donation of conservation easements the second is whether a forty percent gross valuation misstatement penalty is applicable under the tax court's ruling and the third is whether and to what extent the limited partners capital contributions were made in exchange for so called the skies sales of partnership property as distinct from partnership interests as to each of these issues i submit to you that the tax court either misapplied the law nord undisputed facts or in some cases did both but i'd like to do today is to begin by discussing the penalty which both sides agree was erroneous we imposed under the tax court's ruling that i'd like to talk about the sky's sale issue and that i'd like to talk about the  the two aspects of the tax court's disallowance of the doctrines the perpetuity requirement and the baseline duck station requirement starting with the penalty as i said but sides agree that the tax court erred in applying the gross valuation mistake of penalty based solely on a disallowance ruling that had nothing whatsoever to do with the value of these things so what is the right if we agree with both sides then what is the pends it depends on what this court does with respect to the duction if you were to agree with us and reverse with respect to the deduction other words you agree with us as to both the baseline documentation issue and the  we recognize that there's going to have to be a remake there have to be remapped for the tax court to decide these alternative arguments they raise including valuation the applicability of a penalty and whatever defenses we have available for example the reasonable cause defense did actually the court already foreshadowed is is available to the b c are one partnership so the penalty would be back on the table but in a different context if we agreed with you on that index correct correct now if we disagree with you on th entirety that should be the end of it they should not have a second chance to be able to go back and say you know we'll take the court's complete disallows of the dec deduction but we want either this court or the tax court to consider valuation what you best below he did file a motion for reconsideration but he did so admitted lee far too late outside the time frame and therefore filed a motion for leave to file an out of time motion for consideration which was denied as it should have been secondly the commissioner  did not file across appeal in this court even though he's seeking to expand upon his rights by altering or modifying the tax accords decision in judgment and thirdly he's not challenging any of the tax court's rulings in this appeal farm there is no case there's no statute to supports giving him the second chance just further opportunity he seeks to go to either have this court or to go back to the tax court to do a valuation that would best would result in a partial disallowance just for the sole purpose of trying to set up this forty percent gross margin of this last in something that's already been fully disallowed under that exactly exactly the analogy i think of as it's sort of like the new england patriots scoring the winning touchdown and sudden sudden death overtime of the super bowl and saying well we want the ball back so we can go back and try to kick a field goal for the purpose of beating the point spread or something it's not a great analogy but i think it illustrates that they're trying to actually have the cake need to they're amount of the deduction should have been correct can i see on that in that you know i'm saying you're in a law school and i feel like i'm going to ask a stupid question but that's ok i have already graduated it seems like there's all this discussion about the fact that they got the value of the deduction is being part of the value of what they bought when they bought the partnership interest but isn't it always true when you donate to charity that you get the value of the deduction judge james from understand your question to to take it don't need to take charitable contributions donations for conservation easement you have to me a number of steps under section one seven one of which is to perpetuity requirement another which is to baseline duct tape and court held that we did not satisfy you the one we say we did right but there's also an argument that was made that for three hundred fifty thousand dollars you got three hundred fifty thousand dollars or maybe i'm getting the mount wrong but you got two hundred fifty thousand dollars worth of value and therefore you really didn't make any kind of donation judge james i think you may be conflating to disguise sal maybe i'm just i found this very difficult to understand the disguised sale argument so i guess maybe in my i'm sure my colleagues got it right off the bat but i did let me tell you here it is three hundred fifty thousand dollars a saying you got a home side but they're also saying you got any interest in the common area that's worth something and then also said i thought you got one hundred thousand hours worth of sort of tax credit i think that's there are ok and what i'm trying to understand on the hundred thousand is isn't it always true that when you do something that's deductible you're getting that deduction as part of that doing when i give one hundred dollars to the church maybe it's completely out of altruism but i also get the benefit of that deduction so why would that can't it's kind of value against me that's what i'm trying to understand and that name right demonstrate that i don't understand the you know you want to now it's the so that's the that was my question which we took a while to get to but that's what i'm trying to get  o the the argument that the tax deduction should be considered to be of the scope of the skies selling them was not an argument to tax court even except and i think with good reason because the case law says point if i give one hundred dollars a church that's going to be one hundred dollars deduction so now the commission or the tax iris would say well you got value for that