Tax Court’s Third Strike on Hypothetical Mining Valuations: Paul-Adams Quarry and the Jones Day Theory Rejected Again

Paul- Adams Quarry Trust LLC marks the third opinion in which a valuation theory proposed by law firm Jones Day has not received much respect from the Tax Court. The other two Beaverdam Creek Holdings LLC by Judge Goeke and Ranch Springs LLC by Judge Lauber are now wending their way separately through the 11th Circuit where they will be considered separately by the same three-judge panel. Attorney Charles Hodges indicated to me, that Paul-Adams will also be appealed. Paul-Adams was, as we shall see, not a syndicated deal, but it was inspired by the syndicated conservation easement industry.

About The Conservation Easement Controversy

The syndicated conservation easement industry was inspired by the 2009 decision in the case of Kiva Dunes Conservation LLC.  Kiva Dunes was a golf course on the Gulf Coast ripe to be developed into condominiums and an important stopping point for migratory birds. The owners wanted it to continue as a golf course and did not have much use for charitable deductions so they took on partners who put in money who were specially allocated the charitable contribution for donating an easement.  The valuation stood up in Tax Court.

As it happens, there are probably not enough land poor people to create an industry around that model.  What evolved was a system whereby land was effectively bought and then sold to an investment partnership that would donate a conservation easement.  In order for that to work, though, the value of the conservation easement had to be worth a substantial multiple of the price it had been recently purchased at.  A Senate Finance Committee report in 2020 noted that the “engine of every syndicated conservation-easement transaction” is an inflated appraisal.

The industry had an answer to the “inflated appraisal” argument.  An excerpt from an email reproduced in the committee report stated:

“conservation easement appraisal is very different from a normal real estate appraisal since it takes in to account all future economic benefit on the land and takes future value discounted to present day.”

Robert Ramsey president of the Partnership for Conservation, the industry trade group argued in an article that the idea that a conservation easement’s value was limited to what land had changed hands for was a myth.

I did not notice anybody making these sort of arguments in court until this year.  The Jones Day team headed by Charles Hodges II has proposed a theory that can make the industry valuations make sense. The theory is laid out in detail in article in Bloomberg Tax, if you are interested. The point that comes up in recent cases is the notion that in order for a sale to be counted as a comparable sale, both the buyer and the seller must be market participants. So if a syndicator buys from a farmer property which has a highest and best use as a granite mine, that sale does not count as a comparable which solves the Achilles Heel of the industry. There are no comparable sales, so the value of the easement is the discounted presented value of a hypothetical granite mine.  As noted, Judge Lauber and Judge Goeke of the United States Tax Court are not buying it.  Judge Toro isn’t buying it either as we shall see.

About Paul-Adams

Paul-Adams Quarry Trust LLC (P-A)  owned a 207.32 acre property in Elbert County GA. Elberton,the county seat of Elbert County,   is known as the Granite Capital of the World. The partners in P-A, Robert Paul and Francis Adams, acquired the property in 2007 for $429,875.  They started quarrying the property in 2010, experienced losses and abandoned the effort in 2012 which is when they contributed it to P-A.  In December 2017 they granted a conservation easement to the Oconee River Land Trust.  The easement was valued at $10,234,108.   The IRS said the easement was worth $612,000.

Robert Paul had purchased the property for $199,000 in 1997 and sold it in 2000 for $327,000.  As noted he and Mr. Adams acquired the property for $429,875 and unsuccessfully quarried it till 2012.  They stopped quarrying there even though Mr. Adams was actively searching for a a granite quarry to meet the needs of this granite fabrication business.  He leased another quarry in 2014.  He had an option till 2019 to acquire that 159 acre parcel for $1.4 million net of payments he had already made on the lease.

Those facts left Judge Toro taken aback at the eight-figure valuation of the P-A property.

“Yet, when the easement was granted over the Paul-Adams property in 2017, Paul-Adams claimed the property was worth $10,545,088, relying on its supposed value as an operating granite quarry. In petitioner’s view, the dormant Paul-Adams property could, within four years of being revived, produce a material percentage of the total granite dimension stone produced annually in the entire State of Georgia.

Petitioner has provided no credible evidence of how this would be achieved or why, if these claims were true, the property had not already been used for this purpose.”

