Wendell H. Murphy, Jr. & Wendy F. Murphy

United States Tax Court
T.C. Memo. 2023-72WENDELL H. MURPHY, JR. AND WENDY F. MURPHY,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
WENDELL H. MURPHY AND LINDA G. MURPHY,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket Nos. 14536-16, 14541-16. Filed June 15, 2023.
—————
Ps, through S-corp, owned two tracts of land
(“Tract 1” and “Tract 2”), which they developed into a
residential community with two golf courses, a clubhouse,
a recreation facility, and multiple nature trails. Tract 1
shares a border with a river (and is adjacent to a wildlife
reserve), and Tract 2 is an interior, land-locked tract to the
north. S-corp donated by deed in 2010 perpetual
conservation easements (each constituting a “qualified real
property interest” under I.R.C. § 170(h)(1)(A)) on Tract 1
and Tract 2 to a “qualified organization” under I.R.C.
§ 170(h)(1)(B). Relying on appraisals, Ps claimed
charitable contribution deductions of $8,424,909 for the
Tract 1 easement and $1,080,814 for the Tract 2 easement
as “qualified conservation contribution[s]” under I.R.C.
§ 170(h) on their tax returns, prepared by a competent
professional who was given all the information he
requested. Ps’ expert valued the easements on the basis
Served 06/15/23
2
[*2] that each tract would be developed as residential housing,
assuming in each instance that the other tract would
remain a golf course. Attached to the return was an
incomplete Form 8283, “Noncash Charitable
Contributions”, that did not report Ps’ basis in either
Tract 1 or Tract 2.
R examined Ps’ returns and issued to them Notices
of Deficiency (“NODs”) determining to disallow the
deductions. The NODs stated only that Ps’ individual
returns were being adjusted in accordance with the results
of S-corp’s examination. The NODs did not determine any
penalties. Ps filed petitions in this Court challenging the
determinations in the NODs.
In his amended answer, R asserted (for the first
time, i.e., as “new matter”) accuracy-related penalties
under I.R.C. § 6662. Before trial, R also asserted (again, as
“new matter”) that Ps’ charitable contribution deductions
should be entirely disallowed on the basis of the incomplete
Form 8283 appraisal summaries required by I.R.C.
§ 170(f)(11)(C) and Treas. Reg. § 1.170A-13(c)(4). R agrees
he has the burden of proof as to “new matter”.
The issues for decision are: (1) whether Ps failed to
comply with the substantiation and reporting
requirements of I.R.C. § 170(f)(11), and if so, whether that
failure is excusable for reasonable cause under I.R.C.
§ 170(f)(11)(A)(ii)(II); (2) whether the easements donated
on Tract 1 and on Tract 2 are “qualified conservation
contribution[s]” under I.R.C. § 170(h)(1); (3) the values of
the easements granted on Tract 1 and Tract 2; and
(4) whether any penalties under I.R.C. § 6662 are
applicable.
Held: Ps failed to comply (strictly or substantially)
with the substantiation and reporting requirements of
I.R.C. § 170(f)(11), but that failure was due to reasonable
cause because R failed to carry his burden to disprove
reasonable cause.
Held, further, the easement on Tract 1 protects a
“relatively natural habitat of fish, wildlife, or plants, or
3
[*3] similar ecosystem” within the meaning of I.R.C.
§ 170(h)(4)(A)(ii), and the easement on Tract 2 preserves
“land areas for outdoor recreation by, or the education of,
the general public” within the meaning of I.R.C.
§ 170(h)(4)(A)(i).
Held, further, the value of the easement granted on
Tract 1 is $2,790,274 (about $4.5 million less than Ps
claimed), and the value of the easement granted on Tract 2
is $100,000 (about $900,000 less than Ps claimed).
Held, further, unless otherwise conceded by the
Commissioner, Ps are liable for gross valuation
misstatement penalties under I.R.C. 6662(h).
—————
David D. Aughtry, John W. Hackney, and Kristen S. Lowther, for
petitioners.
Amy Dyar Seals, Olivia Hyatt Rembach, Corey R. Clapper, and Ashley
M. Bender, for respondent.
TABLE OF CONTENTS
MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 6
FINDINGS OF FACT .............................................................................. 7
The Murphy family ........................................................................... 7
Duplin Land and River Landing ...................................................... 8
Developing River Landing ........................................................ 8
The two golf courses .................................................................. 9
Natural habitat on the River Tract ........................................ 10
Public access to River Landing ............................................... 11
The easement donations in 2010 ................................................... 11
The River Tract easement ....................................................... 12
The Landing Tract easement .................................................. 16
Valuing the River Tract easement and the Landing Tract
easement in 2010..................................................................... 17
4
[*4] Reporting the easement donations on the 2010 tax returns ........ 18
Duplin Land’s 2010 return...................................................... 18
The Murphys’ individual returns ........................................... 19
Examinations, notices, and Tax Court proceedings ...................... 19
IRS examination of Duplin Land’s return .............................. 19
NOD to Wendell and Linda Murphy ...................................... 19
NOD to Dell and Wendy Murphy ........................................... 20
Petitions and answers ............................................................. 20
Trial of these cases .................................................................. 21
The value of the donated easements.............................................. 21
OPINION ................................................................................................ 22
I. Burden of proof and production ..................................................... 22
A. The general rules .................................................................... 22
1. Burden of proof under Rule 142 ....................................... 22
2. Burden of production under section 7491(c) .................... 22
B. The “new matter” exception.................................................... 23
1. The nature of “new matter” .............................................. 23
2. The “reasonable cause” defense as to penalty ................. 24
3. The “reasonable cause” defense as to a “new matter”
substantiation issue under section 170(f)(11)(A)(i) ......... 25
II. The substantiation requirements of section 170(f)(11) and
Treasury Regulation § 1.170A-13(c) .............................................. 28
A. A description of the requirements .......................................... 28
B. Compliance with the requirements ........................................ 30
1. Strict compliance .............................................................. 30
2. Substantial compliance .................................................... 31
C. Reasonable cause for noncompliance ..................................... 33
III. Qualified conservation contributions under section 170(h) .......... 37
A. The requirements for a “qualified conservation
contribution” ............................................................................ 38
B. The parties’ dispute as to conservation purpose .................... 38
5
[*5] 1. The statute lists “conservation purpose[s]”. .................... 38
2. The deeds state “Conservation Purposes”. ...................... 39
3. We consider only a conservation purpose that is
stated in the deed. ............................................................ 42
4. The River Tract easement does protect “a relatively
natural habitat”. ............................................................... 48
5. The Landing Tract easement does preserve a land
area for outdoor recreation and education. ..................... 57
C. The River Tract and Landing Tract easements protect
their conservation purposes in perpetuity. ............................ 60
1. The statute and regulations permit but limit a
donor’s reservation of rights............................................. 60
2. Rights are reserved in the River Tract and Landing
Tract easement deeds. ...................................................... 61
3. The River Tract easement deed protects its
conservation purpose in perpetuity notwithstanding
the reserved rights. ........................................................... 62
4. The reserved rights in the Landing Tract easement
deed facilitate its perpetual conservation purpose. ........ 63
IV. Valuing the easement donations.................................................... 63
A. General principles of valuation .............................................. 63
B. Valuation under consistent assumptions about
development ............................................................................ 65
C. Valuation of the River Tract easement .................................. 66
D. Valuation of the Landing Tract easement ............................. 68
V. Penalties under section 6662 ......................................................... 69
A. Penalty principles ................................................................... 69
B. Section 6662 penalties with respect to Duplin Land and
Wendell and Linda Murphy individually ............................... 70
VI. Conclusion ....................................................................................... 72
6
[*6] MEMORANDUM FINDINGS OF FACT AND OPINION
GUSTAFSON, Judge: At issue in these consolidated cases are
charitable contribution deductions under section 170(h) 1 for the
donation in 2010 of two conservation easements by members of the
Murphy family—through an S corporation, Duplin Land Development,
Inc. (“Duplin Land”)—to the North American Land Trust (“NALT”). The
IRS issued to Wendell H. Murphy, Sr. (“Wendell”), and Linda G.
Murphy, and to Wendell H. Murphy, Jr. (“Dell”), and Wendy F. Murphy,
notices of deficiency (“NODs”) determining inter alia to disallow two
charitable contribution deductions (of $1 million and $7.3 million)
claimed on their respective Forms 1040, “U.S. Individual Income Tax
Return”, that were passed through to them from Duplin Land’s
Form 1120–S, “U.S. Income Tax Return for an S Corporation”, and
determining associated deficiencies in federal income tax for 2010. Both
married couples filed timely petitions challenging their deficiencies.
After concessions, the remaining issues for decision are:
(1) whether the Murphy family 2 satisfied the substantiation and
reporting requirements of section 170(f)(11); (2) whether the two
easements donated through Duplin Land were “exclusively for
conservation purposes” within the meaning of section 170(h)(1)(C),
(4)(A), and (5)(A); (3) the fair market value of each conservation
easement; and (4) whether petitioners are liable for any penalties under
section 6662. We hold that petitioners did not satisfy the reporting
requirements of section 170(f)(11) but that their failure to do so was for
reasonable cause. We further hold that each easement donated by
Duplin Land satisfies a conservation purpose under section 170(h)(4)(A)
and protects its conservation purpose in perpetuity. Finally, we hold
that the values of the easements donated by Duplin Land are $100,000
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., as in effect at the relevant times; regulation references are to
the Code of Federal Regulations, Title 26 (“Treas. Reg.”), as in effect at the relevant
times; and Rule references are to the Tax Court Rules of Practice and Procedure. Some
dollar amounts are rounded. A citation of a “Doc.” in this Opinion refers to a document
as numbered in the Tax Court docket record of Docket No. 14536-16, and a pinpoint
citation therein refers to the pagination as generated in the digital file.
2 In this Opinion we sometimes collectively refer to Wendell and Linda
Murphy, Dell and Wendy Murphy, and their related entity Duplin Land, as “the
Murphy family”. Where specificity is necessary, we will refer to each petitioner or
entity by name.
7
[*7] and $2,790,274 (i.e., less than was claimed on Duplin Land’s return)
and that penalties are applicable to Wendell and Linda Murphy.
FINDINGS OF FACT
When the respective petitions were filed in these cases, Wendell
and Linda Murphy resided in Florida, and Dell and Wendy Murphy
resided in North Carolina. The likely forum for an appeal in these cases
is the U.S. Court of Appeals for the Eleventh Circuit. 3
The Murphy family
The Murphy family is a multi-generation farming family from
Bladen County, North Carolina, which has operations throughout the
country. The Murphy family is well known for its success and
innovation in the hog-farming industry, and Wendell Murphy (the
patriarch of the family) helped develop various processes that became
industry-standard practices in hog farming. Wendell Murphy also
taught agriculture classes to high school students and was active in
various environmental projects and policy proposals submitted to the
North Carolina state legislature.
In the early to mid 1990s, Wendell Murphy and his son Dell
expanded the Murphys’ business to include real estate development,
discussed in greater detail below. Wendell remained actively involved
in the Murphys’ business until sometime around 2010, when he and
Linda retired to Florida. By that time Dell was managing the Murphys’
3In the event of separate appeals by the petitioners in the two cases, venue for
an appeal by Dell and Wendy Murphy in Docket No. 14536-16 would be the U.S. Court
of Appeals for the Fourth Circuit, and venue for an appeal by Wendell and Linda
Murphy in Docket No. 14541-16 would be the Eleventh Circuit, unless the parties
stipulate otherwise pursuant to section 7482(b)(2). See § 7482(b). However, the
Commissioner acknowledges that “if respondent prevails in the case, petitioners could
choose to file an appeal from these consolidated cases to either the United States Court
of Appeals for the Fourth Circuit or the United States Court of Appeals for the
Eleventh Circuit. See Estate of Israel v. IRS, 159 F.3d 593, 595–96 (D.C. Cir. 1998);
Buckrey v. Comm’r, T.C. Memo 2017-138 at 5 n.11 (2017).” Doc. 143, ¶ 2. Petitioners
make it clear, see Doc. 144, that their preferred venue is the Eleventh Circuit, the court
that decided Champions Retreat Golf Founders, LLC v. Commissioner, 959 F.3d 1033(11th Cir. 2020), vacating and remanding, T.C. Memo. 2018-146. We will therefore
follow the precedent of the Eleventh Circuit, discussed below in Part III.B.4. See
Golsen v. Commissioner, 54 T.C. 742, 756–57 (1970), aff’d, 445 F.2d 985 (10th Cir.
1971).
8
[*8] business, which included 50 hog-farming facilities as well as
various real estate projects and investments in North Carolina.
Duplin Land and River Landing
The Murphy family formed Duplin Land in September 1993. In
1993 Duplin Land acquired two adjacent tracts of undeveloped land—
one (“the River Tract”) along the northern border of the Northeast Cape
Fear River and another (“the Landing Tract”) to the north—containing
wetlands and flood plains dense with trees and vegetation. 4 Over
several years, Duplin Land acquired smaller parcels of land adjacent to
these two tracts (for an eventual total of 1,350 acres) 5 and ultimately
developed River Landing—a residential community with two golf
courses.
Developing River Landing
While creating a development plan for River Landing, Duplin
Land hired consultants and surveyors to identify and mark protected
wetland areas on the River Tract and the Landing Tract. The U.S. Army
Corps of Engineers (“USACE”) approved that the development proposed
by Duplin Land would not harm any existing wetland areas. Duplin
Land also obtained approval from Duplin County to develop River
Landing. After the USACE and Duplin County approved the
development of River Landing, Duplin Land began raising and grading
ground, clearing trees, installing paved roads and hiking trails, and
building retention ponds. The development transformed 1,350 acres of
rural land into a gated 1,500-lot 6 residential community featuring two
18-hole golf courses, a clubhouse, recreation facilities, and nature trails.
4 The physical characteristics of the River Tract and the Landing Tract
resemble the nearby Angola Bay Game Land, which is 34,000 acres of natural habitat
managed by the North Carolina Wildlife Resources Commission. The Angola Bay
Game Land is immediately east of the River Tract on the other side of the Northeast
Cape Fear River.
5 The River Tract consists of 16 parcels of land in Duplin County, and the
Landing Tract consists of 23 parcels of land in Duplin County. At no time was either
tract subject to any zoning restrictions.
6 This 1,500-lot figure represents the total number of lots platted in the
development plan for River Landing, with most of the lots being in the northern portion
of the property, away from the Northeast Cape Fear River and wetland areas. As of
2010, 1,200 to 1,350 lots had been sold, but only 350 residents were actually living in
River Landing.
9
[*9] Although developed, River Landing preserved numerous open
spaces containing lakes, ponds, wooded areas, and river frontage.
The two golf courses
Two 18-hole championship golf courses are part of River Landing:
the River Course (which opened in 1996) and the Landing Course (which
opened in 2006). The River Course covers approximately 241 acres of
the River Tract. Single-family lots are platted along the northern,
western, and eastern sides of the River Course, and the Northeast Cape
Fear River borders its southern side. The River Course has significant
water features, vegetation, and wetland areas throughout the central
portions of the course. The Landing Course covers approximately 251
acres of the Landing Tract, is more centrally located within River
Landing, and is surrounded by single-family lots on all sides, though it
preserves some modest natural features such as trees, vegetation, and
ponds. Both golf courses were designed by architect Clyde Johnson, who
recommended minimizing the surface area of intensively managed
fairways, greens, and tees to reduce the need for chemical fertilizers and
pesticides and to maintain a more natural golf course with
unmanicured, unmaintained “no mow” areas containing native grass
and plant species in lieu of intensively managed turf grass.
The River Course and the Landing Course were open year round
and were played by country club members 7 (both resident and non-
resident) and their guests, as well as by resident non-members and the
general public, who could play either course by reserving a tee time
through the pro shop or through third-party vendors and paying a fee.8
River Landing also sponsored and hosted charity golf tournaments,
summer youth programs, high school and college golf competitions, and
other sporting and recreational events. By 2010 the River Course
ranked number 25 out of the Top 50 golf courses in North Carolina, and
the Landing Course ranked number 48. From 2008 to 2010 an average
of 36,000 total rounds of golf were played annually at River Landing.
But despite the popularity of the River Landing golf courses, they
incurred net operating losses every year from 1996 to 2010.
7 By 2010 there were 279 members of the River Landing country club.
8 Neither party put on evidence about the amount of the fees charged to play
on the River Landing golf courses. The Commissioner made no showing or contention
that the reservation and fee requirements of these courses are more onerous than those
a member of the public would face to play golf on a public municipal course.
10
[*10] Natural habitat on the River Tract
The River Tract runs parallel to the Angola Bay Game Lands and
Cape Fear River Basin conservation areas along the Northeast Cape
Fear River and is ecologically consistent with those conservation areas
as wetland forest. Despite the development of residential lots on the
River Tract, of the 241 acres which comprise the River Course (and the
River Tract easement, as discussed below at p. 12) approximately 52%
is golf course tees, fairways, and greens, 15% is ponds, and the
remaining 33% is tree cover. The pond portion of the River Tract
consists of ten independent aquatic resources (streams, ponds, wetlands,
and river). Most of the tree cover percentage is a cohesive forested
corridor in the eastern part of the River Tract (bordered by River Course
hole numbers three through eight to the east, south, and west, and by
residential lots to the north) that, as petitioners’ expert Heather L.
Wallace stated in her report (discussed below at p. 53), contains “a
globally imperiled variant of the blackwater cypress-gum swamp
ecological association . . . termed the Atlantic Coastal Plain Blackwater
Cove Woodland”.
