17379-19 17380-19 17381-19 17382-19
Christian N. Weiler Judge.
In these four consolidated cases petitioner Bobby A. Branch is the tax matters partner for four entities: Green Valley Investors, LLC (Green Valley); Vista Hill Investments, LLC (Vista Hill); Big Hill Partners, LLC (Big Hill); and Tick Creek Holdings, LLC (Tick Creek) (collectively, along with Mr. Branch, referred to as "petitioners"). In this order we sometimes refer to these entities individually as "LLC" and collectively as "the LLCs".
In December 2014 Green Valley, Big Hill, and Tick Creek each granted a conservation easement to Triangle Land Conservancy (TLC). In December 2015 Vista Hill did the same. Each LLC claimed a corresponding charitable contribution deduction. By notices of final partnership administrative adjustment (FPAA) issued on June 24, 2019, to the four LLCs, the Internal Revenue Service (IRS) disallowed the deductions and determined accuracy-related penalties under section 6662. On September 20, 2019, petitioners timely petitioned this Court challenging these determinations. At the time the petitions were filed, the LLCs' principal place of business was located in North Carolina.
Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect for all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
In each of these related cases the Commissioner of Internal Revenue (respondent) twice moved for partial summary judgment. In his first motion for partial summary judgment respondent contended each LLC is not entitled to a deduction for the charitable contribution of an easement because the easement does not protect the conservation purpose in perpetuity, as required by section 170(h)(5)(A). In his second motion for partial summary judgment respondent argued that each LLC grossly misstated the value of the respective donated easements and that the penalty for a gross valuation misstatement should apply. Pursuant to this Court's order served on May 27, 2021 (Order), we granted respondent's first motion for partial summary judgment and denied respondent's second motion for partial summary judgment. On June 28, 2021, petitioners in each of these consolidated cases filed a motion for reconsideration of this Court's Order. For the reasons below, we deny petitioners' motions.
The following facts are drawn from the parties' pleadings, respondent's first and second motions for summary judgment, including a declaration and exhibits, and petitioners' responses to respondent's motions for summary judgment. We will refer to these documents as the parties' "motion papers" in this order. These facts are stated solely for the purpose of ruling on petitioners' motions for reconsideration.
A. The Syndicated Conservation Easement Transaction
In 2011 Bobby A. Branch and Elizabeth N. Branch bought a little over six-hundred acres of land in North Carolina (Parent Tract) in two transactions. Later that year Mr. and Mrs. Branch transferred the Parent Tract to Bonlee Investment Properties, LLC (Bonlee). Mr. Branch served as the sole member and manager of Bonlee.
In August 2014 Bonlee engaged Strategic Capital Partners, LLC and Bridge Capital Associates, Inc. (collectively Strategic Capital) for investment banking services. In September 2014 Bonlee engaged Van Sant & Wingard, LLC to perform appraisals for proposed conservation easements on sections of the Parent Tract.
Around the same time in September 2014 Mr. Branch formed Green Valley, Big Hill, and Tick Creek. In February 2015 Mr. Branch formed Vista Hill. Mr. Branch and Bonlee were the initial members of each LLC. Mr. Branch contributed cash to each LLC in exchange for a one-percent membership interest in each LLC.
Bonlee contributed a portion of the Parent Tract to each LLC in exchange for a 99-percent membership interest in each LLC. Specifically, on November 24, 2014, Bonlee contributed 141.65 acres to Green Valley (Green Valley Property). Bonlee also contributed 96.71 acres to Big Hill (Big Hill Property), and 108.35 acres to Tick Creek (Tick Creek Property) on November 24, 2014. On June 16, 2015, Bonlee contributed 112.46 acres to Vista Hill (Vista Hill Property).
Strategic Capital acted as a placement agent with respect to four separate private placement offerings. Strategic Capital issued a Confidential Private Placement Memorandum with respect to each LLC. With Strategic Capital's assistance Green Valley, Vista Hill, and Big Hill offered investors the opportunity to buy up to 95 Class A Units in each LLC for $50,000 per Unit, for a total offering price of $4.75 million. Tick Creek offered investors the opportunity to buy up to 190 Class A Units for $25,000 per Unit for a total offering price of $4.75 million.
