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Government Seeks Partial Reversal in Conservation Easement Case

SEP. 30, 2019

Pine Mountain Preserve LLLP et al. v. Commissioner

DATED SEP. 30, 2019
DOCUMENT ATTRIBUTES

Pine Mountain Preserve LLLP et al. v. Commissioner

PINE MOUNTAIN PRESERVE, LLLP,
formerly known as Chelsea Preserve, LLLP;
EDDLEMAN PROPERTIES, LLC, Tax Matters Partner
Petitioner-Appellant/Cross-Appellee
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee/Cross-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

ON APPEAL FROM THE DECISION OF THE
UNITED STATES TAX COURT

PRINCIPAL AND RESPONSE BRIEF FOR THE COMMISSIONER

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

FRANCESCA UGOLINI (202) 514-1882
JACOB CHRISTENSEN (202) 307-0878
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT

Pursuant to Federal Rule of Appellate Procedure 26.1 and Eleventh Circuit Rule 26.1-1, counsel for the Commissioner of Internal Revenue hereby certify that, to the best of their knowledge, information, and belief, the following persons and entities have an interest in the outcome of this appeal:

Christensen, Jacob, attorney, Tax Division, U.S. Department of Justice

Cleverdon, Edwin B., attorney, Internal Revenue Service

Crump, Horace, attorney, Internal Revenue Service

Desmond, Michael J., Chief Counsel, Internal Revenue Service

Eddleman, Bill

Eddleman, Douglas

Eddleman Properties, LLC, tax matters partner, appellant Kelley, Matthew R., attorney, Internal Revenue Service Lauber, Albert G, Judge, United States Tax Court Levin, Michelle Abroms, attorney for appellant

Levitt, Ronald A., attorney for appellant

Morrison, Richard T., Judge, United States Tax Court Pine Mountain Preserve, LLLP, appellant Rhodes, Gregory P., attorney for appellant

Rothenberg, Gilbert S., Chief, Appellate Section, Tax Division, U.S. Department of Justice

Ugolini, Francesca, attorney, Tax Division, U.S. Department of Justice

Wooldridge, David W., attorney for appellant

Zuckerman, Richard E., Principal Deputy Assistant Attorney General, Tax Division, U.S. Department of Justice

STATEMENT REGARDING ORAL ARGUMENT

Counsel for the Commissioner believe that oral argument would be helpful to the Court's disposition of this case.


TABLE OF CONTENTS

Statement regarding oral argument

Table of contents

Table of citations

Statement of jurisdiction

Statement of the issues

Statement of the case

A. Course of proceedings and disposition in the court below

B. Statement of the facts

1. The Pine Mountain property

2. The terms of the easements

a. The 2005 easement

b. The 2006 easement

c. The 2007 easement

3. Pine Mountain's charitable-contribution deduction claims

4. The Tax Court proceedings

C. Statement of the standard or scope of review

Summary of argument

Argument

I. The Tax Court correctly held that Pine Mountain was not entitled to charitable-contribution deductions for its donations of the 2005 and 2006 easements

A. The Tax Court correctly held that neither the 2005 easement nor the 2006 easement was a “qualified real property interest”

1. Introduction

2. The 2005 and 2006 easements' restriction on the use that could be made of the encumbered real property was not granted in perpetuity

a. The 2005 easement

b. The 2006 easement

B. Pine Mountain's arguments fail to establish error in the Tax Court's decision

1. The Tax Court did not confuse I.R.C. § 170(h)'s perpetuity requirements

2. Pine Mountain's attempt to distinguish Belk is unavailing

a. The substitute property's location, whether inside or outside a conservation easement's exterior boundaries, is irrelevant

b. That the building areas may theoretically remain “subject to the easement” is also irrelevant

3. The Tax Court did not inject a “meaningfulness” standard into I.R.C. § 170(h)(2)(C) that renders I.R.C. § 170(h)(5)(A) superfluous

4. Pine Mountain's reliance on examples in the Treasury regulations is misplaced

5. Pine Mountain's reliance on non-precedential private-letter rulings violates I.R.C. § 6110(k)(3)

C. Alternatively, the 2005 and 2006 easements were not contributed “exclusively for conservation purposes”

D. The amendment clause violates the perpetuity requirements of I.R.C. §§ 170(h)(2)(C) and 170(h)(5)(A)

II. The Tax Court erred in determining that Pine Mountain was entitled to a charitable-contribution  deduction for its donation of the 2007 easement

A. The amendment clause violates the perpetuity requirement of I.R.C. § 170(h)(2)(C)

B. The amendment clause also violates the perpetuity requirement of I.R.C. § 170(h)(5)(A)

C. The Tax Court's analysis of the amendment clause was flawed in several respects

III. The Tax Court erred in its methodology and determination of the fair market value of the 2007 easement

A. Introduction and valuation proceedings below

B. The Tax Court failed to adopt a valuation method that is capable of meaningful review

C. The Tax Court erred in rejecting the Commissioner's valuation based on the comparable-easement-sales method

Conclusion

Certificate of compliance

Certificate of service

TABLE OF CITATIONS

Cases:

Akers v. Commissioner, 798 F.2d 894 (6th Cir. 1986)

Alvary v. United States, 302 F.2d 790 (2d Cir. 1962)

Amergen Energy Co. v. United States, 94 Fed. Cl. 413 (2010)

American Bus. Ass'n v. Slater, 231 F.3d 1 (D.C. Cir. 2000)

Auer v. Robbins, 519 U.S. 452 (1997)

Balsam Mountain Invs. v. Commissioner, 109 T.C.M. (CCH) 1214 (T.C. 2015)

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

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

Carpenter v. Commissioner, T.C. Memo. 2012-1 (2012)

Connecticut Nat'l Bank v. Germain, 503 U.S. 249 (1992)

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

Esgar Corp. v. Commissioner, 744 F.3d 648 (10th Cir. 2014)24

Estate of Trompeter v. Commissioner, 279 F.3d 767 (9th Cir. 2002)

Evans v. Georgia Regional Hospital, 850 F.3d 1248 (11th Cir. 2017)

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

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

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

Kardash v. Commissioner, 866 F.3d 1249 (11th Cir. 2017)

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

Kisor v. Wilkie, 139 S. Ct. 2400 (2019)

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

Ocmulgee Fields, Inc. v. Commissioner, 613 F.3d 1360 (11th Cir. 2010)

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

PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (11th Cir. 2018)

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

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

United States v. Steele, 147 F.3d 1316 (11th Cir. 1998)

Statutes

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

§ 170

§ 170(a)(1)

§ 170(f)(3)(A) 

§ 170(f)(3)(B)(iii) 

§ 170(f)(11)(D)

§ 170(h)

§ 170(h)(1)

§ 170(h)(1)(C)

* § 170(h)(2)(C)

* § 170(h)(5)(A) 

§ 6110(k)(3) 

§ 6226(a)(1) 

§ 6226(f) 

§ 6234 

§ 7482(a)(1) 

§ 7502 

Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520 (1976)

Tax Reduction and Simplification Act of 1977,Pub. L. 95-30, 91 Stat. 126 (1977) 

Tax Treatment Extension Act of 1980, Pub. L. 96-541, 94 Stat. 3204 (1980) 

Tax Equity and Fiscal Responsibility Act of 1982 Pub. L. No. 97-248, 96 Stat. 324 (1982) Bipartisan Budget Act of 2015,

Pub. L. No. 114-74, 129 Stat. 625 (2015)

Regulations

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

§ 1.170A-14(b)(2)

* § 1.170A-14(e)(2)

§ 1.170A-14(f)

* § 1.170A-14(g)(1)

§ 1.170A-14(g)(3)

§ 1.170A-14(g)(5)(i)

§ 1.170A-14(g)(6)(i)

§ 1.170A-14(h)(3)(i)

§ 1.170A-14(h)(3)(ii)

Other Authorities

Fed. R. App. P. 13(a)(1)

H.R. Rep. No. 94-658 (1975)

S. Rep. No. 96-1007 (1980)

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

Staff of J. Comm. on Taxation, 96th Cong., Description of Miscellaneous Tax Bills Scheduled for a Hearing before the Subcommittee on Select Revenue Measures of the Committee on Ways and Means on June 26, 1980, JCS-33-80 (Comm. Print 1980)

Tax Court Rule 143(g)(2)

* Cases or authorities chiefly relied upon have asterisks.


STATEMENT OF JURISDICTION

On January 22, 2013, the Internal Revenue Service (“IRS”) issued notices of final partnership administrative adjustment to Pine Mountain Preserve, LLLP, pursuant to the partnership audit procedures established by the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), Pub. L. No. 97-248, § 402(a), 96 Stat. 324, 648 (1982) (formerly codified as 26 U.S.C. §§ 6221-6234).1 In the notices, the IRS disallowed charitable-contribution deductions that Pine Mountain claimed on its partnership returns for the years 2005, 2006, and 2007. (Exs. 9, 10, 11.)2 On April 22, 2013, Eddleman Properties, LLC, the tax matters partner, mailed a petition to the Tax Court for readjustment of partnership items under § 6226(a)(1) of the Internal Revenue Code (“I.R.C.”) (26 U.S.C.), as then in effect. (Doc. 1.) The petition is deemed to have been timely filed under I.R.C. § 7502. The Tax Court had jurisdiction under I.R.C. § 6226(f), as then in effect. Appellant's statement of jurisdiction incorrectly states that the Tax Court's jurisdiction was based on current I.R.C. § 6234, which was not in effect at the time of the petition.

On February 7, 2019, the Tax Court entered a final decision disposing of all claims of all parties. (Doc. 102.) Pine Mountain filed a timely notice of appeal on May 7, 2019, within 90 days of the decision, and the Commissioner filed a timely notice of cross-appeal on June 3, 2019, within 120 days of the decision. (Docs. 103, 107); see Fed. R. App. P. 13(a)(1). This Court has jurisdiction under I.R.C. § 7482(a)(1).

STATEMENT OF THE ISSUES

Pine Mountain's appeal

1. Whether the Tax Court correctly determined that Pine Mountain was not entitled to charitable-contribution deductions for the years 2005 and 2006 for its donation of a conservation easement in each of those years.

Commissioner's cross-appeal

2. Whether the Tax Court erred in determining that Pine Mountain was entitled to a charitable-contribution deduction for the donation of an easement in 2007.

3. If the Tax Court did not so err, whether the court erred in its methodology and determination of the fair market value of the 2007 easement.

STATEMENT OF THE CASE

A. Course of proceedings and disposition in the court below

This federal tax case involves Pine Mountain's claims for charitable-contribution deductions for its donations of three conservation easements — one in each of the years 2005, 2006, and 2007 — encumbering real property that it owned in Alabama. The Tax Court sustained the Commissioner's determination that Pine Mountain was not entitled to any deduction for its donations of the 2005 easement or the 2006 easement because those easements were not qualified conservation contributions. The Tax Court determined that Pine Mountain was entitled to a deduction for its donation of the 2007 easement, however, and allowed a deduction of $4,779,500 based on the court's determination that this was the fair market value of the 2007 easement at the time of the donation. Pine Mountain appealed, and the Commissioner cross-appealed.

B. Statement of the facts

1. The Pine Mountain property

In 2004, real-estate developers Douglas Eddleman and his father, Billy Eddleman, began acquiring tracts of land for potential future development in Shelby County, Alabama. (Op. 4.) The Eddlemans, through entities they owned, eventually purchased ten contiguous parcels of unimproved land covering approximately 6,224 acres, the last of which they acquired in October 2007. (Op. 4-11.) The Eddlemans formed the Pine Mountain partnership (formerly known as Chelsea Preserve, LLLP) to hold these properties for development. (Op. 6.) The location, dates of purchase, and the prices paid for each of the parcels is set forth in the parties' stipulations and in the Tax Court's opinion. (See Op. 4-11; Doc 41 ¶¶ 35-46.) The combined acquisition cost of all ten parcels (collectively, the “Pine Mountain property”) was $37,070,435. (Op. 12.)

