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           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                           FILED
                                                                      August 14, 2018
                                      No. 17-60276
                                                                       Lyle W. Cayce
                                                                            Clerk
PBBM-ROSE HILL, LIMITED; PBBM CORPORATION, Tax Matters
Partner,

                                                   Petitioners - Appellants
v.

COMMISSIONER OF INTERNAL REVENUE,


                                                   Respondent - Appellee




                             Appeal from a Decision of the
                               United States Tax Court


Before KING, SOUTHWICK, and HO, Circuit Judges.*
KING, Circuit Judge:
      For the 2007 tax year, PBBM Rose Hill, Ltd., claimed a charitable
contribution deduction of $15,160,000 for its donation of a conservation
easement to the North American Land Trust. Subsequently, the Commissioner
of Internal Revenue issued a final partnership administrative adjustment that
determined PBBM Rose Hill, Ltd., was not entitled to the deduction and
assessed a penalty for the overvaluation of the conservation easement. PBBM
Rose Hill, Ltd., and its tax matters partner, PBBM Corp., filed a petition for



      *   Judge Ho concurs in the judgment only.
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                                  No. 17-60276
readjustment in tax court. The tax court concluded that the contribution was
not exclusively for conservation purposes because it (1) did not protect any of
the conservation purposes under 26 U.S.C. § 170(h)(4)(A)(i)–(iii) and (2) failed
to satisfy the perpetuity requirement of § 170(h)(5)(A). Consequently, the tax
court disallowed the deduction. The tax court also concluded that the value of
the easement was $100,000 and PBBM Rose Hill, Ltd., was subject to a gross
valuation misstatement penalty. We hold that while the contribution protected
the conservation purpose of preserving land for outdoor recreation by the
general public under § 170(h)(4)(A)(i), it did not meet the perpetuity
requirement of § 170(h)(5)(A). Accordingly, the donation did not qualify for a
deduction. We also find no error in the tax court’s valuation of the easement or
its determination of a penalty. Thus, we AFFIRM.
                                        I.
                                       A.
      In 1996, Rose Hill Plantation Development Company Limited
Partnership (“RHP Development”) conveyed 241.48 acres of real property (the
“Property”) to Rose Hill Country Club, Inc. (“RHCC”). The Property is located
in Beaufort County, South Carolina. The deed that conveyed the Property to
RHCC contained a use restriction, which required the Property to “be utilized
only for recreational facilities or open space for a period of thirty (30) years.”
In 2002, RHCC conveyed the Property to PBBM Rose Hill, Ltd. (“PBBM”)—the
taxpayer in this case—for $2,442,148. The deed that conveyed the Property to
PBBM contained the use restriction. When PBBM was the owner, the Property
consisted of primarily a 27-hole golf course and also included facilities such as
a club house for the neighboring residential community. As the golf course was
not profitable, PBBM closed it in January 2006. Two months later, it filed for
voluntary Chapter 11 bankruptcy. In October 2006, PBBM initiated an
adversary proceeding before the bankruptcy court against RHP Development,
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RHCC, Red Star Capital, L.P., 1 and the Rose Hill Plantation Property Owners
Association, Inc. (“POA”), seeking, inter alia, to invalidate the use restriction.
       In July 2007, PBBM entered into a settlement agreement with the POA,
which the bankruptcy court approved. Specifically, the POA agreed that it
would not contest or interfere with PBBM seeking invalidation or removal of
the use restriction in any proceeding before the bankruptcy court. However,
PBBM agreed that any final judgment rendering the use restriction invalid
and removing it would not have a binding or preclusive effect as to the POA for
purposes of res judicata or collateral estoppel. The POA also agreed to forbear
from enforcing the use restriction until the 180th day that any such judgment
became final, unless there was an attempt to develop the Property. Further,
the POA obtained an option to purchase the Property.
       In August 2007, the POA decided to exercise its purchase option, and
PBBM filed a motion in the bankruptcy court to approve the sale of the
Property for $2.3 million. The bankruptcy court approved the sale in mid-
September 2007. A couple of weeks later, the bankruptcy court entered an
order that confirmed the taxpayer’s plan of reorganization under Chapter 11.
In early December 2007, the bankruptcy court entered judgments that
invalidated and removed the use restriction on the Property as to RHCC, RHP
Development, and Red Star Capital. PBBM closed on the sale of the Property
to the POA in early January 2008.
                                            B.
       Prior to the closing of the sale to the POA, on December 17, 2007, PBBM
conveyed a conservation easement of about 234 acres of the Property
(“Conservation Area”) to the North American Land Trust (“NALT”). The


       1Red Star Capital is the successor to the interests of Carolina First Bank, which was
one of PBBM’s creditors that was involved in the financing of the Property in the sale from
RHCC to PBBM.
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Conservation Area consisted of the 27-hole golf course; the seven acres of the
Property that were not conveyed included two acres of golf course maintenance
areas and the five acres that held the club house. In the easement deed, PBBM
“voluntarily, unconditionally and absolutely” granted NALT and its successors
and assigns the “easements, covenants, prohibitions and restrictions” set forth
in the deed “in perpetuity” in order to accomplish the “Conservation Purposes.”
The deed lists four “Conservation Purposes”:
      Preservation of the Conservation Area for outdoor recreation by,
      or the education of, the general public; and
      Preservation of the Conservation Area as a relatively natural
      habitat of fish, wildlife, or plants or similar ecosystem; and
      Preservation of the Conservation Area as open space which
      provides scenic enjoyment to the general public and yields a
      significant public benefit; and
      Preservation of the Conservation Area as open space which, if
      preserved, will advance a clearly delineated Federal, State or local
      governmental conservation policy and will yield a significant
      public benefit . . . .
      Paragraph 2.1 restricts the Conservation Area from being used “for a
residence or for any commercial, institutional, industrial or agricultural
purpose or purposes.” Paragraph 2.4.1 states that “[t]he Property is and shall
continue to be and remain open for substantial and regular use by the general
public for outdoor recreation . . . , whether for use in the game of golf . . . or for
other outdoor recreation.” Paragraph 2.4.1 permits the “charging of fees” as
long as “the Property is open for the substantial and regular use of the general
public” and the fees do not defeat such use or “result in the operation of the
Property as a private membership club.” Paragraph 2.4.2 states that if the
Property ceases “to be used as a golf course,” then the Property “shall be use[d]
for passive recreation and no other use.”



