                               T.C. Memo. 2020-94



                         UNITED STATES TAX COURT



   LUMPKIN ONE FIVE SIX, LLC, 156 PARTNERS, LLC, TAX MATTERS
                      PARTNER, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 191-18.                        Filed June 23, 2020.



      David Mace Wooldridge, Ronald A. Levitt, Gregory P. Rhodes, and

Michelle A. Levin, for petitioner.

      Christopher A. Pavilonis, A. Gary Begun, Jeremy D. Cameron, and Denise

A. Diloreto, for respondent.



                           MEMORANDUM OPINION


      KERRIGAN, Judge: This case is before the Court on the parties’ cross-

motions for partial summary judgment. On November 9, 2017, respondent issued
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[*2] a notice of final partnership administrative adjustment (FPAA) for tax year

2012 to 156 Partners, LLC, as tax matters partner for Lumpkin One Five Six, LLC

(Lumpkin). In the FPAA respondent disallowed a $2,483,000 deduction for a

noncash charitable contribution and asserted a gross valuation misstatement

penalty pursuant to section 6662(h), or in the alternative, a penalty pursuant to

section 6662(a).1

      Respondent contends that the extinguishment clause in Lumpkin’s deed of

conservation easement violates the requirements of section 1.170A-14(g)(6)(ii),

Income Tax Regs. Respondent further contends that the deed’s inclusion of a

right to designate an acceptable development-area homesite violates section

170(h)(2)(C) and section 1.170A-14(g)(1), Income Tax Regs. Petitioner, by

contrast, contends that the deed meets the requirements of section 170(h)(5)

because the deed provides that the conservation purposes are protected in

perpetuity. Petitioner further contends that respondent’s interpretation of the

regulation is incorrect or alternatively, if respondent’s interpretation is found to be

correct, that the regulation is invalid.


      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
                                        -3-

[*3]                                Background

       There is no dispute as to the following facts drawn from the parties’ motions

papers and attached declarations and exhibits. When the petition was filed,

Lumpkin’s principal place of business was in Georgia.

       On December 1, 2011, George L. Frady transferred a 156.43-acre tract of

land in Lumpkin County, Georgia (property), to Lumpkin, a Georgia limited

liability company. Lumpkin reported on its Form 1065, U.S. Return of Partnership

Income, for tax year 2012 that Mr. Frady sold the property to Lumpkin for

$319,990.

       On December 29, 2012, Lumpkin conveyed a deed of easement to the

Atlantic Coast Conservancy, Inc. (ACC), a Georgia nonprofit corporation. ACC

was a “qualified organization” for purposes of section 170(h)(3). The deed was

recorded in Lumpkin County on December 31, 2012. The easement covers 154.93

of 156.43 acres that Mr. Frady transferred to Lumpkin (easement area).

       Lumpkin claimed a $2,483,000 charitable contribution deduction for its

contribution of the conservation easement to ACC on its 2012 Form 1065.

Lumpkin attached to its partnership return Form 8283, Noncash Charitable

Contributions, which included a supplemental statement that listed the appraised

fair market value (FMV) of the unencumbered property as $2,711,000.
                                        -4-

[*4] The deed includes provisions for the distribution of proceeds in the event of

extinguishment or condemnation. Section 15.1 of the deed provides that,

following a judicial extinguishment, the donee shall be entitled to a portion of the

proceeds “at least equal to the perpetual conservation restriction’s proportionate

value unless otherwise provided by Georgia law at that time.” The deed provides:

“This easement constitutes a real property interest immediately vested in

Conservancy.” Section 15.2 explains the stipulation the parties agreed to

regarding proceeds. This section provides:

      [T]his Easement shall have at the time of Extinguishment a fair
      market value determined by multiplying the then fair market value of
      the Easement Area unencumbered by the Easement (minus any
      increase in value after the date of this grant attributable to
      improvements) by the ratio of the value of the Easement at the time of
      this grant to the value of the Easement Area, without deduction for
      the value of the Easement, at the time of this grant.

      The deed divides the easement area into three principal areas: (1) Resource

Protection Area (RPA), (2) Acceptable Development Area (ADA), and

(3) Agricultural Area (AA), any portion of the easement area that is not ADA or

the RPA. The RPA is the area surrounding Hurricane Creek. The deed allows for

three ADAs for the following purposes: a homesite, a main access road, and a

secondary access road.
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[*5] Section 5.1 of the deed prohibits “the change, disturbance, alteration, or

impairment of the relatively natural habitat for plants, wildlife, or similar

ecosystems within and upon the Easement Area, except as provided herein in the

* * * Acceptable Development Area.” Section 5.2 prohibits “the construction

and/or placement of any building structures, permanent camping accommodations,

mobile homes, or billboards, except as expressly provided herein in the

Agricultural Area”.

