Lontrac Enterprises, LLC, Lontrac Investors, LLC, Tax Matters Partner v. Commissioner of Internal Revenue, T.C. Memo. 2026-108, October 22, 2026

In Lontrac Enterprises, LLC v. Commissioner, T.C. Memo. 2026-108 (filed October 22, 2026), Chief Judge Urda delivered a scathing opinion dismantling a syndicated conservation easement tax shelter that claimed a $74.5 million charitable contribution deduction for real property previously listed on the open market for $2.9 million with no interested buyers. Describing the transaction as “resembling the movie Groundhog Day” and featuring “the same old moves,” the United States Tax Court reduced the allowable charitable deduction under Internal Revenue Code (I.R.C.) § 170 to $500,000 and sustained a 40% gross valuation misstatement penalty under I.R.C. § 6662(h).

This article provides a comprehensive, highly technical analysis of the factual record, the relief sought by the taxpayers, the legal standards governing easement valuation and penalty approval, the Court’s rigorous factual application, and the critical practice takeaways for tax practitioners advising clients on valuation methodologies and partnership tax controversy.

Factual Background and Transactional Structure

The subject property consists of approximately 309.6 contiguous acres situated in Polk County, Tennessee, near the North Carolina border. The terrain is vacant, mountainous land surrounded by national forest, featuring 1,900 feet of frontage along the Hiwassee River (classified by the state as “exceptional Tennessee waters”) and Shadwick Branch. Notably, the property is bisected by the historic Hiwassee River Rail Adventure line owned by the Tennessee Overhill Heritage Association, featuring the “Hiwassee Loop”—a rare rail structure where tracks spiral over themselves up a mountain.

In 2006, Lon Dillard and his wife Tracy acquired the property for $1,300,000, funding the purchase with $50,000 of personal capital and a $1,250,000 bank loan secured by the land and personally guaranteed by the Dillards. Following the 2008 economic downturn, the Dillards attempted to sell the property. They listed it for sale in 2008 for $4.68 million, lowered the asking price to $3.9 million six months later, and further reduced it in 2009 to $2,964,000. The property sat actively listed on the local Multiple Listing Service (MLS) at $2,964,000 for five consecutive years (through September 2014) without attracting a single buyer.

In December 2012, the Dillards formed Lontrac Enterprises, LLC (Lontrac), a Georgia limited liability company classified as a partnership under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), and transferred the property to Lontrac for nominal consideration ($10) without Lontrac assuming the mortgage debt. Facing ongoing debt service pressure, Mr. Dillard partnered with attorney Jim Adams in 2014 to structure a syndicated conservation easement transaction:

Entity Formation and Capital Raising: Mr. Adams formed Lontrac Investors, LLC (Investors), as a syndication vehicle. A November 2014 Private Placement Memorandum (PPM) prepared by the law firm Morris, Manning & Martin, LLP offered high-income investors the opportunity to acquire a 95% ownership stake in Investors for $8,800,100.
Promised Tax Benefits: The PPM touted projected conservation easement tax deductions ranging from $49 million to $63.5 million. It explicitly calculated that for every $200,000 invested, an investor would receive $610,791 in federal and state tax savings (assuming a 45% combined marginal rate)—representing a return on investment exceeding 305%.
Fund Allocation: Investors used $990,000 of the investor funds to acquire a 99% membership interest in Lontrac (valuing 100% of Lontrac at $1,000,000). The Dillards utilized $750,000 of these proceeds to satisfy the outstanding bank mortgage. The vast majority of the remaining $7.8 million raised went to fees and redemptions: $5.7 million to redeem initial units held by Messrs. Adams and Dillard, $1.4 million in management and advisory fees, and $675,000 for legal, accounting, and appraisal services.
Easement Grant: On December 29, 2014, Lontrac granted a perpetual conservation easement over 288.8 acres of the property to Foothills Land Conservancy.

To support the claimed deduction, promoters commissioned reports from aggregate operator Curtis Colwell and geologist Joel Warner, who asserted that the property contained vast reserves of granite/metagreywacke suitable for commercial quarrying. Appraiser Duane Miller issued a final valuation report dated June 29, 2015, opining that the property’s pre-easement highest and best use (HBU) was a commercial granite mine valued at $75,000,000 based on a 25-year discounted cash flow (DCF) model. Estimating a post-easement value of $493,000 via comparable sales, Miller concluded the easement’s fair market value was $74,507,000. Lontrac claimed a charitable contribution deduction of $74,507,000 on its 2014 Form 1065.

