Tony Townley, one of the founders of Zaxby’s, has won a substantial refund in his suit against the United States for a tax refund related to disallowed conservation easement deductions.  We don’t get to know how big the refund was.  He was looking for $43 million.  Townley and the government entered into a confidential settlement.  We know that the settlement amount was at least $2 million and one would think, given that it was a settlement, less than $43 million.  The reason we know that the settlement was at least $2 million is that it was sent to the Joint Committee on Taxation for review.  The Committee staff had no objection.

Syndicated Conservation Easements

This case was not about a syndication.  The Townleys had owned the property for quite a while and were making the donation on their own account.  Still, it would seem that what has been going on with syndicated deals may have affected how the property was valued.  Syndicated conservation easements were inspired by the 2009 Kiva Dunes decision.  Kiva Dunes was a golf course on the gulf coast.  It was also an important stopping point for migratory birds. The property had been owned by the same group for quite a while and they wanted to keep it as a golf course, but its value as a site for beachfront condos was tempting. The golf course owners could not use a charitable contribution.  So they created a special class of partnership interest that people interested in the deduction took more or less in exchange for a capital contribution.  The IRS disputed the valuation but the partnership prevailed in Tax Court.

This was sort of the inspiration for the easement syndication industry, but there were not a lot of situations like Kiva Dunes available.  I remember getting a call from somebody who was working on a plan to buy property and create partnerships where people would buy in with a view to getting a charitable contribution from the donation of a conservation easement by the partnership.  I thought it was the stupidest idea I had ever heard.

The market for undeveloped land is imperfect, but  the people engaged with it are not a bunch of idiots.  So if you buy multiple parcels of land you will not be able to buy them at an average value substantially below fair market value.  And an easement is always going to be a fraction of fair market value.  And the tax benefit of a deduction is going to be a fraction of the deduction.  Silly me.  The industry grew up around the notion that an easement could be worth a multiple of the value of the land that it encumbered.  Robert Ramsey, President of the trade association Partnership For Conservation (P4C) wrote in Tax Notes that the idea that the value of an easement could not exceed the value of the land it encumbered was a myth.

I heard that argument a few times from, but in reading recent Tax Court opinions, it does not seem that anybody ever made it in court.  The Senate Finance Committee commissioned report on the industry in 2020 found that the “engine of every syndicated conservation-easement transaction” is an inflated appraisal.

The Townley Valuation

The Townley deduction of $166,499,000 for an easement on property assessed at $1,678,435 with basis of $1,277,420 was based on the highest and best use of the land being gravel mining. The taxpayer’s valuation rested on the discounted cash flow from mining the gravel on the land. The taxpayer appraisers argued that there were no comparable sales because they could not find an sales where buyer and seller had reasonable knowledge of the relevant facts.  That would be one where the exploration of the granite mining potential of the land had been done as thoroughly as Team Townley had done it.

These sorts of valuation had a really bad year in Tax Court in 2024.  Tax Court judges have made it clear that fair market value is based on what somebody would be willing to pay in the present,

In Savannah Shoals Judge Goeke in allowing only 2.5% of an easement deduction based on mining wrote:

“Significantly, none of petitioner’s experts who testified at trial opined as to the fair market value of the unencumbered easement property. Rather, they determined the net present value of the subsurface aggregate and ignored the regulatory definition of fair market value. The regulations require us to determine fair market value on the basis of the price that a willing buyer and a willing seller would agree to.”

In Big Escambia Ventures LLC, Judge Lauber was ruling on $187,370,000 in charitable contributions that were allocated to investors who had contributed $36 million for property that had recently changed hands in an arms length transaction for $9.5 million.  He was ruling on three out of thirteen related partnerships.  Projecting to the total group gives a disallowance of $175,000,000.  On the mining valuation he quoted from a Fourth Circuit opinion:

“ valuations almost always achieve chimerical magnitude, because, in the mythical business world of income capitalization, nothing ever goes wrong. There is always demand; prices always go up; no competing material displaces the market.”

Townley Not In Tax Court

Rather than take the IRS on in Tax Court, Townley, advised by attorney David Aughtry, paid the tax and then sued for refund in the United States District Court Middle District of Georgia.  Judge Clay D. Land, whose Court, unlike the Tax Court, is not flooded with easement cases scolded the government attorneys for the harsh attitude in their briefing:

“From the heated rhetoric flowing from some of the briefing in this case, it is evident that the IRS and its counsel passionately believe that this worthy conservation scheme has been abused by greedy taxpayers assisted by clever lawyers, crafty accountants, and over-zealous appraisers. That rhetoric, some of which rises to the level of hyperbole, is not particularly helpful in focusing on the precise legal issues to be decided in the present case. Quite frankly, when legitimate skepticism evolves into generalized cynicism, such an attitude is typically counterproductive to assisting the Court to objectively evaluate legal requirements on a case-by-case basis.”

Judge Land ruled against IRS motions to disallow the deduction on technical grounds, which is pretty consistent with the way the Tax Court has been going.  When it came to the valuation problem, though, he was ready to leave that to a jury.  Attorney Lew Taishoff who blogs the Tax Court with incredible intensity gave me some comments on the decision to have the matter tried in District Court before a jury.

“Townley is a local good ol’ boy who cares about The Home Place, and made good selling fried chicken to the locals, not some hedgefund sharpie who made a pile swindling the home folks.

And if he gets a jury, the odds are 99-to-one none of them will begin to understand what the experts are talking about. If lawyers can’t add, and judges won’t add, juries are even less numerate. Mention tax law, and you might as well be talking about Cabbalah or astrophysics.

Remember, USDCJs aren’t tax specialists. I doubt one in fifty does her/his own tax return, much less has ever done anyone else’s.”

That prospect probably accounts for the government’s willingness to settle.  The wisdom of the taxpayer in shunning Tax Court is probably best illustrated by another mining easement case represented by David Aughtry.

The Kaolin Mine

David Aughtry was the attorney in another Georgia mining case – J L Minerals LLC.  Judge Urda found the $16,745,000 deduction was an outrageous overstatement.  As appears to be the trend Judge Urda allowed that JL MInerals had donative intend, that the donation was made exclusively for conservation purposes and that the appraisal was qualified, all issues the IRS had contested.

When it came to valuation though only $93,600 was allowed as a deduction.  He was pretty hard on them.

“We begin with the simple observation that the evidence before us, including the testimony of market participants, firmly establishes that no one involved in the kaolin industry would have paid nearly $17 million for the easement property even if a person were to credit the GMT report and the discounted cashflow analyses that followed it. To put it another way, no rational businessperson would pay the net present value of a business simply to buy the property, as is implicit in Beasley Timber’s position equating the two values.”

Like the Townley case J L Minerals LLC was not a syndicated deal.

The Lesson

The Charitable Conservation Easement Program Integrity Act seems like it should have put an end to abusive syndications, although we will see how it is enforced.  The syndication industry, however, created a demand for wilder and wilder appraisals and the supply arose to meet that demand.  We can expect that those wild appraisals will not go away.  At least for now, though, if big dollars are involved, it seems like taxpayers should avoid Tax Court, pay up and sue for refund.

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