Riddle Aggregates, LLC, Ornstein-Schuler, LLC, Tax Matters Partner v. Commissioner of Internal Revenue, T.C. Memo. 2026-117, November 10, 2026

For certified public accountants and enrolled agents advising clients on conservation contributions, partnership taxation, and valuation controversies, the United States Tax Court’s decision in Riddle Aggregates, LLC v. Commissioner provides an instructive dissection of the valuation mechanics governing conservation easements. The opinion forcefully reinforces the judicial consensus regarding the severe limitations of discounted cash flow (DCF) modeling for unmined, undeveloped real property, the preeminence of comparable sales under the principle of substitution, the probative weight of recent arm’s-length entity-level transactions, and the strict, non-waivable application of the 40% gross valuation misstatement penalty under Internal Revenue Code (IRC) Section 6662(h).

Factual Background and Syndication Mechanics

The case arose from a syndicated conservation easement transaction structured in Morgan County, Alabama, within the Huntsville-Decatur-Albertville Combined Statistical Area. The subject real estate consisted of a 231.22-acre parcel, designated as Tract Two (the Riddle Property), which was carved out of a larger 2,744.30-acre parent tract originally acquired on May 8, 2006, by Freeman Five, LLC (Freeman Five), an entity managed by James Freeman Sr., an experienced real estate trader who had executed over fifty transactions. While portions of the property had historically been used for agriculture and remained fallow as of the valuation date, the property had never been utilized for commercial mining.

In early 2017, Freeman Five engaged a land brokerage firm to market the parent tract. At the time, Freeman Five was under no financial distress. Longleaf Ventures, LLC (Longleaf), an entity affiliated with promoters Matthew Ornstein and Frank A. Schuler IV (operating collectively through Ornstein-Schuler, LLC, or OSI), submitted letters of intent in March and April 2017 to acquire approximately 1,451 acres of the parent tract at a contract price of $2,500 per acre.

To execute the acquisition and subsequent syndication, the promoters orchestrated a multi-tiered entity structure:

On September 6, 2017, Freeman Five recorded a subdivision certificate dividing the parent tract into seven separate parcels.
Pursuant to an agreement dated September 12, 2017, Freeman Five contributed Tracts One, Two, and Three (aggregating 880.56 acres) to Quorum Holdings, LLC, in exchange for a 100% interest. Freeman Five then immediately sold a 98% interest in Quorum Holdings to Longleaf for $2,236,175, establishing an unadjusted unit price of roughly $2,539 per acre, or approximately $2,591 per acre when grossed up to 100%.
On October 13, 2017, Quorum Holdings conveyed the 231.22-acre Riddle Property to Riddle Aggregates, LLC (Riddle), an LLC formed by an OSI employee, in exchange for 100% of the membership interests in Riddle. The real estate sales validation form filed in connection with this deed recited a property value of $613,440 (approximately $2,653 per acre).
Quorum Holdings distributed its interests pro rata (98% to Longleaf, 2% to Freeman Five members), and Longleaf distributed its 98% interest to its constituent member LLCs.

Simultaneously, the promoters procured preliminary geotechnical and feasibility studies. Longleaf engaged ECS Southeast LP (ECS) to perform geotechnical exploration. ECS completed two exploratory borings with rock coring, testing one sample from each boring, and issued a report on August 7, 2017, identifying Bangor limestone formation bedrock alongside Pottsville formation sandstone. Riddle subsequently engaged Galt Mining Investments, LLC, which retained Blethen Mine Consultants, LLC (Blethen). Blethen issued reports on October 13 and November 22, 2017, asserting that the parcel contained 25,596,000 tons of proven mineral reserves. Utilizing a 15-year DCF projection discounted at 12%, Blethen modeled a hypothetical limestone quarry on the raw land having a net present value of $45,412,000. Weibel & Associates, Inc. (Weibel) adopted Blethen’s DCF figures to appraise a conservation easement on the parcel at $44,995,000.

