In a recent memorandum opinion, Jackson Stone South, LLC v. Commissioner, T.C. Memo. 2025-96, the U.S. Tax Court dismantled a syndicated conservation easement transaction, disallowing a deduction for one of the two easements at issue and drastically reducing the value of the other. This case provides a valuable technical review for tax professionals, covering issues from donative intent and baseline documentation to highest and best use (HBU) valuation and penalty application. The court’s detailed analysis reinforces critical substantiation requirements and offers a clear rejection of speculative valuation methodologies in the context of conservation easements.

Factual Background

The case involved two partnerships, Jackson Stone South, LLC (JSS) and Jackson Stone North, LLC (JSN), formed by H. Brian Jackson and his family. The Jackson family had deep roots in Jones County, Georgia, and Mr. Jackson was an experienced real estate developer in the area. The family partnership contributed approximately 541 acres of land, split between JSS and JSN, for the purpose of executing syndicated conservation easement transactions.

Mr. Jackson engaged William Wingate of Winfield Conservation Services, LLC (WCS), a firm specializing in such deals, particularly those claiming mining as the property’s HBU. The agreement stipulated that WCS would manage the syndication, raise funds from third-party investors, and pay all associated costs. In return, the Jackson family partnership would receive a substantial payment—ultimately $2.5 million—and retain a 5% interest in the entities, entitling them to a corresponding portion of the tax deduction.

WCS marketed the investment to third parties, promising a tax deduction of 4.5 to 1 on their investment. The offerings were fully subscribed, and on December 13, 2016, investor-owned entities acquired 95% of the membership units in both JSS and JSN. Just two days later, on December 15, 2016, JSS and JSN donated perpetual conservation easements over their respective properties to the Oconee River Land Trust, Inc. (ORLT), a qualified organization.

On their 2016 tax returns, JSS and JSN each claimed a charitable contribution deduction of $19,044,000. These deductions were based on appraisals by Dale Hayter, who determined that the HBU of each property was a commercial granite aggregate mine. He valued the properties using a discounted cash-flow (DCF) analysis, which projected future income from these hypothetical mines. This valuation stood in stark contrast to a 2013 appraisal of part of the JSN property, which valued it at just $2,300 per acre for rural residential and recreational use. The IRS disallowed the deductions in full and asserted penalties.

The Taxpayer’s Request for Relief

Before the Tax Court, the petitioners, as tax matters partners for JSS and JSN, sought a redetermination of the IRS’s adjustments. They argued that they had satisfied all requirements under I.R.C. § 170 for a qualified conservation contribution, including possessing the requisite donative intent, meeting the conservation purpose test, and complying with all substantiation requirements. Crucially, they defended the HBU determination of mining and the DCF valuation method used in the Hayter appraisals as the appropriate means to establish the fair market value (FMV) of the easements.

The Court’s Legal Analysis and Application

The court systematically addressed each of the IRS’s challenges, ultimately siding with the government on most key issues.

Donative Intent

The IRS argued that the LLCs lacked the necessary donative intent because the transactions were structured solely to generate tax benefits for investors that would exceed their cash outlay. The court, consistent with its recent rulings in cases like Mill Road, T.C. Memo. 2023-129, and Oconee Landing Property, LLC, T.C. Memo. 2024-25, rejected this argument. It reasoned that the investors objectively voted to donate a perpetual conservation easement to a charity rather than pursue a riskier development path. The court distinguished the case from quid pro quo scenarios, noting that the tax benefits provided by Congress to incentivize such donations do not negate charitable intent (Buckelew Farm, T.C. Memo. 2024-52, at *43).

Conservation Purpose and Baseline Documentation (JSN)

The court’s analysis of the JSN easement was particularly critical. The IRS challenged the JSN deduction on two grounds: failure to satisfy a conservation purpose under I.R.C. § 170(h)(4) and failure to comply with the baseline documentation requirements of Treas. Reg. § 1.170A-14(g)(5).

Baseline Documentation: The regulations require that when a donor reserves rights that could impair conservation interests, they must provide documentation sufficient to establish the property’s condition at the time of the donation. This documentation must be accompanied by a signed statement from the donor and donee attesting to its accuracy (Treas. Reg. § 1.170A-14(g)(5)(i)).

The court found JSN’s baseline report to be fatally flawed and inaccurate. The report misidentified nearly 50% of the property’s land cover, labeling large areas of pine forest as higher-quality "mesic hardwood forest" and "oak-hickory-pine forest". Evidence showed that the preparer of the report was directed by the donee (ORLT) to make these changes and that Mr. Jackson himself had identified inaccuracies that were never corrected. The court held that these significant errors made it "impossible" for ORLT to monitor compliance with the easement’s terms, particularly given the reserved rights for forestry and agriculture. Citing the Fourth Circuit’s decision in Brooks v. Commissioner, 109 F.4th 205 (4th Cir. 2024), the court concluded that this failure to comply with the mandatory baseline documentation requirement was an independent basis for disallowing the entire deduction.

Conservation Purpose: The JSN easement deed claimed two conservation purposes: protection of a relatively natural habitat (I.R.C. § 170(h)(4)(A)(ii)) and preservation of open space pursuant to a government policy (I.R.C. § 170(h)(4)(A)(iii)(II)).

The court rejected the "natural habitat" purpose, crediting the testimony of the IRS’s expert, Dr. Chamberlain, who found that over 78% of the property was common pine plantation, not the high-quality habitats claimed. No rare, threatened, or endangered species were observed on the property. The court found that the small portion of bottomland hardwood forest (14.8%) was "greatly marginalized" by the surrounding pine plantation and did not constitute a significant habitat.