because you got a deduction and therefore you didn't really give a contribution and that seems very circular to say that tax deduction ought to be counted as part of the sky sale analysis but on the other hand it ought to be completely disallowed so others try to ascribe a value to something that in the next breath they say should be certainly than the exits are but then are you just disagreeing that they are also counting the value of the common area and as you discuss a oh yeah let me also i think we need the representatives but whatever but what the facts are and what they're talking about what they say is that each limited partner got a got an interest  in the common areas of the ranch which they say equates to one forty seven since there are forty seven women markers of ten million which is what they say as to the value of the encumbered common area that gap up to the amount of the limited partners total capital contribution was due to the home site with the home site parse the five acre home site parcels are worth fifteen to twenty thousand dollars that's it court could fix the value of the home side parcels which right now we just have a range for purposes of determining what the true amount of the sky sale is but he's he's clearly and then wants determine what happens well i'm trying to get to a bottom line  accepted your legs so backing up if we accepted your argument that there should have been and loud deduction that this was proper and overrule what was done on the the documentation and the boundaries issue then you have to decide to disguise sale i think you would have to decide that anyway ok and then that what has what effect on these partners none of the limited partners only has to be regional  parkers because the discussed sale affects the amount of income that is recognized has to be regional partners and there are three of right now the court has held that every dollar of the limited partners capital contributions was exchange for additional total of thirty minutes per side i think we can live with that but i appreciate that all right i think what they're saying is i got your track on the disguised sales to go back to the other arguments you are making well often says i'll continue with th sky's sale because i don't we're not done with that i don't think with respect to common areas they talk about having an interest in the common areas that the real facts are that the limited partners do not and will not hav ownership interest in the common areas the partnerships currently own the common areas and at some point a future they will transfer them to the b c r a the boston canyon ranch association which is the homeowners bear the right to trap and use that common area judge chance that's it that's right they do have the right to use the common areas but that is not equivalent to a fee simple ownership interest in the common areas there's a difference of course between the right to use and the simple ownership and of course you value them differently the problem with respect to the right to use is they never valued what this right to use can anybody else could i go out to this ranch and just start running around hunting in you know enjoying the beauty of the surroundings without i don't her to do i don't think so accepted that the limited partners don't have the right to exclude others it's the partnerships that have the right to exclude others and likewise it's the party who is using this common area there than the partners department delimit partners and their guests so that kind of answers the question  permission of the partnership correct correct and that's the point that they do have the right to use but the commissioner never ascribed a value never try to prove the value of this right to you about the holder goes it have any and all through it's through the easement agreement has a right to restrict enforced restriction in restriction of use on that easement so i think if i can sort of cut to the bottom line on the sky sale issue you have a cop ca contribution and it was made in exchange for the homesite parcels which are only worth fifteen to twenty thousand dollars apiece they were made exchange for partnership interest which is a nontaxable transaction under the tax code the capital you for a partnership interest is not taxable and then you have a right to use but they never met their burden of putting a value on their use so the bottom line is the tax court's determination of every dollar of four circuit bill cases well that was kind of going outside the original plot we're trading you know this room for that room over there versus this chair for that chair and i understand that distinction but then kind of weird is that and if you have a huge area of several hundred acres and i trade my five acres for his five acres for these five acres that seems very much like bell on the other hand if we determine that oh it turns out be you know spotted owl is nesting over here in this little corner that i had planned to build my house we have to kind of move it around so that i don't interfere with the spot it out that makes a lot of sense or with the boundary was here but it needs to be here to avoid some you know water source or this it and i think that's where you all are trying to you know it this but the problem i have is like if we were to go with you we're we drawing a line that would work for future understanding yeah i'm not sure that can be know the exteriors boundary of the easement whenever you talk about of the homes of the battery could move slightly but the size of the homes and parcel will always remain a five acre is simply the shape of the twisties right take all the holes and put him over in one side of the g s i do i don't this this is this is their argument against this allowing this i don't think they make that argument because remember  talks about boundary modification it doesn't talk about relocation of the home site parcels that's another distinction is this is simply slight boundary modifications and importantly unlike in doug where you have