Court Opinion

ID: 9893384
Source: CourtListenerOpinion
Date Created: 2023-10-26 19:02:27.116723+00
Date Added: 2024-06-11T09:02:59.667761
License: Public Domain

United States Tax Court

                         T.C. Memo. 2023-129

                MILL ROAD 36 HENRY, LLC,
        MR36 MANAGER, LLC, TAX MATTERS PARTNER,
                        Petitioner

                                    v.

           COMMISSIONER OF INTERNAL REVENUE,
                       Respondent

                               —————

Docket No. 11676-20.                              Filed October 26, 2023.

                               —————

            MRP, an LLC organized by real estate professionals
      and investors to buy and sell land, acquired 117 acres of
      undeveloped suburban land along a county road for
      $1.25 million (about $10,700 per acre) in December 2014.
      BI, an entity owned by another real estate professional,
      thereafter acquired from MRP a 25% undivided interest in
      these parcels for $315,000. MRP and BI then partitioned
      40 acres of the eastern tract to create a new tract (“Tract”).
      MRP and BI then contributed Tract to MR36, a TEFRA
      partnership. MR36’s only asset was Tract. MRP then sold
      the remainder of the 117 acres to two other entities.

             In September 2016 an investment fund, IF, acquired
      a 97% ownership interest in MR36 for $1 million
      (equivalent to about $25,800 per acre). Under the control
      of IF, MR36 donated by deed in December 2016 a perpetual
      conservation easement (constituting a “qualified real
      property interest” under I.R.C. § 170(h)(1)(A)) on 33 acres
      of Tract to SCT (a “qualified organization” under I.R.C.
      § 170(h)(1)(B)) for “conservation purposes” under I.R.C.
      § 170(h)(1)(C). Relying on a professional appraisal, MR36
      claimed a charitable contribution deduction of $8,935,000
      (about $270,800 for each of the 33 acres) for a “qualified

                           Served 10/26/23
                                     2

[*2]   conservation contribution” under I.R.C. § 170(h) on its tax
       return.

             R examined MR36’s return and issued a Notice of
       Final Partnership Administrative Adjustment (“FPAA”)
       determining to disallow the charitable contribution
       deduction. MR36’s TMP filed a petition in this Court
       challenging the FPAA.

              Held: MR36 made a qualified conservation
       contribution under I.R.C. § 170(h) and attached to its
       return a qualified appraisal by a qualified appraiser under
       I.R.C. § 170(f)(11) and Treas. Reg. § 1.170A-13(c)(3).

             Held, further, the value of the easement granted on
       Tract is $900,000 (about $27,300 per acre)—the amount
       conceded by R.

              Held, further, because Tract had been inventory held
       for sale to customers in the ordinary course of business by
       MRP and BI—the partners who contributed it to MR36—
       the amount of MR36’s deduction is limited under
       I.R.C. § 170(e)(1)(A) to its adjusted basis in Tract,
       $416,563.

             Held, further, the I.R.C. § 6663 fraud penalty is not
       applicable to MR36, but the I.R.C. § 6662(h) gross
       valuation misstatement penalty is applicable. To the
       extent the deduction is disallowed not because of valuation
       but because of the basis limitation of I.R.C. § 170(e)(1)(A),
       the penalty for a substantial understatement of income tax
       under I.R.C. § 6662(b)(2) applies, or, in the alternative, the
       penalty for negligence under I.R.C. § 6662(b)(1) applies.

                                —————

Anson H. Asbury, R. Brian Gardner III, Ethan J. Vernon, and Lauren T.
Heron, for petitioner.

Olivia Hyatt Rembach, Ashley M. Bender, Kristina L. Rico, Elizabeth C.
Mourges, Kimberly B. Tyson, and Matthew T. James, for respondent.
                                                     3

[*3]                          TABLE OF CONTENTS
FINDINGS OF FACT .............................................................................. 6
Jeff Grant’s real estate business ............................................................. 6
Benjamin Helms and Benwood Investments, LLC................................. 7
Dr. Chen, Qin Meng, and Zhen Wang ..................................................... 7
Daniel Carbonara and Old Ivy Capital Partners, LLC .......................... 8
Adam Price and Falcon Design Consultants .......................................... 9
Ron S. Foster & Co., Inc........................................................................... 9
Mill Road Partners ................................................................................... 9
The Mill Road Tract ............................................................................... 10
Mill Road 36 ........................................................................................... 10
Falcon Design’s concept plan ................................................................. 11
Mill Road 36’s zoning application.......................................................... 12
Mr. Grant’s other properties.................................................................. 15
MR36 Investments, LLC........................................................................ 15
Sale of interests in Mill Road 36 ........................................................... 16
Mill Road 36’s easement donation ......................................................... 16
SCT’s baseline report ............................................................................. 17
The easement deed................................................................................. 17
Valuing the easement for the 2016 tax return ..................................... 19
Reporting the easement donation on Mill Road 36’s 2016 return ....... 21
IRS examination and FPAA .................................................................. 23
Tax Court proceedings ........................................................................... 24
The value of the Mill Road Tract easement .......................................... 24
      Petitioner’s expert, Mr. Clanton .................................................... 25
      The Commissioner’s expert, Mr. Kinney ....................................... 25
      Our findings as to the value of the Mill Road Tract ..................... 26
OPINION ................................................................................................ 26
I.    Burden of proof ............................................................................... 26
II.   Qualified conservation contributions............................................. 27
      A.     Whether Mill Road 36 donated a qualified real property
             interest .................................................................................... 27
                 1.        Donative intent ..................................................... 27
                 2.        The existence of the partnership ......................... 28
      B.     Whether the easement satisfies an enumerated
             conservation purpose .............................................................. 30
                 1.     Protection of a relatively natural habitat ............ 31
                 2.     Preservation of open space ................................... 35
                 3.     The size of the Mill Road easement ..................... 36
                                                    4

[*4] C.      Whether the easement protects its conservation
             purposes in perpetuity ............................................................ 39
III. Compliance with the substantiation requirements ...................... 40
      A.     A summary of the requirements............................................. 40
      B.     The two supposed defects ....................................................... 41
                 1.    Whether Mill Road 36 “had knowledge of facts” . 42
                 2.    Whether necessary signatures are missing ......... 45
IV. The value of the easement donation .............................................. 46
      A.     The method of valuing a conservation easement................... 46
      B.     The value of the Mill Road Tract easement ........................... 48
                1.      Legal permissibility .............................................. 48
                2.      Sales comparables ................................................ 50
                3.      Sales history of the Mill Road Tract .................... 52
V.    The amount of the allowable charitable contribution
      deduction ......................................................................................... 53
      A.     Special rules for inventory property....................................... 54
      B.     The Mill Road Tract as inventory .......................................... 55
VI. Penalties ......................................................................................... 56
      A.     Section 6663 fraud penalty ..................................................... 57
                 1.     General fraud penalty principles ......................... 57
                 2.     Liability for the fraud penalty ............................. 58
      B.     Section 6662 accuracy-related penalty................................... 64
                 1.     General accuracy-related penalty principles ....... 64
                 2.     Liability for an accuracy-related penalty ............ 65
                 3.     Whether Mill Road 36 is liable for an accuracy-
                        related penalty ...................................................... 67
VII. Conclusion ....................................................................................... 71
APPENDIX ............................................................................................. 72
                                           5

[*5]     MEMORANDUM FINDINGS OF FACT AND OPINION

       GUSTAFSON, Judge: At issue is a charitable contribution
deduction for the donation in 2016 of a conservation easement on 39.68
acres of real property (“Mill Road Tract”) by a TEFRA partnership, 1 Mill
Road 36 Henry, LLC (“Mill Road 36”), 2 to the Southern Conservation
Trust, Inc. (“SCT”). Pursuant to section 6223(a)(2), 3 the IRS issued to
Mill Road 36 a Notice of Final Partnership Administrative Adjustment
(“FPAA”) disallowing the $8,935,000 charitable contribution deduction
claimed on Mill Road 36’s Form 1065, “U.S. Return of Partnership
Income”, for the tax year ending on December 31, 2016. MR36 Manager,
LLC, as Tax Matters Partner (“TMP”) of Mill Road 36, timely filed a
petition in this Court challenging the determination.

       The issues for decision are: (1) whether Mill Road 36 attached to
its tax return a “qualified appraisal” by a “qualified appraiser” within
the meaning of section 170(f)(11) and Treasury Regulation
§ 1.170A-13(c)(3); (2) whether the easement is a “qualified conservation
contribution” under section 170(h); (3) the fair market value of the
easement; (4) whether Mill Road 36’s deduction is limited to its basis in
the donated property under section 170(e)(1)(A); and (5) whether the

        1 Before its repeal, see Bipartisan Budget Act of 2015,    Pub. L. No. 114-74,
§ 1101(a), 129 Stat. 584, 625, the Tax Equity and Fiscal Responsibility Act of 1982
(“TEFRA”), Pub. L. No. 97-248, §§ 401–406, 96 Stat. 324, 648–70, governed the tax
treatment and audit procedures for many partnerships, including Mill Road 36 Henry,
LLC. TEFRA partnerships are subject to special tax and audit rules. See §§ 6221–
6234. TEFRA requires the uniform treatment of all “partnership item[s]”—a term
defined by section 6231(a)(3)—and its general goal is to have a single point of
adjustment for the Internal Revenue Service (“IRS”) rather than having it make
separate partnership-item adjustments on each partner’s individual return. See H.R.
Rep. No. 97-760, at 599–601 (1982) (Conf. Rep.), as reprinted in 1982-2 C.B. 600,
662–63. Under TEFRA, if the IRS decides to adjust any partnership items on a
partnership return, it must notify the individual partners of the adjustment by issuing
a Notice of Final Partnership Administrative Adjustment. § 6223(a).
        2 The name of the entity at issue in this case—“Mill Road 36 Henry LLC”—

followed a convention used by Mr. Jeff Grant (discussed below) for an entity to own
property: “Mill Road” was an adjacent road; “36” was the approximate acreage of the
property to be owned by the entity (although in fact the property had a total of about
40 acres, and the easement covered about 33 acres); and “Henry” was the name of the
county in which the property was situated.
        3 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (“Code”), as in effect at the relevant times; regulation references
are to the Treasury Regulations (“Treas. Reg.”) codified in Title 26 of the Code of
Federal Regulations, as in effect at the relevant times; and Rule references are to the
Tax Court Rules of Practice and Procedure. Some dollar amounts are rounded.
                                        6

[*6] fraud penalty under section 6663, or in the alternative an accuracy-
related penalty under section 6662, is applicable to Mill Road 36 for
2016. We hold (1) that the appraisal attached to Mill Road 36’s tax
return is a qualified appraisal by a qualified appraiser; (2) that the
easement donated on the Mill Road Tract is a qualified conservation
contribution under section 170(h); (3) that the value of the easement
donated by Mill Road 36 was $900,000 (i.e., about $8 million less than
the value Mill Road 36 claimed on its return); (4) that the amount of Mill
Road 36’s deduction is limited to $416,563 (i.e., Mill Road 36’s basis in
the Mill Road Tract) under section 170(e)(1)(A); and (5) that the section
6663 fraud penalty is not applicable to Mill Road 36 for 2016, but that
accuracy-related penalties under section 6662 are applicable.

                            FINDINGS OF FACT

       When MR36 Manager, LLC, filed the petition commencing this
case, the principal place of business of Mill Road 36 was in Georgia. 4

Jeff Grant’s real estate business

       Jeff Grant was born and raised in Henry County, Georgia, and he
has lived there for most of his life. Mr. Grant started his business in
real estate buying timberland in the early 1980s. He has extensive
knowledge and experience in the Henry County real estate market. At
the time of trial Mr. Grant owned (outright or through a partnership)
approximately 21,000 acres of land—4,000 acres of which are in Henry
County.

       Sometime after 2008 Mr. Grant started Southern Consulting
Services, for which he is owner, chief executive officer, and chief
financial officer. Through Southern Consulting Services Mr. Grant
makes money from consulting fees and by either selling land to
developers outright or forming joint ventures with them. Mr. Grant sells
land to developers for what he refers to as “dirt price”, which he defines
as the price of the undeveloped land (i.e., without utilities or other
infrastructure installed) but with a concept plan. 5 He determines the
“dirt” sale price on the basis of the total number of residential units in

       4 Under section 7482(b)(1)(E), venue for an appeal would be the Court of
Appeals for the Eleventh Circuit, unless stipulated otherwise pursuant to section
7482(b)(2).
         5 The alternative to “dirt price” is “horizontal development price”, which

includes the cost of installing water, sewer, storm drainage, streets, and erosion
control.
                                    7

[*7] the concept plan, and it is Mr. Grant’s objective to increase the sale
price by maximizing the number of residential units to the extent
allowed under local county ordinances. Although Mr. Grant makes a
profit from land sales, he often sells property for less than its appraised
value so that a prospective buyer-developer will consider the land a
bargain and a profitable prospect. Whether the land sold by Mr. Grant
to a buyer is ultimately developed pursuant to the concept plan is
immaterial to Mr. Grant, because his business activity is merely to sell
the land at a profit.

Benjamin Helms and Benwood Investments, LLC

       Benjamin Helms is a lifelong resident of Henry County, Georgia.
Mr. Helms and Mr. Grant have been friends since childhood and have
worked together in the real estate business since the 1980s. Mr. Helms
is an officer of Southern Consulting Services along with Mr. Grant, but
he also owns his own entity, Benwood Investments, LLC (“Benwood
Investments”), which he started in May 2011. Benwood Investments is
in the business of buying and selling real estate.

Dr. Chen, Qin Meng, and Zhen Wang

       Dr. Chen (now deceased) was an orthopedic surgeon and from
2014 was a business partner of Mr. Grant in the real estate business.
Qin Meng is Dr. Chen’s widow and is a dual citizen of the United States
and China. Ms. Meng is a real estate investor, and she continued
investing with Mr. Grant after Dr. Chen’s death. Zhen Wang is an
accountant and real estate investor who lives in Shanghai, China, and
is Ms. Meng’s brother-in-law. Mr. Wang also began investing in real
estate with Mr. Grant in 2014. Ms. Meng’s and Mr. Wang’s investments
in real estate with Mr. Grant are generally undertaken by means of
limited liability companies (“LLCs”) with Mr. Grant as managing
member, and Ms. Meng and Mr. Wang trust Mr. Grant to find good
investment properties for their capital. Each LLC created by Mr. Grant
for this purpose holds a particular property as its only asset and is
generally named using a combination of the road name, county, and
acreage. One such entity was Mill Road Partners 125, LLC (“Mill Road
Partners”)—an entity formed specifically to purchase the parent tract
(which was evidently expected to be 125 acres but actually consisted of
117 acres) that included the eventual 40-acre property at issue in this
case (discussed below at page 10).
                                          8

[*8] Daniel Carbonara and Old Ivy Capital Partners, LLC

       Daniel Carbonara began his career in Atlanta, Georgia, at the
public accounting firm KPMG, working on mergers and acquisitions
transactions. But following his receipt of a master of business
administration degree from Duke University, Mr. Carbonara moved to
New York City. There he worked in corporate finance and investment
banking, and his responsibilities included finding and connecting
networks of investors and businesses to “create transactions”.
Mr. Carbonara eventually moved with his family back to the Atlanta
area, and after a few years he began working for Brookstone Partners—
a private equity fund—where his responsibility was to find
opportunities to deploy firm and third-party capital.

       Ultimately Mr. Carbonara formed Old Ivy Capital Partners, LLC
(“Old Ivy”), as a joint venture with Peachtree Investment Solutions—a
firm owned by two individuals with backgrounds in tax equity.6
Through Old Ivy Mr. Carbonara gained experience structuring tax
equity transactions and syndication of tax credits and conservation
easements. The partners agreed to terminate the original Old Ivy
(organized in Delaware) in 2013, and in that same year Mr. Carbonara
reformed Old Ivy as a Georgia LLC and was its sole member and owner.
Through Old Ivy, Mr. Carbonara thereafter marketed investment
opportunities to raise third-party capital for business opportunities
including real estate and operating businesses to generate above-stock-
market returns. Having grown up near Henry County, Mr. Carbonara
was familiar with its real estate market.

      Mr. Carbonara met Mr. Grant in 2014 and began purchasing
property from him. Each sale to Mr. Carbonara of land owned by
Mr. Grant (of which there were at least nine) was structured as a sale of
a partnership interest in the partnership which held the property, and
Mr. Grant was aware that Mr. Carbonara intended to donate syndicated
conservation easements on the properties.

        6 See Phillip Brown & Molly F. Sherlock, Cong. Rsch. Serv., R41635, ARRA

Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis,
and Policy Options 16 (2011) (“Tax equity is a hybrid (debt/equity) type of investment
that has a preferred position, over the project sponsor, for the project cash flows and
tax benefits”).
                                          9

[*9] Adam Price and Falcon Design Consultants

       Adam Price is a professional engineer who does business in the
State of Georgia (as well as other states) and is the managing partner of
Falcon Design Consultants (“Falcon Design”). Mr. Price’s work includes
land surveying, infrastructure designing (such as roads, pipes, water
lines, sewer lines, storm sewers), land grading, and construction
administration. Mr. Price did not design vertical buildings as an
architect would do; rather, his work involved preparing a site for a
future building. Mr. Grant hired Falcon Design (and Mr. Price) to create
concept plans for 27 projects in 2016—12 of which were for assisted
living facilities (including the Mill Road Tract, as discussed below).

Ron S. Foster & Co., Inc.

      Ron Foster is a professional appraiser in Lilburn, Georgia.
Mr. Grant hired Mr. Foster in June 2016 to appraise 33 properties—one
of which was the Mill Road Tract. Janet Gaskin and David Miller
worked for Mr. Foster and frequently corresponded with Mr. Grant on
Mr. Foster’s behalf.

Mill Road Partners

       Mill Road Partners is a Georgia LLC organized by Mr. Grant,
Ms. Meng, and Mr. Wang to buy and sell land. On December 12, 2014,
Mill Road Partners acquired two tracts of undeveloped land in a
highway corridor of Henry County designated for medium to high
density development (a 49.83-acre tract along the western frontage of
Mill Road and a 67.57-acre tract along the eastern frontage of Mill Road,
totaling about 117 acres) for total consideration of $1,250,000 (i.e.,
averaging under $10,700 per acre). Approximately two weeks later, on
December 30, 2014, Benwood Investments acquired a 25% undivided
interest in these tracts along Mill Road for consideration of $315,000 (an
amount corresponding to about $10,770 per acre). 7 The 67.57-acre tract
east of Mill Road contains the acreage that would eventually be subject
to the conservation easement at issue in this case. Mill Road Partners
and Benwood Investments then partitioned 39.68 acres (which we

        7 Benwood Investment acquired an interest in the land itself, not an interest

in Mill Road Partners. Benwood Investments acquired not 25% of the acreage but
rather an undivided 25% interest in the acreage. But if those proportions are treated
as equivalent, then Benwood Investment’s 25% equated to 29.25 acres (117 acres ×
0.25 = 29.25 acres), and its purchase price of $315,000 divided by 29.25 yields $10,769
per acre.
                                    10

[*10] hereafter round up to 40 acres) to create the Mill Road Tract,
which they then contributed to Mill Road 36 on August 28, 2015.
Pursuant to section 723, Mill Road 36 took from its contributing
partners a “carry-over” basis of $428,317 in the Mill Road Tract.

