United States Tax Court

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T.C. Memo. 2024-93

J L MINERALS, LLC, BEASLEY TIMBER MANAGEMENT, LLC,

TAX MATTERS PARTNER,

Petitioner

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 17076-21.

Filed October 8, 2024.

__________

L, an LLC organized by two real estate

professionals, bought 645 acres of land in rural Georgia in

December 2015 for $1.6 million (about $2,481 per acre).

Later on the day of acquisition, L contributed 64.7 acres of

the property (easement property) to J, another LLC entity

that the real estate professionals had organized. The

easement property previously had been subject to a tenyear mineral lease that granted a mining company and its

successor the right to explore the property and extract a

mineral called kaolin, which was abundant in the area. No

mining, however, had occurred during the period of the

lease.

In January 2016 P, a timber company, purchased a

98% interest in (i) J for $167,837 (about $2,647 per acre)

and (ii) L for $3,132,163. J donated, by deed in December

2017, a perpetual conservation easement (constituting a

“qualified real property interest” under I.R.C.

§ 170(h)(1)(A)) on the easement property to H (a “qualified

organization” under I.R.C. § 170(h)(1)(B)) for “conservation

purposes” under I.R.C. § 170(h)(1)(C). Relying on a

professional appraisal, J claimed a charitable contribution

deduction of $16,745,000 (about $258,810 per acre) for a

Served 10/08/24

[*2]

“qualified conservation contribution” under I.R.C. § 170(h)

on its tax return.

R examined J’s return and issued a notice of final

partnership

administrative

adjustment

(FPAA)

determining to disallow the charitable contribution

deduction.

P timely filed a petition in this Court

challenging the FPAA.

Held: J made a qualified conservation contribution

under I.R.C. § 170(h) and attached to its return a qualified

appraisal by a qualified appraiser under I.R.C. § 170(f)(11)

and Treas. Reg. § 1.170A-13(c)(3).

Held, further, the amount of the charitable

contribution deduction is $93,690.

Held, further, the I.R.C. § 6662(h) gross valuation

misstatement penalty is applicable.

__________

David D. Aughtry and Jasen D. Hanson, for petitioner.

Elizabeth C. Mourges, Kimberly B. Tyson, Scott A. Hovey, Daniel K.

McClendon, Robert J. Braxton, and Alexandra E. Nicholaides, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

URDA, Judge: In 2016 petitioner, Beasley Timber Management,

LLC (Beasley Timber), paid $167,837 to buy a 98% interest in J L

Minerals, LLC (JL Minerals), a limited liability company that owned a

single asset, 64.7 acres of land in Wilkinson County, Georgia. This

transaction was part of a broader acquisition of timberland totaling

1,116 acres, with Beasley Timber valuing the timber, land, and

improvements at $3.3 million, the price it ultimately paid. During

discussions, the seller highlighted that the purchase would open the

door to many millions of dollars in possible tax deductions through the

donation of conservation easements—a vehicle well known to both buyer

and seller.

[*3] And so it followed. The next year JL Minerals donated a

conservation easement on the 64.7-acre property to Heritage

Preservation Trust (Heritage). On its 2017 tax return JL Minerals

claimed a charitable contribution deduction of $16,745,000 relating to

this donation. The Internal Revenue Service (IRS) issued a notice of

final partnership administrative adjustment (FPAA), which, among

other things, disallowed the deduction and determined penalties.

The parties have rounded up some of the usual suspects in this

Court: (1) whether JL Minerals had donative intent; (2) whether the

contribution was made “exclusively for conservation purposes,” see

I.R.C. § 170(h)(1)(C), (4), (5)(A); 1 and (3) whether JL Minerals obtained

a qualified appraisal by a qualified appraiser, see I.R.C. § 170(f)(11)(D)

and (E). Although JL Minerals scrapes by each of these requirements,

we find that the deduction amount was an outrageous overstatement.

Given that the value claimed on JL Minerals’s tax return ($16,745,000)

exceeded the correct amount ($93,690) by more than 200%, JL Minerals

is also liable for the 40% gross misstatement penalty, see I.R.C. § 6662(a)

and (h).

FINDINGS OF FACT

The following facts are derived from the pleadings, stipulations of

facts with attached exhibits, and the evidence admitted at trial. JL

Minerals is a Georgia limited liability company organized on December

23, 2015, and classified as a TEFRA partnership. 2 JL Minerals’s

principal place of business has been Georgia during all times relevant to

this case, including when its petition was filed. Beasley Timber is its

tax matters partner with respect to its 2017 taxable year.

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and Rule references are to the Tax Court Rules of Practice and

Procedure. We round all monetary values to the nearest dollar.

2 Before its repeal, the Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71, governed the tax

treatment and audit procedures for many partnerships, including JL Minerals.

[*4] I.

Overview of the Property at Issue and Georgia Kaolin Industry

Location and Topography

This case revolves around 64.7 acres of undeveloped land in

Wilkinson County, Georgia (easement property).

The easement

property comprises a 61.65-acre tract and 3.05-acre tract, separated by

a large pond. As of the time of donation, a hunting lodge overlooked the

pond.

The easement property is directly off Georgia State Route 112, a

rural area of forests and mines with little residential development. The

forested areas comprise mostly mesic hardwood forest, as well as mixed

pine/hardwood successional forest, managed pine forest, bottomland

hardwood forest, and a pecan orchard.

The easement property has varied topography with a series of

deep ravines and steep slopes throughout. The southern part features

the highest elevation at 465 feet above sea level, with the northernmost

part the lowest, dropping to 240 feet above sea level.

[*5]

Georgia Kaolin

Introduction

The easement property is in a geologic province called the Fall

Line, which is known to host significant deposits of kaolin (also referred

to as clay). Kaolin is an alumina-silicate mineral that historically has

been used in the production of paper, plastics, rubber, paints, and other

products. Kaolin is one of the most ubiquitous silicate minerals in the

world and is mined in many countries including Brazil, the United

Kingdom, and Australia.

For more than 100 years, Georgia has been the nation’s dominant

source of kaolin, accounting for approximately 90% of domestic

production. According to the Washington County, Georgia, website,

kaolin deposits in Georgia are “found in a relatively narrow ‘belt’ along

the Fall Line,” commonly referred to as the Georgia Clay (or Kaolin)

Belt. See Kaolin Capital of the World, https://washingtoncountyga.gov/

228/Kaolin-Capital-of-the-World (last visited Aug 15, 2024). The home

of the Georgia kaolin industry is Sandersville, Georgia, in the county

over (Washington County) from the easement property (Wilkinson

County).

The U.S. kaolin industry has faced headwinds since 2000. Data

from the U.S. Geological Survey (USGS) Commodity Summaries show

that the amount of kaolin mined dropped from 8.8 million metric tons in

2000 to 5.7 million metric tons in 2016. 3 Nat’l Mins. Info. Ctr., Clays

Statistics and Information, Mineral Commodity Summaries,

https://www.usgs.gov/centers/national-minerals-information-center/

clays-statistics-and-information (last visited Aug. 15, 2024). This

decline in production stemmed from factors including increased

competition from abroad and from other minerals, such as calcium

carbonate.

3 We take judicial notice of this decline in domestic production as documented

by the USGS, a source relied upon by both parties in various ways and whose accuracy

cannot be reasonably challenged. See Fed. R. Evid. 201(b). To be clear, the USGS

measures the amount of kaolin produced by reference to short dry tons of kaolin. This

measure is slightly different from that used in kaolin mining, which refers to wet tons

of kaolin. It takes approximately 1.66 crude wet tons of kaolin to produce one short

dry ton of kaolin product.

[*6]

Processing

The kaolin industry is built around processing raw kaolin into

various end products. As of 2017 the industry was dominated by four

major processing companies: Imerys Kaolin, Inc. (Imerys), BASF Corp.

(BASF), KaMin Performance Minerals (KaMin), and Thiele Kaolin Co.

These major companies were joined by a few “minor” processors which

tended to focus on lower cost and lower revenue methods.

Kaolin can be processed in a few different ways. Calcined kaolin

processing involves processing the raw kaolin with water for refinement

and heating in a kiln, i.e., calcining, to remove all crystalline structural

water from the product. Hydrous processing also processes using water,

but it allows the products to retain their crystalline structural water.

Air-float processing is a dry processing that “floats” the kaolin clay from

the interburden (referring to waste or spoil within an ore deposit) with

no water and no removal of crystalline structural water from the

product. Calcined kaolin has historically fetched the highest prices per

ton, followed by hydrous and finally air-float. 4

Not all kaolin is suitable for processing into all end products,

however. Kaolin is not homogenous and features differences in

important physical and chemical qualities including brightness/color,

viscosity, PH level, particle size distribution, and metal levels. The

numerous kaolin end products sold by industry participants each

require different volumes and types of kaolin meeting precise

specifications. As credibly explained by Doral Mills, a former chief

geologist at Imerys, “only a very small portion of . . . kaolin meets or

exceeds all the specifications and requirements that any particular

kaolin company requires. Most of it, its highest and best use is just to

hold the earth together.”

As of 2017 each of the processors owned its own plants that

specialized in manufacturing their respective lines of kaolin end

products. The types of kaolin needed by a given plant varied according

to the end products generated by that plant.

4 Kaolin could also be processed into proppants, small beads used for oil and

gas drilling. The proppant market suffered a severe decline in the 2010s because of

changes in the oil and gas industry.

[*7]

Testing, Exploration, and Mining

The major processors obtained at least 95% of the kaolin that they

processed from land that they owned or over which they had a mineral

lease giving them a right to mine. A processor’s need to obtain kaolin

with defined specifications, as required for use at a particular plant,

shaped the contours of the kaolin industry.

Each of the four major processors invested in its own testing

laboratory to determine whether a particular sample of kaolin met its

specifications. Given the importance of determining whether the kaolin

met the requirements for one of a given company’s end products, none

of the processing companies farmed out its testing or relied on outside

representations as to quality.

The processing companies and their many predecessors had

actively explored land in the Georgia Clay Belt (including Washington

and Wilkinson Counties) for decades looking for kaolin meeting their

respective specifications. When a processor came across a property with

potential, the processor generally would enter into a preliminary drilling

agreement or an option agreement with a landowner that would allow

the company to conduct exploratory drilling and testing before entering

into a long-term lease or purchasing the property. This exploratory

drilling would involve prospecting or wildcat drilling with relatively

wide spacing (400–800 feet) between drillholes. The samples were then

tested to estimate the quantity and quality of the kaolin.

If the testing showed kaolin meeting required specifications that

could be used at a particular plant, the processors would open

negotiations to lease or buy the property. Before 2017, leases, rather

than land purchases, were the norm. When leasing, a processor would

pay a royalty rate based on tonnage, with proximity to a particular plant

playing an important role in determining the rate.

After securing rights to either lease or purchase, a processor

would do further drilling and testing. The processors uniformly used a

grid method, the tried-and-true method for evaluating kaolin deposits.

Over periods extending as much as five to eight years, the processors

would drill with ever-tighter space between drillhole centers, going from

400 feet to 200 down to 100 or even 50 feet. After testing those samples,

the processors were able to identify with certainty the types of kaolin on

the property (i.e., whether the kaolin met their unique specifications)

and estimate the volumes of the various types of usable kaolin.

[*8] As a processor’s certainty about the exact specifications of the

kaolin on the property grew, the processor would catalog the amounts of

the various types in a reserve report. The major companies strove to

have at least 15 to 20 years of inventory for each of the types of kaolin

required to process their various end products.

Of course, learning about kaolin specifications and volume on a

piece of property was only one part of the equation, as the processors

had to consider the costs of extracting the kaolin. Generally, the most

significant costs were the removal of overburden, i.e., the soil on top of

a kaolin deposit, and the hauling of the crude kaolin to a processing

plant or a blunging facility (a facility where the processor would turn

mined kaolin into a slurry that could be transported to a processing

plant by pipeline). Other costs included reclamation costs, fuel

surcharges, and royalty rates if the property was leased.

The ratio of overburden to kaolin was a particularly significant

factor, although that ratio might not be uniform across a property. The

processors did not view the ratio in a void, however, with an

understanding that an objective amount of overburden was meaningful.

Thus, a 6:1 overburden ratio at 10 feet of depth had a considerably

different complexion from a 6:1 ratio at 100 feet of depth, given the costs

in moving and storing the overburden. As one industry participant

credibly explained, “deeper you go, naturally, the more overburden you

have to encounter and the higher your costs.”

The location of the property and the hauling distance to plant or

blunging sites were also critical cost considerations. Kaolin processors

sought land with kaolin meeting certain specifications relatively near

plants that could use kaolin with those specifications in the manufacture

of end products.

Mr. Mills aptly summarized at trial the proposition facing a

kaolin processor:

[F]irst of all, the kaolin has to meet a set of specific

specifications that are required by that particular company

to make the product that they’re selling to their customers.

So obviously, they would have to find kaolin on that

property that met or exceeded all those specifications.

Then they would have to find a group of holes that joined

without manholes in between them where they could mine

that whole area. And then that area has to be under

[*9]

acceptable overburden where it doesn’t cost more to get the

clay than it’s worth. And then it’s going to be close enough

to their plant to justify hauling it. So there’s a whole bunch

of variables involved. And if it fails any of them, then it’s

not used.

If the economics permitted, the property would be mined. The

needs of the plant again were paramount. Kaolin processors would

assess the anticipated requirements of a processing plant over a severalmonth period and attempt to mine to provide the plant’s necessities for

volumes of various types of kaolin. The processor would strip

overburden from a small portion of the property (generally a three- or

five-acre area, referred to as a cut) to access kaolin needed at a

particular plant, always testing the quality of the kaolin to ensure that

it met the specifications. Economic considerations continued after

opening the mine: The processors would continually evaluate as they

mined property whether the overburden ratio or depth might make

mining unfeasible.

The four major processors focused on various end products, which

provided opportunity for collaboration. They occasionally swapped

kaolin and allowed other processors to test or buy unwanted clay.

Contractors

In addition to the processing companies, several mining

contractors played important roles in the kaolin industry, including

overburden removal and crude hauling. The most prominent of these

contractors was Arcilla Mining & Land Co., LLC (Arcilla), founded in

1992. Arcilla provided assorted services to processors (both the four

major companies and assorted minor, primarily air-float processors)

including stripping overburden, hauling crude clay, and mining kaolin

on their behalf. Arcilla also acted as an independent supplier of kaolin,

although the major processors preferred not to buy kaolin from it

because of its higher costs.

Arcilla did at times supply the major processors with kaolin. Joe

McKenzie, who spent 51 years in the kaolin industry until his

retirement from BASF in 2016, credibly testified to the process: “Arcilla

does not just mine clay and take it to a customer. They go to a kaolin

company, the kaolin company will do drilling, testing, and would make

sure there’s a clay that they would be willing to have.”

[*10] Aside from Arcilla, it was exceedingly rare for kaolin companies

to purchase kaolin from individual landowners that opened their own

mines.

II.

Scaly Knob

Royce Lawrence

In January 1995 the easement property was acquired by Royce

Lawrence as part of a $500,000 purchase of more than 400 acres from

the Anglo-American Clays Corp., a kaolin mining company then in

operation. As relevant here, Mr. Lawrence ultimately assembled 645

total acres (including the easement property), which we will refer to as

the Scaly Knob property.

Both before and during Mr. Lawrence’s ownership, at least three

kaolin companies, as well as Mr. Lawrence himself, conducted

exploratory drilling to assess the Scaly Knob property’s potential for

kaolin mining. Specifically, contemporaneous logs reflect drilling in

1981, 1995, and 1998.

In 1997 a kaolin company named Englehard Corp. (Englehard),

which ultimately became part of BASF, entered into a lease with Mr.

Lawrence to mine the portion of the Scaly Knob property that had been

drilled in 1995. After mining of this area ended, Englehard reclaimed

this land as the pond that now separates the two tracts of the easement

property. Mr. Lawrence wanted to construct his own private hunting

reserve, with a cabin overlooking the reclamation pond.

Scaly Knob, LLC

Mr. Lawrence did not live to see his dream come true, sadly

passing away. Twelve of his friends, who shared a passion for the

outdoors and wished to commemorate Mr. Lawrence, picked up the

torch, forming Scaly Knob, LLC (Club), and buying the Scaly Knob

property from Mr. Lawrence’s estate in 2001. The Club members were

successful businesspeople, including Mr. Mills, who as Imerys’s chief

geologist headed the exploration and development department of the

largest kaolin company at the time. The Club planned to use the

property primarily for hunting and fishing.

Two years after purchasing the Scaly Knob property, the Club

began exploring its kaolin mining potential, turning, inter alia, to Mr.

Mills, whose job for most of the 30 years that he worked in the kaolin

[*11] industry was “determin[ing] where a mineral may be.” As Mr.

Mills credibly testified at trial, he “was intimately familiar with the

kaolin deposits in the area,” knowing “what possibility was there.” He

knew for example that a kaolin company had “found a deposit of clay [on

the Scaly Knob property] and mined it out,” while other companies that

had drilled the property “found no clay that they wanted to use.”

