Kimberly Road Fulton 25, LLC v. Commissioner and South Fulton Parkway 58, LLC v. Commissioner, T.C. Memo. 2026-36, May 4, 2026

The United States Tax Court recently handed down a memorandum decision in the consolidated cases of Kimberly Road Fulton 25, LLC v. Commissioner and South Fulton Parkway 58, LLC v. Commissioner, T.C. Memo. 2026-36. Governed by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), this case highlights the critical importance of a realistic Highest and Best Use (HBU) analysis and the limits of the comparable sales method when appraising properties for Internal Revenue Code (IRC) § 170(h) charitable deductions. While the taxpayers successfully defended the procedural validity and conservation purposes of their easements, they were ultimately defeated by vastly overstated appraisals that resulted in severe valuation misstatement penalties.

Facts of the Case

The taxpayers, two Georgia limited liability companies treated as partnerships for federal tax purposes, entered into syndicated conservation easement transactions in 2017. The partnerships were formed by Jeffrey Grant, a real estate investor, and Daniel Carbonara, a private equity manager.

The subject properties consisted of two parcels of vacant land in the Atlanta area: the "Kimberly Road" property (approximately 25.4 acres, zoned for high-density housing) and the "South Fulton" property (roughly 130 acres, zoned for mixed-use). Grant and his affiliated entities had acquired the properties at deep discounts. The Kimberly Road property was reacquired after foreclosure for $500,000, and the South Fulton property was acquired as part of a multi-state bundle of properties for just $350,000.

Through private-placement memoranda (PPMs), Carbonara raised capital from investors, projecting a targeted return of 145% based heavily on expected tax benefits. To facilitate the transactions, the syndicators presented the partnerships with development plans (e.g., a 600-unit assisted-living facility on a 50-foot cliff for Kimberly Road) alongside a conservation-easement alternative. Predictably, the investors voted for the conservation easements.

In December 2017, the partnerships granted conservation easements restricting development on both properties to the Southern Conservation Trust (SCT), a qualified IRC § 501(c)(3) organization. On their 2017 Forms 1065, Kimberly Road and South Fulton claimed charitable contribution deductions of $9,866,000 and $15,871,000, respectively, relying on appraisals performed by Thomas Spears.

Taxpayers' Request for Relief and the Commissioner's Adjustments

The Internal Revenue Service (IRS) audited both partnerships and issued Notices of Final Partnership Administrative Adjustment (FPAAs). The Commissioner entirely disallowed the multi-million-dollar noncash charitable contribution deductions for the conservation easements. Additionally, the Commissioner asserted the 40% gross valuation misstatement penalty under IRC § 6662(h).

The Tax Matters Partners (TMPs) for the entities petitioned the Tax Court for a readjustment of partnership items, arguing that the partnerships fully complied with the statutory and regulatory requirements for IRC § 170(h) conservation contributions and that their appraised values were correct.

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

The Tax Court, in an opinion authored by Judge Holmes, broke the analysis into several highly technical components, evaluating the economic substance of the partnerships, the procedural requirements of the appraisals, the statutory conservation purposes, and finally, the valuation of the easements.

Economic Substance and Donative Intent

The Commissioner initially mounted an attack on the bona fides of the partnerships, asserting that the entities lacked a valid business purpose and were motivated solely by tax avoidance, citing Historic Boardwalk Hall, LLC v. Commissioner, 694 F.3d 425 (3d Cir. 2012). The Commissioner further argued that the pursuit of tax benefits negated the "donative intent" required under IRC § 170.

The Court flatly rejected these arguments. Distinguishing the underlying legislative intent, the Court noted that "[d]eductions for donating property interests to a nonprofit organization are, however, specifically authorized by the Code and, like the tax credits at issue in Historic Boardwalk, do not require an investment or business purpose".

Regarding donative intent, the Court applied Hernandez v. Commissioner, 490 U.S. 680 (1989), maintaining that subjective intent is largely irrelevant absent a direct quid pro quo from the donee. The Court decisively ruled, "whether the purported partners were subjectively motivated by the tax benefits of a contribution of conservation easements is immaterial to the objective fact that they donated conservation easements on the properties to SCT". The Court further explained that "the sine qua non of a charitable contribution is the act of transferring property without adequate consideration in return," quoting United States v. Am. Bar Endowment, 477 U.S. 105, 118 (1986). Because the substantial tax benefits flowed from Congress and not from SCT, those benefits were "merely incidental to the donation of the easements to SCT".

Qualified Appraisals and Substantial Compliance

The Commissioner argued the deductions should be disallowed procedurally, claiming the appraisals were not "qualified appraisals" under Treas. Reg. § 1.170A-13(c)(2)(i)(A) because the appraiser, Spears, acted as an advocate rather than an objective evaluator. The Court disagreed, finding that "a reasonable person would not expect Spears’s objectivity to be fatally compromised and that he did not act solely as an advocate for the partnerships’ views".

