Tax Court rejects $5.22M charitable deductions for sale of Rockland quarry

A New Jersey family that tried to develop a granite quarry in Rockland County — while facing challenges from regulators and rattlesnakes — has received another setback.

United States Tax Court ruled on July 11 that family owners of the Braen Commercial Holding Corp. mining company cannot deduct $5.22 million as a charitable contribution on their personal tax returns.

“None of the Braens is entitled to any charitable contribution deduction,” the court concluded, and they are liable for penalties.

Braen Holdings owned four quarries in New Jersey, as well as asphalt and concrete manufacturing plants. It was structured as an S Corporation owned by seven families, where company income passes to the shareholders and their tax returns.

In 1998 Braen Holdings paid $3.5 million for 505 acres of rugged land in Ramapo and the Village of Hillburn, near Harriman State Park and Interstate 87. The Braens believed the Rockland property had significant deposits of granite and other minerals.

Most of the property was zoned for industrial use but did not allow quarrying. Braen Holdings needed a conditional use permit from Ramapo and a mining permit from New York State.

The state Department of Environmental Conservation was concerned about the impact of mining on the aquifer and on dens of timber rattlesnakes and on other environmental issues. And for eight years, according to the tax court decision, the company made little headway with the state.

The Braens also encountered significant community opposition. In 2004, Ramapo enacted a new land use law that changed the zoning from industrial to low-density rural residential.

Braen Holdings sued, and Rockland Supreme Court ordered the parties to negotiate a deal.

Ultimately, in 2010, Ramapo agreed to buy 425 acres for $5.25 million and to change the zoning on the remaining 80 acres back to industrial use.

Braen Holdings’ 2010 tax return depicted the deal as a deductible charitable donation, claiming that the land and mineral rights were worth more than $17.4 million.

The company said it was entitled to a $12.2 million charitable deduction but was asking for only $5.2 million to avoid a dispute with the IRS and a potential penalty for misstating the valuation.

The Braen families then deducted their proportional shares of the $5.2 million on their individual tax returns.

The Internal Revenue Service disallowed the deductions. The families petitioned U.S. Tax Court to overturn the IRS decision, and a trial was held in 2021.

The Braens argued that they were entitled to deduct the difference between the fair market value of the property and the purchase price.

Tax court found that the transaction did not qualify as a bargain sale for charity because Braen Holdings had also received a direct economic benefit from the sale when the property was rezoned to industrial use.

“The zoning reversion was central to the overall deal,” the court said. “The record amply demonstrates that Holdings prized the planned industrial zoning designation for potential future development.”

The IRS had also imposed a 20% penalty for substantially misstating the value of the property.

The Braens’ valuation experts determined the highest and best use of the property was as a quarry, and including mineral rights, was worth $11 million to $12.19 million. As a residential property, it was worth $6.84 million.

The IRS expert valued the property at $4.85 million for residential development.

The court concluded that Braen Holdings had no reasonable expectation when it sold the property to Ramapo in 2010 that it could procure the mining and zoning permits it needed for quarrying.

Quarrying was improbable, the court said, leaving residential development as the highest and best use. The court concluded that the fair market value for a residential development was $5,227,060, or nearly the same as the price actually paid for the property.

The transaction fell well short of a bargain sale for charity, according to the court. And the Braens are liable for penalties because they substantially misstated the property’s value in claiming charitable deductions.