Opinion
13010-20
08-10-2022
ROCK SPRING, LLC, ROCK SPRING INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
This case involves a charitable contribution deduction claimed by Rock Spring, LLC (Rock Spring), for a fee simple donation of land. The Internal Revenue Service (IRS or respondent) disallowed the deduction and determined penalties. On August 2, 2022, this case was assigned to the undersigned for trial or other disposition.
Currently before the Court is a Motion for Partial Summary Judgment filed by respondent. Respondent contends that Rock Spring's deduction was properly disallowed because (1) the appraisal attached to its return was not performed by a "qualified appraiser" as required by section 170(f)(11)(E)(ii) and Treas. Reg. § 1.170A-13(c)(5); and (2) the appraisal was not a "qualified appraisal" as required by section 170(f)(11)(E)(i) and Treas. Reg. § 1.170A-13(c)(2). Finding that there exist genuine disputes of material fact, we will deny the Motion.
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 parties' motion papers and the declaration and exhibits attached thereto. They are stated solely for purposes of deciding respondent's Motion 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).
Rock Spring is an Alabama limited liability company. It is treated as a partnership for Federal income tax purposes and Rock Spring Investors, LLC, is its tax matters partner. Rock Spring had its principal place of business in Alabama when the petition was filed.
In 2013 Isbell Development, LLC (Isbell), purchased a 440-acre tract of land in Morgan County, Alabama, for $880,000. Sixty-four years previously this land had been conveyed to a prior owner by the United States, through its agent the Tennessee Valley Authority (TVA), via special warranty deed (SWD). The SWD reserved certain rights to TVA, including the rights to flood low-lying areas of the tract in the event of a weather emergency and to take steps to prevent disease (including malaria). The TVA's reservation of rights bound all future owners, including Isbell.
On December 22, 2016, Isbell contributed roughly 121 acres of the above-described tract (Property) to Rock Spring. On December 29, 2016, Rock Spring donated the Property in fee simple to the Foothills Land Conservancy via limited warranty deed (donation LWD), which was recorded the same day. Under the caption "Permitted Title Exceptions," the donation LWD incorporates the "Covenants, conditions and restrictions set forth" in the SWD, including certain rights reserved to the TVA.
Rock Spring timely filed Form 1065, U.S. Return of Partnership Income, for its 2016 taxable year. On that return it claimed a charitable contribution deduction of $23,560,000 for its donation of the Property. In support of that valuation it attached an appraisal by Claud Clark III, who opined that the highest and best use of the Property would be a limestone mine. Because the limestone mine did not yet exist, we will refer to it as a hypothetical limestone mine.
The IRS selected Rock Spring's 2016 return for examination. On July 9, 2020, the IRS issued petitioner a timely notice of final partnership administrative adjustment (FPAA) disallowing the charitable contribution deduction and determining penalties. The FPAA determined that Rock Spring had failed to satisfy all applicable requirements of section 170 and the Treasury Regulations. Alternatively the FPAA determined that, if any deduction was allowable, Rock Spring had not established that the Property was worth more than $424,000. Petitioner timely petitioned this Court for readjustment of the partnership items. On March 31, 2022, respondent filed a Motion for Partial Summary Judgment, to which petitioner timely responded.
Respondent asks us to hold, as a matter of law, that Clark was not a "qualified appraiser" and that his appraisal was not a "qualified appraisal." Respondent urges that Clark improperly posited a hypothetical limestone mine as the Property's highest and best use without considering how the TVA's exercise of its reserved rights would negatively affect the operation and value of such a mine. According to respondent, Clark did not supply "[a] description of the [P]roperty in sufficient detail," Treas. Reg. § 1.170A-13(c)(3)(ii)(A), because he did not "describe, analyze or evaluate the effects of the [TVA] restrictions on the value of the Property." Petitioner contends that the IRS is essentially challenging Clark's valuation conclusions, which involve questions of material fact that (on petitioner's view) must be resolved at trial.
Discussion
A. 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 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. See Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant partial summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party (here petitioner). Sundstrand Corp., 98 T.C. at 520.
B. Analysis
Where a contribution of property is valued in excess of $500,000, the taxpayer must obtain and attach to his return "a qualified appraisal of such property." § 170(f)(11)(D). An appraisal is qualified if it is "conducted by a qualified appraiser in accordance with generally accepted appraisal standards" and meets requirements set forth in "regulations or other guidance prescribed by the Secretary." § 170(f)(11)(E)(i).
1. "Qualified Appraiser"
To be a "qualified appraiser," an individual must have "earned an appraisal designation from a recognized professional appraiser organization or ha[ve] otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary." § 170(f)(11)(E)(ii)(I). Such individual must "regularly perform[] appraisals for which . . . [he] receives compensation" and must meet "such other requirements as may be prescribed by the Secretary." § 170(f)(11)(E)(ii)(II) and (III). The individual also must "demonstrate[] verifiable education and experience in valuing the type of property subject to the appraisal." § 170(f)(11)(E)(iii)(I).
Respondent notes that Clark surrendered his appraisal license in 2019 pursuant to a consent order. But the IRS does not contend that Clark in 2017 failed to satisfy the general requirements stated above. Rather, respondent urges that Clark was not a qualified appraiser by virtue of the "exception" set forth in Treas. Reg. § 1.170A-13(c)(5)(ii).
