Oakbrook Land Holdings, LLC v. Comm'r, 154 T.C. No. 10

• Court: United States Tax Court
• Writing for the Court: LAUBER, Judge
• Parties: OAKBROOK LAND HOLDINGS, LLC, WILLIAM DUANE HORTON, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Decision Date: 12 May 2020
• Docket Number: Docket No. 5444-13.,154 T.C. No. 10

OAKBROOK LAND HOLDINGS, LLC, WILLIAM DUANE HORTON,
TAX MATTERS PARTNER, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

154 T.C. No. 10
Docket No. 5444-13.

UNITED STATES TAX COURT

May 12, 2020

In 2008 P donated a conservation easement to a qualified organization and claimed a charitable contribution deduction under I.R.C. sec. 170(a). The easement deed provided that, if the conservation restriction were extinguished at some future date, the donee would receive a share of the proceeds equal to the fair market value of the easement on the date the contribution was made. The deed further provided that the donee's share as thus determined would be reduced by the value of any improvements made by the donor after granting the easement. R disallowed the deduction, contending (among other things) that the extinguishment clause violated the requirements of sec. 1.170A-14(g)(6), Income Tax Regs.

In Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, issued concurrently with this Opinion, the Court holds that the easement deed violates the "protected in perpetuity" requirement of I.R.C. sec. 170(h)(5), as interpreted in sec. 1.170A-14(g)(6), Income Tax Regs., because the donee's share of the

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extinguishment proceeds (1) is based on a fixed historical value rather than a proportionate share, and (2) is reduced by the value of any improvements made by the donor. This Opinion addresses petitioner's challenge to the validity of the regulation.

Held: Sec. 1.170A-14(g)(6), Income Tax Regs., was properly promulgated and is valid under the Administrative Procedure Act, 5 U.S.C. sec. 553 (2018).

Held, further, the construction of I.R.C. sec. 170(h)(5) as set forth in sec. 1.170A-14(g)(6), Income Tax Regs., is valid under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).

David M. Wooldridge, Michelle A. Levin, Ronald A. Levitt, and Gregory P. Rhodes, for petitioner.

W. Benjamin McClendon, Bruce K. Meneely, Robert W. Dillard, and William W. Kiessling, for respondent.

LAUBER, Judge: Oakbrook Land Holdings, LLC (Oakbrook), purchased 143 acres of land near Chattanooga, Tennessee, in December 2007 for $1,700,000. In December 2008, slightly more than one year later, Oakbrook donated a conservation easement over a portion of the tract to the Southeast Regional Land Conservancy (SRLC). On its Federal income tax return for 2008, Oakbrook claimed for this donation a charitable contribution deduction of $9,545,000. Oakbrook thus

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took the position that the land covered by the easement had appreciated in value by about 700% in a single year during the worst real estate crisis to hit the United States since the Great Depression.

The case was tried before Judge Holmes in 2016, and the facts are stated more fully in a separate Memorandum Opinion authored by him and filed concurrently herewith. Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54. That opinion holds that the easement Oakbrook granted did not satisfy the "protected in perpetuity" requirement of section 170(h)(5)(A) and section 1.170A-14(g)(6), Income Tax Regs.¹ That is because the donee's share of the proceeds, in the event the property were sold following a judicial extinguishment of the easement, would be (1) determined according to a fixed historical value rather than a proportionate share of the proceeds and (2) reduced by the value of any improvements made by the donor. See Oakbrook Land Holdings, LLC, T.C. Memo. 2020-54, at *36-*37. In this Opinion we address and reject petitioner's challenge to the validity of this regulation.

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FINDINGS OF FACT

In December 2008 Oakbrook executed a Conservation Easement and Declaration of Restrictions and Covenants (Deed) with SRLC, a "qualified organization" under section 170(h)(3). This easement covered 106 acres (or 75%) of the tract Oakbrook had purchased the previous December. The parties understood that changed circumstances might make it impossible, at some point in the future, to continue protecting the conservation area. Should that happen, article VI, section B(2), of the Deed governed how Oakbrook and SRLC would divide the proceeds of sale following a judicial extinguishment of the easement. It provided:

