Opinion
6084-21
05-31-2023
CONTINENTAL DOWNTOWN PROPERTIES, LLC, HISTORIC PRESERVATION FUND 2016 LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Patrick J. Urda, Judge
In December 2016, Continental Downtown Properties, LLC (Continental) granted a façade easement over the Yuster Building in Columbus, Ohio to Heritage Ohio, Inc. (Heritage). [Doc. 1.] Continental claimed a charitable contribution deduction for the easement donation on its 2016 tax return. [Id.] As relevant here, the IRS thereafter disallowed this deduction and determined a panoply of penalties. [Id., Ex. A.]
The Commissioner has filed a motion for partial summary judgment, in which he argues that the easement's conservation purpose was not protected in perpetuity as required by section 170(h)(5)(A). [Doc. 12 at 5.] Material issues of fact remain, however, and we thus will deny the motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation inferences 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. All amounts are rounded to the nearest dollar.
Background
The following facts are derived from the parties' pleadings, motion papers, and the declarations and exhibits attached thereto. They are stated solely for purposes of deciding the motion for partial summary judgment 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).
Continental is an Ohio limited liability company treated as a TEFRApartnership for federal income tax purposes, and Historic Preservation Fund 2016 LLC is its tax matters partner. [Doc. 1 at 2.] Continental had its principal place of business in Ohio when it timely filed its petition [id. at 3], and an appeal of this case would accordingly lie to the U.S. Court of Appeals for the Sixth Circuit absent stipulation to the contrary, see I.R.C. § 7482(b)(1)(E).
Before its repeal, TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71) governed the tax treatment and audit procedures for many partnerships, including Continental. TEFRA was repealed by the Bipartisan Budget Act of 2015, Pub. L. 114-74, § 1101(a), 129 Stat. 584, 625, for partnership tax years after December 31, 2017.
In 2016, Continental owned the Yuster Building in Columbus, Ohio, an eight-story building built in 1924, which had been designed by the prominent Ohio architect Frank L. Packard. [Doc. 1 at 9.] In December 2016, Continental granted to Heritage a façade easement, which was recorded on December 27, 2016. [Doc. 13 at 46-71.]
See Evan Weese, 93-year-old downtown building nominated for National Register of Historic Places, Columbia Business First (Mar. 28, 2017), https://www.bizjournals.com/columbus/news/2017/03/28/93-year-old-downtown-building-nominatedfor.html (last visited Nov. 16, 2022).
The easement deed states that Continental grants an easement over "the Building Façade and the Development Rights." [Doc. 13 at 49.] The former term refers to "the Building's entire exterior, including but not limited to, the front, side and rear exterior walls, height, roof, roof lines, color, building materials and windows." [Id. at 48.] The latter term is defined as "the right to develop the air space above and adjacent to the Building, encompassing all such air space of the Property." [Id.] According to the deed, the easement's purpose is to ensure that the façade of the Yuster Building is "retained and maintained forever in its rehabilitated condition and state exclusively for conservation and preservation purposes . . . and to prevent any use or change" of the façade or the air space above or adjacent to the building in a way that is inconsistent with its historic character. [Id. at 49.]
The deed prohibits Continental from changing or altering the façade "in any manner that is inconsistent with the historical character thereof, that will substantially impair or interfere with the [c]onservation [f]eatures or that is otherwise contrary to any appliable local, state and federal standards for rehabilitation of a historic building, including the Secretary's standards." [Doc. 13 at 50.] The deed also requires Heritage's consent for any changes to the façade (or to the façade's "material or workmanship") subject to a few provisos. [Id. at 50-53.] Heritage's approval is not required, inter alia, (1) to rehabilitate the building or façade "in accordance with the [Secretary of the Interior's Standards for Rehabilitation and Guidelines of Rehabilitating Historic Buildings (Secretary's Standards)], provided that such rehabilitation is undertaken pursuant to a plan of rehabilitation that has received Part 2 approval from the National Park Service and/or the Ohio State Historic Preservation Office" [id. at 53]; (2) "to repair, maintain and replace doors, windows and other components of the [façade] as may become necessary due to normal wear and tear . . . provided that such repairs, maintenance and replacements conform with the Secretary's Standards and all applicable local, state and federal standards for rehabilitation of a historic building" [id. at 52]; and (3) for other acts and uses which are "permitted by governmental statute, ordinance, or regulation [and] . . . are not inconsistent with the historical character of the Building Façade or the purposes of this Agreement" [id.].
The deed also addresses the possibility that the easement might be extinguished in a future judicial proceeding. [Doc. 13 at 59-60.] As an initial matter, it provides that, in "accordance with Treas. Reg. § 1.170A-14(g)(6)(ii), and for purposes of allocating proceeds pursuant to Sections 9.2 and 9.3, [Continental and Heritage] stipulate that as of the Recording Date, [they] are each vested with real property interests in the Property and that such interests have a stipulated percentage interest in the fair market value of the Property." [Id. at 59.]
