Opinion
11780-20
05-11-2022
LODEBAR PROPERTY, LLC, LODEBAR MANAGER, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
This is a syndicated conservation easement case. The Internal Revenue Service (IRS or respondent) disallowed a charitable contribution deduction claimed for the easement by Lodebar Property, LLC (Lodebar), and determined penalties under sections 6662 and 6662A. Petitioner timely petitioned this Court for readjustment of the partnership items.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
On June 23, 2021, respondent filed a motion for partial summary judgment contending that the deduction was properly disallowed because the deed of easement was invalid. Alternatively, respondent contends that the deed does not comply with the "judicial extinguishment" regulation. See Treas. Reg. § 1.170A-14(g)(6)(ii). On December 16, 2021, this case was assigned to the undersigned, and petitioner at our direction timely responded to the motion. Finding that there exist genuine disputes of material fact, we will deny the motion.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding respondent's motion and not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Lodebar is a Georgia limited liability company organized in June 2016. It is treated as a partnership for Federal income tax purposes, and petitioner Lodebar Manager, LLC, is its tax matters partner. Lodebar had its principal place of business in Georgia when the petition was filed. Absent stipulation to the contrary, appeal of this case would lie to the U.S. Court of Appeals for the Eleventh Circuit. See § 7482(b)(1)(E).
In 2016 Lodebar acquired roughly 410 acres of land (Property) in Liberty County, Georgia. In November 2016, after Lodebar's controlling member solicited investors, Lodebar Investors, LLC, purchased a 97% interest in Lodebar for $2,100,000. On December 27, 2016, Lodebar granted to the Southern Conservation Trust (SCT or grantee) a conservation easement over 390.8 acres of the Property.
The deed of easement was recorded on December 29, 2016. The deed states that it covers "approximately 390.8 acres" and that it is "between Lodebar . . . in favor of [SCT]." It states that all notices and communications shall be directed to SCT and Lodebar. Charles A. Kiene, a member/manager of Lodebar, initialed every page of the deed and signed the last page as "Member/Manager." But the entity name above his signature is shown as "Ripley Properties, LLC" rather "Lodebar Property, LLC." Attached to the deed was Exhibit A, captioned "Legal Description of Property." Exhibit A stated that the property subject to the easement comprised 2, 593 acres, whereas it actually comprised 390.8 acres, as stated in the deed.
Lodebar filed Form 1065, U.S. Return of Partnership Income, for its 2016 tax year. On that return it valued the Property (before placement of the easement) at $16,000,000, and it claimed a charitable contribution deduction of $14,486,927 for the donation of the easement. In support of this supposed value Lodebar relied on an appraisal prepared by Martin Van Sant and Thomas Wingard.
In December 2017, after Lodebar's 2016 return was filed, the contracting parties became aware of the two discrepancies mentioned above. On December 8, 2017, Mr. Kiene signed a "Corrective Deed of Conservation Easement" in his capacity as "President" or "Manager" of Lodebar. The amended deed included a corrected version of Exhibit A stating that "the land thus described contains 390.8 acres, more or less." The amended deed was recorded in December 2017 but provided that it was to be effective as of December 27, 2016.
The deed (as amended) recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 18 provides that "[t]he amount of the proceeds to which Grantee shall be entitled[] shall be determined in accordance with the Proceeds paragraph." Paragraph 20, captioned "Proceeds," specifies that the grantee's share of any future proceeds would be determined "by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement."
The IRS selected Lodebar's return for examination. On June 22, 2020, the IRS issued petitioner a timely notice of final partnership administrative adjustment disallowing the charitable contribution deduction on the ground that Lodebar failed to establish that it "made a contribution or gift of a conservation easement during the [2016] tax year. Alternatively, the IRS determined that Lodebar had "failed to establish that [it] satisfied all the requirements of I.R.C. Section 170." The IRS determined a 40% "gross valuation misstatement" penalty under section 6662(h) and (in the alternative) a 20% accuracy-related penalty under other Code provisions.
Discussion
A. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant partial summary judgment regarding an issue as to which there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant partial summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party (here petitioner). Sundstrand Corp., 98 T.C. at 520.
B. Analysis
1. Validity of the Deed
Respondent contends that Lodebar's deduction was properly disallowed because the deed "was not effective to grant a conservation easement." That is so, respondent says, because the original deed was signed by Ripley Properties, LLC, rather than by Lodebar, and because Exhibit A to the deed misdescribed the Property's acreage. Petitioner argues that under Georgia law "scrivener's errors do not invalidate a deed" and that the deed clearly specifies who made the donation and the property that was being donated.
