Lumpkin One Five Six, LLC, 156 Partners, LLC, Tax Matters Partner v. Commissioner , 2020 T.C. Memo. 94 ( 2020 )

T.C. Memo. 2020-94UNITED STATES TAX COURT
LUMPKIN ONE FIVE SIX, LLC, 156 PARTNERS, LLC, TAX MATTERS
PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 191-18. Filed June 23, 2020.
David Mace Wooldridge, Ronald A. Levitt, Gregory P. Rhodes, and
Michelle A. Levin, for petitioner.
Christopher A. Pavilonis, A. Gary Begun, Jeremy D. Cameron, and Denise
A. Diloreto, for respondent.
MEMORANDUM OPINION
KERRIGAN, Judge: This case is before the Court on the parties’ cross-
motions for partial summary judgment. On November 9, 2017, respondent issued
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[*2] a notice of final partnership administrative adjustment (FPAA) for tax year
2012 to 156 Partners, LLC, as tax matters partner for Lumpkin One Five Six, LLC
(Lumpkin). In the FPAA respondent disallowed a $2,483,000 deduction for a
noncash charitable contribution and asserted a gross valuation misstatement
penalty pursuant to section 6662(h), or in the alternative, a penalty pursuant to
section 6662(a).1
Respondent contends that the extinguishment clause in Lumpkin’s deed of
conservation easement violates the requirements of section 1.170A-14(g)(6)(ii),
Income Tax Regs. Respondent further contends that the deed’s inclusion of a
right to designate an acceptable development-area homesite violates section
170(h)(2)(C) and section 1.170A-14(g)(1), Income Tax Regs. Petitioner, by
contrast, contends that the deed meets the requirements of section 170(h)(5)
because the deed provides that the conservation purposes are protected in
perpetuity. Petitioner further contends that respondent’s interpretation of the
regulation is incorrect or alternatively, if respondent’s interpretation is found to be
correct, that the regulation is invalid.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
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[*3] Background
There is no dispute as to the following facts drawn from the parties’ motions
papers and attached declarations and exhibits. When the petition was filed,
Lumpkin’s principal place of business was in Georgia.
On December 1, 2011, George L. Frady transferred a 156.43-acre tract of
land in Lumpkin County, Georgia (property), to Lumpkin, a Georgia limited
liability company. Lumpkin reported on its Form 1065, U.S. Return of Partnership
Income, for tax year 2012 that Mr. Frady sold the property to Lumpkin for
$319,990.
On December 29, 2012, Lumpkin conveyed a deed of easement to the
Atlantic Coast Conservancy, Inc. (ACC), a Georgia nonprofit corporation. ACC
was a “qualified organization” for purposes of section 170(h)(3). The deed was
recorded in Lumpkin County on December 31, 2012. The easement covers 154.93
of 156.43 acres that Mr. Frady transferred to Lumpkin (easement area).
Lumpkin claimed a $2,483,000 charitable contribution deduction for its
contribution of the conservation easement to ACC on its 2012 Form 1065.
Lumpkin attached to its partnership return Form 8283, Noncash Charitable
Contributions, which included a supplemental statement that listed the appraised
fair market value (FMV) of the unencumbered property as $2,711,000.
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[*4] The deed includes provisions for the distribution of proceeds in the event of
extinguishment or condemnation. Section 15.1 of the deed provides that,
following a judicial extinguishment, the donee shall be entitled to a portion of the
proceeds “at least equal to the perpetual conservation restriction’s proportionate
value unless otherwise provided by Georgia law at that time.” The deed provides:
“This easement constitutes a real property interest immediately vested in
Conservancy.” Section 15.2 explains the stipulation the parties agreed to
regarding proceeds. This section provides:
[T]his Easement shall have at the time of Extinguishment a fair
market value determined by multiplying the then fair market value of
the Easement Area 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 Easement Area, without deduction for
the value of the Easement, at the time of this grant.
The deed divides the easement area into three principal areas: (1) Resource
Protection Area (RPA), (2) Acceptable Development Area (ADA), and
(3) Agricultural Area (AA), any portion of the easement area that is not ADA or
the RPA. The RPA is the area surrounding Hurricane Creek. The deed allows for
three ADAs for the following purposes: a homesite, a main access road, and a
secondary access road.
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[*5] Section 5.1 of the deed prohibits “the change, disturbance, alteration, or
impairment of the relatively natural habitat for plants, wildlife, or similar
ecosystems within and upon the Easement Area, except as provided herein in the
* * * Acceptable Development Area.” Section 5.2 prohibits “the construction
and/or placement of any building structures, permanent camping accommodations,
mobile homes, or billboards, except as expressly provided herein in the
Agricultural Area”.
In the deed Lumpkin reserved the right to have an ADA homesite placed in
the AA with 30 day’s prior written notice to the ACC. The deed allows Lumpkin
to use up to 1-1/2 acres of AA as an ADA to construct a homesite including a
single-family dwelling and accessory buildings and improvements such as
garages, carports, and storage sheds. ACC’s permission is not required to exercise
any of these rights.
