                             T.C. Memo. 2020-22



                       UNITED STATES TAX COURT



                 RAILROAD HOLDINGS, LLC,
RAILROAD LAND MANAGER, LLC, TAX MATTERS PARTNER, Petitioner
      v. COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 11838-16.                          Filed February 5, 2020.



           P executed a conservation easement deed in favor of D, a
    charitable organization. The deed provided that, if the easement were
    ever extinguished and proceeds were to be allocated between P
    and D, then D “shall be entitled to a portion of the proceeds at least
    equal to the fair market value of the Conservation Easement * * * as
    of the date of this Conservation Easement”, rather than being entitled
    to a proportionate share of the proceeds. P claimed a charitable
    contribution deduction for the contribution, and R disallowed the
    deduction.

           Held: P is not entitled to the deduction because, as a result of
    the extinguishment provision, the conservation purpose of the
    easement was not “protected in perpetuity” within the meaning of
    I.R.C. sec. 170(h)(5)(A).
                                       -2-

[*2] John P. Barrie, for petitioner.

      Candace M. Williams, for respondent.



                           MEMORANDUM OPINION


      GUSTAFSON, Judge: Petitioner in this case is Railroad Land Manager,

LLC (“RLM”), the tax matters partner (“TMP”) of Railroad Holdings, LLC

(“Railroad Holdings”). In 2012 Railroad Holdings executed a deed declaring a

conservation easement in favor of a tax-exempt charitable organization; and on its

tax return for that year--Form 1065, “U.S. Return of Partnership Income”--

Railroad Holdings claimed, pursuant to section 170(h),1 a charitable contribution

deduction of $16 million. By notice of final partnership administrative adjustment

(“FPAA”) dated March 15, 2016, the Commissioner disallowed the deduction and

determined that penalties were applicable. The Commissioner has now moved for

partial summary judgment on the issue of whether (as he contends) Railroad

Holdings was not entitled to the deduction because the easement failed to satisfy


      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (“26 U.S.C.”; “the Code”) in effect for the relevant times, and all
Rule references are to the Tax Court Rules of Practice and Procedure. Dollar
amounts are rounded, and the precise amounts are undisputed in the parties’
submissions.
                                        -3-

[*3] the requirement of section 170(h)(5)(A) that the conservation purpose of the

contribution be protected in perpetuity.2 We hold that Railroad Holdings is not

entitled to the deduction, and we will grant the Commissioner’s motion.

                                     Background

      The following facts are not in dispute.

Railroad Holdings and its property

      Railroad Holdings and its TMP, RLM, were formed and continue to exist as

limited liability companies under the laws of the State of Georgia.

      On January 28, 2008, Sage Mill Investment Property Two, Ltd. (“SMIP”),

acquired 454 acres of land (“the subject property”) in Aiken County, South

Carolina, for about $4 million.

      On December 17, 2012, SMIP transferred a 51% interest in 452 acres of the

subject property to Railroad Manager, LLC (RR Manager), a South Carolina

limited liability company wholly owned by SMIP. On that same date, the

following occurred: (1) SMIP and RR Manager each contributed their respective


      2
       Section 170(h) contains two “perpetuity” requirements--i.e., the
requirement of section 170(h)(2)(C) that there be “a restriction (granted in
perpetuity) on the use which may be made of the real property” (emphasis added),
and the requirement of section 170(h)(5)(A) that “the conservation purpose * * *
[be] protected in perpetuity” (emphasis added). The latter provision is the subject
of the Commissioner’s motion and this opinion.
                                        -4-

[*4] interests in the subject property to the newly formed Railroad Holdings;

(2) RLM, the TMP, acquired .01% of RR Manager’s interest in Railroad Holdings

in exchange for $100; (3) SMIP sold its 49% interest in Railroad Holdings to LCV

Fund XI, LLC (“LCV Fund”); (4) RR Manager sold 98.04% of its 50.99% interest

in Railroad Holdings to LCV Fund. When the dust settled, Railroad Holdings

owned the 452 acres; and Railroad Holdings was itself owned 98.99% by LCV

Fund, 1% by RR Manager, and .01% by RLM.

Deed of easement

      On December 26, 2012, Railroad Holdings contributed a conservation

easement on the 452-acre parcel of the subject property to the Southeast Regional

Land Conservancy, Inc. (“SERLC”). For purposes of this opinion, we assume (in

favor of Railroad Holdings) that SERLC was a qualified organization to receive

such a contribution and that, apart from the issue addressed here, the easement

qualified as a charitable contribution deduction.

