Green Valley Investors LLC et al. v. Commissioner; No. 17379-19

GREEN VALLEY INVESTORS, LLC, BOBBY A. BRANCH, TAX MATTERS PARTNER, ET AL., Petitioners, v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

UNITED STATES TAX COURT

Judge Weiler

RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING QUALIFIED APPRAISALS

RESPONDENT MOVES, pursuant to the provisions of Tax Court Rule 121, for summary judgment in respondent's favor on the issue of whether the appraisal documents at issue in these consolidated cases ("the V&W Appraisals"), which value properties that the documents acknowledge, on their face, do not exist as of the donation date are qualified appraisals under Internal Revenue Code section 170(f) and the regulations thereunder. There is no genuine material factual dispute that the V&W Appraisals do not provide the fair market value for the properties contributed and do not comply with generally accepted appraisal standards.

Respondent is concurrently filing a Memorandum of Facts and Law in Support of Respondent's Motion for Partial Summary Judgment Regarding Qualified Appraisals ("Memorandum"), which details the facts and law showing why this motion should be granted.

IN SUPPORT THEREOF, respondent respectfully states:

1. The pleadings in the consolidated cases were closed on the following dates:

a. Docket No. 17379-19: March 11, 2020.

b. Docket No. 17380-19: March 3, 2020.

c. Docket No. 17381-19: February 26, 2020.

d. Docket No. 17382-19: March 4, 2020.

2. On November 10, 2020, the Court consolidated for trial (among other purposes) the cases set forth in paragraph 1.

3. This motion is being made at least 30 days after the date that the pleadings in this case closed, more than 60 days before the date on which these cases will be calendared for trial, and within such time as not to delay the trial. Tax Court Rule 121(a).

4. The above-captioned cases are syndicated conservation easement cases, as described in Notice 2017-10, 2017-4 I.R.B. 544, involving disallowed deductions for charitable conservation easement donation claimed on the LLCs'1 Forms 1065 U.S. Return of Partnership Income ("Form 1065").

5. To support their claimed deductions, the LLCs each included with their Form 1065 an appraisal document prepared by Messrs. Van Sant and Wingard.

6. The V&W Appraisals claimed that the pre-easement value of each of the four properties at issue was more than eighty times higher than what Messrs. Van Sant and Wingard had valued the same properties (plus additional acreage) as being worth the year before.

7. The V&W Appraisals reached these values by treating indisputably vacant parcels of land as if the parcels were existing mining operations.

8. For reasons set forth in the Memorandum of Law filed concurrently herewith, respondent now seeks summary adjudication that, as a matter of law, the "V&W Appraisals" are not qualified appraisals and that consequently, if the amount determined to be the correct value of the donated easements is at least 150% of the value claimed on the LLCs' Forms 1065, the reasonable cause exception under section 6664(c)(3) does not apply.

9. In support of this motion, respondent relies upon (1) the pleadings, (2) the documents (Ex. A1-28) described in, and attached to, respondent's previously filed Motions for Partial Summary Judgment and Respondent's Objection to Petitioner's Motion for Partial Summary Judgment on Qualified Appraisals,2 and (3) the Fourth Declaration of Emily J. Giometti (Attachment A) and attached exhibits included with the instant motion.

10. Respondent respectfully states that counsel of record has reviewed the administrative file and, on the basis of the review of the file and the pleadings, concludes that there remains no genuine issue of material fact for trial as to the question put before the Court herein. As a matter of law, the V&W Appraisals are not qualified appraisals.

11. Petitioner objects to the granting of respondent's motion.

WHEREFORE, it is prayed that respondent's motion be granted.

DRITA TONUZI
Deputy Chief Counsel (Operations)
Internal Revenue Service

Date: 04/05/22

By: EMILY J. GIOMETTI
Special Trial Attorney
(Large Business & International)
Tax Court Bar No. GE0326
JW Peck Federal Building
550 Main Street, Suite 9-351
Cincinnati, OH 45202-2727
Telephone: (513) 975-6847
[email protected]

OF COUNSEL:
ROBIN GREENHOUSE
Division Counsel
(Large Business & International)
JOHN M. ALTMAN
National Strategic Litigation Counsel
(Large Business & International)
TRAVIS T. VANCE
Strategic Litigation Counsel
(Large Business & International)

FOOTNOTES

1. The four LLCs, referred to collectively herein as "the LLCs" are Green Valley Investors, LLC ("Green Valley"); Tick Creek Holdings, LLC ("Tick Creek"); Big Hill Partners, LLC ("Big Hill"); and Vista Hill Investments, LLC ("Vista Hill").

