Partnership Petitions for Readjustment of Conservation Easement Items

ECHELON WATERS, LLC, MARLIN WOODS CAPITAL, 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, MARLIN WOODS CAPITAL, LLC, HEREBY PETITIONS this Court as Tax Matters Partner (“TMP”) for Echelon Waters, LLC (“Echelon”) for the tax period ending December 31, 2017 to dispute the Notice of Final Partnership Administrative Adjustment, dated August 18, 2021, (“FPAA”) pertaining to the 2017 Form 1065 (U.S. Return of Partnership Income) for Echelon.²

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

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, Echelon reported a $12,860,000 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 $12,860,000 non-cash charitable deduction reported by Echelon 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) an experienced appraiser with over 17 years of appraisal experience.

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 “nothing distinguishes the subject property as being unique or significant and no significant species or habitats are present on the property.”⁶ Contrary to Respondent's contentions, the property at issue 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 nine 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 $236,312,118.

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

A. The Petitioner, Marlin Woods Capital LLC, is a Florida limited liability company having its principal place of business at 4355 Cobb Parkway, Suite J555, Atlanta, Georgia 30339.

B. Echelon's current mailing address is 4355 Cobb Parkway, Suite J555, Atlanta, Georgia 30339, and its principal place of business is in Florida.

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

D. Echelon is a Florida domestic limited liability company.

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

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

G. Echelon'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 Echelon.

I. The Small Business and Self-Employed Division of the Internal Revenue Service located in Boston, Massachusetts issued an FPAA relating to the Echelon's 2017 Form 1065 on August 18, 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 $12,860,000 non-cash charitable contribution deduction pursuant to Section 170(h).

2. Disallowance of a $180,000 non-cash charitable contribution deduction pursuant to Section 170.

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, and/or

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.

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 of the conservation easement at the time of donation is not less than $12,860,000.

4. The fair market value of the non-cash donation of a fee simple interest at the time of donation is not less than $180,000.

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 Echelon 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. Echelon 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 Echelon on December 31, 2017.

3. Echelon Waters Group LLC owned 97.99 percent of the profit, loss, and capital of Echelon on December 31, 2017.

4. Bereah Holdings LLC owned 1 percent of the profit, loss, and capital of Echelon on December 31, 2017.

5. Polk Holdings LLC owned 1 percent of the profit, loss, and capital of Echelon on December 31, 2017.

6. Petitioner was appointed manager of Echelon on October 24, 2016.

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

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

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

Property Background

10. As of November 29, 2017, Echelon owned approximately 82.89 acres of real property located in Polk County, Florida (the “Property”).

11. Echelon acquired the Property as a capital contribution by Special Warranty Deed dated October 21, 2016.

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

13. The Property is located in an area with significant limestone reserves.

14. The surficial geology of the Property is of the Cypresshead Formation.

15. The Cypresshead Formation, consists of reddish brown to reddish orange, unconsolidated to poorly consolidated, fine to very coarse grained, clean to clayey sands.

16. The underlying geology is the Hawthorn Group, Arcadia Formation, Tampa Member.

17. The Arcadia Formation, Tampa Member consists predominantly of limestone with subordinate dolostone, sand and clay.

Title & Mining Due Diligence

18. Echelon, recognizing the potential of developing the Property as a limestone mine, undertook certain due diligence to evaluate the feasibility of doing so.

19. Echelon hired a professional land surveyor licensed in Florida to prepare a survey of the Property (the “Survey”).

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

21. Based upon the Title Report, dated October 24, 2016, Echelon owned the surface estate of the Property, as well as the mineral estate at the time of the donation, subject to certain conditions.

22. The Title Report goes back to 1881, the year that The Florida Internal Improvement Fund began conveying property it had acquired by acts of the United States Congress.

23. Echelon hired an experienced geologist (the “Geotechnical Engineer”), to explore the bedrock conditions and determine and evaluate the quality of the minerals on the Property.

