The Tax Court took a $74.5 million conservation easement deduction, ran it through the reality filter, and reduced it to $500,000. The rest? Chalk it up to a quarry valuation that didn’t survive contact with the evidence. Oh, and they threw in a 40% penalty for good measure.
Holding
Chief Judge Patrick J. Urda did the math: Lontrac’s conservation easement wasn’t worth $74.5 million. It was worth $500,000. The 40% penalty for gross valuation misstatement stuck. So did the IRS’s paperwork.
The Court told everyone to go do the math under Rule 155. No one looked thrilled.
Why It Matters
The decision reinforces established valuation principles. A taxpayer cannot establish a property’s highest and best use through hypothetical mining operations without credible geological evidence, demonstrated market demand, and reliable financial projections. The Court applied existing valuation law rather than announcing a new restriction on conservation easement deductions.
A qualifying conservation easement does not establish its claimed value. The IRS conceded that Lontrac’s donation satisfied Section 170(h). The dispute concerned the property’s value, not whether the donation met the statutory conservation requirements. The Court allowed a $500,000 deduction despite rejecting nearly all of the claimed valuation.
An excessive appraisal does not automatically disqualify the appraiser. The Court distinguished an unreliable or grossly inflated appraisal from evidence that the donor expected the appraiser to falsify the valuation. The IRS failed to establish the circumstances necessary to disqualify the appraiser under the applicable regulation, although the Court gave his appraisal no evidentiary weight.
The penalty ruling follows controlling Eleventh Circuit law. Under Kroner v. Commissioner, Section 6751(b)(1) requires written supervisory approval before assessment. The IRS had obtained approval before issuing the final partnership administrative adjustment. The Court rejected Lontrac’s additional challenges to the supervisor’s understanding of the audit.
Key Facts
Property acquisition and unsuccessful sale efforts
Lon Dillard and his wife, Tracy, acquired approximately 309.6 acres in Polk County, Tennessee, through their corporation in 2006. They paid $1.3 million and financed most of the purchase with a bank loan.
The mountainous property bordered the Hiwassee River, included streams and forested land, and accommodated a historic tourist railroad. The owners primarily used it for recreation.
The Dillards initially contemplated development or resale. They listed the property for $4.68 million in 2008, reduced the asking price to $3.9 million, and lowered it again to $2,964,000 in 2009.
The property remained available at that price through September 2014 without attracting a buyer.
The Dillards formed Lontrac Enterprises in December 2012 and transferred the property to the entity.
Development of the easement transaction
Dillard subsequently consulted quarry operator Curtis Colwell about using the property for mining or granting a conservation easement.
Attorney Jim Adams helped organize the transaction through Lontrac Investors, LLC, an entity designed to solicit investments from individuals seeking tax benefits.
A November 2014 private placement memorandum projected substantial charitable contribution deductions from an easement donation.
The memorandum estimated that a $200,000 investment would produce $610,791 in combined federal and state tax benefits, assuming a 45% tax rate. This represented projected tax benefits exceeding three times the original investment.
Investors ultimately contributed $8,800,100. Lontrac Investors purchased a 99% ownership interest in Lontrac Enterprises for $990,000.
The transaction contemplated substantial payments to its organizers, including approximately $5.7 million to redeem ownership interests held by Adams and the Dillards and another $1.4 million in management and advisory fees.
The Dillards used $750,000 of the purchase proceeds to satisfy the property’s outstanding debt.
The $74.5 million appraisal
Lontrac obtained three appraisals that assigned pre-easement property values exceeding $60 million.
The partnership selected appraiser Duane Miller’s valuation.
Miller had previously appraised the property at $2.03 million in 2008 and $1.56 million in 2010. His new appraisal, dated June 29, 2015, valued the property at $75 million based on its purported potential as a granite quarry.
Miller estimated its value after the easement at $493,000 and calculated an easement value of $74,507,000.
His analysis relied heavily on reports by Colwell and geologist Joel Warner on estimated mineral resources, production volumes, and mining profitability.
On December 29, 2014, Lontrac granted Foothills Land Conservancy a conservation easement covering approximately 288.8 acres.
Lontrac claimed a $74,507,000 charitable contribution deduction on its 2014 partnership return.
IRS examination
The IRS issued a notice of final partnership administrative adjustment on October 3, 2017.
The IRS disallowed the claimed deduction and assessed a 40% gross valuation misstatement penalty, with an alternative 20% accuracy-related penalty.
