Partnership Challenges Denial of Conservation Easement Deduction

SPADE ROCK, LLC, ORNSTEIN-SCHULER, 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, ORNSTEIN-SCHULER, LLC, HEREBY PETITIONS this Court as Tax Matters Partner (“TMP”) for Spade Rock, LLC (“Spade Rock”) for the tax period ending December 31, 2017 to dispute the Notice of Final Partnership Administrative Adjustment (“FPAA”), dated August 20, 2021, pertaining to the 2017 Form 1065 (U.S. Return of Partnership Income) for Spade Rock.²

The core issue in this case is whether Spade Rock is entitled to the claimed charitable contribution deductions for its donations of a conservation easement on a 269.49 acre subparcel (the “Conserved Property”) and a fee simple interest in a total of 309.49 acres of real property (the “Property”) located in Morgan 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 2017 Form 1065, Spade Rock reported a $44,740,000 non-cash charitable deduction related to the conservation easement contribution, which among other things prohibited the property from being used for mining.

The 1RS has determined that the value of the conservation easement is worth nothing. In stark contrast, the $44,740,000 non-cash charitable deduction reported by Spade Rock was based on the analysis of (i) a qualified mining engineer, (ii) two qualified mining engineers who reviewed the first mining engineer's analysis for reasonableness, (iii) a qualified appraiser with 35 years of appraisal experience and a qualified appraiser with over 12 years of appraisal experience, and (iv) a second appraiser, with over 40 years of experience in the commercial real estate appraisal industry, who prepared reviews of the qualified appraisals.

The IRS publicly released an advanced copy of Notice 2017-10 on December 23, 2016.⁴ Following the public release of Notice 2017-10 and prior to the filing of the tax return at issue here, Petitioner's then counsel provided the following nonprivileged explanation of the “Monetization of Conservation Easement Transactions (1/18/17)”:

When Congress enacts tax incentives, it does so to encourage certain uneconomic behavior that generally would not occur absent the tax incentives. Many of these tax incentives are in the form of credits, such as historic rehabilitation credits, low income housing credits and renewable energy credits (wind and solar). The common characteristic of these incentives is they only act as an incentive for taxpayers who otherwise have a significant tax liability and who are eligible to participate in the incentive. If a taxpayer does not have a significant tax liability or is otherwise ineligible to participate in the incentive, then there is no incentive for the taxpayer to undertake the uneconomic activity that Congress is trying to encourage.

In the case of most of these credit programs, the owner/developer of the property is not in a position to benefit from the tax incentive, either because the owner does not have a significant tax liability or the owner's participation is limited by technical tax rules e.g. passive loss rules, at risk basis rules etc. Historically the answer has been for the owner to form a partnership and admit into the partnership investors who can benefit from the prescribed benefit, and to allocate the credits or other tax benefits to the investor partners who have been admitted to the partnership. These investors are typically admitted to the partnership on the eve of the creation of the tax benefit e.g. on the day before the underlying property is placed in service by the investment partnership. In the case of low income housing credits, often the only economic benefit to be received by the investor is the tax credit (i.e. there is no expectation of any cash distributions or other economic return to the investor.) These investors generally are recognized as legitimate partners in the property owning partnership. Accordingly, investors are entitled to their allocable share of tax benefits that are generated after their admission to the partnership (even though the investors may have been admitted to the partnership only the day before the tax benefit is generated).⁵

It should also be noted that most of these programs involve promoters/syndicators who, for a fee, provide the necessary service of matching up property owners with investors. Nobody would suggest that the partnership structure does not work because somebody was paid a fee to facilitate the transaction.

Conservation easement transactions follow this same partnership structure. Congress has enacted incentives in the form of (i) providing a charitable deduction based on an appraised fair market value of the donated property, (ii) allowing a deduction for a donation of only a partial interest in the property (where otherwise only a donation of 100% of the fee title would qualify for a deduction), (iii) allowing an offset of up to 50% of the taxpayer's income (as opposed to 30% for other property donations), and (iv) allowing a 15 year carry forward of unused deductions (versus the usual 5 year carryforward period). Why did Congress do this? To encourage the most uneconomic behavior of all — to give away valuable property that would preserve open space, scenic views or a natural habitat for wildlife and plants. Unfortunately, many landowners are not in the position to take advantage of this tax incentive. Not only may they not have a sufficient tax liability to absorb the tax benefits, but they may also lack the significant resources necessary to effect a conservation easement donation. The costs of biology reports, lawyers, accountants, land trusts, engineers, surveyors, appraisers, market feasibility reports, drilling tests, etc. are substantial. Moreover, any debt that encumbers the property to be conserved must be satisfied prior to donation. These immediate costs are often beyond the means of many landowners.