      The deed of easement provides for the possible future circumstance in

which the easement might have to be extinguished and the property sold. As to

the distribution of proceeds in such a circumstance, the deed provides as follows

in article VI (“Miscellaneous”), part B (“Conservation Purpose”):
                                        -5-

[*5]          (2) This Conservation Easement gives rise to a real property
       right and interest immediately vested in SERLC. For purposes of this
       Conservation Easement, the fair market value of SERLC’s right and
       interest (which value shall remain constant) shall be equal to the
       difference between (a) the fair market value of the Conservation Area
       as if not burdened by this Conservation Easement and (b) the fair
       market value of the Conservation Area burdened by this Conservation
       Easement, as such values are determined as of the date of this
       Conservation Easement. If a change in conditions makes impossible
       or impractical any continued protection of the Conservation Area for
       conservation purposes, the restrictions contained herein may only be
       extinguished by judicial proceeding. Upon such proceeding, SERLC,
       upon a subsequent sale, exchange or involuntary conversion of the
       Conservation Area, shall be entitled to a portion of the proceeds at
       least equal to the fair market value of the Conservation Easement as
       provided above. SERLC shall use its share of the proceeds in a
       manner consistent with the conservation purposes set forth in the
       Recitals herein.

              (3) Whenever all or part of the Conservation Area is taken in
       exercise of eminent domain by public, corporate, or other authority so
       as to abrogate the restrictions imposed by this Conservation
       Easement, Owner and SERLC shall join in appropriate actions at the
       time of such taking to recover the full value of the taking and all
       incidental or direct damages resulting from the taking, which
       proceeds shall be divided in accordance with the proportionate value
       of SERLC’s and Owner’s interests as specified above. All expenses,
       including attorneys’ fees, incurred by Owner and SERLC in such
       action shall be paid out of the recovered proceeds to the extent not
       paid by the condemning authority.
              [Emphasis added.]

Article VI, part D (“Construction of Terms”), reads as follows:

       This Conservation Easement shall be construed to promote the
       purposes of the Conservation Easement Act (S.C. Code §27-8-10,
       et seq.), which authorizes the creation of conservation easements for
                                       -6-

[*6] purposes including those set forth in the recitals herein, and the
     conservation purposes of this Conservation Easement, including such
     purposes as are defined in Section 170(h)(4)(A) of the Internal
     Revenue Code. The parties recognize the Conservation Values, and
     have the common purpose of preserving these values. Any general
     rule of construction to the contrary notwithstanding, this
     Conservation Easement shall be liberally construed in favor of the
     grant to protect the Conservation Values and effect the policies and
     purposes of SERLC. If any provision in this Conservation Easement
     is found to be ambiguous, an interpretation consistent with its
     conservation purposes that would render the provision valid should
     be favored over any interpretation that would render it invalid. If any
     provision of this Conservation Easement is determined by final
     judgment of a court having competent jurisdiction to be invalid, such
     determination shall not have the effect of rendering the remaining
     provisions of this Conservation Easement invalid. The parties intend
     that this Conservation Easement, which is by nature and character
     primarily prohibitive (in that the Owner has restricted and limited the
     rights inherent in ownership of the Conservation Area), shall be
     construed at all times and by all parties to effectuate the conservation
     purposes of this Conservation Easement.

Tax return and examination

      On its Form 1065 for the year 2012, Railroad Holdings claimed a

$16 million deduction for this contribution. The IRS examined the return. On

March 15, 2016, the IRS mailed to Railroad Holdings and its TMP the FPAA that

set forth the IRS’s determination to disallow the full amount of Railroad Holdings’

deduction for the contribution of the easement. The FPAA explained that the

disallowance was based, in part, on the determination that the donation of the

easement is not a qualified conservation contribution under section 170(h).
                                          -7-

[*7] Tax Court proceedings

      The TMP timely filed a petition in this Court on May 17, 2016. At that

time, the principal place of business of both Railroad Holdings and the TMP was

in Georgia.

      The Commissioner has moved for partial summary judgment, and Railroad

Holdings has opposed.

                                      Discussion

I.    Summary judgment

      The purpose of summary judgment is to expedite litigation and avoid

unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988).

The Court may grant summary judgment when there is no genuine dispute as to

any material fact and 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). In deciding whether to grant summary judgment, we draw factual

inferences in the light most favorable to the non-moving party, Sundstrand Corp.

v. Commissioner, 98 T.C. at 520--in this instance, the petitioner. The critical fact

in this case is simply the text of the deed--in particular, the provision as to

distribution of proceeds in the event of extinguishment--and there is no dispute

about what the deed says.
                                          -8-

[*8] II.     Deduction for 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

fair market value of the property at the time the gift is made. See 26 C.F.R. sec.

