Morgan Run Partners, LLC, Overflow Marketing, LLC, Tax Matters Partner ( 2022 )

United States Tax Court
T.C. Memo. 2022-61MORGAN RUN PARTNERS, LLC, OVERFLOW MARKETING, LLC,
TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 8669-20. Filed June 14, 2022.
—————
Vivian D. Hoard, for petitioner.
John T. Arthur, Christopher D. Bradley, Marissa J. Savit, and Alexan-
dra E. Nicholaides, for respondent.
MEMORANDUM OPINION
LAUBER, Judge: This is a syndicated conservation easement
case. The Internal Revenue Service (IRS or respondent) disallowed the
charitable contribution deduction claimed for the easement by Morgan
Run Partners, LLC (Morgan), and determined penalties. Currently be-
fore the Court is respondent’s Motion for Partial Summary Judgment.
Respondent contends that the deduction was properly disallowed be-
cause the easement’s conservation purpose was not “protected in perpe-
tuity.” See § 170(h)(5)(A). 1 Separately, respondent contends that the
IRS complied with the requirements of section 6751(b)(1) by securing
timely supervisory approval of the penalties. We will deny the Motion
1 Unless otherwise indicated, all statutory references are to the Internal Reve-
nue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation refer-
ences 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 Pro-
cedure.
Served 06/14/22
2
[*2] on the section 170(h)(5)(A) question but grant it with respect to sec-
tion 6751(b)(1).
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 respondent’s Motion 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).
Morgan is an Alabama limited liability company organized in
May 2016. It is treated as a TEFRA partnership for Federal income tax
purposes, and petitioner Overflow Marketing, LLC, is its tax matters
partner. 2 Morgan had its principal place of business in Alabama when
the Petition was timely filed.
In November 2016 Greenwood Partners, LLC, acquired a 94%
membership interest in Morgan by contributing to it roughly 232 acres
of land (Property) in Jefferson County, Alabama. In December 2016
Morgan granted to the National Farmer’s Trust (Trust or grantee) a con-
servation easement over the Property. The deed of easement was rec-
orded on December 20, 2016.
The easement deed states that it “gives rise to a real property
right and interest.” Article 6.1 provides that the fair market value
(FMV) of the Trust’s right and interest “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.” The deed thus defines
the Trust’s property right as equal to the FMV of the easement, but it
does not specify the point in time at which this calculation is to be made.
The deed does not address the possibility that the easement might
be extinguished in a future judicial proceeding. Rather, article 6.5 ex-
presses the parties’ intention that “no change in conditions . . . will at
any time or in any event result in the extinguishment of any of the cov-
enants, restrictions or easements” specified in the deed. Article 6.7
acknowledges “that circumstances could arise which would justify the
modification of certain of the restrictions” set forth in the deed. In that
2 Before its repeal, TEFRA (the Tax Equity and Fiscal Responsibility Act of
1982, Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71) governed the tax treatment
and audit procedures for many partnerships, including Morgan.
3
[*3] event article 6.7 specifies that the Trust and owner (viz., Morgan or
its successor) “shall mutually have the right, in their sole discretion, to
agree to amendments to [the deed] which are not inconsistent with the
Conservation Purposes.” This procedure is subject to the proviso that
the Trust shall have no power to agree to any amendment “that would
result in this Conservation Easement failing to qualify as a qualified
contribution under Section 170(h) of the Internal Revenue Code.”
Article 6.6 addresses the possibility that the easement re-
strictions might be abrogated “by exercise of eminent domain.” In that
event the Trust and owner “shall join in appropriate actions . . . to re-
cover the full value of the taking and all incidental or direct damages.”
Upon such recovery, “[t]he Trust shall be entitled the Trust’s Propor-
tionate Share of the recovered proceeds,” but the term “Proportionate
Share” is not defined. In connection with any eminent domain action,
“[a]ll expenses incurred by Owner and the Trust reasonable attorneys’
fees . . . shall be paid out of the recovered proceeds.”
Morgan timely filed Form 1065, U.S. Return of Partnership In-
come, for its 2016 tax year. On that return it claimed a charitable con-
tribution deduction of $26 million for the donation of the easement. In
support of this supposed value Morgan relied on an appraisal prepared
by Ronald Foster.
The IRS selected Morgan’s return for examination and assigned
the case to Revenue Agent (RA) Karen Alibozek. In September 2019, as
the examination neared completion, RA Alibozek recommended asser-
tion of penalties against Morgan under sections 6662 and 6662A. Her
recommendations to this effect were set forth in a civil penalty approval
form. RA Alibozek’s group manager, Margaret McCarter, digitally
signed the form on September 17, 2019. Ms. McCarter has submitted a
declaration confirming that she supervised RA Alibozek’s work during
the examination.
On October 21, 2019, RA Alibozek mailed petitioner a packet of
documents, including Letter 1807, that set forth her proposed adjust-
ments and penalty recommendations. More than two months later, on
January 10, 2020, the IRS issued petitioner a notice of final partnership
administrative adjustment (FPAA), including a Form 886–A, Explana-
tion of Items, disallowing the charitable contribution deduction in full
and determining penalties. As an alternative, the FPAA determined
that any allowable charitable contribution deduction could not exceed
4
[*4] $989,357. Petitioner timely petitioned this Court for readjustment
of the partnership items.
