Partnership Seeks Rehearing in Easement Donation Deduction Case

Hoffman Properties II, LP by Five M Acq I, LLC, Tax Matters Partner
Petitioners-Appellants
v.
Commissioner of Internal Revenue,
Respondent-Appellee

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

ON APPEAL FROM THE DECISION OF
THE UNITED STATES TAX COURT

APPELLANTS' PETITION FOR REHEARING OR REHEARING EN BANC UNDER FEDERAL RULES OF APPELLATE PROCEDURE 35 AND 40

George M. Clarke III
Vivek A. Patel
Brandon M. King
Baker & McKenzie LLP
815 Connecticut Ave NW
Washington, DC 20006
(202) 835-6184
Attorneys for Petitioners-Appellants

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TABLE OF CONTENTS

INTRODUCTION AND RULE 35(B)(1) STATEMENT

ARGUMENT

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)

Black & Decker Corp. v. Commissioner, 986 F.2d 60 (4th Cir. 1993)

Celotex Corp. v. Catrett, 477 U.S. 317 (1986)

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

Commissioner v. Estate of Sternberger, 348 U.S. 187 (1955)

Davis v. United States, 495 U.S. 472 (1990)

Estate of Quick v. Commissioner, 110 T.C. 440 (1998)

Glass v. Commissioner, 471 F.3d 698 (6th Cir. 2006), aff'g 124 T.C. 258 (2005)

Graev v. Commissioner, 140 T.C. 377 (2013), superseded in part and modified in part by 149 T.C. 485 (2017)

John Deere Co. v. Am. Nat. Bank, Stafford, 809 F.2d 1190 (5th Cir. 1987)

Massey v. Congress Life Ins. Co., 116 F.3d 1414 (11th Cir. 1997)

Oldham v. O.K. Farms, 871 F.3d 1147 (10th Cir. 2017)

Ramsey v. Coughlin, 94 F.3d 71 (2d Cir. 1996)

Russello v. United States, 464 U.S. 16 (1983)

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

Summa Holdings, Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017)

United States v. Dean, 224 F.2d 26 (1st Cir. 1955)

Yashon v. Gregory, 737 F.2d 547 (6th Cir. 1984)

Statutes

I.R.C. § 170(h)(1)(B)

I.R.C. § 170(h)(4)(B)

I.R.C. § 170(h)(4)(B)(i)

I.R.C. § 170(h)(5)(A)

Other Authorities

S. Rep. 96-1007

Treas. Reg. § 1.170A-14(a)

Treas. Reg. § 1.170A-14(c)(1)

Treas. Reg. § 1.170A-14(e)(3)

Treas. Reg. § 1.170A-14(g)

Treas. Reg. § 1.170A-14(g)(1)

Treas. Reg. § 1.170A-14(g)(3)

Treas. Reg. § 1.170A-14(g)(4)(i)

Treas. Reg. § 1.170A-14(g)(5)

Treas. Reg. § 1.170A-14(g)(5)(i)

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INTRODUCTION AND RULE 35(B)(1) STATEMENT

Section 170(h)(5)(A) requires that the conservation purpose of an easement be preserved “in perpetuity.” This section, and the corresponding Treasury Regulations, require that the donee of such an easement receive from the donor the right to “prevent uses of the retained interest inconsistent with the conservation purposes of the donation.” Treas. Reg. § 1.170A-14(g)(1). The Panel held that the 45-Day Provision, as a matter of law, unambiguously caused AAHP (the donee) to be stripped of its right to prevent such inconsistent uses. The Panel's holding exceeded even the Commissioner's interpretation of the perpetuity requirement and adopted a novel, and erroneous, determination of what restrictions are allowed on how a donee exercises its rights. The decision thus conflicts with authoritative law in this Court and decisions in other circuits. Accordingly, rehearing en banc is warranted to resolve the conflict as to what rights donors can reserve and what restrictions can be placed on donees in easement deeds.

For decades, donors and donees have executed deeds that reserve rights to donors, including timing rules like the 45-Day Provision. The Commissioner has not issued guidance on these provisions or their ramifications on the perpetuity requirement despite being well aware of their existence. Until this case, such timing provisions have gone unchallenged. The Panel's decision to affirm the Commissioner's new litigating position constitutes unfair surprise, unduly prejudices Hoffman and the universe of easement donors and donees, raises a “question of exceptional importance,” and is a separate ground for rehearing this case en banc.