2. See each Memorandum of Law in Support of Respondent's First Motion for Partial Summary Judgment (May 1, 2020) (Index No. 12), pp. 2-7, each Memorandum of Law in Support of Respondent's Second Motion for Partial Summary Judgment (October 9, 2020) (Index No. 31 for docket no. 17379-19, 17380-19, and 17382-19; Index No. 32 for docket no. 17381-19), pp. 3-9, and Respondent's Objection to Petitioner's Motion for Partial Summary Judgment on Qualified Appraisers (February 11, 2022) (Index No. 128 for Docket No. 17379-19), Attachment A.

Green Valley Investors LLC et al. v. Commissioner; No. 17379-19<

GREEN VALLEY INVESTORS, LLC, BOBBY A. BRANCH, TAX MATTERS PARTNER, ET AL., v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

UNITED STATES TAX COURT

Judge Weiler

Filed Electronically

MEMORANDUM OF LAW IN SUPPORT OF RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING QUALIFIED APPRAISALS

DRITA TONUZI
Deputy Chief Counsel (Operations)
Internal Revenue Service

OF COUNSEL:
ROBIN GREENHOUSE
Division Counsel
(Large Business & International)
JOHN M. ALTMAN
National Strategic Litigation Counsel
(Large Business & International)
TRAVIS T. VANCE
Strategic Litigation Counsel
(Large Business & International)

CONTENTS

PRELIMINARY STATEMENT

I. STATEMENT OF FACTS

A. The Syndicated Conservation Easement Transaction

B. The V & W Appraisals

II. ARGUMENT

A. Standard for Summary Judgment

B. Qualified Appraisal Requirements

C. As a Matter of Law, the V&W Appraisals Are Not Qualified Appraisals

1. The V&W Appraisals do not Provide a Fair Market Value for the Property Contributed.

2. The V&W Appraisals Were not Prepared in Accordance with Generally Accepted Appraisal Standards.

(a) The V&W Appraisals Are Generally Misleading and Not Credible

(b) The V&W Appraisals Fail to Disclose a Prior Assignment

D. If the Value Claimed on the LLCs' Returns is 150% or More of the Amount Determined to Be the Correct Valuation Amount, the Reasonable Cause Exception Does Not Apply

III. CONCLUSION

CITATIONS

Cases

Alli v. Commissioner, T.C. Memo. 2014-15

Cartwright, United States v., 411 U.S. 546 (1973)

Chirinos de Alvarez v. Creole Petroleum Corp., 613 F.2d 1240 (3d Cir. 1980)

Costello v. Commissioner, T.C. Memo. 2015-87

Elec. Arts, Inc. v. Commissioner, 118 T.C. 228 (2002)

Empire Elec. Co. v. United States, 311 F.2d 175 (2d Cir. 1962)

Espinoza v. Commissioner, 78 T.C. 412 (1982)

Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34

Harding v. Commissioner, T.C. Memo. 1995-216

Hewitt v. Commissioner, 109 T.C. 258 (1997), aff'd 166 F.3d 332 (4th Cir. 1998)

Martin v. Pilot Indus., 632 F.2d 271 (4th Cir. 1980)

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986)

Naftel v. Commissioner, 85 T.C. 527 (1985)

Pine Mountain Preserve, LLLP v. Comm'r, 978 F.3d 1200 (11th Cir. 2020)

Platts v. Commissioner, T.C. Memo. 2018-31

Rolfs v. Commissioner, 135 T.C. 471 (2010), aff'd 668 F.3d 888 (7th Cir. 2012)

Rothman v. Commissioner, T.C. Memo. 2012-218

Smith v. Commissioner, T.C. Memo. 2007-368, aff'd 364 Fed. Appx. 317 (9th Cir. 2009)

SWF Real Estate LLC v. Commissioner, T.C. Memo. 2015-63 at [*98]

TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354 (11th Cir. 2021)

Code Sections

I.R.C. § 170

I.R.C. § 170(f)

I.R.C. § 170(f)(11)

I.R.C. § 170(f)(11)(D)

I.R.C. § 170(f)(11)(E)

I.R.C. § 6662(b)

I.R.C. § 6662(b)(3)

I.R.C. § 6662(d)

I.R.C. § 6662(e)

I.R.C. § 6662(e)(1)(A)

I.R.C. § 6662(h)

I.R.C. § 6662(h)(2)(A)

I.R.C. § 6662A

I.R.C. § 6664(c)(1)

I.R.C. § 6664(c)(3)

Regulations

Treas. Reg. § 1.170A-1(c)