To finance the acquisition of the Pine Mountain property, Pine Mountain made private-placement offerings that permitted investors to purchase limited interests in the Pine Mountain partnership. (Exs. 82, 83.) In August 2005, investors paid a total of $29,970,000 for a 50% share in the partnership. (Doc. 41 ¶ 90.) In December 2006, Pine Mountain offered additional limited-partnership units to its limited partners, who invested another $14,985,000 in the partnership. (Doc. 41 ¶ 91.) After the second offering, the limited partners collectively continued to own 50% of the partnership, while Eddleman Properties, LLC, retained the other 50% interest. (Doc. 41 ¶ 91.)

The private-placement memorandum explained that Pine Mountain anticipated developing the Pine Mountain property “principally as a residential development with limited commercial development and with common amenities such as parks, lakes, and public and recreational facilities.” (Ex. 82 at 7.) The memorandum stated that Pine Mountain may grant conservation easements over part of the property, in which case the partnership could be entitled to charitable-contribution deductions for the value of the conservation easements. (Ex. 82 at 14.) The memorandum further noted, however, that the partnership “does not intend to grant conservation easements unless it appears it would be in the economic interest of its partners” to do so. (Ex. 82 at 14.)

The Pine Mountain property is situated north of the Highway 280 corridor that stretches from Birmingham to Harpersville in Shelby County. (Op. 4.) At the time the Eddlemans began assembling the Pine Mountain property, it consisted of unincorporated and unimproved land. (Op. 6.) In September 2006, the nearby town of Westover signed an agreement to annex the Pine Mountain property into the municipality of Westover, and the annexation was completed in March 2007. (Op. 9, 11; Ex. 51.) A month later, in April 2007, the town of Westover approved Pine Mountain's application to rezone the property from “agriculture preserve” to “planned unit development” (Op. 11; Ex. 81 at 1), although, at the time of the trial, the Pine Mountain property was still undeveloped (Tr. 162; Doc. 99 at 20).

In each of the years 2005, 2006, and 2007, Pine Mountain granted to the North American Land Trust (“NALT”) a conservation easement over a portion of the Pine Mountain property. (See Ex. 1) (map of the easement locations).

2. The terms of the easements

a. The 2005 easement

On December 27, 2005, Pine Mountain granted to NALT a conservation easement over 559.48 noncontiguous acres within Parcel 2 of the Pine Mountain property. (Doc. 41 ¶¶ 4-6; Ex. 2.) At the time of the contribution, Pine Mountain owned 2,880.96 acres of the Pine Mountain property (Parcels 1-6). (Doc. 41 ¶ 6.) The conservation area, which covers the 559.48 acres described above, consists mostly of ridgelines and higher-elevation land, with the balance consisting of lower-lying land around a man-made lake located near the center of Parcel 2. (Op. 12-13.)

The 2005 easement states as its “conservation purposes” the preservation of the conservation area “as a relatively natural habitat of fish, wildlife, or plants or similar ecosystem” and “as open space which provides scenic enjoyment to the general public and yields a significant public benefit.” (Ex. 2 at 3.) Specifically, the easement states that it seeks to protect: (i) three natural communities of trees; (ii) riparian areas that drain into the Coosa River watershed; (iii) the habitats of certain plants and birds; and (iv) a “scenic woodland view from US Highway 280.” (Ex. 2 at 3.) To that end, Article 1 of the easement grants a “perpetual easement in gross” over the conservation area. (Ex. 2 at 4.) Article 2 then sets forth various restrictions that prohibit residential, commercial, and industrial development of the conservation area, among other things, while generally permitting recreational and agricultural activity. (Ex. 2 at 4-8.) As the Tax Court described in detail, however, Article 3 of the easement, captioned “Reserved Rights,” lists numerous “exceptions” to the restrictions in Article 2. (Ex. 2 at 8-20; Op. 13-18.)

First, Article 3.1 permits the construction of ten single-family dwellings or luxury homes — one within each of ten “building areas” located inside the conservation area — as well as the construction of “other [s]tructures customarily accessory to residential use, including but not limited to a shed, garage, gazebo, vehicle parking area, and pool” inside each of the ten building areas. (Ex. 2 at 9.) The easement initially designates the locations of the ten building areas as one-acre lots situated around an existing man-made lake. (Ex. 2 at 9, 38.) But the easement permits Pine Mountain or subsequent owners to modify the boundaries of the building areas if: (i) the boundary modification does not, in NALT's “reasonable judgment,” result in any material adverse effect on the conservation purposes; (ii) the size of a building area is not increased; and (iii) the boundary modification is properly recorded. (Ex. 2 at 13 (Article 3.16).) The easement thus permits the building areas to be relocated to other locations inside the conservation area, without any limitation on how many building areas can be moved, how often this can be done, or how far into the future such relocations can occur. (Op. 14, 48.)

Next, in addition to the building areas, the 2005 easement permits Pine Mountain and subsequent owners to build numerous other structures at undesignated locations inside the conservation area. These include:

  • Ten barns (one for each building area) for livestock shelter or agricultural storage, each of which may include “an apartment for occupancy by a caretaker and such caretaker's family” and may occupy up to 5,000 square feet of ground coverage. Each barn must be located within 1,000 feet of the building area. (Article 3.2.)

  • Common facilities consisting of “one barn,” a “riding stable,” and an “indoor riding ring.” Ten acres of “land disturbed and trees cleared” is permitted for the construction of these buildings. (Article 3.2.)

  • Two scenic overlook structures, “one of which may include a guest bedroom” and the other of which shall be similar to a picnic pavilion or gazebo. Six acres of trees may be demolished in the construction of the scenic overlooks, and additional trees may be cleared as needed to “maintain a viewing corridor for each scenic overlook structure.” (Article 3.3.)

  • Four “boat launch facilit[ies]”; four “boat storage building[s]”; and ten piers. (Article 3.4.)

  • Five ponds occupying up to five acres of surface area each. (Article 3.7.)

  • A “reasonable” (but unspecified) number of hunting stands or blinds to facilitate hunting, trapping, and fishing by homeowners and their guests. (Articles 3.9 and 3.19.)

(Ex. 2 at 9-11.) As noted, the easement does not specify a location for any of these structures.

Further, although Article 2 of the easement purports to prohibit a variety of other uses or activities inside the conservation area, Article 3 carves out exceptions that in each instance reserve the right of Pine Mountain and homeowners to engage in those same activities. These include:

  • The right to construct, use, and maintain roads, driveways, service vehicle trails, nature trails, paths, and raised walkways over and across the conservation area, notwithstanding the purported restriction in Article 2 on the construction of any road or pathway in the conservation area. (Compare Articles 3.6, 3.6, 3.12, 3.13, and 3.23, with Article 2.6.)

  • The right to cut down, remove, harvest, and sell trees in the conservation area, or to use the trees for firewood, notwithstanding the purported restriction in Article 2 on the cutting, removal, or destruction of live or dead trees. (Compare Articles 3.20 and 3.21, with Article 2.7.)

  • The right to erect signs, including for advertisement, notwithstanding the purported restriction in Article 2 on all signs in the conservation area. (Compare Article 3.22, with Article 2.8.)

  • The right to drill wells and withdraw water from the conservation area for residential use and other purposes, notwithstanding the purported restriction in Article 2 on the removal of ground or surface water from the conservation area. (Compare Article 3.17, with Articles 2.5 and 2.12.)

  • The right to use the conservation area for underground disposal of waste or sewage water, notwithstanding the purported restriction in Article 2 on the discharge of waste water in the conservation area. (Compare Articles 3.18 and 3.15, with Article 2.12.)

  • The right to “subdivide the [c]onservation [a]rea into one or more lots, tracts or parcels under separate ownership.” (Compare Article 3.24, with Article 2.17.)

  • The right of homeowners and their guests to hunt, trap, fish, and to otherwise harvest all kinds of wildlife. (Articles 3.10 and 3.19.)

(Ex. 2 at 4-20.)

Finally, the 2005 easement states that “circumstances could arise which would justify the modification of certain of the restrictions” in the easement. “To this end,” the easement gives Pine Mountain (or subsequent owners) and NALT the right, in their “sole discretion,” to modify the terms of the easement. Article 6.7 states in this regard that —

[Pine Mountain] and [NALT] recognize that circumstances could arise which would justify the modification of certain of the restrictions contained in this Conservation Easement. To this end, [NALT] and the 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. . . .

(Ex. 2 at 26.) Article 6.7 further states that the right to amend the easement is subject to the general condition that NALT “shall have no right or power to agree to any amendments . . . that would result in this Conservation Easement failing to qualify . . . as a qualified conservation contribution under Section 170(h) of the Internal Revenue Code and applicable regulations.” (Ex. 2 at 26.)

b. The 2006 easement

On December 20, 2006, Pine Mountain granted a conservation easement over 499.23 noncontiguous acres located within Parcels 2, 5, and 6 of the Pine Mountain property (the “2006 easement”). (Doc. 41 ¶¶ 8-10; Ex. 4.) At the time of the 2006 contribution, Pine Mountain owned 5,028.32 acres of the Pine Mountain property (Parcels 1-8), with an option to purchase an additional 1,195.91 acres (Parcels 9 and 10). (Doc. 41 ¶ 9.) The conserved land comprises higher elevation territory in the northern half of Parcel 6 and lower-lying land in the southern portions of Parcels 2 and 5. (Op. 18-19.)

The 2006 easement lists the same conservation purposes as the 2005 easement and one additional purpose: the preservation of the conservation area “as open space [that] will advance a clearly delineated Federal, State, or local governmental conservation policy.”3 (Ex. 4 at 2.) Like the 2005 easement, Article 1 of the 2006 easement grants a “perpetual easement in gross” over the 2006 conservation area, Article 2 sets forth restrictions pertaining to the use of the conservation area, and Article 3 reserves to Pine Mountain and subsequent owners numerous rights as “exceptions” to those restrictions. (Ex. 4 at 3-18.) Article 6.7 contains a general amendment provision identical to the one in the 2005 easement. (Ex. 4 at 24.)

The restrictions in Article 2 and the reserved rights in Article 3 of the 2006 easement are substantially identical to those in the 2005 easement, with a few notable differences. Like the 2005 easement, the 2006 easement carves out six “building areas” inside the 2006 conservation area for the construction, within each, of a single-family luxury home and other structures accessory to residential use, “including but not limited to a shed, garage, gazebo, and pool.” (Ex. 4 at 8 (Article 3.1).) The 2006 easement, however, does not specify even the initial locations of the six building areas, nor does it place any limitation on where within the 2006 conservation area such building areas may be located, except to state that the locations must be “approved in advance” by NALT. (Ex. 4 at 8 (Article 3.1); Op. 19-20.) The 2006 easement, like the 2005 easement, permits subsequent modification of the boundaries of the building areas (once selected). (Ex. 4 at 12 (Article 3.16).)

