Kenneth Brooks v. Commissioner of Internal Revenue

109 F.4th 205

• Court: Court of Appeals for the Fourth Circuit
• Decided: July 15, 2024
• Docket: 23-1314
• Status: Published

Opinion

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PUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 23-1314

KENNETH M. BROOKS; ANITA WOLKE BROOKS,

Petitioners - Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent - Appellee.

Appeal from the United States Tax Court. (Tax Ct. No. 28206-15)

Argued: May 10, 2024 Decided: July 15, 2024

Before WILKINSON, NIEMEYER, and QUATTLEBAUM, Circuit Judges.

Affirmed by published opinion. Judge Niemeyer wrote the opinion, in which Judge Wilkinson joined. Judge Quattlebaum wrote a separate opinion concurring in part and in the judgment.

ARGUED: Steven G. Hall, BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC, Atlanta, Georgia, for Appellants. Julie Ciamporcero Avetta, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Joshua Tropper, BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC, Atlanta, Georgia, for Appellants. David A. Hubbert, Deputy Assistant Attorney General, Jennifer M. Rubin, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 2 of 33

NIEMEYER, Circuit Judge:

In this case, the Commissioner of Internal Revenue (1) disallowed a married

couple’s deductions on their income tax returns for a conservation easement granted to a

local government and (2) imposed accuracy-related penalties for their gross valuation

misstatements. The United States Tax Court upheld the Commissioner’s action, and the

taxpayers now challenge the Tax Court’s decision.

In 2006, Kenneth Brooks and Anita Wolke Brooks, through their family limited

liability company, purchased roughly 85 acres of vacant land in southeast Liberty County,

Georgia, for $1.35 million and divided it into two parcels of roughly 44 acres and 41 acres,

respectively. A year later, they granted Liberty County a conservation easement on the 41-

acre parcel and claimed $5.1 million as a charitable deduction on their income tax returns,

beginning with their 2007 return and continuing thereafter with carry-forward deductions

through at least 2012. In 2015, the Commissioner issued the Brookses a notice of

deficiency for their 2010, 2011, and 2012 tax returns, disallowing the deductions and

assessing penalties. By that time, the statute of limitations had already run on the

deductions that the Brookses had taken on their returns before 2010. The Commissioner

concluded that the deductions failed to comply with multiple requirements of the Internal

Revenue Code and regulations and that the Brookses’ valuation of the donated property

amounted to a “gross valuation misstatement.”

The Brookses filed a petition with the Tax Court challenging the deficiency notice,

and, following trial, the Tax Court upheld both the Commissioner’s disallowance of the

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charitable deductions related to the donation of the conservation easement and the

imposition of a 40 percent penalty for a “gross valuation misstatement.”

For the reasons that follow, we affirm.

I

In December 2006, Kenneth Brooks and Anita Wolke Brooks, who are physicians

living and practicing in Falls Church, Virginia, purchased, through their family limited

liability company, 85.314 acres of vacant property in the southeastern portion of Liberty

County, Georgia, with the intent of building a vacation home and recreational facilities.

Shortly before this purchase, the land had been owned by timber companies, who then

conveyed it to the Brookses’ seller, Hampton Island, LLC. Despite the seller’s name, the

property is not on an island, nor is it evident that there is any island nearby called Hampton

Island. The Brookses’ property is, however, contiguous to a 4,000-acre Planned Unit

Development (“PUD”) called “Hampton Island Preserve,” but development there had

hardly begun, as only two houses had been built in it, and what would be the primary road

near the Brookses’ property had not yet been built. The Brookses’ property was not part

of the Hampton Island Preserve PUD, and it was accessible only through an easement to a

nearby road. It did have access to electrical and telephone lines, but not to water and sewer

lines. While the property was roughly one-quarter mile east of I-95, access to I-95 was

over 5 miles away. The property was zoned agricultural and could be, under the Liberty

County zoning ordinance, subdivided into no more than 10 parcels with a minimum lot

size of 5 acres.

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At the time of the purchase, the Brookses divided the 85-acre property into one

parcel of 45.113 acres and one parcel of 41.201 acres, and, a year later, on December 20,

2007, they granted Liberty County a conservation easement on the 41-acre parcel “for and

in consideration of the sum of ten dollars ($10.00) and other good and valuable

consideration,” although the easement deed did not describe that “other consideration.”

The easement deed prohibited development of the property and required that it be

preserved in its natural state, albeit subject to the exercise of numerous rights reserved to

the Brookses. In particular, the deed reserved to the Brookses the right: (1) to construct

two paddocks totaling 20 acres for horse boarding; (2) to construct a barn on one acre of

land; (3) to construct fencing around the perimeter of the property and around the

paddocks; (4) to install underground and overhead utilities, including water, electric, and

cable lines; (5) to install lighting on the one-acre barn parcel; (6) to use five acres of the

donated property for “agricultural activities,” which were defined as “personal and

commercial organic gardening”; (7) to mortgage, sell, and pledge the property; (8) to cut,

burn, or remove vegetation deemed to be a nuisance species or with prior agreement of

Liberty County; (9) to harvest timber to build the above-referenced paddocks; (10) to plant

indigenous trees and shrubs; (11) to maintain and replace, if necessary, all existing road

beds; (12) to use and enjoy the property for recreational activities not inconsistent with the

purposes of the easement; and (13) to retain all other rights and privileges of ownership not

expressly prohibited in the easement deed. The Brookses attached to the easement deed a

“boundary description” of the property, which included two maps, and a “Baseline Survey

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Summary” of the property, consisting of three pages of substantive text that contained

limited information on the general conditions of the donated property at the time.

Thus, even though the Brookses granted Liberty County a conservation easement

over the 41-acre parcel, they retained rights to use the entire property recreationally and to

develop over one-half of it into horse paddocks, a barn, and a large garden for personal and

commercial purposes.