Treas. Reg. § 1.170A-1(c)(1)

Treas. Reg. § 1.170A-1(c)(2)

Treas. Reg. § 1.170A-13(c)

Treas. Reg. § 1.170A-13(c)(3)(ii)(I)

Treas. Reg. § 1.170A-14(h)(3)

Treas. Reg. § 1.170A-14(h)(3)(i)

Treas. Reg. § 1.170A-14(h)(3)(ii)

Other Authorities

Notice 2006-96, 2006-46 I.R.B. 1

Notice 2006-96, 2006-46 I.R.B. 1, Sec. 3.02(2)

T.C. Rule 121

T.C. Rule 121(a)

T.C. Rule 121(b)

Uniform Standards of Professional Appraisal Practice, 2014-15 Ed

PRELIMINARY STATEMENT

RESPONDENT SUBMITS this memorandum of law in support of his fourth Motion for Partial Summary Judgment. Respondent's Motion seeks summary judgment on a single, discrete issue: can an appraisal that values a property that the appraisal acknowledges, on its face, does not exist as of the donation date be a qualified appraisal under Internal Revenue Code section 170(f)1?

The appraisal documents at issue in these consolidated cases ("the V&W Appraisals"), which were attached to the Forms 1065 U.S. Return of Partnership Income ("Forms 1065") filed by the four LLCs2 involved in the instant cases, did just that: they valued indisputably vacant parcels of land as if the parcels were existing mining operations. Respondent requests that the Court determine that, as a matter of law, the "V&W Appraisals" are not qualified appraisals and that consequently, if the amount determined to be the correct value of the donated easements is at least 150% of the value claimed on the LLCs' Forms 1065, the reasonable cause exception under section 6664(c)(3) does not apply.

I. STATEMENT OF FACTS

The Memoranda in Support of respondent's previously filed Motions for Partial Summary Judgment described the syndicated conservation easement transactions at issue in these consolidated cases.3 Many undisputed facts described therein are also relevant to the subject of the instant Motion. Thus, Attachments A to respondent's first and second Motions for Partial Summary Judgment (Declaration of Emily J. Giometti), filed in each case (prior to consolidation) on May 1, 2020 and October 9, 2020, respectively, and their attached exhibits are incorporated by reference. Also incorporated by reference is Attachment A to Respondent's Objection to Petitioner's Motion for Partial Summary Judgment on Qualified Appraisers (Third Declaration of Emily J. Giometti) and attached exhibits A23 through A28.4 The exhibits most pertinent to the instant Motion, all but one of which have been previously filed, are attached to the Fourth Declaration of Emily J. Giometti, filed herewith. Appendix A to this Memorandum lists all exhibit numbers. As many of the exhibits are substantively identical across the dockets, unless otherwise stated, all exhibit references in the body of this Memorandum are to the exhibits attached to the four declarations executed by Ms. Giometti, and specifically those which pertain to the lead docket, 17379-19.

A. The Syndicated Conservation Easement Transaction

In 2011, Bobby A. and Elizabeth N. Branch ("Mr. and Mrs. Branch") purchased 607.132 acres of land in North Carolina ("the parent tract") in two transactions for a total price of $2,237,600. In July of 2012, Mr. and Mrs. Branch transferred the parent tract as an initial capital contribution to Bonlee Investment Properties, LLC ("Bonlee"), a single-member limited liability company. (Ex. A6-A8, A20 no. 9.a., A21). Although both Mr. and Mrs. Branch contributed the parent tract to Bonlee, Mr. Branch was the sole member and manager of Bonlee. (Ex. A7-A8).

On December 27, 2013, Bonlee donated a conservation easement on a 151.99 acre portion of the parent tract ("Bonlee property") to Triangle Land Conservancy ("TLC"). (Ex. A28). Martin Van Sant and Thomas Wingard prepared an appraisal dated December 31, 2013 ("V&W Bonlee Appraisal") valuing the entire 607-acre parent tract — that is, the 151.99 acre Bonlee property and the remaining 455.18 acres, which include the properties later transferred to the LLCs and involved in the instant cases, as described below. (Ex. A27). The V&W Bonlee Appraisal claims that the parent tract was worth $22 million immediately prior to Bonlee's easement grant and $1,520,000 after the easement grant, at the end of December 2013. (Ex. A27, p. 2-3).

In September of 2014 (or February 2015, in the case of Vista Hill), the LLCs were formed. (Ex. A10). Each LLC initially had two members: Mr. Branch and Bonlee. (Ex. A11). Mr. Branch made a de minimis cash contribution to each LLC and was named as the LLCs' manager. As its initial capital contribution to each LLC, Bonlee transferred a portion of the parent tract.5 (Ex. A11 Exhibit A: Annex 2 on pg. 43, A13, A14, A16, A20 no. 10.a.).