Discussion
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. See Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In
deciding whether to grant partial summary judgment, we construe fac-
tual materials and inferences drawn from them in the light most favor-
able to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. Where
the moving party properly makes and supports a motion for summary
judgment, “an adverse party may not rest upon the mere allegations or
denials of such party’s pleading” but must set forth specific facts, by af-
fidavit or otherwise, showing that there is a genuine dispute for trial.
Rule 121(d).
B. Analysis
1. “Protected in Perpetuity”
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 “qual-
ified conservation contribution,” the conservation purpose must be “pro-
tected in perpetuity.” § 170(h)(1)(C), (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).
In 1986 the Department of the Treasury issued final rules for de-
termining whether this “protected in perpetuity” requirement is met. Of
importance here are the rules governing the mandatory division of pro-
ceeds in the event the property is sold following 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
5
[*5] 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
grantee, following sale of the property, will receive a proportionate share
of the proceeds and use those proceeds consistently with the conserva-
tion purposes underlying the original gift. Ibid. In effect, the “perpetu-
ity” requirement is deemed satisfied because the sale proceeds replace
the easement as an asset deployed by the donee “exclusively for conser-
vation purposes.” § 170(h)(5)(A).
Treasury Regulation § 1.170A-14(g)(6)(i) sets forth a formula for
determining the proportionate share the grantee must receive upon any
extinguishment of the easement, providing that the grantee must be en-
titled to proceeds “determined under paragraph (g)(6)(ii).” That para-
graph, captioned “Proceeds,” provides in part as follows:
[F]or a deduction to be allowed under this section, at the
time of the gift the donor must agree that the donation of
the perpetual conservation restriction gives rise to a prop-
erty right, immediately vested in the donee organization,
with a fair market value that is at least equal to the pro-
portionate value that the perpetual conservation re-
striction at the time of the gift, bears to the value of the
property as a whole at that time. . . . For purposes of this
paragraph . . . , that proportionate value of the donee’s
property rights shall remain constant. Accordingly, when
a change in conditions give rise to the extinguishment of a
perpetual conservation restriction under paragraph
(g)(6)(i) of this section, the donee organization, on a subse-
quent sale, exchange, or involuntary conversion of the sub-
ject property, must be entitled to a portion of the proceeds
at least equal to that proportionate value of the perpetual
conservation restriction, unless state law provides that the
donor is entitled to the full proceeds . . . .
In other words the grantee’s proportionate share is to be determined by
a fraction, the numerator of which is “the fair market value of the con-
servation easement on the date of the gift,” and the denominator of
which is “the fair market value of the property as a whole on the date of
the gift.” Carroll v. Commissioner, 146 T.C. 196, 216 (2016); see also
PBBM-Rose Hill, 900 F.3d at 207.
6
[*6] Respondent contends that the deed at issue violates the “judicial
extinguishment” regulation. But this deed, unlike most easement deeds
the Court has examined, does not explicitly address the subject of judi-
cial extinguishment. Rather, it expresses the parties’ intention that “no
change in conditions . . . will at any time or in any event result in the
extinguishment” of the easement. Should circumstances arise that
would justify modifying certain restrictions, the deed envisions that
Morgan and the Trust would agree to appropriate amendments, with
the proviso that the Trust would have no power to agree to any amend-
ment that would violate section 170(h). Given this text, petitioner has
a reasonable argument that the deed violates neither the “judicial extin-
guishment” regulation nor the statutory requirement that the conserva-
tion purpose be “protected in perpetuity.” See § 170(h)(5)(A).
The deed does address, in article 6.6, the possibility that the re-
strictions might be abrogated “by exercise of eminent domain.” Refer-
ring to article 6.1 of the deed, respondent urges that the Trust would
then be limited to receiving proceeds equal to the value of the easement
when initially granted, with no protection against inflation. That out-
come would be at odds with the “protected in perpetuity” requirement.
See, e.g., R.R. Holdings, LLC v. Commissioner, T.C. Memo. 2020-22, 119
T.C.M. (CCH) 1136, 1139. But article 6.6 says that in the event of emi-
nent domain the Trust shall be entitled, not to a fixed historical value,
but to “the Trust’s Proportionate share of the recovered proceeds.”
Oddly, the term “Proportionate Share,” though seemingly intended as a
term of art, is not defined in the deed. This creates an ambiguity that
would need to be resolved under principles of Alabama law, which might
include parol evidence. See Moore v. Pa. Castle Energy Corp., 89 F.3d
791, 795–96 (11th Cir. 1996).