In December 2014 investors purchased Class A Units in Green Valley, Big Hill, and Tick Creek. In late 2015 investors bought Class A Units in Vista Hill. On December 30, 2014, Green Valley executed a deed of conservation easement in favor of TLC, according to which Green Valley encumbered 136.12 acres of the Green Valley Property with a conservation easement. On December 30, 2014, Big Hill also executed an easement deed in favor of TLC, according to which Big Hill encumbered all 96.71 acres of the Big Hill Property. On the same date Tick Creek executed a deed of conservation easement in favor of TLC, according to which Tick Creek encumbered all 108.35 acres of the Tick Creek Property. On December 2, 2015, Vista Hill executed an easement deed in favor of TLC, encumbering all 112.46 acres of the Vista Hill Property (collectively, Easement Deeds).
B. The Easement Deeds
The Easement Deeds address the possibility that the conservation easement may be terminated and the property sold or taken for public use. The Easement Deeds include the following language in almost the same form:
The Easement Deeds granted by Green Valley and Big Hill do not contain the word "perpetual" in the first sentence of the excerpt.
At the time of conveyance of the Conservation Easement to Grantee, this perpetual Conservation Easement gives rise to a real property right, immediately vested in Grantee with a fair market value that is at least equal to the proportionate value that this Conservation Easement bears to the value of the Property as a whole on the date of this Conservation Easement. If the easement or part thereof is terminated and the Property is sold or taken for public use, then, as required by U.S. Treas. Reg. Section 1.170A-14(g)(6), Grantee shall be entitled to a percentage of the gross sale proceeds or condemnation award (minus any amount attributed to new improvements made after the date of the conveyance, which amount shall be reserved to Grantors), equal to the ratio of the appraised value of this easement to the unrestricted fair market value of the Property, as these values are determined on the date of this Conservation Easement and all such proceeds shall be used by Grantee in a manner consistent with the conservation purposes of this Conservation Easement. [Emphasis added.]
The Easement Deeds also contain a paragraph referred to by petitioners as an "interpretive clause", stating that the Easement Deeds "shall be interpreted under the laws of North Carolina, resolving any ambiguities and questions of the validity of specific provisions as to give maximum effect to its conservation purposes."
C. Tax Reporting and IRS Adjustments
Green Valley, Big Hill, and Tick Creek each timely filed Form 1065, U.S. Return of Partnership Income, for taxable year 2014, and Vista Hill timely filed Form 1065 for taxable year 2015. On its Form 1065 Green Valley claimed a deduction of $22,559,000 for its charitable easement contribution to TLC. Similarly, Big Hill claimed a charitable deduction in the amount of $22,626,000, and Tick Creek claimed a charitable deduction in the amount of $22,605,000 for taxable year 2014. Vista Hill claimed a charitable deduction in the amount of $22,498,000 for taxable year 2015.
Green Valley's Form 1065 included an appraisal prepared by Van Sant & Wingard (Van Sant & Wingard Appraisal), which employed a discounted cash flow analysis of the revenue that a quarry on the property could produce if it sold the maximum volume of road construction aggregate that the market would support. Considering the potential for a quarry, the Van Sant & Wingard Appraisal concluded that the Green Valley Property had a value of $22,800,000, out of which the appraisal subtracted $241,000 as an alleged post-easement value to arrive at a value of $22,559,000. Vista Hill, Big Hill, and Tick Creek included similar appraisals employing a sales comparison approach in support of the respective deductions claimed.
The IRS issued four FPAAs to the LLCs, respectively, on June 24, 2019. The IRS determined that the LLCs had not established that the claimed charitable contribution deductions met the requirements of section 170, or, alternatively, that the value of the charitable contribution deductions exceeded $0. The IRS also determined that the underpayment resulted from a gross valuation misstatement under section 6662(h), or alternatively, that the underpayment was attributable to: (1) a substantial valuation misstatement under section 6662(e); (2) negligence or disregard of rules or regulations under section 6662(c); or (3) a substantial understatement of tax under section 6662(d).
A. Standard for Motions for Reconsideration
Unlike motions for reconsideration of findings of fact or opinion, there is no specific rule governing the standards of this Court with respect to motions for reconsideration of its orders. However, it is the policy of this Court to consider and hear all issues raised by the parties in one proceeding to avoid piecemeal and protracted litigation. CWT Farms Inc. v. Commissioner, 79 T.C. 1054, 1057 (1982). Reconsideration is generally denied in the absence of substantial error or unusual circumstance. Haft Trust v. Commissioner, 62 T.C. 145, 147 (1974), aff'd on this issue, 510 F.2d 43, 45 fn. 1 (1st Cir. 1975). Consequently, reconsideration rests with the sound discretion of the Court and we generally do not grant reconsideration to resolve issues which could have been previously raised. Id.
