Partnership Responds to Government in Conservation Easement Appeal

PINE MOUNTAIN PRESERVE, LLLP, f.k.a. Chelsea Preserve, LLLP, EDDLEMAN PROPERTIES, LLC, Tax Matters Partner,
Petitioner-Appellant/Cross Appellee,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee/Cross-Appellant.

United States Court of Appeals
for the
Eleventh Circuit

APPEAL FROM THE UNITED STATES TAX COURT
(Hon. Albert G. Lauber)

APPELLANT'S REPLY BRIEF AND RESPONSE TO CROSS-APPEAL

David M. Wooldridge
Sirote & Permutt, P.C.
2311 Highland Avenue South
Birmingham, AL 35205
T: (205) 930-5219

Gregory P. Rhodes
Sirote & Permutt, P.C.
2311 Highland Avenue South
Birmingham, AL 35205
T: (205) 930-5445

Attorneys for Appellant/Cross Appellee

CERTIFICATE OF INTERESTED PERSONS

Pursuant to 11th Circuit R. 26.1-1, 26.1-3, and 27-1, it is hereby certified that the following persons and entities have an interest in the outcome of this case or have participated as attorneys or judges in the adjudication of this case:

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TABLE OF CONTENTS

CERTIFICATE OF INTERESTED PERSONS

TABLE OF CONTENTS

INTRODUCTION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Federal Cases

Access Now, Inc. v. Southwest Airlines Co., 385 F.3d 1324 (11th Cir. 2004)

BC Ranch II, L.P. v. Commissioner, 867 F.3d 547, 552-53 (5th Cir. 2017)

Belk v. Commissioner, 140 T.C. 1 (T.C. 2013)

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

Belk v. Commissioner, T.C. Memo. 2013-154, 2013 WL 3064555 (T.C. 2013)

Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Cir. 2005)

Blue Martini Kendall, LLC v. Miami Dade County Florida, 816 F.3d 1343 (11th Cir. 2016)

Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981)

Butler v. Commissioner, T.C. Memo. 2012-72, 2012 WL 913695 (T.C. 2012)

Cannon v. Commissioner, 533 F.2d 959 (5th Cir. 1976)

Christopher v. SmithKline Beecham Corp., 567 U.S. 142 (2012)

Davis v. Commissioner, 716 F.3d 560 (11th Cir. 2013)

Evans v. Georgia Reg'l Hosp., 850 F.3d 1248 (11th Cir. 2017)

Hanover Bank v. Commissioner, 369 U.S. 672 (1962)

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

McGrady v. Commissioner, T.C. Memo. 2016-233, 2016 WL 7414590 (T.C. 2016)

Palmer Ranch Holdings Ltd v. Commissioner, 812 F.3d 982 (11th Cir. 2016)

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

Symington v. Commissioner, 87 T.C. 892 (T.C. 1986)

Thomas v. Cooper Lighting, Inc., 506 F.3d 1361 (11th Cir. 2007)

Trout Ranch, LLC v. Commissioner, T.C. Memo 2010-283, 2010 WL 5395108 (T.C. 2010)

United States v. Stein, 889 F.3d 1200 (11th Cir. 2018)

Federal Statutes

I.R.C. § 170(h)

I.R.C. § 170(h)(1)(B)

I.R.C. § 170(h)(2)(C)

I.R.C. § 170(h)(3)

I.R.C. § 170(h)(5)(A)

I.R.C. § 501(c)(3)

I.R.C. § 4958

I.R.C. § 6033(a)(1)

I.R.C. § 6110

I.R.C. § 6110(k)

I.R.C. § 6662(b)(3)

I.R.C. § 6662(h)

State Statutes

Ala. Code § 35-18-1 (adopted 1997)

Ala. Code § 35-18-2

Ala. Code § 35-18-2(a)

Ala. Code § 35-18-3(b)

Alaska Stat. §§ 34.17.010 to 34.17.060

Ariz. Rev. Stat. Ann. § 33-272

Ark. Code Ann. §§ 15-20-401 to 15-20-410

D.C. Code §§ 42-201 to 42-205

Del. Code Ann. Title 7 §§ 6901-6905

Ga. Code Ann. §§ 44-10-1 to 44-10-8

Idaho Code Ann. §§ 55-2101 to 55-2109

Ind. Code §§ 32-23-5-1 to 32-23-5-8

Kan. Stat. Ann. §§ 58-3810 to 58-3817

Ky. Rev. Stat. Ann. §§ 382.800 to 382.860

La. Stat. Ann. §§ 9:1271 to 9:1276

Me. Rev. Stat. Ann. Title 33 §§ 476 to 479-B

Minn. Stat. §§ 84C.01 to 84C.05

Miss. Code Ann. §§ 89-19-1 to 89-19-15

N.C. Gen. Stat. §§ 121-34 to121-42

N.M. Stat. Ann. §§ 47-12-1 to 47-12-6

Nev. Rev. Stat. §§ 111.390 to 111.440

Okla. Stat. Title 60 §§ 49.1 to 49.8

Or. Rev. Stat. §§ 271.715 to 271.795

S.C. Code Ann. §§ 27-8-10 to 27-8-80

S. D. Codified Laws §§ 1-19B-56 to 1-19B-60

Tex. Nat. Res. Code. Ann. §§ 183.011 to 183.005

Va. Code Ann. §§ 10.1-1009 to 10.1-1016

W. Va. Code §§ 20-12-1 to 20-12-8

Wis. Stat. § 700.40

Wyo. Stat. Ann. §§ 34-1-201 to 34-1-207

Regulations

Priv. Ltr. Rul. 200403044 (Jan. 16, 2004)

Priv. Ltr. Rul. 9603018 (Jan. 19, 1996)

Treas. Reg. § 1.170A-14(c)

Treas. Reg. § 1.170A-14(c)(2)

Treas. Reg. § 1.170A-14(f)

Treas. Reg. § 1.170A-14(g)

Treas. Reg. § 1.170A-14(g)(1)

Treas. Reg. § 1.170A-14(g)(5)

Treas. Reg. § 1.170A-14(g)(5)(i)

Treas. Reg. § 1.170A-14(g)(5)(ii)

Treas. Reg. § 1.170A-14(g)(6)

Treas. Reg. § 1.170A-14(h)(3)(i)

Treas. Reg. § 1.501(c)(3)-1

Treas. Reg. § 1.501(c)(3)-1(c)(1)

Treas. Reg. § 1.501(c)(3)-1(d)(ii)

Other Authorities

55 Cong. Rec. 6728 (1917)

Exec. Order No. 13892, 84 Fed. Reg. 55239 (Oct. 9, 2019)

Internal Revenue Serv., Instructions for Schedule D (Form 990) at 2 (2018); https://www.irs.gov/pub/irs-prior/i990sd--2018.pdf

Internal Revenue Serv., Schedule D (Form 990) at 1 (2008), https://www.irs.gov/pub/irs-prior/f990sd--2018.pdf

S. Rep. No. 96-1007

Unif. Conservation Easement Act § 2(a) (Unif. Law Comm'n 1981), https://www.uniformlaws.org/committees/community-home?CommunityKey=4297dc67-1a90-4e43-b704-7b277c4a11bd

10 Williston on Contracts § 29:41 (4th ed. 2019)

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INTRODUCTION

The Commissioner asks this Court to reverse two holdings of the tax court. First, he asks that deductions be denied for conservation easements that include a clause permitting amendments by mutual consent of the landowner and land trust. Second, he asks this Court to reject the tax court's value determination.

Easement clauses permitting amendments by mutual consent of the landowner and land trust are ubiquitous. In land conservation, amendments to perpetual easements are needed to cope with unforeseen circumstances arising decades or even centuries later. Congress assigned to land trusts the role of enforcing conservation easement restrictions and protecting the conservation purposes of easements in perpetuity. Congress required land trusts to have the commitment and resources to perform their obligations and required them to be qualified as publicly supported tax-exempt organizations. Thus, Congress ensured that land trusts would be regulated by the Commissioner and audited to assure compliance with their obligations. The Commissioner requires each land trust to disclose any modifications of easements in their annual tax reporting.

