Partnership Challenges Conservation Easement Adjustments

NORTH DONALD LA PROPERTY, LLC, NORTH DONALD LA INVESTORS, LLC, TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226¹

Pursuant to Tax Court Rule 241, North Donald LA Property, LLC hereby petitions for readjustment of the partnership items set forth by the Commissioner of Internal Revenue (“Respondent”) in a Notice of Final Partnership Administrative Adjustment (hereafter the “FPAA”) which is dated August 26, 2021, and as the basis for its case alleges as follows:

1. Petitioner. North Donald LA Investors, LLC (hereafter “Petitioner”) is the Tax Matters Partner for North Donald LA Property, LLC (hereafter “North Donald”).

2. North Donald LA Property, LLC. The FPAA and this petition relate to North Donald LA Property, LLC, a limited liability company organized and existing under the laws of the State of Missouri. North Donald is treated as a TEFRA partnership for federal income tax purposes. North Donald maintains its principal place of business in Missouri.

3. The Form 1065 federal partnership tax return (the “Tax Return”) of North Donald for the tax year ending December 31, 2017 was timely filed electronically with the Internal Revenue Service (“IRS”).

4. Status of the Petitioner. Petitioner is the Tax Matters Partner of North Donald.

5. The FPAA. The FPAA (a copy of which is attached hereto and marked “Exhibit A”) is dated August 26, 2021. The 1RS office located in Nashville, Tennessee issued the FPAA.

6. Taxable Year. The FPAA issued to North Donald was issued for the taxable year ending December 31, 2017 (the “2017 Year”).

7. Assignment of Errors. The errors committed by Respondent in the FPAA are as follows:

a. Non-Cash Charitable Contribution Issue. Respondent erred in determining that a non-cash charitable contribution deduction in the amount of $115,391,000 for the 2017 Tax Year was not allowed, in whole or in part, on the stated basis that: “You have not established that North Donald LA Property, LLC made a noncash charitable contribution during the tax year ended December 31, 2017 . . . the charitable contribution claimed on North Donald LA Property, LLC's Return of Partnership Income (Form 1065) is reduced by $115,391,000 for the tax year ended December 31, 2017.”

b. Petitioner provided Respondent with a copy of the Deed of Conservation Easement (“Easement Deed”), dated December 28, 2017, which was also filed with the Clerk of the Court of Jefferson Davis Parish on December 29, 2017. The Easement Deed conclusively established the non-cash charitable contribution.

c. Petitioner is unable to respond with more specificity to Respondent's contention regarding the Non-Cash Charitable Contribution Issue because Respondent has not explained its determination that Petitioner did not make a non-cash charitable contribution.

d. During the course of the audit, Petitioner provided all documentation establishing the gift of a non-cash charitable contribution. Respondent never indicated that the documentation was incomplete or that additional documentation was necessary to establish the donation of a non-cash charitable contribution.

e. Qualified Contribution Issue. Respondent erred in determining that a noncash charitable contribution deduction in the amount of $115,391,000 for the 2017 Tax Year was not allowed, in whole or in part, on the stated basis that: “To the extent you are able to establish that a noncash charitable contribution has been made, you failed to establish that it satisfied all the requirements of I.R.C. § 170 . . . [a]ccordingly, the charitable contribution claimed on North Donald LA Property, LLC's Return of Partnership Income (Form 1065) is reduced by $115,391,000 for the tax year ended December 31, 2017.”

f. Petitioner is unable to respond with more specificity to Respondent's contention regarding Petitioner's failure to comply with I.R.C. § 170 because Respondent has not identified which requirements under I.R.C. § 170 were not met or the manner in which they were not met.

g. North Donald and its members satisfied all of the requirements of I.R.C. § 170 and the applicable Treasury Regulations necessary to be entitled to a qualified conservation contribution deduction in the amount of at least $115,391,000 for the 2017 Year attributable to North Donald's contribution of the qualified conservation easement (the “Easement”).

