DOJ Seeks Expert's Valuation Reports in Other Easement Cases

TONY D. TOWNLEY and ELIZABETH A. TOWNLEY,
Plaintiffs and Counterclaim defendants,
v.
UNITED STATES OF AMERICA,
Defendant and Counterclaimant.

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
ATHENS DIVISION

UNITED STATES' MOTION TO COMPEL DISCOVERY FROM BURGEX MINING CONSULTANTS

Pursuant to Fed. R. Civ. P. 45(d)(2) the United States moves for an order compelling third party Burgex Mining Consultants (“Burgex”) to produce 35 documents responsive to the United States' subpoena for the production of documents. About six months ago the United States first requested documents relevant to Burgex's work in support of tax refund claims at issue in this case. Though Burgex was later disclosed as one of Plaintiffs' expert witnesses in this litigation, Burgex was originally subpoenaed as a third-party witness on the issue of the reasonableness of Plaintiffs' refund claims.

The United States has since significantly narrowed the scope of the original subpoena, and a protective order has been entered in the case to handle third parties' confidentiality interests, mooting much of Burgex's original grounds for refusing to comply. The request is relevant to claims and defenses in this case and — as Burgex acknowledged in a letter to the United States — the documents at issue would be minimally burdensome for Burgex to search for and produce. The Court should therefore grant this motion.

BACKGROUND

This is a federal income tax case in which Plaintiffs claim a refund of approximately $43 million based on the donation of conservation easements over three properties, as reflected on Plaintiffs' 2022 filings of amended tax returns for the tax years 2018, 2019 and 2020. (ECF No. 1 at 29-41). The United States has alleged under I.R.C. § 6676 that Plaintiffs' refund claims were made for excessive amounts without reasonable cause. (ECF No. 11 at 17-23).

For two of the three conservation easement deductions at issue Plaintiffs' valuation of the property relied on a “Technical Due Diligence Business Plan and Market Analysis” prepared by Burgex. (ECF No. 4-2 at 6-60; ECF No. 4-4 at 6-59). Burgex valued Plaintiffs' property in Taliaferro County, GA at nearly $72 million (ECF No. 4-2 at 50) and Plaintiffs' property in Wilkes County, GA at nearly $57 million (ECF No. 4-4 at 49). These are and always have been tracts of vacant land. Yet, Burgex valued them as operating granite mining businesses.

At the outset of fact discovery, the United States served Burgex a Fed. R. Civ. P. 45 subpoena requesting, inter alia, its comparable recent work valuing granitic properties in the southeast. Ex. 1 at 3-4. This Court later issued a Protective Order governing discovery in the case, which allows third parties to designate disclosures as confidential and which specifies a redaction protocol in the event documents so designated are to be publicly filed. (ECF No. 18). After entry of the Protective Order, Burgex objected to the United States' subpoena on grounds of relevance, proportionality, burdensomeness, and confidentiality concerns. Ex. 2 at 5.

Then, on May 31, Plaintiffs disclosed “Chris E. Summers and/or other representatives of Burgex Mining Consultants” as one of their eight initially-designated experts. Ex. 3 at 2. Plaintiffs proffered two expert reports from Burgex that were largely identical to the “Technical Due Diligence Business Plan[s] and Market Analys[e]s” submitted to the Internal Revenue Service in 2022 in support of Plaintiffs' amended tax returns. Each contained an Appendix wherein Burgex listed, as “Publications Authored . . . Within the Preceding Ten Years,” over 200 other “Technical Due Diligence Business Plan[s] and Market Analys[e]s.”

The documents in the Appendices are responsive to the United States' subpoena. And so, on August 22, the United States sent a letter to Plaintiffs' counsel and Burgex's counsel requesting disclosure of a small fraction of these now-officially-acknowledged documents, narrowing its original subpoena request to Burgex's “crushed stone” analyses across ten counties in northeast Georgia (35 reports). Plaintiffs' counsel responded that those entire Appendices were “inadvertently disclosed because of the misunderstanding of the meaning of publications” and asserted that it would move for a Protective Order should the United States ever file the expert reports without redacting the Appendices. Ex. 4. Plaintiffs have not amended the reports to remove the appendices.

