North Donald LA Property, LLC v. Commissioner

Clay Dreams in a Swamp: The $115 Million 'Fantasy'

A staggering $115.4 million charitable contribution deduction for a conservation easement has been slashed to a mere $175,824 by the Tax Court, following a dispute over the valuation of land purportedly ripe for clay mining. The alleged "clay mine," situated on Louisiana farmland that was, in reality, a wetland, became the focal point of a valuation battle where the land's purported appreciation soared by over 14,000% in just 21 months. The Tax Court, in North Donald LA Property, LLC v. Commissioner, T.C. Memo. 2026-19, lambasted the valuation as 'grotesque' and akin to 'fan fiction.' While imposing a stiff 40% gross valuation misstatement penalty under Section 6662(h), the court declined to uphold the IRS's assertion of the fraud penalty, due to disclosures made on the return.

From Rice Farm to 'Jed Clampett' Strike

Continuing from the Tax Court's characterization of the North Donald LA Property, LLC v. Commissioner case as a "grotesque" valuation reminiscent of "fan fiction," the story begins with the Donald family, who for decades had farmed rice, soybeans, and crawfish on their 3,324-acre property known as the Donald Farm in Jefferson Davis Parish, Louisiana. In March 2016, the Donalds sold the farm to the Reserve at Welsh, LLC, an entity controlled by Sixty West, LLC, for approximately $9,888,000, or $2,975 per acre. This price aligned with the market rate for agricultural land in the area.

Sixty West, a company specializing in transactions that offered tax credits and other tax benefits to investors, acquired the Donald Farm with a plan to reimagine it as a clay mine. Sixty West ultimately sponsored or co-sponsored 13 syndicated conservation easement (SCE) transactions involving land carved from the Donald Farm. The aggregate value that the 13 partnerships placed on that land was $989,105,000—100 times the March 2016 purchase price.

However, several "bad facts" undermined the legitimacy of this dramatic valuation increase. First, there was an email where one of Sixty West's principals described the situation as feeling like "Jed Clampett on this clay ground," referencing the fictional family from The Beverly Hillbillies who became rich overnight after striking oil. This comment suggested an awareness of the unlikely nature of their sudden "discovery."

Further complicating matters was the lack of any formal steps toward rezoning the property. The Donald Farm was zoned A-1 Agricultural, and to operate a clay mine, it would need to be rezoned to an Industrial classification. Sixty West never submitted a rezoning application to the Parish, relying instead on letters from local attorneys that offered opinions on the probability of rezoning approval.

Most notably, Sixty West manufactured evidence to simulate demand for the clay. They paid $30,000 to two local truckers to secure letters of intent to purchase clay from the Reserve at Welsh. One trucker testified that he only had two trucks and one driver, rendering him incapable of handling the projected volumes. The other trucker testified he signed the letter as a favor and was not paid. These "trucker letters" were then used in a mining feasibility study to justify the inflated valuation of the land as a clay mine.

Valuation Analysis: Why the 'Royalty Method' Failed

The previous section detailed how North Donald procured manufactured evidence to simulate demand for the clay. They paid $30,000 to two local truckers to secure letters of intent to purchase clay from the Reserve at Welsh. One trucker testified that he only had two trucks and one driver, rendering him incapable of handling the projected volumes. The other trucker testified he signed the letter as a favor and was not paid. These "trucker letters" were then used in a mining feasibility study to justify the inflated valuation of the land as a clay mine.

The central issue in dispute was the valuation of the conservation easement. The IRS argued that the claimed $115 million deduction was wildly inflated. The court's analysis hinged on determining the "highest and best use" (HBU) of the property before the easement was put in place.

North Donald contended that the HBU was as a clay mine, arguing it had significant deposits of clay suitable for levee construction. To support this, their appraiser used the "royalty income method." This method projects the income a landowner would receive by leasing the land to a mining operator, then discounts that future income stream to present value. In essence, the appraiser calculated what someone might pay for the right to mine the clay, and declared that to be the land's value.

However, the Tax Court rejected this approach. The court emphasized that HBU must be "physically possible, legally permissible, financially feasible, and maximally productive." Here, the legal permissibility was a major sticking point. The property's zoning classification permitted only agricultural uses. The court found North Donald "failed to establish a reasonable probability that the land could be rezoned to permit use for clay mining." Without rezoning, mining was simply not allowed.

Even if rezoning could have been secured, the court was unconvinced that a clay mine would have been financially feasible. The court highlighted the "high transportation costs to levee construction sites and the high cost of securing wetland 'mitigation credits.'" These costs, the court reasoned, would have made clay mining economically unviable.

The court was particularly critical of North Donald's experts, Clark and Catlett. It likened their valuation to something out of a "Jed Clampett" episode – a sudden, unexpected fortune arising from a previously unremarkable piece of land. But unlike Jed, whose oil strike was real, North Donald's clay mine was a "fantasy." The court found that the experts had essentially plucked numbers out of thin air to justify the inflated valuation.