h. Respondent's failure to identify any deficiencies in the Easement, or otherwise identify how North Donald failed to comply with I.R.C. § 170, makes the FPAA and its corresponding allegations arbitrary and capricious, resulting in an invalid FPAA for the 2017 Year under the Administrative Procedure Act (“APA”) and other relevant law.

i. Other Deductions Issue. Respondent erred in determining that the other deductions in the amount of $1,157,469 for the 2017 Tax Year were not allowed, in whole or in part, on the stated basis that: “You have not established that North Donald LA Property, LLC had paid or incurred this amount as an ordinary and necessary business expense per I.R.C. § 162(a) . . . [a]ccordingly, 'Other deductions' claimed on Schedule K, Line 13d of your Return of Partnership Income (Form 1065) for the tax year ended December 31, 2017 is reduced by $1,157,469.”

j. North Donald and its members satisfied all the requirements of the Internal Revenue Code necessary to be entitled to a deduction in the amount of at least $1,157,469 for the 2017 Year attributable to “Other deductions.”

k. Petitioner is unable to respond with more specificity to Respondent's contention regarding the Other Deductions Issue because Respondent has not specified why the requirements under the Internal Revenue Code which were not met or the manner in which they were not met.

l. Respondent's failure to support his determination reducing the amount of “Other Deductions” makes the FPAA and the corresponding allegations arbitrary and capricious resulting in an invalid FPAA for the 2017 year under the Administrative Procedures Act and other relevant law.

m. Valuation Issue. Respondent erred in determining that North Donald failed to demonstrate the value of the Easement. This assigned error is referred to herein as the “Valuation Issue.”

n. Respondent's determination with respect to the Valuation Issue is arbitrary, capricious, and lacks a reasoned basis resulting in an invalid FPAA for the 2017 Year under the APA and other relevant law.

o. Respondent offered no support for his determination that North Donald failed to establish the value of the non-cash charitable contributions and has offered no alternative value.

p. North Donald has established, through a qualified appraisal and other evidence, the value of the Easement to be at least $115,391,000.

q. Fraud Penalty Issue. Respondent erred in determining that “the adjustment of charitable contribution partnership items of $115,391,000.00 are attributable to fraud. It is therefore determined that a 75% penalty shall be imposed on all underpayments of tax as provided by I.R.C. § 6663(a) and (b).”

r. Pursuant to Tax Court Rule 142(b), Respondent must establish by clear and convincing evidence that the fraud penalty is warranted. However, the FPAA contains only the bald assertion of a fraud penalty with no supporting allegations. Because Respondent has not proffered any evidence, let alone clear and convincing evidence, that would establish fraud, Respondent cannot meet the burden of proof required by Tax Court Rule 142(b).

s. North Donald and its members relied on competent advisors to properly prepare the Tax Return in a complete and accurate manner and provided their advisors with all necessary information. The manner in which the charitable contribution deduction was computed was disclosed in the appraisal submitted with the Tax Return.

t. Reliance on advisors, as well as full disclosure of the conservation easement donation and the manner in which its value was computed, negates any suggestion of fraud or fraudulent intent.

u. Additionally, under I.R.C. § 6751, no penalty may be assessed by the IRS unless the initial determination of such penalty is personally approved in writing by the immediate supervisor of the person making such a determination.

v. On information and belief, the revenue agent failed to obtain personal approval, in writing, from her immediate supervisor prior to conveying the penalty determination to North Donald.

w. Consequently, Respondent erred in asserting any penalty under I.R.C. § 6663(a) and (b) in connection with the Easement donation.

x. Gross Valuation Misstatement Penalty Issue. Respondent erred in determining that “the underpayments of tax resulting from the adjustment of charitable contribution partnership items of $115,391,000.00 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).”

y. The Easement was neither overvalued by North Donald nor was there an underpayment of tax.

z. North Donald has established, through a qualified appraisal, and other evidence, the value of the Easement to be at least $115,391,000.

