”Buckelew Farm shows the lengths to which the IRS will assert technical grounds to disallow a charitable income tax deduction in its entirety, particularly to thwart abusive syndicated conservation easement tax shelters aimed at producing artificially inflated charitable income tax deductions.  This should serve as a lesson to taxpayers of the absolute need to comply with the multitude of requirements under Section 170 and the regulations thereunder in connection with claiming a charitable income tax deduction. 

Notwithstanding the Tax Court determination that the taxpayer had, in fact, complied with each and every one of the technical requirements relied upon by the IRS in denying the deduction in the first instance, a clear victory for the taxpayer, the Court determined that the claimed $47,570,000 valuation of the easement placed on property that was purchased for approximately $4 million  was ‘firmly planted somewhere in the realm of fantasy’ and reduced the amount of the charitable income tax deduction to $4,595,000, the amount determined by the appraisal obtained by the IRS.   

Although the taxpayer managed to avoid the 75% civil fraud penalty on account of its express disclosure on its tax return of the principal facts about regarding the contribution of the easement, a 40% gross valuation misstatement penalty applied.  In the end, therefore, despite the Tax Court ultimately permitting a charitable income deduction for the donation of conservation easement, this case was a big win for the IRS.”

Richard L. Fox provides members with important and timely commentary that examines issues in connection with the recent case of Buckelew Farm, LLC v. Commissioner.

Richard L. Fox is an attorney and founding partner of the Law Offices of Richard L. Fox, LLC (www.richardfoxlaw.com). Richard is the author of the treatise, Charitable Giving: Taxation, Planning and Strategies, a Thomson Reuters/Warren, Gorham and Lamont publication, and the Bloomberg Tax Management Portfolio Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects (Portfolio 452), writes a national quarterly bulletin on charitable giving, and writes and speaks frequently on issues pertaining to philanthropy, charitable giving vehicles, estate and gift planning and nonprofit organizations.  Richard is also member of the editorial board of the Estate Planning Journal and a Fellow of the American College of Trust and Estate Counsel (ACTEC). 

Here is his commentary:

EXECUTIVE SUMMARY:

Buckelew Farm, LLC^[i] is a highly instructive case recently decided by the Tax Court involving the continuing efforts of the IRS to thwart abusive syndicated conservation easement tax shelters aimed at producing artificially inflated charitable income tax deductions.  In this case, the IRS denied a  claimed $47,570,000 charitable income tax deduction in its entirety on the basis of the partnership, initially formed by two former Atlanta Braves players, failing to comply with an array of technical requirements imposed under Section 170 and the regulations thereunder.  Thus, as it has done in a multitude of cases involving charitable contributions where the IRS has prevailed in disallowing a claimed charitable income tax deduction solely on technical grounds, the IRS disallowed the deduction without any regard to the propriety of the $47,570,000 value of the easement claimed by the partnership.  These types of cases often offer low-hanging fruit to the IRS to disallow claimed charitable income tax deductions essentially based on foot faults by taxpayers and show the lengths to which the IRS will go to seek the disallowance, particularly in cases involving perceived abusive conservation easement donations. 

Contrary to the IRS position in this case, however, the Tax Court determined that the taxpayer had, in fact, complied with each and every one of the technical requirements relied upon by the IRS in denying the deduction in the first instance, a clear victory for the taxpayer.  Ultimately, therefore, the sole issue before the court was the determination of the fair market value of the donated conservation easement. Here, the taxpayer was not quite as fortunate. Although it permitted a charitable income tax deduction, the Tax Court determined that the claimed $47,570,000 valuation of the easement placed on property that was purchased for approximately $4 million was “firmly planted somewhere in the realm of fantasy” and reduced the amount of the charitable income tax deduction to $4,595,000, the value determined by the appraiser for the IRS.  Although the IRS argued for the imposition of the civil fraud penalty, the Tax Court opted only to impose the 40% "gross valuation misstatement."  In the end, therefore, despite the Tax Court ultimately permitting a charitable deduction for the donation of the conservation easement, this case was a big win for the IRS. 

