IRS Argues Partnership’s Charitable Deduction Properly Denied

HOFFMAN PROPERTIES II, L.P., FIVE M ACQ I, LLC,
Tax Matters Partner, 
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

ON APPEAL FROM THE DECISION OF THE UNITED STATES TAX COURT

BRIEF FOR THE APPELLEE

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

JACOB CHRISTENSEN
(202) 307-0878
IVAN C. DALE
(202) 307-6615
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

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TABLE OF CONTENTS

Table of contents

Table of authorities

Statement in support of oral argument

Jurisdictional statement

Statement of the issue

Statement of the case

Summary of argument

Argument:

Conclusion

Addendum — relevant statutes and regulations

Certificate of compliance

Certificate of service

TABLE OF AUTHORITIES

Cases:

Andrews v. Columbia Gas Transmission Corp., 544 F.3d 618 (6th Cir. 2008)

BC Ranch II, L.P. v. Commissioner, 867 F.3d 547 (5th Cir. 2017)

Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014)

Briggs v. Commissioner, 72 T.C. 646 (1979)

Celotex Corp. v. Catrett, 477 U.S. 317 (1986)

Chrysler Corp. v. Commissioner, 436 F.3d 644 (6th Cir. 2006)

Cleveland-Cliffs Iron Co. v. Chicago & N. W. Transp. Co., 581 F. Supp. 1144 (W.D. Mich. 1984)

Esgar Corp. v. Commissioner, 744 F.3d 648 (10th Cir. 2014)

Garofoli v. Whiskey Island Partners, Ltd., 25 N.E.3d 400 (Ohio Ct. App. 2014)

GenCorp, Inc. v. American Int'l Underwriters, 178 F.3d 804 (6th Cir. 1999)

Glass v. Commissioner, 471 F.3d 698 (6th Cir. 2006)

Glass v. Commissioner, 124 T.C. 258 (2005)

Golden v. Commissioner, 548 F.3d 487 (6th Cir. 2008)

Graham v. Drydock Coal Co., 667 N.E.2d 949 (Ohio 1996)

Greer v. Commissioner, 557 F.3d 688 (6th Cir. 2009)

Herman v. Commissioner, T.C. Memo 2009-205, 2009 WL 2923945 (2009)

Hernandez v. Commissioner, 490 U.S. 680 (1989)

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992)

Max Trucking, LLC v. Liberty Mut. Ins. Corp., 802 F.3d 793 (6th Cir. 2015)

Minnick v. Commissioner, 796 F.3d 1156 (9th Cir. 2015)

New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934)

Palmolive Building Investors, LLC v. Commissioner, 149 T.C. 380 (2017)

Partita Partners, LLC v. United States, 216 F. Supp. 3d 337 (S.D.N.Y. 2016)

Royal Insurance Co. of America v. Orient Overseas Container Line Ltd., 525 F.3d 409, 421 (6th Cir. 2008)

Savedoff v. Access Group, Inc., 524 F.3d 754 (6th Cir. 2008)

Saunders v. Mortensen, 801 N.E.2d 452, 454 (Ohio 2004)

Scheildman v. Commissioner, 755 F.3d 148 (2d Cir. 2014)

Shifrin v. Forest City Enterprises, Inc., 597 N.E.2d 499 (Ohio 1996)

Simmons v. Commissioner, T.C. Memo. 2009-208, 2009 WL 2950610 (2009)

Smith v. Perkins Board of Education, 708 F.3d 821 (6th Cir. 2013)

Tennessee Consolidated Coal Co. v. United Mine Workers of America, 416 F.2d 1192 (6th Cir. 1969)

Turcar, LLC v. I.R.S., 451 F. App'x 509 (6th Cir. 2011)

United States v. Dean, 224 F.2d 26 (1st Cir. 1955)

United States v. Ehrmann, 2013 WL 7873795 (N.D. Ohio Feb. 12, 2013)

United States v. Am. Bar Endowment, 477 U.S. 105 (1986)

Wohl v. Swinney, 888 N.E.2d 1062 (Ohio 2008)

Statutes:

Internal Revenue Code (26 U.S.C) (2007):

Internal Revenue Code of 1986 (26 U.S.C):

Bipartisan Budget Act of 2015, Pub. L. No. 114-74, 129 Stat. 584 (2015)

Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324

Tax Reduction and Simplification Act of 1977, Pub. L. No. 95-30, 91 Stat. 126

Tax Reform Act of 1969, Pub. L. No. 91-172, 83 Stat. 487

Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520

Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, 94 Stat. 3204

Regulations:

Treasury Regulations (26 C.F.R.):

Treasury Regulations (26 C.F.R.):

36 C.F.R. § 67.7

Miscellaneous:

Ann Taylor Schwing, Perpetuity is Forever, Almost Always: Why It Is Wrong To Promote Amendment and Termination of Perpetual Conservation Easements, 37 Harv. Envtl. L. Rev. 217 (2013)

Announcement 2015-5, Deletions from Cumulative List of Organizations, Contributions to Which Are Deductible Under Section 170 of the Code, 2015-7 I.R.B. 602 (2015)

Black's Law Dictionary (11th ed. 2019)

Rev. Proc. 82-39, 1982-1 C.B. 759 (1982)

Rev. Proc. 2018-32, 2018-23 I.R.B. 739 (2018)

S. Rep. No. 96-1007 (1980), 1980 U.S.C.C.A.N. 6736

Tax Ct. R. 121

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STATEMENT IN SUPPORT OF ORAL ARGUMENT

Counsel for the Commissioner believe that oral argument would assist the Court as it navigates the intricate statutory and regulatory scheme governing the federal tax treatment of conservation easements, i.e., contributions of partial interests in property or restrictions on the use of property for conservation purposes.

JURISDICTIONAL STATEMENT

1. Jurisdiction in the Tax Court

Although partnerships do not themselves pay federal income tax, the Internal Revenue Code (26 U.S.C.) (“I.R.C.” or the “Code”) requires them to file annual information returns reporting items of income, deduction, and credit. I.R.C. § 6031. Individual partners then report their distributive shares of these items on their respective income tax returns. I.R.C. §§ 701-704. To provide for consistent treatment among partners, the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), Pub. L. No. 97-248, 96 Stat. 324, added §§ 6221-6232 to the Code, providing for the resolution of disputes regarding “partnership items” in unified, partnership-level administrative and judicial proceedings.¹

Pursuant to TEFRA procedures, the Commissioner of Internal Revenue, on March 3, 2015, mailed a Notice of Final Partnership Administrative Adjustment (“FPAA”) to appellant Five M Acq. I, LLC (“Five M”), as the tax matters partner of Hoffman Properties II, Ltd. (“Hoffman”), proposing adjustments to the partnership items with respect to Hoffman's 2007 partnership return. (Amended Answer Ex. A (FPAA), RE No. 5, A. 29-37.)² See I.R.C. § 6223(a)(2).

On May 29, 2015, within 90 days of the mailing of the FPAA, Five M, as Hoffman's tax matters partner,³ filed in the Tax Court a petition for readjustment of partnership items in response to the FPAA. (Petition, RE No. 1, A. 11-22.) See I.R.C. § 6226(a)(1). The Tax Court had jurisdiction pursuant to I.R.C. §§ 6226 and 7442.

2. Jurisdiction in the Court of Appeals

In a decision dated May 6, 2019, the Tax Court (Judge Joseph W. Nega) determined that Hoffman was not entitled to an approximately $15 million charitable contribution deduction that it had claimed on its 2007 return, but that accuracy-related penalties did not apply to any understatement of tax attributable to the improperly-claimed deduction. (Decision, RE No. 113, A. 785-86.) The Tax Court's decision finally disposed of all issues as to all parties. On July 22, 2019, Petitioner filed a notice of appeal. (Notice of appeal, RE No. 117, A. 787-88.) The notice of appeal was timely filed within 90 days of the Tax Court's decision. See I.R.C. § 7483. This Court has jurisdiction under I.R.C. § 7482(a).

STATEMENT OF THE ISSUES

1. Whether the Tax Court correctly held that the conservation purpose of certain restrictions on Hoffman's right to develop its property was not “protected in perpetuity” under I.R.C. § 170(h)(5).

2. Whether the Tax Court correctly held that Hoffman's contribution of a façade easement was not “exclusively for conservation purposes” under I.R.C. § 170(h)(4)(B).