The promoters then marketed membership units in Riddle Aggregates Group (RAG), the syndication vehicle holding an option to acquire the membership interests in Riddle. RAG issued a Confidential Private Placement Memorandum (PPM) dated October 30, 2017, offering 999 units at $7,397 per unit ($7,397,000 total offering). While the PPM listed four theoretical options—conservation donation, quarry development, holding for appreciation, or leasing to a mine operator—it heavily cautioned investors that mining was “a highly complex, expensive, and potentially dangerous process” that “would probably require significant additional capital.” The PPM specifically warned that “only potential Investors who are not focused on maximizing the potential cash return from an investment in the membership interest in the Company should consider subscribing.” The offering was fully subscribed by 74 investors contributing $7,397,000.

On December 5, 2017, RAG acquired a 97.99% interest in Riddle for $6,923,466, with Ornstein-Schuler, LLC (OS LLC) retaining 0.01% and Freeman Five members retaining 2%. On December 8, 2017, Riddle executed a deed conveying a conservation easement encumbering 227.95 acres to Atlantic Coast Conservancy, Inc. Five days later, on December 13, 2017, Riddle donated the underlying fee simple interest in the entire 231.22-acre tract, subject to the easement, to Atlantic Coast Conservancy Properties, LLC. The recorded sales validation form accompanying the fee transfer listed the county tax assessor’s market value at $352,071.

Taxpayer Reporting and Procedural Posture

On its timely filed Form 1065, U.S. Return of Partnership Income, for the short tax period ending December 31, 2017, Riddle claimed noncash charitable contribution deductions totaling $45,350,000 under IRC Section 170:

A deduction of $44,995,000 for the donation of the conservation easement; and
A deduction of $355,000 for the donation of the residual fee simple interest.

The return was audited under the unified partnership audit procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), IRC Sections 6221 through 6234 (prior to repeal by the Bipartisan Budget Act of 2015). On August 23, 2021, the Internal Revenue Service issued a Notice of Final Partnership Administrative Adjustment (FPAA) completely disallowing the $44,995,000 conservation easement deduction, disallowing $10,000 of the fee simple deduction, and asserting accuracy-related penalties under IRC Section 6662, including the 40% gross valuation misstatement penalty under Section 6662(h). Petitioner OS LLC, as Tax Matters Partner, filed a timely petition in the Tax Court.

Prior to trial, the parties narrowed the disputed issues through three successive Stipulations of Settled Issues:

The IRS conceded that the donation satisfied the statutory criteria of a “qualified conservation contribution” under IRC Section 170(h)(1)–(5) and the substantiation requirements of Section 170(f)(8).
The IRS conceded the Section 6663 fraud penalty and the Section 6662A reportable transaction understatement penalty.
The parties agreed that Riddle was entitled to charitable deductions under Section 170 and that Section 170(e) did not limit the allowable deduction.
The parties stipulated that the fair market value of the Riddle Property immediately after the grant of the easement was $345,000, and the IRS conceded accuracy-related penalties on the $10,000 adjustment to the after-value.

Consequently, the issues tried before the Tax Court were limited to: (1) the unencumbered fair market value of the Riddle Property before the donation and the resulting value of the conservation easement under Treasury Regulation Section 1.170A-14(h)(3)(i); and (2) whether the partnership was liable for accuracy-related penalties under IRC Section 6662, specifically the 40% gross valuation misstatement penalty under Section 6662(h).

Evidentiary Standards and Burden of Proof under Section 7491

As a preliminary matter, petitioner argued that the burden of proof on valuation should shift to the Commissioner pursuant to IRC Section 7491(a)(1) and (2), contending that it had complied with all substantiation and recordkeeping requirements and fully cooperated during the administrative audit.

Judge Kerrigan summarily rejected this contention. Citing Welch v. Helvering, 290 U.S. 111 (1933), Republic Plaza Properties Partnership v. Commissioner, 107 T.C. 94 (1996), and INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), the court noted that IRS adjustments in an FPAA are presumed correct and deductions are a matter of legislative grace. Under IRC Section 7491(a)(1), the burden shifts only if the taxpayer introduces credible evidence, and as established in Knudsen v. Commissioner, 131 T.C. 185 (2008), a burden shift possesses operational significance only in the event of an evidentiary tie. Judge Kerrigan stated:

“We have discerned no evidentiary tie on any relevant factual question and are able to decide the issues here on the preponderance of the evidence.”

