Syndicated Conservation Easements: Tax Court Disallows $142 Million in Deductions and Imposes 40 Percent Penalties

WASHINGTON — The Tax Court on Tuesday disallowed $142 million in charitable deductions claimed by four partnerships that donated conservation easements on rural land in Georgia and Alabama, finding that the appraisals supporting the deductions valued the land as a granite quarry and luxury subdivision that could never have been built, and upheld 40 percent penalties on the investors' underpayments. The decision in Cottonwood Ridge Holdings v. Commissioner is among the largest in the court's long run of syndicated easement cases and follows the pattern of its predecessors: the deduction survives at a fraction of the claimed figure, and the penalty attaches in full.

"A quarry that exists only in an appraisal is not a quarry," the court wrote.

The transactions

A promoter acquired about 1,900 acres of timberland in 2018 and 2019 for a total of roughly $9 million, placed parcels in four partnerships, and sold interests in the partnerships to about 340 investors for a combined $31 million. Within months of each closing, the partnerships donated conservation easements to a land trust and claimed deductions totaling $148.2 million, allocated to the investors — a return of about $4.75 in deductions for every dollar invested. The appraisals supporting the deductions valued the unencumbered land on the assumption that its highest and best use was, for three parcels, a granite aggregate quarry, and for the fourth, a gated residential community with a golf course. The IRS disallowed the deductions in full and asserted penalties; the partnerships petitioned the Tax Court.

What the court held

1. Highest and best use must be reasonably probable. Valuation for Section 170(h) purposes asks what a willing buyer would pay a willing seller for the land before and after the easement. The before value may reflect a use other than the current one only if that use is legally permissible, physically possible, financially feasible and reasonably probable in the near future. The court found none of those conditions met for the quarry: no mining permit had been sought, no geological testing had established the quality or extent of the granite, no operator had expressed interest, the site had no rail or highway access, and the nearest aggregate market was already served by two quarries with decades of reserves. The residential community fared no better: the parcel lacked water and sewer service, the county had no plans to extend them, and comparable rural land sold for about $4,500 an acre against the appraisal's implied $78,000.
2. The appraisals were not credible. The court found that the appraiser had been given the deduction target before the valuation began, had used a discounted cash flow model for the quarry whose inputs — production volumes, prices and a thirty-year horizon — were supplied by the promoter, and had valued the residential parcel by subtracting development costs from projected lot sales for a subdivision that had not been designed. The IRS's expert, valuing the land as timber and recreation acreage with comparable sales, was accepted with minor adjustments.
3. The deduction allowed. Using the before-and-after method with the court's values, the four easements were worth $6.2 million in total — somewhat less than the investors had paid for their interests.
4. Penalties. Because the claimed values exceeded 200 percent of the correct values, the 40 percent gross valuation misstatement penalty under Section 6662(h) applies to the resulting underpayments. The partnerships argued reasonable cause, citing the appraiser's credentials and a tax opinion obtained by the promoter; the court held that Section 6664(c)(3) forecloses the defense for gross valuation misstatements of charitable contribution property, and that in any event an opinion commissioned by the promoter on facts the promoter supplied is not the independent advice the defense contemplates.

The IRS had also argued that the easement deeds' provisions on the division of proceeds if the easement were ever extinguished violated the perpetuity requirement. The court did not reach the question: appeal in the case lies to the Eleventh Circuit, which held the IRS's proceeds regulation invalid in Hewitt v. Commissioner (2021), and the government pressed valuation instead.

A quarry that exists only in an appraisal is not a quarry.

From the opinion

Where the decision fits

Year	Development	Effect
2017	IRS Notice 2017-10 identifies syndicated easements as listed transactions	Disclosure required; later set aside for lack of notice and comment in Green Valley Investors (T.C. 2022)
2021–22	Hewitt (11th Cir.) invalidates the proceeds regulation; Oakbrook (6th Cir.) upholds it	IRS shifts to valuation in Eleventh Circuit cases
Dec. 2022	SECURE 2.0 Act, Section 605	Partnership easement deductions capped at 2.5 times contributing partners' basis for contributions after December 29, 2022, with exceptions
2023–24	Promoters convicted of conspiracy and fraud; sentences of up to 25 years	Criminal exposure for the architects of the largest schemes
Oct. 2024	Final regulations re-list syndicated easements	Disclosure obligations restored on a rulemaking record
2026	Cottonwood Ridge	Pre-cap deals continue to fail on valuation, with penalties

What it means

• For investors in pre-2023 deals. Several hundred syndicated easement cases remain pending; the IRS's settlement initiative, which offered reduced penalties for concession of most of the deduction, remains the benchmark against which litigation outcomes like this one are measured — and this one was worse.
• For appraisers. The court's findings on the appraiser's process will be referred to the IRS Office of Professional Responsibility; appraiser penalties under Section 6695A are in play.
• For post-cap transactions. The 2.5-times-basis limit removes the arithmetic that made syndication work, but the valuation principles the court applied govern every easement deduction, syndicated or not.

The Counsel will report any appeal to the Eleventh Circuit. Investors in pending syndicated easement cases should discuss the decision's valuation findings and the settlement initiative with their tax counsel; the penalty exposure is not subject to the reasonable-cause defense.

This report is for general information only and is not legal or tax advice. Readers should consult a licensed attorney or tax professional about their own circumstances. Docket numbers and citations are to the official reporters unless otherwise stated.