There Is More

You can learn a good bit about the granite mining business from reading this opinion.  The reason that Elberton is know as the “Granite Capital of the World” is that it sits atop the Elberton granite deposit estimated by geologists to be 35 miles long 6 miles wide and 2 to 3 miles deep. Originally an annoyance to local farmers the deposit became the basis of a major industry. You can learn about it in exchange for ten minutes of lifespan here. It is all rather fascinating, but not necessary to understand the tax issues here other than to note that the huge granite deposit is not of a uniform quality, so even though you know that if you drill you are going to hit granite, you don’t know that it is something that can be mined profitably.

Mr. Adams has worked in the granite industry since the 1960s and is the owner of Star Granite (SG), a small memorial fabricator. Some of the granite for SG came from quarries in which he had an interest. Due to increased demand in 2011, he was looking for an additional granite quarry to purchase. Ultimately in 2018 Mr. Adams sold SG for around $41.2 million. He kept his quarry interests and agreed to provide granite to the buyer.

Mr. Paul began working in the granite industry in 1962.  He was quite successful and had owned both granite fabrication plants and quarries. In 2012 he gifted the fabrication arm of his business called Eagle Granite to his family and kept his quarries.

There is a good amount of detail on the ups and downs of the various quarries.

Origin Of The Easement Transaction

Over the years Mr. Adams engaged in several transactions to lessen his tax burden.  In 2016 he invested in Jackson Crossroads LLC which yielded a $2,000,000 deduction. The Tax Matters Partner was Greencone Investments. That one was litigated and based on the opinion in 2024 (TCM 2024-111), about $100,000 of that deduction was ultimately allowed. Another Greencone deal he was involved in, known as Cape Resources, had him invest $3.8 million for a $16 million deduction I found an IRS summons in PACER that indicates Cape Resources was under investigation by the IRS and that it was a 2018 deal. There is a stipulated decision on Tax Court docket 2180-23 in 2024 indicating the case settled with a substantial imputed tax.

After investing in Jackson Crossroad Mr. Adams approached Greencone to discuss doing a private easement transaction.  Greencone only did syndicated deals so they referred him to Mooncrest Consulting LLC. Mr. Adams provided Mooncrest with a plat map and acreage, but did not provide information on the mining that had been done on the property.

There were some boreholes drilled that indicated some areas of high quality granite.  The appraisal by Robert Fletcher of over $10 million based on a highest and best use as an active granite dimension stone mine.  Mr. Fletcher did not have access to the financial results of the mining that had been done on the property from 2010 to 2012.

The Trial

The P-A legal team put on a geologic expert who conceived of a hypothetical quarry pit on the property from which 10.7 million tons of aggregate could be mined for a total of $140 million.  An expert in mineral economics and granite market studies converted the 10.7 million tons of aggregate to 130.7 million cubic feet of dimension stone, which is more valuable.  Using a 9% discount rate, he valued the hypothetical operating mine at $12.157 million.  On a royalty basis where someone else would be running the mine he arrived at a value of $5.349 million. Mr. Fletcher, the original appraiser, also testified arriving at a value of $10,545,980 which after deducting an after value of $310,980 arrived at the claimed value of $10,234,108 for the easement.

The IRS had Andy Sheppard a certified general real property appraiser. Using comparable sales he arrived at a before value of $985,000  and an after value of $373,000 making for an easement value of $612,000.

Both the P-A team and the IRS had rebuttal experts to shoot some holes in the initial expert testimony

The Opinion

Judge Toro ruled that the burden of proof had not shifted to the IRS, but that that was not that significant as the result was not close to a tie.  He also ruled that Mr. Fletcher’s appraisal was a qualified appraisal. He ruled in favor of the IRS on a constitutional challenge to the gross valuation penalties.  Those three rulings did not take up much space. The ruling on valuation merited a lot more.

Judge Toro found that the projected hypothetical mine that supported the high valuation was based on unrealistic sale volume and market share forecasts, unrealistic quarry efficiency, unproven quality of granite, unrealistic projected prices, unrealistic labor assumptions and unrealistic assumptions about granite deposits.  That led to the conclusion that there was not a reasonable probability that the land would be used as an active granite dimension stone

The IRS argued that the highest and best use of the property was potential mining after more extensive drilling/testing, creation of a mine plan and completion of a market feasibility study.  Whether it would be dimension or aggregate production was an open question. Judge Toro agreed with IRS on highest and best use.  That led to Judge Toro going with the comparable sales approach.  He noted the taxpayer’s objections to the Sheppard appraisal, that was based on comparable sales.

