PBBM-Rose Hill, Ltd. v. Comm'r of Internal Revenue

900 F.3d 193

PBBM-ROSE HILL, LIMITED; PBBM Corporation, Tax Matters Partner, Petitioners–Appellants

v.COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee

No. 17-60276

United States Court of Appeals, Fifth Circuit.

FILED August 14, 2018

David M. Wooldridge, Gregory Philip Rhodes, Esq., Sirote & Permutt, P.C., Birmingham, AL, Michelle Abroms Levin, Attorney, Sirote & Permutt, P.C., Huntsville, AL, for Petitioners–Appellants.

Jennifer Marie Rubin, Esq., David A. Hubbert, Gilbert Steven Rothenberg, Esq., Senior Attorney, Francesca Ugolini, U.S. Department of Justice, Tax Division, Appellate Section, William M. Paul, Internal Revenue Service, Washington, DC, for Respondent–Appellee.

George Asimos, Esq., Saul Ewing, L.L.P., Harrisburg, PA, Harry Dean Shapiro, Esq., Saul Ewing Arnstein & Lehr, L.L.P., Baltimore, MD, for Amicus Curiae North American Land Trust.

Ann Taylor Schwing, Esq., Best Best & Krieger, L.L.P., Sacramento, CA, for Amicus Curiae Ann Taylor Schwing.

Before KING, SOUTHWICK, and HO, Circuit Judges.^*

KING, Circuit Judge:

For the 2007 tax year, PBBM Rose Hill, Ltd., claimed a charitable contribution deduction of $15,160,000 for its donation of a conservation easement to the North American Land Trust. Subsequently, the Commissioner of Internal Revenue issued a final partnership administrative adjustment that determined PBBM Rose Hill, Ltd., was not entitled to the deduction and assessed a penalty for the overvaluation of the conservation easement. PBBM Rose Hill, Ltd., and its tax matters partner, PBBM Corp., filed a petition for readjustment in tax court. The tax court concluded that the contribution was not exclusively for conservation purposes because it (1) did not protect any of the conservation purposes under 26 U.S.C. § 170(h)(4)(A)(i)–(iii) and (2) failed to satisfy the perpetuity requirement of § 170(h)(5)(A). Consequently, the tax court disallowed the deduction. The tax court also concluded that the value of the easement was $100,000 and PBBM Rose Hill, Ltd., was subject to a gross valuation misstatement penalty. We hold that while the contribution protected the conservation purpose of preserving land for outdoor recreation by the general public under § 170(h)(4)(A)(i), it did not meet the perpetuity requirement of § 170(h)(5)(A). Accordingly, the donation did not qualify for a deduction. We also find no error in the tax court’s valuation of the easement or its determination of a penalty. Thus, we AFFIRM.

I.

A.

In 1996, Rose Hill Plantation Development Company Limited Partnership ("RHP Development") conveyed 241.48 acres of real property (the "Property") to Rose Hill Country Club, Inc. ("RHCC"). The Property is located in Beaufort County, South Carolina. The deed that conveyed the Property to RHCC contained a use restriction, which required the Property to "be utilized only for recreational facilities or open space for a period of thirty (30) years." In 2002, RHCC conveyed the Property to PBBM Rose Hill, Ltd. ("PBBM")—the taxpayer in this case—for $2,442,148. The deed that conveyed the Property to PBBM contained the use restriction. When PBBM was the owner, the Property consisted of primarily a 27-hole golf course and also included facilities such as a club house for the neighboring residential community. As the golf course was not profitable, PBBM closed it in January 2006. Two months later, it filed for voluntary Chapter 11 bankruptcy. In October 2006, PBBM initiated an adversary proceeding before the bankruptcy court against RHP Development, RHCC, Red Star Capital, L.P.,¹ and the Rose Hill Plantation Property Owners Association, Inc. ("POA"), seeking, inter alia, to invalidate the use restriction.

In July 2007, PBBM entered into a settlement agreement with the POA, which the bankruptcy court approved. Specifically, the POA agreed that it would not contest or interfere with PBBM seeking invalidation or removal of the use restriction in any proceeding before the bankruptcy court. However, PBBM agreed that any final judgment rendering the use restriction invalid and removing it would not have a binding or preclusive effect as to the POA for purposes of res judicata or collateral estoppel. The POA also agreed to forbear from enforcing the use restriction until the 180th day that any such judgment became final, unless there was an attempt to develop the Property. Further, the POA obtained an option to purchase the Property.

