Court Opinion

ID: 4543539
Source: CourtListenerOpinion
Date Created: 2020-06-24 05:01:20.446327+00
Date Added: 2024-06-11T12:45:31.510556
License: Public Domain

T.C. Memo. 2020-93

                          UNITED STATES TAX COURT

 PLATEAU HOLDINGS, LLC, WATERFALL DEVELOPMENT MANAGER,
           LLC, TAX MATTERS PARTNER, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 12519-16.                        Filed June 23, 2020.

      John P. Barrie, Christine A. Long, Christopher S. Rizek, and Scott D.

Michel, for petitioner.

      Shannon E. Craft, Rebeccah L. Bower, and John T. Arthur, for respondent.

            MEMORANDUM FINDINGS OF FACT AND OPINION

      LAUBER, Judge: This case involves a charitable contribution deduction

claimed by Plateau Holdings, LLC (Plateau), for conservation easements. On its

2012 Federal income tax return Plateau claimed a deduction of roughly $25.5
                                        -2-

[*2] million for the donation of easements covering two parcels of land in rural

Tennessee. Those two parcels were Plateau’s only assets. Eight days before

Plateau made this contribution, an investor had acquired, in an arm’s-length

transaction, a 98.99% indirect ownership interest in Plateau for less than $6

million.

      The Internal Revenue Service (IRS or respondent) issued Plateau’s tax mat-

ters partner (TMP or petitioner) a notice of final partnership administrative adjust-

ment (FPAA) that disallowed the deduction and determined a 40% gross valuation

misstatement penalty under section 6662(e) and (h).1 Following the TMP’s timely

petition, we tried the case in Atlanta, Georgia, and heard expert testimony addres-

sing the valuation of the easements. Multiple rounds of briefing followed.

      We hold that the IRS properly disallowed the deduction in full because the

conservation purpose underlying the easements was not “protected in perpetuity”

as required by section 170(h)(5)(A). That is “because the charitable grantee was

not absolutely entitled to a proportionate share of the proceeds in the event the

property was sold following a judicial extinguishment of the easement.” See Coal

Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 127 (2019). Because

      1
      Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code) in effect at all relevant times. We round all monetary
amounts to the nearest dollar and all acreage to the nearest acre.
                                        -3-

[*3] Plateau on its return grossly misstated the value of the contribution, the IRS

properly determined a 40% penalty.

                               FINDINGS OF FACT

      The parties filed a stipulation of facts with accompanying exhibits that are

incorporated by this reference. Plateau and petitioner each had its principal place

of business in Georgia when the petition was filed.

A.    The Property

      This case involves two contiguous parcels of land in Grundy and Coffee

Counties, rural counties in south central Tennessee between Nashville and Chatta-

nooga. Rogers Group, Inc. (Rogers), a minerals company, originally owned the

parcels (and thousands of surrounding acres), upon which it had conducted surface

mining operations. The mining activity ceased many years ago. The property in-

cludes a large man-made lake and several smaller lakes formed from open pits that

have filled with water.

      The two parcels and surrounding acreage changed hands several times be-

tween 2006 and 2012, and these transactions have some relevance to the valuation

question before us. In July 2006 Rogers transferred 2,500 acres (excluding miner-

al rights) to LandDevelopment.com, Inc. (LD.com), for $2.5 million, or $1,000 per
                                         -4-

[*4] acre. In June 2008 LD.com transferred 2,233 of those acres to Darai Corp.

(Darai) for $7.5 million.

      In October 2009 Darai transferred those same 2,233 acres back to LD.com,

receiving in exchange a 400-acre tract of land near Murfreesboro, Tennessee,

worth $5.5 million. The parties thus valued the 2,233-acre tract at $2,463 per acre.

Darai was willing to take this $2 million loss because it viewed the Murfreesboro

tract as more developable than the 2,233-acre tract, which was not close to any

major cities. In January 2012 LD.com transferred 1,171 of these 2,233 acres to

Pull Tight Hill, LLC (Pull Tight LLC). We will refer to this 1,171-acre parcel, one

of the two parcels at issue, as the Pull Tight parcel.2

      In August 2011 Rogers transferred to Land South TN, LLC (Land South

LLC), 1,273 acres of neighboring land (excluding mineral rights) for $1,045 per

acre. We will refer to this 1,273-acre tract, the second parcel at issue, as the Land

South parcel. The Pull Tight and Land South parcels were contiguous, consisting

of 2,444 acres in toto, and we will refer to them collectively as the Property. Pull

Tight LLC and Land South LLC were owned by Ardavan Afrakhteh, an active

      2
        When making this transfer, LD.com retained four acres adjacent to the Pull
Tight parcel. This exclusion caused errors with respect to subsequent transfers,
which sometimes refer to the Pull Tight parcel as containing 1,175 acres. The
parties agree that the Pull Tight parcel contains 1,171 acres.
                                          -5-

[*5] player in the Tennessee real estate market with a reputation as a savvy

investor.

       On June 21, 2012, the Chancery Court of Coffee County issued “orders of

abandoned mineral interest” with respect to the Property. These orders reunited

the mineral interests with the surface interests of the Pull Tight and Land South

parcels. Pull Tight LLC and Land South LLC thereafter held, collectively, full

title to all interests in the Property.

       As of June 2012 the Property had scenic features, including waterfalls, sce-

nic overlooks, and lakes, but was completely undeveloped. It had a few access

roads and an unpaved aircraft landing strip, remnants of past surface mining activ-

ities. Big Creek Utility District, the public water company serving the area, had its

closest access point one quarter mile away. Any increase in service to the Prop-

erty would have required a significant upgrade to the utility’s water lines, likely

necessitating a bond issue to secure funding. Even with such upgrades, the util-

ity’s reservoir source could have served only about 25 new residences.

B.     Ownership Changes

       Peach Tree Investment Solutions, LLC (Peach Tree), a Georgia entity

founded by Pete Davis, specialized in offering syndicated conservation easement

investments to wealthy investors. On August 3, 2012, Peach Tree caused Plateau
                                        -6-

[*6] to be created as a Georgia limited liability company (LLC). At all relevant

times Plateau has been classified as a partnership subject to the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA). See secs. 6221-6234 (as in effect for

years before 2018). At all relevant times petitioner, an affiliate of Peach Tree, has

been Plateau’s TMP.

