Thursday June 1, 2023
Summary Judgment Denied on the Conservation Easement Case
Hickory Equestrian LLC et al. v. Commissioner; No. 347-21
HICKORY EQUESTRIAN, LLC, JEFFREY BLAND, TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
This case involves a charitable contribution deduction claimed by Hickory Equestrian, LLC (Hickory), for a conservation easement. The Internal Revenue Service (IRS or respondent) disallowed the deduction and determined penalties. Petitioner timely petitioned this Court for readjustment of the partnership items.
On October 14, 2021, respondent filed a motion for partial summary judgment contending that the deduction was properly disallowed because Hickory failed to satisfy the substantiation requirements of Treasury Regulation § 1.170A13(c).1 Alternatively, respondent contends that, because of certain rights reserved by Hickory, the conservation purpose was not "protected in perpetuity." See § 170(h)(5)(A). On December 15, 2021, this case was assigned to the undersigned, and petitioner at our direction responded to the motion. We will grant the motion in part and deny it in part.
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 respondent's motion 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).
Hickory is a Georgia limited liability company. It is treated as a partnership for Federal income tax purposes, and petitioner Jeffrey Bland is its tax matters partner. Hickory 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 § 7482(b)(1)(E).
In November 2011 Hickory acquired, by capital contribution, 305.4 acres of land (Property) in Dade County, Georgia. The individuals who made this contribution (or their predecessors) had purchased the Property in 2002 for $111,715. On December 30, 2011, Hickory granted to the North American Land Trust (NALT or grantee) a conservation easement over most of the Property. The deed of easement was recorded the same day.
The deed recites that the easement is intended to preserve "open space" and a "natural habitat of fish [and] wildlife." The deed generally prohibits commercial or residential development. But it reserves certain rights to Hickory, including the rights to engage in recreational activities such as hunting, fishing, and horseback riding. In connection with these recreational activities, Hickory reserved the right to build "hunting or observation stands," bird houses, trails, and signage. Hickory also reserved the right to perform maintenance activities: It could maintain trails, dredge or channel watercourses "if necessary to maintain wetlands," remove damaged trees that blocked trails or threatened injury, and build a shed to store maintenance equipment. The deed does not explicitly require Hickory to secure NALT's approval before exercising these particular rights. However, article 2.17 of the deed includes a general requirement that Hickory notify NALT "in writing before exercising any Reserved Right that may impair the conservation interests associated with the Conservation Area."
Hickory reserved other rights that explicitly required prior consultation with and/or approval from NALT. Hickory could build service vehicle trails, but only if the "design and location [were] approved, in advance, by [NALT] in its discretion." Hickory could engage in forest management activities, but only if it secured NALT's prior approval for a "timber harvest or management plan." Hickory could build fences and raised walkways, repair roads, restore wetlands, remove vegetation, and construct "facilities normally used in connection with supplying utilities," but only if NALT supplied its prior approval for Hickory's exercise of these reserved rights.
In any case where NALT's advance approval was required, Hickory had to notify NALT at least 45 days before embarking on the exercise of any reserved right. NALT had 30 days from receipt of such notice to approve (or decline to approve) the proposed action. In the event that NALT's approval was required and it failed to respond within 30 days "and further fail[ed] to respond within ten days after a second written request, . . . then [NALT] is deemed to have granted consent or approval . . . unless the activity for which approval is required is plainly prohibited" by the deed of easement.
Hickory filed Form 1065, U.S. Return of Partnership Income, for its 2011 tax year. On that return it valued the Property (before placement of the easement) at $6,718,111, and it claimed a charitable contribution deduction of $6,366,711 for the donation of the easement. Hickory included with its return a Form 8283, Noncash Charitable Contributions, and appended a document titled "Noncash Charitable Contributions Attachment."
The IRS selected Hickory's return for examination. On November 5, 2020, the IRS issued petitioner a timely notice of final partnership administrative adjustment (FPAA) disallowing the charitable contribution deduction on the ground that Hickory had failed to meet "all the requirements of I.R.C. Section 170." The FPAA alternatively determined that, if any deduction were allowable, Hickory had not "established the value of the noncash charitable contribution." Petitioner timely petitioned this Court for readjustment of the partnership items.
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 (here petitioner). Sundstrand Corp., 98 T.C. at 520.
1. Appraisal Summary
Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must "obtain[ ] a qualified appraisal of such property and attach[ ] to the return . . . such information regarding such property and such appraisal as the Secretary may require." § 170(f)(11)(C). The required information includes "an appraisal summary" that must be attached "to the return on which such deduction is first claimed for such contribution." Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a)(1)(B), 98 Stat. at 691; see Treas. Reg. §1.170A-13(c)(2). The IRS has prescribed Form 8283 to be used as the "appraisal summary." Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450.