Mr. Mills and his colleagues focused their attention on what

would later become the easement property because it sat between two

kaolin mines, i.e., Englehard’s mine and a mine bordering the property

operated by J.M. Huber Corp. (Huber). Mr. Mills believed that there

would be limited interest in the easement property from most kaolin

companies because “there would have been too much overburden for [a

mining company] to consider unless they had the adjoining property.”

Given that Englehard had elected to close its mine rather than

expand onto the easement property, the Club representatives believed

that it would be unlikely to pursue further mining activities. The Club

accordingly concentrated on Huber, with Mr. Mills reasoning that “it

was highly likely that a small amount of clay would go from the Huber

side onto [the Scaly Knob property] side, and it might be possible that

Huber could come across the property line and mine that clay and

benefit both [the Club] and Huber.”

Mr. Mills accordingly approached Huber, explaining his thinking.

He also enticed Huber with the prospect that it could recover more

kaolin from its own mine if it also had the right to cross over into the

Scaly Knob property.

In July 2003 the Club and Huber agreed to a ten-year mineral

lease contract over the easement property. The lease was structured to

give Huber a three-month “prospecting and option period” that allowed

it to conduct exploratory drilling for an up-front payment of $3,000,

before exercising the option to lease (or abandoning its right to do so).

Under the contract, Huber agreed to pay a royalty rate equal to $1.85

per short wet ton for all the kaolin that they removed from the property

plus an annual payment of $20,000. Although Huber conducted

extensive drilling of the easement property thereafter, Huber did not

proceed to mine it.

In 2008 Huber’s Clay Division was acquired and then

reconstituted as KaMin. As part of this acquisition, Huber assigned its

mineral lease rights over the easement property to KaMin. Like its

[*12] predecessor, KaMin elected not to mine the easement property at

any point over the next five years because it did not meet its needs.

KaMin chose not to renew the mineral lease when it expired in 2013.

The Club did not enter into a mineral lease with any of the other kaolin

companies after KaMin’s lease expired. Although Mr. Mills obtained

Huber’s drilling data on behalf of the Club (before he separated), he

credibly testified that he “didn’t see anything that [he] could take to a

kaolin company that would convince them to mine the property.”

III.

New Neighbors Become New Owners

Free-Wil

In August 2014 a company named Free-Wil Holdings, LLC (FreeWil), purchased 470.7 acres directly to the south of the Scaly Knob

property for $620,000. Free-Wil was founded as a real estate investment

company in 2003 and was owned in equal part by Marion “Butch” R.

Freeman, Jr., a certified public accountant, and Craig Wilson, a forester.

Messrs. Freeman and Wilson expanded their vision to include

facilitating the donation of conservation easements in order to generate

tax deductions. In addition to using Free-Wil, Messrs. Freeman and

Wilson founded another company, CPG Associates, LLC (CPG), to assist

on these matters. 5 By 2014 Messrs. Freeman and Wilson had been

involved in at least ten conservation easement projects under the

auspices of CPG and other entities.

When Free-Wil purchased the tract south of the Scaly Knob

property, Messrs. Freeman and Wilson were aware that the family from

which it purchased hosted an active kaolin mine on part of the property

that it retained. Later in 2014 Free-Wil contributed the 470.7-acre

parcel to Jackson Lake Plantation, LLC (Jackson Lake), another entity

set up by Messrs. Freeman and Wilson. Free-Wil held a 98%

membership stake in Jackson Lake, with Messrs. Freeman and Wilson

each holding a 1% interest.

End of the Club

Meanwhile the Club was beginning to fray. Several of the original

members had left, with Mr. Mills separating under a cloud. They had

been replaced by new members with different ideas, including that the

Club was a business venture rather than a retreat. Some of the new

5 The acronym “CPG” apparently stood for Conservation Professionals Group.

[*13] members wished to more actively explore kaolin mining on the

property, with all of the members well aware of the Huber mineral lease.

By 2015 the Club was rife with disputes on a wide variety of

topics. Given the rancor, the Club began to explore a sale of the Scaly

Knob property, spurred by certain members’ financial and health issues.

One member of the Club attempted to buy the Scaly Knob property for

$1.7 million, or to force a sale to a kaolin company, which he believed

could garner between $2.1 and $2.5 million. Both overtures were

rebuffed by the Club.

Having reached an impasse, the Club turned to its new neighbors,

Messrs. Freeman and Wilson, to gauge their interest in purchasing the

Scaly Knob property. Mr. Freeman conducted due diligence, during

which he learned of the Huber mineral lease over the easement

property.

During late fall 2015 Messrs. Freeman and Wilson engaged the

services of Bill Rivers, an experienced local geologist who had worked in

the kaolin industry. As reflected in contemporaneous invoices, Mr.

Rivers met with Messrs. Freeman and Wilson on November 17, 2015, to

discuss “possible conservation use for Scaly Knob and Jackson Lake.”

On December 11, 2015, Mr. Wilson and Mr. Rivers visited the Scaly

Knob property, observing “[k]aolin still in place at old mine.”

Following the examination of the Scaly Knob property, Mr. Rivers

contacted representatives from Imerys, KaMin, and BASF for any

relevant mining data. The representative from KaMin stated that it was

“finished mining the property and is now reclaiming it,” while the BASF

representative expressed willingness to share data so long as Mr. Rivers

provided a letter “stating the conservation purpose and who was

involved, and that we did not plan to mine it.”

On December 17, 2015, the Club agreed to sell the Scaly Knob

property to Jackson Lake for $1.6 million. The Club determined the sale

price based on the members’ general knowledge of prices per acre in

Wilkinson County, with an eye to profit and a fair price.

The sale closed on December 22, 2015, bringing the total acreage

under Jackson Lake’s control to approximately 1,116 acres (470.7 acres

+ 645 acres). The next day Messrs. Freeman and Wilson organized JL

Minerals, with Free-Wil holding a 98% member interest and Messrs.

Freeman and Wilson each holding a 1% interest.

[*14] Later, on December 23, Jackson Lake contributed the 64.7-acre

easement property to JL Minerals. At trial Mr. Freeman explained that

he and Mr. Wilson took this action in light of “the mineral lease” and

“because of the prospect of that being a conservation option.”

IV.

Beasley Timber Enters the Scene

Timber Business

While finalizing the deal with the Club, Messrs. Freeman and

Wilson were working to sell all 1,116 acres under their control, with

Beasley Timber already in mind as a potential purchaser. Beasley

Timber is a very successful family timber company owned by Darrell

Beasley and his sister and run by Mr. Beasley and his brother-in-law

Zach Johnson. Mr. Johnson was responsible for all timber acquisitions

whereas Mr. Beasley oversaw the business operation generally,

including approving every purchase made by Mr. Johnson. Under their

leadership, Beasley Timber grew to include over 2,000 employees, 50

logging crews, 40 foresters in four states, and five sawmills.

Beasley Timber’s operation required a considerable, consistent

supply of timber. Beasley Timber purchased a tract almost every day,

making approximately 250 buys a year. When determining whether to

buy timber, Mr. Johnson would undertake his own inspection of the

property, rather than trust seller representations.

Primary

considerations included logability and accessibility, as they tried to

harvest within four to six months.

The company usually purchased rights to log timber for its mills

separately from the land, but at times purchased both timber logging

rights and land. Beasley Timber currently holds more than 120,000

acres. Through these land purchases, Messrs. Beasley and Johnson

were aware that rural land in Wilkinson County, and surrounding

counties, went for around $1,200 an acre and never sold for over $50,000

per acre in or before 2017.

Where Beasley Timber purchased land as well as the rights to log

timber, they would plant trees to farm and ultimately harvest. This life

cycle spanned approximately 25 to 30 years, with thinning

approximately once a decade to provide more sunlight and vegetation.

Beasley Timber’s need for trees brought them into contact with

Messrs. Freeman and Wilson. Mr. Beasley first met Mr. Wilson when

working as a logger, with Mr. Wilson as a forestry consultant. Later,

[*15] Messrs. Freeman and Wilson’s investment in rural real estate led

to a business relationship with Beasley Timber, with timber sales,

rather than land sales, occupying the heart.

Initiation into the Mysteries

Messrs. Beasley and Johnson learned of conservation easements

at the knees of Messrs. Freeman and Wilson. The four men, along with

other members of Mr. Beasley’s extended family, purchased a 3,000-acre

ranch in Colorado in 2003 for hunting and other outdoor activities.

Around this time Mr. Freeman heard about state and federal tax

benefits of conservation easements from an acquaintance, informing his

partners about this strategy. Starting in 2003 or 2004 the four men

investigated a conservation easement relating to a coal deposit on the

Colorado property. The pursuit came up dry as they did not control the

mineral rights under Colorado law, thus dooming any potential for a

conservation easement.

The Colorado flirtation was not Beasley Timber’s only foray into

the world of conservation easements. As one of Beasley Timber’s

commercial lenders explained at trial, the placement of conservation

easements was “part of something that [it] do[es] regularly to land that

[it] purchase[s] as part of [its] business.”

Purchase of Jackson Lake and JL Minerals

After the acquisition of the Scaly Knob property, Mr. Wilson

arranged a tour for Mr. Johnson of the Jackson Lake and JL Minerals

properties. Mr. Johnson was impressed by both the quality of the timber

and its accessibility, a particularly important consideration for logging

during the winter months.

The four friends got down to brass tacks. As Mr. Johnson

summarized, Messrs. Freeman and Wilson were “trying to get the

highest price,” while their Beasley Timber counterparts were “trying to

buy at the cheapest.” Messrs. Freeman and Wilson’s asking price was a

total of $3.3 million for both properties. On the buyer side, Beasley

Timber estimated the timber value alone at $1.6 million. Mr. Beasley

estimated the value of the bare land at $1,200 per acre (approximately

$1.34 million all told) and the improvements, such as the hunting lodge,

at $400,000 to $500,000.

The deal as conceptualized by Mr. Freeman always included a

conservation easement component. Specifically, Mr. Freeman provided

[*16] a chart suggesting a charitable contribution deduction of

$6,456,289, which would result in tax savings of $2,259,701. During the

negotiations, both Beasley Timber and Messrs. Freeman and Wilson

were aware of the existence of the Huber lease in January 2016, and

thus the possibility for kaolin mining on the easement property.

In January 2016 Beasley Timber purchased Free-Wil’s 98% share

in Jackson Lake and 98% share in JL Minerals for a combined purchase

price of $3,300,000. Specifically, Beasley Timber paid $167,837 for the

interest in JL Minerals and $3,132,163 for the interest in Jackson Lake.

At the time, JL Minerals’s sole asset was the 64.7-acre easement

property and Jackson Lake’s sole asset was the remainder of the 1,116

acres (Jackson Lake property). Both Messrs. Freeman and Wilson

retained their respective 1% interests in both entities, although each

entered into option contracts giving Beasley Timber the right, but not

the obligation, to purchase both of their respective 1% interests in JL

Minerals for $15,000 or less.

Beasley Timber used an existing stumpage line of credit with

Southeastern Bank to help fund this acquisition. Before agreeing to

provide the funding, Southeastern Bank retained an experienced local

appraiser, Dan Hester, to appraise the bare land, excluding the timber

value. Specifically, the Bank wanted Mr. Hester to determine “the most

probable price which a property should bring in a competitive and open

market under all conditions requisite to a fair sale, the buyer and seller

each acting prudently and knowledgeably.” Despite knowing that kaolin

was very prevalent in the area, Mr. Hester concluded a fair market value

of approximately $1.4 million for the more than 1,100-acre property.

Next Phases

Harvesting the Timber

Beasley Timber’s need for logs to fill its mills pushed it to cut

almost immediately following its purchases. Just 12 days after closing,

Beasley Timber began harvesting timber on the Jackson Lake property.

In the first year after acquisition, Beasley Timber’s logging crew

harvested 49% of the timber on the track equating to $907,000 in value.

Beasley Timber did not cut on the easement property, however.

[*17] B.

Conservation Easement

Laying the Groundwork

Meanwhile, Messrs. Freeman and Wilson’s work on a

conservation easement continued apace. Mr. Freeman explained that

the strategy was to “split the property between 2 entities with [the]

intention of executing 2 conservation easements” “[r]ather than hav[ing]

one very large easement deduction in a single LLC.” Mr. Freeman

further noted that “[a]pproximately 64 acres of the subject tract is held

in an LLC, ‘JL Minerals, LLC’ which is the primary area that kaolin is

known to exist.” Mr. Freeman further speculated that the remainder of

the 1,116 acres, i.e., Jackson Lake, could support a highest and best use

(for easement valuation purposes) of a conservation community.

During January and February 2016 Mr. Rivers continued his

pursuit of drilling data from certain of the major kaolin companies. For

example, in January, he wrote to Mr. McKenzie at BASF, explaining

that the “owners hope to place this property into conservation and are

looking for all the drill data and supporting documents that are

available to substantiate the kaolin mineral values for the property.” He

further noted that the “investors are willing to pay for the information,

and it will be used for conservation purposes only.” He also discussed

with Arcilla using its laboratory to test drilling samples from the

property. Throughout February Mr. Rivers also worked on a technical

report about the presence of kaolin on the Scaly Knob property.

By the end of February 2016 the working relationship between

Messrs. Freeman and Wilson and Mr. Rivers changed, however. In an

email to Dale Hayter, the person who would later appraise the easement

at issue, Mr. Freeman observed that “Mr. Rivers has never done any

consulting work related to a conservation easement.” Mr. Freeman

continued that he and Mr. Wilson “attempted to convey the goals of our

project [but Mr. Rivers’s] thought process revolves around commercial

mineral market considerations which . . . don’t necessarily align with

the dynamics of conservation easement considerations.” As Mr.

Freeman credibly explained at trial, Mr. Rivers believed that the kaolin

on the 1,116-acre property could generate approximately $2–4 million in

royalty payments.

“Accordingly, we feel Mr. Rivers’ primary

contribution to the project will be to provide estimated mineral (kaolin

and otherwise) tonnages and leave the valuation to another skill set.”

[*18] According to invoices that Mr. Rivers sent to Mr. Freeman in

June, he spent March through May assembling drill data and maps from

previous kaolin company drillings of the Scaly Knob property, and, more

specifically, the easement property. After consulting with Messrs.

Freeman and Wilson, Mr. Rivers “propose[d] 21 [drill] holes [to test for

kaolin] based on old drill data.” By early June, Mr. Rivers received the

Huber drill data for the easement property from KaMin officials, which

he then used to prepare maps for drillers.

Although Mr. Rivers had initially considered using Arcilla’s

laboratory to test core samples from the easement property, in May he

ultimately settled on Ginn Mineral Technology (GMT). By late June Mr.

Rivers confirmed with Messrs. Freeman and Wilson that “Michael Ginn

will be coordinating everything from here out” and that Mr. Rivers

“expect[ed] to be involved only in setting drill holes, getting them drilled

and getting the drill core to the Ginn Minerals lab from here on out,

unless informed otherwise.” On June 27, 2016, Mr. Rivers informed

Messrs. Freeman and Wilson that he “delivered all of the research data

that [he] ha[d] compiled and a copy of the attached preliminary report

to Michael Ginn last week.” The material provided to Mr. Ginn

“included all of the Evans [Clay Co. (now Unimin)] and Kamin drill data,

USGS kaolin pricing from 1995-2016, kaolin leases with per-ton pricing,

location maps and drill hole maps.”

An Evolving Roster

Mr. Freeman’s Run at Andy Sheppard

As Mr. Rivers’s role changed in May and June 2016, Mr. Freeman

was on the hunt for an appraiser. In early May he reached out to a

Georgia appraiser named Andy Sheppard, who had previous experience

with valuing kaolin. Mr. Freeman explained that he was “looking to

develop another solid appraisal resource to utilize on an annual basis

for CE projects” and provided Mr. Sheppard a list of references for CPG

in case Mr. Sheppard “need[ed] to know anything about our business

practices.” Although the record at trial does not disclose that either Mr.

Beasley or Mr. Johnson had previously used CPG in connection with an

easement, both of their names were listed on the first page of a 27-name

reference list.

After Mr. Sheppard expressed interest in potentially working

with CPG, Mr. Freeman sent an email with a list of four 2016

conservation easement projects, including potential easements on JL

[*19] Minerals and Jackson Lake.

Regarding JL Minerals, Mr.

Freeman wrote that they were “close to having the geologist’s

conclusions regarding mineral quantities and the clay characteristics,”

pointing out that, “[u]ntil recently, Kamin had a long-term lease . . . and

has been gracious enough to share the info with us.” Mr. Freeman

further stated that “[t]o minimize confusion going forward, [he] thought

it would be helpful to provide a snapshot of the prior easements [they

had] completed along with the final diminution amounts so [Mr.

Sheppard could] get a sense of what the numbers look like for projects

very similar to the 4 pending transactions excepting the mineral

considerations.” Attached to the email was a list of 12 transactions from

2008 through 2014, as well as four transactions for 2016, including JL

Minerals’s. Although communications continued with Mr. Sheppard, no

agreement was reached by the end of June.

GMT

2016 work

Mr. Freeman had better success with GMT, an established

mineral process laboratory in Sandersville, with particular expertise

and experience in kaolin. GMT was led by Michael Ginn, who had

decades of experience in evaluating minerals, and his daughter, Laura

Ginn Mason.