      In the deed Lumpkin reserved the right to have an ADA homesite placed in

the AA with 30 day’s prior written notice to the ACC. The deed allows Lumpkin

to use up to 1-1/2 acres of AA as an ADA to construct a homesite including a

single-family dwelling and accessory buildings and improvements such as

garages, carports, and storage sheds. ACC’s permission is not required to exercise

any of these rights.

                                      Discussion

      Summary judgment may be granted where the pleadings and other 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. Rule 121(b); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The

burden is on the moving party to demonstrate that there is no genuine dispute as to
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[*6] any material fact and that the party is entitled to judgment as a matter of law.

FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74-75 (2001). Both parties

have moved for partial summary judgment, and they agree that there exist no

genuine disputes of material fact regarding the questions they have asked us to

decide. After reviewing the pleadings and the motions with accompanying

exhibits and declarations, we conclude that a decision may be rendered as a matter

of law.

I.    Qualified Conservation Contribution

      Section 170(a)(1) allows a deduction for any charitable contribution made

within the taxable year. If the taxpayer makes a charitable contribution of

property other than money, the amount of the contribution is generally equal to the

FMV of the property at the time the gift is made. See sec. 1.170A-1(c)(1), Income

Tax Regs.

      The Code generally restricts a taxpayer’s charitable contribution deduction

for the donation of “an interest in property which consists of less than the

taxpayer’s entire interest in such property”. Sec. 170(f)(3)(A). However, there is

an exception to this rule for a “qualified conservation contribution.” Sec.

170(f)(3)(B)(iii). This exception applies to a “qualified conservation contribution”
                                         -7-

[*7] which is a contribution of a qualified real property interest to a qualified

organization 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. This

results in the “perpetuity” requirement being satisfied because the sale proceeds

replace the easement as an asset deployed by the donee “exclusively for

conservation purposes”. Sec. 170(h)(5)(A); see also Oakbrook Land Holdings,

LLC v. Commissioner, 154 T.C. ___, ___ (slip op. at 7) (May 12, 2020).

      Section 1.170A-14(g)(6)(ii), Income Tax Regs., defines “Proceeds”, as

follows:
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[*8] [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
     * * *.

      Neither party contends that Lumpkin is entitled to the full proceeds pursuant

to Georgia law.

      To meet the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.

(proceeds regulation), the deed must guarantee that the donee will receive “a

proportionate share of extinguishment proceeds”. Carroll v. Commissioner, 146

T.C. 196, 219 (2016); see PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193,

207 (5th Cir. 2018) (“[T]he ‘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.”).
                                        -9-

[*9] Respondent contends that the deed violates the proceeds regulation because

it provides that the portion of proceeds required to be allocated to the donee in the

event of an extinguishment shall be reduced by the value of improvements to the

land made by Lumpkin after the grant of the easement. Petitioner contends that

the deed satisfies the regulation because proceeds attributable to the value of

improvements made by the landowner after the donation of the conservation

easement are not immediately vested and are not part of the easement granted to

the donee.

      The proceeds regulation specifically states that the donee “must be entitled

to a portion of the proceeds at least equal to that proportionate value”. Sec.

1.170A-14(g)(6)(ii), Income Tax Regs. The word “must” clearly requires that the

donee receive at least the proportionate value. PBBM-Rose Hill, Ltd. v.

Commissioner, 900 F.3d at 208. The regulation does not permit that “any amount,

including that attributable to improvements, may be subtracted out” of the

proceeds. Id.; see also Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126,

138 (2019). Since the deed reduces the donee’s share of the proceeds by reducing

the FMV of the unencumbered property at the time of sale by any increase in value

attributable to posteasement improvements before applying the proportionate

distribution percentages, the conservation purpose is not protected in perpetuity.
                                        - 10 -

[*10] See sec. 170(h)(5)(A); sec. 1.170A-14(g)(6)(ii), Income Tax Regs.; see also

PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d at 208; Coal Prop. Holdings,

LLC v. Commissioner, 153 T.C. at 139.

      Respondent also argues that the easement is not a qualified real property

interest because the deed reserves the right for Lumpkin or a subsequent fee

simple landowner to redesignate an unidentified portion of the AA as an ADA.

We have established above that the contribution does not qualify under section

170 as a “qualified conservation contribution” because the deed’s extinguishment

clause fails to meet the requirements of the proceeds regulation. Accordingly, we

do not need to address this issue.

II.   Validity of the Proceeds Regulation

      Petitioner contends that respondent’s interpretation of the proceeds

regulation is incorrect. We have decided that respondent’s interpretation is correct

and that the deed does not comply with the regulation. Petitioner further contends

that if respondent’s interpretation is correct, then the proceeds regulation is

arbitrary and capricious and is therefore invalid.

      When considering whether a regulation is arbitrary and capricious, we

generally employ the two-part inquiry established by Chevron, U.S.A., Inc. v. Nat.

