9/18/2018. Federal Tax Issues. Agenda. CE Holder Approval Provisions. Handouts and Rally App. The Latest and Greatest

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1 9/18/2018 Agenda Federal Tax Issues The Latest and Greatest Rob Levin, Jessica Jay, Steve Small October 12/13, 2018 CE Holder Approval Provisions (10 Minutes) Public Recreation Test in Deductible CE (5 Minutes) Habitat Test in Deductible CE (5 Minutes) Valuation (5 Minutes) Quid Pro Quo Cases (10 Minutes) Tax Credit Limit Proposed Regulation (5 Minutes) Amendment Law Update (5 Minutes) Syndication Update (10 Minutes) Lessee as Donor (5 Minutes) CE Termination Proceeds Provision (15 Minutes) Q&A (15 Minutes) #Rally #RALLY2018 LAND TRUST ALLIANCE Handouts and Rally App CE Holder Approval Provisions Handouts > Termination Proceeds Examples > PowerPoint Slides Rally App > Alliance Letter to Karin Gross on Termination Proceeds > Case decisions/opinions Hoffman Properties, II, L.P. v. Commissioner, No > Three unpublished Tax Court orders finding that default approval provisions in conservation/preservation easements violate perpetuity requirement. > Historic preservation façade easement on building in Cleveland. > Disputed provision: If AAHP fails to expressly reject Hoffman's proposal within 45 days of receiving such, the easement provides Hoffman with automatic approval to "undertake the proposed activity in accordance with the plan or request submitted". 3 #RALLY2018 LAND TRUST ALLIANCE 4 #RALLY2018 LAND TRUST ALLIANCE 1

2 9/18/2018 CE Holder Approval Provisions Hoffman Properties, II, L.P. v. Commissioner, No o Decision default approval provision violated prohibition and preservation requirement of 170(h)(4)(B)(i). o Decision 1 same provision also violated exclusively for conservation purposes requirement of 170(h)(5) o Decision 2 Denied motion to reconsider decision. CE Holder Approval Provisions Hoffman Properties, II, L.P. v. Commissioner, No > Tax Court: Default approval provision was categorical. Landowner had no affirmative duty to self-evaluate its request against the regulatory standards. Even blatantly inconsistent request could sneak through if Holder wasn t paying attention. 5 #RALLY2018 LAND TRUST ALLIANCE 6 #RALLY2018 LAND TRUST ALLIANCE CE Holder Approval Provisions Alternate Approval Provision 1 > In the event that HOLDER fails to respond to GRANTOR s request within sixty (60) days, GRANTOR may proceed with the requested activity only if the following conditions are met: (a) HOLDER provided acknowledgment of receipt of the original request; (b) GRANTOR provides a separate written notice of its intent to proceed with the requested activity; (c) GRANTOR does not proceed with the requested activity until five (5) business days after providing such separate written notice of its intent to proceed; (d) GRANTOR does not receive any objection from HOLDER of GRANTOR s separate written notice of its intent to proceed; and (e) the activity in question is not contrary to any express or implied restriction in the Conservation Easement. CE Holder Approval Provisions Alternate Approval Provision 2 > Holder s failure to respond within the sixty (60) day period shall be deemed a constructive denial, and Owner may seek relief from the courts and recover reasonable fees and costs if a court rules the constructive denial unjustified. 7 #RALLY2018 LAND TRUST ALLIANCE 8 #RALLY2018 LAND TRUST ALLIANCE 2

3 9/18/2018 Public Recreational Access in Deductible CE I.R.C. 170(h)(4)(A)(i) > preservation of land areas for outdoor recreation by, or the education of, the general public Treas. Reg A-14(d)(2)(ii) > substantial and regular use of the general public Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > CE on golf course in gated community. Tax Court ruled that CE didn t meet any of conservation purposes tests (open space, habitat, or public recreation). Taxpayer appealed on public recreation issue. > 27-hole golf course at time of CE donation. But after donation HOA purchased property and converted 9 holes into park for use of subdivision lot owners. Public allowed to pay to play golf, but not allowed to access park. 9 #RALLY2018 LAND TRUST ALLIANCE 10 #RALLY2018 LAND TRUST ALLIANCE Public Recreational Access in Deductible CE Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Issue 1 Should the degree of public access be evaluated only according to the four corners of the CE, or also take into account subsequent actions by landowner? > 5 th Circuit held that in general, courts should look only to the CE itself. Triangulated from other subsections of CE regs that referred to the terms of the easement or at the time of the gift. Exception where donor knew or should have known that public access would not be at the level provided for in the CE. 11 #RALLY2018 LAND TRUST ALLIANCE 12 #RALLY2018 LAND TRUST ALLIANCE 3

4 9/18/2018 Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Issue 2 - Contradictory provisions in CE about public access. Some said no public access, others said substantial and regular public access. Which prevailed? o 5 th Circuit said provisions allowing public access were more specific than the provisions precluding public access. o But how specific were they? Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Did the 5 th Circuit get the public access issues right? > What is the Holder s obligation to enforce the public access terms of the CE? 5 th Circuit doesn t really address that question. > If two-thirds of a large protected property is open for public recreational access but one-third is placed off limits, should that disqualify a deduction? > Should a pay-to-play golf course be considered accessible for public recreation? ($35 to play 18 holes) 13 #RALLY2018 LAND TRUST ALLIANCE 14 #RALLY2018 LAND TRUST ALLIANCE Habitat Test in Deductible CE Habitat Test in Deductible CE Champions Retreat Golf Founders, LLC v. Commissioner, 2018 T.C. 146 (U.S.T.C. Sept. 10, 2018) > Another golf course habitat case. See Atkinson, PBBM-Rose Hill, and Kiva Dunes (sort of) > Another NALT case (sixth so far) > All kinds of red flags o o o Syndicated deal Put together by accountant to rescue failing golf club High appraisal ($10M) 15 #RALLY2018 LAND TRUST ALLIANCE 16 #RALLY2018 LAND TRUST ALLIANCE 4

5 9/18/2018 Habitat Test in Deductible CE Champions Retreat Golf Founders, LLC v. Commissioner > Good news: Rare, threatened, or endangered species not limited to federal Endangered Species Act > But: not a sufficient presence of such species to meet habitat test > Extensive analysis of bird species. Conclusion: No highly threatened birds, only more common ones. > Southern fox squirrel in decline but not threatened > One arguably threatened plant species, but only found in small portion of Protected Property (17%), and pesticides used on golf course could harm it. Habitat Test in Deductible CE Champions Retreat Golf Founders, LLC v. Commissioner > Contributes to ecological viability or nearby park or preserve o o o Sumter National Forest was across river from Protected Property No go because PP was not a natural area Pesticides Golf course vegetation management Same holding as in Atkinson 17 #RALLY2018 LAND TRUST ALLIANCE 18 #RALLY2018 LAND TRUST ALLIANCE Habitat Test in Deductible CE How much do these golf course habitat cases threaten good CE projects? > Not at all? Marginally? Seriously? > Tips going forward: o Don t mail it in on habitat. (Especially if open space, recreation, historic preservation are also questionable.) o Apply a meaningful pesticides standard, if at all possible. o If deduction is important and habitat is best case, consider tailoring CE s to avoid marginal or un-natural habitats. o Don t worry too much (yet) these are all golf course cases. Remember Butler CE Valuation PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Taxpayer s appraiser found Before value of $15,680,000 o Attorney s letter opining on right to develop commercially was key to Taxpayer appraisal s Extraordinary Assumption > IRS found Before value of $2,400,000 > Tax Court sided with IRS. > Fifth Circuit affirmed. 19 #RALLY2018 LAND TRUST ALLIANCE 20 #RALLY2018 LAND TRUST ALLIANCE 5

6 9/18/2018 CE Valuation Key Issues: Highest and Best Use When is additional development reasonable and probable? > As of right vs. requiring public review and approval (e.g., rezoning) > How to factor in the strength of neighborhood opposition? > How to weigh the validity of a privately granted use restriction? The tells in PBBM > Taxpayer sold the property for $2.3 million to the property owners association. > Attorney who wrote letter was not called to testify Quid Pro Quo in Charitable Donation/CEs Quid Pro Quo Cases o Wendell Falls o Triumph Mixed Use 21 #RALLY2018 LAND TRUST ALLIANCE 22 #RALLY2018 LAND TRUST ALLIANCE Quid Pro Quo Conservation Easement Wendell Falls Development, LLC v. Commissioner, T.C. Memo (U.S.T.C. April 4, 2018), (NC), (Motion for reconsideration pending) > LLC owns 1,280 acres; plans mixed-use community, 125-acre park to County, CE to land trust > Town approves PUD on 1,280 acres with 125 acres designated as park, states no preferential zoning in return > LLC agrees to sell 125 acres to County at appraised value with condition that LLC convey CE > LLC conveys CE on 125 acres to land trust, sells land to County > LLC claims charitable deduction of $4,818,000 based on appraisal of CE > IRS disallows on valuation and lack of donative intent, with penalties Quid Pro Quo Conservation Easement > Tax Court denies deduction on summary judgment: o Agrees with IRS that LLC conveyed CE with expectation of receiving substantial benefit of increased value to residential lots located near conserved land o Finds CE had zero value because highest and best use of 125 acres was as a park o o Finds enhanced value to LLC s abutting property outweighed any value of the easement Declines to assess any penalties applying reasonable cause and good faith exception in I.R.C. 6664(c)(1) 23 #RALLY2018 LAND TRUST ALLIANCE 24 #RALLY2018 LAND TRUST ALLIANCE 6

7 9/18/2018 Quid Pro Quo Conservation Easement Court s reasoning blended several different federal tax concepts > Substantial benefits analysis really donative intent and quid pro quo principles > Substantial benefits analysis cursory, with facts much less damning to LLC than other cases (Pollard v. Commissioner or Costello v. Commissioner) > Muddled enhancement issue, relevant only to valuation and not to deductibility analysis > Accepted without detailed analysis that enhancement effect exceeded value of CE Quid Pro Quo Charitable Donation Land Triumph Mixed Use Investments III, LLC v. Commissioner, T.C. Memo (U.S.T.C. May 15, 2018), (UT), appeal period open > LLC owns 2,800 acres of land, seeks to develop planned community for which 10% of land must remain undeveloped open space > City approves plans allowing 3,500 residential units; amends to allow additional 3,500 units with 1,000 acres of open space to be given to City > Final agreement of 747 acres open space to City and reduction by 2000 units > State transfer is voluntary charitable donation made without consideration, City s approval of plans was in no way contingent upon transfer of property. > LLC claims $11,040,000 charitable contribution deduction for land transfer > The IRS challenges the deduction in its entirety 25 #RALLY2018 LAND TRUST ALLIANCE 26 #RALLY2018 LAND TRUST ALLIANCE Quid Pro Quo Charitable Donation Land Proposed Fed. Regulation for State Tax Credits Tax Court denies deduction in entirety: > Finds LLC transferred 747 acres and development credits as quid pro quo exchange for current approval of concept plan and future approval of area plan > Finds despite provisions of agreement characterizing transfers as voluntary donations, external features of transaction evidenced by back and forth negotiations between City and LLC demonstrated a clear quid pro quo arrangement > Denied in its entirety because LLC failed to place any value on consideration of approvals following Pollard v. Commissioner and Seventeen Seventy Sherman St., LLC v. Commissioner *Takeaway--taxpayer cannot paper over quid pro quo arrangement with a purported donation agreement; proof is in the pudding Outgrowth of 2017 tax law $10,000-a-year cap on deductions for state and local taxes (SALT) > Response to NY and NJ work around tax credits > Requires federal deduction reduction by amount of state tax credit, unless tax credit is 15% or less of contribution > Effective August 27, 2018 with 45 day comment period > Relies on quid pro quo > Negative impact on conservation tax credits (CO, VA) > Potential coordinated response: o o o Beyond scope of original law Tax credits are not quid pro quo Grandfather/exclude conservation tax credits 27 #RALLY2018 LAND TRUST ALLIANCE 28 #RALLY2018 LAND TRUST ALLIANCE 7

8 9/18/2018 Amendment Law Update No Movement in Legal Cases > Three federal tax cases where IRS challenges amendment clauses as non-perpetual Sells, et al., v. Commissioner (Alliance amicus granted), Kumar, et al., v. Commissioner, (Alliance amicus granted), Pine Mountain Preserve, LLLP v. Commissioner, (Alliance amicus denied) No Movement in Regulation > IRS Notice Request for Comments to Priority Guidance Plan for 170(h) charitable contributions of conservation easements (Alliance Position Paper and Transmittal Letter) Amendment Law Update Yes Movement on Drafting Guidance: Alliance checklist of 8 elements: 1. Perpetual CE; intent to protect conservation purposes perpetually 2. Acknowledge natural conditions, landscape, consistent uses, economic and cultural conditions and technologies change over time 3. Full disclosure nothing requires Grantor/Grantee to modify CE 4. Grantee sole discretion for all determinations 5. Incorporate all Amendment Principles 6. Conform to all Grantee policies in effect at time of amendment 7. Approval dictated by state law, and U.S. Tax Code if donated 8. Discretionary approval, waiver and consent can be encompassed 29 #RALLY2018 LAND TRUST ALLIANCE 30 #RALLY2018 LAND TRUST ALLIANCE Syndication To stop syndicated conservation easement deduction transactions, we need legislative relief, a fix to the current tax code rules. > 1.IRS auditors are outgunned and outnumbered, best efforts are a drop in the bucket. > 2.Litigation process takes so long, not much of a deterrence to current investors. > 3.Investors are either (a) happily buying a package that seems too good to be true, but the investors are reassured by promoters, consultants, law firms, etc; Or (b) investors know they are buying into a tax shelter but are keenly aware of points 1 and 2 above. Syndication IRS Notice (December 2017) > Requires reporting a transaction as a Listed Transaction (which requires filing a separate form with the IRS identifying what you are doing) if a transaction meets the following requirements: o Oral or written promotional material; o Investors; o Promised federal tax deduction that is at least 250% of the investor s investment; and o A contribution and resulting deduction 31 #RALLY2018 LAND TRUST ALLIANCE 32 #RALLY2018 LAND TRUST ALLIANCE 8

9 9/18/2018 Syndication IRS Large Business and International Division > September 2018 announcement new campaign targeting syndicated conservation easement transactions. Syndication Charitable Conservation Easement Program Integrity Act > House (H.R. 4459) and Senate (S. 2436) > Legislative language is complicated, relies on crossreferencing sections of the tax code partnership taxation provisions. > Summary: If you make an investment in a transaction, and the deduction you receive is greater than 250% of your investment, the deduction will be limited to 250% of your investment. There are exceptions to the rule, including for easement donations by family partnerships, but the rule is very carefully drafted to target syndicated conservation easement deduction tax shelters. 33 #RALLY2018 LAND TRUST ALLIANCE 34 #RALLY2018 LAND TRUST ALLIANCE Lessee as Donor Harbor Lofts: Vamp Building in Lynn, MA Lessee as Donor Harbor Lofts Associates v. Commissioner, 151 T.C. No. 3 (U.S.T.C. August 27, 2018) > Held: Harbor Lofts, as a long-term lessee of the two buildings, does not hold a fee interest in the property subject to the facade easement and cannot contribute a conservation easement under I.R.C. sec. 170(h). > Held, further, a lessee is not entitled to a charitable contribution deduction under I.R.C. sec. 170(h) for joining the fee owner of real property in granting a conservation easement. 35 #RALLY2018 LAND TRUST ALLIANCE 36 #RALLY2018 LAND TRUST ALLIANCE 9

10 9/18/2018 CE Termination Proceeds Provision Issue: In recent years, IRS began challenging CE deductions because the termination proceeds provision tweaked the Regulation language by allowing credit to the landowner for the value of improvements allowed under the CE. Land Trust Alliance letter to IRS. CE Termination Proceeds Provision PBBM Rose Hill v. Commissioner, --- F.3d - -- (5 th Cir. 2018) > CE provided that any amount attributable to improvements constructed on the Conservation Area, as well as actual bona fide expenses of the sale, should be subtracted from the total proceeds before determining the respective proportionate shares due to the Grantee and the Grantor. > Deduction denied. 37 #RALLY2018 LAND TRUST ALLIANCE 38 #RALLY2018 LAND TRUST ALLIANCE CE Termination Proceeds Provision PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > CE s termination proceeds provision included adjustment for any amount attributable to improvements constructed on the Conservation Area, as well as actual bona fide expenses of the sale. > Deduction denied. > The regulation does not indicate that any amount, including that attributable to improvements, may be subtracted out. CE Termination Proceeds Provision What do we do with current CE projects? > Keep improvements language out of termination provision and hope this never comes up > Continue using improvements language and be prepared to fight IRS on issue > Structure CE so improvements are excluded from deductible CE (i.e., not subject to any CE or placed in separate non-deductible CE) > See handout Proceeds Provision Examples 39 #RALLY2018 LAND TRUST ALLIANCE 40 #RALLY2018 LAND TRUST ALLIANCE 10

11 9/18/2018 CE Termination Proceeds Provision CE Termination Proceeds Provision Case By Case Approach > In many easements, there are no reserved rights to build value-enhancing improvements don t worry be happy. > Appreciate rarity of extreme situation where CE is completely or mostly terminated. 41 #RALLY2018 LAND TRUST ALLIANCE 42 #RALLY2018 LAND TRUST ALLIANCE 11

12 Conservation Easement Termination Proceeds Provision Steve Small s Fun Examples Example 1 Aunt Sally has a 100-acre farm. The farm is valued at $1 million. The farm includes Sally s residence, and a barn and other outbuildings. Aunt Sally conveys a conservation easement on the farm to the local land trust. The easement allows continuing agricultural activity, but no other residential, commercial, or industrial improvements. Assume the easement document includes the simple version of the proceeds rule. The value of the property after the easement is $400,000. According to the regulations and the proceeds rule, Aunt Sally is treated as having made a gift to the land trust of 60% of the value of the farm. The land trust is now treated as owning a 60% interest in the value of the farm, but, actually, only if and when the extinguishment and proceeds rule is triggered at some point in the future. If the easement is never extinguished, the 60% interest remains nothing but a concept. Time goes by, some event occurs that makes it impractical to keep the easement in place. The then-current landowner and the land trust go to court and the court agrees that under all the circumstances the easement can be extinguished, and it is. The property is sold for $2 million. According to the proceeds rule, what is the land trust s share of the $2 million? What is the landowner s share of the $2 million? Aaaah for the simple days of yesteryear. Bonus question: Is the land trust s share of the $2 million unrelated business income? 1