Unlike the 2005 easement, the 2006 easement does not include among the reserved rights in Article 3 the right to construct any scenic overlooks, riding stables, ponds, boat storage buildings, or piers. (Op. 20-21.) The 2006 easement does, however, permit the construction of a water tower and underground pipelines across the conservation area. These facilities may be used as a water supply for the sixteen building areas permitted inside the 2005 and 2006 conservation areas, as well as for residential and commercial developments constructed outside of the conservation areas in Parcels 2, 5, and 6 of the Pine Mountain property. (Ex. 4 at 8-9; Op. 20.)

c. The 2007 easement

On December 19, 2007, Pine Mountain granted a conservation easement over 224.55 noncontiguous acres within Parcels 5, 6, and 7 of the Pine Mountain property (the “2007 easement”). (Doc. 41 ¶¶ 11-13; Ex. 5.) At the time of the 2007 contribution, Pine Mountain owned all 10 parcels of the Pine Mountain property, consisting of 6,224.23 total acres. (Doc. 41 ¶ 12.) The conserved land under the 2007 easement comprises higher-elevation territory in Parcel 7 and several lower-lying areas in Parcels 5 and 6 that are traversed by streams. (Op. 21.)

The 2007 easement states the same conservation purposes as the 2005 easement. (Ex. 5 at 2.) And, like the other easements, Article 2 purports to restrict certain uses of the 2007 conservation area, while Article 3 reserves to Pine Mountain or subsequent owners numerous rights as “exceptions” to those restrictions. (Ex. 5 at 4-15.) Article 6.7 contains a general amendment provision identical to the amendment provision in the other easements. (Ex. 5 at 21.)

Unlike the 2005 and 2006 easements, however, the 2007 easement does not designate any “building areas” or permit residential construction anywhere within the 2007 conservation area. Nor does it reserve rights to construct any barns, scenic overlooks, riding stables, ponds, boat storage buildings, or piers. (Ex. 5; Op. 22.) The 2007 easement does, however, permit the construction of a water tower and underground pipelines to serve as a water supply to the six building areas permitted by the 2006 easement and to residential or commercial developments constructed outside of the conservation areas in Parcels 5, 6, and 7 of the Pine Mountain property. (Ex. 4 at 8-9; Op. 20.)

3. Pine Mountain's charitable-contribution deduction claims

On its partnership returns for the years 2005, 2006, and 2007, Pine Mountain claimed charitable-contribution deductions of $16,550,000, $12,726,000, and $4,100,000, respectively, for its donations to NALT of the 2005, 2006, and 2007 easements. (Doc. 41 ¶¶ 1, 14, 16, 18.) These amounts were based on appraisals prepared by Clark, Sands & Associates, P.C., which Pine Mountain attached to its returns. (See Exs. 6, 7, 8.)

After an audit, the IRS disallowed in their entirety Pine Mountain's claimed deductions for each year. The IRS determined with respect to each donation that “the requirements of Internal Revenue Code Section 170 have not been met” and that, alternatively, Pine Mountain had not established that the value of the contributed property was as claimed. (Ex. 9 at 7; Ex. 10 at 7; Ex. 11 at 7.)

4. The Tax Court proceedings

Pine Mountain filed a Tax Court petition challenging the IRS's determinations. In addition to arguing that it was entitled to the deductions, Pine Mountain claimed that the value of the donated easements was substantially greater than what it claimed on its tax returns. Based on new appraisals prepared for the Tax Court proceeding by Pine Mountain's retained expert, Raymond Veal, Pine Mountain claimed that the 2005 easement was worth $54,690,000; that the 2006 easement was worth $33,570,000; and that the 2007 easement was worth $9,110,000. (Op. 24-27.) Pine Mountain thus claimed that it was entitled to deductions in the aggregate amount of $97,370,000 — almost three times higher than what it claimed on its returns, and over $60 million more than the $37,070,435 it paid to acquire the entire Pine Mountain property not long before — even though the donated easements together encumbered only 20% of the property's total acreage (1,283 acres out of 6,224 total acres). (Op. 57.)

The Commissioner contended that Pine Mountain was not entitled to any deduction because none of the easements was a “qualified real property interest” and none was donated “exclusively for conservation purposes.” See I.R.C. § 170(h)(1). In addition, the Commissioner argued that the values of the easements were substantially less than Pine Mountain claimed. The Commissioner's valuation expert, Gary McGurrin, determined values of $1,119,000, $998,000, and $449,000, for the 2005, 2006, and 2007 easements, respectively. (Op. 27.)

In a reviewed opinion authored by Judge Lauber, and joined by ten other judges, the Tax Court sustained the Commissioner's determination that no deduction was allowed for Pine Mountain's donations of the 2005 and 2006 easements, but the court held that a deduction was allowed for Pine Mountain's donation of the 2007 easement (to the extent of its value). (Op. 29-57.) The trial judge dissented from the court's reviewed opinion. (Op. 59-116.) The Tax Court issued a separate memorandum opinion on the valuation issue that was authored by the trial judge, determining that the value of the 2007 easement was $4,779,500. (Doc. 99.)

C. Statement of the standard or scope of review

This Court reviews the Tax Court's legal conclusions de novo and its factual findings for clear error. Kardash v. Commissioner, 866 F.3d 1249, 1252 (11th Cir. 2017). Thus, the Tax Court's interpretations of the Internal Revenue Code are reviewed de novo, but its underlying findings of facts and factual inferences are reviewed for clear error. Ocmulgee Fields, Inc. v. Commissioner, 613 F.3d 1360, 1364 (11th Cir. 2010). As for the valuation issue, “[w]hether the Tax Court used the correct standard to determine fair market value is a legal issue,” but “[a] determination of fair market value is a mixed question of fact and law: the factual premises are subject to a clearly erroneous standard while the legal conclusions are subject to de novo review.” Palmer Ranch Holdings Ltd. v. Commissioner, 812 F.3d 982, 993-94 (11th Cir. 2016).

SUMMARY OF ARGUMENT

Section 170(h) of the Internal Revenue Code requires that a conservation easement's restriction on the use that may be made of the encumbered property be “granted in perpetuity,” I.R.C. § 170(h)(2)(C), and that the easement's conservation purposes be “protected in perpetuity,” I.R.C. § 170(h)(5)(A), for the donation to qualify for a charitable-contribution deduction. The Tax Court correctly denied deductions for Pine Mountains donations of the 2005 and 2006 easements. But the court erred in granting a deduction for Pine Mountain's donation of the 2007 easement, and the court further erred in its determination of the 2007 easement's value.

1. The Tax Court correctly held that Pine Mountain is not entitled to charitable-contribution deductions for its donations of the 2005 and 2006 easements because neither easement's restriction on the use that may be made of the encumbered land was granted in perpetuity. Although both easements purport to protect in perpetuity the use of the conservation areas from any form of development, the reserved rights in each easement permit Pine Mountain to later re-designate unspecified portions of the conserved land as building area sites dedicated to upscale residential development. That development may include up to 16 single-family luxury homes located anywhere in the conservation areas, as well as numerous other structures and facilities intended for the homeowners' recreation and enjoyment. Thus, neither easement's restriction on the use of the encumbered property satisfies §170(h)(2)(C)'s granted-in-perpetuity requirement for a deduction. Alternatively, the 2005 and 2006 easements fail § 170(h)(5)(A)'s protected-in-perpetuity requirement.

None of Pine Mountain's arguments establishes error in the Tax Court's decision. The court did not confuse § 170(h)'s two perpetuity requirements, nor did the court err in applying relevant case law. Further, Pine Mountain's reliance on certain examples in the Treasury regulations and on non-precedential IRS rulings is misguided and ignores the Treasury regulation's more analogous examples, which support the Tax Court's decision here.

2. The Tax Court erred in allowing a deduction for the 2007 easement because the easement's general amendment clause violates the perpetuity requirements of both § 170(h)(2)(C) and § 170(h)(5)(A). The amendment clause violates § 170(h)(2)(C) because it gives the parties sole discretion to modify the land-use restrictions imposed by the easement, which are therefore not perpetual. The amendment clause also violates § 170(h)(5)(A) by permitting “trade-off” amendments (i.e., an amendment that has both negative and positive effects on conservation interests, but is deemed by the parties, on balance, to have an overall neutral or protection-enhancing effect).

3. Finally, the Tax Court erred in its value determination for the 2007 easement. First, the court did not follow any recognized valuation method and failed to adopt a method that is capable of meaningful review. The court rejected the valuations determined by both parties' experts, finding flaws in each, and then picked a number exactly in the middle without attempting to quantify the alleged errors in each expert's valuation to support its determination. Second, the court erred in rejecting the Commissioner's valuation using the comparable-easement-sales method (the preferred method under the regulations) based on erroneous findings that are not supported by the record.

The Tax Court's disallowance of a deduction for 2005 and 2006 should be affirmed, and its allowance of a deduction for 2007 should be reversed. If the 2007 deduction is affirmed, then the Tax Court's value determination for the 2007 easement should be vacated and remanded.

ARGUMENT

I. The Tax Court correctly held that Pine Mountain was not entitled to charitable-contribution deductions for its donations of the 2005 and 2006 easements

It is now a “familiar rule” that an income-tax deduction “is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer.” INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (internal quotations and citations omitted). Deductions under the Internal Revenue Code are “strictly construed” and “allowed only as there is a clear provision therefore.” Id. This standard of strict statutory construction applies to Pine Mountain's claims for charitable-contribution deductions in this case.4

Section 170 of the Internal Revenue Code allows a deduction for charitable contributions that are properly verified under the regulations. I.R.C. § 170(a)(1). As a general rule, taxpayers are not entitled to a deduction for the donation of a partial interest in property. I.R.C. § 170(f)(3)(A). But the Code provides a limited exception for a “qualified conservation contribution.” I.R.C. § 170(f)(3)(B)(iii). This exception was enacted as part of the Tax Treatment Extension Act of 1980, Pub. L. 96-541, § 6(a), 94 Stat. 3204, 3206 (1980). As the legislative history indicates, the allowance of a tax deduction for qualified conservation contributions was “directed at the preservation of unique or otherwise significant land areas or structures.” S. Rep. No. 96-1007, at 9 (1980). Congress was also mindful of the “potential for abuse,” and it wanted to restrict the qualifying contributions “where there is no assurance that the public benefit, if any, furthered by the contribution would be substantial enough to justify the allowance of a deduction.” Id. at 9-10.

To qualify for a deduction, a conservation contribution must satisfy three criteria: the contribution must be “(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes.” I.R.C. § 170(h)(1). The Tax Court correctly held that neither the 2005 easement nor the 2006 easement that Pine Mountain contributed to NALT satisfied the first of these criteria — i.e., neither was a “qualified real property interest” — because the easements' restriction on the use that could be made of the encumbered land was not “granted in perpetuity.” I.R.C. § 170(h)(2)(C). The Tax Court did not reach the Commissioner's alternative argument that the easements also failed the “exclusively for conservation purposes” criteria because the conservation purpose was not “protected in perpetuity,” I.R.C. §170(h)(5)(A), but the 2005 and 2006 easements are ineligible for a deduction for this additional reason.

