Rocky Comfort Creek Holdings, LLC v. Comm'r of Internal Revenue

ROCKY COMFORT CREEK HOLDINGS, LLC, ROCKY COMFORT CREEK INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 12106-20

United States Tax Court

February 17, 2022

ORDER

Albert G. Lauber Judge

This is a syndicated conservation easement case. The Internal Revenue Service (IRS or respondent) disallowed a charitable contribution deduction claimed for the easement by Rocky Comfort Creek Holdings, LLC (Rocky Comfort), and determined penalties under sections 6662 and 6662A.^[1] Currently before the Court is respondent's motion for summary judgment filed August 12, 2021, contending that the deduction was properly disallowed and that Rocky Comfort is liable for penalties. Finding that there exist genuine disputes of material fact, we will deny the motion.

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 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).

Rocky Comfort is a Georgia limited liability company organized in January 2016. It is treated as a partnership for Federal income tax purposes, and petitioner Rocky Comfort Creek Investors, LLC, is its tax matters partner. Rocky Comfort 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 December 2016 Greenway Family Farm, LLC (Greenway), acquired a 99% membership interest in Rocky Comfort by contributing to it roughly 140 acres of land (Property) in Jefferson County Georgia. The Property was a portion of a larger tract that Greenway had purchased in 2012 for $2, 200, 000. On December 15, 2016, after petitioner solicited investors through a private placement memorandum, petitioner purchased from Greenway a 97% interest in Rocky Comfort for $2, 400, 000. Six days later, on December 21, 2016, Rocky Comfort granted to the Foothills Land Conservancy (Foothills or grantee) a conservation easement over the Property.

Rocky Comfort filed Form 1065, U.S. Return of Partnership Income for its short 2016 tax year. On that return it valued the Property (before placement of the easement) at $27, 600, 000 and it claimed a charitable contribution deduction of $27, 390, 000 for the donation of the easement. In support of this supposed value Rocky Comfort relied on an appraisal prepared by Martin Van Sant and Thomas Wingard.

The deed of easement recites the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to Rocky Comfort, including the rights to engage in forest management activities and to build a limited number of structures. In general, Rocky Comfort could exercise these reserved rights only after consulting with Foothills. In any case where Foothills' advance approval was required, Rocky Comfort had to notify Foothills at least 30 days before embarking on the exercise of any reserved right. Foothills had 30 days from receipt of such notice to approve (or decline to approve) the proposed action. In the event that Foothills' approval was required and it failed to respond within 30 days, "then [Foothills] is deemed to have granted approval . . . EXCEPT WHERE the requested action . . . would result in an adverse effect on the Conservation Purposes or Conservation Values in any material respect."

The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 9(a) of the deed provides that "[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of prior claims, . . . shall be the stipulated fair market value of the Easement, or proportionate part thereof, as determined in accordance with Paragraph 9(b)." Paragraph 9(b), cap-tioned "Valuation," provides a formula.

The IRS selected Rocky Comfort's return for examination. On July 16, 2020, the IRS issued petitioner a timely notice of final partnership administrative adjustment disallowing the charitable contribution deduction on the ground that Rocky Comfort had "failed to establish that it satisfied all the requirements of I.R.C. § 170." The IRS determined a 40% "gross valuation misstatement" penalty under section 6662(h) and (in the alternative) a 20% accuracy-related penalty under other Code provisions.

Discussion

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 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 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.

B. "Protected in Perpetuity"

The Internal Revenue 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).

Respondent contends that the conservation purpose underlying the easement was not "protected in perpetuity." His principal argument is that the easement deed fails to comply with Treas. Reg. § 1.170A-14(g)(6), the "judicial extinguishment" regulation. That is assertedly so because, in the event the Property were sold following extinguishment of the easement, the grantee's share of the proceeds would be improperly reduced by prior claims against Rocky Comfort (or its successors). Alternatively, respondent urges that the deed fails to prevent Rocky Comfort from engaging in activities inconsistent with the easement's conservation purposes. Petitioner vigorously resists these contentions, and the parties have advanced several arguments and sub-arguments, which we consider in turn.

1. Judicial Extinguishment

The regulations set forth detailed rules for determining whether the "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 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. In effect, the "perpetuity" requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee exclusively for conservation purposes.

In Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 137-140 (2019), we held that a deed of easement failed to satisfy these regulatory requirements where the donee's share of post-extinguishment sale proceeds was improperly reduced in two ways--by carve-outs for "donor improvements" and for "prior claims" against the donor. In this case respondent does not cite any "donor improvements" problem. But he notes that, if the Property is sold following judicial extinguishment of the easement, Foothills' proportionate share of the proceeds will be calculated only "after the satisfaction of prior claims." Respondent contends that this provision, like the provision in Coal Property Holdings, improperly reduces Foothills' share of the sale proceeds by any claims against Rocky Comfort or its successors.

Petitioner urges that the deed complies with the "judicial extinguishment" regulation. Alternatively, petitioner argues that Treas. Reg. § 1.170A-14(g)(6)(ii) is sub-stantively invalid under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and constitutes "arbitrary and capricious" rulemaking in violation of the Administrative Procedure Act (APA). We rejected these arguments in a recent Court-reviewed Opinion. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020), appeal filed, No. 20-2117 (6th Cir. Oct. 16, 2020). However, on December 29, 2021, the Eleventh Circuit held that "the Commissioner's interpretation of § 1.170A-14(g)(6)(ii), to disallow the subtraction of the value of post-donation improvements . . . is arbitrary and capricious and therefore invalid under the APA's procedural requirements." Hewitt v. Commissioner, 21 F.4th 1336, 1353 (11th Cir. 2021), rev'g and remanding T.C. Memo. 2020-89 (applying Oakbrook).

We are obligated to follow the law as established by the Eleventh...