Therefore, utilizing the model established for other tax incentives, the landowner forms a partnership with investors who can provide the capital required to pay these costs and also possibly pay the owner for a portion of its interest in the partnership. These investors become partners in a partnership that owns real estate and are allocated profits, losses and deductions (including charitable deductions) derived by the partnership after the admission of the investors. There should be no suggestion that some kind of prohibited assignment of deduction has occurred (just as there is no suggestion that the allocation of post admission depreciation deductions to investors in a partnership that owns improved property should be deemed an assignment of deductions). Also, it is relevant that the investors continue to own an interest in a partnership that owns the property (and frequently other property) after the easement is donated. It should also be noted, that the use of promoters/syndicators to match up land owners with investors should not adversely impact the investment analysis.

Upon examination, the IRS determined that the Conserved Property is “not a 'significant' natural habitat, but instead, is ordinary property that does not satisfy the purported conservation purposes,” and “[t]here is no indication form the site visit or the monitoring reports of any endangered, threatened or rare species on the Easement Property.”⁶ Contrary to Respondent's contentions, the Conserved Property has substantial conservation value.⁷ 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.⁸ 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.⁹ On the Conserved Property, qualified environmental experts have identified at least thirteen different rare, threatened or endangered species (“RTEs”).¹⁰ 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 $71,200,953.

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

A. The Petitioner, Omstein-Schuler, LLC, is a Georgia limited liability company having its principal place of business at 4355 Cobb Parkway, Suite J555, Atlanta, Georgia 30339.

B. Spade Rock's current mailing address is 4355 Cobb Parkway, Suite J555, Atlanta, Georgia 30339, and its principal place of business is Alabama.

C. Petitioner is the TMP for Spade Rock with respect to its 2017 Form 1065.

D. Spade Rock is an Alabama domestic limited liability company.

E. Spade Rock is classified as a partnership for federal tax purposes.

F. Spade Rock filed its 2017 Form 1065 with the Internal Revenue Service Center in Ogden, Utah.

G. Spade Rock'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 Spade Rock.

I. The Small Business and Self-Employed Division of the Internal Revenue Service located in Phoenix, Arizona issued an FPAA relating to Spade Rock's 2017 Form 1065 on August 20, 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 $44,740,000 non-cash charitable contribution deduction pursuant to Section 170(h).

2. A $55,000 adjustment to the non-cash charitable contribution deduction pursuant to Section 170, from the claimed deduction of $520,000.

3. Assertion of the 75 percent fraud penalty pursuant to Section 6663.

4. As alternatives to the 75-percent penalty:

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

ii. Assertion of the 20 percent reportable transaction understatement penalty pursuant to Section 6662A;

iii. Assertion of the 20 percent understatement 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;

ii. The preservation of open space (including farmland and forest land) 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; and/or

iii. The preservation of the Newsome Sinks Karst Area, a United States National Natural Landmark.¹¹

2. No permitted use listed in the Deed of Conservation Easement (defined below) 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 $44,740,000.

4. The FMV of the non-cash donation of the fee simple interest at the time of donation was not less than $520,000.

5. Respondent erred in asserting penalties based on, alternatively, civil fraud pursuant to Section 6663, 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), substantial understatement of income tax pursuant to Section 6662(d), or substantial valuation misstatement pursuant to Section 6662(e); and

6. Respondent erred in asserting that Spade Rock 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. Spade Rock was classified as a partnership for federal tax purposes on December 31, 2017.

2. Petitioner owned 0.01 percent of the profit, loss, and capital of Spade Rock on December 31, 2017.

3. Spade Rock Partners LLC owned 97.99 percent of the profit, loss, and capital of Spade Rock on December 31, 2017.

4. Seven other individuals owned varying interests in Spade Rock, collectively comprising a total of 2 percent of the profit, loss, and capital of Spade Rock on December 31, 2017.

