Opinion
17379-19 17380-19 17381-19 17382-19
07-22-2022
GREEN VALLEY INVESTORS, LLC, BOBBY A. BRANCH, TAX MATTERS PARTNER, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler Judge
In these four consolidated cases petitioner Bobby A. Branch is the tax matters partner for four entities: Green Valley Investors, LLC (Green Valley); Vista Hill Investments, LLC (Vista Hill); Big Hill Partners, LLC (Big Hill); and Tick Creek Holdings, LLC (Tick Creek) (collectively, along with Mr. Branch, referred to as "petitioner"). In this order we sometimes refer to these entities individually as "LLC" and collectively as "the LLCs."
On April 5, 2022, respondent filed his Fourth Motion for Partial Summary Judgment (Fourth Motion) with regard to petitioner's appraisals (the "V&W appraisals") used for charitable conservation easement donations claimed on the LLCs' Form 1065, U.S. Return of Partnership Income. Respondent's Fourth Motion seeks summary adjudication from this Court on the issue of whether the V&W appraisals are qualified appraisals under section 170(f) (and the regulations thereunder). Respondent requests that the Court determine that, as a matter of law, the V&W appraisals are not qualified appraisals, and that consequently, if the amount of the donated easement is at least 150% of the value claimed on the LLCs' Form 1065, the reasonable cause exception under section 6664(c)(3) does not apply.
See Ex. A18 for docket no. 17379-19 and 17380-19, A16 for docket no. 17381-19 and A15 for docket no. 17382-19.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar.
On June 8, 2022, petitioner filed his objection to respondent's Fourth Motion. On June 16, 2022, respondent filed a response to petitioner's objection to respondent's Fourth Motion, and then on July 1, 2022, petitioner filed a reply to respondent's response to petitioner's objection. For the reasons discussed below, the Court will deny, without prejudice, respondent's Fourth Motion.
Background
The following facts are derived from the parties' motion papers and the declarations and exhibits attached thereto. They are stated solely for purposes of deciding respondent's Fourth Motion and not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Respondent argues that as a matter of law, the V&W appraisals are not qualified appraisals because the V&W appraisals (i) do not provide a fair market value for the property contributed and (ii) were not prepared in accordance with the Generally Accepted Appraisal Standards (GAAS).
Respondent contends that the V&W appraisals provide a fair market value for something other than the property that was actually contributed. Specifically, respondent contends that the appraisals of the subject property developed as a hypothetical mining operation do not reflect the fair market value of the vacant and undeveloped land as actually contributed.
Respondent also contends that the V&W appraisals were not prepared in accordance with the principles of GAAS because the appraisals were prepared in a misleading and unmeaningful manner and that the appraisals make false certifications. It is respondent's position that the V&W appraisals are misleading due to the vastly different values reached in earlier appraisals, and that a lack of credibility stems from the use of the hypothetical mining operation. Respondent also asserts that the V&W appraisals make false certifications because the 2014 and 2015 appraisals of the subject property wrongly certify that no services by appraisers regarding the subject property were performed within the three-year period immediately preceding the acceptance of the assignment.
Petitioner states in his objection that whether the V&A appraisals satisfy the requirements under section 170(f) is a genuine question of material fact to be answered by the Court after trial, not in a motion for summary judgment. Petitioner also contends that the V&W appraisals valued the subject property for the purpose of a conservation easement, the fair market value used in determination of the donation amount is based on the highest and best use, which is a question of fact, and that the hypothetical condition at issue is fully disclosed and substantiated in the appraisals themselves.
The hypothetical condition tested whether a mining operation was legally permissible, physically possible, financially feasible, and maximally production.
Analysis
The purpose of summary judgment is to expedite litigation and avoid unnecessary and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). However, it is not a substitute for trial; it should not be used to resolve genuine disputes over material factual issues. Id. When determining whether to grant summary judgment, we must view factual materials and inferences drawn therefrom in the light most favorable to the nonmoving party. See FPL Grp., Inc. & Subs., 116 T.C. at 75; Bond v. Commissioner, 100 T.C. 32, 36 (1993).