On their 2007 tax return, the Brookses claimed a $5.1-million charitable deduction

for the “41.201 acre tract of vacant land” over which they had granted an easement to

Liberty County and stated that the “cost or adjusted basis” for the 41-acre tract was $1.35

million, which was the total amount they had paid for the 85-acre parcel. They attached to

their return an appraisal made by Jim R. Clower, Sr., an appraiser in Lawrenceville,

Georgia, who valued the easement on the 41-acre parcel at $5.1 million, as well as the deed

granting the easement, which had been signed by Liberty County. But they did not include

any other document that purported to be a “contemporaneous written acknowledgment of

the contribution by the donee organization,” which was required under the tax laws. Such

an acknowledgment had to disclose, among other things, all consideration provided by

Liberty County in exchange for the easement and the value of such consideration. The

Brookses took a deduction of $748,702 on their 2007 return for the donation and a carry-

forward deduction of $1,004,654 on their 2009 return. Beginning in 2010, they took the

carry-forward deductions that are subject to this action — $657,135 in 2010; $763,835 in

2011; and $743,862 in 2012.

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On August 21, 2015, the Commissioner of Internal Revenue issued a notice of

deficiency to the Brookses for their 2010, 2011, and 2012 tax returns. The notice stated

that the Commissioner had “determined that the deduction claimed on [the Brookses’]

return for contributions based on the donation of a conservation easement [was] disallowed

in full because the donation fail[ed] to qualify as an allowable deduction under section 170,

section 162, or any other section of the Internal Revenue Code.” It also stated that the

Commissioner had imposed a 40 percent accuracy-related penalty under 26 U.S.C.

§ 6662(h) for a “gross valuation misstatement.” By the time the Commissioner assessed

this deficiency for the Brookses’ 2010, 2011, and 2012 tax returns, the statute of limitations

had run with respect to the deductions they had claimed on their returns before 2010.

The Brookses filed a petition in the United States Tax Court, challenging the notice

of deficiency.

Under the standing rules of the Tax Court, the parties were required to provide each

other with all documents to be used at trial at least 14 days before the scheduled trial date.

In this case, the Commissioner provided a document required for its case only 7 days before

the trial — a document entitled IRS Civil Penalty Approval Form, which an IRS manager

had to fill out before penalties could be assessed. Because its disclosure was 7 days late,

the Brookses objected to the document’s introduction into evidence.

At trial, in addition to lay factual witnesses, both the Brookses and the

Commissioner presented expert testimony regarding the value of the easement. The

Brookses no longer sought to defend the $5.1 million valuation that they provided to the

IRS with their 2007 return. Rather, they retained another appraiser for trial, Duane Miller,

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who valued the easement at $3.63 million. In doing so, he projected the fair market value

of the 85-acre property before the easement as $7.66 million and after the easement as

$4.03 million, with the difference being the $3.63 million value of the easement that he

gave at trial. The Commissioner’s expert projected the fair market value of the 85-acre

property before the easement as $1.41 million and after the easement as $940,000,

providing a fair market value of the easement on the 41-acre parcel as $470,000. During

the trial, the Tax Court admitted into evidence the Civil Penalty Approval Form, in the

interest of justice and the absence of prejudice.

On December 19, 2022, the Tax Court issued a decision both disallowing the

deduction and imposing 40 percent penalties, as requested by the Commissioner. In

disallowing the deduction, the court held (1) that the taxpayers had failed to satisfy the

statutory requirement of producing a “contemporaneous written acknowledgment” that

established the amount (if any) of consideration received from Liberty County for the

donation of the conservation easement; (2) that the Brookses’ Baseline Report included

with the easement was insufficient to fulfill the requirement of demonstrating the status of

the property at the time of the contribution, as required by 26 C.F.R. § 1.170A-14(g)(5);

and (3) that the Brookses had misrepresented their basis in the easement property on their

tax return, in violation of 26 C.F.R. § 1.170A-13(c), and had not provided reasonable cause

to excuse doing so.

As for the 40 percent penalties for gross valuation misstatements, the Tax Court

found that the “assumptions made by [the Brookses’] expert, [Duane] Miller, [were]

insufficiently plausible to support his valuation.” It noted that Miller’s valuation was

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predicated on assumptions regarding zoning changes and easement access that would have

facilitated development of the property into residential housing but that the expert had not

provided “any reason” for such assumptions. As a consequence, the court concluded that

the assessment “was too speculative to yield an accurate valuation.” In addition, the court

noted that even if it were to find that the speculative development was plausible, “Mr.

Miller’s calculations include[d] significant errors inflating his valuation.” Instead, the

court found, in agreement with the Commissioner’s expert, that the entire property’s value

before the easement was $1.41 million, which, it observed, was “consistent with the

$1,350,000 price [the Brookses] paid for the subject property only one year” prior to the

donation in question. The court also found that the same property’s value after the grant

was $940,000, such that the value of the easement was $470,000. In view of these findings,

the court concluded that the Brookses had grossly misstated the value of the donated

easement and were therefore liable for the 40 percent accuracy-related penalties for each

of the three years at issue.

Accordingly, the Tax Court assessed a deficiency of $212,181 and penalty of

$84,530.80 for the tax year 2010; a deficiency of $262,260 and penalty of $104,904 for the

tax year 2011; and a deficiency of $252,885 and penalty of $101,154 for the tax year 2012.

From the Tax Court’s decision, the Brookses filed this appeal. See 26 U.S.C.

§§ 7482, 7483.

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II

The Brookses contend first that they “complied (and certainly substantially

complied) with the [tax] law’s nuanced requirements” and that therefore their deduction

should not have been disallowed. The Tax Court, however, affirmed the disallowance

based on three independent failures by the Brookses: (1) their failure to provide the IRS

with a contemporaneous written acknowledgment, as required by 26 U.S.C. §170(f)(8);

(2) their failure to submit an adequate baseline report to Liberty County, as required by 26

C.F.R. § 1.170A-14(g)(5); and (3) their misrepresentation of their basis in the property

subject to the easement and their failure to provide a reasonable excuse for doing so, in

violation of 26 C.F.R. § 1.170A-13(c). Each failure was relied on independently by the

Commissioner to disallow the deduction, and consequently we address each separately.

