The U.S. Tax Court, in Lake Jordan Holdings, LLC v. Commissioner, T.C. Memo. 2025-123, delivered a thorough rejection of an egregious valuation claimed for a syndicated conservation easement, underscoring the necessity of grounding valuations in objective market realities rather than speculative assumptions. This memorandum opinion details the continuation of the "depressingly long line" of cash grabs disguised as charitable contributions. Although the Court ultimately found the basic requirements for claiming a charitable contribution deduction were met, the value claimed was deemed excessive, leading to the imposition of a 40% gross valuation misstatement penalty.

Factual Background of the Transaction

Lake Jordan Holdings, LLC (Holdings), a Georgia LLC classified as a TEFRA partnership, claimed a charitable contribution deduction of $12,740,000 on its 2017 tax return for the donation of a conservation easement over 157 acres in Elmore County, Alabama (the easement property).

Property Acquisition and Syndication Structure

The easement property consisted of 165 acres of rural land situated on Lake Jordan. The nearest town was Titus, described as little more than a "crossroads with a stop sign". The property featured sloping terrain, accessibility challenges due to road layouts, and lacked existing utilities. The land was purchased for $583,000 only a few months before the deduction was claimed.

The seller, Robert Barrett, a sophisticated local real estate investor, assembled the acreage between 1992 and 2001. Facing financial pressures, Mr. Barrett estimated the property’s fair value at $583,000, calculating this based on acreage value ($2,200/acre) plus $25,000 for each of 11 lakefront lots, minus $55,000 for road construction costs.

The transaction was orchestrated by Paul Thomas and Nancy Zak, who specialized in syndicated conservation easements. Ms. Zak’s model depended on securing inexpensive land and assigning it high development potential, aiming for a hypothetical highest and best use value around 10X the cost of the land. This approach utilized appraisers, such as Wilmot McRae Greene and Cynthia Milner, who collaborated tightly with Ms. Zak’s team to produce multiple draft appraisals based on development plans that were never intended to be built. Solicitation materials promised investors a tax deduction return equivalent to several times the investment, specifically advertising a 4.5:1 ratio for the Lake Jordan deal as a risk mitigation strategy.

The ownership structure involved Holdings (PropCo), initially wholly owned by Mr. Barrett, and Lake Jordan Partners, LLC (Partners) (InvestCo). On December 29, 2017, Partners purchased a 96% interest in Holdings from the Barretts for $583,000, triggering a technical termination of Holdings as a partnership under I.R.C. § 708(b)(1). The investors in Partners overwhelmingly voted for the conservation easement option. Ms. Zak and Mr. Thomas, through various entities, collectively netted $545,220 each for their roles in structuring the donation.

Appraisal and Tax Reporting

The final appraisal, prepared primarily by Ms. Milner and Mr. Greene, was completed on March 9, 2018. It valued the easement using the "before and after" method. The appraisal asserted a highest and best use as a lakeside residential community (after initially pivoting from an "active adult community" due to geography and cost issues). Relying on a discounted cash flow analysis, the appraisal concluded a before-easement value of $13,049,376 and an after-easement value of $308,097, resulting in a claimed easement value of $12,740,000. This high valuation was achieved by increasing assumed lot prices and significantly slashing estimated development costs (from $8.9 million initially anticipated down to $4,271,560).

Holdings’ CPA, Kimberly Skalski, prepared two short-year tax returns due to the technical termination. The conservation easement deduction was claimed on the second short-year return covering the period beginning December 29, 2017, and ending December 31, 2017.

The IRS issued an FPAA disallowing the entire deduction, asserting Holdings failed to satisfy I.R.C. § 170 requirements and prove the value of the contribution. The IRS also asserted various penalties, including the 40% gross valuation misstatement penalty under I.R.C. § 6662(h).

Taxpayer Positions and Judicial Analysis

The Tax Matters Partner timely petitioned the Court for readjustment. While the Court acknowledged that Holdings generally met the conservation requirements under I.R.C. § 170(h)(1) (as the Commissioner conceded these issues post-trial), it addressed the Commissioner’s three independent grounds for denying the deduction in its entirety.