       Of the original 117 total acres, the remaining 77 acres (after
partition of the 40-acre Mill Road Tract) were disposed of as follows: A
31.5-acre parcel to the southeast of the Mill Road Tract was sold to
Evergreen Management Group in an arm’s-length commercial
transaction for which Mr. Grant was paid a commission for his role as
an agent facilitating the sale. The remaining parcels were later sold to
49 Mill Road Henry, LLC (another LLC controlled by Benwood
Investments, Ms. Meng, and Mr. Wang).

The Mill Road Tract

       As the Commissioner’s expert explains, “Henry County is located
within the southern portion of the Atlanta metropolitan area”, and the
Mill Road Tract is “in an area of heavy commercial and residential
development”. The Commissioner acknowledges that the Mill Road
Tract “has intensely developed subdivisions on the north and east sides”.

       But the Mill Road Tract is 40 acres of undeveloped land located
in that rapidly growing suburb. Mill Road runs along its western border.
Residential development is to the north and east. A tributary stream to
Birch Creek runs inside the property’s southern border and establishes
a wetland area and riparian buffer that covers approximately 27% of the
property. Birch Creek feeds into the larger Walnut Creek, which is a
main tributary to the South River—a designated high priority
watershed in the Georgia State Wildlife Action Plan (“SWAP”). The
interior of the Mill Road Tract is 61% oak-hickory forest, which is visible
along one-quarter mile of Mill Road.

Mill Road 36

        Mill Road 36 is a Georgia LLC, treated as a partnership for
federal income tax purposes. Mr. Grant organized Mill Road 36, and the
original members were Ms. Meng (with a 20% interest), Mr. Wang (with
55%), and Benwood Investments (with 25%). David Harris (a lawyer
engaged by Mr. Grant) filed articles of organization for Mill Road 36
with the State of Georgia on December 10, 2015. (Before the date of that
filing, however, Mr. Grant, operating as managing member in the name
of Mill Road 36, acquired title to the 40-acre Mill Road Tract, engaged
Falcon Design for a concept plan and Mr. Foster for an appraisal, and
                                        11

[*11] marketed the Mill Road Tract for sale to developers or other real
estate investors.) Mill Road 36’s only asset was the 40-acre Mill Road
Tract, and its ostensible business purpose was to hold the Mill Road
Tract for sale to a developer. Accordingly, Mr. Grant had a topography
survey done on the Mill Road Tract, as well as soil studies, rock studies,
wetlands surveys, and flood zone surveys. Mr. Grant also had concept
plans prepared for the Mill Road Tract to be developed for single-family,
multi-family, and assisted-living units.

Falcon Design’s concept plan

       In 2015 Falcon Design prepared a horizontal 8 concept plan for a
senior-living development on the Mill Road Tract, considering its
topography, wetlands (as recognized and marked by Henry County), and
the Birch Creek flood plain. Mr. Price reviewed the concept plan. The
concept plan included both a 552-unit assisted living facility (on the
northern portion of the Mill Road Tract) and 125 “senior independent
living” units 9 (on the southern portion) for a total of 677 units.

       Mr. Price came up with the 677-unit plan by using as a model the
building layout of an assisted living facility in Alabama and in effect
placing that model on the Mill Road Tract. Mr. Grant indicated to
Mr. Price that the concept plan should show buildings four stories high
and should include the maximum number of units within the physical
limitations of the Mill Road Tract. Mr. Price was not aware of any
specific requirements that the Georgia Department of Community
Health imposes on “assisted” and “independent” living facilities, but
Mr. Grant assumed that, because the “assisted living” ordinance in
Henry County (discussed below) does not specify density requirements
or density caps, a development with as many units as physically possible
on the land could be approved. Mr. Grant was indifferent to the average
bed capacity for assisted living facilities in Georgia because his goal with
any property he sold was to maximize the total number of units proposed
for the property (and thereby to maximize its potential price). The
intended buyer of the Mill Road Tract with the concept plan for a senior

       8 The concept plan is “horizontal” because it designs only roads, parking, and

building placement within the Mill Road Tract, and does not undertake the “vertical”
design of any buildings that would need to be constructed to develop the property in
accordance with the plan. Such a design is typically done by an architect.
         9 According to petitioner’s expert, Mr. Clanton, “[i]ndependent living

communities are an age restricted development that enable individuals to maintain
their lifestyles without custodial or medical assistance.”
                                    12

[*12] living development would have been a senior living developer.
Neither Mr. Price nor Mr. Grant had any specialized training regarding
assisted living facilities, nor was either of them familiar with the legal
requirements governing approval, licensure, construction, and
operation of assisted living facilities in Georgia.

Mill Road 36’s zoning application

        Zoning approval for an application for development in Henry
County generally followed a three-step process: first, the application had
to receive a recommendation from the Planning and Zoning staff that
the Zoning Advisory Board approve the requested “conditional use”—
i.e., use of the property subject to conditions to be stated in the eventual
permit that the county would issue; second, the conditional use had to
be approved by the Zoning Advisory Board itself; and third, the
conditional use then had to be approved by the Commissioner of
Planning and Zoning in Henry County. However, because of a need in
Henry County for senior assisted living facilities, Henry County
Planning and Zoning removed the third step of the approval process so
that the final step—approval by the Commissioner—would no longer be
required. That is, approval of an assisted living facility development in
Henry County followed a two-step process. Generally, if the Henry
County Planning and Zoning staff recommended that a conditional use
be approved, then the Zoning Advisory Board approved the conditional
use, and the zoning approval was thereby final.

       Mill Road 36 filed on July 8, 2016, an application for conditional
use to develop an assisted facility on the Mill Road Tract. The
application was prepared by Falcon Design and included its concept plan
for a senior-living development on the Mill Road Tract.

       Henry County Planning and Zoning prepared a “Conditional Use
Evaluation Report” for the proposed assisted living facility on the Mill
Road Tract, which it issued on July 8, 2016. The report recommended
county approval by the Zoning Advisory Board subject to, inter alia, the
following condition:

      The deed of the subject properties shall be restricted with
      the following clause: “Only those facilities that qualify as
      assisted living facilities per ULDC [Unified Land
      Development Code], Chapter 4, Section 4.03.18 and
      Appendix A may be constructed, operated, and maintained
      on these properties.”
                                     13

[*13] Appendix A to the cited provision of the Henry County Code of
Ordinances, Unified Land Development Code defines “assisted living
facility” as

      a state-licensed use in which domiciliary care is provided to
      adults who are provided with food, shelter and personal
      services within independent living units which could
      include kitchen facilities in which residents have the option
      of preparing and serving some or all of their own meals.
      This use shall not include hospitals, convalescent centers,
      nursing homes, hospices, clinics, or similar institutions
      devoted primarily to the diagnosis and treatment of the sick
      or injured.

(Emphasis added.)      This definition of “assisted living facility”
(implicated in the condition stated in the “Conditional Use Evaluation
Report” for the Mill Road Tract) includes two features that must be
noted:

        First, this definition begins with the point that an “assisted living
facility” is a “state-licensed use”. The state regulations governing
licensure to operate such a facility in Georgia are found in Ga. Code Ann.
§§ 31-6-40 (2009) and 31-6-43 (2012) and Ga. Comp. R. & Regs. 111-8-
63 (2012), and they require the facility to obtain (1) a certificate of need
from the Georgia Department of Community Health, Healthcare
Facility Regulation Division, Office of Health Planning, Ga. Code Ann.
§ 31-6-40(a), for which it must first submit a letter of intent to submit
an application for a certificate of need and, at least 30 days later, the
actual application, Ga. Code Ann. § 31-6-43(a), and (2) a permit to
operate an assisted living facility on the property, Ga. Comp. R. & Regs.
111-8-63-.05, for which an application must be submitted showing floor
plans, pictures, personnel, ownership, zoning compliance, and financial
stability. No such submissions were made with respect to the Mill Road
Tract.

      Second, the county’s definition of “assisted living facility”
excludes facilities for treating the sick and injured, and the definition
evidently presumes that all residents are instead capable of
“independent living” (though neither “independent living units” nor
“independent living facility” are terms specifically defined in
Appendix A).
                                          14

[*14] Approving an assisted living development (or leaving the
application pending) had an effect on Henry County’s overall
development plan, and therefore the Planning and Zoning staff, after
giving its recommendation of approval for conditional use, requested
that Mr. Grant withdraw the application if he thought that the assisted
living facility granted conditional use might not actually be developed.
Mr. Grant obliged and withdrew the application because the decision
whether to proceed to actual development was not up to him but rather
to his eventual buyer. The Commissioners of Henry County Planning
and Zoning asked Mr. Grant to withdraw his conditional use
applications because those multiple applications would disrupt the
county’s planning and approval of other assisted living facility
developments, if the property that had been either approved or
recommended for approval for conditional use as an assisted living
facility was instead thereafter placed in conservation while its
application remained pending.

       Mr. Grant communicated to Mr. Price of Falcon Design
approximately one week before receiving the approval recommendation
letter that it was his intention to withdraw the application upon receipt
of the letter approving conditional use. 10 Consistent with that
communication, Mill Road 36 did withdraw its conditional approval
application on July 11, 2016, after receiving the letter from the Henry
County Planning and Zoning recommending approval by the Zoning
Advisory Board. However, withdrawal of the application was not the
only option available to Mill Road 36. The other available option would
have been to table the application by submitting a formal written
request and paying a nominal $300 fee. If the application were tabled,
then when the applicant later decided to proceed, consideration of the
application would resume from the point in the approval process at
which it had previously been tabled. But if an application was
withdrawn, then the applicant had to start the approval process from
the beginning if it were to resubmit an application.

         10 Of the multiple properties for which Falcon Design created an assisted living

facility concept plan for Mr. Grant, none were ultimately developed into an assisted
living facility, and many of the conditional use applications to Henry County Planning
and Zoning for conditional approval were withdrawn. See infra Appendix. In fact,
many of the assisted living concept plans that Falcon Design prepared for Mr. Grant
were for properties that Mr. Grant ultimately sold to Mr. Carbonara and upon which
Mr. Carbonara organized syndicated conservation easement donations.
                                         15

[*15] Mr. Grant’s other properties

        Concurrent with Mr. Grant’s work on the Mill Road Tract, he
acted as an owner or agent of at least 10 other entities, each of whose
only asset was a parcel of property in Henry County. See infra
Appendix. For each of these properties, Mr. Grant hired Mr. Price to
prepare a concept plan for an assisted living facility (ranging between
650 and 1,800 senior living units) to be submitted to Henry County
Planning and Zoning with an application for “conditional use”.
However, after Mr. Grant’s entity received a zoning verification letter or
a recommendation of approval from the Planning and Zoning staff, in
each instance the application for conditional use was withdrawn. The
concept plans for these properties proposed facilities with numbers of
units ranging from 585 to 1,838 and totaling 9,264. Conservation
easements were ultimately donated on all of these 10 other properties,
and Mr. Grant hired Mr. Foster to appraise each easement on the basis
of its highest and best use before the donation as an assisted living
facility. The Mill Road Tract was plainly not a unique parcel, and a
buyer with an actual interest in building an assisted living facility would
have had his choice of parcels selling for less than $11,000 per acre, any
of which could receive, and many had received, the same
recommendation of approval by county zoning staff.

MR36 Investments, LLC

       In June 2016 Mr. Carbonara was negotiating with Mr. Grant to
purchase the 40-acre Mill Road Tract—i.e., to purchase the tract
indirectly by purchasing its owner, Mill Road 36—and that purchase
would be made by another entity: MR36 Investments, LLC (“MR36
Investments”), a Delaware LLC formed by Mr. Carbonara on July 19,
2016. MR36 Investments, at the direction of Mr. Carbonara, created a
Private Placement Memorandum for prospective investors on August 1,
2016. MR36 Investments’ private placement memorandum stated that
its business purpose was “to acquire, own and hold for investment a
97.99% interest in Mill Road 36 Henry LLC”. It offered “up to four
hundred ten (410) units of membership interest (the ‘Units’) at $5,000
per Unit” 11 and stated that “[p]urchasers of the Units offered hereby will
become Investor Members in the Fund and will receive allocation of
income, loss, deductions and tax credits”. The memorandum explained

        11 Four hundred ten units at $5,000 each would yield a total of $2,050,000. If

that total is attributed to Mill Road 36’s 40 acres, then the per-acre amount would be
about $51,250.
                                          16

[*16] that the investment options for the Mill Road Tract were (1) “to
realize possible capital appreciation in the value of the property,” (2) “to
develop the property, and/or” (3) to “grant a conservation easement over
the Property in order to preserve the Property and to generate federal
income tax benefits.” Under the terms of MR36 Investments’ operating
agreement, any of these three options could be approved by a simple
majority vote of the partners, and voting was conducted by electronic
ballot via email.

Sale of interests in Mill Road 36

      On September 20, 2016, each member in Mill Road 36 (Ms. Meng,
Mr. Wang, and Benwood Investments) sold most or all of its interest to
MR36 Investments and executed an Amended Operating Agreement.
Afterwards the percentage ownership in Mill Road 36 was the following:
Ms. Meng (3%), Mr. Wang (0%), Benwood Investments (0%), MR36
Investments (97%). MR36 Investments paid $1 million for its 97%
ownership in Mill Road 36, which corresponded to about $25,800 per
acre for the Mill Road Tract. 12 MR36 Manager then became the
managing member of Mill Road 36. Mr. Carbonara owns 100% of MR36
Manager through Old Ivy.

Mill Road 36’s easement donation

       On December 16, 2016—not quite three months after MR36
Investments purchased Mill Road 36—the members of MR36
Investments held a meeting at which they voted to approve the donation
of a conservation easement on the Mill Road Tract. Mill Road 36
received a tax opinion letter from a professional adviser. On December
28, 2016, Mill Road 36 conveyed to SCT by deed dated that day an
easement covering 32.96 acres (which we hereafter round up to 33 acres)
of the Mill Road Tract. The 33-acre easement on the 40-acre Mill Road
Tract excluded a roughly 6-acre flood plain along the tract’s southern
border and 1 acre in the tract’s northwest corner.

        12 If 97% of Mill Road 36 was worth $1 million, then algebraically speaking

100% would have been worth $1,030,928. If Mill Road 36’s only asset was the 40-acre
Mill Road Tract, and if the purchase price of Mill Road 36 can be attributed entirely to
that single 40-acre tract, then for each acre of the tract MR36 Investments paid
$25,773. Petitioner disputes this equation.
                                   17

[*17] SCT’s baseline report

       SCT—the donee of the Mill Road Tract easement—is a section
501(c)(3) public charity dedicated to conserving land in the southeastern
United States. Since its founding in 1993 it has conserved over 65,000
acres of land. Before Mill Road 36’s easement donation, SCT had
prepared a baseline report for the Mill Road Tract dated December 15,
2016 (“Baseline Report”), describing the conservation values of the tract.
The Baseline Report identifies the Birch Creek floodplain, wetlands, and
oak-hickory forest as habitats that the easement would protect. The
Baseline Report also explains that, by protecting the forest on the Mill
Road Tract, the easement would preserve the view of the forest along
Mill Road. The Baseline Report further states that the easement will
contribute to Georgia State and Henry County policies prioritizing green
space in rapidly developing metro areas, impaired waters such as
Walnut Creek and the South River, and air quality control.

The easement deed

      The easement deed executed by Mill Road 36 lists the following
conservation values:

      1. Protection of the Property provides for the protection of
      significant, relatively-natural habitat of fish, wildlife, or
      plants, or similar ecosystem, (including but not limited to,
      habitat for rare, threatened, and/or endangered species)
      within the meaning of § 170(h)(4)(A)(ii) of the Internal
      Revenue Code of 1986 . . . and promotion of the Georgia
      Comprehensive Wildlife Conservation Strategy (Aug.
      2005) (“GCWCS”). . . . The Property contains “High
      Priority Habitats” in the Piedmont Ecoregion. Protection
      of these streams and habitats will ensure that the habitats
      remain preserved, supporting flora and fauna within the
      region, and will further the goals of GCWCS. The Property
      also contains the following high priority habitats as defined
      by the Georgia State Wildlife Action Plan (SWAP).

             a. Oak Hickory Forest

             ....

             b. Streams

             ....
                                   18

[*18] 2. The preservation of certain open space (including
      farmland and forest land) where such preservation is
      pursuant to a clearly delineated Federal, State and local
      governmental policy, and will yield a significant public
      benefit in accordance with § 170(h)(4)(A)(iii)(II) of the
      Code. . . .

             a. Scenic Enjoyment. The property maintains a
             forested and open viewshed for the public, as visible
             from approximately 0.25 mile of Mill Road, a paved
             county road, that is highly travelled.

The easement deed states that it is preserving open space pursuant to
the following governmental policies: GCWCS; the Agricultural
Conservation Easement Program; the Georgia Conservation Use Value
Assessment; the Georgia Forestry Commission—Urban Forest Priority
Areas; and the Henry County Comprehensive Land Use Plan (2009).

       To protect its conservation values, the easement deed establishes
“Special Natural Areas”, “Aesthetic Buffers”, and a “Riparian Buffer” on
designated portions of the Mill Road Tract. The Special Natural Areas
include the oak-hickory forest, wetlands, and stream habitats, and they
are designated on a map of the Mill Road Tract included in the Baseline
Report. The easement deed affords, to the Special Natural Areas,
heightened protections because they are considered “high-priority
habitats”. The Aesthetic Buffer “permanently protect[s] a 100’ buffer
strip of forest land along the property’s frontage on Mill Road to provide
a scenic benefit. And the “Riparian Buffer” establishes a 100-foot buffer
“to preserve a permanent, vegetative buffer” along the tributaries to
Birch Creek present on the Mill Road Tract.

      The easement deed gives SCT the right to monitor Mill Road 36’s
compliance with its conservation terms, to enter the Mill Road Tract,
and to enforce the terms of the easement. The easement deed prohibits
Mill Road 36 (and future owners of the property) from altering the
natural features of the Mill Road Tract, engaging in any residential or
commercial activity, further subdividing the parcel, constructing any
improvements, extracting any natural resources, installing utilities, or
paving roads.

      Mill Road 36 reserved in the easement deed (outside the Special
Natural Areas) the right to conduct permitted agriculture in the “Early
Successional/Old Field” area, to engage in certain recreational activities
                                    19

[*19] such as hunting, fishing, camping, hiking, and horse-back riding
for personal and educational purposes, and to construct small
“Recreational-Only” structures.

       We find that the conservation easement on the Mill Road Tract
protects a relatively natural habitat within the meaning of section
170(h)(4)(A)(ii), and we further find that the conservation easement
provides a scenic view to the general public which yields a significant
public benefit within the meaning of section 170(h)(4)(A)(iii)(I).

Valuing the easement for the 2016 tax return

       As early as June 23, 2016, Mr. Grant and Mr. Carbonara had
directed Mr. Foster to appraise a conservation easement on the Mill
Road Tract, and Mr. Grant formally hired Mr. Foster to appraise it on
July 11, 2016. Mr. Foster appraised the value of the Mill Road Tract
easement in a report dated March 16, 2017. The appraisal states: “The
property [i.e., the Mill Road Tract] is approved for 677 Senior Assisted
Living Units of any kind by the Henry County Planning and Zoning
Authority.” (Emphasis added.) In fact, as is explained above, the
application had been withdrawn and no final approval had been
obtained. Mr. Foster had been given a copy of the staff’s report, which
concludes with a “Recommendation” that “recommends Approval”. His
appraisal explains that “[t]he client provided a zoning verification letter
(that can be found in the Addendum of this report)” and quotes the entire
conclusion of the staff’s letter (in a block quote with “Recommendation”
rendered in bold typeface). See Ex. 31-J, at 65 (quotation in appraisal);
Ex. 32-J, at 33–34 (staff letter in Addendum). If, in their conversations
with the appraiser, Mr. Grant and Mr. Carbonara were imprecise on the
important distinction between a recommendation and an approval, they
did give him the actual document; and we know that he read it, because
he quoted it in his appraisal; and we know that he saw the word
“Recommendation”, because he rendered it in bold.

