Opinion
11982-16
08-31-2022
LONG LEAF PROPERTY HOLDINGS, LLC, LONG LEAF MANAGER, LLC, TAX MATTERS PARTNER, Petitioner, JAMES SHAW & TYSON RHAME, Intervenors v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
This case involves a charitable contribution deduction claimed by Long Leaf Property Holdings, LLC (Long Leaf), for the donation of conservation easements. The Internal Revenue Service (IRS or respondent) disallowed the deduction and determined penalties. Petitioner timely petitioned this Court for readjustment of the partnership items. By order served July 23, 2021, we permitted James Shaw and Tyson Rhame, partners in Long Leaf other than the tax matters partner, to participate in this case as intervenors.
On November 22, 2021, respondent filed a Motion for Partial Summary Judgment directed to the question whether the conservation purpose underlying the easements is protected in perpetuity as required by section 170(h)(5)(A). On January 28, 2022, intervenors opposed that Motion and filed their own Cross-Motion for Partial Summary Judgment addressing the same question. We will deny respondent's Motion at this time and hold intervenors' Motion in abeyance.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C, in effect at all relevant times, all regulation 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.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding the parties' Motions 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).
Long Leaf was formed as a Georgia limited liability company on November 30, 2011. At all relevant times, it was treated as a partnership for Federal income tax purposes. Long Leaf is subject to the TEFRA unified audit and litigation procedures,and petitioner Long Leaf Manager, LLC, is its tax matters partner. Long Leaf had its principal place of business in Georgia when the Petition was filed. Absent stipulation to the contrary, appeal of this case would lie to the U.S. Court of Appeals for the Eleventh Circuit. See § 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. at 648-71) governed the tax treatment and audit procedures for many partnerships.
On December 28, 2011, Long Leaf and the Southeast Regional Land Conservancy, Inc. (SERLC) executed three deeds of conservation easement covering land in Aiken County, South Carolina (Properties). Each deed recognizes the possibility that the easement might be extinguished at some future date and the Property sold. Section VI(B)(2) of each easement deed provides as follows:
This Conservation Easement gives rise to a real property right and interest immediately vested in SERLC. For purposes of this Conservation Easement, the fair market value of SERLC's right and interest (which value shall remain constant) shall be equal to the difference between (a) the fair market value of the Conservation Area as if not burdened by this Conservation Easement and (b) the fair market value of the Conservation Area burdened by this Conservation Easement, as such values are determined as of the date of this Conservation Easement. If a change in conditions makes impossible or impractical any continued protection of the Conservation Area for conservation purposes, the restrictions contained herein may only be extinguished by judicial proceeding. Upon such proceeding, SERLC, upon a subsequent sale, exchange or involuntary conversion of the Conservation Area, shall be entitled to a portion of the proceeds at least equal to the fair market value of the Conservation Easement as provided above. SERLC shall use its share of the proceeds in a manner consistent with the conservation purposes set forth in the Recitals herein.
The next section of each deed, Section VI(B)(3), describes what should happen if part of the Property is taken through eminent domain:
Whenever all or part of the Conservation Area is taken in exercise of eminent domain by public, corporate, or other authority so as to abrogate the restrictions imposed by this Conservation Easement, [Long Leaf] and SERLC shall join in appropriate actions at the time of such
taking to recover the full value of the taking and all incidental or direct damages resulting from the taking, which proceeds shall be divided in accordance with the proportionate value of SERLC's and [Long Leaf's] interests as specified above. All expenses, including attorneys' fees, incurred by [Long Leaf] and SERLC in such action shall be paid out of the recovered proceeds to the extent not paid by the condemning authority.
Long Leaf filed a Form 1065, U.S. Return of Partnership Income, for its short tax year beginning November 30, 2011, and ending December 31, 2011. On that return it claimed a charitable contribution deduction of $35 million for its donation of the easements.
The IRS selected Long Leaf's return for examination. Following the examination, on March 23, 2016, the IRS mailed to Long Leaf and its tax matters partner a Notice of Final Partnership Administrative Adjustment disallowing the charitable contribution deduction and determining penalties for gross valuation misstatement, substantial valuation misstatement, and negligence or disregard of rules or regulations. See § 6662(a), (b)(1), (b)(3), (c), (e), and (h). Petitioner timely petitioned this Court for readjustment of the partnership items.