A

First, as to the contemporaneous written acknowledgment, 26 U.S.C. § 170(f)(8)

provides that “[n]o deduction shall be allowed . . . for any [charitable] contribution of $250

or more unless the taxpayer substantiates the contribution by a contemporaneous written

acknowledgment of the contribution by the donee organization that meets the requirements

of subparagraph (B).” 26 U.S.C. § 170(f)(8)(A) (emphasis added). Subparagraph (B)

provides, in turn, that the contemporaneous written acknowledgment must include (1) “the

amount of cash and a description (but not value) of any property other than cash

contributed”; (2) “whether the donee organization provided any goods or services in

consideration, in whole or in part, for any property” donated; and (3) “a description and

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good faith estimate of the value of any goods or services” provided as consideration. Id.

§ 170(f)(8)(B) (cleaned up).

When asked in deposition about whether the Brookses’ 2007 tax return had a

contemporaneous written acknowledgment, Mr. Brooks answered that he relied on the

professionals whom he had hired and was “assured this was all aboveboard.” The

Brookses’ discovery responses to the Commissioner, however, were more forthright,

stating that at the time that the easement was granted, “[the Brookses] received a

contemporaneous written acknowledgment, which satisfied the requirements of I.R.C.

§ 170(f)(8) and related regulations,” but that they had lost it in the intervening years. After

realizing the difficulty in relying on this response, the Brookses thereafter took the position

that the easement deed itself satisfied the requirements for a contemporaneous written

acknowledgment, noting that such an acknowledgment need not take any particular form

and that the deed given by Liberty County contained all the information required for the

acknowledgment.

They argue that the deed itself established that Liberty County paid no consideration

for the easement, thus providing the information that would otherwise have been included

in a separate contemporaneous written acknowledgment. While they recognize that the

language of the deed included a statement of consideration — “for and in consideration of

the sum of ten dollars ($10.00) and other good and valuable consideration” — they argue

that such language was mere “boilerplate” and therefore should be disregarded. Rather,

they argue, the deed should be taken “as a whole” and, when so considered, it satisfies 26

U.S.C. § 170(f)(8). They focus, in particular, on a “whereas” clause in the deed that recites

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that Liberty County “acknowledge[d] that the Grantor has agreed to convey and donate the

Conservation Easement” (emphasis added), arguing that “donate” there meant that they

“g[ave] [the easement] without receiving consideration for the transfer,” relying on the

definition of “donate” in Black’s Law Dictionary. See Donate, Black’s Law Dictionary

(11th ed. 2019).

The Commissioner contends that the deed, by its language, actually “leav[es] open

the possibility that additional consideration was provided in exchange for the contribution,”

which means that the deed failed to satisfy the requirements of § 170(f)(8)(B). But the

Commissioner reached this position through peculiar reasoning, noting that the

consideration language in the deed was “boilerplate” and therefore could be “properly

disregarded.” Thus, in the absence of any statement as to consideration, the deed did not

satisfy the requirements of § 170(f)(8)(B), which requires a statement disclosing any

consideration and its value.

The Brookses, the Commissioner, and indeed the Tax Court all recognized that the

clause in the deed reciting consideration — for “ten dollars ($10.00) and other good and

valuable consideration” — was “boilerplate.” Because the language was boilerplate, the

parties argue that it can therefore be ignored. This reasoning is especially curious, because

it depends on the proposition that boilerplate language in a contract may be ignored when

interpreting the contract. If this were true, however, numerous clauses in numerous

contracts would have to be ignored because they were formed with boilerplate language.

Using the same dictionary relied on by the Brookses, we note that Black’s Law

Dictionary defines “boilerplate” to mean “[r]eady-made or all-purpose language that will

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fit in a variety of documents” and to mean “[f]ixed or standardized contractual language

that the proposing party often views as relatively nonnegotiable.” See Boilerplate, Black’s

Law Dictionary (11th ed. 2019). While boilerplate language in a contract is standardized

language and therefore is thought to be language that was not negotiated, the language is

not meaningless; it is the language of the contract, and contracts are “replete with

boilerplate” language. Digit. Equip. Corp. v. Desktop Direct, Inc., 511 U.S. 863, 879

(1994). Such boilerplate language is often included in deeds to refer to consideration

generally and is understood to mean that, while consideration was given, the specific

amount is not stated in the deed. See Wood v. Roberts, 586 P.2d 405, 407 (Utah 1978)

(“[T]he deed itself specified the consideration to be ‘Ten Dollars and other good and

valuation considerations,’ and evidence is admissible to show what that consideration

was”); Zorn v. Robertson, 228 S.E.2d 804, 805 (Ga. 1976) (“[W]here the consideration is

expressed only by way of recital, it is permissible to show by parol testimony that the true

consideration is in fact different from that expressed in the deed”); Finley v. Williams, 29

S.W.2d 103, 106 (Mo. 1930) (“The fact that the sum of one dollar is stated as a

consideration is modified by the next clause, ‘and other good and valuable consideration,’

and such clause is open to investigation and explanation”). Thus, that language as to

consideration has been standardized does not mean it can be ignored. See id. Indeed, the

parties did not ignore it but included it in the deed, and accordingly it must be taken into

account. Moreover, were such language describing consideration to be ignored, the parties

could be faced with the argument that the contract lacked consideration and was therefore

unenforceable.

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The language here provided that consideration was $10.00 and other unspecified

consideration. And, because the deed did not describe the other consideration, it could well

have been an agreement by Liberty County to modify zoning for the Brookses’ property or

to reduce the Brookses’ taxes or to provide them with infrastructure support, any of which

would not be uncommon in connection with a real estate transaction, especially one

involving property that was subject to development. The deed simply does not specify the

amount or nature of the consideration for the deed, which could have been additional

money or other benefits.