Fundamental to the Commissioner's position is a presumption that land trusts will abandon their rights and obligations under easement deeds. The legislative history reflects the opposite. The court below and courts of appeals have been confident that land trusts will discharge their responsibilities and will not imperil their exempt status or risk penalties by allowing private benefit. See Simmons v. Commissioner, 646 F.3d 6, 10-11 (D.C. Cir. 2011); Kaufman v. Shulman, 687 F.3d 21, 27-28 (1st Cir. 2012).

The Commissioner's position on amendment clauses is new, far-reaching, and unexpected. The legislative history does not support it, nor is it disclosed in any guidance issued by the Commissioner. It penalizes taxpayers trying in good faith to comply with complex requirements of the law. It penalizes prior behavior without fair warning, in precisely the manner condemned by the Supreme Court in Christopher v. SmithKline Beecham Corp., 567 U.S. 142 (2012).

The Commissioner's response to Pine Mountain's appeal, concerning location of homesites on the 2005 and 2006 easements, amounts to a specialized application of his more general position on amendment clauses of conservation easements. The Commissioner says that the absence of immutable, fixed locations for sixteen homesites on a 1000-acre easement tract violates Sections¹ 170(h)(2)(C) and 170(h)(5)(A). He urges this Court to disregard the critical fact that the land trust must approve the location of each homesite in advance.

This far-reaching and previously undisclosed position disregards years of precedent and practice, as well as the Commissioner's regulations, which have permitted homesites without a fixed location. This is another example of unfair surprise and retroactive application of an interpretation without fair warning. It is also a position rejected by the Fifth Circuit Court of Appeals in BC Ranch II, L.P. v. Commissioner, 867 F.3d 547, 552-53 (5th Cir. 2017).

The Commissioner also raises for the first time a new issue. He asserts that the Pine Mountain easements permit uses by the landowner that are inconsistent with the easements' conservation purposes. But, again, he disregards the land trust's role to strictly enforce the easement restrictions to protect the conservation purposes of easements. Furthermore, the record establishes that the easement deeds preserve conservation purposes in perpetuity.

Finally, regarding the valuation of the 2007 easement, the Commissioner asks this Court to substitute its own judgment for that of the trial court on an issue within the tax court's discretion. The Commissioner's position has no basis in law of fact.

I. The Tax Court Correctly Determined the Amendment Clauses Do Not Violate Section 170(h)(2)(C).

The Commissioner does not trust land trusts to do their job. On this basis, he says inclusion of the following clause in these conservation easements violates the perpetuity requirements for deductible donations:

Owner and Holder recognize that circumstances could arise which would justify the modification of certain of the restrictions contained in this Conservation Easement. To this end, Holder and legal owner or owners of the Conservation Area . . . shall mutually have the right, in their sole discretion, to agree to amendments to this Conservation Easement which are not inconsistent with the Conservation Purposes; provided, however, that Holder shall have no right or power to agree to any amendments hereto that would result in this Conservation Easement failing to qualify as a valid conservation agreement under the “State Conservation Easement Law” . . .

(Ex. 2 at 26; Ex. 4 at 24; Ex. 5 at 21 (emphasis added).)

Conservation easements incorporate amendment clauses, like this one, to provide land trusts the flexibility they need to ensure that the conservation values of the property are protected in perpetuity. See BC Ranch, II, 867 F.3d at 553. See Amicus Brief of LTA at 14-17.

A. Courts Have Rejected the Commissioner's Interpretation of “Perpetuity”.

The Commissioner's sole legal basis for his position is the term “perpetuity” used twice in Section 170(h):

• The Pine Mountain easements must be one of three types of “interest in real property,” in this case “a restriction (granted in perpetuity) on the use which may be made of the real property.” I.R.C. § 170(h)(2)(C).

• And the conservation purposes of the easement must be “protected in perpetuity.” I.R.C. § 170(h)(5)(A).

Interpretation of the term “perpetuity” to bar deductions if an easement includes such an amendment clause is an issue of first impression. The Commissioner's distrust of land trusts is not. Similar attacks based on his distrust have been rebuffed in several cases, including in the court below² and in analogous cases. See Simmons, 646 F.3d at 10-11; Kaufman, 687 F.3d at 27-28. Most recently, the Fifth Circuit rejected Commissioner's position as it relates specifically to homesites located within conservation easements. BC Ranch, II, 867 F.3d at 553.

B. Congress Entrusted Enforcement and Protection of Conservation Purposes of Easements to Land Trusts.

Congress does not share the Commissioner's distrust. Congress explicitly placed its confidence in qualified land trusts³ when it created the present conservation easement program in 1980. At that time, Congress created each element of the program: the three “qualified real property interest” classifications, the perpetuity requirements, and the “qualified organization” requirements. Congress has not altered these provisions.

Senate Finance Committee Report 96-1007 accompanying the Tax Treatment Act of 1980 explains the role Congress expected for the qualified recipients of easements. Congress assigned to them both authority and the responsibility to monitor and to enforce conservation easements:

The committee intends that the perpetual restrictions must be enforceable by the donee organization [ ] against all other parties in interest [ ]. The committee does not, by the requirement that the conservation purpose be protected in perpetuity, intend that a recipient of a conservation contribution must set aside funds for the enforcement of the contribution. The committee does intend, however, to limit the deduction only to those cases where the conservation purposes will in practice be carried out. The committee contemplates that the contributions will be made to organizations which have the commitment and the resources to enforce the perpetual restrictions and to protect the conservation purposes. . . . In general, the bill restricts eligible recipients of contributions of partial interests for conservation purposes to governments and publicly supported charities.

S. Rep. No. 96-1007 at 14 (emphasis added; extraneous material deleted).

The Commissioner's regulations reiterate and reinforce Congress' requirement that a land trust must be committed “to protect[ing] the conservation purposes of the donation” and must “have the resources to enforce the restrictions.” Reg. § 1.170A-14(c)(2). See also Reg. § 1.501(c)(3)-1(c)(1) (organization will not qualify “if more than an insubstantial part of its activities is not in furtherance of an exempt purpose”); Reg. § 1.501(c)(3)-1(d)(ii) (organization will not qualify “unless it serves a public rather than a private interest”). An easement may be transferred by a donee only to another qualified organization. Reg. § 1.170A-14(c)(2). 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.” Reg. § 1.170A-14(g)(1).

If a landowner reserves rights under an easement that might impair conservation interests associated with the property, the land trust must be provided documentation describing in detail the condition of the property at the time of donation (“baseline documentation”). Reg. § 1.170A-14(g)(5)(i). From that documentation, the land trust can determine future changes to the property that might violate the restrictions or other terms of the easement. In addition, the landowner must notify the land trust, in writing, before exercising any reserved right. Reg. § 1.170A-14(g)(5)(ii).

Finally, and most importantly, the terms of the easement must expressly give the land trust the rights to enter the property, inspect its condition, and ascertain compliance with the easement restrictions. The easement must give the land trust the right and power to enforce the easement restrictions in court proceedings. Remedies must include restoration of the property to its previous condition, and amendment is critical to protecting that remedy. Reg. § 1.170A-14(g)(5)(ii).

Congress required that land trusts be publicly supported exempt organizations. I.R.C. § 170(h)(3). As such, land trusts are heavily regulated by the Commissioner. They must file an annual Form 990 Schedule D reporting their activities or risk losing their exempt organization status. I.R.C. § 6033(a)(1); Internal Revenue Serv., Schedule D (Form 990) at 1 (2018), https://www.irs.gov/pub/irs-prior/f990sd--2018.pdf.⁴ They must provide specific information about the easements they hold and their monitoring and enforcement policies. Id. at 1, Part II. Line 3 requires disclosure of any modifications, transfers, releases, extinguishments, or terminations of easements. Id.⁵ Thus, the Commissioner is easily able to identify any land trust making modifications of conservation easements and can audit that land trust to ensure the land trust is doing its job.

The Commissioner has a host of enforcement tools to use against a land trust that fails to protect and enforce the conservation purposes of a conservation easement.⁶ These include penalties and excise taxes for transactions that provide material benefit to private individuals. See, e.g., Reg. § 1.501(c)(3)-1; I.R.C. § 4958. Foremost, the Commissioner may revoke a land trust's exempt status for violation of its specific duties to protect the conservation purposes and enforce the restrictions of an easement. As the Commissioner warns land trusts in his Instructions to Form 990 Schedule D, “For each easement modified, transferred, released, extinguished, or terminated, in whole or in part, explain the changes in Part XIII. Tax exemption may be undermined by the modification, transfer, release, extinguishment, or termination of an easement.” Internal Revenue Serv., Instructions for Schedule D (Form 990) at 2 (2018), https://www.irs.gov/pub/irs-prior/i990sd--2018.pdf.