FACTS:

Purchase of Land by Partnership and Subsequent Attempts to Sell

January 4, 1999, former Atlanta Braves baseball players Ryan Klesko and John Smoltz formed a partnership known as Big K Farms, LLC (“Big K Farms”), each holding a 50% ownership interest, whose Articles of Organization were signed on December 9, 1998.  Subsequently, through the year 2006, Big K Farms acquired eight parcels of land in Jones County, Georgia for $4,014,000, consisting of 1,561.65 acres. The land was purchased for its timber value and various recreational uses, including hunting, fishing, and other outdoor sporting activities.  

By 2012, Big K Farms was actively trying to sell the land, listing it with a broker who specialized in large hunting parcels.  Although the partners wanted to initially list the land for $14 million, the broker informed them that the current market conditions could not support such a price and, ultimately, the land was listed for $9 million.  Even the $9 million amount was not considered reasonable by the broker, who advised the partners that for an asking price of $9 million, a buyer could purchase a plantation in southern Georgia that is three times bigger, “which makes a difficult sale,” and noted that if forced to sell it, he would expect the land “to fetch between $3 million and $3.5 million.”  After the property was listed twice and was on the market for 6 to 12 months, the broker did not receive any concrete offers or interest in the land from potential buyers.

Sale of Land for $6 Million to Partnership to Engage in Syndicated Conservation Easement Transaction

After it was unable to sell the land after the listing with a broker, Big K Farms was approached by James M. Adams III, who had spent his entire career in the real estate industry and had worked for several companies in various roles in the development of hotels, office buildings, apartments, planned communities, public-private ventures, golf courses, and other recreational activities.  Despite the land being listed for $9 million, Mr. Adams presented a conservation easement plan to Mr. Klesko and Mr. Smoltz and discussed a $6 million purchase price.  In an email dated  June 19, 2012, a financial advisor to Mr. Smoltz advised him that the land was likely worth only about $3 million but that Mr. Adams was willing to extend the $6 million offer because of the “value of the potential deductions and tax credits” and that Mr. Adam’s offer seemed to be a “good bet.”  

On February 18, 2013, a new partnership was formed, known as Big K, which thereafter issued an investor package that included a private placement memorandum (“PPM”) to potential investors to raise up to $9.8 million, selling 49 units at $200,000 each.  Six million dollars of the proceeds raised were to be used to acquire a 99% ownership interest in Big K Farms, the partnership that owned the subject land.  The PPM outlined three possible uses for the land, described as follows: (1) a development proposal for the property that “lends itself well to an upscale conservation oriented “sporting club” development and has market analysis and valuation support for this use”; (2) an investment proposal to acquire the land, manage the timber pursuant to a timber management plan, and to strive for an overall return of around 8% annually; and (3) a conservation proposal involving the use of a deed restriction to perpetually restrict the development of all or portions of the land.  

In early December 2013, the partners of Big K unanimously voted in favor of the conservation proposal pursuant to which Big K Farms, the partnership owned by Big K and the owner of the subject land, would make a charitable contribution of a conservation easement.

Conservation Easement Transaction

On December 26, 2013, consistent with the vote of the Big K partners, Big K Farms contributed a conservation easement to Southeast Regional Land Conservancy, Inc. (“SERLC”), a tax-exempt organization described under Section 501(c)(3), over approximately 1,545.79 acres of land in perpetuity to protect the conservation values, which referred to natural open space and scenic and educational values. The conservation easement deed identified five conservation purposes: (1) water quality protection; (2) natural habitat protection; (3) open space protection; (4) scenic enjoyment of the general public; and (5) public conservation education.  

Under Section 170(h)(2)(C), a “qualified real property interest” includes “a restriction (granted in perpetuity) on the use which may be made of the real property.” The Tax Court concluded that Big K Farms donated to SERLC a perpetual conservation easement on approximately 1,545.79 acres of land, which severely restricted its use of the property in accordance with the conservation easement deed.  The court determined that the easement satisfied the definition of a qualified real property interest under Section 170(h)(2)(C).