1.170A-1(c)(1), Income Tax Regs. The Code generally restricts a taxpayer’s

charitable contribution deduction for the donation of “an interest in property

which consists of less than the taxpayer’s entire interest in such property”. Sec.

170(f)(3)(A). But there is an exception to this rule for a “qualified conservation

contribution.” Sec. 170(f)(3)(B)(iii).

       Section 170(h)(1) defines a “qualified conservation contribution” as a

contribution of a “qualified real property interest” to a “qualified organization”

(which we assume SERLC to be) “exclusively for conservation purposes.” Under

section 170(h)(2)(C), a “qualified real property interest” includes an interest in

real property that is a restriction granted in perpetuity on the use of the real

property. Section 170(h)(5)(A) provides that a contribution is not treated as

exclusively for conservation purposes unless the conservation purpose is protected

in perpetuity.
                                          -9-

[*9] III.    Proceeds from extinguishment

       The Commissioner contends that article VI.B(2) of the deed of easement,

which specifies the allocation of the proceeds from a sale of the property if the

easement is ever extinguished as a result of judicial proceedings, fails to protect

the conservation purpose in perpetuity.

       A.    The proportionality requirement

       In order to satisfy the requirement that the conservation purpose be

protected in perpetuity, any interest in the property retained by the donor must be

subject to legally enforceable restrictions that will prevent uses of the retained

interest inconsistent with the conservation purpose of the donation. 26 C.F.R.

sec. 1.170A-14(g)(1), Income Tax Regs. It is possible that an easement may be

extinguished, and in such an instance the easement would not have lasted in

perpetuity. However, the regulation provides that if an extinguishment does

occur, the donation will nonetheless be deemed to have been in perpetuity if the

proceeds of the extinguishment are paid to the donee organization and the donee

uses them for its conservation purposes. Section -14(g)(6)(ii) of the regulation

requires as follows:

       [F]or a deduction to be allowed under this section, at the time of the
       gift the donor must agree that the donation of the perpetual
       conservation restriction gives rise to a property right, immediately
                                         - 10 -

[*10] 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. * * * [T]hat proportionate value of the donee’s
      property rights shall remain constant. * * * [T]he 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 * * *. [Emphasis added.3]

      B.     Coal Property Holdings

      In Coal Property Holdings, LLC v. Commissioner, 153 T.C. __ (Oct. 28,

2019), this Court recently addressed the deductibility of a conservation

contribution where the easement deed contained a proportionality formula similar

in some respects to the formula in the easement deed at issue here. In Coal

Property the deed provided that the donee’s share of the proceeds of a judicial

extinguishment would be calculated by using the easement’s proportion of value,

as determined at the time of the gift (so far, so good), but multiplying it not against

the property’s total fair market value at the time of sale but rather against the

property’s fair market value at the time of sale “minus any increase in value after

the date of th[e] grant attributable to improvements”. Id. at __ (slip op. at 9)

      3
        The regulation continues: “unless state law provides that the donor is
entitled to the full proceeds from the conversion without regard to the terms of the
prior perpetual conservation restriction.” 26 C.F.R. sec. 1.170A-14(g)(6)(ii),
Income Tax Regs. In this case neither party contends that Railroad Holdings
would be entitled to the full proceeds under applicable State law.
                                        - 11 -

[*11] (emphasis added). We held that this subtraction, which diminishes the

donee’s share of the proceeds, is not permitted. Rather, under the regulation, a

“donee * * * must be entitled to a portion of the proceeds at least equal to that

proportionate value of the perpetual conservation restriction”; or else this limited

exception to the perpetual use restriction of the conservation easement is not

satisfied, and the donor has failed to meet the requirement that the conservation

purpose of the contribution be protected in perpetuity. 26 C.F.R. sec. 1.170A-

14(g)(6)(ii). The donee’s entitlement to a proportionate share of the

extinguishment proceeds must be absolute. See Coal Property Holdings, LLC v.

Commissioner, 153 T.C. at __ (slip op. at 18) (citing Carroll v. Commissioner, 146

T.C. 196, 212 (2016)).