24. As a part of the engagement, the Geotechnical Engineer (i) conducted a borehole drilling program to explore the subsurface bedrock conditions, (ii) obtained laboratory testing on rock core samples from the boring to evaluate pertinent engineering properties, and (iii) prepared a report titled “A Geologic Report on the approximately 82.89 acres on the Echelon Waters LLC property in Polk County, Florida” which presents the field and laboratory data obtained during the engagement (the “Geotechnical Report”).

25. Between April 29, 2016 and May 3, 2016, the Geotechnical Engineer visited the Property with a drilling rig.

26. During the visits, the Geotechnical Engineer drilled one core sample to a depth of 70 feet below the surface to explore the subsurface bedrock conditions.

27. The limerock core sample was observed, bagged, and a field geologic log was prepared.

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

29. The laboratory was certified by the Florida Department of Transportation. The laboratory analyzed the limerock for density, optimum moisture, limerock bearing ratio (LBR), and % passing #4 sieve.

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

31. Echelon hired a professional mining engineering firm (the “Mining Engineer”), to analyze the Geotechnical Report and determine the feasibility for operating a limestone quarry on the Property.

32. 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 Florida; (iv) Registered Founding Member of the Society for Mining, Metallurgy and Exploration; and (v) Licensed Member of the National Society for Professional Engineers.

33. 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 20 in Florida.

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

35. The Mining Business Plan concludes that the Property contains Proven Mineral Reserves of approximately 3.322 million tons of lime rock.

36. The Mining Business Plan concludes that the limestone from the core sample passed the standards set out by the Florida Department of Transportation for use in all applications, except for “Aggregates” as defined by Florida Department of Transportation specifications subject to further testing, and also met specifications and requirements for general construction applications.

37. The Mining Business Plan concludes that there were no material issues that would impede the mining operation set up and/or permitting process.

38. The Mining Business Plan concludes that it was highly and reasonably probable that a mining operation on the Property could obtain all necessary Florida permits for a mine within six to nine months.

39. The Mining Business Plan concludes that developing and operating a crushed stone quarry on the Property was “viable and its success highly probable in the given market.”

40. The Mining Business Plan projects a NPV of approximately $13,064 million for a portable crushed stone plant.

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

42. 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.

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

44. The Mining Busines Plan concluded there were no material issues that would impede the mining operation set up and/or permitting process and all necessary permitting could be achieved in six to nine months. The Burgex Desktop Review concluded that such conclusions were reasonable.

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

46. 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 most key transportation applications.

47. The Burgex Desktop Review concludes that a NPV of $13,064 million is reasonable based on the qualified assumptions, data, and analysis provided in the Mining Business Plan.

48. Echelon 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”).

49. 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.

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

51. The Mining Business Plan concluded there were no material issues that would impede the mining operation set up and/or permitting process and all necessary permitting could be achieved in six to nine months. The Orlandi Desktop Review concludes that the review of the “Permits/Zoning/Environmental aspects of the property [was] . . . thorough and complete.”

52. The Orlandi Desktop Review concludes that the price assumed in the Mining Business Plan was below that of the average price of surrounding operations, and the price assumed was reasonable and would allow for market penetration.

53. The Orlandi Desktop Review concludes that the local limestone supply deficit of 19 million tons increases the viability of developing a limestone quarry on the Property.

54. The Orlandi Desktop Review concludes that a NPV of $13,064 million is reasonable based on the assumptions, data, and analysis provided in the Mining Business Plan.

Baseline Documentation Report

55. Recognizing the potential conservation values of the Property, Echelon engaged Atlantic Coast Conservancy, Inc. (“ACC”) to undertake certain diligence to investigate and confirm the Property's conservation values pursuant to a Conservation Easement Project Proposal, dated October 30, 2017.

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

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

58. ACC memorialized its findings in a Baseline Documentation Report, dated November 30, 2017, which documented the current physical condition and status of the Property and identified the conservation values.

