Opinion
12141-20
02-18-2022
SAND VALLEY HOLDINGS, LLC, SAND VALLEY INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
This is a syndicated conservation easement case. The Internal Revenue Service (IRS or respondent) disallowed a charitable contribution deduction claimed for the easement by Sand Valley Holdings, LLC (Sand Valley), and determined penalties under sections 6662 and 6662A. Currently before the Court is respondent's motion for summary judgment, filed August 6, 2021, contending that the deduction was properly disallowed and that Sand Valley is liable for penalties. 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 pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding respondent's motion and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Sand Valley is a Georgia limited liability company organized in January 2016. It is treated as a partnership for Federal income tax purposes, and petitioner Sand Valley Investors, LLC, is its tax matters partner. Sand Valley 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).
In December 2016 Greenway Family Farm, LLC (Greenway), acquired a 99% membership interest in Sand Valley by contributing to it roughly 146 acres of land (Property) in Jefferson County, Georgia. The Property was a portion of a larger tract that Greenway had purchased in 2012 for $2,200,000. On December 15, 2016, after petitioner solicited investors through a private placement memorandum, petitioner purchased from Greenway a 97% interest in Sand Valley for $3,590,000. Six days later, on December 21, 2016, Sand Valley granted to the Foothills Land Conservancy (Foothills or grantee) a conservation easement over the Property.
Sand Valley filed Form 1065, U.S. Return of Partnership Income, for its short 2016 tax year. On that return it valued the Property (before placement of the easement) at $35,600,000, and it claimed a charitable contribution deduction of $35,380,000 for the donation of the easement. In support of this supposed value Sand Valley relied on an appraisal prepared by Martin Van Sant and Thomas Wingard.
The deed of easement recites the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to Sand Valley, including the rights to engage in forest management activities and to build a limited number of structures. In general, Sand Valley could exercise these reserved rights only after consulting with Foothills. In any case where Foothills' advance approval was required, Sand Valley had to notify Foothills at least 30 days before embarking on the exercise of any reserved right. Foothills had 30 days from receipt of such notice to approve (or decline to approve) the proposed action. In the event that Foothills' approval was required and it failed to respond within 30 days, then Foothills "is deemed to have granted approval . . . EXCEPT WHERE the requested action . . . would result in an adverse effect on the Conservation Purposes or Conservation Values in any material respect."
The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 9(a) of the deed provides that "[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of prior claims, . . . shall be the stipulated fair market value of the Easement, or proportionate part thereof, as determined in accordance with Paragraph 9(b)." Paragraph 9(b), cap-tioned "Valuation," provides a formula.
The IRS selected Sand Valley's return for examination. On July 7, 2020, the IRS issued petitioner a timely notice of final partnership administrative adjustment disallowing the charitable contribution deduction on the ground that Sand Valley had "failed to establish that the gift or contribution satisfied all the requirements of I.R.C. § 170 and the corresponding Treasury Regulations." The IRS determined a 40% "gross valuation misstatement" penalty under section 6662(h) and (in the alternative) a 20% accuracy-related penalty under other Code provisions.
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 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 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. "Protected in Perpetuity"
The Internal Revenue 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 "qualified 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)(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).
Respondent contends that the conservation purpose underlying the easement was not "protected in perpetuity." His principal argument is that the easement deed fails to comply with Treas. Reg. § 1.170A-14(g)(6), the "judicial extinguishment" regulation. That is assertedly so because, in the event the Property were sold following extinguishment of the easement, the grantee's share of the proceeds would be improperly reduced by prior claims against Sand Valley (or its successors). Alternatively, respondent urges that the deed fails to prevent Sand Valley from engaging in activities inconsistent with the easement's conservation purposes. Petitioner vigorously resists these contentions, and the parties have advanced several arguments and sub-arguments, which we consider in turn.
1. Judicial Extinguishment
The regulations set forth detailed rules for determining whether the "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 a judicial 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 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 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.
In Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 137-140 (2019), we held that a deed of easement failed to satisfy these regulatory requirements where 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. In this case respondent does not cite any "donor improvements" problem. But he notes that, if the Property is sold following judicial extinguishment of the easement, Foothills' proportionate share of the proceeds will be calculated only "after the satisfaction of prior claims." Respondent contends that this provision, like the provision in Coal Property Holdings, improperly reduces Foothills' share of the sale proceeds by any claims against Sand Valley or its successors.
Petitioner urges that the deed complies with the "judicial extinguishment" regulation. Alternatively, petitioner argues that Treas. Reg. § 1.170A-14(g)(6)(ii) is sub-stantively 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 recent Court-reviewed Opinion. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020), appeal filed, No. 20-2117 (6th Cir. Oct. 16, 2020). 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 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). At the moment, however, 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 (holding that "the 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 pro-cedurally 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 that question before the authoring court has had the chance to do so. We will accordingly deny respondent's motion for summary judgment with respect to the "prior claims" issue, without prejudice to respondent's resubmission of his motion (or his advancing this argument at trial and in post-trial briefs) should subsequent developments warrant that course of action.