“Petitioner attempts to undermine Mr. Sheppard’s comparable sales analysis by arguing, primarily, that Mr. Sheppard analyzed sales that were not between “market participants,” that he analyzed sales that occurred after Paul-Adams contributed its easement, that Mr. Sheppard failed to verify the terms of the sales he selected, and that Mr. Sheppard’s comparable properties did not have the correct highest and best use because they were not active mines. We find these arguments unpersuasive.” (Emphasis added)

The “market participants” objection is drawn from the Jones Day theory that I have not seen anyone else putting forth.

Judge Toro rejected that argument on three grounds.  First of all, there is no legal authority supporting it.  Of course, that is what you expect with a new argument. Second Judge Toro disagrees with the Jones Day reading of the Appraisal Institute’s manual. The third is that the argument requires the assumption that the sellers in the noted sales were all economic idiots. As noted he did not find the other arguments persuasive either.

Reaction

I heard from Charles Hodges II, who led the Jones Day Team representing P-A.  Mr. Hodges was particularly concerned about a passage in Judge Toro’s critique of the income method. Judge noted the disparity between the owner operator valuation and the royalty income valuation,

“Put another way, when donating an easement, property owners may give up the right to use a particular property for a particular purpose (e.g., mining). But the easement in no way limits the property owner’s right to conduct business elsewhere. The property owner remains free to lease another similar piece of property and apply his existing capital, skills, and so on to mine there. So long as the lease payment for the similar property is equal to what the lease payment would be for the property on which the easement will be granted, the owner would continue to receive all the returns to which the owner would be entitled for his mining activities, except for the value attributable to the land itself.”

Reflecting on that Mr. Hodges wrote me :

“This is where we are now—the Tax Court now tells taxpayers how to conduct their businesses to MINIMIZE tax benefits.”

He also commented:

“Obviously disappointed in the opinion.  If this fact pattern does not satisfy 170(h) I do not know what does.  You had two granite industry veterans who donated a 200-acre piece of granite property in the heart of Elberton, Georgia, the Granite Capital of the World, because it manufactures two-thirds of the monuments in this country.  The granite veterans were selling their business and donated the property that sat adjacent to an active 100-year old quarry.   The Tax Court had found the quarry property in Beaverdam satisfied financial feasibility in the same market in the same year that the Court in Paul Adams claimed financial feasibility was not satisfied.  The question that I have, and still do, would the owners of Paul-Adams had taken $600,000 for this piece of property in 2017 with an aging baby boomer generation and the ability to maintain their family for at least three generations?  Like Ranch Springs, the opinion focuses solely on what the willing buyer would pay.   We think the hypothetical price must also taken into account what the seller knows about the value of the property.”

Other Coverage

Ed Zollars in Current Federal Tax Developments has Valuation Misstatement and Highest and Best Use: Tax Court Again Rejects Easement Valuation Based on Discounted Cash Flow Analysis for a Nonexistent Business He wrote:

“Determining the value of raw land with potential minerals is like appraising an unfinished novel—while the author (taxpayer) believes the book holds immense value based on its projected sales as a global bestseller (active quarry use), a careful editor (the Court) must value the work based on its current market reality”

Lew Taishoff of Taishoff Law has Heightened Dixieland Rhetoric. Mr. Taishoff emphasizes the fact that the property had a mine that had been shut down.

“A key fact is that the petitioners tried to quarry on the property, lost money (despite being longtime quarry operators), closed up the business, and sat for five (count ’em, five) years with the property dormant. Though they claim they found valuable granite, they closed up just when a major buyer was looking for more product. Makes no sense. And they lost $360K in the operation before shutting down, when starting a new quarry operation wasn’t that much more.”

Jack Townsend on Federal Tax Procedure uses a title, which I will bowderlize –Tax Court Yet Again Finds B******t Conservation Easement Grossly Overvalued (11/4/25).

Just a personal statement here: I hope the Tax Court starts levying substantial penalties on these b******t artists wasting everyone’s time. (But, I am sure, making lots of money for the petitioners’ lawyers to waste everyone else’s time.)

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Originally published on Forbes.com.

For articles oriented toward tax professionals check out Think Outside The Tax Box.