Menu
Tax Notes logo

Partnership Argues Tax Court Erred in Charitable Deduction Case

SEP. 9, 2019

Hoffman Properties II LP v. Commissioner

DATED SEP. 9, 2019
DOCUMENT ATTRIBUTES

Hoffman Properties II LP v. Commissioner

Hoffman Properties II, LP by Five M Acq. I, LLC, Tax Matters Partner
Petitioners-Appellants
v.
Commissioner of Internal Revenue,
Respondent-Appellee

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

ON APPEAL FROM THE DECISION OF
THE UNITED STATES TAX COURT

BRIEF FOR PETITIONERS-APPELLANTS,
HOFFMAN PROPERTIES II, LP
BY FIVE M ACQ. I, LLC, TAX MATTERS PARTNER

George M. Clarke III
Vivek A. Patel
Brandon M. King
Baker & McKenzie LLP
815 Connecticut Ave NW
Washington, DC 20006
(202) 835-6184
Attorneys for Petitioners-Appellants

DISCLOSURE OF CORPORATE AFFILIATIONS
AND FINANCIAL INTEREST

Neither Hoffman Properties II, LP, the partnership at issue in this proceeding, nor Five M Acq. I, LLC, the Tax Matters Partner, is a subsidiary or affiliate of a publicly owned corporation. There is no other publicly owned corporation, not a party to the appeal, that has a financial interest in the outcome in this case.


TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT IN SUPPORT OF ORAL ARGUMENT

JURISDICTIONAL STATEMENT

STATEMENT OF ISSUES

STATEMENT OF THE CASE

The Conservation Easements

Nature of the Dispute and the Tax Court's Orders

SUMMARY OF THE ARGUMENT

ARGUMENT

I. Summary judgment is to be cautiously and sparingly applied and only granted when the moving party meets its burden of proving that no genuine issue of material fact remains for trial

II. The Tax Court departed from this Court's summary judgment standard by improperly and prematurely granting summary judgment on material factual issues that the parties genuinely disputed

III. The Tax Court entered summary judgment that was legally flawed

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

ADDENDUM

TABLE OF AUTHORITIES

Cases

7 Med. Sys., LLC v. Open MRI of Steubenville, 2012 Ohio 3009 (Ohio Ct. App. June 28, 2012

Abeita v. TransAmerica Mailings, 159 F.3d 246 (6th Cir. 1998)

Advanced Concrete Tools, Inc. v. Beach, 525 F. App'x 317 (6th Cir. 2013)

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)

Associated Press v. United States, 326 U.S. 1 (1945)

Aubin Indus., Inc. v. Smith, 321 F. App'x 422 (6th Cir. 2008)

Aurora Shores Homeowners Assoc. v. Hardy, 37 Ohio App. 3d 169, 525 N.E.2d 26 (1987)

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

Beaty v. United States, 937 F.2d 288 (6th Cir. 1991)

Bennett v. City of Eastpointe, 410 F.3d 810 (6th Cir. 2005)

Bohn Aluminum & Brass Corp. v. Storm King Corp., 303 F.2d 425 (6th Cir. 1962)

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

Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011)

Delphi Auto Sys., LLC v. United Plastics, Inc., 418 F. App'x 374 (6th Cir. 2011)

Espinoza v. Commissioner, 78 T.C. 412 (1982)

Excel Energy, Inc. v. Cannelton Sales, 246 F. App'x 953 (6th Cir. 2007)

Flitcroft v. Commissioner, 328 F.2d 449 (9th Cir. 1964)

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

Glass v. Commissioner, 124 T.C. 258 (2005), aff'd, 471 F.3d 698 (6th Cir. 2006)

Gorra v. Commissioner, T.C. Memo. 2013-254, 111 T.C.M. (CCH) 1362

Hamilton v. Starcom Mediavest Group, Inc., 522 F.3d 623 (6th Cir. 2008)

Hardesty v. Hamburg Twp., 461 F.3d 646 (6th Cir. 2006)

Harrington v. Vandalia-Butler Bd. Of Educ., 649 F.2d 434 (6th Cir. 1981)

Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012)

Kistner v. Califano, 579 F.2d 1004 (6th Cir. 1978)

Kroh v. Commissioner, 98 T.C. 383 (1992)

Max Arnold & Sons, LLC v. W.L. Hailey & Co., 452 F.3d 494 (6th Cir. 2006)

Middleton v. Reynold Metals Co., 963 F.2d 881 (6th Cir. 1992)

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)

Preece v. Commissioner, 95 T.C. 594 (1990)

Routman v. Automatic Data Processing, Inc., 873 F.2d 970 (6th Cir. 1989)

RP Golf, LLC v. Commissioner, T.C. Memo. 2016-80, 111 T.C.M. (CCH) 1362

S.J. Groves & Sons Co. v. Ohio Tpk. Comm'n, 315 F.2d 235 (6th Cir. 1963)

Saunders v. Mortensen, 101 Ohio St 3d 86, 801 N.E.2d 452 (Ohio 2004)

Shelby Cty. Health Care Corp. v. S. Council of Indus. Workers Health & Welfare Tr. Fund, 203 F.3d 926 (6th Cir. 2000)

Shiosaki v. Commissioner, 61 T.C. 861 (1974)

Simmons v. Commissioner, T.C. Memo. 2009-208, 98 T.C.M. (CCH) 57934, aff'd 646 F.3d 6 (D.C. Cir. 2011)

Stotler v. Commissioner, T.C. Memo. 1987-275, 53 T.C.M. (CCH) 973 (1987)

Street v. J.C. Bradford & Co., 886 F.2d 1472 (6th Cir. 1989)

Turcar, LLC v. IRS, 451 F. App'x 513 (6th Cir. 2011)

United Rentals (N. Am.), Inc. v. Keizer, 355 F.3d 399, 411 (6th Cir. 2004) )

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

Yashon v. Gregory, 737 F.2d 547 (6th Cir. 1984)

Statutes and Legislative History

I.R.C. § 6214

I.R.C. § 7442

I.R.C. § 7482

I.R.C. § 7483

I.R.C. § 7502

I.R.C. § 47(c)(3)(B)

I.R.C. § 170(f)(3)(B)(iii)

I.R.C. § 170(h)

I.R.C. § 170(h)(1)(A)

I.R.C. § 170(h)(1)(B)

I.R.C. § 170(h)(1)(C)

I.R.C. § 170(h)(2)(C)

I.R.C. § 170(h)(4)(A)

I.R.C. § 170(h)(4)(B)

I.R.C. § 170(h)(4)(B)(i)

I.R.C. § 170(h)(4)(B)(ii)

I.R.C. § 170(h)(4)(C)(ii)

I.R.C. § 170(h)(5)(A)

Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, § 6(b), 94 Stat. 3204, S. Rep. No. 96-1007, 1980-2 C.B. 599

Tax Reduction and Simplification Act of 1977, Pub. L. No. 95-30, § 309, 91 Stat. 126, H. Conf. Rept. 95-263, 1977-1 C.B. 523

Other Authorities

Restatement (Second) of Contracts, § 155 (Am. Law. Inst.1981)

36 C.F.R. § 67

Fed. R. Civ. P. 56(a)

Fed. R. Civ. P. 56(c)

Treas. Reg. § 1.170A-14(e)

Treas. Reg. § 1.170A-14(g)

Stacey R. Griffin, Validity and Construction of Restrictive Covenant Requiring Lot Owner To Obtain Approval of Plans for Construction or Renovation, 115 A.L.R. 5th 251, 2a (2004)


 STATEMENT IN SUPPORT OF ORAL ARGUMENT

Given the interaction of the complex Internal Revenue Code provisions governing conservation easements in I.R.C. § 170(h), the Treasury Regulations, and the case law thereunder, oral argument will assist the Court in its disposition of this appeal. As one significant example, this Court's review of the Tax Court's novel and sua sponte application of the preservation and prohibition requirement in I.R.C. § 170(h)(4)(B)(i) and the “in perpetuity” requirement in I.R.C. § 170(h)(5)(A) to a single contract provision would benefit from discussion.