Discussion
A. Summary Judgment Standard
The parties have filed Cross-Motions for Partial Summary Judgment on the "protected in perpetuity" issue. 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 partial 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. Rule 121 (b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002).
B. Judicial Extinguishment
The Code generally restricts a taxpayer's charitable contribution deduction for the donation of "an interest in property which consists of less than the taxpayer's entire interest in such property." § 170(f)(3)(A). But there is an exception for a "qual-ified conservation contribution." § 170(f)(3)(B)(iii), (h)(1). For the donation of an easement to be a "qualified conservation contribution," the conservation purpose must be "protected in perpetuity." § 170(h)(1)(C), (5)(A); see TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1362 (11th Cir. 2021); PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 201 (5th Cir. 2018).
In 1986 the Department of the Treasury issued final rules for determining whether this "protected in perpetuity" requirement is met. Of importance here are the rules governing the mandatory division of proceeds in the event the property is sold following extinguishment of the easement. See Treas. Reg. § 1.170A-14(g)(6). The regulations recognize 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 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. Ibid. 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." § 170(h)(5)(A).
Treasury Regulation § 1.170A-14(g)(6) sets forth a formula for determining the proportionate share the grantee must receive upon any extinguishment of the easement. It provides that the grantee must be entitled to proceeds "determined under paragraph (g)(6)(ii)." That paragraph, captioned "Proceeds," provides in part as follows:
[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[s] 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 . . . .
This regulation requires that 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); see also PBBM-Rose Hill, 900 F.3d at 207. We will refer to this regulation as imposing a "proportionate share requirement."
C. Construction of the Easement Deed
The judicial extinguishment provisions of the three deeds are identical. The first sentence provides, consistently with Treas. Reg. § 1.170A-14(g)(6)(ii), that the easement "gives rise to a perpetual real property right and interest immediately vested in SERLC." So far, so good.
The second sentence specifies the procedures that apply "[f]or purposes of this Conservation Easement." That sentence defines "the fair market value of SERLC's right and interest" as "equal to" the difference between (a) the fair market value (FMV) of the Property unburdened by the easement and (b) the FMV of the Property burdened by the easement, "as such values are determined as of the date of this Conservation Easement." The deed thus equates SERLC's vested property right with the FMV of the easement on the date of the gift.
The third sentence notes the possibility that the easement might be extinguished in a future judicial proceeding. The fourth sentence is the critical sentence; it specifies what SERLC is to receive in that event. The fourth sentence states: "Upon such proceeding" and "upon a subsequent sale . . . of the Conservation Area, [SERLC] shall be entitled to a portion of the proceeds at least equal to the fair market value of the Conservation Easement as provided above."
The phrase "as provided above" refers back to the second sentence, which sets forth the equation that determines "the fair market value of SERLC's right and interest." And the second sentence explicitly states that the FMV of the easement is determined "as of the date of this Conservation Easement." In short, rather than entitling SERLC to a proportionate share of future sale proceeds, the deed limits SERLC's share to a fixed historical value, namely, the FMV of the easement on the date of the gift. The judicial extinguishment provision of each deed is unambiguous in this respect.
Intervenors draw our attention to an opinion of the South Carolina Court of Common Pleas (Jasper County) in Sand Investment Co., LLC v. Southeast Regional Land Conservancy, Inc., docket No. 220-CP-27-00306. That opinion analyzed a similar deed and found it ambiguous under South Carolina law. For the reasons outlined in the text, we do not agree with that conclusion. We are not bound (and intervenors do not contend that we are bound) by that trial court decision. Cf. Cullifer v. Commissioner, T.C. Memo. 2014-208, 108 T.C.M. (CCH) 408, 419 (quoting Flintkote Co. v. Dravo Corp., 678 F.2d 942-45 (11th Cir. 1982) ("In determining the law of the state, federal courts must follow the decisions of the state's highest court, and in the absence of such decisions on an issue, must adhere to the decisions of the state's intermediate appellate courts unless there is some persuasive indication that the state's highest court would decide the issue otherwise.").