5. Petitioner was appointed manager of Spade Rock on October 13, 2017.

6. On December 31, 2017, Petitioner was the general partner of Spade Rock for purposes of Section 6231(a)(7).

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

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

Property Background

9. As of December 10, 2017, Spade Rock owned approximately 309.49 acres of real property located in Morgan County, Alabama.

10. Spade Rock acquired the Property as a capital contribution by Statutory Warranty Deed dated October 9, 2017.

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 limestone reserves.

13. The bedrock beneath the Property is part of the Bangor Limestone of Mississippian Formation.

14. The Bangor Limestone of Mississippian Formation consists of gray dense limestone and soft calcareous shales.

15. This type of limestone is partly politic and partly finely crystalline and thick-bedded.

Title & Mining Due Diligence

16. Spade Rock, recognizing the potential of developing all or a portion of the Property as a limestone mine, undertook certain due diligence to evaluate the feasibility of doing so.

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

18. Spade Rock hired an Alabama law firm specializing in real estate law to prepare a title report on the Property (the “Title Report”).

19. Based upon the Title Report, dated November 2, 2017, Spade Rock owned the entire mineral and surface estates of the Conserved Property at the time of the donation.

20. Spade Rock hired a national firm with over 25 years of experience in geotechnical, construction materials, environmental and facilities engineering (the “Geotechnical Engineer”), to explore the bedrock conditions, and determine and evaluate the quality of the minerals on the Property.

21. As a part of the engagement, the Geotechnical Engineer (i) reviewed the local geology, (ii) conducted a borehole drilling program to explore the subsurface bedrock conditions, (iii) obtained laboratory testing on rock core samples from the boring to evaluate pertinent engineering properties, and (iv) prepared a report titled “Report of Geotechnical Exploration & Rock Testing Rock Study - Spade Rock LLC Morgan County, Alabama” which presents the field and laboratory data obtained during the engagement (the “Geotechnical Report”).

22. Between July 12, 2017 and July 18, 2017, the Geotechnical Engineer visited the Property with a drilling rig.

23. During the visits, the Geotechnical Engineer drilled two core samples to depths of 112 feet and 113 feet, respectively, below the surface, to explore the subsurface bedrock conditions.

24. The limestone core samples were placed in boxes, classified, photographed, and a field geologic log was prepared.

25. The Geotechnical Engineer worked with a professional engineering company that performs laboratory soil tests to evaluate the chemical composition and engineering properties of the rock core samples.

26. The laboratory was certified by the Georgia Department of Transportation. The laboratory subjected the limestone core samples to the following laboratory tests: (i) Standard Test Method for Insoluble Residue in Carbonate Aggregates; (ii) Standard Test Method for the Resistance to Degradation of Large-Size Coarse Aggregate by Abrasion and Impact in the Los Angeles Machine; (iii) Standard Test Method for Specific Gravity of Solids by Water Pycnometer; and (iv) Standard Test Method for Soundness of Aggregate by Use of Sodium Sulfate or Magnesium Sulfate.

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

28. Spade Rock hired a professional mining engineering firm (the “Mining Engineer”), to analyze the Geotechnical Report and determine the feasibility for operating a portable crushed stone plant and limestone quarry on the Property (the “Mining Operation”).

29. The Mining Engineer possessed the following qualifications: (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.

30. In 2017, the Mining Engineer possessed over 37 years of mining engineering experience and assisted mine operators with setting up and obtaining permits for over 100 mines nationwide, including 10 in Alabama.

31. The Mining Engineer prepared a report titled “Technical Due Diligence Prefeasibility Study Business Plan and Valuation” for the Property (the “Mining Business Plan”).

32. The Mining Business Plan concludes that there were Proven Mineral Reserves of approximately 48.773 million tons of lime rock on 203.29 minable acres of the Conserved Property.

33. The Mining Business Plan concludes that the limestone material from the core samples passes the standards set out by the Alabama and Tennessee Departments of Transportation for use in all coarse aggregate applications as well as the specifications and requirements for general construction applications.

34. The Mining Business Plan concludes that there were no local zoning restrictions that would limit the development of the Mining Operation.

35. The Mining Business Plan concludes that it was highly and reasonably probable that the Mining Operation could obtain all necessary Alabama permits for a limestone quarry within three to nine months.

