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LLC Challenges IRS Denial of Conservation Easement Deduction

JUL. 10, 2020

Dorchester Farms Property LLC et al. v. Commissioner

DATED JUL. 10, 2020
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Dorchester Farms Property LLC et al. v. Commissioner

[Editor's Note:

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

]

DORCHESTER FARMS PROPERTY, LLC,
DORCHESTER
FARMS MANAGER, LLC,
TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

SERVED Aug 07 2020

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226

PETITIONER HEREBY PETITIONS for a readjustment of the partnership items set forth by the Commissioner of Internal Revenue (“Respondent”) in the Notice of Final Partnership Administrative Adjustment dated March 12, 2020 (hereinafter “FPAA”) issued to Dorchester Farms Property, LLC for the taxable year ending December 31, 2016. As the basis for its case, Petitioner alleges as follows:

1. Petitioner Dorchester Farms Manager, LLC is the Tax Matters Partner (“TMP”) for Dorchester Farms Property, LLC.

2. The partnership is Dorchester Farms Property, LLC (the “Partnership”), whose current address is 267 Highway 74 North, Suite 4, Peachtree City, Georgia 30269.

3. The FPAA was purportedly mailed to the TMP on March 12, 2020 by the Legacy SAA-Technical Services Program Manager in Springfield, New Jersey. A copy of the FPAA is attached as Exhibit A.

4. The FPAA asserts adjustments in the form of a charitable contribution deduction disallowance in the amount of $18,663,918.

5. All of the proposed adjustments on the grounds stated in the FPAA are in dispute. In the FPAA, Respondent has erred, inter alia, with respect to the following:

a. Respondent erred in determining that the Partnership did not make a contribution or gift of a conservation easement during the tax year ending December 31, 2016.

b. Respondent erred in determining that the Partnership failed to establish that the gift or contribution satisfied all the requirements of Section 1701 and the corresponding Treasury Regulations for deducting a noncash charitable contribution.

c. Respondent erred in disallowing the Partnership's charitable contribution deduction in the amount of $18,663,918 for the 2016 tax year. 

d. Respondent's FPAA does not meet the notice requirements of Section 7522(a) because it fails to adequately describe the basis for the adjustment to the Partnership's 2016 tax return. Petitioner is unable to respond to the FPAA with any specificity because Respondent does not state which requirements of Section 170 or the corresponding Treasury Regulations that he alleges Petitioner did not satisfy.

e. The Partnership and its members satisfied all of the requirements of Section 170 and the corresponding Treasury Regulations required to be entitled to a charitable contribution deduction for the donation of a conservation easement in the amount of at least $18,663,918 for the 2016 tax year.

f. Respondent's failure to identify the specific requirements of Section 170 and the corresponding Treasury Regulations that Petitioner allegedly failed to meet make the FPAA and its allegations arbitrary and capricious, resulting in an invalid FPAA for the 2016 tax year under the Administrative Procedure Act and other relevant law.

g. Respondent erred in determining, alternatively, that if the Partnership met all the requirements of Section 170, the value of the contributed property was not greater than $0.

h. Respondent's determination that the value of the conservation easement donation was not greater than $0 is arbitrary, capricious, and without basis in fact or law.

i. The Partnership established through a qualified appraisal and other evidence that the value of the conservation easement donation is at least $20,740,000.

j. Respondent erred in determining that the Partnership is liable for the 40 percent gross valuation misstatement penalty under Section 6662(a), 6662(b)(3), 6662(e), and 6662(h) for the 2016 tax year.

k. The Partnership did not overvalue the conservation easement donation.

l. Respondent failed to provide an adequate basis to support his assertion that the conservation easement was overvalued.

m. Respondent erred in determining, alternatively, that the Partnership is liable for the 20 percent penalty under Sections 6662(a), 6662(b)(3), and 6662(e) for a substantial valuation misstatement for the 2016 tax year.

n. The Partnership did not overvalue the conservation easement donation.

o. The Partnership had reasonable cause for any alleged underpayment.

p. The Partnership hired a qualified appraiser, obtained a qualified appraisal, and made a good faith investigation into the value of the conservation easement.

q. Respondent erred in determining that the 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 reasonable showing 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.