I. Do the V&W Appraisals Provide a Fair Market Value?
Where a contribution of property is valued in excess of $500,000, the taxpayer must obtain and attach to his return "a qualified appraisal of such property." I.R.C. § 170(f)(11)(D). An appraisal is qualified if it is "conducted by a qualified appraiser in accordance with generally accepted appraisal standards" and meets requirements set forth in "regulations or other guidance prescribed by the Secretary." I.R.C. § 170(f)(11)(E)(i). Treasury Regulation § 1.170A-13(c)(3)(ii) specifies information that a qualified appraisal must include. Specifically, a qualified appraisal must include a fair market value within the meaning of Treasury Regulation § 1.170A-1(c)(2). Treas. Reg. § 1.170A-13(c)(3)(ii)(I).
The Treasury Regulations define fair market value as 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).
When there is a substantial record of sales of comparable properties, the donated property's fair market value is determined on the basis of the sales prices of those comparables. Treas. Reg. § 1.170A-14(h)(3)(i). Because sales of conservation easements are rare, the regulations authorize the use of a before and after valuation method to value easements. Id. Under the before and after method, the easement's fair market value is the difference between the fair market value of the property unencumbered by the easement (before value) and its fair market value after the easement's grant (after value). Id.; see Hilborn v. Commissioner, 85 T.C. 677, 688-89 (1985). An appraiser may use the comparable sales method or another accepted method to estimate the before and after values. Hilborn v. Commissioner, 85 T.C. at 689.
Additionally, Treasury Regulation § 1.170A-14(h)(3)(ii) provides that, where a before and after valuation is used, as the case here, "the fair market value of the property before contribution of the conservation easement must take into account not only the current use of the property but also an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed." For example, this Court has stated that, "[i]t is irrelevant that petitioners never intended to develop the property into an industrial use. If it is reasonable and probable that the . . . property could be rezoned to an industrial use and that there was a demand for industrial property within a reasonable proximity to the gift." Frazee v. Commissioner, 98 T.C. 554, 563-64 (1992).
The fair market value of land is generally determined on the basis of its highest and best use. Hilborn v. Commissioner, 85 T.C. at 689-90. The highest and best use is "the highest and most profitable use for which property is adaptable and needed or likely to be needed in the reasonably near future". Olson v. United States, 292 U.S. 246, 255, 54 S.Ct. 704, 78 L.Ed. 1236 (1934); see Symington v. Commissioner, 87 T.C. 892, 897 (1986). Whether the owner has put the property to such use or intends to do so is not determinative. Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986). Highest and best use is a question of fact and requires an objective assessment of the likelihood that the donated property would be put to such use. Id. at 408; Treas. Reg. § 1.170A-14(h)(3)(ii).
We rely on expert opinions to assist us with the determination of fair market value. Fed.R.Evid. 702. We evaluate expert opinions in the light of the experts' demonstrated qualifications, the factors they considered to reach their conclusions, and all other evidence in the record. See Parker v. Commissioner, 86 T.C. 547, 561 (1986); Casey v. Commissioner, 38 T.C. 357, 381 (1962). We are not bound by an expert opinion and may accept or reject expert testimony, in part or in its entirety, in the exercise of our sound judgment. Helvering v. Nat'l Grocery Co., 304 U.S. 282, 295, 58 S.Ct. 932, 82 L.Ed. 1346 (1938); Estate of Newhouse v. Commissioner, 94 T.C. 193, 217 (1990); Laureys v. Commissioner, 92 T.C. 101, 127 (1989).
Respondent contends, in part, that the V&W appraisals do not meet the statutory requirements of a qualified appraisal because they value something other than the land actually contributed. Specifically, respondent cites to Costello v. Commissioner, T.C. Memo. 2015-87, in which this Court pointed out that an appraisal which values something other than the contributed property does not comply with the regulatory requirements "because it prevents the Commissioner from properly understanding and evaluating the claimed contribution." Costello, T.C. Memo. 2015-87, at *25. The appraisal in Costello did not "describe, or purport to value, a conservation easement" so the Court determined that it would be extremely difficult for a person reading the appraisal to ascertain that the property that was appraised is the same property that was intended to be contributed. Id. at *17-18.