      Peach Tree concurrently caused to be created Peach Tree CE Fund XXV,

LLC (CE Fund). A single investor owned 100% of CE Fund through a wholly

owned LLC. Roughly concurrently with these events Pull Tight LLC and Land

South LLC (still owned by Mr. Afrakhteh) formed Plateau Manager, LLC (Plateau

Manager). Mr. Afrakhteh was unrelated to Peach Tree, Mr. Davis, and the invest-

or who owned CE Fund.

      On December 17, 2012, Pull Tight LLC transferred the Pull Tight parcel to

Plateau, and Land South LLC concurrently transferred the Land South parcel to

Plateau. Both transfers were made through Plateau Manager. As of that date the

members of Plateau and their relative ownership interests were as follows: Plateau

Manager (50.99%), Pull Tight LLC (23.5%), Land South LLC (25.5%), and peti-

tioner (.01%). Plateau’s only asset at that point was the Property.

      The following day Pull Tight LLC and Land South LLC sold the entirety of

their respective interests in Plateau to CE Fund, and Plateau Manager concurrently
                                        -7-

[*7] sold a 49.99% interest in Plateau to CE Fund. CE Fund thereby acquired a

98.99% ownership interest in Plateau, and it paid a total of $5,822,000 for that

interest. Because Pull Tight LLC, Land South LLC, and Plateau Manager were

directly or indirectly owned by Mr. Afrakhteh, and because Mr. Afrakhteh was un-

related to CE Fund and Peach Tree, the $5,822,000 price that CE Fund paid for its

98.99% interest in Plateau bore the earmarks of an arm’s-length price. The re-

maining interests in Plateau were held by Plateau Manager (1%) and petitioner

(.01%).

      Before these transactions were executed, the investor who owned 100% of

CE Fund was informed that Plateau intended to place conservation easements on

the Property and claim, on its 2012 tax return, a charitable contribution deduction

exceeding $25 million. The investor was given a copy of an appraisal prepared by

David R. Roberts that placed a value of $25,449,000 on the contemplated ease-

ments.3 By paying $5,822,000 for a 98.99% interest in Plateau, the investor in ef-

fect purchased a tax deduction exceeding $25 million for 23 cents on the dollar.

Eight days later, on December 26, 2012, Plateau conveyed two open-space conser-

      3
        Mr. Roberts was the original appraiser in numerous other conservation
easement cases that this Court has decided. See, e.g., Woodland Prop. Holdings,
LLC v. Commissioner, T.C. Memo. 2020-55; Oakhill Woods, LLC v. Commis-
sioner, T.C. Memo. 2020-24.
                                          -8-

[*8] vation easements over the Property to Foothills Land Conservancy

(Conservancy), a tax-exempt organization and a “qualified organization” for

purposes of section 170(h)(3). The easement deeds were recorded the next day.

C.    The Easement Deeds

      The easement deeds were prepared by Mark Jendrek, an attorney for the

Conservancy. The easements cover 1,126 of the 1,171 acres constituting the Pull

Tight parcel4 and 1,228 of the 1,273 acres constituting the Land South parcel. The

two 45-acre tracts excluded from the easements were contiguous and had ample

frontage on several lakes. Plateau subsequently valued those 90 acres at

$1,795,000.5

      Although Mr. Jendrek prepared separate easement deeds for the two parcels,

the deeds are largely identical apart from the property descriptions. The deeds re-

cite the parties’ intent to ensure that the land “be retained forever in its current

natural, scenic, forested, and open land condition” and to prevent any use of the

      4
       The easement deed for the Pull Tight parcel incorrectly specifies its total
acreage as 1,175, owing to the error noted supra note 2.
      5
       On February 22, 2013, Plateau transferred those 90 acres to Battlefield
Ministries, Inc., for use as a youth camp. On its Federal income tax return for
2013, Plateau claimed for that transfer a charitable contribution deduction of
$1,795,000, based on another appraisal by Mr. Roberts. The propriety of that
deduction is not before us.
                                          -9-

[*9] conserved area inconsistent with the conservation purpose. Plateau as grantor

reserved rights with respect to the conserved areas, including the rights: (1) to

harvest timber commercially, subject to certain conditions including approval by

the Conservancy; (2) to construct dwellings in specified building areas; (3) to con-

struct utility lines to serve any residential facilities; (4) to construct and maintain

roadways and paths; (5) to construct recreation facilities; (6) to hunt and fish on

the property; and (7) to build a boat house and fishing platforms on the lakes.

      Section 9.1 of each deed provides that, if circumstances should arise that

render the conservation purpose impossible to accomplish, the easement “can only

be terminated or extinguished * * * by judicial proceedings in a court of compe-

tent jurisdiction.” If the land is sold following such judicial action, “[t]he amount

of the proceeds to which the Grantee shall be entitled, after the satisfaction of prior

claims, * * * shall be the stipulated fair market value of this Easement * * * as

determined in accordance with Section 9.2 or * * * [s]ection 1.170A-14, [Income

Tax Regs.,] if different.” In the event of a condemnation the grantee is likewise

entitled to receive a share of the proceeds as determined by “the ratio set forth in

Section 9.2.”

      Section 9.2 specifies how the fair market value (FMV) of the easement shall

be determined for this purpose:
                                        - 10 -

[*10] This Easement constitutes a real property interest immediately vested
      in Grantee, which * * * the parties stipulate to have a fair market
      value determined by multiplying (a) the fair market value of the Pro-
      perty unencumbered by this Easement (minus any increase in value
      after the date of this grant attributable to improvements) by (b) a frac-
      tion, the numerator of which is the value of this Easement at the time
      of the grant and the denominator of which is the value of the Property
      without deduction of the value of this Easement at the time of this
      grant. * * * For purposes of this Section, the ratio of the value of this
      Easement to the value of the Property unencumbered by this Ease-
      ment shall remain constant. * * * It is intended that this Section 9.2
      be interpreted to adhere to and be consistent with * * * [section]
      1.170A-14(g)(6)(ii)[, Income Tax Regs].

These “judicial extinguishment” provisions are virtually identical to those we con-

sidered in Coal Prop. Holdings, 153 T.C. at 130-131, a case that likewise involved

a contribution to the Conservancy.

D.      Tax Return and IRS Examination

        Plateau timely filed Form 1065, U.S. Return of Partnership Income, for its

short tax year beginning December 15 and ending December 31, 2012. On that

return it claimed a charitable contribution deduction of $25,472,000. This repre-

sented the sum of $10,899,000 for the easement covering the Pull Tight parcel,

$14,550,000 for the easement covering the Land South parcel, and a $23,000 cash

gift.

        Plateau included with its return a copy of an appraisal performed by Mr.