lot land swapping you had you could lift the restriction off property inside and put it on property outside which compromise both the qualified a crazy old and a quite a compromised based on documentation because neither one at the outset evaluated that property outside the what is there that in the plan or whatever it is that makes the the possible revision of the homesites saw it as you called it i think it slight what does that mean well i think it simply article three point two point one i believe is to boundary modification provision which talks about making slight modify the slightest my word with modifications to the boundary doesn't talk about relocating the entire holding this in the slice of swiss cheese just slightly changing the shape to accommodate changing environmental conditions and the like neither of which none of that which would compromise the qualified appraisal or the baseline documentation because both covered all the property that would be subject to the to the modification we don't have a believes in within that one the original range parties gave value in exchange for something what they were sold in the marketing materials is the home site the right to use the common areas and the marketing materials kind of sold the tax deduction as a rebate so trying a third of the pass through deduction how does that differ from the charity sends me a solicitation please give a hundred dollars asterisk we are a farmer once you three all deduct all contributions are tax deductible to the full extent of the law is selling the deduction to me in exchange for my contribution to your point one it's the marketing materials here actually look listed at like a rebate to i'm not trying to make this as an the students here but kind of contrary to what we all understand this is the that this is simply the argument this is what the people thought they were giving value for because of what was laid out in the marketing materials is what the value why it would be worth making  given by the buyers here was part of it just as you understand i think that's a little bit circular at least as far as as far as the deduction is concerned it seems like it's always true if you do something with awareness of tax consequences in those tax concerts consequences included deduction that that's part of why you're doing that then now you're going to say that's a value that then offsets i think that i understand your concern i don't think it affects the outcome of this case in any way ok i think that the issue here is that the tax that the fires gave value in a transaction between both parties that's our general contribute all the common areas to the museum or a homeowner's association here that's why the tax court said that those that land was being home but i live in a development there's a park down the street let's say that that park is worth one hundred and there's twenty get myself in trouble trying to do math but there's twenty people in the development i don't feel like i owe i own five thousand dollars that park because why the right to use it i don't own it and i can't keep anybody else out but i  can go down to the park but so really could probably anybody else and that doesn't give me any ownership and all in that so how can i realize there's some value to being able to use the park but how i don't know that i can value that by taking a hundred thousand dollars  dividing it by the twenty other or the one thousand other people myself who could use a park as your boy and i would just say that if you think the entire amount paid i mean perhaps i don't know why these people gave the money this so these are my five acres and we find out this little edge turns out to be where the spotted owl is so i just want to slightly avoid the spawn it out by moving it maybe i'm not making a movie moving it like that so very small and it's for good conservation purposes and it's always kind of think when you're like bam that's the end of it and in perpetuity you're in history goodbye but that seems a little rigid there's that there's absolutely nothing wrong with giving some additional amount in order to plot this is the whole plot of which there's little some parts and now we're moving over here now we're going over taking my neighbor's house not just making little changes around here so that's why i'm saying to me and my colleagues may disagree i think just completely saying everything has to be rigid down to the last inch is an unworkable and kind of ridiculous rule on the other hand i agree you can't just keep well now i know i want to have this guy's law and now this is going to be the law because then you never really have the conservation purpose if you're just jumping all over the place so why would a lion of the now having to oversee this and these being true by angry modifications rather than complete wholesale exchanges why would that be a sufficient limitation on you know a sufficient middle ground kind of line that we could draw from the reason given by the fourth circuit because they're in the fourth circuit involved there was also way under stood the situation they cannot have six acres they can only have five acres in the shape of it can be varied and y and they are there willing to be willing to work they rode because that included a shift internally of goods home plate boundaries it is very difficult for me to see how not going to be unhappy that i get that close to the door but that isn't the answer that isn't the question would you agree that if the home site boundaries were fixed the men have a different not fixed but they can only be changed slightly i don't know where we're i don't know where where the language is that controls that but if if it does only allow slight particular case under the law write something that other people will look to other people who might want to donate to conservation purposes how do we what is what is it that they're supposed to have turned over that they didn't turn over because then means we're just relying on whoever the particular judge of the tax court is