Opinion
3411-21
08-04-2023
DEL MONTE LLC,DEV X INVESTMENT 2015, LLC,TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
PATRICK J. URDA JUDGE
In December 2016, Del Monte LLC (Del Monte) granted a façade easement over the Del Monte Apartments in Columbus, Ohio, to Heritage Ohio, Inc. (Heritage). [Doc. 1 at 7-8. Del Monte claimed a charitable contribution deduction for the easement donation on its 2016 tax return. [Id. at 7.] As relevant here, the IRS thereafter disallowed this deduction and determined multiple penalties. [Id., Ex. A.]
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. "Doc." references are to the docket record compiled by the Clerk of the Court, using .pdf pagination.
The Commissioner has filed a motion for partial summary judgment, which reiterates many of the same arguments set forth in his motion for partial summary judgment in Continental Downtown Properties v. Commissioner, Docket No. 6084-21. We denied the motion filed in Docket No. 6084-21 on May 31, 2023, and reach the same result here. We likewise deny partial summary judgment on the sole new argument advanced by the Commissioner.
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).
Del Monte is an Ohio limited liability company treated as a TEFRApartnership for federal income tax purposes, and Dev X Investment 2015 LLC is its tax matters partner. [Doc. 1 at 2.] Del Monte had its principal place of business in Ohio when it timely filed its petition [id.], 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 Del Monte. 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, Del Monte owned the Del Monte Apartments (the Building) in Columbus, Ohio, a three-story building built in 1902, which the U.S. National Park Service listed as a historic place in 2016. [Doc. 1 at 7.] In December 2016, Del Monte granted to Heritage a façade easement, which was recorded on December 27, 2016. [Doc. 16 at 41-63.]
The easement deed was substantively identical (in the parts pertinent to the pending motion) to the deed we considered in Continental Downtown Properties. We will accordingly provide an abbreviated overview of pertinent provisions, which are more fully laid out in our Order issued in that case. See Doc. 36, Continental Downtown Props., Docket No. 6084-21. Specifically, Del Monte granted an easement over (1) "Building Façade," which was defined as "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" and (2) its "Development Rights," which referred to "the right to develop the air space above and adjacent to the Building, encompassing all such air space of the Property." [Doc. 16 at 43.]
The deed prohibits changes to 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. 16 at 45.] Heritage's consent is required for changes to the façade, except in enumerated circumstances including: (1) rehabilitation consistent with specified Department of the Interior standards (Interior standards), which has received federal or state approval, (2) repair to façade wear-and-tear that conforms with Interior standards and all other applicable governmental rehabilitation standards, and (3) other acts permitted by statute, ordinance, and regulation that are not inconsistent with the historical character of the façade or the deed's conservation purposes. [Id. at 45-49.]
The deed also addresses the possibility that the easement might be extinguished in a future judicial proceeding, providing that each party is "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" 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." [Doc. 16 at 54-55.] The deed further specifies that "the percentage interest of [each] in the fair market value of the Property shall remain constant as of the Recording Date . . ., including [for purposes of] the allocation of proceeds pursuant to Sections 9.2 and 9.3." [Id. at 55.]
As in Continental Downtown Properties, the deed states that "[i]n 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." [Doc. 16 at 54.] In the event of a sale following judicial extinguishment of the easement, the deed provides that Del Monte 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." [Id. at 55.]
Del Monte filed a Form 1065, U.S. Return of Partnership Income, for its 2016 tax year. [Doc. 16 at 11.] On this return, it claimed a charitable contribution deduction of $18,802,000 for the façade easement. [Id. at 14.] It attached to this return an appraisal of the easement, which reflected a "before" value of $19,727,000, and an "after" value of $985,000. See I.R.C. § 170(h)(4)(B)(iii)(I). [Id. at 64-68.] The appraisal determined that $52,000 of the diminution in value was attributable to the restrictions on the building façade, leaving $18,750,000 attributable to restrictions on development. [Id. at 64-68.]
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. Legal Overview
Mindful of our previous ruling in Continental Downtown Properties, we will offer an abbreviated overview of the charitable contribution deduction framework as relevant here. Generally, a taxpayer may claim a deduction for a charitable contribution of a partial interest in property consisting of a "qualified real property interest . . . to a qualified organization . . . exclusively for conservation purposes," I.R.C. § 170(h)(1). A qualified real property interest includes both "the entire interest of the donor other than a qualified mineral interest" and "a restriction (granted in perpetuity) on the use which may be made of the real property." I.R.C. § 170(h)(2)(A), (C). A charitable contribution of a restriction over the exterior of a certified historic structure (such as the 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). Where an unexpected change renders the continued use of the property for conservation purposes impossible or impractical, "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. Treas. Reg. § 1.170A-14(g)(6)(i). Consistent with Treasury Regulation § 1.170A-14(g)(6)(ii), 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).
B. Analysis
As he did in Continental Downtown Properties, the Commissioner argues that Del Monte's donation fails to satisfy the "exclusively for conservation purposes" requirement because of the portions of the deed (1) describing the façade and the Del Monte's rights to rehabilitate and (2) providing for Heritage's share of extinguishment proceeds pursuant to Treasury Regulation § 1.170A-14(g)(6)(ii). We repeat our conclusions from our earlier Order in light of the identical language in the deeds and accordingly deny summary judgment. As to the façade-related arguments, the Commissioner has failed to establish either that the Building is not a certified historic structure or that the requirement that rehabilitation abide by, inter alia, Interior standards does not adequately safeguard against changes inconsistent with the façade's historic character. As to the proceeds argument, the Commissioner has identified an ambiguity in the deed with respect to the meaning of the "specific[]allocat[ion]" language, which requires a factual inquiry into the parties' intent and thus is inappropriate for summary judgment.
The Commissioner offers one argument that we did not consider in the related case, arguing that Del Monte's donation of development rights is not a donation of a qualified real property interest. [Doc. 15 at 26-29.] The Commissioner contends that the development rights were encompassed in the definition of the façade relating to "height" and thus were redundant. [Id. at 26-27.] The Commissioner further argues that, to the extent that the development rights were not redundant, the restrictions on them "represent the contribution of a property interest which is far less than the entirety of the property, as required by Section 170(h)(2)(A)." [Id. at 27.] And the Commissioner asserts that Del Monte failed to satisfy various requirements (i.e., a contemporaneous written acknowledgement and qualified appraisal) for the development rights to be considered under section 170(h)(2)(C). [Id. at 28.]
We will deny summary judgment on this point as well. If we resolve doubts in favor of the non-movant (as Rule 121 requires), we must conclude that the deed contains considerable ambiguity with respect to the development rights (particularly in light of the reference to "height" in the definition of the façade), which may necessitate a factual inquiry into the parties' intent. That inquiry will also inform our consideration of the scope and applicability of the appraisal and contemporaneous written acknowledgement obtained by Del Monte. These issues are thus not amenable to summary adjudication.
We accordingly 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 [Doc. 15], is denied without prejudice. It is further
ORDERED that the parties shall file, on or before September 5, 2023, a joint status report expressing their views as to the conduct of further proceedings in this case.