Village at Effingham, LLC, Effingham Managers, LLC, Tax Matters Partner v. Commissioner , 2020 T.C. Memo. 102 ( 2020 )

T.C. Memo. 2020-102
UNITED STATES TAX COURT
VILLAGE AT EFFINGHAM, LLC, EFFINGHAM MANAGERS, LLC,
TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2426-18. Filed July 9, 2020.
Anson H. Asbury, Ethan J. Vernon, and Gilbert L. Carey, Jr., for petitioner.
Christopher D. Bradley, Jason P. Oppenheim, John W. Sheffield III, and
John T. Arthur, for respondent.
MEMORANDUM OPINION
LAUBER, Judge: This is one of many cases in this Court involving char-
itable contribution deductions for conservation easements. Currently before the
Court are cross-motions for partial summary judgment filed by the Internal Reve-
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[*2] nue Service (IRS or respondent) and by petitioner. The questions presented
by these motions are substantially identical to those decided adversely to the
taxpayers in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir.
2018); Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12,
2020); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); Oakhill
Woods, LLC v. Commissioner, T.C. Memo. 2020-24; and Belair Woods, LLC v.
Commissioner, T.C. Memo. 2018-159. Following the analyses in those opinions
we will grant respondent’s motion and deny petitioner’s cross-motion.
Background
There is no dispute as to the following facts, which are drawn from the peti-
tion, the parties’ motion papers, and the attached declarations and exhibits.
Village at Effingham, LLC (Village), is a Georgia limited liability company (LLC)
that has operated at all times as a partnership for Federal income tax purposes.
Village had its principal place of business in Georgia when its petition was filed.
In December 2008 Village acquired, apparently by contribution from HRH
Investments, LLC (HRH), a 175-acre tract of land in Effingham County, Georgia.
On December 28, 2010, Village donated a conservation easement over 165 acres
of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organi-
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[*3] zation” for purposes of section 170(h)(3).1 We will refer to this 165-acre tract
as the conserved area or the Property. The deed of easement was recorded the
same day.2
The easement deed recites the conservation purposes and generally prohibits
commercial or residential development. But it reserves certain rights to Village as
grantor, including the rights to conduct commercial agricultural and timber-
harvesting activities within the conserved area. Village also reserved the right to
construct within the conserved area “a limited number of improvements and
buildings.” These improvements could include the development of “woods roads”
for permitted agricultural and forestry activities, construction of agricultural
buildings (including barns and sheds) covering up to 50% of a designated one-acre
1
All statutory references are to the Internal Revenue Code (Code) in effect
for the year at issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. We round monetary amounts to the nearest dollar.
2
HRH or its affiliates contributed other tracts of land in Effingham County
to other LLCs, and Effingham Managers, LLC, petitioner in this case, served as
tax matters partner for most of these LLCs. Each LLC granted a conservation
easement to GLT. The IRS has challenged the charitable contribution deductions
claimed by the LLCs for those other donations. See Englewood Place, LLC v.
Commissioner, T.C. Memo. 2020-105; Maple Landing, LLC v. Commissioner,
T.C. Memo. 2020-104; Riverside Place, LLC v. Commissioner, T.C. Memo.
2020-103; Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24; Belair
Woods, LLC v. Commissioner, T.C. Memo. 2018-159; Red Oak Estates, LLC v.
Commissioner, T.C. Dkt. No. 13659-17; Cottonwood Place, LLC v. Commission-
er, T.C. Dkt. No. 14076-17.
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[*4] plot, maintenance of existing roads, and the construction of two residential
driveways and utilities (including water, septic, and power lines) to serve two
adjacent five-acre residential parcels owned by an affiliate of Village.
The deed recognizes the possibility that the easement might be extinguished
at some future date. In the event the Property were sold following judicial extin-
guishment of the easement, paragraph 17 of the deed provided that “[t]he amount
of the proceeds to which Grantee shall be entitled, after the satisfaction of any and
all prior claims, shall be determined, unless otherwise provided by Georgia law at
the time, in accordance with the Proceeds paragraph.” (Neither party contends
that Georgia law “otherwise provide[s].”) Paragraph 19, captioned “Proceeds,”
specified that the grantee’s share of any future proceeds would be determined
by multiplying the fair market value of the Property unencumbered by
this Conservation Easement (minus any increase in value after the
date of this Conservation Easement attributable to improvements) by
the ratio of the value of the Conservation Easement at the time of this
conveyance to the value of the Property at the time of this conveyance
without deduction for the value of the Conservation Easement.