The deed specifies that "the percentage interest of [each] in the fair market value of the Property shall remain constant as of the Recording Date . . ., it being the express intention of [Continental and Heritage] that [Heritage] shall always retain its percentage interest for purposes of this Agreement, including the allocation of proceeds in Sections 9.2 and 9.3." [Doc. 13 at 59.] "In addition to all of the Development Rights, [Heritage's] percentage interest in the Building shall be determined by dividing the difference between: (a) the fair market value of the Building before the grant of the Easement, excluding the value of the Development Rights, and (b) the fair market value of the Building after the grant of the Easement, by (c) the fair market value of the Building before the grant of the Easement, excluding the value of the Development Rights." [Id.] The "fair market values of the Building to be used to calculate [Heritage's] percentage interest . . . shall be those values used to calculate the deduction for federal income tax purposes pursuant to Section 170(h) of the Code, as set forth in the qualified appraisal obtained by [Continental]." [Id.]
In the event of a sale following judicial extinguishment of the easement, the deed provides that Continental and Heritage "shall share in any proceeds . . . after satisfaction of any costs or expenses customarily associated therewith ("Net Proceeds"), and after distribution to [Heritage] of any proceeds specifically allocated to the Development Rights, in accordance with their respective percentage interests in the fair market value of the Property, as such interests are determined under the provisions of Section 9.1." [Doc. 13 at 60.] The deed further specifies that if "the amount of proceeds actually received by [Heritage] is insufficient to cover [its] percentage interest as determined under the provisions of Section 9.1, [Continental] hereby agrees to pay to [Heritage] an amount equal to such insufficiency and such amount . . . shall be deemed to be Net Proceeds." [Id.]
Continental timely filed a Form 1065, U.S. Return of Partnership Income, for its 2016 tax year. [Doc. 13 at 12.] On this return, it claimed a charitable contribution deduction of $20,718,000 for the façade easement. [Id. at 15; Doc. 20 at 7.] It attached to this return an appraisal of the easement, which reflected a "before" value of $27,862,000, and an "after" value of $7,204,000. See I.R.C. § 170(h)(4)(B)(iii)(I). [Doc. 20 at 9; Doc. 13 at 71-75.] The appraisal determined that $379,000 of the diminution in value was attributable to the restrictions on the building façade, and $20,279,000 was attributable to restrictions on development. [Doc. 13 at 71-75.]
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant summary judgment or partial summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. See Rule 121(a); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520
II. Charitable Contribution Deduction
A. Governing Framework
Section 170(a)(1) allows a deduction for a charitable contribution made in the taxable year. This deduction is disallowed with respect to a charitable contribution of a partial interest in property, subject to certain specified exceptions. See I.R.C. § 170(f)(3)(A). One such exception is for a "qualified conservation contribution," I.R.C. § 170(f)(3)(B)(iii), which is defined as a contribution of a "qualified real property interest . . . to a qualified organization . . . exclusively for conservation purposes," I.R.C. § 170(h)(1).
The Code defines "conservation purpose" to include "the preservation of . . . a certified historic structure." I.R.C. § 170(h)(4)(A)(iv). A certified historic structure, in turn, refers to "any building . . . which is listed in the National Register [or] . . . is located in a registered historic district . . . and is certified by the Secretary of the Interior to the Secretary as being of historic significance to the district." I.R.C. § 170(h)(4)(C). A charitable contribution of a restriction over the exterior of a certified historic structure (such as a façade easement in this case) "shall not be considered exclusively for conservation purposes unless" the restriction (i) preserves the entire exterior of the building and (ii) prohibits any change in the exterior of the building which is inconsistent with the historical character of such exterior. I.R.C. § 170(h)(4)(B)
The Code further establishes that a "contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity." I.R.C. § 170(h)(5)(A). Treasury Regulations provide guidance for the satisfaction of this requirement; of particular importance are the rules governing the mandatory division of proceeds in the event the property is sold following extinguishment of the easement.
Treasury Regulation § 1.170A-14(g)(6)(i) recognizes that "a subsequent unexpected change in the conditions surrounding the property . . . can make impossible or impractical the continued use of the property for conservation purposes." 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 grantee, 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. Id. 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." I.R.C. § 170(h)(5)(A).
Treasury Regulation § 1.170A-14(g)(6)(ii) sets forth a formula for determining the proportionate share the grantee must receive upon any extinguishment of the easement:
[F]or a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time. . . . For purposes of this paragraph . . ., that proportionate value of the donee's property rights shall remain constant. Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds . . . .
In other words, the grantee's proportionate share is to be determined by a fraction, the numerator of which is "the fair market value of the conservation easement on the date of the gift," and the denominator of which is "the fair market value of the property as a whole on the date of the gift." Carroll v. Commissioner, 146 T.C. 196, 216 (2016). If a grantee is not absolutely entitled to a proportionate share of extinguishment proceeds, then the conservation purpose of the contribution is not protected in perpetuity. Id. at 212.
B. Analysis
The Commissioner argues that Continental's donation fails to satisfy the "exclusively for conservation purposes" requirement in two ways. He first objects to the easement deed's description of the façade and Continental's right to rehabilitate that façade without Heritage's approval. [Doc. 12 at 19-23.] The Commissioner further contends that the deed fails to ensure that Heritage will receive a proportionate share upon extinguishment pursuant to Treasury Regulation § 1.170A-14(g)(6)(ii). [Id. at 23-30.] Neither argument supports summary judgment.
We begin with the deed's provisions relating to the façade and Continental's right to make changes without Heritage's consent. The Commissioner asserts that the deed violates the perpetuity requirement because it "donates a façade in an as yet to be rehabilitated condition" [Doc. 12 at 22-23], based on the deed's statement that the façade "will be retained and maintained forever in its rehabilitated condition and state" [Doc. 13 at 49]. Even assuming arguendo that the Commissioner's interpretation is correct, the Code does not require a building to be in its original state to qualify as a "certified historic structure" pursuant to section 170(h)(4)(A)(iv).
We likewise are unpersuaded by the Commissioner's challenge to the deed's provision allowing Continental "the right to rehabilitate after the grant of easement without further approval." [Doc. 12 at 23.] Section 170(h)(4)(B)(i) provides that a façade easement "shall not be considered exclusively for conservation purposes unless," inter alia, it prohibits any change in the exterior of the building which is inconsistent with the historical character of such exterior. The Commissioner objects to the deed's reservation of Continental's right to rehabilitate the façade "in accordance with the Secretary's Standards, provided that such rehabilitation is undertaken pursuant to a plan of rehabilitation that has received Part 2 approval from the National Park Service and/or the Ohio State Preservation Office." [Doc. 12 at 22.]
Summary judgment is plainly not warranted. In the language that the Commissioner spotlights, the deed expressly premises rehabilitation on compliance with the Secretary of the Interior's Standards for Rehabilitation and Guidelines of Rehabilitating Historic Buildings. The Commissioner will have the opportunity at trial to explain why requiring compliance with federal standards governing historic preservation is not a sufficient bar to changes inconsistent with the façade's historic character.
The Commissioner fares little better with respect to judicial extinguishment. He objects that the deed's "alternative method fails to provide that Heritage's share of the extinguishment proceeds will be at least equal to the minimum amount determined under . . . Treas. Reg. § 1.170A-14(g)(6)(ii)" because it "fails to explain how to determine the amount of extinguishment proceeds which are 'specifically allocated to the Development Rights.'" [Doc. 12 at 29.]
The Commissioner has identified ambiguity in the deed. Although the deed states that the parties "are each vested with real property interests in the Property [which] have a stipulated percentage interest in the fair market value of the Property" and notes that Heritage's percentage interest includes "all of the Development Rights," the deed is silent as to how precisely proceeds are to be "specifically allocated to the Development Rights." [Doc. 13 at 59-60.] If the "specific allocat[ion]" language refers to a proportionate share of proceeds determined based on the value that the Development Rights bears to the fair market value of the building as a whole, the deed's method appears to pass muster. [Id. at 60.] If this language bears a different meaning, for example, by referring to a fixed amount allocated to Development Rights as part of a sale, it might not.
Under Ohio law, if a "contract is ambiguous, ascertaining the parties' intent constitutes a question of fact." Tera, LLC v. Rice Drilling D, LLC, 205 N.E.3d 1168, 1183 (Ohio Ct. App. 2023). "[I]f a term cannot be determined from the four corners of a contract, factual determination of intent or reasonableness may be necessary to supply the missing term." Savedoff v. Access Group, Inc., 524 F.3d 754, 763 (6th Cir. 2008) (quoting Inland Refuse Transfer Co. v. Browning-Ferries Indus. of Ohio, Inc., 474 N.E.2d 271, 272-73 (1984)); see also Corder v. Ohio Edison Co., 205 N.E.3d 616, 623 (Ohio Ct. App. 2022). This open factual question precludes summary adjudication.
For these reasons, we will deny the Commissioner's motion for partial summary judgment at this time, without prejudice to his resubmission of these arguments should later developments support that action.
Accordingly, it is
ORDERED that the Commissioner's motion for partial summary judgment, filed February 24, 2022, is denied without prejudice. It is further
ORDERED that the parties shall file, on or before July 17, 2023, a joint status report expressing their views as to the conduct of further proceedings in this case.