2021

Rocky Branch Timberlands LLC et al. v. Commissioner

DATED OCT. 20, 2021
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Rocky Branch Timberlands LLC et al. v. Commissioner

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

ROCKY BRANCH TIMBERLANDS, LLC,
ROCKY BRANCH INVESTMENTS, LLC,
TAX MATTERS PARTNER
Petitioner.
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226

Petitioner, Rocky Branch Investments, LLC, petitions under Code1 Section 6626(a) for readjustment of the partnership items set forth in the Notice of Final Partnership Administrative Adjustment (“FPAA”), dated July 23, 2021, relating to the 2017 Form 1065 for Rocky Branch Timberlands, LLC (“Rocky Branch”). As the basis for its case, Petitioner alleges the following:

1. Rocky Branch's current address and principal place of business is 210 E. 2nd Avenue, Suite 105, Rome, Georgia 30161.

2. Rocky Branch is an Alabama limited liability company.

3. Rocky Branch is a partnership for federal tax purposes

4. Petitioner is the Tax Matters Partner (“TMP”) of Rocky Branch for its 2017 Form 1065.

5. Petitioner's current address and principal place of business is 210 E. 2nd Avenue, Suite 105, Rome, Georgia 30161.

6. Petitioner is an Alabama limited liability company.

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

8. On or about July 23, 2021, Respondent's office located at 801 Broadway, MDP 26, Nashville, TN 37203 issued the FPAA. A complete copy of the FPAA is attached to this Petition as Exhibit A.

9. Petitioner disputes all proposed adjustments in the FPAA.

10. Respondent made the following errors in the FPAA:

a. Respondent erred in adjusting any items on the Form 1065;

b. Charitable Contribution: Respondent erred in adjusting “Charitable Contributions 50 percent” reported on Schedule K Line 13a from $26,505,000 to $0;

c. Respondent erred in asserting that Rocky Branch did not establish that it made a non-cash charitable contribution;

d. Respondent erred in determining that Rocky Branch “failed to establish that it satisfied all the requirements of I.R.C. § 170 and the corresponding Treasury Regulations for deducting a noncash charitable contribution.” Respondent failed to identify with specificity which “requirements” under Section 170 were not met, nor the manner in which they were not met.

e. The Commissioner's failure to identify any deficiencies in the Easement or otherwise identify how Petitioner failed to comply with Section 170 makes the FPAA and its corresponding allegations arbitrary and capricious, which invalidates the 2017 FPAA under the Administrative Procedures Act and other relevant law.

f. Respondent erred in determining that Rocky Branch did “not establish[ ] the value of the noncash charitable contribution.” This determination is arbitrary, capricious, and lacks a reasoned basis, which invalidates the 2017 FPAA under the Administrative Procedures Act and other relevant law.

g. Rocky Branch established, through a qualified appraisal and other evidence, the value of the Easement to be at least $26,475,000.

h. Respondent erred in disallowing $30,000 of cash contributions reported on Rocky Branch's 2017 Form 1065.

i. Penalties: Respondent erred when he determined “that the underpayments of tax resulting from the adjustment of partnership items of $26,505,000 are attributable to a gross valuation misstatement. It is therefore determined that a 40% penalty shall be imposed on the underpayments of tax resulting from the gross valuation misstatement as provided by I.R.C. § 6662(h).”

j. Respondent erred when he determined that “adjustments to the partnership items are attributable to a listed transaction under I.R.C. § 6707A(c), specifically a transaction described in Notice 2017-10 . . . If the I.R.C. § 6662(h) penalty is found not to apply to any portion of the understatement, then a 20% penalty under I.R.C. § 6662A applies to that amount.”

k. Respondent failed to comply with the notice-and-comment provisions of the Administrative Procedure Act in promulgating Notice 2017-10. As such, Notice 2017-10 was issued unlawfully.

l. Because Notice 2017-10 is an unlawful agency action, Rocky Branch cannot be penalized for any understatement of tax attributable to participation in a transaction listed in Notice 2017-10.

m. Respondent's assertion of a reportable transaction penalty under Section 6662A is arbitrary and capricious because it is based on unlawful agency action and Respondent failed to comply with the Administrative Procedure Act.

n. Respondent erred when he determined “that any underpayments of tax from the adjustments of partnership items are attributable to (1) negligence or disregard of the rules or regulations, (2) substantial understatements of income tax, and (3) substantial valuation misstatements as provided by I.R.C. § 6662(c), (d), and (e), respectively.” Respondent erred when he determined that in the alternative a 20% penalty on the underpayment of tax applied.