36. The Mining Business Plan concludes that the development of the Mining Operation “is viable and its success highly probable in the given market.”

37. The Mining Business Plan projects a NPV of approximately $45.226 million from the Mining Operation.

38. Spade Rock hired a second Registered Professional Engineer to review the Mining Business Plan and prepare a “Desktop Review of Spade Rock LLC Technical Due Diligence Business Plan” (the “Burgex Desktop Review”).

39. The Burgex Desktop Review concludes that the Mining Business Plan applied sound engineering, judgement, market analysis, experience, and industry standard methods in a way that strongly demonstrates the technical and business feasibility of the project.

40. The Burgex Desktop Review concludes that the reserve calculations presented in the Mining Business Plan were accurate and complete.

41. The Mining Business Plan concluded that it was highly and reasonably probable that the Mining Operation could obtain all necessary Alabama permits for a limestone quarry within three to nine months. The Burgex Desktop Review concluded that such anticipated timeline was reasonable, and that the Mining Business Plan provided a thorough explanation of the permitting, zoning, and environmental aspects of the Mining Operation.

42. The Burgex Desktop Review concludes that the prices assumed in the Mining Business Plan were justified.

43. The Burgex Desktop Review agrees that the conclusions in the Mining Business Plan with respect to the geologic investigation are reasonable and demonstrate that the limestone is both abundant on the property and has the ability to meet the demands of general construction as well as key transportation markets.

44. The Burgex Desktop Review concludes that a NPV of $45.226 million is reasonable based on the qualified assumptions, data, and analysis provided in the Mining Business Plan.

45. Spade Rock hired a third Registered Professional Engineer to review the Mining Business Plan and prepare a “Desktop Review of Technical Due Diligence Prefeasibility Study Business Plan and Valuation” (the “Orlandi Desktop Review”).

46. The Orlandi Desktop Review concludes that the Mining Business Plan uses sound engineering judgement and state-of-the-art mining industry software to determine the technical and business feasibility of the project.

47. The Orlandi Desktop Review concludes that the reserve calculations presented in the Mining Business Plan were accurate and complete.

48. The Orlandi Desktop Review concludes that that there are no zoning restrictions that would limit the ability to mine on the Conserved Property, and there are no material issues that would impact permitting.

49. The Orlandi Desktop Review concludes that the price assumed in the Mining Business Plan was below that of any surrounding operations based on an analysis of Department of Transportation bids, and the price assumed in the Mining Business Plan was reasonable and would allow for quick market penetration.

50. The Orlandi Desktop Review concludes that the additional reserves available below a depth of 26 feet into the limestone increases the viability of the Mining Operation.

51. The Orlandi Desktop Review concludes that a NPV of $45.226 million is reasonable based on the assumptions, data, and analysis provided in the Mining Business Plan.

Baseline Documentation Report

52. Recognizing the potential conservation values, Spade Rock engaged Atlantic Coast Conservancy, Inc. (“ACC”) to undertake certain due diligence to investigate and confirm the conservation values pursuant to a Conservation Easement Project Proposal, dated September 1, 2017.

53. ACC is a Georgia corporation that was a federal tax-exempt organization under Section 501(c)(3) at all times during 2017.

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

55. ACC memorialized its findings in a Baseline Documentation Report, dated December 11, 2017, which documented the current physical condition and status of the Conserved Property and identified the conservation values.

56. The Baseline Documentation Report contains numerous maps, including U.S. Geological Survey topographic maps, and aerial photographs.

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

58. The Baseline Documentation Report indicates that the Conserved Property in its present state “has not been developed and possesses significant agricultural, scenic vistas, open space, wildlife habitat, forest ecosystem, aquatic ecosystem, plant habitats, and cave and karst topography. The [Conserved] Property has no dwellings or structures, and is composed of agricultural fields adjacent to a mature oak-hickory-pine forest inhabiting moderate to steep limerock slopes of Lamons Cove and Newsome Sinks located in the Plateau Escarpment subregion of the Southwestern Appalachians ecoregion leading to 1) a large cave with a freshwater spring (Hughes Cave/Hughes Spring) with an associated spring pool and spring run, and 2) a first-order freshwater stream (unnamed spring and spring run) . . . that are of great importance to the Conservancy, the people of Morgan County, and the people of the State of Alabama and are worthy of preservation.”

