MEMORANDUM FINDINGS OF FACT AND OPINION
Eight enterprising taxpayers created a partnership to buy property at a distress sale and then donate a conservation easement on it to a land trust. They paid $1.4 million in August 2002 for the entire property, and valued the easement at $5.4 million in December 2003 when they donated it.
Why are these conservation-easement cases different from all other conservation-easement cases? The Commissioner doesn't think they are. He argues that the partners misstated the easement's value and that they should get no deductions at all because one of the clauses in the deed of easement violated the same regulation we construed and upheld in
FINDINGS OF FACT
The Land and Easement
Nestled in the foothills of the Appalachian Mountains near Anniston in Calhoun County, Alabama, lies a 398.01-acre piece of land. It's close to Interstate 20 and is comprised of 161.5 acres of flatland and 236.51 acres of mountainous land.
But much of Moses' wealth was in technology stocks, and when the tech bubble burst in 2001, Mr. Moses suddenly became insolvent. The Moseses decided to sell the land they had just bought. They tried to sell the entire parcel, and when that didn't work they divided the flat part of their parcel from the part that was mountainous. They were able to sell the 161.5 acres of flatland for about $1.4 million. This left the Moseses with the mountainous land and a large pile of debt. It seemed at first that they could find no buyer for the land that remained.
Burning Bush Farms, LLC
With Mr. Moses' debt still a problem, he and his attorney came up with a plan for him and seven of his friends. In August 2002 Burning Bush Farms, LLC was formed with eight members—Kevin Sells, Charlie Williams, Steven Moses, Freddy Welch, Jay Pumroy, John Davis, Lori Brown-James, and Stephen Whatley
Once Burning Bush took over, its members started to investigate how to put a conservation easement on their property. They spoke with Mark Pentecost of Chattoawah Open Land Trust, Inc. (COLT), whom Mr. Moses had worked with on conservation programs in the past. COLT provided Mr. Moses with "A Professional's Guide to Conservation Easements." In late 2003, Burning Bush deeded a conservation easement on the acres that it owned to COLT. It seemed that Burning Bush would be the way for the Moseses to cross from their debt troubles to the promised land with bags filled, not with jewels of gold and borrowed raiment, but with their more modern and valuable equivalent—very large tax deductions for themselves and their partners.
Might this work? The key is paragraph 16 of the deed, which contains an extinguishment-proceeds clause. It reads in full:
OK so far. But then paragraph 17 adds:
Burning Bush and its members relied on Katherine Ebbins, the executive director of COLT and a licensed attorney, to ensure that the conservation easement was properly put into place and complied with the regulations.
When the time came to file its return, Burning Bush did so on Form 1065, U.S. Return of Partnership Income.
Burning Bush also reported on this return a second noncash charitable contribution of "Timber" valued at $275,340. Burning Bush described the timber as "PULP, Chip N SAW, SAW Timber." It attached a separate appraisal of this donated timber. That appraisal describes the timber as "forest products growing on [the] property." The appraisal then lists the value of eight types of "products."
Burning Bush issued Schedules K-1, Partner's Share of Income, Credits, Deductions, etc., to its eight members. Since the members were equal partners, each had a noncash, flowthrough charitable contribution of $708,792—the math works out to $674,375 for the donation of the conservation easement to COLT and $34,417 for the donation of the timber.
These amounts were very large compared to each partner's adjusted gross income, which meant that each of them had to carry forward some of that deduction to later years.
Audit and Trial
The Commissioner noticed these large deductions, arrayed several chariots of revenue agents against them, and shot forth against them a quiverful of notices of deficiency—sending each member his or her own. Each notice denied any deduction for the donation of either the conservation easement or the timber.
The Commissioner also wants penalties—for both the conservation easement and the timber donation—but here the facts become a bit convoluted. The parties stipulated that the Commissioner had a "penalty-approval form" only for the Moseses and the Pumroys. Both these penalty-approval forms were approved by a "Group Manager" and dated before the Moseses or the Pumroys received their notices. The penalty-approval form for the Moseses shows approval of penalties for substantial understatement and gross misvaluation, but doesn't approve a penalty for negligence or substantial misvaluation. This form doesn't specifically mention either the easement or the timber, but states that the "contribution deduction appear[s] overstated by the valuation."
