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Partnership Challenges Denial of Conservation Easement Deduction

DEC. 6, 2021

Quality Minerals LLC et al. v. Commissioner

DATED DEC. 6, 2021
DOCUMENT ATTRIBUTES

Quality Minerals LLC et al. v. Commissioner

[Editor's Note:

View exhibits in PDF version of document.

]

QUALITY MINERALS, LLC, GH MANAGER, 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

PETITIONER, GH MANAGER, LLC, HEREBY PETITIONS this Court as Tax Matters Partner (“TMP”) for Quality Minerals, LLC (“Quality”) for the tax period ending December 31, 2015 to dispute the Notice of Final Partnership Administrative Adjustment, dated September 16, 2021, (“FPAA”) pertaining to the 2015 Form 1065 (U.S. Return of Partnership Income) for Quality.2

The core issue in this case is whether Quality is entitled to the claimed charitable contribution deduction for its donations of a conservation easement on and fee simple interest in real property located in Montgomery County, Alabama.

In enacting Section 170(h), Congress provided for a charitable tax deduction related to contributions of certain conservation easements to land trusts. In so doing, Congress recognized that “conservation . . . ultimately boil(s) down to rewarding the private landowner who conserves the public interest.”3 On its 2015 Form 1065, Quality reported a $13,610,000 non-cash charitable deduction related to the conservation easement contribution, which among other things prohibited the property from being used for mining.

The IRS has determined that the value of the conservation easement is worth nothing. In stark contrast, the $13,610,000 non-cash charitable deduction reported by Quality was based on the analysis of (i) a qualified mining engineer, (ii) a qualified appraiser with 35 years of experience, and (iii) a second qualified appraiser with over 10 years of experience appraising real property.

Upon examination, the IRS determined that the “property is not a unique habitat, for the area,” and that “there are no endangered plant or animal species found on the property.”4 Contrary to Respondent's contentions, the property at issue has substantial conservation value.5 The U.S. Fish & Wildlife Service has proposed removing 23 species, many of which were found only in the Southeastern United States, from the Federal Lists of Endangered and Threatened Wildlife and Plants due to extinction caused by climate change and habitat extinction.6 In a press release, the U.S. Fish & Wildlife Service urged private landowners and others to take steps “to enhance wildlife habitat and improve biodiversity” through the conservation of land.7 On the conserved property, qualified environmental experts have identified at least four different rare, threatened, or endangered species (“RTEs”).8 Further, using methodology adopted by virtually every federal department or agency with environmental responsibility, qualified environmental economists conservatively calculate the net present value (“NPV”) of the public interest benefits in the conservation to current and future generations to be at least $64,643,431.

As the basis for its case, Petitioner alleges as follows:

A. The Petitioner, GH Manager, LLC, is a Georgia domestic limited liability company having its principal place of business at 4355 Cobb Parkway, Suite J555, Atlanta, GA 30339.

B. Quality's current mailing address is 4355 Cobb Parkway, Suite J555, Atlanta, GA 30339, and its principal place of business is in Alabama.

C. Petitioner is the TMP for Quality with respect to its 2015 Form 1065.

D. Quality is an Alabama domestic limited liability company.

E. Quality is classified as a partnership for federal tax purposes.

F. Quality filed its 2015 Form 1065 with the Internal Revenue Service Center in Ogden, Utah.

G. Quality's taxpayer identification number is set forth in the Statement of Taxpayer Identification Number, which is attached to this Petition.

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

I. The Internal Revenue Service located in Oakland, California issued an FPAA relating to Quality's 2015 Form 1065 on September 16,2021, a copy of which is attached hereto as Exhibit A and which has been redacted pursuant to Tax Court Rule 27.

J. Respondent made the following adjustments in the FPAA:

1. Disallowance of the $13,610,000 non-cash charitable contribution deduction pursuant to Section 170(h).

2. Disallowance of the $240,000 non-cash charitable contribution deduction pursuant to Section 170.

3. Assertion of the 75 percent fraud penalty on all underpayments of tax pursuant to Section 6663(a) and (b).

4. As alternatives to the 75 percent penalty:

i. A 40 percent gross valuation misstatement penalty pursuant to Section 6662(h);

ii. A 20 percent reportable transaction understatement penalty pursuant to Section 6662A(b);

iii. A 20 percent accuracy-related penalty pursuant to Section 6662(c), (d), and (e).

K. Petitioner disputes all proposed adjustments in the FPAA.

L. Respondent erred in his determinations reflected in the FPAA for the following reasons:

1. The donation of the conservation easement achieved the following valid conservation purposes, defined by Section 170(h)(4):

i. The protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem, and/or

ii. The preservation of open space (including farmland and forestland) where such preservation will yield a significant public benefit and is (I) for the scenic enjoyment of the general public, or (II) pursuant to a clearly delineated Federal, State, or local governmental conservation policy;

2. No permitted use listed in the Deed of Conservation Easement conflicts with any of the valid conservation purposes achieved by the donation of the easement;

3. The fair market value (“FMV”) of the conservation easement at the time of donation was not less than $13,610,000;

4. The FMV of the non-cash donation of the fee simple interest at the time of donation was not less than $240,000;

5. Respondent erred in asserting penalties based on civil fraud pursuant to Section 6663(a) and (b), alternatively, a gross valuation misstatement pursuant to Section 6662(h), a reportable transaction understatement pursuant to Section 6662A, negligence or disregard of rules and regulations pursuant to Section 6662(c), a substantial understatement of income tax pursuant to Section 6662(d), or a substantial valuation misstatement pursuant to Section 6662(e); and

6. Respondent erred in asserting that Quality and its partners failed to exercise reasonable cause or establish other defenses to the alleged penalties.