The River Tract contains diverse habitats including open space,
upland forest, forest edge, ponds, streams, and wetlands, and is home to
approximately 210 total plant and animal species (including
7 amphibians, 1 arachnid, 4 crustaceans, 1 fungus, 41 insects,
20 mammals, 4 mollusks, 8 reptiles, 34 vascular plants, 79 birds, and
12 fish). Of the total plant and animal species present on the River
Tract, 32 were considered rare or significant by the U.S. Fish & Wildlife
Service (“USFWS”), North Carolina Wildlife Resources Commission,
North Carolina Natural Heritage Program, NatureServe, Partners in
Flight, and National Audubon Society as of 2018, and 26 were
considered rare as of 2010. Of the 32 rare or significant species present
on the River Tract, 25 are birds, 1 is insect, and 6 are mammal. 9 Specific
bird species of conservation importance that were observed foraging and
roosting on the River Tract include the Northern Flicker, Pine Warbler,
Red Headed Woodpecker, Downy Woodpecker, and Brown Thrasher, as
well as the American Bald Eagle; and specific mammal species of
conservation importance observed on the River Tract include the
Eastern Fox Squirrel and the Tri-colored bat. Additionally, the habitat
9 A table attached to the report of petitioners’ expert, Ms. Wallace, summarizes
the “Rare Animal Species of [the] River Tract Conservation Easement” and their
respective conservation rankings in both 2010 and 2018.
11
[*11] of the River Tract is common for the American alligator, which has
been seen and photographed by residents of River Landing.
Public access to River Landing
River Landing is a gated community with guarded entrances
(although River Landing is not enclosed by fences around the entire
perimeter). Residents of River Landing may enter and exit the property
at will, but members of the general public who wish to enter by car must
first stop at the visitor’s entrance and state their purpose for entering
River Landing before a guard will open the gate and permit access to the
property. For a member of the general public to play golf at either the
River Course or the Landing Course, they must reserve a tee time and
pay a fee, and then pass through the visitor’s entrance. However,
members of the general public who merely wish to use River Landing’s
hiking and biking trails can access the property through a paved trail at
the entrance to River Landing without being inspected by the guards or
paying any associated fee. This trail head is open and accessible at all
times of the day and year.
The easement donations in 2010
In 2010 the Murphy family donated five conservation
easements—two of which are the subject of this Opinion 10—to NALT, a
section 501(c)(3) charitable organization that is a “qualified
organization” for the purposes of section 170(h)(1)(B). The Murphys
donated both easements at issue (located on the River Tract and the
Landing Tract of the River Landing development) through Duplin Land.
On December 27, 2010, 17 years after it had first acquired the
River Tract and the Landing Tract, Duplin Land granted to NALT two
deeds of easement (the “River Tract easement deed” and the “Landing
Tract easement deed”). Both the River Tract easement deed and the
Landing Tract easement deed were recorded with the State of North
Carolina, County of Duplin, on December 30, 2010. Before accepting the
easement donations, NALT performed due diligence by inspecting the
River Tract and the Landing Tract and reviewing the proposed River
Tract easement deed and the proposed Landing Tract easement deed to
10 The Commissioner initially challenged the deductibility of all five of the
conservation easements donated by the Murphy family, but he has since conceded that
petitioners are entitled to charitable contribution deductions for two of them (referred
to by the parties as “Magnolia #3 and Magnolia #4”). One is at issue in Murfam, Docket
No. 8039-16.
12
[*12] determine whether the donations were suitable for NALT’s
conservation easement program. After determining that the donations
were suitable, NALT prepared a baseline documentation report for each
easement (“River Baseline Report” and “Landing Baseline Report”),
which summarized the donated easement, the respective conservation
interest(s), and NALT’s future role in monitoring the easement.
The River Tract easement
The River Tract easement covers 241 acres of the River Tract
including the River golf course and surrounding undeveloped areas. The
River Tract easement deed states its ostensibly plural “Conservation
Purposes” as follows—
WHEREAS, preservation of the Conservation Area
shall serve the following purposes pursuant to 26 U.S.C.
§ 170(h)(4)(a) and 26 CFR § 1.170A-14(d)(i), (the
“Conservation Purposes”):
Preservation of the Conservation Area as a
relatively natural habitat of fish, wildlife, or plants
or similar ecosystem
—but the deed thereby states a singular purpose: preservation of a
“relatively natural habitat”. The River Tract easement deed further
states the following “Conservation Values”:
WHEREAS, the features of the Conservation Area having
ecological significance (which may be hereinafter called the
“Conservation Values”) and the Conservation Purposes
have been established in the reports, plans, photographs,
documentation, and exhibits assembled by, and retained in
the offices of, North American Land Trust (collectively
called the “Baseline Documentation”), pursuant to 26 CFR
§170A-14(g)(5), which describes, among others, the
following Conservation Values of the Conservation Area:
The Conservation Area provides wildlife corridors,
breeding habitat, foraging habitat, and shelter for at
least fifty species of animals; and
The Conservation Area provides the natural
ecological requirements for at least one hundred
species of plants; and
13
[*13] The Conservation Area supports one natural
community: Coastal Plain Bottomland Hardwoods
(Blackwater Subtype); and
The Conservation Area contains wetlands that
provide the adequate breeding habitat for obligate
amphibians and invertebrate species; and
The Conservation Area provides the natural
ecological requirements and supports at least two
animal Species of Special Concern in North
Carolina: Eastern Fox Squirrel (Sciurus niger), and
Bald Eagle (Haliaeetus leucocephalus); and
The Conservation Area contains wetlands that hold
and filter waters that drain into the Northeast Cape
Fear River; and
Preservation of the Conservation Area provides
suitable habitat for and supports 5 species of birds
that are considered Species of Regional Importance
as monitored by the Partners In Flight Species
Assessment Database: Northern Flicker (Colaptes
auratus), Pine Warbler (Dendroica pinus), Red
Headed Woodpecker (Melanerpes erythrocephalus),
Downy Woodpecker (Picoides pubescens), Brown
Thrasher (Toxostoma rufum).
These “Conservation Values” all manifestly relate to the River Tract
easement deed’s stated purpose of preserving a “relatively natural
habitat”.
Article 2 of the River Tract easement deed sets forth the perpetual
restrictive covenants, which generally prohibit Duplin Land (and its
successors and assigns) from constructing additional structures,
removing ground or surface water, paving new roads or paths, removing
trees and other vegetation, altering topography or otherwise disturbing
land or waterways, and introducing non-native invasive plant species.
Article 2.3 requires Duplin Land to “use and apply the best
environmental practices then prevailing in the golf industry”, and it
refers to the publication “Environmental Principles for Golf Courses in
the United States” adopted by the Golf Course Superintendents
Association of America, and to the “PGA Tour Agronomy Tournament
Preparation Handbook”.
14
[*14] The perpetual restrictions in Article 2 of the River Tract easement
deed are subject to certain reserved rights provided in Article 3, which
permit the owner of the River Tract (i.e., Duplin Land and its successors)
to make continued use of the easement property as a golf course.
Specifically, Article 3.1 of the River Tract easement deed permits Duplin
Land, without NALT’s approval, to—
construct the following types of additional Structures
commonly accessory to the operation of a golf course or
other use of the Conservation Area for outdoor recreation
or outdoor education: rain shelters, rest stations, food
concession stands, or other structures that enhance public
recreation or education, with aggregate floor or ground
surface area of all such Structures not exceeding 2,500
square feet and provided that no such activity shall have a
material adverse effect on the Conservation Purposes.
With the right set forth in this paragraph to construct
additional Structures within the Conservation Areas shall
also be included the right to remove trees or other
vegetation and to grade and otherwise disturb land to the
most limited extent necessary to exercise the Reserved
Rights without having any material adverse effect on the
Conservation Purposes.
In addition, Article 3.3—
reserves the right, without prior consent of Holder [i.e.,
NALT], to continue to operate, repair, upgrade, maintain,
and replace in the event of casualty loss, the Golf Course,
at the time this Conservation Easement is granted,
together with any Permitted Alterations, including those
certain improvements, including but not limited to,
structures, roads, cart paths, and other items including
ball washing stands, waste baskets, signs, covered rest
stops and bathroom facilities; roads and bridges; paved and
unpaved cart paths; landscaping improvements, other
types of vegetation; ponds, lakes, and other water courses;
drainage ditches as well as irrigation and drainage lines;
site work and grading; fairways, tee boxes, greens, and
other golf course play areas, utility infrastructure; and all
other improvements, if any, on the Conservation Area
including but not limited to the following:
15
[*15] 3.3.1 Maintain in good and manicured condition the
roads, trails or walkways, walkways, fairways,
greens, tee boxes, sand traps, waste bunkers, areas
in the rough, and other Golf Course play areas
including any lakes, ponds, and other water courses
which are an integral part of the Golf Course . . . .
Included within this right of maintenance, without
limitation, are the right to: prune or remove dead,
unsightly or hazardous vegetation affecting any
such fairway, rough or green, road, trail or walkway
area; selectively cut and thin trees as well as the
right to plant new trees and vegetation and make
other landscaping improvements to maintain the
playability and/or improve the attractiveness of the
Golf Course; install or apply materials necessary to
correct or impede erosion; grade earth to maintain a
passable condition or to control or impede erosion;
replace existing culverts, water control structures
and bridges; and maintain roadside ditches.
....
3.3.3 Fill, excavate, dredge, and transplant materials as
is necessary for the creation and maintenance of
typical golf course improvements . . . such as sand
traps, tee boxes, fairways, greens, waste bunkers,
areas in the rough, etc.
....
3.3.5 Maintain, repair, and improve any structure, utility,
or other apparatus or appurtenance located within
the easement area.
3.3.6 Any such maintenance or alterations shall be
conducted in accordance with a reasonable
interpretation of the standards for golf course
maintenance set out in Section 2.3 herein [requiring
Duplin Land to follow the “best environmental
practices then prevailing in the golf industry”].
However, the preamble paragraph of Article 3 in the River Tract
easement deed provides that “the Reserved Rights set forth in . . .
Article 3 shall not be construed to permit Owner [i.e., Duplin Land] to
16
[*16] violate the provisions of Section 2.3 [requiring Duplin Land to
follow the best environmental practices then prevailing in the golf
industry] and 2.4 [limiting the types of recreational activities
permissible on the River Tract easement] which shall supersede the
provisions of Article 3.”
The Landing Tract easement
The Landing Tract easement covers 251 acres of the Landing
Tract including the Landing golf course. The Landing Tract easement
deed states its “Conservation Purposes” as follows:
WHEREAS, preservation of the Conservation Area
shall serve the following purposes pursuant to 26 U.S.C.
§ 170(h)(4)(a) and 26 CFR § 170A-14(d)(i), (the
“Conservation Purposes”):
Preservation of the Conservation Area for outdoor
recreation by, or the education of, the general public;
and
Preservation of the Conservation Area as open space
which provides scenic enjoyment to the general
public and yields a significant public benefit; and
Preservation of the Conservation Area as open space
which, if preserved, will advance a clearly delineated
Federal, State or local governmental conservation
policy and will yield a significant public benefit . . . .
That is, the Landing Tract easement deed states multiple purposes—
outdoor recreation or education by the public, and open space for scenic
enjoyment of the public and advancing of a governmental conservation
policy. The Landing Tract easement deed also states “Conservation
Values” similar to those provided in the River Tract easement deed. 11
11 The “Conservation Values” provided in the Landing Tract easement deed
differ slightly from those stated in the River Tract easement deed with respect to the
diversity of plant and animal species. For example, the “Conservation Values”
provided in the Landing Tract easement deed state that the Landing Tract supports
“at least fifty species of plants” and “at least one animal Species of Special Concern in
North Carolina: Eastern Fox Squirrel”, i.e., not an American Bald Eagle as in the River
Tract easement deed.
17
[*17] Article 2 of the Landing Tract easement deed contains the same
perpetual restrictive covenants as the River Tract easement deed,
except that Article 2.4 of the Landing Tract easement deed provides the
following additional provision:
2.4 Use By General Public. The Property is and shall
continue to be and remain open for substantial and regular
use by the general public for outdoor recreations or outdoor
education activity, whether for use in the game of golf in
the layout and formation of the Golf Course in place at the
time of granting this Conservation Easement or for other
outdoor recreation or education activities, provided that
such activities do not involve the construction of
substantial Structures or other improvements and do not
otherwise conflict with the Conservation Purposes of the
Conservation Easement. The forgoing is not intended to
prohibit the charging of fees such as, but not limited to,
greens, carts, concession, group, and social fees, so long as
the Property is open for the substantial and regular use of
the general public and so long as the establishment of such
fees neither defeats such substantial and regular use by
the general public use.
The reserved rights in Article 3 of the Landing Tract easement
deed are identical to those in the River Tract easement deed, except that
the Landing Tract easement deed contains one additional provision
“reserv[ing] the right to provide an outdoor education program for the
general public on a regular and substantial basis”.
Valuing the River Tract easement and the Landing Tract
easement in 2010
Before making the conveyances, Duplin Land engaged
Mr. F. Bruce Sauter to appraise the River Tract easement and the
Landing Tract easement. Mr. Sauter appraised each easement using a
“before and after” valuation method. As to the River Tract, Mr. Sauter
determined that its highest and best use before donation of the River
Tract easement was medium and high-density development of 155 to
160 single-family homes, using a subdivision plan prepared by the C.E.
Group, Inc. (“C.E. Group”). In valuing the River Tract easement, Mr.
Sauter presumed that the Landing Course would continue to operate as
a golf course, which would both preserve the incentive to develop the
River Tract and increase its value. On these assumptions, Mr. Sauter
18
[*18] determined that the value of the River Tract before the easement
donation was $9,718,062, that its value after the easement donation was
$2,374,119, and that therefore the value attributable to the River Tract
easement was $7,344,095.
Mr. Sauter performed the same type of “before and after”
valuation for the Landing Tract easement. Relying again on the
subdivision plan prepared by the C.E. Group, 12 Mr. Sauter determined
that the highest and best use of the Landing Tract before the easement
donation was low-density development. In valuing the Landing Tract
easement, Mr. Sauter presumed that the River Course would continue
to operate as a golf course. (That is, in each valuation he presumed that
the subject golf course would be discontinued and that the golf course on
the other tract would continue to operate.) On these assumptions, Mr.
Sauter determined that the value of the Landing Tract before the
easement donation was $1,457,842, that its value after the easement
donation was $377,028, and that therefore the value attributable to the
Landing Tract easement was $1,080,814.
Reporting the easement donations on the 2010 tax returns
Duplin Land’s 2010 return
The Murphy family engaged Dixon Hughes Goodman (“Dixon
Hughes”)—one of the largest certified public accountant (“CPA”) firms
in North Carolina—to prepare Duplin Land’s Form 1120–S for the 2010
tax year. Dixon Hughes requested from the Murphy family all the
information it deemed necessary to prepare Duplin Land’s return, and
the Murphy family provided all the information that had been requested
from them by Dixon Hughes. Dixon Hughes prepared Duplin Land’s
return, Wendell and Linda Murphy’s joint return, and Dell and Wendy
Murphy’s joint return on the basis of the information received from the
Murphy family, and all returns were filed as they were prepared by
Dixon Hughes. Duplin Land’s return reported the donations of the River
Tract easement and the Landing Tract easement and claimed
corresponding charitable contribution deductions of $7,344,095 and
$1,080,814. The return included Form 8283, “Noncash Charitable
Contributions”, for each easement which was signed by both Mr. Sauter
12 We note that Mr. Sauter relied in part on the capacity plan prepared for the
River Tract because no capacity plan was prepared for the Landing Tract in 2010, and
we note further that the capacity plan prepared for the River Tract was somewhat
simple in that the plan merely placed lots in the areas of the River Tract that had
already been cleared for the golf course.
19
[*19] and Andrew L. Johnson (the president of NALT) and included the
cover letters of Mr. Sauter’s appraisals. However, the following portions
of Duplin Land’s Forms 8283 were either incomplete or entirely blank:
Page 1 included only Duplin Land’s identifying information, but nothing
about the contributions; and Page 2 failed to include the date and
manner in which the donor acquired the property, the donor’s cost or
adjusted basis for the property, or whether the contribution was made
as part of a bargain sale.
The Murphys’ individual returns
The Murphy family also engaged Dixon Hughes to prepare their
personal tax returns. Wendell and Linda Murphy claimed charitable
contribution deductions for the donations of the River Tract easement
and the Landing Tract easement on their joint 2010 Form 1040, “U.S.
Individual Income Tax Return”, according to the amounts passed
through to them from Duplin Land’s return and shown on Schedule K–1,
“Shareholder’s Share of Income, Deductions, Credits, etc.”—as did Dell
and Wendy Murphy. The two couples’ joint returns included Forms 8283
that, for purposes of cost basis and date of acquisition on Page 1, stated
“FROM SCHEDULE K–1 (FORM 1065 OR 1120S)”, reported the
respective fair market value of each contribution, and then stated “SEE
ATTACHED STMTS”. Copies of Mr. Sauter’s and Mr. Piner’s appraisals
were also attached to the Murphy family’s individual returns.
Examinations, notices, and Tax Court proceedings
IRS examination of Duplin Land’s return
The IRS examined Duplin Land’s 2010 return, determined to
disallow the charitable contribution deductions for the donations of the
River Tract easement and the Landing Tract easement, and proposed
adjustments that subsequently affected the Murphy family’s individual
returns for 2010. No notices or determinations issued to Duplin Land
were made part of the record in these cases, and we therefore rely, for
information about the Duplin Land adjustments, on the NODs issued to
the Murphys for their individual returns, as explained below.
NOD to Wendell and Linda Murphy
On March 28, 2016, the IRS issued to Wendell and Linda Murphy
an NOD determining a $764,723 deficiency in tax for 2010. The NOD
did not determine any penalties. The NOD included Form 886–A,
“Explanation of Items,” which listed adjustments to charitable
20
[*20] contributions by Duplin Land and stated: “Your return is being
adjusted in accordance with the examination results of [Duplin Land’s
return].” The corresponding adjustment reduced their claimed
charitable contributions from Duplin Land from $1,505,206 claimed on
the return down to $758. The NOD to Wendell and Linda Murphy did
not assert liability for any penalty, nor did it determine to deny the
charitable contribution deduction on the basis of their failure to satisfy
the substantiation and reporting requirements of section 170(f)(11).
NOD to Dell and Wendy Murphy
On March 28, 2016, the IRS also issued to Dell and Wendy
Murphy an NOD determining a $918,994 deficiency in tax for 2010. The
NOD did not determine any penalties. The NOD included Form 886–A,
which listed adjustments to charitable contributions by Duplin Land
and stated: “This is the adjustment in accordance with the examination
results of [Duplin Land’s return]. Shown as information only.” The
corresponding adjustment reduced the Duplin Land charitable
contributions from $2,064,282 claimed on the return down to $1,039.