        The appraisal report states two extraordinary assumptions made
by Mr. Foster in determining the value of the Mill Road Tract easement:
first, that “[t]he subject property acreage provided by the client in the
legal description is correct”, and second, that “[i]nformation on the
subject property provided to me by the client is correct”. The appraisal
report identifies the referenced “client-provided information” to be
“concept plan, warranty deed and Deed of Easement” as well as the
Baseline Report.
                                         20

[*20] Mr. Foster valued the Mill Road Tract easement using the before-
and-after method. Mr. Foster concluded “that the highest and best use
of the subject property [before the donation] is for Senior Assisted
Living/Senior Independent Living Development”, and he considered this
use to be legally permissible on the basis of the Conditional Use
Evaluation Report from Henry County Planning and Zoning
recommending zoning approval of an assisted living facility. Mr. Foster
specifically stated that “[b]ased on [the Conditional Use Evaluation
Report], the subject property is not considered to have any legal
deterrents to development.”

       Mr. Foster used the sales comparison approach but employed the
“price per unit” (not the price per acre) as the unit of comparison. He
identified four properties (only one of which was in Henry County) that
had previously been sold for “Senior Development”, and for each he
divided the sale price of the land by the number of “Approved Units” to
yield a “Price Per Unit”, ranging from $13,500 to $22,667 per unit (with
the Henry County “comparable” having a $19,565 price per unit). By
reference to these “comparable” sales, Mr. Foster then valued the Mill
Road Tract under Falcon Design’s concept plan to be worth $13,500 per
unit. Mr. Foster multiplied the projected 677 units by the assumed price
per unit of $13,500, and then subtracted the cost to connect public sewer
to the Mill Road Tract ($147,000), to determine the value of the Mill
Road Tract before donation of the easement in December 2016 to be
almost $9 million—viz., $8,992,500, roughly $224,800 per acre. (This
per-acre amount is obviously greater than the roughly $10,700-per-acre
price that Mill Road Partners paid in mid-December 2014, the $10,770
effective price that Benwood Investments paid in late-December 2014,
and the $25,800-per-acre effective price that MR36 Investments paid in
September 2016.)

       Mr. Foster concluded that the highest and best use of the Mill
Road Tract after the easement donation was “uses allowed in the Deed
of Easement”, specifically “[i]n specified areas agricultural activity, low-
impact outdoor recreation and education activities, and some hunting
. . . and/or a public park.” Once again using the sales comparison
method, but this time with “price per acre” as the relevant unit of
comparison, 13 Mr. Foster “after”-valued the Mill Road Tract (i.e., as

       13 Because the highest and best use of the Mill Road Tract “after” donation of

the conservation easement is outdoor recreation, Mr. Foster determined his “after”
value by deriving a value per acre from his suggested comparable properties and then
multiplying the average per acre value times 33 acres.
                                        21

[*21] encumbered by the easement) to be worth $1,700 per acre, for an
overall value of $56,032 ($1,700 per acre × 32.96 acres). However,
Mr. Foster also concluded that the value of the 0.93-acre corner portion
of the tract excluded from the conservation easement would be
enhanced, and (using the sales comparison approach and price per acre
unit of comparison) he estimated the value of the enhancement to be
$2,418.

      Altogether, Mr. Foster estimated the value of the Mill Road Tract
easement (i.e., the forfeited value of developing an assisted living facility
on the tract) to be $8,935,000. Mr. Carbonara reviewed Mr. Foster’s
appraisal report and professed at trial that he found it to be
“conservative” (relative to other appraisals of conservation easements
that he had seen) but nonetheless reasonable.

Reporting the easement donation on Mill Road 36’s 2016 return

       Mill Road 36 filed two returns for 2016, covering its two “short
periods” for that year: one return covered the short period from
January 1 through September 20, 2016 (the date on which MR36
Investments acquired its 97% interest in Mill Road 36), and the second
return covered the short period from September 20 through
December 31, 2016. 14 The returns were prepared by an accounting firm
that obtained its information about Mill Road 36 and the easement
contribution from Mr. Carbonara.           Mill Road 36 reported its
conservation easement donation on its return for the second short
period.     Attached to that return was Form 8886, “Reportable
Transaction Disclosure Statement”, as well as Form 8283, “Noncash
Charitable Contributions”. The attachment to Form 8283 recites that
“[a] copy of the appraisal that substantiates these values . . . is filed with
this Form 8283 and the donor’s tax return.” (As is stated above, the
zoning staff’s recommendation of approval is quoted in, and is attached
as an addendum to, the appraisal.)

      Both the Form 8283 and the Form 8886 explicitly disclosed the
disparity between Mill Road 36’s very low basis in the Mill Road Tract
and the very high claimed value of the easement. The Form 8283
reported on line 5A that the property was acquired by “PURCHASE” in

       14 Mill Road 36 originally reported incorrectly, treating January 1 through

December 29, 2016, as the first short period and treating December 29 through
December 31, 2016, as the second short period. But Mill Road 36 later filed, on May
7, 2019, a Form 1065X, “Amended Return or Administrative Adjustment Request
(AAR)”, correcting the short period dates to end and begin on September 20, 2016.
                                           22

[*22] August 2015 with “Donor’s cost or adjusted basis” as $416,563” 15
and that it was contributed 16 months later on December 28, 2016, with
an “Appraised fair market value” and “Amount claimed as a deduction”
of “8,935,000”, an amount equal to 20 times the reported basis. On an
attachment to the Form 8283, Mill Road 36 repeated:

        The determined fair market value of the conservation
        easement non-cash charitable contribution is $8,935,000 as
        of December 28, 2016 according to [appraiser] Ronald S.
        Foster . . . . The property was acquired by Mill Road Henry
        36 [sic], LLC on August 28, 2015 via transfer from related
        parties. . . . The Donor’s cost basis in the Property is
        $416,563 before the donation as reported on Form 8283.

The Form 8283 was signed both by Mr. Foster as the appraiser and by
Katie Pace on behalf of SCT.

       To similar effect, the Form 8886 attached to the return
specifically called attention to the deduction claimed for the contribution
of the conservation easement on the Mill Road Tract. It reported the
“Name of reportable transaction” on line 1a as “MILL ROAD HENRY 36
LLC – SYND CONSERV EASEMENT”; and on Schedule M–1,
Statement 6, it reported “EXCESS VALUE OF NONCASH DONATION
OVER BASIS” as “8,518,437”. On line 2 (“Identify the type of reportable
transaction”), box “a” had been checked, indicating a “Listed”
transaction; and on line 3 the “published guidance number for the listed
transaction” was given as “2017-10”. 16

        15 The reported basis of $416,563, if attributed to the 39.68 acres, yields a basis

of $10,498 per acre—an amount that corresponds roughly to the $10,700 per acre that
had been paid by Mill Road Partners, which then contributed the 40-acre Mill Road
Tract to Mill Road 36. (If attributed only to the 32.96 acres in the easement per se, the
total basis of $416,563 would have yielded instead a basis of $12,638 per acre, so we
infer that Mill Road 36 reported its basis in the entire Mill Road Tract.)
        16 The IRS’s Notice 2017-10, 2017-4 I.R.B. 544, 544, begins: “The Department

of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are
aware that some promoters are syndicating conservation easement transactions that
purport to give investors the opportunity to obtain charitable contribution deductions
in amounts that significantly exceed the amount invested. This notice alerts taxpayers
and their representatives that the transaction described in section 2 of this notice is a
tax avoidance transaction . . . .”
                                        23

[*23] IRS examination and FPAA

       The IRS selected Mill Road 36’s partnership return for
examination and assigned the examination to Revenue Agent Thomas
Rikard. Agent Rikard’s “Examining Officer’s Activity Record” (Ex. 42-J)
shows that on February 21, 2019, he “started the Penalty section” of his
report; that on April 22, 2019, he “worked on the Penalties section” of
his report; and that on April 23, 2019, he “completed the Penalties
section”. On May 28, 2019, he again considered the issue of penalties,
prepared “Penalty lead sheets”, and sent them “for . . . approval” to his
immediate supervisor, Supervisory Revenue Agent Margaret McCarter.
Over the next two months he discussed penalties with his supervisor
and with an attorney from the Office of Chief Counsel, revised his
penalty approval form, and prepared other penalty-related paperwork. 17
On August 5, 2019, Agent Rikard prepared a “Civil Penalty Approval
Form” (Ex. 40-J) that listed, as its “Primary Position”, the 40% gross
valuation misstatement penalty of section 6662(h) (and listed, as an
“Alternative Position”, various 20% penalties under sections 6662 and
6662A). Supervisory Revenue Agent McCarter electronically signed the
form on August 8, 2019, thereby attesting: “I approve the penalties
identified above”. On that same day she signed a “Supplemental Civil
Penalty Approval Form” (Ex. 41-J), stating that she “first approved” the
penalties on that date and that Agent Rikard had “first determined” the
penalties “on 5/28/2019” (the date he first prepared “Penalty lead
sheets”). Agent Rikard signed the supplemental form the next day,
August 9, 2019. As of that time no communication had been made to
petitioner about penalties. The first time that the IRS examiners
communicated to petitioner about penalties was when Mr. Rikard
mailed a copy of his report on September 24, 2019.

       At the conclusion of the examination, the IRS issued to Mill Road
36, on June 11, 2020, an FPAA for the tax year ending December 31,
2016. The FPAA proposes to reduce Mill Road 36’s charitable
contribution deduction by $8,935,000.         The FPAA explains that
petitioner “failed to establish that the gift or contribution satisfied all

        17 Agent Rikard’s activity record shows relevant entries dated 6/12/19 (“The

agent prepared a Penalty package- LS-300, Supplemental form and Penalty write-Up.
The agent completed the forms and sent it to GM [Group Manager, i.e., Supervisory
Revenue Agent McCarter] for signature and approval. The agent called the GM to
discuss the forms”); 7/3/19 (“The agent revisited the Penalty section and forms”);
7/10/19 (“The agent revised the penalty forms per GM”); 8/5/19 (“The agent prepared
the penalty forms for the GM”); and 8/8/19 (“The agent and the GM reviewed . . . the
Penalty write ups. The GM made suggestions for changes”).
                                    24

[*24] the requirements of I.R.C. § 170 and the corresponding Treasury
Regulations for deducting a noncash charitable contribution.” In the
alternative, the FPAA states that petitioner did not establish “that the
value of the contributed property claimed . . . was greater than
$510,400.”

      As to penalty, the FPAA asserts that the 40% penalty for a gross
valuation misstatement, or in the alternative the 20% penalty either for
a substantial understatement of income tax or for negligence, is
applicable to Mill Road 36 pursuant to section 6662(a), (b), (c), (d), (e),
and (h). The FPAA also asserts that the 20% penalty under section
6662A for underpayments of tax attributable to reportable transactions
under section 6707A(c) is applicable to Mill Road 36. But see infra note
35.

Tax Court proceedings

       MR36 Manager LLC, as TMP, timely filed in the Tax Court a
petition to challenge the adjustment in the FPAA. After the trial of this
case, the Commissioner filed an amended answer alleging that the
section 6663 fraud penalty is applicable to Mill Road 36 for 2016, and
that, in compliance with section 6751(b)(1), the initial determination of
that penalty had been made by the Commissioner’s counsel in this case,
and that her initial determination had been approved in writing by her
immediate supervisors. (Petitioner disputes the sufficiency of the
Commissioner’s compliance as to the fraud penalty; but because we
conclude on other grounds that the fraud penalty should not be
sustained, see infra Part VI.A, we do not discuss further its initial
determination and supervisory approval.)

The value of the Mill Road Tract easement

       The parties disagree as to the value of the Mill Road Tract
easement. In preparation for trial, petitioner engaged James C. Clanton
to value the Mill Road Tract easement (not Mr. Foster, who had done
the appraisal for reporting the contribution on the tax return), and the
Commissioner engaged Ray Kinney. We accept that both Mr. Clanton
and Mr. Kinney are professional appraisers with sufficient expertise to
value the conservation easement at issue. In doing so, both experts used
the before-and-after method (as Mr. Foster had done).
                                  25

[*25] Petitioner’s expert, Mr. Clanton

       Mr. Clanton opined that “the highest and best use before the
conservation easement would have been to sell the property to an
experienced operator for them to develop the 33.89 +/− acre tract with a
senior housing community”, and he estimated the fair market value of
the Mill Road Tract before the easement donation to have been
$6,780,000. He made this estimate on the basis of four properties that
had previously been developed as assisted living facilities that he
determined were comparable to the Mill Road Tract, but in fact none of
the four were in Henry County; rather all were in Gwinnett and Fulton
Counties. Mr. Clanton opined that the highest and best use after the
conservation easement “is to hold both tracts under the same ownership,
obtain a variance for the Unencumbered Site. . . and improve the 0.93
+/− acre tract [in the northwest corner] with an owner-occupied, single-
family residential dwelling”, and he estimated the fair market value of
the Mill Road Tract after the easement donation to be $80,000.
Mr. Clanton estimated the value of the enhancement of the
unencumbered portion of the Mill Road Tract as $5,000, and therefore
concluded that the fair market value of the easement was $6,695,000
(about $2 million less than the deduction claimed on Mill Road 36’s tax
return).

      The Commissioner’s expert, Mr. Kinney

       At trial Mr. Kinney opined that the highest and best use before
the conservation easement “would have been as an investment property
purchased for speculative assisted living development with a secondary
fallback use as low density residential”, and he estimated the value of
the Mill Road Tract before the conservation easement to have been
$990,000. He made this estimate on the basis of seven comparable sales,
six of which were in Henry County. Similarly to Mr. Clanton,
Mr. Kinney opined that “the highest and best use after imposition of the
easement is for a single residential estate lot, or farmstead, with
associated private recreational greenspace.” Mr. Kinney estimated the
value of the Mill Road Tract after the conservation easement to be
$90,000, on the basis of four comparable sales of properties encumbered
by conservation easements. Mr. Kinney therefore estimated the value
of the Mill Road Tract easement to be $900,000 (as compared to
Mr. Clanton’s almost $6.7 million).
                                          26

[*26] Our findings as to the value of the Mill Road Tract

       After due consideration of the expert reports and testimony
offered by both parties, and for the reasons explained below in Part IV.B,
we accept the conclusions of the Commissioner’s expert Mr. Kinney. We
find that the highest and best use of the Mill Road Tract before the
easement donation was to hold the property for sale to an experienced
developer, and that the corresponding value of the Mill Road Tract
before the easement donation was $990,000 (i.e., about $24,750 per
acre). We further find that the highest and best use of the Mill Road
Tract after the easement donation is to develop the unencumbered
portion of the Mill Road Tract as a single-family residential lot, and that
the value of the Mill Road Tract after the easement donation is $90,000.
The fair market value of the 33-acre Mill Road Tract easement was
therefore $900,000.

                                     OPINION

I.     Burden of proof

       Rule 142(a)(1) provides that “[t]he burden of proof[18] shall be
upon the petitioner, except as otherwise provided by statute or
determined by the Court”. Generally, the IRS’s adjustments in an FPAA
are presumed to be correct, and the taxpayer bears the burden of proving
them wrong. See Welch v. Helvering, 290 U.S. 111, 115 (1933); Crescent
Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013). Petitioner
thus generally bears the burden of proving Mill Road 36’s entitlement
to the charitable deduction for qualified conservation contributions
under the applicable provisions of section 170, as well as the burden of
proving the value of the conservation easement.

       To show its entitlement to the charitable contribution deduction
at issue, petitioner must prove (1) that Mill Road 36 made a qualifying
contribution, (2) that it satisfied (or is excused from) the substantiation

         18 As to burden of production, section 7491(c) provides that the Commissioner

“shall have the burden of production in any court proceeding with respect to the
liability of any individual for any penalty, addition to tax, or additional amount”.
(Emphasis added.) However, section 7491(c) does not apply to TEFRA partnership-
level proceedings (such as this case).         See Dynamo Holdings Ltd. P’ship v.
Commissioner, 150 T.C. 224, 234 (2018). Consequently, as a general rule, in a TEFRA
partnership case the petitioner has not only the burden of proof but also the burden of
production, even as to any penalty.
                                    27

[*27] requirements for such a contribution, and (3) the value of the
contribution. We discuss each of these issues in turn.

II.   Qualified conservation contributions

       Section 170(a)(1) allows a deduction for any charitable
contribution made within the taxable year. The Code generally restricts
a taxpayer’s charitable contribution deduction for donations of “an
interest in property which consists of less than the taxpayer’s entire
interest in such property”. § 170(f)(3)(A). That is, if someone owns
property and donates to charity only a partial interest in that property,
he may not claim a charitable contribution deduction for that donation.
However, the statute provides an exception—and allows a deduction—
for a “qualified conservation contribution”.            § 170(f)(3)(B)(iii).
Section 170(h)(1) defines a “qualified conservation contribution” to be
(1) the contribution of a “qualified real property interest,” (2) to a
“qualified organization,” (3) “exclusively for conservation purposes.” We
examine each in turn.

      A.     Whether Mill Road 36 donated a qualified real property
             interest

       Under section 170(h)(2)(C), a “qualified real property interest”
includes “a restriction (granted in perpetuity) on the use which may be
made of the real property.” Mill Road 36 donated to SCT a perpetual
easement on the Mill Road Tract which expressly restricts its use of the
property as specified in the easement deed, and accordingly meets the
definition of a qualified real property interest in section 170(h)(2)(C).

      The Commissioner, however, makes two principal arguments
that Mill Road 36 did not donate a “qualified real property interest”
within the meaning of section 170(h)(2). For the reasons explained
below, we reject the Commissioner’s contentions.

             1.     Donative intent

       First, the Commissioner argues that Mill Road 36 lacked donative
intent to make a gift because it was primarily motivated to monetize the
federal income tax deduction for its investors. He points to the private
placement memorandum circulated by Mr. Carbonara, as well as
subsequent communications with investors, promising to prospective
investors a tax benefit ratio of 4.25 times their investment in MR36
Investments. That is, he contends that Mill Road 36 was subjectively
motivated not by disinterested generosity but by tax avoidance.
                                    28

[*28] The Commissioner’s contention as to Mill Road 36’s subjective
intent is defeated by the objective fact that a perpetual conservation
easement on the Mill Road Tract was donated to SCT. Investors in
MR36 Investments were presented with three strategic options for the
Mill Road Tract and were given an opportunity to vote pursuant to the
operating agreement. The investors were given an option between the
possibility of future income or a present deduction, and they ultimately
voted to forgo the possibilities of future capital appreciation and instead
to donate a perpetual easement on the property and receive a present
tax benefit. That federal income tax benefits are a consideration in
determining whether to make a contribution does not undermine the
validity of the contribution. It may be that the ideal donor does not let
his left hand know what his right hand is doing, see Matthew 6:3, but
section 170 does not insist on that ideal. Rather, a donor motivated by
guilt, or by the hope of being admired, or by the desire for a tax benefit,
may still deduct his contribution. Congress long ago decided to
incentivize charitable contributions by allowing a deduction for those
contributions, and it would be perverse indeed to deny a deduction to a
donor simply because he had responded to the incentive. The
Government may not “take[] away with the executive hand what it gives
with the legislative”. Cross Refined Coal, LLC v. Commissioner, 45
F.4th 150, 158 (D.C. Cir. 2022) (quoting Sacks v. Commissioner, 69 F.3d
982, 992 (9th Cir. 1995), rev’g T.C. Memo. 1992-526).

