Opinion
23621-15 23647-15
04-24-2023
NATHANIEL A. CARTER & STELLA C. CARTER, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
James S. Halpern, Judge
Respondent determined deficiencies in the income tax of petitioners and accuracy-related penalties under section 6662 for petitioners' taxable years 2011 and 2012 and, in the case of the Carter petitioners, 2013. The deficiencies are attributable to respondent's disallowance of charitable contribution deductions claimed for the conveyance on December 27, 2011, by Dover Hall Plantation, LLC, (the partnership) to the North American Land Trust (NALT) of an easement on property known as Dover Hall. In Carter v. Commissioner, T.C. Memo. 2020-21, rev'd and remanded, 2022 WL 4232170 (11th Cir. 2022), we agreed with respondent that, because of the partnership's retained right to build a single-family dwelling on each of 11 "building areas," the easement on the Dover Hall property did not restrict the partnership's use of the property in perpetuity and thus was not a "qualified real property interest," within the meaning of section 170(h)(2)(A). In reaching that conclusion, we followed the analysis of Pine Mountain Preserve, LLLP v. Commissioner, 151 T.C. 247 (2018), aff'd in part, vacated in part, rev'd in part, 978 F.3d 1200 (11th Cir. 2020). Because we concluded that the easement did not meet section 170(h)(2)(A)'s perpetual restriction requirement, we saw no need to consider respondent's arguments that the easement failed other requirements of section 170(h) and its accompanying regulations. Carter v. Commissioner, T.C. Memo. 2020-21, at *10, n.6. Although we upheld respondent's disallowance of the charitable contribution deductions in issue, we did not uphold his determination of valuation misstatement penalties because he had not demonstrated compliance with the supervisory approval requirement of section 6751(b)(1).
All statutory references are to the Internal Revenue Code, Title 26, U.S.C., in effect for the years in issue, and all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for those years.
On appeal to the Eleventh Circuit, the parties agreed that that court's decision in Pine Mountain required the reversal of our decision that the easement was not a qualified real property interest within the meaning of section 170(h)(2)(C). Petitioners asked the appellate court to consider the remaining issues in the cases while the government asked that the cases be remanded to allow this Court to consider those issues. The Eleventh Circuit agreed with the government and remanded the cases to allow us to consider whether the partnership's contribution to NALT of a qualified real property interest met the other requirements for deduction under section 170(h) and its accompanying regulations.
Following its opinion in Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022), the Eleventh Circuit reversed our decision that respondent had not demonstrated timely supervisory approval of valuation misstatement penalties. Carter v. Commissioner, 2022 WL 4232170, at *2.
After we received the Eleventh Circuit's mandate, we directed the parties to "file reports stating their views as to the actions this Court should take on remand." In the report he submitted in response to that order, respondent identified two grounds for disallowing the partnership's deduction for its contribution of what we must accept as a qualified real property interest. First, respondent claims that petitioners did not demonstrate compliance with the documentation requirements provided in Treasury Regulation § 1.170A-14(g)(5)(i). And, second, respondent contends that "the easement's reserved rights allow inconsistent uses which impair the conservation interests that the easement seeks to protect." In their status report, petitioners advise us that the "remaining issues relating to the validity of the conservation easement . . . include[e] whether the conservation easement protects the conservation purposes in perpetuity under I.R.C. § 170(h)(5)(A) and whether there was adequate baseline documentation of the property at the time of the donation."
Although the parties disagree on how we should resolve the remaining issues, they agree that those issues have been "fully briefed." As explained below, however, in our consideration of the remaining issues, we have identified several points that could be further developed. With this order, we are therefore directing the parties to submit supplemental briefs to address the points raised below.