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      In Article 3 of the deed, PBBM reserved several rights including the right
to construct, inter alia, a tennis facility, single-family dwellings, driveways,
community gardens, parking areas, and fences. It also preserved the right to
install “no trespassing” signs in paragraph 3.18.1. Paragraph 3.21.2 states that
the reserved rights cannot be exercised unless that exercise “will have no
material adverse effect on the Conservation Purposes.”
      Paragraph 6.2 states that “[a]ny general rule of construction to the
contrary notwithstanding, [the deed] shall be liberally construed in favor of the
grant to promote, protect and fulfill the Conservation Purposes” and “[i]f any
provision . . . is found to be ambiguous, an interpretation consistent with the
Conservation Purposes that would render the provision valid should be favored
over any interpretation that would render it invalid.” Paragraph 6.5 provides
that if “any cause or circumstance gives rise to the extinguishment of [the
easement] . . . then [NALT], on any subsequent sale, exchange or involuntary
conversion of the Conservation Area, shall be entitled to a portion of the
proceeds of sale equal to the greater of” the fair market value of the easement
around the date of the deed, or a defined share of the amount of proceeds
remaining after both the “actual bona fide expenses” of the sale and the
“amount attributable to improvements constructed upon the Conservation
Area pursuant to” the reserved rights, if any, are deducted. That defined share
is the fair market value of the easement around the date of the deed, divided
by the value of the land not burdened by the easement around the date of the
deed. Paragraph 6.14 states that “[n]othing in [the deed] shall be construed to
create any right of access to the Conservation Area by the public.”
                                       C.
      In 2008, PBBM filed its partnership tax return for the 2007 tax year and
claimed a charitable contribution deduction of $15,160,000 for its donation of
the conservation easement. In 2014, the Commissioner of Internal Revenue
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                                    No. 17-60276
(“Commissioner”) issued a final partnership administrative adjustment
(“FPAA”), which determined that PBBM was not entitled to the deduction and
assessed a penalty for overvaluing the conservation easement. PBBM and its
tax matters partner, PBBM Corp. (collectively “PBBM”), challenged the FPAA
in tax court. After a five-day trial, the tax court concluded that, inter alia, the
easement was not exclusively for conservation purposes and therefore no
deduction was allowed; the value of the easement was only $100,000; and
PBBM was subject to a gross valuation misstatement penalty.
      PBBM timely appealed. 2
                                          II.
       “As a general rule, for charitable gifts of property, a taxpayer is ‘not
allowed to take a deduction if the charitable gift consists of less than the
taxpayer’s entire interest in that property.’” Whitehouse Hotel Ltd. P’ship v.
Comm’r, 615 F.3d 321, 329 (5th Cir. 2010) (quoting Glass v. Comm’r, 471 F.3d
698, 706 (6th Cir. 2006)). A contribution of a “qualified conservation easement”
is an exception to this rule. See id. To constitute such an easement, the
contribution must be “(A) of a qualified real property interest, (B) to a qualified
organization, [and] (C) exclusively for conservation purposes.” 26 U.S.C.
§ 170(h)(1). “An easement qualifies . . . if it is a ‘restriction (granted in
perpetuity) on the use which may be made of the real property.’” BC Ranch II,
L.P. v. Comm’r, 867 F.3d 547, 551 (5th Cir. 2017) (quoting 26 U.S.C.
§ 170(h)(2)(C)). The taxpayer (here, PBBM) “has the burden of proving
entitlement to [its] claimed deduction.” Id.
      We review the tax court’s conclusions of law de novo and findings of fact
for clear error. Id. To the extent that this case involves statutory interpretation


      2  NALT has filed an amicus brief in support of PBBM. Ann Taylor Schwing—an
attorney and board member for the Land Trust of Napa County—has filed an amicus brief in
support of the Commissioner.
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of the Internal Revenue Code (i.e., Title 26 of the U.S. Code), we review that
interpretation de novo. See Schaeffler v. United States, 889 F.3d 238, 242 (5th
Cir. 2018). “We begin ‘by examining the plain language of the relevant
statute.’” Id. (quoting Stanford v. Comm’r, 152 F.3d 450, 455–56 (5th Cir.
1998)). If the plain language of the statute does not address the issue, then we
look to the Internal Revenue Service (“IRS”) regulations and legislative
history. 3 See Kornman & Assocs., Inc. v. United States, 527 F.3d 443, 451 (5th
Cir. 2008); cf. 26 U.S.C. § 170(a)(1) (“A charitable contribution shall be
allowable as a deduction only if verified under regulations prescribed by the
Secretary.”). Only when the statute, the IRS regulations, and legislative
history are uninstructive does this court look to the Commissioner’s
interpretation as reflected in other IRS guidance. See Kornman, 527 F.3d at
452. Further, “we analyze tax deductions for the grant of conservation
easements made pursuant to [26 U.S.C. § 170(h)] under [this] ordinary
standard of statutory construction,” not a strict standard. BC Ranch, 867 F.3d
at 554.
       There are several issues on appeal. We begin by deciding whether the
“exclusively for conservation purposes” requirement in 26 U.S.C. § 170(h)(1)(C)
is met, therefore entitling PBBM to a deduction for its contribution of the
conservation easement. We then address the issues related to the valuation of
the easement and the applicability of a penalty.
                                             III.
       Under 26 U.S.C. § 170(h)(1)(C), the taxpayer’s contribution must be
“exclusively for conservation purposes” in order to constitute a qualified
conservation easement. Section 170(h)(4)(A) enumerates five “conservation


       3 Much of the legislative history for 26 U.S.C. § 170(h) was incorporated into 26 C.F.R.
§ 1.170A-14. Compare 26 C.F.R. § 1.170A-14(d), with S. Rep. No. 96-1007, at 10–14 (1980),
as reprinted in 1980 U.S.C.C.A.N. 6736, 6745–49.
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purpose[s].” They are (1) preservation of land for recreation, (2) protection of a
natural habitat, (3) preservation of open space for scenic enjoyment,
(4) preservation of open space pursuant to a government conservation policy,
and (5) preservation of historic land or structures. 26 U.S.C. § 170(h)(4)(A). 4
The level of public access required to satisfy each conservation purpose is
different.     See    26 C.F.R.      § 1.170A-14(d)(2)(ii),       (d)(3)(iii),    (d)(4)(ii)(B),
(d)(4)(iii)(C), (d)(5)(iv). The taxpayer’s contribution is “exclusively” for a
conservation purpose only if that purpose is “protected in perpetuity.”
26 U.S.C. § 170(h)(5)(A). The tax court determined that PBBM’s contribution
(1) did not protect any of the conservation purposes under § 170(h)(4)(A)(i)–(iii)
and (2) failed to satisfy the perpetuity requirement of § 170(h)(5)(A) because
the easement deed’s extinguishment provision (paragraph 6.5) does not comply
with 26 C.F.R. § 1.170A-14(g)(6). Accordingly, the tax court concluded that the
“exclusively for conservation purposes” requirement in 26 U.S.C. § 170(h)(1)(C)
was not satisfied and disallowed PBBM’s deduction.
       In order for PBBM to prevail on its challenge to the tax court’s
disallowance of its deduction, it must prove that the tax court erred in both of
its determinations. PBBM fails to do so. For the reasons below, we conclude


