In 2006, a couple bought 310 acres in Tennessee for $1.3 million; years later a partnership claimed a $74.5 million conservation tax deduction, but a US judge valued the easement at just $500,000 and upheld a penalty

A United States Tax Court has sharply cut a huge tax deduction claimed by a Georgia-based partnership over land in Tennessee. The partnership claimed $74.5 million. The court said the land was worth only $500,000. 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. The court also upheld a mandatory 40 percent penalty from the Internal Revenue Service (IRS) for a gross valuation misstatement. It rejected the partnership’s efforts to defend the multi-million-dollar deduction. The case is about a 310-acre piece of land in Grundy County, Tennessee. 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. They paid $50,000 of their own cash and took out a mortgage for the rest. Over the next few years, the owners put the land up for sale but could not find a buyer. They failed to sell it even when they listed it for $2.9 million.Even with that weak sales history, the land was later placed into a syndicated conservation easement deal. Lontrac Enterprises, LLC, which counts as a partnership for federal tax purposes, bought an interest in the property. In December 2014, it gave a perpetual conservation easement covering about 288.8 acres to the Foothills Land Conservancy. A private placement memorandum sent to possible investors promised big tax savings. The partnership offered a 95 percent stake to investors for about $8.8 million. It projected that investors would get tax deductions worth far more than three times the cash they put in. On its federal tax returns, Lontrac claimed a charitable contribution deduction of $74.5 million. It said the best and most profitable use of the land was as a commercial limestone mine.

Audacious valuation based on fictional mining plan

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. “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. “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 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. The court said the partnership had not gotten the zoning approvals it needed and had no proper engineering studies. 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.”

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. 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. 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. This is true even if they relied on advice from a professional appraiser. As a result, Chief Judge Urda confirmed that the 40 percent penalty from the IRS stands in full. 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.