Opinion
12421-19
05-05-2022
LONGWOOD PRESERVE HOLDINGS, LLC, LONGWOOD PRESERVE INVESTORS, LLC, TAX MATTERS PARTNER Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler Judge
This case involves a charitable contribution deduction claimed by Longwood Preserve Holdings, LLC (Longwood), for a conservation easement. The Internal Revenue Service (IRS or respondent) disallowed this deduction and determined penalties. On January 28, 2020, respondent filed a motion for partial summary judgment, and on April 3, 2020, petitioner filed a cross-motion for partial summary judgment. On September 10, 2020, this case was assigned to the undersigned for trial or other disposition. On November 3, 2020, petitioner filed a motion to stay this case, pending a decision by the Court of Appeals for the Eleventh Circuit, indicating that this Court's decision in Hewitt v. Commissioner, T.C. Memo. 2020-89, addresses similar issues as those raised in respondent's motion. We granted petitioner's motion to stay on February 17, 2021, pending a decision from the Eleventh Circuit. On December 29, 2021, the Eleventh Circuit entered its decision in Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. Dec. 29, 2021), rev'g and remanding T.C. Memo. 2020-89. Accordingly the stay in this proceeding is no longer in effect and we are prepared to rule on the parties cross-motions for partial summary judgment. Based on the reasoning below, we will deny the parties cross-motions.
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 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).
Longwood is a Georgia limited liability company formed in 2014 and is treated as a partnership for Federal income tax purposes. Petitioner Longwood Preserve Investors, LLC is its tax matters partner. Longwood had its principal place of business in Georgia when this petition was filed.
In December 2014 Longwood acquired by capital contribution approximately 519 acres of land (property) located in Glynn County, Georgia. On December 15, 2015, Longwood granted to the Georgia Alabama Land Trust (GALT or grantee) a conservation easement over the property. The deed of easement was recorded the same day. Longwood filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return, Longwood claimed a charitable contribution deduction of $24,100,000 for the donation of the conservation easement.
The deed of easement recites the conservation purposes and generally prohibits commercial or residential development. The conservation purposes include the protection of natural habitats, forests and wetlands, and the preservation of open space for the scenic enjoyment of the public. The deed reserves certain rights to Longwood, including the construction and/or maintenance of the following: (1) a ropes course; (2) a community garden; and (3) a nature trail. Longwood must generally notify GALT before exercising the aforementioned reserved rights.
The IRS selected Longwood's 2015 tax return for examination. Following the examination of that return, the IRS issued petitioner, on April 9, 2019, a timely notice of final partnership administrative adjustment (FPAA) disallowing Longwood's charitable deduction and determining penalties. Petitioner timely petitioned this Court for readjustment of the partnership items.
Discussion
I. Arguments of the Parties
Respondent's motion seeks summary adjudication on the grounds that Longwood's conservation easement contribution was not a qualified contribution under I.R.C. § 170(h) because it does not satisfy the perpetuity requirement of I.R.C. § 170(h)(5)(A). In his memorandum of law in support of his motion for partial summary judgment, respondent cites to Treas. Reg. § 1.170A-14(g)(6)(ii) (the "Proceeds Regulation") and contends petitioner's conservation deeds violates this regulation by improperly carving out donor retained improvements. Respondent also cites to our holdings in Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); Palmolive Building Investors, LLC v. Commissioner, 149 T.C. 380 (2017); and the Court of Appeals for the U.S. Fifth Circuit decision in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018) as further support of his argument.
Petitioner's cross-motion for partial summary judgment seeks summary adjudication in its favor and seeks a determination from this Court that the deed of easement satisfies the perpetuity requirement of I.R.C. § 170(h). In petitioner's memorandum of law in support of its motion, petitioner contends how the Proceeds Regulation is invalid, arbitrary and capricious; how this regulation was promulgated without explanation or analysis in violation of the Administrative Procedures Act; and how this regulation contradicts respondent's previous interpretation of the statute at issue in this case.
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 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. See 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. "If, in this generous light, a material issue is found to exist, summary judgment is improper." Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc., 182 F.3d 157, 160 (2d Cir. 1999).
