Opinion
12384-20
03-17-2022
VALLEY PARK RANCH, LLC, REED OPPENHEIMER, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Courtney D. Jones Judge
Background
This case involves a charitable contribution deduction claimed by Valley Park Ranch, LLC (Valley Park) under section 170 for a donation of a conservation easement. The Internal Revenue Service (IRS or respondent) issued a Notice of Final Partnership Administrative Adjustment (FPAA) for the 2016 tax year to petitioner Reed Oppenheimer, the tax matters partner of Valley Park (TMP), wherein respondent disallowed that claimed deduction and asserted penalties.
Unless otherwise indicated, 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.
Pending before the Court are the parties' cross-motions for partial summary judgment. The facts discussed below are drawn from the petition, the parties' motion papers, and the attached exhibits. For the reasons discussed below, we will order additional briefing as to the deed's satisfaction of the statutory requirements under sections 170(h)(2) and (5).
These facts are stated solely for purposes of deciding the pending cross-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).
I. Original Deed and Partnership Return
On December 22, 2016, Valley Park granted Compatible Lands Foundation (CLF) a conservation easement over 45.76 acres in Rogers County, Oklahoma (Property). The deed recognizes the possibility that the easement might be extinguished at some future date and the Property sold.
Paragraph 12 of the deed, titled "Extinguishment" (extinguishment paragraph), provides as follows:
If circumstances arise in the future such as to render the purpose of this Easement impossible to accomplish or obsolete, this Easement can only be terminated or extinguished, whether in whole or in part, by judicial proceedings in a court of competent jurisdiction, and the amount of the proceeds to which Grantee shall be entitled, after the satisfaction of prior claims, from any sale, exchange, or involuntary conversion of all or any portion of the Property subsequent to such termination or extinguishment, shall be determined by the court, unless otherwise provided by State or Federal law at the time. [Emphasis added.]
Paragraph 13 of the deed, titled "Condemnation" (condemnation paragraph), provides as follows:
If the Easement is taken, in whole or in part, by exercise of the power of eminent domain, Grantor and Grantee shall be entitled to compensation, by the entity declaring power of eminent domain, in accordance with applicable law, policy, and procedures. Respective portions shall be determined by a Qualified Appraisal meeting standards as established by the United States Department of the Treasury. [Emphasis added.]
For its 2016 tax year, Valley Park claimed a charitable contribution deduction of $14,800,000 for the donation of the easement to CLF on its Form 1065, U.S. Return of Partnership Income.
II. IRS Examination, Amendment to Original Deed, and FPAA
The IRS examined Valley Park's return. On June 4, 2020-more than three years after the grant of the easement-Valley Park and CLF executed an Amendment to the Deed (amendment). The amendment provides that the extinguishment and condemnation paragraphs "should be amended" as follows:
12. Extinguishment
The donation of this Easement gives rise to a property right, immediately vested in the Grantee, which has a fair market value that is at least equal to the proportionate value that this Easement bears on the date hereof to the fair market value of the Property as a whole at that time. Such proportionate value shall remain constant.
It is the intention of the Parties that no change in conditions surrounding the Property, including for example, but without limitation, changes in the use of properties adjoining or in the vicinity of the Property, will at any time or in any event result in the extinguishment of any of the terms and restrictions set forth in this Easement (the Purpose of the Easement). Notwithstanding the foregoing intention, in order to ensure compliance with 26 CFR 1.170A-14(g)(6), if a sudden and unexpected change in conditions surrounding the Property make impossible or impractical the continued use of the Property for conservation purposes as described herein, and as a result of such change, gives rise to the extinguishment of this Easement by judicial proceedings, the Grantee, on a subsequent sale or exchange of all or part of the Property, shall be entitled to a portion of the proceeds of such sale or exchange at least equal to the proportionate value that the perpetual conservation easement granted hereunder bears to the value of the Property as a whole on the date hereof unless state law provides that the Grantor is entitled to the full proceeds for such judicial conversion without regard to the terms of this Easement. Such portion of the proceeds allocable to the Grantee shall be used by the Grantee in a manner consistent with the Purpose of this Easement as set forth herein.