In spite of (i) Congress' intent that land trusts monitor and enforce deductible conservation easements, (ii) the tools Congress gave to land trusts to accomplish monitoring and enforcement, (iii) Congress' requirement that land trusts have the commitment and resources to enforce their easements, and (iv) safeguards Congress has put in place to ensure that land trusts properly enforce their easements in accord with their obligations as qualifying tax-exempt organizations, the Commissioner maintains that land trusts cannot be trusted to do their job. The Commissioner wants to prohibit land trusts from having discretion to amend conservation easements.⁷

C. The Commissioner's Position Is Unsupported by the Statute and Regulations, and Results in Unfair Surprise and Harm.

There is no mention of amendments in the statute. Amendments are also not mentioned in the regulations, not even in paragraphs that address “perpetuity.” Reg. § 1.170A-14(g). A single paragraph addresses “extinguishment,” which is allowed under a judicial procedure. Reg. § 1.170A-14(g)(6). In his brief, the Commissioner suggests that this “extinguishment” provision relates to amendments and is the only, “exceedingly narrow” exception to a prohibition on amendments. (Appellee Brief at 30, 43, 63.)

The Commissioner knows better. His Form 990 Schedule D and its Instructions demonstrate that modification is an altogether different act than extinguishment. Internal Revenue Serv., Schedule D (Form 990) at 1 (2018), https://www.irs.gov/pub/irs-prior/f990sd--2018.pdf; Internal Revenue Serv., Instructions for Schedule D (Form 990) at 2 (2018); https://www.irs.gov/pub/irs-prior/i990sd--2018.pdf. The term “extinguishment” cannot reasonably be construed to include the entire broad category of amendments. But the provision does fairly raise this question: If the Commissioner made a provision permitting the extreme act of extinguishment but made no provision for amendments, were amendments thereby flatly prohibited? The more logical interpretation is that they are permitted, and they do not require a judicial procedure.

The Commissioner has never issued a regulation or any other guidance describing his position that amendment clauses violate perpetuity. There is certainly no guidance informing taxpayers and easement recipients how they might craft a clause the Commissioner might deem acceptable, if any. Considering the extent of guidance in the regulations on other matters he deems important and the number of easements affected, one would expect the Commissioner's new interpretation to have received at least some attention during the last 39 years.

But no. In spite of Congress's express concern about “the need of potential donors to be secure in their knowledge that a contemplated contribution will qualify for a deduction,”⁸ the Commissioner has not given taxpayers any notice of the position he now presents to this Court.

By raising this issue for the first time in the context of litigation, the Commissioner is engaging in the sort of practice condemned by the Supreme Court in Christopher v. SmithKline Beecham Corp., 567 U.S. 142 (2012). “[A]gencies should provide regulated parties 'fair warning of the conduct [a regulation] prohibits or requires.'” Id. (citing Gates & Fox Co. v. Occupational Safety & Health Review Comm'n, 790 F.2d 154, 156 (D.C. Cir 1986) (alteration in original)). Where an agency's announcement of its interpretation is “preceded by a very lengthy period of conspicuous inaction, the potential for unfair surprise is acute.” 567 U.S. at 158. Failure to provide fair warning of the Commissioner's new position on amendments is “precisely the kind of 'unfair surprise'” condemned by the Court. See id. at 156 (citations omitted).⁹

D. The Commissioner's Position on Amendments is Unworkable and Defies Commonsense.

In the 39 years since Congress enacted the operative language of Section 170(h), tens of thousands of easements have been donated to more than 1000 land trusts and government agencies. Amendment clauses are ubiquitous in these easements, as they are in most contracts. Op. 54; See Amicus Brief of LTA at 7-9. State laws enabling the creation of conservation easements based on the Uniform Conservation Easement Act (“U.C.E.A.”) have specifically authorized amendment of conservation easements in the same manner as other easements. Unif. Conservation Easement Act § 2(a)(Unif. Law Comm'n 1981), https://www.uniformlaws.org/committees/community-home?CommunityKey=4297dc67-1a90-4e43-b704-7b277c4a11bd..¹⁰ Alabama enacted its version in 1997.¹¹ Nearly half of all states have adopted all or substantially all of the Uniform Conservation Easement Act.¹²

The Commissioner's position, if adopted, would imperil most if not all donated conservation easements. In a brief footnote, the Commissioner claims that not all amendment clauses violate perpetuity requirements.(Appellee Br. at 63, n.11.) However, he suggests no provision of the Code, regulations or other guidance that would inform taxpayers or this Court where a line might be drawn between “good” and “bad” clauses. The Commissioner also admits that even a clause he might now deem to be “good” could be amended and turned “bad.” (Id. at 67.)¹³

Certainly, Congress may place any requirement upon deductibility that it chooses.However, the Commissioner asks this Court to adopt his novel interpretation of Sections 170(h)(2)(C) and 170(h)(5)(A) so as to disqualify vast numbers of conservation easements. When this Court considers the Commissioner's interpretation of “perpetuity,” it is reasonable to consider whether Congress in 1980 intended an interpretation of “perpetuity” to be so broad that few, if any, conservation easements could qualify for the program it was creating.¹⁴

So, what did Congress intend? It created the role it assigned to land trusts and charged them with the obligation (commitment) to enforce the restrictions and to protect the conservation purposes of conservation easements. Congress expected the land trusts, and not the Commissioner, to enforce the restrictions of the easement. “By requiring that the conservation purpose be protected in perpetuity, the committee intends that the perpetual restrictions must be enforceable by the donee organization . . . against all other parties in interest.” S. Rep. No. 96-1007 at 14.

Congress did not expressly or implicitly restrict the ability of land trusts to agree to amendments, so long as the conservation purposes of the easement were protected. Congress knew that land trusts, burdened with those express obligations, would be subject to oversight by the Commissioner if more than an insubstantial benefit fell to any landowner.¹⁵ The Commissioner strengthened and streamlined his oversight of land trusts by the requirements he added to Schedule D of the land trust's Form 990.¹⁶

The Commissioner's regulations also accept risk from unforeseen occurrences. If the land trust's interest may be defeated by a future act or event, a deduction is nevertheless allowed if, on the date the easement is donated, it appears that such an act or event “is so remote as to be negligible.” Reg. § 1.170A-14(g)(5). The risk that a land trust will violate its obligations and escape notice by the Commissioner is negligible.

When the easement is donated, the land trust must be a qualified organization and have the commitment to enforce the easement restrictions and to protect the conservation purposes. The Commissioner will have determined prior to that time that the land trust meets the requirements to be a qualified organization under Section 501(c)(3). Cf. Simmons, supra at 27. The Commissioner stipulated that NALT was a qualified organization. (Doc. 41 ¶ 65.) And the record is clear that NALT would not agree to any amendment that threatens the conservation purposes of the Pine Mountain easements. (Tr. 205:25-206:4, 214:23-215:5, 216:17-21, 218:7-22, 219:9-220:20, 221:21-24, 256:8-18, 261:19-262:14, 263:14-264:2; 402:19-404:7, 405:4-406:27, 415:7-14, 417:9-17, 421:23-422:9.) The Commissioner has plenty of tools to hold land trusts accountable.

II. The Tax Court Erred in Determining the 2005 and 2006 Easements Do Not Restrict the Use of the Underlying Real Property in Perpetuity.

By focusing on the limited right to build 10 homes on the 2005 easement property and 6 homes on the 2006 easement property, the Commissioner and the tax court's majority failed to see the forest for the trees. Pine Mountain is entitled to a deduction for its donation of the 2005 easement because the easement precludes any development (residential, industrial, or otherwise) on the 559 acres encumbered by the easement, save only the limited development allowed on 10 single-acre “Building Areas,” which is restricted to single-family homes of certain specifications. The 2006 easement similarly precludes substantially all development on the vast majority of that property, allowing only 6 homes on 6 of 499 acres.