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

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

61. The Baseline Documentation Report indicates that the Property in its present state “is undeveloped and possesses significant wildlife, forest, agricultural, scenic vistas, open space, aquatic, and plant habitat features including, without limitation, a native dry prairie interspersed with isolated freshwater marsh areas being utilized as agricultural pastures on Southwestern Florida Flatwoods subregion areas of the Southern Coastal Plain ecoregion leading to a first-order freshwater stream . . . that are of great importance to the Grantee, the people of Polk County, and the people of the State of Florida and are worthy of preservation.”

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

63. 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 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

64. The members of Echelon 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.

65. The members of Echelon 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

66. On November 30,2017, Echelon granted a Deed of Conservation Easement (the “Deed”) encumbering approximately 82.89 acres of the Property in favor of ACC.

67. ACC was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of November 30, 2017.

68. ACC was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of November 30, 2017.

69. The Property was not subject to a mortgage as of November 30, 2017.

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

71. Echelon did not contribute the Conservation Easement to ACC in a bargain sale.

72. Echelon did not receive any consideration from ACC in exchange for donating the Conservation Easement.

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

Deed of Conservation Easement

74. The Clerk of the Court of Polk County, Florida recorded the Deed on December 4, 2017.

75. The Deed incorporates the Baseline Documentation Report, dated November 30, 2017.

76. The Deed identifies various conservation purposes.

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

78. 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.

79. The Deed protects the 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).

80. 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 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).

81. 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).

82. 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, (iii) prevent any use of the Property that will impair or interfere with the conservation values as set forth in the Conservation Easement, (iv) retain land or water areas predominantly in their existing, natural, vegetative, hydrologic, scenic, open or wooded condition, and to retain such areas as suitable habitat for fish, plants, or wildlife, in accordance with Section 704.06, Florida Statutes, (v) retain and maintain, in their enhanced, restored, or created condition, those wetland, stream and upland areas included in the Conservation Easement which were enhanced, restored, or created pursuant to Environmental and Wetland Resource Permits for aggregate mined lands, and (vi) protect in perpetuity those conservation purposes set forth in the Code that are described in the Conservation Easement.

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

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

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

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

87. The Deed prohibits Echelon 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 Property.

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

89. 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)(h).

Contemporaneous Written Acknowledgement of Conservation Easement

90. ACC provided a letter to Echelon dated November 30, 2017, acknowledging receipt of the donation of the Conservation Easement (the “Conservation Easement Donation Acknowledgment Letter”).

91. 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.

92. 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

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

94. Clayton Weibel, one of the Appraisers, holds a MAI designation from the Appraisal Institute.¹¹

95. The Appraisers were not direct partners of Echelon.

96. The Appraisers were not indirect partners of Echelon.

97. 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.

98. The Appraisers were not parties to the transaction in which Echelon acquired the Property.

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

100. The Appraisers were not employees of (i) Echelon, (ii) a direct partner of Echelon, (iii) an indirect partner of Echelon, (iv) a party to the transaction in which Echelon acquired the Property, (v) ACC, or (vi) Petitioner.

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

102. Both of the Appraisers performed a majority of their appraisals in 2017 for parties other than Echelon.

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

Qualified Appraisal of Conservation Easement

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

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

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

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

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

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

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

111. The Easement Appraisal states that Echelon donated the Conservation Easement to ACC on November 30, 2017.

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

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

114. The Easement Appraisal contains a list of the qualifications of both of the Appraisers, including their background, experience, education, and membership in professional associations.

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

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

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

118. The Easement Appraisal indicates that the Appraisers based the FMV of the Conservation Easement on market conditions as of November 30, 2017.

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

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

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

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

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

124. The Easement Appraisal concludes that the FMV of the Property before Echelon donated the Conservation Easement was $13,040,000.