In August 2016 GMT submitted an engagement proposal, stating

its understanding that Messrs. Freeman and Wilson were “interested in

[GMT’s] providing a range of services to streamline and successfully

complete the mineral based conservation easement.” Specifically, GMT

proposed to identify and retain (1) a “third party qualified geologist” and

(2) a “qualified and certified mineral/real estate appraiser,” further

agreeing to “assist with the ‘independent’ duties and function of the

geologist and appraiser by providing time and resources relating to

mineral exploration and testing, experience relating to mineral

applications/markets and general consulting.” GMT charged $50,000

for its services.

Later that month, GMT hired Waters Drilling Co., LLC (Waters

Drilling), to drill 12 boreholes along the northern and middle portions of

the easement property. Eleven of the boreholes produced core samples

containing kaolin and one drill hole lost circulation. 6 According to Mr.

6 Loss of circulation occurs when the drill has lost the requisite pressure to

bring the core sample to the surface for collection.

[*20] Freeman, the results from the 2016 drilling showed evidence of

potential kaolin reserves and overburden within industry norms. Mr.

Beasley remembered that the testing “came back very favorable,”

showing “a lot” of “high quality” kaolin. As he further recalled, “it

needed more testing, a full amount of drilling in order to actually be

conclusive.”

ii.

Mr. Sheppard Rebuffs GMT’s Overtures

In late September 2016 GMT contacted Mr. Sheppard to revisit

his willingness to serve as appraiser to assorted mineral conservation

easement projects sponsored by Messrs. Freeman and Wilson. After Mr.

Sheppard talked with Mr. Freeman “about the model GMT has

successfully used on several Mineral Conservation Easements in past

years,” Ms. Mason inquired into Mr. Sheppard’s interest in becoming a

member of a “team for three [conservation easements] for 2016 . . . [with]

many scheduled to complete in 2017.”

Mr. Sheppard responded by expressing “some concern regarding

methodology,” as described by Mr. Freeman. Mr. Sheppard sent three

documents that “la[id] out the fundamental aspects of valuing properties

with known (or assumed) mineral reserves, as well as information which

debunks common myths regarding mineral property/valuation.” Mr.

Sheppard emphasized that the “primary tool for valuing raw land, prior

to rezoning and/or prior to obtaining a Surface Mining Permit, is the

Sales Comparison Approach.” He expressly noted that an “[i]ncome

based model is helpful, but ultimately highly subjective without great

data.” “Given that the conservation easement includes the value of the

real estate, and not the business value associated with operating a

quarry, a Royalty Revenue analysis is the only reasonable approach to

value the land being donated in the ‘before’ scenario.” He closed with a

note of caution, stating: “Trust me, I know the temptation to go with a

higher value, . . . but I’m not in the business of getting fined $10k per

report for purporting an illogical valuation.”

GMT did not reach an agreement with Mr. Sheppard to be part of

its team going forward.

iii.

2017 work

In May 2017 Mr. Freeman retained GMT to perform exploratory

drilling on 27 additional acres of the easement property. GMT agreed

to drill approximately nine holes to “give a more accurate depiction of

the volume of commercial kaolin and other mineral resources on your

[*21] property,” followed by analysis of the core samples. “A key

objective of the evaluation is to identify the highest and best use of the

potential mineral reserve[s] [for easement valuation purposes].” GMT

wrote that it “expect[s] to discover clay on the property and in some cases

significant volumes of clay . . . based on adjacent mining and previous

drilling records.”

GMT again turned to Waters Drilling, tasking them to drill eight

additional boreholes in the southern part of the easement property. This

drilling was in a part of the easement property different from that

drilled the previous year. As such, it did not involve attempting to

obtain more precise data on the kaolin deposit previously explored by

means of tighter spacing, as is common in the industry. Waters Drilling

found kaolin in four of the drillholes, and its drill lost circulation in the

other four locations.

iv.

GMT Report

In October 2017 GMT issued a kaolin and mineral resource

evaluation report that presented GMT’s findings regarding the quality

and quantity of the kaolin on the easement property. Although Waters

Drilling had drilled a total of 20 bore holes, the report referred to only

16 holes.

From the holes it did consider, the GMT report concluded an

average overburden of 92 feet, a clay strata thickness of 40 feet, and an

overburden-to-clay ratio of 2.3:1. The report stated that the drilling

moved the easement property “from a potential mineral resource into

the defined category of ‘Identified Mineral Reserve.’” The report

concluded that the easement property contained over 5,304,000 short

wet tons of average to excellent quality kaolin clay.

The report further concluded that the amount of kaolin could

support mining 150,000 to 250,000 crude wet tons annually for at least

20 years.

It then stated that the easement property provided

opportunity for the landowner to operate as a “[kaolin] contractor with

limited competition from other contractors or the actual kaolin

producers.” The report explained that a landowner could successfully

replicate Arcilla’s business model “with experienced contractors and

consultants,” which would improve earnings over a mineral lease or sale

of the property “by $4.00 to $10.00 per wet crude ton.” It stated, finally,

that a capable landowner could make a significant profit by offering

delivered crude clay to a kaolin producer at $14–$22 per ton.

[*22] At no point after the 2016 GMT drilling and testing, the 2017

GMT drilling and testing, or the preparation of the GMT report did a JL

Minerals representative contact any kaolin company to gauge interest

in the purchase or lease of the property or whether the kaolin on the

property was economically mineable.

Lawyers, Accountants, and Appraiser

As GMT worked away, JL Minerals (primarily acting through Mr.

Freeman) turned to old conservation easement hands to round out its

roster of professionals. In July 2017 JL Minerals secured the services of

McRae Smith Peek & Harman (McRae), to review title issues and

compliance with requirements to claim a federal tax deduction in

connection with a conservation easement donation on the easement

property. McRae had worked with Mr. Freeman and Mr. Hayter on past

conservation easement projects. Another familiar face was Kimberly

Skalski, a certified public accountant whose husband’s law firm had

worked on conservation easements with Mr. Freeman for years.

For its appraiser, JL Minerals picked Mr. Hayter, a Georgia real

estate appraiser with whom Mr. Freeman had been talking since

February 2016. From the very start Mr. Freeman explained to Mr.

Hayter that “a major consideration for the easement is the value of the

kaolin on the property.” In an introductory email Mr. Freeman

emphasized that, as part of any engagement, Mr. Hayter would “provide

the mineral valuation by working with . . . reputable sources to establish

the unit prices and other relevant information needed to establish the

mineral values.”

In April 2016 Mr. Freeman continued the intermittent

discussions with Mr. Hayter, noting that, with respect to JL Minerals,

they were “close to having the geologist’s conclusions regarding mineral

quantities and the clay characteristics.” As was the case with Mr.

Sheppard, Mr. Freeman sent Mr. Hayter a “snapshot” of prior

easements he had completed to give Mr. Hayter a sense of the

expectation for the easement property’s valuation. In addition, Mr.

Freeman provided his team’s “best unofficial estimates of diminution

values for the current projects [including JL Minerals] in advance.”

Around this time Mr. Freeman also drew Mr. Hayter’s attention

to two state court rulings in the condemnation context that valued

kaolin land at approximately $71,000 per acre in one case and more than

$100,000 per acre in another. Mr. Freeman noted that Mr. Sheppard

[*23] had testified as an expert in kaolin land value and suggested that

“[i]t may be of some value to have [Mr. Hayter] plan on consulting with

this firm (at [Mr. Freeman’s] cost of course) to utilize some of [Mr.

Sheppard’s] experience in this area.”

Despite these early conversations, Mr. Hayter did not formally

agree to appraise the easement property until August 2017. In the

interim, Messrs. Freeman and Hayter discussed other conservation

easement projects including Jackson Lake, Double Creek Plantation,

and Fish Trap Cup Retreat. 7

Talks with Loudermilk

Despite the preparatory work on the conservation easement front,

Mr. Freeman and JL Minerals nonetheless kept their ears open to any

offers for the properties. In 2017 Mr. Freeman was approached by Robin

Loudermilk, a successful Georgia businessman in the real estate field,

whose varied holdings spanned high-rise buildings, development of

single-family housing in rural Georgia, farmland, and timberland. Mr.

Loudermilk owns a property of approximately 7,200 acres in Wilkinson

County. Mr. Loudermilk’s land serves as a wetlands mitigation bank

and borders the easement property and the Jackson Lake property.

Given his knowledge of Georgia real estate, Mr. Loudermilk

expected that he might pay $600–$2,400 per acre, the going rate for raw

land in Wilkinson County. In their discussions, Mr. Freeman described

the kaolin on the property and broached the idea of a conservation

easement. Mr. Loudermilk was uncomfortable with the concept,

explaining his view that conservation easements “value [property] as to

what it could be, not what it is.”

In April 2017 Mr. Freeman offered Mr. Loudermilk three options

to buy the land: (1) $2.9 million for all 1,116 acres including remaining

timber and hard assets, with the sellers retaining mineral rights;

(2) $9.4 million to acquire all 1,116 acres, as well as the mineral rights,

drilling data, and propriety information with respect to the easement

property; and (3) $9.4 million plus future consideration for 1,116 acres

including all mineral rights on the entire 1,116-acre tract.

Mr. Loudermilk responded that the parties were “too far apart in

[their] valuations to have a serious conversation,” as he valued the first

7 On February 15, 2016, Mr. Hayter formally agreed to appraise the Jackson

Lake tract for Mr. Freeman.

[*24] option at $1.5 million and the second at $5 million. In concluding

the communication, he expressed appreciation for both positions and his

“feel[ing] [the parties] may have different motivations.”

Mr. Freeman received no other expressions of interest in the

properties from potential buyers.

VI.

Conservation Easement

In October 2017 JL Minerals agreed to donate a conservation

easement over the easement property, as well as $40,000, to Heritage.

Heritage agreed to create a baseline documentation report

“documenting [the easement] property’s natural resources and critical

habitat,” to draft the conservation easement documents, and to

“perpetually administer, monitor, and defend the easement.”

On October 31, 2017, Kristina Sorensen issued a baseline

documentation report for the easement property, detailing the easement

property’s natural resources and habitats. In particular, the baseline

documentation reflected that 66% of the property constituted mature

mesic hardwood forest with another 3% of the property bottomland

hardwood forest, both of which had been designated “high priority”

habitats by the Georgia Department of Natural Resources in its 2015

State Wildlife Action Plan (2015 SWAP). Although the report noted that

the easement property itself contained neither permanent nor

intermittent streams, it pointed out that it “lies in an important

groundwater recharge area for the Floridan aquifer.” The report also

noted that Wilkinson County had records of 11 rare or endangered

species, although none had been spotted on the property.

On December 21, 2017, JL Minerals donated a conservation

easement over the easement property to Heritage, which recorded the

deed eight days later. The easement deed identified various purposes,

including retaining the easement property in a relatively natural

condition, protecting the conservation values of the easement property,

“including productive forestry and agricultural resources,” and

preventing any use that would impair or interfere with the conservation

values. The deed defined the term “conservation values” as (1) the

protection of relatively natural habitat and (2) the preservation of open

space for scenic enjoyment of the public or pursuant to a clearly

delineated governmental conservation policy.

In the deed, JL Minerals expressly reserved the right to engage

in agriculture and forestry, subject to specified requirements including

[*25] that it be carried out (1) in accordance with state and federal law

and best management practices, (2) pursuant to a land management

plan with the terms of the conservation easement, and (3) in a manner

that does not materially impair or interfere with conservation value.

The deed prohibited active commercial forestry and imposed no-cut

zones in special natural areas of mesic hardwood and bottomland

hardwood, which covered approximately two-thirds of the property.

Although the deed allowed borrow pits for specific uses on the easement

property, it also prohibited “filling, excavation, dredging, mining, or

drilling,” “removal of topsoil, sand, gravel, rock, peat, minerals or other

materials,” and any “change in the topography of the land” except as “is

consistent with Treas. Reg. § 1.170A-14(g)(4)” and “necessary for

construction and maintenance on the [easement property] of roads,

bridges, and culverts.”

VII.

Appraisal Report

On February 23, 2018, Mr. Hayter completed his appraisal report

on the easement property. In preparing his appraisal, Mr. Hayter relied

on the GMT report regarding the minerals on the property and the

broader kaolin market.

To value the easement itself, Mr. Hayter used the “before and

after” method. He first valued the easement property before the

granting of the easement and subsequently found the value of the

easement property after the granting of the easement. The difference

between the values equaled the value of the easement. To determine

the “before” and “after” values, Mr. Hayter determined that the highest

and best use for the easement property before the easement was twofold:

development as a kaolin mine on the 61.65-acre tract and as residentialagricultural on the 3.05-acre tract. In light of this highest and best use,

Mr. Hayter determined that the sales comparison approach was

inapplicable and turned to the income approach (i.e., a discounted

cashflow method), which produced a before value of $16,800,000 for the

kaolin mine portion of the property and $8,500 for the other three acres,

amounting to a rounded before-easement value of $16,810,000. Having

calculated an after-easement value of $65,000, Mr. Hayter concluded

that the value of the conservation easement was $16,745,000

($16,810,000−$65,000).

[*26] VIII. Tax Return and IRS Examination

JL Minerals timely filed its Form 1065, U.S. Return of

Partnership Income, for the 2017 tax year. It claimed a charitable

contribution deduction for a conservation easement of $16,745,000. It

also claimed $227,534 for “Other Deductions,” which encompassed

“Professional Fees,” “Appraisals Fees,” and “Mineral Assessment Fees.”

The IRS selected JL Minerals’s 2017 return for examination. On

or about May 19, 2021, the IRS issued an FPAA that disallowed

$16,745,000 of the claimed charitable contribution deduction (the

portion attributable to the easement), determining that JL Minerals had

not established that it made a contribution or gift in 2017 and had

otherwise failed to show that all requirements of section 170 had been

met.

The FPAA also disallowed $227,534 in claimed “Other

Deductions,” explaining that JL Minerals had failed to show that this

amount was deductible under the Code.

As to the charitable

contribution deduction, the IRS determined a 40% accuracy-related

penalty under section 6662(e) and (h) (applicable in the case of a “gross

valuation misstatement”) and (in the alternative) a 20% penalty under

other provisions of section 6662. 8 The IRS also determined a 20%

accuracy-related penalty on the underpayment of tax resulting from the

“Other Deductions” adjustment under section 6662(c) and (d).

OPINION

Burden of Proof

Generally, the IRS’s adjustments in an FPAA are presumed

correct, and the taxpayer bears the burden of proving them wrong. See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Crescent

Holdings, LLC v. Commissioner, 141 T.C. 477, 485 (2013). The taxpayer

also bears the burden of proving entitlement to any deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

Section 7491 provides that the burden of proof on a factual issue

may shift to the Commissioner if the taxpayer satisfies specified

conditions. To trigger such a shift, a taxpayer must have “introduce[d]

credible evidence with respect to [that] factual issue,” I.R.C.

8 We previously have held that the IRS secured timely supervisory approval to

assert each of these penalties, while granting Beasley Timber’s motion for partial

summary judgment as to the reportable transaction penalty.

[*27] § 7491(a)(1), and must have “complied with the requirements

under this title to substantiate any item,” I.R.C. § 7491(a)(2)(A). 9

The resolution of the issues in this case does not depend on which

party has the burden of proof. When each party has satisfied its burden

of production, then the party supported by the weight of the evidence

will prevail, and a shift in the burden of proof has real significance only

in the event of an evidentiary tie. See Knudsen v. Commissioner, 131

T.C. 185, 189 (2008), supplementing T.C. Memo. 2007-340. We do not

perceive an evidentiary tie in this case and are able to resolve the issues

on the preponderance of the evidence. See id.; Schank v. Commissioner,

T.C. Memo. 2015-235, at *16. 10

II.

Section 170 Qualified Conservation Contributions

Section 170(a) allows the deduction of a charitable contribution

made within a taxable year. If the taxpayer makes a gift of property

other than money, the amount of the contribution is generally equal to

the fair market value of the property at the time of the gift. See Treas.

Reg. § 1.170A-1(c)(1).

As a general rule, no deduction is allowed for a contribution of

less than a donor’s entire interest in property. I.R.C. § 170(f)(3)(A).

Section 170(f)(3)(B)(iii) excepts from this broad prohibition a deduction

for a contribution of a partial interest in property that constitutes a

“qualified conservation contribution.” This exception applies where

(1) the taxpayer makes a donation of a “qualified real property interest,”

(2) to a “qualified organization,” and (3) the donation is “exclusively for

conservation purposes.” I.R.C. § 170(h)(1).

The Commissioner asserts that JL Minerals’s charitable

contribution does not count as a “qualified conservation contribution” for

four reasons. He first contends that JL Minerals lacked the requisite

donative intent to make a charitable contribution. The Commissioner’s

remaining arguments sound in various prerequisites established by the

9 Section 7491(c) provides that the Commissioner “shall have the burden of

production in any court proceeding with respect to the liability of any individual for

any penalty, addition to tax, or additional amount.” (Emphasis added.) This provision

does not apply to TEFRA partnership-level proceedings (such as this case). See

Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 234 (2018). Thus, in a

TEFRA partnership case the petitioner has not only the burden of proof but also the

burden of production, even as to any penalty. Id.

10 Consequently, Beasley Timber’s motion to shift the burden of proof, filed on

February 21, 2023, is denied as moot.