Although the 2005 and 2006 easements each allow several “uses” on the 1058 acres protected by the easements, all of those uses are extensively restricted.¹⁷ The limited uses permitted by the easement deeds affect less than 30¹⁸ of the 1058 acres protected by the 2005 and 2006 easements. Over 1028 acres will be perpetually undisturbed. And the 30 acres on which some disturbance is allowed are nevertheless subject to various restrictions of the easements. The restrictions of the easements apply to the entire 1058 acres. There are not 1058, or more, separate easements.

A. The Uses Permitted Within the Building Areas are Restricted as Required Under Section 170(h)(2)(C).

In both the 2005 and 2006 easement deeds, the uses allowed in the “Building Areas” are not unrestricted. There are limits on what can be built in a Building Area — only one single-family dwelling and certain accessory structures. Also, the locations of the Building Areas are restricted. They must be the locations identified in an exhibit to the deed or a location approved in advance by the land trust. In the latter case, the modification must occur through an amendment to the easement deed. (Ex. 2 at 9 §3.1, 13 §3.16; Ex. 4 at 8 §3.1, 12 § 3.16.)

Modification of the fixed locations in the 2005 easement can be made only if it “does not, in Holder's reasonable judgment, directly or indirectly result in any material adverse effect on any of the conservation purposes.” (Ex. 4 at 12.) The Building Area locations within the 2006 easement similarly “must not, in Holder's judgment, directly or indirectly result in any material adverse effect on any of the Conservation Values or Conservation Purposes.” (Ex. 2 at 8 §3.1.) Furthermore, as an amendment, the modification cannot be “inconsistent with the Conservation Purposes.” (Ex. 4 at 25 §6.7; Ex. 2 at 24.)¹⁹ Finally, such amendment would be reported to the IRS on NALT's Form 990.

The land trust determined that exercise of the totality of the reserved rights, including the limited number of Building Areas, would have no adverse effect on the Conservation Purposes of the easements. (Ex. 4 at 8; Ex. 2 at 7-8, leading text). Furthermore, NALT actively monitors the Building Areas to ensure activity in those areas conforms to the easement restrictions. (Tr. 218:3-22.) NALT's enforcement rights continue to apply to the entire 1058 acres of property in perpetuity, including the Building Areas. These rights include the “right to seek specific performance by Owner of the restoration of the Conservation Area to its original condition as established in the Baseline Documentation.” (Ex. 2 at 20-21 §5.2; Ex. 4 at 19 §5.2.) (emphasis added).

The Commissioner's statement that the easement deeds “permit the donor and future owners to reclaim initially-protected land by relocating the building areas to other, possibly more desirable, locations inside the conservation area” mischaracterizes the operation of the easement deeds. (See Appellee's Br. at 32.) There is no mechanism in the easement deeds permitting the landowner to “reclaim” property. The entire easement property will never be free and clear of the easement encumbrances. All 1058 acres always remain in the easements, subject to the easements' restrictions. (See Ex. 2; Ex. 4.) Even within the Building Areas, the various restrictions protecting conservation purposes remain in effect.²⁰ (See Ex. 4 at 4-7, art. 2; Ex. 2 at 3-7.) The easement deeds provide that the only way the restrictions may be extinguished is by judicial proceeding, as required by the Treasury regulations. (See Ex. 2 at 20 §5.1; Ex. 4 at 19 §5.1.)

B. The Legislative History of Section 170(h)(2)(C) Supports that the 2005 and 2006 Easements Restrict the Use of the Property in Perpetuity.

The Commissioner's brief cites to legislative history describing Congress's intent for qualified conservation contributions but ignores specific comments relating to the types of property interests that qualify for the deduction. (Appellee's Br. at 24-25.)

The law prior to 1980 permitted fewer and more limited categories of property qualifying for deduction, “(a) lease on, option to purchase, or easement with respect to real property granted in perpetuity or (b) a remainder interest in real property.” S. Rep. No. 96-1007 at 9. When enacting Section 170(h)(2)(C), Congress explained that it was expanding “the types of partial interests which may qualify as a deductible conservation contribution.” Id. The types of partial interests which may qualify were modified,

by replacing the present category covering a lease on[,] option to purchase, or easement with respect to real property granted in perpetuity with a general category covering “a restriction (granted in perpetuity) on the use which may be made of the real property.” This new language would cover easements and other interests in real property that under State Property laws have similar attributes (e.g., a restrictive covenant). The bill does not modify the other category of partial interests. . . .”

Id. at 10.

The phrase in Section 170(h)(2)(C) upon which the Commissioner now assigns extensive and nuanced meaning was no more than a category of property interests that replaced the previous terms, “lease,” “option,” and “easement.” There is no suggestion that any particular restrictions were (or should be) the focus of the phrase or that any particular restrictions must extend fully to each acre of restricted property. In other words, the phrase was merely a category of property interest, not a set of qualitative standards to be teased out.

The legislative history also describes a number of types of restrictions, approved administratively by the Commissioner, that Congress wanted to qualify. These include, “restrictions on the type and height of buildings that may be erected, the removal of trees, the erection of utility lines, the dumping of trash, and the use of signs.” S. Rep. No. 96-1007 at 8-9.²¹ Thus, an easement that restricts the types of buildings that may be built, like the Pine Mountain easements do, is consistent with Congress's intention when enacting Section 170(h)(2)(C). The Commissioner's statement, that “Congress intended that once property was encumbered for conservation purposes” the owner could not build any building on it, is simply contrary to Congress' stated intent. (See Appellee's Br. at 44.)

The Commissioner attempts to re-write the statute, arguing that under Section 170(h)(2)(C) “each easement's original 'restriction . . . on the use which may be made of the real property'” must be granted in perpetuity. (Appellee's Br. at 46.) (emphasis in original.) By adding “original” to the statute, the Commissioner hopes to inject his vision of a set of qualitative measures into what Congress intended merely to be a category of property rights.

In addition to inserting the term “original” into the statue, the Commissioner seeks to alter the terms “a restriction” and “the real property.” He says, “the easements allow portions of conserved land that were initially protected from residential development to be completely stripped of that protection.” (Appellee's Br. at 46.)

First, no portion of “the real property” is stripped of restrictions against multi-family, commercial or industrial uses, commercial signs, dumping, most timber cutting, telecommunication towers, etc. (Ex. 4 at 4-8; Ex. 2 at 4-7.)

Second, “the real property” consists of the entire 559 acres of the 2005 easement and the 499 acres of the 2006 easement. That real property is protected from any development greater than ten and six homesites, respectively. That limitation is the “restriction” of the easement, concerning homesites. There is no separate easement on any one acre within the 1058 acres. The easement is the forest, not each individual tree.

The primarily purposes of the easements are to preserve natural habitat and protect a scenic view of the ridge line of Pine Mountain. (Ex. 2 at 2; Ex. 4 at 2.) The easement deeds contain a battery of restrictions that accomplish those purposes. No single or primary restriction accomplishes them, although tree cutting would seem important. (Ex. 2 at 4-7; Ex. 4 at 3-7.) Very limited “development” is permitted on the property, which limited amount the land trust determined not to adversely affect the conservation purposes. (Ex. 2 at 8; Ex. 4 at 8.) The specific location of each structure requires the land trust's approval and must be “consistent with,” and have “no material adverse effect” on the conservation purposes. (Ex. 2 at 8, 24; Ex. 4 at 12, 25.)

The specific location of each structure is no more important to the conservation purposes than the location of any trees being cut. Trees are critical to the conservation purposes, but not all trees are important. Some may be cut without adversely impacting the conservation purposes of the easement. (Ex. 2 at 13-14, 15 (notice and approval); Ex. 4 at 13-14, 16 (notice and approval)). However, under the Commissioner's theory, the location of the tree must be known in advance so he can decide if conservation purposes are affected by cutting it.

C. Pine Mountain's 2005 and 2006 Donations Comply with the Requirements of the Regulations.

The regulations include requirements when the landowner retains reserved rights, such as the right to build a home. This is a recognition that elements of reserved rights cannot and will not be fixed at the time of donation. “In the case of a donation . . . of any qualified real property interest when the donor reserves rights the exercise of which may impair the conservation interests associated with the property . . . the donor must”, among other things,

Reg. § 1.170A-14(g)(5)(i)-(ii).