      C.     Analysis

      With different text, the deed in this case bears the same essential flaw as the

deed in Coal Property: Though the deed incorporates from the regulation the

phrase “proportionate value”, the deed does not create a proportion or fraction that

represents the donee’s share of the property right, and hence a corresponding

fraction of proceeds to which the donee is perpetually entitled. See PBBM-Rose

Hill, Ltd. v. Commissioner, 900 F.3d 193, 205-206 (5th Cir. 2018). Rather, the

deed determines instead a “proportionate value * * * at the time of the gift”--
                                        - 12 -

[*12] meaning a dollar value that “shall remain constant”--and guarantees only

that “constant” amount (i.e., that fixed dollar amount) for the donee. The defect

can be illustrated as follows:

      If the easement contributed by Railroad Holdings’ deed were, at the time of

the contribution, worth 10% of the value of a $10 million property, then the

“proportionate value” of the easement (as the deed uses that term) would be

$1 million, and that dollar value--rather than the fraction of value it did represent--

“shall remain constant”. Thus, if a court extinguished the easement many years

later after the property had appreciated to $20 million, the donee’s share of

extinguishment proceeds would be not 10% of $20 million (i.e., the fractional

share represented by $2 million) but rather the “constant” $1 million. The

regulation requires that the donee “must be entitled to a portion of the proceeds at

least equal to that proportionate value” (in this example, 10% of $20 million, or

$2 million), 26 C.F.R. sec. 1.170A-14(g)(6)(ii), but Railroad Holdings’ deed

would give the donee only “at least” a constant 10% of the $10 million value “as

of the date of” the contribution, or $1 million. (As we explain below in Part IV.A,

an entitlement to an amount that is “at least” a fixed value is an entitlement only to

no less than that value.)
                                       - 13 -

[*13] The deed in Coal Property achieved an impermissible diminution in the

donee’s entitlement by expressly subtracting the increase in value that was

attributable to subsequent improvements. The deed here achieves such a

diminution by applying its formula to a date-of-gift value that would exclude

subsequent appreciation. Neither of these approaches complies with the

regulation.

      In this case SERLC will watch its proportion of potential extinguishment

proceeds shrink over the years if the underlying property appreciates. This

shrinking contribution cannot be said to be “perpetual” within the meaning of the

regulation.

IV.   Petitioner’s arguments

      Petitioner offers three arguments to dispute this application of the regulation

to its deed. None has merit.

      A.      “At least”

      Petitioner argues:

      Section B(2) does not limit, or put a cap on, the amount that SERLC
      would receive, but rather clearly and unambiguously provides that
      SERLC “shall be entitled to a portion of the proceeds at least equal to
      the fair market value of this Conservation Easement”.

          In plain language, the proceeds will first be distributed to make
      SERLC whole, to provide to SERLC all of the proceeds equal to the
                                          - 14 -

[*14] fair market value of the Conservation Easement determined as of the
      date of the Conservation Easement. However, under the specific
      terms of Section B(2), SERLC is not limited to that amount. If the
      proceeds exceed the values determined as of the date of the
      Conservation Easement, then the excess will be split based on the
      ratio of the value of the Conservation Easement as of the date of the
      donation of the Conservation Easement over the value of the
      Conservation Area without the burden of the Conservation Easement
      as of the date of the donation of the Conservation Easement.

The totality of the “plain language” and “specific terms” on which this contention

rests is the single phrase “at least”, and that phrase will not bear the weight that

petitioner’s argument must put on it. Petitioner’s explanation of “split[ting]”

“proceeds [that] exceed” the date-of-donation values is an invention with no basis

in the text of the deed.

      The regulation sets a minimum for the donee’s participation in

extinguishment proceeds and then, using the phrase “at least”, makes it explicit

that a deed may be more generous to the donee and still comply.4 But a deed that

      4
       The minimum value set by the regulation is a proportion of the proceeds
determined by the ratio of the fair market value of the easement at the time of
donation to the fair market value of the property at the time of the donation. If the
property depreciated over time, then it is conceivable that the minimum to which
the donee would be entitled upon extinguishment would actually be a lower value.
Only in such an unlikely circumstance would this deed, as petitioner argues,
provide a minimum amount to the donee that is higher than the regulation requires.
But because the deed also allows for the possibility that the donee would receive a
value that is less than the ratio set by the regulation, it fails to meet the
proportionality requirement, which must be strictly construed. See Carroll v.
                                                                            (continued...)
                                         - 15 -

[*15] provides for the donee a share of proceeds that may be less than the

minimum cannot comply by adding “at least” to its deficient formula. The donee

must obtain through the deed a “property right” that includes a proportionate share

of proceeds. If the donee’s only right under the deed is to receive “at least” a

deficient share, with a hope that there might be more, then the deed does not

comply with the regulation.

      B.     The donee’s declaration

      Petitioner submits a declaration of an officer of SERLC (whose personnel

presumably composed the pertinent language of the deed); and that declaration,

petitioner says, “confirms the intent of SERLC that its conservation deeds of

easement be in full compliance with Section 170(h) of the Code and Section

1.170A-14, Income Tax Regs., and specifically, Section 170(h)(5)(A) and Section

[1.]170A-14(g)(6), Income Tax Regs.”

