Hoffman Props. II, LP v. Comm'r of Internal Revenue

• Citation: 956 F.3d 832
• Decision Date: 14 April 2020
• Docket Number: No. 19-1831,19-1831
• Parties: HOFFMAN PROPERTIES II, LP; Five M Acq I, LLC, Tax Matters Partner, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

956 F.3d 832

HOFFMAN PROPERTIES II, LP; Five M Acq I, LLC, Tax Matters Partner, Petitioners-Appellants,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 19-1831

United States Court of Appeals, Sixth Circuit.

Decided and Filed: April 14, 2020

ON BRIEF: George M. Clarke III, Vivek A. Patel, Brandon M. King, BAKER & MCKENZIE LLP, Washington, D.C., for Appellants. Jacob Christensen, Ivan C. Dale, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

Before: GUY, THAPAR, and BUSH, Circuit Judges.

THAPAR, Circuit Judge.

Forever is a really long time—no less so in tax law. The Internal Revenue Code requires that certain donations be "protected in perpetuity" for the donor to receive a tax deduction. I.R.C. § 170(h)(5)(A). The question here is whether a donation satisfies this requirement when it empowers the donor to make harmful changes to the donation whenever the donee fails to act within 45 days of the proposed change. The Tax Court found that this 45-day window falls well short of "perpetuity." We agree and affirm.

Hoffman Properties owns the historic Tremaine Building in Cleveland, Ohio. Over a decade ago, Hoffman donated an easement in the façade of the building and certain airspace restrictions associated with the building to the American Association of Historic Preservation (AAHP). Broadly speaking, Hoffman agreed not to alter the historical character of the façade or to build in the airspace above or next to the building—subject to certain provisions in the donation agreement. Hoffman then sought a $15 million tax deduction for its donation.

As a general rule, the Internal Revenue Code doesn’t allow taxpayers to take a charitable deduction for a donation of a partial interest in property (like an easement). I.R.C. § 170(f)(3)(A) ; Treas. Reg. § 1.170A-14(a). But there’s a narrow exception to that rule for what’s called a "qualified conservation contribution." I.R.C. § 170(f)(3)(B)(iii) ; Treas. Reg. § 1.170A-14(a). To qualify, the donation must be "exclusively for conservation purposes." I.R.C. § 170(h)(1)(C) ; Treas. Reg. § 1.170A-14(e). And relevant here, the term "conservation purpose" includes the preservation of historic buildings. I.R.C. § 170(h)(4)(A)(iv) ; Treas. Reg. § 1.170A-14(d)(5).

Based on these provisions, the IRS concluded that Hoffman wasn’t entitled to a deduction. In later proceedings, the Tax Court agreed and granted summary judgment to the agency, holding that Hoffman’s donation didn’t qualify because it wasn’t "exclusively for conservation purposes." We review that decision de novo. See Golden v. Comm’r , 548 F.3d 487, 492 (6th Cir. 2008).

The Internal Revenue Code includes various requirements for a donation to be considered "exclusively for conservation purposes." See I.R.C. § 170(h)(4)(B), (5) ; Treas. Reg. § 1.170A-14(e), (g). The Tax Court found that Hoffman’s donation failed multiple of these requirements. But in this case, we need consider only one: the donation must "protect[ ]" the conservation purposes "in perpetuity." I.R.C. § 170(h)(5)(A).

The parties agree on the general legal framework. To satisfy the "perpetuity" requirement, the donation must be "[e]nforceable in perpetuity," meaning that it includes "legally enforceable restrictions" that will prevent the donor from using its retained interest in the property in a way "inconsistent with the [donation’s] conservation purposes." Treas. Reg. § 1.170A-14(g)(1) ; see Glass v. Comm’r , 471 F.3d 698, 713 (6th Cir. 2006). The parties simply disagree about whether Hoffman’s donation included adequate restrictions.

So this case largely turns on the meaning of the donation agreement. As usual, we look to state law to interpret the agreement. See United States v. Nat’l Bank of Commerce , 472 U.S. 713, 722, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) ; PBBM-Rose Hill, Ltd. v. Comm’r , 900 F.3d 193, 203 (5th Cir. 2018). The parties agree that Ohio contract law applies. See Andrews v. Columbia Gas Transmission Corp. , 544 F.3d 618, 623–24 (6th Cir. 2008). Under Ohio law, courts presume that parties expressed their contractual intent "in the language they [chose] to use in their agreement." Savedoff v. Access Grp., Inc. , 524 F.3d 754, 763 (6th Cir. 2008) (quoting Graham v. Drydock Coal Co. , 76 Ohio St.3d 311, 667 N.E.2d 949, 952 (Ohio 1996) ).