The Commissioner later conceded the technical challenges to the donation’s qualification under Section 170(h). The remaining substantive issues concerned valuation and penalties.
Statutory and Regulatory Framework
Section 170(a) and (h): Section 170 permits deductions for qualifying charitable contributions, including certain perpetual conservation restrictions granted to eligible organizations for conservation purposes. The deduction generally reflects the donated property’s fair market value.
Treasury Regulation Section 1.170A-14(h)(3): When comparable conservation easement sales do not provide reliable valuation evidence, the regulation directs taxpayers to use the before-and-after method. This measures the difference between the property’s fair market value before and after the conservation restriction. The analysis considers the property’s highest and best use, meaning its reasonably probable, most valuable permissible use.
Section 170(f)(11) and Treasury Regulation Section 1.170A-13(c)(5)(ii): The Code imposes qualified appraisal requirements for substantial noncash charitable deductions. The regulation disqualifies an appraiser when the donor knows facts that would cause a reasonable person to expect the appraiser falsely to overstate the property’s value.
Sections 6662(h) and 6664(c)(3): A gross valuation misstatement generally occurs when the reported value reaches at least 200% of the correct value. A 40% penalty applies to the portion of the tax underpayment attributable to that misstatement. The reasonable-cause defense does not apply to gross valuation misstatements involving donated property.
Section 6751(b)(1): The IRS must obtain personal written approval of an initial penalty determination from the employee’s immediate supervisor or another designated official. Controlling Eleventh Circuit precedent addresses when the IRS must obtain that approval.
Arguments
Taxpayer argued:
Mining metagreywacke, a hard metamorphic rock, represented the property’s highest and best use in December 2014.
Geological reports, available rock samples, and projected mineral production supported the property’s substantial mining value.
The discounted cash flow method appropriately captured the anticipated income from quarry operations. Lontrac relied on trial appraiser Dale Hayter’s $61.5 million pre-easement valuation and additional expert analysis.
The historic railroad crossing the property offered access to markets beyond the immediate area and supported the projected production and sales volumes.
The IRS had not established grounds for disqualifying Miller as an appraiser.
The IRS failed to satisfy Section 6751(b)(1) because the supervisory approval process lacked the necessary understanding and review of the penalty determination.
Government argued:
Recreational use with existing development rights, rather than mineral extraction, represented the property’s highest and best use.
The taxpayer lacked reliable geological testing to establish commercially exploitable mineral deposits.
The projected mining operations relied on unsupported production volumes, weak demand assumptions, uncertain railroad access, and unrealistic expenses.
Comparable property sales provided a more reliable valuation than projected mining income.
Miller’s appraisal did not meet the qualified appraiser requirements because of the circumstances surrounding its inflated valuation. The IRS also urged the Court to draw an adverse inference from Miller’s refusal to testify on Fifth Amendment grounds.
The reported valuation triggered the 40% gross valuation misstatement penalty, and the IRS had obtained the required supervisory approval.
Court’s Reasoning
1. The evidence did not establish commercially exploitable mineral deposits.
The Court identified fundamental deficiencies in the geological work underlying Lontrac’s mining projections.
Dillard drilled five test holes in 2013 while searching for precious metals. The holes ranged from 31 to 73 feet deep.
None occupied the areas that Warner subsequently identified as suitable for mining.
Warner collected exposed rock samples, but he did not obtain continuous subsurface cores from the proposed quarry areas.
The Court credited the government’s mining and geological experts, Patrick Daniels and Berkley Tracy, who explained why the limited exploration could not reliably establish the mineral deposit’s quantity, quality, density, or continuity.
The Court also identified an important discrepancy in the original analysis.
Colwell and Miller assumed that the property contained granite. Warner’s observations identified metagreywacke instead, and the record did not support granite deposits on the property.
Colwell later revised his report to substitute metagreywacke without materially rebuilding his underlying economic analysis.
Warner also revised his resource estimates upward from approximately 47 million tons to more than 79 million tons after advisers questioned discrepancies between the reports. Those revisions changed density assumptions and removed language acknowledging insufficient geological evidence.
The Court rejected the reports as reliable support for commercially exploitable mineral resources.
2. The projected market could not support the claimed production.
Lontrac’s projections contemplated initial annual production of approximately 950,000 tons, potentially increasing to 1.5 million tons.
The Court found no objective market evidence supporting those volumes.