This Section shall also apply whenever all or part of the Property is taken by the exercise of eminent domain by judicial proceedings the same as any other extinguishment by judicial proceedings otherwise described in this Section. Grantor and the Grantee shall join in appropriate actions at the time of such taking by eminent domain to recover the full value of the taking and all incidental or direct damages resulting from such taking.
This Section shall be construed to cause this Easement to conform to the requirements of 26 CFR §1.170A-14(g)(6), it being the specific intention of the parties that the conservation purposes protected in this Easement shall be treated as being protected in perpetuity in accordance with 26 CFR §1.170A-14(g)(6). [Emphasis added.]
13. Condemnation
If the Easement is taken, in whole or in part, by exercise of the power of eminent domain, Grantor and Grantee shall be entitled to compensation, by the entity declaring power of eminent domain, in accordance with applicable law, policy and procedures. Respective portions shall be determined in accordance with the methodology for sharing the proceeds established in Section 12 above with respect to Extinguishments. [Emphasis added.]
Following the exam, on July 23, 2020, the IRS mailed the FPAA to Valley Park and its TMP. In relevant part, the FPAA states:
You have not established that Valley Park Ranch, LLC made a noncash charitable contribution during the tax year ended December 31, 2016. To the extent you are able to establish that a noncash charitable contribution has been made, you failed to establish that it satisfied all the requirements of I.R.C. § 170 and the corresponding Treasury Regulations for deducting a noncash charitable contribution.
The TMP filed the petition on October 19, 2020. In his petition, petitioner claims that Valley Park maintains its principal place of business in Oklahoma. Though respondent admits in its answer only that Valley Park has used the listed address [in Oklahoma], respondent nevertheless states in motion papers that this case is "almost certainly" appealable to the U.S. Court of Appeals for the Tenth Circuit.
III. Action in the District Court of Rogers County, Oklahoma
On February 25, 2021, Valley Park filed a petition for declaratory judgment with the District Court of Rogers County, Oklahoma (the district court) in which Valley Park prayed for the district court to enter a judgment declaring that, among other things, the extinguishment and condemnation paragraphs in the original deed are ambiguous, thus making it proper for the district court to consider extrinsic evidence to determine the intent of the parties. Valley Park also asked the district court to declare that at the time of execution of the original deed, Valley Park intended that the terms of the original deed would meet the requirements of a qualified easement contribution under section 170 and the corresponding regulations.
CLF was a party to the proceeding; respondent was not.
On May 17, 2021 the district court entered a journal entry of judgment, as follows:
IT IS THEREFORE ORDERED, ADJUDGED, DECREED AND DECLARED that: a) Paragraphs 12 and 13 of the Conservation Easement Deed are ambiguous; b) at the time of the execution of the Conservation Easement Deed, Valley Park intended that the terms of the Conservation Easement Deed would meet the requirements of a qualified conservation easement contribution under Section 170 of the Code and the Regulations relating thereto; c) as a matter of Oklahoma law, any court determining the amount of proceeds to which CLF, or its successors and assigns, is entitled to receive upon an extinguishment of the Conservation Easement under Paragraphs 12 or 13 of the Conservation Easement Deed must construe such provisions consistent with Treas. Reg. §1.170A-14(g)(6); and d) in the event of an extinguishment of the Conservation Easement (in whole or in part), Paragraphs 12 and 13 of the Conservation Easement Deed require that Valley Park and CLF, and their respective successors and assigns, share
any extinguishment proceeds proportionately in accordance with Treas. Reg. §1.170A-14(g)(6).