Treasury Regulation § 1.170A-14(g)(5)(i) applies to a donation of a qualified real property interest after February 13, 1986, if "the donor reserves rights the exercise of which may impair the conservation interests associated with the property." When those conditions are met, the donor is not entitled to a deduction unless the donor "make[s] available to the donee, prior to the time the donation is made, documentation sufficient to establish the condition of the property at the time of the gift." Treas. Reg. § 1.170A-14(g)(5)(i). The maps, photographs, or other documentation "must be accompanied by a statement signed by the donor and a representative of the donee clearly referencing the documentation and in substance saying 'This natural resources inventory is an accurate representation of [the protected property] at the time of the transfer.'" Treas. Reg. § 1.170A-14(g)(5)(i)(D).
In his status report, respondent argues that "petitioners failed to make available to the donee, before the grant of the easement, documentation sufficient to establish the condition of the property as required by Treas. Reg. § 1.170A-14(g)(5)(i)." Respondent refers to testimony by "petitioners' own witnesses" to the effect that "the baseline documentation was not assembled until months after donation of the easement, making compliance with the requirement impossible."
The testimony to which respondent refers is that of Stephen Lee Echols, a conservation biologist for NALT. Mr. Echols testified that the document titled "Baseline Documentation," included in the record as Exhibit 51-J, "wasn't assembled until after [a] review of the property" in Spring 2012. But Mr. Echols also testified that he visited the Dover Hall property several times in October 2011, took photos and notes, and documented the property's condition. On December 9, 2011, he presented his documentation to NALT's board before its approval of the contribution.
The subsequent supplementation of the documentation Mr. Echols prepared does not establish that the documentation available at the time of the gift did not adequately document the property's condition. How do we know, however, that the documentation that was available was sufficient? One basis for making that determination-indeed, perhaps the only reliable basis-is through the signed written statement required by Treasury Regulation § 1.170A-14(g)(5)(i)(D).
Exhibit 51-J includes an "Owner Acknowledgment," in which representatives of the partnership and NALT attest that the documentation to which it is attached accurately represents "the physical condition of the Conservation Area." As respondent observed in his opening brief, however, "there is no indication when [the Owner Acknowledgment] was signed by the donor and a representative of the donee." The Owner Acknowledgement identifies December 30, 2011, as the date on which the easement was recorded. But it provides no other dates. In particular, it does not identify the date on which it was signed.
Petitioners make no argument that the Owner Acknowledgment included in Exhibit 51-J was signed by representatives of the partnership and NALT on or before December 27, 2011, the date of the partnership's conveyance of the easement. Instead, petitioners claim that the easement deed satisfies the signed written statement requirement provided in Treasury Regulation § 1.170A-14(g)(5)(i)(D). The deed was signed on the partnership's behalf by petitioner Nathaniel Carter and on NALT's behalf by its president, Andrew L. Johnson. Section 6.18.2 of the deed provides a list of items included in the "Baseline Documentation," a term that the deed defines as "the reports, plans, photographs, documentation, and exhibits assembled by, and retained in the offices of, North American Land Trust." Section 6.18.3 provides that "[t]he Baseline Documentation is an accurate representation of the condition of the Conservation Area, subject to supplementation and amendment by mutual agreement of the Owner [the partnership] and the Holder [NALT]." Petitioners neglect to mention, however, that section 6.18 of the deed is captioned "Warranties and Representations of Owner." The statements listed in section 6.18 are those that the partnership, by signing the deed, "acknowledges, warrants and represents to Holder." Petitioners do not explain how a unilateral representation by the partnership can be construed as a statement by NALT.
A conclusion that petitioners have not demonstrated that the documentation available to NALT at the time of the partnership's gift was accompanied by a signed written statement of the type contemplated by Treasury Regulation § 1.170A-14(g)(5)(i)(D) would not necessarily end our inquiry. A taxpayer's failure to strictly comply with a rule that is directory rather than mandatory can be excused if the taxpayer substantially complied with the rule. See generally RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 15-16 (2017), aff'd sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019). A taxpayer's partial compliance with a directory rule is sufficient if the taxpayer's errors or omissions do not prevent the rule from achieving its intended purpose. See id. at 16. Neither party has addressed whether the signed written statement requirement is directory or mandatory and, if directory, whether petitioners' compliance with that requirement, if not strict, was sufficiently substantial as to fulfill the rule's purpose.
