Tax Court Grants IRS Request for Depositions in Easement Case

Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner,
Petitioner
v.
Commissioner of Internal Revenue,
Respondent

United States Tax Court

ORDER

On September 23, 2021, respondent filed Motions to Compel the Taking of Depositions of James M. Reynolds III and Mercer I. Reynolds III. Respondent proposes to take the depositions via Zoomgov. We will grant the Motions.

This case involves a charitable contribution deduction claimed by Oconee Landing Property, LLC (Oconee), for a conservation easement. Petitioner Oconee Landing Investors, LLC (petitioner), is Oconee's tax matters partner. The property subject to the easement was acquired by the Reynoldses in November 2003. They held the property until 2014, when they contributed it to Carey Station, LLC (CS), in exchange for membership interests in CS, of which they effectively owned 100%.

On December 21, 2015, CS contributed the property to Oconee in exchange for a 99% membership interest in Oconee. Two days later, petitioner purchased a 97% interest in Oconee from CS for $2,440,000. The same day, petitioner made a $1.3 million cash contribution to Oconee.

Eight days later, on December 31, 2015, Oconee donated a conservation easement over the property to the Georgia Alabama Land Trust. The deed of easement was recorded the same day. Oconee at that point was owned 97% by petitioner, 2% by CS, and 1% by Carey Station Manager, LLC.

Oconee timely filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it claimed a charitable contribution deduction of $20,670,000 for its donation of the conservation easement. In April 2019 the IRS issued Oconee a notice of final partnership administrative adjustment (FPAA) disallowing the charitable contribution deduction in full. The FPAA alternatively determined that, if any deduction were allowable, Oconee had not “established that the value of the contributed property * * * was greater than $1,420,560.”

On June 17, 2021, respondent contacted counsel for the Reynoldses, requesting that they participate in a “transcribed informal interview.” Although respondent had already obtained some documents during informal discovery, respondent sought to “learn[ ] of any oral communications or meetings that may have occurred and the impressions that the [Reynoldses] may have had surrounding the property and the transaction at issue.” This request was rejected.

On August 20, 2021, respondent served the Reynoldses with notices of deposition and subpoenas. When they objected, respondent moved to compel the taking of depositions. Petitioner filed an opposition to those motions on October 26, 2021, and counsel for the Reynoldses filed oppositions on October 28, 2021.

Rule 74(c) provides that the taking of a deposition of a non-party witness is an extraordinary method of discovery. Such depositions may be utilized when the testimony sought is relevant and not privileged and “cannot be obtained through informal consultation or communication.” Rules 70(b), 74(c)(1).

It appears that the Reynoldses possess relevant, non-privileged information. They are real estate professionals who owned the property for ten years before the easement was granted. As the de facto owners of the property (through CS) on December 23, 2015, they were presumably involved in negotiating the transaction by which petitioner effectively acquired a 97% interest in the property from CS for $2,440,000. The Reynoldses likely have knowledge as to whether that was an arm's-length purchase price, a relevant fact in assessing the reasonableness of the $20,670,000 value petitioner placed on the easement eight days later. See Plateau Holdings, LLC, T.C. Memo. 2020-93, 119 T.C.M. (CCH) 1619, 1620, 1626. The Reynoldses may be able to provide other insights into the value and development potential of the property, including the results of any previous efforts they may have made to sell it. See Hewitt v. Commissioner, T.C. Memo. 2020-89, 119 T.C.M. (CCH) 1593, 1601 (finding relevant a landowner's testimony in a conservation easement case “regarding the value of his property”); Schmidt v. Commissioner, T.C. Memo. 2014-159, 108 T.C.M. (CCH) 135, 141 (finding a landowner “competent to offer opinion testimony with respect to the value of his or her property”).

The Reynoldses contend that respondent has made insufficient efforts to obtain the needed information by informal means. But when IRS counsel requested that they participate in an informal interview, they refused. They assert that this request was not really informal, urging that a “transcribed informal interview” is equivalent to a deposition and is simply a different set of words “to describe a nearly identical process.” We disagree: At no point did respondent request that the interview be taken under oath or penalty of perjury, as a deposition would be.

The Reynoldses argue that being subjected to a deposition will be “unduly burdensome” and force them “to seek an extensive protective order * * * to protect [themselves] from 'annoyance, embarrassment, oppression, [and] undue burden [and] expense.'” These high-level assertions of burden are unconvincing. Respondent proposes to take the depositions by Zoomgov, thus limiting the expense they must incur. Their counsel are free to negotiate with IRS counsel about the length of the depositions. If the Reynoldses have legitimate claims of privilege (such as the attorney-client privilege) they may assert any applicable privilege in response to specific questions. To the extent their counsel believe that questions are straying into areas that could not possibly lead to the discovery of relevant evidence, they may raise reasonable objections during the deposition. A protective order under Tax Court Rule 103 is generally not the appropriate mechanism for this purpose.

Upon due consideration, it is

ORDERED that respondent's Motions to Compel the Taking of Depositions, filed September 23, 2021, at docket entries ## 89 and 90, are granted in that respondent may take the depositions of James M. Reynolds III and Mercer I. Reynolds III via Zoomgov at a time and date to be mutually agreed upon. It is further

ORDERED that, in addition to regular service, the clerk shall serve a copy of this Order on counsel for James M. Reynolds III and Mercer I. Reynolds III as follows:

Wes Sheumaker
Eversheds Sutherland LLP
999 Peachtree Street, NE, Suite 2300
Atlanta, GA 30309-3996

Sarah E. Paul
Eversheds Sutherland LLP
The Grace Building, 40^th Floor
1114 Avenue of the Americas
New York, NY 10036-7703

(Signed) Albert G. Lauber
Judge