             2.     The existence of the partnership

       Second, the Commissioner argues that the transfer of the Mill
Road Tract to Mill Road 36 in August 2015 occurred before articles of
organization for Mill Road 36 had been filed with Georgia’s secretary of
state, and that this mistake reflects inter alia “a lack of attention to
detail and no intent to form a true partnership.”

       Although the Mill Road Tract was contributed to “Mill Road 36
Henry LLC” in August 2015 before its articles of organization had been
filed with the Georgia secretary of state in December 2015, we do not
view this irregularity to be fatal to Mill Road 36’s legal right to donate
a conservation easement to SCT in December 2016 (or its entitlement to
a corresponding charitable contribution deduction for 2016). The filing
of the articles is not decisive as to the existence of the entity. Under
Georgia law, “[a] partnership is an association of two or more persons to
carry on as co-owners a business for profit”. Ga. Code Ann. § 14-8-6(a)
(1995). Similarly, for federal tax purposes section 761(a) provides that
“the term ‘partnership’ includes a syndicate, group, pool, joint venture
                                    29

[*29] or other unincorporated organization through or by means of
which any business, financial operation, or venture is carried on, and
which is not . . . a corporation or a trust or estate.” The Supreme Court
articulated in Commissioner v. Culbertson, 337 U.S. 733, 740 (1949)
(quoting Commissioner v. Tower, 326 U.S. 280, 286 (1946)), the following
standard for determining the existence of a partnership for federal
income tax purposes:

      [A] partnership is created “when persons join together
      their money, goods, labor, or skill for the purpose of
      carrying on a trade, profession, or business and when there
      is community of interest in the profits and losses.” . . . A
      partnership is, in other words, an organization for the
      production of income to which each partner contributes one
      or both of the ingredients of income—capital or services.

But the Code’s definition of a partnership in section 761(a) also includes
joint ventures, which we have defined as “a ‘special combination of two
or more persons, where in some specific venture a profit is jointly sought
without any actual partnership or corporate designation,’ and also as ‘an
association of persons to carry out a single business enterprise for
profit.’” Beck Chem. Equip. Corp. v. Commissioner, 27 T.C. 840, 848–49
(1957) (quoting 48 C.J.S. Joint Ventures §§ 1–2).

       We are satisfied that, at the time in August 2015 that the tract
was contributed to Mill Road 36, it met the standard to be considered a
valid partnership both under Georgia law and for federal income tax
purposes. The initial operating agreement for Mill Road 36 was
executed by Mr. Wang, Ms. Meng, and Benwood Investments on
December 10, 2015, and provided for the members’ contributions of cash,
property, or services as well as their rights to share income, profits, and
losses. Mill Road 36 was a venture undertaken by real estate
professionals—Mr. Grant, Mr. Wang, Ms. Meng, and Benwood
Investments—who knew each other well, dealt with each other
regularly, and held themselves out as engaging in the real estate
business through that entity for profit, and who in fact did engage in
business for profit when in September 2016 the owners of Mill Road 36
sold 97% of their ownership interests in Mill Road 36 to MR36
Investments. Furthermore, articles of organization for Mill Road 36
were delivered to the Georgia secretary of state before the close of 2015
(the year of the contribution to Mill Road 36), and Mill Road 36 duly filed
a federal income tax return for 2016. Accordingly, we hold Mill Road 36
                                     30

[*30] was lawfully engaged in business during 2016 as a bona fide
partnership.

      B.     Whether the easement satisfies an enumerated conservation
             purpose

      Section 170(h)(4)(A) provides that the term “conservation
purpose” means:

             (i) the preservation of land areas for outdoor
      recreation by, or the education of, the general public,
             (ii) the protection of a relatively natural habitat of
      fish, wildlife, or plants, or similar ecosystem,
             (iii) the preservation of open space (including
      farmland and forest land) where such preservation is—
                     (I) for the scenic enjoyment of the general
             public, or
                     (II) pursuant to a clearly delineated Federal,
             State, or local governmental conservation policy,
      and will yield a significant public benefit, or
             (iv) the preservation of an historically important
      land area or a certified historic structure.

That is, the statute provides four potential qualifying purposes, the
third of which (“preservation of open space”) has two variants. “Under
the statute, each of these four prongs is a conservation purpose in and
of itself, and a taxpayer’s satisfaction of one of these prongs suffices to
establish the requisite conservation purpose.”               Herman v.
Commissioner, T.C. Memo. 2009-205, 98 T.C.M. (CCH) 197, 200 (citing
S. Rep. No. 96-1007, at 10 (1980), as reprinted in 1980-2 C.B. 599, 604).

        As we explained in Murphy v. Commissioner, T.C. Memo. 2023-
72, at *42–43, in determining whether an easement satisfies a
conservation purpose provided in section 170(h)(4)(A), we consider only
those conservation purposes that are stated in the easement deed. Here,
the easement deed for the Mill Road Tract states the following
conservation purposes: first, the “protection of a relatively natural
habitat of fish, wildlife, or plants, or similar ecosystem”, under section
170(h)(4)(A)(ii); and second, the “preservation of open space” under
section 170(h)(4)(A)(iii) that “yield[s] a significant public benefit” either
(I) for the scenic enjoyment of the general public or (II) pursuant to a
clearly delineated governmental conservation policy.
                                          31

[*31]          1.      Protection of a relatively natural habitat

       The Commissioner argues that the Mill Road Tract easement
does not protect a significant relatively natural habitat within the
meaning of section 170(h)(4)(A)(ii) and Treasury Regulation
§ 1.170A-14(d)(3)(i) because, according to him, “[d]eductions for
conservation easements should be directed at the preservation of unique
or otherwise significant land areas”. He points to the legislative history
of section 170(h) to argue that “the habitat protection in section
170(h)(4)(A)(ii) applies to ‘significant natural habitats and ecosystems’
and not all habitats and ecosystems. H.R. Rep. No. 96-1108 (1980) p.11.”
The Commissioner proffered at trial the expert report of Dr. Martin
Main, who “concluded that the conservation easement property does not
provide a habitat for rare, endangered, or threatened species of animal,
fish, or plants”; and the Commissioner relies on that report to assert
that the Mill Road Tract easement does not protect a significant habitat
or ecosystem. The Commissioner points out that petitioner’s expert
Christopher Wilson did not “see any endangered, rare, or priority species
on the property. . . . Instead, he named 61 species of common birds and
animals that he observed on the property, none of which are included on
the Georgia State Wildlife Action Plan.” According to the Commissioner,
“protection of common species does not make a property a significant
relatively natural habitat under section 170.” However, we are
influenced not only by petitioner’s expert but also by the Baseline Report
of SCT, the land conservancy. 19 The Commissioner’s insistence on the
presence of “high-quality” 20 habitats of threatened or rare species
elevates the standard beyond the requirements of section
170(h)(4)(A)(ii).

      We do not much resist the proposition that Dr. Main’s opinion
shows the absence of high-quality habitats of rare, endangered, or
threatened species; but Congress did not determine to incentivize only

        19 We do not delegate to the donee the determination of whether the easement

qualifies under section 170(h), but we do find its determination probative. There is no
suggestion of collusion between donor and donee to support a false claim of
conservation purposes. SCT’s purpose for existence is to preserve properties with
conservation values, and its conclusions merit consideration.
        20 See Commissioner’s Opening Br. at 44, 122, 126 (Doc. 149). The phrase

“high-quality” does not appear in section 170(h), nor in the pertinent regulations
concerning “relatively natural habitat” or “open space”. The phrase does appear in
Treasury Regulation § 1.170A-14(d)(3)(ii), addressing “natural areas [not relevant
here] that represent high quality examples of a terrestrial community or aquatic
community”.
                                           32

[*32] the preservation of “natural” or “high-quality” areas but rather to
allow a charitable contribution deduction for the donation of an
easement that has, as its “conservation purpose”, “the protection of a
relatively natural habitat of fish, wildlife, or plants, or similar
ecosystem”. § 170(h)(4)(A)(ii) (emphasis added). The added word—
“relatively”—means “not absolutely”. Relatively, Webster’s Third New
International Dictionary of the English Language, Unabridged (2002).
We do not repeat here but we do follow our analysis in Murphy, T.C.
Memo. 2023-72, at *48–52, where we noted the distinctions between
untouched wilderness areas, “natural areas” 21 that may be developed or
disturbed to some extent, and “relatively natural” areas that may be
even more altered but still retain conservation value. Consequently, our
determination under section 170(h)(4)(A)(ii) does not depend on whether
the Mill Road Tract is a wilderness area or is a “natural area” of “high
quality” (evidently it is not) but on whether petitioner’s contribution
protects a “relatively natural habitat”.

       Commentary on the phrase “relatively natural habitat” from
section 170(h)(4)(A)(ii) is given in Treasury Regulation § 1.170A-
14(d)(3)(i), which provides:

        The donation of a qualified real property interest to protect
        a significant relatively natural habitat in which a fish,
        wildlife, or plant community, or similar ecosystem
        normally lives will meet the conservation purposes test of
        this section. The fact that the habitat or environment has
        been altered to some extent by human activity will not
        result in a deduction being denied under this section if the
        fish, wildlife, or plants continue to exist there in a
        relatively natural state.

         21 See Treas. Reg. § 1.170A-14(d)(3)(ii) (“Significant habitats and ecosystems

include . . . natural areas that represent high quality examples of a terrestrial
community or aquatic community, such as islands that are undeveloped or not
intensely developed where the coastal ecosystem is relatively intact; and natural areas
which are included in, or which contribute to, the ecological viability of a local, state,
or national park, nature preserve, wildlife refuge, wilderness area, or other similar
conservation area” (emphasis added)). As we explained in Murphy, “[s]uch a ‘natural
area’ may be a full-blown ‘wilderness area’, but (the regulation indicates) it may also
be ‘included in . . . a local, state, or national park’—areas that sometimes include trails
(sometimes paved), ski slopes and other recreational facilities, campgrounds
(sometimes with sanitary facilities), cabins, and even hotels.” Murphy, T.C. Memo.
2023-72, at *50 & n.24.
                                         33

[*33] (Emphasis added.) Proceeding from this addition of the word
“significant”, Treasury Regulation § 1.170A-14(d)(3)(ii) 22 provides the
following standards for discerning what constitutes a significant habitat
(with bracketed numbers interpolated):

       Significant habitats and ecosystems include, but are not
       limited to, [1] habitats for rare, endangered, or threatened
       species of animal, fish, or plants; [2] natural areas that
       represent high quality examples of a terrestrial community
       or aquatic community, such as islands that are
       undeveloped or not intensely developed where the coastal
       ecosystem is relatively intact; and [3] natural areas which
       are included in, or which contribute to, the ecological
       viability of a local, state, or national park, nature preserve,
       wildlife refuge, wilderness area, or other similar
       conservation area.

The Commissioner’s position stresses heavily the word “significant” but
almost writes out of the regulation the phrase “but are not limited to”.
In this plain text of the regulation, relatively natural habitats “are not
limited to” those with rare, endangered, or threatened species.

       In Champions Retreat Golf Founders, LLC v. Commissioner, 959
F.3d 1033, 1036 (11th Cir. 2020), vacating and remanding T.C. Memo.
2018-146, the Eleventh Circuit—the presumptive venue for appeal in
this case, see supra note 4—described the relation between the
“relatively natural habitat” text in section 170(h)(4)(A)(ii) and the
“significant relatively natural habitat” text in Treasury Regulation
§ 1.170A-14(d)(3)(i) as follows:

       [E]ven without the regulation, the Code would not be
       construed to apply to a completely trivial habitat—a few
       commonly occurring ants plainly would not do, nor would
       many other species not in need of conservation. Requiring
       some level of significance thus is unobjectionable. So long
       as the regulation’s use of this term is not construed to mean

         22 Petitioner challenges the procedural validity of Treasury Regulation

§ 1.170A-14(d)(3)(ii) on the basis that the Secretary neglected to respond to a
significant comment from the Ohio Conservation Foundation. However, because we
hold that the Mill Road Tract easement satisfies each conservation purpose stated in
its deed, we need not undertake an administrative law analysis of Treasury Regulation
§ 1.170A-14(d)(3)(ii) in this case.
                                          34

[*34] more than the Code will support, there is no reason to
      doubt the regulation’s validity.

The Eleventh Circuit thus construes the regulation to connote “some
level of significance” that is not “trivial”. By that standard, the
Commissioner’s notion of “significan[ce]” is overstated. 23

       Similarly, the Commissioner’s insistence that the Mill Road Tract
must contain a high-quality habitat for rare or endangered animals or
plants in order to satisfy the section 170(h)(4)(A)(ii) conservation
purpose requires more than what is stated in the Code—“protection of a
relatively natural habitat”. Petitioner correctly points out that the Mill
Road Tract contains the following “four habitats designated as high
priority habitats by the Georgia [SWAP]: (1) Oak-Hickory-Pine Forest,
(2) Bottomland Hardwood Forest, (3) Beaver Ponds, and (4) Streams.”
Because of the conservation easement, these habitats will continue to
exist on the Mill Road Tract free from developmental interference. As
the Mill Road corridor in Henry County continues to develop, the
habitats on the Mill Road Tract will provide a haven for the natural
ecological community of the Georgia Piedmont region and will exist
there in a relatively natural state. Although petitioner relies on the
expert report of Mr. Wilson, who observed on the Mill Road Tract five
bird species of priority concern according to the Atlantic Coast Joint
Venture Plan among 57 bird species of priority concern in the region,
section 170(h)(4)(A)(ii) does not mandate that the “fish, wildlife, or
plants, or similar ecosystem” be rare or threatened, nor does it specify a
threshold number of species that must be present for the conservation
purpose to be satisfied.        Under the plain meaning of section
170(h)(4)(A)(ii), all that is required is that the easement protect “a
relatively natural habitat of fish, wildlife, or plants, or similar
ecosystem”. The Mill Road Tract easement protects plant communities
and ecosystems natural to Henry County, which will continue to exist in
a relatively natural state as the surrounding area is developed. We
therefore hold that the Mill Road Tract easement satisfies the
conservation purpose of section 170(h)(4)(A)(ii).

      The Commissioner further argues that the easement is “not
contiguous to a park, nature preserve, wildlife refuge, wilderness area,

         23 In this case we follow the precedent of the Eleventh Circuit, the presumptive

venue for appeal in this case. See Golsen v. Commissioner, 54 T.C. 742, 756–57 (1970),
aff’d, 445 F.2d 985 (10th Cir. 1971). We need not consider whether the “relatively
natural habitat” at issue here might fail to be “significant” under a more exacting
standard.
                                   35

[*35] or conservation area” and therefore “does not contain natural
areas that are included in or contribute to the ecological viability of a
local, state, or national park, nature preserve, wildlife refuge,
wilderness area, or similar conservation area.” Petitioner points out,
however, that the easement “contributes to the ecological viability of the
Walnut Creek watershed district”. The easement deed establishes its
riparian buffer to preserve the wetland ecosystem along the tributaries
to Birch Creek present on the Mill Road Tract. Although the
Commissioner counters that the easement merely recites the protections
of streams provided by local law and thus “did not add any protection to
the buffer abutting the property’s stream”, we disagree with the
Commissioner because the protections provided by local law could
become more relaxed in the future, whereas the protections provided in
the easement deed will remain in perpetuity.

             2.     Preservation of open space

                    a.    Governmental conservation policy

       Petitioner argues that the easement preserves open space
pursuant to the Georgia SWAP; the Georgia Forestry Commissioner’s
Urban Forest Priority Areas; the Henry County Comprehensive Plan;
and the U.S. Department of Agriculture’s policies for the conservation of
productive farming soils.       The Commissioner counters that the
governmental conservation policies petitioner listed do not guarantee
protection of the Mill Road Tract because it is not specifically mentioned
or accepted into the policies. Although we accept that the Mill Road
Tract easement preserves open space pursuant to the governmental
policies petitioner identifies, we do not consider whether such
preservation yields a significant public benefit because we are able more
easily to hold that the Mill Road Tract easement provides a significant
public benefit by providing the general public with a scenic view along
Mill Road.

                    b.    Scenic view

       Petitioner asserts that the easement provides a scenic view for
over 7,000 vehicles passing the Mill Road Tract every day, and that the
easement’s “forested viewshed protected by the Aesthetic Buffer in the
Easement Deed will remain undeveloped in perpetuity.”                 The
Commissioner denigrates the value of this scenic view: “[T]he view of
the property is neither unique nor significant; the view is mostly of pine
trees, which is the same view as the view across the street, as well as
                                   36

[*36] along countless other roads in Henry County, Georgia.” According
to the Commissioner, this is insufficient for the Mill Road Tract
easement to yield a significant public benefit. We disagree.

       The Commissioner takes for granted that “the same view” that is
offered by the Mill Road Tract to passers-by is now and will always
remain available “along countless other roads in Henry County”. But
this ignores the fact, which the Commissioner admits, that the Mill Road
Tract is “in an area of heavy commercial and residential development”
and “has intensely developed subdivisions” on two sides. As an area
evolves from fields and forests to neighborhoods and then to shopping
centers, the value of stands of pine trees along some of the roads becomes
greater.

       As the general public commutes along Mill Road in the years
ahead, it will benefit from a stretch of open space pine forest more than
from another stretch of the continuing development (whether strip malls
or residential subdivisions). The easement deed ensures that this
forested view will exist in perpetuity along Mill Road, and the
significance of the public benefit will only increase as Henry County
becomes more developed and Mill Road becomes more heavily traveled.
We therefore hold that the Mill Road Tract easement meets the “open
space” conservation purpose of section 170(h)(4)(A)(iii)(I).

             3.     The size of the Mill Road easement

       For both the “relatively natural habitat” issue and the “open
space” issue, the Commissioner points to the small size of the easement
as evidence that it lacks conservation value. As to “relatively natural
habitat”, he argues that “[t]he property is not a high-quality example of
any habitat because of the property’s small size . . . . [A]t 0.05 square
miles, Partnership’s conservation easement was too small for purposes
of conservation.” The Commissioner acknowledges “that size is not
completely determinative if the area contains special places or a
valuable habitat” but insists the property has nothing valuable on it.
“Because only the small ‘special natural area’ on the property is
protected from agriculture and forestry, . . . only about half of the
already-small property is protected, which amounts to only
approximately 0.025 square miles[, which is] . . . too small to be a
significant relatively natural habitat.” As to “open space” giving a
“scenic view”, the Commissioner cites Treasury Regulation § 1.170A-
14(d)(4)(ii)(B), which, he acknowledges, provides that “visual (rather
than physical) access to or across the property by the general public is
                                            37

[*37] sufficient” and that “the entire property need not be visible to the
public” but also (he stresses) that “the public benefit from the donation
may be insufficient to qualify for a deduction if only a small portion of
the property is visible to the public”; and he argues that the easement
involves only a “small parcel of land . . . with only a 0.25-mile view”. The
Commissioner essentially contends that the Mill Road easement is too
small to have a conservation purpose.