Furthermore, the Brookses’ reliance on the use of the word “donate” in the

“whereas” clauses provides them no support. The “whereas” clauses express background

facts and recitals for the agreements in the deed, but they are not the “operative” terms and

conditions of the deed. Abraham Zion Corp. v. Lebow, 761 F.2d 93, 103 (2d Cir. 1985)

(“Although statements in a ‘whereas’ clause may be useful in interpreting an ambiguous

operative clause in a contract, it cannot create any right beyond those arising from the

operative terms of the document” (cleaned up)). The “whereas” clause here says,

“Whereas, [Liberty County] acknowledges that the [Brookses] ha[ve] agreed to convey

and donate” the easement, but the deed itself provides the terms and conditions of the

donation. (Emphasis added). And in this case, the donation was, according to the contract,

in fact made for payment by Liberty County of “ten dollars ($10.00) and other good and

valuable consideration.” As such, the terms of the deed unambiguously call for the

exchange of consideration, even if the amount was not specified.

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The parties also devote many pages arguing the consequence of the deed’s lack of

a merger clause. The Commissioner suggests that, in the absence of a merger clause, other

consideration — apart from that specified in the deed — could have exchanged hands

thereby rendering the deed an inadequate contemporaneous written acknowledgment. The

Brookses disagree. But whether there was or was not a merger clause is of no moment

because the deed itself specifies that other good and valuable consideration was indeed

given, without specifying its nature and value.

Accordingly, we conclude that the deed did not satisfy the requirements of a

contemporaneous written acknowledgment, as stated in § 170(f)(8), because it failed to

state “[w]hether [Liberty County] provided any goods or services in consideration, in

whole or in part, for [the easement donated]” and to provide a “description and good faith

estimate of the value of any goods or services referred to in [the prior] clause.” 26 U.S.C.

§ 170(f)(8)(B)(ii)–(iii). Thus, as directed by the statutory provision, “No deduction shall

be allowed.” Id. § 170(f)(8)(A).

The Brookses contend nonetheless that the Tax Court’s ruling on this issue was

“formulaic,” “unfair,” and “hyper-technical” and that they had substantially complied with

the statutory requirements. But this argument overlooks the nature of charitable

deductions, the obligations of the Commissioner in enforcing the Internal Revenue Code,

and the abuse that the specified information was designed to address.

First, “an income tax deduction is a matter of legislative grace.” Interstate Transit

Lines v. Comm’r, 319 U.S. 590, 593 (1943). As such, deductions “are strictly construed

and allowed only ‘as there is a clear provision therefor.’” INDOPCO, Inc. v. Comm’r, 503

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U.S. 79, 84 (1992) (quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)).

And “the burden of clearly showing the right to the claimed deduction is on the taxpayer.”

Interstate Transit, 319 U.S. at 593.

But it does not even require a strict construction to recognize that § 170(f)(8)

requires the disallowance of a charitable contribution — stating, “[n]o deduction shall be

allowed” — unless the taxpayer provides the IRS with a contemporaneous written

acknowledgment. 26 U.S.C. § 170(f)(8)(A) (emphasis added). In view of the fact that the

Brookses did not satisfy the requirement of such an acknowledgment, especially its

important term of stating the consideration that they received, if any, from Liberty County

in exchange for the donation, it is hardly appropriate for them to argue that enforcement of

the provision was hyper-technical or indeed unfair.

Moreover, strict enforcement of these charitable contribution requirements is

necessary to prevent the abuse of conservation easements. To be sure, conservation

easements serve a beneficial societal function, allowing property owners to restrict in

perpetuity development on land that is inconsistent with the terms of the easement with the

goal of maintaining a property’s unique ecological and historical attributes. But because

the valuation of the easements can be subject to “little more than the imagination of the

appraiser” valuing the property, Equity Inv. Assocs., LLC v. United States, 40 F.4th 156,

160 n.3 (4th Cir. 2022), claiming such charitable deductions can be the product of abuse.

As conservation easements increased in the 1980s, Congress became aware of the

potential for abuse and attempted to combat it by imposing more stringent substantiation

requirements in the Deficit Reduction Act of 1984. The provisions of that Act were meant

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“to provide a mechanism whereby [the Commissioner] would obtain sufficient return

information in support of the claimed valuation of charitable contributions of property to

enable [the Commissioner] to deal more effectively with the prevalent use of

overvaluations.” Hewitt v. Comm’r, 109 T.C. 258, 265 (1997), aff’d, 166 F.3d 332 (4th

Cir. 1998) (citing S. Comm. on Finance, Deficit Reduction Act of 1984, Explanation

of Provisions Approved by the Committee on March 21, 1984, S. Prt. 98–169, vol. I, at

444–445 (S. Comm. Print 1984)). But even with these efforts, the valuations of

conservation easements relied on for charitable deductions have grown disproportionately,

outstripping even the explosive growth in the amount of land donated, suggesting the need

for greater scrutiny of appraisals provided for those deductions. “The deduction, once

estimated to cost the federal government less than $10 million a year, now costs billions of

dollars annually” in lost revenue. Andrew Flynn, Restoring the Conservation Purpose in

Conservation Easements: Ensuring Effective and Equitable Land Protection Through

Internal Revenue Code Section 170(h), 40 Stan. Env’t L.J. 3, 6 (2021). By 2016, the

revenue lost to the deduction was “comparable with the entire budgets of the National Park

Service, Fish and Wildlife Service, and Bureau of Land Management.” Id. at 7.

In short, while a conservation easement provides a public benefit, it also offers an

avenue for abuse. And it is precisely to address such abuse that the strict enforcement of

deduction requirements for donations of conservation easements is necessary. Fairness

cannot be defined as a relaxation of those requirements.

Accordingly, we affirm the Tax Court’s disallowance of the Brookses’ charitable

deduction simply by applying the requirements of § 170(f)(8) as written.