The revenue agent who drafted the penalty-approval form for the Pumroys clearly wanted penalties for negligence and substantial understatement, but also checked a box on a row that says this: "Section 6662(h) Substantial Valuation Misstatement." One can immediately see a problem—section 6662(h) defines gross misvaluation; it's section 6662(b)(3) that defines substantial misvaluation. The revenue agent filled in the comment box:
Because the verbal description says "substantial valuation misstatement" and the comment box mentions only "substantial misstatement penalty," we might have been inclined to find that the revenue agent was seeking approval for a substantial-misvaluation penalty. The Commissioner, however, asserted in his reply brief that "[t]he penalty approval form for Jay and Sondra Pumroy contains a scrivener's error that identifies the I.R.C. § 6662(h) gross valuation misstatement penalty as the substantial valuation misstatement penalty. Although the written reference is slightly ambiguous, the reference to I.R.C. § 6662(h) is clear." We accept his clarification of this ambiguity, and find that for the Pumroys the grossmis-valuation, and not the substantial-misvaluation, penalty was put in play and approved by this form.
One then turns to the notices of deficiency. Here there was a bit more uniformity. The Commissioner asserted 20% accuracy-related penalties under section 6662(a) for negligence, substantial understatement, or substantial misvaluation in the notices of deficiency against all the members except for Sells. None of the notices asserted a gross-misvaluation penalty under section 6662(h), even against the Moseses and Pumroys despite penalty-approval forms that approved section 6662(h) penalties against them.
All eight members of Burning Bush filed their petitions while residents of Alabama.
We tried these cases in Birmingham, Alabama. At trial the taxpayers orally moved to shift the burden of proof, on the ground that they had cooperated with the Commissioner's requests. We granted their motion after trial, but it makes no difference because we can decide the various issues in these cases on a preponderance of evidence.
The parties settled many issues; one they did not is the subject of a separate opinion that we also release today.
Noncash Charitable Contributions
Section 170 sets the rules for the deductibility of charitable contributions, and there are regulations that go into much greater detail.
One type of noncash charitable contribution is the donation of a partial interest in real estate. The Code generally disallows a charitable-contribution deduction for a gift of real property that "consists of less than the taxpayer's entire interest in such property." Sec. 170(f)(3)(A).
There is an exception for the donation of conservation easements. Sec. 170(f)(3)(B)(iii). A "qualified conservation contribution" is "a contribution— (A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes." Sec. 170(h)(1). A contribution must satisfy each of these requirements, but our focus here is on the third requirement— that the contribution be "exclusively for conservation purposes," sec. 170(h)(1)(C), which the Code defines in the negative: "A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity," sec. 170(h)(5)(A) (emphasis added).
The Donation of the Conservation Easement
We will focus first on the donation of the conservation easement, which we must deny now that the Court has decided
"Proportionate value" demands the creation of a fraction, the numerator of which is the fair market value (FMV) of the easement and the denominator of which is the FMV of the contributed property unburdened by the easement, both on the date of donation.
Burning Bush's deed would subtract the value of any improvements from any condemnation award before calculating what percentage of those proceeds would go to the donee. That means that this deed, like the one in
The partners make two arguments that we didn't see in
That's what we did here. There are a great many conservation-easement cases before our Court, and we are trying to be as consistent as possible in how we analyze them. Even without supplemental briefing, the question is a legal one and "a deficiency assessment may be sustained upon any legal ground supporting it, even though the Commissioner did not rely thereon when the assessment was made."
The partners' next argument is a substantive one—that there is language in section 1.170A-14(g)(6)(ii) that nullifies the "proportionate value" requirement. The language that they point to is at the end:
Sec. 1.170A-14(g)(6)(ii), Income Tax Regs. (emphasis added). The partners argue that under Alabama law the owner of a conservation easement isn't entitled to proceeds where the land is "taken for and devoted to [a] public purpose."
The problem for Burning Bush and its members here is that the regulation speaks of the involuntary conversion of a "perpetual conservation restriction,"
We do not, however, think that Alabama law on this subject is what the regulation means when it speaks of a state law that "provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction." Sec. 1.170A-14(g)(6)(ii), Income Tax Regs. Here's why: When, for example, property owners in a subdivision all have easements on each other's properties in the form of restrictions on use of their property to "residential purposes only," there is ambiguity about whether that easement is a contract right or a property right. When a local government in Alabama condemns land to construct a road or build a school, it has to invoke eminent domain against "property owners" and compensate them. If all the homeowners in a subdivision were "owners" of the condemned property, they too would need to be pleaded in and receive compensation for whatever the value of their easement was. If they weren't, the condemning government would succeed only to the condemned property owner's rights—instead of getting land on which to build a road, the local highway department would get only land which it could use "for residential purposes only."