BRIEF FOR PETITIONERS-APPELLANTS

JURISDICTIONAL STATEMENT

On March 3, 2015, the Commissioner of Internal Revenue mailed a Notice of Final Partnership Administrative Adjustment to Hoffman Properties II, LP with respect to its 2007 Form 1065, U.S. Return of Partnership Income. JA029-JA037. On May 29, 2015, the tax matters partner of Hoffman, Five M Acq. I, LLC, filed a timely petition in the U.S. Tax Court challenging the asserted tax deficiency in the FPAA and accuracy-related penalties arising from the same issue. JA011-JA022. The Tax Court had jurisdiction pursuant to sections 6214(a) and 7442 of the Internal Revenue Code.1

On May 6, 2019, the Tax Court entered a final order and decision disposing of all issues. JA771-JA786. Appellant filed a timely notice of appeal on July 22, 2019, under sections 7502 and 7483. JA787-JA788. This Court has jurisdiction to entertain the appeal pursuant to section 7482(a)(1). Because Hoffman's principal place of business was Cleveland, Ohio at the time it filed its Tax Court petition, JA011, venue in this Court is proper under section 7482(b)(1).

STATEMENT OF ISSUES

1. Whether the Tax Court improperly granted summary judgment to the government by failing to construe facts in favor of the nonmoving party and deciding material questions of fact that were genuinely in dispute between the parties.

2. Whether the Tax Court erroneously granted summary judgment to the government on the basis of inapplicable law or misconstrued legal standards, some of which the Tax Court raised (and then decided) sua sponte.

STATEMENT OF THE CASE

The Conservation Easements

During 2007, Hoffman owned the Tremaine Building, an historic building located in Cleveland, Ohio that was listed in the National Register of Historic Places. JA104. Hoffman's wholly owned subsidiary, Prospect Avenue Parking LLC, also owned two adjacent parking lots (“Adjacent Property,” and collectively with the Tremaine Building, the “Property”). Id.

On December 28, 2007, in a document entitled “Historic Preservation Agreement – The Historic Tremaine Building (Façade Easement and Air Rights Restriction)” (hereinafter, the “Easement Deed”), Hoffman donated an easement over the façade of the Tremaine Building and a restriction over the air space above the Property to the American Association of Historic Preservation (“AAHP”), a non-profit corporation organized under the laws of the state of Ohio and a recognized section 501(c)(3) public charity. JA104-JA127. In general, the Easement Deed recognizes the significant architectural, cultural, and historical features of the Tremaine Building and preserves its entire exterior — including its walls, elevations, rooflines, color, building materials, windows, and doors — from renovation or development for the benefit of the general public (the “Façade Easement”). JA105. In order to also protect the air space above the Property, the Easement Deed recognizes the potential for construction in that air space and the possibility that any development in that space would interfere with the general public's ability to enjoy the scenic panorama and historic urban landscape of the neighborhood. Id. The Easement Deed thus preserves that air space above the Property by relinquishing to AAHP Hoffman's rights and ability to develop it (the “Air Space Restriction”). JA105. On December 31, 2007, Hoffman recorded the Easement Deed in the Cuyahoga County, Ohio recorder's office. JA104-JA127.

The Easement Deed sets forth the rights and restrictions of Hoffman and AAHP with respect to the Property. JA106. Article 1 operates to grant from Hoffman to AAHP the Façade Easement and Air Space Restriction for the purpose of assuring the conservation and preservation of the scenic, aesthetic, historic, and cultural aspects of the Property for the general public. Id. Article 2 establishes Hoffman's obligation to maintain the façade and air space of the Property and entirely and perpetually prohibits Hoffman's ability to alter the Property in several material respects. JA106-JA107. For example, Article 2.2(d) prohibits Hoffman from placing or erecting any “other buildings or structures, including satellite receiving dishes, small rooftop dishes, antenna or other data transmission or receiving devices or canopies” on the Property. JA107.

Article 3 further restricts Hoffman's ability to develop the Property in other respects by requiring Hoffman to first obtain approval from AAHP for certain changes to the Property. Id. For example, Article 3.1(a) restricts Hoffman's ability to construct any lateral addition to the Tremaine Building, and Article 3.1(f) restricts Hoffman's ability to alter or change the appearance of the air space above the Property. JA107-JA108. If Hoffman wishes to make any of these or other Article 3 changes to the Property, it first must submit to AAHP a request for permission, along with plans, specifications, and designs necessary to identify the proposal with reasonable specificity. JA108. In determining whether to approve or deny Hoffman's development proposals, AAHP must apply standards set forth in The Secretary of the Interior's Standards for Rehabilitation and Guidelines for Rehabilitating Historic Buildings (“Secretary of the Interior's Standards”), (36 C.F.R. § 67.7). Id. Article 3.2 requires AAHP to approve or disapprove Hoffman's request within 45 days of Hoffman's submission (the “45-Day Provision”), and its failure to act within 45 days constitutes a deemed approval of the request and allows Hoffman to undertake the proposal. Id.

Article 4 reserves Hoffman's rights to engage in any other activity or use of the Property that is permitted by existing statutes, ordinances, zoning, or regulation, as long as the activity or use does not substantially impair the conservation and preservation features of the Façade Easement and Air Space Restriction and is not inconsistent with the purposes of the Easement Deed. JA109-JA110.

Articles 7.2 and 7.3 grant to AAHP rights to inspect the Property to determine compliance with the Easement Deed and to obtain from Hoffman a certification of compliance. JA112-JA113. Additionally, Article 7.4 provides AAHP with various remedies for any violation of the terms of the Easement Deed, including temporary, preliminary, or permanent injunctions for any violation by Hoffman and allows AAHP to require Hoffman to restore the Property to the condition existing prior to the time of any violation. JA113. Article 7.8 requires Hoffman to pay for any costs AAHP incurs in enforcing its rights under the Easement Deed. JA114.

Finally, to memorialize Hoffman and AAHP's mutual intent that the conservation purposes of the Façade Easement and Air Space Restriction be preserved in all circumstances, Article 10.1 provides that the Easement Deed must “be interpreted broadly to effect its purposes and the transfer of rights and the restrictions on use” contained therein. JA118.

By executing the Easement Deed, and thus granting to AAHP the Façade Easement and Air Space Restriction, Hoffman took advantage of Code section 170(h), which Congress enacted in 1980 to incentivize preservation of the character of historic buildings and scenic panoramas so they would not fall prey to commercial development. See Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, § 6(b), 94 Stat. 3204, 3206 (1980). Section 170(h) encourages the charitable contribution of conservation easements over, among other things, historic buildings, historic land, and scenic panoramas by providing a federal income tax deduction for the value of the easement. To obtain the deduction, the contribution must be a “qualified conservation contribution.” I.R.C. § 170(f)(3)(B)(iii). There are several requirements to be a qualified conservation contribution,2 but the requirement at issue in this case is that the contribution of the conservation easement must be “exclusively for conservation purposes.” I.R.C. § 170(h)(1)(C). Qualifying conservation purposes are enumerated in the statute, which also requires the conservation purpose to be protected in perpetuity. I.R.C. § 170(h)(4)(A); § 170(h)(5)(A).

After verifying that the Easement Deed properly complied with all of the requirements of section 170(h), in September 2008, Hoffman filed with the Internal Revenue Service (“IRS”) a Form 1065 for its 2007 tax year that reported a deduction under section 170(h) of $15,025,463 for Hoffman's charitable contributions of the Façade Easement and Air Space Restriction. JA091-JA099. Hoffman and AAHP later determined that, due to a clerical error, a portion of the Easement Deed was inadvertently omitted prior to signing. Hoffman and AAHP remedied that omission in October of 2009 by executing a document titled “Public Law 109-280 'Special Rules' Compliance Agreement Re: Historic Preservation Agreement, The Historic Tremaine Building” (the “P.L. Amendment”). JA378-JA380. In the P.L. Amendment, Hoffman and AAHP acknowledged their mutual desire to comply with Code section 170(h) when they executed the Easement Deed. JA378. The P.L. Amendment contained restrictions and other statements — including an agreement to protect the entire exterior (front, sides, rear, and height) of the Tremaine Building and to prohibit any change to the Tremaine Building that would be inconsistent with its historical character, as well as a certification under penalties of perjury that AAHP is a qualified organization with the resources and commitment to manage and enforce the Façade Easement — to comply with requirements in section 170(h)(4)(B)(i) and (ii). JA378-JA379. On September 21, 2010, the IRS began an audit of Hoffman's Form 1065 for its 2007 tax year.

Nature of the Dispute and the Tax Court's Orders

On March 3, 2015, the IRS issued Hoffman an FPAA disallowing the full amount of Hoffman's charitable contribution deduction on the basis that both the Façade Easement and the Air Space Restriction were not qualified under section 170(h)(4)(B) and (5)(A). JA029-JA037. Hoffman thereafter filed a timely petition with the Tax Court, contending that the IRS's determination in its FPAA was in error. JA011-JA022.