III. 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." I.R.C. § 170(f)(3)(A). But there is an exception for a "qualified conservation contribution." I.R.C. § 170(f)(3)(B)(iii), (h)(1). For an easement of the sort involved here, a charitable contribution deduction is allowable only if the underlying conservation purpose is "protected in perpetuity." I.R.C. § 170(h)(5)(A); see TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1362 (11th Cir. 2021); PBBM-Rose Hill, Ltd., 900 F.3d at 201.
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 Prop. Holdings, 153 T.C. at 137-140, 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 vigorously resists these contentions.
IV. Carve-Out for Donor Improvements
The deed here provides that, if the property is sold following judicial extinguishment of the easement, Longwood's share of the proceeds will be determined by "multiplying the fair market value of the property unencumbered by th[e] Conservation Easement (minus any increase in value after the date of th[e] Conservation Easement attributable to improvements) by 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 Proceeds Regulation. See Treas. Reg. § 1.170A-14(g)(6)(ii). However, before applying the regulatory apportionment fraction, the deed at issue here - like the deed in Coal Prop. Holdings, - reduces the sale proceeds by "any increase in value after the date of th[e] . . . [grant] attributable to improvements." See Coal Prop. 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 fair market value of any new improvements that the donor later made to the property. Ibid. We held in Coal Prop. 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.
Respondent's motion seeks to bring our decision in Coal Prop. Holdings, to an illogical conclusion; namely, that no right of use or ownership in future improvements may be retained by the donor. However, we have never held that retaining rights to improvements in the donated property, ipso facto, violates the "granted in perpetuity" requirement.
In Coal Prop. 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).
Here, the original deed mentions existing structures, which include a storage shed inside the main entrance and a metal entrance gate. Respondent alleges these structures are the only existing improvements at the property. Accordingly, for purposes of ruling on respondent's motion for partial summary judgement, we assume that only a storage shed and metal entrance gate exist on the property.
Paragraph 4(e) of the original deed reserved to the "Grantor" - i.e., to Longwood - the right to make future improvements to the property covered by the original easement. These improvements could include the construction and/or maintenance of the following: (1) a ropes course, which would include a "trailhead, permeable parking area, picnic pavilions, sheds, restroom facilities, entrance gates and booths, and informational kiosks;" (2) a community garden and farmer's market, which would include the construction of "agricultural buildings" such as a "small produce stand or farmer's market facility" (barns and sheds); and (3) a nature trail, which would include a permeably surfaced public walking and bicycle trail.
In short, the property has no existing material improvements, and the permitted future improvements appear to consist of modest structures intended for recreational and educational use. At trial, petitioner may be able to establish that these improvements (if built) would be unlikely to increase the property's fair market value in a material way (if at all). If any increase in value attributable to improvements would be de minimis, petitioner could contend that the deed's "donor improvements" clause would not cause GALT to receive less than its proportionate share of the proceeds in the event the property were sold following judicial extinguishment of the easement.
Valuation of improvements can be difficult to quantify accurately and is an intensely factual matter. We have previously denied summary judgment in easement cases where the carved-out donor improvements had questionable (if any) real value. See, e.g., 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.
V. Validity of the Proceeds Regulation
Petitioner contends that the Proceeds Regulation goes beyond its statutory limitations, suffers from fatal procedural defects in violation of the Administrative Procedure Act (APA), and lacks rational basis because it contradicts respondent's longstanding interpretation. We rejected this APA challenge in a recent Court-reviewed Opinion. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (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. Dec. 29, 2021), rev'g and remanding T.C. Memo. 2020-89 (applying Oakbrook). Appeal of this case probably lies in the Eleventh Circuit. Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
We further note how petitioner's cross-motion relates to the single issue of whether the easement deed satisfies the perpetuity requirement of I.R.C. § 170(h) and consequently petitioner's cross-motion would not resolve this case. After considering matters of judicial economy, we conclude significant issues for trial would remain even if we were to grant petitioner's cross-motion for partial summary judgment; therefore, it is unclear that the purposes of summary judgment would be accomplished here. See e.g. FPL Grp., Inc. & Subs. 116 T.C. at 74.
Considering the foregoing, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed January 28, 2020, is denied. It is further
ORDERED that petitioner's Motion for Partial Summary Judgment, filed April 3, 2020, is denied.