A completed appraisal summary must include "[t]he manner of acquisition . . . and the date of acquisition of the [donated] property by the donor," as well as "[t]he cost or other basis of the property." Treas. Reg. § 1.170A-13(c)(4)(ii)(D) and (E); see also DEFRA, § 155(a)(1)(C) (requiring taxpayer to include with the return "such additional information (including the cost basis and acquisition date of the contributed property) as the Secretary may prescribe"). Failure to comply with these requirements generally precludes a deduction. See § 170(f)(11)(A) (providing that "no deduction shall be allowed" unless a taxpayer meets the appraisal summary requirements of section 170(f)(11)(C)).
Section B, Part I of Form 8283 requires the taxpayer to supply "Information on Donated Property." In box 5(a) Hickory described the property as a "Conservation Easement under IRC 170(h) on land in Dade County, Georgia." In box 5(e), which asks "How acquired by donor," Hickory wrote "See Attached." Box 5(f), which asks for the "Donor's cost or adjusted basis," was left blank. In an attachment Hickory stated that the "basis in the property is not included . . . because . . . the basis of the property (in this case a conservation easement) is not determinable." Hickory declined to disclose its basis in the underlying land, asserting that it "ha[d] a holding period in the donated property in excess of 12 months . . . [and] such basis will not impact the amount of the claimed deduction."
Respondent contends that the deduction was properly disallowed because Hickory declined to report on Form 8283 its "cost or adjusted basis." We have previously held that a taxpayer's failure to disclose the "cost or adjusted basis" of charitable contribution property may be fatal to the claim for a deduction. See, e.g., RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 16-17 (2017), aff'd sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019). Petitioner contends that Hickory substantially complied with the applicable reporting requirements. Alternatively, petitioner urges that Hickory had reasonable cause for omitting the "cost or adjusted basis."
i. Substantial Compliance
Acknowledging that Hickory did not strictly comply with the reporting requirements, petitioner relies on a line of cases beginning with Bond v. Commissioner, 100 T.C. 32, 41-42 (1993), which have held that some of these requirements may be satisfied by substantial, rather than by literal, compliance. "The doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply." Durden v. Commissioner, T.C. Memo. 2012-140, 103 T.C.M. (CCH) 1762, 1763. Substantial compliance may be shown where the taxpayer "provided most of the information required" or made omissions "solely through inadvertence." Hewitt v. Commissioner, 109 T.C. 258, 265 n.10 (1997), aff'd, 166 F.3d 332 (4th Cir. 1998). But to substantially comply, the taxpayer must satisfy all reporting requirements that relate "to the substance or essence of the statute." Bond, 100 T.C. at 41 (quoting Taylor v. Commissioner, 67 T.C. 1071, 1077 (1977)).
The requirement to disclose "cost or adjusted basis" is necessary to facilitate the Commissioner's efficient identification of overvalued property. "When a taxpayer claims a charitable contribution deduction for recently purchased property, a wide gap between cost basis and claimed value raises a red flag suggesting that the return merits examination." Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24, 119 T.C.M. (CCH) 1144, 1148. "Unless the taxpayer complies with the regulatory requirement that he disclose his cost basis and the date and manner of acquiring the property, the Commissioner will be deprived of an essential tool that Congress intended him to have." Ibid.
For these reasons, we concluded in RERI Holdings I, 149 T.C. at 16-17, that the taxpayer's omission of "cost or adjusted basis" was fatal to its claim for a deduction. In that case the taxpayer had claimed a deduction reflecting a value 11 times higher than its basis in property it had purchased 17 months earlier. We noted that this "significant disparity . . ., had it been disclosed, would have alerted [the IRS] to a potential overvaluation." Id. at 17. Because the failure to supply cost basis information "prevented the appraisal summary from achieving its intended purpose," we held that this failure could not be excused on grounds of substantial compliance. Id. at 16; accord, Oakhill Woods, 119 T.C.M. (CCH) at 1148-1149; Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, 116 T.C.M. (CCH) 325, 329.
Here, Hickory acquired the land in question from its partners in November 2011. The partners (or their predecessors) had purchased the land in 2002 for $111,715. In December 2011 Hickory granted an easement over this land to NALT, valuing the unencumbered Property at $6,718,111. Hickory thus took the position that the Property had appreciated by more than 5,000% during a 9-year period that included the Great Recession of 2008-2009. This is precisely the sort of information that Congress wished the IRS to have, and Hickory's refusal to supply it contravenes the "essential requirements of the governing statute." See Estate of Evenchik, T.C. Memo. 2013-34, 103 T.C.M. (CCH) 1231, 1234 (quoting Estate of Clause v. Commissioner, 122 T.C. 115, 122 (2004)).