On August 5, 2016, the Commissioner filed its first motion for partial summary judgment. JA038-JA054. In that motion, the Commissioner contended that (i) the Air Space Restriction was not protected in perpetuity under section 170(h)(2)(C) and (5)(A), and (ii) the Façade Easement did not satisfy section 170(h)(4)(B)(i) and (ii) because the Easement Deed omitted those terms, and the P.L. Amendment was not effective to bring the Easement Deed into compliance with those terms. JA039-JA040. The parties lodged extensive briefs largely focused on whether, under Ohio property law, the Air Space Restriction was properly recorded in the Adjacent Property's chain of title and whether the P.L. Amendment properly related back to the Easement Deed under Ohio contract law. JA003-JA006.

The Tax Court, dissatisfied with the parties' briefing, requested the parties to address another issue: whether the disputed portions of the Façade Easement constitute interests in real property, “imbuing [AAHP] with superior property rights in perpetuity.” JA199-JA201. After receiving the parties' additional briefs, the Tax Court partially granted the Commissioner's first motion for partial summary judgment (the “Easement Order”, dated July 12, 2017) with respect to two issues. JA279-JA291. First, the Tax Court determined that the Easement Deed did not satisfy the preservation and prohibition requirements of section 170(h)(4)(B)(i) with respect to the Façade Easement because it determined that the 45-Day Provision rendered those protections non-perpetual. JA285-JA287. Second, the Tax Court determined that the Easement Deed did not satisfy the certification requirements of section 170(h)(4)(B)(ii) because it determined that the P.L. Amendment did not relate back to the date of the Easement Deed. JA287-JA291.

On August 11, 2017, Hoffman moved for reconsideration of the Easement Order, principally contending that neither party had briefed the 45-Day Provision and thus that Hoffman was prejudiced by not being able to show the court its significance in the context of the entire Easement Deed. JA292-JA298. Shortly thereafter, on August 24, 2017, the Commissioner, relying principally on the 45-Day Provision that the Tax Court first raised in the Easement Order, filed a second motion for partial summary judgment. JA513-JA525. In his motion, the Commissioner now, and for the first time, contended that the 45-Day Provision curtailed AAHP's discretion to approve or deny Hoffman's development proposals, and thus the Air Space Restriction did not satisfy the requirements of section 170(h)(5)(A). JA521-JA524.

On March 14, 2018, the Tax Court denied Hoffman's request for reconsideration. JA622-JA634. On the same day, the Tax Court granted the Commissioner's second motion for partial summary judgment (the “Restriction Order”), finding that the Easement Deed also did not satisfy section 170(h)(5)(A) with respect to the Air Space Restriction because it determined that the 45-Day Provision prevented AAHP from enforcing its conservation purpose in perpetuity. JA635-JA654.

On May 6, 2019, the Tax Court issued a final order and decision granting the Commissioner's motion for entry of decision. JA771-JA786. In this order, the Tax Court noted that Hoffman had raised an additional disputed question of fact — that Article 2.2(d) of the Easement Deed ensures the perpetual protection of the airspace by prohibiting all development of that space. JA777-JA783. Hoffman contended that this restriction constituted a separate qualified easement contribution, and that a trial was necessary to resolve this question. JA755. The Tax Court disagreed, treating this issue as a question of law and finding that Hoffman and AAHP did not intend Article 2.2(d) to prohibit all development within the airspace. JA782-JA783.

Over the course of its orders and final decision, the Tax Court held, based solely on a single term of the Easement Deed, that neither the Façade Easement nor the Air Space Restriction satisfied the requirements of section 170(h) because the 45-Day Provision might prevent AAHP from denying Hoffman the ability to change the Property in a manner inconsistent with the stated conservation purposes. The Tax Court also held that, with respect to the Façade Easement, the Easement Deed did not contain the conservation purpose language required under section 170(h)(4)(B)(i) and (ii).

SUMMARY OF THE ARGUMENT

Summary judgment is not a substitute for trial and should not be used to resolve disputes over factual issues. In granting the Commissioner's two summary judgment motions, and ultimately entering decision in his favor, the Tax Court disregarded the requirements set forth in Rule 56 of the Federal Rules of Civil Procedure as interpreted by the Supreme Court, this Court, and the Tax Court.

In his motions, the Commissioner asked the Tax Court to consider whether, as a matter of law, easements that Hoffman conveyed to AAHP qualified as deductible charitable contributions under section 170(h). To resolve these motions, the Tax Court had to address two underlying questions: (1) whether the Façade Easement perpetually preserved the entire exterior of the Tremaine Building and prohibited any change inconsistent with its historical character, and (2) whether the conservation purposes of the Air Space Restriction were protected in perpetuity. Both questions required the Tax Court to analyze the terms of the Easement Deed and to give effect to the parties' intent in entering into that deed: namely, to preserve the scenic and historic qualities of the Property. When read as a whole, the Easement Deed prevented Hoffman in the first instance from proposing changes inconsistent with the conservation purposes of both the Façade Easement and the Air Space Restriction and also provided sufficient rights for AAHP to protect those conservation purposes in perpetuity and take appropriate legal action to remedy any violations of the Easement Deed.

But the Tax Court did not interpret the Easement Deed as a whole. Instead, without briefing or fact-finding, it fixated on a single term in that deed which required AAHP to disapprove requests to change the Property within 45 days. Having no evidence that Hoffman ever proposed a covered change or that AAHP would fail to respond to one, the Tax Court still held that this 45-Day Provision curtailed AAHP's “unlimited discretionary authority” to approve alterations to the Property and to prevent uses inconsistent with the conservation purposes of the two easements. The Tax Court reached this conclusion despite the absence of any requirement in the law that the donee of a conservation easement have “unlimited discretionary authority.”

The Tax Court thus elevated a single provision of the Easement Deed over the whole. Rather than resolving an ambiguity in that deed, this analysis introduced one: namely, what were the parties' intentions with respect to this single provision? When contract interpretation involves such an ambiguity, ascertaining the contracting parties' true intent with respect to the provision and the contract as a whole is a question of fact. Hoffman should have been given the opportunity to introduce evidence to elucidate that intent and to brief this disputed material fact. It wasn't. Instead, Hoffman first learned of the importance of the 45-Day Provision to the Tax Court's analysis when it read the Easement Order. Neither Hoffman nor the Commissioner had raised (much less briefed) the 45-Day Provision as a relevant consideration to the question before the Tax Court, and the Tax Court did not request briefing on that issue (although it did on other issues). The Tax Court's sua sponte grant of summary judgment thus deprived Hoffman of unequivocal notice of the grounds of its decision and an opportunity to “come forward with all of [its] evidence.” See Celotex Corp. v. Catrett, 477 U.S. 317, 326 (1986).

The Tax Court then compounded this initial error. It determined that the Air Space Restriction also did not protect in perpetuity the conservation purposes of that easement solely because of the 45-Day Provision. The Tax Court thus entered judgment as a matter of law on questions that have consistently been treated as factual issues: whether conservation purposes will be carried out in perpetuity and whether the donee has the commitment and resources to protect conservation purposes. The Tax Court also determined that the exercise of the 45-Day Provision was not “so remote as to be negligible” under Treasury Regulation section 1.170A-14(g)(3), a question that required the court to determine whether persons would disregard the occurrence as “so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction,” and that is routinely considered factual by trial courts.

At every step of its analysis, the Tax Court addressed questions of material fact that were in dispute between the parties, and it answered those questions by drawing factual inferences against Hoffman, the nonmoving party. Those decisions relieved the Commissioner of his burden to show an absence of evidence that would make summary judgment appropriate. Accordingly, this case should be remanded for development of the facts necessary to properly decide the questions at issue.

ARGUMENT

The Tax Court's determination that Hoffman was not entitled to deduct, as a charitable contribution, the value of the Façade Easement and the Air Space Restriction granted to AAHP was based entirely on summary judgment papers. This Court reviews de novo a district court's grant of summary judgment. Hamilton v. Starcom Mediavest Group, Inc., 522 F.3d 623, 627 (6th Cir. 2008) (citing Hardesty v. Hamburg Twp., 461 F.3d 646, 650 (6th Cir. 2006)). And it reviews for an abuse of discretion a district court's decision to grant summary judgment sua sponte. Bennett v. City of Eastpointe, 410 F.3d 810, 816 (6th Cir. 2005) (citing Shelby Cty. Health Care Corp. v.S. Council of Indus. Workers Health & Welfare Tr. Fund, 203 F.3d 926, 931 (6th Cir. 2000)). If this Court finds that the Tax Court abused its discretion, it should “reverse and remand to provide the [lower] court the opportunity to review all of the evidence before making a substantive decision.” Bennett, 410 F.3d at 816.