M. Based on information and belief, the facts, and mixed points of fact and law, upon which Petitioner relies include, but are not limited to, the following:

General

1. Quality was classified as a partnership for federal tax purposes on December 31, 2015.

2. Petitioner owned 0.01 percent of the profit, loss, and capital of Quality on December 31, 2015.

3. Quality Minerals Partners LLC owned 95.99 percent of the profit, loss, and capital of Quality on December 31, 2015.

4. Two individuals collectively owned four percent of the profit, loss, and capital of Quality on December 31, 2015.

5. Petitioner was appointed manager of Quality on October 14, 2015.

6. On December 31, 2015, Petitioner was a general partner of Quality for purposes of Section 6231(a)(7).

7. Quality's designation of Petitioner as TMP complies with the Internal Revenue Code and related Treasury Regulations.

8. Quality meets the net worth criteria described in Section 7430(c)(4)(A)(ii).

Property Background

9. As of December 9, 2015, Quality owned approximately 82.10 acres of real property located in Montgomery County, Alabama (the “Property”).

10. Quality acquired the Property as a capital contribution by Statutory Warranty Deed dated September 11, 2015.

11. The Property is treated as long-term capital gain property pursuant to Sections 723 and 1223(2).

12. The Property is located in an area with significant sand, gravel, and clay reserves.

Title & Mining Due Diligence

13. Quality, recognizing the potential of developing the Property as a sand and gravel mine, undertook certain due diligence to evaluate the feasibility of doing so.

14. Quality hired a professional land surveyor licensed in Alabama to prepare a survey of the Property (the “Survey”).

15. An Alabama law firm specializing in real estate law was hired to prepare a title report of the Property (the “Title Report”).

16. Quality hired an experienced geologist (the “Geotechnical Engineer”), to explore the subsurface conditions of the Property, and determine the general soil conditions of proposed pit areas.

17. As a part of the engagement, the Geotechnical Engineer (i) explored the subsurface conditions, (ii) obtained laboratory testing on boring samples collected from the Property, and (iii) prepared a report titled “Report of Geotechnical Exploration Alabama River Sand & Gravel Pits 82.10 Acre Tract Montgomery, Alabama” which presents the field and laboratory data obtained during the engagement (the “Geotechnical Report”).

18. The Geotechnical Engineer visited the Property with a drilling rig.

19. During the visit, the Geotechnical Engineer drilled two boreholes on the Property to explore the subsurface conditions.

20. The sand and gravel samples were collected and boring logs were prepared.

21. The Geotechnical Engineer worked with a professional engineering company that performed laboratory soil tests to evaluate the chemical composition and engineering properties of the sand and gravel samples.

22. The laboratory analyzed the sand and gravel samples for the following characteristics: (i) grainsize; (ii) LA abrasion; and (iii) sulfate soundness.

23. The results of the laboratory testing are presented in the Geotechnical Report.

24. Quality hired a professional mining engineering firm (the “Mining Engineer”), to analyze the Geotechnical Report and determine the feasibility for operating a sand and gravel mine on the Property.

25. The Mining Engineer possessed the following qualifications and credentials: (i) Master of Science degree in Mining Engineering; (ii) Master of Business Administration degree; (iii) Licensed as a Registered Professional Engineer in 11 states, including Alabama; (iv) Registered Founding Member of the Society for Mining, Metallurgy and Exploration; and (v) Licensed Member of the National Society for Professional Engineers.

26. In 2015, the Mining Engineer possessed 35 years of mining engineering experience, which included working with over 100 mine operators to analyze geological data, design and develop mine plans, and/or obtain mining permits from state and local regulatory authorities.

27. The Mining Engineer prepared a report titled “Technical Due Diligence Business Plan” for the Property (the “Mining Business Plan”).

28. The Mining Business Plan concludes that the Property contains Proven Mineral Reserves of approximately 5.995 million tons of sand, gravel, and clay.

29. The Mining Business Plan concludes that it was reasonably probable that all necessary permits to operate a sand and gravel mine on the Property could be obtained within three to six months.

30. The Mining Business Plan concludes that developing and operating a mine on the Property was viable in the given market.

31. The Mining Business Plan projects a net present value (“NPV”) of $13.94 million for a sand and gravel mine on the Property.

Baseline Documentation Report

32. Recognizing the potential conservation values of the Property, Quality hired Atlantic Coast Conservancy, Inc. (“ACC”) to undertake certain diligence to investigate and confirm the Property's conservation values.