Taxpayers’ Requested Relief and IRS Adjustments

Upon audit, the Internal Revenue Service issued a Notice of Final Partnership Administrative Adjustment (FPAA) to Investors (as Tax Matters Partner) on October 3, 2017. The FPAA disallowed the $74,507,000 charitable deduction in full, asserting that the fair market value of the easement was zero. Additionally, the IRS determined a 40% penalty for gross valuation misstatement under I.R.C. § 6662(h) and alternative 20% accuracy-related penalties under I.R.C. § 6662(b) for substantial understatement, substantial valuation misstatement, or negligence.

Before the U.S. Tax Court, Petitioners requested the following specific judicial relief:

Full allowance of the $74,507,000 charitable contribution deduction under I.R.C. § 170(a) and § 170(h).
Judicial confirmation that the pre-easement highest and best use of the Lontrac property was a commercial metagreywacke/aggregate mine, and that the DCF income approach was the legally required valuation methodology under Treas. Reg. § 1.170A-14(h)(3)(i).
Complete disallowance of accuracy-related penalties, arguing that the IRS failed to satisfy the written supervisory approval requirement of I.R.C. § 6751(b)(1) prior to issuing the FPAA.
Rejection of Respondent’s assertion that appraiser Duane Miller was a disqualified appraiser under Treas. Reg. § 1.170A-13(c)(5)(ii).

Judicial Analysis of Controlling Legal Principles

Chief Judge Urda’s opinion systematically articulated and applied controlling statutory provisions, Treasury Regulations, and federal appellate precedent governing charitable contributions, valuation standards, expert testimony, and penalty administration.

Burden of Proof and Evidentiary Standards

Under Tax Court Rule 142(a) and established precedent (Welch v. Helvering, 290 U.S. 111, 115 (1933); Crescent Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013)), the IRS’s adjustments in an FPAA are presumed correct, placing the burden of proof on the taxpayer. While I.R.C. § 7491(a) permits a shift in the burden of proof to the Commissioner upon the introduction of credible evidence and compliance with substantiation rules, the Court noted that burden-shifting has “real significance only in the event of an evidentiary tie” (Knudsen v. Commissioner, 131 T.C. 185, 189 (2008)). Because the outcome was fully determinable on the preponderance of the evidence, the burden allocation was non-dispositive.

Qualified Appraiser Standards and Fifth Amendment Inferences

Under I.R.C. § 170(f)(11)(D) and (E), charitable deductions exceeding $500,000 require a qualified appraisal by a qualified appraiser. The IRS contended that Duane Miller was not a qualified appraiser under Treas. Reg. § 1.170A-13(c)(5)(ii), which disqualifies an appraiser if the donor knows facts that would cause a reasonable person to expect the appraiser “falsely to overstate” the property’s value.

The Court clarified that the phrase “falsely to overstate” requires proof of “collusion and deception as to the value of the property” (Kaufman v. Commissioner, T.C. Memo. 2014-52; Paul-Adams Quarry Trust, LLC v. Commissioner, T.C. Memo. 2025-112). An appraiser is not disqualified merely because they carelessly or incompetently overstated value, or because the donor knew facts causing overvaluation (Seabrook Property, LLC v. Commissioner, T.C. Memo. 2025-6).

At trial, Mr. Miller invoked his Fifth Amendment privilege against self-incrimination and refused to testify. The IRS urged the Court to draw an adverse inference that Miller colluded with the promoters. Applying the flexible four-factor test from LiButti v. United States, 107 F.3d 110 (2d Cir. 1997), as adopted by the Eleventh Circuit in Coquina Investments v. TD Bank, N.A., 760 F.3d 1300 (11th Cir. 2014), Chief Judge Urda declined to draw a negative inference against Lontrac, noting that Miller was a non-party “strictly a hired hand” without ongoing loyalty to Lontrac. However, the Court ruled that Miller’s invocation deprived the IRS of cross-examination under Rule 143(g)(2), assigning zero evidentiary weight to Miller’s appraisal (Feinberg v. Commissioner, 916 F.3d 1330, 1337 (10th Cir. 2019)).

