The partnership claimed $74.5 million. The court said the land was worth only $500,000. The court also upheld a mandatory 40 percent penalty from the Internal Revenue Service (IRS) for a gross valuation misstatement. The case is about a 310-acre piece of land in Grundy County, Tennessee. A couple named Tommy and Evelyn Dillard bought the whole property in 2006 for $1.3 million, according to court records cited in the decision. They paid $50,000 of their own cash and took out a mortgage for the rest. They failed to sell it even when they listed it for $2.9 million.
A United States Tax Court has sharply cut a huge tax deduction claimed by a Georgia-based partnership over land in Tennessee. In a written opinion, Chief Judge David Urda ruled against Lontrac Enterprises, LLC. He found that the value it claimed had no link to economic reality. It rejected the partnership’s efforts to defend the multi-million-dollar deduction. Over the next few years, the owners put the land up for sale but could not find a buyer.
“This case stands apart only for the sheer audacity of the numbers involved, the partnership here claimed a deduction of $74.5 million for an easement… on property that had been sitting on the market for years, failing to find a buyer willing to pay $2.9 million. The court decided that the true fair market value of the conservation easement was no more than $500,000. The claimed $74.5 million deduction was higher than the court’s figure by several thousand percent. That put it well over the legal line for a gross valuation misstatement under Section 6662(h) of the Internal Revenue Code. Under federal tax law, a gross valuation overstatement happens when a claimed property value is 200 percent or more of the correct amount. Under Section 6664(c)(3), taxpayers who make gross valuation misstatements on charitable contribution deductions cannot use a reasonable cause or good faith defense.
As a result, Chief Judge Urda confirmed that the 40 percent penalty from the IRS stands in full.
“In a situation resembling the movie Groundhog Day, we once again consider a syndicated conservation easement transaction featuring the same old moves,” Chief Judge Urda wrote in the opinion. The court said the partnership had not gotten the zoning approvals it needed and had no proper engineering studies. Chief Judge Urda sharply criticized the partnership’s claims. He compared the usual workings of syndicated tax shelters to a repeating loop. Writing for the court, he noted that this case stood out mainly for the huge gap between the real market and the tax claim. The Tax Court found that the claim that the land held a very valuable mining business was pure guesswork with no facts to back it up. The opinion noted that the rocks behind the supposed mining plan could be seen with the naked eye. It also noted that the United States Geological Survey had already mapped the area in detail. It also gave no market evidence that a commercial quarry was possible or even planned. Chief Judge Urda called the business a legal fiction made only to avoid taxes, stating that “the idea of mining was chimerical, simply a way to get at a wholly unmerited tax deduction. To decide what the donation was really worth, the Tax Court put aside the cash flow models from the partnership’s appraisal experts. It gave those reports no weight as evidence. Instead, the court used the method of the experts hired by the IRS, who compared sales of similar pieces of land in the local Tennessee real estate market. This is true even if they relied on advice from a professional appraiser. The ruling against Lontrac Enterprises is one of several recent U.S. Tax Court decisions aimed at syndicated conservation easements. The IRS has steadily challenged similar deals across the country. In these deals, organizers buy rural land, place limits on development, and use inflated, speculative appraisals to create huge tax write-offs for high-income investors.