A. The Tax Court correctly held that neither the 2005 easement nor the 2006 easement was a “qualified real property interest”

1. Introduction

Section 170(h)(2) defines a “qualified real property interest” to include “a restriction (granted in perpetuity) on the use which may be made of the real property.” I.R.C. § 170(h)(2)(C). Because an easement is “a restriction . . . on the use which may be made of . . . real property,” id., the donation of a conservation easement may provide the basis for a deduction under § 170 — if the restriction is granted in perpetuity. Treas. Reg. (26 C.F.R.) § 1.170A-14(b)(2); Belk, 774 F.3d at 225. The statutory requirement that an easement's restriction be “granted in perpetuity” reflects a notable change that Congress made in a 1977 amendment to the statute.5

Moreover, to qualify for a deduction, § 170(h)(2)(C) requires that the perpetual use restriction attach at the outset to a defined and immutable parcel of land. The Fourth Circuit recently explained, in examining § 170(h)(2)(C)'s language, that “the placement of the article 'the' before 'real property' makes clear that a perpetual use restriction must attach to a defined parcel of real property rather than simply some or any (or interchangeable parcels of) real property.” Belk, 774 F.3d at 225; see also American Bus. Ass'n v. Slater, 231 F.3d 1, 4-5 (D.C. Cir. 2000) (“It is a rule of law well established that the definite article 'the' particularizes the subject which it precedes. It is a word of limitation as opposed to the indefinite or generalizing force of 'a' or 'an.'”). Congress's use of the definite article in § 170(h)(2)(C) demonstrates its intent to require a donor to grant in perpetuity a restriction on the use of specific property. Therefore, a conservation easement that permits the donor to reclaim the conserved land, or to substitute other property for the real property subject to the use restriction under the easement, does not qualify. “[T]he Code requires a donor to grant an easement to a single, immutable parcel at the outset to qualify for a charitable deduction.” Belk, 774 F.3d at 227 (emphasis and footnote omitted).

In Belk, a developer donated to a land trust a conservation easement over a golf course. The easement, however, permitted the developer to swap land in and out of the easement by substituting land contiguous to the conservation area for an equal or lesser area of land comprising a portion of the conservation area. The developer's substitution right was conditioned on the land trust's agreement that the substitution would have no adverse effect on the easement's conservation purposes and that the substituted property was of equal or greater size, value, and ecological quality. 774 F.3d at 223.

The Fourth Circuit held that the easement was not a “qualified real property interest” under § 170(h)(2)(C) because “the real property contributed to the [t]rust [was] not subject to a use restriction in perpetuity.” Id. at 226. The court explained that, although the easement purported “to restrict development rights in perpetuity for a defined parcel of land,” it allowed the developer to “remove land from that defined parcel and substitute other land.” Id. The court concluded that § 170(h)(2)(C)'s plain language barred a deduction: “§ 170(h)(2)(C) means what it says: a charitable deduction may be claimed for the donation of a conservation easement only when that easement restricts the use of the donated property in perpetuity.” Id. at 227.

The Belk court found additional support for its ruling in the separate statutory requirement that “[i]n the case of contributions of property for which a deduction of more than $500,000 is claimed . . . a qualified appraisal of such property” must accompany the tax return, I.R.C. § 170(f)(11)(D), and in the regulatory requirement that a donor of a conservation easement make available to the donee “documentation sufficient to establish the condition of the property,” Treas. Reg. §1.170A-14(g)(5)(i). As the court explained, these requirements would be rendered meaningless if a donor were allowed to change the real property that is subject to a use restriction under the easement. Belk, 774 F.3d at 226-27; see also Balsam Mountain Invs. v. Commissioner, 109 T.C.M. (CCH) 1214 (2015) (applying Belk to deny a deduction where the easement allowed substitution of conserved land, even though any substitution had to be effected within 5 years of the easement date and could not result in the removal of more than 5% of the original conservation area).

The Treasury regulations offer a “single — and exceedingly narrow — exception to the requirement that a conservation easement impose a perpetual use restriction.” Belk, 774 F.3d at 225. In this respect, the regulations provide that —

If a subsequent unexpected change in the conditions surrounding the property that is th e subject of a donation under this paragraph can make impossible or impractical the continued use of the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and all of the donee's proceeds . . . from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution.

Treas. Reg. § 1.170A-14(g)(6)(i). “Thus, absent these 'unexpected' and extraordinary circumstances, real property placed under easement must remain there in perpetuity in order for the donor of the easement to claim a charitable deduction.” Belk, 774 F.3d at 225.

As the Tax Court recognized, the Fifth Circuit in BC Ranch II, 867 F.3d 547, in a 2-1 split decision, reached a contrary conclusion in a case involving moveable homesites. As explained infra pp. 40-44, we submit that the dissent in BC Ranch correctly opined that the Belk analysis applies to cases involving moveable homesites.

2. The 2005 and 2006 easements' restriction on the use that could be made of the encumbered real property was not granted in perpetuity

The Tax Court correctly held that neither the 2005 easement nor the 2006 easement was “a restriction (granted in perpetuity) on the use which may be made of the real property.” I.R.C. § 170(h)(2)(C). That is because the reserved rights in the easements allow Pine Mountain (or subsequent owners) to reclaim initially-protected portions of the conservation area and dedicate that land instead to residential development. Thus, land that was originally subject to a restriction that prohibited development (among other things) can be stripped of that protection and used for residential development. Such residential development may include up to 16 single-family luxury homes as well as numerous other structures and facilities intended for the homeowners' recreation and enjoyment. The fact that the easements allow the donor to engage in previously-prohibited uses of the conserved land demonstrates that the easements' restriction on the use that could be made of that land was not “granted in perpetuity.” I.R.C. §170(h)(2)(C); see also Treas. Reg. § 1.170A-14(b)(2) (“Any rights reserved by the donor in the donation of a perpetual conservation restriction must conform to the requirements” of § 170(h) and the regulations.).

a. The 2005 easement

The 2005 easement reserves to Pine Mountain and subsequent owners the right to construct ten single-family luxury homes and various accessory structures within each of ten “building areas” inside the 2005 conservation area. Similar to the easement in Belk, the 2005 easement permits Pine Mountain, with NALT's consent (and subject to certain conditions), to modify the boundaries of the building areas.6 The easement thus permits 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, without any limitation on how many building areas can be moved, how often this can be done, or how far into the future such relocations can occur.

In this manner, the 2005 easement “purports to restrict development rights in perpetuity for a defined parcel of land, but upon satisfying the conditions in the [boundary-modification] provision, the taxpayers may remove land from that defined parcel and substitute other land.” Belk, 774 F.3d at 226. Because the easement permits unspecified portions of the conservation area to be re-designated as the new location of a building area for residential development, the easement's restriction prohibiting development plainly did not attach in perpetuity to the initially-defined parcel of land, as § 170(h)(2)(C) requires.

In addition to permitting relocation of the building areas, the 2005 easement permits Pine Mountain or subsequent owners to build numerous other structures intended for the homeowners' recreation and enjoyment, without specifying the location for any of those structures inside the conservation area. These include: (i) ten barns, each of which may include “an apartment for occupancy by a caretaker and such caretaker's family”; (ii) common facilities consisting of a barn, a riding stable, and a riding ring occupying up to ten acres; (iii) two scenic overlooks, one of which may include a “guest bedroom,” occupying up to six acres; (iv) five ponds occupying up to 25 acres; (v) and up to 14 piers and boat launches, which may include four “common boat launch facilit[ies] with associated boat storage building[s].” (Ex. 2 at 9-11.) As the Tax Court observed, these additional structures “[c]ollectively . . . have the effect of expanding the residential development well beyond the ten acres consumed by the Building Areas alone.” (Op. 48.)

The Tax Court correctly concluded, based on these facts, that “the rights reserved to Pine Mountain, considered in their entirety, prevent the 2005 easement from constituting a 'qualified real property interest.'” (Op. 48.) Therefore, Pine Mountain is not entitled to a deduction for its donation of the 2005 easement.

b. The 2006 easement

Like the 2005 easement, the 2006 easement permits the establishment of six “building areas” inside the 2006 conservation area. Each building area may include a single-family luxury home as well as other accessory structures, including but not limited to “a shed, garage, gazebo, and pool.” (Ex. 4 at 8.) But the 2006 easement does not specify even the initial locations for any of these building areas, nor does it place any limitation on where the building areas may be located inside the conservation area, except to state that the locations must be “approved in advance” by NALT. (Ex. 4 at 8.) The easement thus permits Pine Mountain to engage in previously-prohibited uses of the conserved land by designating building areas for residential development. This demonstrates that the easement's initial restriction on the use that could be made of the conserved land — prohibiting, inter alia, development — was not granted in perpetuity.

The Tax Court correctly determined under these circumstances that “the easement, when granted, did not create a perpetual use restriction on a defined parcel of land, as required by section 170(h)(2)(C).” (Op. 45.) Indeed, as the court pointed out, “it was impossible to define, when the 2006 easement was granted, what 'real property' would actually be restricted from development, because the residential lots could literally be placed anywhere within the 2006 Conservation Area. As a result, the perpetual use restriction did not attach at the outset 'to a defined parcel of real property' or to 'a single, immutable parcel' of land.” (Op. 45) (quoting Belk, 774 F.3d at 225, 227). Therefore, the 2006 easement was not a qualified real property interest, and Pine Mountain is not entitled a deduction for its donation of the easement.

B. Pine Mountain's arguments fail to establish error in the Tax Court's decision

1. The Tax Court did not confuse I.R.C. § 170(h)'s perpetuity requirements

Section 170(h)(2)(C) requires that a conservation easement's restriction on the use that may be made of the real property be “granted in perpetuity,” and section 170(h)(5)(A) separately requires that the easement's conservation purposes be “protected in perpetuity.” Pine Mountain's argument (Br. 22-27) that the Tax Court confused these perpetuity requirements reflects a fundamental misunderstanding of the court's opinion.

Pine Mountain claims that the Tax Court improperly considered “the sufficiency of [the] easement's restrictions” in concluding that neither the 2005 easement nor the 2006 easement was a qualified real property interest under § 170(h)(2)(C). (See Br. 24.) Specifically, Pine Mountain finds fault with the court's statement, taken out of context, that “[s]ection 170(h)(2)(C) requires that the land restricted by the conservation easement be protected from development in perpetuity.” (Br. 23) (quoting (Op. 42)). Pine Mountain points out that “[s]ection 170(h)(2)(C) does not prohibit any particular use” and that “[u]ses that conflict with conservation purposes are restricted by a different provision, section 170(h)(5)(A).” (Br. 23.)

Pine Mountain's view, in other words, is that § 170(h)(2)(C) is aimed solely at defining the tract of land subject to the easement and that § 170(h)(5)(A) governs any questions about how that land is used. But the plain language of § 170(h)(2)(C) refutes this strict dichotomy by defining a “qualified real property interest” as “a restriction (granted in perpetuity) on the use which may be made of the real property.” (Emphasis added.) Thus, § 170(h)(2)(C) is concerned with both defining the specific tract of property subject to the easement and the use to which such property may be put.

The Tax Court here correctly focused on the critical defect under §170(h)(2)(C) that it was impossible to determine what parcels of property were actually subject to the easements' use restriction — i.e., development — because Pine Mountain and NALT are free, under the terms of the easement, to move the building areas around within the protected area.7 (See Op. 44-48.) If the locations of the building areas were fixed by the easement, and the parties to the easement were not free to move them around, then the analysis would properly focus on §170(h)(5)(A), viz., whether the conservation purposes truly were protected in perpetuity in light of the development that is allowed on the property. But without knowing, in the first instance, where on the property development will occur (a matter that is governed by §170(h)(2)(C)), it is impossible for the IRS to assess whether the conservation purposes (e.g., protecting a natural habitat) will be protected (a matter governed by § 170(h)(5)(A)).

The 2005 easement in this case illustrates this problem. The 2005 easement allows ten luxury homesites to be built within the protected area, and an exhibit attached to the easement shows the location (at least initially) of those homesites — around a man-made lake. In theory, then, the IRS could assess whether residential construction would interfere with the protection of a natural habitat because it knows where, on the property, to conduct that inquiry: around the man-made lake.