Village timely filed Form 1065, U.S. Return of Partnership Income, for its
taxable year beginning December 22, 2010, and ending December 31, 2010. On
that return it claimed a charitable contribution deduction of $5,237,000 for its
donation of the easement. Village relied on an appraisal by David R. Roberts, who
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[*5] used the “before and after method” to determine the easement’s fair market
value (FMV).3
Village included with its return a Form 8283, Noncash Charitable Contribu-
tions, executed by Mr. Roberts and GLT. When a taxpayer donates property
(other than publicly traded securities) valued in excess of $5,000, the taxpayer
must provide on Form 8283 specified information about the donated property,
including the date and method of acquisition and the donor’s “cost or adjusted
basis.” In the relevant boxes on Form 8283 Village wrote “see attachment” or
“SA” and appended a three-page attachment. The attachment stated that the Pro-
perty had been “acquired by donor” on December 17, 2008, by “purchase/-
exchange.” With respect to “cost or adjusted basis” Village stated:
A declaration of the taxpayer’s basis in the property is not included in
* * * the attached Form 8283 because of the fact that the basis of the
property is not taken into consideration when computing the amount
of the deduction.
3
Petitioner represents that Village’s cost basis for the 175-acre tract was
$300,989. Assuming that to be true, Mr. Roberts’ valuation supposed that the
Property had appreciated in value by more than 1,700% during one of the worst
financial crises to hit the United States since the Great Depression. Mr. Roberts
was the original appraiser in numerous other conservation easement cases that this
Court has decided. See, e.g., Plateau Holdings, LLC. v. Commissioner, T.C.
Memo. 2020-93; Woodland Prop. Holdings, LLC v. Commissioner, T.C. Memo.
2020-55; Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24.
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[*6] The IRS selected Village’s 2010 return for examination. On October 30,
2017, the IRS issued Village a timely notice of final partnership administrative
adjustment (FPAA) disallowing the charitable contribution deduction in full be-
cause Village had not shown that the requirements of section 170 were met. The
FPAA alternatively determined that, if any deduction were allowable, Village had
not established that the FMV of the easement exceeded $0. The FPAA determined
a 40% “gross valuation misstatement” penalty under section 6662(h) and (in the
alternative) a 20% accuracy-related penalty under other provisions of section
6662(a).
Petitioner timely petitioned this Court for readjustment of the partnership
items, see sec. 6226(f), and the parties filed cross-motions for partial summary
judgment. Respondent contends that the charitable contribution deduction was
properly disallowed for two independently sufficient reasons. First, he contends
that the conservation purpose underlying the easement is not “protected in per-
petuity,” see sec. 170(h)(5)(A), because the easement deed fails to comply with the
regulations governing judicial extinguishment, see sec. 1.170A-14(g)(6), Income
Tax Regs. Second, he contends that Village did not attach to its 2010 return, as
the regulations require, a fully completed appraisal summary on Form 8283. See
sec. 1.170A-13(c)(2)(i)(B), Income Tax Regs. Petitioner contends that Village
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[*7] complied with all regulatory requirements and (if it did not) that the
regulations imposing these requirements are invalid. We have rejected all of
petitioner’s arguments in cases involving substantially similar deeds of easement,
and we do so again here.
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. Commis-
sioner, 116 T.C. 73, 74 (2001). We may grant partial summary judgment regard-
ing 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. Commission-
er, 118 T.C. 226, 238 (2002). Petitioner has alleged no genuine dispute of materi-
al fact affecting the two questions that respondent has proposed for summary adju-
dication. We conclude that these issues may appropriately be adjudicated sum-
marily.
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 taxpay-
er’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception
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[*8] 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 “pro-
tected in perpetuity” requirement is met. Of importance here are the rules govern-
ing 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 con-
ditions surrounding the [donated] property * * * can make impossible or impracti-
cal 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 conserva-
tion purposes.” Sec. 170(h)(5)(A).
