Friday July 30, 2021
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No Summary Judgment on Conservation Easement Gift
Montgomery-Alabama River, LLC, Parkway South, LLC, Tax Matters Partner, Petitioner v.
Commissioner of Internal Revenue, Respondent
United States Tax Court
This case involves a charitable contribution deduction claimed by Montgomery-Alabama River, LLC (Montgomery), for a conservation easement. Currently before the Court are respondent's motion for partial summary judgment, filed July 31, 2020, and petitioner's cross-motion for partial summary judgment, filed October 30, 2020. We shall deny both motions.
The following facts are derived from the parties' pleadings, motion papers, and exhibits attached thereto. They are stated solely for purposes of deciding the parties' cross-motions for partial summary judgment 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).
Montgomery was formed as a Georgia limited liability company in July 2014. For its short tax year beginning December 3, 2014, and ending December 31, 2014, it was treated as a partnership for Federal income tax purposes. Montgomery is subject to the TEFRA unified audit and litigation procedures, and petitioner Parkway South, LLC, is its tax matters partner.
In September 2014 Montgomery acquired, by capital contribution, 132 acres of land in Elmore County, Alabama (Property). On December 2, 2014, Montgomery River Group, LLC, an entity owned by a group of investors, purchased a 95% interest in Montgomery for $3.4 million. On December 15, 2014, Montgomery granted to the National Wild Turkey Federation Research Foundation (Foundation) a conservation easement over the Property. The deed of conservation easement (Deed) was recorded the same day. One week later, on December 22, 2014, Montgomery donated its fee simple interest in the Property to American Upland Land Trust, LLC (Upland), a passthrough entity wholly owned by the Foundation. In March 2019 Upland sold its fee simple interest in the Property (plus two other properties) to an unrelated entity for $875,000.
The Deed recites the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to the donor, including the rights to conduct agricultural and foresting activities. The donor also reserved the right to construct within the conserved area "a limited number of improvements and buildings." These improvements could include the construction of a "residential dwelling and related outbuildings and structures," the construction of "facilities normally used in connection with supplying utilities [and] waste systems," the construction of "new wells for agricultural or residential use," and the construction of roads and trails. Montgomery made no improvements to the Property during the week between its donation of the easement and its donation of the fee simple interest.
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 16 provides that "[t]he amount of the proceeds to which Grantee shall be entitled shall be determined in accordance with the Proceeds paragraph * * *, unless state law provides otherwise." Paragraph 18, captioned "Proceeds," specifies that the Deed granted the Foundation "a real property interest, immediately vested in Grantee," and that this vested property interest entitled the Foundation to receive, in the event of an extinguishment, a specified share of any future proceeds.
Montgomery timely filed Form 1065, U.S. Return of Partnership Income, for its short taxable year ending December 31, 2014. On that return it claimed a charitable contribution deduction of $12,675,000 for its donation of the easement. It also claimed a charitable contribution deduction of $4,225,000 for its donation of the fee simple.
Following examination of that return the IRS issued petitioner, on March 7, 2019, a notice of final partnership administrative adjustment (FPAA) disallowing in full the charitable contribution deduction for the easement. The FPAA also adjusted downward Montgomery's deduction for the fee simple donation, stating that the fair market value (FMV) of the Property was $543,000. The FPAA alternatively determined that, if any deduction for the easement were allowable, Montgomery had not established that the FMV of the easement exceeded $252,000.
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. 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. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party "may not rest upon the mere allegations or denials" of his pleadings but instead "must set forth specific facts showing there is a genuine dispute" for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
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." Sec. 170(f)(3)(A). But there is an exception for a "qualified conservation contribution." Sec. 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." Sec. 170(h)(5)(A).
The regulations set forth detailed 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 a judicial extinguishment of the easement. See sec. 1.170A-14(g)(6), Income Tax Regs. 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 by carve-outs for donor improvements. Respondent contends that the Deed in this case has these defects, and petitioner vigorously resists these contentions. The parties have advanced several arguments and sub-arguments, which we consider in turn.
1. State Law Override
Section 1.170A-14(g)(6)(ii), Income Tax Regs., requires that the charitable grantee receive, in the event an easement is extinguished, a proportionate share of the proceeds upon any subsequent sale of the property. This regulation makes an exception if the applicable State law would allow the donor to retain "the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction." Ibid. Petitioner contends that Alabama law (the law applicable here) dictates that the Foundation would not receive any proceeds if a court later extinguishes, terminates, or condemns the Foundation's contractual rights under the Deed.
We have previously addressed and rejected the same argument about the effect of Alabama law with respect to the conservation easement at issue here. See Montgomery-Alabama River, LLC v. Commissioner, T.C. Memo. 2021-62, at *9 (denying petitioner's motion to certify this question to the Alabama Supreme Court because "Alabama law unambiguously treats conservation easements as real property interests"); see also Sells v. Commissioner, T.C. Memo. 2021-12, at *16-*19; Smith Lake, LLC v. Commissioner, T.C. Memo. 2020-107, 120 T.C.M. (CCH) 35, 37; Hewitt v. Commissioner, T.C. Memo. 2020-89, 119 T.C.M. (CCH) 1593, 1598-1599. We reject petitioner's argument for the reasons stated in those opinions.