In August 2007, the POA decided to exercise its purchase option, and PBBM filed a motion in the bankruptcy court to approve the sale of the Property for $2.3 million. The bankruptcy court approved the sale in mid-September 2007. A couple of weeks later, the bankruptcy court entered an order that confirmed the taxpayer’s plan of reorganization under Chapter 11. In early December 2007, the bankruptcy court entered judgments that invalidated and removed the use restriction on the Property as to RHCC, RHP Development, and Red Star Capital. PBBM closed on the sale of the Property to the POA in early January 2008.

B.

Prior to the closing of the sale to the POA, on December 17, 2007, PBBM conveyed a conservation easement of about 234 acres of the Property ("Conservation Area") to the North American Land Trust ("NALT"). The Conservation Area consisted of the 27-hole golf course; the seven acres of the Property that were not conveyed included two acres of golf course maintenance areas and the five acres that held the club house. In the easement deed, PBBM "voluntarily, unconditionally and absolutely" granted NALT and its successors and assigns the "easements, covenants, prohibitions and restrictions" set forth in the deed "in perpetuity" in order to accomplish the "Conservation Purposes." The deed lists four "Conservation Purposes":

Preservation of the Conservation Area for outdoor recreation by, or the education of, the general public; and

Preservation of the Conservation Area as a relatively natural habitat of fish, wildlife, or plants or similar ecosystem; andPreservation of the Conservation Area as open space which provides scenic enjoyment to the general public and yields a significant public benefit; and

Preservation of the Conservation Area as open space which, if preserved, will advance a clearly delineated Federal, State or local governmental conservation policy and will yield a significant public benefit....

Paragraph 2.1 restricts the Conservation Area from being used "for a residence or for any commercial, institutional, industrial or agricultural purpose or purposes." Paragraph 2.4.1 states that "[t]he Property is and shall continue to be and remain open for substantial and regular use by the general public for outdoor recreation ..., whether for use in the game of golf ... or for other outdoor recreation." Paragraph 2.4.1 permits the "charging of fees" as long as "the Property is open for the substantial and regular use of the general public" and the fees do not defeat such use or "result in the operation of the Property as a private membership club." Paragraph 2.4.2 states that if the Property ceases "to be used as a golf course," then the Property "shall be use[d] for passive recreation and no other use."

In Article 3 of the deed, PBBM reserved several rights including the right to construct, inter alia, a tennis facility, single-family dwellings, driveways, community gardens, parking areas, and fences. It also preserved the right to install "no trespassing" signs in paragraph 3.18.1. Paragraph 3.21.2 states that the reserved rights cannot be exercised unless that exercise "will have no material adverse effect on the Conservation Purposes."

Paragraph 6.2 states that "[a]ny general rule of construction to the contrary notwithstanding, [the deed] shall be liberally construed in favor of the grant to promote, protect and fulfill the Conservation Purposes" and "[i]f any provision ... is found to be ambiguous, an interpretation consistent with the Conservation Purposes that would render the provision valid should be favored over any interpretation that would render it invalid." Paragraph 6.5 provides that if "any cause or circumstance gives rise to the extinguishment of [the easement] ... then [NALT], on any subsequent sale, exchange or involuntary conversion of the Conservation Area, shall be entitled to a portion of the proceeds of sale equal to the greater of" the fair market value of the easement around the date of the deed, or a defined share of the amount of proceeds remaining after both the "actual bona fide expenses" of the sale and the "amount attributable to improvements constructed upon the Conservation Area pursuant to" the reserved rights, if any, are deducted. That defined share is the fair market value of the easement around the date of the deed, divided by the value of the land not burdened by the easement around the date of the deed. Paragraph 6.14 states that "[n]othing in [the deed] shall be construed to create any right of access to the Conservation Area by the public."

C.

In 2008, PBBM filed its partnership tax return for the 2007 tax year and claimed a charitable contribution deduction of $15,160,000 for its donation of the conservation easement. In 2014, the Commissioner of Internal Revenue ("Commissioner") issued a final partnership administrative adjustment ("FPAA"), which determined that PBBM was not entitled to the deduction and assessed a penalty for overvaluing the conservation easement. PBBM and its tax matters partner, PBBM Corp. (collectively "PBBM"), challenged the FPAA in tax court. After a five-day trial, the tax court concluded that, inter alia, the easement was not exclusively for conservation purposes and therefore no deduction was allowed; the value of the easement was only $100,000; and PBBM was subject to a gross valuation misstatement penalty.

PBBM timely appealed.²

II.

"As a general rule, for charitable gifts of property, a taxpayer is ‘not allowed to take a deduction if the charitable gift consists of less than the taxpayer’s entire interest in that...