Intervenors rely on the deeds' eminent domain provision, paragraph VI.B(3), which immediately follows the judicial extinguishment provision, to contend that the deed is ambiguous. See supra pp. 2-3. It says that, if any part of the Property "is taken in exercise of eminent domain," Long Leaf and SERLC shall take appropriate action "to recover the full value of the taking," with the resulting proceeds being "divided in accordance with the proportionate value of SERLC's and [Long Leaf's] interests as specified above." This eminent domain provision is substantially identical to the eminent domain provision of the deed in Railroad Holdings, LLC v. Commissioner, T.C. Memo. 2020-22, 119 T.C.M. (CCH) 1136, 1137, and in Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, 119 T.C.M. (CCH) 1351, 1353. We conclude here, as we did in both of those cases, that these references to "proportionate value" do not help the taxpayer. See R.R. Holdings, 119 T.C.M. (CCH) at 1139; Oakbrook, 119 T.C.M. (CCH) at 1359.
To begin with, paragraph VI.B(3) deals only with eminent domain. It has no application where the Property is not taken but is simply sold by the owner after the easement has been lifted. Thus, even if paragraph VI.B(3) were thought consistent with the regulation, it does not apply in the event of judicial extinguishment unconnected to a taking.
In any event, the division of proceeds dictated by paragraph VI.B(3), notwithstanding the reference to "proportionate value," is not consistent with the regulation. The eminent domain provision refers to "the proportionate value of SERLC's and [Long Leaf's] interests as specified above." The value of SERLC's interest "as specified above-viz., in paragraph VI(B)(2)-is the FMV of the easement on the date of the gift. The value of Long Leaf's interest would necessarily be the balance of the proceeds received. As we conclude below, SERLC's share as thus defined is deficient because it is capped at a fixed date-of-gift value. That deficient share can be described as a "proportionate value" as compared with the total proceeds received; needless to say, any value can be described as "a proportion" of some larger value. But that division of proceeds would not comply with the regulation because the proportion is in-correct.
Even if the deed were thought ambiguous, petitioner has supplied no evidence as to why the ambiguity should be resolved in its favor. A party opposing summary judgment must set forth, by declaration or otherwise, "specific facts showing that there is a genuine dispute for trial." Rule 121(d). Petitioner urges that parol evidence would be admissible to resolve ambiguity in a contract whose interpretation is governed by South Carolina law. But petitioner offers no indication as to what that parol evidence would be, who would supply it, or why it would be convincing. And petitioner has supplied no declaration in support of its opposition to respondent's motion. A declaration was supplied in Railroad Holdings, but we nevertheless granted summary judgment for respondent. See Railroad Holdings, LLC v. Commissioner, T.C. Memo. 2020-22, 119 T.C.M. (CCH) 1136, 1140 (finding no genuine dispute of material fact where declaration was "broad and general," did not allege "an error or accident in drafting," and did not "proffer [any] parol evidence of intended meanings").
D. Analysis
The judicial extinguishment provision of Long Leaf's deeds fails to meet the regulation's proportionate share requirement for the same reason the deed failed in Railroad Holdings, 119 T.C.M. (CCH) 1136. Accord Oakbrook, 119 T.C.M. (CCH) 1352; Woodland Prop. Holdings, LLC v. Commissioner, T.C. Memo. 2020-55, 119 T.C.M. (CCH) 1361. The deed limits the donee's share of future proceeds to a fixed date-of-gift value, rather than entitling it to a full proportionate share of the sale proceeds actually generated. "Though the deed incorporates from the regulation the phrase 'proportionate value', the deed does not create a proportion or fraction that represents the donee's share of the property right, and hence a corresponding fraction of proceeds to which the donee is perpetually entitled." R.R. Holdings, 119 T.C.M. at 1139. Instead, the deed guarantees SERLC only a fixed historical value, "which value shall remain constant." If the Property were to appreciate-real estate often does- SERLC would "watch its proportion of potential extinguishment proceeds shrink over the years." Ibid. Thus, the easement's conservation purpose is not protected in perpetuity.
As in Railroad Holdings and Woodland Property, the deed at issue says that SERLC shall be entitled to a portion of the proceeds "at least equal to" the historical FMV of the easement. But the phrase "at least" does not help intervenors. This phrase simply means that Long Leaf would have the option-as it would have in the absence of such explicit text-of giving SERLC a larger share of the sale proceeds if it wished to do so. But the regulation requires that the donee receive a vested property right in a proportionate share of the proceeds. "If the donee's only right under the deed is to receive 'at least' a deficient share, with a hope that there might be more, then the deed does not comply with the regulation." Woodland Prop., 119 T.C.M. (CCH) at 1363; R.R. Holdings, 119 T.C.M. (CCH) at 1140.
