Opinion
3412-22
03-02-2023
SAVANNAH SHOALS, LLC, GREEN CREEK RESOURCES, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph Robert Goeke Judge
On January 25, 2023, respondent filed a Motion for Partial Summary Judgment that a $23 million charitable contribution deduction for the donation of a conservation easement is disallowed on the ground that Savannah Shoals, LLC (Shoals), did not donate the easement during the short tax year ending December 31, 2017 (respondent's Motion #1), and a Motion for Partial Summary Judgment that the $23 million deduction is disallowed on the ground that the easement's conservation purpose was not protected in perpetuity as required by section 170(h)(5)(A) (respondent's Motion #2). On February 27, 2023, petitioner filed Oppositions to both Motions. Respondent concedes that if the Court were to grant either Motion, substantial issues will remain for trial with respect to penalties.
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 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.
Standards for Summary Judgment
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). Under Rule 121(b) the Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. 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 the light most favorable to the nonmoving party. Id. The nonmoving party may not rest upon mere 2 allegations or denials of his pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
Statement of the Law
Section 170(a)(1) allows taxpayers to deduct charitable contributions made "within the taxable year". Taxpayers may deduct the fair market value (FMV) donation to be a "qualified conservation contribution," the conservation purpose must be "protected in perpetuity. § 170(h)(1)(C), (5)(A).
Background
The following background is derived from the pleadings, the parties' motion papers, exhibits, and declarations. They are stated solely for purposes of deciding respondent's motions and not as findings of fact in this case. Sundstrand Corp., 98 T.C. at 520.
Shoals is a Delaware limited liability company (LLC) organized in October 2017 and is treated as a TEFRA partnership for Federal income tax purposes. Green Creek Resources, LLC, is its tax matters partner. Shoals had its principal place of business in Georgia when the Petition was timely filed. Accordingly, this case is appealable to the Court of Appeals for the Eleventh Circuit.
On December 28, 2017, Savannah Shoals Investments (SSI) acquired a 92% interest in Shoals. The purchase terminated Shoals' taxable year under section 708(b)(1)(B), which requires a technical termination of a partnership upon a change in ownership of more than a 50% interest within a 12-month period. See Treas. Reg. § 1.708-1(b)(2). The technical termination required Shoals to file a return for a short taxable year. Id. subpara. (3) (partnership taxable year closes for all partners on the date that the partnership terminates). Shoals filed two short-year returns for 2017, one beginning on October 12, 2017, and ending on December 27, 2017 (first short year), and the second beginning on December 28, 2017, and ending on December 31, 2017 (second short year). The first short-year return reported the technical termination; it did not report the easement deduction.
On December 28, 2017, Shoals donated the conservation easement. Shoals reported the easement deduction on the second short-year return. The deed was signed, notarized, and recorded on December 28, 2017, at 4:46 p.m.
On December 21, 2021, respondent issued a Final Partnership Administrative Adjustment (FPAA) disallowing a $23 million charitable contribution deduction claimed on Shoals' second short year return for the donation of the conservation easement. Alternatively, respondent determined that Shoals overvalued the easement and that the amount of deduction should be reduced by the amount of the overstatement. 3
Motion #1, Short Year of the Easement Deduction
Respondent argues that SSI's purchase of the 92% interest in Shoal was void because it was prohibited by Shoals' operating agreement. He argues that SSI cannot be allocated any part of the easement deduction because it was not a member of Shoals. Alternatively, assuming we find that SSI's purchase was valid, respondent asserts that Shoals did not make the easement donation within the second short year.
With respect to respondent's first argument, petitioner has introduced evidence to establish that SSI's purchase was valid because it was approved by written consent of all LLC members in accordance with the operating agreement, as amended. Accordingly, there is a genuine dispute of material fact as to the validity of SSI's purchase, and respondent is not entitled to summary judgment that SSI did not own an interest in Shoals during 2017.
In his alternative argument, respondent asserts that Shoals used the incorrect dates for its short-year returns. As stated above, Shoals filed two short-year returns, the first short year ended December 27, 2017, which was the day before SSI's purchase and the day before the easement deduction, and the second short year was December 28 to 31, 2017. Respondent argues that Shoals' first short year ended on December 28, 2017, the date of SSI's purchase and Shoals' technical termination. Accordingly, he argues that the second short year began on December 29, 2017, and ended on December 31, 2017. We refer to petitioner's dates as the reported short years and respondent's dates as the revised short years.
The parties agree that Shoals donated the easement on December 28, 2017. Respondent argues that Shoals should have reported the easement deduction on the revised first short-year return. He argues that SSI was not a member of Shoals during the revised first short year. Accordingly, he argues that SSI is not entitled to allocation of part of the easement deduction.
Petitioner disagrees with respondent's revised short year dates. It acknowledges that SSI's purchase of the LLC interest and the easement donation occurred on the same date, December 28, 2017, but asserts that the purchase price was paid before the easement was donated at 4:46 p.m. It asserts that SSI was a member of Shoals during the reported second short year (December 28 to 31, 2017).
Treas. Reg. § 1.708-1(b)(3) provides that the partnership taxable year closes for all partners on the date that the partnership terminates. Treas. Reg. § 1.708-1(d)(2)(i) provides that the new partnership shall file a separate tax return for the taxable year beginning on the day after the date of the division.