       4 Section 170(h)(4)(A) states:
   [T]he term “conservation purpose” means—
       (i) the preservation of land areas for outdoor recreation by, or the education of, the
       general public,
       (ii) the protection of a relatively natural habitat of fish, wildlife, or plants, or
       similar ecosystem,
       (iii) the preservation of open space (including farmland and forest land) where
       such preservation is—
            (I) for the scenic enjoyment of the general public, or
            (II) pursuant to a clearly delineated Federal, State, or local governmental
            conservation policy,
       and will yield a significant public benefit, or
       (iv) the preservation of an historically important land area or a certified historic
       structure.
26 U.S.C. § 170(h)(4)(A).
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that the contribution protected the conservation purpose of preserving land for
outdoor recreation by the general public under § 170(h)(4)(A)(i), but did not
meet the perpetuity requirement of § 170(h)(5)(A).
                                        A.
      PBBM contended in the tax court that the contribution met the
conservation purposes enumerated in § 170(h)(4)(A)(i)–(iii). On appeal, the
only conservation purpose at issue is “the preservation of land areas for outdoor
recreation by . . . the general public.” 26 U.S.C. § 170(h)(4)(A)(i). The parties
do not dispute that land has been preserved for outdoor recreation; they
dispute whether it has been preserved for use by the general public. The plain
language of the statute does not signify what such use must look like in order
to qualify for a deduction. The accompanying regulation states that recreation
on the preserved land must be “for the substantial and regular use of the
general public.” 26 C.F.R. § 1.170A-14(d)(2)(ii) (emphasis added).
      Below, the tax court noted conflicting provisions in the deed: the deed
requires the Property to be open for use by the general public (paragraph 2.4.1),
with this requirement to be enforced by NALT in court (paragraph 5.1), but
also states that there exists no right of access by the public (paragraph 6.14).
Ultimately, the tax court concluded that the contribution failed to protect the
public use of the land for outdoor recreation. It based its conclusion on the
actual use of the Property after the creation of the easement. After the POA
bought the Property, it operated 18 holes of golf, but converted part of the
Property into a park. Access to the Property is controlled by a gatehouse. A
visitor who gains access is given a restricted pass for his or her vehicle. That
pass limits the visitor’s access to certain areas, such as the golf course and club
restaurant, and warns that access to other areas constitutes trespassing. The
public does not have access to the park; a sign on the road to the park states
“[p]roperty owners, residents & guests only beyond this point.”
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       The parties first debate whether the tax court erroneously looked beyond
the language of the deed and to the actions of the subsequent owner (i.e., the
POA) in determining whether the contribution was exclusively for a
conservation purpose. PBBM argues that the tax court should have examined
only the terms of the deed in its inquiry. As support for its position, PBBM
quotes a regulatory provision concerning the public-access requirement for
historic preservation easements:
       The amount of access afforded the public by the donation of an
       easement shall be determined with reference to the amount of
       access permitted by the terms of the easement which are
       established by the donor, rather than the amount of access actually
       provided by the donee organization.
26 C.F.R. § 1.170A-14(d)(5)(iv)(C) (emphasis added). The Commissioner
contends that this provision does not apply to recreation easements, such as
the one here.
       It is true that the regulatory provision cited by PBBM applies to historic
preservation easements. 5 Id. However, the regulations concerning open space
easements also indicate that public access should be determined by examining
the language of the deed. See id. § 1.170A-14(d)(4)(ii)(B) (“Under the terms of
an open space easement on scenic property, the entire property need not be
visible to the public for a donation to qualify under this section . . . .” (emphasis
added)); id. § 1.170A-14(d)(4)(v) (“A deduction will not be allowed for the
preservation of open space under section 170(h)(4)(A)(iii), if the terms of the


       5    Several other regulations related to historic preservation easements also suggest
that such easements should be evaluated on their written terms. See, e.g., 26 C.F.R. § 1.170A-
14(d)(5)(iv)(A) (“[T]he terms of the easement must be such that the general public is given the
opportunity on a regular basis to view the characteristics and features of the property . . . .”
(emphasis added)); id. § 1.170A-14(d)(5)(v) (“Example 1. . . . Pursuant to the terms of the
easement, the house may be opened to the public . . . .” (emphasis added)); id. (“Example 2 . . .
[T]he donation would meet the public access requirement if the terms of the easement
permitted the donee organization to open the property to the public every other weekend
. . . .” (emphasis added)).
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easement permit a degree of intrusion or future development that would
interfere with the essential scenic quality of the land . . . .” (emphasis added)).
In addition, regulatory provisions concerning what it means for the
conservation purpose to be “protected in perpetuity” imply that the analysis of
whether the contribution qualifies for a deduction should be confined to the
time of the contribution. See, e.g., id. § 1.170A-14(g)(6)(ii) (“[A]t the time of the
gift the donor must agree that the donation of the perpetual conservation
restriction gives rise to a property right . . . .” (emphasis added)); id. § 1.170A-
14(h)(3) (“The value of the contribution under section 170 in the case of a
charitable contribution of a perpetual conservation restriction is the fair
market value of the perpetual conservation restriction at the time of the
contribution.”    (emphasis     added)).        Read     together,   the    regulations
accompanying conservation easements strongly suggest that, in determining
whether the public-access requirement for a recreation easement is fulfilled,
the focus should generally be on the terms of the deed and not on the actual
use of the land after the donation of the easement. This comports with South
Carolina’s rule of construction that “[t]he intention of the grantor [of the
easement] must be found within the four corners of the deed.” Windham v.
Riddle, 672 S.E.2d 578, 583 (S.C. 2009) (quoting Gardner v. Mozingo, 358
S.E.2d 390, 392 (S.C. 1987)).
      The regulations also signify that an exception to this general rule occurs
when the donor knew or should have known, at the time of the donation, that
the access eventually provided would be significantly less than the amount of
access permitted under the terms of the easement. See 26 C.F.R. § 1.170A-
14(d)(5)(iv)(C) (“[I]f the donor is aware of any facts indicating that the amount
of access that the donee organization will provide is significantly less than the
amount of access permitted under the terms of the easement, then the amount
of access afforded the public shall be determined with reference to this lesser
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amount.”); cf. id. § 1.170A-14(g)(3) (“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.”). The Commissioner argues that this exception applies here
as PBBM had several pre-purchase meetings with the POA concerning the use
restriction during the bankruptcy proceedings. This is unconvincing. While
PBBM was familiar with the POA in past dealings, these dealings informed
PBBM only that the POA was opposed to the removal of the use restriction
(i.e., opposed to development), not that it objected to the public use of the
Property.
      Next, we decide whether the terms of the recreation easement here fulfill
the public-access requirement. We apply state law “for determining the rights
transferred by the easement at issue.” Whitehouse Hotel, 615 F.3d at 329.
Under South Carolina law, “[i]n construing a deed, ‘the intention of the grantor
must be ascertained and effectuated, unless that intention contravenes some
well settled rule of law or public policy.’” Windham, 672 S.E.2d at 582–83
(quoting Wayburn v. Smith, 239 S.E.2d 890, 892 (S.C. 1977)). “[T]he deed must
be construed as a whole and effect given to every part if it can be done
consistently with the law.” Id. at 583 (quoting Gardner, 358 S.E.2d at 391–92).
      As the tax court noted, there are conflicting provisions in the deed with
respect to public access. In favor of public access, the deed lists, as a
“Conservation Purpose[],” preservation of the land “for outdoor recreation by
. . . the general public” (mirroring the language of 26 U.S.C. § 170(h)(4)(A)(i)),
and paragraph 2.4.1 states that “[t]he Property is and shall continue to be and
remain open for substantial and regular use by the general public for outdoor
recreation” (mirroring the language of 26 C.F.R. § 1.170A-14(d)(2)(ii)). Against
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public access, paragraph 6.14 states that the easement does not create “any”
right of public access, and paragraph 3.18.1 preserves the right for the owner
to post “no trespassing” signs.
      On appeal, PBBM contends that the deed provides a right of public access
for outdoor recreation, to be enforced by NALT in court. PBBM interprets
paragraph 6.14 to mean that the right conveyed to the public is not
“unfettered.” It argues that the deed requires the Property to remain open for
public use (paragraph 2.4.1) and allows for the owner to fulfill this mandate by
conveying licenses to members of the general public to play golf or engage in
another recreational purpose. According to PBBM, paragraph 6.14 does not
affect such a mandate. Additionally, PBBM asserts that paragraph 6.14 should
be interpreted according to paragraph 6.2, which provides for liberal
construction in line with the Conservation Purposes. In response, the
Commissioner contends that the provisions of the deed, as a whole, convey that
the owner is prohibited from using any part of the Property for purposes other
than recreation, but is allowed to prevent the general public from accessing
substantial areas of the land. The Commissioner states that the broad
language of paragraph 6.14 does not permit it to be interpreted as a time-and-
manner restriction. The Commissioner further adds that paragraph 6.2 does
not apply because it is a savings clause as in Belk v. Commissioner, 774 F.3d
221, 228–29 (4th Cir. 2014), and paragraph 6.14 is not ambiguous.
      We hold that the terms of the recreation easement here satisfy the
public-access requirement in § 170(h)(4)(A)(i). In reaching this conclusion, we
do not rely on paragraph 6.2. That paragraph states “[a]ny general rule of
construction to the contrary notwithstanding, [the deed] shall be liberally
construed in favor of the grant to promote, protect and fulfill the Conservation
Purposes” and “[i]f any provision . . . is found to be ambiguous, an
interpretation consistent with the Conservation Purposes that would render
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the provision valid should be favored over any interpretation that would render
it invalid.” Contra the Commissioner, this clause is not a savings clause as in
Belk. In Belk, the Fourth Circuit held that the savings clause, which provided
for “a future event [to] alter[] the tax consequences of a conveyance,” did not
render the easement at issue eligible for a deduction. 774 F.3d at 229. Unlike
the savings clause in Belk, paragraph 6.2 imposes no condition subsequent, but
is merely a clause concerning the interpretation of the deed. Even so,
paragraph 6.2 does not aid PBBM’s position, as it provides that the deed be
construed consistent with the “Conservation Purposes.” There are four
“Conservation Purposes” listed at the beginning of the deed; they mirror the
four conservation purposes enumerated in § 170(h)(4)(A)(i)–(iii). Each purpose
requires a different level of public access, as described in the accompanying
regulations.   See   26 C.F.R.   § 1.170A-14(d)(2)(ii),   (d)(3)(iii),   (d)(4)(ii)(B),
(d)(4)(iii)(C). Thus, it is unclear that paragraph 6.2 provides that the deed be
construed to give rise to the level of public access required for the recreation
purpose.
      We construe the deed as whole and give effect to all the provisions. In
doing so, we give greater weight to the deed’s specific terms in paragraph 2.4.1
than its general language in paragraph 6.14. See Restatement (Second) of
Contracts § 203(c) (Am. Law Inst. 1981). Paragraph 2.4.1 provides that “[t]he
Property is and shall continue to be and remain open for substantial and
regular use by the general public for outdoor recreation.” It also states that any
fees charged cannot defeat such use or “result in the operation of the Property
as a private membership club.” Paragraph 2.4.1 creates an obligation on the
owner to operate the Property in such a way that provides access to the public
for “substantial and regular” recreational use. The general terms in