Interests in each LLC were thereafter sold to investors6 such that after the purchases, investors owned 97% of each LLC, and Mr. Branch and Bonlee owned the remaining 3%. (Ex. A11, A15, A17, A20 no. 11 and 14, A22). The investors paid a total of $5,000,000 ($4,950,000 in the case of Tick Creek), minus approximately $1 million in syndication fees, for their 97% LLC interest. (Ex. A17, A20 no. 12, 13.a.). Shortly after the investors purchased their LLC shares, each LLC executed a Deed of Conservation Easement ("Easement Deed"), in favor of TLC. (Ex. A19).

On their Forms 1065, the LLCs each claimed a charitable contribution deduction of approximately $22.5 million for their easement donations to TLC. (Ex. A16). Respondent disallowed the deductions by Notices of Final Partnership Administrative Adjustment ("FPAA") issued June 24, 2019. (Ex. A to Petition) The FPAAs determined that the LLCs had not complied with the requirements of I.R.C. § 170 and had not established that the value of the transferred conservation easements exceeded $0. (Ex. A to Petition) The FPAAs also asserted accuracy-related penalties for gross valuation misstatements, substantial valuation misstatements, substantial understatements of tax, and negligence under sections 6662(e) and (h), (e), (d) and (b), respectively. (Ex. A to Petition). A penalty for a reportable transaction understatement under section 6662A in each case was asserted on Answer.

B. The V&W Appraisals

To substantiate the easement contribution deductions, the V&W Appraisals7 were attached to the LLCs' Form 1065s. The V&W Appraisals used a "before and after" method — that is, upon concluding that there were no comparable easement sales, the V&W Appraisals purported to value the easements by determining the pre-easement value of each property and subtracting from those amounts the properties' values immediately after the easement grants:

	Green Valley	Big Hill	Tick Creek	Vista Hill
Before Easement Value	$22,800,000	$22,800,000	$22,800,000	$22,700,000
After Easement Value	$241,000	$174,000	$195,000	$202,000
Value of Easement	$22,559,000	$22,626,000	$22,605,000	$22,498,000

The V&W Appraisals claimed that the pre-easement value of each of the four properties was more than eighty times higher than what Messrs. Van Sant and Wingard had valued the same properties (plus the Bonlee property) as being worth the year before (see Ex. A27):

Year
Value Per Acre
2011
Purchase Price
$3,745
2013
Value — V&W Bonlee Appraisal
$2,500
2014-15
Value — V&W Appraisals
$200,600

Each of the four V&W Appraisals acknowledge that the subject properties are "vacant land" (Ex. A18, p. 33) and refer to them throughout as "unimproved." For example, in describing the property held by Green Valley, the V&W Appraisal states that "[t]he 141.65 acres are unimproved and have been used for agricultural purposes with some areas of woodland." (Ex. A18, p. 15). In valuing the pre-easement properties, however, the V&W Appraisals utilized a "hypothetical condition," which is defined as "a condition directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results." (Ex. A18, p.6). Specifically, the V&W Appraisals assume "that there is a viable mining operation . . . on the subject property as of the effective date of valuation."

(Ex. A18, p. 6, p. 28) To put it another way, Messrs. Van Sant and Wingard knew and acknowledged that there were no mining operations in existence, but they admittedly valued the properties as if the properties were operating mines.

II. ARGUMENT

A. Standard for Summary Judgment

Tax Court Rule 121(a) allows either party to move for a summary adjudication of all or any part of the legal issues in controversy. Summary judgment enables the parties to avoid unnecessary and expensive trials and to otherwise expedite litigation. Elec. Arts, Inc. v. Commissioner, 118 T.C. 228, 238 (2002). To meet the requirements of Rule 121, "the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, [must] show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." T.C. Rule 121(b); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Such materials establish an absence of any genuine issue of material fact if they contain undisputed evidentiary facts from which only one inference can reasonably be drawn. Empire Elec. Co. v. United States, 311 F.2d 175, 180 (2d Cir. 1962). See also Martin v. Pilot Indus., 632 F.2d 271, 275 (4th Cir. 1980); Chirinos de Alvarez v. Creole Petroleum Corp., 613 F.2d 1240, 1244 (3d Cir. 1980) ("[W]hen an issue of fact is supported by affidavits or other evidence which admit of only one conclusion, the court may not draw an opposite conclusion merely on the basis of unsupported allegations.").