But the 2005 easement also allows Pine Mountain and NALT to move the building areas to another location. If Pine Mountain and NALT later agree to relocate the building sites away from the man-made lake to a new location miles away, then any determination by the IRS that construction around the lake would not have interfered with the conservation purposes becomes utterly irrelevant. How can the IRS determine whether the conservation purposes will be protected if it does not know where on the property development will occur? Yet Congress has charged the IRS with determining whether easements meet the requirements of § 170(h) at the time of the donation, and in order for the IRS to do so, it must know, at that time, where on the conserved area the use restriction referred to in § 170(h)(2)(C) actually exists.

Here, the Tax Court held that the easements' restriction on the use of the conserved land was not granted in perpetuity, as §170(h)(2)(C) requires. In so holding, the court properly recognized that Pine Mountain's ability to reclaim the initially-protected land and dedicate it to residential development — a previously-prohibited use under the easements — is a fundamental defect that implicates §170(h)(2)(C), not § 170(h)(5)(A). Pine Mountain itself concedes that, under § 170(h)(2)(C), “the restrictions of the easement are to perpetually encumber a tract of land.” (Br. 24.) That plainly did not happen here. Ultimately, it is Pine Mountain, not the Tax Court, that is confusing the two perpetuity requirements of § 170(h)(2)(C) and §170(h)(5)(A).

2. Pine Mountain's attempt to distinguish Belk is unavailing

Pine Mountain's attempts to distinguish Belk because (1) the building areas permitted by the 2005 and 2006 easements must be located somewhere inside, not outside, the exterior boundaries of the easements (see Br. 29-33); and because (2) the building areas (theoretically) remain subject to the easements (see Br. 26, 30), are distinctions without a difference.

a. The substitute property's location, whether inside or outside a conservation easement's exterior boundaries, is irrelevant

In BC Ranch II, 867 F.3d 547, a divided panel of the Fifth Circuit held that the conservation easements in that case satisfied §170(h)(2)(C), even though the easements allowed the parties to modify the boundaries of “homesite” parcels (which were dedicated to residential development) inside the conservation areas. The majority “view[ed] Belk as distinguishable” because the substitution provision in Belk could lead to modification of the easement's exterior boundaries, whereas the easements in BC Ranch II “d[id] not allow any change in the exterior boundaries of the easements. . . . ” 867 F.3d at 552. The majority concluded on this basis that the easements in BC Ranch II “differ[ed] markedly” from the easement in Belk. Id. Judge Dennis dissented, finding the majority's “attempted distinction [of Belk] unpersuasive.” Id. at 562 (Dennis, J., dissenting). In his view, the fact that the land substitution occurs only “within the outer boundaries” of the easement “makes no meaningful difference” because the easements still “do not attach in perpetuity to the initially defined parcel of real property.” Id. at 562-63.

The Tax Court correctly concluded below that “the Fourth Circuit's analysis of this issue in Belk was correct” and that “Judge Dennis was correct in believing that the scenario presented by [BC Ranch II] (and this case) cannot meaningfully be distinguished from the scenario presented by Belk.” (Op. 41.) It makes no difference under §170(h)(2)(C) whether the substituted property is located inside or outside a conservation easement's exterior boundaries. In either case, land that was initially restricted under the easement may lose that protection by being swapped with other land and used for development. Thus, regardless where the substituted property is located, the conservation easement's restriction on the “use” that may be made of “the real property” to which the easement initially attached was not “granted in perpetuity.” I.R.C. § 170(h)(2)(C). As the Tax Court explained, “[w]hat matters is whether there is a perpetual use restriction on 'the real property' covered by the easement at the time the easement is granted.” (Op. 43.)

The majority's opinion in BC Ranch II was apparently influenced by a perceived “need for flexibility to address changing or unforeseen conditions on or under property subject to a conservation easement. . . .” 867 F.3d at 553. Although Congress contemplated enacting rules to cover the situation “where a transferred partial interest in real property, for which a deduction was allowed because it served a conservation purpose, ceases to be used in furtherance of the conservation purpose,” see Staff of J. Comm. on Taxation, 96th Cong., Description of Miscellaneous Tax Bills Scheduled for a Hearing before the Subcommittee on Select Revenue Measures of the Committee on Ways and Means on June 26, 1980, JCS-33-80, at 27 (Comm. Print 1980), Congress ultimately left this issue for the Treasury Department to address in regulations. As explained supra p. 30, the regulations do offer a limited exception to the requirement that a conservation easement impose a perpetual use restriction on a defined and immutable parcel of land — i.e., if a subsequent “unexpected” change in conditions makes “impossible or impractical” the continued use of the property for conservation purposes and the restrictions are “extinguished by a judicial proceeding.” Treas. Reg. § 1.170A-14(g)(6)(i). But, “absent these 'unexpected' and extraordinary circumstances, real property placed under easement must remain there in perpetuity in order for the donor of the easement to claim a charitable deduction.” Belk, 774 F.3d at 225.

Moreover, any perceived need for flexibility (in addition to what the Treasury regulations already provide) cannot override the plain terms of the statute. Section 170(h)(2)(C) explicitly requires that a conservation easement grant a perpetual restriction on the use which may be made of “the real property,” I.R.C. § 170(h)(2)(C) (emphasis added), making clear that a perpetual use restriction must attach to a defined and immutable parcel of real property, Belk, 774 F.3d at 225. “[W]e must presume that Congress said what it meant and meant what it said.” United States v. Steele, 147 F.3d 1316, 1318 (11th Cir. 1998) (en banc); see also Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253-54 (1992) (“We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there.”). Congress's intent that specific real property be subject to a perpetual use restriction is further indicated by the 1977 amendment to the statute, which changed the requirement that an easement be “of not less than 30 years' duration” to provide instead that the easement must be granted “in perpetuity” to qualify for a deduction. See footnote 5, supra pp. 26-27. This change makes clear that Congress intended that once property was encumbered for conservation purposes, the owner would not be able to reclaim it for subsequent development. But that is precisely what the boundary-modification provisions here allow.

b. That the building areas may theoretically remain “subject to the easement” is also irrelevant

Pine Mountain also argues that Belk is distinguishable because the landowner in Belk “reserved the right to remove all or part of the [conserved land] from the easement (freeing it from the easement restrictions)” (Br. 26), whereas the building areas permitted by the 2005 and 2006 easements in this case “are included within the description of the Conservation Area” and thus remain “subject to the restrictions of the conservation easements” (Br. 30, 37-38). The dissenting judge below made the same point (see Op. 78), and the Tax Court correctly dismissed it as being based on a “distinction without a difference” (Op. 43 n.6.)

Pine Mountain argues at length that the building areas permitted by the 2005 and 2006 easements remain subject to the easement restrictions. (Br. 33-39.) It claims the easements still prevent the building areas from being used for “duplexes, apartments, commercial or industrial buildings or activities, storage of chemicals, or retail shops, stores, or commercial workshops.” (Br. 35.) But these uses are largely restricted by the existing zoning designation, as the Tax Court noted (Op. 50), and would be economically irrational, in any event, on one-acre lots surrounded by undeveloped land.

But, even assuming arguendo that the building areas might theoretically remain subject to some use restrictions granted by the easements, that still would not cure the critical defect under §170(h)(2)(C), which is that each easement's original “restriction . . . on the use which may be made of the real property,” I.R.C. § 170(h)(2)(C), still was not granted in perpetuity. The fact remains that the easements allow portions of the conserved land that were initially protected from residential development to be completely stripped of that protection in contravention of § 170(h)(2)(C)'s granted-in-perpetuity requirement. The Tax Court was exactly right when it stated — 

The key point under section 170(h)(2)(C) is that both easements have the same defect. By permitting the homesite parcels to be relocated to other sections of the conservation area, the deed allows the developer to subject to residential development land that was supposed to be protected in perpetuity from any form of development.

(Op. 43. n.6.)

Indeed, the whole point of § 170(h)(2)(C) is to ensure that a conservation easement's restriction on the use that may be made of the real property is perpetual, meaning that the restriction cannot be subsequently removed, weakened, or diminished — for example, by removing certain of its prohibitions on the use of the encumbered property (perhaps while leaving others intact). The provisions allowing a deduction for qualified conservation contributions would be subject to all sorts of abuse if taxpayers could grant (initially) robust land-use restrictions in an easement document that, at the same time, allows the most significant of those restrictions to later be clawed back, and still qualify for a deduction. Section 170(h)(2)(C) was designed to prevent that. Thus, for example, a conservation easement that robustly prohibits 10 specified uses of the conserved land is still not a qualified real property interest under § 170(h)(2)(C) if it allows the taxpayer to later jettison 9 of them. Under the strict statutory construction that the statute deserves, see INDOPCO, 503 U.S. at 84, section 170(h)(2)(C) should be so interpreted.

In this case, the only meaningful restrictions granted by the 2005 and 2006 easements — e.g., the prohibition on development — can be stripped away from the parcels of conserved land re-designated as one of 16 building areas. The Tax Court correctly rejected Pine Mountain's and the dissenting judge's position that would “make the outcome turn on a purely formal choice exercised by the draftsman when defining the metes and bounds of the conservation easement.” (Op. 50-51.)

Finally, Pine Mountain is wrong when it repeatedly asserts that the Tax Court's opinion is internally inconsistent by holding that “a modifiable Building Area is impermissible as a matter of law, but a water tower and associated piping whose location is not fixed in advance is permissible.” (Br. 20, 27, 39.) The Tax Court correctly recognized that there is a qualitative difference between the ability to build 16 luxury homes with appurtenant structures anywhere within the conserved area — a drastic departure from the easement's prohibition on residential development — and the ability to build a single water tower within the conserved area. The court observed that “[a]lthough the water tower, if poorly placed, could conceivably affect whether 'the conservation purpose is protected in perpetuity' under section 170(h)(5)(A), . . . it has no effect on whether the use restriction attaches in perpetuity 'to a defined parcel of real property' as required by section 170(h)(2)(C).” (Op. 52.)

3. The Tax Court did not inject a “meaningfulness” standard into I.R.C. § 170(h)(2)(C) that renders I.R.C. § 170(h)(5)(A) superfluous

Pine Mountain also argues (Br. 40-41) that the Tax Court's opinion creates a “meaningfulness” standard under § 170(h)(2)(C) that renders § 170(h)(5)(A) superfluous. Not so.

The Tax Court stated that the dissenting judge's attempt to distinguish this case from other cases involving § 170(h)(2)(C) was not “meaningful” because the building areas “are not 'subject to the easements' in any meaningful sense.” (Op. 43 n.6, 49.) But that was not the basis for the court's decision. As the court explained (after noting that the attempted distinction was not “meaningful”): “In any event, the key point under section 170(h)(2)(C) is that both easements have the same defect” in that they “allow[ ] the developer to subject to residential development land that was supposed to be protected in perpetuity from any form of development.” (Op. 43 n.6) (emphasis added).

As this statement demonstrates, the Tax Court's holding was based on the fact that the easements permit land that was initially protected from development subsequently to be divested of that protection — in violation of § 170(h)(2)(C)'s granted-in-perpetuity requirement. Section 170(h)(5)(A), on the other hand, is concerned only with whether a use restriction that is granted in perpetuity adequately protects the conservation purpose. Nothing in the Tax Court's holding renders § 170(h)(5)(A) superfluous.

4. Pine Mountain's reliance on examples in the Treasury regulations is misplaced

Pine Mountain argues that Treasury Regulation § 1.170A-14(f), Example 4, demonstrates error in the Tax Court's decision. (Br. 46, 50.) This section of the regulations, however, does not even relate to the requirements of § 170(h)(2)(C), on which the Tax Court based its decision, see Treas. Reg. § 1.170A-14(f) (“The provisions of this section relating to conservation purposes may be illustrated by the following examples.”) (emphasis added), which likely explains why the court did not refer to it in its opinion.