Furthermore, the court observed that pursuant to Dynamo Holdings Ltd. Partnership v. Commissioner, 150 T.C. 224 (2018), the Commissioner does not bear the burden of production for penalties in TEFRA partnership-level proceedings.

Legal Framework Governing Easement Valuation and Highest and Best Use

Under Treasury Regulation Section 1.170A-1(c)(2), fair market value represents “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.” Because sales of conservation easements are rare and an established market rarely exists (Symington v. Commissioner, 87 T.C. 892 (1986)), courts apply the “before and after” valuation methodology under Treasury Regulation Section 1.170A-14(h)(3)(i). Under this construct, the easement’s value equals the fair market value of the unencumbered property before the grant minus the fair market value of the encumbered property remaining after the donation (TOT Property Holdings, LLC v. Commissioner, 1 F.4th 1354 (11th Cir. 2021)).

A critical element of the before-valuation is the determination of the property’s highest and best use (HBU) on the valuation date (Treas. Reg. § 1.170A-14(h)(3)(i), (ii); Stanley Works & Subsidiaries v. Commissioner, 87 T.C. 389 (1986)). To qualify as highest and best use, a proposed use must satisfy four foundational criteria: it must be (1) legally permissible, (2) physically possible, (3) financially feasible, and (4) maximally productive (Ranch Springs, LLC v. Commissioner, 164 T.C. 93 (2025); Whitehouse Hotel Ltd. Partnership v. Commissioner, 139 T.C. 304 (2012)).

Reviewing Eleventh Circuit precedent, Judge Kerrigan highlighted that strict application of the four traditional factors is not required, as articulated in Savannah Shoals, LLC v. Commissioner, 182 F.4th 1314 (11th Cir. 2026). Rather, the inquiry turns on whether the proposed use is “reasonable and probable” or “too risky to qualify” (TOT Property Holdings, 1 F.4th at 1369). Quoting the seminal Supreme Court decision in Olson v. United States, 292 U.S. 246 (1934), the court emphasized:

“[T]he Supreme Court ‘instructed that “[t]he highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future,” while not itself “the measure of value,” was relevant to the “extent that the prospect for such use affects the market value.”’”

A use claiming a higher value than existing use requires both “closeness in time” and “reasonable probability” (Hilborn v. Commissioner, 85 T.C. 677 (1985)). Furthermore, an existing use is legally presumed to be the property’s highest and best use absent compelling proof to the contrary (United States v. Buhler, 305 F.2d 319 (5th Cir. 1962); Ranch Springs, 164 T.C. at 136). Crucially, the court reiterated from Boltar, L.L.C. v. Commissioner, 136 T.C. 326 (2011), that highest and best use is merely an element of fair market value and cannot override the essential requirement that a hypothetical willing buyer would actually purchase the real estate for the indicated value.

In the specific context of mineral properties, the court invoked established Fourth and Tenth Circuit jurisprudence:

“Where the asserted highest and best use of property is the extraction of minerals, the presence of the mineral in a commercially exploitable amount and the existence of a market ‘that would justify its extraction in the reasonably foreseeable future’ must be shown. ‘There must be some objective support for the future demand, including volume and duration. Mere physical adaptability to a use does not establish a market.’” (J L Minerals, LLC v. Commissioner, T.C. Memo. 2024-93 (quoting Esgar Corp. v. Commissioner, T.C. Memo. 2012-35, aff’d, 744 F.3d 648 (10th Cir. 2014); United States v. 69.1 Acres of Land, 942 F.2d 290 (4th Cir. 1991); United States v. Whitehurst, 337 F.2d 765 (4th Cir. 1964))).

Scrutiny of Mining Feasibility and Market Analysis

Petitioner contended that the highest and best use of the Riddle Property before the easement was an operating limestone aggregate quarry, sponsoring expert reports from Gregory Gold (mining engineer), Michael Stine (mineral valuation/market analyst), and Kyle Catlett (real estate appraiser). Respondent countered through reports from Brian Groff (mining engineer), Neal Rigby (mining feasibility), Shannon Rentz (geologist/market analyst), and Michael Rogers (real estate appraiser), maintaining that the highest and best use was limited residential, agriculture, silviculture, and recreation, with potential for future mining.