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B

As to the sufficiency of the Baseline Report that the Brookses provided to Liberty

County, 26 C.F.R. § 1.170A-14(g)(5) required that the Brookses provide documentation to

the County describing the baseline status of the property so as to fix the scope of the

easement at the time of the donation and therefore enable its enforcement later against

encroachment by the Brookses or others. This requirement is necessary to prevent the very

core of potential abuse. The governing regulation provides first:

A deduction under section 170 is generally not allowed for a charitable contribution of any interest in property that consists of less than the donor’s entire interest in the property . . . . However, a deduction may be allowed under section 170(f)(3)(B)(iii) for the value of a qualified conservation contribution if the requirements of this section are met.

26 C.F.R. § 1.170A-14(a). It then provides:

[F]or a deduction to be allowable under this section the donor must make available to the donee, prior to the time the donation is made, documentation sufficient to establish the condition of the property at the time of the gift. Such documentation is designed to protect the conservation interests associated with the property, which although protected in perpetuity by the easement, could be adversely affected by the exercise of the reserved rights.

Id. § 1.170A-14(g)(5) (emphasis added). Finally, it suggests how the documentation

requirement may be satisfied with maps and photographs of various types, demonstrating

the scope and nature of conserved areas, id. § 1.170A-14(g)(5)(i)(A)–(D), and it requires

that the donee, at the time of donation, confirm that the documentation is “accurate,” id.

§ 1.170A-14(g)(5)(i)(D).

The conservation easement deed in this case grants, in perpetuity, an easement “to

assure that the Protected Property will be retained forever predominantly in its natural,

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scenic and open condition” and “to protect any rare plants, animals, or plant communities

on the Protected Property.” The deed also includes a description of the extensive rights

that the donors reserved from the contributed estate. Attached to the deed was a metes and

bounds description of the 41-acre parcel, together with two maps depicting it. Also

included with the deed was a “Baseline Survey and Documentation Report,” which

purported to comply with 26 C.F.R. § 1.170A-14(g)(5).

The Baseline Report described the 41.201 acres of property as:

Property was in commercial timber until fairly recently. Much of the property now is a grassy pasture. There are isolated hardwoods throughout the interior of the property. Nearly adjacent to the north side of Boy Scout Camp Road, which runs roughly through the center of the property.

This Baseline Report also included “Geological Information” about the “Coastal Plain”

region of which the property is a part, reproducing general information of the region

prepared in 1976 by the Department of Geology of the University of Georgia. None of the

geological information, however, was specific in location or time to the donated property

or even the contiguous Hampton Island Preserve area. Finally, the Baseline Report referred

briefly and generally to “soils,” “ecological features,” and “public benefits,” deferring for

detail to an attached “photo of [the] property” and, as to ecological features, to “the

photographs section.” But the Report included no such photographs, nor did it provide any

further descriptions.

In short, the Baseline Report provided no specifics about where timber, open fields,

special plant life, and habitats were located, such that at a later time a portion of the

property could be identified as being impermissibly degraded by the exercise of the rights

18 USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 19 of 33

reserved by the Brookses. And those rights were extensive, covering 16 numbered

paragraphs. They included the right to construct “two (2) paddocks totaling twenty (20)

acres for horse boarding and use”; to construct “one (1) barn on one (1) acre of land in the

paddocks area”; to construct “rail fencing around the perimeter of the Protected Property”;

to “install underground and overhead utilities including water, electric, and cable lines”; to

use “five (5) acres of the Protected Property for limited ‘agricultural activities[]’ . . . limited

to personal and commercial organic gardening”; “to harvest timber for the purpose of

construction of the paddocks (as set forth above)”; and “to plant indigenous trees and

shrubs including, but not limited to, the red cedar and wax myrtle on the Protected

Property.” The Brookses thus reserved to themselves the right to develop over one-half of

the property covered by the conservation easement, and the Baseline Report provides no

indication where such development will take place or what parts of the property will be

protected from development, resulting in the inability of anyone, after the contribution, to

enforce the easement.

The Tax Court thus found that the documentation failed to satisfy the regulatory

requirements. After cataloguing the Baseline Report’s deficiencies in describing

vegetation, flora, fauna, and distinct natural features, the court focused on the lack of

delineation between protected and unprotected locations of the property:

While the Easement Deed authorizes Liberty County to enter the encumbered parcel to conduct inspections to ensure ongoing compliance, the information in the Baseline Report is insufficient for us to evaluate whether changes fall within the limits of the reserved rights. The deed allows for the harvesting of forests on the property but only for construction of two paddocks. The document does not describe the sizes or locations of the forests, so it would

19 USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 20 of 33

be at a minimum difficult and at a maximum impossible to gauge whether the amount harvested was reasonable for the construction of two paddocks.

Thus, the court concluded that because the Baseline Report could not serve “to protect the

conservation interests associated with the property, which . . . could be adversely affected

by the exercise of the reserved rights” (quoting 26 C.F.R. § 1.170A-14(g)(5)(i)), the

deduction must be disallowed.

The Brookses argue that, for a number of reasons, the Tax Court should be reversed,

contending first:

Nothing about TR § 1.170A-14(g)(5) contemplates or creates an active role for the IRS in either dictating the baseline documents supplied to the donee or second guessing that which has already been approved by the donee. Certainly, nothing contemplates that a third-party IRS agent who was not involved in the back and forth between the donor and the donee, is not familiar with the property donated, may not know anything about its conservation purpose, may have no experience in assessing what is necessary to monitor a conservation easement, and may be looking at it years later, will have authority to subjectively decide the documentation a qualified donee organization certified as adequate, was not.

This argument, however, does not merely miss the forest for the trees; it misses both. The

deduction for the conservation easement is authorized by the Internal Revenue Code as an

exception to the general proposition that donors gift their entire interest in property. See

26 U.S.C. § 170(f)(3)(B)(iii); see also 26 C.F.R. § 1.170A-14(a). And the burden falls on

the taxpayer to justify to the IRS the deduction for such a donation. The Commissioner

viewed the Brookses’ effort to justify their donation and, based on what the Brookses

provided to the IRS, disallowed the donation. It was not up to the Brookses and Liberty

County to agree to waive requirements for justifying the deduction, as the Brookses argue.