59. The Baseline Documentation Report concludes that the placement of a conservation easement would protect a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.

60. The Baseline Documentation Report concludes that the placement of a conservation easement would result in multiple significant public benefits, including the preservation of open space (including farmland and forest land) where such preservation is pursuant to a clearly delineated federal, state, or local government conservation policy and where such preservation is for the scenic enjoyment for the general public.

Member Vote

61. The members of Spade Rock 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 a portion of the Property.

62. The members of Spade Rock voted to conserve a 269.49-acre portion of the Property in perpetuity by granting a conservation easement on the Conserved Property (the “Conservation Easement”) and donating the fee simple interest in the Property (the “Fee Simple Interest”).

Donation of Conservation Easement

63. On December 11, 2017, Spade Rock granted a Deed of Conservation Easement (the “Deed”) encumbering the Conserved Property in favor of ACC.

64. ACC was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of December 11, 2017.

65. ACC was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of December 11, 2017.

66. The Conserved Property was not subject to a mortgage as of December 11, 2017.

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

68. Spade Rock did not contribute the Conservation Easement to ACC in a bargain sale.

69. Spade Rock did not receive any consideration from ACC in exchange for donating the Conservation Easement.

70. Spade Rock did not receive any consideration from any other party in exchange for donating the Conservation Easement to ACC.

Deed of Conservation Easement

71. The Probate Court Judge of Morgan County, Alabama recorded the Deed on December 13, 2017.

72. The Deed incorporates the Baseline Documentation Report, dated December 11, 2017.

73. The Deed identifies various conservation purposes.

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

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

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

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

78. The Deed protects the Conserved 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).

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

80. The Deed establishes a Landmark Resource Protection Area to protect the Newsome Springs/Newsome Sinks Karst Area.

81. The Deed identifies the specific conservation values of the Conserved Property.

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

83. The Deed provides ACC the rights to preserve and protect the conservation values and the purpose of the easement in perpetuity.

84. The Deed permits ACC to enter the Conserved Property at reasonable times, to inspect the Conserved Property, to monitor compliance with the Deed, and to enforce the purposes of the Conservation Easement.

85. The Deed prohibits Spade Rock and all future owners from exploring for or extracting minerals, oil, gas, or other hydrocarbons, soils, sands, gravel, rock, or other materials on or below the surface of the Conserved Property.

86. The restrictions on the use of the Conserved Property stated in the Deed are binding on Spade Rock and all future owners in perpetuity.

87. 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

88. ACC provided a letter to Spade Rock dated December 11, 2017, acknowledging receipt of the donation of the Conservation Easement (the “Conservation Easement Donation Acknowledgment Letter”).

89. 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.

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

Qualified Appraisers for Conservation Easement

91. Two qualified and licensed appraisers with over 47 years of combined appraisal experience, including certain experience appraising land and conservation easements, (collectively, the “Appraisers”) prepared an “Appraisal Report” dated February 14, 2018 (the “Easement Appraisal”) to determine the FMV of the Conservation Easement.

92. Clayton Weibel, one of the Appraisers, holds a MAI designation from the Appraisal Institute.¹²

93. The Appraisers were not direct partners of Spade Rock.

94. The Appraisers were not indirect partners of Spade Rock.

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

96. The Appraisers were not parties to the transaction in which Spade Rock acquired the Property.

97. The Appraisers were not the donees of the Conservation Easement.

98. The Appraisers were not employees of (i) Spade Rock, (ii) direct partners of Spade Rock, (iii) indirect partners of Spade Rock, (iv) parties to the transaction in which Spade Rock acquired the Property, (v) ACC, or (vi) Petitioner.

99. The Appraisers were not “related” under Section 267(b) to any of the persons described immediately above.

100. Each of the Appraisers performed a majority of his appraisals in 2017 for parties other than Spade Rock.

101. Each of the Appraisers was a “qualified appraiser,” as defined by Section 170 and the Treasury Regulations thereunder.

Qualified Appraisal of Conservation Easement

102. The Appraisers have local knowledge and experience in preparing appraisals related to conservation easements.

103. The Easement Appraisal is dated February 14, 2018.

104. The Appraisers dated the Easement Appraisal before the extended deadline for Spade Rock to file its 2017 Form 1065 on which it claimed the charitable deduction related to the donation of the Conservation Easement.