Res. Def. Council, Inc., 467 U.S. 837 (1984). The first part is to inquire “whether
                                        - 11 -

[*11] Congress has directly spoken to the precise question at issue.” Id. at 842. If

the intent of Congress is clear, there is no further inquiry. Id. Pursuant to section

170(h)(5)(A) the conservation purpose must be “protected in perpetuity.”

However, Congress did not address specifically the allocation of extinguishment

proceeds. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___

(slip op. at 26).

       We now consider whether the proceeds regulation “is based on a

permissible construction of the statute.” See Chevron, 467 U.S. at 843. Since the

statute is silent, we must give deference to the interpretation embodied in the

agency’s regulation unless it is “arbitrary, capricious, or manifestly contrary to the

statute.” Id. at 844; see United States v. Mead Corp., 533 U.S. 218, 227 (2001).

We will uphold the proceeds regulation if it represents a “reasonable

interpretation” of the law Congress enacted. See Chevron, 467 U.S. at 844; see

also SIH Partners LLLP v. Commissioner, 150 T.C. 28, 50 (2018), aff’d, 923 F.3d

296 (3d Cir. 2019).

       Petitioner does not challenge the validity of the proceeds regulation in its

entirety. Rather, petitioner contests the regulation on two grounds: (1) the

requirement that an easement deed allocate the economic benefit of subsequent

improvements made (and paid for) by the landowner to the donee upon
                                        - 12 -

[*12] termination of the easement lacks a rational basis and (2) the “proportionate

value” provision of the proceeds regulation is ambiguous.

       Petitioner contends that there is no rational basis for requiring an easement

deed to share with the donee the economic benefit of subsequent improvements

made and funded by a landowner because the donee does not contribute toward

the cost of the improvements and the landowner does not receive a deduction for

any such improvements. Petitioner argues further that it is even more irrational to

require a subsequent landowner to forfeit to the land trust a substantial portion of

the proceeds attributable to the improvements made and owned by the subsequent

owner despite the fact that the subsequent owner did not donate the easement to

the land trust or receive a charitable contribution deduction. It asserts that such a

result is illogical and inconsistent with the purpose of the proceeds regulation.

       The regulation does not address donor improvements. The absence of a

provision addressing donor improvements does not render the regulation

“arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 U.S.

at 844; see also Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___

(slip op. at 29).

       In Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___ (slip

op. at 29), we reasoned that Treasury’s goal in prescribing the proceeds regulation
                                        - 13 -

[*13] was to ensure satisfaction of the statute’s “protected in perpetuity”

requirement. This requirement is deemed satisfied under Treasury’s interpretation

of the proceeds regulation because the sale proceeds replace the easement as an

asset employed by the donee “exclusively for conservation purposes”. Sec.

170(h)(5)(A); see also Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C.

at ___ (slip op. at 8). There may be scenarios, such as a decline in land values, in

which reducing the donee’s proceeds by the value of landowner improvements

would frustrate the goal of the sales proceeds’ replacing the value of the easement.

Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___ (slip op. at 29).

      We stated in Oakbrook that “Treasury’s overarching goal was to guarantee

that the donee, upon judicial extinguishment of the easement, would receive the

full share of proceeds to which it was entitled.” Id. at ___ (slip op. at 31). We

concluded that Treasury exercised reasoned judgment in its effort to reach the goal

of section 170(h)(5)(A). Id.

      Petitioner also contends that the “proportionate value” provision of the

proceeds regulation is ambiguous. Pursuant to section 1.170A-14(g)(6)(ii),

Income Tax Regs., the donee’s share is determined by multiplying the sale

proceeds by a fraction, the numerator of which is the FMV of the easement at the

time it was granted, and the denominator of which is the FMV of the entire
                                        - 14 -

[*14] property at that time. In Oakbrook Land Holdings, LLC v. Commissioner,

154 T.C. at ___ (slip op. at 28), we concluded that the proceeds regulation’s

“proportionate value” approach is not “arbitrary, capricious, or manifestly contrary

to the statute” as examined under the two-part inquiry.

III.   Conclusion

       The deed granting the conservation easement reduces the donee’s share of

the proceeds in the event of extinguishment by the value of improvements (if any)

made by the donor. Accordingly, petitioner has not satisfied the perpetuity

requirement of section 170(h)(5)(A). Furthermore, we reject petitioner’s challenge

to the validity of the proceeds regulation and find that the construction of section

170(h)(5) as set forth in section 1.170A-14(g)(6), Income Tax Regs., is valid under

Chevron. See Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. at ___

(slip op. at 25, 28-33).

       Accordingly, we will grant respondent’s motion for partial summary

judgment and deny petitioner’s cross-motion for partial summary judgment. We

have considered all of the arguments made by the parties, and to the extent not

mentioned above, we conclude that they are moot, irrelevant, or without merit.
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[*15] To reflect the foregoing,


                                           An appropriate order will be issued.