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                                       No. 17-60276
paragraph 6.14 do not render this obligation meaningless. 6 Finally, as this
provision refers to “[t]he Property” in its entirety, the Commissioner’s
argument that the deed allows the owner to prevent the public from accessing
certain areas of the land fails.
       In sum, the terms of the recreation easement here fulfill the public-
access requirement in § 170(h)(4)(A)(i).
                                              B.
       Next, 26 U.S.C. § 170(h)(1)(C) requires that the taxpayer’s contribution
be “exclusively for conservation purposes.” The taxpayer’s contribution is
“exclusively” for such a purpose only if that purpose is “protected in
perpetuity.” 26 U.S.C. § 170(h)(5)(A). The tax code “does not define the phrase
‘protected in perpetuity,’ or otherwise describe how a taxpayer may accomplish
this statutory mandate.” Mitchell v. Comm’r, 775 F.3d 1243, 1247 (10th Cir.
2015). As such, the Commissioner promulgated regulatory provisions “to
ensure that a conservation purpose be protected in perpetuity.” Id.; see
26 C.F.R. § 1.170A-14(g). The “extinguishment regulation”—26 C.F.R.
§ 1.170A-14(g)(6)—is one of these provisions. The purpose of this regulation is
(1) to prevent a taxpayer (or his successor) “from reaping a windfall if the
property is destroyed or condemned” such that the easement cannot remain in
place and (2) to assure that the donee can use its portion of any proceeds to
advance the conservation purpose elsewhere. See Kaufman v. Shulman, 687
F.3d 21, 26 (1st Cir. 2012). In other words, the Commissioner recognized that