[*28] Code for a donation to be “exclusively for conservation purposes.”

He asserts that the conservation easement fails to satisfy any

conservation purpose outlined by the Code. See I.R.C. § 170(h)(4). The

Commissioner next argues that the easement fails to protect any

conservation purpose in perpetuity. See I.R.C. § 170(h)(5)(A). He finally

challenges the easement’s explicit permission for borrow pits in light of

the Code’s prohibition of surface mining. See I.R.C. § 170(h)(5)(B). We

reject each of these contentions.

Donative Intent

The Commissioner argues that JL Minerals lacked donative

intent because it was primarily motivated to monetize the federal

income tax deduction for Beasley Timber and its partners, Messrs.

Freeman and Wilson. The Commissioner’s challenge is unfounded:

[A] donor motivated by guilt, or by the hope of being

admired, or by the desire for a tax benefit, may still deduct

his contribution. Congress long ago decided to incentivize

charitable contributions by allowing a deduction for those

contributions, and it would be perverse indeed to deny a

deduction to a donor simply because he had responded to

the incentive.

Mill Road 36 Henry, LLC v. Commissioner, T.C. Memo. 2023-129, at *28;

see also Buckelew Farm, LLC v. Commissioner, T.C. Memo. 2024-52,

at *42–43; Oconee Landing Prop., LLC v. Commissioner, T.C. Memo.

2024-25, at *37–38, supplemented by T.C. Memo. 2024-73.

Nor does our “quid pro quo” precedent rescue the Commissioner.

“If a transaction with a charity ‘is structured as a quid pro quo

exchange’—i.e., if the taxpayer receives property or services equal in

value to what he conveyed—there is no ‘contribution or gift’ within the

meaning of the statute.” Oconee Landing, T.C. Memo. 2024-25, at *37

(quoting Hernandez v. Commissioner, 490 U.S. 680, 701–02 (1989)). The

quid received here consisted of a huge tax deduction, which was provided

by the Department of the Treasury, not Heritage. As we have explained

before, we have seen “no case in which the tax benefits associated with

a charitable contribution deduction have been deemed a ‘quid pro quo’

that negates the donor’s charitable intent.” Buckelew Farm, T.C. Memo.

2024-52, at *43; see also Oconee Landing, T.C. Memo. 2024-25, at *38.

[*29] B.

Exclusively for Conservation Purposes

Conservation Purpose

Section 170(h)(4)(A) defines the term “conservation purpose” to

mean, inter alia, “the protection of a relatively natural habitat of fish,

wildlife, or plants, or similar ecosystem,” or “the preservation of open

space . . . where such preservation is . . . pursuant to a clearly delineated

Federal, State, or local governmental conservation policy, [that] will

yield a significant public benefit.” I.R.C. § 170(h)(4)(A)(ii) and (iii).

“Under the statute, each of these . . . prongs is a conservation purpose

in and of itself, and a taxpayer’s satisfaction of one of these prongs

suffices to establish the requisite conservation purpose.” Murphy v.

Commissioner, T.C. Memo. 2023-72, at *39 (quoting Herman v.

Commissioner, T.C. Memo. 2009-205, 2009 WL 2923945, at *6).

We begin by identifying the conservation purposes specified in the

deed. Id. at *42 (“We consider only a conservation purpose that is stated

in the deed.”). The deed includes a paragraph entitled “Purpose,” which

states:

It is the exclusive purpose of the Conservation Easement

to assure that the Property will be retained forever in its

predominantly relatively natural, forested, open space, and

relatively undeveloped condition, and to preserve and

protect the Conservation Values of the Property,

including . . . a variety of significant natural habitats, and

to prevent any use of the Property that will impair or

interfere with the Conservation Values of the Property

(collectively, the [“]Purposes”).

The deed further provides that the right “[t]o preserve and protect the

Conservation Values” was conveyed to Heritage “[t]o accomplish the

Purpose of this Conservation Easement.”

The term “Conservation Values” is defined in a recital that

provides that “the Property in its present state has not been developed

and possesses significant open space, forested, agricultural, watershed,

wildlife, and habitat features (collectively, the ‘Conservation Values’).”

The deed continues that “[i]n particular, said Conservation Values

include:” “1. [p]rotection of [r]elatively [n]atural [h]abitat,” specifically

bottomland hardwood forest and mesic hardwood forest, and

“2. [p]reservation of [o]pen [s]pace (including farmland and forest land)

for [s]cenic [e]njoyment of the [p]ublic or pursuant to a clearly delineated

[*30] governmental conservation policy.” As scenic enjoyment, the deed

points to the 265 feet that forms the easement property’s southern

border; for government conservation policy, the deed references “Prime

Farmland Soils and Soils of Statewide Importance, as defined by the

U.S. Department of Agriculture and Natural Resource Conservation

Services,” and protection of the Lower Oconee River Watershed as

designated in the 2005 Georgia Comprehensive Wildlife Conservation

Strategy.

Stitching these provisions together, the deed incorporates the

definition of Conservation Values set forth in the recital as part of its

defined Purpose. The purpose thus includes “to preserve and protect

conservation values,” i.e., (1) relatively natural habitat, (2) open space

for scenic enjoyment, and (3) open space for protection of certain soils

defined by the Department of Agriculture or the Lower Oconee River

Watershed pursuant to the 2005 Georgia Comprehensive Wildlife

Conservation Strategy. Although Beasley Timber attempts to rely on

the 2015 SWAP as a delineated government policy, the deed does not

support this assertion. The deed enumerates as part of its conservation

values preservation of open space in service of two specific government

policies and plainly does not include the 2015 SWAP. What the deed

has not expressed, we will not consider. See Murphy, T.C. Memo. 202372, at *45. 11

Having identified the universe of potential conservation

purposes, we consider whether the easement protects any of these

purposes. Our analysis starts and ends with the preservation of “a

relatively natural habitat of fish, wildlife, or plants, or similar

ecosystem” pursuant to section 170(h)(4)(A)(ii).

As the U.S. Court of Appeals for the Eleventh Circuit, to which

an appeal in this case would ordinarily lie, see I.R.C. § 7482(b)(1), has

recognized, the Department of the Treasury has issued a regulation on

this point that “makes more explicit what one might reasonably construe

the Code to mean anyway,” Champions Retreat Golf Founders, LLC v.

Commissioner, 959 F.3d 1033, 1036 (11th Cir. 2020), vacating and

remanding T.C. Memo. 2018-146. Specifically, Treasury Regulation

11 Of course, had the deed included preservation of open space pursuant to the

2015 SWAP as a conservation value, Heritage would have the right to preserve and

protect open space pursuant to the 2015 SWAP. See Murphy, T.C. Memo. 2023-72,

at *46. As we concluded in Murphy, we find it difficult to believe that a court would

sustain an objection by Heritage based on the 2015 SWAP without any explicit

statement designating it as a conservation value. See id.

[*31] § 1.170A-14(d)(3)(i) provides that the habitat being preserved

must be a “significant relatively natural habitat in which a fish, wildlife,

or plant community, or similar ecosystem normally lives.”

“Requiring some level of significance . . . is unobjectionable.”

Champions Retreat Golf Founders, LLC v. Commissioner, 949 F.3d at

1036. “[E]ven without the regulation, the Code would not be construed

to apply to a completely trivial habitat—a few commonly occurring ants

plainly would not do, nor would many other species not in need of

conservation.” Id. To sum up, the Eleventh Circuit in Champions

Retreat “construes the regulation to connote ‘some level of significance’

that is not ‘trivial.’” Mill Road, T.C. Memo. 2023-129, at *34.

Beasley Timber argues that the concept of “significant relatively

natural habitat” as described in the regulation conflicts with the plain

statutory text. Since Beasley Timber turned in its brief, there has been

a sea change in the framework governing how courts interpret the

relationship between statutes and regulations. See Loper Bright Enters.

v. Raimondo, 144 S. Ct. 2244, 2273 (2024). We are not called upon to

determine the fallout in this case, however, because the easement here

satisfies the section 170(h)(4)(A)(ii) requirement of a “relatively natural

habitat” even assuming arguendo that the Code requires a “level of

significance that is not trivial.”

We begin with a quick review of the rest of the key wording. A

habitat is “‘[t]he area or environment where an organism or ecological

community normally lives or occurs’ or ‘[t]he place where a person or

thing is most likely to be found.’” Glass v. Commissioner, 124 T.C. 258,

281–82 (2005) (quoting American Heritage Dictionary of the English

Language (4th ed. 2000)), aff’d, 471 F.3d 698 (6th Cir. 2006). In

distinguishing “relatively natural” from the unadorned “natural” we

have looked to Treasury Regulation § 1.170A-14(d)(3), which notes that

the “fact that the habitat or environment has been altered to some

extent by human activity will not result in a deduction being denied

under this section if the fish, wildlife, or plants continue to exist there

in a relatively natural state.” See, e.g., Murphy, T.C. Memo. 2023-72,

at *50 (“‘[N]atural’ does not necessarily mean untouched by human

hands and feet but can refer to areas somewhat altered by human

activity; and ‘relatively natural’ refers to areas that may be even more

altered but still retain conservation value . . . .”).

The JL Minerals easement protects significant relatively natural

habitats. We first consider whether the property contains a relatively

[*32] natural habitat. The baseline documentation report identifies two

habitats in particular, stating that 69% of the easement property is

covered with either mature mesic hardwood forest or bottomland

hardwood forest, with the remainder mixed between managed pine and

succession forest. The Commissioner’s expert agrees with the baseline

documentation report’s conclusion that such habitats exist and does not

suggest that these habitats were anything but relatively natural.

Although the Commissioner observes that there is no water on or

running through the property, he fails to show that water on the

property is a necessary prerequisite for these habitats.

As to significance, the State of Georgia has designated both of

these types of forest high priority habitats in its 2015 SWAP. The 2015

SWAP identifies high priority habitats based on the rarity of the habitat

as well as on whether the habitat supports species in need of

conservation. The Georgia Department of Natural Resources website

defines “high-priority habitats” as “natural habitats that rank highest

for recommended research or other conservation-related matters. For

some, it may be because of their rarity; for others, it may be because

little is known about them or because they face daunting threats, such

as habitat loss or fragmentation.” State Wildlife Action Plan, Ga. Dep’t

of Nat. Res., https://georgiawildlife.com/WildlifeActionPlan (last visited

July 19, 2024). The Commissioner responds that Beasley Timber fails

to explain how the mesic and bottomland hardwood habitat on the

easement property fits within the definitions of the 2015 SWAP. The

baseline documentation report explicitly linked the two, and the

Commissioner offers nothing besides conjecture to suggest that the

baseline documentation report is wrong.

The Commissioner also questions the significance of the habitats

on the property because they do not fit within any of the examples in the

regulation of significant natural habitats and ecosystems. As we have

explained before, Treasury Regulation § 1.170A-14(d)(3)(ii) contains a

nonexhaustive list, which generally “distinguish[es] species that

reasonably warrant protection, on the one hand, from commonly

occurring species for which the loss of habitat is not of significant

concern.” Champions Retreat Golf Founders, LLC v. Commissioner, 959

F.3d at 1036. We believe that Georgia’s designation of mesic and

bottomland hardwood forests as high priority habitats shows “‘some

level of significance’ that is not ‘trivial.’” Mill Road, T.C. Memo. 2023129, at *34 (quoting Champions Retreat Golf Founders, LLC v.

Commissioner, 959 F.3d at 1036).

[*33] The Commissioner finally points to the small size of the easement

as evidence that it lacks conservation value. The easement property is

64.7 acres (.10 square mile), and the land designated as “Special Natural

Areas” by the easement deed represent roughly two-thirds of the

easement property (.07 square mile), which the Commissioner alleges is

“too small to provide a significant relatively natural habitat.” The

Commissioner seeks to import a size requirement that the Code does not

impose. See Glass v. Commissioner, 471 F.3d at 711 (“[A]s the

Commissioner concedes, there is no provision in I.R.C. § 170(h) or the

implementing regulations that requires a minimum size for a qualifying

conservation contribution.”).

“Under the plain meaning of section 170(h)(4)(A)(ii), all that is

required is that the easement protect ‘a relatively natural habitat of fish,

wildlife, or plants, or similar ecosystem’.” Mill Road, T.C. Memo. 2023129, at *34. The easement property “protects plant communities and

ecosystems natural to [Wilkinson] County, which will continue to exist

in a relatively natural state” no matter whether any development occurs

around it. Id. The easement deed thus satisfies the conservation

purpose requirement of section 170(h)(4)(A)(ii). 12

Protected In Perpetuity

Section 170(h)(5)(A) provides that a contribution will not be

treated as being made exclusively for conservation purposes “unless the

conservation purpose is protected in perpetuity.” Given that a qualified

conservation contribution encompasses donations of less than a donor’s

full interest in property, see I.R.C. § 170(f)(3)(A), (B)(iii), (h)(2)(C), we

consider this requirement taking into account rights reserved by the

donor. The Treasury regulations have pondered the same point and

identified three permutations, which we have summarized before:

Altogether, these regulations provide that a donor

(1) may reserve in the easement deed rights to make

continued use of the easement property, provided that

there are enforceable restrictions to prevent uses

12 Given our conclusion that the deed satisfies the conservation purpose

requirement by protecting the relatively natural mesic hardwood forest and

bottomland hardwood forest habitats under section 170(h)(4)(A)(ii), we need not reach

the parties’ wide variety of other arguments relating to this requirement, including

whether a potential habitat for rare, threatened, or endangered species counts as

significant, arguments regarding section 170(h)(4)(A)(ii), and the procedural validity

of various regulations under the Administrative Procedure Act.

[*34] inconsistent with conservation purposes, (2) may continue

pre-existing use of the easement property that does not

conflict with the conservation purposes of the gift, and

(3) cannot use the property in such a way that would

destroy other significant conservation interests (unless

pursuant to protecting the conservation purpose of the

easement).

Murphy, T.C. Memo. 2023-72, at *61; see also Mill Road, T.C. Memo.

2023-129, at *39; Treas. Reg. § 1.170A-14(b)(2), (e)(2) and (3), (g)(1).

The rights reserved in the easement deed do not contravene the

protection of its conservation purpose (i.e., the preservation of mesic and

bottomland hardwood forests) in perpetuity.

Although the

Commissioner asserts that the unfettered exercise of the reserved rights

could have negative effects on conservation writ large, he misses the

forest for the trees. Each of the reserved rights but one 13 contains

linguistic variations on a common theme: The respective right is allowed

so long as it does “not materially impair or interfere with the

Conservation Values,” or, to put it positively, “preserve[s] the

Conservation Values.” The deed further equips Heritage with the right

to require compliance with the deed’s purpose—to preserve and protect

the Conservation Values—by “bring[ing] an action at law or in equity . . .

to enforce the terms of this Conservation Easement.” See Mill Road,

T.C. Memo. 2023-129, at *40. The reserved rights are married to

enforceable restrictions to prevent uses inconsistent with conservation

purpose, and the deed thus passes muster under the “protected in

perpetuity” requirement of the Code and the regulations.

Retention of a Qualified Mineral Interest Under

Section 170(h)(5)(B)

Section 170(h)(5)(B) provides, as a general matter, that the

“protected in perpetuity” requirement is not met “in the case of a

contribution of any interest where there is a retention of a qualified

mineral interest . . . if at any time there may be extraction or removal of

minerals by any surface mining method.” The Code defines a qualified

mineral interest as “subsurface oil, gas, or other minerals, and . . . the

13 The easement deed does not reference conservation values or purpose with

respect to JL Minerals’s reservation of the “right to take action reasonably necessary

to prevent erosion on the [easement property] or to protect public health and safety.”

The Commissioner nonetheless does not object to this reservation of rights or suggest

how it might threaten the perpetual protection of the conservation purpose.

[*35] right to access such minerals.” I.R.C. § 170(h)(6); see also Treas.

Reg. § 1.170A-14(b)(1)(i).

Treasury Regulation § 1.170A-14(g)(4)

observes in this regard that “a deduction under this section will not be

denied in the case of certain methods of mining that may have limited,

localized impact on the real property but that are not irremediably

destructive of significant conservation interests.”

The deed contains two pertinent provisions. It first specifies:

There shall be no filling, excavation, dredging, mining or

drilling, no removal of topsoil, sand, gravel, rock, peat

minerals, or other materials, and no change in the

topography of the land in any manner except as is

consistent with Treas. Reg. § 1.170A-14(g)(4) and as

necessary for construction and maintenance on [the

easement property] of roads, bridges, and culverts.

The deed later grants the “right to have borrow pits not to exceed a total

of 1 acre, to provide required fill material for use, such as repairing

roads, solely and exclusively on the” easement property. 14

The Commissioner argues that the “borrow pit” carveout is a

violation of section 170(h)(5)(B) because it necessarily involves the

removal of material containing minerals using a surface mining method.

The Commissioner’s own regulation, which allows “certain methods of

mining that may have limited, localized impact on the real property but

that are not irremediably destructive of significant conservation

interests,” belies this sophistry. Treas. Reg. § 1.170A-14(g)(4). The deed

allows for digging up a limited amount of dirt to repair roads solely on

the property, which plainly fits in the permissible kind of localized lowimpact disturbance. 15

III.