This would be decidedly unsatisfactory, and Alabama rejected that characterization in
As we explained in
We also found at least one state law that does seem to be governed by the last few lines in section 1.170A-14(g)(6)(ii). California's Government Code states:
Cal. Gov't Code sec. 51095 (West 2003) (emphasis added).
The reason for such an apparently odd provision is that the California legislature was worried that local governments would view property with conservation easements as especially juicy targets for condemnation because they could be had cheaply.
We can safely reject Burning Bush's state-law argument. The general rule of section 1.170A-14(g)(6)(ii) applies and forces us to disallow the deduction for the conservation easement.
That leaves us to figure out the partners' second noncash charitable contribution—their donation of timber on the property.
The Donation of Timber
What's at Issue?
The Commissioner challenged the deductibility of Burning Bush's donation of timber in his posttrial brief. The partners argued in their posttrial brief that this is the first they're hearing of the issue, and they say this means that it's not properly before us.
As a general rule, we consider only the issues that the parties plead.
Here we do find each partner was put on fair notice that the timber donation was at issue. The Commissioner denied each member's total noncash charitable deduction, and we think any reasonable taxpayer would recognize that disallowing the sum of two numbers means that both are disallowed. The members, in their petitions, challenged the disallowance of this total dollar amount even though they didn't mention the disallowance of the timber-donation portion with any specificity. We find from this they did indeed challenge its disallowance. And in his pretrial memo the Commissioner specifically stated that the contribution of timber was being challenged—albeit as a "Conservation Easement Issue." This is enough for fair notice.
Donation of the Timber
Although we find that the donation of Burning Bush's timber is at issue, we agree with the members that the Commissioner's analysis of it is quite confusing. He argues in his posttrial briefs that the timber donation violates section 170(h)— the subsection that addresses contributions of qualified conservation easements. He specifically argues that the timber donation doesn't have a conservation purpose since the clearcutting of land can't possibly be for a conservation purpose.
As we search through the record, we find next to no other mention of the timber donation from either party. The only evidence that we have (besides the disallowance of the timber donations in the notices of deficiency) is the initial claiming of the deduction by the partners on their tax returns. Those returns each have two separate Forms 8283 attached—one for the donation of the conservation easement and one for the donation of "Timber". And attached to each form were separate appraisals—one of the value of the conservation easement and one of the value of the timber. The appraisal of the timber donation describes the value of eight timber products that were "growing on [the] property" but makes no mention of a conservation easement. When we look at the entire record, we find it more likely than not that the timber donation was not a donation of a conservation easement but rather just a separate noncash donation. Section 170(h) and its regulations that govern the donation of conservation easements just don't apply.
But that doesn't mean the partners are out of the woods just yet. According to the appraisal, Burning Bush acquired the land on which it placed the easement on the very same date that it reported it had acquired the timber—August 6, 2002. And Burning Bush contributed both the easement and the timber to the same donee, COLT. Because of this, we find it more likely than not that the timber donated by Burning Bush is the same standing timber on which it had placed a conservation easement.
That is a problem. The value that Burning Bush placed on the standing timber is its value as timber products. One can see this on the Form 8283—which describes the donation of "Pulp, Chip N Saw, Saw Timber"—products that result from timber's harvest. And the attached appraisal—which described eight products—would require the timber's harvest.
The problem here is that Alabama law
The cutting of timber and its conversion into lumber and other wood products is not a conservation purpose.
That leaves penalties. Here again confusion reigns. The Commissioner wants penalties for both the conservation easement and the timber donation. And one would think the outcome for each partner should be the same—after all, at first glance they seem to be lined up in the same rank and one might have expected the Commissioner to unleash a light barrage that would easily hit them all. But the Commissioner misfired, causing chaos and confusion; and we are left to assess the damage.
We will first briefly discuss the penalties involved, and then whether the partners can shelter from them in the procedural defenses that we have recently made available. Only then do we decide any remaining penalty issues on their merits.