Aggregate, the crushed rock used in construction, ordinarily serves geographically limited markets because transportation costs account for a substantial portion of delivered prices.
The property occupied a sparsely populated area with limited development activity.
Government experts identified approximately 20 competing quarries within 50 miles. Several existing operations had unused production capacity.
Lontrac’s own expert estimated regional demand at approximately four million tons annually. A new quarry producing one million tons would therefore need to capture roughly one-quarter of the existing regional market.
The evidence did not establish that Lontrac could obtain that market share.
The Court also rejected estimates that substantial additional construction demand would support a new quarry in the reasonably foreseeable future.
3. The railroad did not establish access to distant markets.
Lontrac relied heavily on the historic Hiwassee railroad as a potential means of transporting aggregate to customers beyond the usual trucking radius.
The Court identified two deficiencies.
First, the partnership failed to establish that the railroad’s owner would permit the proposed freight operations or that its infrastructure could accommodate the necessary loads.
The railroad principally served scenic tourism. Its facilities included wooden supports and a historic trestle. The railroad was not a common carrier obligated to transport Lontrac’s freight.
Second, Lontrac did not establish that distant buyers would purchase its aggregate rather than comparable material from closer producers.
Even if rail transportation proved feasible, additional handling and transportation expenses could eliminate any price advantage.
The Court therefore excluded the proposed railroad operations from its evaluation of reasonably probable mining demand.
4. The financial projections lacked reliable cost assumptions.
Colwell’s original report estimated operating costs at $6.50 per ton and incorporated broad assumptions about startup expenses, equipment, and other costs.
The report did not provide sufficient itemized support.
Lontrac’s later expert, Richard Capps, estimated approximately $5.5 million in preliminary capital expenses and operating costs of $8.75 per ton.
The Court found those figures insufficiently supported, particularly given the property’s difficult terrain and potential infrastructure requirements.
The Court also rejected Lontrac’s attempt to strengthen its original conclusions with later expert reports that still relied on the same deficient geological and market analyses.
As a result, the Court gave no weight to the taxpayer’s expert opinions supporting mining as the property’s highest and best use.
For purposes of its analysis, the Court assumed a quarry could satisfy applicable legal requirements. It rejected the claim because it lacked credible mineral, market, and financial evidence, not because it concluded that mining permits were legally unavailable.
5. Comparable sales established a $1.1 million pre-easement value.
The Court determined that, in December 2014, the property’s highest and best use remained recreation with its existing future development rights.
It accepted government appraiser Roger Ball’s comparable sales analysis.
Ball examined five comparable properties and adjusted their sales prices for relevant characteristics, including location-related features, topography, acreage, river frontage, accessibility, and transaction dates.
His analysis indicated an average adjusted value of approximately $3,500 per acre and a rounded total property value of $1.1 million.
The Court also considered the September 2014 transaction in which Investors agreed to acquire the property for $1 million or a 99% partnership interest for $990,000.
That transaction supported Ball’s valuation and contradicted Lontrac’s substantially higher mining-based appraisal.
The Court rejected the discounted cash flow approach because Lontrac lacked an established income-producing history, a reasonably probable mining operation, and reliable inputs for projecting future income.
Government expert Ball valued the property after the easement at $600,000. Taxpayer expert Hayter proposed $712,000.
Because a lower after-easement value increased the deduction, the Court treated the Commissioner’s $600,000 figure as conceded.
The resulting calculation was straightforward:
Property value before the easement: $1,100,000
Property value after the easement: $600,000
Allowable easement deduction: $500,000
The Court therefore reduced the claimed deduction by $74,007,000.
6. The appraisal deficiencies did not establish regulatory disqualification.
The IRS argued that Miller was not a qualified appraiser because Lontrac’s organizers possessed information that should have caused them to expect a falsely inflated valuation.
The Court distinguished knowledge of an inaccurate appraisal from knowledge suggesting deliberate falsification or collusion.
Adams had asked Miller and two other appraisers to evaluate the property as a mine. Each returned a valuation exceeding $60 million.
Although the organizers wanted a substantial deduction and the underlying reports contained serious weaknesses, those facts did not establish that a reasonable person with their knowledge would expect Miller to falsify the valuation.
Miller invoked his Fifth Amendment right against self-incrimination and declined to answer questions at trial.
The Court refused to draw the adverse inference the IRS requested, applying the factors that govern a nonparty witness’s invocation of the privilege.
