A United States Tax Court has sharply cut a huge tax deduction claimed by a Georgia-based partnership over land in Tennessee.
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Court → cut → Tennessee
The partnership claimed $74.5 million.
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partnership → claim → million
The court said the land was worth only $500,000.
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land → say → ?
In a written opinion, Chief Judge David Urda ruled against Lontrac Enterprises, LLC.
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Urda → write → LLC
He found that the value it claimed had no link to economic reality.
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it → find → reality
The court also upheld a mandatory 40 percent penalty from the Internal Revenue Service (IRS) for a gross valuation misstatement.
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court → uphold → misstatement
It rejected the partnership’s efforts to defend the multi-million-dollar deduction.
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It → reject → deduction
According to court records cited in the decision, a couple named Tommy and Evelyn Dillard bought the whole property in 2006 for $1.3 million.
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couple → accord → million
They paid $50,000 of their own cash and took out a mortgage for the rest.
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They → pay → rest
Over the next few years, the owners put the land up for sale but could not find a buyer.
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owners → put → buyer
They failed to sell it even when they listed it for $2.9 million.
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they → fail → million
Even with that weak sales history, the land was later placed into a syndicated conservation easement deal.
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land → place → deal
Lontrac Enterprises, LLC, which counts as a partnership for federal tax purposes, bought an interest in the property.
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which → count → property
In December 2014, it gave a perpetual conservation easement covering about 288.8 acres to the Foothills Land Conservancy.
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it → give → Conservancy
A private placement memorandum sent to possible investors promised big tax savings.
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memorandum → send → savings
The partnership offered a 95 percent stake to investors for about $8.8 million.
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partnership → offer → million
It projected that investors would get tax deductions worth far more than three times the cash they put in.
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they → project → deductions
On its federal tax returns, Lontrac claimed a charitable contribution deduction of $74.5 million.
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Lontrac → claim → million
It said the best and most profitable use of the land was as a commercial limestone mine.
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use → say → mine
Audacious valuation based on fictional mining plan
Chief Judge Urda sharply criticized the partnership’s claims.
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Urda → base → claims
He compared the usual workings of syndicated tax shelters to a repeating loop.
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He → compare → 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.
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case → write → market
“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.
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Urda → resemble → opinion
“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.”
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that → stand → million
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.
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land → find → it
The opinion noted that the rocks behind the supposed mining plan could be seen with the naked eye.
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rocks → note → eye
It also noted that the United States Geological Survey had already mapped the area in detail.
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Survey → note → detail
The court said the partnership had not gotten the zoning approvals it needed and had no proper engineering studies.
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it → say → studies
It also gave no market evidence that a commercial quarry was possible or even planned.
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quarry → give → evidence
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.”
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idea → call → deduction
Disallowance and strict valuation penalties
To decide what the donation was really worth, the Tax Court put aside the cash flow models from the partnership’s appraisal experts.
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Court → decide → experts
It gave those reports no weight as evidence.
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It → give → 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.
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who → use → market
The court decided that the true fair market value of the conservation easement was no more than $500,000.
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value → decide → easement
The claimed $74.5 million deduction was higher than the court’s figure by several thousand percent.
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deduction → claim → percent
That put it well over the legal line for a gross valuation misstatement under Section 6662(h) of the Internal Revenue Code.
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That → put → Code
Under federal tax law, a gross valuation overstatement happens when a claimed property value is 200 percent or more of the correct amount.
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value → happen → 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.
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who → make → defense
This is true even if they relied on advice from a professional appraiser.
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they → rely → appraiser
As a result, Chief Judge Urda confirmed that the 40 percent penalty from the IRS stands in full.
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penalty → confirm → IRS
…and 3 more, not listed.
The Aporia