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

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

q. Other Deductions: Respondent erred in adjusting “other deductions” reported on Schedule K, line 13d from $1,086,525 to $106,525;

r. Respondent erred by failing to describe any meaningful factual, tax, or legal basis for disallowing Rocky Branch's "other deductions" reported on Schedule K, line 13d.

s. Respondent erred in asserting that Rock Branch did not substantiate the "other deductions" reported on Schedule K, line 13d as ordinary and necessary business expenses under Section 162.

t. Respondent erred in asserting that a portion of the claimed expense is not allowable as it is considered a nondeductible syndication expense within the meaning of I.R.C. § 709.

u. Respondent erred in applying penalties under section 6662(b)(1), (b)(2), (c), and (d) at the partnership level.

v. Respondent's failure to support his determination makes the FPAA and the corresponding allegations arbitrary and capricious which invalidates the 2017 FPAA under the Administrative Procedures Act and other relevant law.

w. Respondent failed to provide review by the Independent Appeals Office as required by section 7803(e), which invalidates the 2017 FPAA.

8. The facts upon which Petitioner relies for the foregoing assignments of error and its case are as follows:

a. Rocky Branch timely filed its Form 1065 federal income tax return for the 2017 Year. The partnership tax return contained all required attachments and information, including a properly completed Form 8283.

b. During the 2017 Year, Rocky Branch owned approximately 71.35 acres of real property in Coosa County, AL (the “Property”).

c. On or about December 28, 2017, Rocky Branch made a legally effective donation of a conservation easement (the “Easement”) over the 71.35 acres of the Property by executing a Deed of Conservation Easement.

d. The Easement encumbers certain economically and ecologically valuable areas located within the Property.

e. The Easement was donated to Foothills Land Conservancy (“Foothills”). Foothills 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 Respondent.

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

g. Foothills has the experience and means to monitor and enforce the Easement. Foothills has expressed the intent to monitor and enforce its rights under the Easement.

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

i. The Easement Deed conveys to Foothills the right to enforce the terms of the Easement Deed and to protect the conservation purposes in perpetuity.

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

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

l. The highest and best economical use of the Property immediately preceding the Easement grant was for near-term development as a granite quarry.

m. Once the Easement was placed upon the Property, the highest and best use of the property changed dramatically. The Property could no longer be economically developed because Rocky Branch relinquished its right to develop the Property in perpetuity.

n. 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 Property.

o. The appraisal of the value of the Easement (the “Appraisal”) was performed by Dale W. Hayter, Jr. MAI, AI-GRS of Independent Appraisals, 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). In addition, a review appraisal was performed by Kenneth A. Pettay, of Alpha and Omega Services LLC.

p. 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).

q. 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).

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

s. Rocky Branch satisfied all other requirements necessary to be entitled to a charitable deduction for the donation of the Easement, as reported omits Form 1065 for 2017.

t. Pursuant to section 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Easement because Rocky 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 2017 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.

WHEREFORE, Petitioner prays that the Court dismisses the FPAA as invalid or otherwise readjusts the partnership items consisting of the charitable contribution deduction for the Easement and determines the amount of the deduction to have been properly deducted in the amount claimed. Petitioner further prays that the Court shifts the burden of proof to Respondent and determines that the Commissioner erred by: (1) reducing the noncash charitable contribution of Rocky Branch for the 2017 Year, (2) disallowing the “Other deductions” claimed by Rocky Branch, and (3) determining the application of accuracy-related and other penalties against Rocky Branch for the 2017 Year.

Dated October 20, 2021

Matthew T. Journy
Tax Court Bar No. JM0174

Rebecca M. Stork
Tax Court Bar No. SR1684

Journy, PLLC
300 New Jersey Avenue, NW,
Suite 900
Washington, DC 20001

FOOTNOTES

1All references to “Code” mean the Internal Revenue Code of 1986 as amended.

END FOOTNOTES

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