13 Example 2 Assume generally the same facts as in Example 1, except under the provisions of the easement Sally reserves the right to divide and convey from the property two five-acre lots, with the right to build one residence and appropriate outbuildings on each lot. The value of the farm (before the easement) is still $1,000,000. The easement reduces the value of the farm to $600,000. Under the proceeds rule, the land trust now has a proportionate interest of 40%. Time goes by, Sally sells one of the house lots to a new owner, who pays for the construction of a new principal residence and other allowed outbuildings. More time goes by, Sally sells the farm, including the remaining five-acre lot, to a new owner. The new owner needs cash, and sells the five-acre lot to another person, who pays for the construction of a new principal residence and other allowed outbuildings. More time goes by, the easement becomes impractical, the three then-current landowners and the land trust go to court and the court agrees that the easement can be extinguished, and it is. The property is sold for $3 million. According to the proceeds rule, how much does the land trust get? How is the balance of the money distributed? If the land trust gets $1.2 million, that leaves $1.8 million to divide among the three current landowners. The owner of the first house lot has an appraisal that values the house and lot at $550,000. The owner of the second house and lot has an appraisal that values that house and lot at $650,000. Assume you are the landowners, not the land trust. Does that work for you? 2

14 Example 3 Assume all of the same people and dollar facts as in Example 2, except the deed of easement follows the simple proceeds rule, BUT modified in this manner: After subtracting from the total proceeds any amount attributable to the value of improvements constructed by Grantor, Grantee shall be entitled to its proportionate share (as hereinabove defined) of the proceeds. Assume the value attributable to the improvements on the two house lots is $550,000 and $650,000 respectively. Recap: the property sold for $3,000,000. Subtracting the $1,200,000 attributable to improvements leaves $1,800,000. The land trust s share is $720,000 (40% of $1,800,000). The three landowners are now free to argue about how to divide up the balance of the proceeds. In Example 2, without the carve-out for improvements, the land trust receives $1,200,000. With the carve-out, the land trust receives $720,000. Is this fair? Discuss. Example 4 Assume all of the same facts as in Example 3, with this difference: there is a final determination by the IRS, or by a court of competent jurisdiction, that the easement did not qualify for a deduction in the first place because of the netting out of the value of improvements (or, actually, for any other reason). Of course the easement was still recorded and therefore enforceable in perpetuity. What is the result? Is this fair? If there was no deduction, should the land trust be entitled to any of the proceeds? Discuss. 3

15 Example 5 Assume all of the same facts as in Example 4 (easement; netting out of improvements, same numbers; deduction denied), except the easement document includes the following language at an appropriate place in the proceeds rule: Pursuant to Treas. Reg. Section 1.170A-14(g)(6)(ii) (first sentence), requiring the determination of the value of the Easement on the effective date of this grant, Grantor and Grantee hereby agree to amend such values, if necessary, to reflect any final determination of such value by the Internal Revenue Service or court of competent jurisdiction in any appeal of the final determination by the Internal Revenue Service. (emphasis added) Example 6 What about if the proceeds clause also (or instead) included this provision: After subtracting from the total proceeds any actual bona fide expenses of the sale, Grantee shall be entitled to its proportionate share (as hereinabove defined) of the proceeds. 4

16 Federal Tax Issues The Latest and Greatest Rob Levin, Jessica Jay, Steve Small October 12/13, 2018 #Rally2018

17 Agenda CE Holder Approval Provisions (10 Minutes) Public Recreation Test in Deductible CE (5 Minutes) Habitat Test in Deductible CE (5 Minutes) Valuation (5 Minutes) Quid Pro Quo Cases (10 Minutes) Tax Credit Limit Proposed Regulation (5 Minutes) Amendment Law Update (5 Minutes) Syndication Update (10 Minutes) Lessee as Donor (5 Minutes) CE Termination Proceeds Provision (15 Minutes) Q&A (15 Minutes) 2 #RALLY2018 LAND TRUST ALLIANCE

18 Handouts and Rally App Handouts > Termination Proceeds Examples > PowerPoint Slides Rally App > Alliance Letter to Karin Gross on Termination Proceeds > Case decisions/opinions 3 #RALLY2018 LAND TRUST ALLIANCE

19 CE Holder Approval Provisions Hoffman Properties, II, L.P. v. Commissioner, No > Three unpublished Tax Court orders finding that default approval provisions in conservation/preservation easements violate perpetuity requirement. > Historic preservation façade easement on building in Cleveland. > Disputed provision: If AAHP fails to expressly reject Hoffman's proposal within 45 days of receiving such, the easement provides Hoffman with automatic approval to "undertake the proposed activity in accordance with the plan or request submitted". 4 #RALLY2018 LAND TRUST ALLIANCE

20 CE Holder Approval Provisions Hoffman Properties, II, L.P. v. Commissioner, No o o Decision default approval provision violated prohibition and preservation requirement of 170(h)(4)(B)(i) Decision 1 same provision also violated exclusively for conservation purposes requirement of 170(h)(5) o Decision 2 Denied motion to reconsider decision. 5 #RALLY2018 LAND TRUST ALLIANCE

21 CE Holder Approval Provisions Hoffman Properties, II, L.P. v. Commissioner, No > Tax Court: Default approval provision was categorical. Landowner had no affirmative duty to self-evaluate its request against the regulatory standards. Even blatantly inconsistent request could sneak through if Holder wasn t paying attention. 6 #RALLY2018 LAND TRUST ALLIANCE

22 CE Holder Approval Provisions Alternate Approval Provision 1 > In the event that HOLDER fails to respond to GRANTOR s request within sixty (60) days, GRANTOR may proceed with the requested activity only if the following conditions are met: (a) HOLDER provided acknowledgment of receipt of the original request; (b) GRANTOR provides a separate written notice of its intent to proceed with the requested activity; (c) GRANTOR does not proceed with the requested activity until five (5) business days after providing such separate written notice of its intent to proceed; (d) GRANTOR does not receive any objection from HOLDER of GRANTOR s separate written notice of its intent to proceed; and (e) the activity in question is not contrary to any express or implied restriction in the Conservation Easement. 7 #RALLY2018 LAND TRUST ALLIANCE

23 CE Holder Approval Provisions Alternate Approval Provision 2 > Holder s failure to respond within the sixty (60) day period shall be deemed a constructive denial, and Owner may seek relief from the courts and recover reasonable fees and costs if a court rules the constructive denial unjustified. 8 #RALLY2018 LAND TRUST ALLIANCE

24 Public Recreational Access in Deductible CE I.R.C. 170(h)(4)(A)(i) > preservation of land areas for outdoor recreation by, or the education of, the general public Treas. Reg A-14(d)(2)(ii) > substantial and regular use of the general public 9 #RALLY2018 LAND TRUST ALLIANCE

25 Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > CE on golf course in gated community. Tax Court ruled that CE didn t meet any of conservation purposes tests (open space, habitat, or public recreation). Taxpayer appealed on public recreation issue. > 27-hole golf course at time of CE donation. But after donation HOA purchased property and converted 9 holes into park for use of subdivision lot owners. Public allowed to pay to play golf, but not allowed to access park. 10 #RALLY2018 LAND TRUST ALLIANCE

26 Public Recreational Access in Deductible CE 11 #RALLY2018 LAND TRUST ALLIANCE

27 Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Issue 1 Should the degree of public access be evaluated only according to the four corners of the CE, or also take into account subsequent actions by landowner? > 5 th Circuit held that in general, courts should look only to the CE itself. Triangulated from other subsections of CE regs that referred to the terms of the easement or at the time of the gift. Exception where donor knew or should have known that public access would not be at the level provided for in the CE. 12 #RALLY2018 LAND TRUST ALLIANCE

28 Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Issue 2 - Contradictory provisions in CE about public access. Some said no public access, others said substantial and regular public access. Which prevailed? o o 5 th Circuit said provisions allowing public access were more specific than the provisions precluding public access. But how specific were they? 13 #RALLY2018 LAND TRUST ALLIANCE

29 Public Recreational Access in Deductible CE PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Did the 5 th Circuit get the public access issues right? > What is the Holder s obligation to enforce the public access terms of the CE? 5 th Circuit doesn t really address that question. > If two-thirds of a large protected property is open for public recreational access but one-third is placed off limits, should that disqualify a deduction? > Should a pay-to-play golf course be considered accessible for public recreation? ($35 to play 18 holes) 14 #RALLY2018 LAND TRUST ALLIANCE

30 Habitat Test in Deductible CE Champions Retreat Golf Founders, LLC v. Commissioner, 2018 T.C. 146 (U.S.T.C. Sept. 10, 2018) > Another golf course habitat case. See Atkinson, PBBM-Rose Hill, and Kiva Dunes (sort of) > Another NALT case (sixth so far) > All kinds of red flags o o o Syndicated deal Put together by accountant to rescue failing golf club High appraisal ($10M) 15 #RALLY2018 LAND TRUST ALLIANCE

31 Habitat Test in Deductible CE 16 #RALLY2018 LAND TRUST ALLIANCE

32 Habitat Test in Deductible CE Champions Retreat Golf Founders, LLC v. Commissioner > Good news: Rare, threatened, or endangered species not limited to federal Endangered Species Act > But: not a sufficient presence of such species to meet habitat test > Extensive analysis of bird species. Conclusion: No highly threatened birds, only more common ones. > Southern fox squirrel in decline but not threatened > One arguably threatened plant species, but only found in small portion of Protected Property (17%), and pesticides used on golf course could harm it. 17 #RALLY2018 LAND TRUST ALLIANCE

33 Habitat Test in Deductible CE Champions Retreat Golf Founders, LLC v. Commissioner > Contributes to ecological viability or nearby park or preserve o o o Sumter National Forest was across river from Protected Property No go because PP was not a natural area Pesticides Golf course vegetation management Same holding as in Atkinson 18 #RALLY2018 LAND TRUST ALLIANCE

34 Habitat Test in Deductible CE How much do these golf course habitat cases threaten good CE projects? > Not at all? Marginally? Seriously? > Tips going forward: o o o o Don t mail it in on habitat. (Especially if open space, recreation, historic preservation are also questionable.) Apply a meaningful pesticides standard, if at all possible. If deduction is important and habitat is best case, consider tailoring CE s to avoid marginal or un-natural habitats. Don t worry too much (yet) these are all golf course cases. Remember Butler 19 #RALLY2018 LAND TRUST ALLIANCE

35 CE Valuation PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > Taxpayer s appraiser found Before value of $15,680,000 o Attorney s letter opining on right to develop commercially was key to Taxpayer appraisal s Extraordinary Assumption > IRS found Before value of $2,400,000 > Tax Court sided with IRS. > Fifth Circuit affirmed. 20 #RALLY2018 LAND TRUST ALLIANCE

36 CE Valuation Key Issues: Highest and Best Use When is additional development reasonable and probable? > As of right vs. requiring public review and approval (e.g., rezoning) > How to factor in the strength of neighborhood opposition? > How to weigh the validity of a privately granted use restriction? The tells in PBBM > Taxpayer sold the property for $2.3 million to the property owners association. > Attorney who wrote letter was not called to testify 21 #RALLY2018 LAND TRUST ALLIANCE

37 Quid Pro Quo in Charitable Donation/CEs Quid Pro Quo Cases o Wendell Falls o Triumph Mixed Use 22 #RALLY2018 LAND TRUST ALLIANCE

38 Quid Pro Quo Conservation Easement Wendell Falls Development, LLC v. Commissioner, T.C. Memo (U.S.T.C. April 4, 2018), (NC), (Motion for reconsideration pending) > LLC owns 1,280 acres; plans mixed-use community, 125-acre park to County, CE to land trust > Town approves PUD on 1,280 acres with 125 acres designated as park, states no preferential zoning in return > LLC agrees to sell 125 acres to County at appraised value with condition that LLC convey CE > LLC conveys CE on 125 acres to land trust, sells land to County > LLC claims charitable deduction of $4,818,000 based on appraisal of CE > IRS disallows on valuation and lack of donative intent, with penalties 23 #RALLY2018 LAND TRUST ALLIANCE

39 Quid Pro Quo Conservation Easement > Tax Court denies deduction on summary judgment: o Agrees with IRS that LLC conveyed CE with expectation of receiving substantial benefit of increased value to residential lots located near conserved land o Finds CE had zero value because highest and best use of 125 acres was as a park o Finds enhanced value to LLC s abutting property outweighed any value of the easement o Declines to assess any penalties applying reasonable cause and good faith exception in I.R.C. 6664(c)(1) 24 #RALLY2018 LAND TRUST ALLIANCE

40 Quid Pro Quo Conservation Easement Court s reasoning blended several different federal tax concepts > Substantial benefits analysis really donative intent and quid pro quo principles > Substantial benefits analysis cursory, with facts much less damning to LLC than other cases (Pollard v. Commissioner or Costello v. Commissioner) > Muddled enhancement issue, relevant only to valuation and not to deductibility analysis > Accepted without detailed analysis that enhancement effect exceeded value of CE 25 #RALLY2018 LAND TRUST ALLIANCE

41 Quid Pro Quo Charitable Donation Land Triumph Mixed Use Investments III, LLC v. Commissioner, T.C. Memo (U.S.T.C. May 15, 2018), (UT), appeal period open > LLC owns 2,800 acres of land, seeks to develop planned community for which 10% of land must remain undeveloped open space > City approves plans allowing 3,500 residential units; amends to allow additional 3,500 units with 1,000 acres of open space to be given to City > Final agreement of 747 acres open space to City and reduction by 2000 units > State transfer is voluntary charitable donation made without consideration, City s approval of plans was in no way contingent upon transfer of property. > LLC claims $11,040,000 charitable contribution deduction for land transfer > The IRS challenges the deduction in its entirety 26 #RALLY2018 LAND TRUST ALLIANCE

42 Quid Pro Quo Charitable Donation Land Tax Court denies deduction in entirety: > Finds LLC transferred 747 acres and development credits as quid pro quo exchange for current approval of concept plan and future approval of area plan > Finds despite provisions of agreement characterizing transfers as voluntary donations, external features of transaction evidenced by back and forth negotiations between City and LLC demonstrated a clear quid pro quo arrangement > Denied in its entirety because LLC failed to place any value on consideration of approvals following Pollard v. Commissioner and Seventeen Seventy Sherman St., LLC v. Commissioner *Takeaway--taxpayer cannot paper over quid pro quo arrangement with a purported donation agreement; proof is in the pudding 27 #RALLY2018 LAND TRUST ALLIANCE

43 Proposed Fed. Regulation for State Tax Credits Outgrowth of 2017 tax law $10,000-a-year cap on deductions for state and local taxes (SALT) > Response to NY and NJ work around tax credits > Requires federal deduction reduction by amount of state tax credit, unless tax credit is 15% or less of contribution > Effective August 27, 2018 with 45 day comment period > Relies on quid pro quo > Negative impact on conservation tax credits (CO, VA) > Potential coordinated response: o o o Beyond scope of original law Tax credits are not quid pro quo Grandfather/exclude conservation tax credits 28 #RALLY2018 LAND TRUST ALLIANCE

44 Amendment Law Update No Movement in Legal Cases > Three federal tax cases where IRS challenges amendment clauses as non-perpetual Sells, et al., v. Commissioner (Alliance amicus granted), Kumar, et al., v. Commissioner, (Alliance amicus granted), Pine Mountain Preserve, LLLP v. Commissioner, (Alliance amicus denied) No Movement in Regulation > IRS Notice Request for Comments to Priority Guidance Plan for 170(h) charitable contributions of conservation easements (Alliance Position Paper and Transmittal Letter) 29 #RALLY2018 LAND TRUST ALLIANCE

45 Amendment Law Update Yes Movement on Drafting Guidance: Alliance checklist of 8 elements: 1. Perpetual CE; intent to protect conservation purposes perpetually 2. Acknowledge natural conditions, landscape, consistent uses, economic and cultural conditions and technologies change over time 3. Full disclosure nothing requires Grantor/Grantee to modify CE 4. Grantee sole discretion for all determinations 5. Incorporate all Amendment Principles 6. Conform to all Grantee policies in effect at time of amendment 7. Approval dictated by state law, and U.S. Tax Code if donated 8. Discretionary approval, waiver and consent can be encompassed 30 #RALLY2018 LAND TRUST ALLIANCE

46 Syndication To stop syndicated conservation easement deduction transactions, we need legislative relief, a fix to the current tax code rules. > 1.IRS auditors are outgunned and outnumbered, best efforts are a drop in the bucket. > 2.Litigation process takes so long, not much of a deterrence to current investors. > 3.Investors are either (a) happily buying a package that seems too good to be true, but the investors are reassured by promoters, consultants, law firms, etc; Or (b) investors know they are buying into a tax shelter but are keenly aware of points 1 and 2 above. 31 #RALLY2018 LAND TRUST ALLIANCE

47 Syndication IRS Notice (December 2017) > Requires reporting a transaction as a Listed Transaction (which requires filing a separate form with the IRS identifying what you are doing) if a transaction meets the following requirements: o Oral or written promotional material; o Investors; o Promised federal tax deduction that is at least 250% of the investor s investment; and o A contribution and resulting deduction 32 #RALLY2018 LAND TRUST ALLIANCE

48 Syndication IRS Large Business and International Division > September 2018 announcement new campaign targeting syndicated conservation easement transactions. 33 #RALLY2018 LAND TRUST ALLIANCE

49 Syndication Charitable Conservation Easement Program Integrity Act > House (H.R. 4459) and Senate (S. 2436) > Legislative language is complicated, relies on crossreferencing sections of the tax code partnership taxation provisions. > Summary: If you make an investment in a transaction, and the deduction you receive is greater than 250% of your investment, the deduction will be limited to 250% of your investment. There are exceptions to the rule, including for easement donations by family partnerships, but the rule is very carefully drafted to target syndicated conservation easement deduction tax shelters. 34 #RALLY2018 LAND TRUST ALLIANCE

50 Lessee as Donor Harbor Lofts: Vamp Building in Lynn, MA 35 #RALLY2018 LAND TRUST ALLIANCE

51 Lessee as Donor Harbor Lofts Associates v. Commissioner, 151 T.C. No. 3 (U.S.T.C. August 27, 2018) > Held: Harbor Lofts, as a long-term lessee of the two buildings, does not hold a fee interest in the property subject to the facade easement and cannot contribute a conservation easement under I.R.C. sec. 170(h). > Held, further, a lessee is not entitled to a charitable contribution deduction under I.R.C. sec. 170(h) for joining the fee owner of real property in granting a conservation easement. 36 #RALLY2018 LAND TRUST ALLIANCE

52 CE Termination Proceeds Provision Issue: In recent years, IRS began challenging CE deductions because the termination proceeds provision tweaked the Regulation language by allowing credit to the landowner for the value of improvements allowed under the CE. Land Trust Alliance letter to IRS. 37 #RALLY2018 LAND TRUST ALLIANCE

53 CE Termination Proceeds Provision PBBM Rose Hill v. Commissioner, --- F.3d - -- (5 th Cir. 2018) > CE provided that any amount attributable to improvements constructed on the Conservation Area, as well as actual bona fide expenses of the sale, should be subtracted from the total proceeds before determining the respective proportionate shares due to the Grantee and the Grantor. > Deduction denied. 38 #RALLY2018 LAND TRUST ALLIANCE

54 CE Termination Proceeds Provision PBBM Rose Hill v. Commissioner, --- F.3d --- (5 th Cir. 2018) > CE s termination proceeds provision included adjustment for any amount attributable to improvements constructed on the Conservation Area, as well as actual bona fide expenses of the sale. > Deduction denied. > The regulation does not indicate that any amount, including that attributable to improvements, may be subtracted out. 39 #RALLY2018 LAND TRUST ALLIANCE

55 CE Termination Proceeds Provision What do we do with current CE projects? > Keep improvements language out of termination provision and hope this never comes up > Continue using improvements language and be prepared to fight IRS on issue > Structure CE so improvements are excluded from deductible CE (i.e., not subject to any CE or placed in separate non-deductible CE) > See handout Proceeds Provision Examples 40 #RALLY2018 LAND TRUST ALLIANCE

56 CE Termination Proceeds Provision 41 #RALLY2018 LAND TRUST ALLIANCE

57 CE Termination Proceeds Provision Case By Case Approach > In many easements, there are no reserved rights to build value-enhancing improvements don t worry be happy. > Appreciate rarity of extreme situation where CE is completely or mostly terminated. 42 #RALLY2018 LAND TRUST ALLIANCE

58 151 T.C. No. 3 UNITED STATES TAX COURT HARBOR LOFTS ASSOCIATES, CROWNINSHIELD CORPORATION, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No Filed August 27, E, a nonprofit development corporation, is the fee simple owner of two buildings listed on the National Register of Historic Places. H, a partnership, is a long-term lessee of those buildings. In 2009, H and E joined together in transferring a facade easement to a qualified organization under I.R.C. sec. 170(h)(3). H claimed a charitable contribution deduction of $4,457,515 for In a notice of final partnership administrative adjustment issued with respect to H, R disallowed H s claimed charitable contribution deduction for the donation of the facade easement. R also determined that an accuracy-related penalty under I.R.C. sec. 6662(a) applies. H s tax matters partner filed a petition in this Court challenging R s determinations and filed a motion for partial summary judgment under Rule 121. R filed a cross-motion for partial summary judgment on the same issue.