        The easement area is 33 acres 24 of the 40-acre Mill Road Tract.
Admittedly, this is not Yellowstone, with its 2.2 million acres. But in a
suburban setting, an easement covering 33 acres is hardly negligible. It
may be illuminating to compare the Mill Road easement not to
Yellowstone but instead to something like the 50-acre Boston
Common, 25 which is the oldest and one of the best known city parks in
the United States. The Mill Road easement area is about two-thirds the
size of the Boston Common. Both the Boston Common and the Mill Road
Tract are irregular in shape, so for simplicity in comparing them we
assume that each is a square. If it were square, the Boston Common
(50 acres, or about 0.08 square miles) would be, on each side, about 1,475
feet (less than a third of a mile but more than a fourth of a mile), with a
perimeter of about one and one-tenth miles. The Mill Road easement
(33 acres, or about 0.05 square miles) would be, on each side, about 1,200

        24 The Commissioner argues that the 33-acre size of the easement must be

discounted: “Because only the small ‘special natural area’ on the property is protected
from agriculture and forestry, . . . only about half of the already-small property is
protected, which amounts to only approximately 0.025 square miles[, or 16 acres,
which is] . . . too small to be a significant relatively natural habitat.” Petitioner shows,
however, that this Special Natural Area is in fact 61% of the easement area (i.e.,
20 acres). More important, we think the Commissioner’s discount is unwarranted
because the entire 33 acres is protected from development, and the 39% of the tract
outside the Special Natural Area supports the conservation values of that area.
Cf. Champions Retreat Golf Founders, LLC v. Commissioner, 959 F.3d at 1039 (“It is
true, as the Commissioner notes, that the knotweed exists on only a limited proportion
of the easement—perhaps 7%, with the capacity to occupy up to 17%. But the
knotweed that exists, whatever its proportion, is worthy of protection”).
         25 In order to visualize and consider the size of the Mill Road easement, we

make this comparison to the Boston Common because it is a well-known property of
which we can take judicial notice. We do not make the comparison because we think
Boston is equivalent to Henry County, nor because we think that a city park is
equivalent to private property in a suburb, nor because we have decided that the
Boston Common necessarily, within the meaning of section 170(h), has a “relatively
natural habitat” or constitutes a qualifying “open space”. The Common simply
illustrates that a 50-acre tract is sufficiently large to have a profound effect on the
character of its developed surroundings. We think the same could be true for a 33-acre
tract.
                                       38

[*38] feet (a little less than a fourth of a mile and a little more than a
fifth of a mile), with a perimeter of about nine-tenths of a mile. An
undeveloped area, even on this modest scale—and especially when
surrounded by development in an urban or suburban setting—can be a
noteworthy and beneficial feature.

       We assume that there could be a tract so small that it could not
support any qualifying conservation purpose (“a completely trivial
habitat”, in the words of Champions Retreat Golf Founders, LLC v.
Commissioner, 959 F.3d at 1036)—suppose, for illustrative purposes, a
highway median strip, or perhaps an empty 0.1-acre lot in a residential
neighborhood. But in determining that the Mill Road easement is not
so small that it lacks conservation values, we are influenced by SCT’s
Baseline report. “Oak-Hickory-Pine Forest is considered the climax
forest of the Piedmont . . . . The [p]roperty is 61% oak-hickory forest
that is being designated a Special Natural Area.” The Commissioner’s
insistence of a requisite size for a conservation easement, like his
arguments about “high-quality” habitats, lacks any basis in the
statutory text. The fact that 33 acres of land containing natural plant
communities and ecosystems will remain undeveloped among a rapidly
developing area is sufficient under section 170(h)(4)(A)(ii).

         Our conclusion that a pine tree forest along a highway can
constitute “open space . . . for the scenic enjoyment of the general public,
. . . yield[ing] a significant public benefit”, see § 170(h)(4)(A)(iii)(I), is not
altered by the fact that the preserved view in this case is not longer than
a quarter mile. The regulation does warn that “the public benefit from
the donation may be insufficient to qualify for a deduction if only a small
portion of the property is visible to the public”, Treas. Reg. § 1.170A-
14(d)(4)(ii)(B); but in this case that “portion” is the entire northern
boundary of the tract along Mill Road, slightly longer than a fourth of
the property’s entire circumference. Even a quarter-mile respite from
development alters the character of the neighborhood. If sprawl moving
south from Atlanta is otherwise unchecked, the perpetual presence of
the pine forest on at least this portion of Mill Road may for many be a
welcome relief from the strip malls, shopping centers, and residential
subdivisions. The Mill Road easement substantially benefits the public
by preserving a scenic view of this quarter-mile forest.
                                   39

[*39] C.     Whether the easement protects its conservation purposes in
             perpetuity

      Section 170(h)(5)(A) provides that “[a] contribution shall not be
treated as exclusively for conservation purposes unless the conservation
purpose is protected in perpetuity”, and we explained in Belk v.
Commissioner, 140 T.C. 1, 12 (2013), supplemented by T.C. Memo. 2013-
154, aff’d, 774 F.3d 221 (4th Cir. 2014), that “the section 170(h)(5)
requirement that the conservation purpose be protected in perpetuity is
separate and distinct from the section 170(h)(2)(C) requirement that
there be real property subject to a use restriction in perpetuity.”

       Because a “qualified conservation contribution” can be a donation
of a partial interest in property, § 170(f)(3)(B)(iii), a donor of a
conservation easement may reserve in the easement deed rights
permitting it to make continued use of the property. However, to be
entitled to a charitable contribution deduction for donation of a
conservation easement, Treasury Regulation § 1.170A-14(b)(2) requires
that “[a]ny rights reserved by the donor in the donation of a perpetual
conservation restriction must conform to the requirements of this
section [i.e., Treasury Regulation § 1.170A-14]”. As we explained in
Murphy, T.C. Memo. 2023-79, at *60–61, Treasury Regulation § 1.170A-
14(d), (e), and (g) taken as a whole provides that a donor (1) may reserve
in the easement deed rights to make continued use of the easement
property, provided that there are enforceable restrictions to prevent
uses inconsistent with conservation purposes, (2) may continue pre-
existing use of the easement property that does not conflict with the
conservation purposes of the gift, and (3) cannot use the property in a
way that would destroy other significant conservation interests (unless
pursuant to protecting the conservation purpose of the easement).

      The Commissioner argues that “the reserved rights in the
easement deed permit uses that would destroy those conservation
purposes.” Specifically, the Commissioner complains of the reserved
right to engage in forestry and agriculture, as well as the right to
construct park structures and trails, on portions of the easement.

       We agree with petitioner, however, that the reserved rights in the
easement deed do not undermine its conservation purposes. The
aesthetic buffer provided in the easement deed preserves the scenic view
of the Mill Road Tract along Mill Road in perpetuity. The easement deed
gives enhanced protection to special natural areas on the Mill Road
Tract, specifying that all construction must take place outside of the
                                          40

[*40] special natural areas. If the reserved rights were exercised to the
fullest extent allowable under the easement deed, we think that the Mill
Road Tract easement would still fulfill its stated conservation purposes.
But it must be kept in mind that there are no reserved rights that are
unconditional; that is, even expressly reserved rights are made subject
to the condition that they “are not inconsistent with the Purpose of this
Conservation Easement”. If a conservation purpose were to be
threatened by the exercise of a reserved right, the easement deed gives
SCT the right to monitor and prevent the exercise of that reserved
right. 26 We hold that the reserved rights do not interfere with the
protection of the conservation purposes in perpetuity.

III.    Compliance with the substantiation requirements

        “A charitable contribution shall be allowable as a deduction only
if verified under regulations prescribed by the Secretary.” § 170(a)(1).
The Commissioner contends that there are two defects in Mill Road 36’s
compliance with those requirements; but to put these alleged defects
into perspective, we first summarize the requirements and then discuss
each of these two defects in turn.

        A.      A summary of the requirements

      Section 170(f)(11) imposes, for charitable contribution deductions,
heightened substantiation requirements on taxpayers, depending on the
value of the contribution. 27 Section 170(f)(11)(A)(i) provides that for

        26 If SCT were to fail to enforce the terms of the easement deed, then “the

Attorney General or the district attorney of the circuit in which the major portion of
trust property lies shall represent the interests of the beneficiaries and the interests
of this state as parens patriae in all legal matters pertaining to the administration and
disposition of such trust.” Ga. Code Ann. § 53-12-174 (2010).
         27 In the Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a)(1)

and (2), 98 Stat. 494, 691—an uncodified statutory provision—Congress directed the
Secretary to issue regulations under section 170(a)(1) “which require any individual,
closely held corporation, or personal service corporation claiming a deduction under
section 170” greater than $5,000 to “obtain a qualified appraisal for the property
contributed,” “attach an appraisal summary to the return on which such deduction is
first claimed for such contribution,” and “include on such return such additional
information (including the cost basis and acquisition date of the contributed property)
as the Secretary may prescribe in such regulations.” In response to DEFRA’s directive,
the Secretary added paragraph (c) to Treasury Regulation § 1.170A-13. But in the
American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 883(a), 118 Stat. 1418,
1631, Congress added paragraph (11) to subsection (f) of section 170 to “extend[] to all
C corporations the present and prior law requirement, applicable to an individual,
                                          41

[*41] deductions greater than $500,000, a taxpayer must attach “a
description of such property”, § 170(f)(11)(B), obtain “a qualified
appraisal of such property”, § 170(f)(11)(C), and “attach[] to the return
for the taxable year a qualified appraisal of such property”,
§ 170(f)(11)(D).

        Treasury Regulation § 1.170A-13(c)(3)(ii) provides that a
“qualified appraisal” must contain, inter alia, the following information:
(1) a description of the property; (2) the date(s) on which the property
was appraised; (3) the property’s fair market value; (4) the method used
to value the property; and (5) the specific basis for the valuation and a
justification of that basis.

       Treasury Regulation § 1.170A-13(c)(3)(i)(B) provides that a
qualified appraisal must be “prepared, signed, and dated by a qualified
appraiser”. A “qualified appraiser” must (1) hold himself out to the
public as an appraiser; (2) be qualified to make appraisals of the type of
property being valued; and (3) acknowledge that aiding and abetting an
understatement of tax liability may subject them to a penalty pursuant
to section 6701. Treas. Reg. § 1.170A-13(c)(5)(i). Moreover, a qualified
appraiser cannot be one who (1) receives a deduction under section 170
for the contribution of the property that is being appraised, (2) was a
party to the donor’s acquisition of the property being appraised, (3) is
the donee of the property, (4) was a person employed by any of the
aforementioned, (5) is related to any of the aforementioned within the
meaning of section 267(b) (not applicable here), or (6) is an appraiser
regularly engaged by any of the aforementioned who does not make a
majority of his appraisals for other persons during the taxable year. Id.
subdiv. (iv).

       B.      The two supposed defects

       Mill Road 36 did have an appraiser and an appraisal, but the
Commissioner asserts that its substantiation had two fatal defects—i.e.,
(1) the appraiser was not qualified because Mill Road 36 “had knowledge
of facts that would cause a reasonable person to expect the appraiser

closely-held corporation, personal service corporation, partnership, or S corporation,
that the donor must obtain a qualified appraisal of the property if the amount of the
deduction claimed exceeds $5,000.” Staff of J. Comm. On Tax’n, 108th Cong., General
Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05, at 462
(J. Comm. Print 2005). “The Act also provide[d] that if the amount of the contribution
of property . . . exceeds $500,000, then the donor (whether an individual, partnership,
or corporation) must attach the qualified appraisal to the donor’s tax return.” Id.
                                    42

[*42] [Mr. Foster] falsely to overstate the value of the donated property”,
see id. subdiv. (ii), and (2) two necessary persons in addition to
Mr. Foster failed to “sign[] the qualified appraisal and appraisal
summary”, see id. subdiv (iii). For the reasons we now explain, we
conclude that Mill Road 36’s substantiation did not have these defects.

             1.     Whether Mill Road 36 “had knowledge of facts”

       Treasury Regulation § 1.170A-13(c)(5)(ii) provides that an
appraiser is not qualified if “the donor [here, Mill Road 36] had
knowledge of facts that would cause a reasonable person to expect the
appraiser [here, Mr. Foster] falsely to overstate the value of the donated
property”. Reading this regulation carefully, we observe that it is not
the appraisal that may become disqualified, but rather the appraiser.
We furthermore observe that the appraiser does not become disqualified
simply because (1) the appraiser incompetently or carelessly overstated
the value, and/or (2) the donor knew that the appraiser overstated the
value, and/or (3) the donor knew facts about the property that caused the
value to be overstated. Rather, this disqualification occurs when the
donor knows facts that do or should cause him to expect the appraiser
to falsely overstate the value. Such facts will be facts about the
appraiser, and the resulting expectation is not just an incorrect
overstated value but a “falsely” overstated value. Thus, Treasury
Regulation § 1.170A-13(c)(5)(ii) provides the following as an illustration:
“[T]he donor and the appraiser make an agreement concerning the
amount at which the property will be valued and the donor knows that
such amount exceeds the fair market value of the property”. Of course,
such an agreement would be a fact about the appraiser that is known to
the donor; and a valuation known to be in excess of fair market value
but agreed to nonetheless would be not just an incorrect amount but a
culpably “false[]” overstatement of value.

       The Commissioner urges us away from this close reading of the
regulation and asks us to read it “more broadly”, but we decline to do so.
The Code elsewhere imposes consequences for overstated value (e.g.,
disallowance of the overstated deduction) and even for grossly
overstated value (e.g., the 40% penalty we discuss below in Part VI.B),
and the regulatory text we construe here is manifestly focused on
something beyond that: a taxpayer-donor’s knowledge of an appraiser’s
deception. As we stated in Kaufman v. Commissioner, T.C. Memo. 2014-
52, at *70–71 (footnote omitted), aff’d, 784 F.3d 56 (1st Cir. 2015):
                                         43

[*43] We take from the example and from the modification of the
      infinitive “to overstate” by the adverb “falsely” in the
      regulations that the expression “falsely to overstate” is
      intended to convey a sense of collusion and deception as to
      the value of the property. While we will state shortly our
      finding that [the taxpayers] lacked reasonable cause and
      did not act in good faith . . . we do not believe that, as we
      interpret the term, Mr. Hanlon [the appraiser] acted falsely
      with respect to his appraisal of the facade easement. We
      find that he was a qualified appraiser within the meaning
      of section 6664(c)(2)(A). That is not to say that he was right
      or that petitioners did not have reason to question his
      valuation; it is only to say that, with respect to the
      technical meaning of the term “qualified appraiser”, he was
      qualified.

The Commissioner argues that Mr. Carbonara (as exclusive owner of the
managing member of Mill Road 36 and its TMP) and Mr. Grant (as prior
managing member of Mill Road 36 and engager of Mr. Foster’s
appraisal) had knowledge of facts that would cause Mr. Foster’s
appraisal to be unqualified, but many of the facts the Commissioner
relies on are beside the point for this purpose.

       The Commissioner points to facts about the Mill Road Tract that
were known to Mr. Grant and Mr. Carbonara and that do indeed
undermine the value petitioner claimed and deducted (that the tract had
not been formally approved for an assisted living facility; that the
concept plan inflated the number of units that could fit on the tract; and
that “Messrs. Carbonara and Grant knew the price of vacant land zoned
RA in Henry County was nowhere near $271,086 per acre ($8,935,000 /
32.96 [acres]) because they were buying and selling it at per acre prices
between $3,730 and $19,483 per acre”); but these facts, without more,
do not show any “false”-ness or deception by Mr. Foster. 28 One fact
known to Mr. Grant and Mr. Carbonara that the Commissioner fairly
presses to undermine the valuation is that, contrary to the express
assumption in Mr. Foster’s valuation, the county zoning officials had not
approved the building of an assisted living facility on the Mill Road
Tract but had only recommended it. Given that Mr. Foster had been

        28 Mr. Foster signed the Form 8283 on which (as we discuss below in Part VI.A

involving the fraud penalty) Mill Road 36’s low basis was frankly juxtaposed with the
high claimed value. The opportunity for “deception” in such a circumstance would be
complicated.
                                    44

[*44] given the letter (which included a “Recommendation” of
“recommend[ed] Approval”), quoted it, and attached it to his appraisal,
it is hard to account for the error. We think it most likely that Mr. Foster
simply did not realize that his statement was incorrect and that he
mistook the recommendation for an “approval”. It also seems likely that
Mr. Grant and Mr. Carbonara shared his carelessness on the point
because of their not unreasonable belief that approval would ultimately
be given if requested and their ignorance and lack of curiosity about
state-level approval.

       Some facts that the Commissioner cites about the appraisals
(such as the number of similar appraisals in Henry County at the same
time) do indeed undermine their probative value and may come closer
to being facts known to Messrs. Grant and Carbonara that might
suggest some deception by Mr. Foster. But the testimony of Mr. Grant
(who was called by each of the two parties as part of its case in chief and
whose testimony about his business dealings we generally found to be
credible) establishes that Messrs. Grant, Foster, and Carbonara were
not as closely related to each other as the Commissioner seems to
assume. Their interests overlapped but did not perfectly coincide.
Mr. Grant had hired Mr. Foster for appraisals and had hired Falcon
Design for concept plans since long before he met Mr. Carbonara, sold
land to him, or anticipated conservation easements. Mr. Grant
explained that it was not unusual for him to hire Mr. Foster for multiple
appraisals at the same time. Mr. Grant also hired other appraisers as
well as other concept designers in the ordinary course of his business,
and Mr. Foster and Falcon Design had clients other than Mr. Grant.
Mr. Grant’s business is to acquire land, obtain a concept plan for the
land, have the property appraised with that concept plan, and then sell
that development opportunity to an experienced developer (or else form
a joint venture with them), an activity for which he found Mr. Foster
and Falcon Design to be useful and credible. Mr. Grant explained that
whether the buyer might be a developer or a contributor of the property,
he maximizes the number of units in a concept plan because he
negotiates his sale prices using a per unit value. In this case that buyer
was Mr. Carbonara, who when negotiating the purchase price of the Mill
Road Tract wanted to reduce the number of units in the concept plan to
508 to lower the price at which MR36 Investments could buy it. If
Mr. Carbonara had been successful in reducing the number of units in
the concept plan, then presumably Mr. Foster would have accordingly
determined a lower value of the Mill Road Tract in his appraisal, which
would have correspondingly reduced the amount of the deduction for
donation of the conservation easement. Mr. Grant and Mr. Carbonara
                                          45

[*45] both evidently hoped for economies of scale, and we do not think
that this disqualified Mr. Foster or his appraisals. Neither Mr. Grant
nor Mr. Foster was a recipient of the deduction for contributing the Mill
Road Tract easement to SCT.

       In short, Mr. Foster is a professional appraiser who held himself
out to the public as such, was qualified to appraise property with an
assisted living facility concept plan, is not excluded under the provisions
of Treasury Regulation § 1.170A-13(c)(5)(iv), and made the statement
acknowledging that he could be subject to penalty pursuant to section
6701. We therefore hold that he was a “qualified appraiser” under
Treasury Regulation 1.170A-13(c)(5) and that his appraisal of the Mill
Road Tract easement was a “qualified appraisal” under Treasury
Regulation 1.170A-13(c)(3). 29

               2.      Whether necessary signatures are missing

       The Commissioner also complains that Janet Gaskin and David
Miller contributed to Mr. Foster’s appraisal of the Mill Road Tract
easement but did not sign the appraisal, in supposed violation of
Treasury Regulation § 1.170A-13(c)(5)(iii), which provides: “[I]f two or
more appraisers contribute to a single appraisal, each appraiser shall
comply with the requirements of this paragraph (c), including signing
the qualified appraisal and appraisal summary”. However, we are
persuaded by the testimony of Ms. Gaskin that she and Mr. Miller were
employees of Mr. Foster, and that Mr. Foster guided and supervised
their work and made all material determinations for appraising the Mill
Road Tract easement such that he is the qualified appraiser required by
Treasury Regulation § 1.170A-13(c)(3)(i)(B) to sign the appraisal, and
that the regulation does not also require the signatures of the
subordinates who assisted him. Although Ms. Gaskin and Mr. Miller
assisted Mr. Foster in the preparation of his appraisal report, there is
(in the words of Zarlengo v. Commissioner, T.C. Memo. 2014-161, at *40)
“no indication in the record that any of the figures in the appraisal report
were [their] own.”