aa. Because Respondent has not made a determination as to the value of the Easement, Respondent has no basis upon which he can determine it is overvalued.

bb. Additionally, under I.R.C. § 6751, no penalty may be assessed by the IRS unless the initial determination of such penalty is approved in writing by the immediate supervisor of the person making such a determination.

cc. On information and belief, the revenue agent failed to obtain personal approval, in writing, from her immediate supervisor prior to conveying the penalty determination to North Donald.

dd. Consequently, Respondent erred in asserting a gross valuation misstatement penalty under I.R.C. § 6662(h) in connection with the Easement donation.

ee. Reportable Transaction Penalty Issue. Respondent erred in determining “that the adjustments to charitable contribution partnership items are attributable to a listed transaction under I.R.C. § 6707A(c), specifically a transaction described in Notice 2017-10. These adjustments result in a reportable transaction understatement as defined in I.R.C. § 6662A(b).”

ff. Respondent's determination is erroneous because the charitable contribution of the Easement does not warrant a reportable transaction penalty. All details of the transaction were properly disclosed to the 1RS. Moreover, North Donald relied on competent advisors, and substantial authority exists for the position taken on its Tax Return. North Donald reasonably believed that its treatment of the donation was proper.

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

hh. Because Notice 2017-10 is an unlawful agency action, North Donald may not be penalized for any understatement of tax attributable to participation in a transaction listed in Notice 2017-10.

ii. Respondent's assertion of a reportable transaction penalty under I.R.C. § 6662A is arbitrary and capricious, based on unlawful agency action, and results in an invalid FPAA for the 2017 Year under the APA and other relevant law.

jj. In the alternative, North Donald cannot be penalized under I.R.C. § 6662A because North Donald correctly reported the charitable contribution deduction in connection with the Easement donation on North Donald's Tax Return, therefore, no underpayments exist.

kk. North Donald and its members had substantial authority for the position taken on North Donald's Tax Return, had reasonable cause, and acted in good faith.

ll. Additionally, under I.R.C. § 6751, no penalty may be assessed by the IRS unless the initial determination of such penalty is personally approved in writing by the immediate supervisor of the person making such a determination.

mm. On information and belief, the revenue agent failed to obtain personal approval from her immediate supervisor, in writing, prior to conveying the reportable transaction penalty determination to North Donald.

nn. Consequently, Respondent erred in asserting a reportable transaction penalty under I.R.C. § 6662A in connection with the Easement donation.

oo. Additional Penalty Issue. Respondent erred in determining, that any underpayments of tax from the adjustments of partnership items are attributable to “(1) negligence or disregard of 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.”

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

qq. Additionally, under I.R.C. § 6751, no penalty may be assessed by the IRS unless the initial determination of such penalty is personally approved, in writing, by the immediate supervisor of the person making such a determination.

rr. On information and belief, the revenue agent failed to obtain personal approval from her immediate supervisor, in writing, prior to conveying the penalty determination to North Donald.

ss. Consequently, Respondent erred in asserting any penalty under I.R.C. § 6662 in connection with the Easement donation.

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

a. North Donald LA Property, LLC. North Donald LA Property, LLC is a limited liability company formed under the laws of the State of Missouri. North Donald is treated as a partnership for federal income tax purposes.

b. Tax Return. North Donald 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.

c. Property. During the 2017 Year, North Donald owned 244.73 acres of real property in Jefferson Davis Parish, Louisiana (the “North Donald Property”).

d. Easement Donation. North Donald made a legally effective donation of the Easement over 244.73 acres of the North Donald Property (the “Easement Property”) by executing a Deed of Conservation Easement (the “Easement Deed”) on or about December 28, 2017 and recording the Easement Deed on or about December 29, 2017.

e. The Easement Deed is recorded in Jefferson Davis Parish, Louisiana book of records in Conveyance Book, File Number 703675.

f. The Easement encumbers economically and ecologically valuable real estate.

