Thursday February 2, 2023
Conservation Deed Defect Not Sufficient for Summary Judgment
Hancock County Land Acquisitions LLC et al. v. Commissioner; No. 12385-20
HANCOCK COUNTY LAND ACQUISITIONS, LLC, SOUTHEASTERN ARGIVE INVESTMENTS, LLC, TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
Washington, DC 20217
This case involves a charitable contribution deduction claimed by Hancock County Land Acquisitions, LLC (Hancock), for a conservation easement. On December 17, 2021, the case was assigned to the undersigned for trial or other disposition.
Currently before the Court is a motion for partial summary judgment filed by the Internal Revenue Service (IRS or respondent). Respondent contends that Hancock's deduction should be disallowed in its entirety for two reasons: (1) failure of the easement deed to protect the conservation purpose in perpetuity, and (2) alleged defects in Hancock's appraisal summary. Finding that there exist genuine disputes of material fact, we will deny the motion.
The following facts are derived from the parties' pleadings, motion papers, and declarations and exhibits attached thereto. They are stated solely for the purpose of deciding respondent's motion 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).
Hancock is a Mississippi limited liability company (LLC) that has at all relevant times been treated as a partnership for Federal income tax purposes. Hancock had its principal place of business in Georgia when its petition was filed. Absent stipulation to the contrary, this case would be appealable to the U.S. Court of Appeals for the Eleventh Circuit. See § 7482(b)(1)(E).1
On October 1, 2013, Mine Assets Holdings, LLC (MAH), purchased a 1,700-acre tract of land in Hancock County, Mississippi, for $4 million. This tract lies within a 125,000-acre “acoustical buffer zone” surrounding the Stennis Space Center, a rocket propulsion test facility operated by the National Aeronautics and Space Administration (NASA). Cognizant of the risks surrounding tests of rocket engines, the United States for decades has held a “perpetual and assignable easement” over this buffer zone (NASA easement). The NASA easement grants the United States the right, within the buffer zone, “to prohibit human habitation or human occupancy of dwellings and other buildings, and the right to prohibit the construction of dwellings and other buildings susceptible of being used for human habitation or human occupancy.”
On March 12, 2015, MAH contributed roughly 1,400 acres of the above-described tract to Wet Mine Assets Holding, LLC (WMAH). On April 28, 2016, Hancock was formed, with Southeastern Argive Investments, LLC (SAI), as its tax matters partner. At that point WMAH held a 98% interest in Hancock (i.e., 98 of 100 membership units).
On June 8, 2016, SAI began soliciting investors through a private placement memorandum, with the goal of raising $18,247,575 to purchase 97 units of Hancock from WMAH. On June 15, 2016, WMAH contributed 236.12 acres of its 1,400-acre tract to Hancock as a capital contribution. Those 236.12 acres (Property) comprise the real estate subject to the easement in this case. Two days later, on June 17, 2016, SAI's offering closed, and WMAH sold to SAI 97 of its 98 Hancock units for $18,247,575, as contemplated in the private placement memorandum.
On August 2, 2016, Hancock donated a conservation easement over the Property — separate and distinct from the NASA easement — to the Atlantic Coast Conservancy, Inc. (ACC or grantee), a “qualified organization” within the meaning of section 170(h)(3). The deed of easement was recorded the following day. At the time of its donation, the Property appears to have had some existing improvements, including access roads, animal feeders, and wooden shooting houses.
The easement deed reserves to Hancock as grantor the right to make certain future improvements to the Property. First, Hancock may maintain, enlarge, or replace the main access road and secondary access roads in “Acceptable Development Areas.” Second, Hancock may construct new fences, and it may maintain, enlarge, and/or replace existing fences, for the purpose of preventing trespassing on the Property. Third, Hancock may maintain, enlarge, or replace certain “rustic structures,” so long as the structures “blend with natural surrounding and complement the natural and scenic features of the landscape.” Finally, Hancock may establish and maintain hunting stands and platforms so long as such accessories “minimize[ ] damage to the Property, and so long as these activities preserve the value of the Open Area as wildlife habitat.”
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, section 15.2 of the deed, entitled “Proceeds,” specifies the amount of proceeds that ACC would receive:
This Easement constitutes a real property interest immediately vested in . . . [ACC]. For the purposes of this Subsection and pursuant to Treasury Regulation 1.170A-14(g)(6)(ii), the Parties stipulate that this Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Property unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the Easement at the time of this grant to the value of the Property, without deduction for the value of the Easement, at the time of this grant. . . . For purposes of this paragraph, the ratio of the value of the Easement to the value of the Property unencumbered by the Easement shall remain constant.