Respondent also faults the deed for providing that, in the event of
an eminent domain recovery, “[a]ll expenses incurred by Owner and the
Trust reasonable attorneys’ fees . . . shall be paid out of the recovered
proceeds.” But as we have previously noted, “[i]t is not necessarily un-
reasonable for a deed to provide that prior claims [or expenses] may be
paid from sale proceeds.” Coal Prop. Holdings, LLC v. Commissioner,
153 T.C. 126, 145 n.5 (2019). What would be unreasonable (and violative
of the regulation) would be a requirement that all claims and expenses
of sale be paid out of the Trust’s share of the proceeds. See ibid. Here,
the deed provides that the proceeds will be reduced by both parties’ ex-
penses. It is not obvious that this violates the “judicial extinguishment”
regulation or the statutory requirement that the conservation purpose
be “protected in perpetuity.” See § 170(h)(5)(A). We will accordingly
7
[*7] deny respondent’s Motion with respect to the “protected in perpetu-
ity” requirement.
2. Penalty Approval
Section 6751(b)(1) provides that “[n]o penalty under this title
shall be assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the in-
dividual making such determination.” In a TEFRA case such as this,
supervisory approval generally must be obtained before the IRS issues
an FPAA to the partnership. See Palmolive Bldg. Inv’rs, LLC v. Com-
missioner, 152 T.C. 75, 83 (2019). If supervisory approval is obtained by
that date, the partnership must establish that the approval was un-
timely, i.e., “that there was a formal communication of the penalty be-
fore the proffered approval” was secured. See Frost v. Commissioner,
154 T.C. 23, 35 (2020). 3
Respondent has supplied a copy of the civil penalty approval form
by which RA Alibozek recommended assertion of penalties against Mor-
gan. RA Alibozek’s immediate supervisor, Ms. McCarter, signed the
penalty approval form on September 17, 2019. The Letter 1807 notify-
ing petitioner of the proposed penalties was issued on October 21, 2019.
The FPAA with enclosed Form 886–A was issued on January 10, 2020.
Because RA Alibozek secured supervisory approval from Ms. McCarter
before either of those communications was made to petitioner, the ap-
proval was timely. See Frost, 154 T.C. at 35. 4
Petitioner does not allege that the IRS formally communicated to
Morgan, before September 17, 2019, its decision to assert penalties. Pe-
titioner nonetheless argues that there is a dispute of fact as to whether
the IRS issued some sort of penalty communication before that date. Pe-
titioner asserts that the answer to this question is currently “unknowa-
ble” and must be determined by trial.
We disagree. Respondent has supplied documentary evidence
confirming that RA Alibozek’s immediate supervisor approved the
3 Although the Commissioner does not bear a burden of production with respect
to penalties in a partnership-level proceeding, a partnership may raise section 6751(b)
as an affirmative defense. See Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C.
224, 236–37 (2018).
4 Because RA Alibozek secured supervisory approval on September 17, 2019,
we need not decide whether the “initial determination” to assert penalties was embod-
ied in the Letter 1807 (dated October 21, 2019) or the FPAA (dated January 10, 2020).
8
[*8] assertion of penalties on September 17, 2019, well before the IRS
formally communicated its penalty determinations to petitioner. As we
have repeatedly held, the statute’s timeliness inquiry “turns on the tim-
ing of the first ‘formal written communication’ to the taxpayer against
whom the penalties are being asserted.” Oxbow Bend, LLC v. Commis-
sioner, T.C. Memo. 2022-23, at *8 (quoting Belair Woods, LLC v. Com-
missioner, 154 T.C. 1, 10 (2020)). We have regularly decided this ques-
tion on summary judgment, on the basis of IRS records and declarations
from relevant IRS officers. See, e.g., Sand Inv. Co. v. Commissioner, 157
T.C. 136 (2021); Long Branch Land, LLC v. Commissioner, T.C. Memo.
2022-2; Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-
125. 5
If the IRS issued Morgan or its representatives any “formal writ-
ten communication” of penalties before September 17, 2019, they would
presumably have that document in their possession. Petitioner does not
allege that Morgan received any such document or that any other type
of formal penalty communication occurred. There being no genuine dis-
pute of material fact on this point, we will grant respondent’s Motion
with respect to penalty approval. See Rule 121(d) (providing that a party
opposing summary judgment may not rely on “mere allegations or deni-
als” but “must set forth specific facts,” including facts established “by
affidavits or declarations”).
To reflect the foregoing,
An order will be issued granting in part and denying in part re-
spondent’s Motion for Partial Summary Judgment.
5 In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th
Cir. 2022), rev’g and remanding 154 T.C. 68 (2020), the U.S. Court of Appeals for the
Ninth Circuit considered the timeline for obtaining supervisory approval of “assessable
penalties,” which are not subject to deficiency or TEFRA procedures. The court held
that, for an assessable penalty, supervisory approval is timely if secured before the
penalty is assessed or “before the relevant supervisor loses discretion whether to ap-
prove the penalty assessment.” Id. at 1074. The court suggested that, in a deficiency
or TEFRA case such as this, the deadline for securing supervisory approval would be
the issuance of the notice of deficiency or the FPAA. Id. at 1071 n.4. If that analysis
were adopted here, supervisory approval of the penalties was clearly timely: Approval
was secured in September 2019, and the FPAA was not issued until January 2020.