The NOD to Dell and Wendy Murphy did not assert liability for any
penalty, nor did it determine to deny the charitable contribution
deduction on the basis of their failure to satisfy the substantiation and
reporting requirements of section 170(f)(11).
Petitions and answers
On June 24, 2016, each couple—Dell and Wendy Murphy and
Wendell and Linda Murphy—timely filed a petition challenging the
IRS’s determination of a deficiency for 2010. The Commissioner’s
answers filed in August 2016 did not assert any liability for penalties.
Rather, each answer alleged:
[R]espondent is awaiting the delivery of various relevant
administrative files. Further alleges that after a review of
said administrative files, respondent may file an
Amendment to his Answer which may include affirmative
allegations in support of the determination that there is a
gross valuation misstatement penalty under I.R.C.
§§ 6662(e) and (h), or in the alternative, that there is an
accuracy-related penalty under I.R.C. § 6662(a), with
respect to the disallowance of the charitable deductions at
issue in the instant case.
21
[*21] In his amended answers filed in September 2016, the
Commissioner asserted—for the first time—gross valuation
misstatement penalties under section 6662(e) and (h) or, in the
alternative, accuracy-related penalties under section 6662(a). The
Commissioner later conceded all penalties as to Dell and Wendy Murphy
in Docket No. 14536-16.
Neither the Commissioner’s answers nor his amended answers
alleged noncompliance with the substantiation requirements of section
170(f)(11) to report in the return and attach to the return certain
information with respect to the taxpayer’s basis in the donated property
and the appraisal thereof. Rather, the Commissioner first made this
contention in his pretrial memorandum.
Trial of these cases
These cases were consolidated for trial (along with Docket
No. 8039-16), during which the parties offered expert reports and
testimony regarding the values of the River Tract easement and the
Landing Tract easement, as well as the ecological and recreational
aspects of the River Tract easement and the Landing Tract easement.
Additionally, the Murphy family testified regarding their businesses
and the preparation of the tax returns in these cases.
The value of the donated easements
In preparation for trial the Murphy family engaged Mr. Amos
Franklin Dean to value the River Tract easement and the Landing Tract
easement, and the Commissioner engaged Stephen Hughes to value the
River Tract easement and the Landing Tract easement. After due
consideration of the expert reports and testimony offered by both
parties, and for the reasons explained below in Part IV.C, we find that
the highest and best use of the River Tract before the easement donation
was development of 172 lots, and that the corresponding value of the
River Tract before the easement donation was $5,140,274. We find that
after the easement donation, the highest and best use of the River Tract
was continued use as a golf course (and development of zero lots), and
that the value of the River Tract after the easement donation was
$2,350,000. Therefore, we find that the value of the River Tract
easement was $5,140,274 minus $2,350,000, or $2,790,274.
As to the Landing Tract, for the reasons explained below in Part
IV.D, we find that the highest and best use before the easement donation
was continued use as a golf course and development of 5 lots, and that
22
[*22] the corresponding value of the Landing Tract before the easement
donation was $2,550,000. We find that after the easement donation, the
highest and best use of the Landing Tract was continued use as a golf
course (and development of zero lots), and that the value of the Landing
Tract after the easement donation was $2,450,000. Therefore, we find
that the value of the Landing Tract easement was $2,550,000 minus
$2,450,000, or $100,000.
OPINION
I. Burden of proof and production
A. The general rules
1. Burden of proof under Rule 142
Rule 142 provides that “[t]he burden of proof shall be upon the
petitioner, except as otherwise provided by statute or determined by the
Court”. Generally, the IRS’s determinations in an NOD are presumed
correct and the taxpayer bears the burden of proving them wrong. See
Welch v. Helvering, 290 U.S. 111, 115 (1933). Furthermore, taxpayers
bear the burden of proving entitlement to deductions claimed. See
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The Murphys
thus generally bear the burden of proving their entitlement to the
charitable contribution deductions for qualified conservation
contributions under the applicable provisions of section 170, see Rule
142(a), which includes proving that the donations of conservation
easements on the River Tract and the Landing Tract satisfy the
requirements of section 170(h) and that they obtained qualified
appraisals under section 170(f)(11)(E), as well as the value of the
respective easements. However, this general rule is subject to
exceptions that affect the outcome of some issues in these cases, which
we now discuss.
2. Burden of production under section 7491(c)
Section 7491(c) provides that the Commissioner “shall have the
burden of production in any court proceeding with respect to the liability
of any individual for any penalty, addition to tax, or additional amount”.
That burden includes the obligation to show compliance with the
requirement of section 6751(b)(1) that there be written supervisory
approval of the “initial determination” of the penalty liability. The
Commissioner made that showing, and petitioners make no contention
23
[*23] as to any failure to comply with the procedural requirement of
section 6751(b)(1).
As to the merits of the penalty liability, “to meet his burden of
production, the Commissioner must come forward with sufficient
evidence indicating that it is appropriate to impose the relevant
penalty.” Higbee v. Commissioner, 116 T.C. 438, 446 (2001). “[O]nce the
Commissioner meets his burden of production, the taxpayer must come
forward with evidence sufficient to persuade a Court that the
Commissioner’s determination is incorrect.” Id. at 447. The
Commissioner has met his burden of production as to penalties in these
cases by asserting, on the basis of his valuation expert’s report, that
accuracy-related penalties under section 6662 are applicable, and
though they stoutly oppose the penalties, petitioners do not dispute
whether the Commissioner has met that threshold burden of production
as to penalties.
B. The “new matter” exception
The general rule that the taxpayer bears the burden of proof is
subject to an exception that affects the outcome of some issues in these
cases: Not the taxpayer but the Commissioner bears the burden of proof
“in respect of any new matter, increases in deficiency, and affirmative
defenses, pleaded in the answer”. Rule 142(a)(1).
1. The nature of “new matter”
“A new theory that is presented to sustain a deficiency is treated
as a new matter when it either [1] alters the original deficiency or
[2] requires the presentation of different evidence. A new theory which
merely clarifies or develops the original determination is not a new
matter in respect of which respondent bears the burden of proof.” Wayne
Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989) (citations
omitted).
Since 1990 this “new matter” rule has been “supported by the
statutory requirements of section 7522.” Shea v. Commissioner, 112
T.C. 183, 197 (1999). In that year Congress added section 7522(a) to the
Code to require NODs to “describe the basis for, and identify the
amounts (if any) of, the tax due, interest, additional amounts, additions
24
[*24] to the tax, and assessable penalties included in such notice.”
Construing that provision, we held that
where a notice of deficiency fails to describe the basis on
which the Commissioner relies to support a deficiency
determination and that basis requires the presentation of
evidence that is different than that which would be
necessary to resolve the determinations that were
described in the notice of deficiency, the Commissioner will
bear the burden of proof regarding the new basis.
Shea, 112 T.C. at 197.
2. The “reasonable cause” defense as to penalty
Under section 6664(c)(1), “No penalty shall be imposed under
section 6662 or 6663 with respect to any portion of an underpayment if
it is shown that there was a reasonable cause for such portion and that
the taxpayer acted in good faith with respect to such portion.”
(Emphasis added.) Where the Commissioner asserts a penalty for the
first time as “new matter” in his answer and reasonable cause is at issue,
his burden of proof on the imposition of that penalty includes showing
the absence of “reasonable cause”. See, e.g., RERI Holdings I, LLC v.
Commissioner, 149 T.C. 1, 38–40 (2017), aff’d sub nom. Blau v.
Commissioner, 924 F.3d 1261 (D.C. Cir. 2019); Rader v. Commissioner,
143 T.C. 376, 389 (2014), aff’d in part, 616 F. App’x 391 (10th Cir. 2015);
Arnold v. Commissioner, T.C. Memo. 2003-259, 86 T.C.M. (CCH) 341,
344; Collins v. Commissioner, T.C. Memo. 1994-409, 68 T.C.M. (CCH)
484, 488; Taylor v. Commissioner, T.C. Memo. 1989-201, 57 T.C.M.
(CCH) 276, 279–80; Pickett v. Commissioner, T.C. Memo. 1975-33, 34
T.C.M. (CCH) 213, 224; Bruner Woolen Co. v. Commissioner, 6 B.T.A.
881, 882 (1927).
In these cases, the NODs included no penalty determinations.
Rather, it was in amended answers to the petitions in both cases that
the Commissioner first asserted gross valuation misstatement penalties
under section 6662(e) and (h), or in the alternative, accuracy-related
penalties under section 6662(a). Because the penalties asserted by the
Commissioner in his amended answers increase the liabilities above
those originally determined in the NODs issued to the Murphys, the
penalties are “new matter” for which the Commissioner bears the overall
burden of proof. That burden includes the burden to show the absence
25
[*25] of “reasonable cause”. See Rader, 143 T.C. at 389; Arnold, 86
T.C.M. (CCH) at 344; Bruner Woolen Co., 6 B.T.A. at 882.
3. The “reasonable cause” defense as to a “new matter”
substantiation issue under section 170(f)(11)(A)(i)
A second “reasonable cause” provision is also significant in these
cases. As is explained below in greater detail in Part II.A, the Code has
a demanding regime for substantiating charitable contribution
deductions like the ones at issue here. Section 170(f)(11) and Treasury
Regulation § 1.170A-13(c)(2)(i)(B) require that the taxpayer “[a]ttach a
fully completed appraisal summary” (emphasis added) to his return, and
that appraisal summary is to include “[t]he cost or other basis of the
property”. Treas. Reg. § 1.170A-13(c)(4)(ii)(E). If a donor fails to meet
these requirements, then section 170(f)(11)(A)(i) provides that “no
deduction shall be allowed”.
However, there is an exception to this disallowance.
Section 170(f)(11)(A)(ii)(II) provides that the taxpayer’s deduction will
not be disallowed “if it is shown that the failure to meet such
requirements is due to reasonable cause and not to willful neglect”; and
“reasonable cause” is, of course, the same phrase we mentioned in
Part I.B.2 above in connection with penalties, where we showed that a
shift in the burden of proof as to a penalty affects the burden of proof as
to a “reasonable cause” defense to that penalty. This Court has not
previously addressed explicitly the question of the burden of proof on the
“reasonable cause” defense when the Commissioner raises the issue of
noncompliance with section 170(f)(11) as “new matter” in litigation and
reasonable cause for the noncompliance is at issue. But in Belair Woods
we considered the relatedness of the section 170(f)(11)(A)(ii)(II)
“reasonable cause” defense to the “reasonable cause” defense in the
penalty context, and we concluded that the same standard—“ordinary
business care and prudence”, United States v. Boyle, 469 U.S. 241, 246
(1985) (quoting Treas. Reg. § 301.6651-1(c)(1))—should apply in both
instances, see Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-
159, at *22–23 (first citing Alli v. Commissioner, T.C. Memo. 2014-15,
at *60–61; and then citing Crimi v. Commissioner, T.C. Memo. 2013-51,
at *98–99).
Consistent with that conclusion in Belair Woods that penalty
principles properly inform our construction of “reasonable cause” under
the substantiation provisions of section 170(f)(11)(A)(ii)(II), we hold that
the determination of which party bears the burden of proof on
26
[*26] reasonable cause under the substantiation provisions depends (as
it does for penalty liability) on whether the Commissioner’s contention
of noncompliance with the substantiation provisions is new matter. If
the Commissioner’s contention about noncompliance with the
substantiation requirements of section 170(f)(11) is new matter, then he
bears the burden on that contention and on the “reasonable cause”
defense to it—i.e., the Commissioner must prove the absence of
reasonable cause.
This shift in the burden of proof occurs here. As we discuss below
in Part II.B, the Commissioner argues that the Murphys’ charitable
contribution deductions should be entirely disallowed because of their
failure to comply with the substantiation requirements of section
170(f)(11)(C) and Treasury Regulation § 1.170A-13(c)(2) and (4), since
the Murphys did not attach a “fully completed appraisal summary” on
Forms 8283 to their tax returns; and the Commissioner denies the
existence of “reasonable cause” for that noncompliance under
section 170(f)(11)(A)(ii)(II). The Commissioner first made this
contention not in the NODs, not in his answers to the petitions nor in
his amended answers, but rather in his pretrial memorandum. We
conclude that compliance with the appraisal summary requirement of
section 170(f)(11)(C) and Treasury Regulation § 1.170A-13(c)(2) and
(4) was “new matter” at the trial of these cases; and we further conclude,
guided by our penalty jurisprudence as we construe and apply the
section 170(f)(11)(A)(ii)(II) reasonable cause defense, that the
Commissioner’s burden includes showing that the failure to fully
complete the appraisal summary was not due to reasonable cause or was
due to willful neglect. See Belair Woods, LLC, T.C. Memo. 2018-159,
at *22–23; Alli, T.C. Memo. 2014-15, at *60–61; Crimi, T.C. Memo. 2013-
51, at *98–99.
The NOD issued to Wendell and Linda Murphy denied in its
entirety the non-cash portion of the charitable contribution deduction
passed through to them by Duplin Land. The NOD stated that it made
that adjustment “in accordance with the examination results of the
[Duplin Land] partnership return”, but it did not state what the grounds
were for that determination. Likewise, the NOD issued to Dell and
Wendy Murphy denied in its entirety the non-cash portion of the
charitable contribution deduction passed through to them by Duplin
Land, but similarly did not state the grounds for that determination.
Thus, both NODs adopt a determination made in the examination of
Duplin Land’s Form 1120–S to entirely disallow the charitable
contribution deductions for the donations of the River Tract and the
27
[*27] Landing Tract easements; but, despite the Commissioner’s
allegations in his answers that he “is awaiting the delivery of the
relevant administrative file that likely contains” the notice issued to
Duplin Land, the notice issued to Duplin Land does not appear in the
evidentiary record of these cases. We are therefore unable to determine
the basis upon which the Commissioner disallowed Duplin Land’s non-
cash charitable contribution deductions by consulting any notice
describing the results of the S corporation examination. We can,
however, confidently infer the Commissioner’s basis for disallowance
from his answers in these cases.
Wendell and Linda Murphy’s petition and Dell and Wendy
Murphy’s petition both state the following in paragraph 7(a) (with
bracketed sentence numbers interpolated):
[2] The Commissioner alleges that the Duplin Land
Conservation Easements donated by Duplin Land, as
reported on the Form 1120 S for Duplin Land for the
Duplin Land Tax Year and supported by the appraisals by
F. Bruce Sauter & Associates, Inc. attached to such
Form 1120-S (the “Duplin Land Appraisals”), did not
qualify under or otherwise fully satisfy the requirements of
I R C. § 170(h) and the related Treasury Regulations. . . .
[4] Although not set forth in the Notice Documents, it is
understood that the determination by the Commissioner
that the Duplin Land Conservation Easements failed to
meet the requirements I.R.C. § 170(h) is based on that
certain Form 886-A titled “Explanation of Items –
Donation of Conservation Easement” prepared by R.
Nixon, an employee of the Internal Revenue Service, with
assistance from Gary McGurrin, Senior Appraiser with the
Internal Revenue Service, for the respective examination
(“Duplin Land Examination Report”). [5] Mr. Nixon and
Mr. McGurrin concluded that Duplin Land did not provide
a “qualified appraisal”.
In his answers in both cases, the Commissioner “[a]dmits” the
allegations in sentence 4 and “[a]dmits; denies error” the allegations in
sentence 5.
Therefore, on the basis of the NODs issued to Wendell and Linda
Murphy and to Dell and Wendy Murphy, as supplemented by the
parties’ pleadings, we hold that the NODs state, as the bases for their
28
[*28] determinations to deny the full amounts of the charitable
contribution deductions, two grounds—i.e., failure to meet the
requirements of section 170(h) (“Qualified conservation contribution”)
and lack of qualified appraisals (as defined in section 170(f)(11)(E) and
Treasury Regulation § 1.170A-13(c)(3))—and, as stated above, the
Murphys bear the burden of proof on these issues. But section
170(f)(11)(E) and Treasury Regulation § 1.170A-13(c)(3) provide the
rules for a “qualified appraisal”, whereas the rules for an “appraisal
summary” are in section 170(f)(11)(C) and Treasury Regulation
§ 1.170A-13(c)(4). A “qualified appraisal” and an “appraisal summary”
are distinct documents that provide different information for different
purposes. Compare Treas. Reg. § 1.170A-13(c)(3), with Treas. Reg.
§ 1.170A-13(c)(4). The Commissioner’s appraisal summary contention
therefore requires petitioners to present additional evidence beyond
what would be required to rebut the determinations made in the NODs.
For this reason, the Commissioner’s appraisal summary contention is
new matter for which he bears the overall burden of proof, including
showing a lack of reasonable cause for the Murphys’ noncompliance.
II. The substantiation requirements of section 170(f)(11) and
Treasury Regulation § 1.170A-13(c)
A. A description of the requirements
Section 170(a)(1) allows a deduction for any charitable
contribution made within the taxable year. If a taxpayer makes a
charitable contribution of property other than money, then the amount
of the contribution is the fair market value of the property at the time
the contribution is made. See Treas. Reg. § 1.170A-1(c)(1). However,
“[a] charitable contribution shall be allowable as a deduction only if
verified under regulations prescribed by the Secretary.” § 170(a)(1).
Section 170(f)(11) imposes, for charitable contribution deductions,
heightened substantiation requirements on taxpayers depending on the
value of the contribution. 13 Section 170(f)(11)(A)(i) provides that “no
13 In the Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a)(1)
and (2), 98 Stat. 494, 691—an off-Code statutory provision—Congress directed the
Secretary to issue regulations under section 170(a)(1) “which require any individual,
closely held corporation, or personal service corporation claiming a deduction under
section 170” greater than $5,000 to “obtain a qualified appraisal for the property
contributed,” “attach an appraisal summary to the return on which such deduction is
first claimed for such contribution,” and “include on such return such additional
29
[*29] deduction shall be allowed . . . for any contribution of property for
which a deduction of more than $500 is claimed unless such person
meets the requirements of subparagraphs (B) [for deductions greater
than $500], (C) [for deductions greater than $5,000], and (D) [for
deductions greater than $500,000], as the case may be, with respect to
such contribution.” For contributions of $500 or more, a taxpayer must
attach “a description of the property and such other information as the
Secretary may require”. § 170(f)(11)(B). For contributions of $5,000 or
more, a taxpayer must also 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). Accordingly, Treasury Regulation § 1.170A-13(c)(2)(i)
provides:
[A] donor who claims or reports a deduction with respect to
a charitable contribution to which this paragraph (c)
[entitled “Deductions in excess of $5,000 for certain
charitable contributions of property made after
December 31, 1984”] applies must comply with the
following three requirements:
(A) Obtain a qualified appraisal (as defined in
paragraph (c)(3) of this section) for such property
contributed. If the contributed property is a partial
interest, the appraisal shall be of the partial
interest.