       6 We note that it is the specific obligation imposed on the owner by paragraph 2.4.1—
not the fact that the owner can grant licenses to members of the general public—that satisfies
the public-access requirement of § 170(h)(4)(A)(i). Under South Carolina law, “a license to be
on the premises for an agreed purpose is a contractual right personal to the licensee.” Hilton
Head Air Serv., Inc. v. Beaufort County, 418 S.E.2d 849, 853 (S.C. Ct. App. 1992). Licenses
are revocable, Briarcliffe Acres v. Briarcliffe Realty Co., 206 S.E.2d 886, 894–95 (S.C. 1974),
and thus do not guarantee that use by the general public for recreation will be “protected in
perpetuity” as § 170(h)(5)(A) requires the conservation purpose to be.
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                                    No. 17-60276
the conservation interest that is the subject of a donation could be destroyed
in the future and set forth a regulation to guarantee that such an interest is
still protected in such an event.
      Subsection (g)(6)(i) states that “[i]f a subsequent unexpected change” in
the property conditions “can make impossible or impractical the continued use
of the property for conservation purposes,” these purposes are still “protected
in perpetuity if the restrictions are extinguished by judicial proceeding and all
of the donee’s proceeds . . . from a subsequent sale or exchange of the property
are used by the donee organization in a manner consistent” with these
purposes. 26 C.F.R. § 1.170A-14(g)(6)(i). The next subsection, which is
particularly relevant here, states:
      [A]t the time of the gift the donor must agree that the donation of
      the perpetual conservation restriction gives rise to a property right
      . . . 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. . . . [T]hat proportionate value of the donee’s property
      rights shall remain constant. . . . [When the unexpected change
      occurs, the donee] must be entitled to a portion of the proceeds at
      least equal to that proportionate value of the perpetual
      conservation restriction . . . .
Id. § 1.170A-14(g)(6)(ii).
      First, there is ambiguity as to whether the phrase “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”
modifies “property right” or “fair market value.” Id. Though this is not an issue
that the parties have raised, resolving this ambiguity is important in
determining what the extinguishment regulation requires.
      If the aforementioned phrase is interpreted to modify “fair market
value,” then the “proportionate value” would equal the dollar amount of the
value of the conservation easement at the time of the gift. In favor of this
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                                  No. 17-60276
interpretation is the use of the term “value,” which is “the monetary worth of
something.” Value, Merriam-Webster’s Collegiate Dictionary (11th ed. 2003);
see also Value, Black’s Law Dictionary (10th ed. 2014) (“The monetary worth
or price of something; the amount of goods, services, or money that something
commands in an exchange.”). The regulations discussing the determination of
the “fair market value” of the conservation easement also support the notion
that the “proportionate value” is a sum of money. See, e.g., 26 C.F.R. § 1.170A-
14(h)(3)(i) (“If there is a substantial record of sales of easements comparable to
the donated easement . . . , the fair market value of the donated easement is
based on the sales prices of such comparable easements.”). Under this
construction, the phrase “bears to the value of the property as a whole at that
time” would be useful only to explain why the value is named “proportionate.”
Id. § 1.170A-14(g)(6)(ii).
      On the other side, if the aforementioned phrase is interpreted to modify
“property right,” then the “proportionate value” would equal a fraction (or
share), instead of a dollar figure. That fraction would be defined as what the
value of the conservation easement at the time of the gift “bears to the value
of the property as a whole at that time.” Id. This interpretation is supported
by the reference to the “proportionate value” as a “portion” of the proceeds. Id.
      Both parties and the tax court construed the “proportionate value” to be
a fraction (or share). This interpretation is in line with the understanding of
other tax courts and the First Circuit. See, e.g., Kaufman, 687 F.3d at 26
(discussing the extinguishment regulation’s requirement that the donee
organization be entitled to “a proportionate share of post-extinguishment
proceeds” (emphasis added)); Carroll v. Comm’r, 146 T.C. 196, 212 (2016) (“[I]f
a grantee is not absolutely entitled to a proportionate share of extinguishment
proceeds, then the conservation purpose of the contribution is not protected in
perpetuity.” (emphasis added)). This construction is also consistent with the
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                                  No. 17-60276
Commissioner’s interpretation in prior IRS private letter rulings. I.R.S. Priv.
Ltr. Rul. 200836014 (Sept. 5, 2008) (“[T]he Protected Property payable to the
Donee represents a percentage interest in the fair market value of the Protected
Property . . . .” (emphasis added)); I.R.S. Priv. Ltr. Rul. 200403044 (Jan. 16,
2004) (“The portion of the proceeds . . . payable to the Donee equals an amount
that is determined by dividing the fair market value of the Easement donation
by the fair market value of the Subject Tract (at the time of the Easement).”);
I.R.S. Priv. Ltr. Rul. 200208019 (Feb. 22, 2002) (“[T]he easement . . . gives the
donee a property right that satisfies the percentage values requirement of the
regulation . . . .” (emphasis added)); I.R.S. Priv. Ltr. Rul. 199933029 (Aug. 20,
1999) (“[T]he easement . . . meets the requisite percentage values . . . with
respect to property rights.” (emphasis added)).
      Because the extinguishment regulation is ambiguous as to this issue and
the Commissioner’s construction is not “plainly erroneous or inconsistent with
the regulation,” Tex. Clinical Labs, Inc. v. Sebelius, 612 F.3d 771, 777 (5th Cir.
2010) (quoting Auer v. Robbins, 519 U.S. 452, 461 (1997)), we interpret the
phrase “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” to modify “property right.” Accordingly, the
“proportionate value” is a fraction equal to the value of the conservation
easement at the time of the gift, divided by the value of the property as a whole
at that time.
      The tax court concluded that the contribution failed to satisfy the
perpetuity requirement of 26 U.S.C. § 170(h)(5)(A) because the easement
deed’s extinguishment provision (paragraph 6.5) does not comply with
26 C.F.R. § 1.170A-14(g)(6)(ii). Paragraph 6.5 provides that if “any cause or
circumstance gives rise to the extinguishment of [the easement] . . . then
[NALT], on any subsequent sale, exchange or involuntary conversion of the
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                                 No. 17-60276
Conservation Area, shall be entitled to a portion of the proceeds of the sale
equal to the greater of” the fair market value of the easement around the date
of the deed, or a defined share of the amount of proceeds remaining after both
the “actual bona fide expenses” of the sale and the “amount attributable to
improvements constructed upon the Conservation Area pursuant to” the
reserved rights, if any, are deducted. That defined share is the fair market
value of the easement around the date of the deed, divided by the value of the
land not burdened by the easement around the date of the deed. The tax court
explained that under paragraph 6.5’s formula, NALT would not receive the
amount required by the extinguishment regulation in some circumstances.
      On appeal, the parties dispute whether the extinguishment regulation is
satisfied because paragraph 6.5 permits the value of improvements to be
subtracted out of the proceeds, prior to the donee taking its share. PBBM
argues that there is no statutory or regulatory requirement entitling the donee
to the value of improvements on the property. It points out that an IRS private
letter ruling supports its position. See I.R.S. Priv. Ltr. Rul. 200836014 (Sept.
5, 2008). In response, the Commissioner argues that, under the plain terms of
26 C.F.R. § 1.170A-14(g)(6)(ii), the extinguishment provision in a deed cannot
include factors, such as the value of improvements, that could decrease the
amount of proceeds below the minimum the donee must receive. It explains
that the IRS private letter ruling does not reflect the Commissioner’s current
position and cannot be used as precedent or to alter the plain meaning of a
regulation.
      We agree with the Commissioner. “A regulation should be construed to
give effect to the natural and plain meaning of its words.” Diamond Roofing
Co. v. Occupational Safety & Health Review Comm’n, 528 F.2d 645, 649 (5th
Cir. 1976); see Rothkamm v. United States, 802 F.3d 699, 703 (5th Cir. 2015)
(concluding that the district court erred “in its interpretation of [26 U.S.C.]
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                                 No. 17-60276
§ 7811(d)’s tolling provision by failing to follow the plain language of the
statute and associated regulations”). Here, the plain language states that upon
judicial extinguishment, the donee “must be entitled to a portion of the
proceeds at least equal to that proportionate value.” 26 C.F.R. § 1.170A-
14(g)(6)(ii). The “proceeds” are specified to be from a “sale, exchange, or
involuntary conversion” of the property. Id. The regulation does not define
“proceeds.” The ordinary meaning of “proceeds” is “the total amount brought
in,” such as “the proceeds of a sale.” Proceeds, Merriam-Webster’s Collegiate
Dictionary (11th ed. 2003) (emphasis added); see also Proceeds, Black’s Law
Dictionary (10th ed. 2014) (“The value of land, goods, or investments when
converted into money; the amount of money received from a sale”). The
regulation does not indicate that any amount, including that attributable to
improvements, may be subtracted out. The word “must” clearly mandates that
the donee receive at least the proportionate value—which, as explained above,
is a fraction—of the “proceeds.” 26 C.F.R. § 1.170A-14(g)(6)(ii). Accordingly, as
paragraph 6.5 permits the deduction of the value of improvements from the
proceeds, prior to the donee taking its share, the provision fails to meet the
requirement set forth in § 1.170A-14(g)(6)(ii). Further, the regulatory provision
preceding the extinguishment regulation elaborates on the protection of a
conservation interest in perpetuity “when the donor reserves rights the
exercise of which may impair” that interest. Id. § 1.170A-14(g)(5)(i). This
suggests that the Commissioner recognized the possibility of improvements on
the property after the donation of the easement, but chose not to carve out an
exception for the allocation of proceeds in the event of extinguishment when
such improvements have been made.
      We need not look to PBBM’s cited IRS private letter ruling because the
regulation is not ambiguous in this regard. See Christensen v. Harris County,
529 U.S. 576, 588 (2000) (“[A]n agency’s interpretation of its own regulation is
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                                    No. 17-60276
entitled to deference . . . only when the language of the regulation is
ambiguous.” (citations omitted)); Exelon Wind 1, L.L.C. v. Nelson, 766 F.3d
380, 402 (5th Cir. 2014) (“[W]e do not need to reach this question of deference
because the regulation’s plain language bars the [agency’s] interpretation.”).
But even assuming arguendo the regulation were ambiguous, we would not
defer to the interpretation in that IRS private letter ruling. While such a ruling
can “reveal the [agency’s] interpretation,” Smith v. Reg’l Transit Auth., 827
F.3d 412, 420 n.3 (5th Cir. 2016) (quoting Hanover Bank v. Comm’r, 369 U.S.
672, 686 (1962)), it is “not binding with respect to parties other than the
taxpayer to whom it was issued,” id., and may not be “cited as precedent,”
Transco Expl. Co. v. Comm’r, 949 F.2d 837, 840 (5th Cir. 1992) (citation
omitted). In Transco Exploration Co., we used the Commissioner’s reading of
26 U.S.C. § 4988(b) in a private letter ruling as support when it lined up with
our plain-meaning interpretations of that statute and the relevant regulations.
Id.
        Here, PBBM is not the taxpayer to whom the ruling was issued. 7 Under
an ordinary reading of the regulation, “proceeds” means the total amount
brought in from the sale, and the donee must be entitled to a portion—at least
the proportionate value—of this amount. The IRS private letter ruling, which
PBBM cites, concludes that the extinguishment regulation is satisfied by an
easement deed that permits the “amount attributable to the value of a
permissible improvement made by Grantors, if any, after the date of the
contribution” to be deducted from the proceeds prior to multiplication by the
proportionate value. I.R.S. Priv. Ltr. Rul. 200836014 (Sept. 5, 2008). The letter
does not provide any rationale for this conclusion. Accordingly, even if the