105. The Appraisers both signed and dated the Easement Appraisal.

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

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

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

109. The Easement Appraisal states that Spade Rock donated the Conservation Easement to ACC on December 11, 2017.

110. The Easement Appraisal contains the name, address, appraiser certification license number, and social security number of each of the Appraisers.

111. The Easement Appraisal contains the name, address, and taxpayer identification number of the appraisal companies.

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

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

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

115. The Easement Appraisal provides the basis for the conclusions by the Appraisers regarding the FMV of the Conservation Easement.

116. The Easement Appraisal indicates that the Appraisers based the FMV of the Conservation Easement on market conditions as of December 11, 2017.

117. The Easement Appraisal concludes that the FMV of the Property before Spade Rock donated the Conservation Easement was $45,260,000.

118. The Easement Appraisal concludes that the FMV of the Property after Spade Rock donated the Conservation Easement was $520,000.

119. The Easement Appraisal concludes that the FMV of the Conservation Easement was $44,740,000.

120. The fees charged by the Appraisers for preparation of the Easement Appraisal were not based on a percentage of the appraised value of the Conservation Easement.

121. The fees charged by the Appraisers for preparation of the Easement Appraisal were not based on a percentage of the amount allowable as a charitable deduction under Section 170.

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

Donation of Fee Simple Interest

123. On December 13, 2017, Spade Rock donated the Fee Simple Interest via Warranty Deed to Atlantic Coast Conservancy Properties, LLC (“ACC Properties”).

124. The Warranty Deed was recorded with the Probate Court Judge of Morgan County, Alabama on December 13, 2017.

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

126. ACC Properties was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of December 13, 2017.

127. ACC Properties was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of December 13, 2017.

128. The Property was not subject to a mortgage as of December 13, 2017.

129. Spade Rock did not contribute the Fee Simple Interest to ACC Properties in a bargain sale.

130. Spade Rock did not receive any consideration from ACC Properties in exchange for donating the Fee Simple Interest.

131. Spade Rock 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

132. ACC Properties provided a letter to Spade Rock, dated December 13, 2017, acknowledging receipt of the donation of the Fee Simple Interest (the “Fee Simple Donation Acknowledgment Letter”).

133. 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.

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

Qualified Appraisers for Fee Simple Interest Donation

135. The Appraisers also prepared an “Appraisal Report” dated February 14, 2018 (the “Fee Simple Appraisal”) to determine the FMV of the Fee Simple Interest donated to ACC Properties.

136. The Appraisers were not direct partners of Spade Rock.

137. The Appraisers were not indirect partners of Spade Rock.

138. The Appraisers 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.

139. The Appraisers were not parties to the transaction in which Spade Rock acquired the Fee Simple Interest in the Property.

140. The Appraisers were not the donees of the Fee Simple Interest.

141. The Appraisers were not employees of (i) Spade Rock, (ii) direct partners of Spade Rock, (iii) indirect partners of Spade Rock, (iv) parties to the transaction in which Spade Rock acquired the Property, (v) ACC Properties, or (vi) Petitioner.

142. The Appraisers were not “related” under Section 267(b) to any of the persons described immediately above.

143. Each of the Appraisers performed a majority of his appraisals in 2017 for parties other than Spade Rock.

144. Each of the Appraisers was a “qualified appraiser,” as defined by Section 170 and the Treasury Regulations thereunder.

Qualified Appraisal for Fee Simple Interest Donation

145. The Fee Simple Appraisal is dated February 14, 2018.

146. The Appraisers dated the Fee Simple Appraisal before the extended deadline for Spade Rock to file its 2017 Form 1065 on which it claimed the charitable deduction related to the donation of the Fee Simple Interest.

147. The Appraisers both signed and dated the Fee Simple Appraisal.

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

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

150. The Fee Simple Appraisal states that Spade Rock donated the Fee Simple Interest to ACC Properties on December 13, 2017.

151. The Fee Simple Appraisal contains the name, address, appraiser certification license number, and social security number of each of the Appraisers.

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

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

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

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

156. The Fee Simple Appraisal provides the basis for the conclusions by the Appraisers regarding the FMV of the Fee Simple Interest.

157. The Fee Simple Appraisal indicates that the Appraisers based the FMV of the Fee Simple Interest on market conditions as of December 13, 2017.