Discussion
Summary judgment may be granted where the pleadings and other materials
show that there is no genuine dispute as to any material fact and that a decision
may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The
burden is on the moving party to demonstrate that there is no genuine dispute as to
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[*6] any material fact and that the party is entitled to judgment as a matter of law.
FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74-75 (2001). Both parties
have moved for partial summary judgment, and they agree that there exist no
genuine disputes of material fact regarding the questions they have asked us to
decide. After reviewing the pleadings and the motions with accompanying
exhibits and declarations, we conclude that a decision may be rendered as a matter
of law.
I. Qualified Conservation Contribution
Section 170(a)(1) allows a deduction for any charitable contribution made
within the taxable year. If the taxpayer makes a charitable contribution of
property other than money, the amount of the contribution is generally equal to the
FMV of the property at the time the gift is made. See sec. 1.170A-1(c)(1), Income
Tax Regs.
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). However, there is
an exception to this rule for a “qualified conservation contribution.” Sec.
170(f)(3)(B)(iii). This exception applies to a “qualified conservation contribution”
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[*7] which is a contribution of a qualified real property interest to a qualified
organization exclusively for conservation purposes. Sec. 170(h)(1).
Section 170(h)(5)(A) provides that a contribution will not be treated as
being made exclusively for conservation purposes “unless the conservation
purpose is protected in perpetuity.” The accompanying regulation recognizes 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”. Sec. 1.170A-14(g)(6)(i), Income Tax Regs.
In these circumstances the conservation purpose can be treated as protected in
perpetuity if the restrictions are extinguished by judicial proceeding and the
easement deed ensures that the charitable donee, following the 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. Id. This
results in the “perpetuity” requirement being satisfied because the sale proceeds
replace the easement as an asset deployed by the donee “exclusively for
conservation purposes”. Sec. 170(h)(5)(A); see also Oakbrook Land Holdings,
LLC v. Commissioner, 154 T.C. ___, ___ (slip op. at 7) (May 12, 2020).
Section 1.170A-14(g)(6)(ii), Income Tax Regs., defines “Proceeds”, as
follows:
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[*8] [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 property right, immediately
vested in the donee organization, with a fair market value that is at
least equal to the proportionate value that the perpetual conservation
restriction 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
subsequent sale, exchange, or involuntary conversion of the subject
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
* * *.
Neither party contends that Lumpkin is entitled to the full proceeds pursuant
to Georgia law.
To meet the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.
(proceeds regulation), the deed must guarantee that the donee will receive “a
proportionate share of extinguishment proceeds”. Carroll v. Commissioner, 146
T.C. 196, 219 (2016); see PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193,
207 (5th Cir. 2018) (“[T]he ‘proportionate value’ is a fraction equal to the value of
the conservation easement at the time of the gift, divided by the value of the
property as a whole at that time.”).
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[*9] Respondent contends that the deed violates the proceeds regulation because
it provides that the portion of proceeds required to be allocated to the donee in the
event of an extinguishment shall be reduced by the value of improvements to the
land made by Lumpkin after the grant of the easement. Petitioner contends that
the deed satisfies the regulation because proceeds attributable to the value of
improvements made by the landowner after the donation of the conservation
easement are not immediately vested and are not part of the easement granted to
the donee.
The proceeds regulation specifically states that the donee “must be entitled
to a portion of the proceeds at least equal to that proportionate value”. Sec.
1.170A-14(g)(6)(ii), Income Tax Regs. The word “must” clearly requires that the
donee receive at least the proportionate value. PBBM-Rose Hill, Ltd. v.
Commissioner, 900 F.3d at 208. The regulation does not permit that “any amount,
including that attributable to improvements, may be subtracted out” of the
proceeds. Id.; see also Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126,
138 (2019). Since the deed reduces the donee’s share of the proceeds by reducing
the FMV of the unencumbered property at the time of sale by any increase in value
attributable to posteasement improvements before applying the proportionate
distribution percentages, the conservation purpose is not protected in perpetuity.
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[*10] See sec. 170(h)(5)(A); sec. 1.170A-14(g)(6)(ii), Income Tax Regs.; see also
PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d at 208; Coal Prop. Holdings,
LLC v. Commissioner, 153 T.C. at 139.
Respondent also argues that the easement is not a qualified real property
interest because the deed reserves the right for Lumpkin or a subsequent fee
simple landowner to redesignate an unidentified portion of the AA as an ADA.
We have established above that the contribution does not qualify under section
170 as a “qualified conservation contribution” because the deed’s extinguishment
clause fails to meet the requirements of the proceeds regulation. Accordingly, we
do not need to address this issue.
II. Validity of the Proceeds Regulation
Petitioner contends that respondent’s interpretation of the proceeds
regulation is incorrect. We have decided that respondent’s interpretation is correct
and that the deed does not comply with the regulation. Petitioner further contends
that if respondent’s interpretation is correct, then the proceeds regulation is
arbitrary and capricious and is therefore invalid.