IV. Motions for Partial Summary Judgment
A. Respondent's Motion
On October 20, 2021, respondent filed a Motion for Partial Summary Judgment. The motion asks the Court to sustain the disallowance on the ground that the deed fails to satisfy the requirements of section 170(h)(5)(A) and Treas. Reg. §1.170A-14(g)(6). Specifically, respondent contends that the language in the original deed's extinguishment paragraph, which provides for the donee's share of the proceeds to "be determined by the court", fails to conform to the requirements of Treas. Reg. § 1.170A-14(g)(6)(ii). Further, respondent does not concede that Valley Park's contribution meets any of the requirements of section 170.
B. Petitioner's Objection and Motion
On November 22, 2021, petitioner filed an Objection to respondent's motion and its own Motion for Partial Summary Judgment together with a Memorandum of Law in Support of Motion for Partial Summary Judgment.
Petitioner avers that the deed complies with section 170(h)(5)(A) and Treas. Reg. § 1.170A-14(g)(6). With respect to the regulation, petitioner argues that the language in the extinguishment paragraph that provides for a court to determine the donee's share, "unless otherwise provided by State or Federal law", thereby incorporates Treas. Reg. § 1.170A-14(g)(6) and thereby complies with Treas. Reg. § 1.170A-14(g)(6)(ii).
In the alternative, petitioner argues that the extinguishment paragraph in the original deed is ambiguous, as determined by the district court. Petitioner points to the district court's declaratory judgment for the propositions that: (1) for state law purposes, any court construing the extinguishment paragraph [in the original deed] should construe it to be consistent with the Extinguishment Regulation; and (2) in the event of an extinguishment, the [original] deed requires the parties to share any proceeds in accordance with the Extinguishment Regulation.
Throughout its motion papers, petitioner uses the term "Extinguishment Regulation" to refer to both Treas. Reg. 1.170A-14(g)(6) (Motion for Partial Summary Judgment, Par. 6) and Treas. Reg. § 1.170A-14(g)(6)(ii) (Memorandum of Law). To the extent that petitioner continues to use the term "Extinguishment Regulation", the Court asks that petitioner clarify whether his use of the term refers generally to paragraph (g)(6) or specifically to paragraph (g)(6)(ii).
Petitioner also argues that the language in the extinguishment paragraph that grants proceeds to the donee "after the satisfaction of prior claims" (the prior claims provision) satisfies the requirements of Treas. Reg. § 1.170A-14(g)(6)(ii) because in fact the Property had no prior claims at the time of the donation.
Petitioner further argues that the regulation is invalid because respondent failed to comply with the Administrative Procedure Act (APA), in its promulgation. See 5 U.S.C. § 706. Petitioner's memorandum notes that (at the time of filing) the validity of the regulation was pending before the U.S. Courts of Appeals for the Sixth and Eleventh Circuits, respectively.
C. Respondent's Objection and Response
Respondent filed an Objection and Response to petitioner's motion on January 31, 2022. In addition to arguing that the original deed's reference to "Federal law" is unavailing, respondent argues that the prior claims provision violates the requirements of section 1.170A-14(g)(6)(i) and (ii) because the grantee is not absolutely entitled to receive proceeds according to its proportionate value at the time of the donation.
With respect to the declaratory judgment of the district court, respondent insists that it should not affect this case because, generally, Oklahoma declaratory judgments do not affect those who were not a party to the suit. To the filing, respondent attached the relevant docket sheet from the district court, showing that respondent was not a party to the proceeding.
D. Petitioner's Motion for Leave to File Sur-Reply
On March 7, 2022, petitioner filed a motion for leave to file sur-reply and lodged a copy of the sur-reply. The motion asserts that the sur-reply is appropriate so that petitioner can respond to allegedly new arguments raised in respondent's objection and response. Because we will order further briefing, as described below, we will deny petitioner's motion for leave as moot.
Discussion
I. Venue in the Event of Appeals
While respondent does not concede or stipulate that Valley Park maintains its principal place of business in Oklahoma, respondent states that venue for an appeal of this case would "almost certainly" lie in the Tenth Circuit. At this stage of the proceedings, we conclude the same in the absence of written stipulation to the contrary. See sec. 7482(b)(1)(E).