33. ACC is a Georgia nonprofit corporation that was a federal tax-exempt organization under Section 501(c)(3) at all times during 2015.

34. ACC visited the Property to assess the conservation values and prepare a “Baseline Documentation Report.”

35. ACC memorialized its findings in a Baseline Documentation Report, dated December 10,2015, which documented the current physical condition and status of the Property and identified the conservation values.

36. The Baseline Documentation Report contains numerous maps covering the Property, including U.S. Geological Survey topographic maps, and aerial photographs.

37. The Baseline Documentation Report contains numerous photographs taken at various locations on the Property.

38. The Baseline Documentation Report indicates that the Property in its present state is undeveloped and “possesses significant wildlife, forest, aquatic, agricultural, scenic vistas, open space, and plant habitat features” and “is composed of a sparsely vegetated open/agricultural area adjacent to a forested floodplain on Southeastern Floodplains and Low Terraces subregion slopes of the Southeastern Plains ecoregion. . . .”

39. The Baseline Documentation Report concludes that conserving the Property would protect a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.

40. The Baseline Documentation Report concludes that conserving the Property would result in multiple significant public benefits, including the preservation of open space (including farmland and forestland) where such preservation is pursuant to a clearly delineated federal, state, or local governmental conservation policy and where such preservation is for the scenic enjoyment for the general public.

Member Vote

41. The members of Quality considered the following options: (i) hold the Property for long-term investment; (ii) lease the Property to a third-party mining company; (iii) operate the Property as a mine; or (iv) conserve the Property.

42. The members of Quality voted to conserve the Property in perpetuity by granting a conservation easement on the Property (the “Conservation Easement”) and donating the fee simple interest in the Property (the “Fee Simple Interest”).

Donation of Conservation Easement

43. On December 10,2015, Quality granted a Deed of Conservation Easement (the “Deed”) encumbering approximately 82.10 acres of the Property in favor of ACC.

44. ACC was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of December 10, 2015.

45. ACC was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of December 10, 2015.

46. The Property was not subject to a mortgage as of December 10, 2015.

47. The Conservation Easement was a “qualified real property interest” for purposes of Section 170 and the Treasury Regulations thereunder.

48. Quality did not contribute the Conservation Easement to ACC in a bargain sale.

49. Quality did not receive any consideration from ACC in exchange for donating the Conservation Easement.

50. Quality did not receive any consideration from any other party in exchange for donating the Conservation Easement to ACC.

Deed of Conservation Easement

51. The Deed was recorded with the Judge of Probate of Montgomery County, Alabama on December 11, 2015.

52. The Deed incorporates the Baseline Documentation Report dated December 10, 2015.

53. The Deed identifies various conservation purposes.

54. The Deed indicates that the Conservation Easement will protect a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.

55. The Deed indicates that the Conservation Easement will preserve open space (including farmland and forestland) pursuant to a clearly delineated federal, state, or local governmental policy, and will yield a significant public benefit.

56. The Deed protects the Property as a relatively natural habitat of fish, wildlife, plants, or similar ecosystem, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(ii).

57. The Deed protects the Property as an open space (including farmland and forestland), where such preservation is pursuant to a clearly delineated federal, state, or local governmental policy, and will yield a significant public benefit, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(iii)(II).

58. The Deed protects the Property as an open space (including farmland and forestland), where such preservation is for the scenic enjoyment for the general public and will yield a significant benefit, which qualifies as a conservation purpose as defined by Section 170(h)(4)(A)(iii)(I).

59. The Deed indicates that the exclusive purpose of the Conservation Easement is to (i) protect the conservation values in perpetuity, (ii) ensure that the Property will remain forever predominantly in its natural condition, and (iii) prevent any use of the Property that will impair or interfere with the conservation values of the Property.

60. The Deed identifies the specific conservation values of the Property.

61. The Baseline Documentation Report documents the specific conservation values of the Property.

62. The Deed provides ACC the rights to preserve and protect the conservation values of the Property in perpetuity.

63. The Deed permits ACC to enter the Property at reasonable times to inspect the Property, to monitor Grantor's compliance with the Deed, and to enforce the purpose of the Conservation Easement.

64. The Deed prohibits Quality and all future owners from exploration or extraction of minerals, oil, gas, or other hydrocarbons, soils, sands, gravel, rock, or other materials on or below the surface of the Property.

65. The restrictions on the use of the Property stated in the Deed are binding on Quality and all future owners of the Property in perpetuity.

66. The Deed provides a formula for calculating ACC's proportionate share of extinguishment proceeds that fully complies with the requirements of Treas. Reg. § 1.170A-14(g)(6)(ii).

Contemporaneous Written Acknowledgement of Conservation Easement

67. ACC provided a letter to Quality dated December 10, 2015, acknowledging receipt of the donation of the Conservation Easement (the “Conservation Easement Donation Acknowledgment Letter”).

68. The Conservation Easement Donation Acknowledgment Letter confirms that ACC did not provide any goods or services in exchange for the donation of the Conservation Easement.