In any event, the facts of this case more closely resemble those in another example provided in the same regulation, Treas. Reg. § 1.170A-14(f), Example 3, in which no deduction was allowed. In Example 3, the taxpayer wishes to grant a scenic easement over Greenacre to a qualifying conservation organization, while reserving the right to subdivide the land into 90-acre parcels with no more than one single-family home allowable on each parcel. The regulation concludes that “[r]andom building on the property, even as little as one home for each 90 acres, would destroy the scenic character of the view” and, therefore, no deduction would be allowed. Example 3 thus directly refutes Pine Mountain's broad contention that “floating homesites” are permissible under the Code. (See Br. 21.)

Example 4, which Pine Mountain cites, assumes the same facts as Example 3, except that “not all of Greenacre is visible from the park” and “the deed of easement allows for limited cluster development . . . located in areas generally not visible from the national park and subject to site and building plan approval by the donee organization in order to preserve the scenic view from the park.” Treas. Reg. § 1.170A-14(f), Example 4 (emphasis added). Critically, “the donor and the donee have already identified sites where limited cluster development would not be visible from the park or would not impair the view.” Id. The regulation concludes that the donation would qualify for a deduction under that section.

A critical distinction between these two examples is that, in Example 4, the IRS is able to verify compliance with the deduction requirements at the time of donation, whereas in Example 3 the IRS is not able to do so. In Example 4, the terms of the easement deed itself restrict the location of the limited cluster development to areas “not visible from the national park,” and the donor and donee have already identified sites that would not impair the scenic view. By contrast, the 2005 and 2006 easements here place no limitation on the placement or relocation of the 16 building areas anywhere inside the conservation areas, except to require NALT's approval or judgment that conservation purposes would not be adversely affected. (See Ex. 2 at 13 (Article 3.16); Ex. 4 at 8 (Article 3.1).) But NALT is not a “tax compliance officer.” (Op. 70-71) (Morrison, J., dissenting). And the fact remains that the IRS is unable to verify, at the time of donation, that placement of the building areas in the future would not adversely impact the conservation purposes of the 2005 and 2006 easements.

Accordingly, far from demonstrating error in the Tax Court's decision, the examples in the regulation actually support it.

5. Pine Mountain's reliance on non-precedential private-letter rulings violates I.R.C. § 6110(k)(3)

Pine Mountain and the amicus, Land Trust Alliance, Inc., cite several private-letter rulings that they contend support their respective positions. (Br. 49; Am. Br. 21-22.) Section 6110(k)(3) of the Code prohibits such written determinations from being “used or cited as precedent,” a prohibition that is restated in each of those rulings. See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 208 (11th Cir. 2018) (IRS private-letter rulings are “not binding” and “may not be cited as precedent”); Amergen Energy Co. v. United States, 94 Fed. Cl. 413, 418-19 (2010). The reason for the Code's strict prohibition on the use or citation of such materials as precedent is that they are not subject to an adequately high level of review within the IRS or the Department of the Treasury before their issuance. See H.R. Rep. No. 94-658, at 322-23 (1975). Thus, contrary to Pine Mountain's claims, such rulings do not reflect “the agency's fair and considered judgment on the matter in question” (Br. 48) (quoting Auer v. Robbins, 519 U.S. 452, 462 (1997)), and the Tax Court was not required to defer to any interpretations they may espouse. See Kisor v. Wilkie, 139 S. Ct. 2400 (2019) (Auer deference does not apply if “an interpretation does not reflect an agency's authoritative, expertise-based, fair, or considered judgment.”) (internal quotation omitted). Pine Mountain's repeated citation to such materials flatly ignores the plain language of § 6110(k)(3). Therefore, this Court should not consider those materials.8

In any event, Pine Mountain's reliance on the private-letter rulings is misplaced. The private-letter rulings are fact-specific, and many of the facts are redacted, which is another reason they cannot be used or cited as precedent. Because each ruling turned on the specific facts involved, they cannot support an across-the-board rule that moveable homesites are allowed. To the contrary, the examples in the Treasury regulation demonstrate that each case turns on the totality of the facts and the particular restrictions and protections built into the easement deed. Treas. Reg. § 1.170A-14(f), Examples 1-5.

For this reason, the laundry list of cases that Pine Mountain cites (Br. 25) for the proposition that “[r]eserved rights to build homesites and recreation structures . . . have never served as the basis to disallow a deduction” is also misguided. Example 3 in the regulations, which prohibits a deduction for “[r]andom building on the property, even as little as one home for each 90 acres,” Treas. Reg. § 1.170A-14(f), directly refutes Pine Mountain's overly-simplistic contention in this regard.

Finally, Pine Mountain's unsupported assertion (Br. 20) that the Tax Court's decision “will be applied to invalidate a great many recent easement donations” is entirely speculative and has absolutely no support in the record.

* * *

For the foregoing reasons, the Tax Court correctly held that the 2005 and 2006 easements were not “qualified real property interest[s]” and, therefore, that Pine Mountain was not entitled to a deduction for those easements.

C. Alternatively, the 2005 and 2006 easements were not contributed “exclusively for conservation purposes”

In addition to being a “qualified real property interest,” a qualified conservation contribution must be donated “exclusively for conservation purposes.” I.R.C. § 170(h)(1)(C). To satisfy this latter requirement, the conservation purpose must be “protected in perpetuity.” I.R.C. §170(h)(5)(A). The Tax Court did not reach the Commissioner's alternative argument that the 2005 and 2006 easements failed this additional requirement, but the court's findings support affirmance on this additional ground. See Evans v. Georgia Regional Hospital, 850 F.3d 1248, 1253 (11th Cir. 2017) (“[W]e may affirm on any ground supported by the record, regardless of whether that ground was relied on or considered below.”).9

The 2005 and 2006 easements fail § 170(h)(5)(A)'s perpetuity requirements; specifically, the requirements of Treasury Regulation §1.170A-14(g)(1). This regulation provides that “any interest in the property retained by the donor . . . must be subject to legally enforceable restrictions . . . that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation.” The 2005 and 2006 easements violate this provision because they allow Pine Mountain to reclaim portions of the conserved land, by re-designating the land for building areas, and to use that land for residential development — a use that the Tax Court found was “antithetical” to each easement's conservation purposes. (Op. 49.)

We discussed above Pine Mountain's argument that the building areas remain “subject to the restrictions of the conservation easements.” (Br. 37-38.) Whatever restrictions may theoretically remain intact inside the building areas, however, one thing is clear: any such restrictions are inadequate to “prevent uses of the retained interest inconsistent with the conservation purposes of the donation.” Treas. Reg. § 1.170A-14(g)(1). The 2005 and 2006 easements' conservation purposes are to protect the conservation areas “as a relatively natural habitat of fish, wildlife, or plants or similar ecosystem” and “as open space which provides scenic enjoyment to the general public and yields a significant public benefit.” (Ex. 2 at 3; Ex. 4 at 2.) In each of the reclaimed building areas, however, the developer can construct a single-family luxury home and “other structures customarily accessory to residential use, including but not limited to a shed, garage, gazebo, and pool,” as well as a 5,000-square-foot barn that may include “an apartment for occupancy by a caretaker and such caretaker's family.” As the Tax Court found, “homeowners would be exempt from the easement's restrictions on erecting structures, building roads, building driveways, cutting trees, removing rock and topsoil, drilling wells, placing signs, and engaging in recreational activities.” (Op. 50.) Based on these findings, the court concluded that the building areas would be “exempt, for all practical purposes, from the restrictions imposed by the easement.” (Op. 51.)

The Tax Court's findings support an alternative holding that the easements fail the requirements of Treasury Regulation § 1.170A-14(g)(1). That is because the easements allow Pine Mountain to take back initially-protected land and to use that land in ways that are antithetical to the easements' conservation purposes. Thus, Pine Mountain's retained interest in the property is not “subject to legally enforceable restrictions . . . that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation.” Treas. Reg. § 1.170A-14(g)(1); see also Treas. Reg. § 1.170A-14(e)(2). Therefore, Pine Mountain is not entitled to any deduction for its donations of the 2005 and 2006 easements for this additional reason.

D. The amendment clause violates the perpetuity requirements of I.R.C. §§ 170(h)(2)(C) and 170(h)(5)(A)

Finally, all three easements contain an identical amendment clause in Article 6.7 that permits the parties to modify each easement's restriction on the use that may be made of the conservation areas. For the reasons we explain below in our discussion of the 2007 easement, the amendment clause violates the perpetuity requirements of both §170(h)(2)(C) and § 170(h)(5)(A). This provides yet another independent basis for affirming the Tax Court's decision that Pine Mountain is not entitled to any deduction for its donation of the 2005 and 2006 easements.

II. The Tax Court erred in determining that Pine Mountain was entitled to a charitable-contribution deduction for its donation of the 2007 easement

A. The amendment clause violates the perpetuity requirement of I.R.C. § 170(h)(2)(C)

The Tax Court erred in its determination that Pine Mountain was entitled to a deduction for its donation of the 2007 easement. As noted, each easement in this case contains an identical, liberally-worded amendment clause that gives the parties broad discretion to modify the land-use restrictions imposed by the easements that, together with all of the other reserved rights under the easements, cause them to violate the perpetuity requirements of § 170(h)(2)(C) and § 170(h)(5)(A).

In Article 6.7 of each easement, the parties recite that they “recognize that circumstances could arise which would justify the modification of certain restrictions contained in this Conservation Easement.” “To this end,” Article 6.7 further provides that NALT and the owner “shall mutually have the right, in their sole discretion, to agree to amendments” to the easement. (Ex. 5 at 21.) The only purported limitation on amendments to the easement and its restrictions is that the amendment not be (in the parties' own judgment) “inconsistent with the Conservation Purposes.”10 (Ex. 5 at 21.)

Article 6.7 enables the parties to amend the easement in ways that plainly violate the statutory perpetuity requirements. The amendment clause explicitly authorizes the parties to modify the “restrictions” spelled out in Article 2 that together restrict the use which may be made of the conserved land. The parties may thus reduce, diminish, or eliminate altogether, any of those restrictions that protect the conservation area (e.g., prohibiting the erection of structures, placing of signs, cutting down trees, building roads and driveways, discharging chemicals and waste water into water courses, etc.). Section 170(h)(2)(C), however, requires that an easement's restriction on the use of the real property it encumbers to be granted in perpetuity. Although the amendment clause here would purportedly preclude the parties from making an amendment that is “inconsistent with the Conservation Purposes,” that limitation relates only to the separate perpetuity requirement in § 170(h)(5)(A), not to §170(h)(2)(C)'s granted-in-perpetuity requirement. Nothing in the amendment clause requires that NALT, or anyone else, verify compliance of any proposed amendment with § 170(h)(2)(C)'s perpetuity requirement. To the contrary, the amendment clause specifically contemplates, and expressly allows, such amendments as would violate §170(h)(2)(C) by permitting the parties “in their sole discretion” to modify the land-use “restrictions” listed in Article 2 of the easement.

As we have explained, the only exception to § 170(h)(2)(C)'s requirement that a conservation easement impose a perpetual use restriction is provided for in the regulations. That narrow exception in the regulation permits extinguishment of a conservation easement's restrictions only in the event of an “unexpected change” in conditions that make “impossible or impractical the continued use of the property for conservation purposes,” in which event the restrictions may only be “extinguished by judicial proceeding.” Treas. Reg. § 1.170A-14(g)(6)(i); see Carpenter v. Commissioner, T.C. Memo. 2012-1, at *18-19 (2012) (“[R]estrictions [in an easement deed] are supposed to be perpetual in the first place, and the decision to terminate them should not be solely by interested parties.”) (citing Small, Federal Tax Law of Conservation Easements 16-4 (1986)).

