Summary Judgment Motions Mostly Denied in Easement Deduction Case

ST. ANDREWS PLANTATION, LLC,
JOSEPH N. MCDONOUGH,
TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

ALS

ORDER

This case involves three disputed charitable contribution deductions for conservation easements: one for tax year 2011 and two for tax year 2012. Respondent, the Commissioner of the Internal Revenue Service ("the Commissioner") has filed a motion for summary judgment (Doc. 17), and petitioner Joseph N. McDonough, the tax matters partner ("TMP") for St. Andrews Plantation, LLC ("St. Andrews"), has filed an objection to the Commissioner's motion and a cross-motion for summary judgment (Doc. 20). We will grant the Commissioner's motion in part and will deny petitioner's cross-motion.

Issues and contentions

The Commissioner argues, inter alia, that none of the deductions are allowable because the conservation purposes of the easements were not "protected in perpetuity", as required by section 170(h)(5)(A).¹ In support of that outcome the Commissioner relies on a regulation providing that, if an easement is extinguished and the property is sold, the charitable grantee must be entitled to a proportionate share of the sale proceeds. See 26 C.F.R. sec. 1.170A-14(g)(6), Income Tax Regs. The Commissioner contends that the deed of easement fails this test under Carroll v. Commissioner, 146 T.C. 196, 212 (2016) and Palmolive Building Investors v. Commissioner, 149 T.C. 380, 398-406 (2017), because it fails to guarantee the donee its proportionate share of proceeds upon an extinguishment.

The Commissioner also argues that the deduction based on the contribution in 2011 should be disallowed for the additional reason that St. Andrews did not disclose all of the information required on the IRS Form 8283, "Noncash Charitable Contributions", attached to its 2011 Form 1065, "U.S. Return of Partnership Income". In support he relies on RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), in which we held that the omission from the Form 8283 of the donor's cost or other adjusted basis caused the form to fail to satisfy the requirement of 26 C.F.R. sec. 1.170A-13(c)(2)(i). That regulation requires the taxpayer to attach a "fully completed appraisal summary" to the return. The Commissioner also relies on our opinion in Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, in which we held that the taxpayer did not substantially comply with the regulation when it intentionally omitted cost or adjusted basis from the Form 8283.

Petitioner argues that the Commissioner's motion should be denied because "all development rights were carved out of the easement" and "the only retained rights . . . are maintenance rights that have no impact on value". Petitioner further contends in his cross-motion for summary judgment that the regulations in sections 1.170A-14(g)(6) and 1.170A-13(c) are invalid, arguing in the alternative that issues of fact preclude granting the Commissioner's motion for summary judgment.

Shortly after petitioner filed his brief in opposition, the Court issued its decision in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12, 2020), upholding the validity of26 C.F.R. section 1.170A-14(g)(6). The Commissioner then filed a reply (Doc. 24) and subsequently, with leave of the Court to address Oakbrook Land Holdings, LLC v. Commissioner, petitioner filed a sur-reply (Doc. 30) and the Commissioner filed a supplemental memorandum (Doc. 31).

We will deny the Commissioner's motion in substantial part, but we will grant the Commissioner's motion insofar as it asserts that St. Andrews failed to strictly or substantially comply with 26 C.F.R. section 1.170A-13 but we will leave for trial the issue of whether St. Andrews qualifies for the reasonable cause exception under section 170(f)(11)(A). We will deny petitioner's cross-motion.

Background

Except where noted, the following facts are not in dispute.

St. Andrews and its property

St. Andrews was formed and continues to exist as a limited liability company under the laws of the state of Georgia. St. Andrews is treated as a partnership for federal income tax purposes. On January 28, 2005, St. Andrews purchased 2,783 acres of real property in Glynn County, Georgia, which included the three parcels of real estate comprising the 247 acres of property ("the subject property") that later became subject to the three easements in this case.

The Deed of easement and first and second amendments to the Deed

St. Andrews donated the first of the three conservation easements to Georgia Land Trust, Inc. ("GLT") over 140 acres of the subject property by deed of easement recorded December 29, 2011 (hereinafter referred to as "the Deed", inclusive of amendments unless otherwise specified). The original Deed (prior to amendment) included a legal description of the 140-acres as Exhibit A, and it incorporated by reference a baseline documentation report as Exhibit B. We assume for purposes of resolving the motion for summary judgment that GLT was a organization qualified to receive the conservation contribution and that, apart from the two issues raised in the Commissioner's motion, the easement qualified for a charitable contribution deduction.

