Glade Creek Partner, LLC v. Commissioner of Internal Revenue

USCA11 Case: 21-11251 Date Filed: 08/22/2022 Page: 1 of 18

[DO NOT PUBLISH]

In the

United States Court of Appeals

For the Eleventh Circuit

____________________

No. 21-11251

____________________

GLADE CREEK PARTNER, LLC,

c/o Sequatchie Holdings, LLC Tax Matters Partner,

Petitioner-Appellant,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

____________________

Petition for Review of a Decision of the

U.S. Tax Court

Agency No. 22272-17

____________________

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2 Opinion of the Court 21-11251

Before NEWSOM, TJOFLAT, and ED CARNES, Circuit Judges.

PER CURIAM:

This case involves a tax dispute over a conservation ease-

ment. The tax court determined that Glade Creek Partners, LLC,

improperly claimed a charitable contribution tax deduction be-

cause it failed to ensure that the conservation purposes of an ease-

ment it had donated to a charitable organization were protected in

perpetuity. The court also found that Glade Creek owes a penalty

for substantially misstating the value of the easement. Glade Creek

appeals.

I.

International Land Co. (ILC) purchased almost 2,000 acres

of undeveloped land in Tennessee for just over $9 million in 2006.

After initial residential development plans didn’t entirely pan out,

ILC sold what remained of the property to Hawks Bluff Investment

Group, Inc., a corporation formed by two ILC members and James

Vincent, a local real estate investor. Hawks Bluff obtained owner-

ship of the property along with all of ILC’s debts. Efforts to develop

the land continued but still didn’t pan out, and Vincent became

worried about paying the debts the company had incurred.

Vincent heard that a conservation easement might help. He

spoke with Matthew Campbell, who was managing several com-

panies that had donated conservation easements and was experi-

enced in marketing companies to investors as tax savings

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21-11251 Opinion of the Court 3

opportunities. After talking to Campbell, Vincent decided that his

financial problems would be solved by donating a conservation

easement on part of the Hawks Bluff property to a charitable or-

ganization.

Campbell understood the purpose of the easement was to

generate enough money to repay the Hawks Bluff debt. He

formed two new entities, Glade Creek Partners, LLC, and Sequat-

chie Holdings, LLC. The plan was for Glade Creek to take control

of the Hawks Bluff property and debt, and for Sequatchie to pro-

mote the conservation easement as an investment opportunity.

Campbell would act as Glade Creek’s manager, and he would sell

Sequatchie in a private offering. Once the sale of it had raised

enough money from investors to cover the Hawks Bluff debt, Se-

quatchie would purchase a majority membership interest in Glade

Creek and grant the conservation easement on the land. The in-

vestors would receive a significant charitable contribution tax de-

duction in return. See I.R.C. § 170.

Campbell set the offering price for shares of Sequatchie

without considering the property’s fair market value, because he

wanted to raise enough money to repay the Hawks Bluff debt, re-

gardless of what the property was actually worth. Campbell hired

the professionals needed to complete the transaction, including

lawyers, a brokerage firm, and two appraisers. He told potential

investors that the conservation easement would generate a total

estimated charitable contribution deduction of $17.7 million, and

that the more an investor invested, the larger portion of that

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4 Opinion of the Court 21-11251

deduction the investor could claim. The plan raised enough

money to cover the Hawks Bluff debt, and Glade Creek donated

the conservation easement to Atlantic Coast Conservancy, Inc.

When executing a deed of easement, Glade Creek included

a provision addressing what would happen if it became impossible

to use the property for conservation purposes. The deed provided

in that situation a court could terminate — or, in tax terms, “extin-

guish” — the easement, and the Conservancy would be entitled to

a portion of the proceeds from any “subsequent sale or exchange

of the property.” See Treas. Reg. § 1.170A-14(g)(6). According to

the deed, the Conservancy’s portion of any extinguishment pro-

ceeds would be calculated using the easement’s fair market value

at the time of the sale “minus any increase in value” that was “at-

tributable to improvements” made after the easement was granted.

That amount attributed to improvements would not go to the

Conservancy but back to Glade Creek.

