Image by Grok
Piton Holdings
In July we had a regular Tax Court decision on a syndicated conservation easement in Piton Holdings LLC 167 TC No. 4. It was about limestone mining, which made me keep thinking about rhinestone and Glen Campbell’s 1975 hit Rhinestone Cowboy
I couldn’t resist asking Grok for a song called Limestone Easement.
I’ve been walking these Form 8283s so long
Looking for a deduction I can call my own
There’s been a load of compromising
On the road to my big write-off
But I’m gonna be where the lights of the audit never shine on meLike a limestone easement
Riding out on a valuation in a star-spangled appraisal show
Like a limestone easement
Getting cards and letters from promoters I don’t even know
And offers coming over the phoneWell, I really don’t mind the IRS letters
And a setback or two down the line
As long as my appraiser keeps saying
“Highest and best use is a mine”
And the numbers keep climbingThere’ll be a load of happy taxpayers
And a fancy tax court opinion someday
When the lights of the deduction
Finally find meLike a limestone easement
Riding out on a valuation in a star-spangled appraisal show
Like a limestone easement
Getting cards and letters from promoters I don’t even know
And offers coming over the phone
If you are new to my blog, you can check out this roundup of my conservation tax coverage and be assured it is generally pretty serious.
At any rate, there is not a lot to distinguish it from the line of easement cases that have been coming out of the Tax Court for the last few years. Entities related to Ornstein Schuler arranged to acquire a 98% interest in an entity owning a 377.74 acre parcel of rural undeveloped land in Madison County, Alabama for $816,000 in 2018. The famous Clayton Weibel appraised the property as being worth $42,200,000 before a conservation easement was placed on it and $565,000 thereafter. The step by step of this is reviewed in painful detail, but the bottom line seems to be that just shy of seven million dollars was raised from investors who would share the resulting tax deductions totaling $42,200,000 for donation of the easement immediately followed (i.e. two minutes later) by a donation of the fee interest.
Judge Kerrigan’s bottom line was $1,440,000 for the total of the easement ($800,000) and the fee interest ($640,000), a pretty good bump from the $832,653 implied by the price paid for 98%, but a long, long way from over $42 million. There was a dispute about how the remaining paltry deduction would be allocated among the partners. Apparently, transfers which should have been recorded before the contribution were not recorded until twenty minutes later. An example of Reilly’s Fourth Law of Tax Planning – Execution isn’t everything, but it’s a lot. Even if there had been a win on valuation, nothing would have been allocated to the investors because of that oopsies.
Why A Regular Opinion?
What is special about the Piton decision is a constitutional challenge to the accuracy-penalty. The Seventh Amendment. Right to trial by jury. They based the claim on the 2024 Supreme Court opinion SEC v Jarkesy. The Tax Court had already addressed this question with respect to TEFRA partnerships in Riddle Aggregates and the answer was the same for BBA partnerships. They also thought that they could get out of the penalty by disclosure, but that is inapplicable to the valuation penalty.
Some Confusion
I am puzzled as to what will happen if the partnership makes a push-out election given that the investors have been ruled to not have been in the partnership at the time of the contribution. If there is not push-out and IRS chases the partners for payments, are the investors home free?
Other Coverage
Ed Zollars does a deep dive at Current Federal Tax Developments. He observes:
“The court’s blistering rejection of the “owner-operator” DCF method for vacant, unimproved land indicates that the Tax Court will not accept speculative business projections to value raw land. Valuation must be grounded in comparable property sales.”
I sort of thought we were already there.
Lew Taishoff in Don’t Suppose You Can Disclose focused on the statutory penalty issue.