On December 27, 2012, St. Andrews donated two additional conservation easements to GLT by recording amendments to the original Deed, which amendments were incorporated into and made part thereof: The First Amendment to the Deed of Conservation Easement added 60 acres of the subject property to the property subject to the Deed; and the Second Amendment to Deed of Conservation Easement added 47 acres of the subject property subject to the Deed. The first and second amendments each included, as Exhibit A, a legal description of the property added by the amendment, and they both incorporated by reference, as Exhibit B, a baseline documentation report that detailed both properties.

The Deed's allocation of proceeds of extinguishment

The Deed recites the parties' intent "that the Property be preserved in perpetuity in substantially its present state" as it existed at the time that St. Andrews granted the easement. Notwithstanding the parties' stated intent, the Deed provides for the possible circumstance in which the easement might have to be extinguished and the subject property sold. As to the distribution of proceeds in such a circumstance, the Deed provides as follows in paragraphs 17 through 19:

17. Extinguishment or Termination. It is the unequivocal intention of Grantor and Grantee that the Purpose of this Conservation Easement be carried out in perpetuity. If circumstances arise in the future that render the Purpose of this Conservation Easement impossible to accomplish, this Conservation Easement can only be terminated or extinguished, whether in whole or in part, by judicial proceedings in a court of competent jurisdiction pursuant to O.C.G.A. § 44-10-4(c). The amount of the proceeds to which Grantee shall be entitled, shall be determined in accordance with the Proceeds paragraph below, unless state law provides otherwise. Any and all prior claims shall first be satisfied by Grantor's portion of the proceeds before Grantee's portion is diminished in any way. Grantee shall use all such proceeds in a manner consistent with the Purpose of this Conservation Easement. Grantor and Grantee agree that changed economic conditions shall not be considered as circumstances justifying the termination or extinguishment of this Conservation Easement.

18. Condemnation. If this Conservation Easement is taken, in whole or in part, by exercise of the power of eminent domain or acquired by purchase in lieu of condemnation, Grantee shall be entitled to that portion of the proceeds from the Property's subsequent sale, exchange, or involuntary conversion in accordance the Proceeds paragraph below, unless state law provides otherwise, and Grantor and Grantee agree to join in all necessary and appropriate actions to recover the full value of such condemnation, including all incidental damages.

19. Proceeds. This Conservation Easement constitutes a real property interest, immediately vested in Grantee at the time Grantor conveys this Conservation Easement to Grantee. As required under Treas. Reg. § 1.170A-14(g)(6)(ii), the parties stipulate to have a current fair market value determined by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement. The value of this Conservation Easement at the time of this conveyance, and the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement, shall be determined according to that certain Property Appraisal Report, on file at the office of the Grantee, prepared on behalf of Grantor to establish the value of this Conservation Easement for purposes pursuant to § 170(h) of the Code. For the purposes of this Paragraph, the ratio of the value of the Conservation Easement to the value of the Property unencumbered by the Conservation Easement shall remain constant. [Emphasis added.]

To summarize: in the event that the easement must be terminated or extinguished, the Deed allocates the proceeds to the Grantee by first subtracting the fair market value of any post-donation improvements to the property from the total amount of the proceeds; then multiplying the remaining amount of proceeds by a ratio that is equivalent to the fair market value of the easement at the time of the donation over the fair market value of the property at the time of the donation. (As is explained below in part III.A, we have held that subtracting the value attributable to "post-gift" improvements is not sufficient to meet the "protected in perpetuity" requirement of section 170(h)(5).)