        29 That is, the evidence in this case does not establish that Mill Road 36 had

knowledge of facts that would cause a reasonable person to expect Mr. Foster falsely
to overstate the value of the donated property—a fact-intensive inquiry that is
inherently case-specific. This is not a case in which the evidence shows that the donor
provided a valuation that was endorsed by the appraiser, though both knew that the
valuation contradicted the appraiser’s professional judgment.
                                    46

[*46] IV.   The value of the easement donation

      A.     The method of valuing a conservation easement

       Generally, the amount of a charitable contribution deduction
under section 170(a) for a donation of property is the “fair market value”
of the property at the time of the donation. Treas. Reg. § 1.170A-1(c)(1).
Treasury Regulation § 1.170A-1(c)(2) defines fair market value to be “the
price at which the property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or sell
and both having reasonable knowledge of relevant facts.” With respect
to valuing a donation of a partial interest in property, Treasury
Regulation § 1.170A-7(c) provides that “[e]xcept as provided in
§ 1.170A-14, the amount of the deduction under section 170 . . . is the
fair market value of the partial interest at the time of the contribution.”
And Treasury Regulation § 1.170A-14(h)(3)(i) in turn sets forth the
following method for valuing a perpetual conservation restriction:

      If there is a substantial record of sales of easements
      comparable to the donated easement (such as purchases
      pursuant to a governmental program), the fair market
      value of the donated easement is based on the sales prices
      of such comparable easements. If no substantial record of
      market-place sales is available to use as a meaningful or
      valid comparison, as a general rule (but not necessarily in
      all cases) the fair market value of a perpetual conservation
      restriction is equal to the difference between the fair
      market value of the property it encumbers before the
      granting of the restriction and the fair market value of the
      encumbered property after the granting of the restriction.
      The amount of the deduction in the case of a charitable
      contribution of a perpetual conservation restriction
      covering a portion of the contiguous property owned by a
      donor and the donor’s family . . . is the difference between
      the fair market value of the entire contiguous parcel of
      property before and after the granting of the restriction.

       The fair market value of property on a given date is a question of
fact to be resolved on the basis of the entire record. McGuire v.
Commissioner, 44 T.C. 801, 806–07 (1965); Kaplan v. Commissioner,
43 T.C. 663, 665 (1965). In this case we do not have “a substantial record
of sales of easements comparable to the donated easement”, and we will
                                   47

[*47] therefore base our valuation on the before and after method. See
Treas. Reg. § 1.170A-14(h)(3)(i). To do so—

      If before and after valuation is used, the fair market value
      of the property before contribution of the conservation
      restriction must take into account not only the current use
      of the property but also an objective assessment of how
      immediate or remote the likelihood is that the property,
      absent the restriction, would in fact be developed, as well
      as any effect from zoning, conservation, or historic
      preservation laws that already restrict the property’s
      potential highest and best use.

Id. subdiv. (ii); see also Stanley Works & Subs. v. Commissioner, 87 T.C.
389, 400 (1986). A property’s highest and best use is the “highest and
most profitable use for which the property is adaptable and needed or
likely to be needed in the reasonably near future”. Olson v. United
States, 292 U.S. 246, 255 (1934).

       To show the value of the conservation easement, including the
property’s highest and best use before and after the donation, the parties
have offered the reports and testimony of expert witnesses. See Rule
143(g). “Opinion testimony of an expert is admissible if and because it
will assist the trier of fact to understand the evidence that will
determine a fact in issue”, and we evaluate expert opinions “in light of
the demonstrated qualifications of the expert and all other evidence of
value.” Parker v. Commissioner, 86 T.C. 547, 561 (1986) (citing Fed. R.
Evid. 702). Where experts offer competing estimates of fair market
value, we decide how to weigh those estimates by, inter alia, examining
the factors they considered in reaching their conclusions. See Casey v.
Commissioner, 38 T.C. 357, 381 (1962). We are not bound by the opinion
of any expert witness, and we may accept or reject expert testimony in
the exercise of our sound judgment. Helvering v. Nat’l Grocery Co., 304
U.S. 282, 294–95 (1938); Estate of Newhouse v. Commissioner, 94 T.C.
193, 217 (1990). We may also reach a decision as to the value of property
that is based on our own examination of the evidence in the record. See
Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff’g T.C.
Memo. 1974-285.

       Having established the subject and method of valuation, as well
as the scope of evidence with which to do so, we will now explain the
basis of our valuation of the Mill Road Tract easement as stated above
in the findings of fact.
                                    48

[*48] B.     The value of the Mill Road Tract easement

       As with Mr. Foster’s appraisal made at the time of the
contribution, the parties’ expert witnesses at trial applied the following
criteria for analyzing the highest and best use of the Mill Road Tract:
the use must be physically possible, legally permissible, financially
feasible, and maximally productive. Of these four criteria, the one in
sharpest dispute is whether an assisted living facility of the kind and
magnitude provided in the concept plan would be “legally permissible”
on the Mill Road Tract. Legally permissible uses are those “that are not
precluded by law, zoning ordinances[,] or private deed restrictions.”
Furthermore, both experts valued the Mill Road Tract using the sales
comparison approach. That is, once an asserted highest and best use of
property is deemed to be, inter alia, legally permissible, the property can
then be valued on the basis of sales of comparable properties put to that
same use. “The Sales Comparison Approach is based on the premise
that a buyer would pay no more for a specific property than the cost of
obtaining a property with the same quality, utility, and perceived
benefits of ownership.” Both experts agree that fair market value
assumes a hypothetical sale between a willing buyer and a willing seller.
For the reasons explained below, we disagree with Mr. Clanton’s
determinations with respect to highest and best use of the Mill Road
Tract and comparable sales before the easement donation, and we
therefore do not accept his valuation. We instead accept Mr. Kinney’s
valuation of the Mill Road Tract easement as its fair market value in
December 2016.

             1.     Legal permissibility

                    a.     County approval

       Mr. Clanton states that “the legally permissible uses are typically
determined by the zoning constraints of the jurisdiction in which the
property is located”, and he then references Henry County Code of
Ordinances Section 4.03.18 (stated in the recommendation letter for
conditional approval by the Henry County Zoning Advisory Board).
Mr. Clanton’s report makes the extraordinary assumption “that
developing the 33.89 +/− acres with a senior housing community, to a
maximum of 677-units, would be legally permitted by zoning”. We think
it is reasonable for Mr. Clanton to assume (and the Commissioner’s
expert Mr. Kinney does not disagree) that the staff’s recommendation to
approve conditional use to operate a 677-unit assisted living facility had
a good chance of being followed in due course by Henry County Planning
                                    49

[*49] and Zoning, and the application, if left pending, would have been
granted by “zoning”—i.e., by the county authorities.

        However, although the Henry County Planning and Zoning staff
did recommend that the Zoning Advisory Board approve conditional use
for the Mill Road Tract as an assisted living facility, once that
recommendation was communicated, the application was withdrawn,
thereby forestalling further county-level consideration. Henry County
had a finite capacity for such facilities, and withdrawing the application
for the Mill Road Tract was practically necessary in order to enable the
staff to consider equivalent applications for Mr. Grant’s ten other tracts.
But this meant that, after the withdrawal of the application for the Mill
Road Tract, the Mill Road Tract no longer had any assurance of county
approval. If a later-filed application for another tract received a staff
recommendation of approval for conditional use and then (unlike the
Mill Road Tract) proceeded to final Board approval, then the final
approval of that other tract might impede or prevent such approval for
the Mill Road Tract. Someone considering a purchase of the Mill Road
Tract for development as an assisted living facility could hardly be
indifferent to the withdrawal of the application, and Mr. Clanton’s
extraordinary assumption “that developing . . . a senior housing
community. . . would be legally permitted by zoning”—even just at the
County level— was unwarranted on the facts as they existed at the time
of the appraisal and of the contribution.

                    b.     State approval

       Moreover, Mr. Clanton does not mention the definition of
“assisted living facility” provided in Georgia’s ULDC, Appendix A (also
referenced in the county staff’s recommendation letter), which requires
approval and licensure by the Georgia Division of Healthcare Facilities.
Although Mr. Clanton’s report makes the extraordinary assumption
“that developing the 33.89 +/− acres with a senior housing community,
to a maximum of 677-units, would be legally permitted by zoning”, this
assumption addresses only zoning approval from Henry County and
does not address approval from the Georgia Division of Healthcare
Facilities to operate an assisted living facility of the magnitude provided
in the concept plan.

        Mr. Kinney rejects any assumption that a 677-unit assisted living
facility would have ultimately been licensed by the Georgia Division of
Healthcare Facilities because his market research indicated that a
capacity of 677 units in an assisted living facility was grossly excessive
                                    50

[*50] and that the appropriate capacity for an assisted living facility
was between 60 and 120 units. According to Mr. Kinney’s market
research, a 677-unit facility would have to “include numerous levels of
care ranging from independent living through hospice”, which would
thereby fail the criterion provided in the recommendation letter for
conditional use that the facility meet the requirements of ULDC,
Appendix A, which specifically excludes hospice and intensive care from
the uses of an assisted living facility.

        Mr. Clanton’s valuation (and petitioner’s general assertion that
the highest and best use of the Mill Road Tract before the easement
donation) therefore makes an unreasonable assumption that a 677-unit
assisted living facility would ultimately have been approved by the
Georgia Division of Healthcare Facilities and licensed to operate on the
Mill Road Tract. The Henry County staff’s recommendation letter for
conditional approval of an assisted living facility on the Mill Road Tract
specifically incorporates the definition of “assisted living facility”
provided in Appendix A to ULDC Chapter 4, which requires such a
facility to be “state-licensed”. Accordingly, a mere recommendation that
a 677-unit assisted living facility be approved by the Henry County
Zoning Advisory Board, is insufficient when such a facility also requires
a “certificate of need” and a permit to operate, issued by the Georgia
Division of Healthcare Facilities. Mere county approval (much less mere
recommendation of such approval) by itself does not sufficiently
establish that such an assisted living facility is a legally permissible use
of the Mill Road Tract before the donation of the conservation easement.
Petitioner has thus failed to show that a 677-unit assisted living facility
was a legally permissible use of the Mill Road Tract, and this failure
gravely undermines the highest-and-best-use assumption in its
valuation.

       However, even if the highest and best use had been as
Mr. Clanton asserted, the value could not have been more than a
fraction of what he concluded, for the reasons we now discuss.

             2.     Sales comparables

       Apart from the problems of his highest-and-best-use assumption,
Mr. Clanton’s valuation faces additional problems: He determined his
before value on the basis of four sales of properties that he considered
comparable to the Mill Road Tract. However, none of these properties
is in Henry County. We accordingly do not accept them as properly
comparable to the Mill Road Tract.
                                          51

[*51] Moreover, Mr. Clanton states in his report that “[u]nder the
Principle of Substitution, the value of a property can be estimated at the
cost of acquiring an equally desirable substitute.” 30 This sensible and
intuitive principle undermines Mr. Clanton’s valuation of the Mill Road
Tract, because a willing buyer would not have paid approximately
$197,550 per acre ($6,695,000 / 33.89 acres) for non-unique land in
Henry County when the price per acre for substitute properties
(identified by the Commissioner’s expert Mr. Kinney) was between
$6,000 and $10,000 per acre. The price of substitute land in Henry
County upon which an assisted living facility could be developed reveals
that the high values determined by both the original appraiser
Mr. Foster ($8,935,000) and the trial expert Mr. Clanton ($6,695,000),
even if they were in some sense valid, would be attributable not to the
underlying Mill Road Tract but instead to the finished development of
the property as an assisted living facility. But petitioner has not shown
that the particular qualities of the Mill Road Tract made it uniquely
suitable for an assisted living facility. Mr. Grant himself found 10 other
properties on which such a facility could be built—and no one defended
the idea that demand existed in Henry County for 11 such facilities. The
regulation sensibly instructs us to make “an objective assessment of how
immediate or remote the likelihood is that the property, absent the
restriction, would in fact be developed,” Treas. Reg. § 1.170A-14(h)(3)(ii);
and in light of the high number of available properties just as suitable
as the Mill Road Tract, one cannot say that there was a high likelihood
that the Mill Road Tract would have been developed into an assisted
living facility—and one can say that there was a zero probability that it
would have been developed if the selling price had been $6.7 million or
any other remotely similar price.

      A developer intending to build a facility would never have
contemplated buying the Mill Road Tract for $6.7 million but would
instead have bought one of the many other tracts available at much
lower prices. As a prospective developer would do, we view the price of
a comparable undeveloped lot in Henry County as the proper
“substitute” by which to value to the Mill Road Tract. Mr. Kinney’s

        30 See Estate of Rabe v. Commissioner, T.C. Memo. 1975-26, 34 T.C.M. (CCH)

117, 119, aff’d, 566 F.2d 1183 (9th Cir. 1977) (“In the case of vacant, unimproved
property the ‘market data’ or ‘comparable sales’ approach is generally the most reliable
method of valuation, the rationale being that the marketplace is the best indicator of
value, based on the conflicting interests of many buyers and sellers. This in turn is
based on the principle of substitution, i.e., that a prudent man will pay no more for a
given property than he would for a similar property”).
                                         52

[*52] valuation of $900,000 was based on such comparables, and we
adopt his valuation.

               3.      Sales history of the Mill Road Tract

        But we need not look even as far away as other comparable
properties to see that Mr. Clanton’s appraisal was very wide of the mark.
The sales history of the Mill Road Tract itself is powerful evidence of its
value. Mr. Kinney’s valuation is commensurate not only with those
comparables but also with the sales history of the Mill Road Tract itself
(and Mr. Clanton’s is not). Mill Road Partners initially purchased
117.5 acres (comprising a 50-acre tract and a 67.5-acre tract) along Mill
Road on December 12, 2014, for $1.25 million (just below $10,700 per
acre). Less than three weeks later on December 30, 2014, Benwood
Investments acquired a 25% undivided interest in the two parcels for
$315,000 (i.e., a one-fourth interest for approximately one-fourth of Mill
Road Partners’ $1.25 million purchase price). After Mill Road Partners
and Benwood Investments later contributed the 40-acre Mill Road Tract
to Mill Road 36 as its only asset, a 97% ownership interest in Mill Road
36 was sold to MR36 Investments in September 2016 for $1 million (i.e.,
at a profit). The $1 million sale price (equivalent to about $25,800 per
acre) reflects what Mr. Carbonara’s MR36 Investments considered the
Mill Road Tract to be worth. Mr. Clanton argues that the reason the
ownership interests in Mill Road 36 were sold for less than the appraised
fair market value of the Mill Road Tract was that “investors who acquire
non-controlling interest in marketable securities, in entities with the
primary asset being undeveloped land, require a significant discount”;
but Mr. Grant testified that he considered the sale of the interests in
Mill Road 36 to MR Investments to be a sale of the Mill Road Tract, and
it was on that basis that he negotiated the sale price with
Mr. Carbonara. Altogether, it is reasonable that an easement covering
33 acres of a non-unique 40-acre tract (approximately 82% of the area)
worth $1 million would be valued (as the Commissioner accepts) at
$900,000 (about $27,230 per acre) 31 as opposed to $6,695,000 (i.e., the

        31 To avoid an unintended comparison of apples (40 acres) and oranges

(33 acres), we note that MR36 Investments effectively purchased the 40-acre tract for
$25,800 per acre in September 2016, that it conveyed through Mill Road 36 an
easement of 33 acres in December 2016, and that it claims a deductible value totaling
about $203,000 per acre for that 33-acre easement. We see no evidence that the Mill
Road Tract octupled in value between September and December 2016.
                                          53

[*53] value asserted by petitioner, which amounts to about $203,000 per
acre). 32

V.     The amount of the allowable charitable contribution deduction

        Generally the amount of a donor’s charitable contribution
deduction is the value of the property contributed. See Treas. Reg.
§ 1.170A-1(c)(1). If that generality applied here, then the amount of the
deduction would be the value we have determined for the easement, i.e.,
$900,000. However, the Commissioner argues that the Mill Road Tract
“was inventory in the hands of the contributing partners”—Mill Road
Partners and Benwood Investments—when it was contributed to their
partnership Mill Road 36, and that accordingly the amount of Mill Road
36’s deduction is limited to its basis in the Mill Road Tract pursuant to
section 170(e)(1)(A). For the reasons we explain below, we agree with
the Commissioner and accordingly hold that Mill Road 36’s deduction
for its contribution to SCT of the Mill Road Tract easement is limited to
its basis in the Mill Road Tract—$416,563. 33

       32 Mr. Grant did explain that he generally sells land to developers for a price

below its appraised value (though for more than what he paid for it, so as to enjoy a
profit) not because the appraisal is wrong but because he wants the below-appraised-
value list price to signal to the buyer-developer the profit potential of the property.
But this approach, however reasonable it may be in Mr. Grant’s regular business, does
not account for the pricing in the sale to MR36 Investments of the 97% interest in Mill
Road 36 (whose only asset was the Mill Road Tract) where the appraised value of that
tract was $8.9 million. The gross disparity between the $1 million price and
petitioner’s $6.7 million and $8.9 million appraisals certainly cannot be explained as
one of Mr. Grant’s modest mark-downs to encourage a buyer. Mr. Grant and
Mr. Carbonara had friendly business relations, but there is no reason to suppose that
Mr. Grant intended to let Mr. Carbonara’s MR36 Investments pay him only $1 million
for a property reasonably appraised at $6.7 million or $8.9 million. Rather, the sale
for $1 million is evidence that these higher appraised values bore no relation to the
tract’s actual fair market value. In that transaction the evidence of fair market value
was the sale price—the amount that a willing buyer (Mr. Carbonara) paid to a willing
seller (Mr. Grant).
        33 The Commissioner asserts that petitioner’s “charitable contribution is

limited to its adjusted basis in the property, which was $416,563”; and he does not
make any argument (based on section 170(e)(2), Treasury Regulation § 1.170A-
14(h)(3)(iii), or otherwise) that the deduction should be further limited by allocating
that basis between the easement acreage and the other acreage or between the
easement and the underlying land. We do not attempt any such allocation on our own
motion.
                                    54

[*54] A.     Special rules for inventory property

       Section 170(e)(1)(A) reduces the amount of a taxpayer’s charitable
contribution deduction by “the amount of gain which would not have
been long-term capital gain . . . if the property contributed had been sold
by the taxpayer at its fair market value.” Section 724(b), titled
“Contributions of Inventory Items”, requires the partnership (here Mill
Road 36) to treat as ordinary income or loss “any gain or loss recognized
by the partnership on the disposition of such property during the 5-year
period beginning on the date of such contribution.” Section 724(b)
applies to property that was “contributed to the partnership” (as the Mill
Road Tract was contributed to Mill Road 36) “by a partner” (as the Mill
Road Tract was contributed by Mill Road Partners and Benwood
Investments) and that was an “inventory item” in the contributing
partner’s hands immediately before the contribution. Section 724(d)(2)
incorporates the definition of “inventory item” provided in section
751(d)—i.e., that

      the term “inventory items” means—
                   (1) property of the partnership of the kind
             described in section 1221(a)(1),
                   (2) any other property of the partnership
             which, on sale or exchange by the partnership,
             would be considered property other than a capital
             asset and other than property described in section
             1231, and
                   (3) any other property held by the partnership
             which, if held by the selling or distributee partner,
             would be considered property of the type described
             in paragraph (1) or (2).