The IRS also attacked the South Fulton return because a co-appraiser, Lori Coffey, failed to sign the Form 8283. Relying on the doctrine of substantial compliance, the Court held the defect was not fatal because Coffey signed the appraisal itself and a certification with identical language to the Form 8283, thereby providing the IRS with "sufficient information to permit the Commissioner to evaluate his reported contribution".

Qualified Conservation Purpose

Under IRC § 170(h)(1), a qualified conservation contribution must be made "exclusively for conservation purposes". The taxpayers argued the easements met two recognized statutory purposes: the protection of a relatively natural habitat (IRC § 170(h)(4)(A)(ii)) and the preservation of open space (IRC § 170(h)(4)(A)(iii)).

Relying heavily on the Eleventh Circuit's precedent in Champions Retreat Golf Founders, LLC v. Commissioner, 959 F.3d 1033 (11th Cir. 2020), the Court took a flexible approach to defining a "significant" habitat. The taxpayers' experts identified the presence of rare and threatened species on both properties, including the tricolored bat, the brown-headed nuthatch, and the critically imperiled downy arrowwood shrub. Addressing the Commissioner's argument that the Kimberly Road property was too small or degraded, the Court ruled: "The Code doesn’t require a minimum size for a conservation easement. And the Code doesn’t require that a species inhabit the entire property. If it did, that might cut against the property’s being a relatively natural habitat".

The Court also found the properties satisfied the open space requirement pursuant to a clearly delineated governmental policy, specifically the Georgia State Wildlife Action Plan (SWAP), which targets the preservation of oak-hickory-pine forests. The Court rebuffed the Commissioner's argument that the properties had too many reserved rights (such as logging and hunting) that would destroy the conservation purpose, stating "allowing hunting on conserved lands is a useful monitoring mechanism against dumping and other trespassers".

Valuation and Highest and Best Use

Having survived the IRS's procedural and statutory attacks, the taxpayers faced the valuation hurdle. Pursuant to Treas. Reg. § 1.170A-14(h)(3)(i) and (ii), when comparable sales of easements are unavailable, the "before and after" method must be used, heavily weighting the property's Highest and Best Use (HBU).

The taxpayers' appraiser assumed an HBU of a massive assisted living facility for Kimberly Road and a high-density mixed-use development for South Fulton based primarily on the zoning laws. To find comparable sales supporting these developments, he pulled data from developed parcels situated in wealthy, high-demand areas up to 50 miles away.

The Commissioner's appraiser, Charles Brigden, utilized comparable sales of vacant, raw land located within a close radius of the subject properties, adjusting for topography and lack of immediate access.

The Court firmly adopted the IRS's valuation methodology. A legally permissible use under zoning laws does not automatically dictate the HBU if it lacks economic feasibility and market demand. As the Court noted, "The fair-market value of a property ultimately turns on its realistic and objective potential use".

The Court fiercely criticized the taxpayers' appraiser for searching out comparables of developed properties in entirely different market demographics rather than valuing raw land, ruling: "The comparable sales that he drew were all over the metropolitan Atlanta area and were primarily sales of developed properties. We find that these constituted a different market and were thus not comparable".

Finding Brigden's analysis to be "entirely reasonable," the Court adopted the IRS's "before" values of $470,000 for Kimberly Road and $700,000 for South Fulton, and "after" values of $40,000 and $90,000, respectively.

Gross Valuation Misstatement Penalties

Because the Court adopted the IRS's valuations, the taxpayers' claimed deductions of nearly $26 million combined were vastly overstated. Subtracting the after values from the before values, the Court allowed actual charitable deductions of only $430,000 for Kimberly Road and $610,000 for South Fulton.

Under IRC § 6662(h), a 40% penalty applies if the value claimed on a return is 200% or more of the correct value. Furthermore, Congress eliminated the reasonable-cause defense for gross valuation misstatements of charitable contribution property under IRC § 6664(c)(3). The Court tersely sustained the penalties, summarizing: "This is a math question, and it is a math question that we must find the Commissioner got right".

Conclusions

The Tax Court's decision in T.C. Memo. 2026-36 underscores a frequent pitfall for syndicated conservation easements. Even when a taxpayer flawlessly navigates the complex statutory and regulatory framework of IRC § 170(h)—proving legitimate conservation purposes, presenting scientifically rigorous baseline documentation, and fulfilling the procedural requirements of a qualified appraisal—the deduction will fail if the valuation relies on speculative Highest and Best Use models. Tax professionals advising clients on real estate donations must scrutinize the appraiser's comparable sales methodology to ensure that "raw land" is being compared to "raw land" within the same localized market. Failure to do so invites not only the disallowance of the intended tax benefits but also the imposition of strict liability 40% gross valuation misstatement penalties.

Prepared with assistance from NotebookLM.