I. Summary judgment is to be cautiously and sparingly applied and only granted when the moving party meets its burden of proving that no genuine issue of material fact remains for trial.

Summary judgment is appropriate only where the moving party shows that there is no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The moving party bears the burden to show that summary judgment is appropriate. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989). It must meet that burden by demonstrating through pleadings, depositions, answers to interrogatories, admissions, etc. that “there is an absence of evidence to support the nonmoving party's case.” Celotex Corp., 477 U.S. at 325; Bennett, 410 F.3d at 817. Meeting the burden requires a moving party to “point out specifically why” the nonmoving party has not raised a genuine issue of material fact. Max Arnold & Sons, LLC v. WL Hailey & Co., 452 F.3d 494, 505 (6th Cir. 2006). Only after the moving party meets its initial burden is the nonmoving party required to set forth specific facts, supported by record evidence, showing a genuine issue for trial exists. Abeita v. TransAmerica Mailings, 159 F.3d 246, 250 (6th Cir. 1998); Fed. R. Civ. P. 56(c).And, when considering the record evidence and determining whether a genuine issue exists, the trial court is prohibited from making credibility judgments and weighing the evidence. Bennett, 410 F.3d at 817. Instead, “the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

Taken together, this Court sets a high burden on the moving party to obtain summary judgment. The Tax Court has also recognized that summary judgment, which decides an issue without affording the opportunity for trial, is not a substitute for trial and is a “drastic remedy” that should be “used cautiously and sparingly” only after careful consideration of the entire case. Kroh v. Commissioner, 98 T.C. 383, 390 (1992) (citing Espinoza v. Commissioner, 78 T.C. 412, 416 (1982)); see also Bohn Aluminum and Brass Corp. v. Storm King Corp., 303 F.2d 425, 427 (6th Cir. 1962); Shiosaki v. Commissioner, 61 T.C. 861, 863 (1974) (citing Associated Press v. United States, 326 U.S. 1, 6 (1945)). The Tax Court's decision in this case was a departure from its own standard and, more importantly, from this Court's clear directive that the moving party bears the burden of proving “specifically why” there is no genuine issue of material fact and that factual inferences should be drawn in the non-moving party's favor.

II. The Tax Court departed from this Court's summary judgment standard by improperly and prematurely granting summary judgment on material factual issues that the parties genuinely disputed.

The Tax Court erred in this case because it left unaddressed numerous questions of fact between the parties and decided others that were genuinely in dispute, while repeatedly not drawing factual inferences in Hoffman's favor. These errors were particularly striking with respect to three factual issues it decided without allowing Hoffman the opportunity to rebut with evidence: (1) whether Hoffman and AAHP intended the 45-Day Provision to limit AAHP's authority to protect the conservation purpose of the Façade Easement; (2) whether Hoffman and AAHP intended the 45-Day Provision to limit AAHP's authority to protect the conservation purpose of the Air Space Restriction in perpetuity; and (3) whether the likelihood that AAHP would not stop any inappropriate developments was sufficiently minimal to trigger the “too remote” rule in Treasury Regulation section 1.170A-14(g)(3).3

A. 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.

One of the first questions that the Tax Court addressed was whether the Easement Deed satisfied the preservation and prohibition requirements of section 170(h)(4)(B)(i) with respect to the Façade Easement. In the Tax Court's words, section 170(h)(4)(B)(i) requires that “the easement contain[ ] restrictions perpetually preserving the entire building exterior and prohibiting any change thereto inconsistent with the building's historical character.” JA284. To address this inquiry, the Tax Court properly recognized that it must look to state contract law to ascertain interests in and rights over property for federal tax purposes, and, in doing so, the Court must analyze the terms of the Easement Deed. JA284-JA285. But the Tax Court erred by limiting that inquiry to only a single written term of the Easement Deed rather than considering the entirety of the document. Based on this narrow examination of the deed, without the benefit of any testimony or even briefing on the question of how or whether the 45-Day Provision was reflective of the parties intent, the Tax Court decided that, merely by including the 45-Day Provision, the parties “clearly meant to curtail AAHP's authority to approve alterations and modifications to the exterior of the building.” JA285.

In applying Ohio law to analyze the 45-Day Provision, the Tax Court acknowledged that its primary obligation was to “ascertain and give effect to the intent of the parties.” JA284, citing Saunders v. Mortensen, 801 N.E.2d 452, 454 (Ohio 2004). In doing so, the Tax Court should have read the contract as a whole and gathered the intent of each part from a consideration of the whole. Id. at 454. And if the contract or a relevant provision was ambiguous, ascertaining the contracting parties' intent constitutes a question of fact, 7 Med. Sys., LLC v. Open MRI of Steubenville, 2012 Ohio 3009, at *20 (Ohio Ct. App. June 28, 2012); see also Gencorp, Inc. v. American Int'l Underwriters, 178 F.3d 804, 818 (6th Cir. 1999), that requires the court to consider, among other things, the subject matter of the contract, the situation of the contracting parties, the conditions under which the contract was written, negotiations leading up to the contract's formation, the course of conduct between the contracting parties, and any statements of the contracting parties that could guide the court in ascertaining their intentions. Excel Energy, Inc. v. Cannelton Sales, 246 F. App'x 953, 963 (6th Cir. 2007).

The Tax Court never expressly stated that the 45-Day Provision or the Easement Deed as a whole was ambiguous (nor did it perform any of the other steps above). But 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 rest of the contract. And once the ambiguity arose and intent became an issue, both this Court and the Tax Court are in agreement that summary judgment was inappropriate. See Middleton v. Reynold Metals Co., 963 F.2d 881, 882 (6th Cir. 1992); Preece v. Commissioner, 95 T.C. 594, 609 (1990) (“A conclusion as to the petitioner's intent should not be reached without the benefit of a trial in which his demeanor can be observed and his credibility can be weighed.” (citation omitted)). The Tax Court gave short shrift to that genuine question of material fact: what did Hoffman and AAHP intend in agreeing to the 45-Day Provision and other related terms of the Easement Deed?4

In Partita Partners, LLC v. United States, 216 F. Supp. 3d 337 (S.D.N.Y. 2016), the only case known to have analyzed the requirements of section 170(h)(4)(B)(i), the district court analyzed more than the terms of the deed of easement, which set aside 2,700 square feet for future development and expansion. To determine the impact of that provision on the exterior of the preserved property, the district court considered the donor's intent as set forth in deposition testimony. Because the donor admitted that he intended to build floors above the roof and extend the rear yard, which would necessarily alter the exterior of the preserved property, the district court determined that the donor's conservation easement did not meet the preservation and prohibition requirements of section 170(h)(4)(B)(i). Thus, the district court in Partita Partners looked at facts beyond the terms of the deed in reaching a conclusion about the easement's deductibility under section 170(h).

Here, the Tax Court made no similar attempt. Notably, it did not allow a trial to consider the situations and responsibilities of Hoffman and AAHP, their respective abilities to enforce the contract (including AAHP's rights of inspection and broad remedies under Article 7), the negotiations leading up to the contract, their course of conduct, or a host of other considerations that are required to determine their intent with respect to the meaning of the 45-Day Provision and the Easement Deed as a whole. It instead granted summary judgment by surmising Hoffman and AAHP's intent with respect to the 45-Day Provision on the basis of nothing other than that term's inclusion in the contract. That was clear error, and for that reason alone this Court should remand the case to the Tax Court for additional fact finding.

The sua sponte nature of this decision is also problematic and is a separate ground for reversal and remand. While knowing that the preservation and prohibition requirements were a factual issue requiring analysis of the contracting parties' intent, the Tax Court granted summary judgment sua sponte and foreclosed Hoffman's opportunity to present evidence to rebut the Tax Court's conclusion. A trial court's authority to enter summary judgment on grounds not advanced by either party is permitted only where “the losing party was on notice that she had to come forward with all of her evidence” on the disputed point. Celotex Corp., 477 U.S. at 326. For that reason, this Court discourages a trial court from granting summary judgment sua sponte, like the Tax Court did here. See Beaty v. United States, 937 F.2d 288, 292 (6th Cir. 1991); see also Delphi Auto Sys., LLC v. United Plastics, Inc., 418 F. App'x 374, 379 (6th Cir. 2011).