"Improvements" and development rights in the Deed

Before any such post-donation "improvements" could implicate this subtraction provided in the proceeds formula, the Deed would have to provide for a circumstance in which such "improvements" can be made. Paragraph 3 of the Deed, "Use Limitations", generally prohibits any activity on the property that is inconsistent with the stated purpose of the easement. That paragraph provides that "[t]he Property shall be restricted from any development or any use other than those defined in Paragraph 4 below and those improvements existing as of the date hereof as documented by the Baseline Documentation Report". It also specifically restricts "[a]ny residential, commercial or industrial uses of, or activity on, the Property" with limited exceptions. Subparagraph 3.(d), "Improvements" reiterates this restriction, providing that "[t]he construction or maintenance on the property of any buildings, structures, or other improvements is prohibited, except as described in Paragraph 4 and as otherwise expressly permitted herein." Thus, subparagraph 3(d) seems to imply that improvements may sometimes be permitted by paragraph 4.

However, in fact, paragraph 4 of the Deed, "Reserved Rights", contains no provision that reserves to St. Andrews the right to construct or maintain any "improvements", "buildings", or "structures". It likewise reserves no rights to construct or maintain any "permitted residences". Moreover, under paragraph 27:

all development rights except those associated with the permitted residences and their legally permitted appurtenant structures as noted in Paragraph 4 above [where, in fact, none are noted], that are now or hereafter allocated to, implied, reserved, or inherent in the Property are terminated and extinguished, and shall not be used on or transferred to any other property not within the Property or used for the purposes of calculating permissible lot yield of the Property or any other property.

Instead, the only rights that St. Andrews retains under paragraph 4 that could conceivably call for alterations to the property are the rights: to engage in "permitted forestry" as defined therein, pursuant to best practices and a Land Management Plan; to maintain and cultivate "wildlife food plots" in existence at the time of the donation "as depicted on the Man-Made Features Map in the Baseline Documentation Report"; and to "maintain, without widening, using primarily-permeable materials, the permeable-surfaced roads and trails now existing on the Property . . . [as] are depicted on the Man-Made Features Map of the Baseline Documentation Report . . . [and] to construct and maintain firebreaks, woods roads, and footpaths . . . not in locations or in sufficient number to adversely impact or impair the Conservation Values of the Property".

Condition of subject property at the time of each donation

The December 18-27, 2011, Baseline Report prepared by Marc Hudson, conservation consultant, incorporated as Exhibit B to the original Deed, summarizes the condition of the property at the time of the contribution:

The current land uses of the Property are primarily timber management and recreation. The Property contains a mixture of pine plantation, with small pockets of freshwater wetlands, scrub/shrub forests and tidal marsh which are currently under a natural regeneration management regime.

The report further details that the only existing "man-made features" on the property subject to the first easement at the time of the contribution consisted of: "gravel forest roads, mostly overgrown with grasses", "one metal entrance gate", and "115 acres of slash pine".

The December 13-18, 2012, Baseline Report prepared by David Tipper, a conservation planner at GLT, incorporated as Exhibit B to the first and second amendments to the Deed, summarizes the condition of the properties at the time of the contribution:

The current land uses of the First and Second Amendment Properties are primarily timber management and recreation. The First and Second Amendment properties contain a mixture of pine plantation, with small pockets of freshwater wetlands, scrub/shrub forest and tidal marsh which are currently under a natural regeneration management regime.

The report further details that the only existing "man-made features" on the property subject to the first easement at the time of the contribution consisted of: "[a]pproximately 1,800 feet of man-made drainage ditches" and "[a]pproximately 2,300 feet of roads, permeable base".

Fair market value of St. Andrews' exercise of its reserved rights

In opposition to the Commissioner's motion for summary judgment, petitioner offers three declarations of Martin H. Van Sant², a general real estate appraiser certified in Georgia, who reviewed the Deed and the first and second amendments, and offers the following opinions with respect to the rights reserved to St. Andrews under paragraph 4:

[I]f the Georgia Land Trust permitted St. Andrews Plantation, LLC to exercise any of the retained in Section 4 of the Deed of Conservation Easement, the fair market value of the Conservation Easement would not change.

* * * [I]f the Georgia Land Trust permitted St. Andrews Plantation, LLC to exercise all of the retained in Section 4 of the Deed of Conservation Easement, the fair market value of the Conservation Easement would not change.

* * * [I]f the Georgia Land Trust permitted St. Andrews Plantation, LLC to exercise any combination of the retained in Section 4 of the Deed of Conservation Easement, the fair market value of the Conservation Easement would not change. [Emphasis added.]

