The $74.5 Million Deduction for Land Nobody Would Buy for $2.9 Million

The Tax Court opened this opinion by comparing it to the movie Groundhog Day — “the same old moves.” Investors were promised tax benefits worth more than three times every dollar they put in. The partnership then claimed a $74,507,000 charitable deduction for an easement — a restriction on the use of land — on Tennessee property that had sat on the market for years without finding a buyer at $2.9 million. The court called the number “cartoonish” and the mining idea behind it “chimerical.” Then it did the math itself. This is Lontrac Enterprises, LLC v. Commissioner, T.C. Memo. 2026-108.

What land was this — and what did it actually sell for?

The land is 309.6 acres of vacant, mountainous property in Polk County, Tennessee, near the North Carolina border, surrounded by national forest. It has about 1,900 feet of frontage on the Hiwassee River and is crossed by a scenic tourist railroad — the Hiwassee River Rail Adventure, whose famous Hiwassee Loop spirals up the mountain, beginning on this property.

Lon and Tracy Dillard bought it in 2006 for $1.3 million — $50,000 of their own money and a $1.25 million bank loan the Dillards personally backed. After the 2008 downturn, they tried to sell. The asking price went to $4.68 million in 2008, down to $3.9 million six months later, down to $2,964,000 in 2009 — and the property then sat listed at $2,964,000 for five years, through September 2014, with no takers. Remember that five-year silence. The whole case turns on it.

How did unsold land become a syndicated easement deal?

In December 2012 the Dillards formed Lontrac Enterprises, LLC and transferred the property to it for $10, without Lontrac assuming the loan. In 2014, Mr. Dillard partnered with attorney Jim Adams to structure a syndicated conservation easement transaction — the pattern the IRS lists among its most-abused shelters, and the pattern Chief Judge Urda said he had seen over and over.

A November 2014 private placement memorandum offered investors a 95% stake in a new vehicle, Lontrac Investors, LLC, for $8,800,100. What the memorandum sold was not the land. It sold the deduction: projected easement deductions of $49 million to $63.5 million, and a worked example in which every $200,000 invested would produce $610,791 in federal and state tax savings — a return of more than 305%, on paper, from the tax benefit alone.

Where did the $8.8 million go? Investors paid $990,000 for a 99% interest in Lontrac — pricing the whole company, whose only asset was the land, at $1 million. The Dillards used $750,000 of the proceeds to pay off the bank mortgage. The bulk of the rest went to the promoters and the machine: about $5.7 million to redeem units held by Mr. Adams and Mr. Dillard, about $1.4 million in management and advisory fees, and $675,000 for legal, accounting, and appraisal services. On December 29, 2014, Lontrac granted a perpetual (permanent) conservation easement over 288.8 acres to Foothills Land Conservancy.

Where did $74.5 million come from? A mine that was never tested.

A conservation easement deduction is generally the drop in the property’s value caused by the restrictions — value before minus value after. So everything depended on the “before” number, and the “before” number depended on one claim: that the land’s highest and best use was a commercial granite quarry.

Three appraisers were solicited. All three came back above $60 million: $61.5 million, $69,868,559, and $75 million. Lontrac used the $75 million one — from appraiser Duane Miller, using a 25-year discounted-cash-flow model of the hypothetical mine. Miller put the after-easement value at $493,000 and the easement at $74,507,000, which Lontrac claimed on its 2014 Form 1065.

Two facts sat awkwardly next to that report. First, Miller had appraised this same property for the Dillards’ bank twice before: in 2008 he valued it at $2,030,000 with a highest and best use of holding for future single-family residential development, and in 2010 at $1.56 million. Second, the mining case rested on rock that, in the court’s words, was visible to the naked eye in an area already well mapped by the U.S. Geological Survey — and on a basic identification problem: the promoters and appraisers assumed the rock was granite. The geologist’s report never said granite. It said metagreywacke — a different rock — and granite is, as the analyses of the opinion note, virtually nonexistent in Tennessee bedrock. The name was swapped in later, without new testing.

What did the court find under the surface? Nothing — because nobody looked.

To prove a quarry is a property’s highest and best use, a taxpayer must show the mineral exists in commercially exploitable amounts and that a market exists that would justify extracting it in the reasonably foreseeable future. The record showed:

• No subsurface testing in the mine area. Five test holes had been drilled in 2013 — 31 to 73 feet deep, on the property’s perimeter, while searching (unsuccessfully) for precious metals. Zero drill holes were inside the 110 acres designated as mineable. The rest was surface “grab samples,” which the industry’s own handbook describes as preliminary only and rarely typical of a deposit. The geologist himself had written that continuous cores would have to be taken to verify the rock’s consistency and quality. They never were.
• A market that did not add up. The projections assumed sales of 950,000 tons a year, rising to 1.5 million tons. But crushed rock is heavy and cheap: trucking costs limit its market to roughly a 40-to-50-mile radius. Inside that radius around this rural property — a ZIP Code with under 1,000 residents — there were already 20 operating quarries, many running only a few days a week for lack of demand. Selling a million tons would have meant taking about 25% of the entire regional market from established competitors like Vulcan Materials. The court called that “fanciful” and “entirely implausible.”
• A tourist train, asked to haul rock. The escape hatch was rail: ship the rock to distant cities on the railroad crossing the land. But that line is a scenic tourist railroad owned by a heritage association. It is not a common carrier obligated to haul freight, and its historic wooden trestle bridges could not support heavy aggregate loads.
• Costs the court called “laughable.” The mining plan used an unitemized $6.50 per ton cost and a $250,000 replacement reserve. At trial, the quarry operator behind the plan admitted his family opened quarries “fly by night” — with “no market study,” “no core drilling,” and “no due diligence on any of it.” The court’s answer: that “wing-and-a-prayer method might be acceptable to an entrepreneur whose own money is on the line,” but it is not a basis for a $74.5 million tax deduction.
• The owner’s own conduct. Mr. Dillard was an experienced well-driller with quarry connections, under real financial pressure — and he never tried to mine the land. Instead he agreed to sell 99% of the company that owned it for $990,000. “His own actions,” the court said, “belie the notion that mining was the highest and best use.”