In moving for summary judgment, the burden is on the moving party to establish that there is no genuine issue of material fact. Espinoza v. Commissioner, 78 T.C. 412, 416 (1982). In order to deny a motion for summary judgment, there must be a "genuine" dispute of material fact. T.C. Rule 121(b). The opponent of a summary judgment motion "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986).

It is incontrovertible that the LLCs used the V&W Appraisals to substantiate their claimed deductions, that the V&W Appraisals valued the properties at issue as if such properties were operational mines, that the V&W Appraisals recognized that no such mines existed, and that the properties were, in fact, unimproved land. The distinction between the properties as they existed (easements on unimproved land) and the properties as they were valued (easements on operational mines) makes a significant difference in these consolidated cases. The record in this case shows that there is no genuine dispute as to the material facts needed to render a decision as a matter of law: as a matter of law, the V&W Appraisals are not "qualified appraisals" as required by section 170(f)(11).

B. Qualified Appraisal Requirements

To substantiate a claimed charitable contribution deduction of more than $500,000, the entity claiming the deduction must attach a qualified appraisal to the return on which the deduction is claimed. I.R.C. § 170(f)(11)(D). A qualified appraisal is, "with respect to any property, an appraisal of such property" which is treated as a qualified appraisal under the regulations or other prescribed guidance, and which is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. I.R.C. § 170(f)(11)(E). IRS Notice 2006-96, 200646 I.R.B. 1 provides guidance regarding appraisal requirements for charitable contributions made during 2014 and 2015, the years at issue in this case. Under Notice 2006-96, an appraisal will be treated as a qualified appraisal if it complies with all of the requirements of section 1.170A-13(c) of the existing regulations and is conducted by an appraiser in accordance with generally accepted appraisal standards.

The purpose of the qualified appraisal requirement is to provide the Internal Revenue Service with information sufficient to evaluate claimed charitable deductions and detect overvaluations of contributed property. Hewitt v. Commissioner, 109 T.C. 258, 265 (1997), aff'd 166 F.3d 332 (4th Cir. 1998); Smith v. Commissioner, T.C. Memo. 2007-368 at 37, aff'd 364 Fed. Appx. 317 (9th Cir. 2009). Thus, this Court has repeatedly rejected appraisals that are premised on false assumptions or provide values for something other than the property that was actually contributed. Rolfs v. Commissioner, 135 T.C. 471 (2010), aff'd 668 F.3d 888 (7th Cir. 2012); Platts v. Commissioner, T.C. Memo. 2018-31; Alli v. Commissioner, T.C. Memo. 2014-15; Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34; Rothman v. Commissioner, T.C. Memo. 2012-218; Harding v. Commissioner, T.C. Memo. 1995-216.

In Harding, specifically, this Court held that the qualified appraisal requirement could not be satisfied where the appraisal was "purely hypothetical." Harding, T.C. Memo. 1995-216 at 6-7. Like the V&W Appraisals here, the appraisal at issue in Harding was "purely hypothetical and dependent solely on the accuracy of [another individual's] reserve estimates." Id. at [*3]. Likewise, in Alli, the Tax Court held that an appraisal which did not value the contributed property but rather "a hypothetical, fully renovated version of the contributed property" was not a qualified appraisal. Alli, T.C. Memo. 2014-15, [*30]. The Court noted that, "in order for the qualified appraisal to help the IRS 'deal more effectively with the prevalent use of overvaluations,' the appraised property must be the same property that was donated and that gave rise to the claimed deduction." Id. at [*30]-[*31]. As this Court pointed out in Costello v. Commissioner, T.C. Memo. 2015-87, an appraisal which values something other than the contributed property does not comply with regulatory requirements "because it prevents the Commissioner from properly understanding and evaluating the clamed contribution." Costello, T.C. Memo. 2015-87 at [*25].

C. As a Matter of Law, the V&W Appraisals Are Not Qualified Appraisals

1. The V&W Appraisals do not Provide a Fair Market Value for the Property Contributed.

For an appraisal document to be a qualified appraisal, it must provide, among other things, "the appraised fair market value . . . of the property" on the date of the contribution. Treas. Reg. § 1.170A-13(c)(3)(ii)(I). Fair market value is defined as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." Treas. Reg. § 1.170A-1(c)(2). The "willing buyer willing seller test of fair market value is nearly as old as the federal income, estate, and gifts taxes themselves." United States v. Cartwright, 411 U.S. 546, 551 (1973). All appraisals submitted for federal tax purposes, including conservation easement appraisals, must apply this definition of fair market value. See TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1369 (11th Cir. 2021) ("The correct value of a conservation easement is 'the fair market value of [it] at the time of the contribution.'") (quoting Treas. Reg. § 1.170A-14(h)(3)(i)).