Mr. Van Sant offers the same statements of opinion regarding the fair market value of the Conservation Easement with respect to the state of the easement as stated in the original Deed, the original Deed as modified by the first amendment, and the original Deed as modified by the second amendment — i.e., as to each contribution.

Tax returns and examination

St. Andrews engaged the assistance of MM Bulldawg Manager, LLC, for (among other things) assisting with the identification and hiring of professionals who could assist St. Andrews with the donation and reporting of the easement. Joseph McDonough, the TMP for St. Andrews and petitioner in this case, is also the manager of MM Bulldawg Manager, LLC. Mr. McDonough personally worked with Paul T. Martin, the manager of St. Andrews, to engage Jon R. Langford, CPA, PC, to complete St. Andrews' Forms 1065 for 2011 and 2012. Mr. McDonough contends (and for purposes of the Commissioner's motion, we assume) that he, Mr. Martin, and St. Andrews relied on Mr. Langford to accurately and fully complete those returns, including the attached Forms 8283, and that St. Andrews provided to Mr. Langford copies of the Deed (and for 2012, the first and second amendments), supplemental statements regarding the property, the appraisal of Mr. Clower, and all other information Mr. Langford requested for each easement.

On its Form 1065 for the year 2011, St. Andrews reported a noncash charitable contribution of $16,475,000 for its contribution of the first easement to GLT. On the Form 8283 attached to the return, in Section B, "Donated Property Over $5,000 (Except Certain Publicly Traded Securities)", St. Andrews indicated that it had donated a "Qualified Conservation Contribution". Where the Form 8283 prompted the "taxpayer and/or appraiser" for a "[d]escription of donated property (if you need more space, attach a separate statement)", the information provided indicated "SEE ATTACHED". Where the form prompted "[i]f tangible property was donated, give a brief summary of the overall physical condition at the time of the gift", the space provided was blank. In the space on the following line of the form provided to list the "[a]ppraised fair market value" a value of $16,475,000 was given. The "[d]ate acquired by donor (mo., yr.)" given was "Jan. 2005" and "[h]ow acquired by donor" was "[p]urchase". The space below the prompt for "[d]onor's cost or adjusted basis" was blank.

The Form 8283 for 2011 was signed by "Jim R. Clower", who we assume for purposes of this motion was a qualified appraiser, and contained the executed acknowledgment of GLT. Attached to the Form was a 1-page document entitled "St. Andrews Plantation, LLC attachment to Form 8283 Non-Cash Contribution" that identified "The Property" by referring to the attached legal description and included a "Statement of Purpose of Donation" and list of the conservation purposes of the easement. Attached to that 1-page document were pages 2 through 5 of the Deed, the legal description of the 140-acre property, and correspondence from GLT supporting its acknowledgment of the donation.

On its Form 1065 for 2012, St. Andrews reported noncash charitable contributions of $6,590,000 and $4,333,500 for its contributions to GLT of the second and third easements, covering 60 acres and 47 acres. Attachments to the Forms 8283 associated with each contribution reported that St. Andrew's adjusted basis was $600,000 in the 60-acre property and $460,000 in the 47-acre property. (The Commissioner makes no contentions in his motion regarding the sufficiency of the Forms 8283 attached to the Form 1065 for 2012.)

The IRS examined St. Andrews' returns for 2011 and 2012. On July 10, 2017, the IRS mailed to petitioner and St. Andrews a Notice of Final Partnership Administrative Adjustment ("FPAA") for each of tax years 2011 and 2012. Each FPAA set forth the IRS's determination to disallow the full amounts of St. Andrews' deductions of the contributions of the easements. The disallowances were based, in part, on the IRS's determination that the donations of the easements are not qualified conservation contributions under section 170. See Doc. 1, Forms 886-A, Explanation of Adjustments.

Discussion

I. Summary judgment

The purpose of summary judgment is to expedite litigation and avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we draw factual inferences in the light most favorable to the non-moving party, Sundstrand Corp. v. Commissioner, 98 T.C. at 520. The critical fact bearing on the first issue in this case is simply the text of the deed — and there is no dispute about what the deed says.

As to the second issue (relevant only to the 2011 contribution), the parties do not dispute the critical facts regarding the specific information disclosed (or omitted from) the Form 8283. The facts remain in dispute on the issue of the statutory reasonable cause defense potentially available to petitioner under section 170(f)(11)(A)(ii)(II), as discussed below in part III.C.