Qualified Appraisal Requirements

Section 170(f)(11)(D) generally provides that a charitable

contribution deduction claim exceeding $500,000 must be accompanied

by, inter alia, a qualified appraisal by a qualified appraiser. The Code

14 A borrow pit is “an area where material (usually soil, gravel or sand) is dug

for use at another location. The term is literal—meaning a pit from where material is

borrowed.” Mactec, Inc. v. Bechtel Jacobs Co., LLC., 346 F. App’x 59, 69 (6th Cir. 2009).

15 Although we need not go further, we observe in passing that one of the

Commissioner’s own experts distinguished digging material for a borrow pit from

mining, which is consistent with our view of the regulation.

[*36] defines both terms. A “qualified appraisal” is one that (1) meets

requirements set forth by “regulations or other guidance prescribed by

the Secretary” and (2) “is conducted by a qualified appraiser in

accordance with generally accepted appraisal standards and any

regulations or other guidance prescribed.” I.R.C. § 170(f)(11)(E)(i)

(emphasis added). The term “qualified appraiser” means an individual

who, as relevant here, “meets . . . requirements as may be prescribed by

the Secretary in regulations or other guidance.”

I.R.C.

§ 170(f)(11)(E)(ii)(III). The Commissioner asserts that JL Minerals

failed to obtain a qualified appraisal or to retain a qualified appraiser.

Generally Accepted Appraisal Standards

In response to the statutory incorporation of the requirements of

regulations or guidance into the definition of the term “qualified

appraisal,” the IRS issued I.R.S. Notice 2006-96, 2006-2 C.B. 902 (2006

Notice). As most relevant here, the 2006 Notice explained that an

appraisal is “qualified” if it is consistent with the substance and

principles of the Uniform Standards of Professional Appraisal Practice

(USPAP). 16 See 2006 Notice § 3.02(2).

The parties before us joust over the appraisal’s compliance with

USPAP. In particular, the Commissioner asserts that the appraisal

reflected preordained results, displayed overreliance on the GMT report,

inappropriately preferred the income method to the comparable-sales

method for valuing the property, and overall was not credible. He claims

that these defects cause the appraisal to dip below the minimum

USPAP.

As we have noted before, “[a]ppraising is not an exact science and

has a subjective nature.” Gorra v. Commissioner, T.C. Memo. 2013-254,

16 Effective January 1, 2019, Treasury Regulation § 1.170A-17(a)(2) defines

“generally accepted appraisal standards” for purposes of I.R.C. § 170(f)(11)(e) to mean

“the substance and principles” of USPAP. In adopting this standard, the Department

of the Treasury observed: “The Treasury Department and the IRS agree that it is

beneficial to provide some flexibility by requiring conformity with appraisal standards

that are consistent with the substance and principles of USPAP rather than requiring

that all appraisals be prepared strictly in accordance with USPAP.” Substantiation

and Reporting Requirements for Cash and Noncash Charitable Contribution

Deductions, 83 Fed. Reg. 36417-01, 36420 (July 30, 2018) (to be codified at 26 C.F.R.

pts 1, 602). Although the tax year at issue precedes the effective date of this regulation,

it nonetheless provides that “[t]axpayers may rely on the rules of this section for

appraisals prepared for returns or submissions filed after August 17, 2006.” Treas.

Reg. § 1.170A-17(c).

[*37] at *48. The Commissioner attacks Mr. Hayter primarily for

overreliance on GMT, from which most of his other purported errors

flow, from the Commissioner’s point of view. Mr. Hayter, however,

disclosed his heavy reliance on GMT from the start of his report and

included as an extraordinary assumption that the GMT information was

accurate. The Commissioner further critiques Mr. Hayter’s selected

appraisal methodology (the use of the income approach) and his failure

to sufficiently reconcile the extraordinary results in the GMT report

using the comparable sales method. We are not convinced that Mr.

Hayter’s work is inconsistent with the substance and principles of

USPAP.

Although the Commissioner has identified significant

weaknesses in the appraisal, any failures to comply with USPAP “go

more to the credibility and weight of the appraisal and not to whether

the appraisal complies with generally accepted appraisal standards.”

Buckelew Farm, T.C. Memo. 2024-52, at *49; see also Whitehouse Hotel

Ltd. P’ship v. Commissioner (Whitehouse I), 131 T.C. 112, 127–28 (2008),

vacated and remanded, Whitehouse Hotel Ltd. P’ship v. Commissioner

(Whitehouse II), 615 F.3d 321 (5th Cir. 2010); T.D. 9836, 2018-33 I.R.B.

291, 294 (“[T]he final regulations do not adopt the recommendation to

require strict compliance with USPAP and retain the requirement of

consistency with the substance and principles of USPAP.”).

Qualified Appraiser

The Code’s definition of a qualified appraiser, another necessary

element of a qualified appraisal, incorporates “requirements as may be

prescribed by the Secretary in regulations or other guidance.” See I.R.C.

§ 170(f)(11)(E)(ii). Again, we look to the 2006 Notice, which states that

“[t]he requirements of [Treasury Regulation] § 1.170A-13(c) . . .

concerning qualified appraisals and qualified appraisers continue to

apply to all taxpayers.” 2006 Notice § 3.04(1), 2006-2 C.B. at 903.

As relevant here, Treasury Regulation § 1.170A-13(c)(5)(ii)

provides that an appraiser is not qualified if “the donor [here, JL

Minerals] had knowledge of facts that would cause a reasonable person

to expect the appraiser [here, Mr. Hayter] falsely to overstate the value

of the donated property.”

[I]t is not the appraisal that may become disqualified, but

rather the appraiser. . . . [T]he appraiser does not become

disqualified

simply

because

(1)

the

appraiser

incompetently or carelessly overstated the value, and/or

(2) the donor knew that the appraiser overstated the value,

[*38] and/or (3) the donor knew facts about the property that

caused the value to be overstated.

Rather, this

disqualification occurs when the donor knows facts that do

or should cause him to expect the appraiser to falsely

overstate the value. Such facts will be facts about the

appraiser, and the resulting expectation is not just an

incorrect overstated value but a “falsely” overstated value.

Mill Road, T.C. Memo. 2023-129, at *42; see also Oconee Landing, T.C.

Memo. 2024-25, at *39 (“The ‘knowledge’ requirement in Treasury

Regulation § 1.170A-13(c)(5)(ii) implicates the donor’s actual and/or

constructive knowledge.”).

The Treasury regulation provides an

example sounding in collusion to illustrate this knowledge requirement:

“[T]he 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 . . . .” Treas.

Reg. § 1.170A-13(c)(5)(ii).

“In gauging a partnership’s ‘knowledge’ for this purpose, we look

to the knowledge of the person(s) with ultimate authority to manage the

partnership.” Oconee Landing, T.C. Memo. 2024-25, at *40; see also

Buckelew Farm, T.C. Memo. 2024-52, at *45. Although Messrs.

Freeman and Wilson took an active role in the business dealings of JL

Minerals, including coordinating the conservation easement, ultimate

authority over JL Minerals rested with Messrs. Johnson and Beasley.

Even assuming arguendo that Messrs. Freeman and Wilson’s extensive

work for a 1% ownership stake each in JL Minerals put their much

greater knowledge at issue, we conclude that a reasonable person would

not expect Mr. Hayter to falsely overstate the property’s value even

considering the full facts before Messrs. Freeman and Wilson.

To be clear, the Commissioner’s case is not insubstantial.

Summarizing the brief, Mr. Freeman picked a compliant appraiser

(willing to tweak his numbers to please a client) and pointed him as to

the questionable method to be employed and as to the general values

that he desired. And Mr. Freeman knew that a false overstatement

would result, given the repeated warnings of Mr. Sheppard about the

use of the income method as a means of manipulation.

These facts also can be read as a relatively normal back-and-forth

between client and appraiser. The client first retains someone who has

experience and skill with mineral valuations, and then gives samples of

what the client has found appropriate in the past. So far, so good. The

[*39] client trusts the appraiser to pick an acceptable method and

believes that the income method makes sense given the uniqueness of

the property. And the appraiser, although responsive to feedback,

explicitly aims to stay within the bounds of reasonableness.

On the record before us, we do not conclude that a reasonable

person with Mr. Freeman’s knowledge would expect Mr. Hayter to

falsely overstate the value nor that there was a meeting of the minds on

a predetermined result. This case presents a markedly different

situation from Oconee Landing, T.C. Memo. 2024-25, at *45, where the

donor intimately understood the fair market value of the property and

reached an implicit agreement with the appraiser as to a value that he

knew to be false. We thus conclude Mr. Hayter is a qualified appraiser

within the meaning of section 170(f)(11)(E). 17

IV.

Valuation

General Principles

Generally, the amount of a charitable contribution deduction

under section 170(a) for a donation of property other than money is the

“fair market value” of the property at the time of the donation. Treas.

Reg. § 1.170A-1(c)(1). Treasury Regulation § 1.170A-1(c)(2) defines fair

market value to be “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.” “This definition, a fixture in the Treasury Regulations

since 1972, is universally acknowledged by professional appraisers

when valuing charitable contributions of property.” Corning Place Ohio,

LLC v. Commissioner, T.C. Memo. 2024-72, at *27; see also Value,

Black’s Law Dictionary (4th ed. 1968) (defining ‘“value’ of land for

purpose of taxation” as the “price that would probably be paid therefor

after fair negotiations between willing seller and buyer”); Interagency

Land Acquisition Conference, Uniform Appraisal Standards for Federal

Land Acquisitions 3 (1971) (defining fair market value as “the amount

in cash, or on terms reasonably equivalent to cash, for which in all

probability the property would be sold by a knowledgeable owner willing

but not obligated to sell to a knowledgeable purchaser who desired but

is not obliged to buy”).

17 Given our finding that JL Minerals complied with the substantiation

requirements set forth in section 170, it is unnecessary to address the Commissioner’s

argument that the failure to comply was due to willful neglect.

[*40] The value of a property on a certain date is a question of fact to

be resolved on the basis of the entire record, see, e.g., Kaplan v.

Commissioner, 43 T.C. 663, 665 (1965), and the parties retained experts

to assist in our inquiry. We evaluate their opinions in light of each

expert’s qualifications and the evidence in the record, and we may accept

an “opinion in toto or accept aspects . . . that we find reliable.” Oconee

Landing, T.C. Memo. 2024-25, at *58; see also Savannah Shoals, LLC v.

Commissioner, T.C. Memo. 2024-35, at *35. We also “may determine

fair market value on the basis of our own examination of the evidence in

the record.” Savannah Shoals, T.C. Memo. 2024-35, at *35; see

Buckelew Farm, T.C. Memo. 2024-52, at *51.

As there is no substantial record of comparable sales of easements

comparable to the JL Minerals easement, the parties agree that the

easement should be valued by calculating the difference between the fair

market value of the easement property before and after JL Minerals

granted the easement. See, e.g., Esgar Corp. v. Commissioner, T.C.

Memo. 2012-35, 2012 WL 371809, at *7, aff’d, 744 F.3d 648 (10th Cir.

2014); Treas. Reg. § 1.170A-14(h)(3)(i). In deciding the “before value,”

we must take into account not only the actual use of the easement

property when the easement was given in December 2017, but also its

highest and best use. See Stanley Works & Subs. v. Commissioner, 87

T.C. 389, 400 (1986); Treas. Reg. § 1.170A-14(h)(3)(ii). Although this

“concept ‘is an element in the determination of fair market value, . . . it

does not eliminate the requirement that a hypothetical willing buyer

would purchase the subject property for the indicated value.’” Excelsior

Aggregates, LLC v. Commissioner, T.C. Memo. 2024-60, at *47 (quoting

Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 336 (2011)); see also

Corning Place, T.C. Memo. 2024-72, at *41.

Highest and Best Use

Legal Grounding

“To determine a property’s highest and best reasonably probable

use, the court focuses on ‘[t]he highest and most profitable use for which

the property is adaptable and needed or likely to be needed in the

reasonably near future.’” Palmer Ranch Holdings Ltd. v. Commissioner,

812 F.3d 982, 996 (11th Cir. 2016) (quoting Symington v. Commissioner,

87 T.C. 892, 897 (1986)), aff’g in part, rev’g and remanding in part T.C.

Memo. 2014-79; accord Olson v. United States, 292 U.S. 246, 255 (1934).

We have defined highest and best use as “[t]he reasonably probable and

legal use of vacant land or an improved property that is physically

[*41] possible, appropriately supported, and financially feasible and

that results in the highest value.” Oconee Landing, T.C. Memo. 202425, at *59 (quoting Whitehouse Hotel Ltd. P’ship v. Commissioner

(Whitehouse III), 139 T.C. 304, 331 (2012); see also Savannah Shoals,

T.C. Memo. 2024-35, at *37. “The highest and best use inquiry is one of

objective probabilities.” Esgar Corp. v. Commissioner, 744 F.3d at 657.

“While highest and best use can be any realistic, objective

potential use of the property, it is presumed to be the use to which the

land is currently being put absent proof to the contrary.” Esgar Corp. v.

Commissioner, 2012 WL 371809, at *7. Where “an asserted highest and

best use differs from current use, the use must be reasonably probable

and have real market value.” Id. (citing United States v. 69.1 Acres of

Land, 942 F.2d 290, 292 (4th Cir. 1991)).

If different from the current use, a proposed highest and best use

requires both “closeness in time” and “reasonable probability.” Hilborn

v. Commissioner, 85 T.C. 677, 689 (1985); see also Savannah Shoals,

T.C. Memo. 2024-35, at *37. Any proposed uses that “depend upon

events or combinations of occurrences which, while within the realm of

possibility, are not fairly shown to be reasonably probable” are to be

excluded from consideration. Olson, 292 U.S. at 257; see also Excelsior

Aggregates, T.C. Memo. 2024-60, at *30; Oconee Landing, T.C. Memo.

2024-25, at *65.

“Where, as here, the parties proposed different uses, we consider

‘[i]f there is too high a chance that the property will not achieve the

proposed use in the near future,’ in which case ‘the use is too risky to

qualify.’” TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1369

(11th Cir. 2021) (quoting Palmer Ranch Holdings Ltd. v. Commissioner,

812 F.3d at 1000). “The principle can also be articulated in terms of

willingness to pay. If a proposed use is too risky for ‘a hypothetical

willing buyer [to] consider [the use] in deciding how much to pay for the

property,’ then the use should not be deemed the highest and best

available.’’ Palmer Ranch Holdings Ltd. v. Commissioner, 812 F.3d at

1000 n.14 (quoting Whitehouse II, 615 F.3d at 335).

On several occasions, we have applied these general principles to

the mining context:

Where the asserted highest and best use of property is the

extraction of minerals, the presence of the mineral in a

commercially exploitable amount and the existence of a

[*42] market “that would justify its extraction in the reasonably

foreseeable future” must be shown. United States v. 69.1

Acres of Land, supra at 292. “There must be some objective

support for the future demand, including volume and

duration. Mere physical adaptability to a use does not

establish a market.” United States v. Whitehurst, 337 F.2d

765, 771–772 (4th Cir. 1964); see also United States v.

494.10 Acres of Land, 592 F.2d 1130, 1132 (10th Cir. 1979)

(stating that “if the ‘future’ is beyond or very much beyond

the ‘near future,’ the use becomes speculative”).

Esgar Corp v. Commissioner, 2012 WL 371809, at *8; 18 see also Excelsior

Aggregates, T.C. Memo. 2024-60, at *35.

Analysis

Beasley Timber argues that the highest and best use of the

property is a landowner-operated kaolin mine, positing a business model

similar to that of Arcilla. The cornerstone for this conclusion is the GMT

mineral report, which was relied upon not only by Mr. Hayter’s

appraisal but by each of JL Minerals’s experts. Specifically, Benjamin

Black (author of the GeoLogic report) started from GMT’s drilling data

and then offered his own analysis of the kaolin bed and how a mine could

be operated on the property to recover the maximum amount of the

deposit, a point assumed but left unsaid in the original GMT report.

Building on GMT and Mr. Black, Dr. Criss Capps produced a “resource

valuation report,” which concluded the kaolin “meets all industry

specifications” for a kaolin reserve with a net present value between

$17.6 and $21.5 million. Two appraisers, Douglas Kenny and Thomas

Spears, each appraised the easement property, concluding that the

mineral deposit described by GMT made the property unique and

deriving value from sales of comparable properties impossible. They

accordingly both used a discounted cashflow analysis to value the

property, assuming a highest and best use of a landowner-operated

kaolin mine along the lines of Arcilla.

For his part, the Commissioner turns to a three-member team of

experts from SRK Consulting, a consulting firm specializing in mining.

18 As we have noted, although the cited cases involved eminent domain or

condemnation, “[f]air market value ‘does not vary according to whether the taxpayer

is seeking a charitable deduction for property contributed or an adequate and just

compensation for property condemned.’” Esgar Corp. v. Commissioner, 2012 WL

371809, at *8 n.12 (quoting Klopp v. Commissioner, T.C. Memo. 1960-185).