125. The Easement Appraisal concludes that the FMV of the Property after Echelon donated the Conservation Easement was $180,000.

126. The Easement Appraisal concludes that the FMV of the Conservation Easement was $12,860,000.

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

128. In determining the FMV of the Property before the donation of the Conservation Easement, the Appraisers considered and subsequently rejected use of the sales-comparison approach because (i) an adequate and reliable analysis was not possible given the limited information available on the sales, and (ii) significant differences existed in the comparable properties in terms of location, physical characteristics, and varying resources in comparison to the subject property.

129. To determine the FMV of the Property before the donation of the Conservation Easement, under the income approach, the Appraisers used the discounted cash flow (“DCF”) method related to the extraction and sale of the limestone reserves on the Property.

130. The DCF method is an acceptable appraisal method for valuing real property that contains a significant amount of underlying mineral reserves.

131. Under the income approach, the Appraisers determined that the FMV of the Property before the donation of the Conservation Easement was $13,040,000.

132. 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”).

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

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

135. The Easement Appraisal concludes that the After-Donation-HBU was financially feasible.

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

137. To determine the FMV of the Property after the donation of the Conservation Easement, the Appraisers used a sales-comparison approach and analyzed seven sales of properties encumbered with conservation easements.

138. 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.

139. 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.

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

Donation of Fee Simple Interest

141. On December 5, 2017, Echelon donated the fee simple interest in the Property (“Fee Simple Interest”) via Special Warranty Deed to Atlantic Coast Conservancy Properties, LLC (“ACC Properties”).

142. The Special Warranty Deed was recorded with the Clerk of Court of Polk County, Florida on December 11, 2017.

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

144. ACC Properties was a “qualified organization” for purposes of Section 170 and the Treasury Regulations thereunder as of December 5, 2017.

145. ACC Properties was an “eligible donee” for purposes of Section 170 and the Treasury Regulations thereunder as of December 5, 2017.

146. The Property was not subject to a mortgage as of December 5, 2017.

147. Echelon did not contribute the Fee Simple Interest to ACC Properties in a bargain sale.

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

149. Echelon 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

150. ACC Properties provided a letter to Echelon, dated December 5, 2017, acknowledging receipt of the donation of the Fee Simple Interest (the “Fee Simple Donation Acknowledgment Letter”).

151. 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.

152. 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

153. 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.

154. The Appraisers were not direct partners of Echelon.

155. The Appraisers were not indirect partners of Echelon.

156. 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.

157. The Appraisers were not parties to the transaction in which Echelon acquired the Fee Simple Interest in the Property.

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

159. The Appraisers were not employees of (i) Echelon, (ii) a direct partner of Echelon, (iii) an indirect partner of Echelon, (iv) a party to the transaction in which Echelon acquired the Property, (v) ACC Properties, or (vi) Petitioner.

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

161. Both of the Appraisers performed a majority of their appraisals in 2017 for parties other than Echelon.

162. 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

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

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

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

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

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

168. The Fee Simple Appraisal states that Echelon donated the Fee Simple Interest to ACC Properties on December 5, 2017.

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

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

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

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

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

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

175. The Fee Simple Appraisal indicates that the Appraisers based the FMV of the Fee Simple Interest on market conditions as of December 5, 2017.

176. The Fee Simple Appraisal concludes that the FMV of the Fee Simple Interest in the Property, as subject to the Conservation Easement, was $180,000.

177. To determine the FMV of the Fee Simple Interest, the Appraisers used the sales-comparison method and analyzed seven sales of comparable properties encumbered with conservation easements.

178. 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.

179. 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.

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

Second Conservation Easement Appraisal Report

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

182. The Second Easement Appraisal Report is dated January 26, 2018.

183. The Second Easement Appraisal Report was prepared under the appraisal standards set out by USPAP.

184. 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.

185. The Second Easement Appraisal Report included the date of contribution; the name, address and taxpayer identification number of the appraiser; the appraiser's qualifications; and a statement that it was prepared for submission to the Internal Revenue Service.