        The ruling was issued in 2008 so PBBM could not have relied on it when drafting
        7

the conservation easement deed.
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                                      No. 17-60276
regulation were ambiguous, we would not follow the IRS’s interpretation in the
ruling because it contravenes a plain reading of the regulation without an
explanation. See Tex. Clinical Labs, 612 F.3d at 777 (stating that this court
owes no deference to an agency’s interpretation of its own ambiguous
regulation if that interpretation is “inconsistent with the regulation” or not the
“agency’s fair and considered judgment” (citations omitted)). 8
                                             C.
       In sum, the “exclusively for conservation purposes” requirement in
26 U.S.C. § 170(h)(1)(C) is not met because PBBM did not comply with the
extinguishment regulation. Accordingly, PBBM is not entitled to a deduction
for its conservation easement contribution.
                                            IV.
       We next address the issues related to the valuation of the easement:
(1) whether the tax court erred in valuing the conservation easement at
$100,000; (2) whether the Commissioner complied with the managerial-
approval requirement in 26 U.S.C. § 6751(b) in assessing the penalty for a
gross valuation misstatement; and (3) whether the underpayments of tax at
issue are “attributable to” a valuation misstatement.
                                             A.
       We first address whether the tax court erred in valuing the conservation
easement at $100,000. Generally, “valuation of property for federal tax
purposes is a question of fact that we review for clear error.” Whitehouse Hotel,
615 F.3d at 335 (quoting Adams v. United States, 218 F.3d 383, 385–86 (5th
Cir. 2000)). “[T]o the extent, however, the finding is ‘predicated on a legal



       8 PBBM also argues, in the alternative, that the extinguishment regulation is invalid
because it itself is arbitrary and capricious. PBBM did not make this contention below and
has forfeited it. See Celanese Corp. v. Martin K. Eby Const. Co., 620 F.3d 529, 531 (5th Cir.
2010). Thus, we do not address it.
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                                 No. 17-60276
conclusion regarding the rights inherent in the property, its valuation is
subject to de novo review.’” Id. (emphasis removed) (quoting Adams, 218 F.3d
at 386). A tax court’s admissibility determination for expert evidence and
assessment of the expert’s qualifications and reliability are reviewed for an
abuse of discretion. See id. at 330. The tax court “is free either to accept or
reject expert testimony in accordance with its own judgment.” Lukens v.
Comm’r, 945 F.2d 92, 96 (5th Cir. 1991).
      Under the before-and-after valuation approach, the value of the
easement “is equal to the difference between the fair market value of the
property it encumbers before the granting of the restriction and the fair market
value of the encumbered property after the granting of the restriction.”
26 C.F.R. § 1.170A-14(h)(3)(i) (emphasis added). A “critical aspect” in
calculating fair market value is determining the “highest and best use” of the
property before and after. Whitehouse Hotel, 615 F.3d at 335. “A property’s
highest and best use is the ‘reasonable and probable use that supports the
highest present value.’” Id. (quoting Frazee v. Comm’r, 98 T.C. 554, 563 (1992)).
We focus on “[t]he highest and most profitable use for which the property is
adaptable and needed or likely to be needed in the reasonably near future.” Id.
(quoting Frazee, 98 T.C. at 563). After arriving at a highest-and-best use, the
next step is to calculate a dollar figure that reflects that use. One method of
doing so is the comparable sales approach. See id. at 334. The before-value
“must take into account not only the current use of the property but also an
objective assessment of how immediate or remote the likelihood is that the
property, absent the restriction, would in fact be developed, as well as any
effect from zoning, conservation, or historic preservation laws that already
restrict the property’s potential highest and best use.” 26 C.F.R. § 1.170A-
14(h)(3)(ii).