59 -2- R argues that H, as the long-term lessee of the two buildings, is not entitled to a charitable contribution deduction under I.R.C. sec. 170(f)(3)(B)(iii) and (h) because H did not hold a fee interest in the buildings and cannot meet the perpetuity requirements of I.R.C. sec. 170(h)(2)(C) and (5)(A) and sec A-14, Income Tax Regs. H argues that fee ownership of real property is not expressly required by I.R.C. sec. 170(h) and that the contribution is similar to a facade easement granted by tenants in common. Alternatively, H argues that it is the equitable owner of the buildings for tax purposes and therefore is eligible for deductions relating to the buildings. Held: H, as a long-term lessee of the two buildings, does not hold a fee interest in the property subject to the facade easement and cannot contribute a conservation easement under I.R.C. sec. 170(h). Held, further, a lessee is not entitled to a charitable contribution deduction under I.R.C. sec. 170(h) for joining the fee owner of real property in granting a conservation easement. Held, further, H s motion for partial summary judgment will be denied. Held, further, R s motion for partial summary judgment will be granted. Jeffrey H. Paravano, Jay R. Nanavati, and Michelle M. Hervey, for petitioners. Deborah Aloof, Bartholomew Cirenza, Shari A. Salu, and Carina J. Campobasso, for respondent.

60 -3- BUCH, Judge: This case is a partnership-level action under section 6226 and is before the Court on the parties cross-motions for partial summary judgment. 1 The issue for decision is whether Harbor Lofts Associates (Harbor Lofts) is entitled to a charitable contribution deduction of $4,457,515 for the noncash contribution of a facade easement under section 170(f)(3)(B)(iii) and (h). We hold that they are not. Harbor Lofts gave up contractual rights it held under the terms of its lease. A contract right in a long-term lease is not a qualified real property interest, and the waiver of contract rights under such lease does not give rise to a charitable contribution deduction contemplated under section 170(f)(3)(B)(iii) and (h). FINDINGS OF FACT Harbor Lofts is a Massachusetts limited partnership and the long-term lessee of the Daly Drug Building and the Vamp Building in Lynn, Massachusetts. The buildings and land are owned by the Economic Development & Industrial Corporation of Lynn (Economic Development Corp.), a Massachusetts public corporation created under chapter 778 of the Massachusetts Legislative Acts of The Economic Development Corp. took ownership of the buildings in the 1 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, unless otherwise indicated.

61 -4- late 1970s under an option contract assigned to it by Lynn Revitalization Corp. Harbor Lofts and the Economic Development Corp. executed a lease for the buildings in 1979 for a term of 61 years. Under the terms of the lease Harbor Lofts took on many of the rights and obligations often associated with property ownership. It is required to pay all insurance and utility costs and can use the buildings for multi-family residential uses and such uses as may be incidental there to, and for no other purpose or purposes whatsoever without the prior written consent of the Economic Development Corp. Harbor Lofts has a right of first refusal to purchase the buildings and is entitled to a portion of the proceeds if the land is taken under eminent domain. The lease requires Harbor Lofts to keep and maintain the buildings at its own expense and allows it to construct on any part or all of the Leased Premises such improvements, alterations and additions * * * as the Lessee may from time to time desire, provided that such do not materially impair the structural integrity of the buildings. Its right to alter the buildings is not unfettered. Alterations over

62 -5- $100,000 must be approved by the Economic Development Corp. although approval may not unreasonably be withheld. 2 Soon after the lease was executed, the buildings went through a historic restoration and were converted into multifamily residential apartment buildings. Harbor Lofts leases the apartments under a combination of Federal housing assistance programs and Massachusetts interest subsidy programs. Since the work was completed in the early 1980s, both buildings have been listed on the National Register of Historic Places. On December 21, 2009, Harbor Lofts and the Economic Development Corp. entered into a preservation restriction agreement with Essex National Heritage Commission, Inc. (Heritage Commission), a Massachusetts nonprofit corporation. 3 The Heritage Commission is a qualified organization under section 170(h)(3) and is chartered to preserve and promote for the benefit of the public the historic, cultural, and natural resources of the North Shore in Essex County, Massachusetts * * * which purposes include the preservation of historically important properties. Harbor Lofts (the buildings lessee) joined together with the 2 The $100,000 limit is indexed for inflation. 3 The preservation restriction agreement was recorded in Essex County, Massachusetts, on December 29, 2009.

63 -6- Economic Development Corp. (the buildings fee simple owner) to grant a facade easement to the Heritage Commission to preserve the buildings exterior. Pursuant to the facade easement Harbor Lofts and the Economic Development Corp. are responsible for all repairs and must maintain the buildings facade in the condition and appearance existing on the Effective Date of this grant as documented in photographs and written descriptions. On December 29, 2009, the same day the facade easement was recorded, Harbor Lofts and the Economic Development Corp. amended the lease by extending its term until December 31, Along with extending the term of the lease Harbor Lofts and the Economic Development Corp. revised the rent payment schedule; in conjunction with these amendments, Harbor Lofts paid $4,500,000 to the Economic Development Corp. Harbor Lofts claimed on its 2009 Form 1065, U.S. Return of Partnership Income, a $4,457,515 charitable contribution deduction under section 170 for the donation of a facade easement. Harbor Lofts claimed that its contribution to Heritage Commission was a perpetual conservation restriction under section 170(h)(2)(C) and section 1.170A-14(b)(2), Income Tax Regs. On October 25, 2016, the Commissioner issued a notice of final partnership administrative adjustment (FPAA) for 2009 to Crowninshield Corp., the tax

64 -7- matters partner of Harbor Lofts. The Commissioner disallowed Harbor Lofts charitable contribution deduction under section 170 and determined an accuracyrelated penalty of 40% for a gross valuation misstatement under section 6662(b)(3), (e), and (h); or, in the alternative, a 20% penalty under section 6662(a). No specific grounds for the 20% penalty are asserted in the FPAA. At the time of the filing of the petition Harbor Lofts had its principal place of business in Massachusetts. Harbor Lofts filed a motion for partial summary judgment on May 25, In its accompanying memorandum Harbor Lofts argues that the facade easement was jointly entered into with the Economic Development Corp. and that it satisfied the requirements of section 170(h)(2)(C). Harbor Lofts position is that the joint facade easement is similar to an easement granted by tenants in common and requires both Harbor Lofts and the Economic Development Corp. to make a joint contribution of their respective interests. Harbor Lofts further contends that it was an essential party to the facade easement because as the lessee of the buildings it possessed the right to enjoy the Property free from hindrance or molestation by any person whatsoever and if it was not bound by the facade easement it would have no obligation to maintain or preserve the historic nature of the Building facades, and the Easement s conservation purpose could not be fulfilled. Among

65 -8- other arguments Harbor Lofts also states that it has the benefits and burdens of ownership of the property and it is the equitable owner of the Property and therefore the owner for tax purposes. The Commissioner filed a response objecting to Harbor Lofts motion and filed his own motion for partial summary judgment. The Commissioner s position is that Harbor Lofts was not the fee simple owner of the buildings at the time the facade easement was entered and is therefore not entitled to a deduction under section 170(f)(3)(B)(iii). The Commissioner does not dispute that the * * * [facade easement] itself is a restriction granted in perpetuity within the meaning of I.R.C. 170(h)(2)(C), because the fee owner of the building, EDIC [the Economic Development Corp.], along with * * * [Harbor Lofts], executed the easement. But the Commissioner disagrees that Harbor Lofts was required to join in granting the facade easement because Harbor Lofts only interest was a personal property interest as lessee of the buildings. He argues that if Harbor Lofts felt its rights under the lease agreement were restricted by the facade easement it could have sought consideration from the Economic Development Corp. The Commissioner disagrees with Harbor Lofts comparison of the facade easement to an easement granted by tenants in common and likewise disagrees with Harbor Lofts proposition that it is the equitable owner of the real property

66 -9- for tax purposes. The Commissioner distinguishes cases in which a lease has been treated as a sale for tax purposes, noting that the Courts have recast a lease as a sale transaction does not imply that taxpayers can do the same to convert a leasehold interest into a real property interest within the meaning of I.R.C. 170(h)(1)(A). Harbor Lofts filed a reply to the Commissioner s response, reiterating many of the same arguments it had made in its motion for partial summary judgment. Its principal argument is that section 170(h)(2)(C) does not explicitly require that a donor of a facade easement own the real property and that multiple parties, such as tenants in common, may join together in granting a facade easement. The Commissioner filed a sur-reply focusing largely on the perpetuity requirements under section 170(h)(2)(C) and (5) and disputing Harbor Lofts comparison to tenants in common. The Commissioner s position is that Harbor Lofts, as a time-limited lessee, does not have a perpetual interest to give and that a time-limited leasehold interest cannot be equated to the fee interest of a tenant-in-common. Finally the Commissioner states that the limited duration of the interest held by a lessee is a significant fact distinguishing the deductibility of a donation made by a tenant-in-common with other similarly situated tenants-in-

67 -10- common, each of whom has a perpetual fee interest, from the non-deductibility by a lessee of a donation made by a landlord. OPINION The issue before this Court is whether Harbor Lofts satisfied the requirements of section 170(f)(3)(B)(iii). In particular, did Harbor Lofts contribute a perpetual conservation restriction as defined under section 170(h)(2)(C) and section 1.170A-14(b)(2), Income Tax Regs., that is exclusively for conservation purposes under section 170(h)(1)(C) and (5)? I. Summary Judgment Either party may move for summary judgment regarding all or any part of the legal issues in controversy. See Rule 121(a). We may grant summary judgment only if there are no genuine disputes as to any material fact. See Rule 121(b); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The moving party bears the burden of proving that no genuine dispute exists as to any material fact and that it is entitled to judgment as a matter of law. See 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, the facts and the inferences drawn from them must be considered in the light most favorable to the nonmoving party. See FPL Grp., Inc. v. Commissioner, 115 T.C. 554, 559 (2000); Bond v.

68 -11- Commissioner, 100 T.C. 32, 36 (1993); Naftel v. Commissioner, 85 T.C. at 529. When a motion for summary judgment is made and properly supported, the nonmoving party may not rest on mere allegations or denials but must set forth specific facts showing that there is a genuine dispute for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986); Sundstrand Corp. v. Commissioner, 98 T.C. at 520; see also Rule 121(d). Both the Commissioner and Harbor Lofts filed motions for partial summary judgment. In considering each motion we construe all factual materials and draw all inferences in favor of the opposing party. II. Charitable Contribution Deduction A deduction is allowed for any charitable contribution for which payment is made within the taxable year if the contribution is verified under regulations prescribed by the Secretary. Sec. 170(a)(1). Harbor Lofts sought a charitable contribution deduction for 2009 for a noncash contribution of a facade easement under section 170(f)(3)(B)(iii) and (h)(2)(c). A. Charitable Contributions of Property A donor is generally not eligible for a charitable contribution deduction for a contribution of property consisting of less than the donor s entire interest in that property. Sec. 170(f)(3)(A). But there is an exception for a qualified conservation contribution. Sec. 170(f)(3)(B)(iii). A contribution of property is a

69 -12- qualified conservation contribution if (1) the property is a qualified real property interest, (2) the property is contributed to a qualified organization, and (3) the contribution is exclusively for conservation purposes. Sec. 170(h)(1); see also sec A-14(a), Income Tax Regs. The Commissioner concedes that all three requirements under section 170(h)(1) are satisfied by the Economic Development Corp. The only dispute is whether Harbor Lofts contributed a qualified real property interest exclusively for conservation purposes under section 170(h)(1)(A) and (C). The phrases qualified real property interest and exclusively for conservation purposes are defined by section 170(h)(2) and (5), respectively. But before we consider those definitions, we must first determine the nature of the property rights held by Harbor Lofts when the facade easement was executed. B. Massachusetts Property Law State law determines the nature of property rights contributed, whereas Federal law determines the appropriate tax treatment of those rights. See United States v. Nat l Bank of Commerce, 472 U.S. 713, 722 (1985); see also 61 York Acquisition, LLC v. Commissioner, T.C. Memo , at *8. Both parties motions assert that the Economic Development Corp. is the fee owner of the two buildings. We agree. The Economic Development Corp.

70 -13- became fee owner of the buildings having taken ownership under the option agreement in the late 1970s. But Harbor Lofts is not a fee owner. In Massachusetts a demise for a period definitely fixed or at least capable of definite ascertainment is a leasehold interest for a term of years. Farris v. Hershfield, 89 N.E.2d 636, 637 (Mass. 1950). Harbor Lofts lease agreement ends in 2056 and is therefore a leasehold interest for a term of years. Massachusetts has traditionally found a leasehold interest for a term of years to be personal property, more specifically a chattel real. Moulton v. Long, 137 N.E. 297, 298 (Mass. 1922). Harbor Lofts is not a fee owner, tenant in common, or joint tenant and has not been granted a life estate or remainder interest. Rather, Harbor Lofts leased property from the Economic Development Corp., and a commercial lease is a contract rather than a conveyance of property. 275 Washington St. Corp. v. Hudson River Int l, LLC, 987 N.E.2d 194, 203 (Mass. 2013). C. Qualified Real Property Interest Section 170(h)(2)(C) defines a qualified real property interest as a restriction (granted in perpetuity) on the use which may be made of the real property. This perpetual conservation restriction, as defined under section 1.170A-14(b)(2), Income Tax Regs., includes an easement or other interest in real

71 -14- property that under state law has attributes similar to an easement (e.g., a restrictive covenant or equitable servitude). Harbor Lofts argues that section 170(h) does not explicitly require fee ownership of real property. But Harbor Lofts, having a leasehold interest for a term of years, is incapable of granting a perpetual restriction on the use of the buildings. Harbor Lofts does not hold a fee interest and cannot grant, through the use of an easement or other State law instrument, a perpetual restriction on the buildings. Harbor Lofts does not hold perpetual property rights in the buildings, so it is not possible for it to contribute a perpetual restriction on the use of the buildings. Harbor Lofts is correct that the Code does not specifically require a donor to hold a fee interest, but only the owner of real property or holder of a fee interest is able to grant a perpetual conservation restriction. Harbor Lofts has given up something of value: the rights to make improvements, alterations, and additions to the buildings. But those rights, initially created under the contract by which Harbor Lofts leases the property, were ceded to the Economic Development Corp. Harbor Lofts gave up contractual rights under the lease agreement, which are personal property rights. And a charitable contribution of a personal property right is not a qualified real property interest under section 170(h)(2)(C).

72 -15- Harbor Lofts argues that by granting the facade easement jointly with the Economic Development Corp. that it has made a contribution under section 170(h) similar to one made by tenants in common. But Harbor Lofts at no point held a fee interest in the properties; it was not a tenant in common with the Economic Development Corp. The limited duration of a lease is far different from fee ownership as tenants in common. Harbor Lofts also argues that its interest under the lease has made them equitable owners of the property for tax purposes. But it supports its argument only with cases involving sale leaseback transactions and rulings applying economic substance and disguised-sale doctrines. These cases are not relevant here. Although Harbor Lofts took on many of the rights and obligations often associated with property ownership, its possession of these rights and obligations is of a finite duration ending on the lease s expiration. Section 170(h)(2)(C) specifically sets forth a perpetuity requirement for a facade easement. Even if we were to find that Harbor Lofts holds equitable ownership in the buildings, it is equitable ownership for only a finite period and cannot satisfy the perpetuity requirements of section 170(h)(2)(C). See, e.g., Wachter v. Commissioner, 142 T.C. 140, 149 n.3 (2014).