B. The amendment clause also violates the perpetuity requirement of I.R.C. § 170(h)(5)(A)

The amendment clause also violates § 170(h)(5)(A)'s protected-in-perpetuity requirement because it permits “trade-off” amendments — i.e., an amendment that has both negative and positive effects on conservation interests, but is deemed by the parties, on balance, to have an overall neutral or protection-enhancing effect on conservation interests. For example, the parties “in their sole discretion” could agree to allow timber harvesting on part of the property, which would be destructive of conservation interests there, in exchange for the owner's agreement to add additional restrictions elsewhere that would arguably have offsetting positive conservation effects. This sort of amendment conflicts with § 170(h)(5)(A)'s protected-in-perpetuity requirement. More specifically, it violates the no-inconsistent-use requirement of Treasury Regulation § 1.170A-14(e)(2), which provides that “a deduction will not be allowed if the contribution would accomplish one of the enumerated conservation purposes but would permit destruction of other significant conservation interests.” The loosely-worded amendment clause in this case would permit such amendments to the easement that, while perhaps “accomplish[ing] one of the enumerated conservation purposes” on part of the property, would nevertheless “permit destruction of other significant conservation interests” in other areas. Treas. Reg. § 1.170A-14(e)(2).11

C. The Tax Court's analysis of the amendment clause was flawed in several respects

The Tax Court's analysis of the amendment-clause issue, in allowing a deduction for the 2007 easement, was flawed in several respects. (See Op. 54-57.) First, the record does not support the court's statement that “many conservation deeds of easement include amendment provisions of this sort.” (Op. 54.) The court cites an amicus brief filed in another case to support this assertion. (Op. 54 n.7.) But, as Judge Morrison explained in his dissenting opinion, the amendment clause involved in the other case had different language and did not refer to modification of the easement's “restrictions,” which is a key problem with the amendment clause at issue here. (See Op. 71-73) (Morrison, J., dissenting).

Next, the Tax Court also did not find the amendment clause to be problematic because NALT, presumably, would not agree to amendments that are inconsistent with the conservation purposes of the easements. (Op. 54.) But this rationale “unrealistically supposes that the NALT will essentially act as a tax compliance officer.” (Op. 70-71) (Morrison, J., dissenting). Congress has charged the Commissioner, not conservation-easement holders, with the obligation to enforce the internal revenue laws. Accordingly, the IRS must be able to ascertain a conservation easement's compliance with the Code's requirements at the time the IRS reviews the taxpayer's claim for a charitable-contribution deduction. Deductibility under § 170(h) does not depend on speculation about the easement holder's future behavior.

In any event, as we have explained, the amendment clause here purports to preclude only those amendments that are “inconsistent with the Conservation Purposes.” It does not require that NALT, or anyone else, verify compliance with § 170(h)(2)(C)'s separate granted-in-perpetuity requirement.

The Tax Court cited Simmons v. Commissioner, 646 F.3d 6 (D.C. Cir. 2011), and Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), as support for its conclusion. In both of those cases, the holder of an historic-façade easement reserved the right to consent to changes in the façade or to abandon certain rights under the easement. The court in both cases held that the easements nevertheless satisfied the perpetuity requirement in § 170(h)(5)(A). Simmons and Kaufman are distinguishable because neither case involved the separate perpetuity requirement in § 170(h)(2)(C). They are further distinguishable because those decisions were based on the court's finding in each case that the possibility that the façade-easement holder would actually abandon its rights under the easement was so remote as to be negligible. Simmons, 646 F.3d at 10; Kaufman, 687 F.3d at 28; see Treas. Reg. § 1.170A-14(g)(3). By contrast, the amendment clause here states that the parties specifically contemplate and affirmatively “recognize” that “circumstances could arise which would justify the modification of certain of the restrictions contained in this Conservation Easement.” (Ex. 5 at 21.)

Finally, the Tax Court erred in its statement that a conservation easement is a “form of contract” that the parties are “free to amend . . . whether or not they explicitly reserve the right to do so.” (Op. 56.) The court reasoned that, viewed from this perspective, the amendment clause is actually a “limiting provision, confining the permissible subset of amendments to those that would not be 'inconsistent with the Conservation Purposes.'” (Op. 56.)

However, if deductible conservation easements were mere contracts that parties were free to amend, then an amendment provision itself could be freely amended and, thus, would not be a limiting provision. Moreover, the Code's detailed statutory scheme imposing specific requirements for a conservation easement to qualify for a deduction would be meaningless if taxpayers, after receiving a tax deduction, were free to amend the easement deed like any ordinary contract. By imposing double-perpetuity requirements in § 170(h)(2)(C) and § 170(h)(5)(A), Congress clearly required more for a conservation contribution to qualify for a deduction. See Schwing, Ann Taylor, Perpetuity Is Forever, Almost Always: Why It Is Wrong To Promote Amendment and Termination of Perpetual Conservation Easements, 37 Harv. Envtl. L. Rev. 217, 239 (2013) (“Tax deductions and corresponding losses to the federal Treasury can be justified only if deductions 'buy' permanent land protection through perpetual easements.”).

For the foregoing reasons, the Tax Court erred in determining that Pine Mountain was entitled to a deduction for its donation of the 2007 easement.

III. The Tax Court erred in its methodology and determination of the fair market value of the 2007 easement

On its tax returns, Pine Mountain claimed that the 2005, 2006, and 2007 easements were worth $16.5 million, $12.7 million, and $4.1 million respectively, and it claimed deductions in those amounts. For the Tax Court proceeding, Pine Mountain retained a new valuation expert who opined that the 2005 easement was worth $54.7 million, the 2006 easement was worth $33.6 million, and the 2007 easement was worth $9.1 million. Pine Mountain thus claimed that it was entitled to deductions of over $97 million — almost three times higher than what it claimed on its tax returns, and over $60 million more than the $37 million it paid to acquire the entire Pine Mountain property between 2004 and 2007. The Commissioner asserted that the easements were worth $1.1 million, $998,000, and $449,000, respectively.

The Tax Court denied the deductions for 2005 and 2006 and, accordingly, did not determine the value of those easements. But, in a separate memorandum opinion authored by the trial judge (Doc. 99), the court did determine a value for the 2007 easement. As explained below, the Tax Court rejected the valuation methods of both parties' experts and instead “split the baby,” determining that the value of the 2007 easement was equal to $4.7 million. The Tax Court's method — or rather lack thereof — is incapable of meaningful review and should be reversed.

A. Introduction and valuation proceedings below

The allowable deduction for a conservation easement is the easement's fair market value at the time of donation. Treas. Reg. §1.170A-14(h)(3)(i). The Treasury regulations provide detailed rules for valuing conservation easements. As relevant here, the regulation states a preference for the comparable-easement-sales method, but allows for the before-and-after method as an alternative. It states:

If there is a substantial record of sales of easements comparable to the donated easement (such as purchases pursuant to a governmental program), the fair market value of the donated easement is based on the sales prices of such comparable easements. 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. . . .

Treas. Reg. § 1.170A-14(h)(3)(i). When using the before-and-after method, the highest and best use of the property subject to the easement must be taken into account. See Treas. Reg. § 1.170A-14(h)(3)(ii).

In addition, if granting a conservation easement increases the value of any other property owned by the donor, then the amount of the deduction for the contribution must be reduced “by the amount of the increase in the value of the other property, whether or not such property is contiguous” to the encumbered property. Treas. Reg. §1.170A-14(h)(3)(i). The regulations acknowledge that “there may be instances where the grant of a conservation restriction may have no material effect on the value of the property or may in fact serve to enhance, rather than reduce, the value of property. In such instances no deduction would be allowable.” Treas. Reg. § 1.170A-14(h)(3)(ii). Thus, an easement may have zero value, notwithstanding that the property owner has given up certain rights. See, e.g., Scheidelman, 755 F.3d 148.

In the Tax Court, the Commissioner's expert, Gary McGurrin, used the comparable-easement-sales method to value the easements. (Ex. 103 (McGurrin report).) McGurrin identified 15 sales of easements in Alabama and Georgia between 2003 and 2009. From these, he selected six easement sales that he thought comparable to the Pine Mountain easements and determined a price range of $537 per acre to $2,747 per acre. After various adjustments, McGurrin determined a value for the Pine Mountain easements of $2,000 per acre, which yielded a value of $449,000 for the 2007 easement. McGurrin also employed the before-and-after method, but he concluded that the comparable-easement-sales method was the most accurate approach.

Pine Mountain's expert, Raymond Veal, appraised the easements' values at significantly higher amounts using only the before-and-after method. (Exs. 99, 100, 101.) His values were primarily driven by a “market feasibility” study prepared by a development consultant, Belinda Sward, who opined that the high mountainous areas covered by the conservation easements were prime real estate because wealthy buyers would pay a premium for homes at high elevations. Veal used Sward's study to determine that the bulk of property covered by the 2007 easement was developable land worth $45,000 per acre (above 600 feet elevation) or $30,000 per acre (below 600 feet elevation). He determined that, with the easements in place, however, the property was worth only $1,000 per acre. Subtracting the “after” value from the “before” value of the encumbered property yielded a value of $9,110,000 for the 2007 easement.

The Tax Court rejected both experts' valuations as flawed. The court concluded McGurrin's valuation was too low, stating that “McGurrin assumed incorrectly that the Pine Mountain property would not be developed” and that “[t]his assumption resulted in McGurrin's underestimating the value of the 2007 easement because he valued the easement on the basis of actual sale prices of easements on rural undevelopable land.” (Doc. 99 at 31.) Conversely, the court thought Veal's valuation was too high, which the court attributed to two problems: (1) Veal's failure to “take into account the beneficial effect that the easement had on surrounding land,” and (2) inherent problems with the before-and-after method. (Id. at 23-24.) In this regard, the court stated that “the diminution in value [of the underlying property] may not always be a good indicator of the value of the easement, just as the cost of a building may not always be a good indicator of its value.” (Id. at 24.)

Based on its determination that both experts' valuations were flawed, the court stated that it could “reach a decision as to the value of property that is based on its own examination of the evidence in the record.” (Doc. 99 at 29.) The court decided to “giv[e] equal weight to the values assigned by Veal and McGurrin” on the theory that “Veal's errors have an effect on the value opposite to McGurrin's, . . . the effects are roughly of the same magnitude, and . . . equally weighting the value assigned by each expert has the effect of correcting their errors.” (Id. at 29, 31.) The court did not undertake any quantitative analysis to determine that the effects were of the same magnitude, but instead found that “the effects are similar in proportion because the magnitude of all three errors” — Veal's two and McGurrin's one — “is proportional to the probability that the Pine Mountain property would be developed.” (Id. at 32.) The court valued the 2007 easement at $4,779,500, exactly half-way between the experts' valuations. (Id. at 36.)

B. The Tax Court failed to adopt a valuation method that is capable of meaningful review

Assuming arguendo that the Tax Court did not err in departing from the Treasury regulation's valuation methods, the court still had to adopt a valuation method that is capable of meaningful review. See Estate of Trompeter v. Commissioner, 279 F.3d 767, 770-73 (9th Cir. 2002); Akers v. Commissioner, 798 F.2d 894, 897 (6th Cir. 1986). Although the ultimate determination of value is a finding of fact, “[w]hether the Tax Court used the correct standard to determine fair market value is a legal issue” reviewed de novo. Palmer Ranch Holdings, 812 F.3d at 993-94.