See Rule 161 governing motions for reconsideration of findings of fact or opinion in this Court.
B. Petitioners' Arguments
Petitioners argue that reconsideration is warranted to address three issues. First, petitioners argue that this Court's Order overlooks a genuine issue of material fact related to the so-called remote event regulation. Petitioners argue that since the possibility of judicial extinguishment is so remote as to be negligible, respondent is not entitled to summary judgment based on new evidence presented by petitioners. Next, petitioners argue that the Order overlooks the Easement Deeds amendment clause and said clause permits an amendment of the Easement Deeds to bring it into compliance with the so-called Proceeds Regulation. Finally, petitioners argue that the Order assumes that the Proceeds Regulation is valid, the Order overlooks the threshold issue of whether the Proceeds Regulation is within respondent's expertise and consequently the regulation is not entitled to judicial deference.
See this Court's May 27, 2021 Order defining and detailing the Proceeds Regulation.
1. The Remote Event Regulation
We have previously determined that petitioners' Easement Deeds do not comply with the Proceeds Regulation. Petitioners now argue that there is a genuine issue of fact related to the so-called remote event standard found in section 1.170A-14(g)(3), Income Tax Regs. The language of the relevant regulation reads as follows:
See this Court's May 27, 2021 Order in this proceeding.
(3) Remote future event. A deduction shall not be disallowed under section 170(f)(3)(B)(iii) and this section merely because the interest which passes to, or is vested in, the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible. See paragraph (e) of § 1.170A-1. For example, a state's statutory requirement that use restrictions must be rerecorded every 30 years to remain enforceable shall not, by itself, render an easement nonperpetual.
On the basis of our review of the prior motion papers petitioners are raising this argument now for the first time and therefore could be denied on that basis alone. In any event, we have previously considered and rejected this same argument. See Carroll v. Commissioner, 146 T.C. 196, 221 (2016), (determining that section 1.170A-14(g)(3), Income Tax Regs., does not negate or nullify the Proceeds Regulation requirements found in section 1.170A-14(g)(6), Income Tax Regs.); see also Palmolive Building Investors, LLC v. Commissioner, 149 T.C. 380, 402-403 (2017).
Moreover, petitioners' citation to Kaufman v. Commissioner, 134 T.C. 182 (2010) is inapposite. In Kaufman v. Commissioner this Court granted, in part, summary judgment in favor of respondent with respect to the question of compliance with the perpetuity requirements under section 1.170A-14(g), Income Tax Regs., while also denying, in part, respondent's summary judgment and reserving for trial the factual issues related to cash charitable contributions and accuracy-related penalties. Id. at 182-183. Similarly, we do not see the remoteness inquiry to be inherently factual. Consequently, we decline to reconsider this Court's Order regarding this issue.
2. The Amendment Clause
Petitioners contend respondent is not entitled to summary judgment, in light of the parties' right to amend the Easement Deeds by mutual consent under the amendment clause to comply with the Proceeds Regulation.
While such a clause exists in each of the Easement Deeds, such rights reserved to the parties have admittedly not been exercised. Petitioners are essentially seeking a declaratory or advisory ruling from the Court on a future, yet to be exercised, contractual provision and whether such future action precludes summary judgment in favor of respondent. This Court declines to act on petitioners' request and reconsider its Order regarding this issue.
3. The Proceeds Regulation and Deference
Petitioners invite the Court to reconsider its Order and point to the decision by the U.S. Supreme Court in Kisor v. Wilkie,, U.S., 139 S.Ct. 2400, 2415-2418 (2019) in support of their argument that the Proceeds Regulation is not entitled to deference, since the regulation was issued governing matters beyond respondent's expertise.
Petitioners are essentially raising the issue of "Auer deference" and whether the Proceeds Regulation is entitled to less deference since promulgation of said regulation is beyond the expertise of respondent.
This Court has previously determined the Proceeds Regulation to be unambiguous as to the issue of whether amounts attributable to improvements can be deducted from the donee's share. See Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 144 (2019). Consequently, the Court declines to reconsider its Order regarding this issue since application of the principle set forth in Kisor v. Wilkie is limited to circumstances where a court finds that a reasonable reading of an agency regulation to be ambiguous. See 139 S.Ct. at 2408
Considering the foregoing, it is
ORDERED that petitioners' motions for reconsideration, filed on June 28, 2021, in each of these consolidated matters, are denied.