Tax Court Cuts a $42 Million Conservation Easement to $800,000

What the court actually decided

The case is Piton Holdings, LLC v. Commissioner, 167 T.C. No. 4, filed July 15, 2026. A partnership claimed a $42.2 million noncash charitable contribution for 2018: $41,635,000 for a conservation easement over 377.74 acres in Madison County, Alabama, plus $565,000 for a fee simple donation. The IRS disallowed the whole thing and asserted $6,220,625 in alternative penalties.

The court valued the easement at $800,000. Not $41.6 million. The arithmetic is the standard before-and-after method under the regulations: the property was worth $1,440,000 before the easement, the parties had already stipulated $640,000 after, so the easement took $800,000 of value. That’s a 98% haircut on the claimed number, and it happened on facts the partnership handed the court itself.

Three separate holdings came out of it, and each one travels well beyond easement deals. The valuation collapsed. The allocation to the paying investors failed as a matter of law. And the 40% penalty stuck, because the two defenses the partnership reached for don’t exist for this kind of penalty.

The clock that broke the allocation

This is the part that should make anyone with a partnership sit up, and it has nothing to do with conservation easements. Under section 706(d)(1), when a partner’s interest changes during the year, everyone’s distributive share has to reflect those varying interests. The regulations go further for a category called extraordinary items, and a donation of a capital asset is one of them. Extraordinary items get allocated to whoever the partners were at the time of day the item occurred. Not the month. Not the day. The time of day.

Here’s the clock the court ran. December 27, 2018 at 3:03 p.m. Central: the easement deed is recorded. 3:05 p.m.: the warranty deed for the fee simple donation is recorded. 3:26 p.m.: 1908 Capital PG wires $4,945,906 and becomes a member. The next afternoon at 3:23 p.m., Piton Group wires $1,700,000 and becomes a member. The partnership then allocated 97% of the easement deduction to Piton Group and 1% to 1908 Capital PG, and 0% to the partners who actually held the interests when the deeds hit the record.

Any closely held partnership that takes in new money late in the year and sells or donates a significant asset is standing on this same rule. Real estate partnerships do it constantly. The deduction, the gain, the loss: all of it lands on whoever was there at the minute, and a well-drafted agreement signed later doesn’t move it.

Why the valuation fell apart

Two core samples across 378 acres

The appraisal rested on a claim that the land’s best use was a commercial limestone quarry. To support it, the promoters had a geotechnical firm drill exactly two core samples across 377.74 acres. That’s one hole per 141 acres, against an industry practice closer to one every 15 acres. Worse, the shale lenses were pulled out of the samples before the material was crushed and tested, and Alabama’s transportation department caps shale in coarse aggregate at 2%. The court’s conclusion was blunt: it was unclear what portion of the rock would even meet the standard, so the partnership never proved there was commercially exploitable stone down there at all.

A discounted cash flow for a quarry that didn’t exist

The appraiser valued raw land by projecting the profits of a mining business that had never been built, never been permitted, and never sold a ton of anything. The Tax Court has rejected that approach repeatedly, and it did so again here, noting that small changes in a few assumptions swing the result enormously. The model assumed a 15% market share out of thin air and ignored transportation costs entirely, which is a strange thing to skip when your product is heavy rock with low value per pound. The court’s line is the one worth remembering: a knowledgeable buyer won’t pay the full projected value of a business for one of the assets the business would need.

The market had already answered the question

The tell was sitting in the partnership’s own file. Six months before the donation, an investor bought a 98% interest in the partnership, whose only asset was this land, for $816,000. Gross that up and the market said the whole property was worth about $832,653, roughly $2,204 an acre. The seller had paid about $1,600 an acre in 2012. Then an appraisal said $41.6 million. When an arm’s-length buyer values something at $832,000 in June and a report values it at fifty times that in December, the June number is the one a court believes.