The conservation easement deed contemplated the possibility that the conservation easement could be extinguished by judicial proceedings and stated in part:

For purposes of this Conservation Easement, the fair market value of SERLC's right and interest (which value shall remain constant) shall be equal to the difference between (a) the fair market value of the Conservation Area as if not burdened by this Conservation Easement and (b) the fair market value of the Conservation Area burdened by this Conservation Easement, as such values are determined as of the date of this Conservation Easement.  (Emphasis added.)

 

If a change in conditions makes impossible or impractical any continued protection of the Conservation Area for conservation purposes, the restrictions contained herein may only be extinguished by judicial proceeding. Upon such proceeding, SERLC, upon a subsequent sale, exchange or involuntary conversion of the Conservation Area, shall be entitled to a portion of the proceeds at least equal to the fair market value of the Conservation Easement as provided above.  

 

Accordingly, the conservation easement deed entitled SERLC to a fixed amount determined at the time of the donation, rather than a proportionate share of proceeds, in the case of judicial extinguishment. 

Claimed Income Tax Deduction by Partnership for Contribution of Conservation Easement

On its 2013 Form 1065, U.S. Return of Partnership Income, Big K Farms reported a charitable income tax deduction of $47,570,000 for the value of the donated conservation easement.  Attached to the Form 1065 were Form 8283, Noncash Charitable Contributions; a supplemental letter; and an appraisal by Dale Hayter, Jr. dated November 15, 2013.  Form 8283 was signed by Mr. Hayter and clearly identified the contribution as a conservation easement under Section 170(h). Moreover, Form 8283 reported the partnership's adjusted tax basis in the land of $3,521,827 and amount claimed as a deduction of $47,570,000.

The supplemental letter attached to Form 8283 indicated that the before value of the land was $50,480,000 and the after value was $2,680,000. After subtracting the “after value” from the “before value,” a $47,800,000 figure was reached and from that number was subtracted the enhanced value of the 6 parcels totaling 10.54 acres of $230,000.  This produced a net conservation easement valuation of $47,570,000, as reflected in Mr. Hayter’s appraisal.  Form 8283, the supplemental letter attached thereto, and the appraisal all explicitly disclosed the conservation easement transaction to the IRS and indicated the relatively low adjusted basis in the land and the substantially higher claimed value of the conservation easement deduction.

IRS Arguments Supporting Denial of Claimed Income Tax Deduction by Partnership Rejected by Tax Court

The IRS asserted a number of grounds for denying in its entirety the claimed charitable income tax deduction for the easement donated by Big K Farms, consisting of the following:

·      Lack of donative intent;

 

·      Failure to satisfy the perpetuity requirement under Reg. 1.170A-14(g)(6)(ii);

 

·      The appraiser valuing the easement was not a “qualified appraiser”; and

 

·      The appraisal was not a “qualified appraisal.”     

Big K Farms Lacked Requisite Donative Intent 

Taking an unusual position in the context of this case and one that has long been rejected by the courts, the IRS argued that the contribution of the conservation easement was not deductible because it lacked the requisite donative intent, contending that the charitable contribution was motivated only in order to obtain federal income tax deductions.  In this regard, the IRS asserted that “the conservation easement deal was priced so that the return for the investors in tax savings would substantially exceed the amounts that they would have to contribute, without which they would not have invested.”  Further noted was that an investor tax benefit ratio of more than four times their investment was all but certain and that none of the investors “focused on the benefits of land preservation or whether SERLC could appropriately steward the donation.”

The Tax Court noted that it had rejected similar donative intent arguments made by the IRS in other cases and that it rejected them again here, noting that the fact “[t]hat federal income tax benefits are a consideration in determining whether to make a contribution does not undermine the validity of the contribution.”  In Mill Road 36 Henry, cited by the Tax Court, a case specifically addressing a conservation easement contribution, the court found the objective fact that a perpetual conservation easement was donated to a charitable organization defeated the contention of the IRS as to the donor's subjective intent.  Here, the Tax Court stated that the investors in Big K Farms “were presented with and given the opportunity to vote on three options for the land, a development proposal, an investment proposal, and a conservation easement proposal. The investors unanimously voted in favor of the conservation easement proposal, choosing present tax benefits over potential future earnings.”  Thus, the Tax Court rejected the argument that the conservation easement was always bound to be donated in order to achieve income tax benefits.