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[*9] The judicial extinguishment provisions of the deed in this case are substan-
tially similar to those that we considered in Coal Prop. Holdings, 153 T.C. 130-
131. Following our reasoning in that case, we conclude that Village’s deed fails to
satisfy the “protected in perpetuity” requirement for two reasons.
First, the regulatory fraction used in the deed to determine the grantee’s
proportionate share of post-extinguishment proceeds is applied, not to the full sale
proceeds--an amount presumably equivalent to the FMV of the Property at the
time of sale--but to the proceeds “minus any increase in value after the date of this
Conservation Easement attributable to improvements.” Thus, the grantee’s share
is improperly reduced on account of (1) appreciation in the value of improvements
existing when the easement was granted plus (2) the FMV of any improvements
that the donor or its successors subsequently make to the Property. By reducing
the grantee’s share in this way, the deed violates the regulatory requirement that
the donee receive, in the event the Property is sold following extinguishment of
the easement, a share of proceeds that is “at least equal to the proportionate value
that the perpetual conservation restriction at the time of the gift, bears to the value
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[*10] of the property as a whole at that time.” See sec. 1.170A-14(g)(6)(ii),
Income Tax Regs.4
As we have noted previously, the requirements of this regulation “are strict-
ly construed.” Carroll v. Commissioner, 146 T.C. 196, 212 (2016). Because the
grantee in this case “is not absolutely entitled to a proportionate share of * * *
[the] proceeds” upon a post-extinguishment sale of the Property, the conservation
purpose underlying the contribution is not “protected in perpetuity.” Coal Prop.
Holdings, 153 T.C. 127, 139 (quoting Carroll, 146 T.C. 212); accord, Plateau
Holdings, LLC v. Commissioner, T.C. Memo. 2020-93; Oakbrook Land Holdings,
LLC v. Commissioner, T.C. Memo. 2020-54. The U.S. Court of Appeals for the
Fifth Circuit has likewise sustained the disallowance of a charitable contribution
deduction where the judicial extinguishment provision of an easement deed in-
cluded a carve-out for donor improvements similar to that here. See PBBM-Rose
Hill, 900 F.3d at 208.
4
The pre-contribution improvements to the conserved area in this case
appear to be less substantial than in Coal Prop. Holdings, LLC v. Commissioner,
153 T.C. 126, 131 (2019). But the deed reserved to Village the right to make post-
contribution improvements to the conserved area, including the rights (for exam-
ple) to construct barns, sheds, roads, driveways, and utilities (including water, sep-
tic, and power lines) to serve the conservation area and/or the adjacent residential
parcels. These factual differences have little impact on our analysis because the
regulation does not permit any reduction of the donee’s share on account of such
donor improvements.
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[*11] The easement deed here has a second problem, which was also present in
Coal Prop. Holdings. The grantee’s tentative share of the proceeds, as determined
under paragraph 19 of the deed, is adjusted further by paragraph 17. It provides
that the grantee’s share will be determined under the Proceeds paragraph, but only
“after the satisfaction of any and all prior claims.” Prior claims against the sale
proceeds might be held by various creditors of Village or its successors.
It is not necessarily unreasonable for a deed to provide that prior claims may
be paid from sale proceeds. What is unreasonable is the requirement that all prior
claims be paid out of the grantee’s share of the proceeds, even if those claims
represent liabilities of Village or its successors. See Coal Prop. Holdings, 153
T.C. 145 n.5. Because the grantee’s share of the proceeds is improperly reduced
by carve-outs both for donor improvements and for claims against the donor, the
deed’s judicial extinguishment provisions do not satisfy the regulatory require-
ments.