Glade Creek claimed a $17,504,000 charitable contribution

deduction on its 2012 tax year return. In 2017, the IRS issued Glade

Creek a Final Partnership Administrative Adjustment (FPAA)

based on that 2012 return. 1 The IRS asserted that Glade Creek was

not entitled to a charitable contribution deduction because of the

1 An FPAA “is the functional equivalent of a Statutory Notice of Deficiency

for individual taxpayers” and is issued when the IRS determines that a change

— or, in tax terms, an “adjustment” — to a partnership tax return is required.

See United States v. Clarke, 816 F.3d 1310, 1313 n.2 (11th Cir. 2016).

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21-11251 Opinion of the Court 5

way that the conservation easement deed handled the possibility of

any future extinguishment proceeds. The IRS also assessed a pen-

alty against Glade Creek for misstating the value of the easement.

Glade Creek petitioned the tax court for review — or, in tax terms,

“readjustment” — of the FPAA. See I.R.C. §§ 6226, 6234.

After a three-day trial, the tax court concluded that Glade

Creek had not properly taken the charitable contribution deduc-

tion. It also concluded that Glade Creek was subject to a penalty

for substantially overstating the value of the easement. Glade

Creek challenges both conclusions.2

II.

Glade Creek challenges the tax court’s conclusion that it im-

properly took the charitable contribution deduction. In reaching

that conclusion, the court noted that to qualify for a charitable con-

tribution deduction, the taxpayer must donate the easement “ex-

clusively for conservation purposes” and those purposes must be

“protected in perpetuity.” I.R.C. § 170(h)(5)(A). The court ex-

plained that, to meet the in-perpetuity requirement, the regulation

interpreting that part of the tax code requires the deed of easement

to “account for the possibility of unexpected changes to the prop-

erty that would undermine the continued use of the property for

conservation purposes.” TOT Prop. Holdings, LLC v. Comm’r, 1

2 In addition, the tax court also addressed a cash donation deduction that

Glade Creek claimed, but it ruled in favor of Glade Creek on that, and the IRS

did not appeal that decision.

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6 Opinion of the Court 21-11251

F.4th 1354, 1362 (11th Cir. 2021). The regulation requires a deed

to account for that possibility because, if it were to occur, “judicial

extinguishment” of the easement would be “required,” and the do-

nee of the easement “must receive a share of the proceeds deter-

mined by” a formula provided in the regulation. Id.; see also Treas.

Reg. § 1.170A-14(g)(6)(ii).

The tax court noted that the formula “does not permit the

value of any posteasement improvements to be subtracted out be-

fore determining the donee’s share” of the proceeds. Because

Glade Creek’s deed did provide for subtracting the improvement

value from the Conservancy’s share of any future extinguishment

proceeds, the tax court found that Glade Creek’s donation violated

the in-perpetuity requirement, which meant the charitable contri-

bution deduction had been improperly claimed on its tax filing.

Glade Creek contends that the tax court erred when it disal-

lowed the deduction for failure to satisfy I.R.C. § 170(h)(5)(A)’s in-

perpetuity requirement. After Glade Creek filed its notice of ap-

peal, we issued Hewitt v. Comm’r, 21 F.4th 1336 (11th Cir. 2021).

In Hewitt, “we conclude[d] that the Commissioner’s interpretation

of [Treas. Reg.] § 1.1740A-14(g)(6)(ii) is arbitrary and capricious

and violates the APA’s procedural requirements.” Id. at 1339. So

Hewitt invalidated the regulation on which the tax court relied in

disallowing Glade Creek’s charitable contribution deduction. See

id. We must follow Hewitt. See, e.g., United States v. Bazantes,

978 F.3d 1227, 1243–44 (11th Cir. 2020) (“Under the well-estab-

lished prior panel precedent rule of this Circuit, the holding of the

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21-11251 Opinion of the Court 7

first panel to address an issue is the law of this Circuit, thereby bind-

ing all subsequent panels unless and until the first panel’s holding

is overruled by the Court sitting en banc or by the Supreme

Court.”) (quotation marks omitted). Accordingly, we will vacate

that part of the tax court’s judgment for reconsideration without

reliance on the regulation.