This Conservation Easement gives rise to a real property right and interest immediately vested in SRLC. For purposes of this Conservation Easement, the fair market value of SRLC's right and interest shall be equal to the difference between (a) the fair market value of the Conservation Area as if not burdened by this Conservation Easement and (b) the fair market value of the Conservation Area burdened by this Conservation Easement, as such values are determined as of the date of this Conservation Easement, (c) less amounts for improvements made by * * * [Oakbrook] in the Conservation Area subsequent to the date of this Conservation Easement, the amount of which will be determined by the value specified for these improvements in a condemnation award in the event all or part of the Conservation Area is taken in exercise of eminent domain * * * . If a change in conditions makes impossible or impractical any continued protection of the Conservation Area for conservation purposes, the restrictions contained herein may only be extinguished by judicial proceeding. Upon such proceeding, SRLC, upon a subsequent sale, exchange or involuntary conversion of the Conservation Area, shall

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be entitled to a portion of the proceeds equal to the fair market value of the Conservation Easement as provided above.

In the event all or part of the conservation area were taken by eminent domain "so as to abrogate the restrictions imposed by this Conservation Easement, * * * [the] proceeds shall be divided in accordance with the proportionate value of SRLC's and * * * [Oakbrook's] interests as specified above." Deed art. VI, sec. B(3).

Oakbrook timely filed a Form 1065, U.S. Return of Partnership Income, for its 2008 taxable year. On that return it claimed a charitable contribution deduction of $9,545,000 for its donation of the easement. The Internal Revenue Service (IRS) selected Oakbrook's return for examination. On December 6, 2012, the IRS issued Oakbrook's tax matters partner (TMP or petitioner) a notice of final partnership administrative adjustment that disallowed the charitable contribution deduction in full. The TMP timely petitioned for readjustment of the partnership items.

Trial was held before Judge Holmes in Birmingham, Alabama, in 2016. At trial the Court heard testimony from the SRLC representative who had drafted the Deed. In post-trial briefs petitioner contended that (1) the extinguishment provision of the Deed complies with the requirements of section 1.170A-14(g)(6), Income Tax Regs., and (2) in the alternative, the regulation is invalid.

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Judge Holmes interpreted the Deed to mean that, in the event of a sale following judicial extinguishment of the easement, SRLC's share of the proceeds would be limited to the "initial fixed value" of the easement, i.e., its fair market value (FMV) on the date it was granted. Oakbrook Land Holdings, LLC, T.C. Memo. 2020-54, at *35. The donee's proceeds as thus determined would then be reduced by the value (as specified in any future condemnation award) of any improvements that Oakbrook had made to the conservation area after donating the easement. Ibid. Thus, if property values rose after that date, SRLC's share would not "be protected from inflation either in local land prices or the economy more generally." Id. at *35-*36. Conversely, if property values fell, SRLC might not receive even the initial fixed value of the easement because of the reduction for improvements. Id. at *36.

The Court concluded that the Deed, as thus construed, failed to satisfy the requirements of section 1.170A-14(g)(6), Income Tax Regs., for two reasons. First, the regulation requires that the donee be entitled to a proportionate share of the proceeds, not to a fixed dollar amount keyed to the easement's initial value. Oakbrook Land Holdings, LLC, T.C. Memo. 2020-54, at *37. Second, the regulation does not permit a reduction of the donee's proceeds on account of improvements made by the donor. Id. at *37-*38 (citing PBBM-Rose Hill, Ltd. v.

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Commissioner, 900 F.3d 193, 208 (5th Cir. 2018)). In this Opinion we address petitioner's challenge to the validity of this regulation.

OPINION

A. Statutory and Regulatory Framework

Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property at the time the gift is made. See sec. 1.170A-1(c)(1), Income Tax Regs.

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." Sec. 170(f)(3)(A). But there is an exception to this rule for a "qualified conservation contribution." Sec. 170(f)(3)(B)(iii). This exception applies where: (1) the taxpayer makes a contribution of a "qualified real property interest," (2) the donee is a "qualified organization," and (3) the contribution is "exclusively for conservation purposes." Sec. 170(h)(1).

Section 170(h)(5)(A) provides that a contribution will not be treated as being made exclusively for conservation purposes "unless the conservation purpose is protected in perpetuity." The regulation interpreting this provision recognizes

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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." Sec. 1.170A-14(g)(6)(i), Income Tax Regs. Despite that possibility "the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding" and...