If the regulation is interpreted, as we have interpreted it, to make Village
ineligible for a charitable contribution deduction, Village contends that the regu-
lation is invalid. It urges that section 1.170A-14(g)(6), Income Tax Regs., is an
“arbitrary and capricious” rule promulgated in violation of the Administrative
Procedure Act. And it contends that the regulation is substantively invalid under
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[*12] the test set forth in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467
U.S. 837 (1984). We comprehensively addressed and rejected both of these
arguments in a recent Court-reviewed Opinion. See Oakbrook Land Holdings,
154 T.C. at __ (slip op. at 15-33). We need not repeat that analysis here.
In sum, we hold that the conservation purpose underlying the easement was
not “protected in perpetuity” as required by section 170(h)(5)(A). For that reason
the charitable contribution deduction claimed by Village must be denied in its en-
tirety. See Coal Prop. Holdings, 153 T.C. 139. We will therefore grant respon-
dent’s motion for partial summary judgment on his first theory.5
5
Petitioner draws our attention to Priv. Ltr. Rul. 200836014 (Sept. 5, 2008)
(PLR), in which the IRS found unobjectionable an easement deed with a judicial
extinguishment clause resembling that here. Petitioner contends that respondent’s
interpretation of the regulation as set forth in that PLR is binding on respondent
under Auer v. Robbins, 519 U.S. 452, 461 (1997). Petitioner’s argument ignores
the fact that determinations embodied in a PLR “may not be used or cited as prece-
dent.” Sec. 6110(k)(3). The taxpayer in PBBM-Rose Hill brought the same PLR
to the Court of Appeals’ attention, but that court paid no heed to it, finding the
regulation unambiguous on its face. See PBBM-Rose Hill, Ltd. v. Commissioner,
900 F.3d 195, 207-208 (5th Cir. 2018). We have done the same. See Coal Prop.
Holdings, 153 T.C. 144. In Oakbrook Land Holdings, LLC v. Commissioner,
T.C. Memo. 2020-54, we dismissed reliance on Auer deference because “the ‘tra-
ditional tools of construction’ le[d] us to hold that the Commissioner’s construc-
tion of the regulation is correct even if we look at the question de novo.” Id.
at *25 (quoting Kisor v. Wilkie, 588 U.S. __, __, 139 S. Ct. 2400, 2415 (2019)).
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[*13] 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.” Sec. 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, sec. 155(a)(1)(B),
98 Stat. at 691; see sec. 1.170A-13(c)(2), Income Tax Regs. The IRS has pre-
scribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commis-
sioner, T.C. Memo. 2000-38, 79 T.C.M. 1444, 1450. Failure to comply
with this requirement generally precludes a deduction. See sec. 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)).
In his response to petitioner’s cross-motion, respondent contends that Vil-
lage’s deduction should be disallowed because it failed to attach to its return a
properly completed appraisal summary. Petitioner contends that Village strictly
(or at least substantially) complied with the applicable regulation. In the alterna-
tive it contends that the regulation is invalid.
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[*14] The regulation requires the donor to “[a]ttach a fully completed appraisal
summary” to the tax return on which the charitable contribution deduction is first
claimed. Sec. 1.170A-13(c)(2)(i)(B), Income Tax Regs. A fully completed ap-
praisal 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.” Id. subpara. (4)(ii)(D) and (E). “If a taxpayer has reason-
able cause for being unable to provide the information required * * * (relating to
the manner of acquisition and basis of the contributed property), an appropriate
explanation should be attached to the appraisal summary.” Id. subdiv. (iv)(C)(1).
In the relevant boxes on its Form 8283 Village wrote “see attachment” and
appended a three-page attachment. The attachment said that the Property had been
acquired by the donor on December 17, 2008, by “purchase/exchange.” It appears
that Village actually acquired the 175 acres by contribution from HRH. The
attachment said that Village would not provide cost basis information “because of
the fact that the basis of the property is not taken into consideration when comput-
ing the amount of the deduction.” The taxpayers in Oakhill Woods, at *7-*8, and
Belair Woods, 116 T.C.M. at 326-327, had attached the same text, verba-
tim, to the Forms 8283 enclosed with their returns.
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[*15] We hold that Village did not report its cost basis information as the regula-
tion requires and as Form 8283 directs. The explanation it attached, far from
showing that it was unable to provide this information, simply asserted that the
information was not necessary. In effect, Village asserted that taxpayers are free
to ignore the requirement that they report cost basis. “Asserting that one may ig-
nore a requirement does not constitute strict compliance with it.” Oakhill Woods,
at *13; Belair Woods, 116 T.C.M. at 327-328.