Petitioner urges that Hickory, while failing to supply any cost basis information on the Form 8283 or its attachments, disclosed its cost basis elsewhere, in a document captioned "IRS Section 721 Disclosure." Hickory evidently included this document in its Form 1065 for 2011 to support its position that Hickory and its partners qualified, under section 721, for nonrecognition of gain on the transfer of the Property to the partnership. On this document Hickory stated that "[t]he tax basis of the land contributed is $111,715."
We rejected a substantially similar argument in Oakhill Woods, holding that the "explicit disclosure of basis on Form 8283 is essential in alerting the Commissioner as to whether (and to what extent) further investigation may be needed." 119 T.C.M. (CCH) at 1149 (citing Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781, 796 (11th Cir. 1984)). In Oakhill Woods we explained that the IRS "reviews millions of returns each year for audit potential, and the disclosure of cost basis on the Form 8283 itself is necessary to make this process manageable." Ibid. There, as here, the taxpayer expressly stated on Form 8283 that basis information was not being provided. In such a case, we reasoned, "revenue agents cannot be required to sift through hundreds of pages of complex returns looking for possible clues about what the taxpayer's cost basis might be." Rather, the required basis information must be "explicitly disclosed where it is required to be disclosed." Ibid.; see also Belair Woods, 119 T.C.M. (CCH) at 329 (same).
This is not a case where the taxpayer did "all that is reasonably possible," Durden, 103 T.C.M. (CCH) at 1763, or omitted information "solely through inadvertence," Hewitt, 109 T.C. at 265 n.10. Allegedly in reliance on the advice it received, Hickory asserted in an attachment to its Form 8283 that the basis in the easement was "not determinable." Rather than supply its basis in the land — a known number — Hickory declined to provide that information on the theory that "such basis will not impact the amount of the claimed deduction." This was not a case of inadvertent omission, but of a conscious election not to supply information. We accordingly hold that Hickory did not comply, literally or substantially, with the regulatory reporting requirements.2
ii. Reasonable Cause Defense
In 2004, the year after the tax year involved in RERI Holdings I, Congress enacted the American Jobs Creation Act of 2004 (AJCA), Pub. L. No. 108-357, § 883(a), 118 Stat. at 1631. The AJCA added to the Code section 170(f)(11), which included, in subparagraph (A)(ii)(II), a new "reasonable cause" defense for failure to comply with the regulatory reporting requirements. That subparagraph excuses failure to satisfy the reporting requirements discussed above if "it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect."
"Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the challenged item." Crimi v. Commissioner, T.C. Memo. 2013-51, 105 T.C.M. (CCH) 1330, 1353 (citing United States v. Boyle, 469 U.S. 241 (1985)). "The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances." Treas. Reg. § 1.6664-4(b)(1).
If a taxpayer alleges reliance on the advice of a tax professional, that "advice must generally be from a competent and independent advisor unburdened with a conflict of interest and not from promoters of the investment." Mortensen v. Commissioner, 440 F.3d 375, 387 (6th Cir. 2006), aff'g T.C. Memo. 2004-279. This defense requires a showing that the taxpayer actually relied in good faith on the advice it received. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98-99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002). This determination "is inherently a fact-intensive one." Alli v. Commissioner, T.C. Memo. 2014-15, 107 T.C.M. (CCH) 1082, 1096 (quoting Crimi, 105 T.C.M. (CCH) at 1353).
Petitioner contends that Hickory, when completing its Form 8283, reasonably relied on advice from the attorneys and accountants who helped prepare its return. Petitioner asserts that these advisers concluded that the instructions to Form 8283 were ambiguous and that Hickory could comply with the reporting requirements by stating that its basis in the easement was "not determinable." We conclude that resolution of this issue will require us to address several questions as to which genuine disputes of material fact currently appear to exist. See Oakhill Woods, 119 T.C.M. (CCH) at 1151 (listing questions of fact). We accordingly reserve for trial the question whether Hickory can avail itself of the "reasonable cause" defense in section 170(f)(11)(A)(ii)(II).