Section 1221(a)(1) (cross-referenced in section 751(d)(1), as quoted
above) excludes from the definition of a capital asset, inter alia,
“property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business”. Likewise, subsection (b)(1)(A)
and (B) of section 1231 (cross-referenced in section 751(d)(2)) exempts
“property . . . properly includable in the inventory of the taxpayer” and
“property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business” from being included in the
calculation of a taxpayer’s section 1231 hotchpot gain or loss.

      Accordingly, if property was held by a contributing partner
primarily for sale in the ordinary course of his trade or business, then
                                              55

[*55] for the partnership that received the property it was an “inventory
item” within the meaning of section 724(b), and disposition of that
property by the receiving partnership would result in ordinary income
or loss to the partnership. If instead the receiving partnership were to
contribute such an “inventory item” to charity, and that contribution
were to give rise to a deduction under section 170, then subsection
(e)(1)(A) would reduce the partnership’s deduction by the amount of
ordinary gain that would have been recognized had the partnership sold
the property. We recently analyzed and applied these provisions in our
opinion in Glade Creek Partners, LLC v. Commissioner, T.C. Memo.
2023-82, supplementing T.C. Memo. 2020-148.

           B.      The Mill Road Tract as inventory

       The Eleventh Circuit—the appellate venue in Glade Creek and
presumptively in this case as well—uses the following inquiries to
determine whether a taxpayer holds property for sale in the ordinary
course of business or as an investment: (1) whether the taxpayer was
engaged in a trade or business, and if so, what business; (2) whether the
taxpayer was holding the property primarily for sale in that business;
and (3) whether the sales contemplated by the taxpayer were “ordinary”
in the course of that business. 34 Sanders v. United States, 740 F.2d 886,
888‒89 (11th Cir. 1984) (citing Suburban Realty Co. v. United States,
615 F.2d 171, 178 (5th Cir. 1980)). Mill Road Partners and Benwood
Investments were the two partners who contributed the Mill Road Tract
to Mill Road 36. Both entities were previously and subsequently
engaged in the business of buying and selling real estate; they acquired

           34 To resolve these three inquiries, the Eleventh Circuit consults seven relevant

factors:
           (1) the nature and purpose of the acquisition of the property and the
           duration of the ownership; (2) the extent and nature of the taxpayer’s
           efforts to sell the property; (3) the number, extent, continuity, and
           substantiality of the sales; (4) the extent of subdividing, developing,
           and advertising to increase sales; (5) the use of a business office for the
           sale of the property; (6) the character and degree of supervision or
           control exercised by the taxpayer over any representative selling the
           property; and (7) the time and effort the taxpayer habitually devoted
           to the sales.
United States v. Winthrop, 417 F.2d 905, 910 (5th Cir. 1969). We need not analyze in
detail each of these factors here because it is evident from the testimony of Mr. Grant
that he himself, Benwood Investments, Ms. Meng, and Mr. Wang all worked together
in the business of buying and selling land, and that the Mill Road Tract was both
acquired and sold within the ordinary course of their real estate business operated
through Mill Road 36.
                                      56

[*56] the 117-acre parent tract that included the Mill Road Tract
pursuant to their real estate business; and they contributed 40 acres of
it—the Mill Road Tract—to Mill Road 36 in furtherance of their real
estate business. And as we found above at page 10, after Mill Road
Partners contributed 40 of the 117 acres to Mill Road 36, Mill Road
Partners used the remaining acres in the ordinary course of their real
estate business by selling the other parcels to Evergreen Management
Group and 49 Mill Road Henry, LLC.

      The fact that 97% ownership of Mill Road 36 was then sold to
MR36 Investments (after the Mill Road Tract was contributed to Mill
Road 36 and before Mill Road 36 made the easement donation) does not
change the fact that the Mill Road Tract was contributed to Mill Road
36 by partners (Mill Road Partners and Benwood Investments) who
were real estate professionals within five years of donating the
conservation easement and claiming the charitable contribution
deduction.

       Accordingly, pursuant to section 724(b), any proceeds from the
sale of the Mill Road Tract would have been ordinary income to Mill
Road 36 at the time the conservation easement was donated; and the
amount of the deduction that was generated by the charitable
contribution that was made (instead of a sale) is limited, by operation of
section 170(e)(1)(A), to Mill Road 36’s basis in the Mill Road Tract. It is
undisputed that Mill Road 36’s basis in the Mill Road Tract at the time
of the conservation easement donation was $416,563, as it reported on
its Form 8283. Mill Road 36 is therefore entitled to a charitable
contribution deduction not of the almost $9 million amount it claimed
on its return, nor the $6.7 million value for which it contended at trial,
nor even the $900,000 value we find for the easement, but its basis of
$416,563.

VI.    Penalties

      The Commissioner asserts that Mill Road 36’s deduction of the
Mill Road Tract easement contribution is subject to the fraud penalty
under section 6663, or, in the alternative, an accuracy-related penalty
under section 6662. 35 For the reasons explained below, we hold that not

       35 The Commissioner also asserts a reportable transaction understatement

penalty under section 6662A.     However, in Green Valley Investors, LLC v.
Commissioner, 159 T.C. 80, 103 (2022), we held the imposition of the reportable
transaction understatement penalty on conservation easements pursuant to Notice
                                    57

[*57] the 75% fraud penalty but rather the alternative 40% gross
valuation misstatement penalty under section 6662(h) (to the extent the
deduction claimed exceeded $900,000) and the 20% negligence or
substantial understatement penalty under section 6662(b)(1) or (2) (to
the extent the deduction claimed exceeded basis of $416,563 but did not
exceed $900,000) are applicable to Mill Road 36.

      A.     Section 6663 fraud penalty

             1.     General fraud penalty principles

       Section 6663(a) imposes a penalty “equal to 75 percent of the
portion of the underpayment which is attributable to fraud.” However,
“[i]n any proceeding involving the issue whether the petitioner has been
guilty of fraud with intent to evade tax, the burden of proof in respect of
such issue shall be upon the Secretary”, § 7454(a), “and that burden of
proof is to be carried by clear and convincing evidence”, Rule 142(b). As
we explained in Parks v. Commissioner, 94 T.C. 654, 660–61 (1980):

      To satisfy his burden of proof, . . . [the Commissioner] must
      show that the taxpayer intended to evade taxes known to
      be owing by conduct intended to conceal, mislead, or
      otherwise prevent the collection of taxes.

As we have explained, “fraud may be proved by circumstantial evidence
and reasonable inferences drawn from the facts because direct proof of
the taxpayer’s intent is rarely available. . . . The intent to conceal or
mislead may be inferred from a pattern of conduct.” Niedringhaus v.
Commissioner, 99 T.C. 202, 210–11 (1992). Facts that show this “intent
to conceal or mislead” are called “badges of fraud”, and the often-quoted
non-exclusive list of such badges tallies them as follows:

      (1) Understatement of income; (2) inadequate records;
      (3) failure to file tax returns; (4) implausible or inconsistent
      explanations of behavior; (5) concealment of assets;
      (6) failure to cooperate with tax authorities; (7) filing false
      W–4’s; (8) failure to make estimated tax payments;

2017-10 was invalid because Notice 2017-10 was issued without the notice and
comment required by the Administrative Procedure Act. See 5 U.S.C. § 553.
                                   58

[*58] (9) dealing in cash; (10) engaging in illegal activity; and
      (11) attempting to conceal illegal activity.

Id. at 211.

              2.   Liability for the fraud penalty

       The Commissioner contends that the section 6663 fraud penalty
is applicable here because Mill Road 36 “through its managers, Daniel
Carbonara and Jeff Grant, intended to evade a tax known or believed to
be owing through an intent to mislead”. However, for the reasons we
explain below, we disagree with the Commissioner as to the applicability
of the section 6663 fraud penalty.

                   a.     Disclosure

       Important to our determination that the fraud penalty is not
applicable is Mill Road 36’s express disclosure on its tax return of the
principal facts about the easement contribution.              Charitable
contribution deductions under section 170 are subject to a robust regime
of substantiation and reporting requirements under section 170(f)(11),
which requires a taxpayer claiming a deduction greater than $500,000
to provide information about the property being contributed, to attach a
completed appraisal summary, and to attach a qualified appraisal.
§ 170(f)(11)(A)–(D). Under Treasury Regulation § 1.170A-13(c)(4)(ii),
the appraisal summary required to be included with the taxpayer’s
return must include, among other things, the following information:
(1) the date the donor acquired the property; (2) the cost or other basis
of the property; and (3) the date the donee received the property. Id.
subdiv. (ii)(D), (E), (G). We have explained the reason for these
requirements:

             The requirement to disclose “cost or adjusted basis,”
      when that information is reasonably obtainable, is
      necessary to facilitate the Commissioner’s efficient
      identification of overvalued property. . . . Unless the
      taxpayer complies with the regulatory requirement that he
      disclose his cost basis and the date and manner of
      acquiring the property, the Commissioner will be deprived
      of an essential tool that Congress intended him to have.

Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, at *17.
                                         59

[*59] But here Mill Road 36 placed that “essential tool” squarely in the
Commissioner’s hand. As we found above at Part III.B, Mill Road 36
strictly complied with the substantiation and reporting requirements of
section 170(f)(11) by attaching to its return Form 8283 that confessed
the disparity between its very low basis in the Mill Road Tract (reported
to be $416,563) and the very high claimed value of the easement
(claimed to be $8,935,000, an amount equal to 20 times the reported
basis). Mill Road 36’s return also included Form 8886 that reported the
deduction claimed for the contribution of “SYND CONSERV
EASEMENT” that yielded “EXCESS VALUE OF NONCASH
DONATION OVER BASIS” in the amount of “8,518,437”.

        We do not see conduct meant (in the words of Parks) to “conceal”
or “mislead”. This is not an instance in which a taxpayer buried an
improper deduction deep in his return, nor even a case where the
taxpayer relegated his disclosure of an improper deduction on a self-
composed attached statement, 36 which no one at the IRS might ever
understand or even see. Rather, the conservation easement transaction
was fully disclosed, in exactly the manner designed by the Treasury
itself to reveal charitable contribution deductions based on overstated
value.     And in this instance, the substantiation and reporting
requirements of section 170(f)(11) appear to have functioned exactly as
intended by Congress: Mill Road 36 donated a conservation easement on
property it owned and claimed a corresponding charitable contribution
deduction; it attached all necessary information to its tax return as
required by the Code and regulations, the purpose of which is to alert
the Commissioner to potential overvaluations of charitable gifts; the
Commissioner was accordingly alerted to the disparity between Mill
Road 36’s basis in the Mill Road Tract and the value of the conservation
easement claimed as a deduction; he determined to examine Mill Road
36’s tax return; and an overvaluation of the charitable contribution has
been determined. We think Mill Road 36’s compliant reporting was
starkly at odds with an intention to conceal.

        36 Cf. Maciel v. Commissioner, 489 F.3d 1018, 1026–27 (9th Cir. 2007) (finding

taxpayer failed to report income from the sale of a business, and his accountant
attached to his return a statement that may have “provide[d] the IRS with a hint about
omitted income” but did “not mention [his entities] by name, nor [did] it explain that
[the taxpayer] sold his partnership share during the tax year and earned a profit on
the transaction”), aff’g in part, rev’g in part T.C. Memo. 2004-28.
                                          60

[*60]                  b.      Badges of fraud

       The Commissioner argues, however, and we assume it is true,
that “fraud is not precluded as a matter of law because a transaction is
disclosed,” 37 and he argues that the facts of the case show fraud
notwithstanding disclosure. The Commissioner does not rely on the 11
“badges” listed above (and indeed those 11 are not perceptible here); but
he posits instead other indicia of fraud—an approach that is certainly
permissible, since the list of 11 “badges of fraud” given above is non-
exclusive. But of course to be an indicium of fraud, a fact must show not
mere error but an “intent to conceal or mislead”. The Commissioner
maintains that in this case fraud is shown by the following five other
badges of fraud. See Corrected Simultaneous Opening Br., at 179
(Doc. 149):

       (1)    “[T]he pattern used by Messrs. Carbonara and Grant in at
least 10 other SCEs in Henry County contemporaneous with
Partnership’s SCE”. Indeed, the apparent replication of the Mill Road
36 contribution in ten other equivalent syndications is certainly
evidence that the approach taken by Mill Road 36 was deliberate and
knowing. If there were any question whether the inflated deduction for
the Mill Road Tract easement was accidental, then the other ten
instances would help to answer that question with a no. But the other
ten instances do not show that the Mill Road Tract deduction was
fraudulent. That someone does eleven similar deals does not, in itself,
prove that one or all of them were fraudulent. If one deal is proved
fraudulent, then perhaps the pattern is evidence that the other deals
may have been fraudulent, too. But we do not view the multiplicity of
deals per se as a badge of fraud.

       (2)   “Partnership’s deliberate overvaluing of the conservation
easement”. The Commissioner states that “[d]eliberately misvaluing an
asset can constitute clear and convincing evidence of fraud”, for which

          37 See Doc. 156 at 134. For this proposition, the Commissioner cites Maciel v.

Commissioner, 489 F.3d at 1027 (discussed supra note 37), and cites (without a
“pinpoint” to a specific page) Wegbreit v. Commissioner, T.C. Memo. 2019-82, aff’d, 21
F.4th 959 (7th Cir. 2021)—apparently because, in that case, “[f]or 2008 [the taxpayers]
. . . included a Form 8886 disclosing their DAT transaction”. T.C. Memo. 2019-82,
at *41. This quotation is the entirety of what the opinion says about the disclosure of
the transaction. However, the relevant effect of the DAT transaction in that case
appears to have arisen in 2006 (the actual year of the transaction), not 2008 (the year
of the disclosure), and the case involves five taxable years, multiple issues, and
multiple moving pieces. The significance of the “disclos[ure]” in Wegbreit is not at all
clear.
                                    61

[*61] proposition it cites as support our opinion in Estate of Trompeter
v. Commissioner, T.C. Memo. 2004-27, 87 T.C.M. (CCH) 851, aff’d in
part, rev’d in part and remanded, 170 F. App’x 484 (9th Cir. 2006).
However, Trompeter is unhelpful authority to cite when arguing for
fraud notwithstanding disclosure, because what Estate of Trompeter, 87
T.C.M. at 875, actually states is:

      [T]he coexecutors’ willing and conscious failure to disclose
      to [the Commissioner] the assets of the estate, coupled with
      their deliberate undervaluation of some of the assets which
      were disclosed to [the Commissioner], constitutes clear and
      convincing evidence of fraud deserving of the section 6663
      penalty.

(Emphasis added.) The Code does impose a penalty on overvaluation
notwithstanding disclosure, and that penalty—in an amount up to
40%—is in the accuracy-related underpayment penalty regime under
section 6662. Since Mill Road 36’s overvaluation is expressly disclosed
in compliance with the reporting regimes that were applicable here (and
results in imposition of the enhanced 40% penalty), then on the facts of
this case we do not think that the overvaluation itself also warrants the
75% fraud penalty.

       (3)    “Partnership’s purported reliance on an appraisal
containing multiple false statements and fraudulent analysis”. The
principal defects in Mr. Foster’s appraisal on which Mill Road 36 based
the claimed deduction were his stated assumption that “[t]he property
is approved for 677 Senior Assisted Living Units” and his valuation of
the property on a per unit-basis (rather than a per-acre basis) based on
non-comparable properties. But while we think that these definite
errors were surely negligent, we are not persuaded, by “clear and
convincing evidence”, Rule 142(b), that they were fraudulent in the
context of this transaction, i.e., Mr. Grant’s real estate business in which
he often developed a concept plan and hired Mr. Foster to assume that
plan and appraise a property for sale to a developer.

      Since Mr. Grant generally did not involve himself in the actual
development of a project, his purposes were usually satisfied with a
concept plan that seemed to be in the realm of reason. He left it to the
prospective purchaser-developer to decide whether the project was
actually feasible and to work out the actual problems of getting final
approval for zoning variances and obtaining any necessary permits.
Once he had a buyer, Mr. Grant was on to the next project. In the case
                                    62

[*62] of the properties designated for assisted living facilities, he
similarly contented himself with a concept plan plausible to himself and
a recommendation from the zoning staff.             Mr. Foster accepted
Mr. Grant’s concept plan and its number of units and valued the
property by reference to “comparable” properties that did exist and to
their “per-unit” prices that were arithmetically correct. Mr. Foster’s per-
unit price of $13,500 for the Mill Road Tract was in fact less than the
$19,565 per unit price that he derived for the nearest of his four
“comparables”. Mr. Foster’s valuation using the per-unit (not per-acre)
price was explicitly set out in the appraisal attached to the return.

        If someone actually interested in developing an assisted living
facility had stepped forward as a prospective buyer, Mr. Grant’s method
of doing business would have left it to the buyer to do his own due
diligence about the number and value of units that might actually be
possible and to get final zoning approval and whatever other county or
state permits or licensing that would have been required. Mr. Grant’s
approach (and Mr. Foster’s corresponding valuation) would have been
completely unsatisfactory for someone purchasing property with a plan
of actually building an assisted living facility—but that was not
Mr. Grant’s plan. Rather, his plan was to sell the property to such a
developer. Mr. Grant did not purport to know much about assisted
living facilities nor, for his purposes, did he need to know much about
them.

        Mr. Carbonara had a perspective similar in some respects to
Mr. Grant’s: Mr. Carbonara did not know much about assisted living
facilities and did not plan to build one. He had no incentive to study the
zoning rules referenced in the zoning staff’s recommendation nor to
notice that their definitions incorporated state rules he had not
investigated. And though the per-unit method in the appraisal yielded
a value woefully at odds with the principle of substitution, its arithmetic
was correct, a licensed appraiser had validated it, and it was disclosed
on the appraisal attached to the return. This yielded gross error, but we
cannot say it was fraud.

       (4)   “[L]ack of credibility in testimony”. The actual concrete
facts underlying most of the issues in this case were largely undisputed,
and most in fact were stipulated. This is not a case in which witnesses
were sharply cross-examined about income amounts or expenditures.
Rather, the process by which the various entities were formed; the
manner in which and the purpose for which the Mill Road Tract was
acquired; the amounts of dollars that changed hands; the contents of the
                                           63

[*63] deed, appraisal documents, and tax filings; the communications
with customers about tax benefits—all these were confirmed by
Mr. Grant and Mr. Carbonara, who did not deny that the tract had been
valued at multiples of its then-recent acquisition cost.

       But as a proffered “badge of fraud”, the Commissioner cites
against them five instances (only two of them in fact “testimony”) of
“Implausible Testimony and Factual Misstatements”. See Corrected
Simultaneous Opening Br., at 195–98 (Doc. 149). These consisted of
(1) Mr. Carbonara’s erroneous pretrial statement (corrected at trial) that
he had never received a Schedule K–1, “Partner’s Share of Income,
Deductions, Credits, etc.”, from “Emerald Acquisition entities”;
(2) Mr. Carbonara’s stating at trial his opinion that Mr. Foster’s
$8.9 million appraisal was “conservative”; (3) Mr. Carbonara’s incorrect
testimony about the determination of the call price of options for the
membership units of MR36 Investments; (4) Mr. Carbonara’s pretrial
statements that the zoning application for the tract had been approved
(rather than merely recommended for approval); and (5) Mr. Grant’s and
Mr. Carbonara’s reliance on the appraisal that incorrectly stated that a
zoning application had been approved (rather than merely
recommended for approval).