Highest and Best Use (HBU) Framework

Pursuant to Treas. Reg. § 1.170A-14(h)(3)(ii), an easement’s fair market value under the before-and-after method relies on the property’s highest and best use. Grounded in the Supreme Court’s landmark decision in Olson v. United States, 292 U.S. 246 (1934), and reaffirmed by the Eleventh Circuit in Savannah Shoals, LLC v. Commissioner, 182 F.4th 1314 (11th Cir. 2026), HBU reflects the “highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future.”

The legal principles established by the Court include:

Presumption of Current Use: There is a baseline legal presumption that “the current use of property amounts to its best use” because economic self-interest incentivizes land owners to put property to its most profitable use (Corning Place Ohio, LLC v. Commissioner, 158 F.4th 715, 722 (6th Cir. 2025); Ranch Springs, LLC v. Commissioner, 164 T.C. 93, 136 (2025); United States v. Buhler, 305 F.2d 319, 328 (5th Cir. 1962)).
Exclusion of Speculative Uses: Elements affecting value that depend on events which are merely within the realm of possibility, rather than “fairly shown to be reasonably probable,” must be excluded (Olson, 292 U.S. at 257). HBU “may not be the maximally profitable imaginable use” (Jackson Crossroads LLC v. Commissioner, 2026 WL 822261, at *2 (11th Cir. 2026)).
Mineral Extraction Standard: Where the asserted HBU is mineral extraction, the taxpayer must demonstrate that the mineral exists in “commercially exploitable amounts” and that “a market exists for the mineral that would justify its extraction in the reasonably foreseeable future” (United States v. 69.1 Acres of Land, 942 F.2d 290, 292 (4th Cir. 1991); St. Genevieve Gas Co. v. TVA, 747 F.2d 1411, 1413 n.4 (11th Cir. 1984); Cameron Development Co. v. United States, 145 F.2d 209, 210 (5th Cir. 1944)).

Valuation Methodology: Comparable Sales vs. Income Approach

Under Treas. Reg. § 1.170A-14(h)(3)(i), if no record of market sales of comparable easements exists, the value is determined via the before-and-after methodology. For unimproved, vacant land, the comparable sales approach is “generally the most reliable method of valuation” (Oconee Landing Property, LLC v. Commissioner, T.C. Memo. 2024-25; Estate of Spruill v. Commissioner, 88 T.C. 1197 (1987)).

The Court emphasized the governing principle of substitution, which dictates that “a hypothetical buyer will not pay more for a given property when an alternative property is available for less” (Buckelew Farm, LLC v. Commissioner, 2025 WL 2502669, at *7 (11th Cir. 2025)). Conversely, the income/DCF approach is appropriate only for properties with an established history of income production or where reliable market parameters exist; speculative projections do not justify its use (Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 325–26 (2013)).

Furthermore, actual arm’s-length transactions involving the subject property or near-100% equity transfers of a single-asset holding entity reasonably close to the valuation date represent the best, most dispositive evidence of pre-easement fair market value (TOT Property Holdings, LLC v. Commissioner, 1 F.4th 1354, 1368 (11th Cir. 2021); Buckelew Farm, T.C. Memo. 2024-52).

Penalty Administration and Supervisory Approval under I.R.C. § 6751(b)(1)

I.R.C. § 6662(h) mandates a 40% penalty on tax underpayments attributable to gross valuation misstatements (where claimed value is 200% or more of correct value). Under I.R.C. § 6664(c)(3), the reasonable cause defense is strictly unavailable for gross valuation misstatements of charitable deduction property.

Addressing supervisory penalty approval under I.R.C. § 6751(b)(1), the Tax Court applied the Eleventh Circuit’s binding precedent in Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022) pursuant to the Golsen rule (Golsen v. Commissioner, 54 T.C. 742 (1970)). Under Kroner, the IRS satisfies § 6751(b)(1) as long as written supervisory approval of the initial penalty determination is obtained before the penalty is assessed. In TEFRA partnership proceedings, assessment occurs after the court’s decision becomes final. Because the IRS Revenue Agent’s supervisor signed the Civil Penalty Approval Form on July 12, 2017—months prior to the issuance of the FPAA on October 3, 2017—the statutory requirement was fully satisfied.