69. The Conservation Easement Donation Acknowledgment Letter constitutes a “contemporaneous written acknowledgement” for purposes of Section 170 and the Treasury Regulations thereunder.

Qualified Appraiser for Conservation Easement

70. A qualified, licensed MAI appraiser9 with 35 years of experience appraising land and conservation easements (the “Appraiser”) prepared an “Appraisal Report” dated March 29, 2016 (the “Easement Appraisal”) to determine the FMV of the Conservation Easement.

71. The Appraiser has local knowledge and experience in preparing appraisals related to conservation easements.

72. The Appraiser was not a direct partner of Quality.

73. The Appraiser was not an indirect partner of Quality.

74. The Appraiser did not claim, report, or otherwise take a deduction under Section 170 or any other tax provision for the donation of the Conservation Easement.

75. The Appraiser was not a party to the transaction in which Quality acquired the Property.

76. The Appraiser was not the donee of the Conservation Easement.

77. The Appraiser was not an employee of (i) Quality, (ii) a direct partner of Quality, (iii) an indirect partner of Quality, (iv) a party to the transaction in which Quality acquired the Property, (v) ACC, or (vi) Petitioner.

78. The Appraiser was not “related” under Section 267(b) to any of the persons described immediately above.

79. The Appraiser performed a majority of his appraisals in 2015 for parties other than Quality.

80. The Appraiser was a “qualified appraiser,” as defined by Section 170 and the Treasury Regulations thereunder, for the donation of the Conservation Easement.

Qualified Appraisal of Conservation Easement

81. The Easement Appraisal is dated March 29, 2016.

82. The Appraiser dated the Easement Appraisal before the extended deadline for Quality to file its 2015 Form 1065 on which it claimed the charitable deduction related to the donation of the Conservation Easement.

83. The Appraiser signed and dated the Easement Appraisal.

84. The Easement Appraisal contains a detailed legal description of the Property.

85. The Easement Appraisal contains a detailed legal description of the Conservation Easement.

86. The Easement Appraisal contains a description of the physical condition of the Property.

87. The Easement Appraisal states that Quality donated the Conservation Easement to ACC on December 11, 2015, which was the date that the Deed was recorded in the real estate property records.

88. The Easement Appraisal contains the name, address, appraiser certification license number, and social security number of the Appraiser.

89. The Easement Appraisal contains the name, address, and taxpayer identification number of the appraisal company.

90. The Easement Appraisal contains a list of the qualifications of the Appraiser, including his background, experience, education, and membership in professional associations.

91. The Easement Appraisal contains a statement that it was prepared for Quality's potential use regarding the preparation and filing of federal income tax returns.

92. The Easement Appraisal states that it was prepared in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”).

93. The Easement Appraisal provides the basis for the conclusions by the Appraiser regarding the FMV of the Conservation Easement.

94. The Appraiser based the FMV of the Conservation Easement on market conditions at the time of the donation of the Conservation Easement.

95. The Easement Appraisal concludes that the highest and best use (“HBU”) for the Property, before the donation of the Conservation Easement, was sand and gravel mining (the “Before-Donation-HBU”).

96. The Easement Appraisal concludes that the Before-Donation-HBU was legally permissible.

97. The Easement Appraisal concludes that the Before-Donation-HBU was physically possible.

98. The Easement Appraisal concludes that the Before-Donation-HBU was financially feasible.

99. The Easement Appraisal concludes that the Before-Donation-HBU was maximally productive.

100. The Easement Appraisal concludes that the FMV of the Property before Quality donated the Conservation Easement was $13,850,000.

101. The Easement Appraisal concludes that the FMV of the Property after Quality donated the Conservation Easement was $240,000.

102. The Easement Appraisal concludes that the FMV of the Conservation Easement was $13,610,000.

103. The Easement Appraisal concludes that the FMV of the Conservation Easement does not enhance the value of any other property owned by Quality or any person related to Quality.

104. In determining the FMV of the Property before the donation of the Conservation Easement, the Appraiser considered both the sales-comparison approach and the income approach.

105. To determine the FMV of the Property before the donation of the Conservation Easement under the sales-comparison approach, the Appraiser analyzed five recent sales or listings of properties.

106. Under the sales-comparison approach, the Appraiser determined that the FMV of the Property before the donation of the Conservation Easement was approximately $10,675,000.

107. To determine the FMV of the Property before the donation of the Conservation Easement, under the income approach, the Appraiser used the discounted cash flow (“DCF”) method.

108. The DCF method is an acceptable appraisal method for valuing real property that contains a significant amount of underlying sand and gravel reserves.

109. Under the income approach, the Appraiser determined that the FMV of the Property before the donation of the Conservation Easement was $13,900,000.

110. The Appraiser concluded that the sales-comparison approach was less reliable due to significant differences in the location, physical characteristics, and varying resources of the comparable properties.

111. In concluding that FMV of the Property before the donation of the Conservation Easement was $13,850,000, the Appraiser determined that the income approach was the better indicator of value and gave more weight to that approach.