Charitable Intent

The Commissioner argued Holdings lacked the requisite donative intent because the transaction was primarily motivated by generating substantial tax deductions for investors and sizable fees for the promoters. The Court rejected this position, citing precedent holding that the objective fact that a perpetual conservation easement was donated defeats arguments regarding subjective intent. The Tax Court reiterated that tax benefits associated with a charitable contribution, provided by the U.S. Treasury, do not constitute a quo that negates the donor’s charitable intent.

Technical Termination Timing

The Commissioner contended that the deduction was claimed on the tax return for the wrong short taxable year due to the technical termination on December 29, 2017. A technical termination occurs when 50% or more of a partnership’s interests are sold or exchanged (I.R.C. § 708(b)(1)(B)). Under Treasury Regulation § 1.708-1(b)(4), the new partnership is deemed formed "immediately" after the termination.

Holdings’ CPA, believing the first short year could not end on the same day the second short year began, incorrectly structured the returns (Sept 25 to Dec 28, 2017, and Dec 29 to Dec 31, 2017). The court confirmed the technical termination occurred on December 29, 2017. The Court found that neither the Code nor the Treasury regulations preclude a new partnership from using the date of the technical termination as the start date of its taxable year. Relying on Savannah Shoals, LLC v. Commissioner, T.C. Memo. 2024-35, the Court concluded that requiring the new partnership’s taxable year to begin the day after termination would distort the allocation of the easement deduction away from the partners who incurred the expense. Therefore, the easement donation deduction was properly claimed on Holdings’ second short-year return.

Qualified Appraisal Requirements

For charitable contribution deductions exceeding $500,000, I.R.C. § 170(f)(11)(D) and (E) require a qualified appraisal by a qualified appraiser. The Commissioner challenged Mr. Greene’s appraisal on three grounds.

1. Licensure: The Commissioner argued Mr. Greene was not a qualified appraiser because he was not licensed in Alabama at the time of the appraisal. The Court found this argument meritless, noting that the Code requires either an appraisal designation from a recognized professional appraiser organization or satisfaction of education/experience requirements (I.R.C. § 170(f)(11)(E)(ii)(I)). Mr. Greene possessed an IFAS designation from the National Association of Independent Fee Appraisers, which satisfied the requirement for a recognized appraisal designation.

2. Generally Accepted Appraisal Standards: The Commissioner asserted the appraisal violated the Uniform Standards of Professional Conduct (USPAP). While the Court noted evidence causing it to doubt Mr. Greene’s work (e.g., sloppiness, omission of the recent purchase price, and tendentious assumptions geared toward high valuation), it concluded that the failures went to the credibility and weight of the appraisal, not whether it fundamentally failed to comply with USPAP’s substance and principles. The Tax Court has noted that strict compliance with USPAP is not required, only consistency with its substance and principles.

3. Co-Author Signature: The Commissioner argued that Ms. Milner, who performed significant labor in preparing the appraisal, failed to sign the appraisal summary (Treas. Reg. § 1.170A-13(c)(5)(iii)). The Court found that Ms. Milner acted as Mr. Greene’s subordinate and under his ultimate direction and supervision; thus, the appraisal summary did not violate the Treasury Regulation.

Determining the Correct Deduction Amount

The charitable contribution deduction is generally equal to the fair market value (FMV) of the property at the time of donation (Treas. Reg. § 1.170A-1(c)(1)). Given the lack of comparable easement sales, the Court used the "before-and-after" method (Treas. Reg. § 1.170A-14(h)(3)(i)).

Highest and Best Use Determination

To determine the "before value," the property’s highest and best use (HBU) must be assessed (Treas. Reg. § 1.170A-14(h)(3)(ii)). HBU must be objectively probable, financially feasible, and not based on mere speculation.

Partners argued for a 157-lot lakeside residential community. The Court rejected this proposed HBU, finding overwhelming evidence supporting the Commissioner’s expert, Mr. Ball, who determined the HBU was low-density residential development on the waterfront, and recreational use for the interior acreage. Key reasons included:

The property’s rural, remote location, lack of amenities, and challenging topography made large-scale development improbable.
The property was sold for $583,000 only months prior, and the seller (Mr. Barrett, a sophisticated local investor) believed $700,000 was the absolute maximum potential value, strongly indicating the lucrative proposed development was not realistically probable.
The reliance on Lake Martin—a premier Alabama lake—to establish market demand was rejected, as Lake Jordan serves a wholly distinct and "more price-sensitive segment".
The proposal featuring a large proportion of interior/off-water lots (127 out of 157) lacked market support in the area.