Roberts dated December 5, 2018. His appraisal relied on the “before and after
                                        - 11 -

[*11] method” to value the easements. See sec. 1.170A-14(h)(3)(i) and (ii),

Income Tax Regs. Mr. Roberts opined that the highest and best use of the

Property unencumbered by the easements would be as “a low-density residential

parcel” with “surrounding recreational areas.” On that assumption he calculated a

“before” value of $29,323,000 (or $11,998 per acre) for the entire Property. After

imposition of the easements, 2,354 acres would be restricted (subject to Plateau’s

reserved rights) and 90 acres would be unrestricted. He concluded that the

combined post-easement value of the 2,444 acres was $3,874,000 (or $1,585 per

acre), yielding a value of $25,449,000 for the two easements.

      Gordon Jack, the accountant who prepared Plateau’s 2012 return, testified at

trial that he prepared the return using information (including Mr. Roberts’ apprais-

al) that he received from Mr. Davis and a representative of Plateau. Mr. Jack did

not investigate the underlying facts but relied entirely on the accuracy of the in-

formation provided to him. He was aware that CE Fund had purchased a 98.99%

interest in Plateau for less than $6 million eight days before Plateau donated the

easements.

      The IRS selected Plateau’s 2012 return for examination. On March 29,

2015, it issued the FPAA that disallowed $25,449,000 of the claimed charitable

contribution deduction (the portion attributable to the easements), determining that
                                       - 12 -

[*12] petitioner had not established that all requirements of section 170 had been

met. The FPAA alternatively determined that Plateau had failed to establish “that

the value of the contributed property interest exceeded $0.” The IRS determined a

40% accuracy-related penalty under section 6662(e) and (h) (applicable in the case

of a “gross valuation misstatement”) and in the alternative a 20% penalty for

(among other things) negligence or a substantial understatement of income tax.

See sec. 6662(a) and (b)(1) and (2). The parties agree and the record reflects that,

before issuing the FPAA, the IRS secured timely managerial approval for the

assertion of each penalty. See sec. 6751(b)(1). Petitioner timely petitioned for

readjustment of partnership items under section 6226(a).

E.    Trial and Expert Testimony

      1.     Petitioner’s Experts

      Mr. Roberts, who prepared the original appraisals, died before trial. At trial

petitioner presented testimony from Thomas Wingard and Martin Van Sant, who

submitted a joint report addressing the value of the easements. The Court recog-

nized them as having expertise in the appraisal of conservation easements.

      In their appraisal Messrs. Wingard and Van Sant valued only the encum-

bered 2,354 acres (excluding the unrestricted 90-acre tract). They calculated a

value of $15,817,000 for the easements, representing the difference between a
                                       - 13 -

[*13] “before” value of $17,700,000 and an “after” value of $1,883,000. They

opined that the highest and best use of the Property unencumbered by the

easements would be as a “low density mountain resort residential development.”

They identified four sales of supposedly comparable properties--two in North

Carolina, one in Georgia, and one in Tennessee.

      Their first comparable property was an 888-acre tract in Banner Elk, North

Carolina, sold for $6,806 per acre in March 2013. Banner Elk was an established

resort town with a vacation rental market about 75 miles from Asheville. Banner

Elk was known for skiing and golf courses and was home to a small private col-

lege. The 888-acre tract contains improvements that include hiking trails, tennis

courts, and an outdoor concert amphitheater, but it is unclear whether those im-

provements existed in March 2013.

      Their second comparable property was a 900-acre tract in Hot Springs,

North Carolina, sold for $5,557 per acre in June 2012. This land was undevel-

oped. But it was only 20 miles from Asheville, a well-known tourist destination.

      Their third comparable property was a 1,200-acre tract in Emerson, Georgia,

sold for $14,151 per acre in August 2011. Emerson is about 30 miles from Atlan-

ta, and the 1,200-acre tract was purchased for development as a sports complex,

including baseball, soccer, and lacrosse fields. Acknowledging that this tract was
                                       - 14 -

[*14] located more favorably than the subject Property and had a different highest

and best use, Messrs. Wingard and Van Sant conceded that this sale was “the least

comparable of the four.”

      Their fourth comparable property was a 1,730-acre tract in Calhoun, Ten-

nessee, sold for $5,082 per acre in August 2008. Calhoun is located between

Chattanooga and Knoxville. The land is adjacent to Interstate 75, a major north-

south highway.

      Messrs. Wingard and Van Sant adjusted these sale prices to reflect supposed

differences between the four properties and the subject Property in terms of loca-

tion, size, road frontage, topography, and other factors. Most of these adjustments

appeared subjective and arbitrary, lacking any solid support in market data. They

adjusted the prices for the Banner Elk, Hot Springs, and Calhoun sales upward by

10%, 44%, and 51%, respectively, in part on the assumption that these properties

had inferior locations as compared with the subject Property. Because the Proper-

ty is in rural Tennessee, far from any major city or resort community and adjacent

to no major highway, this assumption did not appear well founded. Messrs.

Wingard and Van Sant aptly viewed the Emerson property as having a superior

location and accordingly adjusted that sale price downward by 50%.
                                        - 15 -

[*15] After making these adjustments Messrs. Wingard and Van Sant derived ad-

justed per-acre sale prices ranging from $7,076 to $7,988 for their four compara-

bles. Averaging these figures and rounding, they calculated a “before” value of

$7,500 per acre. To calculate the “after” value, they identified six sales of unim-

proved land encumbered by conservation easements in Tennessee, Georgia, and

South Carolina that occurred between October 2004 and October 2009. These sale

prices ranged from $836 to $2,000 per acre, with an average price of $1,365.

Messrs. Wingard and Van Sant adjusted these prices substantially downward,

deriving an “after” value of $800 per acre for the Property.

      Mr. Van Sant admitted that he knew that Plateau’s ownership had changed

shortly before it donated the easements but said he was not aware of the price at

which that sale occurred. Asked whether he was curious as to what that price

might have been, he replied that he saw no need to investigate further “[b]ecause it

could be a partial interest, there could be a lot of unknowns that we’re just not

aware of.”

      Mr. Van Sant admitted that he also knew about the prior sales of acreage

included within the Property. He questioned the arm’s-length character of the

October 2009 transfer of land that became the Pull Tight parcel, noting that the

parties “had had a relationship where they bought and sold real estate from each
                                        - 16 -

[*16] other” so that “the property was not exposed on the open market.” He said

that he had excluded the August 2011 transfer of the Land South parcel from his

analysis because he did not know the value of the mineral rights or how to make

an adjustment.