"State law determines the nature of property rights contributed, whereas Federal law determines the appropriate tax treatment of those rights." Harbor Lofts Assocs. v. Commissioner, 151 T.C. 17, 24 (2018). Under Georgia law a deed may be recorded only if it is "in writing," "signed by the maker," and "attested by an officer . . ., [and] one other witness." Ga. Code Ann. § 44-5-30. Respondent does not dispute that the easement deed was in writing and attested by an officer and a witness. Rather, respondent contends that the deed was not "signed by the maker."
We are not persuaded. Although the entity name shown above Mr. Kiene's signature was inadvertently listed as Ripley Properties, LLC, the deed's title page specifies that the conveyance is "by and between LODEBAR PROPERTY, LLC, . . . in favor of SOUTHERN CONSERVATION TRUST." The deed defines Lodebar as the "Grantor" and consistently refers to Lodebar as the "Grantor." Respondent does not contend that Mr. Kiene lacked authority to sign the deed on behalf of the "Grantor." Indeed, Mr. Kiene signed the amended deed on Lodebar's behalf in December 2017.
Viewing the facts and the inferences drawn from the facts in the light most favorable to petitioner on this point, we conclude that summary judgment must be denied. The question whether the deed was "signed by the maker" presents factual questions that are ill-suited to summary adjudication. We do not believe that petitioner should be precluded from showing that Mr. Kiene signed the original deed on Lodebar's behalf.
Respondent next contends that the charitable contribution was ineffective because Exhibit A to the deed misdescribed the acreage over which the easement was granted. Exhibit A, captioned "Legal Description of Property," stated that the property subject to the easement comprised 2, 593 acres. Because Lodebar intended to donate an easement over 390.8 acres, respondent urges that Exhibit A renders the deed invalid.
Summary judgment is inappropriate on this point as well. Section 44-5-34 of the Georgia Annotated Code provides that where "two clauses in a deed are utterly inconsistent, the former shall prevail; but the intention of the parties should, if possible, be ascertained from the whole instrument and carried into effect." The deed's title page specifies that the easement covers "approximately 390.8 acres." Exhibit B (the Baseline Documentation Report) refers to the easement as covering "+/- 390.8 acres." Those 390.8 acres were carved from the 410-acre tract that Lodebar had acquired earlier in 2016. Since Lodebar owned only 410 acres, it could not possibly have granted an easement over 2, 593 acres. Petitioner may be able to demonstrate at trial, on the basis of the contracting parties' intent, that Exhibit A reflected an immaterial scrivener's error.
2. Judicial Extinguishment
The Internal Revenue Code generally restricts a taxpayer's charitable contribution deduction for the donation of "an interest in property which consists of less than the taxpayer's entire interest in such property." § 170(f)(3)(A). But there is an exception for a "qualified conservation contribution." § 170(f)(3)(B)(iii), (h)(1). For the donation of an easement to be a "qualified conservation contribution," the conservation purpose must be "protected in perpetuity." § 170(h)(5)(A); see TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1362 (11th Cir. 2021); PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 201 (5th Cir. 2018).
The regulations set forth detailed rules for determining whether the "protected in perpetuity" requirement is met. Of importance here are the rules governing the mandatory division of proceeds in the event the Property is sold following a judicial extinguishment of the easement. See Treas. Reg. § 1.170A-14(g)(6). The regulations recognize that "a subsequent unexpected change in the conditions surrounding the [donated] property . . . can make impossible or impractical the continued use of the property for conservation purposes." Id. subdiv. (i). Despite that possibility, "the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding" and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the "perpetuity" requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee exclusively for conservation purposes.
In Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 137-40 (2019), we held that a deed of easement failed to satisfy these regulatory requirements where the donee's share of post-extinguishment sale proceeds was improperly reduced by carve-outs for "donor improvements." Respondent contends that the deed in this case shares these same defects.
Petitioner contends that the motion should be denied in light of the Eleventh Circuit's opinion in Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), rev'g and remanding T.C. Memo. 2020-89. In Hewitt the Eleventh Circuit held that "the Commissioner's interpretation of § 1.170A-14(g)(6)(ii), to disallow the subtraction of the value of post-donation improvements . . ., is arbitrary and capricious and therefore invalid under the APA's procedural requirements." Id. at 1353. We are obligated to follow the law as established by the Eleventh Circuit on this question. See Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). We will accordingly deny respondent's motion for partial summary judgment on this point, without prejudice to his resubmission of the arguments set forth therein should subsequent developments warrant that course of action.
Upon due consideration, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed June 23, 2021, is denied. It is further
ORDERED that the parties shall file, on or before June 8, 2022, a status report (jointly if possible, otherwise separately) expressing their views as to the conduct of further proceedings in this case.