The regulations include several examples concerning the reservation of potentially inconsistent reserved rights. See Reg. § 1.170A-14(f). In Example 3, a deduction is not allowed where “[r]andom building on the property . . . would destroy the scenic character of the view.” (Emphasis added.) Conversely, in Example 4, building is restricted from areas where construction would adversely affect the conservation purpose of the easement. In Example 4, a deduction is allowed when construction is limited to areas “generally not visible from the national park,” and the “site and building plan [are subject to] approval by the donee organization.” These examples demonstrate that absence of fixed locations for homesites is not per se a violation of Section 170(h)(2)(C). Example 4 contemplates selection of locations at some future date under conditions that protect the conservation purposes of the easement.

These examples do not suggest, as the Commissioner argues, that the “IRS [must be] able to verify compliance with the deduction requirements [or home location] at the time of donation.” (See Appellee's Br. at 52.) Neither example even remotely suggests that the IRS reviews the easement deed or the proposed building sites, either at the time of donation or at the time of construction. Treasury recognized that this was the responsibility of the donee organization.²²

Here, the record demonstrates that the Building Areas in the 2005 easement were limited to areas that would not destroy the conservation purpose. (Tr. 215:11-17 (“it was an area that had a long history of disturbance, and it was again, not a . . . highly significant natural community that would be impacted”).) The record also demonstrates, as conceded by the Commissioner in his brief, that neither the 2005 nor the 2006 easement allowed for a “random building on the property.” (See Appellee's Br. at 52. (acknowledging that any changes to the locations of the Building Areas are subject to “NALT's approval and judgment that the conservation purposes are not adversely affected.”)) Finally, the record demonstrates that NALT would not agree to a modification of a Building Area unless NALT could “make sure that the purposes and values are maintained and not compromised in any manner.” (Tr. 256:11-14.) As the tax court minority opinion acknowledged, these procedural safeguards mirror Example 4 of the Commissioner's regulation; thus, the donations comply with the applicable statutes and regulations. (Op. at 97-98.)

D. Belk and its Progeny Support Pine Mountain's Position.

The Commissioner's recitation of dicta from the tax court majority opinion regarding various reserved rights should not obscure the specificity of the tax court's actual holding. The essential holding was that the ability to move a single homesite, to any degree, contravenes Section 170(h)(2)(C). Neither the absolute size of the homesite nor its size relative to the easement were relevant to the ruling.

To appreciate the implications of the tax court's decision, an understanding of its genesis is important. The origin of the tax court's ruling is Belk v. Commissioner, 140 T.C. 1 (T.C. 2013), aff'd, 774 F.3d 221 (4th Cir. 2014) (“Belk I”). In Belk I, the tax court concluded that a reserved right to “swap” real property subject to the easement deed with other, unidentified, property not subject to the easement deed violated Section 170(h)(2)(C). Not only did the easement deed allow the taxpayer to “swap” property in Belk I, it also provided that the land trust could not “unreasonably withhold its approval of a substitution” — i.e., it limited the land trust's discretion. Belk I, 140 T.C. at 14.

The taxpayer in Belk I requested the tax court to reconsider its opinion, arguing Belk I was inconsistent with Priv. Ltr. Rul. 200403044 (Jan. 16, 2004) and Priv. Ltr. Rul. 9603018 (Jan. 19, 1996). In each ruling the Commissioner permitted “floating homesites” (locations to be determined in the future). In response, the tax court issued Belk v. Commissioner, T.C. Memo. 2013-154, 2013 WL 3064555 (T.C. 2013) (“Belk II”). Belk II clarified that Belk I did not contradict the prior IRS guidance. Belk II, 2013 WL 3064555 at *3. The tax court explained that it was not addressing the ability to move reserved rights within the easement boundaries. Id. (“Belk I does not speak to the ability of parties to modify the real property subject to the conservation easement; it simply requires that there be a specific piece of real property subject to the use restriction granted in perpetuity.” (emphasis added).). The Fourth Circuit was aware of this distinction when it affirmed Belk I.

The Commissioner relies heavily on the Fourth Circuit's decision in Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014) ("Belk III"), but ignores the tax court's clarifying decision in Belk II. The Fourth Circuit was clear: the “reserved right, central to this appeal, permits [Belk] to 'substitute an area of land owned by [him] which is contiguous to the Conservation Area for an equal or lesser area of land comprising a portion of the Conservation Area.'” Belk III, 774 F.3d at 223. In contrast, the easement boundaries and land subject to the 2005 and 2006 easements remains unchanged — no land can be taken out and no land can be added. (See Op. at 94-95; Ex. 2; Ex. 4.)

The Fifth Circuit has rejected the extension of Belk I and Belk III to a case involving homesites located wholly within easement boundaries, so long as the external easement boundaries are fixed and immutable. BC Ranch II, 867 F.3d at 552-53. The Commissioner urges this Court to disregard the precedent of BC Ranch. Pine Mountain suggests that the Fifth Circuit opinion is well reasoned and fully consistent with Section 170(h)(2)(C) and its legislative history. The Commissioner has offered no justification for creation of a circuit split.

E. The Tax Court's Decision Underwrites the Unfair Surprise Resulting from the Commissioner's Departure from Long-Standing Guidance and Previous Litigation Positions.

As discussed above, the Commissioner's regulations unambiguously illustrate that the locations of building areas (or other reserved rights) need not be fixed at the time of donation, so long as the location will not adversely affect the conservation purposes.Here, the ultimate location is subject to the land trust's unfettered approval. Similarly, the Commissioner's prior guidance, including Priv. Ltr. Rul. 200403044 (Jan. 16, 2004) and Priv. Ltr. Rul. 9603018 (Jan. 19, 1996),²³ permits a conservation easement donation in which a landowner reserves the limited right to subsequently locate one or more homes on the underlying property. The Commissioner has not published any guidance disavowing these interpretations, and had never challenged the reserved right to relocate homesites in court until BC Ranch and now in Pine Mountain's case. (See Appellant's Br. at 25 (citing cases involving easements where the reserved right to build homes or other buildings were unchallenged).) As the Supreme Court observed in Christopher, “[o]ther than acquiescence, no explanation for the [agency's] inaction is plausible.” 567 U.S. at 158.

The last conservation easement case before this Court involved an easement deed permitting a floating 10-acre “Recreational Site” where several buildings could be built. The easement also had an “amendment clause” nearly identical to the one in the Pine Mountain deeds. Appendix by Petitioner-Cross Respondents Vol. 1 at 120-135, Palmer Ranch Holdings, Ltd. v. Commissioner, No. 14-14167 (11th Cir. Mar. 10, 2015). Yet, neither of those provisions were challenged by the Commissioner. See Palmer Ranch Holdings Ltd v. Commissioner, 812 F.3d 982, 1003 (11th Cir. 2016). The Commissioner's inaction in Palmer Ranch and dozens of conservation easement cases that preceded it undermine the credibility of his position in this case. They underscore the unfair surprise resulting from the Commissioner's new position.

III. The Commissioner's New Argument Under Section 170(h)(5)(A) Is Untimely and Erroneous.

The Commissioner's brief raises a new argument that the 2005 and 2006 easements were not “protected in perpetuity” as required by Section 170(h)(5)(A). The argument is untimely.²⁴ Regardless, neither the record nor the tax court's findings support affirmance on this ground.

A. The Commissioner Cannot Belatedly Raise Section 170(h)(5)(A).

The Commissioner never raised Section 170(h)(5)(A) as a separate issue in its post-trial briefs in the tax court. And although the Commissioner made a reference to Section 170(h)(5)(A) in relation to its Section 170(h)(2)(C) argument, this Court has specifically declined to allow a party to argue a new theory on appeal, even though related to its original theory:

Because these arguments were never presented by the government to the district court, we decline to consider them in the first instance. '[A]s a court of appeals, we review claims of judicial error in the trial courts.' Access Now, Inc. v. Sw. Airlines Co., 385 F.3d 1324, 1331 (11th Cir. 2004). 'If we were to regularly address questions . . . that district[ ] court[s] never had a chance to examine, we would not only waste our resources, but also deviate from the essential nature, purpose, and competence of an appellate court.' Id. Indeed, '[t]oo often our colleagues on the district courts complain that the appellate cases about which they read were not the cases argued before them.' Irving v. Mazda Motor Corp., 136 F.3d 764, 769 (11th Cir. 1998).