112. The Easement Appraisal concludes that the HBU of the Property after the donation of the Conservation Easement was agriculture, forestry, recreational uses, and public enjoyment (the “After-Donation-HBU”).

113. The Easement Appraisal concludes that the After-Donation-HBU was legally permissible.

114. The Easement Appraisal concludes that the After-Donation-HBU was physically possible.

115. The Easement Appraisal concludes that the After-Donation-HBU was finacially feasible.

116. The Easement Appraisal concludes that the After-Donation-HBU was maximally productive.

117. To determine the FMV of the Property after the donation of the Conservation Easement, the Appraiser used a sales-comparison approach and analyzed (i) properties encumbered with conservation easements through the United States Department of Agriculture's Natural Resources Conservation Services program, and (ii) six sales of properties encumbered with conservation easements.

118. The fee charged by the Appraiser for preparation of the Easement Appraisal was not based on a percentage of the appraised value of the Conservation Easement.

119. The fee charged by the Appraiser for preparation of the Easement Appraisal was not based on a percentage of the amount allowable as a charitable deduction under Section 170.

120. The Easement Appraisal was a “qualified appraisal,” as defined by Section 170 and the Treasury Regulations thereunder.

Donation of Fee Simple Interest

121. On December 17, 2015, Quality donated the Fee Simple Interest via Warranty Deed to Atlantic Coast Conservancy Properties, LLC (“ACC Properties”).

122. The Warranty Deed was recorded with the Judge of Probate of Montgomery County, Alabama on December 17, 2015.

123. ACC Properties is a wholly owned subsidiary of ACC that is treated as a disregarded entity for federal income tax purposes.

124. ACC Properties was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of December 17, 2015.

125. ACC Properties was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of December 17, 2015.

126. The Property was not subject to a mortgage as of December 17, 2015.

127. Quality did not contribute the Fee Simple Interest to ACC Properties in a bargain sale.

128. Quality did not receive any consideration from ACC Properties in exchange for donating the Fee Simple Interest.

129. Quality did not receive any consideration from any other party in exchange for donating the Fee Simple Interest to ACC Properties.

Contemporaneous Written Acknowledgement of Fee Simple Interest

130. ACC Properties provided a letter to Quality, dated December 17, 2015, acknowledging receipt of the donation of the Fee Simple Interest (the “Fee Simple Donation Acknowledgment Letter”).

131. The Fee Simple Donation Acknowledgment Letter confirms that ACC Properties did not provide any goods or services in exchange for the donation of the Fee Simple Interest.

132. The Fee Simple Donation Acknowledgment Letter constitutes a “contemporaneous written acknowledgement” for purposes of Section 170 and the Treasury Regulations thereunder.

Qualified Appraiser for Fee Simple Interest Donation

133. The Appraiser also prepared an “Appraisal Report” dated March 29, 2016 (the “Fee Simple Appraisal”) to determine the FMV of the Fee Simple Interest donated to ACC Properties.

134. The Appraiser was not a direct partner of Quality.

135. The Appraiser was not an indirect partner of Quality.

136. The Appraiser did not claim, report, or otherwise take a deduction under Section 170 or any other tax provision for the donation of the Fee Simple Interest.

137. The Appraiser was not a party to the transaction in which Quality acquired the Fee Simple Interest in the Property.

138. The Appraiser was not the donee of the Fee Simple Interest.

139. The Appraiser was not an employee of (i) Quality, (ii) a direct partner of Quality, (iii) an indirect partner of Quality, (iv) a party to the transaction in which Quality acquired the Property, (v) ACC Properties, or (vi) Petitioner.

140. The Appraiser was not “related” under Section 267(b) to any of the persons described immediately above.

141. The Appraiser performed a majority of his appraisals in 2015 for parties other than Quality.

142. The Appraiser was a “qualified appraiser,” as defined by Section 170 and the Treasury Regulations thereunder, for the donation of the Fee Simple Interest.

Qualified Appraisal for Fee Simple Interest Donation

143. The Fee Simple Appraisal is dated March 29, 2016.

144. The Appraiser dated the Fee Simple Appraisal before the extended deadline for Quality to file its 2015 Form 1065 on which it claimed the charitable deduction related to the donation of the Fee Simple Interest.

145. The Appraiser signed and dated the Fee Simple Appraisal.

146. The Fee Simple Appraisal contains a detailed legal description of the Property.

147. The Fee Simple Appraisal contains a description of the physical condition of the Property.

148. The Fee Simple Appraisal states that Quality donated the Fee Simple Interest to ACC Properties on December 17, 2015.

149. The Fee Simple Appraisal contains the name, address, appraiser certification license number, and social security number of the Appraiser.

150. The Fee Simple Appraisal contains the name, address, and taxpayer identification number of the appraisal company.

151. The Fee Simple Appraisal contains a list of the qualifications of the Appraiser, including his background, experience, education, and membership in professional associations.

152. The Fee Simple Appraisal contains a statement that it was prepared for Quality's potential use regarding the preparation and filing of federal income tax returns.