The IRS advanced several other arguments before the tax

court for why Glade Creek should not be allowed to claim a deduc-

tion for the conservation easement. In light of our decision to va-

cate and remand because of our Hewitt decision, we need not ad-

dress those other arguments and will leave them for decision by

the tax court in the first instance.

III.

Glade Creek also challenges the tax court’s conclusion that

it is subject to a penalty for substantially overstating the value of

the easement. That issue exists regardless of whether it properly

claimed a deduction for the easement. That’s because the IRS im-

poses an “accuracy-related penalty” if “any portion of an underpay-

ment of tax” in excess of $5,000 is “attributable to . . . [a]ny substan-

tial valuation misstatement.” I.R.C. § 6662(a), (b)(3), and (e)(2); cf.

Gustashaw v. Comm’r, 696 F.3d 1124, 1136 (11th Cir. 2012) (hold-

ing that an overvaluation penalty should apply even when the

value of the deduction is determined to be zero because the under-

lying transaction lacks any economic substance).

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8 Opinion of the Court 21-11251

In reaching its conclusion that Glade Creek had substantially

overstated the value of the claimed easement deduction, the tax

court used what’s called the “before-and-after” valuation method.

That method calculates the fair market value of the easement by:

(1) determining the fair market value of the property if put to its

highest and best use (the “before” value); (2) determining the fair

market value of the property once it is encumbered by the ease-

ment (the “after” value); and (3) subtracting the after value from

the before value. See Treas. Reg. § 1.170A-14(h)(3)(ii).

To establish the before value, the court relied on Glade

Creek’s land-use expert, Richard Norton, and its valuation expert,

Claud Clark III, who was also one of its appraisers. Norton testified

that the property’s highest and best use was for residential devel-

opment, and he created a hypothetical housing development to il-

lustrate that use. Norton’s hypothetical housing development was

a subdivision of single-family homes.

Clark determined that the value of the property’s highest

and best use was $17,314,049. To reach that number, Clark used

Norton’s hypothetical development and applied a “discounted cash

flow” analysis to estimate the before value of the land. A dis-

counted cash flow analysis is a method of estimating the present

value of an investment. See John A. Bogdanski, Federal Tax Valu-

ation ¶ 3.05(1)(a) (Thompson Reuters 2022); see also Kuebler v.

Vectren Corp., 13 F.4th 631, 639 (7th Cir. 2021) (“A discounted cash

flow analysis estimates the present value of an investment based on

future cash flows.”). The analysis uses an interest rate — which is

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21-11251 Opinion of the Court 9

sometimes called a discount rate — to reduce the value of the in-

vestment to its present value. Bogdanksi, supra, at ¶ 3.05(1)(a).

That’s necessary because the present value of an investment is less

than the value the investor will eventually receive. Id.

As part of his analysis, Clark projected the gross revenues

from Norton’s hypothetical housing development. He also pro-

jected expenses for the development’s sales period, and he in-

creased those expense amounts by 15% to account for the devel-

oper’s profit. He then subtracted the increased projected expenses

from the projected gross revenue, producing a projected net reve-

nue. Finally, he discounted the projected net revenue by 11.25%

to “convert the future dollars to present day values.”

The tax court accepted Norton’s finding about what was the

property’s highest and best use. And the court largely agreed with

Clark’s valuation approach. But the court found an “error” in one

“aspect” of Clark’s “cost analysis”: he had “deviated from industry

practice by including profit as a line-item expense” instead of using

a discount rate that already included “profit risk.” That is, Clark

had treated the theoretical developer’s profit as a separate 15% ex-

pense and then applied an overall 11.25% discount rate when he

should have applied an overall 26.25% discount rate without con-

sidering the developer’s profit separately.

According to Clark’s valuation report, his method applied a

“combined” discount rate of 26.25% that he took from an industry-

recognized quarterly survey of developers. But Clark’s report also

noted that, in the quarterly survey, discount rates for single-family

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10 Opinion of the Court 21-11251

subdivisions like the one in Norton’s hypothetical development al-

ready “include . . . developer’s profit.” Which means that for those

kinds of developments, “profit is not treated as a line item expense”

as it is in discount rates for other kinds of developments like con-

dominiums. By separating profit into a line item expense, Clark

had used the industry practice for condominium developments in-

stead of the industry practice for single-family subdivisions.