The Court nevertheless assigned Miller’s appraisal no evidentiary weight, particularly because his refusal to testify prevented meaningful cross-examination.
The distinction matters: The IRS did not establish the specific knowledge necessary to disqualify the appraiser, but the partnership still failed to substantiate its claimed value.
7. The gross valuation penalty applied, and supervisory approval satisfied the governing standard.
Lontrac reported an easement value of $74,507,000.
The Court determined the value to be $500,000.
The claimed value equaled approximately 14,901% of the correct value, far exceeding the statutory 200% threshold for a gross valuation misstatement.
Section 6662(h) therefore imposed a 40% penalty on the resulting tax underpayment attributable to the misstatement.
The Court also rejected Lontrac’s challenge under Section 6751(b)(1).
Revenue Agent Whit Tindall’s immediate supervisor, Keith Garrison, signed a Civil Penalty Approval Form on July 12, 2017. The IRS issued its final partnership administrative adjustment on October 3, 2017.
The Court applied Kroner v. Commissioner, which holds that the IRS satisfies the supervisory approval requirement when a supervisor approves the initial penalty determination before assessment.
Because the partnership proceeding remained unresolved, the penalty had not yet become assessable. In any event, the IRS secured approval before issuing its adjustment.
The Court found Lontrac’s arguments about the supervisor’s familiarity with the audit irrelevant under the controlling Eleventh Circuit standard.
Because the entire underpayment arose from a gross valuation misstatement, the Court did not address the IRS’s alternative 20% penalty theories.
Result
The Tax Court allowed a $500,000 charitable contribution deduction, sustained the 40% gross valuation misstatement penalty, and ordered entry of decision under Rule 155.
The opinion did not determine the final dollar amount of the partners’ resulting tax liabilities or penalties.
The Takeaway
If you’re pitching a conservation easement based on imaginary mining riches, bring real evidence. Rocks, buyers, trains, and numbers that add up. Otherwise, don’t expect the Tax Court to buy your story—or your valuation.
List of Citations
I.R.C. § 170(a), (h). Establishes the charitable contribution deduction and the requirements for qualified conservation contributions.
I.R.C. § 170(f)(11). Establishes qualified appraisal and substantiation requirements for specified noncash charitable contributions.
Treas. Reg. § 1.170A-14(h)(3). Governs conservation easement valuation, including the before-and-after method and highest-and-best-use analysis.
Treas. Reg. § 1.170A-13(c)(5)(ii). Addresses appraiser disqualification when a donor knows facts that would cause a reasonable person to expect deliberate overvaluation.
I.R.C. § 6662(h). Imposes the 40% gross valuation misstatement penalty.
I.R.C. § 6664(c)(3). Eliminates the reasonable-cause defense for gross valuation misstatements involving charitable property contributions.
I.R.C. § 6751(b)(1). Establishes the written supervisory approval requirement for penalties.
Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022). Establishes the controlling supervisory approval timing standard.
Savannah Shoals, LLC v. Commissioner, 182 F.4th 1314 (11th Cir. 2026). Addresses highest-and-best-use analysis and market demand for proposed aggregate mining in conservation easement valuations.
TOT Property Holdings, LLC v. Commissioner, 1 F.4th 1354 (11th Cir. 2021). Addresses easement valuation and the evidentiary relevance of transactions involving controlling partnership interests.
Ranch Springs, LLC v. Commissioner, 164 T.C. 93 (2025). Addresses expert valuation evidence and the determination of highest and best use.
Paul-Adams Quarry Trust, LLC v. Commissioner, T.C. Memo. 2025-112. Addresses proposed quarry uses and the regulatory standard for disqualifying an appraiser.
Buckelew Farm, LLC v. Commissioner, T.C. Memo. 2024-52, aff’d, 2025 WL 2502669 (11th Cir. Sept. 2, 2025). Supports consideration of actual market transactions and comparable property sales.
LiButti v. United States, 107 F.3d 110 (2d Cir. 1997). Identifies factors governing adverse inferences when a nonparty invokes the Fifth Amendment in civil litigation.
Coquina Investments v. TD Bank, N.A., 760 F.3d 1300 (11th Cir. 2014). Adopts a flexible, case-specific approach to those adverse inferences.
Golsen v. Commissioner, 54 T.C. 742 (1970). Requires the Tax Court to follow controlling appellate precedent when the appeal ordinarily lies to that circuit.