(B) Attach a fully completed appraisal
summary (as defined in paragraph (c)(4) of this
section) to the tax return (or, in the case of a donor
that is a partnership or S corporation, the
information return) on which the deduction for the
information (including the cost basis and acquisition date of the contributed property)
as the Secretary may prescribe in such regulations.” In response to DEFRA’s directive,
the Secretary added paragraph (c) to Treasury Regulation § 1.170A-13. But in the
American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 883(a), 118 Stat. 1418,
1631, Congress added paragraph (11) to subsection (f) of section 170 to “extend[] to all
C corporations the present and prior law requirement, applicable to an individual,
closely-held corporation, personal service corporation, partnership, or S corporation,
that the donor must obtain a qualified appraisal of the property if the amount of the
deduction claimed exceeds $5,000.” Staff of J. Comm. On Taxation, 108th Cong.,
General Explanation of Tax Legislation Enacted in the 108th Congress, at 462 (Comm.
Print 2005). “The Act also provide[d] that if the amount of the contribution of property
. . . exceeds $500,000, then the donor (whether an individual, partnership, or
corporation) must attach the qualified appraisal to the donor’s tax return.” Id.
30
[*30] contribution is first claimed (or reported) by the
donor.
(C) Maintain records containing the
information required by paragraph (b)(2)(ii) of this
section.
Under Treasury Regulation § 1.170A-13(c)(4)(ii), the required appraisal
summary must include, among other things, the following information:
(1) the date the donor acquired the property; (2) the cost or other basis
of the property; and (3) the date the donee received the property. Treas.
Reg. § 1.170A-13(c)(4)(ii)(D), (E), (G). For contributions of $500,000 or
more, a taxpayer must also attach the “qualified appraisal of such
property” to the return. § 170(f)(11)(D). However, as is explained above
in Part I.B.3, a taxpayer’s deduction will not be disallowed for failure to
comply with the heightened substantiation requirements of section
170(f)(11) “if it is shown that the failure to meet such requirements is
due to reasonable cause and not to willful neglect.” § 170(f)(11)(A)(ii)(II).
B. Compliance with the requirements
Because section 170(f)(11)(A)(i) entirely disallows a claimed
charitable contribution deduction unless the taxpayer complies with its
substantiation rules, we consider first whether petitioners met the
substantiation requirements with respect to the easement donations at
issue. We conclude that petitioners did not satisfy the substantiation
requirements of section 170(f)(11) either strictly or substantially. (We
then explain in Part II.C that their failure to do so should be excused for
reasonable cause because the Commissioner failed to prove an absence
of reasonable cause.)
1. Strict compliance
Although petitioners acknowledge that they did not report their
cost basis in any of the donated easements on any of the Forms 8283
attached to their respective returns, as required by Treasury Regulation
§ 1.170A-13(c)(4)(ii)(E), they nonetheless insist that they strictly
complied with section 170(f)(11)(C) because they provided their cost
basis elsewhere (but nonetheless) “on such return” (quoting DEFRA
§ 155(a)(1)(C)). Specifically, petitioners assert that the IRS could have
deduced Duplin Land’s cost basis in the donated easements either by
looking on Schedule L, “Balance Sheet per Books”, at line 12, “Land (net
of any amortization)”, and subtracting the beginning of year amount
from the end of year amount, or alternatively by looking at statement
31
[*31] 11 from Schedule M–1, “Reconciliation of Income (Loss) per Books
With Income (Loss) per Return”, and subtracting its reported values
from the claimed charitable contribution amounts on Form 8283.
We rejected a similar argument in Belair Woods, T.C. Memo.
2018-159, at *19–20 (citations omitted), where we held:
The regulations require that “an appraisal summary shall
include” information concerning basis. The explicit
disclosure of basis on Form 8283 is essential in alerting the
Commissioner as to whether (and to what extent) further
investigation is needed.
The IRS reviews millions of returns each year for
audit potential, and the disclosure of cost basis on the
Form 8283 itself is necessary to make this process
manageable. Revenue agents cannot be required to sift
through dozens or hundreds of pages of complex returns
looking for clues about what the taxpayer’s cost basis might
be.
Because section 170(f)(11)(C) and Treasury Regulation
§ 1.170A-13(c)(4)(i)(A) and (ii)(E) require that a donor’s cost basis be
reported on Form 8283, and all of petitioners’ Forms 8283 left the
donor’s basis box blank, petitioners did not strictly comply with the
reporting requirements of section 170(f)(11).
2. Substantial compliance
Thirty years ago we held in Bond v. Commissioner, 100 T.C. 32,
41–42 (1993), that some of the reporting requirements of Treasury
Regulation § 1.170A-13(c) are “directory and not mandatory”, so that a
donor’s failure to comply strictly with those requirements may be
excused if the donor nonetheless demonstrates “substantial
compliance”. To determine whether a taxpayer has substantially
complied with the reporting requirements of Treasury Regulation
§ 1.170A-13(c), we “consider whether [the taxpayers] provided sufficient
information to permit [the IRS] to evaluate their reported contributions,
as intended by Congress.” Smith v. Commissioner, T.C. Memo. 2007-
368, 94 T.C.M. (CCH) 574, 586 (first citing Bond, 100 T.C. 32; and then
citing Hewitt v. Commissioner, 109 T.C. 258 (1997), aff’d per curiam
without published decision, 116 F.3d 332 (4th Cir. 1998)), aff’d, 364
F. App’x 317 (9th Cir. 2009).
32
[*32] However, we observed in RERI Holdings I, 149 T.C. at 16–17:
[B]ecause RERI’s omission of its basis . . . from the Form
8283 it attached to its 2003 return prevented the appraisal
summary from achieving its intended purpose, RERI’s
failure to meet the requirement of section
1.170A-13(c)(4)(ii)(E), Income Tax Regs., cannot be excused
by substantial compliance. As explained above, Congress
directed the Secretary to adopt stricter substantiation
requirements for charitable contributions to alert the
Commissioner, in advance of audit, of potential
overvaluations of contributed property and thereby deter
taxpayers from claiming excessive deductions in the hope
that they would not be audited. S. Rpt. No. 98-169 (Vol. 1),
supra at 444; 1984 Blue Book, supra at 503–504; see also
Hewitt v. Commissioner, 109 T.C. at 264. . . . Because
RERI failed to provide sufficient information on its
Form 8283 to permit respondent to evaluate its reported
contribution, cf. Smith v. Commissioner, 2007 WL 4410771,
at *19, we cannot excuse on substantial compliance
grounds RERI’s omission from that form of its basis . . . .
Therefore, RERI did not “[a]ttach a fully completed
appraisal summary” to its 2003 return as required by
section 1.170A-13(c)(2)(i)(B), Income Tax Regs. Because
RERI did not meet the substantiation requirements
provided in section 1.170A-13(c)(2), Income Tax Regs., it is
not entitled to any deduction under section 170 . . . . See
sec. 170(a)(1); sec. 1.170A-13(c)(1), Income Tax Regs.
To the same effect, we followed RERI Holdings I in Belair Woods, LLC,
T.C. Memo. 2018-159, at *17, and determined:
The requirement to disclose “cost or adjusted 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 regulatory requirement that he
disclose his cost basis and the date and manner of
acquiring the property, the Commissioner will be deprived
of an essential tool that Congress intended him to have.
Therefore, under the reasoning set forth in Belair Woods, LLC,
T.C. Memo. 2018-159, at *17–19, and RERI Holdings I, 149 T.C.
33[*33] at 16–17, there can be no substantial compliance with Treasury
Regulation § 1.170A-13(c) where—as here—the taxpayer fails to
disclose its cost or adjusted basis in the contributed property on Form
8283. Because none of petitioners’ Forms 8283 reported the cost basis
in the contributed property, petitioners failed to substantially comply
with the reporting requirements of Treasury Regulation § 1.170A-13(c),
and their charitable contribution deductions must be disallowed unless
their failure was “due to reasonable cause and not to willful neglect.”
See § 170(f)(11)(A)(ii)(II).
C. Reasonable cause for noncompliance
Section 170(f)(11)(A)(ii)(II) provides that the taxpayer’s deduction
will not be disallowed “if it is shown that the failure to meet such
requirements is due to reasonable cause and not to willful neglect.” 14 As
is noted above, we concluded in Belair Woods, LLC, T.C. Memo. 2018-
159, at *22–23, that the same standard—“ordinary business care and
prudence”, Boyle, 469 U.S. at 246 (quoting Treas. Reg. § 301.6651-
1(c)(1))—should apply to both the reasonable cause defense in the
penalty context, see § 6664(c)(1); Treas. Reg. § 1.6664-4, and the
reasonable cause defense of section 170(f)(11)(A)(ii)(II). On the basis of
our allocation of the burden of proof above in Part I, the Commissioner
must show that petitioners’ failure to report cost basis in the donated
properties on their Forms 8283 was not due to reasonable cause.
A frequent ground for claiming “reasonable cause”—and the
ground under consideration here—is reliance on professional advice.
14 As we explained in Belair Woods, LLC, T.C. Memo. 2018-159, at *22–23, the
statutory reasonable cause defense under section 170(f)(11)(A)(ii)(II) is broader than
the regulatory reasonable cause defense under Treasury Regulation § 1.170A-
13(c)(4)(iv)(C)(1), which provides:
If a taxpayer has reasonable cause for being unable to provide the
information required by paragraph (c)(4)(ii)(D) and (E) of this section
(relating to the manner of acquisition and basis of the contributed
property), an appropriate explanation should be attached to the
appraisal summary. The taxpayer’s deduction will not be disallowed
simply because of the inability (for reasonable cause) to provide these
items of information.
Petitioners did not attach to their appraisal summaries any explanations for their
failure to report cost basis nor do they assert reasonable cause under Treasury
Regulation § 1.170A-13(c)(4)(iv)(C)(1). Accordingly, we do not address reasonable
cause under Treasury Regulation § 1.170A-13(c)(4)(iv)(C)(1) in this Opinion, and
instead we consider only the statutory “reasonable cause” defense under
section 170(f)(11)(A)(ii)(II).
34
[*34] “Reliance on . . . professional advice . . . constitutes reasonable
cause and good faith if, under all the circumstances, such reliance was
reasonable and the taxpayer acted in good faith.” Treas. Reg. § 1.6664-
4(b)(1). Instructed by Treasury Regulation § 1.6664-4(c), we have held
that reasonable cause based on reliance on an advisor exists where
(1) the advisor was a competent professional who had sufficient
expertise to justify reliance, (2) the taxpayer provided necessary and
accurate information to the advisor, and (3) the taxpayer actually relied
in good faith on the advisor’s judgment. Neonatology Assocs., P.A. v.
Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).
We now follow this penalty-context analysis in determining reasonable
cause under section 170(f)(11)(A)(ii)(II); and we look to see whether the
Commissioner—given his burden of proof on this new matter, see supra
Part I.B.3—has shown that petitioners’ omission of their bases from
Form 8283 is not excused by their reliance on their advisors.
The straightforward and unchallenged trial testimony of Wayne
Robbins (the Dixon Hughes partner who signed Duplin Land’s Form
1120–S) established that petitioners’ advisors, Dixon Hughes, was a
well-known CPA firm with a good reputation in North Carolina, that
petitioners retained Dixon Hughes to prepare all of their returns during
a three-year period and relied on them to do so, that Dixon Hughes
requested all information it thought necessary for preparing petitioners’
returns, that Dixon Hughes received all the information that it
requested from petitioners, that Dixon Hughes prepared the returns in
accordance with that information, and that petitioners filed the returns
as they had been prepared by Dixon Hughes.
That testimony seems to check all the boxes prescribed in
Neonatology Associates. However, Treasury Regulation § 1.6664-4(b)(1)
provides that “[r]eliance on . . . the advice of a professional tax advisor
or an appraiser does not necessarily demonstrate reasonable cause and
good faith.” Paragraph (c)(1) further explains:
In no event will a taxpayer be considered to have
reasonably relied in good faith on advice (including an
opinion) unless the requirements of this paragraph (c)(1)
are satisfied. The fact that these requirements are
satisfied, however, will not necessarily establish that the
taxpayer reasonably relied on the advice (including the
opinion of a tax advisor) in good faith.
35
[*35] The subdivisions of paragraph (c)(1) thereafter provide the
following requirements:
(i) All facts and circumstances considered. The
advice [upon which the taxpayer relies] must be based
upon all pertinent facts and circumstances and the law as
it relates to those facts and circumstances. . . . In addition,
the requirements of this paragraph (c)(1) are not satisfied
if the taxpayer fails to disclose a fact that it knows, or
reasonably should know, to be relevant to the proper tax
treatment of an item.
(ii) No unreasonable assumptions. The advice must
not be based on unreasonable factual or legal assumptions
(including assumptions as to future events) and must not
unreasonably rely on the representations, statements,
findings, or agreements of the taxpayer or any other
person. For example, the advice must not be based upon a
representation or assumption which the taxpayer knows,
or has reason to know, is unlikely to be true . . . .
(iii) Reliance on the invalidity of a regulation. A
taxpayer may not rely on an opinion or advice that a
regulation is invalid to establish that the taxpayer acted
with reasonable cause and good faith unless the taxpayer
adequately disclosed, in accordance with § 1.6662-3(c)(2),
the position that the regulation in question is invalid.
Absence of reasonable cause could be demonstrated, notwithstanding
reliance on an advisor, by showing that the taxpayer failed to comply
with one or more of those requirements. We turn to the Commissioner’s
submissions to see whether he made such a showing.
In his pretrial memorandum (Doc. 57) and in his opening post-
trial brief (Doc. 128), the Commissioner pointed out the failure of
petitioners’ Forms 8283 to state the donor’s basis in the contributed
property, but he made no allegation disputing “reasonable cause” for
that failure. In his answering post-trial brief, the Commissioner’s
position about lack of “reasonable cause” is stated as follows:
Dixon Hughes prepared Duplin Land’s 2010 U.S.
S Corporation Return (Form 1120–S) in accordance with
the records provided to Dixon Hughes by petitioners. See
36
[*36] Tr. 877:10-14.[15] The tax return preparers could not report
the correct information on the Forms 8283 because the
correct information was not provided to them by
petitioners. For example, Duplin Land’s 2010 Form 1120S
failed to report a basis for either the River or Landing
Tracts on the Forms 8283 attached, and reported a
combined basis in the body of the return, without allocating
basis for each property. Tr. 881:19-882:3;[16] Ex. 60–J [tax
return]. Petitioners were in the best and perhaps only
position to provide this information to their preparers.
Petitioners have yet to indicate basis for each property
separately. Entire record.
That is, the Commissioner argues that the Forms 8283 lacked the basis
information not because the advisors had advised that it could or should
be omitted but because petitioners declined to provide it to those
advisors.
The cited evidence does not make this showing. There is simply
no evidence as to whether the advisors asked for basis information.
There is no evidence as to whether petitioners provided basis
information—except that they manifestly did provide enough
information to enable the advisors to know the “combined basis” which
(as the Commissioner acknowledges) appears “in the body of the return”.
To the extent there was basis information not provided by petitioners,
there is no evidence to show why they did not provide it. The reason
that there is no such evidence is that the Commissioner did not cross-
examine the witnesses on the point. Direct examination by petitioners’
counsel included this exchange (Tr. 874):
15The cited transcript states the question: “From your conversations with the
Murphys, what was your perception, as to whether the Murphys genuinely relied upon
you and your firm to properly prepare these returns?” Mr. Robbins answered: “Well, I
mean, we prepared their return entirely. I mean, it was—we would have reviewed their
return just to make sure that it looks like that we had—there were no omissions, or
whatever, but yes, they would have relied on us to take the data provided and prepare
the return.”
16 In the cited transcript counsel stated, “directing your attention to . . . Bates
number page 1754, . . . [t]hat 644,664 number is the combined basis of both charitable
contributions made in 2010, correct?” Mr. Robbins answered, “Yes, that’d be one—
that’s just a combined number. That’s right.” Counsel asked, “But there were two
charitable contributions?” He answered, “There were two, yes. There were. If you
look on 8283, I think that’s correct.”
37
[*37] Q . . . In your dealings with the Murphys,
through the preparation of the earlier returns and these
returns, how responsive were they to providing you
whatever information you and your firm requested?
A They were very responsive. They had a very
good staff there.
The Commissioner did not pursue the point—neither with the witnesses
from the accounting firm nor with the petitioners. He now effectively
asks us to draw a negative inference that petitioners deliberately
withheld basis information from their advisors. Especially since he
bears the burden of proof on this issue, we decline to do draw such an
inference against petitioners.
The record thus lacks explicit evidence on whether the blank
basis boxes on Forms 8283 were the result of Dixon Hughes’ advice or
were instead due to petitioners’ willful neglect. If petitioners bore the
burden to prove reasonable cause, then that lack of evidence might
warrant the conclusion that their omission was not due to reasonable
cause, because there is no evidence of any advice or judgment by the
CPAs to omit cost basis in the donated property. However, in these cases
the burden of proof is on the Commissioner to show a lack of reasonable
cause for omission of cost basis on petitioners Forms 8283, because he
raised this issue as new matter; and he must accordingly suffer the
consequences of any gap in the record. Therefore, we hold that the
Commissioner has failed to carry his burden to show a lack of reasonable
cause, and that petitioners’ omission of their cost bases in the donated
properties on Forms 8283 will accordingly be excused for reasonable
cause, so that we will not disallow their charitable contribution
deductions for failure to comply with the reporting requirements of
section 170(f)(11) and Treasury Regulation § 1.170A-13(c). We will
instead now proceed to determine whether petitioners have proved
entitlement to their charitable contribution deductions for “qualified
conservation contributions” under the requirements of section 170(h).