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                                  No. 17-60276
      On its 2007 partnership return, PBBM claimed a deduction of
$15,160,000 for its donation of the easement. This value relied on an appraisal
performed by Raymond E. Veal on December 13, 2007. The appraisal states
that the valuation rested on the “Extraordinary Assumption” that the Property
“could be rezoned to permit commercial uses”; this assumption was based on a
letter from attorney Edward M. Hughes. In that letter, Hughes opined that the
Rose Hill Master Plan (initially proposed in 1980) and the Declaration of
Covenants and Restrictions of RHP Development and the Rose Hill POA
permitted utilization of the Property as a residential lot, or a public or
commercial site. According to the letter, the Rose Hill Master Plan and the
Declaration were grandfathered in at the time of the enactment of the Beaufort
County Zoning and Development Standards Ordinance (“BC Ordinance”). And,
thus, those documents—not the BC Ordinance—governed the permitted use of
the Property, meaning that development was allowed. The letter also states
that Hughes was not offering an opinion as to the legitimacy of the removal of
the use restriction in the bankruptcy court proceedings.
      In the tax court proceedings, both parties’ valuation experts used the
before-and-after valuation approach. They agreed that the post-easement
highest-and-best use was recreational, yielding an after-value of $2,300,000.
They disputed the before-value, specifically debating whether the Property
could have been developed.
      During the trial, Veal served as PBBM’s expert witness on valuation.
Veal opined that the highest-and-best before-use was to develop the Property
along the lines of a conceptual plan provided by Mark Baker, a land use
planner. After Veal determined this use, he used the comparable sales method
to calculate the value of the Property, specifically relying on sales of developed
land. Veal concluded that the before-value was $15,680,000. Accordingly, he
valued the easement at $13,380,000 (i.e., $15,680,000 minus $2,300,000). This
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                                 No. 17-60276
figure was about $2 million lower than the figure of $15,160,000 used to claim
the deduction. Baker also served as an expert witness for PBBM. He presented
a conceptual plan—that, according to him, could have been adopted in 2007—
to develop the Property to include commercial businesses, additional single-
family residences, and multi-family residences. Veal’s valuation again relied
on the “Extraordinary Assumption” that the Property could have been
developed, which was based on Hughes’s letter; Baker’s plan also rested on
Hughes’s letter.
      The Commissioner’s valuation expert was Terry Dunkin. He opined that
the highest-and-best use was the same before as it was after: use as a golf
course or for another recreational purpose. Like Veal, he also employed the
comparable sales method, but used sales of golf courses instead of developed
properties. Dunkin’s before-value was $2,400,000. Accordingly, he valued the
easement at $100,000 (i.e., $2,400,000 minus $2,300,000). His report states
that the zoning permitted only recreational uses and that “[a]ny other uses
would be speculative at best.” In determining that development was unlikely,
Dunkin testified that he relied on conversations with Hillary Austin (a
Beaufort County Zoning and Development Administrator), a couple of Rose
Hill residents who opposed development, and three professional colleagues.
Dunkin also testified that the validity of the use restriction caused uncertainty
as to the potential development of the Property, as Hughes—in his letter—
purposely refused to opine on it, even though the bankruptcy court had already
issued judgments that removed that restriction.
      Austin served as one of the Commissioner’s fact witnesses. She testified
that around the time the BC Ordinance was adopted in 1990, the developer
petitioned the county council to make the Property a planned unit development
(“PUD”), so as to continue to build it out per the Rose Hill Master Plan from
1980. Consequently, the resulting Rose Hill PUD Master Plan was adopted and
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                                 No. 17-60276
set the zoning, locking in land use and density requirements. Further, Austin
testified that if a developer sought to build in a way contrary to the PUD
Master Plan, the county could issue a stop work order.
      On the question of whether the Property could have been developed, the
tax court weighed the conflicting evidence and found: (1) it was “uncertain”
that the owner could have developed the Property “without permission of the
county”; (2) it was “uncertain” that, if asked, “the county would have given its
permission”; (3) “the adjoining homeowners were opposed to development of
the [P]roperty”; (4) “this opposition would have reduced” the probability that
“the county would have permitted development”; (5) the opposition would have
put pressure on the owner to leave the land undeveloped; and (6) accordingly,
“these uncertainties about the possibility of developing the [P]roperty were so
great that an owner would have been discouraged from pursuing development
of the [P]roperty.” The tax court then agreed with Dunkin that the before-value
was $2,400,000, thus implicitly accepting that the highest and best before-use
was a golf course or other recreational use. Accordingly, it found that the
easement was worth $100,000 (i.e., $2,400,000 minus $2,300,000).
      On appeal, PBBM attacks Dunkin’s reliance on the use restriction in his
valuation because the bankruptcy court issued several judgments removing
that restriction before PBBM donated the easement. PBBM’s argument is
unavailing. The tax court did not explicitly make a finding on the use
restriction, but its opinion can be construed as accepting Dunkin’s assessment,
as the court accepted Dunkin’s valuation. The tax court did not err in doing so.
At the time of Dunkin’s appraisal, the bankruptcy court had already issued
judgments removing the use restriction; Dunkin testified that he was aware of
this. However, Dunkin still considered the use restriction as a factor causing
uncertainty as to whether the Property could have been used for anything
other than a recreational purpose, in part because Hughes’s letter—written
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                                 No. 17-60276
after the bankruptcy judgments—refused to opine on that restriction’s validity.
Next, the bankruptcy judgments concerned only RHCC, RHP Development,
and Red Star Capital. In PBBM’s settlement agreement with the POA, PBBM
agreed that any judgment in the bankruptcy proceedings that rendered the use
restriction invalid or removed it would not have a binding or preclusive effect
as to the POA for purposes of res judicata or collateral estoppel. Thus, it was
unclear whether the use restriction was enforceable by parties other than those
involved in the bankruptcy judgments (including the POA if it had not bought
the Property). Finally, the tax court’s conclusion on the likelihood of
development depended on factors other than the use restriction (i.e., county
approval of development and neighborhood opposition). Therefore, its opinion
may be construed as finding development unlikely, even assuming a non-
enforceable use restriction.
      PBBM also challenges the tax court’s findings related to the likelihood
of development of the Property, contending that county permission was not
required and, even if it were, it would have been given. PBBM argues that the
tax court should not have relied on Dunkin’s assessment, but should have
relied on Hughes’s letter and Baker’s testimony. PBBM’s contentions fail.
Dunkin based his conclusion that development was unlikely on information
from Austin, a county zoning administrator. Austin serves on the county team
that decides whether a change to the PUD Master Plan is “major” or “minor.”
She testified that, if a change were deemed “major,” it would then require full
review by the planning commission, natural resources committee, and county
council. She stated that converting the golf course to commercial development
would likely constitute a “major” change. According to Austin, such a change
would likely not be approved because of neighborhood opposition and open
space requirements, which the golf course fulfilled. PBBM specifically criticizes
Dunkin’s non-consultation of an attorney in forming his opinion. But Dunkin
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                                  No. 17-60276
testified that there was no requirement in his profession as a real estate
appraiser to consult with an attorney, nor did he consult with one routinely
and chose not to do so here.
      With respect to Baker’s conceptual plan, it was created in reliance on
Hughes’s letter that development was permitted. Hughes’s letter was not
admitted as an expert report, nor did Hughes testify. Baker testified that, if
Hughes were incorrect, Baker’s proposed development plan could not have
been done without a zoning change. Though he believed that a zoning change
could have been obtained and that the plan could have garnered neighborhood
approval, Baker stated that the plan had not been vetted by the county zoning
authorities or the POA. Austin testified that Baker’s conceptual plan could not
be properly evaluated for zoning compliance without a drawing by an engineer.
In addition to Dunkin and Austin, Bradley Ayres (a PBBM Corp. vice-
president) and Michael Hagen (a Rose Hill resident and former POA president)
testified that Rose Hill residents opposed development. Further, Baker stated
that four parcels of land that were originally in the Rose Hill PUD Master Plan
had been rezoned and commercially developed. But at least two of these parcels
were no longer a part of the PUD Master Plan as of 2007. The golf course was
in a central location of the Rose Hill neighborhood in 2007 and fulfilled the
open space requirements, whereas land in the parcels that had already been
rezoned at that time could not.
      Finally, this case is not akin to the one that PBBM cites: Palmer Ranch
Holdings Ltd v. Commissioner, 812 F.3d 982 (11th Cir. 2016). In Palmer, the
Eleventh Circuit agreed with the tax court that the county zoning authority
would approve of a Moderate Density Residential (“MDR”) development on a
parcel of land. Id. at 996–97. Following the denial of two prior applications to
develop that parcel, the county zoning authority issued an ordinance that
provided guidance on future development applications concerning that parcel.
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                                     No. 17-60276
Id. at 997. Because a MDR development could fulfill the criteria given in the
ordinance, the tax court found that there was a reasonable probability that the
county zoning authority would approve of such a development. Id. Here, no
prior applications had been submitted to develop the golf course, and no such
clear guidance had been provided by the county zoning authority.
      In sum, the tax court did not err in finding that development was
unlikely and in agreeing with Dunkin’s valuation.
                                           B.
      Next, we address whether the Commissioner complied with the
managerial-approval requirement in 26 U.S.C. § 6751(b) in assessing the
penalty for a gross valuation misstatement. Section 6751(b) states that “[n]o
penalty . . . shall be assessed unless the initial determination of such
assessment is personally approved (in writing) by the immediate supervisor of
the individual making such determination or such higher level official as the
Secretary may designate.” The tax court concluded that the managerial-
approval requirement was fulfilled by a managerial signature on the cover
letter of a summary report on the examination of PBBM that included the
“Gross Valuation Overstatement Penalty Issue Lead Sheet.” The Lead Sheet
showed that an IRS examiner had determined that the penalty was applicable
to underpayments attributable to the claimed deduction for the conservation
easement. 9 The IRS sent the cover letter and summary report to PBBM in
November 2011, prior to the issuance of the FPAA in August 2014. We agree
with the tax court’s conclusion.
      PBBM argues that the Commissioner did not meet the managerial-
approval requirement, relying on Chai v. Commissioner, 851 F.3d 190 (2d Cir.


