IRS Denied Summary Judgment in Conservation Easement Case

WISAWEE PARTNERS II, LLC, E.
RONALD MARTIN, JR., TAX MATTERS
PARTNER, PETITIONER,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent

United States Tax Court

ORDER

This case involves a charitable contribution deduction claimed by Wisawee Partners II, LLC (Wisawee II), for a conservation easement. The Internal Revenue Service (IRS or respondent) disallowed this deduction and determined penalties. On September 24, 2018, respondent filed a motion for partial summary judgment, and on July 16, 2019, petitioner filed a cross-motion for partial summary judgment. On December 15, 2021, this case was assigned to the undersigned for trial or other disposition. We will deny respondent's motion and hold petitioner's in abeyance.

Background

The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding the parties' cross-motions for partial summary judgment and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). Wisawee II, a Georgia limited liability company formed in December 2010, had its principal place of business in Georgia when the petition was filed. Absent stipulation to the contrary, appeal of this case would lie to the U.S. Court of Appeals for the Eleventh Circuit. See sec. 7482(b)(1)(E).¹

In 2005 Wisawee Partners, LLC (Wisawee I), acquired an 850-acre tract in Glynn County, Georgia, near the Georgia coastline. On December 23, 2010, Wisawee I conveyed to Wisawee II a fee simple interest in 112.5 of these acres. On December 29, 2010, Wisawee I granted to the Georgia Land Trust (GLT or grantee) a conservation easement over 714 of the acres that Wisawee I continued to own. The deed of easement was recorded the same day.

The easement deed recites the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to Wisawee I, including the rights to engage in forestry and recreational activities such as hiking, kayaking, crabbing, fishing, and horseback riding. In connection with these recreational activities, Wisawee I reserved the right to develop a road, firebreaks, horse trails, and footpaths, and to build a few docks and crabbing piers. Wisawee I also reserved the right to construct a 1,500 square-foot structure “for recreational day use” only. Wisawee I could install electrical cables, solar panels, and septic systems to serve that structure, and the deed also permitted it to build a modest seating area so that the property could be used for certain public events.

On December 27, 2012, Wisawee II granted to GLT a conservation easement over 39.5 acres of the 112.5-acre tract that Wisawee II had acquired in 2010. Wisawee I, Wisawee II, and GLT effected this grant by executing a “First Amendment to Deed of Conservation Easement” (Amendment), revising the December 29, 2010, deed to include the 39.5 acres. The Amendment stated that its purpose was “to add 39.5 acres, more or less, to the Property subject to the Conservation Easement.” The Amendment was “incorporated into and made a part of the Conservation Easement” and was “binding on the Original Grantor [Wisawee I], Second Grantor [Wisawee II], and Grantee [GLT].”

By executing the Amendment, Wisawee II agreed to the terms of the original deed with a few modifications. The modification most relevant here appears in paragraph 6(A), which reserves to Wisawee II the right to construct an additional “recreational day use structure” on the 39.5-acre tract. This structure could not exceed 2,000 square feet or be used as a dwelling. Wisawee II reserved the right to construct an adjacent seating area, not to exceed 1,000 square feet, to “provide space for educational programs, weddings, and other ceremonies.” And to provide access to these possible future improvements, Wisawee II reserved the right to construct a path and a “small gravel parking area, designed to hold no more than a half-dozen vehicles.”

Both in its original and amended form, the deed recognizes the possibility that the easements might be extinguished at some future date. In the event the property were sold following judicial extinguishment of the easements, paragraph 17 of the deed provides that “[t]he amount of the proceeds to which Grantee shall be entitled . . . shall be determined . . . in accordance with the Proceeds paragraph.” Paragraph 19, captioned “Proceeds,” specifies that the grantee's share of any future proceeds would be determined “by multiplying the fair market value of the Property un-encumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement.”