      In sum, Messrs. Wingard and Van Sant derived a “before” value of

$17,700,000 (2,354 acres × $7,500 per acre, rounded up) and an “after” value of

$1,883,000 (2,354 acres × $800 per acre, rounded down) for the portion of the

Property subject to the easements. They accordingly valued the easements at

$15,817,000, as opposed to $25,449,000 as reported on Plateau’s return. In calcu-

lating this value they ignored the 90-acre lakefront tract that Plateau had retained

and excluded from the easements. They neither valued this tract separately nor

considered whether (or to what extent) the easements enhanced its value, sur-

rounded as it was by 2,000 acres of conserved land.

      2.     Respondent’s Expert

      Respondent presented the report and testimony of Ray Kinney, a senior ap-

praiser and project coordinator at a firm specializing in valuation of environment-

ally sensitive properties. Mr. Kinney also co-owns a brokerage firm that focuses

on the acquisition of large-acreage properties. He has personally performed more
                                         - 17 -

[*17] than 60 appraisals involving conservation easements. The Court recognized

Mr. Kinney as an expert in conservation easement appraisal.

      Mr. Kinney noted that, when the easements were granted in late 2012,

“[d]evelopment in the Central Tennessee market, as well as the national market,

was still recovering from the 2008 stock market crash and ensuing Great Reces-

sion.” He agreed that the Property could eventually be developed but believed

near-term development to be unlikely given the Property’s lack of infrastructure

and existing market conditions. He concluded that its “highest and best use would

have been as an investment property purchased for speculative development, but

with an interim use as forested recreational property.”

      Mr. Kinney calculated a value of $2,695,000 for the easements, representing

the difference between a “before” value of $6,110,000 and an “after” value of

$3,415,000. In reaching these conclusions Mr. Kinney relied on market data and

interviews with buyers and sellers of comparable properties. He also interviewed

a representative of Big Creek Utility District, the public water company serving

the area, regarding its ability to service the Property.

      Mr. Kinney identified four comparable properties, all of which were in

Tennessee and two of which included portions of the Property. His first com-

parable property was the Land South parcel, sold in August 2011 for $1,045 per
                                        - 18 -

[*18] acre.6 This transaction occurred between Rogers and Land South LLC, then

wholly owned by Mr. Afrakhteh. Mr. Kinney interviewed a vice president of

Rogers who confirmed, as the signatory for the transaction, that it was an arm’s-

length sale.

      Mr. Kinney’s second comparable property was the 2,233-acre tract that in-

cluded the Pull Tight parcel, which was transferred in October 2009 by Darai to

LD.com for consideration of $5.5 million (or $2,463 per acre). Mr. Kinney in-

terviewed Darai’s president, an avid real estate investor, who confirmed that this

was an arm’s-length sale. Darai’s president expressed the view that the Property

offered excellent hunting and fishing but that it had little development potential

because of its distance from any major cities.

      Mr. Kinney’s third comparable property was several thousand acres in Van

Buren County, a rural county in central Tennessee, sold for $550 per acre in May

2001. This land was developed as a community equestrian center, featuring hiking

and riding trails, playgrounds, tennis courts, and soccer fields. But the venture

was unsuccessful and was foreclosed upon in 2016. In 2017 the property (includ-

ing improvements) was sold for $2,063 per acre.

      6
       Mineral rights were excluded from this sale, but Mr. Kinney reasonably
viewed this fact as immaterial because those rights likely had minimal value. In-
deed, they were abandoned nine months later. See supra pp. 4-5.
                                       - 19 -

[*19] Mr. Kinney’s fourth comparable property was a 1,500-acre tract in central

Tennessee sold for $5,031 per acre in 2005. This property was located three miles

from Sewanee, Tennessee, and the University of the South. The land bordered a

large lake and was purchased for development as an 80-residence community sur-

rounded by 1,000 acres of green space and hiking trails. Gas, electric, and water

utilities had already been installed when the sale occurred. The ensuing financial

crisis and other complications prevented the development from taking off, and

only a few houses were built and sold. The balance of the land was sold for

$1,493 per acre in 2015.

      Mr. Kinney adjusted these prices to account for differences in the timing of

the sales, prevailing market conditions, property size, and the existence vel non of

improvements. For example, he adjusted the price of his third comparable upward

by 105% to account for market appreciation since 2001. He adjusted the price of

his fourth comparable downward by 25% because it was sold in 2005, at the mar-

ket peak before the bubble burst. Relying on market data from Grundy County

and surrounding counties, he also adjusted the price of his comparable properties

on the basis of their sizes relative to the Property. Together these adjustments

produced an average per-acre sale price of $2,023, slightly below the unadjusted

average price of $2,272 per acre.
                                       - 20 -

[*20] Mr. Kinney recognized that the Property had scenic features, including

waterfalls and lakes. In that respect he found his second comparable property--

which included the Pull Tight parcel--the most relevant. The adjusted sale price

for that October 2009 transaction was $2,481 per acre. On the basis of that fact

and “all the sales data, analysis, market based adjustments, interviews and * * *

[his] personal inspection of the subject property,” Mr. Kinney determined a “be-

fore” value of $2,500 per acre for the Property.

      When preparing his expert report, Mr. Kinney was unaware that CE Fund

had purchased 98.99% of Plateau in an arm’s-length transaction for $5,822,000 on

December 18, 2012. Adjusting that price to account for the minority interest, Mr.

Kinney estimated that a 100% interest in Plateau would have sold for about

$6,151,509. Since Plateau’s only asset was the Property, Mr. Kinney viewed this

transaction as indicating that the Property in December 2012 was worth about

$2,517 per acre ($6,151,509 ÷ 2,444 acres). That figure was consistent with the

“before” value of $2,500 per acre he had determined in his expert report.

      To determine the “after” value of the 2,444 acres making up the Property

Mr. Kinney first valued the 90-acre tract that had been excluded from the ease-

ments. For that purpose he relied on three sales of unencumbered lakefront acre-

age in central Tennessee between 2009 and 2012. Those properties, each acquired
                                       - 21 -

[*21] for residential development, sold for prices between $6,549 and $6,870 per

acre. Applying relatively small adjustments for market conditions and size, Mr.

