Opinion
11814-19
11-24-2021
Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
Albert G. Lauber Judge.
On October 6, 2021, respondent filed Motions to Compel the Taking of Depositions of Thomas F. Wingard and Martin H. Van Sant. Respondent proposes to take the depositions via Zoomgov. We will grant the Motions.
Background
This case involves a charitable contribution deduction claimed by Oconee Landing Property, LLC (Oconee), for a conservation easement. Petitioner Oconee Landing Investors, LLC (petitioner), is Oconee's tax matters partner. The property subject to the easement was acquired by James and Mercer Reynolds (the Reynold-ses) in November 2003. They held the property until 2014, when they contributed it to Carey Station, LLC (CS), in exchange for membership interests in CS, of which they effectively owned 100%.
In May 2015 the Reynoldses signed an engagement letter on behalf of CS to arrange a syndicated conservation easement transaction. They hired Strategic Capital Partners to "handle the engagement of the appraisers." In July 2015 Thomas F. Wingard and Martin H. Van Sant were hired to appraise the proposed conservation easement. They were to be paid $45,000 for an initial appraisal report and $35,000 for any subsequent reports.
On December 3, 2015, Messrs. Wingard and Van Sant issued a "restricted appraisal report" concluding that the proposed easement was worth $20,670,000. Six days later petitioner solicited investors for the syndicated transaction through a private placement memorandum. That memorandum relied on Messrs. Wingard's and Van Sant's conclusion that the easement was worth $20,670,000.
On December 21, 2015, CS contributed the property to Oconee in exchange for a 99% membership interest in Oconee. Two days later, petitioner purchased a 97% interest in Oconee from CS for $2,440,000. Eight days later, on December 31, 2015, Oconee donated a conservation easement over the property to the Georgia Alabama Land Trust. The deed of easement was recorded the same day. Oconee at that point was owned 97% by petitioner, 2% by CS, and 1% by Carey Station Manager, LLC.
Oconee timely filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it claimed a charitable contribution deduction of $20,670,000 for its donation of the conservation easement. It attached to the return a copy of a final appraisal report, dated April 7, 2016, prepared by Messrs. Win-gard and Van Sant.
In April 2019 the IRS issued Oconee a notice of final partnership administrative adjustment (FPAA) disallowing the charitable contribution deduction in full. The FPAA alternatively determined that, if any deduction were allowable, Oconee had not "established that the value of the contributed property * * * was greater than $1,420,560." The FPAA also determined a 40% "gross valuation misstatement" penalty under section 6662(h) and (in the alternative) a 20% accuracy-related penalty under other provisions of section 6662.
All statutory references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
During informal discovery respondent contacted Messrs. Wingard and Van Sant, requesting that they produce documents and participate in informal interviews. This request was rejected. On September 14, 2021, respondent served Messrs. Wingard and Van Sant with notices of deposition and subpoenas. When they objected, respondent moved to compel the taking of depositions. Petitioner filed an opposition to those motions on November 12, 2021. On November 15, 2021, Messrs. Wingard and Van Sant filed oppositions and a motion for a protective order.
Discussion
Rule 74(c) provides that the taking of a deposition of a non-party witness is an extraordinary method of discovery. Such depositions may be utilized when the testimony sought is relevant and not privileged and "cannot be obtained through informal consultation or communication." Rules 70(b), 74(c)(1).
Although Messrs. Wingard and Van Sant are "third parties" in a technical sense, they are no strangers to this case. They were hired to prepare, and did prepare, two appraisal reports of significance here: a "restricted appraisal report" dated December 3, 2015, and a final appraisal report dated April 7, 2016. The first report appears to have been used in connection with marketing the syndicated conservation easement deal to investors. The second report was attached to Oconee's 2015 tax return to support the $20,670,000 value placed on the easement.
Among the issues the Court may need to address in this case are: (1) the proper valuation of the easement; (2) whether Messrs. Wingard and Van Sant are "qualified appraisers," sec. 170(f)(11)(E)(ii); (3) whether the appraisal attached to Oconee's 2015 return was a "qualified appraisal," sec. 170(f)(11)(E)(i); and (4) whether Oconee can show good-faith reliance on professional advice as a basis for a "reasonable cause" defense to certain penalties, see sec. 6664(c).
It seems clear that Messrs. Wingard and Van Sant possess relevant, non-privileged information relating to one or more of these issues. On the valuation question, it may be relevant (a) whether any prior appraisals of the property were brought to Messrs. Wingard's and Van Sant's attention; (b) if so, when those appraisals were made and what values they showed; and (c) whether Messrs. Win-gard's and Van Sant's attention was drawn to the December 23, 2015, transaction by which petitioner purchased a 97% interest in Oconee for $2,440,000. The answers to these questions could also affect the determination whether petitioner relied on Messrs. Wingard's and Van Sant's valuation conclusions in good faith. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002) (citing as relevant whether "the taxpayer provided necessary and accurate information to the adviser" and "actually relied in good faith on the adviser's judgment").