STATEMENT OF THE CASE

1. Procedural history

This case commenced when Petitioner filed a Tax Court petition to challenge the Commissioner's determinations that Hoffman was not entitled to a $15 million charitable contribution deduction on its 2007 partnership return, and that an accuracy-related penalty applied, pursuant to I.R.C. § 6662, to any underpayment of tax resulting from the disallowance of this deduction. (Petition, RE No. 1, A. 11-21; FPAA, RE No. 5, Ex. A, A. 37.) The Tax Court awarded partial summary judgment to the Commissioner on two issues relating to the claimed deduction. (Order granting partial summary judgment (1st PSJ Order), RE No. 57, A. 280, 291.) Petitioner moved for reconsideration of the Tax Court's order granting partial summary judgment, but that motion was denied. (Motion to reconsider, RE 58, A. 292-98; Order denying motion to reconsider, RE 83, A. 634.)

The Commissioner filed a second motion for partial summary judgment (second motion for partial summary judgment (2d MPSJ), RE No. 61), which the Tax Court granted (2d PSJ order, RE No. 84, A. 635-36, 654). The parties stipulated that the accuracy-related penalties originally asserted by the Commissioner did not apply (stipulation of settled issues, RE No. 80, A. 620), and the Commissioner moved for entry of decision on the basis of the stipulation and the court's summary judgment orders (motion for entry of decision, RE No. 90, A. 656, 661). The Tax Court granted the motion (order granting motion for entry of decision, RE No. 112, A. 771, 784), and entered a final decision determining that Hoffman was not entitled to the claimed charitable contribution deduction, but that accuracy-related penalties did not apply to any underpayment resulting from disallowance of the deduction (decision, RE No. 113, A. 785-86). This appeal followed. (Notice of appeal, RE No. 117, A. 787-88.)

2. Facts

a. The easement deed

Hoffman is a limited partnership organized under the laws of the state of Ohio, and is treated as a partnership for federal income tax purposes. (Petition, RE No. 1, A. 11; Amended answer, RE No. 5, A. 24; see I.R.C. § 761(a); Treas. Reg. (26 C.F.R.) §§ 301.7701-2(c), 301.7701-3(a),(b)(1).) Petitioner is Hoffman's general partner as well as its tax matters partner, meaning that Petitioner was responsible for keeping the other partners informed of administrative proceedings with the IRS and generally authorized to provide information to the IRS, seek judicial review of the IRS's determinations, and (in some circumstances) bind other partners to settlement agreements. (Petition, RE No. 1, A. 12; Amended answer, RE No. 5, A. 24; Fisher declaration exhibit 5.1 (Easement deed), RE No. 10, A. 120; see I.R.C. §§ 6223(c)(2),(g), 6224(c)(3), 6226(a), 6230(e), 6231(a)(7).)

Hoffman owned a building (referred to as The Historic Tremaine Building) and an adjacent parking lot in downtown Cleveland, Ohio. (Fisher declaration exhibit 3 (aerial view), RE No. 10, A. 789; Easement deed, RE No. 10, Ex. 5.1, A. 104, 124.) In December 2007, Hoffman contributed a part of that property to the American Association of Historic Preservation (“AAHP”), which was then a tax-exempt entity whose purposes included the preservation and conservation of historic buildings.⁴ (Easement deed, RE No. 10, Ex. 5.1, A. 104, 106.)

The terms of Hoffman's contribution to AAHP were set forth in an agreement (the “easement deed”) that was recorded in the office of the Cuyahoga County Recorder on December 31, 2007. (Easement deed, RE No. 10, Ex. 5.1, A. 104, 120-22.) There were two components to the contribution. The first (the “façade easement”) was a donation to AAHP of a “preservation easement” in the façade of the Tremaine building. (Easement deed, RE No. 10, Ex. 5.1, A. 106.) The second was a restriction (the “air space restriction”) of Hoffman's right to build an addition in the spaces alongside and above the roof of the Tremaine building. (Easement deed, RE No. 10, Ex. 5.1, A. 105-06.)

Sections 1.1 and 1.2 of the easement deed set forth the granting and purpose of the façade easement and air space restriction, and Section 1.3 limits the contribution to the “easement area” and the “air space.”⁵ (Easement deed, RE No. 10, Ex. 5.1, A. 106.) In Section 2.1, Hoffman agreed to maintain and preserve the “conservation features” of the property, defined as “the significant architectural, cultural and historical features of the [Tremaine] building.” (Easement deed, RE No. 10, Ex. 5.1, A. 105-06.) Section 2.2 set forth a series of restrictions on Hoffman's use of the property. Specifically, it prohibited Hoffman from, inter alia, demolishing or removing improvements within the easement area (§ 2.2(a)), except as provided in paragraphs 3 (discussed below) and 5, erecting or allowing anything to grow which might impair the visibility of the building's façade from street level (§ 2.2(c)), and erecting or placing within the air space “other buildings or structures, including satellite dishes, small rooftop dishes, antenna or other data transmission or receiving devices or canopies” (§ 2.2(d)). (Easement deed, RE No. 10, Ex. 5.1, A. 106-07.)

Sections 3.1 set forth a series of “conditional rights” reserved by Hoffman but requiring AAHP's prior approval. Specifically, Section 3.1 stated:

[* * *]

(Easement deed, RE No. 10, Ex. 5.1, A. 107-08.)

Section 3.2, in turn, provided that Hoffman must, if it were to exercise any of these conditional rights, first submit to AAHP a description of and timetable for the proposed activity. (Easement deed, RE No. 10, Ex. 5.1, A. 108.) In such case, AAHP was obligated to certify, within 45 days of receipt of Hoffman's proposal, that it either approved or disapproved of the proposed plan. (Ibid.) In conducting this review, AAHP was instructed to apply the Secretary of the Interior's standards for rehabilitating historic buildings, see 36 C.F.R. § 67.7. (Easement deed, RE No. 10, Ex. 5.1, A. 108.) If AAHP did not respond within 45 days, Section 3.2 further provided that:

(Easement deed, RE No. 10, Ex. 5.1, A. 108).

Section 4.1 enumerated certain rights reserved by Hoffman, including the right to use the property in any way that was permitted by existing law, did not impair the conservation features or the “open space” features of the property,⁷ and was not inconsistent with the purposes of the agreement. (Easement deed, RE No. 10, Ex. 5.1, A. 109-110.) Section 4.2 stated that any such reserved rights, or any other right that was not prohibited or restricted by the agreement, could be exercised by Hoffman without prior notification to or approval by AAHP. (Easement deed, RE No. 10, Ex. 5.1, A. 109-110.)

In addition, the agreement included a merger clause stating that any prior understandings, agreements, and representations were null and void unless set forth in the agreement. (Easement deed, RE No. 10, Ex. 5.1, A. 118.) Section 11.1 authorized modifications of the agreement so long as those modifications did not affect the qualification of the easement or restriction under I.R.C. §§ 170(h) and 501(c)(3). That section provided, however, that any such amendment was not effective until recorded with the Cuyahoga County Recorder's office. (Easement deed, RE No. 10, Ex. 5.1, A. 119.)

Finally, the easement deed was signed by representatives from both Hoffman and AAHP. (Easement deed, RE No. 10, Ex. 5.1, A. 120, 122.) Those signatures were certified by a notary public. (Ibid.) The deed did not, however, contain any certification, under penalty of perjury, that AAHP had the resources to manage and enforce the façade easement or a commitment to do so.

b. Hoffman's 2007 partnership return

On September 29, 2008, Hoffman filed a Form 1065, U.S. Return of Partnership Income, with the IRS. (Fisher declaration Ex. 2 (partnership return), RE No. 10, A. 91-99.) The return claimed a deduction of approximately $15 million for “noncash charitable contributions” made in 2007, with such deduction to be distributed to Hoffman's partners on Schedules K-1. (Partnership return, RE No. 10, Ex. 2, A. 93.) The property contributed was described as a “Conservation Easement on Historic Property located at 1303 Prospect Ave.” in Cleveland (the address of the Tremaine building), and the return included a declaration by Michael Ehrmann, the appraiser of the contributed property.⁸ (Petition, RE No. 1, A. 20; Partnership return, RE No. 10, Ex. 2, A. 99.)

c. The “special rules” agreement

On October 26, 2009, nearly one year and ten months after execution of the easement deed, AAHP's director, Matthew Heinle, received an e-mail from Hoffman's manager, Andrew Sparacia, requesting that Heinle execute, on behalf of AAHP, a document entitled “Public Law 109-280 'Special Rules' Compliance Agreement re: Historic Preservation Agreement The Historic Tremaine Building.” (Affidavit of Matthew A. Heinle, RE No. 10, Ex. 8, A. 132, 135-36.) Heinle executed the “special rules” agreement sometime after October 26, 2009, although the agreement itself was undated, stating that it was “effective as of the 31st day of December, 2007.” (Affidavit of Matthew A. Heinle, RE No. 10, Ex. 8, A. 133; Memorandum in support of motion to reconsider, Ex. G (special rules agreement), RE No. 59, A. 378.)