Before a trial court grants summary judgment sua sponte, it must ensure unequivocal notice to the nonmoving party of impending summary judgment against it and no prejudice to the nonmoving party as a result of summary judgment. See Routman v. Automatic Data Processing, Inc., 873 F.2d 970, 971 (6th Cir. 1989). “The clearly established rule in this circuit is that a district court must afford the party against whom sua sponte summary judgment is to be entered ten-days notice and an adequate opportunity to respond.” Advanced Concrete Tools, Inc. v. Beach, 525 F. App'x 317, 320 (6th Cir. 2013) (citing Yashon v. Gregory, 737 F.2d 547, 552 (6th Cir. 1984)). Adequacy of notice and opportunity to respond '“are determined from the totality of proceedings”' before the trial court, including whether the prevailing party included the issue in its motion for summary judgment and whether it was addressed in either parties' briefing. Id. (quoting Aubin Indus., Inc. v. Smith, 321 F. App'x 422, 423 (6th Cir. 2008)).

Here, Hoffman had no notice at all. The Commissioner's first motion for summary judgment did not contend that the Façade Easement had failed to meet the preservation and prohibition requirements of section 170(h)(4)(B)(i) on the basis of the 45-Day Provision. Neither party addressed the import of the 45-Day Provision in its briefs. This Court has repeatedly found an abuse of discretion where the district court sua sponte grants summary judgment on an issue on which the parties have provided little or no argument. Excel Energy, Inc., 246 F. App'x at 961 (citations omitted). As it did with respect to other issues5 before issuing the Easement Order, “the [Tax Court] easily could have informed the parties that it was considering summary judgment on an alternative basis,” but chose not to. See Turcar, LLC v. IRS, 451 F. App'x 513, 515 (6th Cir. 2011) (rejecting plaintiff's challenge to sua sponte grant of summary judgment where plaintiff was aware the issue “was facially insufficient to support its claims” and did not show prejudice). Instead, Hoffman first learned of the importance of the 45-Day Provision to the case when the Tax Court had already decided the issue against it in the Easement Order. And at that point, it was too late for Hoffman to “come forward with all of [its] evidence,” or to have a reasonable opportunity to respond to the argument.6 See Celotex, 477 U.S. at 326; Bennett, 410 F.3d at 816. Not having an opportunity to respond constitutes prejudice in and of itself. Yashon, 737 F.2d at 552 (citing Harrington v. Vandalia-Butler Bd. Of Educ., 649 F.2d 434, 436 (6th Cir. 1981); Kistner v. Califano, 579 F.2d 1004, 1006 (6th Cir. 1978)).

Having failed to satisfy either the notice or the opportunity requirements that this Court mandates with respect to the 45-Day Provision, the Tax Court's grant of summary judgment on this issue was improper and an abuse of discretion. Routman, 873 F.2d at 971. Accordingly, the Tax Court's final decision, which stems from that initial order,7 should be reversed and remanded for further proceedings to determine Hoffman and AAHP's intent with respect to the 45-Day Provision.

B. The Tax Court Erred in Ruling that the 45-Day Provision Alone Would Prevent AAHP From Adequately Protecting in Perpetuity the Conservation Purpose of the Air Space Restriction.

In the Restriction Order, the Tax Court doubled down on its analysis of the 45-Day Provision in the Easement Order and, by applying the same flawed rationale, granted summary judgment in favor of the Commissioner with respect to the Air Space Restriction. In that second order, the Tax Court determined that, by including the 45-Day Provision in the Easement Deed, Hoffman and AAHP “wished to limit the scope of [AAHP's] rights and have carefully tailored an agreement reflective of that intent.” Again, the Tax Court improperly determined Hoffman and AAHP's intent with respect to the entire Easement Deed without considering any facts beyond the 45-Day Provision and its inclusion in the contract. See Middleton, 963 F.2d at 882; S.J. Groves & Sons Co. v. Ohio Tpk. Comm'n, 315 F.2d 235, 237-38 (6th Cir. 1963). Based on that single provision of the Easement Deed rather than its terms as a whole, the Tax Court ruled that the Air Space Restriction did not meet the in perpetuity requirement of section 170(h)(5)(A).

But whether an easement meets the in perpetuity requirement of section 170(h)(5)(A) is a question of fact. See Glass v. Commissioner, 124 T.C. 258, 282-283 (2005), aff'd, 471 F.3d 698 (6th Cir. 2006). Congress intended for this question of fact to entail an examination of the donee organization's ability to enforce its rights as the holder of the easement. H. Conf. Rept. 95-263, at 30-31, 1977-1 C.B. at 523. Specifically, courts must consider whether “the conservation purposes will in practice be carried out,” and determine whether the donee has “the commitment and resources to enforce the perpetual restrictions and to protect the conservation purposes.” S. Rep. No. 96-1007, 1980-2 C.B. 599; see also Glass, 124 T.C. at 283-284 (considering the commitment and financial resources of the donee organization to enforce preservation-related restrictions in a conservation easement to protect natural resources of bald eagles).

The Tax Court entertained no such analysis of AAHP's commitment or resources here. It sidestepped that factual inquiry and instead assumed that (1) Hoffman would propose changes inconsistent with the Secretary of the Interior's Standards in the first instance (even though Hoffman never has), and (2) AAHP would fail to exercise its discretion to reject any development proposals by Hoffman that it determines are inconsistent with the conservation purpose of the Air Space Restriction (even though AAHP never showed any indication that it would fail to exercise this discretion and never was presented with an opportunity to do so).8 By drawing these factual inferences against the nonmoving party, the Tax Court ran afoul of the summary judgment standard. See Anderson, 477 U.S. at 255. The Tax Court then answered two other questions of fact — Hoffman and AAHP's intent with respect to the terms of the Easement Deed and whether the Air Space Restriction meets the in perpetuity requirement of section 170(h)(5)(A) — on the basis of their inclusion of the 45-Day Provision, a single provision in a twenty-four page Easement Deed. In doing so, the Tax Court essentially cribbed its prior analysis from the Easement Order and refused to even entertain Hoffman's explanation of how the contracting parties intended the entire Easement Deed to operate in preservation of the Air Space Restriction. By answering these questions without a complete fact finding, the Tax Court allowed the Commissioner to prevail without meeting his burden of showing no dispute on these issues. See Street, 886 F.2d at 1479 (“[t]he movant must meet the initial burden of showing 'the absence of a genuine issue of material fact' as to an essential element of the non-movant's case.”). This failure is reversible error.

C. The Tax Court disregarded the application of the “too remote” rule.

In the Restriction Order, the Tax Court also addressed Hoffman's argument that the possibility that AAHP would fail to act within 45 days to deny a request inconsistent with the conservation purposes of the Easement Deed was “so remote as to be negligible.” JA653. That argument was based on Treasury Regulation section 1.170A-14(g)(3), which states that a deduction should not be disallowed:

merely because the interest which passes to, or is vested in, 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.

See also Commissioner v. Simmons, 646 F.3d 6, 10-11 (D.C. Cir. 2011) (“Simmons's deductions cannot be disallowed based upon the remote possibility L'Enfant will abandon the easements.”); Stotler v. Commissioner, T.C. Memo. 1987-275, 53 T.C.M. (CCH) 973, 978-979 (1987) (concluding that an easement was granted in perpetuity even though grantee could theoretically abandon it). Rather, as long as an easement agreement otherwise satisfies the requirements of the Code and the Treasury Regulations, the Commissioner cannot disallow a deduction merely because of some imagined possibility that the conservation purpose might fail in the future.

The Tax Court has defined “too remote” as “a chance which persons generally would 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 (2017). The determination of whether an occurrence is “highly improbable” is a question of fact that is not appropriate for summary judgment. United States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955). So is the determination of whether it could be “ignored with reasonable safety in undertaking a serious business transaction.” Id.