As a result, the tax court concluded that Clark had not fol-

lowed the correct industry practice — the one acknowledged in his

own report — and that he had not satisfactorily explained his fail-

ure to follow that practice. The court then undertook its own cal-

culation of the property’s “before” value and, applying “a discount

rate of 26.25%” to its own “computation of net revenues,” found

that value to be $9,353,171. (Far less than Clark’s $17,314,049 be-

fore value.)

Moving on to the second step of the “before-and-after”

method, the court relied on the IRS’s concession to find that the

property’s “after” value was $476,400. The court then completed

the method’s third step by subtracting the after value ($476,400)

from the before value ($9,353,171), resulting in the conclusion that

the “easement’s fair market value [was] $8,876,771.” 3 Because

3 The tax court initially concluded that the before value of the property was

$9,354,171. But it later stated that the before value was $9,353,171. The court

used the second number to calculate the fair market value of the property,

which it found was $8,876,771. According to the court’s calculations, the after

value should be $8,877,771: ($9,354,171 - $476,400 = 8,877,771). The IRS

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21-11251 Opinion of the Court 11

Glade Creek had claimed a deduction of $17,504,000, the court de-

termined Glade Creek had overvalued the easement by more than

150% (which would have been $13,315,157) but less than 200%

(which would have been $17,753,542). That amount of overvalu-

ing, the court concluded, meant that Glade Creek owed a substan-

tial valuation misstatement penalty. See I.R.C. § 6662.

The court also concluded that Glade Creek did not qualify

for the “reasonable cause” exception to that penalty, which applies

if “the claimed value of the property was based on a qualified ap-

praisal made by a qualified appraiser” and the “taxpayer made a

good faith investigation of the value of the contributed property.”

See I.R.C. § 6664(b)(3). The court found that the appraisers Glade

Creek hired “determined the before value to achieve the tax sav-

ings goals of the easement transaction and did not attempt to accu-

rately ascertain the easement’s fair market value.” It also found

that Campbell, Glade Creek’s manager, “did not make a good faith

investigation into the easement’s fair market value or rely on the

appraisers in good faith to ascertain the easement’s fair market

value” because “Campbell knew that the easement was substan-

tially overvalued” and “wanted an appraisal that accomplished his

tax objectives for the easement transaction.” On those findings,

the court rested its determination that Glade Creek had not “acted

concedes that this “case should be remanded for the limited purpose” of cor-

recting that error. The miscalculation does not impact the substantive issues

before us, and we will REMAND this case with instructions to fix that scrive-

ner’s error.

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12 Opinion of the Court 21-11251

with reasonable cause and in good faith in its valuation of the ease-

ment.”

A.

Glade Creek contends that the tax court erred by sustaining

the substantial valuation misstatement penalty the IRS had im-

posed. It does not dispute that “[t]axpayers who underpay their

taxes due to a ‘valuation misstatement’ may incur an accuracy-re-

lated penalty.” TOT Prop. Holdings, 1 F.4th at 1368 (quotation

marks omitted). Nor does Glade Creek contest that “[t]he degree

of a misstatement determines the severity of the penalty.” Id. at

1369. The applicable statute provides that if a taxpayer has mis-

stated the value of its donated property by between 150% and 200%

of the property’s fair market value, “the IRS will assess a 20% pen-

alty for a substantial valuation misstatement.” Id. (quotation marks

omitted).

As we’ve mentioned, “[t]he correct value of a conservation

easement is the fair market value of it at the time of the contribu-

tion,” which is “generally calculated based on sales prices of com-

parable easements.” Id. (alteration adopted and quotation marks

omitted). When comparable easements are not readily available,

courts can apply the “before-and-after” method to determine the

easement’s fair market value. Id.; see also Treas. Reg. § 1.170A-

14(h)(3)(i). “A determination of fair market value is a mixed ques-

tion of fact and law: the factual premises are subject to a clearly

erroneous standard while the legal conclusions are subject to de

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21-11251 Opinion of the Court 13

novo review.” TOT Prop. Holdings, 1 F.4th at 1368 (quotation

marks omitted).