Respondent also cites to Harding v. Commissioner, T.C. Memo. 1995-216, in which this Court previously held that a qualified appraisal requirement could not be satisfied where the appraisal was "purely hypothetical." Harding, T.C. Memo. 1995-216, at *6-7. In Harding, we noted that "[i]t is obvious that [the appraisal] did not take into account the extant realities or a price that a willing buyer and a willing seller would have paid for the partnership interest." Id. As such the appraisal in Harding was unqualified in part because it did not meet the definition of fair market value as stipulated in Treasury Regulation § 1.170A-1(c)(2). An appraisal that is "purely hypothetical" within this context can therefore be interpreted as one that does not follow the requirements of fair market value.
However, the issue in which respondent emphasizes in both Costello and Harding, concentrate on the accuracy of the fair market value contained within the appraisals and notably these findings were decided after trial. With regard to summary judgment, in Friedberg v. Commissioner, T.C. Memo. 2013-224 we stated that "any evaluation of accuracy is irrelevant for purposes of deciding whether the appraisal is qualified." Friedberg v. Commissioner, T.C. Memo. 2013-224 at *20. To the extent respondent believes that the appraisers' method "was sloppy or inaccurate, or haphazardly applied," that "is irrelevant." Id. (quoting Scheidelman v. Commissioner, 682 F.3d 189, 197 (2d Cir. 2012). We find it is inappropriate to rule on "the reliability and accuracy of the methodology and specific basis of valuation" in a motion for summary judgment. We therefore leave the matter to be decided at trial. Id. at *22.
When considering the elements of a qualified appraisal, we cannot conclude as a matter of law, that the V&W appraisals are unqualified. There remain material facts in dispute between the parties, particularly, whether the highest and best use of the appraised property is objective or purely hypothetical and whether the V&W appraisals meet the requirements of Treasury Regulation § 1.170A-1(c)(2). We have settled on both sides of this issue; thus, it remains best to address the issue after trial.
Compare Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 408 (1986), and Est. of Llyod v. Commissioner, 71 T.C. Memo 1996-30, with Rolfs v. Commissioner, 135 T.C. 471, 495 (2010), aff'd, 668 F.3d 888 (7th Cir. 2012), and Alli v. Commissioner, T.C. Memo. 2014-15.
II. Were the Appraisals Prepared in Accordance with GAAS?
A qualified appraisal must be prepared in accordance with Generally Accepted Appraisal Standard (GAAS). I.R.C. § 170(f)(11)(E). An appraisal that complies with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP) is treated as having been conducted in compliance with GAAS. IRS Notice 2006-96, sec. 3.02(2). If the appraisal does not strictly comply with USPAP, it can still be qualified within the meaning of section 170(f)(11) if it is at least reliable. See SWF Real Est., LLC v. Commissioner, T.C. Memo. 2015-63, at *98 (finding that an appraisal, despite its noncompliance with USPAP, was still acceptable where its alleged technical errors did not render it unreliable or reflect significant substantive errors).
USPAP also provides that appraisals are to be credible and not misleading. The term "credible" under USPAP is defined as "worthy of belief." Ex. A29, USPAP, 2014-15 Ed., U-2, ln. 65. Credible assignments "require support, by relevant evidence and logic, to the degree necessary for the intended use." Id. at ln. 66-67. Thus, an appraiser must not, for example, "use or communicate a report that is known to be misleading or fraudulent." Id. at U-7, ln. 239. Additionally, USPAP requires that an appraiser disclose, in the certification attached to the appraisal report, "any services regarding the subject property performed by the appraiser within the three-year period immediately preceding acceptance of the assignment, as an appraiser or in any other capacity." USPAP, 2014-15 Ed., U-8, ln. 254-59.
Respondent contends that the appraisals were not prepared in accordance with GAAS because the V&W appraisals are generally misleading and not credible and that the V&W appraisals fail to disclose a prior assignment of value made just months prior.
In dispute of respondent's contention that the V&W appraisals are misleading, petitioner contends that the subject property in the prior appraisal is different than the subject property in the current appraisals at issue.
Since there remains a dispute of material facts with regard to the highest and best use of the appraised property, it is not necessary at this time for us to decide whether the V&W appraisals were prepared in accordance with GAAS. Accordingly, we refrain from deciding the issue.
Considering the foregoing, it is
ORDERED that respondent's Fourth Motion for Partial Summary Judgment, filed on April 5, 2022, is hereby denied, without prejudice.