III. Qualified conservation contributions under section 170(h)
The Code generally restricts a taxpayer’s charitable contribution
deduction for donations of “an interest in property which consists of less
than the taxpayer’s entire interest in such property”. § 170(f)(3)(A).
That is, if someone owns property and donates to charity only a partial
interest in that property, he may not claim a charitable contribution
deduction for that donation. However, the statute provides an
38
[*38] exception—and allows a deduction—for a “qualified conservation
contribution”. § 170(f)(3)(B)(iii).
A. The requirements for a “qualified conservation
contribution”
As we have noted, the general rule of section 170(f)(3) is that no
deduction is allowed for a contribution of “less than the taxpayer’s entire
interest in donated property”, but subsection (f)(3)(B)(iii) provides an
exception for a “qualified conservation contribution”. The definition of
this term is given in section 170(h)(1), which provides:
For purposes of subsection (f)(3)(B)(iii), the term “qualified
conservation contribution” means a contribution—
(A) of a qualified real property interest,
(B) to a qualified organization,
(C) exclusively for conservation purposes.
The Commissioner does not dispute that the deeds at issue granted
easements that are “qualified real property interest[s]” as required by
section 170(h)(1)(A) (and defined in section 170(h)(2)). And the parties
have stipulated that NALT is a “qualified organization” as required by
section 170(h)(1)(B) (and defined in section 170(h)(3)). Therefore, for the
River Tract easement and the Landing Tract easement, we discuss only
whether the donations of the easements were “exclusively for
conservation purposes” as required by section 170(h)(1)(C) (and as
defined in section 170(h)(4) and (5)).
B. The parties’ dispute as to conservation purpose
1. The statute lists “conservation purpose[s]”.
“Conservation purpose” is defined in section 170(h)(4)(A), which
provides:
For the purposes of this subsection [i.e., section 170(h)], the
term “conservation purpose” means—
(i) the preservation of land areas for outdoor
recreation by, or the education of, the general public,
(ii) the protection of a relatively natural habitat of
fish, wildlife, or plants, or similar ecosystem,
(iii) the preservation of open space (including
farmland and forest land) where such preservation is—
39
[*39] (I) for the scenic enjoyment of the general
public, or
(II) pursuant to a clearly delineated Federal,
State, or local governmental conservation policy,
and will yield a significant public benefit, or
(iv) the preservation of an historically important
land area or a certified historic structure.
That is, the statute provides four potential qualifying purposes, the
third of which (“preservation of open space”) has two variants. “Under
the statute, each of these four prongs is a conservation purpose in and
of itself, and a taxpayer’s satisfaction of one of these prongs suffices to
establish the requisite conservation purpose.” Herman v.
Commissioner, T.C. Memo. 2009-205, 98 T.C.M. (CCH) 197, 200 (citing
S. Rep. 96-1007, at 10 (1980), as reprinted in 1980-2 C.B. 599, 604).
2. The deeds state “Conservation Purposes”.
The deeds at issue here grant, in identical wording, “a perpetual
easement in gross over the Conservation Area for the purpose of
preserving and protecting the Conservation Purposes.” Each deed also
states what those “Conservation Purposes” are, but they are not
identical in the two deeds.
a. The River Tract easement deed
The River Tract easement deed states ostensibly plural
“Conservation Purposes” that amount to a single purpose, as follows:
WHEREAS, preservation of the Conservation Area
shall serve the following purposes pursuant to 26 U.S.C.
§ 170(h)(4)(a) and 26 CFR § 1.170A-14(d)(i), (the
“Conservation Purposes”):
Preservation of the Conservation Area as a
relatively natural habitat of fish, wildlife, or plants
or similar ecosystem . . . .
“Preservation of . . . relatively natural habitat” is the conservation
purpose approved in section 170(h)(4)(A)(ii). (No other purpose from
section 170(h)(4)(A) is referred to in the “Conservation Purposes” of the
River Tract easement deed.)
40
[*40] Consistent with this “relatively natural habitat” purpose of the
deed, a “Whereas” clause near the beginning of the River Tract easement
deed lists “features of the Conservation Area having ecological
significance (which may be hereinafter called the ‘Conservation
Values’)”, and those seven listed features all relate to the expressed
“Conservation Purposes” of protecting a relatively natural habitat:
WHEREAS, the features of the Conservation Area having
ecological significance (which may be hereinafter called the
“Conservation Values”) and the Conservation Purposes
have been established in the reports, plans, photographs,
documentation, and exhibits assembled by, and retained in
the offices of, North American Land Trust (collectively
called the “Baseline Documentation”), pursuant to 26 CFR
§170A-14(g)(5), which describes, among others, the
following Conservation Values of the Conservation Area:
The Conservation Area provides wildlife corridors,
breeding habitat, foraging habitat, and shelter for at
least fifty species of animals; and
The Conservation Area provides the natural
ecological requirements for at least one hundred
species of plants; and
The Conservation Area supports one natural
community: Coastal Plain Bottomland Hardwoods
(Blackwater Subtype); and
The Conservation Area contains wetlands that
provide the adequate breeding habitat for obligate
amphibians and invertebrate species; and
The Conservation Area provides the natural
ecological requirements and supports at least two
animal Species of Special Concern in North
Carolina: Eastern Fox Squirrel (Sciurus niger), and
Bald Eagle (Haliaeetus leucocephalus); and
The Conservation Area contains wetlands that hold
and filter waters that drain into the Northeast Cape
Fear River; and
41
[*41] Preservation of the Conservation Area provides
suitable habitat for and supports 5 species of birds
that are considered Species of Regional Importance
as monitored by the Partners In Flight Species
Assessment Database: Northern Flicker (Colaptes
auratus), Pine Warbler (Dendroica pinus), Red
Headed Woodpecker (Melanerpes erythrocephalus),
Downy Woodpecker (Picoides pubescens), Brown
Thrasher (Toxostoma rufum) . . . .
These “values” all pertain to species and their habitats (relevant to a
purpose of “protection of a relatively natural habitat of fish, wildlife, or
plants”, under section 170(h)(4)(A)(ii)) (and not, as we stress below in
Part III.B.3.c, to “preservation of open space”).
b. The Landing Tract easement deed
The Landing Tract easement deed states its “Conservation
Purposes” as follows:
WHEREAS, preservation of the Conservation Area
shall serve the following purposes pursuant to 26 U.S.C.
§ 170(h)(4)(a) and 26 CFR § 170A-14(d)(i), (the
“Conservation Purposes”):
Preservation of the Conservation Area for outdoor
recreation by, or the education of, the general public;
and
Preservation of the Conservation Area as open space
which provides scenic enjoyment to the general
public and yields a significant public benefit; and
Preservation of the Conservation Area as open space
which, if preserved, will advance a clearly delineated
Federal, State or local governmental conservation
policy and will yield a significant public benefit . . . .
These are the “outdoor recreation” and “open space” purposes approved
in section 170(h)(4)(A)(i) and (iii). (No other purpose from section
170(h)(4)(A) is referred to in the “Conservation Purposes” of the Landing
Tract easement deed.)
42
[*42] 3. We consider only a conservation purpose that is
stated in the deed.
The River Tract easement deed and the Landing Tract easement
deed state their intended conservation purposes. As we have shown, the
River Tract easement deed states one purpose (i.e., “[p]reservation of . . .
a relatively natural habitat”) and the Landing Tract easement deed
states, depending on how they are counted, two purposes (i.e.,
“preservation . . . for outdoor recreation” and both variants of
“[p]reservation . . . as open space”). But despite the explicit statement
of the conservation purposes in the deeds (and the implicit exclusion of
other potential but unstated conservation purposes), petitioners argue
that the River Tract easement deed and the Landing Tract easement
deed satisfy multiple conservation purposes listed in section
170(h)(4)(A) because “the premises section in the River and Landing
Conservation Deeds refer to a laudable set of wildlife and open space
conservation values, purposes, and goals” and “[t]hose premises shed
light on the meaning of the operative provisions which fulfill the
statutory conservation values and purposes protected by those operative
terms.” The Commissioner, on the other hand, argues “that the
conservation purposes listed in the deed are what matters for meeting
conservation purpose.” We agree with the Commissioner and disregard
alleged purposes not stated as such, for the following reasons:
a. Section 170 requires a “real property interest”.
Section 170(h)(1)(A) grants a deduction only for a contribution of
a “real property interest”. The donee must receive a property right; and
when a donee has received a property right under an easement, the
donee can assert that right against an owner who violates it, and the
courts will enforce that right in favor of the donee.
No deduction is allowed to a taxpayer who simply shares laudable
purposes and goals with a conservancy; a deduction is allowed only when
a deed confers a right to restrict the use of the property. If the “premises
section” of the deed describes goals that are not reflected in the rights
actually conveyed in the deed, then those premises do not carry the day.
As we show below, the “Conservation Purposes” are defined completely
differently in the two deeds at issue here. If we were to construe them
the same, then we would render null what was supposed to be the
operative wording of the instruments.
43
[*43] b. Caselaw directs us to consider the stated
purpose.
Our prior conservation easement cases which have reached the
conservation purpose question have considered whether the easement
achieved a conservation purpose stated in the deed. See, e.g., PBBM-
Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 202 (5th Cir. 2018);
Turner v. Commissioner, 126 T.C. 299, 309, 313–17 (2006); Champions
Retreat, T.C. Memo. 2018-146, at *7–8, *22; Atkinson v. Commissioner,
T.C. Memo. 2015-236, at *7, *24–56. 17 Rather than considering
alternative arguments presented to preserve a claimed charitable
contribution deduction after it has been challenged by the Commissioner
and has become the subject of litigation, we will consider only whether
the River Tract easement and the Landing Tract easement achieve the
“Conservation Purposes” that are stated in their deeds.
c. The River Tract easement deed does not state
an “open space” purpose.
Although “relatively natural habitat” is the only conservation
purpose stated in the deed, petitioners contend that in addition to that
express purpose, the River Tract easement deed also stated multiple
additional conservation purposes, including in particular “open space”.
Petitioners’ brief asserts:
[T]he premises in the River Conservation Deed cite
“relatively natural habitat” and state the intent to
perpetually protect “open space” (Ex. 12-J at B-187):
17 Our opinion in Glass v. Commissioner, 124 T.C. 258, 268, 270–71 (2005),
aff’d, 471 F.3d 698 (6th Cir. 2006), involved two deeds, each of which had a lengthy
“purpose” clause that used the general phrase “natural resource values”. The taxpayer
argued, inter alia, that the easements “protect[ed] a relatively natural habitat”, id.
at 280; the Commissioner argued that the easement failed to achieve that purpose (but
he evidently did not argue that the deeds failed to state that purpose); and we held
“that petitioners have proven that their contributions of the conservation easements
were for a conservation purpose under . . . section 170(h)(4)(A)(ii)” (i.e., “relatively
natural habitat”), id. at 282. The deeds in Glass also included prefatory text stating
that the taxpayer and the donee “recognize the scenic and natural resource values . . .
and share the common intention to preserve these values”, id. at 268, 270; but our
opinion did not rely on the statement of a “common intention”. Unlike Glass, in which
the stated “purpose” we construed was general, these cases involve deeds that
expressly define their “Conservation Purposes” in wording taken verbatim from the
statute and regulations.
44
[*44] WHEREAS, Owner and Holder desire to perpetually
conserve the natural, scientific, educational, open
space, scenic and historical resources of the
Conservation Area . . . .
To use this “Whereas” reference of “desire” as a basis for construing
“open space” as an enforceable “conservation purpose” of the River tract
easement deed, petitioners cite N.C. Gen. Stat. § 39-1.1(a) (1967), which
provides that “[i]n construing a conveyance executed after January 1,
1968, in which there are inconsistent clauses, the courts shall determine
the effect of the instrument on the basis of the intent of the parties as it
appears from all of the provisions of the instrument.” Petitioners rely
on this North Carolina statute to argue that Duplin Land’s and NALT’s
stated mutual desire “to perpetually conserve the . . . open space . . . of
the Conservation Area” means that the River Tract easement deed
intended the preservation of open space as a conservation purpose
pursuant to section 170(h)(4)(A)(iii).
However, the River Tract easement deed has no ambiguity or
inconsistent clauses as to the conservation purpose of the River Tract
easement that would cause us to consider the parties’ intent under N.C.
Gen. Stat. § 39-1.1(a). 18 Petitioners’ argument (as quoted above) omits
key text from the “Whereas” clause that it cites, which reads in its
entirety:
WHEREAS, Owner and Holder desire to perpetually
conserve the natural, scientific, educational, open space,
scenic and historical resources of the Conservation Area to
accomplish the Conservation Purposes.
(Emphasis added.) In this clause, the “desire” for “open space” is
expressed as a means “to accomplish the Conservation Purposes”; and
though conservation of open space is a stated “desire” of the parties, it
is not a stated purpose for which the easement is said to be granted.
Rather, “Conservation Purposes” is an expressly defined term in the
River Tract easement deed, and it is defined therein to mean
18 Furthermore, whether the River Tract easement deed satisfies a
conservation purpose or was granted exclusively for conservation purposes under the
relevant provisions of section 170(h) such that it would be eligible for a charitable
contribution deduction for federal income tax purposes is ultimately a question of
federal law, even though state law creates and governs the nature of interests in
property (and in these cases, the interpretation of property conveyances). See RP Golf,
LLC v. Commissioner, T.C. Memo. 2016-80, at *17, aff’d, 860 F.3d 1096 (8th Cir. 2017).
45
[*45] “[p]reservation of the Conservation Area as a relatively natural
habitat of fish, wildlife, or plants or similar ecosystem” (using the text
of section 170(h)(4)(A)(ii)), and not “preservation of open space” (as in
section 170(h)(4)(A)(iii)). The premises section of the River Tract
easement deed thus states that the “desire to perpetually conserve the
natural, scientific, educational, open space, scenic and historical
resources of the Conservation Area” is an anticipated means “to
accomplish” the “[p]reservation of the Conservation Area as a relatively
natural habitat of fish, wildlife, or plants or similar ecosystem”. But it
does not state that “open space” is one of the purposes for which it grants
the easement to NALT.
It is clear that NALT itself, the donee, did not think that “open
space” was one of the purposes for which it had been granted the River
Tract easement. The River Baseline Report prepared by NALT states
the following regarding the “Conservation Purpose” of the River Tract
easement:
In particular, the River Conservation Area satisfies one (1)
Conservation Purpose:
1. Preservation of the Conservation Area as a
relatively natural habitat of fish, wildlife, or
plants or similar ecosystem; and [sic]
While not specified in the River Conservation Easement
document as a supporting Conservation Purpose, another
Purpose that could have been considered is scenic
enjoyment to the general public. As demonstrated in the
Supportive Mapping, the Conservation Area can be viewed
from the North Cape Fear River.
That is, NALT’s River Baseline Report observes that preservation of
open space for the scenic enjoyment of the general public “could have
been considered”, but states very explicitly that the River Tract
easement deed “satisfies one (1) Conservation Purpose”, namely,
preserving a relatively natural habitat. It is clear that “open space” was
in fact not contemporaneously considered as a conservation purpose by
Duplin Land and NALT before the donation of the River Tract easement.
It must be noted that the additional terms in this “desire” text of
the “Whereas” clause are not limited to “open space” but also state a
“desire to perpetually conserve the . . . historical resources of the
Conservation Area”. Petitioners’ hermeneutic that supports their
46
[*46] discerning an “open space” purpose for the River Tract easement
could just as well support a “historical resources” purpose (a
construction that petitioners do not acknowledge). This reading of the
River Tract easement deed would supposedly entitle NALT to object not
only to use of the property that interfered with the relatively natural
habitat or open space but also to use that interfered with “historical
resources”. It is difficult to imagine a court sustaining any “open space”
or “historical resources” objection by NALT, given the statement of only
one purpose in the River Tract easement deed and given NALT’s
contemporaneous acknowledgement of only one purpose—“relatively
natural habitat”.
Accordingly, we will evaluate only whether the River Tract
easement deed “protect[s] . . . a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem” within the meaning of section
170(h)(4)(A)(ii) and Treasury Regulation § 1.170A-14(d)(3).
d. The Landing Tract deed does not state a
“relatively natural habitat” purpose.
As we demonstrated above in Part III.B.2.b, the Landing Tract
easement deed states conservation purposes of preservation (1) for
outdoor recreation, (2) as open space providing scenic enjoyment to the
public, and (3) as open space to advance a government policy—and no
others. Nonetheless, petitioners argue that the Landing Tract easement
deed “fulfills” an additional purpose: i.e., “[p]reservation of a relatively
natural habitat for plants or wildlife”. As we explained above, petitioner
argued for an unstated purpose in the River Tract easement deed by
quoting text that describes a mutual “desire”. Petitioners point to no
such “desire” text in the Landing Tract easement deed but instead to
“restrictions in Article 2 . . . and the limitations on the reserved rights
in Article 3”. That is, petitioners evidently contend not that a “relatively
natural habitat” purpose is provided or mentioned in the Landing Tract
easement deed but that it has an effect of protecting a relatively natural
habitat.
That argument is defeated both by the actual “Conservation
Purposes” provision in the Landing Tract easement deed and by the
Landing Baseline Report prepared by the donee, NALT. That report
states the same three “Conservation Purposes” that are stated in the
Landing Tract easement deed itself:
47
[*47] In particular, the [Landing] Conservation Area satisfies
three (3) Conservation Purposes:
1. Preservation of the Conservation Area for outdoor
recreation by, or the education of, the general
public; and
2. Preservation of the Conservation Area as open
space which provides scenic enjoyment to the
general public and yields a significant public
benefit; and
3. Preservation of the Conservation Area as open
space which, if preserved, will advance a clearly
delineated Federal, State or local governmental
conservation policy and will yield a significant
public benefit.
The Landing Baseline Report does not state that any other conservation
purpose could have been considered.