The partnership's entitlement to a deduction for its gift to NALT does not depend only on its strict or substantial compliance with the documentation requirements of Treasury Regulation § 1.170A-14(g)(5)(i). Petitioners must also demonstrate that the conservation purposes of the gift were protected in perpetuity. § 170(h)(5)(A).
In the easement deed, the partnership reserved rights to engage in limited development of the Dover Hall property with NALT's approval. As noted above, respondent argues that "the deed of easement's reserved rights allow inconsistent uses which impair the conservation interests that the easement seeks to protect." Although respondent did not call expert witnesses to testify in support of his position, respondent describes petitioners' expert witnesses as having "agreed that the exercise of the reserved rights would impair, injure, and diminish the conservation interests that the easement sought to protect."
The threshold question we face in considering respondent's section 170(h)(5)(A) argument is the standard of reference for evaluating the impacts of the partnership's exercise of the rights it retained under the easement deed. Respondent's argument seems to rest on the premise that the appropriate comparison is (1) the condition of the property after exercise of the retained rights, to (2) the condition the property would have been in, protected by the easement, if the partnership had not exercised those rights. Respondent, as we understand him, contends that, if the exercise of the retained rights would impair at all the extent to which the property provides a natural habitat or open space, the partnership's retention of those rights would violate section 170(h)(5)(A). Petitioners seem not to challenge the premise that the relevant inquiry considers the incremental effect of the exercise of the retained rights (taking the easement protections as a given). Instead, they argue that their "expert evidence . . . established that the retained rights would have a negligible impact on conservation purposes and would, in some cases, enhance them."
We are not convinced that the parties' arguments employ the correct standard of reference. Instead, the required comparison may be (1) the condition of the property after the exercise of the retained rights (but giving effect to the remaining protections of the easement) to (2) the condition the property would have been in if the partnership had not granted the easement to NALT. In other words, the relevant question may be not the incremental effects of the exercise of the retained rights but instead the incremental effect of the easement. The Court of Appeals for the Eleventh Circuit seems to have endorsed that analysis in Champions Retreat Golf Founders, LLC v. Commissioner, 959 F.3d 1033 (11th Cir. 2020). Because the Eleventh Circuit has appellate jurisdiction in these cases, we would, in the exercise of "better judicial administration," follow what we understand to be the analysis in Champions Retreat even if we disagreed with it. Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
In their post-remand status report, petitioners contend that "[t]he evidentiary record . . . established that the conservation easement protects the conservation purposes in perpetuity, consistent with the Eleventh Circuit's decision in Champions Retreat." Petitioners have yet to explain in any detail how the legal analysis presented by the appellate court in Champions Retreat bears on the cases before us.
In Champions Retreat, 959 F.3d at 1034, the Eleventh Circuit held that a taxpayer was entitled to a charitable deduction for its donation of "a conservation easement over property that included a private golf course and undeveloped land." The property covered by the easement was "home to abundant species of birds, some rare, to the regionally declining southern fox squirrel, and to a rare plant species, the denseflower knotweed." Id. at 1037. Although the knotweed may have been harmed by the runoff of chemicals used on the golf course, the court viewed as the relevant question "whether the easement improves the chance that the knotweed will be preserved." Id. at 1039. For two reasons, the court concluded that the easement would improve the knotweed's chance of preservation. First, the easement required the taxpayer "to follow the best environmental practices prevailing in the golf industry." Id. And second, the easement prevented "unrestrained development of the land where the knotweed [was] located," which would have posed "a greater risk than the golf course." Id.