II. Deduction for qualified conservation contribution

A. Qualified conservation contributions

Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the fair market value of the property at the time the gift is made. See 26 C.F.R. sec. 1.170A-1(c)(1). The Code generally restricts a taxpayer's charitable contribution deduction for the donation of "an interest in property which consists of less than the taxpayer's entire interest in such property". Sec. 170(f)(3)(A). But there is an exception to this rule for a "qualified conservation contribution." Sec. 170(f)(3)(B)(iii).

Section 170(h)(1) defines a "qualified conservation contribution" as a contribution of a "qualified real property interest" to a "qualified organization" (which we assume GLT to be) "exclusively for conservation purposes." Under section 170(h)(2)(C), a "qualified real property interest" includes an interest in real property that is a restriction granted in perpetuity on the use of the real property.

Section 170(h)(5)(A) provides that a contribution is not treated as exclusively for conservation purpose — a requirement imposed by section 170(h)(1)(C) — unless the conservation purpose is protected in perpetuity.

B. "Granted in perpetuity" versus "protected in perpetuity"

The Commissioner refers to section 170, subparagraphs (h)(1)(C), (h)(2)(C), and (h)(5)(A) collectively as "the perpetuity requirements" and argues that "St. Andrews cannot satisfy the perpetuity requirements because the Original Deed of Easement, into which the First and Second Amendments are incorporated, fails to make the donee absolutely entitled to the required proportionate share of the proceeds in case of extinguishment". There are in fact two distinct perpetuity requirements, in subsection (h)(2)(C) and subsection (h)(5)(A).

Section 170(h)(2)(C) states that a partial interest in property can be a "qualified real property interest" if it is "a restriction (granted in perpetuity) on the use which may be made of the real property" — i.e., the "granted in perpetuity" requirement. (Emphasis added.) Section 170(h)(5)(A) imposes a different requirement which we have distinguished and referred to as the "protected in perpetuity requirement". See Pine Mountain Preserve, LLP v. Commissioner, 151. T.C. 247, 267 (2018), aff'd in part and rev'd in part, __ F.3d __, 2020 WL 6193897 (1 lth Cir.) (Oct. 22, 2020) (emphasis added). This separate requirement expands upon the definition of "qualified conservation contribution" (defined in section 170(h)(1)(A)-(C)) by adding to the requirement of subparagraph (C) that the contribution be made "exclusively for conservation purposes"; it requires that "[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity." Sec. 170(h)(5)(A). The U.S. Court of Appeals for the Eleventh Circuit, to which an appeal from this case would presumably lie, see 26 U.S.C. sec. 7482(b)(1), affirmed that these are two distinct requirements, characterizing the "granted in perpetuity" requirement as a "relatively low threshold" in contrast with the "protected-in-perpetuity requirement; that, it seems to us, is likely where Congress envisioned the heavy lifting — the more rigorous analysis of the degree to which the grant protects conservation purposes — should occur." Pine Mountain Preserve, LLP v. Commissioner, 2020 WL 6193897 at *6, n.4.

As in our prior cases on the same issue, we construe the Commissioner's argument regarding petitioner's failure to comply with 26 C.F.R. 1.170A-14(g)(6), which provides for a circumstance where "the conservation purpose can nonetheless be treated as protected in perpetuity" in the event of the easement's extinguishment, to be an attack on petitioner's compliance, or lack thereof, with the "protected-in-perpetuity requirement" of section 170(h)(5)(A). See infra Part III.A., discussing Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo 2020-54, Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126 (2019), and other authorities.

III. Analysis

A. Extinguishment clause

The Commissioner contends that paragraph 19 of the Deed, which specifies the allocations of the proceeds of the sale of the property if the easement is ever extinguished, fails to protect the conservation purpose in perpetuity as required by 170(h)(5)(A). In order to satisfy the requirement that the conservation purpose be protected in perpetuity, 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 purpose of the donation. 26 C.F.R. sec. 1.170A-14(g)(1). It is possible that an easement may be extinguished, and in such an instance the easement would not have lasted in perpetuity. However, the regulation provides that if an extinguishment does occur, the donation will nonetheless be deemed to have been in perpetuity if the proceeds of the extinguishment are paid to the donee organization and the donee uses them for its conservation purposes. Section -14(g)(6)(ii) of the regulation requires as follows:

[F]or a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. * * * [T]hat proportionate value of the donee's property rights shall remain constant. * * * [T]he donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction * * *. [Emphasis added.]

In Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at __, (slip op. at 9-33) (citing PBBM Rose-Hill, Inc. v. Commissioner, 900 F. 3d 193, 207 (5th Cir. 2018), we upheld the validity of the Commissioner's interpretation of the regulation that is at issue here — i.e., that "the regulation does not permit that 'any amount, including that attributable to improvements, may be subtracted out' of the proceeds". In the concurrently issued opinion Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, we held that a deed violates the "protected in perpetuity" requirement of section 170(h)(5), as interpreted in 26 C.F.R. sec. 1.170A-14(g)(6), if the donee's share of the extinguishment proceeds is reduced by excluding the value of any improvements made by the donor after the date of gift. We reached the same conclusion in Hewitt v. Commissioner, T.C. Memo. 2020-89, where the language in the deed at issue was equivalent to the Deed at issue here. (The provision allocating the proceeds in the event of a judicial extinguishment in the deed in Hewitt contained language virtually identical to the critical parenthetical in paragraph 19 in St. Andrews' Deed). See also Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 139 (Oct. 28, 2019) (citing Carroll v. Commissioner, 146 T.C. at 212, and holding the same).

The donee's entitlement to a proportionate share of the extinguishment proceeds must be absolute. See Carroll v. Commissioner, 146 T.C. 196, 212 (2016). Therefore the share to which the donee is entitled must include the donee's proportional share of any appreciation in value of the property occurring after the date of the donation. See 26 C.F.R. sec. 1.170A-14(g)(6)(ii). But petitioner argues here that the language subtracting the proceeds attributable to improvements prior to determining GLT's proportional share is effectively a nullity because the Deed does not reserve St. Andrews the right to make any improvements that would add value. We find support for this in the text of the Deed itself.³

"Improvements" under the Deed include "[t]he construction or maintenance on the property of any buildings, structures, or other improvements * * * [and those] described in Paragraph 4 and * * * otherwise expressly permitted herein." But Paragraph 4 of the Deed does not permit construction or maintenance of any buildings or structures, because none existed at the time of the grants of each easement. Upon a full reading of the Deed and the Baseline Reports that support each grant of easement, the "improvements" contemplated by Deed are limited to the construction and maintenance of the "man-made features" of the property noted in the Baseline Reports at the time of each grant. The totality of these features consist only of forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate. The Deed thus seems to effectively to permit only maintenance of existing modest improvements and not to allow any new improvements.

The Deed in this case is different from deeds in our previous cases. In Coal

Prop. Holdings v. Commissioner, 153 T.C. at 138, the improvements existing when the easement was granted "included 20 natural gas wells, two cell phone towers, various roads, and various electricity installations." Id. at 138. The donor reserved the right to make future improvements, including utility installations, roads, and driveways "for vehicular access to areas of the Property on which the existing and additional structures and related ancillary improvements are and may be constructed." Ibid. In Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, slip op. at *8, the parties did not dispute that the deed at issue permitted improvements of value; moreover, the parties expected that the grantor would exercise those improvement rights and found it only "right" that the grantee who "'did not pay for those improvements' * * * shouldn't have a 'property interest in those improvements'". The deeds in these cases contemplated future improvements that had obvious value. See also Hewett v. Commissioner, T.C. Memo 2020-89, slip op. at *7 (finding an impermissible subtraction of the value of improvements that included the rights to build 5 1-acre homesites, each with one residence upon it).

We find plausible petitioner's assertion that the only rights that St. Andrews reserved in the Deed were mere "maintenance rights". St. Andrews may be able to establish at trial that such future improvements as limited by the Deed could not increase the fair market value of the subject property or that any increase in value would be truly de minimis. Thus petitioner may plausibly contend that the improvements clause in the Deed in this case would not cause GLT to receive less than its proportionate share of the proceeds in the event the Property were sold following judicial extinguishment of the easement. Viewing the facts and the inferences to be drawn from the facts in the light most favorable to petitioner, we conclude that a genuine dispute of material fact dictates that we deny respondent's motion for partial summary judgment on this issue.