As this Court and other courts have held, the issue of whether the conservation purpose of the Easement Deed is protected in perpetuity is a question of fact. By upholding the Tax Court's sua sponte grant of summary judgment, the Panel precluded Hoffman from presenting the exact evidence that it claimed was missing from the record: AAHP's ability and willingness to protect the conservation purpose of the Easement Deed and other evidence to explain how the 45-Day Provision is not inconsistent with that conservation purpose. Panel rehearing is necessary to apply the correct standard for granting summary judgment sua sponte and, ultimately, to remand for consideration of evidence on the factual question of the 45-Day Provision's impact on the perpetuity of the easement at issue.

REASONS FOR GRANTING REHEARING

This case raises several “question[s] of exceptional importance.” Two are substantive: (1) whether easement deeds that preserve historic structures can ever restrict how a donee exercises its ability to veto certain proposed developments; and (2) whether an administrative agency that was required to provide guidance on an ambiguous legal provision can unfairly surprise a regulated party by taking a position that contradicts decades of industry interpretation and practice as to that provision. A third is procedural: what is the appropriate standard for applying summary judgment in cases where the trial court has ruled on an issue sua sponte. As discussed below, the Panel's answers to all of these questions conflict with precedent from the Supreme Court, this Court, and other circuit courts. And the Panel's decision places thousands of easement deeds, donors, and donees in a precarious position. All of this warrants en banc or, alternatively, panel rehearing.

ARGUMENT

I. Rehearing En Banc Is Warranted To Resolve Conflicting Interpretations of the Scope of Restrictions on Donee Rights with Respect to Easement Deeds.

Fundamentally, easement deeds are contracts between arm's length negotiating parties: a donor who holds a property interest and a donee who is entitled to receive and preserve that property interest. Both the Internal Revenue Code and the Treasury Regulations recognize this relationship and that donors can reserve rights to alter the easement property if they meet specified requirements. See I.R.C. § 170(h)(4)(B)(i) (contemplating changes that are consistent with conservation purposes); see, e.g., Treas. Reg. § 1.170A-14(g)(5) (allowing a donor to retain certain rights in a qualifying easement notwithstanding that it “may impair conservation interests”).

Article 3 of the Easement Deed allows Hoffman to develop or alter the property in limited aspects if it first obtains approval from AAHP, in compliance with Treasury Regulation section 1.170A-14(g). The 45-Day Provision requires AAHP to act within 45 days of Hoffman's submission. The 45-Day Provision is thus not a substantive restriction on AAHP's rights to prevent development of the easement property. Rather, it is a procedural limitation that dictates how AAHP must exercise its rights in accordance with notions of commercial reasonableness. Nothing in the 45-Day Provision prevented AAHP from rejecting a proposal for inconsistent uses; it just gave AAHP a period in which to do so.

The Panel determined that the 45-Day Provision did not satisfy the perpetuity requirement of section 170(h)(5)(A) as a matter of law. In doing so, it declined to address the reasonableness of whether 45 days — or any amount of time — was sufficient under the present circumstances, because “forever really means forever.” Opinion at 5. Under that reading, no timing restriction on a donee's decision-making, whether it be 45 days, 45 months, or 45 years, would ever be permissible. Such a standard is commercially unworkable. Imagine a donor proposing to modify the property to make it compliant with applicable legal requirements (e.g., adding a wheelchair ramp to access the entrance). Under the Panel's decision, the donee could indefinitely withhold any approval for such modifications, without regard to the necessity or merits of such improvements.

In this way, the Panel's decision blurs settled law that donors can reserve rights in a conservation easement when consistent with conservation purposes. Glass v. Commissioner, 471 F.3d 698, 711 (6th Cir. 2006) (“Taxpayers' reserved rights were consistent with the Easements' stated purpose of protecting threatened plant and wildlife habitats.”), aff'g 124 T.C. 258 (2005). It creates an insurmountable burden for all easement donors that requires them to give veto power to the donee forever, regardless of any time sensitivities of the proposed development or whether proposed changes would actually affect the conservation purpose of the easement.

The Panel's approach ignores that donees are independent entities with interests separate from donors. It also usurps the arm's length commercial negotiations between donors and donees. And it runs counter to Congress's mandate — which this and other courts have observed — to examine the ability and the willingness of the donee to enforce its rights in the easement. See S. Rep. 96-1007, at 13-14; Simmons v. Commissioner, 646 F.3d 6, 10 (D.C. Cir. 2011) (noting that a donee must have a “commitment to protect the conservation purposes of the donation” and “the resources to enforce the restrictions.”) (internal quotations omitted); cf. Davis v. United States, 495 U.S. 472, 483 (1990) (recognizing that the donee must have “significant legal rights” because donees “have both the incentive and legal authority to ensure that [donations] are properly used.”).