The court instead favored the "comparable sales method," which looks to recent sales of similar properties to determine value. Given that the Donald Farm was purchased for $2,975 per acre in March 2016 – "approximating the going rate for similar property in the neighborhood during 2015–2020"– the court concluded that this price was the most reliable indicator of the land's true value. They found the "before value" of the land to be $2,975 per acre and the "after value" (with the easement) to be $2,300 per acre. The difference, $675 per acre, represented the true value of the easement.

This means the allowable charitable contribution deduction was just $175,824—a far cry from the $115,391,000 claimed.

The Fraud Penalty Paradox: How Disclosure Saved the Taxpayer

As the Tax Court determined the allowable charitable contribution deduction was just $175,824—a far cry from the $115,391,000 claimed—the IRS sought to levy a hefty penalty. But a surprising twist emerged regarding the civil fraud penalty under Section 6663.

Section 6663(a) states that "if any part of any underpayment of tax required to be shown on a return is due to fraud," a penalty of 75% of the underpayment attributable to fraud will be imposed. The IRS bears the burden of proving fraud by clear and convincing evidence, a higher standard than the usual preponderance of the evidence. To meet this burden, the IRS must prove (1) there was an underpayment of tax and (2) at least some portion of the underpayment was due to fraud. The court noted that fraud requires "intentional wrongdoing designed to evade tax believed to be owing."

The IRS argued that the managers of North Donald knew the conservation easement was not worth $115,391,000 and that individuals involved in the transaction engaged in "disreputable and suspect conduct." While the court agreed with these points, it ultimately sided with the taxpayer on the fraud penalty.

The crucial factor was North Donald's explicit disclosures on its tax return. The partnership included Form 8283, which requires the reporting of the "donor's cost or adjusted basis" and the "appraised fair market value" of the easement. North Donald reported a basis of $804,232 and an easement value of $115,391,000. It also included Form 8886, used to disclose reportable or "listed" transactions, including syndicated conservation easement (SCE) transactions.

Referencing Mill Road, T.C. Memo. 2023-129, the court emphasized the importance of express disclosure of key facts about SCE transactions. The court reasoned that, by including an accurate Form 8283 showing a massive difference between basis and claimed value, North Donald effectively signaled to the IRS to audit the return. The court stated, "When the taxpayer's return says (in effect) 'please audit me,' the Commissioner has an uphill battle to prove that the taxpayer engaged in conduct 'intended to conceal [or] mislead' the IRS."

Despite the overstated deduction and questionable conduct, the court found that the disclosures negated any inference of intent to conceal. Consequently, the court concluded that the IRS failed to meet its burden of proving fraud by clear and convincing evidence. The 75% civil fraud penalty under Section 6663 was therefore not applied.

However, this disclosure did not absolve North Donald from all penalties. The Tax Court then considered the penalties related to valuation misstatements under Section 6662. Section 6662(a) imposes a 20% penalty for underpayments attributable to a "substantial valuation misstatement." If the value claimed on the return is 150% or more of the correct amount, the misstatement is considered "substantial" under Section 6662(e)(1)(A). This penalty increases to 40% for a "gross valuation misstatement" under Section 6662(h), which occurs if the claimed value exceeds 200% of the correct amount, according to Section 6662(h)(2)(A)(i).

In this case, North Donald claimed $115,391,000 for the easement, while the court determined the value to be $175,824. Because the claimed value exceeded the correct value by more than 200%, the valuation misstatement was deemed "gross." While Section 6664(c)(1) generally provides a "reasonable cause" exception to accuracy-related penalties if the taxpayer acted in good faith, Section 6664(c)(3) explicitly states this defense is not available for gross valuation misstatements related to charitable contribution property. As a result, the strict-liability 40% penalty applied to the portion of North Donald's underpayment attributable to claiming a charitable contribution deduction exceeding $175,824.

Syndication Fees and Final Implications

The court also addressed several "other deductions" claimed by North Donald, most notably a $1.055 million "consulting fee" paid to EvrSource, the sponsor of the syndicated conservation easement (SCE) transaction. The IRS disallowed these deductions in full. Section 162(a) generally allows a deduction for ordinary and necessary business expenses. However, the court agreed with the IRS that the consulting fee was a non-deductible syndication expense. Section 709(a) disallows deductions for amounts paid to organize a partnership or to promote the sale of interests in a partnership (syndication expenses). Treasury Regulations Section 1.709-2(b) specifies that syndication expenses include expenses connected with the marketing of interests in the partnership. Because EvrSource formed North Donald Investors and marketed the deal to investors, the court held that the fee was a non-deductible syndication cost, and North Donald failed to prove otherwise. Similarly, the $50,000 in legal fees paid to the Morris firm for a tax opinion—deemed an integral part of the offering prospectus designed to facilitate the sale of partnership interests—was also ruled a non-deductible syndication expense, citing Surloff v. Commissioner, 81 T.C. 210, 245 (1983).

This case serves as a cautionary tale for taxpayers considering investing in syndicated conservation easement deals, particularly those involving agricultural land where the "highest and best use" is aggressively 'mined' to inflate valuations. It also highlights the critical importance of full disclosure on tax returns. While North Donald's aggressive valuation triggered a steep 40% penalty for a gross valuation misstatement under Section 6662(h), its transparent disclosures ultimately shielded it from a much harsher fraud penalty under Section 6663.