United States v. Stein, 889 F.3d 1200, 1202 (11th Cir. 2018) (alterations in original).

The Commissioner cites Evans v. Georgia Reg'l Hosp. as support for consideration of any new issue supported by the record. 850 F.3d 1248 (11th Cir. 2017). In Evans, this Court recognized that it may affirm “on any ground supported by the record, regardless of whether that ground was relied on or considered below.” 850 F.3d at 1253 (citing Thomas v. Cooper Lighting, Inc., 506 F.3d 1361, 1364 (11th Cir. 2007)). However, in Evans this Court did not heavily rely on the “any grounds” rule to affirm the district court and offered little discussion on the rule's application.

More relevant is the Thomas case cited in Evans. In Thomas, this Court reasoned that it could affirm on such grounds because the “causation issue was expressly raised in [the defendant's] Memorandum of Law in Support of Defendant's Motion for Summary Judgment, and the parties had the opportunity to thoroughly brief this issue.” Id. (emphasis added.) Stated another way, this Court may affirm on any ground if the record reflects that the issue was expressly raised and thoroughly argued. The Commissioner's Section 170(h)(5)(A) argument appears in its pretrial memorandum as an afterthought. (Doc. 31 at 9.) The legal theory was not asserted in motions for summary judgment nor was it argued in post-trial briefing.²⁵ Accordingly, the Commissioner may not now raise this new issue.

B. The Record Demonstrates the Easements Satisfy the Requirements of Section 170(h)(5)(A).

The tax court did not have to address whether the 2005 and 2006 easements contravened Section 170(h)(5)(A) because the Commissioner did not present any evidence on this issue. Conversely, Pine Mountain presented extensive evidence on the issue, most notably the expert and fact testimony of Peter Smith and Lee Echols.

The tax court acknowledged Mr. Smith as an expert in “biology and the assessment of conservation values and how such values are impacted by human interaction.” (Tr. 202:19-25.) His expert report was accepted as his direct testimony. (Ex. 91.) Mr. Smith further testified that he had visited the Pine Mountain property several times — both before (Tr. 263:10-12) and after the easement grants (Ex. 65. See also Tr. 218:3-22) — and determined that the reserved rights were not inconsistent with conservation values. (Tr. 202:13-18, 202:21-203:4, 209:11-19.) Mr. Smith specifically testified that, in all his visits to the property, he had never observed any reserved rights being exercised that would be inconsistent with conservation values. (Tr. 208:16-20.) The Commissioner failed to present any evidence or testimony (expert or otherwise) regarding conservation values or the impact of the reserved rights in the easement deeds, and he had “very, very few” questions about Mr. Smith's expert testimony or his conclusions. (Tr. 205:17-18.) Those “very, very few” questions did not undermine Mr. Smith's expert report or testimony. (Tr. 205-208.)

Similarly, Mr. Echols, a NALT biologist, testified as a fact witness (with extensive biological and ecological experience) regarding the conservation values of the Pine Mountain property and how the rights reserved in the easement deeds were not inconsistent with such values. (Tr. 400-417.) He further testified that NALT would never allow Pine Mountain to exercise a reserved right that might impair conservation values. (Tr. 417:9-17.) Again, the Commissioner's limited cross-examination did nothing to undermine Mr. Echols's testimony. (Tr. 418-421.)

On the record before the tax court, there is no basis to remand the Section 170(h)(5)(A) issue for reconsideration. See Butler v. Commissioner, T.C. Memo. 2012-72, 2012 WL 913695 at *16 (T.C. 2012) (“[R]espondent offered no contrary expert witness testimony and pointed to no evidence that would suggest that CVLT is likely to abandon its right to enforce the conservation deeds. Consequently, we conclude that respondent has failed to establish that the conservation deeds do not protect significant habitat.”) The factual question in Butler was whether the landowner's ability to construct homesites (and many other structures) on easement-encumbered property caused the easement to fail to be “consistent with the conservation purposes” of the deed under Section 170(h)(5)(A). Id. at 13. In Butler, the tax court determined that the taxpayer necessarily prevailed on this issue because the Commissioner presented no expert testimony to show that the reserved rights were inconsistent with conservation values. Id. at 15.

IV. The Value of the 2007 Easement.

The Commissioner asserts that the tax court's valuation of the 2007 easement should be reversed and remanded because (1) the tax court failed to adopt a valuation method that is capable of meaningful review (Appellee Br. at 73-74), and (2) the tax court erred in rejecting the Commissioner's valuation based on the “comparable-easement sales” method employed by the Commissioner's employee-expert. (Appellee Br. at 77-78.) In support of both arguments, the Commissioner relies on a mistaken depiction of the “proceedings below.”

A. Summary of Proceedings Below.

The difference between Pine Mountain's and the Commissioner's valuation experts in this case is attributable almost exclusively to their opinion regarding the highest and best use of the Pine Mountain property before being encumbered by the easements (i.e. the “before value” of the property). The Commissioner's expert, Mr. McGurrin, an IRS employee, testified that the highest and best use of the easement property before encumbrance was “[a]gricultural, which allows for livestock as well as crops, one such crop being timber and recreation use.”²⁶ (Ex. 103 at 46-47.)

Conversely, Pine Mountain's expert, Mr. Veal, determined the highest and best use of the property was commercial and residential development. (Ex. 99 at 64; Ex. 100 at 82; Ex. 101 at 84.) Veal, unlike McGurrin, supported his conclusion with an extensive analysis. This included the strategic aggregation of the Pine Mountain property by Mr. Eddleman, the $45,000,000 raised by Mr. Eddleman from outside investors who received a one-half interest in the venture, the costs to acquire the property and obtain the legal approvals for development, and proposals from adjacent cities to annex the property. (Ex. 100 at 12-19, 27-28; Ex. 101 at 13-20, 28-29.) Veal also provided a detailed analysis of similarly situated and comparable developments by Mr. Eddleman that were located near the property, and the success of those developments. (Ex. 100 at 50-51, 84-95, 302-13; Ex. 101 at 52-53, 93-96, 286-97.)

Veal's determination regarding the highest and best use of the Pine Mountain property was supported by Ms. Belinda Sward, who the tax court accepted as an expert regarding “the market feasibility and development strategies for the Pine Mountain Property.” (Tr. 344-350.) Sward determined the highest and best use of the Pine Mountain property was development as a “regional mountain-oriented master-planned community.” (Ex. 94 at 20.)

Veal's determination was also supported by extensive testimony from Mr. Eddleman, who discussed (1) how he purchased the Pine Mountain property through a series of strategic acquisitions that allowed him to obtain the necessary access to Highway 280 for a major residential and commercial community, (2) the steps he took to prepare the property for development, and (3) his extensive negotiations with the adjacent cities of Westover and Chelsea, which caused the City of Westover to annex the property and provide it with development tax incentives.

Mr. Eddleman's testimony was corroborated and supplemented by testimony from the Mayor of Westover, who discussed how the City of Westover competed with the City of Chelsea to annex the Pine Mountain property because they foresaw a significant development and tax revenue opportunity for the City. (Tr. 274-298.)

Based on the overwhelming evidence presented at trial, the tax court made the determination that “it was reasonably probable that the Pine Mountain property would eventually be zoned for development.” (Doc. 99 at 18–20.) As the tax court noted, this meant the “easements examined by McGurrin were not comparable to the Pine Mountain easements.” (Doc. 99 at 21.)²⁷

Thus, the tax court unambiguously disagreed with McGurrin that the easement sales he utilized were “comparable” to the easements on the Pine Mountain property. Correspondingly, the tax court found “Veal correctly assumed that the Pine Mountain property would be developed.” (Doc. 99 at 30.) These determinations were detailed and supported through specific findings of fact throughout the tax court's opinion. (Doc. 99 at 16-30.)

Although the tax court determined Veal, unlike McGurrin, accurately determined the highest and best use of the Pine Mountain property, the tax court decided to discount Veal's easement value determination based on two grounds. First, the court determined that Veal overestimated the easement value “by ignoring the beneficial effects the easement had on the unrestricted Pine Mountain property.” (Doc. 99 at 30.) Second, the court determined Veal “overestimated the value of the easement because the diminution of the underlying land's value is an imperfect proxy for the market value of this particular easement that restricts the use of highly valuable developable land.” (Doc. 99 at 30-31.)