The Landing Tract easement deed does recite “Conservation
Values” that overlap with those of the River Tract easement deed, 19 and
those values do relate to the River Tract easement deed’s “relatively
natural habitat” purpose. However, those “Conservation Values” do not
correspond to the conservation purposes stated in the Landing Tract
easement deed. Given the express purposes stated in the Landing Tract
easement deed and NALT’s explicit affirmation of those purposes (and
no others), we decline to infer from the “Conservation Values” in the
Landing Tract easement deed that the parties intended an unstated
purpose of protecting a relatively natural habitat. The generally stated
“Conservation Values” concerning the ecological aspects of the Landing
Tract easement must yield to the specifically enumerated conservation
purposes in the Landing Tract easement deed and in the Landing
Baseline Report. See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d
at 204 (“[W]e give greater weight to the deed’s specific terms in
paragraph 2.4.1 than its general language in paragraph 6.14” (citing
Restatement (Second) of Contracts § 203(c) (Am. Law Inst. 1981))).
Therefore, as with the River Tract easement, we will evaluate only
19 Two of the seven “Conservation Values” listed in the River Tract easement
deed, i.e., the third and the sixth, are omitted from those values as stated in the
Landing Tract easement deed. From the fifth value stated on the River Tract easement
deed, the lending deed omits mention of the bald eagle.
48
[*48] whether the Landing Tract easement satisfies a conservation
purpose stated in the Landing Tract easement deed.
4. The River Tract easement does protect “a relatively
natural habitat”.
a. “Natural” and “relatively natural”
The dictionary defines the word “natural” as “of or arising from
nature; in accordance with what is found or expected in nature”;
“produced or existing in nature; not artificial or manufactured”; “in a
state provided by nature, without man-made changes; wild;
uncultivated”. Natural, Webster’s New World College Dictionary (4th ed.
2008). 20 The proposition that a golf course is not “natural” can be easily
defended: A golf course is, in fact, highly artificial. Where nature had
planted a field or forest, man imports a ground cover that is different
from nature’s choice. Diligent, persistent human work is required, using
elaborate mechanical and chemical means, to keep nature at bay—both
plant life and animal life—and to maintain a surface on which a golf ball
will roll. Asphalt paths are laid down to facilitate human foot traffic and
cart traffic, and structures—such as club houses with amenities like
restaurants, shops, and concessions—are built to support the human
activity. If one’s principal goal were to find a natural habitat for rare,
endangered, or threatened species of animals, fish, or plants, one would
not first visit a golf course.
However, Congress did not determine to incentivize only the
preservation of “natural” areas but rather to allow a charitable
contribution deduction for the donation of an easement that has, as its
“conservation purpose”, “the protection of a relatively natural habitat of
fish, wildlife, or plants, or similar ecosystem”. § 170(h)(4)(A)(ii)
(emphasis added). Thus, the statutory term we construe and apply is
not just “natural” but “relatively natural”. Consequently, the outcome
of these cases does not depend on whether the golf course itself is a
“natural area” (it is not) 21 but on whether petitioners’ contribution
20In Webster’s Third New International Dictionary of the English Language,
Unabridged (2002), the relevant sense of the word “Natural” is elaborated as “planted
or growing by itself: not cultivated or introduced artificially” or “existing in or produced
by nature . . . not artificial”.
21 Cf. Champions Retreat, T.C. Memo. 2018-146, at *23, *28 (“we do not find
the [golf course] easement area to be a natural area”).
49
[*49] protects a “relatively natural habitat”. To construe this statute we
must distinguish these terms.
b. Distinguishing the two terms
The added word—“relatively”—means “not absolutely”.
Relatively, Webster’s Third New International Dictionary of the English
Language, Unabridged (2002). Unless “relatively” is, in the words of
H.W. Fowler, being used here simply to “water down” the adjective
“natural”, it is a word that “can properly be used only when some
comparison is expressed or implied”, 22 so the phrase “relatively natural”
prompts the question “Relative to what?” A “relatively tall tree” in a
redwood forest would be much taller than a “relatively tall tree” in an
apple orchard. A habitat that failed to be “relatively natural” compared
to untouched wilderness might nonetheless seem remarkably “natural”
compared to a strip mine. A golf course set in a forested area and
maintained according to “best environmental practices” might be
“relatively natural” compared to an urban golf course under normal
maintenance. We need to know what comparison is expressed or
implied.
The statute itself gives not much help, since the only use of
“natural” in all of section 170 (which is well over 10,000 words long) is
in our phrase “relatively natural” in subsection (h)(4)(A)(ii). However,
we do find the word “natural” in the regulations, which refer to—
natural areas that represent high quality examples of a
terrestrial community or aquatic community, such as
islands that are undeveloped or not intensely developed
where the coastal ecosystem is relatively intact; and
natural areas which are included in, or which contribute to,
the ecological viability of a local, state, or national park,
nature preserve, wildlife refuge, wilderness area, or other
similar conservation area.
Treas. Reg. § 1.170A-14(d)(3)(ii) (emphasis added). By this description,
even “natural areas” 23 may evidently be to some extent developed (just
See H.W. Fowler, Modern English Usage 99 (2d ed. 1965) (“Timid writers
22
who shrink from positive statements have a bad habit of using . . . relatively to water
down their adjectives and adverbs, forgetting that [relatively] can properly be used only
when some comparison is expressed or implied”).
23 Petitioners do not contend that the easement protected habitats in “natural
areas” within the meaning of Treasury Regulation § 1.170A-14(d)(3)(ii).
50
[*50] not “intensely developed”) and may have ecosystems that are not
pristine (but are “relatively intact”). Id. (emphasis added). Such a
“natural area” may be a full-blown “wilderness area”, but (the regulation
indicates) it may also be “included in . . . a local, state, or national
park”—areas that sometimes include trails (sometimes paved), ski
slopes and other recreational facilities, campgrounds (sometimes with
sanitary facilities), cabins, and even hotels. 24 Thus, “natural” does not
necessarily mean untouched by human hands and feet but can refer to
areas somewhat altered by human activity; and “relatively natural”
refers to areas that may be even more altered but still retain
conservation value—in this instance, the ability to serve as habitat for
rare, endangered, or threatened species.
c. Habitat
The noun in our phrase is “habitat”. As the Eleventh Circuit
observed in Champions Retreat v. Commissioner, 959 F.3d at 1038:
“What matters under the Code and regulation is not so much whether
all the land is natural, but whether the habitat is natural.” We have
previously construed “habitat” to mean “‘[t]he area or environment
where an organism or ecological community normally lives or occurs’ or
‘[t]he place where a person or thing is most likely to be found’” and have
construed “community” as “[a] group of plants and animals living and
interacting with one another in a specific region under relatively similar
environmental conditions.” Glass, 124 T.C. at 281–82 (quoting
Community, Habitat, American Heritage Dictionary of the English
Language (4th ed. 2000)).
Commentary on the phrase “relatively natural habitat” from
section 170(h)(4)(A)(ii) is given in Treasury Regulation § 1.170A-
14(d)(3)(i), which provides:
The donation of a qualified real property interest to protect
a significant relatively natural habitat in which a fish,
24 See 16 U.S.C. § 497b (granting the National Forest Service the power to
approve ski permits on federal conservation land); 36 C.F.R. § 2.10(a) (granting the
Department of the Interior superintendent the power to establish camp sites);
36 C.F.R. § 2.19 (governing winter activities on federal recreation land); 36 C.F.R.
§ 5.10 (providing for private lodging establishments on federal conservation/recreation
land by permit); 43 C.F.R. § 21.3(d) (definition of “cabin site” for cabins located on
federal conservation/recreation land); 43 C.F.R. § 8360.0-5(c) (defining “developed
recreation sites and areas”); 43 C.F.R. §§ 8365 et seq. (rules of conduct for patrons of
public recreation land).
51
[*51] wildlife, or plant community, or similar ecosystem
normally lives will meet the conservation purposes test of
this section. The fact that the habitat or environment has
been altered to some extent by human activity will not
result in a deduction being denied under this section if the
fish, wildlife, or plants continue to exist there in a
relatively natural state.
(Emphasis added.) In Champions Retreat v. Commissioner, 959 F.3d
at 1036, the Eleventh Circuit observed the “relatively natural habitat”
text in section 170(h)(4)(A)(ii) and the “significant relatively natural
habitat” text in Treasury Regulation § 1.170A-14(d)(3)(i) and stated as
follows:
[E]ven without the regulation, the Code would not be
construed to apply to a completely trivial habitat—a few
commonly occurring ants plainly would not do, nor would
many other species not in need of conservation. Requiring
some level of significance thus is unobjectionable. So long
as the regulation’s use of this term is not construed to mean
more than the Code will support, there is no reason to
doubt the regulation’s validity.
Treasury Regulation § 1.170A-14(d)(3)(ii) provides the following
standards for discerning what constitutes a significant habitat (with
bracketed numbers interpolated):
Significant habitats and ecosystems include, but are not
limited to, [1] habitats for rare, endangered, or threatened
species of animals, fish, or plants; [2] natural areas that
represent high quality examples of a terrestrial community
or aquatic community, such as islands that are
undeveloped or not intensely developed where the coastal
ecosystem is relatively intact; and [3] natural areas which
are included in, or which contribute to, the ecological
viability of a local, state, or national park, nature preserve,
wildlife refuge, wilderness area, or other similar
conservation area.
Petitioners do not argue that the easements constitute “natural
areas” as in the second and third of these examples. Rather, relying on
the first example (which echoes the text of section 170(h)(4)(A)(ii)), they
argue that the presence of rare plant and animal species in the River
52
[*52] Tract easement shows that it provides a “habitat[] for rare,
endangered, or threatened species of animals, fish, or plants”. The broad
wording of the regulation—“include, but are not limited to”—shows that
these examples should not be strictly construed; and we have expressly
held “that ‘rare, endangered, or threatened’, which is undefined in the
regulations, should not be limited to species listed under the
Endangered Species Act of 1973 . . . (codified as amended at 16 U.S.C.
sec. 1533 (2012)).” Champions Retreat v. Commissioner, T.C. Memo.
2018-146, at *24. Consistent with that holding, the Eleventh Circuit has
construed this standard as “distinguish[ing] species that reasonably
warrant protection, on the one hand, from commonly occurring species
for which the loss of habitat is not of significant concern.” Champions
Retreat v. Commissioner, 959 F.3d at 1036.
d. Analysis
In Champions Retreat, T.C. Memo. 2018-146, at *12–13, we held
that the presence of a squirrel species, a plant (denseflower knotweed),
and 11 bird species “of conservation concern” (in addition to many other
bird species) did not warrant a finding of “relatively natural habitat of
. . . wildlife, or plants”. 25 In these cases the observed species of
conservation concern in the River Tract easement area were
substantially more numerous than those in Champions Retreat. The
star of this show was the American Bald Eagle, recounted in the River
Baseline Report before the donation of the River Tract easement in
December 2010, along with the less famous Eastern Fox Squirrel; but
both are “[r]are and uncommon species observed on the property”. The
River Baseline Report also recounted that the Northern Flicker, Pine
Warbler, Red Headed Woodpecker, Downy Woodpecker, and Brown
Thrasher (each considered a Species of Regional Importance according
to the Partners in Flight Species Assessment Database) “were observed
foraging and roosting in the easement area.”
Petitioners supplement the observations in the River Baseline
Report with two expert reports containing wildlife surveys conducted on
25 The Eleventh Circuit—the probable but perhaps not inevitable venue for an
appeal of these cases, see supra note 3—took a more permissive approach, held that
“the presence of these many species, including some of substantial conservation
concern, shows that the property is a significant habitat for ‘rare, endangered, or
threatened species’”, and vacated our decision. Champions Retreat v. Commissioner,
959 F.3d at 1037. Since the facts we find here make these cases distinguishable from
Champions Retreat, see infra note 29, we need not reconsider in these cases our holding
in Champions Retreat in light of the Eleventh Circuit’s reversal.
53
[*53] the River Tract easement in 2018 26 (one prepared by NALT and
the other prepared by Ms. Heather Wallace, an Environmental Project
Manager for Calyx Engineers + Consultants). NALT’s report contains
“an avian survey, a botanical survey, and a bat audio survey” of the
River Tract easement that found 16 bird species of special concern
(excluding potential migratory species). It reported an area that it
described as “a globally imperiled variant of the blackwater cypress-gum
swamp ecological association . . . termed the Atlantic Coastal Plain
Blackwater Cove Woodland”, detected the presence of “the Tri-colored
bat (Perymyotis subflavus) that has been experiencing dramatic
population declines”, and confirmed that the River Tract easement
habitat is common for the American alligator (whose presence on the
River Tract easement has been confirmed in photographs taken by
residents of River Landing and included in NALT’s report) and a repeat
appearance of the American Bald Eagle (which had been observed eight
years earlier). NALT’s report concludes that “[t]he River Conservation
Area . . . provides important habitat to species that have been classified
as rare, special concern, and regional importance” and that “[w]ithout
the . . . River conservation deeds to protect these diverse species,
residential or commercial development would destroy their habitat.”
Ms. Wallace’s report observed “[t]hirty-two (32) rare species, as
listed in 2018 by the U.S. Fish & Wildlife Service, North Carolina
Wildlife Resources Commission, North Carolina Natural Heritage
Program, NatureServe, Partners in Flight, and National Audubon
Society. Twenty-six (26) of these species appeared on the rare species
lists prepared by these conservation organizations in 2010.” Altogether,
Ms. Wallace observed 25 rare species of bird, 1 rare species of insect, and
6 rare species of mammals.
The Commissioner, however, insists that “[t]he golf courses,
which are the majority of the easement areas, are not the relatively
natural habitat for any animal”. He states (correctly) that “[g]olf courses
are highly managed areas that often deplete water supplies, contain
26 The experts’ reports upon which both parties rely for their contentions as to
whether the River Tract easement provides a relatively natural habitat reflect the
state of the River Tract easement in 2018—eight years after donation of the River
Tract easement in 2010—and accordingly interpret the qualities of the River Tract
easement with the benefit of hindsight. Neither side objects to the other’s use of 2018
data, and we will therefore rely on the 2018 data in reaching our conclusion. Although
an appraisal based on 2018 data might not be appropriate for determining a 2010
value, we think 2018 wildlife data may be useful to show the extent to which perpetual
restrictions imposed in 2010 are yielding their projected consequences.
54
[*54] non-native grasses, shrubs and sometimes trees, and utilize
pesticides, fertilizers, and herbicides as well as fungicides to maintain
the manicured nature of the main playing area of the course.” He relies
on the admittedly credible expert report of Dr. Curtis J. Richardson, of
Richardsons Ecological Consulting (Specializing in Wetland Ecology,
Restoration, Conservation and Ecosystem Service Analysis), who
“proceeded with a full field investigation of the [River Tract easement]
site on September 27–28th 2017.” Dr. Richardson performed a full field
investigation, which surveyed the soils, water quality, vegetation, and
ecological landscape on both the golf course and the surrounding area.
Dr. Richardson made detailed findings about the disturbance of the pre-
existing habitat, 27 the reduced diversity of species on the golf course and
the absence of certain threatened species (compared to nearby natural
habitat), the presence of non-native plant species, the use of chemicals
and the alteration of soil and water chemistry, and the proximity of
residences. He summarized his findings as follows:
[M]y analysis of the regional ecological information, and
the ecological status of the River Golf Course CA
[conservation area], found during the September 2017 site
visit, shows a considerably altered environmental
condition compared to native habitats found at nearby
Angola Bay [Game Lands] and the Cape Fear River Basin.
In fact Duplin and nearby Pender county already have the
luxury of having Angola Bay as a vast wildlife refuge and
conservation area. Collectively, my review of background
materials, land use and golf documents, USDA and
USFWS classifications of soils and wetlands as well as my
field studies and analysis confirms that the River Golf
Course CA does not have the ecological capacity to serve
and protect relatively natural habitat in which fish,
wildlife and plant communities live and ecosystem services
function.
However, Dr. Richardson’s findings confirm that the River Tract
easement comprises not only River golf course areas (which contain
modified features and provide admittedly modest ecological value) but
also forested areas (which more nearly resemble the natural state of the
wetland habitat and provide a higher degree of ecological value)—and
27 Dr. Richardson observed that “more than 50% of land in the Proposed River
Conservation Easement request is comprised of the golf course tees, fairways, greens,
rough etc. The percentage that is in woodlands or partially disturbed habitat is 33%”.
55
[*55] Dr. Richardson acknowledges that those forested areas constitute
approximately one-third of the River Tract easement area. Although Dr.
Richardson’s report focuses more heavily on the modified features of the
River golf course portions of the River Tract easement (comparing them
unfavorably to the natural state of the adjacent Angola Bay and Cape
Fear River Basin conservation areas), his observations are actually not
inconsistent with NALT’s and Ms. Wallace’s findings as to the presence
of rare species on the River Tract easement. Dr. Richardson did not
himself conduct any wildlife surveys on the River Tract easement, and
he neither disagreed with nor cast doubt upon the findings in NALT’s
and Ms. Wallace’s reports.
We do not resist Dr. Richardson’s descriptions of the manner in
which the golf course altered the environment when it was built. But
Treasury Regulation § 1.170A-14(d)(3)(i) provides that “[t]he fact that
the habitat or environment has been altered to some extent by human
activity will not result in a deduction being denied under this section if
the fish, wildlife, or plants continue to exist there in a relatively natural
state”, and we are persuaded that such species do so exist in the River
Tract easement area. Nor do we resist Dr. Richardson’s conclusions
about the respects in which the River Tract easement is inferior to the
nearby conservation areas to which he compares it. It seems that those
other areas might constitute “natural areas” within the meaning of
Treasury Regulation § 1.170A-14(d)(3)(ii); and, if they do, it is no insult
to their conservation value to observe that, even if they are “natural
areas”, they may to some extent be inferior to actual wilderness areas. 28
Moreover, the main relevance of the nearby conservation areas is not
any bad light that they might cast on the River Tract easement; on the
contrary, as Ms. Wallace observed, the River Tract easement is “in close
proximity to and contribute[s] to the ecological viability of Angola Bay
Game Land”. Someone (like NALT) who was interested in protecting
Angola Bay would certainly prefer that it be bordered by the River Tract
easement area rather than be bordered by an unrestricted housing
development, so the conservation value of the River Tract easement is
enhanced, not denigrated, by its proximity to superior conservation
areas.