When considering whether a regulation is arbitrary and capricious, we
generally employ the two-part inquiry established by Chevron, U.S.A., Inc. v. Nat.
Res. Def. Council, Inc., 467 U.S. 837 (1984). The first part is to inquire “whether
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[*11] Congress has directly spoken to the precise question at issue.” Id. at 842. If
the intent of Congress is clear, there is no further inquiry. Id. Pursuant to section
170(h)(5)(A) the conservation purpose must be “protected in perpetuity.”
However, Congress did not address specifically the allocation of extinguishment
proceeds. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___
(slip op. at 26).
We now consider whether the proceeds regulation “is based on a
permissible construction of the statute.” See Chevron, 467 U.S. at 843. Since the
statute is silent, we must give deference to the interpretation embodied in the
agency’s regulation unless it is “arbitrary, capricious, or manifestly contrary to the
statute.” Id. at 844; see United States v. Mead Corp., 533 U.S. 218, 227 (2001).
We will uphold the proceeds regulation if it represents a “reasonable
interpretation” of the law Congress enacted. See Chevron, 467 U.S. at 844; see
also SIH Partners LLLP v. Commissioner, 150 T.C. 28, 50 (2018), aff’d, 923 F.3d
296 (3d Cir. 2019).
Petitioner does not challenge the validity of the proceeds regulation in its
entirety. Rather, petitioner contests the regulation on two grounds: (1) the
requirement that an easement deed allocate the economic benefit of subsequent
improvements made (and paid for) by the landowner to the donee upon
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[*12] termination of the easement lacks a rational basis and (2) the “proportionate
value” provision of the proceeds regulation is ambiguous.
Petitioner contends that there is no rational basis for requiring an easement
deed to share with the donee the economic benefit of subsequent improvements
made and funded by a landowner because the donee does not contribute toward
the cost of the improvements and the landowner does not receive a deduction for
any such improvements. Petitioner argues further that it is even more irrational to
require a subsequent landowner to forfeit to the land trust a substantial portion of
the proceeds attributable to the improvements made and owned by the subsequent
owner despite the fact that the subsequent owner did not donate the easement to
the land trust or receive a charitable contribution deduction. It asserts that such a
result is illogical and inconsistent with the purpose of the proceeds regulation.
The regulation does not address donor improvements. The absence of a
provision addressing donor improvements does not render the regulation
“arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 U.S.
at 844; see also Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___
(slip op. at 29).
In Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___ (slip
op. at 29), we reasoned that Treasury’s goal in prescribing the proceeds regulation
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[*13] was to ensure satisfaction of the statute’s “protected in perpetuity”
requirement. This requirement is deemed satisfied under Treasury’s interpretation
of the proceeds regulation because the sale proceeds replace the easement as an
asset employed by the donee “exclusively for conservation purposes”. Sec.
170(h)(5)(A); see also Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C.
at ___ (slip op. at 8). There may be scenarios, such as a decline in land values, in
which reducing the donee’s proceeds by the value of landowner improvements
would frustrate the goal of the sales proceeds’ replacing the value of the easement.
Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___ (slip op. at 29).
We stated in Oakbrook that “Treasury’s overarching goal was to guarantee
that the donee, upon judicial extinguishment of the easement, would receive the
full share of proceeds to which it was entitled.” Id. at ___ (slip op. at 31). We
concluded that Treasury exercised reasoned judgment in its effort to reach the goal
of section 170(h)(5)(A). Id.Petitioner also contends that the “proportionate value” provision of the
proceeds regulation is ambiguous. Pursuant to section 1.170A-14(g)(6)(ii),
Income Tax Regs., the donee’s share is determined by multiplying the sale
proceeds by a fraction, the numerator of which is the FMV of the easement at the
time it was granted, and the denominator of which is the FMV of the entire
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[*14] property at that time. In Oakbrook Land Holdings, LLC v. Commissioner,
154 T.C. at ___ (slip op. at 28), we concluded that the proceeds regulation’s
“proportionate value” approach is not “arbitrary, capricious, or manifestly contrary
to the statute” as examined under the two-part inquiry.
III. Conclusion
The deed granting the conservation easement reduces the donee’s share of
the proceeds in the event of extinguishment by the value of improvements (if any)
made by the donor. Accordingly, petitioner has not satisfied the perpetuity
requirement of section 170(h)(5)(A). Furthermore, we reject petitioner’s challenge
to the validity of the proceeds regulation and find that the construction of section
170(h)(5) as set forth in section 1.170A-14(g)(6), Income Tax Regs., is valid under
Chevron. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___
(slip op. at 25, 28-33).
Accordingly, we will grant respondent’s motion for partial summary
judgment and deny petitioner’s cross-motion for partial summary judgment. We
have considered all of the arguments made by the parties, and to the extent not
mentioned above, we conclude that they are moot, irrelevant, or without merit.
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[*15] To reflect the foregoing,
An appropriate order will be issued.