2. Reserved Rights
Respondent alternatively contends that the conservation purpose underlying the easement was not "protected in perpetuity" because Sand Valley reserved certain rights that are allegedly inconsistent with the conservation purposes. Treasury Regulation § 1.170A-14(g)(5) governs the "[p]rotection of conservation purpose where [the] taxpayer reserves certain rights." If a donor reserves rights on the land underlying an easement, the donor must provide the donee with certain documentation (e.g., surveys, maps, and aerial photographs) before effecting the donation. Id. sub-div. (i). "[T]he donor must agree to notify the donee, in writing, before exercising any reserved right . . . which may have an adverse impact on the conservation interests." Id. subdiv. (ii). And the deed of easement must authorize "the donee to enter the property at reasonable times for the purpose of inspecting the property . . . [and] to enforce the conservation restrictions by appropriate legal proceedings" if necessary. Ibid. These requirements are "designed to protect the conservation interests associated with the property . . . [that] could be adversely affected by the exercise of the reserved rights." Id. subdiv. (i).
Respondent does not contend that the easement deed explicitly violates any of the regulatory requirements mentioned above. Rather, respondent faults the deed for including a "deemed consent" provision, which allegedly renders Foothills "powerless to prevent [an] inconsistent use" if it does not respond to a request from Sand Valley within 30 days. According to respondent, an easement deed with a "deemed consent" provision cannot satisfy the "protected in perpetuity" requirement because the donee is stripped of its "perpetual right to prevent uses of the Property that are inconsistent with the conservation purposes." Compare Hoffman Props. II, LP v. Commissioner, 956 F.3d 832, 834 (6th Cir. 2020) (holding that a deemed consent provision impaired the conservation purpose where the donor could exercise rights "in a manner contrary to" regulations promulgated by the Secretary of the Interior), with Glade Creek Partners, LLC v. Commissioner, T.C. Memo. 2020-148, 120 T.C.M. (CCH) 285, 291 n.9 (finding a "deemed consent" provision nonproblematic where the donor could exercise only those rights that were consistent with the conservation purposes).
Petitioner emphasizes that the deed prohibits Sand Valley, notwithstanding any "deemed consent," from engaging in an activity that "would result in an adverse effect on the Conservation Purposes . . . in any material respect." In any event, petitioner contends that exercise of the rights in question would not, as a matter of fact, risk any damage to the conservation purposes. And if Foothills should subsequently conclude that Sand Valley's action threatened a conservation purpose, paragraph 6(b) of the deed authorizes Foothills to "enjoin [the] violation" and "require restoration of the Property" to the status quo ante. See Treas. Reg. § 1.170A-14(g)(5)(ii) (requiring that the grantee be able "to enforce the conservation restrictions by appropriate legal proceedings").
On the basis of the record that currently exists, we conclude that summary judgment is inappropriate on this question as well. In a case such as this, we do not think the "deemed consent" issue can be decided as a matter of law. Foothills may be deemed to have consented to exercise of certain rights, but only if it has failed to respond to notices from Sand Valley over a period of time. Foothills' internal procedures and past practice may shed light on whether this is likely to happen. In any event, the question whether exercise of the right to which consent is deemed given would impair any conservation purpose presents factual questions ill-suited to summary adjudication.
For the same reason we demur to respondent's submission that other reserved rights violate, as a matter of law, the "protected in perpetuity" requirement. Respondent contends that Sand Valley improperly reserved rights to build structures on "new areas" of the Property, subdivide portions of the Property, and engage in commercial forestry activities. Sand Valley would generally be required to notify Foothills and secure its consent before doing any of these things. In our view, it is a factual question whether exercise of these particular rights could impair the easement's conservation purposes. See Treas. Reg. § 1.170A-14(f), Examples (3) and (4) (illustrating contrasting factual scenarios). Viewing the facts and inferences to be drawn from the facts in the light most favorable to petitioner, we conclude that genuine disputes of material fact dictate that we deny respondent's motion for summary judgment.
C. Penalties
The IRS determined that Sand Valley is liable for a 40% "gross valuation mis-statement" penalty under section 6662(h) and a 20% "reportable transaction understatement" penalty under section 6662A. Respondent urges that we grant him summary judgment with respect to these penalty determinations.
On December 15, 2016, petitioner purchased a 97% interest in Sand Valley for $3,590,000. At that point, Sand Valley appears to have had no liabilities, and its only meaningful asset was the Property. Six days later, Sand Valley valued the Property at $35,600,000 when determining the fair market value of the easement, which its appraisers supposed to be $35,380,000. Respondent thus urges, with some force, that Sand Valley overstated the value of the easement by more than 850%.
It seems likely that petitioner faces an uphill battle on the valuation front. But because we have not yet determined an "underpayment," see § 6662(h)(1), or an "understatement," see § 6662A(a), respondent's request appears premature. Petitioner also advances a "reasonable cause" defense based on professional advice. For the reportable transaction understatement penalty, this defense is available if the taxpayer satisfies the requirements of section 6664(d). These requirements entail questions of fact. Finally, petitioner alleges a genuine dispute of material fact as to whether the IRS complied with the supervisory approval requirement of section 6751(b) with respect to these penalties. Respondent has advanced no argument as yet regarding section 6751(b), and petitioner asserts that it is seeking informal discovery on this point. We accordingly decline to adjudicate any penalty issues summarily at this time. The parties are free to address section 6751(b), if appropriate, in a subsequent motion. See, e.g., Long Branch Land, LLC v. Commissioner, T.C. Memo. 2022-2; Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125.
In consideration of the foregoing, it is
ORDERED that respondent's Motion for Summary Judgment, filed August 6, 2021, is denied. It is further
ORDERED that, on or before March 21, 2022, the parties shall file a status report (jointly if possible, otherwise separately) expressing their views as to the conduct of further proceedings in this case.