Here, on account of Hoffman's contentions in its briefs, the “too remote” rule is a disputed question of material fact. JA585-JA590; JA609-JA611. Thus, to obtain summary judgment, the Commissioner had the burden of showing that there was no genuine dispute that AAHP would not have exercised its rights or not done so within 45 days of Hoffman's request. See Street, 886 F.2d at 1479. The Commissioner failed to do so. Even had the Commissioner carried his burden, the Tax Court should have then drawn all reasonable inferences in favor of Hoffman as to whether and how likely it would be that AAHP would choose not to exercise its veto rights. See Anderson, 477 U.S. at 255. That, the Tax Court failed to do. Finally, if both the Commissioner carried his burden and the Tax Court drew all reasonable inferences in favor of Hoffman, Hoffman would then have had to fail to set forth facts showing that the likelihood of AAHP's failure to exercise veto rights within 45 days was a genuine issue for trial. See Fed. R. Civ. P. 56(c). Hoffman was never presented with that opportunity.

The Tax Court ignored all of these requirements and the normal course of judicial fact-finding and engaged in precisely the sort of speculation that the “too remote” rule is intended to preclude. The Tax Court reasoned that because Hoffman and AAHP went to the trouble of adding the 45-Day Provision to the Easement Deed, they did not consider it to be an improbable event and that it was possible that AAHP would not actually exercise its veto rights. JA653. But merely adding a contingency to the Easement Deed to address AAHP's failure to timely act with respect to Hoffman's development proposals does not translate to a conclusion that they intended for it to occur, nor that such an event is more than remotely likely to occur. Such a provision could well be intended to spur prompt action by AAHP rather than to override one of the contracting parties' rights. But without hearing testimony, or even absorbing the briefing on the subject, the Tax Court had no appreciable knowledge of why the provision was added in the first place, the history behind the use of that provision in other templates, what Hoffman and AAHP intended by using it in the Easement Deed, what AAHP was capable of determining within 45 days of receiving a request, whether AAHP would have defaulted to denying a request that it could not analyze within 45 days, whether AAHP could have its own charter negatively affected by such a default, or how else Hoffman and AAHP would have acted in such a scenario. The Tax Court reached its determination despite the fact that, as a tax-exempt donee organization, if AAHP had failed to carry out its responsibilities to uphold the public good under the Easement Deed, it would have done so at its own peril and been subject to scrutiny and possible loss of tax-exempt status by the IRS. Kaufman v. Shulman, 687 F.3d 21, 28 (1st Cir. 2012); Simmons, 646 F.3d at 10.

The Tax Court should not have disallowed Hoffman's deduction by hypothesizing improbable circumstances, but more importantly, it should not have done so at the summary judgment stage before Hoffman was able to present evidence on that factual issue. Thus, remanding this case to the Tax Court for a further determination of whether the 45-Day Provision's operation is “so highly improbable that it might be ignored with reasonable safety” would not be “an empty formality with no appreciable possibility of altering the judgment.” See Excel Energy, Inc., 246 F. App'x at 960 (citing United Rentals (N. Am.), Inc. v. Keizer, 355 F.3d 399, 411 (6th Cir. 2004)). It is instead critical to the proper resolution of this factual question.

The Tax Court prematurely disposed of this case with its summary judgment orders. It effectively discharged the Commissioner of his burden to show that no genuine issue of material fact exists. See Bennett, 410 F.3d at 817. It also deprived Hoffman of an adequate opportunity to fully develop its case through witnesses and a trial, when the issues at stake required it. See S.J. Groves & Sons Co., 315 F.2d at 237. Accordingly, remand is warranted to allow Hoffman to fully develop the record and present its arguments.

III. The Tax Court entered summary judgment that was legally flawed.

The Tax Court also erred in determining the legal conclusions that flowed from its curtailed factual inquiries. Specifically, the Tax Court erroneously granted summary judgment on the question of whether the plain language of the Easement Deed supports a section 170(h) deduction and whether the P.L. Amendment satisfies the sworn statement requirement in section 170(h)(4)(B)(ii).

A. The Plain Language of the Easement Deed Allows Hoffman a Deduction for Its Contribution of Both the Façade Easement and the Air Space Restriction.

Through three orders and its decision, the Tax Court determined that Hoffman's charitable contribution of the Façade Easement and Air Space Restriction to AAHP did not satisfy the requirements of section 170(h) and disallowed Hoffman's section 170(h) deduction. But in all of these orders and in its decision, the Tax Court missed the forest by fixating on a single tree: the 45-Day Provision.

By focusing solely on that provision, the Tax Court ignored other key provisions in the Easement Deed that prevent Hoffman in the first instance from proposing changes inconsistent with the conservation purposes of both the Façade Easement and the Air Space Restriction. For example, Article 2.1 requires Hoffman to maintain and preserve at all times the architectural, cultural, historical, and scenic character of the Property so as to not impede or impair the general public's benefit of those features. JA106. It also obliges Hoffman to replace, repair, and reconstruct the Property to ensure its preservation in accordance with Secretary of the Interior's Standards, which are the same standards that determine conservation purpose for purposes of section 170(h).9 Id. That provision alone precludes Hoffman from changing the Property in a way that is inconsistent with the conservation purposes of the Façade Easement or Air Space Restriction. But the Easement Deed also contains additional restrictions and prohibitions on Hoffman's rights. Article 2.2 forbids Hoffman from pursuing certain other activities and development with respect to the Property, including erecting or allowing growth on the Property that would materially impair visibility of the Tremaine Building's façade or erecting or placing buildings or structures in the air space above the Property.10 JA106-JA107. Article 3.1, which reserves certain rights to Hoffman, also allows development only to the extent that it does not run afoul of the Secretary of the Interior's Standards. JA107-JA108. Through these and other provisions, the Easement Deed taken as a whole restricts Hoffman's ability to hinder the conservation purposes of the Façade Easement and the Air Space Restriction.

Further, the Easement Deed as a whole provided sufficient rights for AAHP to protect the conservation purposes of the Façade Easement and the Air Space Restriction in perpetuity and take appropriate legal action to remedy any violations of the Easement Deed. The Easement Deed restricts outright any development inconsistent with its conservation purposes, and also includes procedural safeguards in Articles 3.1 and 3.2 that require AAHP to examine proposals by Hoffman for compliance with the conservation purposes of the Façade Easement and Air Space Restriction, and approve or reject Hoffman's other development proposals (which must include plans, specifications, and designs that allow AAHP to identify the proposed activity with reasonable specificity). JA107-JA108. In reviewing Hoffman's proposals, Article 3.3 requires AAHP to exercise its discretion in a manner that applies the Secretary of the Interior's Standards, again ensuring that any development adheres to that critical source of conservation guidelines. JA108. Separately, Articles 7.2, 7.3, and 7.4 of the Easement Deed provide AAHP rights to inspect the Property to ensure compliance with the Easement Deed, rights to demand certification of compliance with those requirements, and legal and equitable remedies for any violations of the Easement Deed. JA112-JA113. Further, Article 7.8 requires Hoffman to reimburse AAHP for the cost of pursuing enforcement. JA114. The entirety of the Easement Deed thus endows AAHP with the powers and rights to prevent any uses inconsistent with conservation purposes and the obligation to ensure the conservation purposes endure in perpetuity along with the financial support to properly monitor and enforce the conservation purposes.

When read in its entirety, the Easement Deed satisfies the requirements of section 170(h)(4)(B)(i) with respect to the Façade Easement and section 170(h)(5)(A) with respect to both the Façade Easement and the Air Space Restriction. The Tax Court disagreed because it erroneously interpreted Article 3.1 to be a “binary switch” that requires Hoffman to get AAHP's approval before implementing proposals that constitute a restricted use beyond what is allowed by the Secretary of the Interior's Standards. JA649. But, based on its terms, the Easement Deed limits Hoffman's proposals to those that comply with the Secretary of the Interior's Standards. And if there was any doubt as to that interpretation, Article 10.1 clarified that the Easement Deed should be “interpreted broadly to effect its purposes and the transfer of rights and the restrictions on use.” JA154. The Tax Court overlooked that straightforward interpretation of the Easement Deed's terms and the mutually agreed directive in Article 10.1, and instead focused solely on the 45-Day Provision in Article 3.2. The Tax Court determined that the 45-Day Provision effectively was a short circuit to this so-called “binary switch,” automatically stripping AAHP of its rights to prevent any such restricted use and allowing Hoffman to disregard conservation and develop the Property as it pleases. JA649. That was a reversible error.