In Glass, this Court found the easements perpetual and legally enforceable, recognizing the donee's commitment and financial resources to enforce them. This Court affirmed the Tax Court's analysis of whether the easements were “exclusively for conservation purposes,” which considered (1) the donee's commitment to conservation; (2) the donee's financial resources to enforce the easement; (3) the donee's purposes for tax exemption including enforcement of the easement; and (4) requirements in the deed that any subsequent donee be fully committed to enforcing the easement. 124 T.C. at 283. But the Panel's decision assumes away these relevant criteria — AAHP's actions, ability, status, resources, and willingness to preserve the easement — in evaluating whether Hoffman's retained rights are subject to legally enforceable restrictions. I.R.C. § 170(h)(5)(A); Treas. Reg. § 1.170A-14(g)(1). Therefore, it is inconsistent with the decision and the approach in Glass, which acknowledged and respected the donee's “dealing at arm's length with petitioners,” its “(commitment and financial resources) to enforce the preservation-related restrictions,” and how such enforcement was “directly related to its tax-exempt purposes.” Glass, 124 T.C. at 283.

Other circuits have similarly considered a donee's abilities and willingness to protect conservation purposes when evaluating rights reserved by a donor. In Kaufman, the First Circuit rejected arguments that the donee might abandon the easement, holding that the Commissioner may address its concern by enforcing its own regulations requiring “that tax-exempt organizations such as the Trust be operated 'exclusively' for charitable purposes, 26 C.F.R. § 1.501(c)(3)-1.” Kaufman v. Shulman, 687 F.3d 21, 28 (1st Cir. 2012). In Simmons, the D.C. Circuit determined that a clause allowing a donee to abandon its rights did not impede perpetuity of conservation purposes, stating that “[a]ny donee might fail to enforce a conservation easement, with or without a clause stating it may consent to a change or abandon its rights, and a tax-exempt organization would do so at its peril.” 646 F.3d at 10. Assuming that a donee will not preserve conservation purposes of an easement within a certain timeframe is the same as assuming that it might abandon the easement altogether. Just as the donee in Simmons could choose to abandon its rights, AAHP here could choose not to reject a development proposal within 45 days. The Panel's concern that “[i]t only takes one change to destroy the historical character of a building” is no more true here than in Simmons, and is at odds with the regulations, which permit acts that impact conservation interests that nevertheless protect the overall conservation purpose. See, e.g., Treas. Reg. § 1.170A-14(e)(3), (g)(4)(i), (g)(5)(i).

Unlike Glass, Kaufman, and Simmons, and a pragmatic interpretation of section 170(h) and accompanying regulations, the Panel's one-size-fits-all approach ignores Congress's mandate to consider the unique factual circumstances of each easement, including the property donated, the terms of the deed, and the donor and donee (including their respective rights, abilities, and willingness to preserve the easement). Given the number of charitable easement deeds with similar provisions and the amounts of deductions at issue, the contours of what rights these deeds can provide to donors is a “question of exceptional importance.” In addition, to maintain uniformity with prior decisions, it is necessary for the full court to hear this case en banc.

II. Rehearing En Banc Is Warranted To Prevent the Commissioner from Committing Unfair Surprise by Taking a Position Contrary to Industry Practice.

Federal government agencies are typically afforded a degree of deference in interpreting their own ambiguous guidance — but such deference has limits. In Christopher v. SmithKline Beecham Corp., 567 U.S. 142 (2012), the Supreme Court considered whether to defer to the litigating position of the Department of Labor (DOL) on whether “outside salesman” in the Fair Labor Standards Act encompassed sales representatives. DOL's regulations were not informative as to industry's decades-long uniform interpretation of “outside salesman,” and DOL never pursued enforcement of a contrary interpretation. The Court declined to defer to DOL, observing that agencies should provide “'fair warning of the conduct [a regulation] prohibits or requires'” and that not doing so results “in precisely the kind of 'unfair surprise' against which our cases have long warned.” Id. at 144, 156. It also warned that:

It is one thing to expect regulated parties to conform their conduct to an agency's interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency's interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.

Id. at 144, 158-59; see also Summa Holdings, Inc. v. Commissioner, 848 F.3d 779, 781 (6th Cir. 2017) (in rejecting the Commissioner's denial of relief to taxpayers “who complied in full with the printed and accessible words of the tax laws,” this Court asked “[h]ow can citizens comply with what they can't see?”).