28 Angola Bay’s map shows a “Restricted Firearms Zone”, a “Restricted Deer
Hunting Zone”, a “Boating Access Area”, a “Public Parking” area, a “Designated
Hunter Camping Area”, an “Observation Deck”, a “Disabled Hunter Access”, a “WRC
Managed Shooting Range”, “Hunter Access”, a “Disabled Sportsman Road”, “4WD
Hunter Access”, “Trail”, “Waterfowl Blind”, “Disabled Sportsman Access Blind”, a
“Gate”, a “Seasonally Closed Gate”, and a “Scouting Area”.
56
[*56] These distinctions—a true wilderness area, a potentially less
protected “natural area”, and an even less protected “relatively natural
habitat”—are certainly relevant to determining the conservation values
that these areas possess. But the statute does not restrict the charitable
contribution deduction to an easement that protects a wilderness area
or a “natural area”; rather, the statute allows a deduction where an
easement protects “relatively natural habitat”, § 170(h)(4)(A)(ii),
provided (as we have noted) that it is a “significant relatively natural
habitat”, Treas. Reg. § 1.170A-14(d)(3)(i) (emphasis added). We are
persuaded that the relatively natural habitat afforded by the River
Tract easement is significant.
As we read them, the Commissioner’s arguments focus on the
state of the land subject to the River Tract easement, the extent to which
it had previously been altered by the installation and operation of the
River golf course, and the alleged inherent incompatibility between a
golf course and a “relatively natural habitat”. See § 170(h)(4)(A)(ii).
However, the Eleventh Circuit has held that section 170(h)(4)(A)(ii) and
Treasury Regulation § 1.170A-14(d)(3)(ii) “require[] only a ‘relatively
natural habitat . . . or similar ecosystem,’ not that the land itself be
relatively natural.” Champions Retreat v. Commissioner, 959 F.3d at
1037 (quoting § 170(h)(4)(A)(ii)); see also id. at 1038 (“What matters
under the Code and regulation is not so much whether all the land is
natural, but whether the habitat is natural”). “These are the standards
that apply despite the presence of a golf course on part of the property.”
Id. at 1037. Approximately one-third of the River Tract easement
constitutes cohesive forest (concentrated primarily in the southeast
corridor of the River Tract easement but also in the western portion
abutting the Northeast Cape Fear River) containing the Atlantic
Coastal Plain Blackwater Cove Woodland, which exists in a relatively
natural state and provides a habitat for at least 25 rare species of bird,
1 rare species of insect, and 6 rare species of mammals. 29 That the River
golf course itself provides modest ecological value for these rare species
does not diminish the value of the otherwise natural features of the
River Tract easement that do support a “relatively natural habitat of
fish, wildlife, or plants”. See § 170(h)(4)(A)(ii). This conclusion is
vindicated by the increase in the diversity of rare species that has
29 These features of the River Tract easement exceed those of the easement at
issue in Champions Retreat, T.C. Memo. 2018-146, at *10–13, which contained 11 bird
species of conservation concern, the southern fox squirrel, and the denseflower
knotweed, in undisturbed swaths constituting approximately 16% of the easement
area.
57
[*57] occurred on the River Tract easement despite eight years of
simultaneous operation of the River golf course. Ms. Wallace’s report
shows (and Dr. Richardson’s does not rebut) that the River Tract
easement has been successful at its intended conservation purpose. We
therefore hold that the River Tract easement satisfies the conservation
purpose requirement of section 170(h)(4)(A) by “protect[ing] . . . a
relatively natural habitat of fish, wildlife, or plants, or similar
ecosystem” pursuant to section 170(h)(4)(A)(ii).
5. The Landing Tract easement does preserve a land
area for outdoor recreation and education.
The Landing Tract easement will satisfy a conservation purpose
if it either (1) “preserv[es] . . . land areas for outdoor recreation by, or
the education of, the general public,” see § 170(h)(4)(A)(i), (2) preserves
open space “for the scenic enjoyment of the general public” and yields a
significant public benefit, see § 170(h)(4)(A)(iii)(I), or (3) preserves open
space “pursuant to a clearly delineated Federal, State, or local
governmental conservation policy” and yields a significant public
benefit, see § 170(h)(4)(A)(iii)(II). Each of these purposes, which qualify
under the statute, is stated in the Landing Tract easement deed as a
purpose of the Landing Tract easement. We conclude that the Landing
Tract easement satisfies the purpose of “preservation of land areas for
outdoor recreation by, or the education of, the general public” for
purposes of section 170(h)(4)(A)(i), and we therefore need not address
the “preservation of open space” conservation purposes under section
170(h)(4)(A)(iii).
Treasury Regulation § 1.170A-14(d)(2)(i), elaborating “outdoor
recreation”, gives the examples of “the preservation of a water area for
the use of the public for boating or fishing, or a nature or hiking trail for
the use of the public” as qualifying conservation purposes under section
170(h)(4)(A)(i); and Treasury Regulation § 1.170A-14(d)(2)(ii) requires
that the recreation be “for the substantial and regular use of the general
public.” (Emphasis added.) The Landing Tract easement deed is
consistent with these provisions where it provides in Article 2.4 that the
Landing Tract easement “shall continue to be and remain open for
substantial and regular use by the general public for outdoor recreations
or outdoor education activity”.
Petitioners assert that this provision in the Landing Tract
easement deed satisfies the “outdoor recreation by, or the education of,
the general public” conservation purpose of section 170(h)(4)(A)(i) per
58
[*58] se, and petitioners rely on the U.S. Court of Appeals for the Fifth
Circuit’s opinion in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d
at 204–05, which states:
Paragraph 2.4.1 [of the easement deed] provides that “[t]he
Property is and shall continue to be and remain open for
substantial and regular use by the general public for
outdoor recreation.” It also states that any fees charged
cannot defeat such use or “result in the operation of the
Property as a private membership club.” Paragraph 2.4.1
creates an obligation on the owner to operate the Property
in such a way that provides access to the public for
“substantial and regular” recreational use. . . . Finally, as
this provision refers to “[t]he Property” in its entirety, the
Commissioner’s argument that the deed allows the owner
to prevent the public from accessing certain areas of the
land fails.
In sum, the terms of the recreation easement here
fulfill the public-access requirement in § 170(h)(4)(A)(i).
Petitioners assert that the Landing Tract easement satisfies the outdoor
recreation or education purpose in three ways: the general public may
play golf on the Landing golf course by reserving a tee time and paying
a fee; the Landing Tract easement is used for youth educational
activities related to golf; and the general public may freely use the
Landing Tract easement’s hiking and biking trails.
The Commissioner counters that, despite the ostensible public
access provision in the Landing Tract easement deed, the Landing Tract
easement is in fact part of a private community “surrounded by fences
or walls . . . and can only be accessed by guarded gates at the vehicle
entrances to the River Landing community.” According to the
Commissioner,
the general public has to have a purpose to enter the River
Landing community [and accordingly to enter the Landing
Tract easement]—such as a charity event or a pre-
arranged round of golf. They do not have key access and
cannot come and go as they please. The fact that River
Landing allows non-residents and non-members to enter
from time to time, with permission, does not make the
community [and the Landing Tract easement] ‘open’ to the
59
[*59] general public, in the same way that one’s home is not open
to the general public.
The parties agree that, for members of the general public to play
golf on the Landing golf course, they “must call the pro shop, arrange a
tee time, come to the visitor’s entrance, and state that they were there
to play golf, and that the guard would [then] open the manual gate”—
and that doing so also requires them to pay a fee. The Commissioner
made no showing that these requirements are substantially more
onerous than those a member of the public would face to play golf on a
public municipal course. The parties also agree that members of the
general public who are attending an educational or charity event hosted
on the Landing Tract easement may enter the property but that they
must pass through the gated entrance and state their purpose in order
to park inside of the River Landing community. Many a state or
national park has an equivalent gatehouse or kiosk where a visitor may
be stopped to pay an entrance or parking fee. Moreover, members of the
general public who merely want to use the hiking and biking trails of
the Landing Tract easement are able to enter by way of a paved trail
that runs past the guard stand at the entrance of River Landing but
which does not require any inspection by the guards nor any payment of
a fee and which is not closed off at any time of day in any season.
Furthermore, the River Landing development (and thus the Landing
Tract easement) is not entirely enclosed by fencing, and the guarded
gate entrances are therefore not the only means of accessing the
property.
Petitioners’ uncontradicted evidence shows that the development
is truly open to this public use, and there is no evidence to support any
suspicion that in fact it is a closed facility for members only. Any
substantial attempt by River Landing to clamp down on this public use
would violate the easement, and NALT would be responsible to resist
the violation. 30
Altogether, the evidence shows that the Landing Tract easement
deed guarantees the general public the right to access the Landing Tract
easement for outdoor recreation and educational activities, and that the
30 If NALT were to fail to enforce the terms of the Landing Tract easement
deed, then “the Attorney General, the district attorney, a beneficiary, or any other
interested party may maintain a proceeding to enforce a charitable trust.” N.C. Gen.
Stat. § 36C-4-405.1(a) (2006); cf. Finley v. Brown, No. 17 CVS 2812, 2017 WL 3841645,
at *1 (N.C. Super. Ct. Sept. 1, 2017) (permitting suit by “one of five directors of the
Foundation’s board of directors”).
60
[*60] general public does so on a substantial and regular basis.
Approximately one-third of golf rounds played are by non-members, i.e.,
members of the general public. Furthermore, the hiking and biking
trails on the Landing Tract easement are accessible to the general public
year round, and members of the general public may freely enter the
Landing Tract easement for this purpose from the trail head at the front
entrance of River Landing. We therefore hold that the Landing Tract
easement satisfies the conservation purpose requirement of section
170(h)(4)(A) by “preserv[ing] . . . land areas for outdoor recreation by, or
the education of, the general public” pursuant to section 170(h)(4)(A)(i).
C. The River Tract and Landing Tract easements protect their
conservation purposes in perpetuity.
1. The statute and regulations permit but limit a
donor’s reservation of rights.
Section 170(h)(5)(A) provides that “[a] contribution shall not be
treated as exclusively for conservation purposes unless the conservation
purpose is protected in perpetuity”, and we explained in Belk v.
Commissioner, 140 T.C. 1, 12 (2013), supplemented by T.C. Memo. 2013-
154, aff’d, 774 F.3d 221 (4th Cir. 2014), that “the section 170(h)(5)
requirement that the conservation purpose be protected in perpetuity is
separate and distinct from the section 170(h)(2)(C) requirement that
there be real property subject to a use restriction in perpetuity.”
Because a “qualified conservation contribution” can be a donation
of a partial interest in property, § 170(f)(3)(B)(iii), a donor of a
conservation easement may reserve in the easement deed rights
permitting them to make continued use of the property. However, to be
entitled to a charitable contribution deduction for donation of a
conservation easement, Treasury Regulation § 1.170A-14(b)(2) requires
that “[a]ny rights reserved by the donor in the donation of a perpetual
conservation restriction must conform to the requirements of this
section [i.e., Treasury Regulation § 1.170A-14]. See e.g., paragraph
(d)(4)(ii) [scenic enjoyment], (d)(5)(i) [historic preservation], (e)(3)
[inconsistent use permitted], and (g)(4) [retention of qualified mineral
interest] of this section.” To ensure perpetual protection of the
conservation purpose of the easement, Treasury Regulation § 1.170A-
14(g)(1) provides that “any interest in the property retained by the donor
(and the donor’s successors in interest) must be subject to legally
enforceable restrictions . . . that will prevent uses of the retained interest
inconsistent with the conservation purposes of the donation.” See also
61
[*61] Turner, 126 T.C. at 311 (citing Treas. Reg. § 1.170A-14(g)(1)). “A
donor may continue a pre-existing use of the property that does not
conflict with the conservation purposes of the gift”. Treas. Reg.
§ 1.170A-14(e)(3). But the restrictions on a donor’s retained rights in a
conservation easement are not limited to protecting only the intended
conservation purpose of the easement, because Treasury Regulation
§ 1.170A-14(e)(2) provides that “a deduction will not be allowed if the
contribution would accomplish one of the enumerated conservation
purposes but would permit destruction of other significant conservation
interests.” That is, an “inconsistent use” of the property (i.e., a use that
destroys “other significant conservation interests”) is generally
impermissible. “A use that is destructive of conservation interests will
be permitted only if such use is necessary for the protection of the
conservation interests that are the subject of the contribution.” Id.
subpara. (3).
Altogether, these regulations provide that a donor (1) may reserve
in the easement deed rights to make continued use of the easement
property, provided that there are enforceable restrictions to prevent
uses inconsistent with conservation purposes, (2) may continue pre-
existing use of the easement property that does not conflict with the
conservation purposes of the gift, and (3) cannot use the property in such
a way that would destroy other significant conservation interests
(unless pursuant to protecting the conservation purpose of the
easement). We will now examine the reserved rights in the River Tract
easement deed and the Landing Tract easement deed to determine
whether they comply with these regulations and protect their
conservation purposes in perpetuity.
2. Rights are reserved in the River Tract and Landing
Tract easement deeds.
For most of the reserved rights in the River Tract easement deed
and the Landing Tract easement deed, the donor’s exercise of the rights
requires advance approval from NALT to ensure that conservation
purposes are not threatened or undermined, and we see no reason—nor
does the Commissioner argue for one—why NALT would approve
exercise of a reserved right that harmed the conservation values of the
River Tract easement or the Landing Tract easement. Accordingly, for
those reserved rights requiring approval from NALT, we will not further
address whether they fail to protect the conservation purpose of the
River Tract easement and the Landing Tract easement in perpetuity.
62
[*62] However, not every reserved right in the River Tract easement
deed and the Landing Tract easement deed is subject to NALT’s
approval. For example, Articles 3.1 and 3.3 of the River Tract easement
deed permit Duplin Land to build certain structures and alter the
landscape in the easement areas in the interest of maintaining the golf
courses. We will therefore examine whether any reserved right which
does not require advance approval from NALT fails to protect the
respective conservation purposes of the River Tract easement and the
Landing Tract easement in perpetuity.
3. The River Tract easement deed protects its
conservation purpose in perpetuity notwithstanding
the reserved rights.
The Commissioner argues that “[t]he reserved rights completely
vitiate many of the restrictions”, and specifically points out that the
reserved rights to build additional structures, alter land features,
remove vegetation, and install fences pertinent to operation of the River
golf course “prioritize[] the golf course over any natural habitat”. The
Commissioner asserts that “[g]iven these sweeping reserved rights, the
Easements serve to protect nothing other than two private golf courses
and the surrounding golf course development.”
We view the reserved rights to continue operation of, maintain,
repair, improve, and replace (in the event of casualty loss) the River golf
course as existing to support “a pre-existing use of the property that does
not conflict with the conservation purposes of the gift”. See Treas. Reg.
§ 1.170A-14(e)(3). We so conclude because even if these reserved rights
are fully exercised (without the approval of NALT being required), the
golf courses themselves will be maintained according to environment-
friendly “best practices”, and around the golf courses a relatively natural
habitat still exists in the undisturbed portions of the River Tract
easement constituting approximately one-third of its area.
Furthermore, exercising these reserved rights does not “permit
destruction of other significant conservation interests”, see Treas. Reg.
§ 1.170A-14(e)(2), because they do not undermine outdoor recreation by,
or education of, the general public, nor undermine protection of a
relatively natural habitat, preservation of open space, or the
preservation of a historically important land area or structure, see
§ 170(h)(4)(A). We therefore hold that the River Tract easement protects
its conservation purpose in perpetuity and satisfies section 170(h)(5)(A).
63
[*63] 4. The reserved rights in the Landing Tract easement
deed facilitate its perpetual conservation purpose.
The Commissioner points to the same supposed defects to argue
that the Landing Tract easement deed, like the River Tract easement
deed, fails to protect its conservation purpose in perpetuity. However,
having held above in Part III.B.5 that the Landing Tract easement deed
satisfies the conservation purpose of “preserv[ing] . . . land areas for
outdoor recreation by, or the education of, the general public”, see
§ 170(h)(4)(A)(i), we observe now that the reserved rights to maintain,
repair, improve, and continue the operation of the Landing golf course
(as well as the nature trails through the Landing Tract easement)
further that conservation purpose and do not otherwise undermine any
other conservation purpose, see Treas. Reg. § 1.170A-14(e)(2) and (3).
We therefore hold that the Landing Tract easement protects its
conservation purpose in perpetuity and satisfies section 170(h)(5)(A).
IV. Valuing the easement donations
A. General principles of valuation
Generally the amount of a charitable contribution deduction
under section 170(a) for a donation of property is the “fair market value”
of the property at the time of the donation. Treas. Reg. § 1.170A-1(c)(1).
Treasury Regulation § 1.170A-1(c)(2) defines fair market value to be “the
price at which the property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or sell
and both having reasonable knowledge of relevant facts.” With respect
to valuing a donation of a partial interest in property, Treasury
Regulation § 1.170A-7(c) provides that “[e]xcept as provided in § 1.170A-
14, the amount of the deduction under section 170 . . . is the fair market
value of the partial interest at the time of the contribution.” And
Treasury Regulation § 1.170A-14(h)(3)(i) in turn sets forth the following
method for valuing a perpetual conservation restriction:
[Sentence 2:] If there is a substantial record of sales of
easements comparable to the donated easement (such as
purchases pursuant to a governmental program), the fair
market value of the donated easement is based on the sales
prices of such comparable easements. [Sentence 3:] If no
substantial record of market-place sales is available to use
as a meaningful or valid comparison, as a general rule (but
not necessarily in all cases) the fair market value of a
64
[*64] perpetual conservation restriction is equal to the difference
between the fair market value of the property it encumbers
before the granting of the restriction and the fair market
value of the encumbered property after the granting of the
restriction. [Sentence 4:] The amount of the deduction in
the case of a charitable contribution of a perpetual
conservation restriction covering a portion of the
contiguous property owned by a donor and the donor’s
family . . . is the difference between the fair market value
of the entire contiguous parcel of property before and after
the granting of the restriction.
The fair market value of property on a given date is a question of
fact to be resolved on the basis of the entire record. McGuire v.
Commissioner, 44 T.C. 801, 806–07 (1965); see, e.g., Kaplan v.