The tax court used its discretion to weigh the “errors” by McGurrin and Veal to determine the value of the 2007 easement. (Doc. 99 at 29-30.) The tax court explained in detail the effect that McGurrin's erroneous determination of the highest and best use of the Pine Mountain property had on his valuation and why, in the court's judgment, this was equally outweighed by the impact the two errors by Veal had on the valuation of the property. (Doc. 99 at 31-36.) Although one may disagree with the tax court's specific findings and conclusions, the conclusions were clearly based on the court's “own examination of the evidence in the record” and, of course, on the court's evaluation of the credibility of the witnesses. (Doc. 99 at 29.) Ultimately, the tax court determined the impact of each expert's errors were equal in proportion, such that the value of the easement was determined by using an equally weighted average of the two expert opinions. (Doc. 99 at 36.)

B. The Tax Court's Valuation Method is Capable of Meaningful Review.

The Commissioner argues that the tax court's valuation method is not capable of meaningful review because the court “did not follow any recognized valuation methodology, did not incorporate any concrete aspects of the parties' valuations.” (Appellee's Br. at 75.) The Commissioner mischaracterizes the tax court's methodology as a “split the baby approach.” (Appellee's Br. at 76.) Finally, the Commissioner makes off-hand statements regarding certain allegedly “suspect” facts, with no support as to why those facts have any bearing on the standard applied by the tax court or the credibility of its opinion. In fact, the tax court addressed each of those facts and provided an explanation of how each fact impacted its analysis.

(1) The Tax Court Appropriately Applied a Valuation Methodology that Incorporated Concrete Aspects of the Parties' Valuations.

The tax court discussed in detail the methodology it applied. It specifically discussed, in concrete terms, which aspects of the parties' valuations it was incorporating. First, the tax court determined that McGurrin incorrectly determined that the Pine Mountain property was not developable, while Veal correctly determined it was. (Doc. 99 at 21.) This led the court to disregard McGurrin's analysis of sales of conservation easements, all of which were not developable and therefore not comparable. (Doc. 99 at 3.1.) The tax court provided detailed support for its determination of value in this case, and the Commissioner has not identified any clear error requiring a departure from such determination.

Next, the tax court determined that, although Veal correctly determined the highest and best use of the Pine Mountain property, (Doc. 99 at 30) Veal overstated the value for two reasons — he ignored the “beneficial effects the easement had on the unrestricted Pine Mountain property” (Doc. 99 at 30) and he “overestimated the value of the easement because the diminution of the underlying land's value is an imperfect proxy for the market value of this particular easement that restricts the use of highly valuable developable land.” (Doc. 99 at 30-31.) Although, as discussed below, Pine Mountain disagrees with these determinations, they are certainly subject to meaningful review by this Court.

Finally, the tax court incorporated concrete aspects of each party's valuation. First, the tax court agreed and incorporated Veal's highest and best use, and thus his before value determination. (Doc. 99 at 30.) Similarly, the tax court determined that McGurrin's easement sale analysis provided some “check” on what land trusts would be willing to pay for an easement, and thus incorporated that general analysis into its determination. Id. Again, although Pine Mountain disagrees with the second determination, both determinations are subject to meaningful review.

(2) The Tax Court Did Not Blindly “Split-the-Baby.”

The Commissioner is correct that blindly “splitting the baby” to determine valuation is frowned upon. However, doing so is not prohibited. See Cannon v. Commissioner, 533 F.2d 959, 963 (5th Cir. 1976) (Clark, J., dissenting) (“My concern with affirming [the tax court's] decision to 'divide the baby' is that I cannot discern any good reason for disregarding the probative evidence which was developed in favor of an 'equitable' solution which has no factual foundation.” (emphasis added)). But giving weight to two experts' opinions based on the evidence is not an arbitrary finding.

In the present case, the tax court described in detail the underpinnings of his ultimate determination to equally weight the expert values. Although the tax court ultimately determined it appropriate to apply an “equally weighted average” to the two experts' conclusions, this determination was not a product of a blind split-the-baby approach, as alleged by the Commissioner. (Doc. 99 at 36.) In fact, the tax court expended considerable energy describing what weight it afforded each component of the respective expert's reports. (Doc. 99 at 31-36.) It then described the overall effect of each of these aspects and explained why it merited averaging the two expert's values. (Doc. 99 at 36.)

This Court's precedent requires deference to the trial judge's determination of value where the method applied is clearly described. See, e.g., Palmer Ranch, 812 F.3d at 1003 (“The tax court has discretion to adopt a valuation method befitting the matter before it — even if the parties have not proposed that method.” Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Cir. 2005) (held that tax court value which “blended the analysis of experts to arrive at value” was “not clearly erroneous”); Cannon, 533 F.2d at 962 (5th Cir. 1976), cert denied, 430 U.S. 907 (1977)²⁸).

As explained above, the tax court's method and reasoning for according equal weight to the experts is clearly and thoroughly described, and its determination should be accepted by this Court.

(3) The Commissioner's Reference to “Suspect” Facts is Misleading.

In his brief, the Commissioner makes several misleading or misconstrued references to the valuation record. First, the Commissioner's statement that Veal's $97 million valuation is “suspect” in light of Pine Mountain's purchase price of $37 million was directly addressed by the tax court. The tax court noted Mr. Eddleman's efforts to purchase the property in a manner that provided it access to the highways necessary to make it a commercial development. (Doc. 99 at 19.) The tax court specifically found this assemblage (and other related activities) changed the highest and best use of the property. It is hardly surprising that purchasing several tracts of low-value agricultural land from timber companies and, after a great deal of work, making it highly developable, would increase its value significantly.

Second, the Commissioner asserts that Veal's valuations would mean Pine Mountain's limited partners would receive tax deductions greater than the Commissioner thinks is appropriate. However, as the tax court noted, the fact that sophisticated investors were willing to pay $45 million for a one-half, non-controlling limited partnership interest in Pine Mountain before all development and other approvals were obtained, and before the property was fully assembled, supports Veal's determination that the highest-value, buildable, ridgeline property (which the easements encumbered) was worth a significant amount of money. (Doc. 99 at 20-21.)

Third, the Commissioner argues that the tax court was “confused” when it stated that McGurrin assumed that the Pine Mountain property would not be developed. However, McGurrin repeatedly testified that he believed the entire Pine Mountain property would not be developed due to market, competition, zoning and other general factors: “I looked at the property in 2005, the parent tract being close to 2,900 acres. That was the assignment I was given, to value that entire property. . . . It was based on the zoning, the lack of annexation, the property as it existed at that moment in time, in December 2005, nothing was going on, no development was occurring.” (Tr. 813:3-13 (emphasis added).)²⁹

And the Commissioner's conjecture that “it was hotly contested” (Appellee's Br. at 79) whether the easement portions of the Pine Mountain property could physically be developed is belied by the record, including McGurrin's own testimony: “[My comparable easement sales] had the potential for being developed, just like the Pine Mountain property had. . . .” (Tr. 812.)³⁰

Finally, the Commissioner's argument that the “court's explicit embrace of an averaging approach . . . creates an obvious incentive for taxpayers in conservation easement cases to offer inflated valuations” lacks logic. (Appellee's Brief at 77.) Why would a taxpayer in a conservation easement case, or any valuation case, have any more of an incentive to offer an inflated value if averaging were to occur than if the taxpayer's appraisal were to be accepted outright? To the contrary, there are severe financial penalties for substantial or gross overvaluation of donations that more than overcome any incentive to inflate the value. See Sections 6662(b)(3) & (h)(applying a 20% penalty to underpayments attributable to a “substantial” valuation misstatement and a 40% penalty to understatements attributable to a “gross” valuation misstatement).

The Commissioner's completely unsupported suggestion implies the tax court would accept valuations (whether as an average or outright) blindly, or that the tax court would apply a “weighted average” in every case, regardless of the facts. In the present case, the tax court explained in detail why it determined a weighted average was appropriate. (Doc. 99 at 16-36.) The tax court did not apply a weighted average in a vacuum and certainly did not imply such an approach was appropriate in all scenarios.