The recitals to the “special rules” agreement stated that “a clerical error inadvertently deleted” a portion of the easement deed before the parties had signed it, but that the parties desired to comply with I.R.C. § 170(h). (Special rules agreement, RE No. 59, Ex. G, A. 378.) And Section 1.3 of the “special rules” agreement stated that Hoffman and AAHP agreed and certified, under penalty of perjury, that AAHP was a qualified organization with the resources to manage and enforce the restrictions of the easement deed. (Special rules agreement, RE No. 59, Ex. G, A. 379.) The “special rules” agreement was never recorded with the Cuyahoga County Recorder's office. (Fisher declaration & exhibits 5.0, 6.0 & 7.0, RE No. 10, A. 87-88, 103, 129-30.)

d. The FPAA

Ultimately, the IRS determined that Hoffman was not entitled to the $15 million charitable contribution deduction claimed on its 2007 partnership return. (FPAA, RE No. 5, Ex. A, A. 36.) On March 3, 2015, the IRS sent Petitioner an FPAA disallowing the deduction. (FPAA, RE No. 5, Ex. A, A. 29.) The FPAA explained that “[t]he easement was not a qualified conservation contribution under I.R.C. section 170(h),” and that Petitioner “ha[d] not established that the donation of the easement decreased the value of the eased property by any amount over $0.00.” (FPAA, RE No. 5, Ex. A, A. 37.) It further stated that any underpayment of tax resulting from the disallowance of the deduction was “attributable to a gross valuation misstatement,” and that, therefore, a 40% penalty applied to any underpayment by Hoffman's partners that was attributable to the deduction. (Ibid.) Petitioner's Tax Court petition challenged each of these determinations. (Petition, RE No. 1, A. 12-15.)

3. The Tax Court's rulings

a. The Commissioner's first motion for partial summary judgment

In the Tax Court, the Commissioner initially moved for partial summary judgment, seeking summary judgment as to five issues. (First motion for partial summary judgment (1st MPSJ), RE No. 8, A. 39; Supplement to 1st MPSJ, RE No. 33, A. 56; Reply in support of 1st MPSJ, RE No. 30, A. 794-804; see Order granting partial summary judgment (1st PSJ Order), RE No. 57, A. 279-80.) The five issues on which the Commissioner initially sought partial summary judgment were:

(Supplement to 1st MPSJ, RE No. 33, A. 56; Reply in support of 1st MPSJ, RE No. 30, A. 794-804; 1st PSJ Order, RE No. 57, A. 279-80.) The Tax Court granted partial summary judgment as to issues (2) and (3), and denied partial summary judgment, without prejudice, as to issues (1), (4), and (5). (1st PSJ Order, RE No. 57, A. 280, 291.)

With respect to issue (2), the Commissioner had, in a reply brief (Reply in support of 1st MPSJ, RE No. 30, A. 807), relied (in part) on section 3.2 of the easement deed as being “contrary to I.R.C. § 170(h)(4)(B)(i).”⁹ As discussed on p. 10, supra, Section 3.2 includes a 45-day default provision. That is, it provides that if AAHP failed to respond within 45 days to Hoffman's plan to exercise one or more of its “conditional rights” listed in Section 3.1, AAHP will be deemed to have approved the plan. (Easement deed, RE No. 10, Ex. 5.1, A. 108.) The Tax Court held that this 45-day default provision ran afoul of the requirement, in I.R.C. § 170(h)(4)(B)(i), that the façade easement “preserve the entire exterior of the building” and “prohibit[ ] any change in the exterior of the building which is inconsistent with the historical character of such exterior” (the “preservation and prohibition” requirements). (1st PSJ Order, RE No. 57, A. 287.)

Specifically, the Tax Court noted that Hoffman, in Section 3.1, had preserved a set of conditional rights that included the right to alter the Tremaine building's façade in any manner, even if the alteration were contrary to the historical character of the building, so long as AAHP approved of the alteration. (1st PSJ Order, RE No. 57, A. 285.) Because AAHP could only seek remedies for violations of the easement deed, the court observed, “there is no recourse available to AAHP if any alteration occurs by grace of the 45-day default provision, regardless of any potential detriment to or destruction of the historical character of the building's exterior.” (1st PSJ Order, RE No. 57, A. 286.) As a result, the restrictions in the easement deed did not perpetually preserve the Tremaine building's façade and prohibit changes that were inconsistent with its historical character. See I.R.C. § 170(h)(4)(B)(i).

With respect to issue (3), the Tax Court observed that “[t]he language of the easement itself lacks anything resembling a jurat or other avowal that might be construed as Hoffman and AAHP executing a sworn statement, or making any other certification under penalty of perjury[.]” (1st PSJ Order, RE No. 57, A. 290.) The court rejected Petitioner's argument that the sworn-statement requirement was satisfied by notarization of the easement deed, noting that notarization does not place the representations within a document subject to “penalty of perjury,” as I.R.C. § 170(h)(4)(B)(ii) requires. (1st PSJ Order, RE No. 57, A. 288.) The court also rejected Petitioner's argument that the failure to satisfy the sworn-statement requirement was remedied by the “special rules” agreement, because it was “executed long after the close of the tax year at issue.” (1st PSJ Order, RE No. 57, A. 291.)

b. Petitioner's motion to reconsider

Petitioner filed a timely motion to reconsider the order granting partial summary judgment to the Commissioner. (Motion to reconsider, RE No. 58, A. 292-298; see Tax Ct. R. 161.) With respect to the preservation-and-prohibition issue (issue 2, above), petitioner argued that the court had misinterpreted the 45-day default provision. Petitioner maintained that Sections 3.1 and 3.2 of the easement deed prohibited any change that would be inconsistent with the Secretary's standards; that the 45-day default provision was “virtually identical” to corresponding provisions in the model agreement published by the Land Trust Alliance (LTA), an organization consisting of over 1,100 member land trusts; and that, even if AAHP could not enforce a restriction due to the 45-day default provision, the general public, for whose benefit the easement was granted, could. (Motion to reconsider, RE No. 58, A. 295-96.) With respect to the sworn statement issue (issue 3, above), Petitioner argued that, under state and federal law, notarization constitutes a certification under penalty of perjury, and that, in any event, the omission of a sworn statement was a “mutual mistake” and that the court should therefore read the sworn statement into the easement deed. (Motion to reconsider, RE No. 58, A. 297.)

The Tax Court denied the motion to reconsider. (Order denying motion to reconsider, RE No. 83, A. 634.) With respect to the preservation-and-prohibition issue (issue 2, above), the court held that any public right to enforce the terms of the easement deed was no greater than that possessed by AAHP. (Order denying motion to reconsider, RE No. 83, A. 630.) Petitioner's other arguments on the prohibition-and-preservation issue, the court noted, were also made in opposition to a second motion for partial summary judgment filed by the Commissioner, and the court incorporated its disposition of those arguments from its order granting that second motion for partial summary judgment, discussed below. (Order denying motion to reconsider, RE No. 83, A. 628.) As to the sworn-statement issue, the court found that no case law supported the claim that notarization in this context satisfied the requirements of I.R.C. § 170(h)(4)(B)(ii). The court further rejected Petitioner's contention that a sworn statement should be read into the easement deed because its omission did not affect legal rights between the parties to the agreement, but instead impacted only a tax benefit desired by one of the parties. (Order denying motion to reconsider, RE No. 83, A. 631-34.)

c. The Commissioner's second motion for partial summary judgment

As mentioned above (p. 7), there were two components to the contribution Hoffman made to AAHP: the façade easement and the air space restriction. (Easement deed, RE No. 10, Ex. 5.1, A. 106.) The Tax Court's order granting, in part, the Commissioner's first motion for partial summary judgment disposed of the question whether the façade easement was a “qualified conservation contribution” that was deductible on Hoffman's 2007 return. See I.R.C. §§ 170(f)(3)(B)(iii), 170(h)(1)(C), 170(h)(4)(B)(i).

After that order, the Commissioner filed a second motion for partial summary judgment, this time with respect to the air space restriction. (2d MPSJ, RE No. 61.) That motion argued that, because Hoffman, in Sections 3.1 and 3.2 of the easement deed, retained conditional rights to develop the air space in a manner that was inconsistent with the conservation purpose, and because AAHP's right to enforce the air space restrictions was limited by the 45-day default provision, the restrictions were not “granted in perpetuity,” as required by I.R.C. § 170(h)(2)(C), and the conservation purpose of the restrictions were not “protected in perpetuity,” as required by I.R.C. § 170(h)(5)(A). (Memo in support of 2d MPSJ, RE No. 62, A. 831.)