After Mr. Summers' August 30 deposition, during which he answered questions about the reports at issue without objection from Plaintiffs' counsel, see Ex. 5 at 17:10-21:16, the United States sent Plaintiffs' counsel and Burgex's counsel a letter restating its request for the 35 documents reflecting Burgex's valuations of “crushed stone” properties in northeast Georgia. In an abrupt about-face, Plaintiffs' counsel in a September 11 letter then disavowed involvement, accusing the United States of “attempt[ing] to circumvent confidentiality assertions by Burgex by asking [Plaintiffs' counsel] to produce documents not in our custody or control,” and (incorrectly) alleging that because the United States had “insisted on dealing with Burgex and their counsel directly” it was “[in]appropriate to demand that the Townleys require Burgex to hand over its proprietary data.” Ex. 6 at 1.¹

The United States directed all subsequent communications solely to Burgex's counsel. The parties conferred over multiple emails and about a week later it appeared a resolution was going to be reached. On September 18 Burgex's counsel sent an email reporting that he had met with his client, requesting a copy of the Protective Order and a confirmation of the list of reports requested, saying he believed the Protective Order would “address the disclosure argument my client has related to the confidentiality of these reports” and suggesting that it would “take a few days for a few people to locate and pull these reports.” Ex. 7.² But another abrupt about-face occurred on September 21 when Burgex's counsel sent a letter announcing that in spite of that previous email, the greatly narrowed scope, and the governing Protective Order it had nevertheless returned to its original position of refusing to produce any documents in response to the United States' requests. Ex. 8.

MEMORANDUM

The Federal Rules of Civil Procedure authorize “discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case.” Fed. R. Civ. P. 26(b)(1). The Rules “strongly favor full discovery whenever possible,” Republic of Ecuador v. Hinchee, 741 F.3d 1185, 1189 (11th Cir. 2013) (citation omitted), and the “Supreme Court has stressed on multiple occasions the need to construe the Rules liberally to allow for robust discovery.” Akridge v. Alfa Mut. Ins. Co., 1 F. 4th 1271, 1276 (11th Cir. 2021) (citing cases). “Relevance in the context of discovery has been construed broadly to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case.” Id. at 1276 (internal quotation marks and citation omitted); see also Companhia Energetica Potiguar v. Caterpillar Inc., 307 F.R.D. 620, 627 (S.D. Fla. 2015) (discovery is allowed “unless it is clear that the information sought has no possible bearing on the subject matter of the action” (citation omitted)).

The same liberal standards apply to third parties subpoenaed under Fed. R. Civ. P. 45. See Gamache v. Hogue, 595 F. Supp. 3d 1344, 1349 (M.D. Ga. 2022). Thus, “[t]he party resisting production of information bears the burden of establishing lack of relevancy or undue burden in supplying the requested information.” Gober v. City of Leesburg, 197 F.R.D. 519, 521 (M.D. Fla. 2000). Notably, the undue burden analysis for Fed. R. Civ. P. 45 subpoenas is relaxed where a non-party “is not truly disinterested” but instead “has a significant, underlying connection to the case.” Culliver v. Ctr. for Toxicology & Env't Health LLC, No. 3:21-CV-4942-MCR-GRJ, 2022 WL 475185, at *4 (N.D. Fla. Feb. 16, 2022) (citation omitted).

Pursuant to these standards, the Court should order Burgex to produce its market analyses of crushed stone properties in ten counties in northeast Georgia between 2018 and 2022.

I. The Requested Discovery Is Relevant

Burgex prepared reports on two of Plaintiffs' properties to support charitable contribution deductions Plaintiffs claimed on their amended tax returns for tax years 2019 and 2020. Burgex attributed nearly $130 million of combined value to these two tracts of vacant land (then most recently assessed as being worth $819,000 and $230,445 (ECF No. 5-1 at 455; ECF No. 4-3 at 663), less than 1% of Burgex's valuation), on the theory that their true value was that of successfully operating granite mining businesses. Burgex (along with Dr. Richard Crissman Capps, who valued the third relevant tract) replaced Plaintiffs' original consultant Jeffrey Kern of Resource Technologies Corporation, who had performed this role prior to the IRS examination of Plaintiffs' first charitable-deduction attempt.