2. "Protected in Perpetuity"
Respondent alternatively contends that Hickory's deduction must be denied in full because the conservation purpose underlying the easement was not "protected in perpetuity." 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." § 170(f)(3)(A). But there is an exception for a "qualified conservation contribution." § 170(f)(3)(B)(iii), (h)(1). For the donation of an easement to be a "qualified conservation contribution," the conservation purpose must be "protected in perpetuity." § 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 "[p]rotection of conservation purpose where [the] taxpayer reserves certain rights." See Treas. Reg. § 1.170A-14(g)(5). If a donor reserves rights on the land underlying an easement, the donor must provide the donee with certain documentation (e.g., surveys, maps, and aerial photographs) before effecting the donation. Id. subdiv. (i). "[T]he donor must agree to notify the donee, in writing, before exercising any reserved right . . . which may have an adverse impact on the conservation interests." Id. subdiv. (ii). And the deed of easement must authorize "the donee to enter the property at reasonable times for the purpose of inspecting the property . . . [and] to enforce the conservation restrictions by appropriate legal proceedings" if necessary. Ibid. These requirements are "designed to protect the conservation interests associated with the property . . . [that] could be adversely affected by the exercise of the reserved rights." Id. subdiv. (i).
Certain provisions of the deed that reserve rights — e.g., the rights to hunt and fish and to construct hunting stands, trails, and a storage shed — do not explicitly require advance notice to NALT. But article 2.17 of the deed includes a general requirement that Hickory must notify NALT "in writing before exercising any Reserved Right that may impair the conservation interests associated with the Conservation Area." Petitioner accordingly urges that the deed satisfies the literal requirements of Treasury Regulation § 1.170A-14(g)(5)(ii). In any event, it is a factual question whether exercise of these particular rights could "have an adverse impact on the conservation interests." Ibid.
Respondent also faults the deed for including a "deemed consent" provision, which allegedly renders NALT powerless to prevent Hickory from exercising other reserved rights (e.g., building fences, removing vegetation, and installing utilities) if NALT does not timely respond to Hickory's notification requesting approval. According to respondent, an easement deed with a "deemed consent" provision cannot satisfy the "protected in perpetuity" requirement because the donee is stripped of its "perpetual right to prevent activities that are inconsistent with the deed's conservation purposes." Compare Hoffman Props. II, LP v. Commissioner, 956 F.3d 832, 834 (6th Cir. 2020) (holding that a deemed consent provision impaired the conservation purpose where the donor could exercise rights "in a manner contrary to" regulations promulgated by the Secretary of the Interior), with Glade Creek Partners, LLC v. Commissioner, T.C. Memo. 2020-148, 120 T.C.M. (CCH) 285, 291 n.9 (finding a "deemed consent" provision nonproblematic where the donor could exercise only those rights that were consistent with the conservation purposes).
Petitioner emphasizes that the deed prohibits Hickory, notwithstanding any "deemed consent," from engaging in an activity that "is plainly prohibited by th[e] Conservation Easement." In petitioner's view, the deed of easement "plainly prohibits" Hickory from exercising rights that would impair a conservation purpose. In any event, petitioner contends that exercise of the rights in question would not, as a matter of fact, risk any damage to the conservation purposes. See, e.g., art. 3.1 (requiring NALT's prior consent to maintain vehicular trails); art. 3.7 (requiring NALT's prior consent to remove vegetation for restoration purposes); art. 3.12 (requiring NALT's prior consent to engage in forest management and preservation activities). And if NALT subsequently concluded that Hickory's action did threaten a conservation purpose, NALT could "seek specific performance by [Hickory]" and require "restoration of the Conservation Area" to the status quo ante. See Treas. Reg. § 1.170A-14(g)(5)(ii) (requiring that the grantee be able "to enforce the conservation restrictions by appropriate legal proceedings").
On the basis of the record that currently exists, we conclude that respondent's motion on this point must be denied. In a case such as this, we do not think the "deemed consent" issue can be decided as a matter of law. NALT is deemed to have consented to exercise of certain rights, but only if it has failed to respond to two successive notices from Hickory over a period of several months. NALTs internal procedures and past practice may shed light on whether this is likely to happen. In any event, the question whether exercise of the right to which consent is deemed given would impair any conservation purpose presents factual questions ill-suited to summary adjudication.
It is accordingly
ORDERED that respondent's Motion for Partial Summary Judgment, filed October 14, 2021, is denied in part and granted in part, to the extent set forth in this Order. It is further
ORDERED that the parties shall file, on or before March 11, 2022, 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
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2. Petitioner errs in citing Dunlap v. Commissioner, T.C. Memo. 2012-126, 103 T.C.M. (CCH) 1689. In that opinion, which was issued five years before RERI Holdings I, we sustained the disallowance of a charitable contribution deduction for a fašade easement because the taxpayers failed to prove that the easement had a value greater than zero. Id. at 1702. We discussed the taxpayers' submission of incomplete Forms 8283 only in connection with the accuracy-related penalty determined by the IRS, i.e., in deciding whether the taxpayers had "reasonable cause" for their position and had acted "in good faith" within the meaning of section 6664(c)(1). See id. at 1705.
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