Application of the Law to the Facts

Applying these rigorous legal standards to the trial record, Chief Judge Urda systematically rejected Lontrac’s claimed valuation and HBU, characterizing the taxpayers’ positions as defying basic common sense.

Rejection of Mining Highest and Best Use

The Court dissected the reports prepared by Colwell, Warner, and trial experts Dr. Richard Capps and Dale Hayter, uncovering fatal flaws across every operational parameter:

Nonexistent Subsurface Testing: To establish a commercially exploitable deposit under Society for Mining, Metallurgy, & Exploration (SME) guidelines, rigorous subsurface core drilling in a grid pattern (e.g., one hole per four acres) is required. Here, Mr. Dillard had merely drilled five test holes (maximum depth 73 feet) on the property’s perimeter during a previous search for precious metals; zero drill holes were located within the 110 acres designated as mineable. The promoters relied entirely on surface “grab samples.” Citing the National Stone, Sand, & Gravel Association’s Aggregates Handbook, the Court noted that grab samples “are preliminary only and rarely can be considered typical of a deposit.” Chief Judge Urda observed:

“As is plain as the nose on one’s face, without any subsurface testing, one cannot determine either that a mineral exists in commercially exploitable quality and amounts or that a market exists that would justify the extraction of whatever might be there.”
Geological Mineral Misidentification: Promoters and appraisers initially operated under the baseless assumption that the property contained granite. In reality, granite is virtually non-existent in Tennessee bedrock. When alerted to the error, promoter Colwell issued a three-page update arbitrarily substituting “metagreywacke.” The Court noted that swapping minerals without site-specific subsurface testing violated fundamental engineering standards.
Absence of Market Demand and Baseless Production Numbers: Promoters projected annual production of 950,000 to 1,500,000 tons. The Court noted that aggregate is a heavy, low-value commodity restricted by trucking costs to a 40-to-50-mile market radius. The subject property was located in a isolated rural ZIP Code with under 1,000 residents. Within a 50-mile radius, 20 operational quarries already existed, many running only a few days a week due to weak regional demand. Capturing 1,000,000 tons of sales would require Lontrac to seize 25% of the total regional market from established giants like Vulcan Materials Co.—a proposition the Court dismissed as “fanciful” and “entirely implausible.”
The “Nonsolution” of Historic Rail Transport: To bypass the local market, promoters asserted that the bisection of the land by the historic scenic railroad provided rail transport to distant urban markets. However, the line was owned by a heritage association, operated as a tourist attraction around the scenic Hiwassee Loop, was not a common carrier obligated to haul freight, and utilized historic wooden trestle bridges structurally incapable of supporting heavy industrial aggregate loads.
“Laughable” Operating and Startup Cost Estimates: Colwell estimated direct mining costs at an unitemized $6.50 per ton, backed by a $250,000 replacement reserve. At trial, Colwell admitted that his family opened quarries “fly by night” with “no market study,” “no core drilling,” and “no due diligence on any of it.” Chief Judge Urda rejected this approach:

“While Mr. Colwell’s wing-and-a-prayer method might be acceptable to an entrepreneur whose own money is on the line, we decline to endorse random guesswork as a basis for determining a property’s highest-and-best use or to support a $74.5 million tax deduction.”
Taxpayer’s Own Economic Conduct: Chief Judge Urda emphasized that Mr. Dillard—an experienced well-driller with quarry connections—never attempted to mine the land despite financial distress. Instead, he willingly contracted to sell a 99% interest in Lontrac to Investors for $990,000 based on a $1.0 million valuation. “His own actions belie the notion that mining was the highest and best use.”

Consequently, the Court held that the pre-easement highest and best use was its existing use: recreational land with future residential development rights.

Rejection of Expert Testimony and Application of “Garbage-In, Garbage-Out”

Lontrac’s trial experts, Dr. Capps and Mr. Hayter, attempted to rehabilitate the 2014 reports. However, because their expert reports explicitly incorporated and relied upon Colwell and Warner’s flawed data, the Court rejected their testimony:

“Heeding the principle of garbage-in-garbage-out, we give no weight to the views of Dr. Capps or Mr. Hayter as to the mining potential of the Lontrac property.”