Underpinning the Tax Court's flawed analysis was its holding that a donee must have “unlimited discretionary authority to approve or deny changes arising from [a donor's] reserved conditional rights,” and its finding that Hoffman's contribution failed to meet this standard because the 45-Day Provision limited AAHP's discretionary authority. JA286; JA646. The Tax Court purported to find support for its novel legal standard in Gorra v. Commissioner, T.C. Memo. 2013-254, at *25-*28, a memorandum opinion holding that a contribution qualified under section 170(h) because it gave the donee “the ultimate say in granting” the taxpayer permission to alter the underlying property. But Gorra does not create any such standard,11 and its application is more limited than the Tax Court held. In Gorra, the issue was whether the easement deed provided more restrictive rights to the grantor than those provided under New York law. Id. at *58. The Tax Court determined that it did because the deed in that case gave the easement holder unlimited discretion to approve or deny changes, while New York law fell short of that. The Tax Court never held, however, that a donee must have “unlimited discretionary authority” to approve or reject a donor's uses of the encumbered property in order for the donor to meet the requirements of section 170(h).

To date, the “unlimited discretionary authority” standard has not been used in any other case as a requirement for a valid conservation easement donation, largely because the standard would be commercially unreasonable. Under an “unlimited discretionary authority” standard, even a 10-year negative restriction timing provision12 similar to the 45-Day Provision would not satisfy the in perpetuity requirement of section 170(h)(5)(A). Accordingly, the Tax Court's position operates to effectively disqualify every conservation easement deed containing a negative restriction timing provision.

In any event, even if the “unlimited discretionary authority” standard was the proper measure by which to determine whether AAHP could enforce the conservation purposes of the Easement Deed, the 45-Day Provision and the remainder of the Easement Deed met that standard. The 45-Day Provision did not affect in any way AAHP's ability to restrict inconsistent uses in perpetuity; instead, it set forth a reasonable timeline by which AAHP must exercise that unconstrained ability.13 Under the terms of the Easement Deed, AAHP could deny on day 44 a proposal from Hoffman if it had not finished analyzing whether the proposal would uphold the conservation purposes of the Façade Easement or the Air Space Restriction. Hoffman would then have to re-submit its proposal, thus giving AAHP more time to consider the proposal's impact on the Easement Deed's conservation purposes. Nothing in such a process would hinder AAHP's ability to uphold the conservation purposes of the Façade Easement and Air Space Restriction. Thus, Easement Deed as a whole satisfies the requirements of section 170(h) and the Tax Court's decision to grant summary judgment to the Commissioner on this point would be appropriately reversed.

B. The Easement Deed, as Amended By the P.L. Amendment, Satisfied the Sworn Statement Requirement of Section 170(h)(4)(B)(ii).

With respect to the Façade Easement, section 170(h)(4)(B)(ii) requires Hoffman and AAHP to certify, under penalties of perjury, that AAHP: (1) was a “qualified organization”; and (2) “has the resources to manage and enforce the restriction and a commitment to do so.” Although the Easement Deed did not itself include the required sworn statement, Hoffman and AAHP later executed the P.L. Amendment to make clear their mutual intent to include the requisite certification.14

The Tax Court erroneously rejected Hoffman's contention that the P.L. Amendment related back to the Easement Deed. Under the “reformation” doctrine, a document can be reformed “to make a writing express the agreement that the parties intended it should.” Restatement (Second) of Contracts, § 155 (Am. Law Inst. 1981), at 406. Reformation is available when there is a mutual mistake as to expression, i.e., the contracting parties reached an agreement, but the writing fails to express the agreement. Id. The error of expression may include (1) the omission of a term agreed upon, (2) the erroneous reduction to writing of a term agreed upon, or (3) the inclusion of a term not agreed upon. Id. at 407. Additionally, where the contracting parties are “mistaken with respect to the legal effect of the language that they have used, the writing may be reformed to reflect the intended effect.” Id. The most important factor courts look at to determine whether a writing should be reformed is the “original intent of the parties.” See, e.g., Flitcroft v. Commissioner, 328 F.2d 449 (9th Cir. 1964) (allowing retroactive amendment of trust documents based on grantors' original intent to form irrevocable trust).

Here, the P.L. Amendment references the Easement Deed and states that “a clerical error inadvertently deleted Article 13 from the Historic Preservation Agreement” and that “Grantor and Grantee desired to comply with . . . Internal Revenue Code § 170(h) and by this agreement do so.” JA306; JA378-380. Other evidence in the record corroborates this statement. In an email exchange between Hoffman and AAHP dated December 22, 2007, before the date of the executed Easement Deed, Hoffman referenced additions that it had made to an initial draft of the Easement Deed and attached a revised version that contained an Article 13, which was virtually identical to the language of section 170(h)(4)(B)(i) and (ii). JA349-JA373. On December 23, 2007, AAHP's board of directors voted to accept the easement contribution and, on that same day, Hoffman delivered another draft of the Easement Deed to AAHP for their review. JA303-JA304. However, because of a clerical error and time pressure in completing the easement transaction by the end of year, Hoffman inadvertently failed to add Article 13 to the December 23 draft it sent to AAHP, which ultimately became the basis for the final Easement Deed. JA304. A later email exchange between Hoffman and AAHP confirms this mutual mistake and describes the P.L. Amendment as a “correction for the Easement Agreement.” JA135. Based on these documents, there is support for the premise that Hoffman and AAHP intended for the P.L. Amendment to relate back to the Easement Deed and to correct a mutual mistake: their accidental omission of the sworn statement. To the extent more evidence was needed to show that Hoffman and AAHP were reforming the Easement Deed to reflect their original intent,15 the Tax Court should have ordered a hearing on the topic where both parties could have presented witness testimony.

The Tax Court claimed support for its rejection of Hoffman's position by citing RP Golf, LLC v. Commissioner, T.C. Memo. 2016-80, 111 T.C.M. (CCH) 1362. That case involved an attempted retroactive subordination of mortgages to comply with Treasury Regulation section 1.170A-14(g)(2), but other case law required the subordination to be in place at the time the donor granted the easement. By contrast, there is no provision in the Code or the Treasury Regulations or interpretive case law that requires the language in section 170(h)(4)(B)(ii) to exist in the original Easement Deed. More critically, in RP Golf, LLC, the donor did not intend to subordinate the mortgages at the time the original easement deed was executed. By contrast, as demonstrated by the timeline of events above, Hoffman and AAHP did intend to include Article 13 in the original Easement Deed and inadvertently neglected to include it in the final, executed version.

Thus, the Tax Court erred in granting summary judgment on the question of whether the P.L. Amendment relates back to the Easement Deed. It ignored evidence in the record that raised a genuine issue of material fact as to whether Hoffman and AAHP originally intended that relation back. See Middleton, 963 F.2d at 882.

CONCLUSION

The Tax Court's orders and decision below ignored the clear terms of the Easement Deed and the P.L. Amendment that ensured the conservation purposes of the Façade Easement and the Air Space Restriction would be protected in perpetuity. The Tax Court instead fixated on the 45-Day Provision, incorrectly determined that it restricted AAHP's ability to protect the conservation purposes, and disallowed Hoffman's entire charitable contribution deduction on the basis of that single term. The Tax Court did not notify Hoffman of the relevance of that provision to its analysis before making its decision, and then refused to allow Hoffman an opportunity to introduce evidence to explain the parties' intent with respect to the 45-Day Provision or how it would operate in practice given AAHP's resources and obligations to preserve the Property. Those questions of material fact remain in dispute, and the Tax Court's premature decision improperly relieved the Commissioner of his burden to show summary judgment is appropriate and erroneously drew factual inferences in the Commissioner's favor. This case should be reversed and remanded to allow Hoffman to resolve these disputed questions of fact through a trial.

September 9, 2019

Respectfully Submitted,

George M. Clarke III

Baker & McKenzie LLP
815 Connecticut Ave NW
Washington, DC 20006
(202) 835-6184

Attorneys for Petitioners-Appellants

FOOTNOTES

1Unless otherwise indicated, all “section” references are to the Internal Revenue Code of 1986 (26 U.S.C.), as amended and in effect for the year in issue (“Code” or “I.R.C.”), and the Treasury regulations (26 C.F.R.) thereunder.

2A conservation easement contribution must also satisfy two other tests to be a qualified conservation contribution under section 170(h). First, the conservation easement contributed must be a “qualified real property interest.” I.R.C. § 170(h)(1)(A). Second, the conservation easement contribution must be made to a “qualified organization.” I.R.C. § 170(h)(1)(B). The parties do not dispute that both of these requirements are satisfied here. JA283. Thus, the only legal issue in dispute is whether Hoffman satisfied the “exclusively for conservation purposes” test.