The fair market value requirement is echoed elsewhere in the regulations. Under section 1.170A-1(c) of the regulations, the amount of a charitable contribution of property other than money is "the fair market value of the property at the time of the contribution." Treas. Reg. § 1.170A-1(c)(1). For conservation easements specifically, where the "before and after" valuation methodology is typically used due to an absence of comparable marketplace sales, the contribution's value is equal to the "difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after." Treas. Reg. § 1.170A-14(h)(3)(i); See also Pine Mountain Preserve, LLLP v. Comm'r, 978 F.3d 1200, 1211 (11th Cir. 2020) (citing Treas. Reg. § 1.170A-14(h)(3)(i) (explaining that the "before and after" method requires "gauging the difference between the fair market value of the property pre-and post-encumbrance").

In this case, the V&W Appraisals prima facie fail to provide "the appraised fair market value . . . of the property" on the date of the contribution. Treas. Reg. § 1.170A-13(c)(3)(ii)(I). The contributions at issue are conservation easements placed on unimproved land. (Ex. A18, A19). Using the "before and after" methodology, the easements should be valued by subtracting the post-easement value of the unimproved land from the land's value immediately prior to the easement. Messrs. Van Sant and Wingard did not, however, attempt to value unimproved land with development potential (i.e., the property that existed on the easement donation dates) when determining the alleged before-easement values. (Ex. A18, A19, A27). Instead, they valued the pre-easement properties as if there already was "a viable mining operation . . . on the subject property as of the effective date of valuation." (Ex. A18, p. 6, p. 28)

The V&W Appraisals contend that mining was the "highest and best use" of the subject properties. (Ex. A18 p. 2, 72). There is, however, a difference between valuing vacant land with the potential to become a mining operation and valuing vacant land as if the mining operation already existed, which is what the V&W Appraisals did. The latter approach does not comply with the applicable regulations. Treasury Regulation § 1.170A-14(h)(3)(ii) provides that, where a "before and after" valuation is used, "the fair market value of the property before contribution of the conservation easement must take into account not only the current use of the property but also an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed." Assuming, arguendo, that each of the properties' highest and best use was as an owner-operated quarry, the V&W Appraisals' false presumption that the quarries already definitively existed is not "an objective assessment of how immediate or remote the likelihood is" that the highest and best use might come to fruition. Treas. Reg. § 1.170A-14(h)(3).

The V&W Appraisals' hypothetical "as-if developed" valuation flatly violates the qualified appraisal requirements. The before-easement valuation is based on factual assumptions which are indisputably false. A willing buyer would never purchase an unimproved parcel of land for the price of an already-developed parcel. The V&W Appraisals therefore do not provide the fair market values for the unimproved properties on which the easements were placed and do not comply with the applicable valuation standard. Treas. Reg. § 1.170A-1(c).

2. The V&W Appraisals Were not Prepared in Accordance with Generally Accepted Appraisal Standards.

A qualified appraisal must be prepared in accordance with generally accepted appraisal standards. I.R.C. § 170(f)(11)(E). Under IRS Notice 2006-96, which provides the applicable guidance regarding appraisal requirements, an appraisal complies with generally accepted appraisal standards if it is "consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice ("USPAP," Ex. A29) as developed by the Appraisal Standards Board of the Appraisal Foundation." IRS Notice 2006-96, Sec. 3.02(2). Although failure to strictly comply with USPAP will not necessarily preclude an appraisal from meeting regulatory requirements, where this Court has accepted an appraisal despite its non-compliance with USPAP, the Court also found that the report's alleged technical errors did not render it unreliable or reflect more significant substantive errors. SWF Real Estate LLC v. Commissioner, T.C. Memo. 2015-63 at [*98]. In this case, the V&W Appraisals' failure to comply with USPAP goes to the heart of their reliability. Consequently, they cannot be considered "qualified appraisals" within the meaning of section 170(f)(11).

(a) The V&W Appraisals Are Generally Misleading and Not Credible

One of the principal purposes of USPAP is to ensure that appraisals "promote and maintain a high level of public trust in appraisal practice" and are prepared "in a manner that is meaningful and not misleading." Ex. A29, USPAP, 2014-15 Ed., Preamble, U-5. Thus, USPAP provides, throughout, that appraisals be credible and not misleading. The term "credible" means "worthy of belief." Id. at U-2, In. 65. Credible assignments, the USPAP comment points out, "require support, by relevant evidence and logic, to the degree necessary for the intended use." Id. at In. 66-67. Thus an appraiser must not, for example, "use or communicate a report that is known to be misleading or fraudulent." Id. at U-7, In. 239. An appraiser "must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use." Id. at U-14, In. 441. Likewise, an appraisal must "clearly and accurately set forth the appraisal in a manner that will not be misleading." Id. at U-21, In. 650.