The court also found the "open space" purpose failed. The easement deed specified that the preservation was pursuant to two Georgia state programs in which JSN did not actually participate. Even setting that aside, the court determined the easement did not yield a "significant public benefit" as required. The property was not unique, development pressure was low, and public access was virtually nonexistent. Therefore, the JSN donation was not a qualified conservation contribution.

Qualified Appraiser and Qualified Appraisal

The IRS argued that Mr. Hayter was not a "qualified appraiser" under Treas. Reg. § 1.170A-13(c)(5)(ii) because the donor (Mr. Jackson) knew facts that would cause a reasonable person to expect an overvaluation. The court rejected this, stating that the regulation requires a "sense of collusion and deception" between the donor and appraiser, which the evidence did not support. While the transaction was structured to achieve a high valuation, there was no evidence of a direct agreement between JSS/JSN and Mr. Hayter to falsely overstate the value.

Similarly, the court held that the Hayter appraisals were "qualified appraisals" under I.R.C. § 170(f)(11)(E). While the court agreed with the IRS’s expert that the appraisals had numerous flaws and did not fully comply with the Uniform Standards of Professional Appraisal Practice (USPAP), it determined these failures went to the weight and credibility of the valuation, not to whether the appraisals met the broader "generally accepted appraisal standards" required by the statute.

Valuation and Highest and Best Use

This was the core of the court’s opinion regarding the value of the easements. The central question was the HBU of the properties before the easements were granted.

HBU Analysis: The court firmly rejected the petitioners’ claimed HBU of granite mining. An HBU must be, among other things, legally permissible and financially feasible. The court found the mining HBU failed on both counts.

Legally Permissible: The properties were zoned AG-1 (Agricultural), and mining was not a permitted use. A rezoning and a conditional use permit would have been required. The court found this was not "reasonably probable". Since 1996, Jones County had not approved a single new granite mine, and the one application it received was denied due to resident opposition and inconsistency with the county’s land use plan—factors that would have applied equally to the subject properties. Furthermore, public sentiment and local ordinances had turned against new mining operations.
Financially Feasible: The court also concluded that a new mine was not financially feasible. The IRS’s experts convincingly demonstrated that the local market for aggregate was already oversupplied and that existing mines were better located to serve major demand centers. Mr. Hayter’s DCF analysis was found to be deeply flawed, based on unreasonable production estimates and understated operating costs, which artificially inflated the projected value.

The court ultimately agreed with the IRS’s expert, Mr. Sheppard, that the HBU was "continued agricultural/residential/recreational use with knowledge of mineral on the site and opportunity to seek entitlements allowing mining".

Valuation Conclusion: Having rejected the mining HBU, the court also rejected the DCF valuation method, noting it is "inherently speculative and unreliable" for valuing vacant land. Instead, it adopted Mr. Sheppard’s sales comparison approach. Based on sales of similar rural land in the area, the court determined the "before" value of the JSS property was $1,010,000 and the JSN property was $885,000. After determining the "after" values were $550,000 and $480,000 respectively, the court concluded the FMV of the JSS easement was $460,000 and the JSN easement was $405,000. This represented a valuation reduction of over 97% from the amounts claimed on the returns.

Penalties

The court sustained a 40% gross valuation misstatement penalty under I.R.C. § 6662(h) against both partnerships. The claimed value of each easement (over $19 million) was more than 4,000% of the court-determined value, far exceeding the 200% threshold for a gross misstatement. For JSS, this penalty applied to the entire underpayment resulting from the valuation adjustment. The reasonable cause defense under I.R.C. § 6664(c) is not available for gross valuation misstatements on charitable contributions.

For JSN, the 40% penalty applied to the portion of the underpayment attributable to the overvaluation (the difference between the $19.044 million claimed and the $405,000 FMV). For the remaining portion of the underpayment—resulting from the complete disallowance of the $405,000 deduction due to the failed conservation purpose and baseline—the court sustained a 20% negligence penalty under I.R.C. § 6662(b)(1). The court found JSN’s reporting position was "too good to be true," and JSN failed to exercise due diligence, noting that the transaction’s manager, Mr. Jackson, took no steps to verify the deduction’s propriety. The court also rejected any reasonable cause defense based on reliance on professional advice, as the offering documents expressly disclaimed that they could be relied upon for penalty protection.

Conclusion for Practitioners

The Jackson Stone opinion serves as a comprehensive case study on the potential pitfalls of syndicated conservation easement transactions. For tax professionals, the key takeaways are clear:

Substantiation is Paramount: Inaccurate or incomplete baseline reports can be fatal to a deduction, especially when significant rights are reserved. Practitioners must ensure clients understand the critical importance of a meticulously prepared and accurate baseline.
HBU Must Be Realistic: The court will rigorously scrutinize HBU claims that diverge from a property’s current use and zoning. A "reasonably probable" standard for a change in use requires more than speculative expert reports; it demands objective evidence of legal permissibility and financial feasibility.
Valuation Methodology Matters: The court continues to show a strong preference for the sales comparison method for vacant land. DCF analyses based on hypothetical business operations are highly likely to be rejected as speculative.
Penalties are a Serious Risk: Extreme overvaluations will attract the 40% gross valuation misstatement penalty, for which there is no reasonable cause defense. Furthermore, failure to meet the technical requirements of I.R.C. § 170 can lead to negligence penalties, and a "too good to be true" return on investment is a significant red flag for the court.

This case reinforces the need for tax professionals to apply heightened skepticism and due diligence when advising clients on complex transactions like syndicated conservation easements. Reliance on promoters and their hand-picked experts is not a substitute for independent, objective analysis.

Prepared with assistance from NotebookLM.