IRS Opposes Certification of Easement Question to State Court

Montgomery-Alabama River, LLC, Parkway South, LLC, Tax Matters Partner,
Petitioner
v.
Commissioner of Internal Revenue
Respondent

UNITED STATES TAX COURT

JUDGE ALBERT G. LAUBER

RESPONDENT'S RESPONSE TO PETITIONER'S MOTION FOR CERTIFICATION OF A QUESTION TO THE ALABAMA SUPREME COURT

Pursuant to the Court's order dated November 4, 2020, the following is RESPONDENT'S OBJECTION TO PETITIONER'S MOTION FOR CERTIFICATION OF A QUESTION TO THE ALABAMA SUPREME COURT filed on October 30, 2020.

IN SUPPORT THEREOF, respondent respectfully states:

PROCEDURAL BACKGROUND

ARGUMENT

I. CERTIFICATION OF A QUESTION TO ALABAMA SUPREME COURT IS NOT APPROPRIATE

Under Alabama Rules of Court, a Federal Court may certify a question to the Supreme Court of Alabama if questions or propositions of law of the state exist for which there is no clear controlling precedent in the decisions of the Supreme Court of the State. Rule 18(a), Ala. R. App. P. As discussed more fully below, the Supreme Court of Alabama has decided the question of whether the holder of a Deed of Conservation Easement would be entitled to receive compensation in the event of a judicial extinguishment. Therefore, respondent respectfully maintains that Petitioner's certification request must be denied as the Alabama State Supreme Court has definitively decided this issue.

In deciding whether to certify a question to a state court, the 11^th Circuit uses “much judgment, restraint and discretion in certifying. In determining whether to exercise [its] discretion in favor of certification, [the court] consider[s] many factors. The most important are the closeness of the question and the existence of sufficient sources of state law to allow a principled rather than conjectural conclusion. But also to be considered is the degree to which considerations of comity are relevant. And [it] must also take into account practical limitations of the certification process.” Royal Capital Dev., LLC v. Maryland Cas. Co., 659 F.3d 1050, 1055 (11^th Cir. 2011). As further explained infra, the Tax Court in Hewitt similarly exercised restraint and comity in following the clear precedent established in Porterville. See Hewitt, T.C. Memo. 2020-89, at *23 (citing Portersville Bay Oyster Co. v. Blankenship, 275 So. 3d 124, 134 (Ala. 2018)).

Under Alabama statutes, a deed of easement creates a property right and not a mere restrictive covenant. Ala. Code. sec. § 35-18-1(1) (1997). The Supreme Court of Alabama has held that a conservation easement is defined as a non-possessory interest of a holder in real property, and an easement is a property right that entitles the easement holder to compensation for the taking of the easement. Portersville Bay Oyster Co. v. Blankenship, 275 So. 3d 124, 134 (Ala. 2018); see also Ala. Code § 35-18-2(e) (1997).

Alabama State Supreme Court decisions and Alabama statutes are clear on the issue that Petitioner seeks to certify. Because there is no ambiguity or undecided question of law, respondent respectfully maintains that certification to the Supreme Court of Alabama is not appropriate in the instant case.

II. UNDER ALABAMA LAW A CONSERVATION EASEMENT DONEE IS ENTITLED TO RECEIVE A PROPORTIONATE SHARE OF PROCEEDS IN THE EVENT OF JUDICIAL EXTINGUISHMENT

The State Law Exception of Treasury Regulation Section 1.170-14(g)(6)(ii) Does Not Apply To Petitioner's Easement Deed

Petitioner argues that its Easement Deed need not require the Wild Turkey Foundation, as the donee to receive proceeds proportional to the value of the easement restriction over the value of the Property upon a judicial extinguishment because Alabama law says that a donor of an easement receives all proceeds in such an action.

The state law exception in the Treasury Regulations upon which Petitioner relies provides that a donee need not receive any proceeds to satisfy the perpetuity requirement if state law says the donor is entitled to the full amount of proceeds from a judicial extinguishment action. See Treas. Reg. § 1.170A-14(g)(6)(ii). Petitioner cites Burma Hills Development Co. v. Marr, 229 So. 2d 776 (Ala. 1969) to suggest that Petitioner's easement is merely a restrictive covenant which is generally a non-compensable property interest in an Alabama extinguishment action. Petitioner incorrectly maintains that Easement Deed does not provide the Wild Turkey Foundation with any right to use the Property. (See Petitioner's Response to Respondent's Motion for Partial Summary Judgment (“Pet. Resp.”) at p. 29).

Petitioner cites the Tax Court's memorandum opinion in Hewitt v. Commissioner, T.C. Memo 2020-89, for the proposition that that a conservation easement is not a compensable property interest in Alabama. Contrary to Petitioner's claim, Hewitt stands for the exact opposite proposition and in fact fully supports respondent's position as outlined in his July 31, 2020, Motion for Partial Summary Judgment.