Conservation Easement Deed Didn’t Satisfy Proportionate Value Proceeds Requirement Under Reg. 1.170A-14(g)(6)(ii)

The IRS argued that the requirements of Reg. 1.170A-14(g)(6)(ii) must be strictly construed and that the conservation deed conveyed by Big K Farms violated the regulation because SERLC was not guaranteed to receive the proportionate share of the extinguishment proceeds; rather, it would only have a right to a fixed amount based upon values at the time the easement was granted.  Needless to say, as the Tax Court noted, Big K Farms disagreed and averred that the reliance of the IRS on Reg. 1.170A-14(g)(6)(ii) was misplaced because the U.S. Court of Appeals for the Eleventh Circuit in Hewitt held that Reg. § 1.170A-14(g)(6)(ii) is “arbitrary and capricious and violates the APA's procedural requirements” and ultimately ruled it to be invalid.

The Tax Court noted that absent stipulation to the contrary, appeal of this case would lie to the Eleventh Circuit. The IRS argued, however, that the conservation easement deed in Big K Farms  presents facts sufficiently different from those present in Hewitt to render the Eleventh Circuit's opinion not “squarely on point” and therefore not binding. Instead, the IRS urged the court to follow its decision in Oakbrook Land Holdings, “which, unlike the Eleventh Circuit decision in Hewitt, upheld the substantive and procedural validity of Treasury Regulation § 1.170A-14(g)(6)(ii).”  The Tax Court rejected this position, stating:

We remind [the IRS] that this Court will depart from its established precedents and defer to contrary precedent of a particular court of appeals only to avoid “inevitable” reversal. See Lardas v. Commissioner, 99 T.C. 490, 494–95 (1992). To follow the U.S. Court of Appeals for the Sixth Circuit's precedent in this case would surely result in reversal; therefore, we are bound to follow the Eleventh Circuit, which invalidated Treasury Regulation § 1.170A-14(g)(6)(ii).

 

In the light of the foregoing, we find [the IRS's] argument, that the charitable contribution deduction should be denied in full on the basis of the conservation purpose's not being protected in perpetuity as required by section 170(h)(5)(A) and in violation of Treasury Regulation § 1.170A-14(g)(6)(ii), to be meritless.”

Appraiser Was Not a Qualified Appraiser

The IRS did not contest that Mr. Hayter satisfied the requirement of Reg. § 1.170A-13(c)(5)(i), which sets for the qualifications of a “qualified appraisal.” Rather, it sought to disqualify Mr. Hayter as a qualified appraiser under the theory that he ran afoul of Reg. 1.170A-13(c)(5)(ii), the so-called knowledge regulation, which provides, in pertinent part, as follows:

An individual is not a qualified appraiser with respect to a particular donation … if the donor had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property (e.g., the donor and the appraiser make an agreement concerning the amount at which the property will be valued and the donor knows that such amount exceeds the fair market value of the property).

 

The IRS asserted that Reg. 1.170A-13(c)(5)(ii) applied because Big K Farms provided Mr. Hayter with skewed information and withheld information concerning a prior purchase agreement for the land for $6 million and the listing of the property for $9 million without any interest from market participants.  The Tax Court stated, however, that the example given in the regulation focuses on whether there was “an agreement concerning the amount at which the property will be valued and the donor knows that such amount exceeds the fair market value of the property.”  Here, the court observed that no such agreement existed. Further, citing its decision in Kaufman v. Commissioner,  the Tax Court stated that the language “falsely to overstate” the value of donated property within the meaning of in Reg. 1.170A-13(c)(5)(ii) is intended to convey “a sense of collusion and deception as to the value of the property.” 

