Brooks v. Comm'r

109 F.4th 205

Kenneth M. BROOKS; Anita Wolke Brooks, Petitioners - Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee.

No. 23-1314

United States Court of Appeals, Fourth Circuit

Argued: May 10, 2024

Decided: July 15, 2024

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

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.

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.

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 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.

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 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.

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, 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...