Opinion
12401-20
02-23-2022
CUB CREEK PRESERVE, LLC, SOUTHERN LAND PROTECTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Courtney D. Jones Judge
Background
This case involves a charitable contribution deduction claimed by Cub Creek Preserve, LLC (Cub Creek) for a donation of a conservation easement. The Internal Revenue Service (IRS or respondent) issued a Notice of Final Partnership Administrative Adjustment (FPAA) for the 2016 tax year to petitioner Southern Land Protectors, LLC, the tax matters partner of Cub Creek, wherein respondent disallowed the aforementioned claimed deduction and asserted penalties.
I. Motions for Partial Summary Judgment
A. Respondent's Motion
On November 10, 2021, respondent filed a Motion for Partial Summary Judgment (docket entry no. 8). The motion asks the Court to sustain the disallowance on the ground that the deed of conservation easement, on which the deduction is based (the deed), fails to protect the conservation purposes in perpetuity as required by section 170(h)(5)(A). Respondent contends that the deed fails to satisfy the requirements of section 1.170A-14(g)(6)(ii) of the Treasury Regulations because, in the event of judicial extinguishment of the easement, the deed grants proceeds to the donee after the satisfaction of prior claims (the prior claims provision).
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulatory 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.
Near the end of its motion, respondent states that upon its granting, the applicability and amounts of the penalties asserted in the FPAA will still remain at issue.
B. Petitioner's Objection and Motion, and Respondent's Objection and Response
On December 14, 2021, petitioner filed an Objection to respondent's motion and its own Motion for Partial Summary Judgment together with a Memorandum of Law in Support of Motion for Partial Summary Judgment (docket entry nos. 11-13). With respect to the summary judgment standard, petitioner acknowledges that its motion "relates solely to the [d]eed's compliance with the Extinguishment Regulation" and states that petitioner does not concede any other issue raised by respondent.
On the merits, petitioner avers that the deed complies with section 170(h)(5)(A) and Treas. Reg. § 1.170A-14(g)(6). Petitioner also argues that the regulation is invalid because respondent failed to comply with the Administrative Procedure Act (APA), in its promulgation. See 5 U.S.C. § 706. Petitioner's memorandum in support of its motion notes that (at the time of filing) the validity of the regulation was pending before the U.S. Courts of Appeals for the Sixth and Eleventh Circuits, respectively. Respondent filed an Objection and Response to petitioner's motion on February 4, 2022 (docket entry no. 22).
II. Jurisprudential Developments and Cub Creek's Principal Place of Business
We upheld the validity of Treas. Reg. § 1.170A-14(g)(6) in a recent Court-reviewed Opinion, see Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020); however, on December 29, 2021, the Eleventh Circuit held that "the Commissioner's interpretation of §1.170A-14(g)(6)(ii), to disallow subtraction of the value of post-donation improvements … is arbitrary and capricious and therefore invalid under the APA's procedural requirements." Hewitt v. Commissioner, No. 20-13700, 2021 U.S. App. Lexis 38555, at *40-41 (11th Cir. Dec. 29, 2021), rev'g and remanding T.C. Memo. 2020-89.
In its petition, petitioner claims that Cub Creek maintains its principal place of business in Georgia. Though respondent admits in its answer only that Cub Creek has used the listed address [in Georgia] and states in its Objection and Response that it does not concede or stipulate to Cub Creek's principal place of business, respondent nevertheless acknowledges in the Objection and Response that this case is likely appealable to the Eleventh Circuit.
Discussion
I. Venue in the Event of Appeal
While respondent does not concede or stipulate that Cub Creek maintains its principal place of business in Georgia, respondent acknowledges that venue for an appeal of this case would probably lie in the Eleventh Circuit. At this stage of the proceedings, we conclude the same in the absence of written stipulation to the contrary. See sec. 7482(b)(1)(E).
II. 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 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. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
III. Judicial Extinguishment
The regulations set forth detailed rules for determining whether the "protected in perpetuity" requirement is met. Relevant 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 state 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 Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 137-140 (2019), we held that a dead of easement failed to satisfy these regulatory requirements because the donee's share of post-extinguishment sale proceeds was improperly reduced in two ways - by carve-outs for "donor improvements" and for "prior claims" against the donor or its successors. In this case, respondent urges us to follow Coal Property Holdings to find that the prior claims provision improperly reduces the donee's share of the sale proceeds.
As we noted above, the Eleventh Circuit recently held that "the Commissioner's interpretation of §1.170A-14(g)(6)(ii), to disallow subtraction of the value of post-donation improvements … is arbitrary and capricious and therefore invalid under the APA's procedural requirements." Hewitt v. Commissioner, 2021 U.S. App. LEXIS 38555, at *40-41. As we further noted above, appeal of this case probably lies in the Eleventh Circuit. Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). Though the Eleventh Circuit's jurisprudence is not necessarily binding upon this Court, see Lardas v. Commissioner, 99 T.C. 490 (1992); Robinson v. Commissioner, 119 T.C. 44, 51-52, n. 8, we carefully consider it.
IV. Analysis
Though the motions before us address the prior claims provision, not a donor improvements provision (as the deed does not appear to contain a donor improvements provision), respondent's position is based primarily on his assertion that the prior claims provision fails to satisfy the requirements of Treas. Reg. §1.170A-14(g)(6)(ii). It is not entirely clear at this time whether the Eleventh Circuit invalidated Treas. Reg. §1.170A-14(g)(6)(ii) in its entirety, or whether the court invalidated that regulation only insofar as it is interpreted to disallow deductions based on carve-outs for improvements. We also note that the validity of Treas. Reg. §1.170A-14(g)(6)(ii) remains pending before the Sixth Circuit. See Oakbrook Land Holdings, LLC v. Commissioner, No. 20-2117 (6th Cir. Oct. 16, 2020). Under these circumstances, we conclude that summary judgment based upon an application of Treas. Reg. §1.170A-14(g)(6)(ii) to the prior claims provision would be inappropriate.
We further note that each party moved for partial summary judgment. Indeed, petitioner's motion acknowledges that it "relates solely to the [d]eed's compliance with the Extinguishment Regulation" and states that petitioner does not concede any other issue raised by respondent. Similarly, respondent's motion acknowledges that a grant of its motion will not resolve the case. After considering matters of judicial economy, we conclude that even if we were to grant the motion of either party, significant issues for trial would remain. Therefore, it is unclear that the purposes of summary judgment would be accomplished. See e.g., FPL Grp., Inc. & Subs., 116 T.C. at 74.
We will accordingly deny each party's motion for partial summary judgment.
In consideration of the foregoing, it is
ORDERED that respondent's motion for partial summary judgment, filed November 10, 2021 (docket entry no. 8), is denied. It is further
ORDERED that petitioner's motion for partial summary judgment, filed December 14, 2021 (docket entry no. 11), is denied. It is further
ORDERED that, on or before March 25, 2022, the parties shall file a status report (jointly if possible, otherwise separately) identifying the other issues in the case and the prospects for settling them or submitting them fully stipulated.