       The first two of these five are not especially significant to the
issue of fraud. The third undermined Mr. Carbonara’s credibility, but it
involved a fact (concerning the call price) that was not in itself critical
to the case and was settled by reference to documents that
Mr. Carbonara admitted. The fourth and fifth involved the distinction
(thoroughly discussed in this opinion) between a zoning staff
recommendation and actual zoning approval. As we indicated in Part
IV.B.1 above, this can be an important distinction for determining the
highest and best use of a piece of property.

      (5)    “[A] lack of bona fide business transactions that hide the
true nature of the transaction.” The “lack of bona fide business
transactions” 38 to which the Commissioner points as a badge of fraud is

         38 To this point, the Commissioner adds the observation that Mr. Carbonara

spread his 11 Henry County cases around five places of trial. Rule 140(a) provides:
“Request for Place of Trial: When filing a petition, the petitioner must also file a
separate paper requesting the place of trial. See Form 5 (Request for Place of Trial)
shown in the Appendix. . . . The Court will make reasonable efforts to conduct the trial
at the location most convenient to that requested if suitable facilities are available and
will notify the parties of the place at which the trial will be held.” For this case the
                                          64

[*64] equivalent to the defects he alleged to dispute the existence of a
true partnership, which we addressed above in Part II.A.2. By
definition, a charitable contribution lacks a profit motive, but that lack
does not invalidate the contribution nor deprive the donor of his
deduction, nor does it suggest fraud.

       Mill Road 36 can certainly be criticized for its tax reporting; and,
as we explain below, it will be penalized. But on the facts of this case
we cannot hold that fraud has been proved by clear and convincing
evidence. The evidence does not establish an attempt by Mill Road 36
to conceal or deceive in the Commissioner’s administration of tax
collection, and accordingly we hold that the section 6663 fraud penalty
is not applicable to Mill Road 36 for 2016.

       B.      Section 6662 accuracy-related penalty

               1.      General accuracy-related penalty principles

        Section 6662(a) and (b)(1), (2), and (3) imposes an accuracy-
related penalty “on the underpayment of tax required to be shown on a
return . . . equal to 20 percent of the portion of the underpayment to
which this section applies” upon a taxpayer who underpays his tax
because of, inter alia, “[n]egligence or disregard of rules or regulations”,
a “substantial understatement of income tax”, or a “substantial
valuation misstatement”.         An understatement of income tax is
substantial if it exceeds the greater of “10 percent of the tax required to
be shown on the return for the taxable year” or $5,000. § 6662(d)(1)(A).
For 2016, the year at issue, a substantial valuation misstatement exists
if “the value of any property . . . claimed on any return . . . is 150 percent
or more of the amount determined to be the correct amount of such
valuation”. § 6662(e)(1)(A). None of these penalties will be imposed
where the taxpayer had “reasonable cause”. § 6664(c)(1).

requested place of trial was Columbia, South Carolina. In the other 10 cases, petitioner
requested Atlanta, Georgia; Birmingham, Alabama; Knoxville and Nashville,
Tennessee. The Commissioner asserts that Mr. Carbonara did so “to obfuscate and
conceal the pattern of his ‘Contemporaneous SCE Enterprise in Henry County.’” (We
cannot tell whom the Commissioner is quoting when he uses (in quotation marks) the
phrase “Contemporaneous SCE Enterprise in Henry County”.) Since both the
Commissioner and the Court have means for coordinating the handling of related
cases, even in different geographical areas, we do not see how this practice was
oriented toward obfuscation. We can imagine benign reasons for Mr. Carbonara or his
counsel to attempt to prevent 11 cases from ending up on the same trial calendar.
                                   65

[*65] One possible ground for claiming “reasonable cause” is reliance
on professional advice. Treas. Reg. § 1.6664-4(b)(1). Instructed by
Treasury Regulation § 1.6664-4(c), we have held that reasonable cause
based on reliance on an adviser exists where (1) the adviser was a
competent professional who had sufficient expertise to justify reliance,
(2) the taxpayer provided necessary and accurate information to the
adviser, and (3) the taxpayer actually relied in good faith on the
adviser’s judgment. Neonatology Assocs., P.A. v. Commissioner, 115 T.C.
43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      However, in the case of a “gross valuation misstatement”—i.e.,
where the value of property claimed on the return is 200% or more of
the amount determined to be the correct valuation—the rate of the
accuracy-related penalty is increased to 40%, § 6662(h)(1) and (2)(A)(i),
and there is no “reasonable cause” defense available, § 6664(c)(3).

       On the basis of these principles, the record in this case, and the
valuation we determined above in Part IV.B, we will now determine
which penalties are applicable with respect to Mill Road 36’s donation
of the Mill Road Tract easement.

             2.     Liability for an accuracy-related penalty

        Section 6751(b)(1) provides: “No penalty under this title shall be
assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the
individual making such determination . . . .” “The Commissioner’s
noncompliance with section 6751(b) is a partnership-level defense[, and]
[p]arties in a partnership-level case may raise noncompliance with
section 6751(b)(1) as a defense.” Rogers v. Commissioner, T.C. Memo.
2019-61, at *22. Petitioner has disputed the Commissioner’s compliance
with the supervisory approval requirement of section 6751(b)(1) with
respect to the accuracy-related penalties under section 6662 determined
in the FPAA. We will therefore address whether the Commissioner
complied with section 6751(b) in making his penalty determination.

      Agent Rikard first proposed a penalty in the “lead sheet” that he
prepared on May 28, 2019—which he sent to his immediate supervisor
that same day “for . . . approval”. Thereafter, as he made revisions
(sometimes at her direction), he continued to discuss penalties with her.
By August she was evidently ready to approve a penalty, and he
prepared the appropriate approval form on August 5, which she signed
on August 8, 2019—before any communication about a penalty had
                                    66

[*66] been made to Mill Road 36.         Petitioner does not dispute this
chronology.

       Section 6751(b)(1) arose from “Congress’ belief that penalties
should not be used to gain inappropriate leverage over taxpayers, but
‘should only be imposed where appropriate and not as a bargaining chip.’
S. Rept. No. 105-174, at 65 (1998), 1998-3 C.B. 537, 601.” Belair Woods,
LLC v. Commissioner, 154 T.C. 1, 7 (2020). From that perspective,
Agent Rikard’s handling of penalty determinations was exactly as
Congress intended. He worked over a period of months to get his
supervisor’s approval before approaching Mill Road 36 about penalties.

       Petitioner contends otherwise and insists that the supervisory
approval was untimely under section 6751(b)(1). Petitioner contends
that Agent Rikard made his “initial determination . . . [p]rior to
August 5, 2019,” and that, because the supervisor did not approve it
until three days later on August 8, 2019, the approval did not comply
with section 6751(b)(1). As counsel expressed the point at trial,
petitioner contends that “the initial determination should be signed by
the supervisory Revenue agent contemporaneously and . . . the initial
determination should not proceed [i.e., precede] that approval.” This
contention fails.

        If petitioner were correct that section 6751(b)(1) requires that the
supervisory approval be “contemporaneous” with the initial
determination, apart from any communication to the taxpayer, then a
taxpayer might defeat the penalty by showing an agent’s initial
determination on August 5 and a supervisor’s approval on August 8. But
the statute does not state any such requirement, and no court has so
interpreted it. On the contrary, it seems inevitable that the agent’s
initial determination must precede the supervisor’s approval of it, and a
three-day approval period seems unobjectionable when no
communication with the taxpayer takes place.

      The Tax Court has held that

      [t]he ‘initial determination’ of a penalty . . . must be a
      formal act with features resembling those that a
      ‘determination’ itself displays. . . . [T]he ‘initial
      determination’ of a penalty assessment will be embodied in
      a formal written communication to the taxpayer, notifying
      him that the Examination Division has completed its work
      and has made a definite decision to assert penalties.
                                    67

[*67] Belair Woods, 154 T.C. at 10.           No such “formal written
communication” was issued to Mill Road 36 before August 5, 2019, and
petitioner does not contend otherwise. Moreover, the Eleventh Circuit,
viewing the statute differently, has held “that the IRS satisfies [s]ection
6751(b) so long as a supervisor approves an initial determination of a
penalty assessment before it assesses those penalties.” Kroner v.
Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022) (citing Laidlaw’s
Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1071 (9th
Cir. 2022), rev’g and remanding 154 T.C. 68 (2020)), rev’g and
remanding T.C. Memo. 2020-73. Under the facts of this case, it is
undisputed that the section 6662 penalties were approved before the
issuance of the revenue agent’s report, and therefore before the issuance
of the FPAA, and therefore before any penalty assessments (which have
yet to take place). Whether following the Tax Court’s reasoning
(exemplified in Belair) or the different reasoning of the Court of Appeals
for the Eleventh Circuit (set out in Kroner), we must conclude that the
Commissioner satisfied the supervisory approval requirements of
section 6751(b)(1) with respect to the section 6662 penalties at issue.

             3.     Whether Mill Road 36 is liable for an accuracy-
                    related penalty

                    a.     TEFRA jurisdiction for penalties

       Section 6221, as in effect at the relevant time, provided generally
that, in a TEFRA partnership case, “the applicability of any penalty . . .
which relates to an adjustment to a partnership item . . . shall be
determined at the partnership level.” Section 6226(f) likewise states
that our jurisdiction in TEFRA partnership cases is limited to “the
applicability of any penalty . . . which relates to an adjustment to a
partnership item.”      Treasury Regulation § 301.6221-1(c) further
provides that “[p]artnership-level determinations include all the legal
and factual determinations that underlie the determination of any
penalty . . . other than partner-level defenses”. And Treasury
Regulation § 301.6226(f)-1(a) provides that “the court has jurisdiction in
the partnership-level proceeding to determine any penalty . . . that
relates to an adjustment to a partnership item. However, the court does
not have jurisdiction in the partnership-level proceeding to consider any
partner-level defenses to any penalty . . . that relates to an adjustment
to a partnership item.” Accordingly, within our jurisdiction in this
TEFRA case is the ability to determine the applicability of any section
6662 penalty; but to the extent that defenses (such as reasonable cause)
to any penalties would depend on the particular aspects of a partner-
                                     68

[*68] level return, we do not have jurisdiction in this TEFRA case to
consider them.

                     b.     40% penalty for gross valuation misstatement

       Mill Road 36 originally claimed on its partnership return a
charitable contribution deduction of $8,935,000 for its donation of the
Mill Road Tract easement, and in Part IV.B above we determined the
correct deduction to be $900,000. Mill Road 36 therefore overstated on
its return the value of the Mill Road Tract easement by much more than
200%, and accordingly the 40% penalty under section 6662(h) for a gross
valuation misstatement is applicable. See § 6662(e)(1)(A), (h)(2)(A)(i).
That is, to the extent the understatement of income tax is attributable
to disallowing the portion of the deduction above $900,000, the 40%
penalty rate applies rather than the 20% rate (and no reasonable cause
defense exists).

                     c.     20% penalty as to substantial understatement

        To the extent that the understatement of income tax is
attributable solely to the character of the Mill Road Tract as inventory,
it is not “attributable to one or more gross valuation misstatements”.
§ 6662(h)(1). Instead, the portion of the disallowance attributable solely
to the inventory issue is $483,437, which is the difference between the
value of the donated easement (i.e., $900,000) and the allowable
deduction equal to basis (i.e., $416,563). Any understatement of income
tax attributable to that portion of the disallowance that is substantial
under section 6662(b)(2) (i.e., any understatement that “exceeds the
greater of—(i) 10 percent of the tax required to be shown on the return
for the taxable year, or (ii) $5,000”, § 6662(d)(1)(A)) is subject to penalty,
if at all, at the 20% rate of section 6662(a).

       However, a reasonable cause exception exists to the imposition of
a penalty under section 6662, § 6664(c)(1), and one basis for claiming
reasonable cause is reasonable reliance in good faith on the advice of a
professional tax adviser, Treas. Reg. § 1.6664-4(c). Petitioner raises this
reasonable cause defense on the basis that Mr. Carbonara relied on “the
advice of [his] advisors, including (1) the advice and opinion of
experienced and competent tax counsel [the law firm Bryan Cave, LLP],
(2) the experience and expertise of their qualified appraiser [Mr. Foster]
who prepared a qualified appraisal, (3) the advice and preparation
services of a reputable accounting firm [Carr, Riggs & Ingram], and
(4) the guidance of an established land trust [SCT, the donee].” In
                                    69

[*69] support of this reasonable cause defense, petitioner further
asserts that “Mr. Carbonara provided his tax counsel and tax preparer
with the necessary and accurate information to evaluate the transaction
and to prepare the tax return.” We see no inadequacy in the expertise
of the advisers, but petitioner has not shown that Mr. Carbonara
provided them with all the relevant and accurate information to
evaluate the deduction.

      Treasury Regulation § 1.6664-4(c)(1)(i) provides:

      The advice must be based upon all pertinent facts and
      circumstances and the law as it relates to those facts and
      circumstances. . . . In addition, the requirements of this
      paragraph (c)(1) are not satisfied if the taxpayer fails to
      disclose a fact that it knows, or reasonably should know, to
      be relevant to the proper tax treatment of an item.

Petitioner’s briefs press the particular arguments that it had reasonable
cause for its claim of conservation purposes and that it had reasonable
cause for its claim of value. Its briefs do not address the question
whether it had reasonable cause in connection with the inventory issue
under section 170(e)(1)(A), and we could stop our analysis of the
reasonable cause issue there. But if we consider the issue further with
no help from petitioner, the only mention of the issue that we find in the
evidence is in the opinion letter upon which petitioner relies for its
reasonable cause defense, and it is not at all helpful to petitioner on this
point. The opinion letter from Bryan Cave, LLP, states the following:

      Based on the representations from the Owner [i.e.,
      Mr. Carbonara], and we have no knowledge to the contrary,
      that the Property does not constitute stock in trade or
      inventory and because the Property is not one of the other
      types of property listed in Code Section 1221 that do not
      qualify as “capital assets,” the Property is a capital asset.

That is, the opinion letter from the tax advisers plainly shows that they
were aware—and made petitioner aware—of the effect that inventory
character has on a charitable contribution deduction, but petitioner’s
advisers expressly stated that, in opining favorably on the deduction,
they relied on petitioner’s representations that the property was not
inventory but rather was a capital asset. The lawyers did not opine that
the property was non-inventory; they assumed that it was non-inventory
because Mr. Carbonara so represented.
                                    70

[*70] Mr. Carbonara, however, was of course well aware that Mr. Grant
and Mr. Grant’s real estate partners (who had initially acquired the Mill
Road Tract and had contributed it to Mill Road 36) were real estate
professionals who held land as inventory for sale, and Mr. Carbonara
had negotiated with Mr. Grant for the purchase of multiple properties
in Henry County. There is no evidence (nor even any assertion) that
Mr. Carbonara disclosed this information to his tax advisers, and it
therefore appears that he “fail[ed] to disclose a fact that [he] kn[ew], or
reasonably should [have] know[n], to be relevant to the proper tax
treatment of an item.” Treas. Reg. § 1.6664-4(c)(1)(i). Petitioner has
therefore failed to establish a sufficient predicate for reasonable cause
relief from the imposition of an accuracy-related penalty under section
6662 on the basis of reliance on the advice of a professional tax adviser.

                    d.     20% penalty as to negligence

       As to the portion of the understatement of income tax that is
attributable solely to the inventory issue, and in the event that the
understatement for any partner is small enough that, on his return, that
understatement is not “substantial” under section 6662(d)(1)(A), we also
hold, in the alternative, that the underpayment is attributable to
negligence under section 6662(b)(1). Negligence has been defined as
lack of due care or failure to do what a reasonably prudent person would
do under like circumstances. See, e.g., Ocmulgee Fields, Inc. v.
Commissioner, 132 T.C. 105, 123 (2009), aff’d, 613 F.3d 1360 (11th Cir.
2010). It also “includes any failure to make a reasonable attempt to
comply with the provisions of the internal revenue laws or to exercise
ordinary and reasonable care in the preparation of a tax return.” Treas.
Reg. § 1.6662-3(b)(1).

      We hold that the negligence penalty is applicable, essentially for
the same reasons, discussed above in Part VI.B.3.c, that “reasonable
cause” does not excuse the substantial understatement (and it follows
that “reasonable cause” likewise does not excuse the negligence).
Mr. Carbonara was a highly sophisticated and knowledgeable investor,
and he was well aware of all the facts that, as we explain above in Part
V, result in petitioner’s being limited to a deduction for its carryover
basis. On that issue, petitioner has pointed us to no evidence to
contradict the implications of the law firm’s opinion letter:
Mr. Carbonara had been made aware of the capital-vs.-inventory issue,
but he deflected the lawyers from evaluation of that issue by
representing to them “that the Property does not constitute stock in
trade or inventory”. He cannot blame the lawyers for a wrong answer
                                   71

[*71] to a question that he answered himself. We do not see evidence
that petitioner, acting through Mr. Carbonara, made “a reasonable
attempt to comply with the provisions of the internal revenue laws or to
exercise ordinary and reasonable care in the preparation of a tax
return.” Treas. Reg. § 1.6662-3(b)(1).

VII.   Conclusion

       The appraisal attached to Mill Road 36’s tax information was a
“qualified appraisal” within the meaning of Treasury Regulation
§ 1.170A-13(c)(3). The Mill Road Tract easement donation satisfies the
requirements of section 170(h) to be a qualified conservation
contribution, such that a charitable contribution deduction is allowable
for Mill Road 36’s donation to SCT. The value of the Mill Road Tract
easement was $900,000. However, because the Mill Road Tract had
been an inventory item within the meaning of section 724(d)(2), we hold
that the amount of Mill Road 36’s deduction is limited to $416,563, its
adjusted basis in the encumbered portion of the Mill Road Tract.
Finally, we hold that the 75% fraud penalty under section 6663 is not
applicable to Mill Road 36, but that the 40% accuracy-related penalty
for a gross valuation misstatement under section 6662(h) is applicable
to Mill Road 36.

       To reflect the foregoing,

       Decision will be entered under Rule 155.
                                          72

[*72]                                APPENDIX

                       Properties in Henry County for which
                       the Planning and Zoning staff issued
                 a recommendation of approval for conditional use
                        to operate an assisted living facility

                       Concept        Date of
                        Plan      Conditional Use       Date                Price per
        Entity          Units    Evaluation Report    Acquired      Acres    Acre 39
   Mill Road 36
                          677       07/08/2016       08/28/2015     39.68    $10,498
   Henry, LLC
   Highway 81
                          844       08/15/2016       12/29/2015     54.85      10,939
  Henry 55, LLC
  Stroud Road
                         1,838      08/15/2016       01/27/2015    634.93       5,367
 Henry 640, LLC
  Airline Road
    Property              656       08/24/2016       11/29/2016     39.5        9,925
  Holdings LLC
     Hanger
   Highway 81             672       09/13/2016       06/17/1991     86.12       1,682
  Henry 89, LLC
   Harris Drive
                          750       09/13/2016       12/29/2015     73.21      11,380
  Henry 76, LLC
   Highway 20
                          585       09/13/2016       09/29/2011     29.29       9,450
  Henry 30, LLC
  Island Shoals
                         1,733      09/13/2016       01/27/2015    421.01       4,761
 Henry 430, LLC
  We Partner
                          696       09/13/2016       12/29/2015     82.58       6,055
 Weems 82, LLC
   Foster Drive
                          650       03/06/2017       02/27/2016     85.24      10,000
  Henry 86, LLC
  Fairview Road
                          840       03/22/2017       12/16/2016     53.25      10,798
  Henry 65, LLC

        39 The listed price per acre reflects that paid by the acquiring entity for the

subject property before its donation of the conservation easement.