The penalty has no escape hatch

Section 6662(h) doubles the normal 20% accuracy penalty to 40% when a claimed value exceeds the correct value by more than 200%. Piton claimed $41.6 million against a correct $800,000, so it cleared that bar by a wide margin. The partnership tried two defenses and lost both, and this is where the ruling gets useful for people who will never touch an easement.

First, adequate disclosure. The partnership argued that because it disclosed the position, the exception in section 6662(d)(2)(B)(ii) should soften the valuation penalty. The court read the statute and said no: subsection (d) is titled substantial understatement of income tax, and its disclosure exception belongs to that penalty alone. Nothing in section 6662 extends it to the valuation misstatement penalties in subsections (e) and (h). You cannot disclose your way out of a bad number. Disclosure protects a defensible position that the IRS might disagree with. It does nothing for a valuation that’s simply wrong.

Second, reasonable cause. For a substantial valuation overstatement, section 6664(c)(1) can offer relief. For a gross one, section 6664(c)(3) takes that relief away. Cross the 200% line and the good-faith appraisal you relied on stops mattering. The partnership also argued the penalty required a jury trial under the Supreme Court’s 2024 Jarkesy decision. The Tax Court rejected that, following its own recent precedent placing civil tax penalties inside the public rights exception to the Seventh Amendment, and extended that reasoning to partnerships under the centralized audit regime.

What this means if you’re the investor, not the promoter

Most people who get hurt by these deals aren’t the ones who built them. They’re high earners who were handed a private placement memorandum promising a tax benefit worth several times the cash in, and this one promised 4.6 to 1. That ratio is the warning, not the feature. A deduction that large relative to real dollars only works if the underlying asset is worth far more than anyone actually paid for it, which is precisely the assumption the court dismantled here.

If you’re already in one, the calculus changed slightly. The disclosure defense is now expressly closed for valuation penalties, and reasonable cause was never available once the misstatement is gross. The IRS has run a time-limited settlement initiative for syndicated easement disputes, and rulings like this one make the settlement math look better than it did a week ago. If you’re being pitched one, the honest read is that the Tax Court has now rejected the speculative-mineral valuation method so many times that the appraisal underpinning the pitch has a known expiration date.

And if easements have nothing to do with you, take the timing rule anyway. It’s the sleeper holding. Partnership interests move for ordinary reasons: a new member buys in, someone is bought out, an estate settles. Do any of that in the same stretch as a property sale or a large donation, and the clock in the regulation decides who gets the tax result.

What to watch next

An appeal is likely, and it would run to the Eleventh Circuit, which has its own body of law on whether property is a capital asset. The valuation holding is fact-bound and hard to disturb. The two legal holdings are the ones with appellate risk: whether the disclosure exception really is confined to subsection (d), and whether the mid-day extraordinary-item rule can carry that much weight when the parties intended a different result. Until an appeals court says otherwise, treat both as settled.

The quieter question is what the reasoning does to non-easement cases. A court willing to hold an allocation improper as a matter of law over a gap of 23 minutes for one investor, and a single day for the other, has handed the IRS a clean, mechanical argument to use against any partnership with sloppy admission timing. That’s a much bigger population than the syndicated easement world, and most of it has never thought about what time of day its deed was recorded.

How The Reed Corporation works with clients on this

We read the appraisal before the return, not after the notice. On any large noncash contribution the questions are the same: what did an actual buyer pay for this asset recently, does the valuation method match the asset, and does the claimed number survive the 200% test with room to spare. When the answer is uncomfortable, we say so while the position is still a choice.

On the partnership side we check the calendar against the wires. If a client is admitting members and moving a capital asset in the same period, we want the sequence documented to the hour, because that’s the standard the regulation sets and now the one a court has enforced. And when a client is already in a syndicated deal, we work the exposure honestly: what the penalty floor looks like, what a settlement costs, and what the realistic range is. That’s tax strategy work and sometimes audit and notice work, and the earlier it starts the more of it is still a decision rather than a number someone else picked.