Kinney determined an adjusted average price of $6,558 per acre. Rounding to

$6,600, he calculated a value of $594,000 for that portion of the Property.7

      For the easement-encumbered portion of the Property Mr. Kinney determin-

ed his “after” value by reference to sales of one conservation easement and two

parcels of easement-encumbered land in Tennessee, chiefly in nearby Marion

County. From these three comparable properties he derived an average per-acre

sale price of $1,114. He adjusted that figure upward to $1,200, giving more

weight to the comparable that most closely resembled the Property in size and

topography.

      Considering the Property as a whole, Mr. Kinney’s per-acre figures pro-

duced a “before” value of $6,110,000 (2,444 acres × $2,500) and an “after” value

of $3,418,800 (90 acres × $6,600 plus 2,354 acres × $1,200). He rounded the lat-

ter sum down to $3,415,000. He valued the easements sequentially, assuming that

      7
       When preparing his expert report, Mr. Kinney was not aware that Plateau
had agreed to donate the 90-acre tract upon receiving a satisfactory appraisal and
had valued the tract at $1,795,000 in February 2013 when donating it for use as a
youth camp. See supra note 5. Mr. Kinney testified that, had he been aware of
these facts, he would have increased his “after” valuation of the reserved 90 acres.
His $594,000 valuation was thus generous to petitioner.
                                         - 22 -

[*22] the Land South parcel remained unrestricted when the Pull Tight easement

was put in place. On that basis he valued the Pull Tight easement at $740,000 and

the Land South easement at $1,955,000, for a total of $2,695,000 (viz., $6,110,000

minus $3,415,000).

        Mr. Kinney offered rebuttal testimony at trial, particularly concerning the

comparable properties whose sales Messrs. Wingard and Van Sant had used to

calculate their “before” value. He observed that Banner Elk was known as a high-

end resort community and that Hot Springs was close to Asheville, a major tourist

destination. He regarded the property near Atlanta, which was purchased for de-

velopment as a sports complex, as “very obvious[ly] * * * not comparable,” sug-

gesting that “it could as easily have been the Empire State Building.” He empha-

sized the contrast between these three parcels and the Property, located as it was in

rural Tennessee distant from any major city or resort community.

                                      OPINION

        Section 170(a)(1) allows a deduction for any charitable contribution made

within the taxable year. If the taxpayer makes a charitable contribution of prop-

erty other than money, the amount of the contribution is generally equal to the

FMV of the property when the gift is made. See sec. 1.170A-1(c)(1), Income Tax

Regs.
                                        - 23 -

[*23] The Code generally restricts a taxpayer’s charitable contribution deduction

for the donation of “an interest in property which consists of less than the taxpay-

er’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception

to this rule for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii).

This exception applies where: (1) the taxpayer makes a contribution of a “quali-

fied real property interest,” (2) the donee is a “qualified organization,” and (3) the

contribution is “exclusively for conservation purposes.” Sec. 170(h)(1).

      For an easement of the sort involved here, a deduction is allowable only if

the conservation purpose is “protected in perpetuity.” See sec. 170(h)(5)(A). The

regulations set forth detailed rules for determining whether this “protected in per-

petuity” requirement is met. Of importance here are the rules governing the man-

datory division of proceeds in the event the property is sold following a judicial

extinguishment of the easement. See sec. 1.170A-14(g)(6), Income Tax Regs.

      Respondent contends that the easement deeds fail to satisfy the “protected in

perpetuity” requirement because the Conservancy as grantee is not absolutely en-

titled to a proportionate share of the proceeds in the event of a sale following ex-

tinguishment of the easement. We agree with respondent on that point and accord-

ingly hold that Plateau is entitled to no charitable contribution deduction. See
                                          - 24 -

[*24] Coal Prop. Holdings, 153 T.C. at 127.8 We proceed to consider the proper

valuation of the easements in order to determine whether the 40% “gross valuation

misstatement” penalty applies.

A.    Judicial Extinguishment

      The rules governing judicial extinguishment appear in section 1.170A-

14(g)(6), Income Tax Regs. They provide that the donor must agree, when mak-

ing the gift, that the easement gives rise to a property right in the donee having an

FMV “that is at least equal to the proportionate value that the * * * [easement] at

the time of the gift, bears to the value of the property as whole at that time.” Id.

subdiv. (ii). In the event of a sale following judicial extinguishment of the ease-

ment, the donee “must be entitled to a portion of the proceeds at least equal to that

proportionate value.” Ibid. “In effect, the ‘perpetuity’ requirement is deemed

satisfied because the sale proceeds replace the easement as an asset deployed by

the donee ‘exclusively for conservation purposes.’” Coal Prop. Holdings, 153

T.C. at 136 (quoting section 170(h)(5)(A)).9

      8
        Respondent contends in the alternative that the easements are not “qualified
real property interest[s]” because Plateau retained excessive rights with respect to
the conservation area. See supra pp. 8-9. Given our disposition we need not reach
this alternative argument.
      9
          Petitioner has not challenged the validity of the judicial extinguishment
                                                                           (continued...)
                                        - 25 -

[*25] The judicial extinguishment provisions of the deeds in this case are essen-

tially identical to the provisions that we considered in Coal Prop. Holdings. See

id. at 130-131. Following our reasoning in that case, we conclude that the deeds

here fail to satisfy the “granted in perpetuity” requirement for two reasons.

      First, the regulatory fraction used to determine the grantee’s proportionate

share of post-extinguishment proceeds is applied, not to the full proceeds of sale,

but to the proceeds “minus any increase in value after the date of this grant attri-

butable to improvements.” Thus, the donee’s share is improperly reduced on ac-

count of (1) appreciation in the value of improvements existing when the easement

was granted plus (2) the FMV of any improvements that the donor subsequently

makes to the property. Cf. id. at 138. By reducing the donee’s share in this way,

the deeds violate the regulatory requirement that the donee receive, in the event

the property is sold following extinguishment of the easement, a share of proceeds

that is “at least equal to the proportionate value that the perpetual conservation

      9
        (...continued)
regulation, and we recently sustained its validity. See Oakbrook Land Holdings,
LLC v. Commissioner, 154 T.C. __ (May 12, 2020). The regulation contains an
exception to the proceeds requirement where “state law provides that the donor is
entitled to the full proceeds from the conversion without regard to the terms of the
prior perpetual conservation restriction.” Sec. 1.170A-14(g)(6)(ii), Income Tax
Regs. Petitioner does not contend that this exception applies here.
                                         - 26 -

[*26] restriction at the time of the gift, bears to the value of the property as a

whole at that time.” See sec. 1.170A-14(g)(6)(ii), Income Tax Regs.10

      As we have noted previously, the requirements of this regulation “are strict-

ly construed.” Carroll v. Commissioner, 146 T.C. 196, 212 (2016). Because the

Conservancy in this case “is not absolutely entitled to a proportionate share of

* * * [the] proceeds” upon a post-extinguishment sale of the Property, the con-

servation purpose underlying the contribution is not “protected in perpetuity.”