The Tax Court systematically examined and exposed severe technical flaws in petitioner’s expert submissions:

Inadequate Geological Testing and Unworkable Mine Design

Petitioner’s mining engineer, Mr. Gold, projected that a hypothetical mine would extract 27,963,169 tons of limestone over a 30-year mine life. However, his report relied on an initial geotechnical assessment containing data from only two exploratory borings. Both borings were drilled outside Mr. Gold’s proposed mining pit area, leaving zero core testing data from the actual proposed excavation zone. Respondent’s expert, Mr. Groff, demonstrated that establishing geological continuity across limestone strata requires a minimum of three core samples drilled to the elevation of the pit floor to correlate formations, assess deleterious interbeds, and define orientation.

Furthermore, Mr. Gold allocated a mere 4 to 5 acres for the on-site processing plant and stockpiles to handle a projected 1.5 million tons per year. Mr. Groff surveyed six active, competing limestone quarries in the surrounding market, revealing that active quarries producing between 248,812 and 748,599 tons required plant sites ranging from 14 to over 20 acres. Mr. Gold’s proposed plant footprint was roughly one-third the size of the smallest operational quarry plant in the region, rendering the operational mine plan physically unworkable.

Deficient Market Demand and Distribution Assumptions

Petitioner’s market analyst, Mr. Stine, constructed an income model that assigned an arbitrary 15% market capture rate to Morgan County based strictly on road mileage to county borders, rather than distance to actual population centers or construction demand nodes. Respondent’s geologist, Ms. Rentz, demonstrated that existing regional quarry production reported by the Alabama Department of Labor exceeded Mr. Stine’s total market demand estimate by more than 100%, proving that regional supply was already abundant and that no unmet market demand existed for a new entrant.

Moreover, petitioner’s own experts contradicted one another: Mr. Catlett estimated total 2017 market demand at 6,336,000 to 8,173,000 tons, whereas Mr. Stine estimated total demand at only 4,406,130 tons. The court remarked that this wide divergence among petitioner’s own experts failed to inspire confidence.

Compounding these market deficiencies, respondent’s expert Dr. Rigby established that the market within a 25-to-50-mile radius was already dominated by large, well-capitalized, integrated producers (such as Vulcan Materials Co.) that operated multi-site logistics networks, owned downstream ready-mix concrete and asphalt plants, and enjoyed rail and barge access. A hypothetical greenfield quarry on the landlocked Riddle Property possessed no rail or barge access, no downstream integration, and inferior proximity to growth corridors, placing it at an insurmountable delivered-cost disadvantage.

Negative Cash Flow and Financing Realities

Mr. Catlett attempted to perform a “check of reasonableness” on the financial feasibility of a quarry by calculating the net present value of cash flows over its initial six years. However, trial testimony revealed a computational error in Mr. Catlett’s model; upon correction, the net present value of the first six years of operations was negative $778,618. Mr. Catlett conceded under cross-examination that negative cash flow indicates an operation is not financially feasible.

Finally, the court highlighted that the syndication PPM explicitly warned that developing a quarry would require substantial additional capital and was unsuited for investors seeking cash returns. The record was devoid of any evidence that the promoters or syndication investors ever contemplated mining as a genuine commercial endeavor.

Concluding that petitioner failed to demonstrate “closeness in time” or “reasonable probability” of mining operations, the Tax Court adopted Mr. Rogers’s conclusion that the pre-easement highest and best use was limited residential, agricultural, silvicultural, and recreational use, with potential for future mining.

Judicial Rejection of the Discounted Cash Flow Income Method

Having determined that commercial limestone mining was not the highest and best use, the court addressed petitioner’s valuation methodology. Mr. Catlett asserted an unencumbered property value of $28,030,000 ($121,227 per acre) using the “owner-operator” DCF income method, purportedly confirmed by a royalty DCF method.