73 -16- D. Exclusively for Conservation Purposes and Protected in Perpetuity Section 170(h)(5) defines a contribution made exclusively for conservation purposes and states that a contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. As a time-limited lessee Harbor Lofts is incapable of making a contribution protected in perpetuity. Harbor Lofts as lessee does not have the power to impose perpetual restrictions on property in which it does not have an absolute right. It cannot give what it does not have. At most Harbor Lofts can create a restriction that runs through the term of the lease, which is not perpetual. The Economic Development Corp. on the other hand, as fee owner of the buildings, is capable of creating an easement or other State law restriction that runs with the buildings and can therefore protect the conservation purpose in perpetuity. III. Conclusion The Commissioner is entitled to partial summary judgment disallowing Harbor Lofts 2009 charitable contribution deduction. Harbor Lofts, as the buildings long-term lessee, did not have a fee interest in the buildings and did not contribute a conservation restriction protected in perpetuity under section 170(h). Harbor Lofts gave up contractual rights under the lease agreement, which are personal property rights. Because Harbor Lofts failed to meet the requirements of

74 -17- section 170(h), the facade easement does not result in a charitable contribution deduction to Harbor Lofts under section 170(f)(3)(B)(iii). To reflect the foregoing, An appropriate order will be issued.

75 T.C. Memo UNITED STATES TAX COURT CHAMPIONS RETREAT GOLF FOUNDERS, LLC., RIVERWOOD LAND, LLC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No Filed September 10, Vivian D. Hoard, for petitioner. Teri L. Jackson and John P. Healy, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION PUGH, Judge: After concessions, the issue for decision is whether Champions Retreat Golf Founders, LLC (Champions Retreat), is entitled to a $10,427,435 charitable contribution deduction related to the donation of a qualified conservation contribution for the 2010 taxable year disallowed by

76 - 2 - [*2] respondent in a notice of final partnership administrative adjustment (FPAA) issued on November 19, FINDINGS OF FACT Some of the facts have been stipulated and are so found. Champions Retreat is a Georgia limited liability company with a principal place of business in Augusta, Georgia. Champions Retreat was formed on November 6, 2001, to develop and operate a golf club. As of the 2010 taxable year, Champions Retreat Golf Management, LLC, owned a % interest in Champions Retreat; Robert W. Pollard owned a % interest; Riverwood Land, LLC (Riverwood Land), owned a % interest; Kiokee Creek owned a 15% interest; William F. Paine owned a 7.718% interest; Meybohm Realty, Inc., owned a 4.114% interest; and Wayne K. Millar owned a.5172% interest. The remaining interest--approximately 16.6%--was held by 32 other partners, each of whom owned a.5172% interest. 1 Respondent conceded that Champions Retreat did not make a disguised sale to Kiokee Creek Preservation Partners, LLC (Kiokee Creek). Respondent also conceded that Champions Retreat s allocation of the charitable contribution deduction at issue had substantial economic effect. Finally, respondent conceded that Champions Retreat complied with sec. 704 in decreasing the capital accounts of the members receiving allocations of the charitable contribution deduction and in properly allocating interest income and ordinary business loss to its members. All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All monetary amounts are rounded to the nearest dollar.

77 - 3 - [*3] Riverwood Land is a limited liability company with a principal place of business in Augusta. As of the 2010 taxable year, Meybohm Realty and Mr. Pollard each owned a 40% interest and M-Golf, Inc., which is solely owned by Mr. Millar, owned the remaining 20%. I. Development of the Golf Club The easement at issue was placed on part of a 2,215-acre tract of land owned by Canal Industries before 2000 along the Savannah River in Evans, Georgia, approximately 13 miles from Augusta. Canal Industries hired Mr. Millar to develop a golf course on the property because of his relationship with golf legend Gary Player. On August 28, 2000, Pollard Land, Mr. Pollard s timberland investment firm, purchased the property from Canal Industries at the behest of Mr. Millar and E.G. Meybohm, who owns Meybohm Realty. In 2001 Riverwood Land began to develop a portion of the property and marketed it as Riverwood Plantation. On April 5, 2002, Pollard Land conveyed a acre tract to Champions Retreat to build a golf club, which became Champions Retreat Golf Club (golf club). Champions Retreat raised an initial $13.2 million for construction of the golf club by selling 66 residential lots in a development called Founders Village. A lifetime membership at the golf club and an ownership share in Champions

78 - 4 - [*4] Retreat was included in the purchase of a lot in Founders Village. In addition to the $13.2 million, Champions Retreat borrowed heavily in order to complete construction of the golf club. The golf club was completed in June The golf club is in a section of Riverwood Plantation called the Reserve. The Reserve is private and can be accessed only through a security gate, which is manned 24 hours a day. Along with the golf club and Founders Village, the Reserve includes Bishops Court, the Cottages at Riverwood Plantation (Cottages), and the Bungalows at Champions Retreat (Bungalows). Bishops Court is a residential development separate from the golf club. The Cottages and the Bungalows provide guest accommodations. The Cottages adjoin the golf course. The golf club accounts for acres of the acre tract that Champions Retreat acquired in Photos and videos in the record show it to be a visually beautiful, manicured property. It features a 27-hole course (made up of three 9-hole courses), a pro shop, a restaurant, a locker room, a cart storage facility, a driving range and practice area, and a paved parking lot. Mr. Player, Arnold Palmer, and Jack Nicklaus each designed one of the nine-hole courses. Mr. Player designed the Creek course; Mr. Palmer designed the Island course; and Mr. Nicklaus designed the Bluff course.

79 - 5 - [*5] The Creek course is the westernmost of the three courses, and it almost completely surrounds the Founders Village development. Due east of the Creek course is the driving range. The Bluff course is to the north-northeast of the driving range. The Island course is due east of the driving range. The Little River--an offshoot of the Savannah River that goes around Germain Island--runs through the Island course. Six of the nine holes on the Island course are on Germain Island. The banks of this part of the Savannah River are anywhere from 3 to 10 feet high. Sumter National Forest, which is approximately 120,000 acres, lies across the Savannah River, 700 feet from the golf club. II. Donation of the Easement Champions Retreat was not profitable. After our decision in Kiva Dunes Conservation, LLC v. Commissioner, T.C. Memo , Douglass Cates, the accountant for Champions Retreat, proposed the donation of a conservation easement on the property including the golf club. The proposal was meant, among other things, to attract additional investment in Champions Retreat so that it could pay down its debt and remaining construction costs.

80 - 6 - [*6] Lee Echols, a conservation biologist with the North American Land Trust (NALT), 2 performed an initial survey of the property on November 30 and December 1, The initial survey consisted of a tour of the property to document and photograph any significant natural features or significant species or natural communities on the property for the purpose of determining a conservation purpose. Mr. Echols determined in 2009 that the property met the requirements for a conservation easement. Kiokee Creek, a Georgia partnership, was formed on September 24, 2010, as a vehicle for investing in Champions Retreat. Its 15 original members, most of whom were Mr. Cates clients, contributed a total of $2,705,000 for their interests. In November 2010 Kiokee Creek contributed $2,700,000 to Champions Retreat in exchange for a 15% interest. Mr. Echols returned to Champions Retreat on November 12, 2010, to perform another site visit. Mr. Echols again determined that the property was suitable for a conservation easement and, on December 16, 2010, Champions Retreat conveyed an easement to NALT that covered acres (easement area). The easement was recorded on December 29, 2010, in the deeds records of 2 NALT is registered as a charitable organization in Pennsylvania and has tax-exempt status under sec. 501(c)(3).

81 - 7 - [*7] Columbia County, Georgia. NALT acknowledged Champions Retreat s donation of the easement on February 7, Mr. Echols returned to the golf club again on May 12, 2011, so that NALT could have a record of the significant natural features of the property throughout the year. This followup visit, although after the conveyance of the easement, was included in NALT s baseline documentation that Champions Retreat submitted to the Internal Revenue Service (IRS). No representative of Champions Retreat signed the owner acknowledgment line in the documentation. Champions Retreat claimed a $10,427,435 charitable contribution deduction on its Form 1065, U.S. Return of Partnership Income, for the 2010 taxable year for its donation of the easement to NALT. Champions Retreat allocated approximately 98.8% of the deduction to Kiokee Creek, the remaining 1.2% of the deduction to Riverwood Land, and none to the other 37 members. III. Terms of the Easement The easement document identifies three conservation purposes: Preservation of the [easement] area as a relatively natural habitat of fish, wildlife, or plants or similar ecosystem; and Preservation of the [easement] area as open space which provides scenic enjoyment to the general public and yields a significant public benefit; and

82 - 8 - [*8] Preservation of the [easement] 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 * * *. The easement document imposes several restrictions on Champions Retreat. It restricts the ways that Champions Retreat can use the easement area, including the types of structures that Champions Retreat can build on the easement area. It requires Champions Retreat to use the best environmental practices then prevailing in the golfing industry in maintaining the golf club, to keep records relating to maintenance of the golf club, and to submit an annual maintenance report to NALT. In addition, Champions Retreat cannot remove surface or ground water, live or dead trees, or any other raw materials from the easement area. It cannot put up signs or outdoor advertising or construct any new roads on the easement area. It must protect the bodies of water on or near the easement area; creeks and ponds cannot be manipulated, no chemical discharge can be allowed to flow into a creek or pond, no vegetation within 100 feet of a creek or pond can be cleared, and Champions Retreat must take care not to cause soil erosion and sedimentation. The easement document prohibits the division of the easement area into lots and requires Champions Retreat to notify NALT in writing before it exercises a reserved right in a way that may impair the conservation purposes underlying the donation.

83 - 9 - [*9] The easement document allows several exceptions to those restrictions. Champions Retreat can build additional structures of up to an aggregate 10,000 square feet on the easement area and can remove trees and vegetation to do so, and it can shift around greens, fairways, and other features of the golf courses. It can pave and widen an existing road by 10 feet. Champions Retreat has the right to [m]aintain in good and manicured condition the * * * fairways, greens, tee boxes, sand traps, waste bunkers, areas in the rough, and other Golf Course play areas including any lakes, ponds, and other water courses which are an integral part of the Golf Course. This includes the right to use chemicals. It also has the right to remove any tree--whether standing or fallen--that is within 30 feet of a playable area. Champions Retreat must give NALT written notice before it exercises these or any other rights reserved to it in the easement document, and NALT must give its written approval for the exercise of the right. IV. Natural Features of the Easement Area The acre easement area includes 25 of the 27 holes in their entirety, most of the 2 remaining holes, and the driving range. It does not include the parking lot, the pro shop, the restaurant, the locker room, the cart storage facility, the Cottages, the Bungalows, or Founders Village.

84 [*10] A. Plants, Animals, and Aquatic Life on the Easement Area The easement area is in the Lower Piedmont region, which runs from Virginia to Georgia. The Lower Piedmont region tends to be characterized by three types of habitat: (1) Piedmont oak-pine-hickory forest, which is characterized by large canopy trees; (2) Piedmont pine-oak woodlands and forest, which has a more open canopy but a greater presence of subcanopy trees; and (3) Piedmont floodplains and bottomlands, which are wetland forests that occur along rivers and creeks. While efforts were made to preserve the natural beauty of the easement area--especially certain trees--trees were cut down and vegetation was removed during the construction of the golf club. Indeed, the open pine woodlands and savannas in the easement area exhibit very little plant species diversity. However, swaths of wetland, bottomland and riparian forest, and open pond habitat survived the development and remain undisturbed. The two largest undisturbed swaths are the 31 acres to the west of the Little River and the 26 acres on Germain Island. Together these account for a little over 16% of the easement area. Species observed in the easement area are monitored by conservation organizations. NatureServe is a large, umbrella conservation group that relies on reports from biologists around the world to classify natural communities and to

85 [*11] track species of conservation concern. NatureServe s ranking system for the threat level to a species also is used by each State s Natural Heritage Program, which tracks species of conservation concern on a State level. Although not all States fund this program, scientists continue to contribute observations. The NatureServe rankings are G1 through G5; the G stands for global, G1 is the highest threat level, and G5 is the lowest. The State rankings are the same except that S stands for State. Several bird-specific conservation organizations also track bird species of concern. Partners in Flight (PIF) has five threat levels, from Possibly Extinct, at the highest level, to Planning and Responsibility, at the lowest. 3 The Atlantic Coast Joint Venture (ACJV) ranks the threat to birds from Highest Priority to Moderate Priority. 4 The North American Bird Conservation Initiative (NABCI) puts birds facing the most serious threats on the Red Watch list and birds facing less serious threats on the Yellow Watch List. The U.S. Fish and Wildlife Service 3 For PIF the threat levels are, from highest to lowest, (1) Possibly Extinct, (2) Critical Recovery, (3) Immediate Management, (4) Management Attention, and (5) Planning and Responsibility. 4 For ACJV the threat levels are, from highest to lowest, (1) Highest Priority, (2) High Priority, and (3) Moderate Priority.

86 [*12] -- Birds of Conservation Concern 2008 (USFWS) lists bird species that may be candidates for listing under the Endangered Species Act of The table below lists the bird species observed in the easement area that are of conservation concern, according to one or more of these conservation organizations: Name PIF ACJV NABCI USFWS Belted Kingfisher Brownheaded Nuthatch Carolina Chickadee Carolina Wren Downy Woodpecker Eastern Kingbird Eastern Phoebe Eastern Wood Pewee Pine Warbler Management Attention Planning and Responsibility Planning and Responsibility Planning and Responsibility Planning and Responsibility Management Attention Planning and Responsibility Management Attention Planning and Responsibility High -- Yes Moderate Moderate Moderate

87 [*13] Red-Headed Woodpecker Tufted Titmouse Planning and Responsibility Planning and Responsibility Moderate Yellow Watchlist In addition to birds, two other notable species of conservation concern were observed in the easement area. The southern fox squirrel has a G5 ranking from NatureServe but is not tracked by Georgia s Natural Heritage Program. The southern fox squirrel is a game species in Georgia; there is a six-month hunting season during which hunters can catch up to 12 per day. The denseflower knotweed is a plant found in the easement area s bottomland forest and swamp habitats. NatureServe gives it a G5 global ranking and indicates that it has an S1? State ranking in Georgia (the? indicating uncertainty). Georgia s Natural Heritage Program lists it with an S3? ranking. This discrepancy seems due to NatureServe s use of outdated information regarding Georgia s Natural Heritage Program. In the easement area, aquatic life was observed in the man-made water features. Several native species of fish were observed in ponds, such as blueback herring, bluegill, mosquitofish, largemouth bass, and brown bullhead catfish. Some of the larger ponds in the easement area were clear, an indication of a

88 [*14] healthy aquatic environment. Others were green and opaque, however, an indication of water quality problems. The streams in the easement area offered low quality aquatic environments; they exhibited little variety of aquatic life and one emitted a sulfurous odor and had an oily sheen. B. Maintenance in the Easement Area Champions Retreat maintained the golf club meticulously. It installed two nonnative grasses on the fairways and on the greens. Champions Retreat chose Bermuda grass for the fairways because it would enhance playability and because it is suitable for warm temperatures. The bentgrass planted on the greens was suitable for cooler temperatures and required fans to keep it cool. Champions Retreat s mowing fleet included large riding mowers, which it used on the fairways; walk-behind mowers, which it used on the greens and the tee boxes; and smaller tools such as leaf blowers, hedge trimmers, and weed eaters. Champions Retreat generally mowed the fairways every other day and kept them at a height of approximately a quarter of an inch. It kept the bentgrass on the greens at an approximate height of an eighth of an inch and the grass on the rough at about three inches. The easement area includes several man-made water features, in addition to the Savannah and Little Rivers and wetlands on their banks. Most are ponds,

89 [*15] although there are also man-made creeks. Certain of the ponds were used to provide water throughout the courses. Some were used to feed the man-made creeks; pumps took water from the pond up to the top of the creek from where it would flow back down into the pond. One pond was used to irrigate the entire golf club; anywhere from 70,000 to 600,000 gallons of water (depending on the day) was pumped from the Little River into the pond and then distributed around the golf club. Champions Retreat used weed eaters to mow up to the edges of some of the man-made ponds and creeks. And the staff mowed to within 5 or 10 feet of the banks of the Savannah and Little Rivers. Champions Retreat used several chemicals on the golf club s courses that were subject to regulations. The chemicals were applied by licensed members of Champions Retreat s staff or under their supervision. Georgia Department of Agriculture rules governed the application of certain of the chemicals, and Champions Retreat complied with those requirements. Champions Retreat sprayed fungicides throughout the golf club. They were used primarily to kill fungi on the greens but also were used on the fairways and tee boxes. The staff members applying the fungicides were required to wear protective gear, such as gloves and a respirator, while spraying. Champions Retreat also applied herbicides or plant growth regulators to the courses,

90 [*16] specifically the fairways, the rough, the tee boxes, and the greens. The herbicides were meant to prevent the growth of or to kill unwanted plants on the golf courses. Plant growth regulators were meant to make plants short and stubby, reducing the amount of maintenance needed on the golf courses. Staff applying the herbicides and plant growth regulators were required to wear gloves and respirators although certain of the herbicides required the use of coveralls, covering the applicator up to the waist. Champions Retreat used insecticides on the greens and tee boxes to prevent the spread of ants and mole crickets and algaecide on the man-made ponds and creeks to control algae. Champions Retreat also applied fertilizer to the golf courses to revive grass that had been damaged by divots, golfers who deviated from the cart paths, and winter weather. It applied fertilizers to small areas by broadcast spreader and to larger areas by truck. Some of the chemicals used on the golf courses had environmental hazards associated with their use. Several chemicals, including some applied to pond banks, were toxic to fish and aquatic invertebrates if introduced into their habitats, through either direct application or runoff. Fertilizer used on the golf courses also could cause water quality problems such as eutrophication if it made its way into the ponds.