To calculate the before value of the property, courts must

first determine the property’s highest and best use. Palmer Ranch

Holdings Ltd. v. Comm’r, 812 F.3d 982, 987 (11th Cir. 2016). The

highest and best use of the property is one that is “reasonable and

probable” and “supports the highest present value.” Id. (quotation

marks omitted); see also Treas. Reg. § 1.170A-14(h)(3)(ii).

Glade Creek’s land-use expert testified that the property’s

highest and best use was for a residential development of single-

family homes, and the tax court agreed. The court calculated the

before value of the property if put to that use by applying a dis-

count rate of 26.25%. It concluded that the property’s before value

was $9,354,171.

Glade Creek argues the court reached that value in error be-

cause it “sua sponte devised its own appraisal method.” We disa-

gree. The tax court and Clark (Glade Creek’s valuation expert)

both used the before-and-after method, which is the standard

method for determining the value of an easement like the one here.

See TOT Prop. Holdings, 1 F.4th at 1369; Treas. Reg. § 1.170A-

14(h)(3). And they both applied a “discounted cashflow analysis,”

which included using a discount rate to reduce future dollars to

present day values, to determine the before value of the property.

What Glade Creek characterizes as a legal challenge to the

court’s valuation method is actually a factual challenge to the tax

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14 Opinion of the Court 21-11251

court’s computation of the easement’s fair market value. See Est.

of Jelke v. Comm’r, 507 F.3d 1317, 1321 (11th Cir. 2007) (“The

mathematical computation of fair market value is an issue of fact,

but determination of the appropriate valuation method is an issue

of law . . . .”) (quotation marks omitted). Reframed in its proper

light, we review Glade Creek’s challenge only for clear error.

Palmer Ranch Holdings, 812 F.3d at 993 (“We review the tax

court’s legal conclusions de novo and its findings of fact for clear

error.”).

Glade Creek asserts that the IRS had the burden to produce

evidence that Glade Creek substantially overstated the easement’s

value, which the IRS did not meet, and that “there is nothing in the

record to support” the tax court’s “adjustments” to Clark’s valua-

tion. But there is plenty of evidence to support the determination

that the easement’s value was less than Clark said it was, including

Clark’s own report. That report expressly provided for the use of

profit-inclusive discount rates when assessing single-family subdi-

visions, like Glade Creek’s land-use expert used in his hypothetical

housing development. And according to Clark’s characterization

in that report, his own method applied a combined discount rate of

26.25% that he took from an industry-recognized publication

(though the tax court ultimately concluded that the “broken

down” version Clark used — a 15% profit on expenses rate and an

11.25% discount rate — wasn’t equivalent to an overall 26.25% dis-

count rate). The tax court’s valuation was based on that same data,

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21-11251 Opinion of the Court 15

and it was not clear error for the court to apply a 26.25% discount

rate in its calculation.

Glade Creek points out that the tax court did not rely on the

IRS’s expert, and the IRS later disclaimed its expert’s testimony.

But the tax court stated that it had determined the accuracy-related

penalty issue “on the basis of the record and the preponderance of

the evidence.” Regardless of who initially bore the burden of pro-

duction or who introduced the evidence in the record, that record

evidence supports the tax court’s findings.

That is why Glade Creek’s reliance on Estate of Elkins v.

Commissioner, 767 F.3d 443 (5th Cir. 2014), is unpersuasive. In

that case, the tax court considered whether to apply a fractional-

ownership discount when determining the taxable values of several

works of art. Id. at 445. The court rejected the IRS’s position that

no discount applied but also rejected the petitioners’ proposed dis-

count amount. Id. The Fifth Circuit held that it was error for the

tax court to “adopt and apply” its own discount amount “without

any supporting evidence.” Id. The only evidence in the Elkins rec-

ord supported the petitioners’ claimed discount amount, and there

was “no viable factual or legal support” for the discount amount

that the tax court applied. Id. at 450.