Commissioner, 43 T.C. 663, 665 (1965). In these cases, we do not have
“a substantial record of sales of easements comparable to the donated
easement”, and we will therefore base our valuation on the before and
after method. Treas. Reg. § 1.170A-14(h)(3)(i). To do so—
If before and after valuation is used, the fair market value
of the property before contribution of the conservation
restriction must take into account not only the current use
of the property but also an objective assessment of how
immediate or remote the likelihood is that the property,
absent the restriction, would in fact be developed, as well
as any effect from zoning, conservation, or historic
preservation laws that already restrict the property’s
potential highest and best use.
Id. subdiv. (ii); see also Stanley Works & Subs. v. Commissioner, 87 T.C.
389, 400 (1986). A property’s highest and best use is the “highest and
most profitable use for which the property is adaptable and needed or
likely to be needed in the reasonably near future”. Olson v. United
States, 292 U.S. 246, 255 (1934).
To show the values of the conservation easements in these cases,
as well as the properties’ respective highest and best uses, the parties
have offered the reports and testimonies of expert witnesses. See Rule
143(g). “Opinion testimony of an expert is admissible if and because it
will assist the trier of fact to understand the evidence that will
determine a fact in issue”, and we evaluate expert opinions “in light of
the demonstrated qualifications of the expert and all other evidence of
65
[*65] value.” Parker v. Commissioner, 86 T.C. 547, 561 (1986) (citing
Fed. R. Evid. 702). Where experts offer competing estimates of fair
market value, we decide how to weigh those estimates by, inter alia,
examining the factors they considered in reaching their conclusions. See
Casey v. Commissioner, 38 T.C. 357, 381 (1962). We are not bound by
the opinion of any expert witness, and we may accept or reject expert
testimony in the exercise of our sound judgment. Helvering v. Nat’l
Grocery Co., 304 U.S. 282, 294–95 (1938); Estate of Newhouse v.
Commissioner, 94 T.C. 193, 217 (1990). We may also reach a decision as
to the value of property that is based on our own examination of the
evidence in the record. See Silverman v. Commissioner, 538 F.2d 927,
933 (2d Cir. 1976), aff’g T.C. Memo. 1974-285.
Having established the subject and method of valuation, as well
as the scope of evidence with which to do so, we will now explain the
basis of our valuations of the respective easements at issue as stated
above in the findings of fact.
B. Valuation under consistent assumptions about development
River Landing is a cohesive development that, despite spanning
two tracts of land, must be viewed in the aggregate—as must the two
easement donations, which were conceived and executed as organized,
simultaneous donations. River Landing uses common roads and nature
paths as well as shared facilities such as the golf clubhouse and sports
complex that are located on both Tracts and are used by residents and
the general public. However, petitioners’ valuation of each easement
asserts a pre-donation highest and best use of residential development
and assumes that the adjacent tract would continue operating as a golf
course. But the development of each tract while the other remains a golf
course can only exist in the abstract. Both golf courses cannot be
destroyed if both valuations depend on and assume the continued
operation of a golf course. Not every purchaser of a residence in River
Landing is a necessarily a golfer, but golf is critical to the development.
The reality is (and petitioners essentially admit) that an arm’s-length
purchaser of either (or both) of these tracts would look to develop only
one of them and would keep the other as a golf course. No one would
purchase River Landing to dismantle both golf courses and replace them
both with residences, since thereafter there would be no real market for
golf-less residences. The parties agree that, when River Landing is
considered in the aggregate, the River Tract is the one to be developed
and the Landing Tract must remain a golf course. We will therefore
value the River Tract on the assumption that its highest and best use
66
[*66] before the River Tract easement donation was development, and
we will value the Landing Tract on the assumption that its highest and
best use before the Landing Tract easement donation was continued use
as a golf course (with the modest development that would not interfere
with the continued operation of the Landing Tract golf course).
The reports of the Commissioner’s expert, Mr. Hughes, opine that
the highest and best use of both the River and the Landing Tracts would
have been to continue operating as a golf course and to hold portions of
the Tracts for potential development in the future once the housing
market conditions improved. We reject this opinion for several reasons.
First, just as the highest value of the two tracts before the easement
donations would not be realized if both golf courses were to be developed
into lots, the highest value would also not be realized if both Tracts
remained golf courses. The simultaneous operation of both courses had
long been a losing venture, and we are sure that any willing buyer
considering River Landing would have so reckoned. Second, we doubt
that any arm’s-length buyer of these tracts would purchase them to hold
for development in the future, given that the golf courses were not yet
profitable in 2010 whereas the housing market conditions were
improving. However, we do not abandon altogether Mr. Hughes’
valuations of the River Tract and the Landing Tract as golf courses
(which valuations are undisputed because Mr. Dean did not value the
highest and best use of either Tract before or after its easement donation
as a golf course). We will rather adopt and apply Mr. Dean’s
methodology of valuing the River Tract as residential development (with
some correction), and we will apply Mr. Hughes’s methodology of valuing
the River Tract and the Landing Tract as golf courses.
C. Valuation of the River Tract easement
Mr. Sauter prepared the qualified appraisal attached to
petitioners’ returns, and he valued the highest and best use of the River
Tract before the easement donation as “155 to 160 single-family lots of
the size and type found on adjacent Tract at River Landing” on the basis
of a subdivision plan prepared by C.E. Group in 2010. That subdivision
plan provided for 233 total lots on the River Tract, but for reasons not
explained in his appraisal report Mr. Sauter determined the appropriate
number of lots to be between 155 and 160. At trial petitioners offered
the expert report of Mr. Dean, who determined that the highest and best
use of the River Tract before the easement donation was development of
233 lots on the basis of that same subdivision plan prepared by C.E.
67
[*67] Group. 31 However, a pocket of 61 lots of the subdivision plan for
the River Tract is located on the existing driving range for River
Landing, and development of this portion would leave the Landing
Course without a driving range for its operation. Because we view the
respective uses and valuations of the River Tract and the Landing Tract
in the aggregate, we think it is important to the continued use of the
Landing Tract as a golf course that this portion of the River Tract
remain a driving range. Therefore, we will remove from the River Tract
subdivision plan the 61 lots (evidently included by Mr. Dean but not by
Mr. Sauter) that are located on the driving range and will proceed to
determine the value of developing 172 lots on the River Tract.
Mr. Dean uses the income approach to value developing the River
Tract with residential lots. To estimate gross revenue, Mr. Dean
categorizes new lots into river front lots, pond/view lots, and interior
lots. He then assigns a sale price to each type of lot using comparable
market data, estimates the time it would take to sell the amount of new
lots using comparable market data, discounts revenue from sales in
future years to present value, and then deducts the cost of constructing
the development and selling the lots. We find Mr. Dean’s method of
determining the gross revenue of developing the River Tract with
residential lots to be credible and reliable. Using sales of comparable
lots in similar communities in North Carolina, Mr. Dean estimates the
sale price of interior lots to be $66,400, of pond/view lots to be $114,000,
and of river front lots to be $170,000. In the C.E. Group subdivision plan
there are 61 pond/view lots, 45 river front lots, and (as adjusted in this
Opinion) 66 interior lots.
Mr. Dean’s report includes the following costs of selling lots on
the River Tract to estimate the net present value of each type of lot: sales
commissions (5%), advertising (10%), overhead/contingency (2%), real
estate taxes ($1,266 per lot), and entrepreneurial profit (15%). (These
are the transaction costs of selling the lots and are in addition to the
infrastructure costs of developing the lots themselves.) The
Commissioner does not criticize Mr. Dean’s estimation of the transaction
cost of selling the lots. However, the Commissioner correctly points out
that Mr. Dean’s estimate of the infrastructure cost to develop the lots
does not include the cost of removing the existing features of the River
Course such as cart paths, sand traps, irrigation system, and the
31 C.E. Group prepared a revised subdivision plan for River Landing in 2018
that included additional lots on the Landing Tract, but no additional lots on the River
Tract. The 2010 and 2018 subdivision plans are identical as to the River Tract.
68
[*68] associated waste. The Commissioner also argues that Mr. Dean’s
report fails to estimate the effect of single-loaded streets (i.e., lots placed
on only one side of the street) on the overall cost to develop each lot and
asserts that single-loaded streets could potentially double the cost of
development per lot. The Commissioner does not provide an alternative
estimate for the development cost per lot. Mr. Dean originally estimated
the infrastructure cost per lot as $24,300, but then made a downwards
adjustment to $19,400 due to “economies of scale” because the River
Tract subdivision contains more lots than the comparables used to
derive a cost per lot. Neither did Mr. Dean account for the potential
savings of the lots having already been cleared due to the previous golf
course development. Because Mr. Dean’s cost estimate included only
the cost of residential infrastructure per lot and not the cost of removing
the golf course features, we will not adopt his downward adjustment for
economies of scale and will estimate the cost to develop 172 lots on the
River Tract as his original $24,300 per lot.
After discounting the net sale proceeds in future years to present
value (using Mr. Dean’s present value discount rate, which the
Commissioner does not criticize), and deducting the infrastructure costs
from that present value figure, the total present value of developing the
River Tract with residential lots is $5,140,274—this figure is the fair
market value of the highest and best use of the River Tract in 2010
before the easement donation. Mr. Hughes determined the value of
using the River Tract as a golf course after the easement donation to be
$2,350,000. Therefore, the value of the River Tract easement, and the
value of the charitable contribution deduction for its donation, is
$5,140,274 minus $2,350,000, or $2,790,274.
D. Valuation of the Landing Tract easement
Given our view (and the parties’ effective agreement) that
development of River Landing as a whole would require that the
Landing Tract remain a golf course, the highest and best use of the
Landing Tract before the easement donation is continued operation as a
golf course. In valuing the highest and best use of the Landing Tract as
a golf course, the Commissioner’s expert, Mr. Hughes, noted that 5 lots
on the Landing Tract (2 lots on hole 14 and 3 lots on hole 18) could
potentially be added and developed without disturbing the existing
features of the Landing Course. Using data on recent lot sales in River
Landing, Mr. Hughes posited that the reasonable average price for the
five lots is $60,000 per lot—of which one-third is allocable to the land,
one-third is the cost of development, and one-third is for overhead and
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[*69] developer’s profit. Mr. Hughes estimated the land value of each
lot to be $20,000 and estimated that holding the five lots for potential
development would increase the value of the Landing Tract by $100,000
before the easement donation. On the basis of Mr. Hughes’s report, the
Commissioner asserts that “petitioners are not entitled to a deduction
greater than the diminution arrived at by respondent’s expert of
$100,000”, which we take as a well-warranted concession that
petitioners are entitled to deductions of $100,000.
Mr. Dean’s valuation of the Landing Tract used the subdivision
plan prepared by C.E. Group that proposed 296 lots (of which 252 are
interior lots and 44 are pond/view lots). Because, after the development
of the River Tract, this development of the Landing Tract would entirely
discontinue the golf operation, we radically adjust Mr. Dean’s plan down
to five lots (whose categories are unknown), resulting in an approximate
increase in the value of the Landing Tract between $21,500 (presuming
all five lots are interior lots) and $165,000 (presuming all five lots are
pond/view lots). But petitioners did not attempt to show whether the
five lots posited by Mr. Hughes would be interior lots, pond/view lots, or
a combination thereof or what their associated values would be. We
therefore accept the Commissioner’s concession, based on Mr. Hughes’s
report, that the forgone value of developing five lots on the Landing
Tract without disturbing the Landing Course—and therefore the value
of the Landing Tract easement—was $100,000.
V. Penalties under section 6662
The Commissioner has conceded all penalties at issue with
respect to Dell and Wendy Murphy in Docket No. 14536-16. We
therefore address penalties as to Wendell and Linda Murphy in Docket
No. 14541-16.
A. Penalty principles
Section 6662(a) and (b)(1)–(3) imposes an accuracy-related
penalty “equal to 20 percent of the portion of the underpayment to which
this section applies” upon a taxpayer who underpays his tax due to, inter
alia, “[n]egligence or disregard of rules or regulations”, a “substantial
understatement of income tax”, or a “substantial valuation
misstatement”. An understatement of income tax is substantial if it
exceeds the greater of “10 percent of the tax required to be shown on the
return for the taxable year” or $5,000. § 6662(d)(1)(A). For 2010, the
year at issue, a substantial valuation misstatement exists if “the value
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[*70] of any property . . . claimed on any return . . . is 150 percent or
more of the amount determined to be the correct amount of such
valuation”. § 6662(e)(1)(A). None of these penalties will be imposed
where the taxpayer had “reasonable cause”. § 6664(c)(1).
In the case of a “gross valuation misstatement”—i.e., where the
value of property claimed on the return is (as defined in the statute as
in effect for the year at issue) 200% or more than the amount determined
to be the correct valuation—the rate of the accuracy-related penalty is
increased to 40%. § 6662(h)(1) and (2)(A)(i). However, Treasury
Regulation § 1.6662-5(b) provides that “[n]o penalty may be imposed
under section 6662(b)(3) [i.e., for substantial or gross valuation
misstatements] for a taxable year unless the portion of the
underpayment for that year that is attributable to substantial or gross
valuation misstatements exceeds $5,000”. And Treasury Regulation
§ 1.6662-5(h)(1) provides:
The determination of whether there is a substantial or
gross valuation misstatement in the case of a return of a
pass-through entity (as defined in § 1.6662-4(f)(5) [to
include a partnership and an S-corporation]) is made at the
entity level. However, the dollar limitation ($5,000 or
$10,000, as the case may be) is applied at the taxpayer level
(i.e., with respect to the return of the shareholder [or]
partner . . .).
There is no reasonable cause defense available under section 6664(c) to
a gross valuation misstatement. § 6664(c)(3).
On the basis of these principles, the records in these cases, and
the valuations we determined above in Part IV, we will now determine
which penalties are applicable with respect to the easement donations
at issue.
B. Section 6662 penalties with respect to Duplin Land and
Wendell and Linda Murphy individually
Duplin Land originally claimed on its S corporation return 32
charitable contribution deductions of $7,344,095 for its donation of the
River Tract easement and $1,080,814 for its donation of the Landing
Tract easement (totaling $8,424,909). We determined in Part IV above
32 Pursuant to Treasury Regulation § 1.6662-5(h)(1) (quoted in text above), we
quantify the valuation misstatement “at the entity level”, i.e., as reported by Duplin.
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[*71] that the correct amounts of the deductions are substantially less—
i.e., $2,790,274 for the River Tract easement and $100,000 for the
Landing Tract easement (totaling $2,890,274). Treasury Regulation
§ 1.6662-5(f)(1) directs us to determine whether there is a substantial or
gross valuation misstatement on a property-by-property basis. 33
Determined on that basis, Duplin Land’s overstatement of the value of
the River Tract easement on its return was approximately 263% (i.e.,
$7,344,095 ÷ $2,790,274 = 2.63), and its overstatement of the value of
the Landing Tract easement on its return was approximately 1,081%
(i.e., $1,080,814 ÷ $100,000 = 10.81). Therefore, both deductions
reflected gross valuation misstatements under section 6662(h) because
they exceeded 200% of the value determined to be correct, and they are
subject to the 40% penalty, provided that they lead to underpayments
greater than $5,000. See id.; see also Treas. Reg. § 1.6662-5(b), (h)(1)
(“measured at the taxpayer level”).
A rough-and-ready calculation (to be corrected by the parties’
submissions under Rule 155) easily shows that Wendell and Linda
Murphy’s underpayment exceeded $5,000: They originally claimed on
their joint income tax return charitable contribution deductions of
$3,008,896 associated with Duplin Land’s donations of the River Tract
easement and the Landing Tract easement. That amount constitutes
approximately 35.7% of Duplin Land’s charitable contribution deduction
($3,008,896 ÷ $8,424,909 = 0.3571). Their 35.7% share of our revised
valuation(s) of the River Tract easement and the Landing Tract
easement ($2,890,274) is approximately $1,031,828. It therefore
appears that Wendell and Linda Murphy accordingly overstated the
value of the easements on their return by the difference of those two
figures—i.e., $3,008,896 − $1,031,828 = $1,977,068. Section 1(a)
provides that the top marginal tax rate in 2010 was 39.6%; and the
amount of income reported on Wendell and Linda Murphy’s return
places them in the top marginal income tax bracket. On the basis of
these estimates, Wendell and Linda Murphy therefore underpaid their
33 Applying the property-by-property method provided in the regulations is
arguably at odds with our holding above in Part IV.B that the River Tract easement
and the Landing Tract easement must be viewed and valued in the aggregate because
they are both part of an organized, simultaneous contribution. However, because we
determine that both valuation misstatements are “gross” (i.e., greater than 200% of
the values claimed on the return) regardless of whether the River Tract easement and
the Landing Tract easement are viewed separately, as in the computations set forth in
text (i.e., 263% and 1,081%), or in the aggregate (i.e., $8,424,909 ÷ $2,890,274 = 2.91
or 291%) for the purposes of the valuation misstatement penalty, this inconsistency
does not affect our analysis and is therefore immaterial.
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[*72] 2010 tax liability by $782,919 (i.e., greater than $5,000) and are
subject to the 40% gross valuation misstatement penalty in section
6662(a), (e), and (h).
Since we have determined that Wendell and Linda Murphy are
liable for the gross valuation misstatement penalty (and since the
Commissioner has conceded that Dell and Wendy Murphy are not liable
for penalties), we need not address the other penalty provisions in
connection with the River Landing easements.
VI. Conclusion
We hold that petitioners did not satisfy the appraisal summary
requirements of section 170(f)(11) in connection with the claimed
charitable contribution deductions at issue in these cases, but we also
hold that their failure to do so is excused for reasonable cause because
the Commissioner, in raising this issue as new matter in this litigation,
failed to carry his burden to show an absence of reasonable cause. We
further hold that each of the easement donations at issue satisfies the
requirements of section 170(h) and that petitioners are therefore
entitled to charitable contribution deductions equal to their respective
fair market values as of December 2010. Having considered all evidence
presented by the parties, we find those values to be $2,790,274 for the
River Tract easement and $100,000 for the Landing Tract easement.
Finally, we hold that Wendell and Linda Murphy’s claimed deductions
for contribution of the River Tract easement and of the Landing Tract
easement are subject to the section 6662 gross valuation misstatement
penalty.
To reflect the foregoing,
Decisions will be entered under Rule 155.