The court’s summary of the mining record deserves quoting in full: “we are presented with no testing of the subsurface rock on the Lontrac property, fantastical production estimates based on faulty assumptions about what type of rock was present and how it would be transported, and cost estimates unworthy of opening a lemonade stand.” And because the taxpayer’s trial experts built on the same flawed quarry reports, the court gave their mining opinions no weight at all — in its phrase, “garbage-in-garbage-out.”

So what was the easement actually worth?

With the mine gone, the court held the pre-easement highest and best use was the existing one: recreational land with future residential development rights. For vacant land like this, comparable sales — what similar land actually sold for — beat a spreadsheet model of a business that never existed.

• Before the easement: $1.1 million. The IRS expert’s five comparable sales of mountainous acreage averaged about $3,500 per acre. The court noted how strikingly that matched the deal the promoters themselves had just struck: 99% of Lontrac sold for $990,000, implying a $1 million whole.
• After the easement: $600,000. The taxpayer’s appraiser said $712,000; the IRS expert said $600,000. Because a lower “after” value produces a higher easement value, the court treated the IRS as having conceded $600,000.
• The easement: $500,000 — $1.1 million minus $600,000. The deduction was limited to that amount. (The IRS, in its 2017 adjustment notice, had said zero; the court’s number gave Lontrac a real, if far smaller, deduction.)

What happened to the appraiser who signed the $75 million report?

Two things, and both are instructive. At trial, Mr. Miller invoked his Fifth Amendment right against self-incrimination and refused to testify. The court declined to draw an adverse inference against Lontrac from that silence, and it also declined to disqualify him as an appraiser: the disqualification rule requires facts showing the donor expected the appraiser “falsely to overstate” value, which means collusion and deception — careless or even incompetent overvaluation is not enough. But a report whose author cannot be cross-examined carries no weight: the court assigned the $75 million appraisal zero evidentiary weight. Qualified on paper, worthless in court.

Why did the 40% penalty stick — with no reasonable-cause escape?

Section 6662(h) imposes a 40% penalty on the portion of an underpayment caused by a gross valuation misstatement — which, for charitable-deduction property, means the claimed value was 200% or more of the correct value. Lontrac’s claimed $74,507,000 was 14,901% of the correct $500,000. “The valuation misstatement was, to put it mildly, ‘gross,’” the court wrote. And under §6664(c)(3), the usual reasonable-cause defense — “we relied on professionals in good faith” — is not available for gross valuation misstatements of charitable-deduction property. The 40% penalty was sustained in full.

Lontrac also attacked the penalty procedurally, arguing over how deeply the revenue agent’s supervisor had to review it before approval under §6751(b)(1). The supervisor had signed the Civil Penalty Approval Form on July 12, 2017, before the adjustment notice issued on October 3, 2017. Following Eleventh Circuit precedent, the court held that timely written approval before assessment is what the statute requires. The challenge failed. The court closed with a warning to future litigants: given how much of the court’s time syndicated easement cases already consume, do not waste more of it on arguments foreclosed by governing law. The exact tax will be computed under Tax Court Rule 155 (a routine final-math step).

The checklist: what Lontrac teaches about any big valuation

• The market is the first exhibit. Land that sat listed at $2.9 million for five years with no buyer, and a company that sold 99% of itself for $990,000, told the court more than any appraisal. Your own recent asking price and your own deals are evidence — assume the IRS will find them.
• A future use must be probable, not imaginable. Highest and best use means a use that is adaptable and likely to be needed in the reasonably near future. A use nobody tested, permitted, or priced honestly is speculation, and speculation is excluded.
• Test the thing you are selling the court. If the value depends on what is underground, drill. Surface samples and a renamed mineral do not carry a $74 million number.
• An appraisal is only as good as its inputs — and its author’s testimony. Experts who recycle flawed promoter reports inherit the flaws. And an appraiser who takes the Fifth leaves the report with zero weight.
• At 200%, the penalty doubles and the exit closes. Claim 200% or more of the correct value on donated property and the penalty is 40% — with no reasonable-cause defense, however many professionals signed off.
• Read the offering math backwards. When a deal promises more than $3 of tax savings for every $1 invested, the deduction is the product. That is exactly the pattern the IRS targets and this court has decided, repeatedly — hence Groundhog Day.

Alex Volkov, CPA is a New York-licensed CPA with over two decades in accounting, focused on resolving IRS tax problems — back taxes, liens, levies, garnishments, and audits — for individuals and businesses in all 50 states and around the world.