91 [*17] Some of the holes drain into the creeks and ponds in the easement area and into swaths of undisturbed wetlands and forest area. One hole on Germain Island --hole 4 on the Island course--drains into a 26-acre swath of wetlands on the island. Additionally, two holes--hole 2 on the Island course and hole 8 on the Bluff course--drain into a 31-acre swath of wetlands just to the west of the Little River. C. The Easement Area and Public Use Local residents frequently used the Savannah River--including the Little River--for recreational purposes such as kayaking, fishing, or duck hunting. The Benderdinker Festival--a community boating event held annually that included upwards of 800 people--also was held annually on the Savannah and Little Rivers, taking participants in a loop around Germain Island. In 2013 there was a dispute over whether the Benderdinker Festival could use the Little River while Champions Retreat was hosting a golf tournament, which turned on whether the Little River was a public waterway or was privately owned by Champions Retreat. Champions Retreat eventually gave its permission, but whether the Little River is public or private remains unresolved. In addition to the Benderdinker Festival, several other events are held annually at or around the golf club: the Augusta Charity Classic golf tournament,

92 [*18] the Guardian Cup Charity golf tournament, the YMCA Cloverleaf Duathalon, the United Way Charity Classic golf tournament, the Christmas at Champions Retreat holiday festival, the Island Run 3.1, and the Birdies for the Brave golf event. Euchee Creek runs near the southern border of the easement area. It opens into the Little River, but a dam at the mouth of the creek limits access from the Little River. The Columbia County Planning Commission proposed a network of trails in 2007 called the Euchee Creek Greenway. The route proposed in 2007 would have overlooked the golf club from across the creek. Because of revisions in the proposed route, however, the Euchee Creek Greenway was not routed to overlook the golf club as of the time of trial. Columbia County participated in the now-defunct Georgia Greenspace Program, which assisted counties in funding acquisition of property rights to permanently conserve sensitive or natural areas that met specifications designated under State law. The golf club was not designated greenspace under this program. The easement area was designated open space by the Columbia County Planning Commission for purposes of its Comprehensive Plan, Vision 2035 (Vision 2035). Vision 2035, which was developed pursuant to a State planning law, is not connected with Columbia County s implementation of the Georgia Greenspace

93 [*19] Program. There is no application process for an open space designation under Vision 2035, and landowners are not required to submit anything for such a designation to be made. All golf courses in Columbia County are designated open space under Vision V. The FPAA The FPAA denied Champions Retreat s deduction of $10,427,435 for the contribution of the easement on two alternative grounds: (1) the conservation easement did not met the requirements of section 170 and (2) the easement did not have a value greater than zero. Riverwood Land, the tax matters partner, timely petitioned for redetermination. OPINION I. Burden of Proof Ordinarily, the taxpayer bears the burden of proving that the Commissioner s determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and taxpayers bear the burden of proving entitlement to any deductions claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

94 [*20] Petitioner asserts that it has provided complete and conclusive documentation and credible testimony to show Champions Retreat s compliance with section 170(h) sufficient to shift the burden of proof under section 7491(a). Under section 7491(a)(1), [i]f, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue. See Higbee v. Commissioner, 116 T.C. 438, 442 (2001) ( Credible evidence is the quality of evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness). (quoting H.R. Conf. Rept. No , at (1998), C.B. 747, )). The resolution of the issue in this case does not depend on which party has the burden of proof. We resolve it on a preponderance of the evidence in the record. See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008); Schank v. Commissioner, T.C. Memo , at *16. II. Qualified Conservation Contributions Taxpayers are allowed a deduction for charitable contributions made in a taxable year. Sec. 170(a)(1). A charitable contribution is a contribution or gift to

95 [*21] or for the use of an organization that meets the requirements set out in section 170(c). No deduction generally is allowed for the contribution of an interest in property that is less than the taxpayer s entire interest. Sec. 170(f)(3)(A). A taxpayer can claim a deduction under section 170 for contributions of three particular partial interests in property: (1) a contribution of a remainder interest in a personal residence or farm, (2) a contribution of an undivided portion of the taxpayer s entire interest in a property, and (3) a qualified conservation contribution. Sec. 170(f)(3)(B). A qualified conservation contribution is defined as a contribution of a qualified real property interest to a qualified organization, made exclusively for conservation purposes. Sec. 170(h)(1). The parties agree that Champions Retreat s contribution to NALT was a qualified real property interest and that NALT is a qualified organization. See secs. 170(h)(2) and (3). We must decide whether Champions Retreat s contribution was exclusively for conservation purposes. III. Conservation Purpose A contribution is treated as made exclusively for conservation purposes if it satisfies one of the conservation purposes listed in section 170(h)(4). Champions Retreat argues that the contribution of the easement to NALT satisfies two conservation purposes: (1) the protection of a relatively natural habitat of fish,

96 [*22] wildlife, or plants, or a similar ecosystem and (2) the preservation of open space (including farmland and forest land) where such preservation is * * * for the scenic enjoyment of the general public, or * * * pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit. Sec. 170(h)(4)(A)(ii) and (iii). We will address each of these below. Both Champions Retreat and respondent presented expert testimony as to whether the easement area satisfied the conservation purpose requirement. Several experts testified on behalf of Champions Retreat: Keith Lawrence on land planning and civil engineering; 5 Leslie Ager on fisheries biology; Christopher Wilson on wildlife biology and conservation; and Lee Echols, of NALT, on botany, conservation biology, and ecology. Reed Noss testified for respondent on conservation biology. All of the experts were qualified and credible; they differed primarily on the conclusions we should draw from their observations. We will address their testimony in the context of our analysis. 5 Mr. Lawrence is employed by Meybohm Realty and was involved in designing Riverwood Plantation, including the golf club.

97 [*23] A. Relatively Natural Habitat A taxpayer may satisfy the conservation purpose requirement if its contribution protects a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem. Sec. 170(h)(4)(A)(ii). The habitat must be a significant relatively natural habitat in which a fish, wildlife, or plant community, or similar ecosystem normally lives. Sec A-14(d)(3)(i), Income Tax Regs. A habitat is [t]he area or environment where an organism or ecological community normally lives or occurs or [t]he place where a person or thing is most likely to be found. Glass v. Commissioner, 124 T.C. 258, (2005) (quoting American Heritage Dictionary of the English Language 786 (4th ed. 2000)), aff d, 471 F.3d 698 (6th Cir. 2006). A significant relatively natural habitat can include but is not limited to habitats for rare, endangered, or threatened species of animals, fish, or plants; * * * and natural areas which are included in, or which contribute to, the ecological viability of a local, state, or national park, nature preserve, wildlife refuge, wilderness area, or other similar conservation area. Sec A-14(d)(3)(ii), Income Tax Regs. Some human alteration of a significant relatively natural habitat will not result in the denial of a deduction, as long as the fish, wildlife, or plants continue to exist there in a relatively natural state. Id. subdiv. (i).

98 [*24] 1. Rare, Endangered, or Threatened Species Champions Retreat argues that the easement area provides a habitat for several species of conservation concern, namely, birds, the southern fox squirrel, and the denseflower knotweed. We agree with Champions Retreat that rare, endangered, or threatened, which is undefined in the regulations, should not be limited to species listed under the Endangered Species Act of 1973, Pub. L. No , sec. 4, 87 Stat. at (codified as amended at 16 U.S.C. sec (2012)). See sec A-14(d)(3)(ii), Income Tax Regs. Nonetheless, we do not find a sufficient presence of rare, endangered, or threatened species in the easement area to satisfy the conservation purpose requirement. Mr. Echols and Mr. Wilson each observed several species of birds that were on conservation watchlists. Half of the species observed were listed only by PIF, which, as Mr. Wilson notes, is the most inclusive and includes species that are quite common * * * but are nonetheless considered important for conservation and planning purposes based on other factors. Moreover, all of the species listed by PIF that both Mr. Echols and Mr. Wilson observed were ranked as either Planning and Responsibility or Management Attention, the lowest and second lowest rankings, respectively. Five of the twelve species that both Mr. Echols and Mr. Wilson observed were listed by the ACJV. All five of the species listed by ACJV

99 [*25] that were observed were listed as Moderate--for species with larger populations and subject to less serious threats--except one, the brown-headed nuthatch, which is listed as High, the middle threat level. The brown-headed nuthatch also is ranked by PIF as Planning and Responsibility, the lowest threat level. The red-headed woodpecker is the only bird observed by the experts that is tracked by NABCI and is on the Yellow Watch List, which indicates a lower threat level. Both PIF and ACJV assigned the red-headed woodpecker their lowest threat levels. Only 1 of the 12 birds that both Mr. Echols and Mr. Wilson observed is tracked by the USFWS--the brown-headed nuthatch. The expert testimony, while credible, leaves us unpersuaded that there is a sufficient presence of rare, endangered, or threatened bird species on the easement area. None of the bird species observed by both Mr. Echols and Mr. Wilson were assigned the highest threat level by any of the conservation organizations. And although the brown-headed nuthatch was labeled High Priority by ACVJ and tracked by USFWS, PIF ranked it as Planning and Responsibility, which denotes species that are not of regional concern. See Atkinson v. Commissioner, T.C. Memo , at *36 (holding that a species present in the easement area classified as only one step above apparently secure does not satisfy the conservation purpose requirement).

100 [*26] The only other species tracked by conservation organizations and observed by the experts on the easement area are the southern fox squirrel and the denseflower knotweed. While both Champions Retreat s and respondent s experts agreed that southern fox squirrels may be in decline, we cannot conclude from their expert testimony that they are rare, endangered, or threatened. 6 They have a G5 NatureServe ranking, which indicates that they are demonstrably secure globally, are not ranked at all by Georgia s Natural Heritage Program, and are still hunted legally in Georgia. Denseflower knotweed also has a G5 ranking from NatureServe. Its statewide ranking is unclear; NatureServe gives it an S1? ranking in Georgia while Georgia s Natural Heritage Program gives it an S3? ranking. Notwithstanding the uncertainty of its status in Georgia, Mr. Echols testified that the denseflower knotweed is found almost exclusively in the 26-acre swath of bottomland forest on Germain Island. This swath accounts for about 7.5% of the easement area. 6 Petitioner repeatedly cited an article attached to Mr. Wilson s expert report regarding southern fox squirrels in support of Champions Retreat s position. But the author did not testify, nor was the article admitted as evidence. Moreover, petitioner tried but was unable to secure his testimony as an expert, and we quashed the trial subpoena petitioner then issued to him as we viewed the testimony petitioner sought to be in the nature of expert testimony. Petitioner s continued reliance on the article, therefore, is improper, and we do not rely on the article for any facts.

101 [*27] Assuming that denseflower knotweed could flourish in both swaths of undisturbed bottomland forest in the easement area, its found suitable habitat would constitute less than 17% of the easement area. Moreover, hole 4 on the Island course was designed to drain into the only swath of bottomland forest on the easement area in which the denseflower knotweed is found, introducing the chemicals used by Champions Retreat (albeit legally and in accordance with the easement)--including herbicides--into its habitat. Less than 17% of the easement area is not enough to fulfill the conservation purpose of providing a significant relatively natural habitat. See Atkinson v. Commissioner, at *35 (holding that a plant found on 24% of the easement area was too insignificant to lead the Court to conclude that the easement area was a significant relatively natural habitat). Champions Retreat has presented evidence of only one rare, endangered, or threatened species with a habitat on the easement area--denseflower knotweed-- and it inhabits just a small fraction of the easement area. To get around these facts, Champions Retreat would have us ignore the specific wording of the regulation and adopt a standard that includes any species of current or future conservation concern. This we cannot do. Even its own expert, Mr. Wilson, testified that a species listing on one of the rankings of conservation concern is not by itself enough: While important, these lists are not (by themselves) the best

102 [*28] references for determining the conservation significance of a species or its habitat, or for prioritizing conservation actions and guiding habitat protection. We, therefore, conclude that Champions Retreat has not met the conservation purpose requirement by providing a habitat[] for rare, endangered, or threatened species of animals, fish, or plants. See sec A-14(d)(3)(ii), Income Tax Regs. 2. Contributes to Ecological Viability Champions Retreat also contends that the easement area is a relatively natural habitat because it is a natural area that contributes to the ecological viability of Sumter National Forest, across the Savannah River. Mr. Wilson testified that birds, insects, and pollen will travel back and forth between the easement area and Sumter National Forest, enhancing the ecological viability of each. Dr. Noss testified that the easement area is not a natural area. We have no doubt that Sumter National Forest is a national park, in the terms of the regulation. However, we do not find the easement area to be a natural area. Mr. Echols and Mr. Wilson testified that parts of the easement area between fairways resembled open pine woodlands or savannas. Together with the fairways, greens, and tee boxes, the areas that resemble open pine woodlands make up most of the easement area. Mr. Wilson described these areas as

103 [*29] obviously the least natural areas of the property, consisting of non-native grass and maintained through heavy management utilizing chemical fertilizers, pesticides, and fungicides. Dr. Noss testified that the open pine areas on the easement area do not approach the rich plant and animal diversity that generally characterizes an open pine woodland because--like the fairways, greens, and tee boxes--they are planted with nonnative grasses and treated to prevent the growth of native plants at the base of trees. Contrary to Champions Retreat s claim, just having trees and vegetation as well as many species that * * * inhabit them is not enough to constitute a natural area when those trees and vegetation are heavily managed. And the mere fact that a species might inhabit an area--making it suitable --does not make it natural. See Atkinson v. Commissioner, at *41 (holding that the golf course did not contribute to the ecological viability of an adjacent nature preserve because [a] large portion of the 2003 easement property is planted with nonnative grass, the ponds do not exist in a relatively natural state, and the native forests that do remain on the 2003 easement property are at risk of removal pursuant to the terms of the 2003 easement deed ). Even were we to find that the areas resembling open pine woodlands were natural areas, there is no guaranty that they will be protected. The easement allows the removal of any tree--whether standing or fallen--that is within 30 feet

104 [*30] of a playable area. From the photographs in both Mr. Echols and Mr. Wilson s expert reports, it appears that several of the trees in these areas would be eligible for removal under the Easement. Mr. Ager testified that the ponds he surveyed in the easement area were high-quality aquatic environments. However, the chemicals that Champions Retreat uses in the easement area could injure those environments. Some of the chemicals are harmful to aquatic life if they come into contact with water courses, whether applied directly or through runoff. Some of the holes were designed to channel runoff water towards the creeks, ponds, and bottomland forest and wetland areas on the easement area. The experts also agreed that fertilizer quickens the process of eutrophication, which can lead to water quality problems as well. 7 Champions Retreat contends that its use of chemicals in the easement area should not preclude a deduction in this case because it complied with the applicable State rules. The terms of the easement allow Champions Retreat to apply chemicals so long as it follows the best environmental practices then prevailing in the golf industry. We have no doubt that Champions Retreat aims 7 The experts did not agree on the extent to which the ponds in the easement area were eutrophic.

105 [*31] to use the chemicals responsibly, but it did not establish that the best environmental practices in the golf industry are as good as or better than the best environmental practices then prevailing for conservation, as might be expected if conservation was the purpose of the easement. See Atkinson v. Commissioner, at *38. We also cannot conclude that the easement area is a natural area that contributes to the ecological viability of Sumter National Forest across the Savannah River. The experts disagreed as to how many species observed in the easement area have a range that spans the Savannah River or would even be capable of making the 700-foot flight across the river between the easement area and the national forest. And we are unable to conclude that the species we described above as of interest have a range so large. Because we find that the easement area neither provides a habitat for rare, threatened, or endangered species nor is a natural area that contributes to the ecological viability of Sumter National Forest, we find that Champions Retreat s contribution was not made for the conservation purpose of protecting a relatively natural habitat.

106 [*32] B. Preservation of Open Space A contribution also can satisfy the conservation purpose requirement in section 170(h) if it preserves open space. Sec. 170(h)(4)(A)(iii). The preservation must be either for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy. Sec. 170(h)(4)(A)(iii). In either case, the preservation of open space must yield a significant public benefit. Id. 1. Scenic Enjoyment The preservation of open space can be for the scenic enjoyment of the general public if development of the property * * * would interfere with a scenic panorama that can be enjoyed from a park, nature preserve, road, waterbody, trail, or historic structure or land area, and such area * * * is open to, or utilized by, the public. Sec A-14(d)(4)(ii)(A), Income Tax Regs. Satisfaction of the scenic enjoyment requirement depends on visual access to the property rather than physical access. Id. subdiv. (ii)(b). It is not necessary that visual access to the whole property be available to the general public, but visual access to too small a portion may be insufficient. Id. Scenic enjoyment is evaluated by taking into account all relevant facts and circumstances. Id. subdiv. (ii)(a).

107 [*33] The easement area is located in the private section of Riverwood Plantation and is accessible only to members and their guests, through a gate manned 24 hours a day. Even taking into account the annual charity events held at the golf club, we conclude that the public does not have sufficient physical access to enjoy the easement area. And, because of the limited physical access, the public could view the easement area only from the Savannah and Little Rivers, so visual access is limited to the areas adjacent to the those rivers. The extent to which the general public can see the easement area from the rivers is limited further by the 3- to 10- foot river banks. Finally, uncertainty persists regarding public access to the Little River. Thus, we conclude that the contribution of the easement area was not for the scenic enjoyment of the general public. 2. Pursuant to Governmental Conservation Policy A contribution for the preservation of open space is pursuant to a clearly delineated governmental conservation policy if it further[s] a specific, identified conservation project. Sec A-14(d)(4)(iii)(A), Income Tax Regs. While the program need not identify individual lots or parcels of land for certification, it does need to be more than a general declaration of conservation goals. Id. A government program need not be funded for a contribution to satisfy this

108 [*34] requirement, but there must be a significant commitment from the government to the conservation project. Id. The regulations give, as an example of a contribution that meets this requirement, the donation of a perpetual conservation restriction to a qualified organization pursuant to a formal resolution or certification by a local governmental agency established under state law specifically identifying the subject property as worthy of protection for conservation purposes. Id. Champions Retreat contends that it made the contribution of the easement to preserve open space pursuant to a Georgia law directing the Georgia Department of Natural Resources and local governments to promulgate minimum standards for the protection of the natural resources, [the] environment, and vital areas of the state, including, but not limited to, * * * the protection of river corridors. Ga. Code Ann. sec (b) (2018). Champions Retreat also contends that it made this contribution pursuant to Columbia County s implementation of the Georgia Greenspace Program. We conclude that the Georgia statute cited by Champions Retreat does not support an identified conservation project, nor is there evidence that the Greenspace Program designated the easement area as worthy of protection for conservation purposes or that NALT s easement on the easement area is held

109 [*35] under the Greenspace Program. See sec A-14(d)(4)(iii)(A), Income Tax Regs. Champions Retreat argued at trial that the designation of the golf club as open space under the Columbia County Planning Commission s Vision 2035 plan showed that its contribution was pursuant to a local governmental conservation policy. While the Planning Commission did produce Vision 2035 pursuant to State law, it was not a law focused on conservation but rather on land development. We thus conclude that the preservation of open space was not pursuant to a clearly delineated governmental conservation policy. We need not consider whether Champions Retreat s preservation of open space yields significant public benefit--as required by section 170(h)(4)(iii)(A)-- because we find that it was neither for the enjoyment of the general public nor pursuant to a clearly delineated governmental conservation policy. IV. Conclusion Champions Retreat is not entitled to a deduction for a qualified conservation contribution for the 2010 tax year because it has not satisfied the conservation purpose requirement of section 170(h). Because we have determined that its contribution was not made for a conservation purpose, we do not reach whether any of the retained rights in the easement permit a use of the easement area that is

110 [*36] inconsistent with an accomplished conservation purpose, whether the baseline documentation is sufficient to allow NALT to police the future exercise of the retained rights in the easement area, or whether the value of the easement contribution is greater than zero. See sec A-14(e)(2), (g)(5)(i), (h), Income Tax Regs. We have considered all other arguments made and facts presented in reaching our decision, and, to the extent not discussed above, we conclude that they are moot, irrelevant, or without merit. To reflect the foregoing, Decision will be entered for respondent.

