For tax professionals representing partnerships or investors in syndicated conservation easements (SCEs), the United States Tax Court’s recent memorandum decision in North Donald LA Property, LLC v. Commissioner, T.C. Memo. 2026-19, provides essential guidance. The case touches upon the rigorous requirements for qualified appraisals, the critical determination of a property’s highest and best use (HBU) for valuation, the deductibility of syndication costs, and the nuanced application of civil fraud and gross valuation misstatement penalties. This article outlines the factual background, the taxpayer’s positions, the Court’s technical analysis of the applicable Internal Revenue Code (I.R.C.) provisions, and the final conclusions.

Factual Background of the Case

The case involves a syndicated conservation easement transaction surrounding a 3,324-acre property in Jefferson Davis Parish, Louisiana, known as the Donald Farm. Historically used for farming rice, soybeans, and crawfish, the property consists of low-lying fields and wetlands. The underlying soil contained heavy clay, which was advantageous for retaining surface water for rice and crawfish farming, but there was no commercial market for clay in the area.

In March 2016, the Reserve at Welsh, LLC—an entity controlled by a promoter known as Sixty West—purchased the Donald Farm in an arm’s-length transaction for $9,888,000, or $2,975 per acre. Sixty West subsequently carved out several parcels to syndicate for tax purposes, including a 260.48-acre parcel transferred to North Donald LA Property, LLC (North Donald).

Despite the property’s existing zoning as "A–1 Agricultural", the appraisal accompanying North Donald’s 2017 partnership return posited that the HBU of the farmland was a commercial clay mine. Using a discounted cash flow "royalty income method," the appraiser, Claud Clark III, determined that the “before value” of the unencumbered land was $439,492 per acre. North Donald subsequently claimed a $115,391,000 charitable contribution deduction on its 2017 Form 1065, taking the position that "the land had appreciated by more than 14,000% in 21 months".

The partnership additionally claimed $1,157,469 in “other deductions” characterized as investment expenses, which included a $1,055,000 “consulting fee” to the transaction’s sponsor, EvrSource, and $50,000 in legal fees to a law firm serving as a material advisor. Notably, the partnership fully disclosed the transaction on its return, attaching Form 8283 reporting its basis of $804,232 alongside the $115,391,000 appraised value, and enclosing a Form 8886, Reportable Transaction Disclosure Statement.

Taxpayers Request for Relief

In August 2021, the IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) disallowing the $115,391,000 charitable deduction and the $1,157,469 in other deductions in their entirety. The IRS alternatively asserted a 75% civil fraud penalty under I.R.C. § 6663(a), a 40% gross valuation misstatement penalty under I.R.C. § 6662(h), and a 20% accuracy-related penalty under I.R.C. § 6662. The petitioner, North Donald LA Investors, LLC, acting as the Tax Matters Partner (TMP), petitioned the Tax Court for relief from the FPAA adjustments and the asserted penalties.

Court’s Analysis of the Law and Application to the Facts

Qualified Appraisal Requirements Under I.R.C. § 170(f)(11)(D)

A taxpayer claiming a noncash contribution deduction exceeding $500,000 must attach a "qualified appraisal." An appraisal is qualified if it is "conducted by a qualified appraiser in accordance with generally accepted appraisal standards" pursuant to I.R.C. § 170(f)(11)(E)(i). The IRS argued that the appraiser failed to follow the Uniform Standards of Professional Appraisal Practice (USPAP) and, furthermore, that he was disqualified under Treas. Reg. § 1.170A-13(c)(5)(ii) because the donor possessed knowledge that would cause a reasonable person to expect an overstatement of value.

The Court ruled that an appraiser’s failure to strictly follow USPAP "does not render his appraisal per se ‘non-qualified.’ Rather, it is simply a factor to be considered in assessing its persuasiveness." (Lake Jordan Holdings, LLC v. Commissioner, T.C. Memo. 2025-123). Regarding the regulatory exception under Treas. Reg. § 1.170A-13(c)(5)(ii), the Court evaluated the knowledge of the TMP. While the Sixty West promoters manufactured false letters of intent to purchase clay to justify the appraisal, the Court found insufficient evidence that the principals of EvrSource (who controlled North Donald) had knowledge of this deception. Accordingly, the Court held that the appraisal technically met the definition of a "qualified appraisal," avoiding complete disallowance on strict substantiation grounds, though it ultimately afforded the appraisal zero weight.