and how they feel on that day about how you know this pile of documents well this pile one high enough but this one now is and i don't think that's i mean let's back up for a moment there's a purpose to this whole scheme which is to encourage people to noni land for conservation purposes we don't accomplish that by saying but we ain't going to tell you what the rules are will just let you congress made an exception to that rule it was congress that created the long list of acquirements that are necessary when you get a partial interest ok so you have it was for a purpose that was to encourage people so you have a people that would just give the property fee simple whatever those people didn't need this bill because they could have done that a long time ago so the people for whom this bill is geared would your the people that are charitable but would like a little love in action out of it all right all right for those purposes then when done or come back and say well we reserve the right to do those things that at that point they don't need organization needs baseline documentation to show that the exercise of the reserve rights is compromise con deduction high be necessary as a necessary consequence brought the value to zero that's not this case this case is more like the alpha one case out of the federal circuit where the disallowance of the deduction leaves open the question a on the baseline documentation issue to affirm the imposition of the forty percent penalty if you feel you can do that even though the tax court did not make a valuation determination or if you need further evaluation determination to remount to the  and the baseline documentation acquirement that is to end of it with respect to penalty it makes no sense and there's no case law that allows them to get a second bite at the apple having won and got the complete disallow that point i guess the argument is what is to prevent so i'm sure you think your client acted in good faith and if they stumbled it was a good faith stumble as opposed to knowing barging in trying to override these rules but what is to prevent somebody from coming in and trying to pull a fast one that's what penalties are all about i mean if you miss the deadline to pay your taxes even if you're that honorable nice person you've got to pay the penalty because otherwise there's no disincentive for people to say well i don't to fifteen there's a deadline i believe i'll wait til my fifty but this is then it is now the penalty in interest and i don't know what else to hit you with because i get it done my well they're there well could have been a penalty based on the tax co disallowance i'm not valuation grounds but they didn't ask the tax court for that and i said that's the procedural issue that they whatever you know hammer the hand they left in the in the senate yes ok and norm they asked this court go for any kind of alternative penalty they're going for the the big actual out of they want the forty percent gross valuation mistake and saying this is the wrong county maybe there's some other penalty there would apply for the person who messed this all up into a good action they were entitled to but it ain't this somehow being part of the disguise sale income the tax court didn't make that determination i don't think there would have been any basis to do so because very importantly a potential tax deduction is not property and in order to trigger a disguised sale under section seven zero seven you have to have property partnership property in the first instance and a potential tax deduction is not property they cite the fourth circuit case involving the virginia historic tax credit that might be property because it was marketable it was guaranteed but a potential tax deduction under the randall case the u s supreme court is not property and that's where that is should and right there  they would have the opportunity to have a tax court determine the valuation issue which was it was tried but the court chose not to decide the case past based on the valuation ground because it's extraordinarily complicated and it would have only resulted in a partial disallow e so he went with the two legal ground the perpetuity ground of the baseline documentation ground that resulted in the total disallows so on remain and there would be a determination of value and likewise for what purpose for the deduction for yes for purposes of the deduction let's put the disguise sale out here alone for a moment because it's a separate issue so yes the valuation to be determined the court would determine whether any kind of penalty attaches to that depending on the valuation result and the court would determine or perhaps at a partner level determination there would be a determination of defenses like the reasonable cost defense that i years and years and there's tremendous litigation fatigue on both sides to be perfectly frank would not break my heart if the court were to affirm the total disallowance of the deduction and end it right there with no penalty that would at least put an end to this litigation but still do to decide the alternative arguments that were not decided including the valuation or evaluation was the main one i think they made an argument to that that the  the court's ruling is very cryptic it's almost as if he he said that the common areas were were part partnership property that was transferred to that i say that's wrong the common areas are owned by the partnership to this day they'll eventually be transferred to the b c r a potentially but they will never be owned by the partners the partners capital contributions did not go and could not go for fee simple ownership in the common areas and ship there who were the partnership could transfer those to the board no your honor now because of the limited partnership agreements the partnerships own the common areas in r and potentially will transfer students for their attention and presence and we will be holding court to tomorrow and i am six hundred camp st if you want to come down that's open to the public