Similarly, in determining whether the easement preserved open space for scenic enjoyment of the general public, the court looked to unrestrained development as the source of comparison. Although the golf course may not have provided scenic enjoyment, the "natural areas covered by th[e] easement" did. Id. at 1040. "When compared to a condominium building or even private homes," the court reasoned, "the easement property qualifie[d] as open space providing scenic enjoyment." Id. The property might well have provided more of a natural habitat and more scenic views without the golf course. But that, in the court's view, would not be the relevant comparison. The court took the golf course's existence as a given. The relevant question was whether, by reason of the easement preventing further development, the property provided more of a natural habitat and open space for scenic enjoyment than it would have in the easement's absence.
That the golf course predated the easement in Champions Retreat does not necessarily provide a basis for meaningfully distinguishing that case from the ones before us. The same analysis might well have applied if the taxpayer had granted the easement while reserving the right to build the golf course. We see no obvious reason why the deductibility of a taxpayer's gift of a qualified real property interest should turn on whether intended development that might affect the conservation purposes of the gift occurs before or after the granting of the easement.
In any event, the choice between standards of reference in assessing the impact of a donor's exercise of rights to development retained in a conservation easement may not affect the result in the cases before us. If respondent were correct that the relevant question is the incremental effect of the exercise of retained rights (taking the easement as a given), and if Eleventh Circuit precedent did not compel us to employ a contrary analysis, we would still be left with the question of how much of an adverse impact on conservation purposes a donor's exercise of retained rights has to have for the retention of those rights to violate section 170(h)(5)(A). Respondent seems to envision a hair trigger, under which any adverse effect precludes the donor's deduction. He seems to ground that view in the applicable regulations. We are not convinced, however, that the regulations require the standard respondent employs.
Respondent puts particular emphasis on Treasury Regulation § 1.170A-14(e)(2), which provides:
Except as provided in paragraph (e)(4) of this section, a deduction will not be allowed if the contribution would accomplish one of the enumerated conservation purposes but would permit destruction of other significant conservation interests. For example, the preservation of farmland pursuant to a State program for flood prevention and control would not qualify under paragraph (d)(4) of this section if under the terms of the contribution a significant naturally occurring ecosystem could be injured or destroyed by the use of pesticides in the operation of
the farm. However, this requirement is not intended to prohibit uses of the property, such as selective timber harvesting or selective farming if, under the circumstances, those uses do not impair significant conservation interests.
We assume the intended cross-reference is to Treasury Regulation § 1.170A-14(e)(3), which permits "[a] use that is destructive of conservation interests . . . if such use is necessary for the protection of the conservation interests that are the subject of the contribution." Subsection (e) of Treasury Regulation § 1.170A-14 does not include a paragraph (4).
Under Treasury Regulation § 1.170A-14(d)(4), the preservation of open space can be a conservation purpose.
Treasury Regulation § 1.170A-14(e)(2) leaves a wide gap between "not impair" and "destroy." The last sentence of that section could be read, by negative implication, to suggest that retention of a right to use property in a manner that would impair a significant conservation interest would be impermissible. But the regulation provides no operative rule to that effect. The example given indicates that a use that "injures" a conservation interest cannot be allowed. Even accepting that premise, however, the question would remain: How much impairment or injury is too much? Treasury Regulation § 1.170A-14(e)(2) does not clearly support respondent's position that a donor's retention of a right whose exercise would impair or injure a conservation interest to any degree, however minimal, violates section 170(h)(5)(A).
The easement deed prohibits NALT from approving the exercise of any retained right that would have a material adverse effect on the easement's conservation purposes. If NALT carries out its responsibilities, it would follow that any adverse effects of the limited development of the Dover Hall property allowed under the easement would be immaterial. Even if the relevant question were the incremental effects of the exercise of retained rights-rather than the incremental effect of the easement, taking into account the exercise of those rights-it is not clear that the prospect of immaterial adverse effects on the easement's conservation purposes should violate section 170(h)(5)(A).
In their submissions to date, the parties have not addressed to our satisfaction the matters raised in this order. Therefore, it is
ORDERED, that each party shall, on or before May 24, 2023, submit a supplemental brief addressing the points raised in this order.