Highest and Best Use (HBU) and Valuation Methodologies

For charitable contribution purposes, fair market value (FMV) is "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." (Treas. Reg. § 1.170A-1(c)(2)). Valuing a conservation easement requires establishing the property’s HBU, which must be "financially feasible and that results in the highest value." (Whitehouse Hotel Ltd. P’ship v. Commissioner, 139 T.C. 304, 331 (2012)). Crucially, an HBU must be legally permissible. To establish an HBU differing from the current use, the taxpayer must demonstrate "closeness in time" and "reasonable probability" of achieving the proposed use. (Hilborn v. Commissioner, 85 T.C. 677, 689 (1985)).

Applying the law, the Court forcefully rejected the taxpayer’s claim that a clay mine was the HBU. The land was zoned exclusively for agricultural use, and the taxpayer "failed to establish a reasonable probability that the land could be rezoned to permit use for clay mining. Because mining was not a legally permissible use, it was not the property’s HBU.". The Court observed that neighborhood opposition to a 100-foot-deep borrow pit requiring dozens of daily truck trips would be highly likely. Furthermore, even if rezoning were possible, a mine was not financially feasible due to the excessive distance to levee projects and the exorbitant cost of mitigating the protected wetlands situated on the property.

Having rejected the income methods advanced by the taxpayer’s appraisers as "wholly untethered from reality," the Court relied upon the comparable sales approach. The Court held that "[t]he best evidence of a property’s FMV is the price at which it changed hands in an arm’s-length transaction reasonably close in time to the valuation date." (Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2024-60). The Court utilized the property’s March 2016 acquisition price to determine its "before value" was exactly $2,975 per acre.

Deductibility of Syndication and Organizational Costs

The Court next addressed the $1,157,469 in claimed "other deductions." Under I.R.C. § 709(a), "no deduction shall be allowed . . . to [a] partnership or to any partner for any amounts paid or incurred to organize a partnership" or to promote the sale of an interest in the partnership. The Court found that the $1,055,000 "consulting fee" paid to the transaction’s sponsor was entirely "nondeductible as an organizational and/or syndication cost.". Similarly, relying on Surloff v. Commissioner, 81 T.C. 210, 245 (1983), the Court held that the $50,000 legal fee for the preparation of a tax opinion letter integrated into the offering memorandum constituted a "syndication or selling expense.".

Civil Fraud and Valuation Penalties

The IRS asserted the 75% civil fraud penalty under I.R.C. § 6663(a). To sustain this penalty, the Commissioner must prove by clear and convincing evidence that "the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes." (Parks v. Commissioner, 94 T.C. 654, 661 (1990)).

The Court placed "great weight on the disclosures attached to its return". North Donald had filed Forms 8283 and 8886, explicitly showing the $804,232 basis against the $115,391,000 claimed value, with an acquisition date a mere 15 months prior to the valuation. The Court reasoned that "a wide gap between cost basis and claimed value raises a red flag suggesting that the return merits examination". The Court eloquently summarized its stance on disclosure defeating fraud: "When the taxpayer’s return says (in effect) ‘please audit me,’ the Commissioner has an uphill battle to prove that the taxpayer engaged in conduct ’intended to conceal [or] mislead’ the IRS.". The fraud penalty was rejected.

However, the Court sustained the 40% gross valuation misstatement penalty under I.R.C. § 6662(h). A misstatement is "gross" if the claimed value exceeds 200% of the correct amount. Because the taxpayer claimed a value of $115,391,000 and the Court determined the correct value was only $175,824, the threshold was vastly exceeded. The Court emphasized that while a reasonable cause defense under I.R.C. § 6664(c) may apply to "substantial" valuation misstatements, it is statutorily unavailable for "gross" valuation overstatements on charitable contribution property. Finally, a 20% negligence penalty under I.R.C. § 6662(b)(1) was applied to the portion of the underpayment resulting from the disallowed syndication cost deductions, as the partnership failed to establish reliance on professional advice in good faith regarding these clearly nondeductible capital items.

Conclusions

The Tax Court concluded that the valuation of the North Donald conservation easement was "an outrageous overstatement". Utilizing the comparable sales approach, backstopped by the actual recent purchase price of the property, the Court determined the pre-easement value of the property was $2,975 per acre and the post-easement value was $2,300 per acre. Subtracting the after value from the before value, the Court concluded that the reduction in value attributable to the easement was $675 per acre, yielding a total allowable charitable contribution deduction of $175,824.

The Court sustained the complete disallowance of the partnership’s "other deductions," deeming them strictly nondeductible syndication and organizational costs. While the taxpayer’s transparent return disclosures successfully shielded them from a 75% civil fraud penalty, the sheer magnitude of the overstated deduction resulted in the imposition of the strict liability 40% gross valuation misstatement penalty on the easement deduction, along with a 20% negligence penalty on the disallowed syndication expenses.

Prepared with assistance from NotebookLM.