C. The Tax Court Appropriately Rejected McGurrin's Easement Sale Analysis.

The tax court did not err by rejecting McGurrin's “comparable easement sale” analysis. McGurrin did not identify “a substantial record” of easement sales, and the sales he did identify were not “comparable” to the 2007 easement. Tellingly, no court has ever utilized the “substantial easement sale” analysis because it is very unlikely that a substantial record of comparable easement sales will ever exist. Congress was aware of the uncertainty of finding a record of comparable sales of easements and provided an alternative method to value easement donations. S. Rep. No. 96-1007 at 14-15.

(1) The Tax Court Correctly Dismissed McGurrin's Comparable Easement Sale Analysis.

McGurrin gave various reasons for his determination that the highest and best use of the Pine Mountain property was “agricultural property.” These included the topography of the property, the economy, competition from local developments, current “zoning” classification, and county or city approval requirements. The one premise, however, that remained relatively constant was McGurrin's insistence that the property was best suited as agricultural property, not development.

Nevertheless, all the conservation easement sales selected by McGurrin were comparable to the Pine Mountain easements (in McGurrin's mind) only in terms of “size, location and topography.” (Ex. 103 at 50-52.)³¹ McGurrin did not investigate their development potential — to him it was not relevant because he determined “the highest and best use is open space because either the property is not developable because it's too steep, or because the developer never intended to develop those parcels.” (Tr. 848:15-21.)There is no support in the record for either of these assumptions.

Although McGurrin's statements regarding the developability of the easements he utilized were inconsistent, his valuation was clearly based on his determination that the Pine Mountain property could not be developed based on a variety of factors:

PETITIONER'S COUNSEL: So if I'm not mistaken, what you're saying is that you determined that the highest and best use is open space because either the property is not developable because it's too steep, or because the developer never intended to develop those parcels. Is that not right?

MCGURRIN: Yes.

PETITIONER'S COUNSEL: And if either of those proves to be incorrect, then your assumptions of value are —

MCGURRIN: Subject to change.

(Tr. 848:15-24.)

It is also clear that the tax court, which heard a week of virtually uncontroverted testimony and evidence on the subject, disagreed with McGurrin's assumption: “Thus, as we find, it was reasonably probable that the Pine Mountain property would be developed.” (Doc. 99 at 19.)

Because the tax court correctly determined that a “substantial record of sales of easements comparable to the donated easement”³² did not exist, the court was required to determine the value of the easement pursuant to the second sentence of the regulation which states:

If no substantial record of market-place sales is available to use as a meaningful or valid comparison, as a general rule (but not necessarily in all cases) the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.

Reg. § 1.170A-14(h)(3)(i). See also, Palmer Ranch, 812 F.3d at 986 (employing the before and after valuation method).

All the conservation easement cases that have been decided by the tax court (and other courts) have determined the value of conservation easements based on the "before and after" analysis, not a “comparable easement sale” analysis. See, e.g., McGrady v. Commissioner, T.C. Memo. 2016-233, 2016 WL 7414590 at *14 (T.C. 2016) (“Because a market for the purchase and sale of conservation easements rarely exists, the value of a conservation easement is ordinarily determined using the 'before and after' approach mentioned in the regulations.”). See also Symington v. Commissioner, 87 T.C. 892, 894 (T.C. 1986) (“[S]ince most open-space easements are granted by deed of gift there is rarely an established market from which to derive the fair market value. Accordingly, it is usually necessary to value such an easement by applying a 'before and after' analysis.”). The tax court has rejected the comparable easement sales analysis when the easement sales were not comparable to the easement at issue. Trout Ranch, LLC v. Commissioner, T.C. Memo 2010-283, 2010 WL 5395108 at *5 (T.C. 2010). It was not error for the tax court to reject that method in this case for that same reason.

(2) Veal's Valuation Should Have Been Adopted in Its Entirety.

The tax court agreed with Veal that there existed no substantial record of comparable conservation easement sales existed and that the highest and best use of the Pine Mountain property was residential and commercial development. Nonetheless, the tax court departed from Veal's valuation on two grounds: (1) the tax court determined Veal did not accurately account for the enhancement value the easements had on the contiguous property owned by Pine Mountain, and (2) Veal did not account for the restrained resources of potential conservation easement purchasers — i.e., land trusts. If the tax court erred in its valuation determination, it was by departing from the “before and after” approach required by Reg. § 1.170A-14(h)(3)(i) and by discounting Veal's valuation.

(i) Veal correctly applied a contiguous property analysis.

Veal was not required to engage in a separate analysis regarding the “enhancement” impact the easements had on other property owned by Pine Mountain because all such property was “contiguous” to the easements. Accordingly, any enhancement imparted by the easements to other property owned by Pine Mountain was accounted for in Veal's before and after analysis of the entire contiguous property. See Reg. § 1.170A-14(h)(3)(i) (fourth sentence) (“The amount of the deduction in the case of a charitable contribution of a perpetual conservation restriction covering a portion of the contiguous property owned by a donor . . . is the difference between the fair market value of the entire contiguous parcel of property before and after the restriction.” (Emphasis added.)

Veal directly addressed the role of enhancement in his analysis, testifying that encumbering the ridgelines would negatively impact the value of the remaining unencumbered property:

“if they went forward with this really high-end, really nice residential development, with very high-end homes, that the fact that you have property right next to that would make the value close to this development and something that could be seen from this development and perhaps share some of the amenities, would have a higher value. So that in this particular case in my opinion, that — putting the easement on the property actually reduces the value of the entire piece.”

(Tr. 688.)

He testified that this phenomenon occurs in the Birmingham market. (Tr. 689:3.) Similarly, Mr. Eddleman testified that in his extensive experience building on ridges “sets the tone and lets you make a good impression, allows you to attract other high quality homes that are not amenity lots.” (Tr. 44:20-22.)

The Commissioner offered no contradicting evidence on this issue. And the Commissioner's expert similarly determined “enhancement is deemed not to be applicable.” (Ex. 103 at 84.)³³

(ii) The “Constrained Resources” of Conservation Organizations is Not a Relevant Factor Under Reg. § 1.170A-14(h)(3)(i).

The tax court also discounted Veal's valuation because “the diminution of the underlying land's value is an imperfect proxy for the market value of this particular easement that restricts the use of highly valuable developable land.” (Doc. 99 at 30-31.) The tax court reasoned that “a buyer with constrained resources, such as a conservation easement organization,” (Doc 99 at 23) would not pay the “full 'cost' of the Pine Mountain 2007 easement as measured by the before-and-after method.” (Doc. 99 at 24.)

There is no authority in the Code or Treasury regulations to discount the validly determined fair market value of a conservation easement (as derived through the before-and-after method) to account for the “constrained resources” of the non-profit organizations accepting such donations. This notion undermines the concept behind charitable donations generally: Congressionally authorized tax benefits to incentivize donations to charitable organizations that otherwise would not be able to afford such donations, or operate without such "charitable" gifts. See 55 Cong. Rec. 6728 (1917) (legislative history indicating concern over survival of charitable organizations in light of high taxes without a deduction for contributions). As a result, no court has ever imposed such a limitation.

The courts have never endorsed limiting the fair market value of a donation to a charitable organization to account for such organizations' limited resources. Similarly, no court has ever departed from the “before-and-after” methodology mandated by Reg. § 1.170A-14(h)(3)(i) to reflect the “restrained resources” of the donee. Certainly, this Court did not reduce the $21 million deduction the tax court determined Palmer Ranch, LLC was entitled to for its donation of a conservation easement over 82.19 acres to account for the “restrained resources” of Sarasota County. See Palmer Ranch, 812 F.3d 982. There is no support for this arbitrary limitation on the fair market value of a conservation easement, and any such limitation would be impossible to implement by appraisers and the courts alike.

Accordingly, in the event this Court determines that the tax court erred in its valuation determination, the Court should accept Veal's valuation for the 2007 easement.

Respectfully submitted,

SIROTE & PERMUTT, P.C.

David M. Wooldridge
Sirote & Permutt, P.C.
2311 Highland Avenue South
Birmingham, AL 35205
205-930-5219 (telephone)
205-212-3814 (facsimile)
dwooldridge@sirote.com

Gregory P. Rhodes
Sirote & Permutt, P.C.
2311 Highland Avenue South
Birmingham, AL 35205
205-930-5445 (telephone)
205-212-2933 (facsimile)
grhodes@sirote.com