3Other disputed facts ignored by the Tax Court include: (1) whether the Ohio Attorney General or the public could stand in AAHP's shoes to enforce the conservation easement if AAHP did not; (2) whether there were commercial or other reasons for Hoffman and AAHP's deviation with respect to the 45-Day Provision as compared to the then current model agreement in the Land Trust Alliance's 2005 Model Conservation Easement Deed; (3) why the 45-Day Provision in the prior Model Historic Preservation Deed of 1996 contained a 45-day “automatic approval” provision that was deemed acceptable at that time; (4) why Hoffman and AAHP did not simply impose “a blanket restriction or prohibition on the alteration of the air space in a manner similar to those imposed in Article 2 of the agreement.” JA630; JA647; JA774.

4In the Restriction Order, the Tax Court noted the parties' inherent dispute on this material point:

Hoffman argues that the 45-day default provision operates to approve by default only proposed changes that are ipso facto consistent with the secretary's standards; that, by the terms of the agreement, Hoffman is prohibited from even submitting an RFP inconsistent with the secretary's standards, [JA643], whereas Commissioner argues that “the 45-day default provision curtails AAHP's ability both to prevent Hoffman from undertaking inconsistent uses, and to seek legal or equitable remedies of such inconsistent uses because such use would not constitute a breach of the agreement's terms [JA642].

Yet it still granted summary judgment.

5As discussed previously, in an order issued on February 3, 2017, the Tax Court asked Hoffman and the Commissioner to supplement their briefs on the Commissioner's first motion for summary judgment to “set forth authority and analysis under Ohio State and local law: (1) addressing whether the disputed portion of the easement constitutes an interest in real property, imbuing the grantee with superior property rights in perpetuity, and (2) applying their position against the requirements of section 170(h).” JA199-JA201. The Tax Court could easily have added the impact of the 45-Day Provision to this request for briefing.

6Hoffman even tried by filing a motion for reconsideration; but that was summarily rejected by the Tax Court. JA622-JA634.

7In the Restriction Order, the Tax Court uses almost identical language as in the Easement Order, determining that “[t]he impact of the 45-day default provision is clear: it curtails AAHP's authority to review, and approve or reject Hoffman's request to make use of the property in a manner otherwise restricted by the agreement.” JA646. In the Final Order, the Tax Court summarized the two orders and acknowledged, “those holdings reflected [its] determination that the terms of the agreement, here failed perpetually protect the contributions conservation purposes.” JA783.

8Moreover, the Tax Court ignored its own precedent in assuming that AAHP's failure to enforce the terms of the Easement Deed would render the easements non-perpetual. See, e.g., Simmons v. Commissioner, T.C. Memo. 2009-208, 98 T.C.M. (CCH) 57934, aff'd 646 F.3d 6 (D.C. Cir. 2011) (historic preservation deed permitted the donee organization to consent to changes in the conserved façade and abandon its enforcement rights).

9Section 170(h)(4)(C)(ii) defines “certified historic structure” as “any building located in a registered historic district (as defined in section 47(c)(3)(B)).” Section 47(c)(3)(B) defines “registered historic district” as “any district — which is designated under a statute of the appropriate State or local government, if such statute is certified by the Secretary of the Interior to the Secretary [of the Treasury] as containing criteria which will substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district.” The requisite certification is found in “the Secretary of the Interior's Standards for Rehabilitation and Guidelines for Rehabilitating Historic Buildings” under 36 C.F.R. § 67, which is titled “Historic Preservation Certifications under the Internal Revenue Code.”

10Article 2.2(c) of the Easement Deed provides that “[n]othing shall be erected or allowed to grow on the Property which would materially impair the visibility of the Building's Façade from the street level.” JA107. Article 2.2(d) of the Easement Deed provides that “[n]o other buildings or structures, including satellite receiving dishes, small rooftop dishes, antenna or other data transmission or receiving devices or canopies shall be erected or placed within the Air Space.” Id. Read together, these provisions are an absolute prohibition on development that the Tax Court failed to recognize in determining whether the Façade Easement and the Air Space Restriction satisfied the perpetuity requirement of section 170(h)(5)(A). The Tax Court committed legal error by failing to acknowledge Article 2.2(c) and/or Article 2.2(d) independently prohibit Hoffman from even proposing developments that would interfere with the conservation purpose of the Façade Easement and the Air Space Restriction. The Tax Court also committed reversible error by misreading the terms of Article 2 as prohibiting Hoffman “only from erecting satellite dishes and other broadcast antennae within the air space.” JA649.

11Even if Gorra stood for an “unlimited discretionary authority” standard, it would contradict the approach mandated by section 170(h), the accompanying Treasury Regulations, and other binding case law. A donor of a conservation easement, like Hoffman, is able to retain certain rights in the conveyed property without impairing the conservation purposes. See I.R.C. § 170(h)(4)(B)(i) (contemplating changes that are consistent with conservation purposes); Treas. Reg. § 1.170A-14(e)(2) (the prohibition on inconsistent use “is not intended to prohibit uses of the property, . . . if, under the circumstances, those uses do not impair significant conservation interests.”); Treas. Reg. § 1.170A-14(g)(5)(i)-(ii) (contemplating that a donor may retain rights in an easement that “may impair conservation interests”). In Glass, 471 F.3d at 711, this Court upheld a conservation easement deduction where the easement allowed certain structures to be built subject to the easement holder's approval. The Tax Court and other U.S. Courts of Appeal have agreed. See, e.g., BC Ranch II, L.P. v. Commissioner, 867 F.3d 547 (5th Cir. 2017) (reversing the Tax Court and determining that building area adjustment provisions did not disqualify the conservation easement deduction); Simmons v. Commissioner, T.C. Memo 2009-208, 98 T.C.M. (CCH) 57934, aff'd, 646 F.3d 6 (D.C. Cir. 2011) (upholding a historic preservation easement that included a provision allowing the easement holder to abandon some or all of its enforcement rights).

12Negative restriction timing provisions are often inserted in deeds or other instruments, which require approval by the grantor or a third party for any improvements or construction within a reasonable period of time and deem any failure to timely respond as approval of the improvements or construction. See Stacey R. Griffin, Validity and Construction of Restrictive Covenant Requiring Lot Owner To Obtain Approval of Plans for Construction or Renovation, 115 A.L.R. 5th 251, 2a (2004). Generally, jurisdictions uphold the validity and enforceability of such restrictions for purposes of contract and zoning law. Id.; see, e.g., Aurora Shores Homeowners Assoc. v. Hardy, 37 Ohio App. 3d 169, 525 N.E.2d 26 (1987) (appellate court affirmed trial court determination that property owners would not be required to remove a fence for noncompliance with restrictive covenants where committee failed to approve or disapprove the plans in 30 days).

13As explained above, to determine the actual impact of the 45-Day Provision on AAHP's ability or willingness to deny uses of the Property that are inconsistent with conservation purposes, the Tax Court should have examined AAHP's responsibilities, commitment, and resources, as Congress intended. See S. Rep. No. 96-1007, 1980-2 C.B. 599. The Tax Court sidestepped that analysis and instead found that “the easement does not constrain Hoffman's ability to propose changes to the building exterior: it does not require Hoffman to self-evaluate its proposed alterations against the historical character of the building or district, or against the Secretary of the Interior's Standards prior to submitting the proposed modifications to AAHP.” JA285. But those responsibilities belong to AAHP, the donee. See I.R.C. § 170(h)(4)(B); H. Conf. Rep. 95-263, at 30-31, 1977-1 C.B. at 523. The Tax Court failed to allow Hoffman to present facts that would elucidate AAHP's abilities and clarify whether AAHP would abdicate its obligations. This was an improper decision on summary judgment.

14The P.L. Amendment also contained provisions to preserve the entire exterior (front, sides, rear, and height) of the Tremaine Building and to prohibit any change to the Tremaine Building that would be inconsistent with its historical character. JA378. These provisions directly matched the statutory language of section 170(h)(4)(B)(i) and were included in an abundance of caution to ensure the Façade Easement satisfied that provision. Id. Because the terms of the Easement Deed without the P.L. Amendment also satisfy that statutory language, we limit our discussion of the P.L. Amendment to its ramifications with respect to section 170(h)(4)(B)(ii).

15Notably, Hoffman and AAHP executed the P.L. Amendment in October 2009, well before the IRS commenced its examination of Hoffman's Form 1065 for its taxable year 2007.

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID