Davis v. Comm'r of Internal Revenue

1

MICHAEL DAVIS & AMY L. DAVIS Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 14870-20

United States Tax Court

May 23, 2022

ORDER

Christian N. Weiler Judge

This case involves a charitable contribution deduction claimed by D&G for a conservation easement. The Internal Revenue Service (IRS or respondent) disallowed this deduction and determined an accuracy-related penalty. On August 5, 2021 respondent filed a motion for partial summary judgment, and on November 30, 2021, petitioners filed a response to respondent's motion. By order served on February 25 2022, the Court directed the parties to jointly or separately, report to the Court as to the then current status of this case and (1) what issues remain for decision if respondent's motion for partial summary judgment is granted, and (2) what issues remain for decision if respondent's motion for partial summary judgment is denied. On April 5, 2022, this case was assigned to the undersigned for trial or other disposition.

Based on the reasoning below, we will deny respondent's motion for partial summary judgment in part, and grant it, in part.

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 respondent's motion 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).

Petitioner Michael Davis is one of two partners in D&G^[1], an LLC. D&G was a partnership for federal income tax purposes during the 2016 tax year. In December 2014, D&G purchased 9.92 acres in DeKalb County, Georgia, for approximately $6, 000. By deed recorded on December 21, 2016, D&G granted a conservation easement over the 9.92 acres in favor of Southern Conservation Trust, Inc. (Southern Conservation).

Under the deed, D&G reserves the right to make improvements to the property, including the right to construct trails and footpaths on the property, install signs and other marks, construct low impact amenities, maintain and manage the property to prevent erosion, and install picnic tables, benches, and the like.

The deed also provides for the extinguishment or termination of the easement under its Section 9.1, stating that it "can only be terminated or extinguished, whether in whole or in part, by judicial proceedings . . . ." More specifically, under the terms for extinguishment, valuation of the conservation easement would be determined under its Section 9.2, as follows:

"9.2 Valuation. This Easement constitutes a real property interest immediately vested in Grantee, which for the purposes of Section 9.1, the parties stipulate to have a fair market value determined by multiplying (1) the fair market value of the Property encumbered by the Easement (minus any increase in the value after the date of this grant attributable to the improvements) by (2) x/y, which is 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. For the purposes of this paragraph, the ratio of the value of the Easement to the value of the Property unencumbered by the Easement shall remain constant."

On its 2016 federal partnership tax return, D&G claimed a $2, 510, 000 charitable deduction for its donation of the conservation easement to Southern Conservation. Since Mr. Davis owned 50% of D&G, $1, 255, 000 flowed through to him. Of that amount, petitioners claimed $575, 107 as an itemized deduction on their 2016 joint personal income tax return. The IRS examined D&G's federal partnership return and by notice of deficiency disallowed the conservation easement deduction in full, petitioners' itemized deduction, and asserted an accuracy-related penalty under I.R.C. § 6662 against petitioners. On December16, 2020, petitioners timely filed their petition with the Tax Court challenging the IRS' notice of deficiency.

Revenue Agent (RA) Erica Jenkins made the initial determination that the accuracy-related penalty under I.R.C. § 6662 applied against petitioners in her examination report dated June 23, 2020. RA Jenkins's initial determination was personally approved, in writing, on June 24, 2020, by her immediate supervisor, Adam Wooten, by his electronic signature of Letter 5153 (the cover letter for the examination report of RA Jenkins), which was the first time respondent informed petitioners that he intended to pursue the accuracy-related penalty under I.R.C. § 6662.

On October 11, 2021, D&G executed a correction to the deed of conservation easement and recorded said document on October 12, 2021, in DeKalb County, Georgia. The corrected deed has an effective date of December 16, 2016, and deleted the language found above in its Section 9.2 and replaces the language of its Section 9.3 with the following:

"Whenever all or a part of the property is taken in exercise of eminent domain by public, corporate, or other authority so as to abrogate the restrictions imposed by this Conservation Easement, Grantor and Grantee shall join in appropriate actions at the time of such taking to recover the full value of the taking and all incidental or other damages resulting from the taking, which proceeds shall be divided in accordance with the proportionate value of the Grantor and Grantee's interest as specified in Section 9.1."

The foregoing section is modeled after language found in IRS Chief Counsel Advice 202130014.

Discussion

A. The Parties' Arguments

Respondent's motion seeks summary adjudication on the grounds that D&G's conservation easement contribution was not a qualified contribution under I.R.C. § 170(h) because it does not satisfy the perpetuity requirement of I.R.C. § 170(h)(5)(A). In his motion for partial summary judgment, respondent cites to Treas. Reg. § 1.170A-14(g)(6)(ii) (the "proceeds regulation") and contends that the conservation deed in question violates this regulation by improperly carving out donor retained improvements. Respondent also cites to our holdings in Coal Property Holdings v. Commissioner, 153 T.C. 126 (2019); Carroll Palmolive Bldg. Invs. v. Commissioner, 149 T.C. 380 (2017); and the Fifth Circuit Court of Appeals's decision in PBBM-Rose Hill v. Commissioner, 900 F.3d 193 (5th Cir. 2018) as further support of his argument.

Respondent also argues that the requirements of I.R.C. § 6751(b)(1) have been met in this case, since RA Jenkins's initial determination was personally approved, in writing, on June 24, 2020, by her immediate supervisor, Mr. Wooten.

In response, petitioners contend that the original deed does not violate the proceeds regulation and respondent's motion is moot since the original deed has been corrected. Petitioners also contend that we are to liberally interpret the original deed consistent with the parties' intent. In the alternative, petitioners argue that the improvements allowed under the original deed would not increase the value of the property and the proceeds regulation is not a valid exercise of respondent's rule-making authority. Petitioners response does not address respondent's argument with respect to his burden of production under the requirements of I.R.C. § 6751(b)(1).

B. 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. Id. "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).

C. 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." I.R.C. § 170(f)(3)(A). There is, however, an exception for a "qualified conservation contribution." I.R.C. § 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." I.R.C. § 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 at 201.

The Treasury 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 Treasury 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...