Summing up the evidentiary record on highest and best use, Chief Judge Urda stated:

“To recap, we are presented with no testing of the subsurface rock on the Lontrac property, fantastical production estimates based on faulty assumptions about what type of rock was present and how it would be transported, and cost estimates unworthy of opening a lemonade stand.”

Determination of Fair Market Value

Having established that the HBU was recreational/residential development land, the Court rejected Lontrac’s DCF income valuation ($61.5 million to $75 million) and adopted the comparable sales analysis submitted by IRS expert Roger Ball:

Pre-Easement Value: Ball evaluated five comparable sales of unimproved mountainous acreage in the region, applying a 3% annual time adjustment. His analysis yielded an average value of $3,500 per acre, or $1,100,000 for the 309.6-acre property. The Court noted that this $1.1 million figure was strikingly corroborated by the September 2014 arm’s-length transaction wherein Investors acquired 99% of Lontrac for $990,000 (implied 100% value of $1,000,000).
Post-Easement Value: Taxpayer appraiser Hayter asserted a post-easement value of $712,000, while IRS expert Ball determined $600,000. Because a lower post-easement value benefits the taxpayer under the before-and-after formula, the Court treated the IRS as having conceded a post-easement value of $600,000.
Easement Fair Market Value: Subtracting the $600,000 post-easement value from the $1,100,000 pre-easement value, the Court concluded that the true fair market value of the conservation easement was $500,000.

Conclusions of the Court and Statutory Penalties

The Tax Court rendered the following definitive conclusions:

Deduction Disallowance: Lontrac’s claimed charitable contribution deduction was reduced from $74,507,000 to $500,000.
Imposition of Gross Valuation Misstatement Penalty: The reported easement value of $74,507,000 was 14,901% of the $500,000 correct fair market value determined by the Court—far exceeding the statutory threshold of 200% under I.R.C. § 6662(h)(2)(A)(i). Chief Judge Urda remarked that:

“The valuation misstatement was, to put it mildly, ‘gross.’”
Strict Liability Penalty Enforcement: Pursuant to I.R.C. § 6664(c)(3), no reasonable cause exception was available, and the 40% penalty was sustained in full.
Rejection of Procedural Challenge: The Court rejected Lontrac’s 35 pages of briefing challenging the Revenue Agent supervisor’s depth of review under I.R.C. § 6751(b)(1), reiterating that under Eleventh Circuit precedent (Kroner), timely written approval prior to assessment is all that the statute requires.

Closing with a stern admonition to the tax bar, Chief Judge Urda warned:

“Given how much of this Court’s time and resources are already consumed adjudicating syndicated conservation easement cases, we caution litigants not to waste more of this Court’s time with arguments that are foreclosed by governing law.”

Technical Summary for Tax Practitioners

Issue / Element	Taxpayer Position / Claimed	IRS Position (FPAA)	Tax Court Holding (Lontrac)	Controlling Authority
Claimed Deduction	$74,507,000	$0	$500,000	I.R.C. § 170(a), (h)
Pre-Easement HBU	Commercial Mining	Recreational / Timber	Recreational / Residential	Treas. Reg. § 1.170A-14(h)(3)(ii); Olson, 292 U.S. 246
Valuation Method	DCF Income Approach	Comparable Sales	Comparable Sales Approach	Treas. Reg. § 1.170A-14(h)(3)(i); Chapman Glen, 140 T.C. 294
Pre-Easement FMV	$75,000,000	$1,100,000	$1,100,000 ($3,500/acre)	TOT Property, 1 F.4th 1354; Buckelew Farm, 2025 WL 2502669
Post-Easement FMV	$493,000	$600,000	$600,000 (Conceded by IRS)	Treas. Reg. § 1.170A-14(h)(3)(i)
Appraiser Status	Qualified Appraiser	Disqualified (§ 1.170A-13)	Qualified (Zero Weight)	Treas. Reg. § 1.170A-13(c)(5)(ii); Kaufman, T.C. Memo. 2014-52
Penalty Sustained	$0 (Defective § 6751(b))	40% Gross Misstatement	40% Gross Misstatement	I.R.C. § 6662(h); § 6664(c)(3); Kroner, 48 F.4th 1272

Prepared with assistance from Gemini Notebook.