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Will Amended Deed Save Deduction?
Buckelew Farm LLC et al. v. Commissioner; No. 14273-17
Buckelew Farm, LLC F.K.A. Big K Farms LLC, Big K LLC, Tax Matters Partner, Petitioner v.
Commissioner of Internal Revenue, Respondent
United States Tax Court
Washington, DC 22017
This case is before the Court on respondent's motion for partial summary judgment filed on April 29, 2019 pursuant to Rule 121.1 Petitioner filed an objection to respondent's motion on July 2, 2019, and respondent filed a reply to petitioner's objection on September 13, 2019. On May 12, 2020, while respondent's motion for partial summary judgment was still pending before the Court, the Court issued Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020) and Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54. As these opinions address similar issues raised by respondent in his motion for partial summary judgment in this case, the Court issued an Order on May 12, 2020, asking the parties to each file a memorandum setting forth the effect, if any, of the opinions on the pending motion for partial summary judgment. Respondent filed a response to the Order on June 3, 2020, and petitioner filed a response on June 12, 2020. Respondent filed a reply to petitioner's response on July 13, 2020, and petitioner filed a sur-reply on July 23, 2020.2 For the reasons discussed below, we will deny respondent's motion for partial summary judgment.
The following facts are drawn from the parties' pleadings and motion papers. The facts stated below are not findings of fact by this Court and are stated herein solely for the purpose of ruling on petitioner's motion for partial summary judgment.
This case involves a donated conservation easement on property located in Jones County, Georgia. Petitioner Big K, LLC is the tax matters partner of Buckelew Farms, LLC (hereinafter the “Partnership”), a Georgia limited liability company organized in year 1999 under the state laws of Georgia. Petitioner was organized as a limited liability company in year 2013 under the laws of the state of Georgia. On December 12, 2013, petitioner acquired 99% of the Partnership for $6 million.
From 1999 through 2006, the Partnership acquired four tracts of land, in total about 1,544 acres in Jones County, Georgia (the “Property”). On December 20, 2013, eight days after petitioner acquired a 99% interest in the Partnership, the Partnership donated a conservation easement (the “Easement”) on the Property to the Southeast Regional Land Conservancy (“SERLC”), a 501(c)(3) organization, and claimed approximately a $47.5 million noncash charitable contribution deduction on its 2013 tax return. The Easement was contributed for the purpose of protecting in perpetuity diverse habitats, rare species, and important green space in a developing area, in accordance with the requirements of section 170(h)(4)(A)(ii). In determining the value of the charitable deduction resulting from contribution of the Easement, petitioner obtained a qualified appraisal within 60 days of the contribution from a certified real estate appraiser in Georgia. The appraisal report valued the Easement at $47,570,000 and petitioner timely filed a Form 1065 for tax year 2013, claiming a non-cash charitable deduction for the amount. The deed, which was recorded on December 26, 2013 with Jones County Records, contemplates the possibility that the easement could be extinguished by judicial proceedings. The deed stated, in part:
For purposes of the Conservation Easement, the fair market value of SERLC's right and interest (which value shall remain constant) 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 * * * the restrictions contained herein may only be extinguished by judicial proceeding. Upon such proceeding, SERLC, upon a subsequent sale, exchange, or involuntary conversion of the Conservation Area, shall be entitled to a portion of the proceeds at least equal to fair market value of the Conservation Easement as provided above.
On March 30, 2017, respondent issued a Notice of Final Partnership Administrative Adjustment (the “FPAA”) to the Partnership and petitioner for year 2013. The FPAA disallowed the Partnership's claimed $47,570,000 non-cash charitable contribution deduction on the grounds that the Partnership failed to satisfy the requirements of section 170. Alternatively, respondent determined that the Partnership overvalued the donated property interest subject to the Easement and that its deduction should be reduced by the amount of the claimed overstatement. On June 27, 2017, petitioner timely petitioned this Court, alleging that respondent made the following errors:
a. Respondent erred in determining that adjustments to Petitioner's charitable contributions are due to a gross valuation overstatement at the partnership level.
b. Respondent erred in determining that it has not been established that all the requirements of section 170 and the corresponding Treasury Regulations have been satisfied for the claimed noncash charitable contribution.
c. Respondent erred in reducing Petitioner's charitable contributions by $47,605,000 for the tax year ended December 31, 2013.
d. Respondent erred in determining that, in the alternative, it has not been established that the value of the contributions were $47,605,000 as claimed on Petitioner's return for the tax year ended December 31, 2013.