2. Carve-Out for Donor Improvements
The Deed provides that, if the Property is sold following judicial extinguishment of the easement, the Foundation's share of the proceeds will be determined by multiplying the Property's FMV — an amount presumably equal to the sale proceeds — by a fraction. That fraction is "the ratio of the value of the Conservation Easement at the time of th[e] conveyance to the value of the Property at the time of th[e] conveyance without deduction for the value of the Conservation Easement." This fraction is consistent with the formula set forth in the regulation. See sec. 1.170A-14(g)(6)(ii), Income Tax Regs.
Before applying the regulatory apportionment fraction, however, the Deed at issue here — like the deed in Coal Property Holdings — reduces the multiplicand (viz., the sale proceeds) by "any increase in value after the date of th[e] * * * [grant] attributable to improvements." See Coal Property Holdings, 153 T.C. at 138. As we explained in that Opinion, any such increase in value would be attributable to (1) appreciation in the value of the improvements existing when the easement was granted, plus (2) the FMV of any new improvements that the donor later made to the property. Ibid. We held in Coal Property Holdings that reducing the grantee's share in this way violated the "granted in perpetuity" requirement because it prevented the grantee from receiving its full proportionate share of any future sale proceeds. Id. at 137-140.
In Coal Property Holdings the improvements existing when the easement was granted "included 20 natural gas wells, two cell phone towers, various roads, and various electricity installations." Id. at 138. The donor reserved the right to make future improvements, including utility installations, roads, and driveways "for vehicular access to areas of the Property on which the existing and additional structures and related ancillary improvements are and may be constructed." Ibid. These existing and contemplated future improvements had obvious value. Cf. Englewood Place, LLC v. Commissioner, T.C. Memo. 2020-105, at *10 n.4 ("[T]he deed reserved to * * * [the donor] the right to make post-contribution improvements to the conserved area, including the rights (for example) to construct barns, sheds, roads, a residential driveway, and utilities (including water, septic, and power lines)."); Maple Landing, LLC v. Commissioner, T.C. Memo. 2020-104, at *10 n.4 (same).
Paragraph 4(e) of the Deed in this case, captioned "Improvements," provides that "Grantor [and its successors] reserves the right to have a limited number of improvements and buildings." Subparagraph (i)(A) permits the grantor to construct a "residential dwelling and related outbuildings and structures." Paragraph 4(f) permits the grantor to construct "facilities normally used in connection with supplying utilities [and] waste systems." Paragraph 4(g) permits the grantor to construct "new wells for agricultural or residential use." And paragraph 4(h) permits the grantor to construct roads and trails. These contemplated future improvements, like those present in Coal Property Holdings, Englewood Place, and Maple Landing, had obvious value.
Petitioner contends, however, that it is entitled to summary judgment because Montgomery donated both a conservation easement over the Property and the fee simple interest in the Property itself. The Foundation thus owned — directly or through Upland, its wholly-owned disregarded entity — the entire bundle of sticks that constituted the Property's value. Under these circumstances, petitioner contends, the carve-out for the value of donor improvements is nonproblematic because the Foundation, as the holder of the fee simple interest, would own those improvements anyway. In short, petitioner argues that the fee simple donation eliminated the "possibility that [Montgomery] could retain an impermissible interest in the proceeds of any judicial extinguishment of the easement."
Respondent urges that the fee simple donation is irrelevant because it was not made simultaneously with the donation of the easement, but a week later. He asserts that the value of the donor's and donee's interests must be analyzed "at the time of the gift." Sec. 1.170A-14(g)(6)(ii), Income Tax Regs.; see PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 202 (5th Cir. 2018). Petitioner counters that both donations were made pursuant to a "unified plan" and should be considered to have been made simultaneously. Respondent alternatively contends that the fee simple donation caused violation of the Code's perpetuity requirement "by terminating the easement through the state law merger of estates," reserving the right to present evidence at trial on this point.
We conclude that genuine disputes of material fact dictate that we deny both motions for partial summary judgment. The question whether Montgomery made both donations as part of a "unified plan" presents factual questions that are ill-suited to summary disposition. And we do not believe that respondent should be foreclosed from showing at trial that the subsequent fee simple donation terminated the easement through a "merger of estates."
Indeed, if the easement and the fee simple interest were merged, the only remaining question would seem to concern valuation. Petitioner claimed a total contribution deduction of $16.9 million: $12.675 million for the easement and $4.225 million for the fee simple. If the two estates were merged, the Foundation essentially owned the entire Property, and the question would be whether that was worth $16.9 million, as petitioner contends, or $543,000, as respondent contends.
3. Validity of the Regulation
Finally, petitioner contends that the "judicial extinguishment" 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. We comprehensively addressed and rejected these arguments in a recent Court-reviewed Opinion. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020). We need not repeat that analysis here.
In consideration of the foregoing, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed July 31, 2020, is denied. It is further
ORDERED that petitioner's Motion for Partial Summary Judgment, filed October 30, 2020, is denied. It is further
ORDERED that, on or before July 12, 2021, the parties shall file a status report expressing their views as to the conduct of further proceedings in this case.
(Signed) Albert G. Lauber