The United States' denial that Plaintiffs are entitled to a tax refund and its counterclaim that Plaintiffs should be penalized under I.R.C. § 6676 for filing an excessive refund claim both rest in part on our position that Plaintiffs wildly overvalued the charitable contribution deductions.³ Plaintiffs have sought to defend themselves from this charge by citing the allegedly unimpeachable advice they received along the way. See, e.g., ECF No. 1 at ¶¶60 (“Tony found the best advisors he and his advisors could find . . .”), 103 (Plaintiffs' “appraisers possessed extensive experience valuing mineral properties”); ECF No. 13 at 2-3 (Plaintiffs use of “qualified appraisers . . . amply supported by independent investigation . . . exceeds all reasonable cause standards”) and 6 (Plaintiffs “took the utmost care and expense to conduct [ ] due diligence . . .”); ECF No. 25-2 at 7 (“Plaintiffs relied on the best professionals and advisors they could find . . .”).

The qualifications of and methodologies used by these alleged “best advisors” in support of Plaintiffs' tax filings are relevant to claims and defenses in this case. The United States is entitled to discovery into the materials and information that the “best professionals” relied on. This information has a direct bearing on Plaintiffs' reasonable cause defense and must be produced. See Gamache, 595 F. Supp. 3d at 1349. The reasonable cause inquiry has numerous factors about the professional advice cited by the taxpayer, including the assumptions behind and basis for the professional advice, the quality of that advice, and its objective reasonableness. Gustashaw v. Comm'r, 696 F.3d 1124, 1139 (11th Cir. 2012).

The United States issued the original subpoena to Burgex learn if Burgex had analyzed the mining potential of some number of other similar properties in the southeast in recent years. But the United States was unaware of the sheer volume and nature of this work until it was disclosed in the Appendices to Burgex's expert reports and then discussed in Mr. Summers' deposition. In fact, Burgex declared every single property on the list (over 200 tracts) to have a “highest and best use” of mining. That includes 35 reports dealing only with crushed stone in northeast Georgia in which Burgex valued a property as a potentially profitable mining business between 2018 and 2022. Mr. Summers acknowledged this at deposition. He also acknowledged that very few and possibly zero of these ever became operating mines. See Ex. 5 at 17:23-18:23.⁴

The United States is entitled to these reports to see if they were prepared for conservation easement tax deductions and if Burgex was a known conservation easement specialist virtually guaranteed to value Plaintiffs' vacant tracts as operational and successful mining businesses. This information is vital to assess Plaintiffs' claim that they retained “independent” expert advice. And this information is vital to determine whether reliance on the advice was reasonable if one believed the IRS was “hostile” to conservation easements (as Plaintiffs allege they believed, see, e.g., ECF No. 1 at ¶ 86). Regardless, the analysis in these documents is relevant to the valuations in the Burgex reports that Plaintiffs used to support their 2022 amended tax returns.

Burgex used an “income” approach to valuing Plaintiffs' properties, meaning Burgex valued the tracts not as the vacant lands they were and are but instead as the profit-making mining businesses they allegedly could have been. (See ECF No. 4-2 at 46-50; ECF No. 4-4 at 46-49). Both of those reports submitted to the IRS depended not only on Burgex's purported finding that there is a large unmet demand for granite aggregate in the relevant area, but also on Burgex's further assurance that the hypothetical Townley mine was in just the right circumstance to be able to capture all of it (despite the many actually-existing competitor granite mines in the same areas). It is likely that Burgex told dozens of parties the exact same thing about comparable properties. This includes nine other reports in Wilkes County alone — the same place Burgex told Plaintiffs that the mere finding of granite deposits under their land increased its value from around $250,000 to around $57 million. And Burgex's reimagining of the vacant properties as operating mines was the basis for the valuations in the Kenny & Associates (“Kenny”) real estate appraisals that Plaintiffs submitted with their amended tax returns. See ECF No. 4-1 at 414-457 (citing no source other than Burgex in over forty pages of market analysis); ECF No. 4-3 at 715-759 (same).

If Burgex's other reports mirror the reports for Plaintiffs, it will show why Burgex's method using of the income approach to value Plaintiffs' properties was incapable by definition of reaching an accurate or even plausible valuation of the properties and hence objectively unreasonable. As the Eleventh Circuit has held, the question of “highest and best use” under I.R.C. § 170(h) requires demonstrating a high probability that (absent the easement) a willing buyer would have paid the taxpayer's claimed value for the property and put it to the claimed use. See TOT Prop. Holdings, LLC v. Comm'r of Internal Revenue, 1 F.4th 1354, 1369 (11th Cir. 2021); see also 26 C.F.R. § 1.170A-14(h)(3)(ii) (fair market value analysis requires “an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed”). Burgex's reports, read especially in light of Mr. Summers's deposition testimony, will likely directly contradict this. Mr. Summers in fact does not opine that any seller would be likely to offer or any buyer likely to pay the amount at which he values properties. See Ex. 5 at 61:13-23, 77:10-79:5, 93:4-7. His method is premised on disavowing the issue of what is likely to happen to the property. This is what allows for his possibly having told taxpayers, across the 35 requested reports at issue here, of hundreds of millions of dollars in value that could not possibly track any existing market.