II. 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. v. Commissioner, 98 T.C., at 520 .
III. Judicial Extinguishment
A. Statutory and Regulatory Structure
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 "qualified conservation contribution." § 170(f)(3)(B)(iii), (h)(1).
For purposes of subsection (f)(3)(B)(iii), the term "qualified conservation contribution" means a contribution - (A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes. §170(h)(1). For purposes of subsection (h), the term "qualified real property interest" means any of the following interests in real property: (A) the entire interest of the donor other than a qualified mineral interest, (B) a remainder interest, and (C) a restriction (granted in perpetuity) on the use which may be made of the real property. §170(h)(2).
For the donation of an easement to be "exclusively for conservation purposes" the conservation purpose must be "protected in perpetuity". § 170(h)(5)(A). The regulations set forth detailed rules for determining whether this "protected in perpetuity" requirement is met. The motion papers address 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).
B. Jurisprudential Developments
There is a split in the circuits regarding the validity of Treas. Reg. § 1.170A-14(g)(6). We upheld its validity in a recent Court-reviewed Opinion. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020), aff'd 2022 U.S. App. Lexis 6512 at *43 (6th Cir. Mar. 14, 2022). However, the Eleventh Circuit has 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, 2021 U.S. App. Lexis 38555, at *40-41 (11th Cir. Dec. 29, 2021), rev'g and remanding T.C. Memo. 2020-89.
At this stage of the proceedings, we have concluded that appeal of this case would lie in the Tenth Circuit absent written stipulation to the contrary. See sec. 7482(b)(1)(E). Accordingly, we are not bound to follow decisions of the Sixth or Eleventh Circuits in this case. See Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). Nevertheless, we are cognizant that the validity of the entirety of Treas. Reg. 1.170A-14(g)(6)(ii), though affirmed in the Sixth Circuit, remains uncertain in the Eleventh. Compare Oakbrook, 2022 U.S. App. Lexis 6512 at *43, aff'g 154 T.C. 180, with Hewitt, 2021 U.S. App. Lexis 38555, at *40-41.
As the Sixth and Eleventh Circuits have observed, this Court's Oakbrook decision was not unanimous. See Hewitt v. Commissioner, 2021 U.S. App. Lexis 38555, at *27; Oakbrook Land Holdings, LLC, 2022 U.S. App. Lexis 6512 at *13, *44. The undersigned joined part I of Judge Toro's concurring opinion, which part explains that, apart from the issue of compliance with the regulation, the deed in question did not satisfy the statutory requirements for a charitable contribution deduction because the deed did not grant to the donee an "interest[] in real property" as required by section 170(h)(2) of the Code. Oakbrook Land Holdings, LLC,, 154 T.C. at 204-207. Part I further explained that the failure to grant an "interest in real property" as required by section 170(h)(2), affected the deed's compliance with section 170(h)(5)(A). Id. In the Sixth Circuit, the majority declined to consider this argument. Oakbrook Land Holdings, LLC, 2022 U.S. App. Lexis 6512 at *14. But in a concurrence, Judge Guy indicated that he would have considered the argument and would have held that the deed failed to satisfy the requirements of the statute. Id. at *44, *60 (Guy, J., concurring in judgment).
Though the deed in Oakbrook contained a so-called donor improvements provision that is not present in either the original deed or the amendment in the instant case, the analysis set forth in part I of Judge Toro's concurrence is relevant to this case. Respondent has posited that the original deed fails to satisfy the statutory requirements of section 170 in view of alleged defects in the extinguishment paragraph; his motion papers point to the prior claims provision and the language that provides for a court to determine the donee's share of the proceeds "unless otherwise provided by State or Federal law". Petitioner insists that the original deed satisfies the statute.
As acknowledged above, respondent does not concede that Valley Park's contribution meets any of the requirements of section 170. We will consider additional arguments, as needed, in due course.