The Tax Court granted the second motion for partial summary judgment. (Order granting 2d MPSJ, RE No. 84, A. 654.) The court held that “[p]roviding the donee a mere 45-day opportunity to prevent an inconsistent use is a far cry from the perpetual right to prevent an inconsistent use as required by the Code and regulations.” (2d PSJ order, RE No. 84, A. 647.) The court reached its result from the language of the easement deed itself, without the necessity of any inference that AAHP might not enforce the restrictions. (2d PSJ order, RE No. 84, A. 652.) The court determined that this unambiguous language contravened Petitioner's contention that the conditional rights of Section 3.1 included only those rights that would not affect the conservation features of the air space. (2d PSJ order, RE No. 84, A. 647.)

Finally, the court held that the possibility that AAHP would not respond to a plan to develop the air space in a manner contrary to the Secretary's standards was not “so remote as to be negligible,” Treas. Reg. § 1.170A-14(g)(3), as evidenced by the fact that the parties crafted a provision — one different from the model agreement published by the LTA — to deal with precisely that possibility. (2d PSJ order, RE No. 84, A. 647 n.9, 653.) As a result, the court concluded that the terms of Hoffman's contribution did not protect the conservation purpose in perpetuity, as required by I.R.C. § 170(h)(5)(A) and Treas. Reg. § 1.170A-14(g).

d. The motion for entry of decision

The parties subsequently filed a stipulation of settled issues in which the Commissioner abandoned his determination that accuracy-related penalties were applicable to underpayments resulting from disallowance of the charitable contribution deduction. (Stipulation of settled issues, RE No. 80, A. 620.) The Commissioner then moved for entry of a final decision, contending that the stipulation and the court's two orders awarding partial summary judgment to the Commissioner fully disposed of all issues in the case. (Motion for entry of decision, RE No. 90, A. 656, 661.) Petitioner opposed the motion, arguing that, notwithstanding the 45-day default provision, the conservation purpose of Hoffman's contribution was otherwise protected by another section of the easement deed — Section 2.2(d) — which Petitioner interpreted as prohibiting the construction of anything whatsoever within the air space. (Response to motion for entry of decision, RE No. 93, A. 670.) In response, the court ordered additional briefing (order of 7/24/18, RE No. 94) on the impact of Treas. Reg. § 1.170A-14(e)(2), which generally disallows any deduction for a contribution that permits the destruction of other significant conservation interests.

The Tax Court granted the motion for entry of decision. (Order granting motion for entry of decision, RE No. 112, A. 771, 784.) Treating Petitioner's arguments as a request for the court to reconsider its second partial summary judgment order, the court rejected Petitioner's proposed reading of Section 2.2(d) of the easement deed. (Order granting motion for entry of decision, RE No. 112, A. 775, 777-81.) The court noted that Petitioner's reading would create conflict within the agreement and render entire sections meaningless or unnecessary. (Order granting motion for entry of decision, RE No. 112, A. 777.) Applying the principle of esjudem generis, the court interpreted Section 2.2(d) to prohibit construction of buildings and structures similar to the specific examples provided (satellite dishes, antennae, or other data transmission devices). (Order granting motion for entry of decision, RE No. 112, A. 780.) The court held, moreover, that even if Petitioner's reading of Section 2.2(d) were correct, the contribution would run afoul of Treas. Reg. § 1.170A-14(e)(2), because it would still permit uses that may be inconsistent with or destructive of a significant conservation interest, i.e., the preservation of the Tremaine building and its exterior. (Order granting motion for entry of decision, RE No. 112, A. 783.)

Accordingly, the court entered a final decision determining that Hoffman was not entitled to the claimed charitable contribution deduction, but that accuracy-related penalties did not apply to any underpayment resulting from disallowance of the deduction. (Decision, RE No. 113, A. 785-86.)

SUMMARY OF ARGUMENT

Tax deductions are a matter of legislative grace. The provisions of the Internal Revenue Code authorizing such deductions are strictly construed, and deductions are allowed only where the statute clearly authorizes them. The Code generally prohibits deductions for a charitable contribution of a partial interest in property, but makes an exception to this prohibition for contributions that are “exclusively for conservation purposes.” I.R.C. § 170(h)(1). In order for a contribution of a partial interest in property to be “exclusively for conservation purposes,” the conservation purpose of the contribution must be “protected in perpetuity.” I.R.C. § 170(h)(5). Any interest in the property retained by the donor must, at all times, be subject to legally enforceable restrictions that will prevent uses of the property that are inconsistent with the conservation purpose of the contribution. Treas. Reg. § 1.170A-14(g)(1).

Under the plain language of the easement deed in this case, AAHP does not have the perpetual right to prevent uses of the subject property that are inconsistent with the conservation purposes of Hoffman's contribution. Rather, if Hoffman submits a proposal to use the property in a manner that is inconsistent with the conservation purpose of the contribution, AAHP has only 45 days to prevent such use. If AAHP fails to act within that period, then it is powerless to prevent the inconsistent use. Thus, the Tax Court correctly held, as a matter of law, that Hoffman's contribution did not satisfy the perpetuity requirements of I.R.C. § 170(h)(5) and Treas. Reg. § 1.170A-14(g)(1).

Petitioner's arguments to the contrary are without merit. The Tax Court did not, as Petitioner contends, award summary judgment sua sponte or otherwise deprive Petitioner of the opportunity to present its case, and Petitioner suffered no prejudice by the timing of the court's rulings. Nor did the Tax Court err in not considering extrinsic evidence (if any) as to the parties' intent. Under Ohio law, the construction of an easement is a matter of law. The parties' intent is presumed to reside in the language they choose to use in their agreement, and if that language is unambiguous, then parol evidence cannot be considered. And the possibility that the 45-day default provision might be triggered was not “so remote as to be negligible,” as evidenced by the fact that the industry model agreements contemplate such an occurence, and the fact that the parties to the easement in this case negotiated a default provision that deviated from the model agreements to address this specific contingency.

Finally, for much the same reason that the agreement runs afoul of the perpetuity requirement of I.R.C. § 170(h)(5)(A), it fails to meet the additional requirement, applicable to historic buildings, that the agreement prohibit any change in the exterior of the Tremaine building that is inconsistent with its historical character. See I.R.C. § 170(h)(4)(B)(i). Further, the agreement does not meet the requirement, in I.R.C. § 170(h)(4)(B)(ii), that the parties certify as to the donee's purpose, resources, and commitment under penalty of perjury. The parties' subsequent agreement, signed in 2009, does not change the fact that the requirement of a sworn statement had not been met in 2007, the year in issue.

The Tax Court's decision is correct and should be affirmed.

ARGUMENT

I. The Tax Court correctly held that the air space restrictions were not protected in perpetuity under I.R.C. § 170(h)(5)(A)

Standard of review

Tax Court decisions are reviewed “in the same manner and to the same extent as decisions of the district courts.” I.R.C. § 7482(a)(1); Greer v. Commissioner, 557 F.3d 688, 690 (6th Cir. 2009). This Court reviews de novo the Tax Court's grant of summary judgment. Golden v. Commissioner, 548 F.3d 487, 492 (6th Cir. 2008). Summary judgment is proper if the pleadings, discovery, affidavits, and other materials show that there is “no genuine dispute as to any material fact and that a decision may be rendered as a matter of law.” Tax Ct. R. 121.

Questions of statutory interpretation are legal questions subject to de novo review. Max Trucking, LLC v. Liberty Mut. Ins. Corp., 802 F.3d 793, 799 (6th Cir. 2015). In Ohio, the grant of an easement is a contract for purposes of its construction. Andrews v. Columbia Gas Transmission Corp., 544 F.3d 618, 623 (6th Cir. 2008). Questions of contract interpretation, including the question whether a contract provision is ambiguous, are also legal questions subject to de novo review. Royal Insurance Co. of America v. Orient Overseas Container Line Ltd., 525 F.3d 409, 421 (6th Cir. 2008); Saunders v. Mortensen, 801 N.E.2d 452, 454 (Ohio 2004). If a term in a contract is ambiguous, then deciphering the meaning of that term is a question of fact. GenCorp, Inc. v. American Int'l Underwriters, 178 F.3d 804, 818 (6th Cir. 1999) (applying Ohio law).

A. Conservation easement deductions and the requirement that the conservation purpose be protected in perpetuity

1. It is now a “familiar rule” that an income tax deduction “is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer.” INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (internal quotations and citations omitted); Chrysler Corp. v. Commissioner, 436 F.3d 644, 654 (6th Cir. 2006). Thus, deductions under the Internal Revenue Code “are strictly construed and allowed only 'as there is a clear provision therefor.'” INDOPCO, 503 U.S. at 84 (1992) (quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)).¹⁰

The Code generally allows a deduction for any charitable contribution made during the taxable year. I.R.C. § 170(a)(1). A charitable contribution is a gift of property to a charitable organization, made with charitable intent and without the receipt or expectation of receipt of adequate consideration. See Hernandez v. Commissioner, 490 U.S. 680, 690 (1989); United States v. Am. Bar Endowment, 477 U.S. 105, 116-118 (1986). See also Treas. Reg. §§ 1.170A-1(h)(1) and (2).

Deductions generally are not allowed, however, for gifts of partial interests in property. I.R.C. § 170(f)(3)(A). An exception is made for a “qualified conservation contribution.” I.R.C. § 170(f)(3)(B)(iii). The term “qualified conservation contribution” is defined as a contribution “of a qualified real property interest,” I.R.C. § 170(h)(1)(A), “to a qualified organization,” I.R.C. § 170(h)(1)(B), that is “exclusively for conservation purposes,” I.R.C. § 170(h)(1)(C). At issue in this case is whether the façade easement and air space restrictions granted to AAHP were “exclusively for conservation purposes.”

2. Present-day I.R.C. § 170(h) can be traced to the Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, § 6, 94 Stat. 3204, 3206. Prior to that enactment, Congress had, in prohibiting the deduction for contributions of partial interests in property, carved out an exception for the contribution of “an undivided portion of the taxpayer's entire interest in property.” I.R.C. § 170(f)(3)(B)(ii)(1969); Tax Reform Act of 1969, Pub. L. No. 91-172, § 201(a), 83 Stat. 487, 557. The IRS subsequently interpreted that language to include certain kinds of easements, including historic preservation and open space easements, but only if the easement were granted in perpetuity. See S. Rep. No. 96-1007 (1980), reprinted at 1980 U.S.C.C.A.N. 6736. In 1976 and 1977, Congress codified (on a temporary basis) a specific exception applicable to easements “exclusively for conservation purposes.” Tax Reform Act of 1976, Pub. L. No. 94-455, § 2124(e), 90 Stat. 1520, 1919; Tax Reduction and Simplification Act of 1977, Pub. L. No. 95-30, § 309, 91 Stat. 126, 154. The 1976 Act permitted a deduction for conservation easements of “not less than 30 years duration,” Pub. L. No. 94-455, § 2124(e)(1)(C)(iii), while the 1977 Act modified that provision to allow a deduction for the donation of a conservation easement only if it is granted “in perpetuity,” Pub. L. No. 95-30, § 309(a).

Congress reorganized, modified, and added to these provisions in the 1980 Act. Pub. L. No. 96-541, § 6. The Act also made the conservation easement provisions permanent. Ibid.; see S. Rep. 96-1007, at 9. The “conservation purposes” contemplated by the 1980 Act included the “preservation of open space” for the “scenic enjoyment of the public” or “pursuant to a clearly delineated Federal, State, or local conservation policy,” so long as the preservation “will yield a significant public benefit.” Pub. L. No. 96-541, § 6(b) (codifying I.R.C. § 170(h)(4)(A)(iii)). It also included the “preservation of an historically important land area or a certified historic structure.” Pub. L. No. 96-541, § 6(b); see I.R.C. § 170(h)(4)(A)(iv)).

Congress intended, however, that its expansion of the conservation easement deduction avoid any “significant potential for abuse,” and wished to “restrict the qualifying contributions where there is no assurance that the public benefit . . . furthered by the contribution would be substantial enough to justify the allowance of a deduction.” S. Rep. 96-1007, at 9-10. In addition, it “decided that the treatment of open space easements should be clarified.” Id. at 10.

To this end, the 1980 Act retained the requirement that contributions be made “exclusively for conservation purposes,” but also “explicitly provide[d] that this requirement is not satisfied unless the conservation purpose is protected in perpetuity.” S. Rep. 96-1007, at 13. In Congress's view, “the contribution must involve legally enforceable restrictions on the interest in the property retained by the donor that would prevent uses of the retained interest inconsistent with the conservation purposes,” and it sought “to limit the deduction only to those cases where the conservation purposes will in practice be carried out.” Id. at 13-14. Congress believed that “this requirement is not met if the contribution would accomplish one of the enumerated conservation purposes, but would allow uses of the property that would be destructive of other significant conservation interests.” Id. at 13.

The result was that Congress, in the 1980 Act, added what is now § 170(h)(5)(A) to the Code. Under I.R.C. § 170(h)(5)(A), a contribution “shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.” Notably, this requirement is in addition to the requirement that the easement itself be granted in perpetuity. See I.R.C. § 170(h)(2)(C). In other words, § 170(h) “requires perpetuity twice: The easement must be granted in perpetuity (170(h)(2)) and the conservation purpose must be protected in perpetuity (170(h)(5)).” Ann Taylor Schwing, Perpetuity is Forever, Almost Always: Why It Is Wrong To Promote Amendment and Termination of Perpetual Conservation Easements, 37 Harv. Envtl. L. Rev. 217, 221 (2013). It is the latter of these two provisions that is in issue here.

B. The conservation purpose of Hoffman's contribution is not protected in perpetuity

In the easement deed, Hoffman contributes to AAHP both a façade easement in the Tremaine building and an air space restriction with respect to two lots. But in paragraph 3 of the easement deed, Hoffman reserves to itself a set of “conditional rights” with respect to the contribution. (Easement deed, RE No. 10, Ex. 5.1, A. 107-08.) Those “conditional rights” are, in Section 3.1, phrased negatively: Hoffman agrees that it “shall not undertake” any of the actions therein “[w]ithout the prior express written approval” of AAHP, “except those permitted or required hereunder.” (Easement deed, RE No. 10, Ex. 5.1, A. 107.)

The actions which Hoffman agrees not to undertake “without the prior express written approval” of AAHP include: constructing a lateral addition to the Tremaine building or developing the property in a manner contrary to the Secretary's standards (§ 3.1(a)); altering or changing the appearance of the conservation features of the property contrary to the Secretary's standards (§ 3.1(b)); making changes in the material or workmanship of the conservation features of the property contrary to the Secretary's standards (§ 3.1(c)); erecting external signs or advertisements on the building's façade (§ 3.1(d)) or within the air space (§ 3.1(g)); changing the use of the property to a use prohibited by the Secretary's standards (§ 3.1(e)); and altering or changing the appearance of the air space in a manner contrary to the Secretary's standards (§ 3.1(f)). (Easement deed, RE No. 10, Ex. 5.1, A. 107-08.)

In other words, in Section 3.1, Hoffman reserves to itself a set of rights that are potentially inconsistent with the Secretary of the Interior's standards for rehabilitating historic buildings, see 36 C.F.R. § 67.7, and the conservation purposes that a conservation easement is generally supposed to protect. Contributions that reserve to the donor rights that may potentially impair conservation purposes do not necessarily run afoul of the “perpetuity” requirement of I.R.C. § 170(h)(5)(A), so long as the rights are “subject to enforceable restrictions . . . that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation.” Treas. Reg. 1.170A-14(g)(1); see Glass, 471 F.3d at 713.

Indeed, under the terms of the easement deed, AAHP is given the authority to police Hoffman's proposal to ensure that the conservation purposes are protected. That is, Hoffman can't engage in any potentially inconsistent use unless AAHP gives its prior approval. (Easement deed, RE No. 10, Ex. 5.1, A. 107.) That approval, however, “shall be exercised in accordance with Paragraph 3.2 and 3.3” of the agreement. (Ibid.) Under those provisions, AAHP's right to prevent an inconsistent use of the property is not perpetual.

In Section 3.2, Hoffman is obligated, if it wishes to engage in any of the potentially inconsistent uses of the property listed in Section 3.1, to submit to AAHP a description of, and timetable for, the proposed activity. (Easement deed, RE No. 10, Ex. 5.1, A. 108.) AAHP is then obligated to certify, within 45 days of receipt of Hoffman's proposal, that it either approves or disapproves of the proposed plan. (Ibid.) In approving or disapproving of the plan, Section 3.3 instructs AAHP to apply the Secretary's standards. (Easement deed, RE No. 10, Ex. 5.1, A. 108.) If AAHP does not respond within 45 days, Section 3.2 further provides that:

(Easement deed, RE No. 10, Ex. 5.1, A. 108) (emphasis added).

The upshot of these provisions is that Hoffman is explicitly permitted under the terms of the easement deed to undertake a proposed activity that is inconsistent with the conservation purpose of the agreement if it submits a proposal to AAHP and AAHP does not respond within 45 days. In such a case, it would not be a violation of the terms of the easement deed to engage in the proposed activity, even if the activity were, e.g., to completely alter the architectural and historical features of the façade of the Tremaine building (§ 3.1(b)) or to erect a garish billboard within the air space (§ 3.1(g)). (Easement deed, RE No. 10, Ex. 5.1, A. 108.) Because AAHP only has the authority to seek legal and equitable remedies for violations of the terms of the easement deed (§ 7.4), it would be powerless to prevent the proposed activity after the expiration of those 45 days, even if Hoffman had yet to undertake them. (Easement deed, RE No. 10, Ex. 5.1, A. 113.)

