Tax Court In Brief | Brooks v. Comm'r | Charitable Contribution Deductions For Conservation Easement; Contemporaneous Written Acknowledgment; Gross Valuation Misstatement

• Jurisdiction: United States,Federal
• Law Firm: Freeman Law
• Subject Matter: Tax, Income Tax, Tax Authorities
• Author: Freeman Law
• Published date: 05 January 2023

The Tax Court in Brief - December 19th - December 23rd, 2022

Freeman Law's 'The Tax Court in Brief' covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of December 19th, 2022, through December 23rd, 2022

• Starer v. Comm'r, T.C. Memo. 2022-124 | December 20, 2022 |Wells, J. |Docket No. 615-13
• Ayria v Commissioner, T.C Memo. 2022-123 | December 19, 2022 | Lauber, J.| Dkt. No 13745-20
• Mamadou v. Comm'r, T.C. Memo 2022-121 | December 20, 2022 | Lauber, J. | Dkt. No. 9759-21L
• Schwartz v. Comm'r, T.C. Memo 2022-125| December 21, 2022 | Vasquez, J. | Dkt. No. 17291-14L

Brooks v. Comm'r, T.C. Memo. 2022-122 | December 19, 2022 |Wells, J. |Docket No. 28206-15

Summary: This lengthy, detailed, and fact-intensive opinion regards a notice of deficiency issued to Kenneth Brooks and Anita Brooks (the 'Brooks') which disallowed substantial carryover charitable contribution deductions relating to the Brooks' limited liability company's ('LLC') noncash charitable contribution of a conservation easement. In focus are 26 U.S.C. ' 170(h) (qualified conservation contribution) and Treasury Regulation, 26 C.F.R. ' 1.170A-14 (qualified conservation contributions).

The Conservation Easement Grant. On December 15, 2006, the LLC purchased 85.314 acres of real property known as Cotton Row Farm in Liberty County, Georgia, for $1,350,000. The LLC subdivided the property into two parcels of 44.113 and 41.201 acres. The LLC granted and recorded a conservation easement over the 41.201-acre parcel (encumbered parcel) on December 27, 2007, to Liberty County, Georgia, a qualified organization pursuant to section 170(h)(3). The deed that granted the easement (Easement Deed) provided:

Grantor, for and in consideration of the sum of ten dollars ($10.00) and other good and valuable consideration and in consideration of the covenants, mutual agreements, conditions and promises herein contained, does hereby grant unto the Grantee, its successors and assigns, forever a conservation easement as defined in O.C.G.A. ' 44-10-1 et seq. in perpetuity, over the Protected Property of the nature and character and to the extent herein set forth.

The Easement Deed did not otherwise refer to any consideration paid by Liberty County. Various donor-directed restrictions were applied to the encumbered parcel. However, the LLC reserved various rights numbered and described (1) through (7), including to use the encumbered parcel for personal enjoyment not adverse to the conservation values. The terms and conditions applicable to the grant and the parties' respective rights were encompassed in the Easement Deed, although the Easement Deed did not state whether it constituted the entire agreement between the parties. The deed included a 'Boundary Description and Protected Property Reference,' consisting of a description, a map showing the outside boundaries, and a second map adding only that the parcel is bisected by an unidentified element. The deed also included a Baseline Report prepared by a biologist and which contained limited and brief written descriptions about the property, its potential uses, benefits, soil types, and means of access. The property was located, essentially, in rural southeastern Georgia. Some residential development was underway about 15 miles from the property, but for the most part, there were no immediate growth prospects for the area.

Charitable Contribution Deduction Claimed. The LLC claimed a charitable contribution deduction of $5,100,000 on its Form 1065, U.S. Return of Partnership Income, for the contribution of the easement to Liberty County for the taxable year ending December 31, 2007. A Form 8283, Noncash Charitable Contributions, with an appraisal summary was attached to the LLC's 2007 tax return. The Form 8283 reported that the donated property was a qualified conservation contribution on a 41.201-acre tract of vacant land; that the donation was valued at $5,100,000; and that the property was purchased on December 15, 2006. The adjusted or cost basis of the donated property was reported as $1,350,000, the cost basis of the entire 85.314-acre contiguous parcel, instead of the cost basis of only the 41.201-acre encumbered parcel. The Brooks claimed a deduction of $748,702 on their Form 1040X, Amended U.S. Individual Income Tax Return, for the 2007 taxable year resulting from their interest in the LLC's contribution deduction and carried forward the remaining deduction of $4,351,298 to future tax years.

Battle of the Experts' Valuations. Each party provided its own expert to value the conservation easement. There were no sales of comparable conservation easements during the relevant period. Both experts calculated the fair market value of the easement by subtracting the value of Cotton Row Farm after the granting of the easement from the value before the granting of the easement. Both experts determined that the highest and...