Hancock 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 $180,177,000 for the conservation easement it donated to ACC. Hancock included with its return a Form 8283, Noncash Charitable Contributions, and appended a document titled “Supporting Documentation for Form 8283.”
The IRS selected Hancock's 2016 return for examination. On July 23, 2020, the IRS issued petitioner a timely notice of final partnership administrative adjustment (FPAA) disallowing (among other things) the charitable contribution deduction and determining penalties. Petitioner timely petitioned this Court for readjustment of the partnership items. On July 8, 2021, respondent filed a motion for partial summary judgment, to which petitioner timely responded.
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. 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); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). 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. 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.” § 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).
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 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 by carve-outs for donor improvements. Accord, TOT Prop. Holdings, LLC, 1 F.4th at 1363; PBBM-Rose Hill, Ltd., 900 F.3d at 208. Respondent contends that the deed in this case has this defect, and petitioner disagrees.
The deed provides that, if the Property is sold following judicial extin-guishment of the easement, ACC's share of the proceeds will be determined by multiplying the Property's fair market value (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] grant to the value of the Property, without deduction for the value of the Easement, at the time of th[e] grant.” This fraction is consistent with the formula set forth in the regulation. See Treas. Reg. § 1.170A-14(g)(6)(ii).
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.” Coal Prop. Holdings, 153 T.C. at 138 (alteration in original). 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, 120 T.C.M. (CCH) 28, 30 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, 120 T.C.M. (CCH) 23, 26 n.4 (same).
The Property here, comprising 236.12 acres, appears to have some existing improvements, including access roads, animal feeders, and wooden shooting houses. Hancock reserved the right to make specified future improvements: maintaining or enlarging certain access roads, constructing fences to prevent trespassing, and erecting “rustic structures” and hunting platforms. The latter items would ap-parently be short-lived structures fabricated of wood. Petitioner maintains that any such structures would have to comply with the NASA Easement, which gives the United States the right to object to the construction of “dwellings and other buildings susceptible of being used for human habitation or human occupancy.”
Petitioner may be able to establish that the existing improvements to the Property would not appreciate in value and that any future improvements would be unlikely to increase its FMV in a meaningful way (if at all). If any increase in value attributable to improvements would be de minimis, petitioner may plausibly contend that the Deed's “donor improvements” clause would not cause ACC to receive less than its proportionate share of the proceeds in the event the Property were sold following judicial extinguishment of the easement. The donor improvements clause would then be empty verbiage that could not cause the donee to receive less than its full proportionate share.
We have previously denied summary judgment in easement cases where the carved-out donor improvements had questionable (if any) real value. See, e.g., Wisawee Partners II, LLC v. Commissioner, T.C. Dkt. No. 6105-18 (Jan. 7, 2022) (order); Little Horse Creek Prop., LLC v. Commissioner, T.C. Dkt. No. 7421-19 (Mar. 2, 2021) (order); Oconee Landing Prop., LLC v. Commissioner, T.C. Dkt. No. 11814-19 (Aug. 18, 2021) (order). Viewing the facts and inferences to be drawn from the facts in the light most favorable to petitioner here, we conclude that genuine disputes of material fact dictate that we deny respondent's motion for partial summary judgment on this issue.2
C. Appraisal Summary
Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain[ ] a qualified appraisal of such property and attach[ ] to the return . . . such information regarding such property and such appraisal as the Secretary may require.” § 170(f)(11)(C). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a)(1)(B), 98 Stat. at 691; see Treas. Reg. § 1.170A-13(c)(2). The IRS has prescribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450.
A completed appraisal summary must include “[t]he manner of acquisition . . . and the date of acquisition of the [donated] property by the donor,” as well as “[t]he cost or other basis of the property.” § 1.170A-13(c)(4)(ii)(D) and (E); see also DEFRA, § 155(a)(1)(C) (requiring taxpayer to include with the return “such additional information (including the cost basis and acquisition date of the contributed property) as the Secretary may prescribe”). Failure to comply with these requirements generally precludes a deduction. See § 170(f)(11)(A) (providing that “no deduction shall be allowed” unless a taxpayer meets the appraisal summary requirements of section 170(f)(11)(C)).