Coal Prop. Holdings, 153 T.C. at 127, 139 (quoting Carroll, 146 T.C. at 212). The

U.S. Court of Appeals for the Fifth Circuit has likewise sustained the disallowance

of a charitable contribution deduction where the judicial extinguishment provision

of an easement deed included a carve-out for donor improvements similar to that

here. See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 207-208 (5th

Cir. 2018); Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-

54, at *37-*38.

      10
        The pre-contribution improvements to the conserved area in this case were
less substantial than in Coal Prop. Holdings, 153 T.C. at 131. However, the deeds
reserved to Plateau the right to make post-contribution improvements to the con-
served area, including the construction of residences and amenities for future
residents. These factual differences have little impact on our analysis because the
regulation does not permit any reduction of the donee’s share on account of donor
improvements.
                                        - 27 -

[*27] The easement deeds here have a second problem, which was also present in

Coal Prop. Holdings. The Conservancy’s tentative share of the proceeds, as deter-

mined under section 9.2 of each deed, is adjusted further by section 9.1. It pro-

vides that “the amount of the proceeds to which the Grantee shall be entitled * * *

shall be the amount determined under section 9.2,” but only “after the satisfaction

of prior claims.” Prior claims against the sale proceeds might be held by various

creditors of Plateau or its successors in interest. It is not necessarily unreasonable

for a deed to provide that prior claims may be paid from sale proceeds. What is

unreasonable, and what violates the “judicial extinguishment” regulation, is the

requirement that all prior claims be paid out of the Conservancy’s share of the

proceeds, even if those claims represent liabilities of Plateau or its successors. See

Coal Prop. Holdings, 153 T.C. at 145 n.5.

      Petitioner urges that the easement deeds contain “Treasury Regulation over-

ride” clauses mandating that the judicial extinguishment provisions be interpreted

to conform with the regulations. Section 9.1 of each deed states that the Conser-

vancy’s share of the proceeds shall be “determined in accordance with Section 9.2

or * * * Section 1.170A-14, if different.” (Emphasis added.) Section 9.2 states:

“It is intended that this Section 9.2 be interpreted to adhere to and be consistent

with * * * [section] 1.170A-14(g)(6)(ii)” of the regulations.
                                        - 28 -

[*28] We rejected this argument in Coal Prop. Holdings, 153 T.C. at 140-145, and

we reject it again here. Section 9.2 creates valuable property rights in Plateau by

reserving to it a larger portion of future proceeds. The only circumstance in which

the regulation could be determined to require a calculation “different from” sec-

tion 9.2, in derogation of Plateau’s property rights, would be if some tribunal,

State or Federal, authoritatively so held. The clear effect of section 9.1 is thus to

cancel the literal requirements of section 9.2 in the event the latter are determined

not to be in compliance. Section 9.1 thus constitutes a “condition subsequent”

saving clause that we and other courts have consistently declined to enforce. See

Belk v. Commissioner, 774 F.3d 221, 229-230 (4th Cir. 2014), aff’g 140 T.C. 1

(2013); Coal Prop. Holdings, 153 T.C. at 144-145; Palmolive Bldg. Inv’rs, LLC v.

Commissioner, 149 T.C. 380, 405 (2017).

      Petitioner asks that we consider the testimony of Conservancy officials, in-

cluding Mr. Jendrek (who drafted the easement deeds), regarding the proper inter-

pretation of the paragraphs dealing with judicial extinguishment. The Supreme

Court of Tennessee has ruled that, “if the contractual language is initially deemed

unambiguous, its ‘plain meaning’ should be used, without recourse to matters

extraneous to the text of the agreement.” Individual Healthcare Specialists, Inc. v.

BlueCross BlueShield of Tenn., Inc., 566 S.W.3d 671, 691 (Tenn. 2018) (fn. ref.
                                        - 29 -

[*29] omitted). We find the text of the easement deeds clear and unambiguous, as

we did in Coal Prop. Holdings, 153 T.C. at 143-144. To the extent testimony

contradicts the plain text of the deeds, it would be prohibited by the parol evidence

rule. See Individual Healthcare Specialists, Inc., 566 S.W.3d at 696-697.

      We thus conclude that the charitable contribution deduction must be denied

in its entirety because “the conservation purpose of the contribution is not protect-

ed in perpetuity.” Coal Prop. Holdings, 153 T.C. at 139 (quoting Carroll, 146 T.C.

at 212). Although the value of the easements is not material for section 170 pur-

poses, it is material for deciding whether Plateau is liable for the “gross valuation

misstatement” penalty. We turn now to that question.

B.    Accuracy-Related Penalty

      The FPAA determined a 40% accuracy-related penalty under section

6662(e) and (h) (applicable in the case of a “gross valuation misstatement”) and in

the alternative a 20% penalty for negligence or substantial understatement of in-

come tax. Sec. 6662(a) and (b)(1) and (2). Section 7491(c) generally provides

that “the Secretary shall have the burden of production in any court proceeding

with respect to the liability of any individual for any penalty.” This burden re-

quires the Commissioner to come forward with sufficient evidence indicating that

imposition of the penalty is appropriate. See Higbee v. Commissioner, 116 T.C.
                                       - 30 -

[*30] 438, 446 (2001). Once he meets his burden of production, the burden of

proof is on the taxpayer to “come forward with evidence sufficient to persuade a

Court that the Commissioner’s determination is incorrect.” Id. at 447.

      The Commissioner’s burden of production under section 7491(c) includes

establishing compliance with section 6751(b)(1), which requires that penalties be

“personally approved (in writing) by the immediate supervisor of the individual

making such determination.” See Chai v. Commissioner, 851 F.3d 190, 217, 221-

222 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42; Graev v.

Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part

147 T.C. 460 (2016). The parties have stipulated (and the record shows) that time-

ly supervisory approval was secured for the penalties that the IRS determined.

Respondent has thus satisfied his burden of production under section 6751(b)(1).

Respondent has likewise satisfied his burden of production to show that imposi-

tion of penalties is “appropriate,” because the evidence conclusively establishes

that Plateau grossly overvalued the easements. See Higbee, 116 T.C. at 446.