Valuation Methodology

The Court applied the Comparable Sales Approach, which is generally the most reliable method for valuing vacant, unimproved land.

Holdings’ expert relied exclusively on adjustments to Lake Martin sales, which the Court rejected due to the fundamental differences between the markets. The Commissioner’s expert, Mr. Ball, focused on sales of waterfront acreage on Lake Jordan and other Coosa River lakes.

After reviewing and adjusting Mr. Ball’s analysis, particularly focusing on four Lake Jordan sales (2007, 2020, 2021, and 2022), the Court concluded the average adjusted price per acre was $8,344.

The Court also rejected the taxpayer’s reliance on the Income Approach (Discounted Cash Flow or DCF analysis), noting that this method is rarely appropriate for vacant land with no income-producing history because it is "inherently speculative and unreliable". Mr. Eidson’s DCF analysis, which yielded $7.4 million, was flawed because it relied on the rejected HBU and utilized speculative inputs, such as inflated lot prices and an unjustifiably low discount rate (16% chosen versus a noted average of 20.57% for the area).

Final Valuation Conclusion

The Court determined the "before value" based on the property’s 165 acres multiplied by the adjusted per-acre comparable sales price ($8,344), resulting in a value of $1,376,760.

The parties stipulated that the "after value" (the value of the property subject to the easement) was $285,000.

Using the "before-and-after" rule: $1,376,760 (Before Value) – $285,000 (After Value) = $1,091,760

The Court concluded that the value of the conservation easement was $1,091,760.

Penalty Determination

Civil Fraud Penalty

The Commissioner orally moved post-trial to assert the 75% civil fraud penalty under I.R.C. § 6663(a). The Court granted the motion, finding Holdings was not unfairly surprised. However, the Court ultimately denied the penalty, emphasizing that the burden of proving fraud by clear and convincing evidence rests with the Commissioner (I.R.C. § 7454(a); Rule 142(b)). Holdings’ action of disclosing the transaction and attaching the necessary appraisal and forms (including Form 8886, Reportable Transaction Disclosure Statement) alerts the IRS to potential overvaluation, thereby making an intent to evade tax by concealment a "poor fit".

Gross Valuation Misstatement Penalty

In the alternative, the Commissioner asserted the accuracy-related penalties under I.R.C. § 6662.

A gross valuation misstatement occurs if the value claimed on the return exceeds 200% of the amount determined to be correct (I.R.C. § 6662(h)). In such cases, the penalty is increased to 40%, and the reasonable cause defense under I.R.C. § 6664(c)(1) is statutorily unavailable (I.R.C. § 6664(c)(3)).

Holdings claimed a value of $12,740,000. The correct value determined by the Court was $1,091,760.

$12,740,000 / $1,091,760 ≈ 1,167%

Since the claimed value was 1,167% of the correct value, Holdings was liable for the 40% gross valuation misstatement penalty under I.R.C. § 6662(h). The penalty applies to the portion of the underpayment attributable to claiming a value in excess of $1,091,760.

Judicial Conclusion

The Tax Court concluded that Holdings is entitled to a charitable contribution deduction of $1,091,760 for the 2017 short tax year ending December 31, 2017. Holdings was found liable for the 40% gross valuation misstatement penalty under I.R.C. § 6662(h).

This case serves as a stark reminder to tax professionals that while structural and technical compliance (such as proper timing after a technical termination or meeting minimum appraisal standards) may preserve the deduction, aggressive valuations unsupported by objective market data or plausible highest and best use determinations will lead to severe accuracy-related penalties. The Tax Court highlighted that the arm’s-length sale price of the property shortly before the easement grant ($583,000 for 96% interest, or approximately $607,292 adjusted) remains a crucial sanity check that must be reconciled against any proposed speculative valuation.

Prepared with assistance from NotebookLM.