In the end, the Tax Court found that there was no evidence of an “agreement” between Big K Farms and Mr. Hayter concerning the value of the donated conservation easement. In fact, as the Tax Court noted when he was asked whether Big K Farms had a specific value that they wanted him to reach in his appraisal of the donated easement, Mr. Hayter testified that he “never enter[s] into an appraisal with a predetermined value,” that the market determines “what the fair market value is,” and that he stands by the valuation opinion reflected in his report. The court found his testimony credible to negate an inference, as asserted by the IRS, that Big K Farms “heavily influenced and manipulated the appraisal process to achieve his desired result.”  Consequently, the court held that the IRS failed to establish the applicability of  Reg. 1.170A-13(c)(5)(ii) and therefore held that Mr. Hayter was a “qualified appraiser.”

Appraisal Was Not a Qualified Appraisal

As noted by the Tax Court, to be a qualified appraisal under Section 170(f)(11)(E), an appraisal of property must be (1) treated as a qualified appraisal under regulations or other guidance prescribed by the IRS and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the IRS.  The court stated that the regulations impose substantive requirements on the content of an appraisal report, which are intended to provide the IRS with sufficient information to evaluate the claimed deduction and deal more effectively with the prevalent use of overvaluation. 

The IRS sought to disqualify Mr. Hayter's appraisal on the basis of it failing to be “in accordance with generally accepted appraisal standards” based upon its contention that it was not in compliance with Uniform Standards of Professional Appraisal Practices (“USPAP”).  The IRS stated that Mr. Hayter outright failed to comply with USPAP, arguing that “his departures from USPAP are significant, serious, and seemingly intentionally designed to create a report simply to justify the value hoped by the Partnership.”

In addressing this issue, the Tax Court first noted that Section 170(f)(11)(E)(i)(II) specifies, in relevant part, that a qualified appraisal must be “conducted by a qualified appraiser in accordance with generally accepted appraisal standards.”  Big K Farms argued that Mr. Hayter's appraisal “substantially complies with appraisal standards because it allowed respondent to properly understand and monitor the claimed contribution.”  The Tax Court noted that “USPAP is widely recognized and accepted as setting out standards applicable to the appraisal profession” and “[a]dherence to those standards is evidence that the appraiser is applying methods that are generally accepted within the appraisal profession.” Therefore, at a minimum, compliance with USPAP is an indication that the appraiser's valuation report is reliable.  Notwithstanding, the court noted that “[a]ppraising is not an exact science and has a subjective nature” and that “full compliance with USPAP is not the sole measure of reliability,” concluding as follows:  

We generally accept … that Mr. Hayter's 2013 appraisal lacks full compliance under USPAP; however, we find these failures go more to the credibility and weight of the appraisal and not to whether the appraisal complies with generally accepted appraisal standards. Notwithstanding the highest and best use conclusions reached for the Subject Property, we cannot say the appraisal fails to comply with generally accepted appraisal standards.

 

Accordingly, the Tax Court found that Mr. Hayter's appraisal satisfied the requirements of Section 170(f)(11)(E)(i)(II) and, therefore, was a qualified appraisal for purposes of Section 170(f)(11), notwithstanding, as discussed below, the court’s characterization of Mr. Hayter’s valuation as “firmly planted somewhere in the realm of fantasy.” 

Valuation

Under the general rule, the fair market value of a conservation easement is equal to the difference between the fair market value of the property it encumbers before the granting of the easement restriction (“before value”) and the fair market value of the encumbered property after the granting of the restriction (after value).” In this regard, the court noted the sizable disparity between the expert valuations submitted by Big K Farms and the IRS prepared, respectively, by Mr. Hayter  (“Hayter Appraisal) and Zac Ryan (“Ryan Appraisal”). The Hayter Appraisal determined the before value of the land at $50,480,000 and an after value of $2,680,000, thereby appraising the conservation easement at $47,570,000 after subtracting the enhanced value of the 6 parcels totaling 10.54 acres of $230,000.  The Ryan Appraisal determined a before value of $7,395,000 and an after value of $2,800,000, equating to an appraised fair market value of the easement of $4,595,000.  Notably, the court stated that “Mr. Hayter and Mr. Ryan, in essence, agree on the ‘after’ value assessment of the Subject Property as being $2,800,000 and $2,680,000, respectively. Consequently, the dispute centers on the ‘before’ value assessment of the Subject Property.”