That is not so here. The record, including Clark’s report,

supports the tax court’s valuation of the easement. And the court

applied the before-and-after valuation method, which is the stand-

ard method used in these circumstances. The tax court is not re-

quired to accept Glade Creek’s proposed before value or ignore

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16 Opinion of the Court 21-11251

relevant evidence that undermines Glade Creek’s valuation of the

easement. We will not disturb the court’s calculation of the ease-

ment’s value unless “on the entire evidence [we are] left with the

definite and firm conviction that a mistake has been committed.”

Morrissette-Brown v. Mobile Infirmary Med. Ctr., 506 F.3d 1317,

1319 (11th Cir. 2007) (quotation marks omitted). After reviewing

the entire record, we are not left with that conviction. 4

B.

Finally, Glade Creek contends that, even if it misstated the

easement’s value, no penalty should be imposed because of the rea-

sonable cause exception in I.R.C. § 6664. A taxpayer can avoid a

substantial valuation misstatement penalty by showing that “the

claimed value of the property was based on a qualified appraisal

made by a qualified appraiser” and that “in addition to obtaining

such appraisal, the taxpayer made a good faith investigation of the

value of the contributed property.” I.R.C. § 6664(c)(3). Courts de-

termine whether a company has exercised due diligence by looking

at the actions of the company’s manager. See Stobie Creek Invs.

LLC v. United States, 608 F.3d 1366, 1380–83 (Fed. Cir. 2010).

4 Glade Creek’s brief lists several other tax court findings it says were wrong,

but it makes only “passing references to those [findings], without advancing

any arguments or citing any authorities to establish that they were error.”

Sapuppo v. Allstate Floridian Ins. Co., 739 F.3d 678, 681 (11th Cir. 2014). As a

result, Glade Creek has abandoned those issues. Id. at 681–83.

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21-11251 Opinion of the Court 17

The tax court found that the appraisal was not done in good

faith and that Campbell, Glade Creek’s manager, did not make a

good faith investigation of the easement’s fair market value. Glade

Creek argues that the tax court’s finding is “unsupported and is

contradicted by the record.”

As Glade Creek admits in its brief to us, Campbell under-

stood that the goal of creating the conservation easement “was to

raise enough money to repay the outstanding debt and preserve

the property.” And as the tax court found, Campbell “wanted an

appraisal that accomplished his tax objectives for the easement

transaction.” By pursuing that goal single-mindedly, he did not ob-

tain the appraisal in good faith. The court did not clearly err in

finding an absence of good faith.

Even assuming Campbell had obtained the appraisal in good

faith, he was required to do more before Glade Creek could qualify

for the reasonable cause exception. The exception also requires the

taxpayer to make “a good faith investigation” into the property’s

value. I.R.C. § 6664(c)(3)(B); see also Blau v. Comm’r, 924 F.3d

1261, 1280 (D.C. Cir. 2019) (holding that the taxpayer had “failed

to produce evidence that it conducted any investigation beyond the

appraisal, let alone one that qualifies as a good faith investigation

within the meaning of the statute”) (quotation marks omitted);

Kaufman v. Comm’r, 784 F.3d 56, 70 (1st Cir. 2015) (reasoning that

if obtaining an appraisal were enough, it would “render the second

requirement meaningless”). Glade Creek points to no evidence in

the record that Campbell “made a good faith investigation” into

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18 Opinion of the Court 21-11251

the property’s value beyond obtaining the appraisals. For this ad-

ditional reason, the tax court did not clearly err in finding that

Glade Creek failed to meet the requirements of the reasonable

cause exception in § 6664.

IV.

For the reasons discussed, we VACATE the tax court’s rul-

ing denying Glade Creek’s claimed tax deduction and REMAND

for further consideration of that issue consistent with this opinion.

We AFFIRM the tax court’s rulings on the substantial valuation

misstatement penalty, except we VACATE the part of that ruling

reflecting the scrivener’s error discussed in footnote 3 of this opin-

ion and REMAND it for the limited purpose of allowing the court

to correct that scrivener’s error.