The Tax Court flatly rejected the application of the DCF income method to value raw, unimproved real estate:

“Income-based methods are not favored when valuing vacant land with no income-producing history because they are inherently speculative and unreliable.”

Judge Kerrigan reiterated a fundamental valuation principle established across an extensive line of Tax Court jurisprudence (Piton Holdings, LLC v. Commissioner, 167 T.C. (July 15, 2026); Ranch Springs, LLC v. Commissioner, 164 T.C. 93 (2025); Beaverdam Creek Holdings, LLC v. Commissioner, T.C. Memo. 2025-53):

“Previously, we have held that the use of a DCF method is erroneous where it equates the value of raw land with the net present value of a hypothetical limestone business conducted on the land.”

The court noted that this error is recurrent in syndicated conservation easement cases:

“This Court has addressed and rejected repeatedly the use of the income method to value mineral properties with no income-producing history in conservation easement cases. . . . A knowledgeable buyer would simply not pay the entire projected value of a business for one of the assets needed to conduct the business.”

Citing Whitehouse Hotel Ltd. Partnership v. Commissioner, 139 T.C. 304 (2012), the court stressed that capitalization methods depend upon a historical track record of operational earnings, revenue, and expenses. A DCF model applied to raw land is acutely vulnerable to manipulation because relatively minor variations in discount rates, pricing, production, or cost assumptions generate massive distortions in the terminal output. Here, Mr. Catlett assumed perpetual year-over-year sales increases culminating in 1.48 million tons annually by 2046, despite empirical evidence showing that competing regional quarries averaged 300,000 to 400,000 tons and experienced flat or declining production trends. Mr. Groff proved that capping the Riddle Property’s annual production at 460,000 tons drove the model’s net present value below zero. The court dismissed petitioner’s DCF as a “‘rosy projection[]’ that contemplates only success.”

Affirmation of Comparable Sales and the Principle of Substitution

In stark contrast to petitioner’s income modeling, respondent’s expert appraiser, Michael Rogers, utilized the comparable sales approach to establish the unencumbered before-value. Under the principle of substitution, “the value of a property can be estimated at the cost of acquiring an equally desirable substitute” (Mill Road 36 Henry, LLC v. Commissioner, T.C. Memo. 2023-129, aff’d, 2026 WL 2443948 (11th Cir. 2026); North Donald LA Property, LLC v. Commissioner, T.C. Memo. 2026-19).

Mr. Rogers identified six arm’s-length sales of unimproved acreage in Morgan County occurring between 2014 and 2018. These sales exhibited unadjusted prices ranging from $1,839 to $2,911 per acre, with an average price of $2,506 per acre. Accounting for physical and locational attributes, Mr. Rogers concluded an unencumbered value of $2,898 per acre, arriving at a pre-easement fair market value of $670,000. County tax assessor records corroborated this baseline: out of 28 vacant land sales exceeding 50 acres between 2014 and 2019, 27 sold for prices between $1,458 and $11,089 per acre (with the single highest sale at $21,934 per acre reflecting a municipal acquisition for a public high school).

The court emphatically applied the principle of substitution:

“A willing buyer would not have paid roughly $121,000 per acre for nonunique land when the price per acre for substitute properties was less than $3,000 per acre.”

Probative Weight of Prior Arm’s-Length Entity Transfers

The court found compelling verification for Mr. Rogers’s valuation in the September 2017 transaction wherein Freeman Five contributed Tracts One, Two, and Three (880.56 acres) to Quorum Holdings and sold 98% of the entity’s membership interests to Longleaf for $2,236,175. Grossing up this arm’s-length transaction to 100% established an implied market value of $2,281,811, or $2,591 per acre—completed barely three months prior to the conservation contribution.

The court rejected petitioner’s attempt to disregard this sale, relying on Eleventh Circuit authority (TOT Property Holdings, 1 F.4th at 1371; Savannah Shoals II, 182 F.4th at 1332 n.15) establishing that recent arm’s-length purchases of partnership interests holding real property are “‘overwhelmingly significant’ evidence” of market value:

“The purchase of an interest in a partnership can be ‘reflective of the price that the market would pay for [a property], especially when the ownership interest was nearly 100% and the only asset held by the [p]artnership was the [property] itself.’”