153. The Fee Simple Appraisal states that it was prepared in accordance with USPAP.

154. The Fee Simple Appraisal provides the basis for the conclusions by the Appraiser regarding the FMV of the Fee Simple Interest.

155. The Appraiser based the FMV of the Fee Simple Interest on market conditions as of December 17, 2015.

156. The Fee Simple Appraisal concludes that the FMV of the Fee Simple Interest in the Property, as subject to the Conservation Easement, was $240,000.

157. To determine the FMV of the Fee Simple Interest, the Appraiser used a sales-comparison approach and analyzed (i) properties encumbered with conservation easements through the United States Department of Agriculture's Natural Resources Conservation Services program, and (ii) six sales of properties encumbered with conservation easements.

158. The fee charged by the Appraiser for preparation of the Fee Simple Appraisal was not based on a percentage of the appraised value of the Fee Simple Interest.

159. The fee charged by the Appraiser for preparation of the Fee Simple Appraisal was not based on a percentage of the amount allowable as a charitable deduction under Section 170.

160. The Fee Simple Appraisal was a “qualified appraisal,” as defined by Section 170 and the Treasury Regulations thereunder.

Second Conservation Easement Appraisal Report

161. Quality engaged a second appraisal firm to value the Conservation Easement (the “Second Easement Appraisal Report”).

162. The Second Easement Appraisal Report was prepared under the appraisal standards set out by USPAP in place on March 30, 2016.

163. The Second Easement Appraisal Report described the Property, the condition of the Property, the Conservation Easement, and included a copy of the Deed of Conservation Easement in the addenda.

164. The Second Easement Appraisal Report included (i) the date of contribution, (ii) the name, address, and taxpayer identification number of the appraiser, (iii) the appraiser's qualifications, and (iv) a statement that it was prepared for income tax purposes.

165. The Second Easement Appraisal Report contains extensive discussion about the method of valuation and the specific basis for such valuation.

166. The Second Easement Appraisal Report reported a FMV for the Conservation Easement of $13,780,000.

Second Fee Simple Appraisal Report

167. Quality engaged a second appraisal firm to value the Fee Simple Interest (the “Second Fee Simple Appraisal Report”).

168. The Second Fee Simple Appraisal Report was prepared under the appraisal standards set out by USPAP in place March 30, 2016.

169. The Second Fee Simple Appraisal Report described the Property, the condition of the Property, the Conservation Easement, and included a copy of the Deed of Conservation Easement in the addenda.

170. The Second Fee Simple Appraisal Report included (i) the date of contribution, (ii) the name, address, and taxpayer identification number of the appraiser, (iii) the appraiser's qualifications, and (iv) a statement that it was prepared for income tax purposes.

171. The Second Fee Simple Appraisal Report contains extensive discussion about the method of valuation and the specific basis for such valuation.

172. The Second Fee Simple Appraisal Report reported a FMV for the Fee Simple Interest of $220,000.

Filings with Respondent

173. Quality timely filed its 2015 Form 1065.

174. The 2015 Form 1065 reports, among other items, (i) the donation of the Conservation Easement to ACC, and (ii) the donation of the Fee Simple Interest to ACC Properties.

175. Schedule K (Partner's Distributive Share Items) to the 2015 Form 1065 shows, among other items, charitable contributions of $13,885,500 related to the donation of the Conservation Easement, the donation of the Fee Simple Interest, and a cash donation.

176. Quality attached the Easement Appraisal to its timely filed 2015 Form 1065.

177. Quality attached the Fee Simple Appraisal to its timely filed 2015 Form 1065.

178. Quality maintained all records required with respect to the 2015 Form 1065.

Form 8283 for Donation of the Conservation Easement

179. Quality attached a Form 8283 (Noncash Charitable Contributions) to its 2015 Form 1065 to report the donation of the Conservation Easement to ACC.

180. Form 8283 contains all the information required by Treas. Reg. § 1.170A-13(c)(4) with respect to the donation of the Conservation Easement.

181. Form 8283 reports the FMV of the Conservation Easement.

182. Form 8283 reports Quality's adjusted basis in the Property.

183. Form 8283 reports the manner by which Quality obtained the Property.

184. Form 8283 reports the date on which Quality obtained the Property.

185. Dr. Robert Keller, CEO of ACC, signed and dated the Form 8283 on behalf of ACC.

186. The Appraiser signed and dated the Form 8283.

187. Form 8283 contains the name and taxpayer identification number of Quality.

188. Form 8283 contains the name, address, and taxpayer identification number of ACC.

189. Form 8283 identifies the date on which ACC received the donation.

190. Form 8283 indicates that Quality donated the Conservation Easement to ACC.

191. Form 8283 contains the name of the Appraiser.

192. Form 8283 contains the name, address, and tax identification number of the appraisal company.

193. Form 8283 contains a certification by the Appraiser stating that (i) he performed appraisals on a regular basis, (ii) he was qualified to make appraisals of the type of property being valued, (iii) the fee charged for the appraisal was not based on a percentage of the appraised property value, (iv) he was not one of the persons described in Treas. Reg. § 1.170A-13(c)(5)(iv), (v) he understood that an intentionally false or fraudulent overstatement of the value of the property may subject him to a civil penalty under Section 6701, and (vi) he was not barred from presenting evidence or testimony by the Office of Professional Responsibility.