Section B, Part I of Form 8283 requires the taxpayer to supply “Information on Donated Property.” In box 5(a) Hancock described the property as a “cons[ervation] easement under IRC 170(h) on land in Hancock County, MS.” In box 5(d), which asks for “Date acquired by donor,” Hancock wrote “10-2013.” In box 5(e), which asks “How acquired by donor,” Hancock wrote “Purchase.” In box 5(f), which asks for “Donor's cost or adjusted basis,” Hancock wrote “165,551.” And in box 5(h), which asks for “Amount claimed as a deduction,” Hancock wrote “180,177,000.”
Respondent does not challenge the amount Hancock reported as its “cost or adjusted basis,” i.e., $165,551. But respondent contends that Hancock incorrectly reported that it had acquired the Property by purchase in October 2013. MAH indeed had acquired by purchase, in October 2013, the tract from which the Property was carved. But Hancock was the donor, and Hancock acquired the Property on June 15, 2016, by capital contribution from WMAH, which had previously received the Property as a capital contribution from MAH. Respondent contends that these errors in the appraisal summary necessitate disallowance of Hancock's charitable contribution deduction.
We reject petitioner's contention that Hancock “strictly complied” with the reporting requirements in Treasury Regulation § 1.170A-13. But petitioner alternatively relies on a line of cases beginning with Bond v. Commissioner, 100 T.C. 32, 41-42 (1993), which have held that some of these requirements can be satisfied by substantial, rather than by literal, compliance. “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.” Durden v. Commissioner, T.C. Memo. 2012-140, 103 T.C.M. (CCH) 1762, 1763. Substantial compliance may be shown where the taxpayer “provided most of the information required” or made omissions “solely through inadvertence.” Hewitt v. Commissioner, 109 T.C. 258, 265 & n.10 (1997), aff'd without published opinion, 166 F.3d 332 (4th Cir. 1998). But in order to substantially comply, the taxpayer must satisfy all reporting requirements that relate “to the substance or essence of the statute.” Bond, 100 T.C. at 41 (quoting Taylor v. Commissioner, 67 T.C. 1071, 1077 (1977)).
We have previously held that a taxpayer's deliberate failure to disclose on Form 8283 the “cost or adjusted basis” of charitable contribution property goes to the essence of the statute. We reasoned that such information is critical in alerting the Commissioner to potential overvaluations of such property. See, e.g., Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, 116 T.C.M. (CCH) 325, 329. Respondent urges that correct reporting of the Property's acquisition date and manner of acquisition goes to “the essence of the statute” for the same reason.
Petitioner replies that Hancock correctly reported its cost or adjusted basis, which it derived from what appears to have been the last arm's-length transaction involving the Property, namely, MAH's purchase of the 1,700-acre tract for $4 million in October 2013. In petitioner's view, information about subsequent capital contributions among related parties would not add much to the Commissioner's sum of knowledge. Most relevant for a potential IRS examiner would arguably be the in-formation petitioner did disclose: a basis of $165,551, derived from purchase of a 1,700-acre tract in October 2013; and a claimed contribution $180,177,000, derived from donating an easement over 14% of the tract in August 2016. According to petitioner, this constituted a sufficient red flag for audit.
We conclude that little would be gained by deciding the “substantial compliance” question now. Section 170(F)(11)(A)(ii)(II) excuses failure to satisfy the reporting requirements of section 170, including requirements relating to appraisal summaries, if “it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.” Regardless of how the substantial compliance question is resolved, determining whether Hancock qualifies for the reasonable cause defense implicates factual questions that would require testimony from its principals and professional advisors. See Belair Woods, 116 T.C.M (CCH) at 330. Resolution of this latter issue, as well as of the central valuation questions, will require that this case (if not settled) be tried. We do not believe that trial would be appreciably simplified by addressing the Form 8283 issue any further at this point.
In consideration of the foregoing, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed July 8, 2021, is denied. It is further
ORDERED that, on or before February 10, 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.
(Signed) Albert G. Lauber
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26, U.S.C., in effect for the years in issue, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for all the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2. 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, __ F.4th __, __ (slip op. at 36) (11th Cir. Dec. 29, 2021), rev'g and remanding T.C. Memo. 2020-89. Because we will deny respondent's motion for partial summary judgment for the reasons stated in the text, we need not consider at this time the application of Hewitt to this case.
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