The V&W Appraisals do not meet USPAP's basic standards of credibility. Their lack of credibility stems primarily from their use of the "hypothetical condition," described above, that there was a viable mining operation on each property as of the valuation date, when in fact no such mining operations existed.

(Ex. A18, p. 6, p. 28). USPAP defines a "hypothetical condition" as "a condition, directly relative to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis." Id. at. U-3, In. 81. A hypothetical condition may be used only if its use "is clearly required for legal purposes, purposes of reasonable analysis, or for purposes of comparison" and its use "results in a credible analysis." Id. at U.-18, In. 563. Credibility is measured in the context of the intended use of the assignment. Id. at F-72, FAQ 156. "Assignment results that are credible for one intended use may not be credible for another intended use." Id. For instance, an appraisal may employ a hypothetical condition that development on an undeveloped property has been completed and provide an opinion of value for the completed project where the appraisal is intended to be used by a lender to underwrite the credit in a land acquisition loan. Id. at F-100, FAQ 216.

Where, as here, the purpose of the appraisal was to provide an appraised fair market value of the donated property for federal income tax purposes, the use of a hypothetical condition that the donated properties were easements on existing viable mining operations (rather than easements on unimproved land), is misleading and not credible. The V&W Appraisals' lack of credibility is evident not only in the obvious and indisputable factual discrepancy between the appraised property (easement on mining operation) and the donated property (easement on vacant land), but in the appraisal results. The use of this hypothetical condition enabled the V&W Appraisers to value the pre-easement Branch properties at a collective $91,000,000, or roughly $200,000 per acre. Per acre, this is more than five times the amount paid by the investors for ownership interests in the LLCs (whose sole assets, other than de minimis cash, were the subject properties), more than fifty times higher than what Mr. Branch paid for the parent tract, and more than eighty times higher than the value previously given to the exact same properties by Messrs. Van Sant and Wingard. (Ex. A1-5, A11, A15, A17, A20 no. 11, 12, 13.a., and 14, A22, A27). These values defy credulity and do not reflect what a willing buyer, with knowledge that the properties were unimproved, would pay.

(b) The V&W Appraisals Fail to Disclose a Prior Assignment

USPAP requires that an appraiser disclose, in the certification attached to the appraisal report, "any services regarding the subject property performed by the appraiser within the three year period immediately preceding acceptance of the assignment, as an appraiser or in any other capacity." USPAP, 2014-15 Ed., U-7. In. 254-59. In 2013, Messrs. Van Sant and Wingard appraised the parent tract, including the subject properties, after the grant of an easement on a portion of the property by Bonlee. (Ex. A27). They valued it at $1,520,000. (Ex. A27, p. 2-3). When, in 2014 and 2015, they executed appraisals valuing the properties at a collective $91 million, they included certifications which state:

4. I have performed no services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment.

Messrs. Van Sant and Wingard's failure to disclose the 2013 V&W Bonlee Appraisal violates USPAP, and this violation is one which further establishes that the V&W Appraisals are fatally misleading, flawed and not credible.

D. If the Value Claimed on the LLCs' Returns is 150% or More of the Amount Determined to Be the Correct Valuation Amount, the Reasonable Cause Exception Does Not Apply

Although this Court has already held, by Order dated May 27, 2021, that the LLCs are not entitled to deduct their contribution of the easements under section 170, the question of whether the V&W Appraisals are "qualified appraisals" is still relevant to the penalty defenses asserted by Petitioner, and specifically whether any underpayment of tax would be the result of "reasonable cause." Petitions, ¶ 7(m).

Section 6662(b)(3) imposes an accuracy-related penalty on underpayments of tax attributable to valuation misstatements. The penalty equals 40% of the underpayment in the case of a "gross valuation misstatement" and 20% of the underpayment in the case of "substantial valuation misstatement." I.R.C. § 6662 (e) and (h). A "gross valuation misstatement" occurs where the value of any property claimed on a return is 200% or more of the amount determined to be the correct valuation amount. I.R.C. §§ 6662(e)(1)(A) and (h)(2)(A). A "substantial valuation misstatement" occurs where the value of any property claimed on a return is 150% or more of the amount determined to be the correct valuation amount. I.R.C. § 6662(e)(1)(A).