      The Code imposes a 40% penalty in the case of any “gross valuation mis-

statement.” Sec. 6662(e), (h)(1). A misstatement is “gross” if the value of proper-

ty claimed on a return is 200% or more of the correct amount. Sec. 6662(e)(1)(A),

(h)(2)(A)(i). In the case of a partnership such as Plateau, “[t]he determination of
                                        - 31 -

[*31] whether there is a substantial or gross valuation misstatement * * * is made

at the entity level.” Sec. 1.6662-5(h)(1), Income Tax Regs.11

      Plateau on its 2012 return valued the Pull Tight easement at $10,899,000

and the Land South easement at $14,550,000. The deduction allowable for a gift

of property is generally equal to the FMV of the property when the gift is made.

See sec. 1.170A-1(c)(1), Income Tax Regs. The regulations define FMV as “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.” Id. subpara. (2). Determining the FMV

of contributed property entails a factual inquiry. See Estate of DeBie v. Commis-

sioner, 56 T.C. 876, 894 (1971).

      To support their respective positions on the valuation question, the parties

retained experts who testified at trial. We evaluate an expert’s opinion in light of

his qualifications and the evidence in the record. See Parker v. Commissioner, 86

T.C. 547, 561 (1986). When experts offer differing estimates of FMV, we weigh

      11
        No penalty is imposed “unless the portion of the underpayment for the
taxable year attributable to substantial valuation misstatements * * * exceeds
$5,000.” Sec. 6662(e)(2). The availability of this exception is determined at the
partner level. See RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 18-19
(2017), aff’d, 924 F.3d 1261 (D.C. Cir. 2019); sec. 1.6662-5(h)(1), Income Tax
Regs.
                                       - 32 -

[*32] those estimates by examining (among other things) the factors they

considered in reaching their conclusions. See Casey v. Commissioner, 38 T.C.

357, 381 (1962).

      We are not bound by an expert opinion that we find contrary to our judg-

ment. We may accept an expert’s opinion in its entirety, or we may be selective as

to the portions we find reliable. See Helvering v. Nat’l Grocery Co., 304 U.S. 282,

295 (1938); Parker, 86 T.C. at 561-562; Buffalo Tool & Die Mfg. Co. v. Commis-

sioner, 74 T.C. 441, 452 (1980). We may also determine FMV on the basis of our

own examination of the record evidence. See Silverman v. Commissioner, 538

F.2d 927, 933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285.

      In a case such as this we must determine “the fair market value of the per-

petual conservation restriction at the time of the contribution.” Sec. 1.170A-

14(h)(3)(i), Income Tax Regs. “If there is a substantial record of sales of ease-

ments comparable to the donated easement,” the FMV of the donated easement

generally is determined by reference to those sale prices. Ibid. In the absence of

such evidence the FMV of the donated easement “is equal to the difference be-

tween the * * * [FMV] of the property it encumbers before the granting of the

restriction and the * * * [FMV] of the encumbered property after the granting of

the restriction.” Ibid.
                                        - 33 -

[*33] The parties’ experts agreed that this latter mode of valuation--commonly

called the “before and after method”--applies here. Under this method, if the

donor owns property contiguous to the property subjected to the easement, the

FMV of the easement “is the difference between the * * * [FMV] of the entire

contiguous parcel of the property before and after the granting of the restriction.”

Ibid. This latter provision is commonly called the “contiguous parcel” rule. The

“before” valuation 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.” Id. subdiv. (ii).

      1.     “Before” Value

      The evidence at trial convinced us that the most compelling indicator of the

Property’s “before” value was CE Fund’s purchase of a 98.99% interest in Plateau

on December 18, 2012, eight days before the easements were granted. On that day

Plateau’s only assets were the Pull Tight and Land South parcels, which together

made up the Property. Ownership of Plateau was thus a proxy for ownership of

the Property.

      CE Fund purchased its 98.99% interest in Plateau for $5,822,000. The

selling parties were Plateau Manager, Pull Tight LLC, and Land South LLC. All

three were 100% owned (directly or indirectly) by Mr. Afrakhteh, who was unre-
                                         - 34 -

[*34] lated to CE Fund, Peach Tree, and Mr. Davis. Mr. Afrakhteh had a

reputation as an experienced and savvy real estate investor. We find that this was

an arm’s-length transaction 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.” Sec. 1.170A-1(c)(2), Income Tax Regs.

      We found Mr. Kinney to be a credible and candid witness. He was unaware

of the December 18, 2012, transaction when he prepared his report, learning of it

for the first time at trial. After accounting for the minority interest in Plateau, he

estimated that a 100% interest in Plateau would have sold on that date for about

$6,151,509, or $2,517 per acre. We find this to be very persuasive evidence of the

Property’s “before” value.

      Mr. Kinney’s report confirms this value. Two of his comparable property

sales, including the transaction upon which he relied most heavily, involved prior

sales of acreage included within the Property. The Land South parcel was sold in

August 2011 for $1,045 per acre, and the 2,233-acre tract that included the Pull

Tight parcel was sold in October 2009 for $2,463 per acre. Mr. Kinney inter-

viewed parties to those transactions and confirmed that both were arm’s-length

sales. He made reasonable adjustments to these sale prices and to the sales prices

for his other comparable properties, both of which were in rural areas of Tennes-
                                       - 35 -

[*35] see with topography similar to the Property. We find that the “before” value

of the 2,444 acres included within the Property was $2,500 per acre, or

$6,110,000, as Mr. Kinney determined in his report.

      We give no weight to the opinion of petitioner’s experts. Messrs. Wingard

and Van Sant were aware of the December 2012 sale to CE Fund of a 98.99%

interest in Plateau and of the October 2009 and August 2011 sales of acreage in-

cluded within the Property. They addressed none of these transactions in their re-

port. We found their explanations for that failure to be wholly unpersuasive.

      Three of the properties Messrs. Wingard and Van Sant chose as compa-

rables were anything but comparable: All were outside Tennessee, two were in or

near established resort and tourist communities, and one (near Atlanta) had an

entirely different highest and best use. Their fourth comparable was in rural

Tennessee, but it (unlike the Property) was adjacent to a major interstate highway.

Finally, the adjustments that Messrs. Wingard and Van Sant made to the prices of

their supposed comparable properties, mostly beneficial to petitioner, struck the

Court as subjective and arbitrary, lacking any solid basis in market data.