The key language in this agreement is in Paragraph 3. That Paragraph describes certain "[c]onditional [r]ights"—actions that Hoffman could take so long as AAHP approved. JA 107. For instance, Hoffman reserved the right to "[a]lter, reconstruct or change the appearance [of the façade] ... contrary to the Secretary’s Standards" or to "[a]lter or change the appearance of the Air Space in a manner contrary to the Secretary’s Standards." JA 107–08. (For reference, the "Secretary’s Standards" are regulations issued by the Secretary of the Interior on the rehabilitation of historic buildings. 36 C.F.R. § 67.7.) Paragraph 3 also directs Hoffman to submit these proposed changes to AAHP, which would review the changes based on the Secretary’s Standards and either approve or reject them. Finally, the Paragraph makes clear that AAHP’s "failure ... to act within forty-five (45) days of receipt [of a proposed change] shall be deemed to constitute approval [of the change] and to permit [Hoffman] to undertake the proposed activity." JA 108.

Simply put, Paragraph 3 gives AAHP a 45-day window in which to prevent certain changes to the façade or airspace. And if the organization misses that window—for whatever reason—it loses the ability to stop the change. It almost goes without saying that this provision violates the "perpetuity" requirement. After all, there’s a world of difference between restrictions that are enforceable "in perpetuity" and those that are enforceable for only 45 days. See The American Heritage Dictionary 977 (1976) (defining "perpetuity" as "[t]ime without end; eternity"); Black’s Law Dictionary 711 (5th ed. 1979) (defining "in perpetuity" as "[e]ndless duration; forever"); Webster’s Third New International Dictionary 1685 (1986) (defining "perpetuity" as "endless time" and a "duration without limitations as to time"). You can’t even really compare the two.

What’s more, it seems that most (if not all) of the rights reserved in Paragraph 3 could be inconsistent with the conservation purposes of the donation. We know this not only because of the sheer breadth of the reserved rights—for instance, the power to "[a]lter, reconstruct, or change" the façade—but also because many of the rights are expressly defined as "contrary to the Secretary’s Standards." JA 107. Recall that these standards concern the rehabilitation of historic buildings; they’re designed to ensure that any changes are "consistent with the historic character of the property." 36 C.F.R. § 67.7(e). And the donation agreement itself tells AAHP to use these standards when it evaluates whether a proposed change would conflict with the purposes of the donation. So it’s not hard to imagine how these changes would be inconsistent with the conservation purposes of the donation. By all appearances, then, the agreement fails to protect these purposes "in perpetuity."

Hoffman offers several arguments in response.

Sua Sponte Ruling. Hoffman starts with a procedural objection: that the Tax Court improperly raised the 45-day provision on its own initiative. But even if that’s true, Hoffman hasn’t shown it was prejudiced by the ruling. See United Rentals (N. Am.), Inc. v. Keizer , 355 F.3d 399, 411 (6th Cir. 2004). Hoffman had several opportunities to brief the 45-day provision, including when it filed a motion for reconsideration. See Luig v. N. Bay Enters., Inc. , 817 F.3d 901, 905 (5th Cir. 2016) ; Page Plus of Atlanta, Inc. v. Owl Wireless, LLC , 602 F. App'x 232, 235–36 (6th Cir. 2015). And in any event, Hoffman hasn’t identified what new arguments or evidence it would have raised if it had known about the issue earlier. See Keizer , 355 F.3d at 411–12 ; United Bhd. of Carpenters, Dresden Local No. 267 v. Ohio Carpenters Health & Welfare Fund , 926 F.2d 550, 558 (6th Cir. 1991).

The "Perpetuity" Requirement. Hoffman next offers an alternative theory of the "perpetuity" requirement—namely, that the restrictions are perpetual because they will always be a part of the agreement and might prevent future changes to the donation. But the Internal Revenue Code doesn’t care about the mere existence of restrictions; it requires that the donation "protect [ ]" the conservation purposes "in perpetuity." I.R.C. § 170(h)(5)(A) (emphasis added); see also Treas. Reg. § 1.170A-14(g)(1) (explaining that the donation must "prevent uses of the retained interest inconsistent with the conservation purposes of the donation" (emphasis added)); Mark L. Ascher, Federalization of the Law of Charity , 67 Vand. L. Rev. 1581, 1612 (2014) (explaining that the donation must "be effective in preserving the current state of the land or building in question"). And once the 45-day provision is triggered, Hoffman’s donation no longer does that. It only takes one change to destroy the historical character of a building. That the donation might prevent further destruction is beside the point.

Hoffman’s theory also raises more questions than it answers. If a 45-day restriction satisfies the "perpetuity" requirement, what about others? Could Hoffman have required AAHP to respond to a requested change within a week? Or a day? Or even an hour? Rather than try to draw lines—where none exist—we’ll stick with the statutory text: forever really means forever.

The Donation Agreement. Hoffman also insists that other provisions in the agreement protect the conservation purposes "in perpetuity." But this argument misses the point: whatever else the agreement says, Paragraph 3 prevents AAHP from enforcing these provisions if the organization fails to act on the proposed change within 45 days. And again, this brief window falls far short of the statutory requirement that...