[*43] Bart Stryhas testified with respect to deficiencies in GMT’s

methods and report. Dr. Stryhas further explained that, even assuming

the reliability of GMT’s data, its conclusions as to the amount of kaolin

that could be mined were vastly overstated. Dr. Silver Miller testified

about practical questions bearing on topics such as mine pit walls,

topography, and overburden that cast doubt on the viability of a mine

on the easement property. Finally, Matthew Sullivan explained that the

GMT report did not permit declaring the deposit either a mineral

resource or reserve 19 as necessary for the evaluation of the economic

viability of a mining project. Consistent with the conclusions of these

experts that there was insufficient data to presume a viable mine on the

easement property, the Commissioner’s appraisal expert concluded that

the highest and best use in 2017 was its then-current use, i.e.,

agricultural/residential/recreational use with knowledge of mineral on

According to guidelines from the Society for Mining, Metallurgy, and

Exploration (SME Guide), a “[m]ineral [r]esource is a concentration or occurrence of

solid material of economic interest in or on the Earth’s crust in such form, grade, or

quality and quantity that there are reasonable prospects for eventual economic

extraction.” “The term ‘reasonable prospects for eventual economic extraction’ implies

a judgment . . . with respect to the technical and economic factors likely to influence

the prospect of economic extraction, including the approximate mining parameters.”

“Portions of a deposit that do not have potential for eventual economic extraction . . .

cannot be included,” which implies that resources “are constrained within pit shells for

surface mining methods.”

Mineral resources range in order of increasing confidence into inferred,

indicated, and measured classes. An “inferred” resource is “part of a [m]ineral

[r]esource for which quantity and grade or quality are estimated on the basis of limited

geological evidence and sampling” and reasonably assumed, but not verified,

“geological and grade or quality continuity.” “Caution should be exercised if [inferred

resources] are considered in technical and/or economic studies. This class of material

should not be used to economically support Mineral Reserves.” An “indicated” resource

means that part of a resource for which “grade or quality, densities, shape and physical

characteristics are estimated with sufficient confidence to allow the appropriate

application of [m]odifying [f]actors [i.e., technical and economic parameters including

mining, processing, metallurgical, economic marketing, legal, environmental,

infrastructure, social and governmental factors] in sufficient detail to support mine

planning and evaluation of the economic viability of the deposit.” A “measured”

resource is the part of a mineral resource “for which quantity, grade or quality,

densities, shape, and physical characteristics are estimated with confidence sufficient

to allow the application of [m]odifying [f]actors to support detailed mine planning and

final evaluation of the economic viability of the deposit.”

A mineral reserve is the economically mineable part of a measured or indicated

resource. Like a resource, a reserve has varying levels of confidence, i.e., probable or

proven, depending on the confidence in the modifying factors.

[*44] the site and the opportunity to obtain legal entitlements allowing

mining.

In addition to the gaggle of experts on both sides, the parties (and

we) place heavy reliance on information gleaned from industry

participants given the small and cloistered nature of the kaolin industry.

We are treating industry information and data at a relatively high level

of abstraction (and have sealed certain parts of the record) to preserve

confidential information provided by the industry.

The extensive record before us leaves no doubt—kaolin mining

was not the highest and best use of the easement property in 2017.

Behavior of Market Participants

We start with the real world. To put it bluntly, multiple kaolin

processors had taken a close look at the easement property and, in at

least two cases (Huber and then its successor, KaMin) decided that it

was not worth mining or even keeping it as part of a long-term reserve.

The actions of kaolin experts with skin in the game torpedo JL

Minerals’s contention that the kaolin on the easement property “would

justify . . . extraction in the reasonably foreseeable future.” Esgar Corp.

v. Commissioner, 2012 WL 371809, at *8 (quoting 69.1 Acres of Land,

942 F.2d at 292); see also Palmer Ranch Holdings Ltd. v. Commissioner,

812 F.3d at 998 n.12 (“Determining the properties’ highest and best use

necessitated a look at market demand, so the tax court could not be

faulted for taking that look.”); Esgar Corp. v. Commissioner, 744 F.3d at

658 (“The Tax Court was not bound to accept . . . mining as the

properties’ highest and best use if that use was not reasonably probable

to manifest in the reasonably near future.”).

By way of refresher, the market for crude kaolin in Georgia at the

end of 2017 primarily involved four major kaolin processors, which

sought various types of kaolin meeting precise specifications, as well as

a few minor processors that focused on lower grade kaolin suitable for

air-float processing. See supra pp. 6–10. Given the need for categories

of kaolin meeting extremely precise requirements, the major processors

mined 95–100% of their own supply and held decades of inventory

(either through lease or purchase) for each of the types of kaolin needed

for their various end products. These majors only occasionally turned to

Arcilla, which had higher costs and required additional layers of quality

control by the processors. And it was exceedingly rare for the major

[*45] processors to buy kaolin from a landowner that had mined the

kaolin itself.

As part of the century-long odyssey to find sources of kaolin in the

Georgia Kaolin Belt, multiple kaolin companies drilled and tested the

Scaly Knob property, of which the easement property was part. From

1980 until the Club took over in 2001, the Scaly Knob property was

drilled and tested four times by both forerunners to the major companies

(which inherited the data) and air-float processors. This land, in other

words, was terra very much cognita.

Only one of the companies during this period, Englehard (later to

become part of BASF), decided to mine the Scaly Knob property based

on what they had found. As Mr. Mills, who “was intimately familiar

with the kaolin deposits in the area,” explained, the other companies

“found no clay that they wanted to use.”

Englehard’s mine separated the two tracts of what later became

the easement property, with the mine itself ultimately reclaimed as the

pond over which the hunting lodge sat. Englehard opted to close its

mine rather than expand onto the part of the Scaly Knob property that

was to become the easement property. Given the inherent advantages

stemming from expanding an already-operating mine rather than

opening a mine afresh, the closing of the mine (without any lease for

future mining) is a strong indication that mining kaolin on the easement

property was not economically viable, either because none of the

deposits met the specifications for processing into Englehard’s products

or because of the costs attendant on mining an area of steep slopes and

deep ravines, as Ms. Sorenson put it.

Of course, on the other side of what became the easement

property was Huber’s mine, making it a logical partner for the Club’s

kaolin dreams. In fact, as Mr. Mills explained, in his experience no other

kaolin company would be interested because “there would have been too

much overburden for [a mining company] to consider unless they had

the adjoining property.” Mr. Mills, acting on the Club’s behalf, was able

to entice Huber into exploratory drilling and then a mineral lease over

the easement property given the proximity to its mine and possibility of

kaolin deposits similar to the ones that Huber already was mining.

Huber performed exploratory drilling and testing in the northern

half of the easement property, an approach consistent with Mr. Mills’s

observation that the overburden in the southern half was “too great to

[*46] justify removing it.” Despite its exploratory drilling, however,

Huber took no further action. The decision not to move forward with

mining the kaolin on the property again suggests that it was not usable

by Huber. As Mr. Mills put it, a kaolin company that left a valuable

deposit in the ground “wouldn’t be in business very long . . . because it

costs a lot of money to lease a property and to drill it and to test it and

to run it through all the special testing that’s required.”

Mr. Mills did not disagree with Huber’s conclusion. As part of the

mineral lease, Mr. Mills obtained, on the Club’s behalf, Huber’s drilling

data with an eye to marketing the property to other kaolin companies

using that data if Huber did not mine. Mr. Mills testified, however, that

he “didn’t see anything [in the drill data] that [he] could take to a kaolin

company that would convince them to mine the property.”

KaMin acquired the rights to drill the easement property as part

of its acquisition of Huber’s kaolin arm in 2008. It too elected not to

mine the property from 2008 through 2013, or to keep the property

under lease as part of its reserves thereafter. The evidence before us

shows that KaMin took this course because other properties that it

controlled contained kaolin meeting the same specifications, but at more

favorable locations. Moreover, the evidence demonstrates that KaMin’s

data indicated that the portion of the easement property kaolin that

could be used in its operations was a small fraction of the purported

GMT’s 5.3-million-ton estimate.

This is not the only real-world evidence suggesting that

familiarity with the easement property bred lack of interest. In 2016

Mr. Rivers sought Scaly Knob drilling data from Imerys, BASF, and

KaMin, explaining that the owner was interested in conserving the

property. Although a conservation easement would mean the kaolin on

the easement property would be off the market forever, none of the

major kaolin companies—who, again, planned for their needs decades in

the future and had drilling data from their predecessors about the

deposit—offered to buy or lease the property to preserve the ability to

mine at some point. If the data before them showed untapped potential,

the industry would have come calling. We draw the appropriate

conclusion from its decision not to do so.

We also are aware that the major processors often entered into

agreements amongst themselves that allowed for buying or swapping

unwanted kaolin. This course of practice would suggest that if Huber or

KaMin had believed that the kaolin on the easement property would be

[*47] of interest to any of the other processors, either would have

approached them. They did not do so.

The market spoke plainly about the economic viability of a kaolin

mine. Market choices suggest that the kaolin on this property fits within

Mr. Mills’s experience having drilled thousands of properties for kaolin

companies: “the majority of the properties . . . drilled during [his] work

there did not find viable kaolin deposits. They may have had kaolin on

the property, but it wasn’t worth mining, and it wasn’t worth keeping

the lease in hopes of future mining.”

Expert Testimony

Beasley Timber nonetheless holds fast to its conclusion that

kaolin mining was the highest and best use of the easement property,

relying on the conclusions in the GMT report as supplemented by the

GMT supplemental report and Beasley Timber’s other experts. The

evidence before us shows that GMT’s reports cannot bear the weight

placed on them and that Beasley Timber has not demonstrated a

commercially exploitable amount of kaolin and the existence of a market

that would justify its extraction in the reasonably foreseeable future.

Esgar Corp. v. Commissioner, 2012 WL 371809, at *8; see also Excelsior

Aggregates, T.C. Memo. 2024-60, at *35.

GMT Credibility

We start by noting our considerable skepticism about GMT’s

credibility. We acknowledge that Mr. Ginn and the company that he

built were experts in mineral analysis, particularly in the field of kaolin.

Starting in 2016, however, GMT aggressively pursued work

supporting mineral-based conservation easements.

Working on

conservation easements, of course, does not call into question one’s

credibility. Our concerns stem from the fact that on at least eight

occasions to our knowledge GMT concluded that a property in rural

Georgia had an extremely large kaolin deposit (ranging between 3.6 and

6.4 million tons of kaolin), which was later used to support a very large

charitable contribution deduction (between $14.6 and $22 million

dollars). If GMT were correct, the entire kaolin industry has failed to

appreciate hundreds of millions of dollars of valuable kaolin right under

its feet, despite decades of drilling and testing and buying and selling.

Occam’s razor suggests a different result: GMT repeatedly overstated

the amount of commercial-grade kaolin in its reports.

[*48] We have more specific concerns about GMT’s original report in

this case. In the original report, GMT stated that it had directed drilling

of 16 drillholes on the easement property in 2016 and 2017. It then laid

out its analysis based on the results from those 16 samples. But that

description was not correct. As both parties agree, GMT (using Waters

Drilling) drilled 20 drillholes, with four of them losing circulation before

hitting kaolin. The omission from the report of information related to

20% of the total drillholes raises questions about the thoroughness of

the report’s analysis (to be charitable) or selective use of data (to be less

so).

ii.

Kaolin Deposit

Even setting these doubts aside, we are unpersuaded that the

GMT report, together with the various experts’ reports Beasley Timber

commissioned for trial, shows the existence of a commercially

exploitable amount of kaolin, as well as a market that would justify its

extraction in the reasonably near future. See Excelsior Aggregates, T.C.

Memo. 2024-60, at *35; Esgar Corp. v. Commissioner, 2012 WL 371809,

at *8. The GMT report is simply too preliminary and too vague to

provide a sure foundation for Beasley Timber’s position, lacking the kind

of analysis that industry participants engage in when deciding whether

mining a property makes economic sense. And none of the expert

reports, each of which relies on the GMT report, cures its failings.

By way of review, GMT concluded from its analysis of the drilling

samples that the easement property contained over 5,304,000 short wet

tons of average to excellent quality kaolin clay that was well within

desirable clay reserve parameters. The GMT report further concluded

an average overburden of 92 feet, a clay strata thickness of 40 feet, and

an overburden-to-clay ratio of 2.3:1. The report stated that the results

of the drilling moved the easement property “from a potential mineral

resource into the defined category of ‘Identified Mineral Reserve.’”

The report also examined economic prospects for mining the

kaolin. After noting that the amount of kaolin could support mining

150,000 to 250,000 crude wet tones annually for at least 20 years (using

simple division), GMT opined that JL Minerals could operate as a

“contractor with limited competition from other contractors or the actual

kaolin producers.” The report mused that JL Minerals could replicate

Arcilla’s business model “with experienced contractors and consultants,”

which could fetch a price of $14–$22 per ton. We have multiple problems

with these conclusions, but we will concentrate on three major issues.

[*49]

Sufficiency of Data

We start with the drilling of the property, which was meant to

gather sufficient data to obtain a reasonable indication of the quality

and size of a deposit on the property. As explained by Dr. Miller, the

State of Georgia recorded that kaolin companies usually drill 50–100

drillholes for every 100 acres of property, which would equate to

approximately 30–60 drillholes on the easement property. The 16

drillholes that GMT analyzed here are barely more than half the low

end of the number of drillholes the kaolin industry itself uses, raising

questions about the adequacy of the data.

Deepening these questions is the manner in which drilling was

conducted. The kaolin industry witnesses all told a common story on

this point. When first exploring a property, a kaolin company would

engage in sporadic drilling or drilling with relatively wide spacing (400–

800 feet) between drillholes. When more information about the size and

the qualities of the deposit became necessary, the drilling changes to a

grid system with ever-tightening space (400 to 200 to 100 to 50 feet, in

some cases) between drillholes sometimes over years of testing.

The industry uses the grid method because it is the most reliable

way to gather information about the types of kaolin on a property. This

information is critical given the need to feed specific plants kaolin

meeting precise specifications. As Mr. McKenzie explained, the grid

method “makes it easier to do the calculation knowledge [because] . . .

you know the area of influence.” He further testified that, in the absence

of a grid, “certain areas extend out further,” which “would affect [the]

calculations for different types of clay and different parts of the grid.”

The progress from wide-spaced, sporadic exploratory drilling to

more regularized grid-based drilling aligns with the SME Guide, which

explicitly differentiates exploratory results from the category of a

mineral resource or reserve. Even in the category of mineral resources,

these guidelines caution that an “inferred” resource, (i.e., one “for which

quantity and grade or quality are estimated on the basis of limited

geological evidence and sampling” and reasonably assumed, but not

verified, “geological and grade or quality continuity”) “should not be used

to economically support Mineral Reserves.”

Despite having the benefit of KaMin’s drilling data, GMT

performed sporadic, wide-spaced drilling of the easement property

concentrated on roads and the boundaries of the property. The results

[*50] of this drilling are best understood as exploratory and

preliminary, lacking the hallmarks of reliability developed by the

industry. As the SME Guide explains, exploratory results “do not form

part of a declaration of Mineral Resources or Mineral Reserves,” and are

“common in the early stages of exploration when the quantity of data

available is generally not sufficient to allow any reasonable estimates of

Mineral Resources.” At best, the GMT drilling results could be

categorized under SME Guide as an “inferred” resource, too uncertain

to be used to economically support a mineral reserve.

To sum up, the haphazard and cursory GMT drilling program

failed to provide the quantum of reliable data necessary to conclude that

a mine was reasonably probable in the reasonably near future. There is

nothing in the preliminary results produced by the drilling program that

might suggest the industry had previously incorrectly evaluated the

easement property’s mining potential.

The Market

The GMT report, as well as the reports of Dr. Capps, Mr. Spears,

and Mr. Kenny, further fails to identify a market that would justify

extraction in the reasonably near future. The GMT report concludes at

a very high level of abstraction that the property contains “average to

excellent” kaolin that was “well within desirable clay reserve

parameters” and these “reserves would easily integrate into a modern

kaolin processing facility for manufacturing kaolin and kaolin based

products.” Dr. Capps took the baton from there, opining that the

demand for kaolin was moderate to high, that the “high quality” reserve

would be absorbed by the market, and that the kaolin on the property

could support a mine lasting decades. The baton was then passed to the

valuation experts who relied on “market demand for the resources due

to their quality as referenced by the geological studies, independent lab

results, various market information, and [Dr. Capps’s report].” In

essence, Beasley Timber’s position is that the “average to excellent”

quality of the kaolin would plainly find a market and justify extraction.

The problem is that this is not how the kaolin market works.

Every kaolin industry witness who testified at trial agreed on this point:

Specifications for processing drive the market. In the kaolin industry,

customers (i.e., the processors) define their needs for different types of

kaolin meeting assorted technical specifications to be processed into a

set end product at a particular plant. The companies then source the

types and volumes of kaolin required. Unsurprisingly, the major kaolin

[*51] processors fulfill 95–100% of their needs from their own supply,

which stretches decades into the future for each category of kaolin

necessary for a product. In other words, major kaolin processors are not

looking for the platonic form of “good” kaolin but kaolin with very precise

characteristics to fulfill technical needs at a given time.

We struggle with the common conclusion of the GMT report and

the supporting experts that a kaolin deposit vaguely categorized as

“average to excellent” would find a place in this specialized market. The

testimony establishes that major kaolin processors are not looking to

outside suppliers for their kaolin needs, except as a last resort and with

considerable reluctance. This reluctance is rooted in the fact that the

processors need to assure themselves that any kaolin meets their

demanding requirements, which entails testing outside supply

themselves and tight quality control. Additionally, relying on outside

suppliers was more costly than relying on one’s own kaolin reserves.