g. The Easement is a restriction on the use of the Easement Property in perpetuity and protects the Easement Property in perpetuity. North Donald, its heirs or assigns, remain indefinitely subject to the restrictions in the Easement.

h. Donee. The Easement was donated to the Atlantic Coast Conservancy, Inc. (“ACC”). ACC has at all relevant times been recognized by the 1RS as a publicly supported, I. R.C. § 501(c)(3) charitable organization, as described in I.R.C. §§ 170(b)(1)(A)(vi) and 509(a)(1) and received a determination letter to that effect from the Commissioner.

i. ACC was at all relevant times a “qualified organization” authorized to receive conservation easement donations pursuant to I.R.C. § 170(h)(1)(B).

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

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

l. Petitioner received a letter acknowledging the donation of the Easement in compliance with I.R.C. § 170(f)(8).

m. The Easement Deed conveys to ACC 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 prepared 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 as a clay mining operation.

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

r. Conservation Purpose. The Easement meets at least one of the four conservation purposes required under I.R.C. § 170(h)(4)(A) and Treasury Regulation § 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 any single, much less all four, of the conservation purposes described in I.R.C. § 170(h)(4).

t. Appraiser. The appraisal of the value of the Easement (the “Appraisal”) was performed by Claud Clark III (the “Qualified Appraiser”). The Qualified Appraiser was, at the time of the Appraisal, a “qualified appraiser” as defined in Treasury Regulation § 1.170A-13(c)(5).

u. Appraisal. The Appraisal prepared by the Qualified Appraiser and used as a basis for the charitable deduction claimed for the donation of the Easement was a “qualified appraisal” under Treasury Regulation § 1.170A-13(c)(3).

v. 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 §§ 1.170A-13(c)(3) or (c)(5).

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

x. North Donald satisfied all other requirements necessary to be entitled to a charitable deduction for the donation of the Easement, as reported on its Tax Return for the 2017 Year.

y. On information and belief, the individual making the initial determination to assess penalties did not receive personal written approval from her immediate supervisor.

9. Pursuant to Tax Court Rule 142(b), Respondent must establish by clear and convincing evidence that the fraud penalty is warranted. Because Respondent offered no evidence in the FPAA to support the fraud penalty, let alone clear and convincing evidence, the Court should dismiss all adjustments relating to the fraud penalty.

10. Pursuant to I.R.C. § 7491(c), Respondent bears the burden of production with respect to any other penalty asserted in the FPAA.

11. Pursuant to I.R.C. § 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Easement because North Donald 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, 1) dismiss the FPAA as invalid or otherwise readjust the partnership items consisting of the charitable contribution deduction for the Easement and the “other deductions” claimed and determine the amount of the deduction for the Easement and “other deductions” to have been properly deducted in the amount claimed, and 2) dismiss the asserted fraud penalty because Respondent cannot meet his burden. Petitioner further prays that the Court shift the burden of proof to Respondent and determine that the Commissioner erred in: (1) disallowing the non-cash charitable contribution deduction of North Donald for the 2017 Year, (2) disallowing the “Other deductions” claimed by North Donald for the 2017 Year, and (3) determining the application of penalties against North Donald for the 2017 Year.

Dated: September 29, 2021.

GREGORY P. RHODES
Tax Court Bar No. RG0309

SIDNEY W. JACKSON, IV
Tax Court Bar No. JS0169

RONALD A. LEVITT
Tax Court Bar No. LR0545

Dentons Sirote PC
2311 Highland Ave. So. Ste 500
P.O. Box 55757
Birmingham, AL 35205
(205) 930-5445

MICHELLE ABROMS LEVIN
Tax Court Bar No. AM0309

LOGAN C. ABERNATHY
Tax Court Bar No. AL0232

SARAH E. GREEN
Tax Court Bar No. GS21129

Dentons Sirote PC
305 Church Street SW, Ste 800
Huntsville, AL 35801
(256)518-3605

Counsel for Petitioner