194. The statements by the Appraiser in the Form 8283 described immediately above were accurate.

Form 8283 for Donation of the Fee Simple Interest

195. Quality also attached a Form 8283 to its 2015 Form 1065 to report the donation of the Fee Simple Interest to ACC Properties.

196. Form 8283 contains all the information required by Treas. Reg. § 1.170A-13(c)(4) with respect to the donation of the Fee Simple Interest.

197. Form 8283 reports the FMV of the Fee Simple Interest.

198. Form 8283 reports Quality's adjusted basis in the Property.

199. Form 8283 reports the manner by which Quality obtained the Property.

200. Form 8283 reports the date on which Quality obtained the Property.

201. Dr. Robert Keller, CEO of ACC Properties, signed and dated the Form 8283 on behalf of ACC Properties.

202. The Appraiser signed and dated Form 8283.

203. Form 8283 contains the name and taxpayer identification number of Quality.

204. Form 8283 contains the name, address, and taxpayer identification number of ACC Properties.

205. Form 8283 identifies the date on which ACC Properties received the donation.

206. Form 8283 indicates that Quality donated the Fee Simple Interest to ACC Properties.

207. Form 8283 contains the name of the Appraiser.

208. Form 8283 contains the name, address, and tax identification number of the appraisal company.

209. Form 8283 contains a certification by the Appraiser stating that (i) he performed appraisals on a regular basis, (ii) he was qualified to make appraisals of the type of property being valued, (iii) the fee charged for the appraisal was not based on a percentage of the appraised property value, (iv) he was not one of the persons described in Treas. Reg. § 1.170A-13(c)(5)(iv), (v) he understood that an intentionally false or fraudulent overstatement of the value of the property may subject him to a civil penalty under Section 6701, and (vi) he was not barred from presenting evidence or testimony by the Office of Professional Responsibility.

210. The statements by the Appraiser in the Form 8283 described immediately above were accurate.

Contents of FPAA

211. The FPAA does not describe any specific facts, legal theories, tax theories, or analysis for asserting the adjustments of $13,610,000 and $240,000 to the 2015 Form 1065.

212. The FPAA does not describe any specific facts, legal theories, tax theories, or analysis for possible defenses and/or exceptions to penalties asserted.

213. Respondent relied only on his own employees in making the determinations set forth in the FPAA.

214. Respondent did not rely on any independent environmental, ecological, real estate, scientific, mining, financial, economic, engineering, valuation or other professionals in making the determinations set forth in the FPAA.

IRS Notice 2017-10

215. Following the donation of the Conservation Easement at issue, Respondent released an advance copy of Notice 2017-10 on December 23, 2016,10 which identified donations such as that undertaken by Quality as listed transactions.

216. Notice 2017-10 was not published in the Federal Register and did not provide the public with an opportunity to provide comments thereon. Nor did Notice 2017-10 include any finding of good cause that notice and public comment procedures were impracticable, unnecessary, or contrary to the public interest.

217. Quality submitted a Form 8886 (Reportable Transaction Disclosure Statement) fully disclosing its donations of the Conservation Easement and Fee Simple Interest by mailing a completed Form 8886 to Respondent's Office of Tax Shelter Analysis.

History of the Tax Dispute

218. Quality maintained all records required with respect to the 2015 Form 1065.

219. Quality cooperated with Respondent during the audit.

220. Quality cooperated with all requests by Respondent for information, documents, site visits, and meetings during the audit.

221. Representatives of Quality provided a tour of the Property to Respondent during the audit.

Compliance Efforts

222. Quality complied with Section 170 and the Treasury Regulations thereunder with respect to the donation of the Conservation Easement.

223. Quality complied with Section 170 and the Treasury Regulations thereunder with respect to the donation of the Fee Simple Interest.

224. In claiming the charitable deductions related to the donation of the Conservation Easement on its 2015 Form 1065, Quality relied on the Survey, Title Report, Geotechnical Report, Mining Business Plan, Easement Appraisal, Fee Simple Appraisal, Second Easement Appraisal Report, Second Fee Simple Appraisal Report, Deed of Conservation Easement, Baseline Documentation Report, and all sources cited in such documents.

225. Quality reasonably relied on the Survey, Title Report, Geotechnical Report, Mining Business Plan, Easement Appraisal, Fee Simple Appraisal, Second Easement Appraisal Report, Second Fee Simple Appraisal Report, Deed of Conservation Easement, Baseline Documentation Report, and all sources cited in such documents.

226. Quality reasonably relied on the qualified, independent, informed professionals who prepared the Survey, Title Report, Geotechnical Report, Mining Business Plan, Easement Appraisal, Fee Simple Appraisal, Second Easement Appraisal Report, Second Fee Simple Appraisal Report, Deed of Conservation Easement, and Baseline Documentation Report.