E. Intervenors' Arguments
Assuming arguendo that the deeds do not comply with Treasury Regulation § 1.170A-14(g)(6)(ii), intervenors contend that the regulation is substantively invalid under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and constitutes "arbitrary and capricious" rulemaking in violation of the Administrative Procedure Act (APA). We rejected these arguments in a Court-reviewed Opinion that was recently affirmed by the U.S. Court of Appeals for the Sixth Circuit. Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020), aff'd, 28 F.4th 700 (6th Cir. 2022). However, on December 29, 2021, the Eleventh Circuit held that "the Commissioner's interpretation of § 1.170A-14(g)(6)(ii), to disallow the subtraction of the value of post-donation improvements . . ., is arbitrary and capricious and therefore invalid under the APA's procedural requirements." Hewitt v. Commissioner, 21 F.4th 1336, 1353 (11th Cir. 2021), rev'g and remanding T.C. Memo. 2020-89 (applying Oakbrook).
We are obligated to follow the law as established by the Eleventh Circuit on this issue. See Golsen v. Commissioner, 54 T.C. 742, 756-57 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). However, there is some uncertainty as to how the Eleventh Circuit would evaluate the deed involved here, which is deficient not because of a carve-out for "donor improvements" but because it caps the donee's share of post-extinguishment sale proceeds at a fixed historical value. It is not entirely clear whether the Eleventh Circuit invalidated the "judicial extinguishment" regulation in its entirety, or whether the court invalidated that regulation only insofar as it is interpreted to disallow deductions based on carve-outs for donor improvements. Compare Hewitt, 21 F.4th at 1353 ("[T]he Commissioner's interpretation of [the regulation] to disallow the subtraction of the value of post-donation improvements . . . is arbitrary and capricious . . . ."), with id. at 1339 n.1 ("[W]e conclude that § 1.170A-14(g)(6)(ii) is procedurally invalid under the APA . . . ."). The Eleventh Circuit may have the opportunity to define further the scope of its opinion in Hewitt, and we hesitate to address the question presented before the authoring court has had the chance to do so.
For all these reasons, we will deny respondent's Motion for Partial Summary Judgment at this time, without prejudice to his resubmission of the arguments set forth therein should subsequent developments warrant that action. This is the course we have followed in other cases presenting this scenario. See, e.g., Park Lake II, LLC v. Commissioner, T.C. Dkt. No. 12115-20 (Order served June 17, 2022); Park Lake III, LLC v. Commissioner, T.C. Dkt. No. 8018-21 (Order served June 17, 2022); Maxwell-ton Propco, LLC v. Commissioner, T.C. Dkt. No. 11598-20 (Order served May 9, 2022); Sand Valley Holdings, LLC v. Commissioner, T.C. Dkt. No. 12141-20 (Order served Feb. 18, 2022); Rocky Comfort Creek Holdings, LLC v. Commissioner, T.C. Dkt. No. 12106-20 (Order served Feb. 17, 2022). And we will hold intervenors' Motion for Partial Summary Judgment in abeyance pending further appellate developments on the validity of Treas. Reg. § 1.170A-14(g)(6). See Briarcreek Preserve, LLC v. Commissioner, T.C. Dkt. 1547-18 (Order served Apr. 4, 2022); Montgomery-Ala. River, LLC v. Commissioner, T.C. Dkt. 9254-19 (Order served Feb. 25, 2022); Oconee Landing Prop., LLC v. Commissioner, T.C. Dkt. No. 11814-19 (Order served Jan. 10, 2022); Wisawee Partners II, LLC v. Commissioner, T.C. Dkt. No. 6105-18 (Order served Jan. 7, 2022).
Accordingly, it is
ORDERED that respondent's Motion for Summary Judgment, filed November 22, 2021, is denied. It is further
ORDERED that intervenors' Motion for Partial Summary Judgment, filed January 28, 2022, is held in abeyance. It is further
ORDERED that, on or before September 28, 2022, intervenors and respondent shall file a status report (jointly if possible, otherwise separately) expressing their views as to the conduct of further proceedings in this case.