e. Respondent erred in determining that, further in the alternative, it has not been established that the value of the contribution exceeds $324,000.
f. Respondent erred in determining that it has not been established that all the requirements of section 170 and the corresponding Treasury Regulations have been satisfied for the legal and appraisal fees, if any, claimed as a charitable contribution deduction on the tax return for the tax year ended December 31, 2013.
g. Respondent erred in determining that the 40% underpayment of tax penalty of section 6662(a) and (h) resulting from gross valuation misstatement should apply for the 2013 tax year.
h. Respondent erred in determining that, in the alternative, the 20% underpayment of tax penalty of section 6662(a) and section 6662(b)(1), 6662(b)(2), or 6662(b)(3) resulting from negligence or disregard of rules and regulations, substantial understatement of tax, or substantial valuation misstatement, respectively, should apply for the 2013 tax year.
I. Summary Judgment
A party may move for summary judgment regarding all or any part of the legal issues in controversy. See Rule 121(a); Wachter v. Commissioner, 142 T.C. 140, 145 (2014). We may grant summary judgment if the pleadings, stipulations and exhibits, and any other acceptable materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law. See Rule 121(a) and (b); see also CGG Americas, Inc. v. Commissioner, 147 T.C. 78, 82 (2016); Elec. Arts, Inc. & Subs. v. Commissioner, 118 T.C. 226, 238 (2002). We construe the facts and draw all inferences in the light most favorable to the nonmoving party to decide whether summary judgment is appropriate. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). The moving party has the burden of proving that there is no genuine issue of material fact. Naftel v. Commissioner, 85 T.C. 527, 529 (1985). However, the nonmoving party may not rest upon the mere allegations or denials in its pleadings but instead must “set forth specific facts showing that there is a genuine dispute for trial.” Rule 121(d); see also Sundstrand Corp. v. Commissioner, 98 T.C. at 520.
II. Qualified Conservation Contribution
The Code generally disallows a charitable contribution deduction for any gift of real property that “consists of less than the * * * entire interest in such property.” See sec. 170(f)(3)(A). An exception to this general rule is made for the donation of conservation easements. See sec. 170(f)(3)(B)(iii). A “qualified conservation contribution” is “a contribution (A) of a qualified real property interest, (B) to a qualified organization, (C) 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 accompanying regulation recognizes 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.
In these circumstances the conservation purpose can be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and the easement deed ensures that the charitable donee, following the 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. Id. Section 1.170A-14(g)(6)(ii), Income Tax Regs. (hereinafter the “Proceeds Regulation”), specifies that the donee's share of proceeds is as follows:
[F]or a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time. * * * For purposes of this paragraph * * *, that proportionate value of the donee's property rights shall remain constant. Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds
* * *
In his motion for partial summary judgment, respondent argues that the Partnership's 2013 conservation easement contribution was not a qualified conservation contribution under section 170(h) because it did not satisfy the perpetuity requirement of section 170(h)(5)(A). Respondent argues that the extinguishment clause within the deed fixes the value that SERLC is entitled to receive in the case of an extinguishment and thus the Easement is not a qualified donation since it does not meet the requirements of the Proceeds Regulation.
In response, petitioner argues that the Proceeds Regulation is invalid because respondent disregarded numerous negative comments received with respect to the proposed regulation. Petitioner further contends that the regulation is arbitrary and capricious because it lacks a basis and purpose statement that shows that the agency engaged in reasoned decision-making. Finally, petitioner also argues that the Proceeds Regulation is not entitled to deference under the Chevron doctrine because it is not a legislative or specific regulation such as those which conform to the requirements of the Administrative Procedure Act.
In his response to the order issued on May 12, 2020, respondent argues that the Oakbrook opinions support his motion for partial summary judgment.3
In its response to the order issued on May 12, 2020, petitioner reiterates that the Proceeds Regulation is invalid, notwithstanding this Court's decisions in Oakbrook. However, petitioner has essentially shifted its argument and now contends that even if the Court determines that the Proceeds Regulation is valid, respondent's motion for partial summary judgment should be denied for the two reasons discussed below.
The Court is not convinced by petitioner's challenge to the Proceeds Regulations. We comprehensively addressed and rejected these arguments in a recent Court-reviewed Opinion. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180, 189-200 (2020). We need not repeat that analysis here. Accordingly, the Court will now address petitioner's two remaining (or new) arguments which it contends precludes partial summary adjudication in favor of respondent.