And this flaw would doom the Kenny appraisals that relied on Burgex's highest and best use analysis. Kenny's justification for valuing Plaintiffs' properties based on the income approach rather than looking to comparable sales, which is the typical and default approach in real estate appraisal, see Ex. 9 at 88:12-13 (“we always start with the sales comparison approach”), was that a property that has been drilled and declared allegedly economical to mine is incomparable or “unique.” Id. at 122:21-123:3. But Burgex's reports will likely show that there were dozens of identically drilled neighboring granitic properties. What's more, Kenny (like Burgex) ignored this available data. See id. at 59:5-65:19. But in an actual rational market, even if a single one of these dozens of properties had potential as an operational mine, an investor would have had numerous alternatives with which to drive down the price radically below what Burgex and Kenny posit. See also id. at 79:10-14 (Kenny did not consider “alternative tracts that the buyer might consider”).

Burgex has not presented the United States any valid argument against relevance. Its most recent objection letter asserts that Burgex's valuations “typically include[ ] potential property markets within a 45-60-mile radius of the subject property.” Ex. 8 at 2. Presumably Burgex means that some of the requested reports are outside the (self-selected) market radii of their reports in support of Plaintiffs' tax filings and therefore not relevant. But this indicates that Burgex should have been willing to produce any reports that do overlap, and that at the absolute least the nine reports on tracts in the same county as the Townley report are relevant. More broadly, Mr. Summers's deposition testimony raised serious questions about this entire element of Burgex's market analysis. He acknowledged that there could be competition he did not account for entirely outside his market radii and that the major urban markets he posited are all on the outer edge of his sales radii and are all closer to existing granite mines than they would be to the hypothetical Townley mines. See Ex. 5 at 100:4-101:16.

As to Burgex's tautological objection that other reports do not relate to the properties at issue in this case (Ex. 8 at 2), that just begs the question. As Mr. Summers revealed at deposition, it is Burgex's chosen methodology to prepare every report in tunnel-vision isolation, essentially as if it were the only analysis of granitic property in the region. Indeed, Burgex stuck to this practice even for the two properties it prepared for a single client at the same time (the Townleys), which Burgex's own sales radii showed would have been serving the exact same alleged “market.” See Ex. 5 at 94:4-97:3. Mr. Summers's explanation, again, was that investment decisions are none of Burgex's business. Indeed, this method would be completely irrational if Burgex's reports were being used toward investment decisions by entities actually interested in mining. It would mean, for instance, that Burgex could advise an investor to pay $57 million for vacant land in Wilkes County because of its purported highest and best use as an aggregate mine even though Burgex had recently blessed nine other new competitor mines in the very same county. But at least in that case market forces would quickly correct the error. Applied abusively and unreasonably to tax deductions there is no limit to how severely this practice could drain the public fisc. That is why the law requires a highest and best use analysis to demonstrate a high probability that the property would actually have been used that way and/or traded at the value claimed. The United States should be allowed to fully test whether Burgex's reports gave Plaintiffs reasonable cause to make their claims positing $130 million in mining-business value to the IRS.

II. Burgex's Burdensomeness and Confidentiality Objections Are Meritless.

As the party resisting discovery Burgex “bears the burden of making specific objections” showing that the disputed request is unduly burdensome and/or disproportionate to the needs of the case. Gamache, 595 F. Supp. 3d at 1356 (emphasis added) (citations and alteration omitted). Burgex has not and cannot offer a colorable argument that producing thirty-five documents — which Burgex recently told the United States would “take a few days for a few people to locate and pull” (Ex. 7) — is unduly burdensome. See also Marjam Supply Co. of Fla., LLC v. Pliteq, Inc., No. 15-CIV-24363, 2018 WL 1456614, at *7 (S.D. Fla. Mar. 23, 2018) (crediting significant “narrowing of the subpoena” with “strik[ing] a balance between the importance of the discovery in resolving the issues in the case, the likely benefit of the proposed discovery, the expense of the proposed discovery, and any burden” on the subpoenaed third party).