There are two genera of penalties here. One is commonly called the "accuracy related" or "section 6662(a)" penalty. The Code lists several species within this genus in section 6662(b), and three are involved here: section 6662(b)(1), which penalizes understatements due to negligence or intentional disregard of rules and regulations; section 6662(b)(2), which penalizes "substantial understatement" of the tax due; and section 6662(b)(3), which penalizes "substantial" valuation misstatements. All of these carry a 20% penalty, and the Commissioner has to hit with only one of the three to win.
Then there is a 40% penalty.
Section 6662(h) imposes this megapenalty for "gross" misstatements of value on a return.
In another T.C. opinion,
The Chaighoul Problem
Classifying penalties by genus and species is not purely intellectual sport, because it is not enough for the Commissioner to assert penalties in a notice of deficiency or a pleading. He must also show that he complied with section 6751(b) as we have construed it for the last few years. That section states that no penalty is allowed unless the "initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination." Sec. 6751(b)(1). We have construed this to mean that written approval was secured at least by the time the Commissioner issued the notice of deficiency or when he filed the answer or amended answer in which he asserted the penalty.
Approval of one species of penalty doesn't mean approval of any other. In
We have also said that this approval doesn't have to take any particular form.
There's no problem with an IRS employee's ticking more than one box on this form. And in the specific instance of misvaluation penalties, we have held that there's nothing improper in the Commissioner's asserting a 20% substantial misvaluation penalty and in the alternative asserting a 40% gross-misvaluation penalty.
What happened here?
The parties stipulated that the IRS revenue agent completed only two penalty-approval forms, one each for the Moseses and the Pumroys, before he sent out notices of deficiency to all the Burning Bush partners. The Moseses' penalty-approval form mentions only a substantial-understatement penalty and grossmis-valuation penalty. The revenue agent wrote: "The contribution deduction appears overstated by the valuation." The Pumroys were the most unlucky—on their penalty-approval form a supervisor approved both a negligence penalty and a substantial-understatement penalty, as well as a gross-misvaluation penalty. And the same revenue agent was a bit more detailed in the comments section for the Pumroys, writing: "The adjustment is due to an overstated donation of a charitable contribution (Easement) and the Substantial misstatement Penalty is applicable. The alternative position is that the negligence and substantial understatement penalty is applicable."
The Commissioner then sent out notices of deficiency to all the Burning Bush partners in which the Commissioner asserted penalties under section 6662(b)(1), (b)(2), and (b)(3) for 7 of the 8 partners. It's easier to see in a table:
All the Burning Bush partners other than the Moseses and the Pumroys thus emerge unscathed by any of the penalties asserted—for either the conservation easement or the timber donation—in their respective notices of deficiency. The Moseses and the Pumroys, however, require some explanation.
The Moseses need not worry about any penalties related to the timber donation. The approval form makes no mention of the timber and it states the proposed adjustment was due to the "valuation" of the contribution. And the timber's value was never challenged by the Commissioner. Therefore we find it more likely than not there was no written supervisory approval for a penalty related to the timber donation for the Moseses.
The Pumroys' situation is different. There was no supervisory approval for any substantial-misvaluation penalty—no section 6662(b)(3) penalty for the donation of either the conservation easement or the timber. But for the rest of the asserted penalties, the Pumroys once again might feel singled out. On the penalty-approval form for the Pumroys, and unlike the one for the Moseses, the revenue agent didn't limit his initial decision to assert penalties to valuation, but instead took issue with the deduction as a whole. Though he wrote that the adjustment is for the "Easement", and we found that the attempted timber donation was not the donation of an easement,
For all the other taxpayers and types of penalty and particular donation there was no supervisory approval in writing before the Commissioner formally communicated his penalty determinations to the partners.
As these cases made their way toward trial, the Commissioner's lawyer noticed that his revenue agent had won approval to assert section 6662(h) grossmis-valuation penalties (at least for some of the partners), but no one at the IRS had actually notified any of the partners in the notices of deficiency of his determination to do so. The Commissioner then amended his answers in these cases to formally communicate for the first time that he sought section 6662(h) gross-misvaluation penalties against each Burning Bush member except Sells for the donation of the conservation easement.