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

187. The Second Easement Appraisal Report reported a FMV of the Conservation Easement of $12,825,000.

Second Fee Simple Appraisal Report

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

189. The Second Fee Simple Appraisal Report is dated January 26, 2018.

190. The Second Fee Simple Appraisal Report was prepared under the appraisal standards set out by USPAP.

191. 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.

192. The Second Fee Simple Appraisal Report included the date of contribution; the name, address, and taxpayer identification number of the appraiser; the appraiser's qualifications; and a statement that it was prepared for submission to the Internal Revenue Service.

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

194. The Second Fee Simple Appraisal Report reported a FMV for the Fee Simple Interest of $175,000.

Filings with Respondent

195. Echelon timely filed its 2017 Form 1065.

196. 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.

197. Schedule K (Partner's Distributive Share Items) to the 2017 Form 1065 shows, among other items, charitable contributions of $13,050,000 related to the donation of the Conservation Easement, the donation of the Fee Simple Interest, and the cash donations.

198. Echelon attached the Easement Appraisal to its timely filed 2017 Form 1065.

199. Echelon attached the Fee Simple Appraisal to its timely filed 2017 Form 1065.

200. Echelon maintained all records required with respect to the 2017 Form 1065.

Form 8283 for Donation of the Conservation Easement

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

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

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

204. Form 8283 reports Echelon's adjusted basis in the Property.

205. Form 8283 reports the manner by which Echelon obtained the Property.

206. Form 8283 reports the date on which Echelon obtained the Property.

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

208. The Appraisers signed and dated the Form 8283.

209. Form 8283 contains the name and taxpayer identification number of Echelon.

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

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

212. Form 8283 indicates that Echelon donated the Conservation Easement to ACC.

213. Form 8283 contains the names of the Appraisers.

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

215. 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.

216. 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

217. Echelon also attached a Form 8283 to its 2017 Form 1065 to report the donation of the Fee Simple Interest to ACC Properties.

218. 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.

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

220. Form 8283 reports Echelon's adjusted basis in the Property.

221. Form 8283 reports the manner by which Echelon obtained the Property.

222. Form 8283 reports the date on which Echelon obtained the Property.

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

224. The Appraisers signed and dated the Form 8283.

225. Form 8283 contains the name and taxpayer identification number of Echelon.

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

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

228. Form 8283 indicates that Echelon donated the Fee Simple Interest to ACC Properties.

229. Form 8283 contains the names of the Appraisers.

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

231. 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.

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

Contents of FPAA

233. The FPAA does not describe any specific facts, legal theories, tax theories, or analysis for asserting the adjustments of $12,860,000 and $180,000 to the 2017 Form 1065.

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

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

236. 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.

Notice 2017-10

237. Respondent released an advance copy of Notice 2017-10 on December 23, 2016,¹² which identified donations such as that undertaken by Echelon as listed transactions.

238. 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.

239. Echelon submitted a Form 8886 with its 2017 Form 1065, fully disclosing its donation of the Conservation Easement.

240. 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

241. Echelon maintained all records required with respect to the 2017 Form 1065.

242. Echelon cooperated with Respondent during the audit.

243. Echelon cooperated with all requests by Respondent for information, documents, and meetings during the audit.

Compliance Efforts

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

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

246. In claiming the charitable deductions related to the donation of the Conservation Easement on its 2017 Form 1065, Echelon relied on the Survey, Title Report, Geotechnical Report, Mining Business Plan, Burgex Desktop Review, Orlandi Desktop Review, 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.

247. Echelon reasonably relied on the Survey, Title Report, Geotechnical Report, Mining Business Plan, Burgex Desktop Review, Orlandi Desktop Review, 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.

248. Echelon 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, 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 donation of the Conservation Easement and Fee Simple Interest 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 Echelon 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 10, 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
Email: 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