The testimony shows that this aversion to outside supply even stretches

to Arcilla, a longstanding industry participant.

The demanding technical requirements and decades worth of

preexisting inventory of all types of kaolin are only part of the problem

with Beasley Timber’s assumption that a market would snap up JL

Minerals’s kaolin. Timing is also an issue. The testimony at trial

demonstrates that the major processors look to their sales of end

products as well as their plants to determine what kaolin is needed over

the following few months. Assuming that JL Minerals could identify a

particular type of kaolin on the easement property that would be of

interest to a processor, there is no indication that the timelines would

sync up. And, if they did, JL Minerals would then be faced with

competing to convince the processor to buy JL Minerals’s kaolin rather

than using the processor’s own abundant, well-verified inventory or the

already established Arcilla.

We see absolutely no indication that the segment of the kaolin

market represented by the major processors would support extraction of

the little understood kaolin on the easement property in the reasonably

near future, much less support a landowner-operated kaolin mine.

Although we have addressed only one segment of the kaolin

market, we believe that the issues inherent in failing to identify with

any specificity the markets for the various types of kaolin on the

easement property span all segments. The GMT report does not

demonstrate that kaolin from the easement property would be suitable

[*52] for air-float processing or manufacturing into proppants or

refractory material. Of course, these are all lower end parts of the kaolin

market with less revenue that might not justify extraction.

The GMT report and the economic experts point to Arcilla as

evidence that a market exists for kaolin generated by a landowneroperated mining business. Arcilla is not comparable. It has been in

existence since 1992 and during that time has conducted extensive

exploratory drilling throughout the Georgia Kaolin Belt, culminating in

leasing or purchasing land. Arcilla thus replicates the major processors

in having a firm understanding of the precise types of kaolin on the

properties it controls, as well as the particular applications that the

kaolin can be used for by processors. According to Mr. McKenzie, most

of the kaolin that Arcilla mines is sold for air-float processing and

manufacturing into proppants. We see no support for the idea that

Arcilla would have succeeded with a mine-first, customer-later strategy

that JL Minerals assumed. We also question whether declining

domestic market demand would support a competitor to Arcilla. Absent

more analysis regarding the types of kaolin on the property and the

market segments in which Arcilla is active, we are hard pressed to draw

any conclusions from its example.

As Mr. McKenzie credibly testified, a new mining company would

face particular challenges in entering the kaolin industry. Competing

in this market required mining equipment and a lab to analyze the

kaolin, as well as people to run both. As Mr. McKenzie put it, in 2016

and 2017 “[t]here just weren’t people available and it was just a

complicated business.”

Telescoping out somewhat, trends in the international kaolin

market also cast doubt on the market prospects for this kaolin.

Domestic kaolin production declined 35% within the period from 2000

through 2017, per the U.S. Geological Survey. As illustrated by the

careers and testimony of Messrs. McKenzie and Mills, the kaolin

industry went through decades of consolidation and acquisition as the

market tightened. We credit Dr. Miller’s belief that, as of 2017, the

kaolin market was at an equilibrium where demand equaled supply

because of the already established market and the sheer amount of

mining that already existed in the area. Given the structure of the

market and the equilibrium, we simply do not believe a new mine,

especially of the type that JL Minerals hypothesizes, would find a

market for the kaolin.

[*53] To sum up, by sticking to generalities about the types of kaolin on

the property, the GMT report, and its valuation acolytes, have failed to

establish the existence of any market for this kaolin, much less one that

would justify the extraction of the kaolin in the reasonably near future.

Beasley Timber lacks any “objective support for future demand,

including volume and duration” and relies on “[m]ere physical

adaptability to a use.” Esgar Corp. v. Commissioner, 2012 WL 371809,

at *8 (quoting United States v. Whitehurst, 337 F.2d 765, 771–72 (4th

Cir. 1964)). This is not enough to establish a market. See Excelsior

Aggregates, T.C. Memo. 2024-60, at *35; Esgar Corp. v. Commissioner,

2012 WL 371809, at *8.

Mining Issues

We are also unconvinced of the existence of a commercially

exploitable amount of kaolin on the easement property. Even assuming

that drilling data was sufficient to categorize the kaolin deposit as an

“indicated” mineral resource or mineral reserve for which economic

analysis would be appropriate, we have no confidence that the numbers

would make any sense.

The GMT report estimated that the property has 5.3 million tons

of kaolin but makes no provision whatsoever for how exactly to mine the

property. To fill in the gap, Beasley Timber turns to Mr. Black at

GeoLogic, who uses the GMT data to estimate a “resource” on the

property of 7.9 million tons, of which 3.9 million tons were declared a

“reserve.” Mr. Black noted that the mine plan models with slopes inside

the property lines would now allow the recovery of the 5.3 million tons

of kaolin calculated by GMT, but an “expanded, backcut slope starting

on the neighboring property . . . consistent with industry practices . . .

would increase estimated mineable kaolin reserve values . . . to

approximately 6.4 million short tons.”

Although the experts basically agree on the raw numbers

generated from the GMT data, they have strenuous disagreements over

the amount of kaolin that could actually be mined, focusing on questions

of pit slope walls and overburden. In our view, the most critical insight

comes not from the retained experts, but from the testimony of the

industry witnesses. They explained that kaolin mining was an iterative

process in which the company mining a property routinely compares

(1) the costs of removing the overburden and hauling the kaolin to a

processing plant with (2) the value of the kaolin obtained. Given the

steep topography and vastly varying overburden amounts on the

[*54] easement property, we believe that sooner or later the equation

would militate in favor of closing the mine rather than expanding into

an area with high overburden, thus undermining Mr. Black’s conclusion

as to the amounts of kaolin that could be extracted.

Moreover, the industry witnesses emphasized the critical

importance of location in determining the value to be derived from a

kaolin property. Crude kaolin meeting required specifications must be

transported to a plant that needs kaolin of that type or a blunging site

to be made into slurry and transported by pipeline. The lack of

information regarding the types of kaolin on the property and thus the

potential buyers make it impossible to evaluate the crucial hauling costs

and determine whether kaolin mining would, in fact, be economically

feasible.

Conclusion

In summary, we reject Beasley Timber’s argument that the

highest and best use of the easement property in December 2017 was as

a kaolin mine. Although the property contained a kaolin deposit, the

conduct of informed market participants over decades convinces us that

mining was not reasonably probable in the reasonably near future.

Beasley Timber has failed to show otherwise, relying on preliminary and

generalized information that suggests no particular market and a report

that engenders no confidence. Although we grant its point that future

innovations might have transformed the deposit into a thing of value,

this outcome “depend[s] upon events or combinations of occurrences

which, while within the realm of possibility, are not fairly shown to be

reasonably probable.” Olson, 292 U.S. at 257; see also Excelsior

Aggregates, T.C. Memo. 2024-60, at *30. As is, there is simply “too high

a chance that the property will not achieve the proposed use in the near

future,’’ in which case “the use is too risky to qualify.” TOT Prop.

Holdings, LLC v. Commissioner, 1 F.4th at 1369 (quoting Palmer Ranch

Holdings, Ltd. v. Commissioner, 812 F.3d at 1000). The highest and best

use accordingly remains the easement property’s current use,

agricultural/residential/recreational use with knowledge that some

mineral exists on the site.

Valuation of the Easement Property

Legal Framework

Having determined the highest and best use of the property, we

next turn to determining its value before the grant of the easement.

[*55] Unsurprisingly, “[t]his Court has repeatedly affirmed that actual

arm’s-length sales occurring sufficiently close to the valuation date are

the best evidence of value, and typically dispositive, over other valuation

methods.” Buckelew Farm, T.C. Memo. 2024-52, at *56; see also Corning

Place, T.C. Memo. 2024-72, at *28; Excelsior Aggregates, T.C. Memo.

2024-60, at *31 (“The best evidence of a property’s FMV is the price at

which it changed hands in an arm’s-length transaction reasonably close

in time to the valuation date.”); ES NPA Holding, LLC v. Commissioner,

T.C. Memo. 2023-55, at *14. For these purposes, both we and the

Eleventh Circuit have “f[ou]nd the purchase [of a partnership interest]

reflective of the price that the market would pay for the Subject

Property, especially when the ownership interest was nearly 100% and

the only asset held by the Partnership was the Subject Property itself.”

Buckelew Farm, T.C. Memo. 2024-52, at *56; see also TOT Prop.

Holdings, LLC v. Commissioner, 1 F.4th at 1368 (finding that the sale

price for a 98.99% interest in a partnership, whose only meaningful

asset was property on which an easement was granted shortly

thereafter, was representative of the “before” value of the property);

Oconee Landing, T.C. Memo. 2024-25, at *71–72.

In addition to previous sales, we often draw on one or more of

three common approaches to determine the fair market value of a piece

of real property: (1) the market, or comparable sales approach; (2) the

income approach; and (3) a cost, or an asset-based approach. See, e.g.,

Excelsior Aggregates, T.C. Memo. 2024-60, at *32; see also Bank One

Corp. v. Commissioner, 120 T.C. 174, 306 (2003), aff’d in part, vacated

in part, and remanded on another issue sub nom. JPMorgan Chase &

Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006). Our decision on

which approach (or approaches) to use is a question of law, and the

utility of the various approaches can vary according to the type of

property at issue. See Chapman Glen Ltd. v. Commissioner, 140 T.C.

294, 325–26 (2013); see also Corning Place, T.C. Memo. 2024-72, at *31–

32; Savannah Shoals, T.C. Memo. 2024-35, at *35–36. The approaches

provide a valuable sanity check for each other and for the value

indicated by previous sales. See Excelsior Aggregates, T.C. Memo. 202460, at *32.

Analysis

The parties each rely on different champions. For his part, the

Commissioner looks to previous sales of the easement property,

complemented by the comparable sales approach. Beasley Timber turns

to the income approach, asserting that the results of the GMT testing

[*56] meant that this property was unique and income producing,

rendering irrelevant any reference to other sales.

Before engaging with the parties’ respective analyses, we first

reject Beasley Timber’s contention that the GMT report transformed the

easement property into something unique. As we have explained at

length, the GMT report is, at best, a vague and preliminary analysis of

exploratory drilling results. A knowledgeable buyer and seller would

take this report with a grain of salt, establishing the possibility that a

kaolin deposit of undefined quality exists on the easement property. Of

course, it was no secret that the property was in the heart of the Georgia

Kaolin Belt, kaolin companies had drilled on or around the easement

property multiple times, and, as seen in public records, a lengthy

mineral lease over the easement property passed between two

processors, neither of whom chose to open a mine.

Nor do we believe that GMT’s word alone would move the needle.

The trial testimony establishes that at least two kaolin processors

elected not to mine properties touted by GMT (despite receiving

favorable testing data), consistent with general industry practice for

processors to rely on their own testing.

The GMT report, in short, does little to distinguish the easement

property or render inapposite prior sales of the easement property or

sales of other properties that might contain kaolin.

Actual Transactions Involving Property

The results of the actual transactions involving the property

provide consistent and compelling evidence of the easement property’s

value. We first consider the arm’s-length sale of the Scaly Knob property

from the Club to Free-Wil for $1.6 million in December 2015, which

works out to $2,481 per acre. Beasley Timber argues that this was a

distressed sale, noting that relations inside the Club were collapsing and

some of the members were in need of money. The record before us

establishes that the Club, comprising almost exclusively successful and

knowledgeable businesspeople, sought and believed that they had

received a fair price for the property. The facts before us further show

that both the Club and Free-Wil were well aware of the Huber lease, and

thus the potential for kaolin mining. Even the Club member who

believed most strongly in kaolin mining offered approximately the same

price ($1.7 million, a per-acre value of $2,636) to purchase the Scaly

Knob property and believed that the easement property’s maximum

[*57] value was $2.5 million ($3,875 per acre). The $2,481 price per acre

for the Scaly Knob property accordingly provides strong evidence of the

value of the easement property.

We next look to the January 2016 sale of a 98% interest in JL

Minerals (which held the easement property as its only asset) by FreeWil to Beasley Timber for $167,837. Doing some simple math, the 98%

interest in the partnership (with the easement property as its only asset)

suggests a total property value of $171,262 (calculated by dividing

$167,837 by 98%). This amount, in turn, reflects a per-acre value of

$2,647, which is largely consistent with the sale from the Club a few

months earlier.

We note that the buyer and the seller were both aware of the

existence of the Huber lease in January 2016, and thus the possibility

for kaolin mining. Underscoring this point, we believe that savvy

businessmen like Messrs. Beasley and Johnson understood that the 64.7

acres covered by the Huber mineral lease were spun off from the rest of

the total 1,116 acres for a reason. Beasley Timber was buying timber to

be cut and, as a cherry on top, a property ready made to support a

lucrative conservation easement deduction to offset its earnings.

One other, unconsummated, transaction catches our eye. In 2017

Mr. Freeman was approached by Mr. Loudermilk, a very experienced

Georgia real estate buyer, to gauge his interest in purchasing all 1,116

acres that Beasley Timber owned through Jackson Lake and JL

Minerals. Mr. Freeman pitched to Mr. Loudermilk the 2016 drilling

data on the easement property and attempted to entice him with the

prospect of a lucrative conservation easement deduction in addition to

the value of the land itself. Mr. Loudermilk, aware that vacant land in

Wilkinson County went for $600–$2,400 per acre, broke off discussions

because he refused to go above $5 million ($4,480 per acre) even in light

of the drilling data and the potential for a sizable tax deduction.

The record before us provides strong evidence that the true value

of the easement property—even inflated with the prospect of tax

benefits—was a tiny portion of the $259,815 per-acre value that JL

Minerals claimed as a deduction.

Comparable Sales Approach

The comparable sales approach “values property by comparing it

to similar properties sold in arm’s-length transactions around the

valuation date.” Savannah Shoals, T.C. Memo. 2024-35, at *36 (first

[*58] citing Estate of Spruill v. Commissioner, 88 T.C. 1197, 1229 n.24

(1987); and then citing Wolfsen Land & Cattle Co. v. Commissioner, 72

T.C. 1, 19 (1979)). “Because no two properties are ever identical, the

appraiser must adjust the sale prices of the comparables to account for

differences between the properties (e.g., parcel size, location, and

physical features) and the terms of the sales (e.g., proximity to valuation

date and conditions of sale).” Id. (citing Wolfsen Land & Cattle Co., 72

T.C. at 19); see also Excelsior Aggregates, T.C. Memo. 2024-60, at *33.

The reliability of a comparable sales analysis depends on the

comparability of the properties selected as comparables and the

reasonableness of the adjustments made to the prices to establish

comparability. Wolfsen Land & Cattle Co., 72 T.C. at 19–20.

“In the case of vacant, unimproved property . . . the comparable

sales approach is ‘generally the most reliable method of valuation.’”

Oconee Landing, T.C. Memo. 2024-25, at *67 (quoting Estate of Spruill,

88 T.C. at 1229 n.24); see also Excelsior Aggregates, T.C. Memo. 202460, at *38; Savannah Shoals, T.C. Memo. 2024-35, at *35. “The

comparable sales approach is usually the most reliable indicator of value

when sufficient information exists” because “the market place is the best

indicator of value, based on the conflicting interests of many buyers and

sellers.” Corning Place, T.C. Memo. 2024-72, at *32 (quoting Estate of

Spruill, 88 T.C. at 1229 n.24).

Sales of properties similar to the easement property generally

confirm the values seen in the previous transactions. Operating from

the idea that the GMT report rendered the easement property unique,

Mr. Hayter and the Beasley Timber experts did not analyze comparable

properties. The Commissioner’s expert, Mr. Sheppard, thus has the field

to himself, aside from Beasley Timber’s attacks on him. We find his

results persuasive.

Mr. Sheppard concluded that sufficient sales data existed in the

primary trade area for similarly configured tracts with a similar highest

and best use (i.e., agricultural/residential/recreational use with

knowledge of mineral on the site and the opportunity to obtain legal

approvals to allow mining). Out of a pool of several hundred sales, Mr.

Sheppard found 12 sales of properties that he deemed “comparable”

because of exploratory-stage knowledge of kaolin on the respective

properties. Mr. Sheppard focused on transactions sold or purchased by

a known kaolin operator that involved land sales of “active mines,

adjacent land area for expansion of an existing mine, land intended for

(observable using current aerials, views from the street, press releases,

[*59] etc.) immediate or short-term mine development, and land

speculatively purchased but not mined (also observable using aerials,

views from the street, lack of press releases, etc.).”

From the 12, Mr. Sheppard ultimately selected 4 that he believed

to be “the most similar in terms of size/acres, location, and date of sale:”

●Comparable #1: This sale involved a 161.62-acre parcel in

Wilkinson County, Georgia, which was purchased by

Cascadas de Agua Azul, LLC (Agua Azul), in August 2016

for $332,775 ($2,059 per acre). At the time of sale, the

property was adjacent to a large BASF kaolin mining pit

and plant, had proximate highway access, and was not

zoned for a specific use. The seller, an individual, retained

rights to 50% of any royalties paid from mining on the

property.