Wisawee II timely filed Form 1065, U.S. Return of Partnership Income, for its 2012 tax year. On that return it claimed a charitable contribution deduction of $4,332,000 for the donation of the easement over the 39.5-acre tract. Wisawee II included with its return a copy of an appraisal prepared by Alex B. Rubin.

The IRS selected Wisawee II's return for examination.² Following examination of that return the IRS issued petitioner, on January 2, 2018, a notice of final partnership administrative adjustment disallowing Wisawee II's charitable contribution deduction and determining penalties. Petitioner timely petitioned this Court for re-adjustment of the partnership items.

Discussion

A. Summary Judgment Standard

The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant partial summary judgment regarding an issue as to which there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant partial summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. “If, in this generous light, a material issue is found to exist, summary judgment is improper.” Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc., 182 F.3d 157, 160 (2d Cir. 1999).

B. Judicial Extinguishment

The Code generally restricts a taxpayer's charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer's entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1). For an easement of the sort involved here, a charitable contribution deduction is allowable only if the underlying conservation purpose is “protected in perpetuity.” Sec. 170(h)(5)(A); see TOT Prop. Holdings, LLC v. Commissioner, 1 F.4th 1354, 1362 (11th Cir. 2021); PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 201 (5th Cir. 2018).

The regulations set forth detailed rules for determining whether this “protected in perpetuity” requirement is met. Of importance here are the rules governing the mandatory division of proceeds in the event the property is sold following a judicial extinguishment of the easement. See Treas. Reg. § 1.170A-14(g)(6). The regulations recognize that “a subsequent unexpected change in the conditions surrounding the [donated] property . . . can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee exclusively for conservation purposes.

In Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 137-140 (2019), we held that a deed of easement failed to satisfy these regulatory requirements where the donee's share of post-extinguishment sale proceeds was improperly reduced by carve-outs for donor improvements. Accord, TOT Prop. Holdings, LLC, 1 F.4th at 1363; PBBM-Rose Hill, Ltd., 900 F.3d at 208. Respondent contends that the deed in this case has these defects, and petitioner vigorously resists these contentions.

1. Carve-Out for Donor Improvements

The deed provides that, if the property is sold following judicial extinguishment of the easement, GLT's share of the proceeds will be determined by multiplying the property's fair market value — an amount presumably equal to the sale proceeds — by a fraction. That fraction is “the ratio of the value of the Conservation Easement at the time of th[e] conveyance to the value of the Property at the time of th[e] conveyance without deduction for the value of the Conservation Easement.” This fraction is consistent with the formula set forth in the regulation. See Treas. Reg. § 1.170A-14(g)(6)(ii).

Before applying the regulatory apportionment fraction, however, the deed at issue here — like the deed in Coal Property Holdings — reduces the multiplicand (viz., the sale proceeds) by “any increase in value after the date of th[e] . . . [grant] attributable to improvements.” See Coal Prop. Holdings, 153 T.C. at 138. As we explained in that Opinion, any such increase in value would be attributable to (1) appreciation in the value of the improvements existing when the easement was granted, plus (2) the fair market value of any new improvements that the donor later made to the property. Ibid. We held in Coal Property Holdings that reducing the grantee's share in this way violated the “granted in perpetuity” requirement because it prevented the grantee from receiving its full proportionate share of any future sale proceeds. Id. at 137-140.

In Coal Property Holdings the improvements existing when the easement was granted “included 20 natural gas wells, two cell phone towers, various roads, and various electricity installations.” Id. at 138. The donor reserved the right to make future improvements, including utility installations, roads, and driveways “for vehicular access to areas of the Property on which the existing and additional structures and related ancillary improvements are and may be constructed.” Ibid. These existing and contemplated future improvements had obvious value. Cf. Englewood Place, LLC v. Commissioner, T.C. Memo. 2020-105, 120 T.C.M. (CCH) 28, 30 n.4 (“[T]he deed reserved to . . . [the donor] the right to make post-contribution improvements to the conserved area, including the rights (for example) to construct barns, sheds, roads, a residential driveway, and utilities (including water, septic, and power lines).”); Maple Landing, LLC v. Commissioner, T.C. Memo. 2020-104, 120 T.C.M. (CCH) 23, 26 n.4 (same).