Congress revised section 170(h) in 1980 and instructed Treasury and the Commissioner to issue guidance to protect taxpayers from ambiguity. See S. Rep. 96-1007, at 13-14 (ordering that accompanying regulations should have “the highest priority” and directing administrative determinations for “issues that may arise in the interpretation of the statute . . . before publication of regulations”). Treasury Regulation section 1.170A-14(g), however, provides only that any donor-retained interest must be “subject to legally enforceable restrictions . . . that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation.” It does not say that the donee has perpetuity to decide whether to enforce those restrictions. Given that Treasury Regulation section 1.170A-14(a) provides that the conservation purpose “must be protected in perpetuity” (emphasis added) and that section 1.170A-14(g) makes no reference to the perpetual nature of the restrictions, donors and donees reasonably posited that commercially necessary timing restrictions were compliant with the statute. See Russello v. United States, 464 U.S. 16, 23 (1983) (“where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”); Black & Decker Corp. v. Commissioner, 986 F.2d 60, 65 (4th Cir. 1993) (“Regulations, like statutes, are interpreted according to canons of construction.”).

Because the Commissioner never provided guidance — despite Congress's mandate — with respect to timing restrictions in the nearly four decades since the promulgation of section 170(h), donors and donees jointly determined appropriate limits on how a donee exercises its rights. For example, organizations like LTA created model easement deeds, which the Tax Court has endorsed and the Commissioner has referred to as “industry-standard agreements.” Rep. Br. at 5. Terms such as the 45-Day Provision, which was found in the LTA's 1996 model historic preservation deed, were reasonable industry interpretations of the Code and regulations.

After the Easement Order partially disallowed Hoffman's deduction under section 170(h)(4)(B), however, the Commissioner for the first time rejected Hoffman's reliance on industry practice and staked out a contrary position with respect to section 170(h)(5)(A) in additional motions before the Tax Court and in its brief submitted to the Panel. The Commissioner's position constitutes “unfair surprise” because it conflicts with decades of industry-wide interpretation of the statute and (at best) ambiguous regulations. 567 U.S. at 158 (“[W]here . . . an agency's announcement of its interpretation is preceded by a very lengthy period of conspicuous inaction, the potential for unfair surprise is acute.”). The Panel's decision tacitly endorses the Commissioner's abrupt change and harms Hoffman and countless other taxpayers, land trusts, and conservation agencies that have legitimately relied on model deeds that the Commissioner previously lauded. Accordingly, rehearing is necessary to address the question of deference owed to the Commissioner and to set aside this “unfair surprise.”

III. Rehearing is Warranted to Prevent Abrogation of the Bedrock Principles of Summary Judgment.

Hoffman requested remand of this case to develop necessary facts for the Tax Court to arrive at a fully informed decision. The Panel not only rejected Hoffman's request, but broadened the impact of the Tax Court's decision by extending it beyond the 45-Day Provision to cover all timing restrictions. The Panel's decision thus perpetuates the same prejudice from which Hoffman sought relief: its lack of meaningful opportunity to adequately develop the record. And it inappropriately extends the impact of that prejudice to countless other donors of easements.

A. The Panel's Decision Conflicts with Established Law Restricting Sua Sponte Grants of Summary Judgment by Trial Courts.

Because the Commissioner did not raise the 45-Day Provision in its initial briefs for summary judgment, Hoffman could not have known what evidence to present on that issue before the Tax Court issued the Easement Order. The Tax Court disallowed that part of Hoffman's deduction without hearing facts or even appreciating why facts are a necessary part of the analysis. The Panel's decision erroneously reinforces this harm.

Previous Sixth Circuit decisions recognize the inherent prejudice in sua sponte grants of summary judgment, which foreclose the nonmovant's opportunity to respond. See, e.g., Yashon v. Gregory, 737 F.2d 547, 552 (6th Cir. 1984) (Plaintiff is entitled to be informed of the basis for summary judgment so that he may respond “with whatever arguments and evidence in the record that he could muster.”). Other circuits have also taken umbrage with sua sponte grants of summary judgment. Several have held that granting summary judgment on a basis other than that raised by the movant does not constitute sufficient notice to the nonmovant. See, e.g., Oldham v. O.K. Farms, 871 F.3d 1147, 1150-51 (10th Cir. 2017) (reversing and remanding the district court where it “gave no notice that it intended to grant [defendant's] summary judgment motion on a basis that was not raised by [defendant]”); John Deere Co. v. Am. Nat. Bank, Stafford, 809 F.2d 1190, 1192 (5th Cir. 1987) (reversing the district court's grant of summary judgment “on grounds not advanced by the moving party” because it “did not give proper notice.”). Other courts have held that summary judgment is inappropriate where it prematurely forecloses the nonmovant's ability to present its best defense. See, e.g., Massey v. Congress Life Ins. Co., 116 F.3d 1414, 1417-18 (11th Cir. 1997) (reversing and remanding sua sponte summary judgment grant where the nonmovant was not given “an opportunity to marshal their strongest evidence and legal arguments.”); Ramsey v. Coughlin, 94 F.3d 71, 74 (2d Cir. 1996) (sua sponte summary judgment is appropriate only where the record reflects “the losing party's inability to enhance the evidence supporting its position”).