111 CLC UNITED STATES TAX COURT WASHINGTON, DC HOFFMAN PROPERTIES II, L.P., FIVE M ) ACQ I, LLC, TAX MATTERS PARTNER, ) ) Petitioner, ) v. ) Docket No COMMISSIONER OF INTERNAL REVENUE, ) ) Respondent ) ORDER By notice of final partnership administrative adjustment dated March 3, 2015, respondent disallowed a $15,025,463 deduction for a noncash charitable contribution (contribution) for the taxable year ending December 31, 2007, (year at issue) of petitioner Hoffman Properties II, L.P (Hoffman), and determined accuracy-related penalties under section On May 29, 2015, Five M Acq. I, LLC (TMP), the tax matters partner for Hoffman, filed a petition for readjustment of partnership items under section 6226, challenging these determinations. On August 5, 2016, respondent filed a Motion for Partial Summary Judgment, with respect to a portion of the contribution (respondent's first motion). On July 12, 2017, we issued an Order (first order) that granted respondent's first motion of August 5, 2016, and sustained respondent's disallowance of a deduction for a portion of the contribution for failure to comply with the requirements of section 170(h)(4)(B). On August 11, 2017, pursuant to Rule 161, petitioner timely filed a motion for reconsideration with respect to our first order. On September 7, 2017, respondent filed his response objecting to petitioner's motion. 'All section references are to the Internal Revenue Code (Code) and regulations in effect for the tax year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. SERVED Mar

112 - 2 - Background Hoffman and TMP were formed and operate in the State of Ohio. Hoffman was formed as a partnership and is treated as such for Federal income tax purposes. At all relevant times, Hoffman2 owned the Tremaine building (building) located at 1303 Prospect Ave., Cleveland, Ohio, as well as a pair of adjacent parking lots (adjacent lots) located at 1227 Prospect Ave., Cleveland, Ohio (collectively, the property). On December 28, 2007, Hoffman conveyed to the American Association of Historic Preservation (AAHP) an easement deed agreement (agreement) encumbering specific aspects of the property. Hoffman's contribution comprised a set of use restrictions encumbering (1) the exterior of the building (the easement), and (2) the air space above the building and adjacent lots (the restriction).3 AAHP is a non-profit corporation organized under the laws of the State of Ohio, and at the time of the conveyance was a recognized section 501(c)(3) public charity with the purpose of furthering historic preservation. The Agreement The agreement contains a number of recitals recognizing both AAHP's nonprofit status and its eligibility to receive qualified conservation contributions under section 170(h). It also expresses the parties' mutual desire to provide the general public a significant benefit through preservation of the property's "open space features", and the building's exterior for purposes of historic preservation. 2Whether directly or through its wholly owned subsidiary Prospect Ave Parking, LLC. 3On August 25, 2017, respondent filed a second Motion for Partial Summary Judgment (respondent's second motion), requesting summary adjudication with respect to the restriction portion of the contribution. On March 14, 2018, we issued an Order (second order) granting respondent's second motion and holding that Hoffman's restriction contribution failed to satisfy the perpetuity requirements of sec. 170(h)(5)(A) and sec A-14(e) and (g), Income Tax Regs.

113 - 3 - To achieve this end, the agreement grants AAHP the restriction, which restricts Hoffman's ability to develop or interfere with the property's air space.4 In addition, the agreement grants AAHP the easement, which operates to restrict Hoffman's ability to alter or modify the exterior of the building. The agreement, however, recognizes that Hoffman's contribution does not represent Hoffman's full interest in the property. In order to reconcile the restriction and easement with Hoffman's retention of the underlying property, the agreement establishes three tranches of rights with respect to Hoffman's continuing use of the property: (1) the unrestricted reserved; (2) the conditional or restricted; and (3) the expressly prohibited. The Unrestricted Reserved Rights Article 4 of the agreement establishes an explicit baseline. It provides Hoffman the absolute right to engage in all acts and uses that "do not substantially impair" the air space or the building's exterior, and "are not inconsistent with the purposes of" the agreement. The agreement's default rule provides that Hoffman may engage in all uses of the underlying property not expressly prohibited or otherwise restricted by the agreement, and deems that any use not so prohibited or restricted is consistent with the purposes of the agreement. With respect to these unrestricted rights, Hoffman's ability to act is unfettered and requires no prior notification to, or approval by, AAHP. The Restricted, Conditional Rights Article 3 of the agreement explicitly restricts Hoffman's right to make certain uses of the building's exterior and air space. In order to exercise any of its restricted rights, Hoffman must first seek and receive AAHP's permission to proceed. If Hoffman wishes to exercise any of its restricted rights, the agreement requires Hoffman to provide AAHP a formal request for permission (RFP). The 4The agreement defines "the Restriction" as the relinquishment of the "Air Space Development Rights". Air space development rights is a defined term encapsulating the "right to build any addition within the Air Space." Air space is defined as the "spaces * * * alongside the Building and above the roof of the building".

114 - 4 - RFP must contain all plans, specifications, design drawings and schedules relevant to the restricted use Hoffman wishes to undertake. The agreement does not constrain the scope, scale, or character of work Hoffman may propose in such an RFP. The agreement also does not impose on Hoffman an affirmative duty to selfevaluate its RFP against any relevant standards prior to submitting its request to AAHP. The agreement obliges AAHP to review any RFP submitted by Hoffman and, in doing so, requires AAHP to base its approval or rejection on an application of the "secretary's standards".5 The agreement provides AAHP a 45-day window to complete its review of any RFP and tender a formal disposition to Hoffman with respect thereto. If AAHP fails to expressly reject or approve Hoffman's RFP within this 45-day window, then a default rule (the 45-day default provision) provides that AAHP's failure: shall be deemed to constitute approval by Grantee [i.e., AAHP] of the plan or request as submitted and to permit Grantors [i.e., Hoffman] to undertake the proposed activity in accordance with the plan or request as submitted. The Grant of Rights to AAHP The agreement further provides AAHP with various rights, responsibilities, and obligations meant to advance the stated conservation purpose of the agreement. Notably, the agreement provides AAHP the authority to pursue any and all legal or equitable remedies against Hoffman, but only if Hoffman violates the agreement's terms. 5The agreement defines "the Secretary's standards" in paragraph 3.3 as the "Secretary of the Interior's Standards for Rehabilitation and Guidelines for Rehabilitating Historic Buildings," located at 36 C.F.R. sec Paragraph 2.3 of the agreement similarly, but more broadly, defines the Secretary's standards by reference to 36 C.F.R. sec. 67, generally.

115 - 5 - Subsequent Events On December 31, 2007, the agreement was recorded in Cuyahoga County, Ohio. On September 29, 2008, Hoffman claimed the contribution as a noncash charitable conservation contribution in the amount of $15,025,463 on its return for the year at issue. On October 26, 2009, a representative from Hoffman contacted AAHP, requesting execution of an agreement purporting to be a "correction" to the easement. The agreement is titled "Public Law 'Special Rules' Compliance Agreement" (subsequent agreement), and purports to be a section of the easement that was "inadvertently deleted" just before signing. Exclusive of its recitals, the subsequent agreement's terms mirror near identically section 170(h)(4)(B)(i) and (ii) as they purport to protect the entire exterior of the building; prohibit any change to the building's exterior that would be inconsistent with the building's historical character; and certify--under penalty of perjury--that AAHP is a qualified easement-holding organization with the resources and commitment to manage and enforce the easement. The subsequent agreement was executed by representatives of Hoffman and AAHP, but it was not recorded as an amendment to the easement. Discussion I. Reconsideration, Generally Reconsideration under Rule 161 serves the limited purpose of correcting substantial errors of fact or law. Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998). The granting of a motion for reconsideration rests with the discretion of this Court. Vaughn v. Commissioner, 87 T.C. 164, 166 (1986). A motion for reconsideration is not the appropriate mechanism by to which reassert previously unsuccessful arguments or to present new legal theories. Bedrosian v. Commissioner, 144 T.C. 152, 156 (2015). Accordingly, the Court declines to grant motions for reconsideration absent a showing of unusual circumstance or substantial error. Id.; Estate of Quirk v. Commissioner, 928 F.2d 751, 759 (6th Cir. 1991), aff'g in part, remanding in part T.C. Memo

116 - 6 - II. Conservation Contributions Section 170(a)(1) provides taxpayers a deduction for any charitable contribution made during the taxable year. Charitable contributions may include gifts of property to charitable organizations that are made with charitable intent and without the receipt, or expectation of receipt, of adequate consideration. Zarlengo v. Commissioner, T.C. Memo , at *18; see sec A-1(h)(1) and (2), Income Tax Regs. Section 170(f)(3)(A) disallows a deduction for noncash charitable contributions of property consisting of less than a donor taxpayer's entire interest in that property. The Code, however, provides an exception to this general rule for a taxpayer making a "qualified conservation contribution". Sec. 170(f)(3)(B)(iii). As pertinent here, a qualified conservation contribution must be made "exclusively for conservation purposes." Sec. 170(h)(1). The contribution of an easement encumbering the facade of a certified historic structure, or other building located within a registered historic district may constitute a qualified conservation contribution. Sec. 170(h)(4)(A)(iv) and (C). The contribution of such an easement, however, "shall not be considered exclusively for conservation purposes unless" the contribution complies with the requirements of section 170(h)(4)(B)(i) (the preservation and prohibition requirement), and section 170(h)(4)(B)(ii) (the sworn statement requirement). Sec. 170(h)(4)(B) (emphasis added). III. Hoffman's Positions In our first order we recognized that the agreement's 45-day default period curtails AAHP's authority to prevent, or right to legally or equitably remedy, alterations or modifications to the building's facade that are inconsistent with the historical character of the building. Thus, we held that the terms of the agreement failed to satisfy the preservation and prohibition requirements of section 170(h)(4)(B)(ii). Additionally, in our first order we recognized that the agreement's recitals and terms averred that AAHP constituted a qualified organization able and ready to enforce the easement. We also recognized, however, that the agreement lacked any sworn statement or other certification, made by Hoffman and AAHP, that would place the veracity of those representations under penalty of perjury. Accordingly, we held that, at the close of Hoffman's tax year at issue, Hoffman

117 - 7 - had not satisfied the sworn statement requirement of section 170(h)(4)(B)(ii), and was therefore not entitled to a deduction for the year at issue. Hoffman moves for reconsideration of both our holdings. With respect to our preservation and prohibition holding, Hoffman argues that the agreement's shortcomings identified in, and informing our holding are irrelevant as the general public or the Attorney General of Ohio have the right to prevent Hoffman from altering or modifying the building's facade in a manner inconsistent with the building's historic character.6 With respect to our sworn statement holding, Hoffman alleges that the Court erred by: (1) failing to recognize that the notarization of the agreement constituted a statement or certification made under penalty of perjury sufficient to satisfy the sworn statement requirement; and (2) declining to exercise its equitable powers to reform the terms of the agreement in order to allow the terms of the subsequent agreement to retroactively perfect the shortcomings of the original agreement. IV. Preservation and Prohibition The contribution of an easement "shall not be considered to be exclusively for conservation purposes unless" the preservation and prohibition requirement is satisfied. Sec. 170(h)(4)(B) (emphasis added). The preservation and prohibition requirement requires that the terms of an easement contribution must contain restrictions that perpetually preserve the subject building's entire exterior and prohibit any change thereto inconsistent with that building's historical character. Sec. 170(h)(4)(B)(i); see sec. 170(h)(5)(A). As discussed in our first order, the terms of the agreement are insufficient to ensure the perpetual preservation of the building's exterior, as required by section 170(h)(4)(B)(i). The agreement reserves to Hoffman a set of restricted rights, the 6Hoffman additionally argues that the Court erred in interpreting the agreement terms. Specifically, Hoffman argues that we misinterpreted the operation of the restricted rights, and the 45-day default provision. Hoffman incorporated their argument, as presented in this motion for reconsideration, into its opposition to respondent's second motion. Accordingly, we decline to again address this particular portion of Hoffman's argument, and choose to incorporate our analysis and holding as detailed in our second order of March 14, 2018.

118 - 8 - exercise of which Hoffman may only undertake when it submits to AAHP an RFP and receives AAHP's approval to proceed with that RFP. In addition to providing these general procedures, however, the agreement also contains the 45-day default provision. The 45-day default provision provides that, if AAHP fails to approve or reject Hoffman's RFP within 45 days, then Hoffman's RFP will be approved by default. The agreement, in addition to providing AAHP the right to approve or reject Hoffman's RFPs, provides AAHP the right to seek legal and equitable remedies for Hoffman's breach of the agreement's terms. In our first order, applying relevant Ohio law to interpret and harmonize the agreement's terms, we determined that the operation of the 45-day default provision curtailed AAHP's authority to prevent alterations and modifications to the building's exterior inconsistent with the historical character of the building, and similarly stripped AAHP of any legal or equitable right to remedy any such alteration. Accordingly, we held that the agreement failed to satisfy the preservation and prohibition requirements of section 170(h)(4)(B)(i), and that Hoffman was not eligible for a deduction under section 170(h) for the year at issue. Nonetheless, Hoffman argues that, should the 45-day default period be construed as a waiver of AAHP's rights under the easement, then Ohio law operates to empower the people and Attorney General of Ohio to enforce the easement and prevent alterations and modifications to the exterior of the building inconsistent with its historic character. In support of this proposition Hoffman invites our attention to, inter alia, Ohio Rev. Code, secs , and , and associated Ohio case law. This body of law, generally, empowers the Ohio Attorney General to enforce, oversee, and administer charitable interests and nonprofit corporations. See Ohio Admin. Code 109:1-1-01(D)(2). In making this contention, Hoffman's argument appears to misconstrue the holding of our first order. Our first order did not feature any finding, inference, or supposition that AAHP might waive, abdicate, or otherwise neglect to enforce or exercise its rights pursuant to the agreement. Rather, our first order held that, because of the 45-day default provision, the rights provided to AAHP pursuant to the agreement are insufficient to perpetually preserve and protect the building exterior as required by section 170(h)(4)(B)(i). It is undisputed that AAHP constitutes a nonprofit corporation subject to the oversight and authority of the Ohio Attorney General. It is undisputed that Ohio

119 _ 9 _ law empowers the Attorney General to initiate a suit to enforce the terms of this agreement, if AAHP neglects to enforce the rights and powers granted it therein. None of the Ohio law cited by Hoffman, however, states that the Ohio Attorney General's exercise of such powers imbue him with any greater right or dominion over a charitable interest, or property, than otherwise possessed by the erstwhile ineffective charitable organization. Thus, it is unclear why Hoffman believes that a hypothetical "enforcement" of the agreement by the Ohio Attorney General would somehow alter the scope and applicability of the legal and equitable rights granted through the agreement's terms.7 See 1982 East, LLC v. Commissioner, T.C. Memo , slip op. at (easement must provide a donee rights sufficient to protect the conservation purpose of the contribution, and the ability to enforce those rights); Gorra v. Commissioner, T.C. Memo , at *25-*28 (easement terms must provide the donee organization "the ultimate say" in alterations to the conservation property). Accordingly, Hoffman has failed to persuade us that we erred in our first order, in holding that the terms of the agreement failed as a matter of law to satisfy the preservation and prohibition requirements of section 170(h)(4)(B)(i), and we affirm our grant of partial summary judgment on the grounds set forth therein. V. Sworn Statement A. Notarization The contribution of an easement "shall not be considered to be exclusively for conservation purposes unless" the sworn statement requirement satisfied. Sec. 170(h)(4)(B) (emphasis added). To satisfy the sworn statement requirement, the donor-taxpayer and donee must "enter into a written agreement certifying, under penalty of perjury, that the donee" is a qualified organization with the resources to manage and enforce the easement, and a commitment to do so. Sec. 170(h)(4)(B)(ii). 7We do not construe Hoffman's argument to suggest, or imply, that the terms of the agreement may be subject alteration pursuant to the doctrine of cy pres, and would otherwise reject an attempt to raise such an argument here as a new legal theory improperly raised for the first time within the context of a motion for reconsideration. Bedrosian v. Commissioner, 144 T.C. at 156.

120 As discussed in our first order, the agreement--signed by representatives of Hoffman and AAHP--contains language averring that AAHP was a qualified organization, with the resources and commitment to manage and enforce terms of the agreement. The agreement, however, lacked any language that would place the veracity and truthfulness of those representations "under penalty of perjury". In opposing respondent's first motion, Hoffman argued that a notary public's notarization of the agreement was sufficient to constitute a statement made under penalty of perjury, and was thus sufficient to satisfy the sworn statement requirement of section 170(h)(4)(B)(ii). In our first order we disagreed, determining that notarization is, generally, a means of preventing fraud and forgery, and authenticating documents. See e.g., Bartholemew v. Blevins, 679 F.3d 497, 502 (6th Cir. 2012); Fed. R. Evid. 902(8); Ohio Rev. Code, secs and Accordingly, we rejected Hoffman's argument and sustained the disallowance of Hoffman's conservation contribution deduction for the year at issue. In its motion for reconsideration Hoffman, again, argues that relevant law establishes that a signed and notarized agreement constitutes a statement or verification under "penalty of perjury", sufficient to satisfy the requirements of section 170(h)(4)(B)(ii). Hoffman argues that notarized statements are more authoritative and reliable than statements certifying that a document, and the representations therein, are made under penalty of perjury. Hoffman argues that, given the agreement's notarization, there was no need for Hoffman and AAHP to declare the agreement made under penalty of perjury, and that doing so would have been "superfluous." We have reviewed the law provided by Hoffman, and determined that it is inapposite. Hoffman's proposition relies on cases where various courts have held that the authenticity or legal usefulness of particular documents could not be established absent notarization, notwithstanding the presence of a purported party signature declaring or otherwise verifying the truthfulness of the contents therein. In each of those cases, however, the documents at issue--primarily affidavits--are of the type whose authenticity and reliability as a record, or as evidence, is of particular concern. Under relevant law, affidavits are written declarations prepared under oath before a proper officer. See Toledo Bar Assn. v. Neller, 809 N.E.2d 1152, (Ohio 2002) ("[A]n affidavit is 'a written declaration under oath'", and "Notaries public are of course the persons who most often administer the oaths that appear on affidavits"). Because a notary is considered such an officer and may administer such an oath, in those particular affidavit cases, notarization is required to authenticate and certify that the oath was administered

121 and the subject document was prepared thereunder. M Balimunkwe v. Bank of America, 2016 WL 75084, at *9 (S.D. Ohio 2016) (notarization is "conclusive evidence of the facts stated in the notary's certification"). Accordingly, in those particular affidavit cases, absent the requisite notarization confirming the document was prepared under oath, those documents failed to qualify as affidavits. Section 170(h)(4)(B)(ii) establishes a baseline for taxpayers wishing to qualify for a conservation contribution deduction. The Code does not require the parties to provide an affidavit, to submit a written declaration prepared under oath. Instead, the Code requires that the parties make certain representations under penalty of perjury in a written agreement. See sec Accordingly, there is no need for a notary to administer any oath, or to attest that the representations of the donor-taxpayer and donee were made thereunder. Presumably, should parties wish to comply with the sworn statement requirement by proffering a written declaration made under oath and notarized accordingly, such an affidavit may very well satisfy section 170(h)(4)(B)(ii). Hoffman, however, has neither alleged that the agreement was prepared and signed under oath, nor has Hoffman attempted to argue that any of the notaries' declarations and seals affixed to the agreement purport to testify as much.8 Accordingly, Hoffman has failed to show that this matter is not simply a rehashing of a previously rejected legal argument, or that the holding of our initial order was in error. Estate of Quick v. Commissioner, 110 T.C. at Accordingly, reconsideration on this matter is inappropriate, and we affirm our 8Patricia L. Lanser, a Notary Public of the State of Ohio, set her seal to the following statement on December 27, 2007, in the State of Ohio, the County of Summit: BEFORE ME, a Notary Public in and for said County and State, personally appeared AMERICAN ASSOCIATION OF HISTORIC PRESERVATION, an Ohio non-profit corporation, by Matthew A. Heinle, its Authorized Representative who acknowledged that he did sign the foregoing instrument and that the same is his free act and deed individually and as such officer. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal* * * Near-identical statements are affixed to the agreement by additional Notary Publics with respect to execution of the agreement by Hoffman and Citizens Bank.