Moreover, there is no requirement that an IRS agent visit the property when enforcing the

20 USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 21 of 33

Tax Code and its regulations. The burden of providing a meaningful baseline report rested

on the Brookses, and the Tax Court found that they did not carry this burden.

In a similar vein, the Brookses argue that “even if the IRS were deputized to

challenge the baseline documentation Liberty County certified as adequate, the [Tax]

Court’s finding otherwise was error.” (Emphasis added). They claim the Internal Revenue

Code and regulations do not authorize an IRS agent to second guess the County’s

certification and “years later” determine that “the documentation [that] a qualified donee

organization certified as adequate, was not.” (Emphasis added). The only evidence about

this argument in the record, however, is the fact that Liberty County signed the

conservation easement deed and the Baseline Report, “acknowledg[ing] and certify[ing]”

that the baseline documentation was an “accurate representation as of the date of the grant.”

See 26 C.F.R. § 1.170A-14(g)(5)(i)(D) (requiring such language). Thus, while the County

agreed that the Baseline Report, to the extent it included any information, was “accurate,”

it did not certify that it was “adequate,” as the Brookses seem to assume. But more

importantly, the adequacy of the documentation to support a charitable deduction had to

be determined by the IRS, not Liberty County.

Finally, the Brookses argue that even if the Baseline Report was not “perfect,” they

substantially complied with the regulatory requirements, citing Bond v. Comm’r, 100 T.C.

32, 41 (1993). To be sure, we have recognized that compliance with regulatory

requirements, unlike statutory requirements, can in some cases be judged against the more

lenient standard of substantial compliance. But we have also emphasized that the “tax laws

are technical and, for the most part, are to be accordingly interpreted.” Hull v. United

21 USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 22 of 33

States, 146 F.3d 235, 238 (4th Cir. 1998) (cleaned up). Thus, we have held that in narrow

circumstances, courts can relieve taxpayers of “perfect compliance” with regulatory

requirements. Volvo Trucks of N.A., Inc. v. United States, 367 F.3d 204, 210 (4th Cir.

2004). But in doing so, we required that the court find that “the taxpayer ha[d] made a

good faith effort at compliance or ha[d] a ‘good excuse’ for noncompliance, and [that]

(1) the regulatory requirement [was] not essential to the tax collection scheme but rather

[was] an unimportant or ‘relatively ancillary requirement’ or (2) the regulatory provision

[was] so confusingly written that it [was] reasonably subject to conflicting interpretations.”

Id.

In this case, the Brookses have failed both to satisfy the documentation requirements

and to make a showing as to why they should be relieved from doing so. The baseline

report is not a “relatively ancillary requirement” nor is the regulation “confusingly written,”

and the Brookses provided no “good excuse” for their noncompliance. As the Tax Court

concluded, their Baseline Report was woefully inadequate, providing virtually no

mechanism by which a reasonable person could delineate the Brookses’ reserved rights

from the rights conveyed to Liberty County in the easement. Because the baseline report

was a mandatory condition — indeed essential — for defining and claiming a conservation

easement as a charitable contribution, the Tax Court properly treated the inadequacy of the

Brookses’ Baseline Report as a basis for disallowing the deductions.

22 USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 23 of 33

C

Finally, the Tax Court disallowed the deductions because the Brookses misstated in

their tax returns their basis in the property that supported their $5.1 million deduction.

They represented that their basis in the property subject to the donated easement was $1.35

million, when in fact the basis was roughly $652,000 (1,350,000 ÷ 85.314 x 41.201).

Section 1.170A-13 sets forth the requirements for claiming deductions for charitable

contributions. And in connection with the valuation of an easement for charitable

deductions, it provides that the taxpayer must obtain a qualified appraisal and attach a

“fully completed appraisal summary” with his return. 26 C.F.R. § 1.170A-13(c)(2)(i). The

regulations provide further that the appraisal summary must include “[t]he cost or other

basis of the property.” Id. § 1.170A-13(c)(4)(ii)(E).

IRS Form 8283 (Noncash Charitable Contributions) calls for this required

information about the donated property, and in the completed Form 8283 that the Brookses

submitted to the IRS, they described “the donated property” as “41.201 acre tract of vacant

land”; gave a “brief summary of the overall physical condition of the property” as “vacant

land”; gave its “appraised fair market value” as $5.1 million; gave “[d]ate acquired” as

“12/15/06”; described “[h]ow acquired” as by “purchase”; gave their “cost or adjusted

basis” as “$1,350,000”; and “claimed as a deduction” $5.1 million.

To be sure, the Brookses did pay $1.35 million for a parcel consisting of 85 acres

of vacant land, but they then subdivided that parcel into two — one parcel of 44 acres and

one of 41 acres. The conservation easement that they granted to Liberty County, for which

they claimed a deduction, covered the 41-acre parcel, which was less than one-half the

23 USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 24 of 33

original property purchased. The basis of this parcel therefore was only $652,000. Thus,

the disclosure that the Brookses made of their “cost or adjusted basis” for the conservation

easement was clearly erroneous, overstating the basis by more than 100 percent.

Rather than concede error and provide the Commissioner with an explanation, the

Brookses claimed that they complied with the tax form because “they stated the basis for

the full Property, as opposed to the 41-acre Parcel,” and “[n]othing about Form 8283 tells

a taxpayer what to do in the circumstances” where the purchasers buy a larger parcel, divide

it in two, and put an easement on a subdivided parcel. Such an argument appears to be

deliberate obfuscation. Certainly, it cannot be made in light of the filled-out Form 8283

that they provided in 2007. The questions were clear, as were the answers. The Form, as

filled out, addressed one parcel of land which the Brookses described as “41.201 acre tract

of vacant land.” There was no disclosure of the larger parcel or of the circumstances of

dividing the larger parcel. Then, with respect to that 41-acre parcel, the Brookses gave

the basis as $1.35 million — obviously an error — and with respect to an easement on that

property, the Brookses claimed a deduction of $5.1 million. The Brookses’ argument that

they were confused by the form is unsupported by any evidence but appears simply to be

manufactured for argument.

Alternatively, the Brookses argue that they substantially complied with the

requirement to provide the property’s “cost or adjusted basis.” But claiming a cost or

adjusted basis of $1.35 million, when it was actually $652,000, cannot be considered

substantial compliance.

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The consequences of the Brookses’ misstatement were not insignificant. It worked

to conceal just how excessive the valuation of the easement in this case was. By reporting

a $1.35 million basis, the Brookses suggested to the IRS that the property’s value increased

roughly 3.8 times in one year, a facially implausible number but not nearly as egregious as

a roughly 7.8-fold increase in value that reporting the correct basis of roughly $652,000

would have revealed. And reporting the correct basis was an important requirement

because, as the Commissioner notes, “extraordinary claim[s] of increased value . . . ma[ke]

the abusive transaction[s] far clearer and provide[] better notice to the IRS.”

The Tax Court explained that because such a misstatement was substantial and

the Brookses did not show “reasonable cause” as opposed to “willful neglect,” 26 U.S.C.

§ 170(f)(11)(A)(ii)(II), the deduction should be disallowed, especially in the context of the

other deficiencies relating to the claimed deduction. See id. § 170(f)(11)(A)(i). We cannot

conclude that the Tax Court clearly erred in its findings.

III

The Internal Revenue Code imposes a penalty on any portion of an underpayment

of tax attributable to a substantial “valuation misstatement.” See 26 U.S.C. § 6662(a),

(b)(3). While the penalty in most cases is 20 percent, see id. § 6662(a), if the underpayment

“is attributable to one or more gross valuation misstatements,” the penalty is 40 percent,

id. § 6662(h)(1) (emphasis added). A “valuation misstatement” is “gross” when “the value

of any property . . . claimed on any [tax] return . . . is 200 percent or more of the amount

determined to be the correct amount of such valuation.” Id. § 6662(e)(1)(A), (h)(2). In

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other words, if the claimed value of property on a tax return is more than two times its

“correct” value, a 40 percent penalty is applied to the underpayment of taxes that resulted

from the excess valuation.

Tax regulations provide the appropriate method for valuing conservation easement

contributions, stating:

The value of the contribution under section 170 in the case of a charitable contribution of a perpetual conservation restriction is the fair market value of the perpetual conservation restriction at the time of the contribution. . . . If no substantial record of market-place sales is available to use . . . the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.

26 C.F.R. § 1.170A-14(h)(3)(i). When the before-and-after valuation method is used, the

value of the property before the contribution “must take into account not only the current

use of the property but also an objective assessment of how immediate or remote the

likelihood is that the property, absent the restriction, would in fact be developed, as well

as any effect from zoning, conservation, or historic preservation laws that already restrict

the property’s potential highest and best use.” Id. § 1.170A-14(h)(3)(ii) (emphasis added).

And we have defined a property’s highest and best use as that use that “would bring the

highest price,” which is generally “presumed to be its current use.” United States v. 69.1

Acres of Land, More or Less, Situated in Platt Springs Twp., 942 F.2d 290, 292 (4th Cir.

1991) (in connection with a condemnation case). If a property owner seeks to define the

highest and best use in a different manner, he must show that the use was “‘reasonably

probable’ and that the probability has a real market value.” Id. (emphasis added) (quoting

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Olson v. United States, 292 U.S. 246, 257 (1934)). Determination of the highest and best

use involves an objective assessment, as the regulation provides. See 26 C.F.R. § 1.170A-

14(h)(3)(ii).

In this case, both the Brookses and the Commissioner presented expert testimony as

to the valuation of the conservation easement that the Brookses granted to Liberty County,

and both experts used the before-and-after method of valuation. The Brookses’ expert,

Duane Miller, valued the easement property with the highest and best use as a subdivision

development, and he took an income approach — using the income from sales of large

individual houses. Under this approach, he presumed that were it not for the contribution

of the easement, the property would have been fully developed and concluded that the

easement had a value of $3.36 million. The Commissioner’s expert, George Petkovich,

valued the entire original property before the contribution of the conservation easement at

$1.41 million, which was in line with the $1.35 million price that the Brookses had paid a

year earlier. In his valuation, Petkovich allowed the possibility that the Brookses’ property

would be annexed to and could be developed as part of the Hampton Island Preserve PUD.

And after valuing the entire property after the easement at $940,000, Petkovich subtracted

that number from the $1.41 million to arrive at the easement’s value of $470,000.

The Tax Court found that Miller’s approach was “too speculative to yield an

accurate valuation.” The court stated that “[t]he assumptions made by” Miller were

“insufficiently plausible to support his valuation” — assumptions regarding zoning

changes and road access that would have enabled development of the property into

residential housing. The court noted that Miller

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did not cite any reason, and [the Brookses] provided no support, for the contention that Liberty County would approve a zoning change. He also provided no basis, and [the Brookses] provided no evidence, for presuming that neighboring property owners who granted easement access to the nearest highway and main roadway would support such development.

The court noted further that even if it “were to find that development was plausible, Mr.

Miller’s calculations included significant errors inflating his valuation.” The court noted

that Miller had

incorrectly identified the zoning of the subject property; stated an incorrect location of the subject property in relation to Interstate 95; and identified the immediate neighborhood as comprising single family homes when all of Hampton Island Preserve had only two homes built at the time of the easement donation.

The court also took issue with the comparable sales that Miller used to verify the

reasonableness of his estimate, noting that Miller “ignored the fact that the 2006 sale of the

property in issue” for $1.35 million “would have provided an arm’s-length and very

appropriate comparable to a theoretical sale” of the property in 2007.

