Opinion
12249-20
06-07-2022
LONG BRANCH INVESTMENTS, LLC, GREENCONE INVESTMENTS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Courtney D. Jones Judge.
This case concerns a $13.83 million deduction claimed under section 170(a)(1)for the charitable contribution of an easement in taxable year 2016 by Long Branch Investments, LLC (Long Branch). The Internal Revenue Service (IRS) disallowed the deduction in a Notice of Final Partnership Administrative Adjustment (FPAA) dated July 16, 2020. The IRS also determined that Long Branch was liable for an accuracy-related penalty under sections 6662 or 6662A. Long Branch's tax matters partner (TMP), Greencone Investments, LLC (Greencone), timely petitioned this Court for review of the adjustments pursuant to section 6226(a)(1).
Unless indicated otherwise, 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.
On November 22, 2021, respondent filed a Motion for Partial Summary Judgment (docket entry no. 11). He argues therein that the IRS's disallowance of the deduction was proper because the condition of a natural resource (at or near the time of conveyance), with regard to which the deed of easement contained express restrictions, was not established through baseline documentation as required under Treasury Regulation § 1.170A-14(g)(5)(i); consequently, he argues that the conservation purpose of the contribution was not "protected in perpetuity" under section 170(h)(5)(A).
On December 6, 2021, Greencone filed a Cross-Motion for Partial Summary Judgment (docket entry no. 15). It argues therein that Treasury Regulation § 1.170A-14(g)(5)(i) does not apply to the contribution at issue, and that even assuming arguendo that it did, Long Branch satisfied the regulation nonetheless. Greencone also challenged the substantive and procedural validity of Treasury Regulation § 1.170A-14(g)(5)(i) under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and the Administrative Procedure Act (APA), respectively.
With respect to its APA challenge, Greencone argues that the Treasury Department "failed to address significant comments . . . raised before the issuance of the final regulations."
We will deny both motions, as well as a third ancillary motion (for mootness).
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits contained therein. They are stated solely for purposes of resolving the motions and not as findings of fact in this case. See Sundstrand v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Long Branch is a Georgia limited liability company and is treated as a partnership for federal income tax purposes.
In July 2016, Long Branch acquired fee simple ownership of approximately 307.06 acres of land located in Morgan and Walton Counties, Georgia (the Property). Long Branch subsequently conveyed an easement over the Property to Oconee River Land Trust (Oconee) in December 2016. The deed of conservation easement (deed) was filed and recorded in the Superior Courts for Morgan and Walton Counties.
The deed recites the conservation purposes and generally prohibits commercial and residential development. The conservation purposes include the protection of the Property's water resources, and the deed generally prohibits activities on the Property that would be detrimental to water quality. The deed also reserves certain rights to Long Branch, including inter alia: (1) vegetation management, which includes planting and removing vegetation and prescribed burning; (2) forest management, which includes herbicide application and prescribed burning; (3) maintenance of existing roads and construction of new roads under certain conditions; (4) building and maintenance of a residential dwelling and associated structures, such as garages, sheds, pools, and gardens; and (5) construction, maintenance, and replacement of utilities, including power, water, and septic systems to support approved structures or uses on the Property. Long Branch must generally notify (and in some cases secure approval from) Oconee before exercising its reserved rights.
Article 5.J of the deed provides:
Except for the water withdrawal by the wells permitted in Article 4, there shall be (i) no pollution, sedimentation, alteration, depletion, or extraction of surface water or natural water courses, subsurface water, or any other water bodies on or within the Property; (ii) no manipulation, diversion, or other alteration of streams; and (iii) no activities conducted on the Property that would be detrimental to water quality or that could alter the natural water level or flow in or over the Property.
Long Branch timely filed a Form 1065, U.S. Return of Partnership Income, for its taxable year 2016. It claimed therein a $13.83 million deduction for the conveyance of the easement to Oconee under section 170(a)(1).