And Burgex has not offered the United States any explanation for why, between September 18 and September 21, the existence of the Protective Order governing this litigation went from satisfactory to meaningless. Burgex's letter states only that the Protective Order “does not cover the extent of Burgex's concerns” because the documents “are the subject of third-party non-disclosure and confidentiality agreements, and would thus require Burgex to disclose confidential proprietary, and private information that could result in a breach of those agreements.” Ex. 8 at 2. These are the sort of “generalities, conclusory statements, and unsupported contentions [that] do not suffice” to justify nondisclosure. Theriot v. Nw. Mut. Life Ins. Co., 382 F. Supp. 3d 1255, 1259 (M.D. Ala. 2019) (citation omitted); see also Estate Of Manship v. United States, 240 F.R.D. 700, 702 (N.D. Ga. 2006) (applying this principle to order discovery the United States requested as to previous work of valuation expert in tax refund case). Moreover “[i]t is well settled that there is no absolute privilege for . . . confidential information; the protection afforded is that if the information sought is shown to be relevant and necessary, proper safeguards will attend disclosure.” Wright & Miller, Fed. Prac. & Proc. Civ. § 2043 (3d ed.). Those safeguards already exist here. Indeed, alleging that compliance with a subpoena would cause a party to breach a confidentiality agreement is not sufficient grounds to avoid the subpoena even without a Protective Order. See Agsouth Genetics, LLC v. Georgia Farm Servs., LLC, No. 1:09-CV-186 (WLS), 2011 WL 13187172, at *3 (M.D. Ga. Feb. 11, 2011). But given the Protective Order that is in place, Burgex's argument is a nonstarter.

III. The Remaining Rule 26(b) Factors Support Granting This Motion.

In deciding discovery disputes, courts also weigh “the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, [and] the importance of the discovery in resolving the issues.” Fed. R. Civ. P. 26(b)(1). These factors also favor the United States.

The United States believes Plaintiffs are seeking an unjustifiable $43 million refund by exploiting Congress's attempt to incentivize tax-deductible property donations. It is prima facie insupportable that even one piece of vacant land in rural Georgia (like Plaintiffs' Wilkes County property) could go from being worth around $250,000 to being worth around $57 million simply because preliminary drilling revealed subsurface granite, which is ubiquitous in the region. See Ex. 10 at 119:5-120:7. Outside a situation like the Klondike gold rush this is simply not how market value works. Worse, it appears possible that Burgex applied a similar hyperinflation of value to 35 nearby properties over just five years, including nine properties in Wilkes County alone. Indeed, if any of this valuation methodology were even remotely plausible there would long ago have been a gold rush-type mining boom in exactly this area. But the only boom has been in tax deductions.⁵ This is the quintessential “action present[ing] . . . vitally important . . . public values” with “importance far beyond the monetary amount involved” (which is itself quite significant). Santa Rosa Dev., LLC v. Santa Rosa Cnty., No. 3:22-CV-660-MCR/MJF, 2022 WL 19333304, at *3 (N.D. Fla. Oct. 31, 2022) (citations omitted). Finally, Burgex is the sole party with access to the information sought, and it will hardly strain its resources to produce 35 documents.

CONCLUSION

Because the United States' requested discovery is minimally burdensome, narrowly tailored to produce evidence relevant to a key issue in this case, and because any confidentiality concerns will be adequately addressed by the Protective Order in place, the Court should grant this motion and compel Burgex to produce the 35 reports identified in the Appendices to its expert reports in this case.

Dated: October 16, 2023

Respectfully submitted,

David A. Hubbert
Deputy Assistant Attorney General

Cory A. Johnson
Senior Litigation Counsel
Lead Counsel
Conor P. Desmond
Jeremy A. Rill
Jikky Thankachan
Alex Schulman
Trial Attorneys
U.S. Department of Justice
Tax Division
P.O. Box 14198
Washington, D.C. 20044
202-307-3046 (Johnson)
202-616-1857 (Desmond)
202-307-0513 (Rill)
202-598-3758 (Thankachan)
202-532-3668 (Schulman)
Fax: 202-514-4963
Cory.A.Johnson@usdoj.gov
Conor.P.Desmond@usdoj.gov
Jeremy.A.Rill@usdoj.gov
Jikky.Thankachan@usdoj.gov
Alexander.Schulman@usdoj.gov

Of Counsel:
Peter D. Leary
United States Attorney
Middle District of Georgia

Attorneys for the United States