B. Validity of section 1.170A-14(g)(6)

Petitioner contends that our construction of 26 C.F.R. section 1.170A-14(g) would be invalid under the Administrative Procedure Act (APA), 5 U.S.C. sec. 553 (2018), and would not be entitled to deference under Chevron U.S.A., Inc. v. Natural Res. Defense Council, 467 U.S. 837 (1984). In St. Andrews' sur-reply addressing the impact of our opinion in Oakbrook Land Holdings, LLC v. Commissioner, 153 T.C. _, petitioner further argued that the Commissioner's interpretation of the regulation (which we upheld) is not entitled to deference because: "(1) it exceeds Respondent's rule-making authority, (2) it goes beyond the statutory limitation that the conservation purpose of an easement be in perpetuity, [and] (3) it suffers from fatal procedural defects". We find that these arguments are foreclosed by our precedent.

The Court addressed such challenges to the substantive and procedural validity of the regulation in Oakbrook Land Holdings, 154 T.C. at _ (slip op. at 15-33), and we need not repeat the analysis here. In Hewitt, slip op. at *15-17 (and in the cases cited therein), we held that we strictly construe Section 1.170A-14(g)(6); and we held, slip op. at *19, that such construction requires in the context of allocating proceeds from an extinguishment that "the value of post-easement improvements may not be subtracted out of the proceeds before determining the donee's proportionate share." See also Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, at *25 (quoting Kisor v. Wilkie, 588 U.S. _, _, 139 S. Ct. 2400, 2415 (2019), for the proposition that "the 'traditional tools of construction' lead us to hold that the Commissioner's construction of the regulation is correct even if we look at the question de novo"). Accordingly, we deny the petitioner's motion on this issue.

C. Omission of cost or adjusted basis from Form 8283 for tax year 2011

Section 170(a)(1) states that "[a] charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary", and section 170(f)(11)(C) requires a taxpayer claiming a deduction for a contribution of property over $5,000 to obtain "a qualified appraisal of such property and attach[ ] to the return for the taxable year in which such contribution is made such information regarding such property and such appraisal as the Secretary may require". Section 1.170A-13(c)(2)(i)(B), requires that for deductions in excess of $5,000 claimed for certain charitable contributions of property made after December 31, 1984, the taxpayer must attach a fully completed appraisal summary to its return. Section 1.170A-13(c)(4)(ii) lists various items that must be included in the appraisal summary, including:

(D) The manner of acquisition (e.g., purchase, exchange, gift, or bequest) and the date of acquisition of the property by the donor, or, if the property was created, produced, or manufactured by or for the donor, a statement to that effect and the approximate date the property was substantially completed; [and]

(E) The cost or other basis of the property * * *.

If a taxpayer is unable to provide the information concerning basis and date of acquisitions, the regulations require the taxpayer to attach an explanation for why the taxpayer is unable to provide such information. Id. subdiv. (iv)(C)(1). As we stated in Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, at *17, "[u]nless the taxpayer complies with the regulatory requirement that he disclose his cost basis and the date and manner of acquiring the property, the Commissioner will be deprived of an essential tool that Congress intended him to have."

Petitioner contends that St. Andrews strictly complied with section 1.170A-13(c) because, notwithstanding the omission of cost or adjusted basis from the appraisal summary, Form 8283, the Schedule L on St. Andrews's 2011 Form 1065 disclosed its basis in investment property at the beginning and at the end of the tax year, and that the difference in the two numbers is the "basis attributable to the donated property." Petitioner alternatively argued that the information disclosed with St. Andrews' 2011 Form 1065 was sufficient to constitute substantial compliance. But even if petitioner is correct that the basis of the donated property might possibly be deduced from information reported on the return, a taxpayer's making it possible for the IRS to deduce that basis is not equivalent to the taxpayer's explicitly disclosing that basis. Moreover, deducing that information would require the IRS to make implicit assumptions about St. Andrews's other activities during the tax year that require guesswork — i.e., "looking for clues about what the taxpayer's cost basis might be" — to an extent that falls far short of compliance with the obligation to report the cost or adjusted basis of donated property on Form 8283. See Belair Woods, LLC v. Commissioner, slip op. at *20.

