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Headline: North Carolina Land Partnerships Lose $90 Million Tax Battle

A group of four North Carolina partnerships recently lost their fight in the Tax Court over $90 million in tax deductions in Green Valley Investors, LLC v. Commissioner, T.C. Memo. 2025-15. The core issue was whether the partnerships' conservation easement deductions met the strict requirements of Section 170, which governs deductions for charitable contributions, including land conservation.

The IRS argued that the land was not actually preserved "in perpetuity," a requirement under Section 170(h), because of a clause in the contract. This clause allowed the partnerships, as owners, to retain the value of any post-donation improvements if the land was ever sold after the easement was extinguished by a court. This arrangement violates Treas. Reg. § 1.170A-14(g)(6), also known as the "Proceeds Regulation," which dictates that the donee organization (the conservation group) must receive a proportionate share of the proceeds reflecting the easement's value at the time of the donation. The court reaffirmed that reducing the donee’s share by the value of post-donation improvements violates the proportionate share requirement, as established in Coal Prop. Holdings, LLC v. Commissioner (153 T.C. 126).

The partnerships also ran into trouble when trying to value the land as a potential granite quarry using a discounted cash flow (DCF) method. They claimed each lot was worth $22 million. The Tax Court rejected this valuation, finding that the land's "highest and best use" (HBU) - the legally permissible and financially feasible use that yields the highest value - was as farmland, not as a quarry. The court determined the "before" value of the land (before the easement) to be between $1.37 million and $1.43 million, while the "after" value (after the easement) was only $250,000.

Because the partnerships' claimed valuation was far greater than the court's determination, the court applied a 40% gross valuation misstatement penalty under Section 6662(h). This penalty applies when the claimed value of property is 200% or more of the correct value.

The IRS also successfully demonstrated compliance with Section 6751(b), which requires supervisory approval for penalties. The partnerships argued that the supervisory approval was not timely. However, the court noted that digital signatures from April 2017 proved the necessary supervisory approval occurred. Final regulations effective December 23, 2024 (T.D. 10017) clarified that Section 6751(b) approval is timely if obtained before the notice of deficiency is mailed.

Furthermore, it's important to note that the IRS has designated syndicated conservation easements like these as "listed transactions" (T.D. 10029, Oct 2024). This designation means that participants face increased scrutiny and stricter disclosure requirements, highlighting the IRS's focus on combating this type of tax shelter.