Section 6662(b)(1) and (2) Penalties
That leaves us to decide only the merits of the penalty determinations that managed to trickle through section 6751's procedural protection. The only accuracy-related penalties that got through were: a section 6662(b)(2) penalty for the conservation easement donation deducted by the Moseses, and both section 6662(b)(1) and (2) penalties for both the conservation easement and timber donations deducted by the Pumroys.
Burden of Production
The Commissioner has the burden of production with respect to penalties. Sec. 7491(c). To meet his burden the Commissioner must produce evidence regarding the appropriateness of imposing a penalty.
For both penalties related to the Burning Bush's timber donation, the Commissioner also satisfied the burden of production as to the Pumroys. He first asserts the Pumroys were negligent and disregarded the rules or regulations with this deduction.
What these penalties have in common is the availability of a reasonablecause-and-good-faith defense. Sec. 6664(c); sec. 1.6664-4(a), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and in good faith is one we make on a case-by-case basis. Sec. 1.6664-4(b)(1), Income Tax Regs. One circumstance that indicates reasonable cause and good faith is an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances.
We denied the deductions for the donation of the conservation easement here because the proceeds clause in the deed violated the regulation. But we think Burning Bush's position was reasonable: An IRS private letter ruling (PLR) suggested that a clause like the one in the deed here would satisfy the regulation.
And both Pumroy and Moses, like all the Burning Bush partners, looked to Ebbins, the executive director of COLT, to ensure that their conservation easement complied with the regulations. The language used in the deed was widespread throughout the Southeast.
But does this defense also work for the Pumroys' timber donation? We think not. Whether the Pumroys had reasonable cause and good faith is a decision made on a case-by-case basis after consideration of all pertinent facts and circumstances.
Whether Section 6662(h) Applies
Section 6662(h) increases the penalty under section 6662(a) to 40% to the extent an underpayment is attributable to a "gross valuation misstatement." But here we denied the entire deduction because the extinguishment-proceeds clause in the deed did not track the regulation. This made us ponder—if an underpayment is attributable to one reason, can a penalty be applied for a completely separate reason?
As it turns out, the answer is yes. We start as always with the text of the Code—section 6662(h)(1) requires that the underpayment be "attributable to" a gross valuation misstatement. So on first glance it might appear that no section 6662(h) penalty should apply since the underpayment was attributable to failure to donate a conservation easement in perpetuity—not because a portion of the deduction reflected a gross misvaluation.
These penalties are in play.
The Proper Value
Although we already know the amount of the deductions the partners are going to get—zero—we must still figure out the actual value of the donation so that we can decide whether they grossly misvalued it.
Under section 170, an easement's value is the FMV of the perpetual conservation restriction at the time of its contribution. Sec. 1.170A-14(h)(3)(i), Income Tax Regs.;
This means we must:
The following chart summarizes each party's position:
Before Best Use
The central point in this valuation dispute is the property's best use before the easement. The partners argue that the best use was to develop the property into a 218-lot residential subdivision. The Commissioner argues that residential development would've been a money loser, which means that the best use of the land was to hold it for speculation. The parties used both the income approach— specifically the discounted cashflow (DCF) method—and the sales-comparison approach. We will first address the parties' DCF analyses.
A DCF analysis projects a property's future cashflow and then discounts it back to present value.
We also find that Burning Bush's expert used construction costs in his analysis that he failed to substantiate and are much too low. He projected total construction costs of $3,051,000 or $180 per linear foot. He based this on the costs of an unrelated subdivision in North Georgia and his general expertise. His position suffered on cross-examination when he was unable to give a dollar-by-dollar breakdown or even a general budget. This lack of any sort of concrete detail leads us to find this part of his opinion unreliable.
The Commissioner's expert analysis was not much better on this point. Though that expert's plan itself is more sound—166 buildable lots in three phases— we find that his costs were grossly overstated. The problem was his source—the Alabama Department of Transportation (DOT). As we learned from credible testimony at trial, comparing DOT costs to costs of building a subdivision is not at all reasonable. DOT requires materials whose costs are much higher than those used in residential construction, and DOT has building specifications that a normal subdivision would not require. We find that the result is a gross overestimate of the cost associated with a potential subdivision on Burning Bush's land.