Further, petitioner did not offer any explanation with the Form 8283 or elsewhere on the return regarding why the information regarding the basis of the property was omitted. See 26 C.F.R. sec. 1.170A-13(c)(4)(iv)(C)(1) (contemplating that a taxpayer may be able to establish reasonable cause for the omission of information required by the regulations by attaching an appropriate explanation to the appraisal summary). We rejected similar arguments in Belair Woods, LLC v. Commissioner, slip op. at *11-21, and we decline here to hold otherwise. Petitioner did not strictly or substantially comply with the regulatory requirement to disclose its basis in the contributed property. RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), affd, Blau v. Commissioner, 924 F.3d 1261, 1269 (D.C. Cir. 2019).

Petitioner also argues that issues of fact preclude summary judgment on the issue of whether St. Andrews satisfied the requirements of section 170(f)(11)(A)(ii)(II), which excuse the denial of the deduction for failure to meet the applicable substantiation requirements "if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect". As the Commissioner acknowledges in his reply brief (Doc. 24 at 33), we have held that this inquiry requires the resolution of numerous specific factual questions, Belair Woods LLC v. Commissioner, slip op. at *24, which are not susceptible to summary adjudication in a case like this one. Accordingly we will deny the Commissioner's motion to the extent it reaches this "reasonable cause" issue.

D. Validity of section 1.170A-13(c)

Petitioner contends that 26 C.F.R. sec. 170A-13(c) is invalid, asserting that as an "interpretive regulation" promulgated pursuant to the Commissioner's general rulemaking authority at section 7805, it "does not carry the force and effect of law"; therefore (petitioner's argument continues) the additional requirement that the regulation imposes upon taxpayers to report "cost basis" and "acquisition date of the contribution property" on the Form 8283 as opposed to on the tax return are "contrary to the plain language of the statute" (section 170(f)(11)) and beyond the scope of its rulemaking authority under "step one" of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 461 U.S. 956 at 842-823 (1983); see also Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44, 55-56 (2011) (holding that the so-called Chevron test applies to treasury regulations).

We considered the same challenge to the same regulation in Oakhill Woods, LLC v. Commissioner, T.C. Memo 2020-54, at *22-27, and held that section 170A-13(c) satisfies both steps of the Chevron test. We specifically held that the Commissioner did not violate Congress's specific mandate "to issue regulations requiring that information concerning cost basis and acquisition date be 'include[d] on such return,'" within the meaning of the Deficit Reduction Act of 1984 ("DEFRA"), Pub. L. No. 98-369, sec. 155(a)(1) when the Commissioner promulgated the regulation at issue requiring, inter alia, that the taxpayer disclose his cost basis on the appraisal summary (Form 8283) of the return. Id. at *24.

Our holding in Oakhill Woods LLC v. Commissioner was supported by reasoning that: (1) "a taxpayer's "return" for a particular year includes all IRS forms and schedules required to be filed as part of the return"; (2) "nothing in DEFRA * * * prohibits the Secretary from requiring that information concerning cost basis and acquisition date be included both on the appraisal summary and elsewhere on the return"; and (3) "DEFRA section 155(a)(3) * * * provides that, '[f]or purposes of this subsection, the appraisal summary shall be in such form and include such information as the Secretary prescribes by regulations.' * * * Congress thus left the Secretary with discretion to require inclusion on Form 8283 of whatever information the Secretary reasonably deemed relevant." Id. at *24-25 (citing Blau, 924 F.3d at 1270). Because petitioner raises no arguments we have not already addressed, we will follow our decision Oakhill Woods, LLC v. Commissioner and deny petitioner's motion for summary judgment on this issue.

In consideration of the foregoing, it is

ORDERED that the Commissioner's motion for partial summary judgment, as supplemented, is denied in part and granted in part as set forth herein. It is further

ORDERED that petitioner's cross-motion for partial summary judgment is denied. It is further

ORDERED that the parties shall file a joint status report on or before January 4, 2021, setting forth the issues remaining for trial and proposing a schedule for further proceedings.

(Signed) David Gustafson
Judge

Dated: Washington, D.C.

November 16, 2020