A. Correction to the Deed4
First, petitioner contends that the parties have filed a correction to the deed to bring it into compliance with the Proceeds Regulation as interpreted in Oakbrook, and that the correction relates back to the execution of the original deed. According to petitioner, the Court must hear the evidence relating to the parties' intent and retroactive correction of the Easement terms.5 Petitioner cites several cases to support the proposition that under Georgia law, parties are permitted to record a correction to a deed to fix mutual mistakes made in the original deed.6 According to petitioner, respondent's motion for summary judgment should be denied as it is based on language of the original deed which has since been replaced.
In his reply, respondent cites to the language “at the time of the gift” found in section 1.170A-14(g)(6)(ii), Income Tax Regs., and primarily relies on Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015), aff'g 138 T.C. 324, to argue that all of the requirements of section 170 must be met at the time of the grant. Respondent also notes that the retroactive date the correction to the deed became effective — December 20, 2013 — precedes the recordation date of December 26, 2013, and consequently the correction cannot relate back to the original donation.
We look to state law to determine the nature of property rights, whereas Federal law determines the appropriate tax treatment of those rights. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985); see also 61 York Acquisition, LLC v. Commissioner, T.C. Memo. 2013-266, at *4. Accordingly, this Court has applied state law in conservation easement cases to determine the nature of property interests. See, e.g., Sells v. Commissioner, T.C. Memo. 2021-12; Wachter v. Commissioner, 142 T.C. 140 (2014); Zarlengo v. Commissioner, T.C. Memo. 2014-161.
In this case, the parties to the original deed recorded the correction to the deed on June 12, 2020. The correction to the deed states, in part, as follows:
The parties agree that the donation of this Conservation Easement gives rise to a property right, immediately vested in SERLC, with a fair market value that is equal to the proportionate value that the Conservation Easement at the time of the gift bears to the value of the property as a whole at that time. For purposes of this paragraph, that proportionate value remains constant. If a change in conditions makes impossible or impractical any continued protection of the Conservation Area for conservation purposes, the restrictions contained herein may be extinguished only by judicial proceeding. Following such proceeding, SERLC, on a subsequent sale, exchange, or involuntary conversion of the property, is entitled to a portion of the proceeds at least equal to that proportionate value of the Conservation Easement, unless state law provides that the Owner is entitled to the full proceeds from the conversion without regards to the terms of this Conservation Easement. SERLC agrees that any such proceeds will be used in a manner consistent with the conservation purposes of this Conservation Easement.
The question here is whether the correction to the deed was permitted under Georgia law and if so, whether the correction can retroactively relate back to the time of granting the Easement and comply with the Proceeds Regulation.7
Although respondent relies on Mitchell to argue that all of the requirements of section 170 must be met at the time of the grant, we find the issues in Mitchell to be distinguishable from the issues in the instant case.8 In Mitchell, the Tenth Circuit held, inter alia, that a taxpayer's grant of a conservation easement was not “protected in perpetuity” due to a violation of the mortgage subordination provision of the conservation easement regulations. Mitchell v. Commissioner, 775 F.3d at 1251. However, in Mitchell, the third party mortgagees did not subordinate their mortgages until after the easements were donated and section 1.170A-14(g)(2) was therefore held not to have been satisfied. We find the Tenth Circuit's reasoning in Mitchell to be specific to the mortgage subordination provision of the regulation.9
In a motion for summary judgment, the moving party bears the burden of proving there is no genuine dispute as to material fact. See Naftel v. Commissioner, 85 T.C. at 529. Viewing the facts and the inferences in the light most favorable to petitioner, we conclude that a genuine dispute of material fact exists, as to the correction of the deed, precluding summary adjudication.10
B. Reformation under State Law
Petitioner also argues that the motion should be denied even without considering the correction to the deed because the deed should be equitably reformed under Georgia law. According to petitioner, the parties to the original deed believed that the conservation easement was in compliance with section 170 and corresponding regulations. Therefore, if the original deed does not comply with the Proceeds Regulation then there was a mutual mistake of law and the parties are entitled to a reformation that relates back to the time the original deed was first executed. Furthermore, petitioner argues that a specific request for reformation is not required but to the extent it is required, this Court should reform the deed to conform to the parties' intent.