Adding to its findings as to Miller’s valuation, the Tax Court found that, “aside from

the [specific] issues,” Miller’s conclusion was “incredible as a practical matter”; the Court

was incredulous that “a fair market value for the conservation easement, a subset of

property rights,” would be six times the “per-acre amount for which” the property had been

purchased in fee simple “just 377 days earlier.”

Instead, the court found more persuasive the evidence presented by the

Commissioner’s expert, Petkovich, which was “consistent with the $1,350,000 price [the

Brookses] paid for the subject property only one year earlier in an arm’s-length transaction

for cash” and which valued the easement at $470,000.

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Because the court concluded that the Brookses’ claimed value for the easement of

$5.1 million was more than 200 percent of its correct value of $470,000, it upheld the

Commissioner’s application of the 40 percent penalty.

The Brookses face a substantial burden in challenging these factual findings of

value. Like most factual determinations, determinations of fair market value are subject to

review only for clear error. Gow v. Comm’r, 19 F. App’x 90, 94 (4th Cir. 2001) (per

curiam); Burbage v. Comm’r, 774 F.2d 644, 646 (4th Cir. 1985). In addition, “the Tax

Court’s credibility determinations, in particular, are entitled substantial appellate

deference.” Baxter v Comm’r, 910 F.3d 150, 159 (4th Cir. 2018).

The Brookses attempt to diminish this deferential standard of review by arguing that

the Tax Court “accept[ed] an appraisal that does not follow the legal requirements”

(emphasis added) and thus that its decision was subject to de novo review. But this

argument mischaracterizes the nature of the Tax Court’s holding. If the Tax Court had

rejected Miller’s valuation methodology as erroneous, we would indeed be required to

review that legal proposition de novo. But the Tax Court did not reject Miller’s

methodology. Rather, it disagreed with the factual assumptions that Miller relied on to

reach his conclusions, finding that Miller’s value was not realistic, which is a question of

fact. In short, the Tax Court relied on a bevy of mistakes and faulty factual assumptions in

rejecting Miller’s evaluation, and the Brookses have not shown that the facts found by the

Tax Court were clearly erroneous.

Thus, based on the record, we conclude that the Tax Court did not clearly err in

finding that the value of the easement that the Brookses donated to Liberty County was

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$470,000, and not $5.1 million or $3.63 million, as claimed at trial. Accordingly, we affirm

the court’s imposition of the 40 percent penalty.

IV

Finally, the Brookses contend that the Tax Court abused its discretion in admitting

into evidence the IRS Civil Penalty Approval Form, which documented that an IRS

manager had approved the assessment of a penalty against the Brookses and which was

required before the IRS could assess such a penalty. See 26 U.S.C. § 6751(b)(1).

The Commissioner provided the Brookses with a copy of the Approval Form seven

days before trial, as the Commissioner intended to introduce it into evidence at trial. But

the Commissioner’s production on this date violated the Tax Court’s standing order, which

required that documents intended for use at trial be provided 14 days before trial.

The Tax Court recognized the Commissioner’s violation but observed that the

Brookses “did not raise compliance with § 6751(b)(1) before or, substantively, during trial

and nonetheless received the form before the record was closed.” The court also observed

that, just as it had in the past reopened the record to admit the Form because doing so

“serve[d] the interest of justice and [was] not prejudicial,” it would do so in this case as

well.

While the Brookses nonetheless insist that the Tax Court erred in admitting the

document, we review the issue as a matter of discretion. And when considering trial

management, we grant trial courts “wide latitude.” Ardrey v. United Parcel Serv., 798 F.2d

679, 682 (4th Cir. 1986); see also Russell v. Absolute Collection Servs., Inc., 763 F.3d 385,

30 USCA4 Appeal: 23-1314 Doc: 48 Filed: 07/15/2024 Pg: 31 of 33

396 (4th Cir. 2014) (noting “the broad discretion accorded to district courts to supervise

discovery, including the imposition of sanctions for discovery abuses, as part of their case-

management authority”). The Brookses have pointed to nothing here that would lead us to

upset that deference. Neither below, nor on appeal, have they raised any legitimate harm

that they suffered by the seven-day delay in disclosure, which left them still with receipt

of the report seven days before trial. And even after they received the form, they did not

raise questions as to its validity or seek further discovery.

We conclude that the Tax Court did not abuse its substantial discretion in admitting

the Approval Form into evidence.

V

The issues before us are influenced by a gentle tension between a defined public

policy of favoring, for the public good, perpetual conservation easements and the strict

requirements imposed on taxpayers when claiming charitable deductions for granting such

easements. While the deduction promotes the public policy — and indeed conservation

easements have ballooned in number as a result — a claim for such deduction still must be

accompanied by the traditional restrictions imposed to regulate abuse, which likewise has

ballooned.

The Brookses saw a good thing both in the tax benefit to them and in the

conservation easement for the public, but they acted with an evident greed that substantially

outweighed their concern for the public benefit. Their documentation was sloppy and

inadequate. But more remarkable was their attempt to claim a $5.1 million deduction for

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a limited easement estate on property that they had purchased in fee simple for $652,000

only a year earlier. Such a claim simply does not pass any reasonable smell test, much less

the tax law’s requirements. It also should not be overlooked that because the IRS did not

challenge the Brookses’ deductions earlier, the Brookses have, despite their deficiencies in

compliance, received the benefit of having deducted $1.75 million for the years before

2010.

For the reasons we have explained, we affirm the decision of the Tax Court.

AFFIRMED

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QUATTLEBAUM, Circuit Judge, concurring in part and in the judgment:

I concur in the majority’s bottom-line judgment and join its opinion in all but Parts

II.B and II.C. As to those portions of the opinion—which regard the Brookses’ baseline

documentation and the basis they reported in their appraisal summary to the IRS—I think

the record presents a close call. But the Brookses must run the table on all three of their

disallowance arguments. So, affirming the Tax Court’s decision that the deed is not a

contemporaneous written acknowledgement is enough to affirm its decision on disallowing

the deductions the Brookses claimed. On disallowance, I would stop there.