      2.     “After” Value

      Immediately before granting the easements Plateau owned the 2,354 acres

proposed to be restricted and an adjacent 90-acre lakefront tract that was excluded
                                       - 36 -

[*36] from the easements. Following the “contiguous property” rule, Mr. Kinney

properly determined the “after” value (as he had determined the “before” value) by

considering the 2,444 acres that constituted “the entire contiguous parcel of pro-

perty.” Sec. 1.170A-14(h)(3)(i), Income Tax Regs. Plateau could scarcely dispute

the value of $594,000 (or $6,600 per acre) that Mr. Kinney placed on the 90-acre

reserved tract, since Plateau valued those same 90 acres at $1,795,000 when

claiming a charitable contribution deduction the following year. See supra p. 8 &

note 5.

      For the 2,354 encumbered acres Mr. Kinney relied on two sales of encum-

bered property and one sale of a conservation easement, all in rural Tennessee.

After making qualitative adjustments of less than 10% and rounding upward, he

calculated an “after” value of $1,200 per acre. We find his methodology correct

and his comparables entirely reasonable.

      In determining their “after” value, Messrs. Wingard and Van Sant valued

only the 2,354 encumbered acres, ignoring the 90-acre reserved tract. Because

they did not follow the “contiguous property” rule, their methodology was erro-

neous as a matter of law. See sec. 1.170A-14(h)(3)(i), Income Tax Regs.12 In any

      12
         Messrs. Wingard and Van Sant rationalized ignoring the reserved 90-acre
tract on the theory that Plateau in December 2012 planned to donate those acres to
                                                                     (continued...)
                                        - 37 -

[*37] event their six comparables had an average unadjusted sale price of $1,365

per acre--higher than Mr. Kinney’s comparables. They were able to derive an

“after” value of $800 per acre only by applying an average downward adjustment

of 41%. They supplied no market-based data to justify an adjustment of that size.

      3.     Application of Penalty

      The Property comprised two contiguous parcels, the Pull Tight parcel (1,171

acres) and the Land South parcel (1,273 acres). We find that this real estate was

worth $2,500 per acre before imposition of the easements. The “before” value of

the Pull Tight parcel was thus $2,927,500 (1,171 acres × $2,500), and the “before”

value of the Land South parcel value was thus $3,182,500 (1,273 acres × $2,500).

      We find that the “after” value of the Pull Tight parcel was $1,648,200 (i.e.,

1,126 encumbered acres at $1,200 per acre plus 45 unencumbered acres at $6,600

per acre). We find that the “after” value of the Land South parcel was $1,770,600

      12
        (...continued)
a charity. Assuming that to be true, it is immaterial. When the easements were
donated on December 26, 2012, the 90-acre tract was unencumbered and consti-
tuted contiguous property owned by Plateau. Plateau owned the full economic
value of that tract; the fact that it extracted that economic value by claiming a tax
deduction of $1,795,000 the following year, rather than by selling the property, is
irrelevant. The regulation requires that the “after” value be determined by consid-
ering the “entire contiguous parcel of property.” See sec. 1.170A-14(h)(3)(i),
Income Tax Regs. Plateau cannot plausibly seek to have those 90 acres valued as
if encumbered for purposes of its 2012 donation while valuing them as unencum-
bered when making its contribution in 2013.
                                       - 38 -

[*38] (i.e., 1,228 encumbered acres at $1,200 per acre plus 45 unencumbered acres

at $6,600 per acre). Subtracting the “after” values from the “before” values, we

find that the correct values of the easements placed on the Pull Tight and Land

South parcels were $1,279,300 and $1,411,900, respectively, or $2,691,200 in the

aggregate.

      “The determination of whether there is a substantial or gross valuation mis-

statement on a return is made on a property-by-property basis.” Sec. 1.6662-

5(f)(1), Income Tax Regs. On its 2012 return Plateau valued the Pull Tight ease-

ment at $10,899,000, which is 852% of its correct value. Plateau valued the Land

South easement at $14,550,000, which is 1031% of its correct value. In each case

Plateau’s claimed value exceeded 200% of “the correct amount of such valuation.”

Sec. 6662(e)(1)(A). Both valuations thus constituted “gross valuation misstate-

ments” within the meaning of section 6662(h)(2)(A)(i).13

      13
         Mr. Kinney valued the easements sequentially, assuming that the Pull
Tight easement existed when the Land South easement was imposed. Although
this made no difference in the aggregate value that he reached, it caused him to
place a higher relative value on the Land South easement. See supra pp. 21-22.
Inasmuch as the easements were granted simultaneously, it seems arbitrary to
assume that either was imposed before the other, and we have determined values
for the two easements accordingly. But no matter how the $2,691,200 aggregate
value is split between the two easements, the values reported on Plateau’s return
would constitute “gross valuation misstatements” within the meaning of section
6662(h)(2)(A)(i).
                                        - 39 -

[*39] Generally, an accuracy-related penalty under section 6662 is not imposed if

the taxpayer demonstrates “reasonable cause” and shows that he “acted in good

faith with respect to * * * [the underpayment].” Sec. 6664(c)(1). However, this

defense is not available “[i]n the case of any underpayment attributable to a * * *

gross valuation over statement * * * with respect to charitable deduction prop-

erty.” Sec. 6664(c)(3). The underpayment of tax resulting from disallowance of

Plateau’s charitable contribution deduction would be attributable to a gross valua-

tion misstatement to the extent that the underpayment reflects the excess values

that Plateau claimed on its return, viz., an excess value of $9,619,700 attributable

to the Pull Tight easement and an excess value of $13,138,100 attributable to the

Land South easement. See RERI Holdings I, LLC v. Commissioner, 149 T.C. 1,

37 (2017), aff’d, 924 F.3d 1261 (D.C. Cir. 2019); see also PBBM-Rose Hill, Ltd.,

900 F.3d at 214. We hold that the 40% penalty is appropriate as applied to the

underpayment as thus determined.14

      14
        Because we have sustained the disallowance of Plateau’s deduction in full,
we may need to consider whether any other penalty applies with respect to the
portion of the underpayment attributable to disallowance of a deduction corre-
sponding to the correct values of the easements. See PBBM-Rose Hill, Ltd., 900
F.3d at 214. In the FPAA respondent determined in the alternative a 20% penalty
for negligence or a substantial understatement of income tax. See sec. 6662(a) and
(b)(1) and (2). We conclude that we would benefit from further submissions from
the parties as to how these penalties (and the defenses available thereto) should be
                                                                        (continued...)
                                     - 40 -

[*40] To reflect the foregoing,

                                              An appropriate order will be issued.

      14
        (...continued)
analyzed in a TEFRA case such as this. These matters will accordingly be ad-
dressed in a subsequent order or opinion.