122 grant of partial summary judgment with respect to the sworn statement requirement on the grounds set forth in our first order. B. Reformation In our first order we examined Ohio law to ascertain whether Hoffman had established a prima facie case for reformation. We observed that scrivener's error is a form of mutual mistake which may justify reformation. See Castle v. Daniels, 475 N.E.2d 149, 153 (Ohio Ct. App. Apr. 25, 1984) (Ohio applies the Restatement (Second) of Contracts, sec. 155 to evaluate matters of mutual mistake, scriveners error); see also ArcelorMittal Cleveland, Inc. v. Jewell Coke Co., L.P., 750 F. Supp. 2d 839, (N.D. Ohio. 2010). We observed that under Ohio law, in order to establish mutual mistake, the parties must show that the terms embodied in a writing are materially at odds with the parties' identical intentions. See Restatement (Second) of Contracts, sec. 155; see also Riser Foods Co. v. Shoregate Props., LLC, 2011 U.S. Dist. LEXIS at *33-*38 (N.D. Ohio 2011). Materiality, in this context, relates to those contractual terms impacting the legal rights and obligations between the parties to the agreement. See Restatement (Second) of Contracts, sec. 155, cmts. a and e. Notwithstanding Hoffman's desire to secure a conservation contribution deduction, we determined that the record failed to establish any fact indicating that the omission of language compliant with the sworn statement requirement from the agreement rendered the agreement materially defective. In other words, Hoffman failed to establish that this omission impacted the legal rights and obligations between Hoffman and AAHP, as established by the agreement. Accordingly, we declined Hoffman's invitation to reform the original agreement. In its motion for reconsideration Hoffman again urges this Court to reform the agreement, and now argues that the tax benefits intended to arise from the agreement were material thereto. Hoffman argues that it would not have entered into the agreement but for its entitlement to a tax deduction, and that the absence of language satisfying the sworn statement requirement functions to deprive Hoffman of its desired benefit. Hoffman does not, however, explain how its inability to secure a desired tax benefit implicates materiality in this context, nor does Hoffman set forth any specific fact to establish that the legal rights and obligations between Hoffman and AAHP as established by the agreement are in any way impacted by the omission of the language contained within the subsequent agreement.

123 It is well settled that a taxpayer's expectations and desires as to the tax consequences of his or her transaction are not determinative, and that the tax consequences of a closed transaction are fixed. Belk v. Commissioner, T.C. Memo , at *12-*16; see Estate of Nicholson v. Commissioner, 94 T.C. 666, 674 (1990) (reformation of a closed transaction will not affect or unsettle the rights of non-parties, including the Federal Government). Accordingly, Hoffman has failed to show that reconsideration is appropriate.9 Upon due consideration, it is hereby ORDERED that petitioner's Motion for Reconsideration, filed on August 11, 2017, is denied. (Signed) Joseph W. Nega Judge Dated: Washington, D.C. March 14, Hoffman argues in the alternative that, by way of the subsequent agreement, it substantially complied with the requirements of section 170(h)(4)(B)(ii). Substantial compliance is narrow equitable doctrine designed to avoid imposing a hardship upon a taxpayer who has done all they can reasonably do to, but have nevertheless failed to, satisfy the requirements of a statutory provision. Estate of Chamberlain v. Commissioner, T.C. Memo , aff'd, 9 F. App'x 713 (9th Cir. 2001). The Tax Court, generally, applies the doctrine of substantial compliance only when a taxpayer fails to comply with procedural or regulatory requirements, but nonetheless has managed to fulfill the requirements of the governmg statute. Estate of Clause v. Commissioner, 122 T.C. 115, 122 (2004). Application, here, of the doctrine of substantial compliance is inappropriate. The governing statutory language of sec. 170(h)(4)(B)(ii) is clearly and unambiguously mandatory. Sec. 170(h)(4)(B) provides that the donation of a conservation easement shall not be considered a qualified conservation contribution unless, and therefore not deductible until, the sworn statement requirement is satisfied. Hoffman and AAHP failed to comply with the sworn statement requirement at the time of the easement contribution. Accordingly, Hoffman failed to fulfill the requirements of the governing statute, and was not entitled to a qualified conservation contribution deduction for the year at issue.

124 CLC UNITED STATES TAX COURT WASHINGTON, DC HOFFMAN PROPERTIES II, L.P., FIVE M ) ACQ I, LLC, TAX MATTERS PARTNER, ) ) Petitioner, ) v. ) Docket No COMMISSIONER OF INTERNAL REVENUE, ) ) Respondent ) ORDER By notice of final partnership administrative adjustment dated March 3, 2015, respondent disallowed a $15,025,463 deduction for a noncash charitable contribution (contribution) for the taxable year ending December 31, 2007, (year at issue) of petitioner Hoffman Properties II, L.P (Hoffman), and determined accuracy-related penalties under section On May 29, 2015, Five M Acq. I, LLC (TMP), the tax matters partner for Hoffman, filed a petition for readjustment of partnership items under section 6226, challenging these determinations. On August 24, 2017, respondent filed the present Motion for Partial Summary Judgment (motion) and a supporting memorandum of law. Respondent's motion seeks summary judgment as to whether a portion of Hoffman's contribution, the use restrictions encumbering the airspace of a specific property, fails to satisfy the perpetuity requirements of section 170(h)(5)(A) and section 1.170A-14(e) and (g), Income Tax Regs.2 On August 25, 2017, respondent ¹All section references are to the Internal Revenue Code (Code) and regulations in effect for the tax year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. 2Because, in deciding this issue, we determine that Hoffman is not entitled to the noncash charitable contribution deduction for the year at issue, we need not reach respondent's alternative argument as to whether Hoffman's contribution satisfied the "qualified real property interest" requirements of sec. 170(h)(2)(c). SERVED Mar

125 - 2 - filed a First Amended Motion for Partial Summary Judgment. For the reasons stated below, we shall grant respondent's motion as amended. Background Hoffman and TMP were formed and operate in the State of Ohio. Hoffman was formed as a partnership and is treated as such for Federal income tax purposes. At all relevant times, Hoffman3 owned the Tremaine building (building) located at 1303 Prospect Ave., Cleveland, Ohio, as well as a pair of adjacent parking lots (adjacent lots) located at 1227 Prospect Ave., Cleveland, Ohio (collectively, the property). On December 28, 2007, Hoffman conveyed to the American Association of Historic Preservation (AAHP) an easement deed agreement (agreement) encumbering specific aspects of the property. Hoffman's contribution comprised a set of use restrictions encumbering (1) the exterior of the building (the easement), and (2) the air space above the building and adjacent lots (the restriction).4 AAHP is a non-profit corporation organized under the laws of the State of Ohio, and at the time of the conveyance was a recognized section 501(c)(3) public charity with the purpose of furthering historic preservation. The conveyance was recorded on December 31, 2007, in Cuyahoga County, Ohio. Hoffman considered the conveyance a noncash charitable conservation contribution, and as such--on September 29, claimed a $15,025,463 deduction on its self-prepared, timely return for the year at issue. 3Whether directly or through its wholly owned subsidiary Prospect Ave Parking, LLC. 40n August 5, 2016, respondent filed a Motion for Partial Summary Judgment (first motion), with respect to the easement portion of the contribution. On July 12, 2017, this Court issued an Order granting respondent's first motion (first order), holding that Hoffman's contribution of the easement failed to entitle Hoffman to a deduction for the year at issue, as it failed to satisfy the requirements of sec. 170(h)(4)(B).

126 - 3 - The Agreement and Terms of The Restriction The agreement contains a number of recitals both recognizing AAHP's non-profit status and its eligibility to receive qualified conservation contributions under section 170(h), and expresses the parties' mutual desire to preserve the property's "open space features" and to deliver the general public a significant benefit from the preservation thereof. The agreement defines open space features as "the scenic panorama and historic urban landscape of the neighborhood in which the [p]roperty is located." To achieve this end, the agreement grants AAHP the restriction.5 Through this restriction Hoffman generally relinquishes its right to develop the property's air space, and covenants to maintain such in "a manner so as not to impair or interfere with the Open Space Features of the Property", stating, in relevant part: The purposes of the Restriction are to assure [sic] that the Open Space Features of the Property will be retained and maintained forever for the scenic, aesthetic, cultural and historic enjoyment of the general public and to prevent any use of the Air Space, except as specifically permitted in this Easement Agreement. The agreement, however, recognizes that Hoffman's contribution does not represent Hoffman's full interest in the property. In order to reconcile the restriction with Hoffman's retention of the underlying property, the agreement establishes three tranches of rights with respect to Hoffman's continuing use of the property: (1) the unrestricted reserved; (2) the conditional or restricted; and (3) the expressly prohibited. The Unrestricted Reserved Rights Article 4 of the agreement establishes an explicit baseline for the restriction. It provides Hoffman the absolute right to engage in all acts and uses that "do not substantially impair * * * the Open Space Features" and "are not inconsistent with 5The agreement defines "the Restriction" as the relinquishment of the "Air Space Development Rights". Air space development rights is a defined term encapsulating the "right to build any addition within the Air Space." Air space is defined as the "spaces * * * alongside the Building and above the roof of the building".

127 - 4 - the purposes of" the agreement. The agreement's default rule provides that Hoffman may engage in all uses of the underlying property not expressly prohibited or otherwise restricted by the agreement, and deems that any use not so prohibited or restricted is consistent with the purposes of the agreement. With respect to these unrestricted rights, Hoffman's ability to act is unfettered and requires no prior notification to, or approval by, AAHP. The Restricted, Conditional Rights Article 3 of the agreement explicitly restricts Hoffman's right to make certain uses of the air space. In order to exercise any of its restricted rights, Hoffman must first seek and receive AAHP's permission to proceed. Paragraph 3.1 states, in relevant part (emphasis added): Without the prior express written approval of Grantee [i.e., AAHP], which shall be exercised in accordance with Paragraph 3.2 and Paragraph 3.3 herein, Grantors [i.e., Hoffman] shall not undertake any of the following actions * * * (a) Construct any lateral addition to the Building (as opposed to any vertical addition within the Air Space) or further develop the Property in a manner contrary to the Secretary's Standards; * * * (f) Alter or change the appearance of the Air Space in a manner contrary to the Secretary's Standards; or (g) Erect external signs or advertisements (meaning signs or advertisements mounted or placed on the exterior of the Building which are visible to persons viewing the exterior of the Property) within the Air Space. Should Hoffman wish to make use of the property in any manner listed above, paragraph 3.2 of the agreement requires Hoffman to provide AAHP a formal request for permission (RFP) to proceed. The RFP must contain all plans, specifications, design drawings and schedules relevant to the restricted use Hoffman wishes to undertake.

128 - 5 - The agreement does not expressly constrain the scope, scale, or character of work Hoffman may propose in such an RFP. The agreement does not impose on Hoffman an affirmative duty to self-evaluate its RFP against any relevant standards prior to submitting such to AAHP. The agreement, instead, requires AAHP to review any RFP submitted by Hoffman. In doing so, AAHP must "apply" the "secretary's standards"6 and, informed thereby, approve or reject Hoffman's RFP. The agreement provides AAHP a 45-day window to complete its review of any RFP and tender a formal disposition to Hoffman with respect thereto. If AAHP fails to expressly reject or approve Hoffman's RFP within this 45-day window, then a default rule (the 45-day default provision) provides that AAHP's failure: shall be deemed to constitute approval by Grantee [i.e., AAHP] of the plan or request as submitted and to permit Grantors [i.e., Hoffman] to undertake the proposed activity in accordance with the plan or request as submitted. The Covenant to Maintain and Prohibited Rights Article 2 of the agreement obliges Hoffman to maintain the air space in a way so as not to impair or interfere with the open space features of the property. 6The agreement defines "the Secretary's standards" in paragraph 3.3 as the "Secretary of the Interior's Standards for Rehabilitation and Guidelines for Rehabilitating Historic Buildings," located at 36 C.F.R. sec Paragraph 2.3 of the agreement similarly, but more broadly, defines the Secretary's standards by reference to 36 C.F.R. sec. 67, generally. We take notice of the entirety of 36 C.F.R. sec. 67. These regulations were promulgated by the Department of the Interior (DOI), pursuant to a designation of authority contained in sec. 47(c)(2)(C), and (c)(3) of the Code, and are collectively titled "Historic Preservation Certifications Under the Internal Revenue Code." Sec. 170(h)(4)(C)(ii) incorporates this delegation of authority, and appropriates these regulations by reference. Sec. 47 governs a taxpayer's eligibility for tax credits resulting from the rehabilitation of a certified historic structure. Sec. 170(h)(4)(C)(ii) governs the deductibility of donations for qualified conservation contributions that preserve buildings located in registered historic districts certified as significant thereto by the DOI.

129 - 6 - To this extent, and as relevant here, Article 2 expressly prohibits the placement or erection of any "other buildings or structures, including satellite receiving dishes, small rooftop dishes, antenna or other data transmission or receiving devices or canopies" within the air space. The Grant of Rights to AAHP The agreement further provides AAHP with various rights, responsibilities, and obligations meant to advance the stated conservation purpose of the agreement. Notably, the agreement provides AAHP the authority to pursue any and all legal or equitable remedies against Hoffman, but only if Hoffman violates the agreement's terms. Discussion I. General A. Summary Judgment Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted with respect to all or any part of the legal issues in controversy "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, 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. The moving party bears the burden of proving there is no genuine issue of material fact. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). The factual materials and the inferences drawn therefrom will be considered in the light most favorable to the nonmoving party. Bond v. Commissioner, 100 T.C. 32, 36 (1993). When a motion for summary judgment is made and supported, the opposing party cannot rest upon mere allegations or denials, but must "set forth specific facts showing that there is a genuine dispute for trial." Rule 121(d). Whether the agreement satisfies the requirements of section 170(h) is a legal question appropriate for summary judgment. See Palmolive Bldg. Investors, LLC v. Commissioner, 149 T.C., (October 10, 2017). As we consider respondent's motion, we draw any factual inferences in favor of Hoffman.

130 - 7 - B. Conservation Contributions Section 170(a)(1) provides taxpayers a deduction for any charitable contribution made during the taxable year. Charitable contributions may include gifts of property to charitable organizations that are made with charitable intent and without the receipt or expectation of receipt of adequate consideration. Zarlengo v. Commissioner, T.C. Memo , at *18; see sec A-1(h)(1) and (2), Income Tax Regs. Section 170(f)(3)(A) disallows a deduction for noncash charitable contributions of property consisting of less than the donor taxpayer's entire interest in that property. The Code, however, provides an exception to this general all-ornothing rule for a taxpayer making a "qualified conservation contribution". Sec. 170(f)(3)(B)(iii). A qualified conservation contribution is defined as the contribution of a "qualified real property interest", to a "qualified organization", that is made "exclusively for conservation purposes." Sec. 170(h)(1). The requirements of section 170(h)(1) are conjunctive, and failure to satisfy any one of these elements will preclude a contribution from being a deductible qualified conservation contribution. See Carroll v. Commissioner, 146 T.C. 196, 205 (2016). C. Perpetual Protection of the Conservation Purpose A contribution is considered made for a "conservation purpose" if the contribution: (1) preserves an outdoor recreational land area for the use or education of the general public; (2) preserves a historically important land area or certified historic structure; (3) protects the habitat of particular flora or fauna; or (4) preserves an open space for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, State, or local government conservation policy. Sec. 170(h)(4)(A). A contribution made for any these conservation purposes will be considered "exclusively for conservation purposes" only when its terms protect the conservation purpose in perpetuity. Sec. 170(h)(5)(A); sec A-14(a), Income Tax Regs. A contribution qualifies as having been made exclusively for conservation purposes, and is considered to protect its conservation purpose in perpetuity, when it grants its recipient a set of legally enforceable rights and restrictions sufficient to enable it to prevent any use of the property that is inconsistent with the contribution's conservation purpose, or to remedy such use. Sec A-14(e)(1), Income Tax Regs. (incorporating paragraphs (g)(1) thru (6));

131 - 8 - see Glass v. Commissioner, 124 T.C. 258, 277 (2005), aff'd, 471 F.3d 698 (6th Cir. 2006); see also 1982 East, LLC v. Commissioner, T.C. Memo , slip op. at A contribution's use restrictions need not prohibit ordinary use of the underlying property, or hinder pre-existing uses of the property, so long as sufficient protections are in place to prevent the destruction of, or interference with, the conservation purposes of the contribution. Sec A-14(e), Income Tax Regs. To the extent that a contribution permits inconsistent use of the underlying property, such uses must be limited to those acts "necessary for the protection of the conservation interests that are the subject of the contribution". Id. para. (e)(3). When the terms of a contribution reserve to the donor rights to undertake specific uses of the underlying property, the donor must be obliged to notify the donee prior to exercising such a right; the donee must be provided the right to inspect the property to ensure compliance with the contribution's terms, and to prevent or remedy acts inconsistent with the conservation purpose by legal or equitable means. Id. paras. (g)(1), (g)(5)(i) and (ii). II. The Parties' Arguments A. Respondent Respondent argues that the restriction fails to qualify as having been made "exclusively for conservation purposes" as required by section 170(h)(5)(A). For purposes of this motion, respondent does not dispute that the agreement's restriction satisfies a statutory conservation purpose. Likewise, respondent does not dispute that the agreement provides AAHP a set of legally enforceable rights meant to ensure Hoffman's compliance with the agreement's written terms. Respondent argues, however, that the scope of AAHP's legally enforceable rights is insufficient to perpetually enforce the restriction, or to prevent uses inconsistent with the restriction's conservation purpose. Respondent argues that the 45-day default provision curtails AAHP's ability both to prevent Hoffman from undertaking inconsistent uses, and to seek legal or equitable remedies of such inconsistent uses because such use would not constitute a breach of the agreement's terms.