In Bond v. Commissioner, 100 T.C. 32, 41-42 (1993), we held that some of
the reporting requirements in section 1.170A-13, Income Tax Regs., can be satis-
fied 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. 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. 41 (quoting Taylor v. Commissioner, 67 T.C. 1071, 1077 (1977)).
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[*16] We hold that Village did not substantially comply because its failure to sup-
ply cost basis violated the essence of the statute. In enacting DEFRA’s heightened
reporting requirements, Congress aimed to give the IRS tools that would enable it
to identify inflated charitable contribution deductions. See RERI Holdings I, LLC
v. Commissioner, 149 T.C. 1, 16-17 (2017), aff’d sub nom. Blau v. Commissioner,
924 F.3d 1261 (D.C. Cir. 2019). The requirement to disclose cost basis when that
information is reasonably obtainable is necessary to facilitate the Commissioner’s
efficient identification of overvalued property. Unless the taxpayer complies with
the requirement that he disclose his cost basis and the date and manner of acquir-
ing the property, the Commissioner will be deprived of an essential tool that Con-
gress intended him to have. See Oakhill Woods, at *15-*22; Belair Woods, 116
T.C.M. at 328-330.6
6
Petitioner contends that Village supplied, elsewhere on its tax return,
information from which its cost basis could be derived, e.g., on Schedule L,
Balance Sheets per Books. We have rejected that argument previously and reject
it again here. See Oakhill Woods, at *19-*20; Belair Woods, 116 T.C.M.
at 329. The regulation requires that “[a]n appraisal summary shall include”
information about basis. Sec. 1.170A-13(c)(4)(ii)(E), Income Tax Regs. The
explicit disclosure of basis on Form 8283 is essential in alerting the Commissioner
as to whether (and to what extent) further investigation may be needed. Where the
taxpayer states on Form 8283 (as Village did) that basis information will not be
provided, revenue agents cannot be required to sift through hundreds of pages of
complex returns looking for possible clues about what the taxpayer’s cost basis
might be.
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[*17] Nor is this a case where the taxpayer did “all that is reasonably possible,”
Durden, 103 T.C.M. at 1763, or omitted information “solely through inad-
vertence,” Hewitt, 109 T.C. 265 n.10. Village explicitly declined to report its
cost basis information, asserting that this information was unnecessary because
“basis * * * is not taken into consideration when computing the amount of the
deduction.” This was not an instance of inadvertent omission but of a conscious
election not to supply information damaging to its position.7
Finally, petitioner in its cross-motion contends that the regulation requiring
disclosure of “cost or other basis” on the appraisal summary is invalid. According
to petitioner, this regulation does not “give effect to the unambiguously expressed
intent of Congress” and is thus invalid under Chevron, U.S.A., Inc., 467 U.S.
at 842-843. The taxpayer in Oakhill Woods, at *22-*27, made precisely the same
argument and we rejected it. We do so again here.
For these reasons we hold that Village did not comply, strictly or substan-
tially, with the regulatory reporting requirements. Accord, Oakhill Woods, at *21-
*22; Loube v. Commissioner, T.C. Memo. 2020-3, at *15-*23; Belair Woods, 116
7
Given our disposition, we need not decide whether Village provided
inaccurate information concerning “[t]he manner of acquisition * * * and the date
of acquisition of the property by the donor,” sec. 1.170A-13(c)(4)(ii)(D), Income
Tax Regs., or (if it did) whether that failure would have supplied sufficient
grounds, standing alone, for disallowance of the charitable contribution deduction.
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[*18] T.C.M. (CCH) at 329-330. This failure supplied an independent ground for
denial of its charitable contribution deduction.8
To reflect the foregoing,
An order will be issued granting
respondent’s motion for partial summary
judgment and denying petitioner’s cross-
motion.
8
Section 170(f)(11)(A)(ii)(II) provides that a charitable contribution deduc-
tion may be allowed, notwithstanding the taxpayer’s failure to comply with the
appraisal summary requirements, “if it is shown that the failure to meet such
requirements is due to reasonable cause and not to willful neglect.” Petitioner has
not advanced a “reasonable cause” defense under this provision and has adduced
no facts that would be relevant in determining its availability.