Respondent argues that even if the original deed could be reformed, it would not impact Federal tax consequences. Respondent further argues that even if reformation could be granted to affect Federal tax consequences, reformation would not warranted under Georgia law as there is no evidence that there was a mutual mistake of law or fact between the parties; the original deed accurately reflected the parties' shared intent of giving the donee a property right in the extinguishment proceeds with a fixed value and the mistaken legal consequences of a deed is not a basis for reformation under Georgia law.
The key issues here are whether judicial reformation changes Federal tax consequences of a completed transaction and if so, whether the deed can be reformed under Georgia law. Reformation is an equitable remedy the grant of which is subject to the discretion of a court. See Restatement (Second) of Contracts, sec. 155 cmt. d (Am. Law Inst. 1981). Under Georgia law, parties may seek to reform a deed based on a mutual mistake of fact or law. O.C.G.A. sec. 23-2-21(b). However, this Court and the Courts of Appeals have expressed the view that “not even judicial reformation can operate to change the Federal tax consequences of a completed transaction.” American Nurseryman Publishing Co. v. Commissioner, 75 T.C. 271, 276 (1980) (citing Van Den Wymelenberg v. United States, 397 F.2d 443, 445 (7th Cir. 1968)). Yet in other instances, this Court has held that reformation does abrogate the obligation to pay Federal tax liabilities in certain situations. See Holland v. Commissioner, T.C. Memo. 1997-302 (“We find that the mistake was a scrivener's error * * *. We believe that the Supreme Court of Georgia would * * * [grant reformation]”).
Although the Court is doubtful that equitable reformation can operate to change the Federal tax consequences of a completed transaction; since the Court has found there remains a genuine dispute of material fact precluding summary adjudication, it is not necessary for the Court to determine now whether the facts of this case warrant the equitable remedy of reformation under Georgia law.11
In view of the foregoing, it is
ORDERED that respondent's motion for partial summary judgment is denied.
Christian N. Weiler
1 .All section references are to the Internal Revenue Code (Code) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure and
2. The undersigned was assigned this matter on May 7, 2021.
3. In Oakbrook, this Court held that the Proceeds Regulation is valid and disallowed the deduction because the deed language of the extinguishment clause does not meet the Proceeds Regulation.
4. These new arguments were set forth in petitioner's memorandum filed in response to the Court's May 12, 2020 order. Although respondent argues that petitioner's new arguments would severely prejudice respondent, we conclude that respondent would not suffer unfair surprise or prejudice as a result of allowing these new arguments; no trial date has been set and respondent will have sufficient time to prepare to resist petitioner's new contentions.
5 .Petitioner has offered unsworn declarations from James C. Wright, executive director of SERLC, and Jim M. Adams, III, managing director of Big K Management, LLC, in support of its argument.
6. For example petitioner cites Decay v. Houston, et al, 295 Ga. 223 (2014) and Widincamp et al. v. Brigman, 166 Ga. 209 (1928).
7. At this time, we decline to opine on whether the correction to the deed complies with the Proceeds Regulation.
8. In at least one other instance the Court was faced with the issue of whether a corrected deed could retroactively comply with the Proceeds Regulations; however the Court declined to consider the issue in a motion for reconsideration. See Battelle Glover Investments, LLC v. Commissioner, Docket # 6904-19 (Order served on August 26, 2021). In another case this Court considered an unrecorded amendment to the easement; however, since the amendment was not recorded we find the case to be distinguishable. See Hoffman Properties II, L.P. v. Commissioner, Docket # 14130-15 (Order served on July 12, 2017).
9. In Mitchell, the Court states, “[a]lthough [taxpayer] is correct the provision contains no explicit reference to the time at which subordination must occur, the provision expressly provides that subordination is a prerequisite to allowing a deduction.” Mitchell v. Commissioner, 775 F.3d 1243, 1250 (10th Cir. 2015).
10. While it is true this Court has previously considered in RP Golf, LLC v. Commissioner, T.C. Memo 2016-80 whether retroactive subordination by a mortgagee complies with section 1.170A-14(g)(2), Income Tax Regs., we find that the issues in the instant case are sufficiently distinct.
11. In at least two prior occasions this Court has considered the issue of equitable reformation under State law (Ohio and Alabama) in the context of an charitable easement deed and compliance with the Proceeds Regulation; in both instances we declined to grant such relief. Battelle Glover Investments, LLC v. Commissioner, Docket # 6904-19 (Order served on August 26, 2021) and Hoffman Properties II, L.P. v. Commissioner, Docket # 14130-15 (Order served on March 14, 2018).