The IRS selected Long Branch's return for examination, which culminated in an FPAA dated July 16, 2020. The IRS disallowed the $13.83 million deduction in full because it determined that Long Branch "failed to establish that the . . . contribution satisfied all the requirements of I.R.C. § 170 and the corresponding Treasury Regulations for deducting a noncash charitable contribution." The IRS also determined that Long Branch was liable for an accuracy-related penalty under sections 6662 or 6662A. Long Branch's TMP, Greencone, timely petitioned this Court on October 14, 2020, for review of the adjustments pursuant to section 6226(a)(1).
Discussion I. Summary Judgment
Summary judgment serves to "expedite litigation and avoid unnecessary and expensive trials." Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant summary judgment when 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). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in a light most favorable to the nonmoving party. See Sundstrand Corp., 98 T.C. at 520. The nonmoving party may not rest upon mere allegations or denials in its pleadings and must set forth specific facts showing there is a genuine dispute for trial. See Rule 121(d); see also Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
II. Section 170
Section 170(a)(1) permits taxpayers to deduct charitable contributions made during the taxable year. However, a taxpayer may not claim a deduction under section 170(a)(1) for charitable contributions of less than his entire interest in property. See § 170(f)(3)(A). An exception to this prohibition exists for "qualified conservation contribution[s]." See id. para. (f)(3)(B)(iii).
Section 170(h)(1) provides that a "qualified conservation contribution" is a contribution: (1) consisting of a qualified real property interest, (2) to a qualified organization, and (3) exclusively for conservation purposes. A contribution is not treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. See id. para. (h)(5)(A).
The regulations promulgated under section 170 set forth rules for determining whether the protected in perpetuity requirement of paragraph (h)(5)(A) is satisfied. Treasury Regulation 1.170A-14(g)(5)(i) requires a taxpayer to provide documentation to the donee prior to effecting the conveyance that is "sufficient to establish the condition of the property at the time of the gift." This material is commonly referred to as baseline documentation, see BC Ranch II, L.P. v. Commissioner, 867 F.3d 547, 554-55 (5th Cir. 2017), vacating and remanding T.C. Memo. 2015-130, and the obligation to produce such material is triggered when the taxpayer "reserves certain rights the exercise of which may impair the conservation interests associated with the property," see Treas. Reg. § 1.170A-14(g)(5)(i). Moreover, "[i]f the terms of the donation contain restrictions with regard to a particular natural resource to be protected, such as water quality . . ., [the taxpayer must also establish] the condition of the resource at or near the time of the gift." See id.
The deed for the easement at issue contains express restrictions with regard to the Property's water resources and generally prohibits activities on the Property that would be detrimental to water quality. See supra note 3. Consequently, respondent argues that Long Branch was required to produce baseline documentation in accordance with Treasury Regulation § 1.170A-14(g)(5)(i) that established the condition of the Property's water resources at or near the time it conveyed the easement to Oconee, which he claims it did not do.
We conclude that this issue is not appropriate for summary adjudication. Although respondent appropriately points to the deed's express restrictions with respect to the Property's water resources, his argument rests on the assumption that the exercise of Long Branch's reserved rights "may impair the conservation interests associated with the property." See Treas. Reg. § 1.170A-14(g)(5)(i). Whether the exercise of any reserved right could impair the easement's conservation purposes is a disputed question of fact. Because resolution of this question-which the parties are free to otherwise resolve via stipulation-will determine whether the baseline documentation requirements apply to the contribution at issue, we also conclude that it is inappropriate to consider at this time Greencone's challenge to the substantive and procedural validity of Treasury Regulation § 1.170A-14(g)(5)(i) under Chevron and the APA, respectively.
Upon due consideration and for the reasons elaborated upon above, it is
ORDERED that respondent's Motion for Partial Summary Judgment (docket entry no. 11), filed on November 22, 2021, is denied. It is further
ORDERED that petitioner's Cross-Motion for Partial Summary Judgment (docket entry no. 15), filed on December 6, 2021, is denied. It is further
ORDERED that petitioner's Motion for Leave to File Reply to Response to Motion for Partial Summary Judgment (docket entry no. 28), filed on January 26, 2022, is denied as moot. It is further
ORDERED that, on or before July 6, 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.