Neither the original deed nor the Amendment mentions any existing improvements on the 39.5-acre tract. Respondent does not allege that there are any improvements. For purposes of ruling on respondent's motion for partial summary judgment, we assume that no improvements currently exist.

Paragraph 4(e) of the original deed reserved to the “Grantor”— i.e., to Wisawee I — the right to make future improvements to the 714-acre tract covered by the original easement. These improvements could include a road, firebreaks, horse trails, foot-paths, docks, crabbing piers, and a day-use recreational structure, which in turn could be served by later-constructed electrical utilities, a well, and/or a septic system. Respondent cites no evidence that Wisawee II, to whom the Amendment refers as “Second Grantor,” had any right to make any of these improvements to the 39.5 acre tract covered by the easement at issue. For purposes of ruling on respondent's motion for partial summary judgment, we assume that the future improvements recited in the original deed could only be made by Wisawee I and could only be made to the original 714-acre tract.

Paragraph 6(A) of the Amendment specifies the rights reserved to Wisawee II. The future improvements that Wisawee II could make to the 39.5-acre tract consist of a single day-use recreational building and adjacent seating area, which together could occupy no more than 3,000 square feet, plus a path and a six-car gravel parking area to provide access to these facilities. These improvements would be intended to “provide space for educational programs, weddings, and other ceremonies.”

In short, the 39.5-acre tract has no existing improvements, and the permitted future improvements appear to consist of one modest structure intended for recreational and educational use. Petitioner may be able to establish that these improvements would be unlikely to increase the property's fair market value in a meaningful way (if at all). If any increase in value attributable to improvements would be de minimis, petitioner may plausibly contend that the deed's “donor improvements” clause would not cause GLT to receive less than its proportionate share of the proceeds in the event the property were sold following judicial extinguishment of the easement.

As respondent acknowledges, valuation of improvements “can be difficult to quantify accurately” and “is an intensely factual matter.” We have previously denied summary judgment in easement cases where the carved-out donor improvements had questionable (if any) real value. See, e.g., Little Horse Creek Prop., LLC v. Commissioner, T.C. Dkt. No. 7421-19 (Mar. 2, 2021) (order); Oconee Landing Prop., LLC v. Commissioner, T.C. Dkt. No. 11814-19 (Aug. 18, 2021) (order). Viewing the facts and inferences to be drawn from the facts in the light most favorable to petitioner here, we conclude that genuine disputes of material fact dictate that we deny respondent's motion for partial summary judgment.

2. Validity of the Regulation

Petitioner contends that the “judicial extinguishment” regulation is substantively invalid under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and constitutes “arbitrary and capricious” rulemaking in violation of the Administrative Procedure Act (APA). We rejected these arguments in a recent Court-reviewed Opinion. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020). However, on December 29, 2021, the Eleventh Circuit held that “the Commissioner's interpretation of § 1.170A-14(g)(6)(ii), to disallow the subtraction of the value of post-donation improvements . . . is arbitrary and capricious and therefore invalid under the APA's procedural requirements.” Hewitt v. Commissioner, __ F.4th __, __ (slip op. at 36) (11th Cir. Dec. 29, 2021), rev'g and remanding T.C. Memo. 2020-89 (applying Oakbrook). In light of the Eleventh Circuit's opinion, we will hold petitioner's motion for partial summary judgment in abeyance pending further developments.

It is accordingly

ORDERED that respondent's Motion for Partial Summary Judgment, filed September 24, 2018, is denied. It is further

ORDERED that petitioner's Motion for Partial Summary Judgment, filed July 16, 2019, is held in abeyance. It is further

ORDERED that, on or before February 4, 2022, the parties shall file a status report (jointly if possible, otherwise separately) expressing their views as to the conduct of further proceedings in this case.

(Signed) Albert G. Lauber
Judge