It is for this reason that the Tax Court held that the conservation purposes of Hoffman's contribution are not “protected in perpetuity.” I.R.C. § 170(h)(5)(A). The restrictions which prevent an inconsistent use of the property are not “enforceable in perpetuity,” Treas. Reg. § 1.170A-14(g)(1), but are enforceable for a period of 45 days after the submission of a proposal to engage in such use. As the Tax Court put it, “[p]roviding the donee with a mere 45-day opportunity to prevent an inconsistent use is a far cry from the perpetual right to prevent an inconsistent use as required by the Code and regulations.” (2d PSJ order, RE No. 84, A. 647.) See Treas. Reg. §§ 1.170A-14(a), (e), (g)(1), and (g)(5)(ii). The Tax Court's ruling in this regard was correct.

C. The Tax Court did not award summary judgment sua sponte and did not deprive Petitioner of the opportunity to present evidence or legal argument

Petitioner's first argument on appeal (Br. 17) is that the Tax Court abused its discretion in “ruling sua sponte that the 45-day provision would prevent AAHP from adequately protecting the conservation purpose of the façade easement.” This argument is wrong in both its premises and its conclusion.

First, the Tax Court did not award summary judgment sua sponte in this case. A ruling sua sponte is one a court makes “without prompting or suggestion,” i.e., “on its own motion.” Black's Law Dictionary (11th ed. 2019). Here, the Tax Court awarded partial summary judgment to the Commissioner twice (1st PSJ order, RE No. 57, A. 279; 2d PSJ order, RE No. 84, A. 635), each time prompted by a motion for partial summary judgment filed by the Commissioner (1st MPSJ, RE No. 8, A. 39; 2d MPSJ, RE No. 61). Neither ruling, therefore, was made sua sponte.

Second, there is no per se prohibition on entering summary judgment sua sponte, and courts are “widely acknowledged to possess the power to enter summary judgments sua sponte, so long as the losing party was on notice that she had to come forward with all of her evidence.” Celotex Corp. v. Catrett, 477 U.S. 317, 326 (1986). Here, the Commissioner's first motion for summary judgment sought a ruling that, among other things, the easement deed did not comply with I.R.C. § 170(h)(4)(B)(i), which required that the façade easement preserve the exterior of the Tremaine building and prohibit any change that is inconsistent with the historical character of exterior. (1st MPSJ, RE No. 8, A. 39-40.) At that point, Petitioner was “on notice that [it] had to come forward with all of its evidence,” Celotex, 477 U.S. at 326, that the deed did comply with the requirements of I.R.C. § 170(h)(4)(B)(i).

Indeed, the Commissioner noted, specifically, that “paragraph 3.2” of the easement deed “contains an automatic default provision, providing that if the Grantee fails to act on the Grantors' request within 45 days of receipt, the Grantor's request will be deemed approved,” and argued that that provision was “contrary to I.R.C. § 170(h)(4)(B)(i).”¹¹ (Reply in support of 1st MPSJ, RE No. 30, A. 807.) The Tax Court's subsequent ruling that the 45-day default provision ran was contrary to the requirements of I.R.C. § 170(h)(4)(B)(i) was therefore not made without adequate notice to Petitioner.

Third, it is not enough for Petitioner to show that summary judgment was entered sua sponte and without adequate notice; Petitioner would also need to show that it was prejudiced by the Tax Court's purported failures in this regard. Smith v. Perkins Board of Education, 708 F.3d 821, 831 (6th Cir. 2013). In this case, Petitioner cannot show prejudice because (1) the Tax Court gave Petitioner no less than three more opportunities to argue for and present evidence in support of its interpretation of the 45-day default provision and (2) the end result would be the same even if the first summary judgment order were set aside.

Petitioner's next opportunity to defend its interpretation of the 45-day default provision was its filing of a motion for reconsideration of the first summary judgment order, including supporting affidavits and other materials that one might submit in opposition to summary judgment. (Motion to reconsider, RE No. 58, A. 292; Memo in support of motion to reconsider, Exs. B, C, E, G, H, A. 348-512.) See Tax Ct. R. 121(b). That motion was not, contrary to Petitioner's claim (Br. 23 n.6), “summarily rejected.” Rather, the court considered the substance of Petitioner's arguments and evidence and found them unpersuasive.¹² (Order denying motion to reconsider, RE No. 83, A. 628-30 & n.6; 2d PSJ order, RE No. 84, A. 644-53.) See Turcar, LLC v. I.R.S., 451 F. App'x 509, 515 (6th Cir. 2011) (finding no prejudice where “Plaintiff had the opportunity in . . . its motion for reconsideration to point to evidence that might alter the district court's judgment” but failed to do so).

In addition, the Commissioner filed a second motion for partial summary judgment, arguing that the 45-day default provision meant that the conservation purposes of Hoffman's contribution were not “protected in perpetuity,” as I.R.C. § 170(h)(5)(A) requires. (Memo in support of 2d MPSJ, RE No. 62, A. 831.) Petitioner had additional opportunities to advocate for its interpretation of the 45-day provision in its response to the Commissioner's second motion and in its sur-reply opposing the second motion. (Response to 2d MPSJ, RE No. 69, A. 571; Sur-reply to 2d MPSJ, RE No. 77.)

Petitioner was even given yet another bite at the proverbial apple, after the Tax Court disposed of the second motion for partial summary judgment, when Petitioner opposed the Commissioner's motion for entry of decision. (Response to motion for entry of decision, RE No. 93; Brief in opposition to motion for entry of decision, RE No. 97; Reply to brief in support of motion for entry of decision, RE No. 105.) The Tax Court, treating Petitioner's opposition as a motion to again reconsider its interpretation of the easement deed, considered the substance of Petitioner's arguments and found them unpersuasive. (Order granting motion for entry of decision, RE No. 11, A. 775-83.)

Finally, the Tax Court's ruling in its second summary judgment order (that the conservation purposes of Hoffman's contribution were not protected in perpetuity, see 2d PSJ order, RE No. 84, A. 644) was more comprehensive than its ruling in its first summary judgment order (that the “façade easement” portion of Hoffman's contribution did not satisfy the Code's preservation and prohibition requirements, see 1st PSJ order, RE No. 57, A. 284-87) and provided an alternate basis for finding that the contribution at issue in the first summary judgment order was not “exclusively for conservation purposes.” See I.R.C. §§ 170(h)(4)(B) & (h)(5)(A). In other words, even if one were to discard the first summary judgment order entirely, the result would not change: As a necessary consequence of the second summary judgment order, Hoffman's contribution to AAHP was not “exclusively for conservation purposes.”

In sum, Petitioner has not shown that the Tax Court entered summary judgment sua sponte, that it was deprived of notice and the opportunity to present evidence, or that it suffered any prejudice. Petitioner has therefore not demonstrated any abuse of discretion by the Tax Court in this regard.

D. The Tax Court did not err in interpreting the easement deed as a matter of law

Petitioner's second argument (Br. 19) is that the Tax Court should not have granted summary judgment because “it introduced an ambiguity by fixating on the 45-day provision to 'give effect to the intent of the parties,' and ignoring the terms of the rest of the contract.” Petitioner contends (Br. 18-19) that “once the ambiguity arose and intent became and issue,” summary judgment was inappropriate, and that the Tax Court should have considered evidence outside the contract. But the Tax Court correctly held (2d PSJ order, RE No. 84, A. 647) that, under the plain language of the agreement, its conservation purposes were not “protected in perpetuity,” I.R.C. § 170(h)(5)(A), because AAHP would have only 45 days after submission of a proposal that was inconsistent with those conservation purposes to enforce the restrictions of the agreement with respect to the proposed activity.

Absent a choice-of-law provision in a contract, the law of the state with the most significant relationship to the contract applies. Andrews, 544 F.3d at 623. In this case, the contracting parties and the subject property are located in Ohio; hence, Ohio law applies. Under Ohio law, an easement grant is a contract for purposes of its construction, ibid., and “the interpretation of written contract terms, including the determination of whether those terms are ambiguous, is a matter of law.” Savedoff v. Access Group, Inc., 524 F.3d 754, 763 (6th Cir. 2008). In addition, the “ 'intent of the parties is presumed to reside in the language they choose to use in their agreement.' ” Ibid. (quoting Graham v. Drydock Coal Co., 667 N.E.2d 949, 952 (Ohio 1996)). “If no ambiguity appears on the face of the instrument, parol evidence cannot be considered” by the court. Shifrin v. Forest City Enterprises, Inc., 597 N.E.2d 499, 501 (Ohio 1996).