r. Respondent erred in determining, alternatively, that the Partnership and its partners are liable for the underpayment of tax attributable to 1) substantial understatements of income tax, or 2) negligence or disregard of rules or regulations as defined in Sections 6662(a), 6662(b)(1), and 6662(b)(2).

s. The Partnership and its partners relied on competent advisors, acted in good faith, and made a good faith investigation of the conservation easement donation.

t. Respondent erred in asserting that there were underpayments of tax from the adjustments of partnership items attributable to a reportable transaction under Section 6707A(c).

u. Respondent erred in determining, alternatively, that the Partnership is liable for the 20 percent reportable transaction penalty under Section 6662A for the 2016 tax year.

v. Respondent knows that he will not be successful on the merits in this case, and that he will not be able to show that Petitioner is liable for the gross valuation misstatement penalty, so he also seeks to assert the Section 6662A penalty.

w. The Section 6662A penalty only applies if Respondent cannot prove the gross valuation misstatement penalty, the substantial valuation misstatement penalty, the substantial understatement penalty, or the accuracy-related penalty.

x. The Partnership and its partners complied with all of the requirements of Section 170(h) in making the charitable contribution of the conservation easement.

y. The Partnership timely submitted a Form 8886, Reportable Transaction Disclosure Statement to the Internal Revenue Service for the Partnership's 2016 conservation easement donation.

z. 1RS Notice 2017-10 violates Executive Orders 13891 and 13892.

aa. The Internal Revenue Service issued Notice 2017-10 without following the procedural requirements of the Administrative Procedure Act and the Congressional Review Act.

bb. Respondent has not complied with Section 6751(b) in asserting penalties for the 2016 tax year.

6. The facts upon which Petitioner relies are, inter alia, as follows:

a. Partnership. The Partnership was formed on April 20, 2016 as a limited liability company under the laws of Georgia.

b. The Partnership acquired approximately 630 acres of real property in Liberty County, Georgia from Laure Stevens Devendorf on December 21, 2016 (the “Property”).

c. On December 27, 2016, the Partnership donated a conservation easement to Southern Conservation Trust, Inc. (“SCT”) on 625 acres of the Property.

d. The Deed of Conservation Easement was recorded in Liberty County, Georgia on December 29, 2016 (the “Conservation Deed”).

e. On December 13, 2017, the Partnership filed a Corrective Deed of Conservation Easement in Liberty County, Georgia to correct the legal description on the Conservation Deed.

f. The Conservation Deed is a legally enforceable deed that restricts the use of the Property in perpetuity and prevents use of the retained interest inconsistent with its conservation purpose.

g. Tax Return. The Partnership timely filed its Form 1065, U.S. Return of Partnership Income, for the 2016 tax year (“Partnership Tax Return”).

h. The Partnership Tax Return included all required information and attachments.

i. The Partnership Tax Return attached a properly completed Form 8283.

j. The Partnership Tax Return reported a charitable contribution deduction for the donation of a conservation easement in the amount of $18,663,918 pursuant to the qualified appraisal (the “Conservation Easement”).

k. Donee. SCT is a tax exempt public charity under Section 501(c)(3), as described in Section 509(a)(1) and 170(b)(l)(A)(vi).

l. SCT was at all relevant times a qualified organization under Section 170(h)(3) and eligible to receive deductible conservation easements pursuant to Section 170(h)(1)(B).

m. SCT has the experience and means to monitor and enforce the Conservation Easement.

n. Petitioner received a letter acknowledging the donation of the Conservation Easement in compliance with Section 170(f)(8).

o. The Conservation Deed conveys to SCT the right to enforce the terms of the Conservation Deed and to protect the conservation purposes in perpetuity.

p. Baseline Report. In connection with the donation of the Conservation Easement, qualified individual(s) issued a baseline report and accompanying documentation (the “Baseline Report”) for the Conservation Easement.

q. The Baseline Report contains an evaluation of certain conservation values and purposes protected by the Conservation Easement.

r. The Baseline Report documents the conditions of the Property at the time of the donation and lists several of the conservation values present within the Conservation Easement.

s. Conservation Purpose. The Conservation Easement meets at least one of the four conservation purposes required under Section 170(h)(4)(A) and Treas. Reg. § 1.170A-14(d), as documented by the Baseline Report, the Conservation Deed, and the attributes of the Property.

t. Respondent has made no determination that the Conservation Easement failed to preserve any one of the four conservation purposes described in Section 170(h)(4).