Section 461 provides that the amount of any deduction shall be taken for the taxable year which is the proper taxable year under the taxpayer's method of 4 accounting used in computing taxable income. As a general rule, a cash-method taxpayer shall take a deduction into account for the taxable year in which paid. Treas. Reg. § 1.461-1(a)(1). Each year's return should be complete in itself, and expenses of one year generally cannot be used to reduce income of a subsequent year. Id. subsec. (a)(3).
Petitioner does not adequately explain the basis for its argument that it should be permitted to use December 27, 2017, as the date of the technical termination, which is in clear conflict with the Treasury regulations. However, absent additional argument and development of the record, the Court is reluctant to find that the facts when viewed in the light most favorable to petitioner fail as a matter of law. Courts have discretion to deny a motion for summary judgment if we believe that "the better course would be to proceed to a full trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Fed. R. Civ. Proc. 56; see Andrew v. Clark, 561 F.3d 261, 271 (4th Cir. 2009); Veillon v. Expl. Servs., Inc., 876 F.2d 1197, 1200 (5th Cir. 1989). Rule 121 is modeled on Fed.R.Evid. Proc. 56. Shiosaki v. Commissioner, 61 T.C. 861, 862 (1974). In the light of respondent's concession that trial is necessary on the valuation of the easement for purposes of penalties, resolution of this issue does not merit delaying trial. Accordingly, we will deny respondent's Motion #1.
Motion #2, Protected-In Perpetuity Requirement
Respondent argues that the extinguishment clause in the deed violates the protected-in perpetuity requirement of section 170(h)(5)(A) because the donee would be paid a fixed dollar amount in the event of extinguishment. He argues that under Article IV, paragraph B(2) of the deed, the donee would be entitled to a fixed dollar amount equal to the FMV of the easement on the date of the donation and, thus, the deed does not ensure that the donee would receive a proportionate share of extinguishment proceeds. He argues that the donee must share in any appreciation in the FMV of the property after the easement date in a proportionate way under the terms of the statute for the conservation purpose to be protected in perpetuity. He asserts that he does not rely on Treasury reg. § 1.170A-14(g)(6)(ii), which the Court of Appeals for the Eleventh Circuit held was invalid with respect to the "Commissioner's interpretation…to disallow the subtraction of the value of post-donation improvements to the easement property in the extinguishment proceeds allocated to the donee in Hewitt v. Commissioner, 21 F.4th 1336, 1339 (11th Cir. 2021), rev'g T.C. Memo. 2020-89. The extinguishment provision of the deed at issue does not address post-donation improvements and does not subtract the value of improvements from the extinguishment proceeds before allocation to the donee.
Petitioner disagrees with respondent's reading of the deed's extinguishment clause; it argues that the donee is entitled to a proportionate share of any extinguishment proceeds in accordance with the Treasury regulation, not a fixed dollar amount. It further argues that absence a valid regulation, the plain language 5 of section 170(h)(5)(A) does not require that the donee receive a share of future appreciation upon an extinguishment.
When Article IV, paragraph B(2) is read in its entirety, it is not clear that the donee would be entitled to a fixed dollar amount as respondent argues. The deed states that "[i]n accordance with Treas. Reg. 1.170A-14(g)(6)(ii), …th[e] Conservation Easement gives rise to a perpetual real property right and interest…that has 'a [FMV] that is at least equal to the proportionate value that the [Easement]…at the time of the gift, bears to the value of the property as a whole at that time.'" Then, the deed defines the FMV of the easement and the donee's rights and interest in terms that seemingly conflict with the prior sentence, stating that the FMV "(which value shall remain constant) shall be equal to the difference between (a) the [FMV] of the Conservation Area as if not burdened by th[e] Conservation Easement and (b) the [FMV] of the Conservation Area burdened by th[e] Conservation Easement, as such values are determined as of the date of th[e] Conservation Easement, as such values are determined as of the date of th[e] Conservation Easement." Next, the deed states that upon a judicial extinguishment, the donee "shall be entitled to a portion of the proceeds at least equal to the FMV of this Conservation Easement (as determined through the equation stated above…) in accordance with Treas. Reg. § 1. l 70A-14(g)(6)(ii)."
For purposes of respondent's Motion #2 on the record before us, we find that the deed is ambiguous as to whether the donee is entitled to receive a portion of post-easement appreciation upon an extinguishment. State law permits consideration of extrinsic and/or parole evidence to resolve a contract ambiguity. See St. Charles Foods, Inc. v. America's Favorite Chicken Co. 198 F.3d 815 (1999); Morgan Run Partners, LLC v. Commissioner, T.C. Memo. 2022-61. There is a genuine issue of material fact as the basic premise of respondent's argument, that the donee is entitled to a fixed dollar amount and will not share in post-easement appreciation. Accordingly, we will deny Motion #2.
Upon due consideration, it is
ORDERED that respondent's Motion for Partial Summary Judgment that the easement was not donated in the short taxable year ending December 31, 2017, is denied without prejudice. It is further
ORDERED that respondent's Motion for Partial Summary Judgment that the deed does not satisfy the protected-in perpetuity requirement of section 170(h)(5) is denied without prejudice. 6