158. The Fee Simple Appraisal concludes that the FMV of the Fee Simple Interest in the Property, as subject to the Conservation Easement, was $520,000.

159. The fees charged by the Appraisers for preparation of the Fee Simple Appraisal were not based on a percentage of the appraised value of the Fee Simple Interest.

160. The fees charged by the Appraisers for preparation of the Fee Simple Appraisal were not based on a percentage of the amount allowable as a charitable deduction under Section 170.

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

Review of the Easement Appraisal

162. Spade Rock engaged a second appraisal firm to prepare an “Appraisal Review Report” of the Easement Appraisal and provide an opinion of the Easement Appraisal's conformance in accordance with regulations, standards, and guidelines and to determine the appraisal's acceptability with regard to adequately supporting the FMV conclusion (the “Easement Appraisal Review”).

163. The Easement Appraisal Review is dated April 7, 2018.

164. The Easement Appraisal Review was prepared under the appraisal standards set out by USPAP.

165. The Easement Appraisal Review included a description of the Property, the data used in the Easement Appraisal, the methods employed by the Appraisers in the Easement Appraisal, and the assumptions and conclusions made by the Appraisers in the Easement Appraisal.

166. The Easement Appraisal Review concludes that the Easement Appraisal is a qualified appraisal completed by a qualified appraiser.

167. The Easement Appraisal Review concludes the Easement Appraisal includes all of the necessary descriptions, methodologies, market data, and analysis to support all of the conclusions made including the HBU and FMV estimates.

168. The Easement Appraisal Review agrees that the FMV of the Conservation Easement was $44,740,000.

Review of the Fee Simple Appraisal

169. Spade Rock engaged a second appraisal firm to prepare an “Appraisal Review Report” of the Fee Simple Appraisal and provide an opinion of the Fee Simple Appraisal's conformance in accordance with regulations, standards, and guidelines and to determine the appraisal's acceptability with regard to adequately supporting the FMV conclusion (the “Fee Simple Appraisal Review”).

170. The Fee Simple Appraisal Review is dated April 7, 2018.

171. The Fee Simple Appraisal Review was prepared under the appraisal standards set out by USPAP.

172. The Fee Simple Appraisal Review included a description of the Property, the data used in the Fee Simple Appraisal, the methods employed by the Appraisers in the Fee Simple Appraisal, and the assumptions and conclusions made by the Appraisers in the Fee Simple Appraisal.

173. The Fee Simple Appraisal Review concludes that the Fee Simple Appraisal is a qualified appraisal completed by a qualified appraiser.

174. The Fee Simple Appraisal Review concludes the Fee Simple Appraisal includes all of the necessary descriptions, methodologies, market data, and analysis to support all of the conclusions made including the HBU and FMV estimates.

175. The Fee Simple Appraisal Review agreed that the FMV for the Fee Simple Interest was $520,000.

Filings with Respondent

176. Spade Rock timely filed its 2017 Form 1065.

177. The 2017 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.

178. Schedule K (Partner's Distributive Share Items) to the 2017 Form 1065 shows, among other items, charitable contributions of $45,270,000 related to the donation of the Conservation Easement, the Fee Simple Interest, and the cash donations.

179. Spade Rock attached the Easement Appraisal to its timely filed 2017 Form 1065.

180. Spade Rock attached the Fee Simple Appraisal to its timely filed 2017 Form 1065.

181. Spade Rock maintained all records required with respect to the 2017 Form 1065.

Form 8283 for Donation of the Conservation Easement

182. Spade Rock attached a Form 8283 (Noncash Charitable Contributions) to its 2017 Form 1065 to report the donation of the Conservation Easement to ACC.

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

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

185. Form 8283 reports Spade Rock's adjusted basis in the Conserved Property.

186. Form 8283 reports the manner by which Spade Rock obtained the Conserved Property.

187. Form 8283 reports the date on which Spade Rock obtained the Conserved Property.

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

189. The Appraisers both signed and dated the Form 8283.

190. Form 8283 contains the name and taxpayer identification number of Spade Rock.

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

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

193. Form 8283 indicates that Spade Rock donated the Conservation Easement to ACC.

194. Form 8283 contains the names of the Appraisers.

195. Form 8283 contains the name, address, and tax identification number of the appraisal companies.

196. Form 8283 contains a certification by each of the Appraisers 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.

197. The statements by each of the Appraisers in the Form 8283 described immediately above were accurate.

Form 8283 for Donation of the Fee Simple Interest

198. Spade Rock also attached a Form 8283 to its 2017 Form 1065 to report the donation of the Fee Simple Interest to ACC Properties.