      We assume for purposes of this opinion that this declaration contains an

accurate statement of SERLC’s intent. But even if we also assume the unstated

(and unsubstantiated) further and more relevant proposition that this was not only

the donee’s intent but also petitioner’s intent, the stated intent does not


      4
     (...continued)
Commissioner, 146 T.C. 196, 212 (2016).
                                        - 16 -

[*16] compensate for the defect in the deed. If petitioner and SERLC intended to

compose a deed that complies with the regulations under section 170, then they

failed to accomplish their intent. Under the law, they needed for the deed to

convey to SERLC a certain property right; and if their deed did not do so by its

explicit terms, then their general intention to comply with section 170(h) and the

regulations does not make up the difference. Whatever they intended, petitioner

did not give and SERLC did not receive the necessary property right.

      Moreover, the declaration is broad and general and does not actually

suggest that the parties intended a division of proceeds other than the division for

which the deed actually provides. The declaration does not allege an error or

accident in the drafting. Petitioner does not argue that State law permits us to

consult parol evidence to determine the meaning of terms in the deed, nor does

petitioner proffer such parol evidence of intended meanings. The declaration as to

intent does not affect the outcome here.

      C.     “Construction of Terms”

      Article VI.D of the deed provides that the deed “shall be construed to

promote * * * the conservation purposes of this Conservation Easement, including

such purposes as are defined in Section 170(h)(4)(A)”. See supra pp. 5-6.

Petitioner insists on the importance of part D, criticizes the Commissioner for
                                        - 17 -

[*17] failing to include it in his memorandum, and quotes part D with this portion

underlined:

      Any general rule of construction to the contrary notwithstanding, this
      Conservation Easement shall be liberally construed in favor of the
      grant to protect the Conservation Values and effect the policies and
      purposes of SERLC. If any provision of this Conservation Easement
      is found to be ambiguous, an interpretation consistent with its
      conservation purposes that would render the provision valid should
      be favored over any interpretation that would render it invalid. * * *

However, petitioner does not explain how this provision should affect our

interpretation of the extinguishment provision and does not give any other

commentary on this provision. In fact, part D of article VI of the deed has no

effect on the outcome of this case.

      First, in calling for the deed to be “construed to promote * * * the

conservation purposes of this Conservation Easement, including such purposes as

are defined in Section 170(h)(4)(A)”, part D refers to paragraph (4)(A) (which

defines “conservation purpose”) and not paragraph (5)(A) (which states the

“protect[ion] in perpetuity” requirement now at issue).

      Second, part D proposes a cure in the case of “ambiguous” terms, whereas

part B(2) is quite clear in establishing its formula for allocating extinguishment

proceeds.
                                        - 18 -

[*18] Third, the cure that part D proposes is to result in “an interpretation * * *

that would render the provision [of the conservation easement] valid”. But the

validity of the conservation easement per se is not at issue here. We assume that

the easement was valid and that it conferred on SERLC the rights that are stated in

the deed. The cure that petitioner needs (but cannot obtain) is not for the validity

of the easement but rather for the non-deductibility of its contribution.

      Fourth, if (contrary to our three points above) this language in part D was

actually a saving clause that purported to cure the proceeds formula, then it would

be unenforceable and could not salvage what would otherwise be a failure of the

formula to provide SERLC with the proportional value of extinguishment

proceeds to which it is entitled. See Coal Property Holdings, LLC v.

Commissioner, 153 T.C. at __ (slip op. at 27) (citing Belk v. Commissioner, 774

F.3d 221, 229 (4th Cir. 2014), aff’g 140 T.C. 1 (2013)). A donor cannot reserve in

an easement deed a right that section 170(h) does not permit (such as a right to

more than his share of extinguishment proceeds) but then save his charitable

contribution by mentioning the rule he has violated and calling for that rule to kick

in and save the day if his violation subsequently comes to light.

      Part B(2) of article VI of the deed contains an unambiguous expression of

the formula to apply to the proceeds of an extinguishment. If the terms of
                                       - 19 -

[*19] part B(2) had never come to light in a tax proceeding, and if later the

easement had ever been judicially extinguished, there is no reason to suppose that

a court distributing proceeds would have overruled the express terms of part B(2).

                                    Conclusion

      The conservation purpose of the easement that Railroad Holdings granted to

SERLC was not “protected in perpetuity” within the meaning of section

170(h)(5)(A). For this reason we find that the Commissioner properly denied the

deduction.

      To reflect the foregoing,


                                                      An appropriate order will be

                                                issued.