Generally, a taxpayer can avoid liability for an accuracy-related penalty if the taxpayer had reasonable cause for the underpayment and acted in good faith with respect to the underpayment. I.R.C. § 6664(c)(1). The reasonable cause defense is not available, however, in the case of an underpayment resulting from a gross valuation misstatement. I.R.C. § 6664(c)(3). For underpayments attributable to substantial valuation misstatements, the reasonable cause exception will only apply if (A) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, as the terms are defined in I.R.C. § 170(f)(11)(E), and (B) the taxpayer made a good faith investigation of the value of the contributed property. I.R.C. § 6664(c)(3).

Thus, if the Court determines that the value claimed on the LLCs' Returns is 200% or more of the correct value, there is no reasonable cause exception. If the Court determines that the value claimed on the LLCs' Returns is 150% or more of the correct value (but less than 200%), the reasonable cause exception can only apply if the additional qualified appraiser and good faith investigation requirements are met. The maximum correct values in this case that would result in valuation misstatements are illustrated in the following chart:

	Green Valley	Big Hill	Tick Creek	Vista Hill
Value of Easement Claimed	$22,559,000	$22,626,000	$22,605,000	$22,498,000
Max. correct value for subst. valuation misstatement	$15,039,333	$15,084,000	$15,070,000	$14,998,666
Max. correct value for gross valuation misstatement	$11,279,500	$11,313,000	$11,302,500	$11,249,000

As established above, the V&W Appraisals, on their face, fail to comply with section 170(f)(11) and the regulations thereunder, and they are not "qualified appraisals." Consequently, if the court determines that the values claimed on the LLCs' returns are 150% or more of the correct valuation amounts, the reasonable cause exception cannot apply.

III. CONCLUSION

The V&W Appraisals valued indisputably vacant parcels of land as if the parcels were existing mining operations. They are undeniably based on a false premise, which renders them misleading and unreliable. On their face, they fail to comply with section 170(f)(11), applicable Treasury regulations, and generally accepted appraisal standards. The V&W Appraisals are, as a matter of law, not qualified appraisals. Respondent's motion should be granted.

DRITA TONUZI
Deputy Chief Counsel (Operations)
Internal Revenue Service

Date: 04/05/22

By: EMILY J. GIOMETTI
Special Trial Attorney
(Large Business & International)
Tax Court Bar No. GE0326
JW Peck Federal Building
550 Main Street, Suite 9-351
Cincinnati, OH 45202-2727
Telephone: (513) 975-6847
[email protected]

OF COUNSEL:
ROBIN GREENHOUSE
Division Counsel
(Large Business & International)
JOHN M. ALTMAN
National Strategic Litigation Counsel
(Large Business & International)
TRAVIS T. VANCE
Strategic Litigation Counsel
(Large Business & International)

Appendix A — Exhibit Numbers
Description

17379-19

17380-19

17381-19

17382-19

FOOTNOTES

1. Unless otherwise stated, all section references herein are to the Internal Revenue Code of 1986, as in effect for the years at issue.

2. The four LLCs, referred to collectively herein as "the LLCs" are Green Valley Investors, LLC ("Green Valley"); Tick Creek Holdings, LLC ("Tick Creek"); Big Hill Partners, LLC ("Big Hill"); and Vista Hill Investments, LLC ("Vista Hill").

3. See each Memorandum of Law in Support of Respondent's First Motion for Partial Summary Judgment (May 1, 2020) (Index No. 12), pp. 2-7, and each Memorandum of Law in Support of Respondent's Second Motion for Partial Summary Judgment (October 9, 2020) (Index No. 31 for docket no. 17379-19, 17380-19, and 17382-19; Index No. 32 for docket no. 17381-19), pp. 3-9.

4. See Respondent's Objection to Petitioner's Motion for Partial Summary Judgment on Qualified Appraisers (February 11, 2022) (Index No. 128 for Docket No. 17379-19), Attachment A.

5. Green Valley, Big Hill, Tick Creek and Vista Hill each received, respectively, 136.12 acres, 96.71 acres, 108.35 acres, and 112.46 acres.

6. Respondent is using terminology most favorable to petitioner for the purposes of Respondent's Second Motion for Partial Summary Judgment. However, respondent does not concede that any investors in Green Valley invested in anything other than tax deductions; no statement made herein should be construed as a concession of these or similar issues.

7. See Ex. A18 for docket no. 17379-19 and 17380-19, A16 for docket no. 17381-19 and A15 for docket no. 17382-19.