The large disparity in the fair market value estimates was based on a disagreement between the Hayter Appraisal and the Ryan Appraisal as to the highest and best use of the land at the time the conservation easement was donated to SERLC, as well as the comparable property sales used in their respective analyses.  Both Mr. Hayter and Mr. Ryan began their respective highest and best use analyses by considering whether the potential use of the land was (1) legally permissible, (2) physically possible, (3) financially feasible, and (4) maximally productive.  Mr. Hayter determined that the highest and best use before the grant of the conservation easement was the “development of a 307 lot hunting and conservation oriented residential community,” while Mr. Ryan determined the highest and best use to be “continued timber production, possible agriculture, recreation (primarily hunting and fishing), and extremely low-density residential use in conjunction with long-term speculative investment for alternative uses.”  As the court noted, all four criteria are required to be met, and it does not matter that a potential use is physically possible, financially feasible, and maximally productive if it is not legally permissible.

In analyzing Mr. Hayter’s determination of the highest and best use of the land, the court pointed out that the proposed development of the land for a residential community would not be legally permissible under its current zoning classification of rural residential, which allowed for a development density of only one unit per five acres.  Here, the evidence in the record contradicted the position of Big K Farms that the subject property would receive rezoning or a zoning variance  to allow for the development in accordance with the proposed development plan. Further, the proposed development would have required approval at the state level by the Georgia Environmental Protection Division, which was not done in this case. Given the foregoing, the court stated that it had serious concerns as to whether the proposed development of the subject property relied upon the Mr. Hayter in determining its value was a legally permissible use.

Moreover, even if the development plan relied upon by Mr. Hayter was a legally permissible use of the land, the court found that his valuation based on comparable properties was flawed.  All of his selected comparable developments were fairly classified as high-end luxury resorts far from Jones County, with vastly different market conditions and amenity offerings, such as marinas, award-winning golf courses, restaurants, hotels, etc.  While Mr. Hayter did make qualitative adjustments to the lot prices derived from his comparable properties, the court stated that “the values determined therefrom far exceed the price that the proposed development might garner in the market.”  

Mr. Hayter also provided no data to support his contention that national home builders were acquiring large undeveloped land parcels in the near term for subdivision development or that residential development pressure is moving north toward the subject land.  Additionally, Mr. Hayter provided no information concerning market conditions in the counties where his comparables were located nor any analysis of how they were similar to or different from Jones County.  The court also noted that the substitute price for vacant land in and around Jones County revealed that the before value of $50,480,000 determined by Mr. Hayter was formed on the basis of the proposed development actually being built, and not on the basis of the value of the underling property.

In the end, the court rejected the Hayter Appraisal in its entirety and adopted the Ryan Appraisal, stating as follows:

Treasury Regulation § 1.170A-14(h)(3)(ii) instructs us to make “an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed.” Given the number of substitute properties available, we find it unlikely that the Subject Property would have been developed in accordance with the proposed development plan and that the probability of development at the selling price of $50,480,000 is firmly planted somewhere in the realm of fantasy.

 

Consequently, we find respondent's expert Mr. Ryan's “before” value of $4,750 per acre or $7,395,000, which was based on comparable vacant property sales, to be the proper value of the Subject Property and adopt it accordingly.

Penalties

The IRS contended that the 75% civil fraud penalty under Section 6663(a) applied, asserting that the “record is replete with lies and falsehoods …  to conceal the underlying tax avoidance scheme.”  In its analysis of the applicability of the civil fraud penalty, the court, citing Section 7454, noted that in any proceeding involving the issue of whether the taxpay is guilty of fraud with the intent to evade tax, the burden of proof in respect to such issue shall be on the IRS and that burden must be “carried by clear and convincing evidence.” 