199. 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.

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

201. Form 8283 reports Spade Rock's adjusted basis in the Fee Simple Interest in the Property.

202. Form 8283 reports the manner by which Spade Rock obtained the Property.

203. Form 8283 reports the date on which Spade Rock obtained the Property.

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

205. The Appraisers both signed and dated Form 8283.

206. Form 8283 contains the name and taxpayer identification number of Spade Rock.

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

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

209. Form 8283 indicates that Spade Rock donated the Fee Simple Interest to ACC Properties.

210. Form 8283 contains the names of the Appraisers.

211. Form 8283 contains the name, address, and tax identification number of the appraisal companies.

212. Form 8283 contains a certification by each of the Appraisers 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.

213. The statements by each of the Appraisers in the Form 8283 described immediately above were accurate.

Contents of FPAA

214. The FPAA does not describe any specific facts, legal theories, tax theories, or analysis for asserting the adjustments of $44,740,000 and $55,000 to the 2017 Form 1065.

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

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

217. Respondent did not retain 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

218. On December 23, 2016, Respondent released an advance copy of Notice 2017-10,¹³ which identified donations such as that undertaken by Spade Rock as listed transactions.

219. 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.

220. Spade Rock submitted a Form 8886 with its 2017 Form 1065, fully disclosing its donations of the Conservation Easement and the Fee Simple Interest.

221. The Partnership also mailed a copy of the completed Form 8886 to Respondent's Office of Tax Shelter Analysis at the same time it filed its 2017 Form 1065.

History of the Tax Dispute

222. Spade Rock maintained all records required with respect to the 2017 Form 1065.

223. Spade Rock cooperated with Respondent during the audit.

224. Spade Rock cooperated with all requests by Respondent for information, documents, and meetings during the audit.

225. Representatives of Spade Rock facilitated and provided a tour of the Property to Respondent during the audit.

Compliance Efforts

226. Spade Rock complied with Section 170 and the Treasury Regulations thereunder with respect to the donation of the Conservation Easement.

227. Spade Rock complied with Section 170 and the Treasury Regulations thereunder with respect to the donation of the Fee Simple Interest.

228. In claiming the charitable deductions related to the donation of the Conservation Easement on its 2017 Form 1065, Spade Rockrelied on the Survey, Title Report, Geotechnical Report, Mining Business Plan, Burgex Desktop Review, Orlandi Desktop Review, Easement Appraisal, Fee Simple Appraisal, Easement Appraisal Review, Fee Simple Appraisal Review, Deed of Conservation Easement, Baseline Documentation Report, and all sources cited in such documents.

229. Spade Rock reasonably relied on the Survey, Title Report, Geotechnical Report, Mining Business Plan, Burgex Desktop Review, Orlandi Desktop Review, Easement Appraisal, Fee Simple Appraisal, Easement Appraisal Review, Fee Simple Appraisal Review, Deed of Conservation Easement, Baseline Documentation Report, and all sources cited in such documents.

230. Spade Rock reasonably relied on the qualified, independent, informed professionals who prepared the Survey, Title Report, Geotechnical Report, Mining Business Plan, Burgex Desktop Review, Orlandi Desktop Review, Easement Appraisal, Fee Simple Appraisal, Easement Appraisal Review, Fee Simple Appraisal Review, Deed of Conservation Easement, and Baseline Documentation Report.

N. The contents of the FPAA, particularly the allegations that the non-cash charitable deduction related to the donation of the Conservation Easement should be $0, are erroneous, unreasonable, arbitrary, and capricious.

O. 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 without the required notice-and-comment procedures, is unlawful and “without observance of procedure required by law.” 5 U.S.C. § 706(2)(D). 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 2017 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 2017 Form 1065;

(iii) Determine that imposition of a penalty under Section 6662A is violative of the Administrative Procedure Act;

(iv) If warranted by the evidence at trial, determine that Spade Rock undervalued the Conservation Easement and/or the Fee Simple Interest and increase the amount of the non-cash charitable donation deductions for 2017 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: November 17, 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