C. Intent of the Parties at the Time of Donation
Petitioner argues that the Court should grant his motion for partial summary judgment because the district court's declaratory judgment ruled that: (a) the extinguishment and condemnation paragraphs are ambiguous and; (b) at the time of execution of the original deed, the parties intended for those paragraphs to comply with section 170 and the corresponding regulations.
In prior cases, we have explained that "text cannot be characterized as . . . an 'interpretational aid' [where] there is nothing that needs interpretation" because the deed's provisions are "clear and unambiguous." Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 144 (2019) (quoting Belk v. Commissioner, 774 F.3d 221, 230 (4th Cir. 2014), aff'g 140 T.C. 1 (2013)). If a deed does not convey specific property rights as required by the regulation, then the parties' "general intention to comply with section 170(h) and the regulations does not make up the difference." R.R. Holdings, LLC, T.C. Memo. 2020-22. ("Petitioner does not argue that State law permits us to consult parol evidence to determine the meaning of terms in the deed, nor does petitioner proffer such parol evidence of intended meanings.")
Unlike the taxpayer in R.R. Holdings¸ petitioner in the instant case presents a judgment of a local court holding that, under Oklahoma law, the extinguishment and condemnation paragraphs in the original deed are ambiguous and finding that Valley Park's intention at the time of the donation was to comply with the Code and the regulations. In Belk, 140 T.C. at 14, we looked to relevant state law to interpret the agreement. In situations in which a deed is ambiguous, petitioner asserts that Oklahoma law calls for a court to first ascertain the true intention of the parties. His declaration states that the parties' intention is further demonstrated by the amendment.
IV. Further Briefing
Because respondent's principal ground advanced on motion for denying Valley Park's claimed deduction under section 170 is that the original deed fails to satisfy the requirements of section 1.170A-14(g)(6) of the Treasury Regulations, the parties' motion papers understandably focus heavily on the regulation. See e.g., Respondent's Motion for Partial Summary Judgment at 8; Petitioner's Motion for Partial Summary Judgment, Pars. 15, 17; Petitioner's Memorandum of Law at 14; Respondent's Objection and Response at 2-3, 9, 15.
After careful consideration of the parties' motion papers, and in light of the uncertainty of the validity of Treas. Reg. §1.170A-14(g)(6)(ii), the Court finds that additional briefing is necessary, to address the deed's satisfaction of the statutory requirements without regard to the regulation. Specifically, the Court will order the parties to address the following issues:
• Whether the extinguishment and condemnation paragraphs in the original deed satisfy the statutory requirement, set forth in section 170(h)(2), that the contribution is a "qualified real property interest". In particular, the parties shall address whether the statutory requirement is satisfied in view of the prior claims provision in the extinguishment paragraph. See Oakbrook, 154 T.C. at 204-207 (Toro, J., concurring).
• Whether the extinguishment and condemnation paragraphs satisfy the statutory requirement, set forth in section 170(h)(5), that the conservation purpose be "protected in perpetuity". In particular, the parties shall address whether the statutory requirement is satisfied in view of the prior claims provision in the extinguishment paragraph. Id. at 206. They shall also address whether the statute is satisfied in view of the language in the extinguishment paragraph of the original deed that provides for a court to determine the donee's share of the proceeds "unless otherwise provided by State or Federal law". Id.
• Whether the extinguishment and condemnation paragraphs satisfy the statutory requirements of sections 170(h)(2) (qualified real property interest) and 170(h)(5) (protected in perpetuity) on account of the declaratory judgment of the district court. In discussing the implications of the declaratory judgment for the satisfaction of the statutory requirements, the parties shall address the extent, if any, to which the
amendment causes the extinguishment and condemnation paragraphs to satisfy the aforementioned statutory requirements.
In consideration of the foregoing, it is
ORDERED that petitioner's motion for leave to file sur-reply, filed March 7, 2022, is denied as moot. It is further
ORDERED that petitioner shall file a response to this Order, addressing the issues identified above, on or before May 2, 2022. It is further
ORDERED that respondent shall file a response to this Order and petitioner's response, on or before June 2, 2022.