u. Appraisal. The appraisal of the values of the Conservation Easement (“Appraisal”) was performed by Martin H. Van Sant, SRA, and Thomas F. Wingard, MAI, SRA.

v. Mr. V an Sant and Mr. Wingard were, at the time of the Appraisal, “qualified appraisers” as described in Treas. Reg. § 1.170A-13(c)(5) (the “Qualified Appraisers”).

w. The Qualified Appraisers concluded the highest and best use of the Property before the donation of the Conservation Easement to be low density residential development.

x. The Qualified Appraisers concluded the highest and best use of the Property after the donation of the Conservation Easement to be passive recreational usage.

y. The Qualified Appraisers determined the value of the Conservation Easement to be $20,740,000, using the before and after method pursuant to Treas. Reg. § 1.170A-14(h)(3).

z. The effective date of the Appraisal was December 29, 2016.

aa. The Appraisal performed by the Qualified Appraisers, and used as a basis for the charitable contribution deduction taken by the Partnership for the donation of the Conservation Easement, was a “qualified appraisal” as defined in Treas. Reg. § 1.170A-13(c)(3).

bb. Respondent has made no determination that the Qualified Appraisers were not qualified appraisers as defined in Treas. Reg. § 1.170A-13(c)(5).

cc. Respondent has made no determination that the Appraisal was not a qualified appraisal, as defined in Treas. Reg. § 1.170A-13(c)(3).

dd. The Appraisal correctly determined the value of the Conservation Easement donated by the Partnership.

ee. Reliance on Experts. The Partnership reasonably relied on the Appraisal in establishing the value of the Conservation Easement and the amount of the charitable contribution deduction.

ff. The Partnership's reliance was reasonable and in good faith, and the Partnership made an independent investigation of the value of the Conservation Easement.

gg. The Partnership provided all of the necessary information to a Certified Public Accountant (“CPA”) and believed the CPA prepared an accurate tax return.

hh. The Partnership reasonably relied on the CPA to prepare an accurate tax return.

ii. The Partnership satisfied all other requirements necessary to be entitled to a charitable contribution deduction for the donation of the Conservation Easement, as reported on its Partnership Tax Return for the 2016 tax year.

jj. The Partnership undervalued the Conservation Easement and respectfully requests an increase in its charitable contribution from $18,663,918 to $20,740,000 and the associated refunds for its partners based on the Qualified Appraisal.

kk. Pursuant to Section 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Conservation Easement because the Partnership has produced credible evidence establishing it is entitled to a charitable contribution deduction for the Conservation Easement in the amount of $20,740,000 for the 2016 tax year, and has otherwise maintained all records, cooperated with Respondent in all phases of the examination process, and complied with all requirements of the Internal Revenue Code and Treasury Regulations.

WHEREFORE, Petitioner prays the Court:

i. Dismiss the FPAA as invalid;

ii. Determine that the Partnership is entitled to a charitable contribution deduction for the donation of a conservation easement during the 2016 tax year;

iii. Determine that the Partnership Tax Return underreported its charitable contribution deduction for the 2016 tax year and that it's tax return is otherwise accurate;

iv. Determine that the Partnership is entitled to a charitable contribution deduction from the donation of a conservation easement in the amount of $20,740,000 for the 2016 tax year;

v. Determine that the Partnership is entitled to increase its Charitable Contribution deduction from $18,663,918 to $20,740,000 and that its partners are entitled to a refund based on any overpayment in taxes from the increased deduction;

vi. Determine that Respondent bears the burden of proof as to all issues; and

vii. Grant such other and further relief as it deems appropriate.

Respectfully submitted this 2nd day of June, 2020.

ADMITTED

Vivian D. Hoard
Tax Court Bar No. HV0055
Counsel for Petitioner
Fox Rothschild, LLP
999 Peachtree Street NE, Suite 1500
Atlanta, GA 30309
(404) 870-3772
vhoard@foxrothschild.com

R. Brian Gardner, III
Tax Court Bar No. GR0812
Counsel for Petitioner
Fox Rothschild, LLP
999 Peachtree Street NE, Suite 1500
Atlanta, GA 30309
(404) 870-3773
bgardner@foxrothschild.com

FOOTNOTES

1All references to “Section” or “I.R.C.” mean the Internal Revenue Code of 1986, as amended.

END FOOTNOTES

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