Here, the Tax Court did not “introduce[ ] an ambiguity” (Br. 19), but, rather, found the relevant provisions of the easement deed to be unambiguous. (2d PSJ order, RE No. 84, A. 648, 652 n.13.) Petitioner appears to suggest (see Br. 19 n.4) that, merely because the parties differed in their interpretation of the 45-day default provision, the provision was ambiguous. But the fact that two parties “may differ on the interpretation of terms in [a] contract does not, by itself, render summary judgment inappropriate.” Cleveland-Cliffs Iron Co. v. Chicago & N. W. Transp. Co., 581 F. Supp. 1144, 1149 (W.D. Mich. 1984) (citing Tennessee Consolidated Coal Co. v. United Mine Workers of America, 416 F.2d 1192, 1199 (6th Cir. 1969)).

Here, the plain language of the agreement reserves to Hoffman a set of conditional rights that include, inter alia, the right to “develop the Property in a manner contrary to the Secretary's Standards” (§ 3.1(a)), and provides that AAHP's failure to act upon a proposal to exercise those rights within 45 days “shall be deemed to constitute approval” and will “permit [Hoffman] to undertake the proposed activity” (§ 3.2). Consequently, the Tax Court had no occasion to look outside the four corners of the easement deed to discern the parties' intent. After all, the easement “consisted not of [Hoffman's] intentions but of what [it] actually conveyed by the easement as written and recorded.” Herman v. Commissioner, T.C. Memo 2009-205, 2009 WL 2923945, at *10 (2009).

Nor did the Tax Court interpret the 45-day default provision in isolation. Instead, it found that Petitioner's proposed interpretation was “contrary to a reading of the agreement as a whole.” (2d PSJ order, RE No. 84, A. 650.) Specifically, the Tax Court noted (ibid.) that Section 4.1 of the easement deed reserved to Hoffman the right to use the property in any manner that did not “substantially impair the Conservation Features or the Open Space Features” of the property and that was “not inconsistent with the purposes” of the agreement (easement deed, RE No. 10, Ex. 5.1, A. 109). The court further noted (2d PSJ order, RE No. 84, A. 650) that Section 4.2 permitted Hoffman to exercise this right without any “prior notification to or approval by” AAHP (easement deed, RE No. 10, Ex. 5.1, A. 110).

As a result, the Tax Court reasoned (2d PSJ order, RE No. 84, A. 650), the “conditional rights” that did require AAHP's approval (§ 3.1) must consist of uses that either substantially impaired the conservation or open space features of the property or were otherwise inconsistent with the conservation purposes of the agreement. (Easement deed, RE No. 10, Ex. 5.1, A. 107-08.) For this reason, Petitioner's argument (Br. 31-32) that Sections 2.1 and 2.2 of the easement deed “prevent Hoffman in the first instance from proposing changes inconsistent with the conservation purposes” of the agreement must fail. Otherwise, the “conditional rights” and approval provisions of the agreement would be entirely superfluous. Wohl v. Swinney, 888 N.E.2d 1062, 1066 (Ohio 2008) (“When interpreting a contract, we will presume that words are used for a specific purpose and will avoid interpretations that render portions meaningless or unnecessary.”)

Instead, the Tax Court correctly applied the rule that “where a general provision in a contract conflicts with a specific provision, the specific provision controls,” Garofoli v. Whiskey Island Partners, Ltd., 25 N.E.3d 400, 406 (Ohio Ct. App. 2014) (citations and internal quotation marks omitted), and held that Section 2.1's general covenant to maintain the conservation features of the property did not override the specific authorization, in Section 3.1, to propose a variety of uses that were “contrary to the Secretary's standards.”¹³ (Easement deed, RE No. 10, Ex. 5.1, A. 107-08.) Because AAHP had only 45 days to prevent such inconsistent uses (§ 3.2, easement deed, RE No. 10, Ex. 5.1, A. 108), the Tax Court correctly held that the conservation purposes of the agreement were not “protected in perpetuity.” I.R.C. § 170(h)(5)(A).

Simmons v. Commissioner, T.C. Memo. 2009-208, 2009 WL 2950610 (2009), aff'd, 646 F.3d 6 (D.C. Cir. 2011), and Glass v. Commissioner, 124 T.C. 258, 282-83 (2005), aff'd, 471 F.3d 698 (6th Cir. 2006), do not compel a different result. Contrary to Petitioner's argument (Br. 25), the Tax Court did not assume that “Hoffman would propose changes inconsistent” with the Secretary's standards or that “AAHP would fail to exercise its discretion to reject any development proposals” that were inconsistent with the conservation purpose of the agreement. As the court explained (2d PSJ order, RE No. 84, A. 652), “the express terms of the agreement fail to provide AAHP the legal rights and powers sufficient to enforce the agreement's conservation purpose in perpetuity” and there was, therefore, “no occasion to infer or otherwise presume that AAHP will fail to enforce its rights.” Concluding that a contract term is not enforceable in perpetuity does not require a finding that the contract term will be violated. The Tax Court thus correctly held that Simmons and Glass are distinguishable. (2d PSJ order, RE No. 84, A. 651-52.)

Nor did the Tax Court break new ground, as Petitioner suggests (Br. 35-37), when it stated (1st PSJ order, RE No. 57, A. 286) that a donor of a conservation easement may reserve the right to alter a historic building's exterior, but will satisfy the requirements of I.R.C. § 170(h) only if the donee has “unlimited discretionary authority” to approve or deny the proposed alterations. Rather, that is simply another way of stating the test set forth in the applicable regulation, i.e., that “any interest in the property retained by the donor . . . must be subject to legally enforceable restrictions . . . that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation,” and that such restrictions must be “enforceable in perpetuity.” Treas. Reg. § 1.170A-14(g)(1). In this case, the restrictions that prevent development that is “contrary to the Secretary's Standards” (easement deed, § 3.1, RE No. 10, Ex. 5.1, A. 107) are not “enforceable in perpetuity,” but only for a 45-day period following the submission of a nonconforming development proposal. Thus, the Tax Court correctly held that the plain language of the easement deed did not protect the conservation purpose of the agreement in perpetuity.

E. The Tax Court did not err in holding that the possibility that the 45-day default provision might be triggered was not “so remote as to be negligible”

Finally, the Tax Court did not err in holding (2d PSJ order, RE No. 84, A. 652) that the “operation of the 45-day default provision cannot be considered so remote as to be negligible.” Petitioner's argument (Br. 27-30) is premised on Treas. Reg. 1.170A-14(g)(3), which states that:

A deduction shall not be disallowed . . . merely because the interest which passes to . . . the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.

(Ibid.) The Tax Court concluded that parties Hoffman and AAHP “did not consider the operation of the 45-day default provision an improbable event,” as evidenced by the fact that they “worked to address that specific circumstance, and assigned it a specific outcome.” (2d PSJ order, RE No. 84, A. 653.)

As Petitioners concede (Br. 27), the “so remote as to be negligible” standard applies to a contingency that “persons generally disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction.” Palmolive Building Investors, LLC v. Commissioner, 149 T.C. 380, 403-04 (2017) (citing United States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955)). Stated differently, it is “a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance.” Briggs v. Commissioner, 72 T.C. 646, 656 (1979), aff'd, 665 F.2d 1051 (9th Cir. 1981). That is a standard that cannot be met here.

The parties to the easement deed in this case did not disregard the possibility that AAHP (or a successor in interest) might fail to respond to a nonconforming development proposal within 45 days. Indeed, not only did they include a specific provision to address that contingency, but they crafted language that departed from the model conservation agreements that, according to Petitioner, are employed by “hundreds, and possibly thousands, of land trusts” around the country. (Motion to reconsider, RE No. 58, A. 296.)

The 1996 model agreement, for instance, provides that a grantee must grant or withhold its approval in writing of a grantor's proposed action within a fixed period of time, but does not address what would happen if the grantee failed to do so. (Memo in support of motion to reconsider, Ex. G (1996 model agreement), RE. No. 59, A. 405.) The comments to that agreement explain that:

To assure grantors that approval decisions will be made in a timely fashion, some easements provide that a grantee's failure to respond in the stated time period shall be deemed an approval, so long as the activity in question is not contrary to any express restriction in the easement.

(1996 model agreement, RE. No. 59, Ex. G, A. 451 (emphasis added).) And the 2005 model agreement explicitly provides that a donee's failure to act within 45 days “shall not be deemed to constitute approval of Grantor's request.” (Response to motion to reconsider, RE No. 66, Ex. A, A. 865 (emphasis added).)