While Mr. Rogers considered this sale as a market benchmark, petitioner’s appraiser completely failed to reconcile his $121,227-per-acre conclusion with the $2,591-per-acre price paid by his own syndication sponsor, speculating without basis that the seller must have lacked market knowledge. The court firmly rejected this assertion, finding that James Freeman Sr. was a highly experienced real estate trader.

Further demonstrating the absurdity of petitioner’s valuation, the court examined a subsequent August 2024 transaction where Hollingshead Materials, LLC, acquired a 946.39-acre parcel in Morgan County with active mining intent. Despite possessing prime frontage on the Tennessee River—granting vital low-cost water barge transportation—the parcel sold for $8,250,000, or $8,717 per acre, representing a tiny fraction of petitioner’s $121,227-per-acre claim.

Valuation Synthesis and Easement Determination

Adopting Mr. Rogers’s valuation, the Tax Court synthesized the before-and-after easement valuation under Treasury Regulation Section 1.170A-14(h)(3)(i):

Valuation Component	Tax Return Position	Tax Court Determination	Variance
Unencumbered Before Value	$45,340,000	$670,000	($44,670,000)
Encumbered After Value	$345,000	$345,000 (Stipulated)	$0
Conservation Easement FMV	$44,995,000	$325,000	($44,670,000)

Subtracting the stipulated encumbered after-value of $345,000 from the unencumbered before-value of $670,000, the court held that the allowable charitable contribution deduction for the conservation easement was $325,000—a reduction of over 99.2% from the $44,995,000 deduction claimed on Form 1065.

Application of the 40% Gross Valuation Misstatement Penalty

Under IRC Section 6662(a) and (b)(3), an accuracy-related penalty of 20% applies to underpayments attributable to substantial valuation misstatements, defined under Section 6662(e)(1)(A) as claimed values equal to 150% or more of the correct amount. Under Section 6662(h)(1) and (h)(2)(A)(i), the penalty rate increases to 40% in the case of a “gross valuation misstatement,” triggered when the claimed value exceeds 200% of the correct amount.

Riddle claimed an easement value of $44,995,000 on its partnership return, whereas the court determined the correct fair market value to be $325,000. Because the claimed deduction exceeded the correct value by nearly 13,845%—far surpassing the 200% threshold—the misstatement was categorized as gross.

For tax practitioners evaluating potential defenses, the court’s penalty holding underscores critical statutory constraints:

Inapplicability of Reasonable Cause: Under IRC Section 6664(c)(1), taxpayers may generally raise a defense of reasonable cause and good faith to avoid Section 6662 penalties. However, Section 6664(c)(3) explicitly bars the reasonable cause defense in cases involving gross valuation misstatements of charitable contribution property. As Judge Kerrigan observed, citing Chandler v. Commissioner, 142 T.C. 279 (2014):

“Since the overstatement was ‘gross,’ the reasonable cause defense is not available.”
Inapplicability of Adequate Disclosure: Petitioner argued that adequate disclosure under IRC Section 6662(d)(2)(B) precluded the imposition of the penalty. The court dismissed this argument out of hand, reiterating that the statutory text of Section 6662 restricts the disclosure exception to substantial understatements of income tax under Section 6662(d), providing no relief against valuation misstatements under subsections (e) or (h) (Piton Holdings, 167 T.C., slip op. at 52).
Constitutional and Administrative Challenges Dismissed: Petitioner additionally raised a constitutional challenge arguing that the Supreme Court’s decision in Trump v. Slaughter, 146 S. Ct. 2283 (2026), undermined the Tax Court’s authority and guaranteed a Seventh Amendment jury trial prior to penalty assessments. The Tax Court rejected this argument, noting that Slaughter expressly disclaimed addressing tenure protections for judges of non-Article III courts, leaving the court’s jurisdiction and penalty adjudication authority fully intact.

The Tax Court entered decision under Rule 155, sustaining the $325,000 easement valuation and imposing the non-waivable 40% gross valuation misstatement penalty under Section 6662(h).

Prepared with assistance from Gemini Notebook.