That section provides that a person is not a qualified appraiser with respect to a particular donation "if the donor has knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property." Ibid. This will be true, for example, if "the donor and the appraiser make an agreement" that the property will be appraised at an inflated value. Ibid. Respondent contends that this exception applies here because Rock Spring: (1) knew that Clark was ignoring the adverse impact of the TVA restrictions; (2) knew that certain contracts on which Clark predicated his discounted cash flow calculation were not genuine; and (3) pressured Clark to reduce his discount rate from 12% to 10%.
These arguments entail questions of material fact-what knowledge Rock Spring and its principals had, whether they made a covert agreement with Clark about the value conclusion to be reached, and whether alleged "pressure" on Clark improperly affected that conclusion. Because these factual questions are subject to genuine dispute, they are not properly resolved on summary judgment.
2. "Qualified Appraisal"
The regulations provide that an appraisal is "qualified" only if it is made "not earlier than 60 days prior to the date of the contribution" and is "prepared, signed, and dated by a qualified appraiser." Treas. Reg. § 1.170A-13(c)(3)(i)(A) and (B). The regulations list information that a "qualified appraisal" must include. Id. § 170A-13(c)(3)(ii). Respondent emphasizes the first piece of required information, namely, "[a] description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was (or will be) contributed."
A taxpayer need not strictly comply with all of the reporting requirements listed in the regulation. In Bond v. Commissioner 100 T.C. 32 (1993), we held that some of these requirements, while "helpful to respondent in the processing and auditing of return on which charitable deductions are claimed," are "directory and not mandatory." 100 T.C. at 41. "The doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply with the specific requirements of a provision." Durden v. Commissioner, T.C. Memo. 2012-140, 103 T.C.M. (CCH) 1762, 1763.
Respondent does not dispute that Clark's appraisal correctly identifies the Property, its location, its acreage, its other physical characteristics, and the fee simple nature of the interest conveyed. But respondent nevertheless contends that Clark did not supply a "description of the property in sufficient detail" because he neglected to consider the effect the TVA's reserved rights on the feasibility of a mining operation and the value of such a mine. The TVA's reserved rights included (among other things) the right to flood low-lying areas of the Property in the event of certain weather emergencies.
It appears to us that respondent seeks to convert a dispute about valuation and valuation methodology into a failure to satisfy the regulatory reporting requirements. Clark described the donated property as a fee simple interest in specified acreage; this description would seem to enable "a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was (or will be) contributed." Treas. Reg. § 1.170A-13(c)(ii)(A). The documentation included with the appraisal acknowledged the existence of TVA's reserved rights, but Clark neglected to discuss the potential adverse impact those rights might have on the Property's alleged "highest and best use" and value. Although that gap may affect the soundness of his conclusions, we do not think it amounts to a misdescription of the Property within the meaning of § 1.170A-13(c)(ii)(A).
Petitioner asserts that Clark might have regarded the TVA's reserved rights as having little practical impact, alleging that a weather emergency sufficient to trigger TVA's right to flood the Property was a mere 1% risk and that another limestone mine was currently operating near the Property. These factual allegations would need to be tested at trial.
Respondent errs in relying on Costello v. Commissioner, T.C. Memo. 2015-87, 109 T.C.M. (CCH) 1441. The question there was whether the taxpayers had secured a "qualified appraisal" for the donation of a conservation easement. We answered that question "no" in part because the appraisal misdescribed the donated property. As we explained, "the appraisal d[id] not describe, or purport to value, a conservation easement; rather, it state[d] that 'the property rights appraised comprise the fee simple interest in the subject property.'" Id. at 1446. Costello was a case where "the property that was appraised" was not "the property that was (or will be) contributed." Treas. Reg. § 1.170A-13(c)(ii)(A). That is not the situation here. Clark's appraisal reasonably described the fee simple interest that was donated; what he omitted was a discussion of reserved rights that arguably affected the Property's value.
The value of property is a question of fact. On a motion for summary judgment, "any evaluation of [an appraisal's] accuracy is irrelevant for purposes of deciding whether the appraisal is qualified." Friedberg v. Commissioner, T.C. Memo. 2013-224, 106 T.C.M (CCH) 360, 365, supplementing T.C. Memo. 2011-238. It may well be that Clark's methodology "was sloppy or inaccurate, or haphazardly applied," but that is not dispositive in determining whether petitioner satisfied the reporting requirements of section 1.170A-13(c)(3). See Friedberg, 106 T.C.M (CCH) at 365 (quoting Scheidelman v. Commissioner, 682 F.3d 189, 197 (2d Cir. 2012)). At bottom, respondent is challenging the reliability and accuracy of Clark's methodology and specific basis of valuation. Cf. Friedberg, 106 T.C.M (CCH) at 365. This dispute must be resolved at trial, not on a motion for summary judgment. See Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 408 (1986) (noting that the "highest and best use" of property presents a question of fact).
Section 170(F)(11)(A)(ii)(II) excuses failure to satisfy the substantiation requirements of section 170, including requirements related to qualified appraisals, if "it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect." Whether Rock Spring would qualify for this defense implicates factual questions that require trial. See Belair Woods v. Commissioner, T.C. Memo. 2018-159, 116 T.C.M. (CCH) 325, 330. Thus, even if the "qualified appraiser" and "qualified appraisal" issues were appropriate for summary adjudication, little would be gained by deciding those questions now.
Upon due consideration, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed March 31, 2022, is denied.