Thus, not only do the industry-standard agreements address the contingency of a grantee's failure to act within a fixed period of time upon a proposal to exercise a reserved right, but Hoffman and AAHP negotiated a provision that deviates from those model agreements insofar as it provides that AAHP's failure to respond within 45 days shall constitute approval of Hoffman's development proposal. Moreover, petitioner had the burden of “clearly showing the right to the claimed deduction,” INDOPCO, 503 U.S. at 84, but has not proffered any evidence that the possibility of default was “so highly improbable . . . as to be lacking in reason and substance,” Briggs, 72 T.C. at 656.¹⁴ Consequently, the Tax Court did not err in concluding on summary judgment that the possibility of a 45-day default was not “so remote” that it is “generally disregard[ed]” as “so highly improbable that it might be ignored with reasonable safety,” Palmolive Building, 149 T.C. at 403, by parties to a conservation easement deed.

II. The Tax Court correctly held that Hoffman's contribution of a façade easement was not exclusively for conservation purposes under I.R.C. § 170(h)(4)(B)

Standard of review

This Court reviews de novo the Tax Court's grant of summary judgment. Golden, 548 F.3d at 492.

Because the Tax Court first decided that the restrictions that pertained to the façade of the Tremaine building were not “exclusively for conservation purposes” (1st PSJ order, RE No. 57, A. 284-90), its later determination that the easement deed did not protect the conservation purpose of the restrictions in perpetuity pertained only to the air space restrictions (2d PSJ order, RE No. 84, A. 636-37, 646). But its holding with respect to the air space restrictions would apply with equal force to the façade easement. The 45-day default provision applies both to the façade easement and the air space restrictions, and the easement deed reserved to Hoffman the right to propose uses of the Tremaine building's façade that were inconsistent with the conservation purpose of the façade easement. (See, e.g., easement deed §§ 3.1(b)-(d).) Consequently, the Tax Court's decision may be affirmed on the basis of the agreement's failure to satisfy the perpetuity requirements of I.R.C. § 170(h)(5)(A), alone.

I.R.C. § 170(h)(4)(B), however, imposes additional requirements on a “restriction with respect to the exterior of a building.” That section provides that a contribution of a restriction with respect to the exterior of a building shall not be “exclusively for conservation purposes” (as I.R.C. § 170(h)(1)(C) requires) unless certain additional criteria are met, two of which are in issue here. First, the restriction must “preserve[ ] the entire exterior of the building” and “prohibit[ ] any change in the exterior of the building which is inconsistent with the historical character of such exterior” (the “preservation and prohibition” requirement). I.R.C. § 170(h)(4)(B)(i). Second, the donor and donee must “enter into a written agreement certifying, under penalty of perjury, that the donee . . . is a qualified organization,” with a conservation purpose, that “has the resources to manage and enforce the restriction and a commitment to do so” (the “sworn statement” requirement). I.R.C. § 170(h)(4)(B)(ii). The Tax Court held that neither the “preservation and prohibition” nor the “sworn statement” requirement was met in this case, and this holding provides an independent basis for disallowing the portion of Hoffman's contribution that pertains to the façade easement. The Tax Court's holding was correct.

A. The contribution agreement did not meet the “preservation and prohibition” requirement of I.R.C. § 170(h)(4)(B)(i)

As indicated above, I.R.C. § 170(h)(4)(B)(i) requires a restriction with respect to the exterior of a historic building, if claimed as the basis for a charitable contribution deduction, to “prohibit[ ] any change in the exterior of the building which is inconsistent with the historical character of such exterior.” In this case, Section 3.1(b) of the easement deed explicitly permits Hoffman to propose actions that may “alter, reconstruct, or change the appearance of” the “significant architectural, cultural and historical features” of the Tremaine building in a manner that is “contrary to the Secretary's standards.” (Easement deed, RE No. 10, Ex. 5.1, A. 105, 107.) And Section 3.1(d) permits Hoffman, with AAHP's approval, to erect “external signs or advertisements” on the façade of the building. (Easement deed, RE No. 10, Ex. 5.1, A. 105-06.) While AAHP, in reviewing Hoffman's proposals, is instructed in Section 3.3 to adhere to the Secretary's standards for rehabilitating historic buildings, 36 C.F.R. § 67.7, Section 3.2's automatic-default provision means that the prohibition against changes to the façade that are inconsistent with its historical character is not absolute. Thus, for the same reason that the agreement fails to satisfy the “perpetuity” requirements of I.R.C. § 170(h)(5)(A), the restrictions with respect to the façade do not satisfy the “preservation and prohibition” requirements of I.R.C. § 170(h)(4)(B)(i).

Petitioner argues (Br. 20) that the Tax Court was obligated to “look[ ] at facts beyond the terms of the deed in reaching a conclusion about the easement's deductibility” under I.R.C. § 170(h)(4)(B)(i). It is unclear why this would be the case. After all, it is the deed's restrictions that must prohibit inconsistent changes in the exterior of the building, and those restrictions are governed by the agreement between the parties. Though Petitioner's point out that the court in Partita Partners, LLC v. United States, 216 F. Supp. 3d 337, 342 (S.D.N.Y. 2016), cited deposition testimony to the effect that the donor actually intended to “build a couple of floors” onto the historic building in issue, it does not follow that such actual intent is required.

The court in Partita Partners disallowed the deduction, in part, because the language of the deed itself permitted “ 'the erection of . . . new or additional improvements on the Property or in the open space above,' ” provided that the donee give “ 'express written consent' ” based on whether the donee deemed the improvements to be “ 'in compliance with Applicable Preservation Laws.' ” 216 F. Supp. 3d at 341-42. The court noted that “the text of section 170(h)(4)(B)(i)(I) requires 'a restriction which preserves the entire exterior of the building,' and not a conditional restriction that delegates to the grantee future decisions on development of the exterior,” 216 F. Supp. 3d at 343, and for that reason awarded the Government partial summary judgment. Here, the restriction in issue not only delegates to AAHP future decisions with respect to the development of the exterior, but provides that the proposed development is automatically approved if AAHP does not respond to a development proposal within 45 days. Accordingly, Partita Partners does not support Petitioner's contention that summary judgment on the “preservation and prohibition” requirement should not have been granted in this case.

B. The easement deed did not meet the “sworn statement” requirement of I.R.C. § 170(h)(4)(B)(ii)

Finally, I.R.C. § 170(h)(4)(B)(ii) requires, as a condition of the charitable contribution deduction, that the donor and donee enter into a written agreement “certifying, under penalty of perjury, that the donee . . . is a qualified organization . . . and has the resources to manage and enforce the restriction and a commitment to do so” (the “sworn statement” requirement). It is undisputed that the easement deed, as recorded with the Cuyahoga County recorder's office, contains no such certification. (Br. 38.) I.R.C. § 170(h)(4)(B)(ii). And the “special rules agreement was not executed until well afer the close of the tax year in issue, as the Tax Court found. (1st PSJ order, RE No. 57, A. 290-91.) Petitioner nevertheless argues that the “special rules” agreement relates back to the easement deed. In this regard, petitioner contends (Br. 39) that, “under the 'reformation' doctrine, a document can be reformed 'to make a writing express the agreement that the parties intended it should.' ” This argument fails for two reasons.

First, § 170(h)(4)(B)(ii) does not require merely that the parties agree that the donee has the resources and commitment to manage and enforce the restriction, but that they certify, under penalty of perjury, that those conditions are present. This requirement must be strictly construed. INDOPCO, 503 U.S. at 84 (1992). The certification contemplated by I.R.C. § 170(h)(4)(B)(ii) is not so much a contract term that the parties negotiate for their own benefit, but an oath taken to ensure that the conservation purposes will, in fact, be carried out. Thus, it is not enough that the parties may have intended to include the certification in the agreement; rather, the certification must have actually been made in a written agreement during the tax year in issue. Here, the requirements of the statute were not met in 2007, the year in which the easement deed was executed and with respect to which the deduction was claimed.

Second, the plain language of the easement deed provides that any amendment to, or modification of, the agreement “shall not be effective” unless it is recorded with the Cuyahoga County Recorder's office. The “special rules” agreement that includes a sworn certification as to donee's resources and commitment was executed in October 2009 but never recorded. Hence, it is ineffective to amend or modify the easement deed. As a result, the Tax Court properly held that the “sworn statement” requirement of I.R.C. § 170(h)(4)(B)(ii) was not met, and that the contribution of the façade easement was therefore not “exclusively for conservation purposes” under I.R.C. §§ 170(h)(1)(C) and (h)(4)(B).

CONCLUSION

For the foregoing reasons, the decision of the Tax Court is correct and should be affirmed.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

Ivan C. Dale

JACOB CHRISTENSEN
(202) 307-0878
IVAN C. DAL
(202) 307-6615
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

OCTOBER 2019