In Hewitt, the Tax Court opined on a conservation easement donation in Alabama. The conservation easement in Hewitt related to pastureland and a wooded area with limited road access. Hewitt, T.C. Memo. 2020-89 at *2. The deed of easement in Hewitt required the donee to preserve and protect the scenic enjoyment of land, agricultural land and production, and a creek. Id. at *3.

The easement deed in Hewitt provided that:

[T]his Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Property unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the Easement at the time of this grant to the value of the Property, without deduction for the value of the Easement, at the time of this grant. * * * [T]he ratio of the value of the Easement to the value of the Property unencumbered by the Easement shall remain constant.

Id.

The Tax Court in Hewitt, in sustaining respondent's disallowance of the taxpayer's claimed deduction, held that the easement deed failed to protect the easement purposes in perpetuity because the proceeds allocation formula subtracted the value of post-easement improvements in determining the donee's share of extinguishment proceeds and, therefore, failed the regulations' prescribed extinguishment proceeds allocation formula. Id. at *5 (citing Coal Property Holdings v. Commissioner, 153 T.C. 138-39 (2019) and PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 208 (5th Cir. 2018)).

Respondent maintains that the Easement Deed at issue contains the same provision as in Hewitt. The taxpayers in Hewitt also argued that their easement donation qualified for the state law exception in Reg. § 1.170A-14(g)(6)(ii) by citing Burma Hills. Id. at *8. The Tax Court rejected this argument.

In Hewitt, the Court explained that the mutually restrictive covenant in Burma Hills was an equitable easement that did not create a property right entitling the restricted property owners to compensation in an Alabama extinguishment action. Id. (emphasis added). The Court contrasted the non-compensable equitable easement in Burma Hills with an easement whose holder receives a compensable interest in real property though a written easement. Id. (citing Portersville Bay Oyster Co. v. Blankenship, 275 So. 3d 124, 134 (Ala. 2018)) and Ala. Code section 35-18-2(e)). The Tax Court in Hewitt also cited Portersville Bay Oyster Co. to show that holders of a shellfish aquaculture easement enjoyed compensable private property rights as holders of an easement grant from the state of Alabama. Id.; Portersville, 275 So. 3d at 134.

Alabama Code section 35-18-1 defines the interest of the donee of a conservation easement as the “nonpossessory interest of a holder in real property.” Under Alabama Code section 35-18-2(a), a conservation easement is terminated like any other easement. Section 35-18-2(e) provides that a conservation easement may be condemned in the same manner as “any other property interest.” In other words, an Alabama conservation easement donor is not entitled to all proceeds in an Alabama extinguishment action because holders of a written easement have compensable property rights which is in direct conflict with the position petitioner maintains.

As this Court cogently points out in Hewitt, under Alabama law if multiple estates hold property that is taken via eminent domain, each estate owner has a corresponding right to share in the condemnation award and the award is apportioned in accordance with their respective ownership interests. Hewitt, supra, at *8 (citing Harco Drug, Inc. v. Notsla, Inc., 382 So. 2d 1, 3 (Ala. 1980) for the proposition that both a lessee and a lessor are estate holders entitled to damages in a condemnation proceeding).

Petitioner's reliance on both Hewitt and Portersville is misplaced. The holding in each of these cases supports respondent's position and confirms that Alabama easements are compensable property interests to a donee as an estate holder. Thus, the holder of the easements is deemed to have compensable property rights in the event of a judicial extinguishment.

Because the holders of conservation easements are entitled to proceeds in an Alabama condemnation, the subject Easement Deed does not qualify for the state law exception found in Treas. Reg. § 1.170A-14(g)(6)(ii). There is no colorable argument that there is an ambiguity requiring the certification of this question to the Alabama Supreme Court. The question of law has previously been decided by Alabama Supreme Court. Therefore, Respondent respectfully maintains that certification to Alabama Supreme Court is not appropriate.

WHEREFORE, respondent respectfully requests that the Court deny Petitioner's October 30, 2020, Motion for Certification and grant Respondent's Motion for Partial Summary Judgment filed on July 31, 2020.

Date: February 18, 2021

WILLIAM M. PAUL
Acting Chief Counsel
Internal Revenue Service

SHAWNA A. EARLY 
Special Trial Attorney (SBSE)
Tax Court Bar No. ES0127
33 Maiden Lane, 14th Floor
New York, New York 10038-4518
Telephone: 646-259-8031
shawna.a.early@irscounsel.treas.gov

MARIANO R. ARDAYA-BEECHER
Attorney (SBSE)
Tax Court Bar No. AM0353
Telephone: (617) 788-0808
mariano.beecher@irscounsel.treas.gov

OF COUNSEL:
JOSEPH W. SPIRES
Division Counsel
(Small Business/Self-Employed)
MICHAEL R. FIORE
Area Counsel
(Small Business/Self-Employed:Area 1)
MARC L. CAINE
Associate Area Counsel
(Small Business/Self-Employed)