      9 The tax court also determined that, alternatively, the subsequent approval of the
penalty by an appeals officer and appeals team manager in May 2014 satisfied the § 6751(b)
requirement.
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                                       No. 17-60276
2017). In Chai, the Second Circuit held (1) “that § 6751(b)(1) requires written
approval of the initial penalty determination no later than the date the IRS
issues the notice of deficiency . . . asserting such penalty” and (2) “that
compliance with § 6751(b) is part of the Commissioner’s burden of production
and proof in a deficiency case in which a penalty is asserted.” Id. at 221. PBBM
cites dicta in Chai to argue that § 6751(b) was not met by the managerial
signature on the cover letter because the penalty was not on the same page:
“[T]he IRS’s current administrative practice requires a supervisor’s approval
to be noted on the form reflecting the examining agent’s penalty determination
or otherwise be documented in the applicable workpapers.” Id. at 220.
       PBBM’s contention fails. While the Second Circuit recognized this IRS
practice, it did not adopt it as the Circuit’s standard, nor did it conclude that
this practice was the only way of fulfilling the “in writing” requirement. It
simply used it as support for its first holding that managerial approval should
occur “prior to the issuance of a notice of deficiency.” Id. The plain language of
§ 6751(b) mandates only that the approval of the penalty assessment be “in
writing” and by a manager (either the immediate supervisor or a higher level
official). Accordingly, the aforementioned managerial signature on the cover
letter of a summary report on the examination of PBBM met this statutory
requirement. 10
                                              C.
       Finally, we address whether the underpayments of tax at issue are
“attributable to” a valuation misstatement. Section 6662 permits a 20 percent
accuracy-related penalty on underpayments of tax “attributable to,” inter alia,


       10PBBM also argues that, pursuant to 26 U.S.C. § 7491(c), the Commissioner had the
burden to prove the fulfillment of the § 6751(b) requirement. We need not address the burden-
of-proof issue today. Because the Commissioner has produced sufficient evidence that
§ 6751(b) has been satisfied, an error related to the burden of proof, if any, is harmless. Cf.
Brinkley v. Comm’r, 808 F.3d 657, 664 (5th Cir. 2015).
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                                   No. 17-60276
a “substantial valuation misstatement.” 26 U.S.C. § 6662(a), (b)(3). If the
valuation misstatement is “gross,” a 40 percent penalty is permitted. Id.
§ 6662(h)(1). A “substantial” valuation misstatement is defined as an
overstatement of “150 percent” of the accurate value, and a “gross” valuation
misstatement is defined as an overstatement of “200 percent” of the accurate
value. Id. § 6662(e)(1)(A), (h)(2)(A)(i). A reasonable-cause exception exists for
some penalties, but not for those on underpayments “attributable to a
substantial or gross valuation overstatement” related to charitable deduction
property. Id. § 6664(c)(1), (c)(3); id. § 6664(c)(1)–(2) (2007).
      The tax court divided PBBM’s underpayments into two categories. The
first contained the underpayments resulting from PBBM’s reporting of a
deduction of $15,160,000 instead of $100,000. The second contained the
underpayments that were solely due to PBBM’s action of claiming a deduction
instead of not doing so (i.e., those corresponding to the difference between a
deduction of $100,000 and $0). The tax court concluded that the gross valuation
misstatement penalty applied to underpayments in the first category and no
penalty applied to those in the second category.
      The ordinary meaning of “attributable to” is “due to, caused by, or
generated by.” See Schaeffler, 889 F.3d at 243–44. Here, the underpayments
corresponding to the difference between $15,160,000 and $100,000 were
generated by a valuation overstatement on the part of PBBM. But for PBBM’s
misstatement, the tax court would not have determined that a penalty applied.
It matters not that the tax court concluded that the donation of the
conservation easement did not meet the requirements of 26 U.S.C. § 170(h) and
therefore did not qualify for a deduction. Assuming arguendo that the tax court
had allowed the deduction, it would have still determined that a penalty
applied to PBBM’s overstatement. Further, as the tax court concluded that no
penalty applied to underpayments resulting from the difference between
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                                    No. 17-60276
$100,000 and $0, its opinion may be construed to penalize only PBBM’s
overstatement and not its decision to claim the deduction.
      PBBM     argues    that   a   penalty   cannot    be    levied   because   the
underpayments were not “attributable to” a valuation misstatement, but
rather due to the denial of the deduction for a non-valuation reason (i.e., not
meeting the requirements of 26 U.S.C. § 170(h)). It relies on Todd v.
Commissioner, 862 F.2d 540 (5th Cir. 1988), and its progeny. It states that
United States v. Woods, 571 U.S. 31 (2013), limited the effect of Todd, but
contends that Woods does not apply when a conservation easement deduction
is denied. It points out that, in BC Ranch (a case involving conservation
easements), the Commissioner stated that Woods was not applicable.
      PBBM’s contentions are unavailing. Todd stands for the proposition that
denial of a deduction for a non-valuation reason (there, a rule regarding food
storage units) bars a valuation misstatement penalty on the corresponding
underpayments of tax, even if those underpayments are in part due to an
overvaluation of property. See 862 F.2d at 541–45. But we have recognized that
Todd and its progeny—on which PBBM relies—have been “effectively
overruled” by Woods. Chemtech Royalty Assocs., L.P. v. United States, 823 F.3d
282, 286 (5th Cir. 2016), cert. denied, 137 S. Ct. 624 (2017). In Woods, the
taxpayers’ underpayments were attributable to the artificiality of the
transactions at issue (i.e., a non-valuation reason). See 571 U.S. at 47. But this,
the Supreme Court declared, did not preclude those underpayments from also
being attributable to the taxpayers’ overstatements of their interests in those
transactions (i.e., valuation misstatements). See id.
      BC Ranch does not suggest that, generally, Woods does not apply to cases
involving conservation easements. In BC Ranch, the tax court imposed a gross
valuation misstatement penalty solely based on the finding that the
conservation easement contributions at issue were not deductible. 867 F.3d at
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559–60. The tax court did not determine the values of the conservation
easements, but instead assumed that the values were $0. See id. at 559–60 &
n.46. The tax court relied on Woods to reach its conclusion. See id. On appeal,
the appellants and Commissioner agreed that Woods did not apply in that way.
Specifically, the Commissioner did not interpret Woods to hold that “whenever
a claimed deduction is disallowed[,] the value . . . of the item deducted is zero.”
Id. at 559 n.46. Nevertheless, the Commissioner maintained that “the penalty
remains applicable because the easements themselves were grossly
overvalued.” Id. at 559. Consequently, this court vacated and remanded to the
tax court for a determination of what the values of the easements were and
what the proper penalty was, if any. See id. at 560. The situation at hand is
different. Here, the tax court made a finding on the value of the easement and
then determined the penalty. It did not automatically assume that the value
of the easement was $0 because the deduction did not meet the requirements
of 26 U.S.C. § 170(h).
      In sum, the tax court did not err in concluding that a gross valuation
misstatement penalty applied.
                                        V.
      PBBM is not entitled to a deduction for its donation of a conservation
easement because its contribution did not comply with the extinguishment
regulation. Further, the tax court did not err in its valuation of the easement
or its decision that a valuation-related penalty applied. Accordingly, we
AFFIRM the judgment of the tax court.




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