In other words, this Court and other circuits agree that lack of notice and opportunity itself causes prejudice. The Panel's determination that Hoffman had “several opportunities to brief the 45-Day Provision,” doesn't substitute for factual development at and before trial. See Opinion, at 4. Hoffman's filing of a motion for reconsideration does not alter this outcome. Once the Tax Court had erroneously decided the question, Hoffman faced an uphill battle for reconsideration. See Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998) (“[W]e generally deny such a motion unless unusual circumstances or substantial error is shown.”).

Further, it is simply false that Hoffman did not state in its briefing here “what new arguments or evidence it would have raised if it had known about the issue earlier.” See Opinion, at 4. Hoffman extensively briefed the specific issues for which it would have introduced new evidence, including:

• Why Hoffman and AAHP included the 45-Day Provision. App. Br. at 29.

• What Hoffman and AAHP intended with respect to the 45-Day Provision. Rep. Br. at 10-11.

• What AAHP was capable of determining within 45 days of receiving a proposal. App. Br. at 29.

• Whether AAHP would have denied a request that it could not analyze within 45 days. Id.

• How AAHP's charter would be negatively affected by enforcement lapses. Id.

• The extent of AAHP's commitment to protecting conservation purposes. Id. at 25.

• Whether Hoffman made any development proposals under Article 3. Rep. Br. at 19.

The Panel ignored these statements and instead denied Hoffman's appeal on the basis of the precise injury that Hoffman is seeking to remedy. That decision conflicts with established precedent restricting sua sponte grants of summary judgment and should be reconsidered.

B. The Panel's Decision Applies an Incorrect Standard for Summary Judgment.

On summary judgment, the burden is on the movant to show an absence of evidence to support the nonmovant's case, and a court is required to draw all justifiable inferences in the nonmovant's favor. See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). The Panel interpreted Article 3 in contravention of this standard by speculating as to the outcome if Hoffman were to exercise certain rights under that Article, assuming AAHP would not act to prevent that exercise,¹ and that Hoffman would invoke the 45-Day Provision to preclude any such act. See, e.g., Opinion, at 4.

Further, the Panel incorrectly assumed that Article 10 operated in a manner contrary to what Hoffman and AAHP intended.² Article 10 provides that the 45-Day Provision should be interpreted in a way that preserves the conservation purpose of the Easement Deed as a whole. Article 10.1(a) requires the Easement Deed to be broadly interpreted to effect its purpose of enforcing conservation purposes. Article 10.1(e) provides that AAHP “shall hold this [donation] 'exclusively for conservation purposes' as that term is defined in the Code and the implementing regulations[.]” Both provisions complement the Tax Court's and this Court's obligation on summary judgment: to construe the Easement Deed in the light most favorable to Hoffman and in a manner that assumes Hoffman and AAHP would protect, at all times, its conservation purposes.

Finally, the Panel determined that the 45-Day Provision causes the easement to fail the perpetuity requirement of section 170(h)(5)(A) as a matter of law. But whether an easement meets the perpetuity requirement of section 170(h)(5)(A) is a question of fact. See Glass, 471 F.3d 698. In particular, Treasury Regulation section 1.170A-14(g)(3) provides that if the possibility that an event affecting the perpetuity of an easement is “so remote as to be negligible,”³ such event shall be disregarded. This inquiry is a factual one, focused on whether a condition is so unlikely to occur that an arm's length donor and donee would disregard it in undertaking an easement transaction.⁴ United States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955); see also Graev v. Commissioner, 140 T.C. 377, 394 (2013), superseded in part and modified in part by 149 T.C. 485 (2017) (“What is determinative under the section 170 'remote' regulations is the possibility, after considering all the facts and circumstances,” that the donee's retention of the easement would be defeated. (emphasis added)).

By upholding the Tax Court's decision, the Panel improperly converted these questions of fact into questions of law, and remand is necessary to allow evidence to address these questions of fact.

CONCLUSION

The Panel's decision should be vacated, and this case should be reheard, either en banc or by the Panel.

Respectfully Submitted,

George M. Clarke III

Vivek A. Patel

Brandon M. King

Baker & McKenzie LLP
815 Connecticut Ave NW
Washington, DC 20006
(202) 835-6184

Attorneys for Petitioners-Appellants

May 29, 2020