N. The contents of the FPAA, particularly the allegation that the non-cash charitable deductions related to the donations of the Conservation Easement and the Fee Simple Interest should be $0, are erroneous, unreasonable, arbitrary, and capricious.

O. Respondent published Notice 2017-10 after Quality made the charitable contributions at issue in this case and after Quality timely filed the 2015 Form 1065 reporting those charitable contributions. Respondent issued Notice 2017-10 without adhering to the notice-and-comment procedures under the Administrative Procedure Act, 5 U.S.C. § 551 et seq. Respondent's assertion of penalties under Section 6662A, based on the retroactive application of Notice 2017-10, without the required notice-and-comment procedures is unlawful and “without observance of procedure required by law.” 5 U.S.C. § 706(2)(D). Further, Respondent's assertion of Section 6662A penalties based on Notice 2017-10 with retroactive effect after the donation was made violates the United States Constitution. As a result, Respondent's assertion of penalties under Section 6662A is invalid.

P. Respondent bears the burden of proof as to all matters.

WHEREFORE, Petitioner requests that the Tax Court:

(i) Determine that the 2015 Form 1065 is accurate as filed;

(ii) Determine that there are no adjustments, penalties, additions to tax, or other amounts due with respect to the 2015 Form 1065;

(iii) Determine that imposition of a penalty under Section 6662A violates the Administrative Procedure Act and the United States Constitution;

(iv) If warranted by the evidence at trial, determine that Quality undervalued the Conservation Easement and/or the Fee Simple Interest and increase the amount of the non-cash charitable donation deductions for 2015 accordingly;

(v) Determine that Respondent has the burden of proof on all issues; and

(vi) Grant such other and further relief that it deems appropriate.

Date: December 6, 2021

Respectfully submitted,

Michael Todd Welty
Tax Court Bar No. WM0494
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404)301-4791
Facsimile: (678) 840-3481
E-mail: todd@toddweltypc.com

Andrew Steigleder
Tax Court Bar No. SA0856
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 793-5402
E-mail: andy@toddweltypc.com

Kevin Johnson
Tax Court Bar No. JK0059
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 835-1601
E-mail: kevin@toddweltypc.com

Lyle Press
Tax Court Bar No. PL0222
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 301-4791
E-mail: lyle@toddweltypc.com

Macdonald A. Norman
Tax Court Bar No. NM0188
TODD WELTY, P.C.
4279 Roswell Rd NE
Suite 208, #352
Atlanta, Georgia 30342
Telephone: (404) 239-2064
E-mail: mac@toddweltypc.com

COUNSEL FOR PETITIONER

FOOTNOTES

1Unless otherwise specifically stated, all uses of the terms “Section,” “Sections,” or “I.R.C.” in this Petition refer to the Internal Revenue Code of 1986, as amended, and all uses of the terms “Treasury Regulation,” “Treasury Regulations,” or “Treas. Reg. §” in this Petition refer to the Treasury Regulations thereunder.

The 2015 Form 1065 mentioned in the FPAA pertains to the tax year beginning October 15, 2015 and ending December 31, 2015. It is referenced in this Petition as the “2015 Form 1065.”

Randy T. Simmons, Property Rights and The Endangered Species Act, Institute for Research on the Economics of Taxation Studies in Social Cost, Regulation, and the Environment: No. 9 (April 2002). See also S. Rep. No. 96-1007, at 9 (1980) (“The committee believes that the preservation of our country's natural resources and cultural heritage is important, and the committee recognizes that conservation easements now play an important role in preservation efforts.”).

Revised Form 886-A (Explanation of Items), at 39.

See, e.g., Peter Kareiva, Conservation Science and Practice, Documenting the conservation value of easements (May 2021).

Endangered and Threatened Wildlife and Plants; Removal of 23 Extinct Species from the Lists of Endangered and Threatened Wildlife and Plants, 86 Fed. Reg. 54,298, 54,298 - 54,338 (Sept. 30, 2021) (to be codified at 50 C.F.R. pt. 17).

Press Release, U.S. Fish & Wildlife Service, U.S. Fish and Wildlife Service Proposes Delisting 23 Species from Endangered Species Act Due to Extinction (Sept. 29, 2021), https://www.fws.gov/news/ShowNews.cfm?ref=u.s.-fish-and-wildlife-service-proposes-delisting-23-species-from-&_ID=37017.

“Rare, threatened, or endangered” species means any invertebrates, fish, wildlife, or plant species that is listed, is a candidate for listing, or is recommended for listing as a rare, threatened, or endangered species by the U.S. Fish and Wildlife Service, the State of Alabama's Natural Resource Agencies, or both.

The Best of the Best, Appraisal Institute, http://www.appraisalinstitute.org/assets/1/29/maidesignation.pdf (last visited October 17, 2021) (“The Appraisal Institute confers MAI Designated membership on commercial and general real estate appraisal professionals demonstrating the highest standards of education, expertise and ethics.”).

Notice 2017-10 was published in the Internal Revenue Bulletin on January 23, 2017.

END FOOTNOTES

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