That expert also had some math problems. He recognized one math error in his report the day before trial that changed his valuation by more than $1.3 million. Then, after skillful cross-examination got him to assert that he was "confident" after finding that mistake, it turned out that he had understated revenue by $700,000 because of another basic math error. And that wasn't the only one. Such errors harm credibility.
We disregard both experts' DCF analyses.
That leaves us with a sales-comparison approach, which we favor anyway when we decide valuation cases,
We find the key difference between the choice of comparables to be the experts' differing views of what the highest and best use of the property was before Burning Bush encumbered it with an easement. We find that a dense residential development of the sort both experts used in their DCF analyses was not financially feasible. But the alternative to this is not necessarily to hold the land for speculation. The Commissioner's expert noted in his report that the realestate market in the area was good at the end of 2003, and he concluded "that the highest and best use analysis must consider future single-family residential development of the property." He reasonably concluded that if a dense residential development didn't make sense economically, "there appears to have been a niche market for upper end homes with views but without a golf course."
Burning Bush's expert made a similar observation in his report. And he reported that a new road that was imminently to be built as of late 2003 would increase access south of I-20 near the property. We find that Burning Bush's expert was more reasonable in concluding that residential development was the highest and best "before" use, even if only less dense residential development. That leads us to conclude that his choice of "before" comparables— sales of raw land suitable for residential development—is more reasonable than the Commissioner's expert's choice of land held only for speculation.
Burning Bush's expert selected five different plots of land that, in his view, are comparable to Burning Bush's property:
He then adjusted these values for their superior and inferior characteristics, compared to Burning Bush's property. As adjusted:
Based on these values, he concluded that Burning Bush's property was worth $13,000/acre. As Burning Bush's property was 236.51 acres, he determined the rounded value was $3,075,000.
We agree that some adjustments are needed to address both the superior and inferior characteristics of these properties. We find, however, that Burning Bush's adjustments are excessive. We agree that the topography of these comparables is inferior to Burning Bush's property—most of them are flatter and lack the views that Burning Bush's property has. But the comparable properties are also superior to the Burning Bush property in some ways. Sale 2 was by the government, potentially inflating the price, and also had good access and exposure. Sale 3 had foreseeably great access beginning in 2004 and is smaller in size. Sale 4 had superior exposure. Sale 5 was purchased by a locality, possibly inflating the price, and had good access and exposure.
We also find that two of the comparables need a bit more adjustment. The price per acre for Sales 2 and 3 excludes a flood plain from the total acreage. This drives up the price per acre.
Sale 1 appears to be an outlier, but its description explains why—the tract was vastly superior in quality. It has good access and exposure, located only three miles from I-20. It is smaller, is a higher density development, and has commercial frontage. All of these superior qualities as well as the substantially higher price per acre than the other comparable land sales, indicate that the Sale 1 property isn't comparable to the Burning Bush property—we will disregard it. After we dismiss Sale 1, the average price per acre comes out to be $10,465. For the reasons we've stated, we do find that there should be a slight upward adjustment for Burning Bush's superior characteristics, and find that a reasonable price per acre is $11,000.
This makes Burning Bush's property's before value $2,601,610.
"After" Best Use
The parties agree that the best use for the Burning Bush property after the donation is speculation or recreation. Burning Bush's expert valued the land in this use at $235,000. The Commissioner's expert valued the land at $350,000. All of the Commissioner's comparable properties were in Alabama, and most of them were mountainous. Burning Bush's expert on the other hand used properties located all over the Southeast, with only one of his comparables in Alabama. One of his comparables was sold two years after the year of the easement; one was sold back in 1998; another one was more than 4 times the size of the Burning Bush property while yet another was more than 13 times larger. We find the Commissioner's expert both reliable and more reasonable.
Conservation Easement Value and Penalty
The following table summarizes our before and after values:
With these values now determined, we can calculate that the conservation easement donated had an FMV of $2,250,000.
But $5,395,000 isn't 400% of $2,250,000, so no gross-misvaluation penalty applies. The partners did report a value for the easement that is more than 200% of the correct value, but a penalty is barred by section 6751(b).
What this all means is that Burning Bush's partners won't get their deductions, but procedural mistakes, a reasonable-cause defense, and an initial deduction that wasn't too high mean that—at least for the all but a tiny sliver of a penalty against the Pumroys—"[t]he depths have covered them; they sank into the bottom as a stone." Exodus 15:5.