Here, the Tax Court's valuation did not follow any recognized valuation method, did not incorporate any concrete aspects of the parties' valuations, and is not capable of meaningful review. The court merely found that McGurrin understated the value of the 2007 easement; that Veal overstated the value; and then decided to average the two numbers. The court based that decision on its finding that “the magnitude of all three errors is proportional to the probability that the Pine Mountain property would be developed.” (Doc. 99 at 32.) The court explained at length how the experts' differing views of development potential had opposite effects on value — an observation that no one disputes — and then speculated out of nowhere that “as the probability of developing the Pine Mountain property increases, each expert's error increases in proportion to the other expert's error.” (Id. at 32.) 

But even the court acknowledged that “[t]he mere fact that the magnitude of the two experts' errors vary proportionally does not mean that the magnitudes are equal.” (Id. at 36) (emphasis added). Yet, the court failed to explain why it nevertheless found that the magnitudes were in fact equal, stating only that “on our review of the entire record, we are convinced that the errors are roughly equal in magnitude.” (Ibid.) Courts have found that type of barebones reasoning insufficient. See Akers, 798 F.2d at 897 (reversing Tax Court valuation where, “[a]fter discussing the testimony of all the experts, but without having attempted to quantify any adjustments that might have been appropriate in their valuation figures,” the Tax Court picked a number in the middle); Alvary v. United States, 302 F.2d 790, 794 (2d Cir. 1962) (“A trial judge cannot arbitrarily disregard all the expert testimony in the record and rely upon his unsubstantiated personal beliefs instead of upon evidence.”).

Moreover, one of the errors identified in Veal's valuation required specific quantification under the Treasury regulation. As indicated above, where an easement has the effect of enhancing surrounding property owned by the donor, the amount of the deduction must be reduced by the increase in value to surrounding property. Treas. Reg. §1.170A-14(h)(3)(i). The court found that the Pine Mountain easements enhanced the surrounding unencumbered property and faulted Veal for failing to reduce his valuation accordingly. (Doc. 99 at 12, 23.) Yet, the court made no effort to quantify that error and instead decided that the error was roughly offset by McGurrin's also-not-quantified undervaluation.

The court's split-the-baby approach also failed to account for the fact that Veal's values for all three easements — more than $97 million in the aggregate — were astronomically higher than what Pine Mountain had claimed on its own returns. Veal's numbers are highly suspect, especially in light of the fact that Pine Mountain paid $37 million total for all 6,224 acres comprising the Pine Mountain property, and the easements encumbered only 20% of that property (note that Pine Mountain still owned the underlying property covered by the easements). These valuations would also mean that Pine Mountain's limited partners would receive tax deductions of almost $49 million — $4 million more than their entire capital investment in Pine Mountain ($45 million). (See Op. 57.) These numbers suggest that Veal's valuation — which the court found was too high — was in fact grossly overstated and, therefore, should not have been given equal weight as the Commissioner's valuation.

Indeed, the court's explicit embrace of an averaging approach, if left standing, creates an obvious incentive for taxpayers in conservation-easement cases to offer inflated valuations. This case is illustrative. Pine Mountain initially reported a $4.1 million value for the 2007 easement on its tax return, but more than doubled that value in the Tax Court, claiming that the easement was worth over $9 million. The Tax Court's split-the-baby approach yielded a $4.7 million value, $600,000 more than what Pine Mountain originally reported on its return.

C. The Tax Court erred in rejecting the Commissioner's valuation based on the comparable-easement-sales method

The Tax Court also erred in rejecting McGurrin's valuation based on the comparable-easement-sales method, which is favored by the regulation, based on the court's erroneous conclusions that (i) “McGurrin assumed incorrectly that the Pine Mountain property would not be developed” (Doc. 99 at 31), and (ii) the easement sales that McGurrin used to value the 2007 easement were not comparable to the Pine Mountain property because they encumbered “rural undevelopable land” (Doc. 99 at 31). The Tax Court was wrong on both counts, as neither is borne out by the record.

First, in stating that McGurrin “assumed incorrectly that the Pine Mountain property would not be developed,” the Tax Court was confused and failed to differentiate between the conservation areas encumbered by the easements and the surrounding Pine Mountain property. McGurrin's valuation assumed only that the property encumbered by the easements was not developable. But McGurrin's valuation specifically contemplated that the surrounding Pine Mountain property could be developed. His expert report, which the court admitted into evidence in lieu of his direct-examination testimony, see Tax Court Rule 143(g)(2), states:

The highest and best use for the parcels encumbered by the 2007 conservation easement is undeveloped, open space to be used for recreation and timber harvesting until the expiration of those rights in 2010, and to become recreational open/park areas if development in the Pine Mountain Preserve were to occur.

(Ex. 103, p. 47 (emphases added); see also id. at 46, 47 (including nearly identical language regarding the 2005 and 2006 easements).) The Master Plan (revised Nov. 22, 2005) for Pine Mountain's proposed development that was submitted to the municipality of Westover showed the conservation areas as open-space, green areas, leading McGurrin to conclude that “there was never any plan to develop the encumbered parcels,” while recognizing that the surrounding property could be developed. (Ex. 103, pp. 44-46.)

For its part, the Tax Court never differentiated between the property covered by the easements and the rest of the Pine Mountain property in determining that “Pine Mountain” had development potential. (Doc. 99 at 18-21.) The development potential of the property covered by the easements was hotly contested between the parties, but the court never resolved this dispute.

Second, nothing in the record supports the Tax Court's finding that the easement sales McGurrin used to value the 2007 easement were not comparable to the Pine Mountain easements because they encumbered “rural undevelopable land” or “rural land with little development potential.” (Doc. 99 at 14, 31.) McGurrin testified just the opposite: that the easements he used as comparables did have development potential similar to Pine Mountain. (Tr. 811-12.) The Tax Court specifically questioned him on this issue, and McGurrin testified that “[t]hey had the potential for being developed, just like the Pine Mountain property had.”12 (Id.) His testimony was unrebutted, yet inexplicably ignored by the Tax Court.

Therefore, the Tax Court's stated reasons for rejecting McGurrin's valuation were clearly erroneous, as they have no support in the record. Given the court's lack of a reviewable, alternative valuation, the valuation issue should be remanded for a redetermination of value in the event this Court were to hold a deduction is allowed for the 2007 easement.

CONCLUSION

For the foregoing reasons, the Tax Court's decision disallowing a deduction for 2005 and 2006 should be affirmed, and the court's allowance of a deduction for 2007 should be reversed. If this Court were to affirm the Tax Court's allowance of a deduction for 2007, then the Tax Court's determination of the fair market value of the 2007 easement should be vacated and remanded.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

FRANCESCA UGOLINI (202) 514-1882
JACOB CHRISTENSEN (202) 307-0878
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044
Jacob.E.Christensen@usdoj.gov
Appellate.TaxCivil@usdoj.gov

SEPTEMBER 2019

FOOTNOTES

1Congress repealed and replaced TEFRA's partnership provisions in the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101, 129 Stat. 625 (2015), effective for tax years after 2017.

2“Ex.” refers to the trial exhibits, “Tr.” refers to the trial transcript, “Doc.” refers to the documents in the record as reflected on the Tax Court's docket sheet, and “Op.” refers to the Tax Court's reviewed opinion (Doc. 101).

3In the proceedings below, Pine Mountain failed to identify any specific governmental conservation policy that would be advanced by the 2006 conservation easement. (See Op. 111) (Morrison, J., dissenting).

4Several courts of appeals have adhered to INDOPCO's strict-construction standard in reviewing taxpayers' charitable contribution claims for the donation of a conservation easement. See Belk v. Commissioner, 774 F.3d 221, 225 (4th Cir. 2014); Minnick v. Commissioner, 796 F.3d 1156, 1159 (9th Cir. 2015); Scheildman v. Commissioner, 755 F.3d 148, 154 (2d Cir. 2014); Esgar Corp. v. Commissioner, 744 F.3d 648, 653 (10th Cir. 2014); Glass v. Commissioner, 471 F.3d 698, 706 (6th Cir. 2006). In BC Ranch II, L.P. v. Commissioner, 867 F.3d 547, 553-54 (5th Cir. 2017), a divided panel of the Fifth Circuit departed from these decisions, concluding that the usual strict construction applicable to what the court called “intentionally adopted tax loopholes” did not apply when reviewing a claimed deduction for the donation of a conservation easement. But, as Judge Dennis explained in his dissenting opinion in that case, the “impermissibly lax standard” applied by the majority was “contrary to the Supreme Court's instructions in INDOPCO.” BC Ranch II, 867 F.3d at 560-61 & nn. 2, 3 (Dennis, J., dissenting).

5In 1976, Congress enacted a temporary provision allowing a deduction for a lease, option to purchase, or “easement with respect to real property of not less than 30 years' duration” granted to a qualified organization exclusively for conservation purposes. Tax Reform Act of 1976, Pub. L. 94-455, § 2124(e) (1976). In 1977, Congress modified the requirement that the easement be “of not less than 30 years' duration,” providing instead that the easement must be granted “in perpetuity” to qualify for a deduction. Tax Reduction and Simplification Act of 1977, Pub. L. 95-30, § 309 (1977).

6The conditions on the boundary-modification provision in the 2005 easement are even less stringent than those imposed by the easement in Belk. In addition to including conditions substantially identical to those in the 2005 easement, the easement in Belk also required that the substitute property have an equal or greater fair market value and be of the same or better ecological quality. Compare Belk, 774 F.3d at 223, with Ex. 2 at 13 (Article 3.16).

7The 2005 and 2006 easements both purport to restrict any form of development in the conservation areas, stating that “[t]he Conservation Area shall not be used for a residence or for any commercial, institutional or industrial purpose” and that “[n]o [s]tructure . . . of any kind shall be built . . . within or upon the Conservation Area.” (Ex. 2 at 5; Ex. 4 at 4.)

8Pine Mountain cites (Br. 48) Hanover Bank v. Commissioner, 369 U.S. 672, 687 (1962), where the Court stated that IRS private rulings “do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws.” See also Davis v. Commissioner, 716 F.3d 560, 569 n.26 (11th Cir. 2013) (quoting Hanover Bank). Hanover Bank, however, predates the statutory prohibition in § 6110(k)(3), which was added to the Code in 1976. Pub. L. No. 94-455, § 1201(a) and (e), 90 Stat. 1520 (1976) (originally codified as § 6110(j)(3)). This Court should follow the current law.

9Pine Mountain's assertion (Br. 18) that “[t]he parties stipulated that the conservation easements . . . satisfied conservation purposes” is incorrect. The stipulations state the Commissioner's position that the reserved rights are destructive of each easement's stated conservation purposes. Doc. 41 ¶¶ 71-73.

10The amendment clause also includes a “savings clause” purporting to preclude any amendment that would disqualify the donation for a tax deduction. But the savings clause, which is identical to the one in Belk, has no effect and is unenforceable. Belk, 774 F.3d at 228-30; id. at 230 (“If every taxpayer could rely on a savings clause to void, after the fact, a disqualifying deduction (or credit), enforcement of the Internal Revenue Code would grind to a halt.”).

11To be clear, the Commissioner does not contend that all amendment clauses in a conservation easement are fatal to a tax deduction. An amendment clause that is limited to corrective or protection-enhancing amendments, for example, would not be problematic. Whether a particular amendment provision is disqualifying must be determined on a case-by-case basis according to the language of the deed.

12Two of McGurrin's comparable-easement sales were located near the Pine Mountain property, in Shelby County, along the same Highway 280 corridor. (Tr. 811-12.)

END FOOTNOTES

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