As petitioner notes, the "qualified appraiser" and "qualified appraisal" inquiries are governed largely by objective factors, many of which depend on what lies within the four corners of the appraisal itself. But other facts may be relevant. An individual is not a "qualified appraiser" with respect to a particular transaction "if the donor had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property." Sec. 1.170A-13(c)(5)(ii), Income Tax Regs. This may be true (for example) if "the donor and the appraiser make an agreement concerning the amount at which the property will be valued and the donor knows that such amount exceeds the fair market value of the property." Ibid. Communications that Messrs. Wingard and Van Sant may have had with the Reynoldses, Strategic Capital Partners, and/or their representatives may shed light on this question. It may also be relevant what roles Messrs. Wingard and Van Sant respectively played in drafting the appraisals, which recite that they were prepared jointly.
In ascertaining whether the taxpayer has a "reasonable cause" defense to penalties in a case such as this, relevant factors may include "the relationship between appraised value and purchase price, the circumstances under which the appraisal was obtained, and the appraiser's relationship to the taxpayer." Sec. 1.6664-4(b)(1), Income Tax Regs. Here again, communications that Messrs. Win-gard and Van Sant may have had with the Reynoldses, Strategic Capital Partners, and their representatives may be relevant. Also of possible relevance is the timeline of the appraisers' work on the project and how their work interfaced with the private placement memorandum that petitioner desired to issue to prospective investors.
Respondent should be permitted to depose Messrs. Wingard and Van Sant in order to discover facts that may be relevant to these inquiries. Both appraisers may be called (by one or both parties) as witnesses at trial. Depositions may assist respondent in obtaining knowledge of relevant facts--in advance of trial--that are currently in the possession of (and known only to) petitioner, its agents, and the associates who helped them arrange the syndicated easement transaction. See P.T. & L Construction Co., Inc. v. Commissioner, 63 T.C. 404, 414 (1974) (stating that "the basic purpose of discovery is to reduce surprise [at trial] by providing a means for the parties to obtain knowledge of all the relevant facts").
Petitioner does not dispute that Messrs. Wingard and Van Sant possess relevant, discoverable information. Indeed, petitioner acknowledges as "a given" that the "appraisers have information relevant to this action." But petitioner asserts that respondent has not presented a "compelling basis" to justify the taking of depositions. It urges that the appraisal attached to Oconee's return speaks for itself and asserts that respondent seeks depositions in order to "discredit the appraisal." We are not persuaded. As explained above, evidence extrinsic to the appraisal itself may be relevant to the "qualified appraiser" question, as well as to the valuation question and the question whether Oconee reasonably relied on the appraisers' conclusions.
Messrs. Wingard and Van Sant have sought a protective order in the event that we grant respondent's motions. They request that the depositions be limited to specific topics, that the deposition transcripts be sealed, and that they be compensated at their "regular hourly rate." We will deny these requests.
Messrs. Wingard and Van Sant received substantial fees for their work, knowing full well that litigation might ensue, and they cannot plausibly express surprise that respondent wishes to depose them. Respondent proposes to take the depositions by Zoomgov, thus limiting the expense they must incur. And their counsel are free to negotiate with respondent's counsel about the length of the depositions.
If Messrs. Wingard and Van Sant have legitimate claims of privilege (such as the attorney-client privilege) they may assert any applicable privilege in response to specific questions. To the extent their counsel believe that questions are straying into areas that could not possibly lead to the discovery of relevant evidence, they may raise reasonable objections during the deposition. A protective order under Tax Court Rule 103 is generally not the appropriate mechanism for this purpose.
Finally, Messrs. Wingard and Van Sant request that the IRS "create an ethical wall." They allege that the IRS is investigating other cases involving their appraisals and that certain procedures need to be in place to ensure that their testimony is not used for an improper purpose. Respondent has confirmed that he "will comply with any and all applicable rules regarding the permissible uses of information gathered through the depositions." We will take respondent at his word.
Upon due consideration, it is
ORDERED that respondent's Motions to Compel the Taking of Depositions, filed October 6, 2021, at docket entries ## 92 and 93, are granted in that respondent may take the depositions of Thomas F. Wingard and Martin H. Van Sant via Zoomgov at a time and date to be mutually agreed upon. It is further
ORDERED that the Motions for Protective Order Pursuant to Rule 103, filed November 15, 2021, at docket entries ## 108 and 112, are denied. It is further
ORDERED that, in addition to regular service, the Clerk shall serve a copy of this Order on counsel for Thomas F. Wingard and Martin H. Van Sant as follows:
Frank Agostino Agostino and Associates, P.C. 14 Washington Place Hackensack, New Jersey 07601