●Comparable #2: This sale involved a 79.09-acre parcel in

Wilkinson County, Georgia, which also was purchased by

Agua Azul in August 2016, for $197,564 ($2,498 per acre).

This property likewise abutted the large BASF kaolin

mining pit and plant, had proximate highway access, and

was not zoned for a specific use. The seller of this property

(a limited liability company) also reserved rights to 50% of

any royalties paid from mining the property.

●Comparable #3: This sale involved a 101.76-acre parcel

near Wilkinson County, Georgia, which was purchased by

Redsprings Properties, LLC, in May 2015 for $150,000

($1,474 per acre). The seller, a limited liability company,

transferred the property in fee simple. The property was

in an area with a major concentration of kaolin processing

plants but along an interior road as opposed to a highway.

●Comparable #4: This sale involved a 191.13-acre parcel in

Wilkinson County, Georgia, which was purchased by

Imerys in February 2015 for $382,000 ($1,999 per acre).

KaMin, the seller, transferred the property in fee simple.

The property was located a similar distance from major

kaolin processing plants as the easement property on an

interior road and was not zoned for a specific use.

As part of his analysis, Mr. Sheppard made upward adjustments

to the sale prices of the four properties to account for characteristics

[*60] inferior to those of the easement property, including reservation

of rights, highway access, location, property infrastructure, and

topography. After the adjustments were made, Mr. Sheppard concluded

that the “before value” of the easement property was between

$1,862/acre and $2,639/acre with Comparable #2 being the most similar

overall giving a fair market value indication for the easement property

at $2,563/acre. On the basis of these facts and all the sales data, Mr.

Sheppard concluded that the fair market value of the entire easement

property, as of December 2017, was “$162,000, rounded ($2,500/acre for

the 64.70 acre subject property).”

At trial and in brief, Beasley Timber critiques Mr. Sheppard’s

valuation, pointing out that in previous takings litigation he had opined

that a property containing kaolin had a value in excess of $90,000 per

acre. This point is unpersuasive. The property at issue in the previous

litigation was at a wholly different stage in development, with KaMin

already leasing the property and having conducted extensive drilling

(e.g., 36 drill holes on approximately 20 acres) that provided precise

information regarding the exact type of kaolin on the property, which

supported actual market analysis. In this case, there is little more than

a guesstimate that there might be commercially exploitable kaolin on

the property, with the actions of market participants providing strong

suggestions to the contrary.

We believe that Mr. Sheppard’s analysis and conclusions are

sound and conclude that they generally confirm the results of the actual

transactions involving the easement property.

Income Approach

The income method values a property by computing the present

value of projected future income from the property. Chapman Glen Ltd.,

140 T.C. at 327; Marine v. Commissioner, 92 T.C. 958, 983 (1989), aff’d,

921 F.2d 280 (9th Cir. 1991) (unpublished table decision); see also

Excelsior Aggregates, T.C. Memo. 2024-60, at *33; Savannah Shoals,

T.C. Memo. 2024-35, at *36. “The theory behind an income approach is

that an investor would be willing to pay no more than the present value

of a property’s anticipated future net income.” Savannah Shoals, T.C.

Memo. 2024-35, at *36 (citing Trout Ranch, LLC v. Commissioner, T.C.

Memo. 2010-283, aff’d, 493 F. App’x 944 (10th Cir. 2012)); see also

Excelsior Aggregates, T.C. Memo. 2024-60, at *33.

[*61] Beasley Timber argues that the income approach best captures

the value of the easement property, given its view that the GMT report

made the property unique and a landowner-operated kaolin mine

represented the highest and best use. We disagree on both points.

GMT’s work on eight conservation kaolin easement cases, finding

approximately the same quantity of purportedly valuable kaolin worth

approximately the same belies the contention that this property is

unique. And, for reasons that we already have detailed, the highest and

best use of the property is not a kaolin mine. Our issues with the use of

the income approach in this context run deeper than just highest and

best use, however, and would require rejection of this approach even if

we were to agree that kaolin mining was plausible.

“The income capitalization [approach] is most reliable when used

to determine the value of an existing business with a track record of

income, expenses, profits, and growth rates. A historical track record

provides real-world inputs that supply a plausible basis for projecting

future revenue.” Excelsior Aggregates, T.C. Memo. 2024-60, at *43–44

(citing Whitehouse III, 139 T.C. at 325 (noting that the income approach

“has been judged an unsatisfactory valuation method for property that

does not have a track record of earnings”)).

“Income valuation methods are not favored when valuing vacant

land with no income-producing history because they are inherently

speculative and unreliable.” Savannah Shoals, T.C. Memo. 2024-35,

at *36; see also Whitehouse Hotel III, 139 T.C. at 324–25; Ambassador

Apartments, Inc. v. Commissioner, 50 T.C. 236, 243–44 (1968), aff’d per

curiam, 406 F.2d 288 (2d Cir. 1969); Excelsior Aggregates, T.C. Memo.

2024-60, at *33. “The income approach is rarely appropriate when

seeking to determine the value of undeveloped property with no existing

cashflow.” Corning Place, T.C. Memo. 2024-72, at *37; see Excelsior

Aggregates, T.C. Memo. 2024-60, at *44 (“[C]ourts have often noted ‘the

folly of trying to estimate the value of undeveloped property by looking

to its anticipated earnings.’” (quoting Pittsburgh Terminal Corp v.

Commissioner, 60 T.C. 80, 89 (1973), aff’d, 500 F.2d 1400 (3d Cir. 1974)

(unpublished table decision))); see also Chapman Glen, 140 T.C. at 327;

Whitehouse Hotel III, 139 T.C. at 324–25; Ambassador Apartments, 50

T.C. at 243–44; Savannah Shoals, T.C. Memo. 2024-35, at *36. “Absent

a financial track record, every input into the DCF analysis necessarily

involves speculation.” Excelsior Aggregates, T.C. Memo. 2024-60, at *44;

see also Corning Place, T.C. Memo. 2024-72, at *37 (“Lacking reliable

data, the appraiser would have to rely on a lengthy series of

assumptions, estimates, and guesstimates.”). “That problem would be

[*62] at its apogee here—attempting to predict the future revenues and

expenses of a nonexistent business for a 30-year period.” Excelsior

Aggregates, T.C. Memo. 2024-60, at *44; see also Corning Place Ohio,

T.C. Memo. 2024-72, at *37–38.

“When the income approach is used, the Court must examine the

plausibility of the critical assumptions made by the appraiser.”

Excelsior Aggregates, T.C. Memo. 2024-60, at *44 (citing Kiva Dunes

Conservation, LLC v. Commissioner, T.C. Memo. 2009-145, 97 T.C.M.

(CCH) 1818, 1820). “Each assumption, whether large or small, carries

with it ‘some risk of error.’” Id. (quoting Whitehouse III, 139 T.C. at 323).

“As interdependent assumptions multiply, the risk of error can increase

exponentially.” Id.

We begin with the simple observation that the evidence before us,

including the testimony of market participants, firmly establishes that

no one involved in the kaolin industry would have paid nearly $17

million for the easement property even if a person were to credit the

GMT report and the discounted cashflow analyses that followed it. To

put it another way, no rational businessperson would pay the net

present value of a business simply to buy the property, as is implicit in

Beasley Timber’s position equating the two values. Savannah Shoals,

T.C. Memo. 2024-35, at *45 (“We are not convinced that a quarry

operator would pay the [mineral’s] net present value for the land as

there would be no means for a profit.”).

This conclusion is underscored by the principle of substitution,

i.e., that “a prudent man will pay no more for a given property than he

would for a similar property.” Mill Road, T.C. Memo. 2023-129, at *51

n.30 (quoting Estate of Rabe v. Commissioner, T.C. Memo. 1975-26, 34

T.C.M. (CCH) 117, 119, aff’d, 566 F.2d 1183 (9th Cir. 1977) (unpublished

table decision)). GMT’s own track record indicates that properties with

similar deposits of kaolin are plentiful in Wilkinson County, and yet

Messrs. Beasley and Loudermilk and various appraisers all noted that

the per-acre values of land in Wilkinson County were somewhere

between $600 and $2,400. No rational businessperson would pay $17

million for a piece of property with possibilities similar to one that could

be purchased for under $200,000.

This example points to the oddity produced by using the income

approach here. JL Minerals is claiming a deduction for donating one

stick in its bundle of property rights. But according to JL Minerals’s

income approach, this one stick has a much greater value than what the

[*63] evidence shows a market participant would pay for the fee simple

property, which includes all the sticks in the bundle.

Something is plainly off.

We believe the reason for the

counterintuitive result is that the discounted cashflow method is not

valuing the property at all, but what a speculative business could do

with the property. But a discounted cashflow method geared to what a

business could earn is of limited utility in determining what a property

is worth.

Of course, that is not to say that the income approach is flawed.

To the contrary, the income approach is reliable where a historical track

record provides supported inputs. The case before us provides an

illustration of an appropriate use of the income method, in fact. As the

industry participants explained, kaolin mining in 2017 almost always

involved a mineral lease between a processor (or Arcilla) and a property

owner, according to which the property owner received agreed royalties

from tonnage of kaolin mined. This type of well-established royalty

agreement of course was seen in fact in the 2003 mineral lease between

the Club and Huber. With historical royalty information, the use of an

income approach could be used to determine the value of the land,

including the royalty derived.

Where the income approach lacks good inputs, it becomes little

more than fan fiction aimed at generating the highest numbers possible,

no matter how objectively ludicrous. We consider as an example Dr.

Capps’s resource valuation report, which uses a discounted cashflow

method to provide a net present value associated with mining the kaolin

deposit. Without knowing more than the vague information provided by

GMT, Dr. Capps predicts a very happy future for a JL Minerals-operated

mine as of 2017, opining that it would carve a niche in the kaolin market

its first year, then expand to 200,000 tons sold the next two years, and

end with 250,000 tons sold the remainder of its 16- or 25-year mine life.

Using average prices and costs, together with a 7.6% discount rate (at

the top end of the normal discount rate range for kaolin companies), Dr.

Capps saw nothing but success ahead had JL Minerals chosen to mine.

These rosy projections have no connection to the reality of kaolin

mining that we saw at trial. Dr. Capps assumes a market that seems

quite unlikely, as evidenced by the fact that there are no landowneroperated mines. The major processors have no interest in buying kaolin

from outside suppliers, except as a last resort, which makes

participation in the higher end of the kaolin market unlikely. Even if

[*64] they had some interest in outside supply, Dr. Capps does not

explain why that supply would be met by JL Minerals rather than

Arcilla, already a known supplier in the industry with considerable

experience in providing kaolin meeting required specifications.

If, as seems likely, the higher end of the market is not open for

business, then JL Minerals would be competing with Arcilla for a share

of the kaolin market for air-float processing, to the extent that the kaolin

on the property even was suitable for such use. The kaolin used for this

type of processing fetches a lower price. Questions of demand are

heightened given declining domestic production and the apparent

surfeit of kaolin-rich properties as seen in the eight other kaolin

conservation easements that GMT backed.

Keeping company with the uncertain demand are the

unsupported costs. Significant parts of the cost figures (hauling and fuel

surcharges) are contingent on the plant’s processing the kaolin or the

blunging site’s receiving the kaolin. These sites are buyer specific, and

consequently the distance and accompanying costs are not at all defined.

More importantly, we believe that Dr. Capps failed to fully take

into account the risks of the landowner-operated mine model. We

question Dr. Capps’s timeline as we heard from industry representatives

that a drilling and testing program could take five to eight years simply

to determine the specification of the kaolin on the property to be mined.

This is a far cry from his discounted cashflow that anticipated sales from

mining during the first year.

Dr. Capps also seems to have basically assumed that JL Minerals

would immediately be functioning like a processor or Arcilla. But, as

Mr. McKenzie observed, a new business would require a lab with

employees to verify the kaolin specifications, as well as a trained crew

to strip overburden, mine, and haul the product. According to Mr.

McKenzie, experienced hands were in short supply in 2017. To the

extent that Beasley Timber argued at trial that Arcilla could step in and

provide these services, we question why Arcilla would not simply treat

JL Minerals like any other landowner who needed kaolin to be mined

and agree to a royalty rate producing a fraction of what Dr. Capps

estimated.

We could go on (and make similar observations about Messrs.

Hayter’s, Spears’s, and Kenny’s analyses). That is the point: Use of the

discounted cashflow method with so few reliable inputs and so many

[*65] variables and unknowns is simply an exercise in imagination. As

such it is altogether unreliable, and we would ignore the laughable

results it generated even if we thought mining were the easement

property’s highest and best use. We caution taxpayers in the future who

choose to use this method without strong support that we will view the

income approach and the discounted cashflow method with skepticism,

particularly in the conservation easement context.

Valuation Conclusion

On the record before us, we find that the easement property had

a before value of $2,700 per acre, in light of the actual sales of the

easement property as well as Mr. Sheppard’s persuasive analysis of

sales of comparable properties. The total before value of the property

accordingly is $174,690 ($2,700 × 64.7 acres). Mr. Sheppard found the

lowest “after value,” concluding that the easement property was worth

$81,000 after the granting of the easement. As this value is more

favorable to JL Minerals than the one its own experts determined, we

will treat this as a concession by the Commissioner.

The fair market value of the conservation easement accordingly

is $93,690 ($174,690 − $81,000) at the time JL Minerals contributed the

conservation easement to Heritage.

Deduction-Related Expenses

In addition to adjusting the charitable contribution, the IRS

disallowed $227,534 in “other” deductions JL Minerals claimed on its

2017 tax return. The parties agree that the amount at issue is actually

$228,913.

Beasley Timber asserts that all of the enumerated expenses were

incurred in connection with “investigating the values of the property and

documenting the conservation easement contribution.” It posits that the

amounts were deductible either under (1) section 165(a) as a loss

stemming from the abandonment of certain of its rights in the easement

property or (2) section 212(3) as expenses incurred as part of its

reporting of the charitable contribution deduction.

Neither provision fits. As an initial matter, Beasley Timber fails

to show that a donation of rights for which a charitable contribution

deduction has been claimed under section 170 can double as a loss for

section 165(a) purposes. And the text of section 212 limits the claimant

of that deduction to “an individual,” which plainly excludes a limited

[*66] liability company such as JL Minerals. See, e.g., Boris I. Bittker

& Lawrence Lokken, Federal Taxation of Income, Estates & Gifts

¶ 20.1.1 (3d ed. 1999). 20

VI.

Section 6662 Accuracy-Related Penalties

The Commissioner determined accuracy-related penalties under

section 6662 with respect to both the charitable contribution deduction

and the other deductions JL Minerals claimed. We conclude that the

40% gross valuation misstatement penalty under section 6662(h)

applies to JL Minerals with respect to the former deduction. We

likewise find that the 20% penalty applies with respect to the other

deductions, either on negligence or substantial understatement

grounds. 21

Governing Principles

Section 6662(a) and (b)(1), (2), and (3) imposes an accuracyrelated penalty on the “underpayment of tax required to be shown on a

return . . . equal to 20 percent of the portion of the underpayment to

which this section applies” upon a taxpayer who underpays its tax

because of, among other things, “[n]egligence or disregard of rules or

regulations,” a “substantial understatement of income tax,” or a

“substantial valuation misstatement.” An understatement of income

tax is substantial if it exceeds the greater of “10 percent of the tax

required to be shown on the return for the taxable year” or $5,000. I.R.C.

§ 6662(d)(1)(A). For 2017, the year at issue, a substantial valuation

misstatement exists if “the value of any property . . . claimed on any

return . . . is 150 percent or more of the amount determined to be the

correct amount of such valuation.” I.R.C. § 6662(e)(1)(A). None of these

penalties will be imposed where the taxpayer had “reasonable cause.”

20 We recognize that businesses often can deduct expenses under section 162

that an individual might deduct under section 212. Beasley Timber makes no

argument that the expenses are deductible under section 162 and has accordingly

forfeited such an argument. See, e.g., Sepulveda v. U.S. Att’y Gen., 401 F.3d 1226, 1228

n.2 (11th Cir. 2005) (stating an appellant who fails to argue an issue in his brief

abandons it); Rowen v. Commissioner, 156 T.C. 101, 115–16 (2021) (explaining that a

“litigant has an obligation to spell out its arguments squarely and distinctly, or else

forever hold its peace” (quoting Schneider v. Kissinger, 412 F.3d 190, 200 n.1 (D.C. Cir.

2005))); Estate of Spizzirri v. Commissioner, T.C. Memo. 2023-25, at *17 n.9 (“The

[taxpayer] has failed to develop this argument and, consequently, has forfeited the

issue.”).

21 The Commissioner has conceded the reportable transaction understatement

penalty under section 6662A asserted in the FPAA.

[*67] I.R.C. § 6664(c)(1).

But see I.R.C. § 6664(c)(3) (imposing

heightened requirements for a substantial valuation overstatement).

One possible ground for claiming “reasonable cause” is reliance

on professional advice. Treas. Reg. § 1.6664-4(b). “If a taxpayer alleges

reliance on the advice of a tax professional, that ‘advice must generally

be from a competent and independent advisor unburdened with a

conflict of interest and not from promoters of the investment.’” Oakhill

Woods, LLC v. Commissioner, T.C

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