Although it stated that the IRS proffered some evidence of conduct that might give rise to a suspicion of fraud, the court found that most of the evidence concerned conduct unrelated to the Form 1065 filed by Big K Farms.  According to the court, the key to the imposition of the civil fraud penalty in the context of this case was the IRS proving by clear and convincing evidence that Big K Farms “intended to evade tax in filing the return.”  The court cited the recently decided case of Mill Road 36 Henry, LLC, which stressed the importance of the express disclosure on the tax return of the principal facts about a syndicated conservation easement contribution in finding that the Section 6663 civil fraud penalty was inapplicable. 

The Tax Court similarly found that the Section 6663(a) civil fraud penalty was not applicable to Big K Farms because of its express disclosure on its Form 1065, notwithstanding that the court considered its appraisal to be “firmly planted somewhere in the realm of fantasy.”  In this regard, the court noted that Big K Farms complied with the reporting requirements of Section 170(f)(11) when it timely filed its 2013 Form 1065 and attached Form 8283, which expressly disclosed the relatively low adjusted tax basis in the subject land and, by comparison, its substantially higher amount claimed as a charitable contribution deduction. The court found Big K Farm’s “compliance with its reporting obligations to stand in stark contrast to an intentional act, on its part, to conceal the underlying transaction from respondent.”

Because the value of the originally claimed charitable income tax deduction of $47,570,000 was more than 200% of the $4,595,000 deduction allowed by the court, the 40% gross valuation misstatement penalty applied. Unlike the 20% accuracy related penalty, the court noted that no reasonable cause defense applies to the 40% penalty. 

COMMENT:

Buckelew Farm shows the lengths to which the IRS will assert technical grounds to disallow a charitable income tax deduction in its entirety, particularly to thwart abusive syndicated conservation easement tax shelters aimed at producing artificially inflated charitable income tax deductions.  This should serve as a lesson to taxpayers of the absolute need to comply with the multitude of requirements under Section 170 and the regulations thereunder in connection with claiming a charitable income tax deduction. 

Notwithstanding the Tax Court determination that the taxpayer had, in fact, complied with each and every one of the technical requirements relied upon by the IRS in denying the deduction in the first instance, a clear victory for the taxpayer, the Court determined that the claimed $47,570,000 valuation of the easement placed on property that was purchased for approximately $4 million  was “firmly planted somewhere in the realm of fantasy” and reduced the amount of the charitable income tax deduction to $4,595,000, the amount determined by the appraisal obtained by the IRS.    

Although the taxpayer managed to avoid the 75% civil fraud penalty on account of its express disclosure on its tax return of the principal facts about regarding the contribution of the easement, a 40% gross valuation misstatement penalty applied.  In the end, therefore, despite the Tax Court ultimately permitting a charitable income deduction for the donation of conservation easement, this case was a big win for the IRS.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Richard L. Fox

CITE AS:

LISI Charitable Planning Newsletter #334 (June 24, 2024) at http://www.leimbergservices.com. Copyright © 2024 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. Our agreement with you does not allow you to use or upload content from LISI into any hardware, software, bot, or external application, including any use(s) for artificial intelligence technologies such as large language models, generative AI, machine learning or AI system. This content is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI. 

CITES: 

Buckelew Farm, LLC, TC Memo. 2024-52; IRC §§ 170(h)(2)(C); 170(h)(5); Reg. § 1.170A-14(g)(6)(ii); Mill Road 36 Henry, LLC v. Commissioner, TC Memo. 2023-129 and Oconee Landing Property, LLC v. Commissioner, TC Memo. 2024-25; Hewitt v. Commissioner, TC Memo. 2020-89; rev’d, 21 F.4th 1336 (11th Cir. 2021); Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir, 2022), aff’g 54 TC 180 (2020).

CITATIONS:

^[i] Buckelew Farm, LLC was known during the relevant periods as “Big K Farms, LLC” and references hereinafter to the taxpayer are to “Big K Farms, LLC.”