132 - 9 - Accordingly, respondent argues the plain language of the agreement is insufficient to be considered enforceable in perpetuity, to satisfy the requirements of section 1.170A-14(g)(1) and (5)(ii), Income Tax Regs. B. Hoffman Hoffman disagrees, arguing that the agreement's language is sufficient to prevent inconsistent use of the underlying property, and that the scope of AAHP's legally enforceable rights is sufficient to perpetually enforce the restriction's conservation purpose. Hoffman argues that the agreement's language expressly prohibits--that under no circumstances may Hoffman make--use of the property "inconsistent with the Secretary's Standards". Hoffman argues that the 45-day default provision operates to approve by default only proposed changes that are ipsofacto consistent with the secretary's standards; that, by the terms of the agreement, Hoffman is prohibited from even submitting an RFP inconsistent with the secretary's standards.7 In the alternative, Hoffman argues that respondent's position is analogous to those advanced by the Commissioner and rejected in Simmons v. Commissioner, T.C. Memo , aff'd, 646 F.3d 6 (D.C. Cir. 2011), Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), aff'g in part, vacating in part, and remanding in part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010), and BC Ranch II, L.P. v. Commissioner, 867 F.3d 547 (5th Cir. 2017), vacating and remanding Bosque Canyon Ranch, L.P. v. Commissioner, T.C. Memo Hoffman argues that "for the Court to find differently would be, at a minimum, a 7As an offer of textual evidence for this proposition, Hoffman invites our attention to paragraph 10.l(a) of the agreement. Paragraph 10.1 is a disclaimer whereby the parties disclaim "any rule of strict construction designed to limit the breadth of restrictions on alienation or use of property shall not apply in the construction or interpretation" of the agreement. To the extent Hoffman believes our analysis applies a rule of strict construction--contra proferentem, or the like--hoffman is mistaken. The parties do not allege, and we do not hold that an ambiguity exists within the relevant terms of the agreement. As such, we are afforded no occasion to apply any such rule of strict construction in our interpretation of the agreement's relevant provisions. Rather, we apply the plain meaning of the clear language employed by the parties to divine the meaning and operation of the contract as bargained for by the parties.

133 violation of the summary judgment standard requiring the Court to view any material facts and inferences in the light most favorable to the nonmoving party." Additionally, Hoffman argues that the potential failure of AAHP to timely reject an inconsistent use RFP, and subsequent default approval thereof, constitutes an act or happening so remote as to be negligible and should therefore be absolved by section 1.170A-14(g)(3), Income Tax Regs.8 III. Analysis A. The Terms of the Agreement Do Not Protect the Conservation Purpose in Perpetuity 1. Operation of Ohio Contract Law For the purposes of this inquiry, we must ascertain the legally enforceable rights granted to AAHP by the terms of the agreement, and whether those rights are sufficient to satisfy the requirements of section 170(h)(5)(A) and section 1.170A-14, Income Tax Regs. To determine a party's interests in and rights over property for Federal tax purposes, we apply the relevant State law. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985); Woods v. Commissioner, 137 T.C. 159, 162 (2011). Under Ohio law, the language of an easement deed is subject to the rules of contract law. Zagrans v. Elek, 2009 WL , at *3 (Ohio Ct. App. June 22, 2009). A court's primary role in examining a contract is to ascertain and give effect to the intent of the parties. Saunders v. Mortensen, 801 N.E.2d 452, 454 (Ohio 2004). Absent an ambiguity, courts will ascertain intent of the parties only 8As an additional argument, Hoffman claims that even if the 45-day default provision results in the agreement failing to satisfy secs. 170(h) and 1.170A- 14(g)(5)(ii), Income Tax Regs., the general public and/or the State of Ohio could enforce the terms of the agreement, and that the contribution should still qualify Hoffman for a deduction for the year at issue. Hoffman also advanced this argument in its Motion for Reconsideration of August 11, On March 14, 2018, we issued an Order denying that motion, and rejecting this argument. Accordingly, we decline to again address this particular portion of Hoffman's argument, and choose to incorporate our analysis and holding as detailed in our Order of March 14, 2018.

134 as expressed in the clear language they bargained to employ. Shifrin v. Forest City Enterprises, Inc., 594 N.E.2d 499, 501 (Ohio 1992). Contracts must be construed in a manner that gives effect to every provision. Saunders, 801 N.E.2d at 455. When interpreting a contract, courts presume that words are used for a specific purpose and will avoid interpretations that render portions of the agreement meaningless or unnecessary. Wohl v. Swinney, 888 N.E.2d 1062, 1066 (Ohio 2008). Where the general provisions of a contract conflict with a specific provision of the same document, the specific provision controls. Hilliard Props. v. Commonwealth Land Title Ins. Co., 1997 Ohio App. Lexis 5698, at *9 (Ohio Ct. App. Dec. 18, 1997) (citing Edmonson v. Motorists Mutual Ins. Co., 356 N.E.2d 722 (Ohio 1976)); Monsler v. Cincinnati Casualty C2, 598 N.E.2d 1203, 1209 (Ohio Ct. App. 1991). The construction of a contract is a matter of law. Saunders, 801 N.E.2d at The Plain Language of the Agreement The agreement broadly reserves to Hoffman the absolute right to make use of the underlying property in any manner that will not "substantially impair" the open space features, or would not otherwise be "inconsistent" with the agreement's purpose. The agreement deems consistent with the agreement's purpose any use of the property not explicitly prohibited or restricted therein, and provides that Hoffman's ability to act in this regard requires no prior notification be provided to, or approval be secured from AAHP. The agreement restricts, as relevant here, Hoffman's right to erect external signs or advertisements within the air space; construct a lateral addition to the adjacent building; develop the collectively encumbered property further; or to otherwise alter or change the appearance of the air space. The agreement, generally, prohibits Hoffman from exercising any of those restricted rights without first requesting and securing AAHP's prior written approval. AAHP maintains the authority to approve or disapprove any RFP submitted by Hoffman, and must "apply" the secretary's standards when exercising this authority. If AAHP fails to complete its review and provide Hoffman written approval or rejection of the RFP within 45 days of receipt thereof, then the RFP is deemed approved, and Hoffman is permitted to "undertake the proposed activity in accordance with the plan or request as submitted."

135 The agreement provides AAHP the authority to enforce the restrictions, prohibitions, and obligations mandated by the agreement. Notably, AAHP is imbued with the power to seek all possible legal and equitable remedies for any act violating the agreement's terms. 3. Application Conservation contributions may reserve conditional rights to donor taxpayers that permit the use and modification of conservation areas, and such a reservation of rights will not ab initio prevent a contribution from constituting a qualified conservation contribution. Sec A-14(e) and (g)(1), (5), Income Tax Regs.; see Glass v. Commissioner, 124 T.C. at 258. To be considered a qualified conservation contribution, however, the contribution's conservation purpose must be protected in perpetuity. Sec. 170(5)(A); sec A-14(a), (g), Income Tax Regs. To protect the conservation purpose in perpetuity the contribution must provide its donee the ability prevent uses of the property inconsistent with the contribution's conservation purpose. Sec A-14(g)(1), Income Tax Regs. Accordingly, the contribution must provide the qualified organization unlimited discretionary authority to approve or deny changes arising from those reserved conditional rights. See Gorra v. Commissioner, T.C. Memo , at *25-*28 (holding a conservation contribution as qualified because its terms granted the donee "the ultimate say in granting" the taxpayer the permission to alter the underlying property). The agreement details and unambiguously restricts Hoffman's ability to make a number of uses with respect to the air space. These restricted uses are not prohibited uses, as Hoffman may engage in any of those restricted activities so long as it first requests and secures the written approval of AAHP. The 45-day default provision provides an unambiguous, specific, carve-out from this written approval requirement, and operates to provide Hoffman automatic approval to exercise any restricted right, whether such use is consistent with the donation's conservation purpose or not. The general provisions of the agreement must give way to the specific. Monsler, 598 N.E.2d at The impact of the 45-day default provision is clear: it curtails AAHP's authority to review, and approve or reject Hoffman's request to make use of the property in a manner otherwise restricted by the agreement. AAHP's authority to review, and approve or reject a proposal to engage in a restricted use constitutes the only prophylactic powers provided to AAHP by the

136 agreement. As such, the 45-day default provision curtails AAHP's legal ability to prevent uses inconsistent with the donation's conservation purpose. Providing the donee a mere 45-day opportunity to prevent an inconsistent use is a far cry from the perpetual right to prevent an inconsistent use as required by the Code and regulations. See sec. 170(h)(5)(A); sec A-14(e) and (g)(1), (5)(ii), Income Tax Regs. Further, the 45-day default provision strips AAHP of a portion of its right to legally or equitably remedy any alterations or modifications that may be inconsistent with the donation's conservation purpose. The agreement provides AAHP the authority to seek legal and equitable remedies only for "violations of the terms of" the agreement. Because any proposed use approved and undertaken by the grace of the 45-day default provision is, by its unambiguous terms, compliant with--not in violation of--the agreement, AAHP possesses no authority to remedy such use that may be inconsistent with the donation's conservation purpose. The agreement's failure to provide AAHP the ability to remedy an inconsistent use undertaken in this fashion is inadequate to protect the conservation purpose in perpetuity.9 Sec. 170(h)(5)(A); sec A-14(g)(5)(ii), Income Tax. Regs; see 1982 East, LLC v. Commissioner, T.C. Memo , slip op. at (discussing the legislative history of section 170(h)(5), the requirement that contributions be subject to legally enforceable restrictions that prevent uses of the donor's retained interest that would be inconsistent with the conservation purpose of the contribution). 9As respondent observes in his response to Hoffman's motion for reconsideration, the 2005 edition of the Conservation Easement Handbook, published by the Land Trust Alliance and the Trust for Public Land, contains a model agreement for taxpayers and qualified organizations wishing to complete a qualified conservation contribution. This model agreement is very similar to the agreement at issue here, but deviates most notably with respect to the 45-day default provision. The model agreement explicitly provides that a donee's failure to act within 45 days "shall not be deemed to constitute approval of Grantor's request" to act upon a restricted right. (emphasis added). The Land Trust Alliance is an organization of over 1,100 land trusts throughout the United States, and the language used in its model agreement is likely used by hundreds of land trusts throughout the country.

137 Hoffman's Interpretation of the Agreement Attempts to Contravene the Plain Language of the Agreement Hoffman argues that an appropriate comprehensive reading of Article 3 requires us to read each restricted right as containing an explicit prohibition on the exercise of such a right in a manner contrary to the secretary's standards. In other words, each right restricted by paragraph 3.1 is also a right subject to an outer limit where acting thereupon becomes per se prohibited. Where the restricted rights are subjected to these outer limit prohibitions, Hoffman argues, the terms of Article 3 also operate to foreclose Hoffman from even proposing to undertake such a course of action, to request permission to engage in activity that does not accord with the secretary's standards. Hoffman invites our attention to the uses enumerated in and restricted by paragraph 3.1. Hoffman observes that a number of these provisions restrict Hoffman's ability to use the property "in a manner contrary to the secretary's standards." Hoffman argues that the use of this prepositional phrase in these particular individual restrictions establishes the outer limit of any otherwise permissible use restricted by the agreement. Hoffman notes that the agreement requires AAHP to review all proposals whereby Hoffman requests permission to exercise a restricted right, and that the agreement requires AAHP to reject any proposed use it finds to be contrary to the secretary's standards. Hoffman argues that reference to this review and approval criteria in the flush language of paragraph 3.1 renders any inconsistent request or proposal per se impermissible and ineligible for review or approval by AAHP. Because the article is constructed in this manner, Hoffman argues, the language of Article 3 prohibits any use contrary to the secretary's standards and the article, as a whole, is to be read as a set of procedures that establish a method for AAHP to evaluate the appropriateness of any "actions taken by Hoffman that are otherwise allowable under the agreement." Hoffman's arguments invite us to read the language of Article 3, and the individually restricted rights thereunder, in a manner contrary to their unambiguous language and in isolation from related operant provisions of the whole agreement. For the three reasons discussed below, we decline to do so. First, Hoffman declines to address the operant flush language of paragraph 3.1: the conditional clause establishing how and when Hoffman may be allowed to exercise its restricted rights. Paragraph 3.1 restricts Hoffman from undertaking

138 any of the actions listed therein until it requests, and secures, the prior approval of AAHP. This clause is a binary switch. If Hoffman does not secure approval, then it may not engage in any of the restricted uses. If Hoffman receives approval, then it may engage in any of the restricted uses. And as addressed above, Hoffman may secure approval by default, or in writing. Second, Hoffman's "outer limit" argument fails to correspond with the unambiguous language employed in paragraph 3.1, and is undermined by a complete reading of the agreement. For example, paragraph 3.1(f) restricts Hoffman's ability to "[a]lter or change the appearance of the Air Space in a manner contrary to the Secretary's Standards". Article 4 reserves to Hoffman the absolute right to make use of the property in any manner not expressly restricted or prohibited by the agreement. Article 2 expressly prohibits Hoffman only from erecting satellite dishes and other broadcast antennae within the air space. In order to give effect to the whole agreement, these articles must be reconciled with one another and the restrictions of paragraph 3.1. The result of that reconciliation is clear. Hoffman holds the right to alter or change the appearance of the air space up to the point where such alterations run afoul of the secretary's standards, and to the extent Hoffman wishes to make an alteration that may fail to comply with the secretary's standards such a use is restricted until Hoffman secures the approval of AAHP.442 As employed in the restrictions under paragraph 3.1, the phrase "contrary to the Secretary's Standards" cannot reasonably be read in a manner other than as a descriptor that characterizes the use contemplated by that specific restriction. As the agreement stands, the language the parties chose to employ fails to reflect the prohibition-within-a-restriction advocated by Hoffman. Should the parties have intended to prohibit Hoffman's ability to alter or modify the air space in a manner advocated by Hoffman here, the parties could have simply imposed a blanket 442We observe that the secretary's standards exclusively address the modification and restoration of historic buildings and structures. The agreement does not prescribe an alternative standard for AAHP to apply in reviewing proposed changes to, or restricted use of, the property's open space features or air space. The parties have not addressed this issue. Accordingly, because we conclude that the plain language of the agreement fails to sufficiently protect the contribution's statutory conservation purpose, we need and do not decide whether the secretary's standards are germane to the instant case.

139 restriction or prohibition on the alteration of the air space in a manner similar to those imposed in Article 2 of the agreement. Third, Hoffman argues that Article 3 must be read in a manner which, notwithstanding the above, proscribes Hoffman from even proposing to undertake an action inconsistent with the secretary's standards. Hoffman does not invite our attention to any particular provision that may be reasonably interpreted to stand for this proposition, nor does Hoffman allege an ambiguity giving rise to such an interpretation. In this regard, Hoffman's proposed interpretation of Article 3 is again contrary to a reading of the agreement as a whole. Article 4 provides that Hoffman may engage in any use not expressly prohibited or restricted by the agreement. Should Hoffman choose to engage in such use it is under no obligation to provide notice to or seek approval from AAHP before proceeding to engage in such use. Indeed, in the light of the Article 4 terms, there would be no need for Hoffman to submit an RFP for any use not contrary to the secretary's standards, as any such u_s_e of the property not expressly prohibited or restricted by the agreement is per se consistent with the agreement's purposes, and requires no prior notification to nor approval by AAHP. If the agreement expressly restricts uses contrary to the secretary's standards, then those are explicitly the types of uses the agreement obliges Hoffman to propose to, and receive permission from, AAHP prior to undertaking such use. Hoffman's argument in this respect relies on an ipse dixit proposition: that Hoffman is prohibited from undertaking any use, or even proposing to make such use that would be contrary to the secretary's standards. This proposition is conclusory and is untethered from the plain language of the agreement. While we agree that under the terms of Article 3 AAHP ought to reject any Hoffman RFP proposing to act "contrary to the secretary's standards", we observe that there is no proscription on Hoffman's ability to propose to act in such a manner, and that should Hoffman submit an inconsistent RFP, the 45-day default provision renders moot what AAHP ought to do as, after 45 days, the provision strips from AAHP the ability to do anything. It is clear to us that the parties negotiated these contract provisions to empower AAHP with a set of legally enforceable rights meant to generally prevent uses destructive of or inconsistent with the conservation of the air space and the open space features of the property. It is also clear to us, however, that the parties wished to limit the scope of those rights and have carefully tailored an agreement

140 reflective of that intent. In doing so, however, the limitations imposed on the scope of those rights cause the restriction to fail to satisfy the requirements of section 170(h)(5)(A) and section 1.170A-14, Income Tax Regs. B. Hoffman's Alternative Positions 1. Misconstruing Respondent's Position Hoffman argues that respondent's position" is analogous to those advanced by the Commissioner and rejected by the courts in Glass v. Commissioner, 124 T.C. 258 (2005), ab,471 F.3d 698 (6th Cir. 2006); Simmons v. Commissioner, T.C. Memo , aff'd, 646 F.3d 6 (D.C. Cir. 2011); and BC Ranch II, L.P. v. Commissioner, 867 F.3d 547 (5th Cir. 2017), vacating and remanding Bosque Canyon Ranch, L.P. v. Commissioner, T.C. Memo ¹² In each of those cases, the Commissioner attempted to challenge the deductibility of a conservation contribution. The Commissioner's challenge centered on his belief that the rights reserved by the parties in the express language of their respective contribution agreements were inconsistent with any statutory conservation purpose. The Commissioner's challenge, however, required the court to find or infer that the qualified organization would decline to enforce its rights provided, or elect to abdicate its responsibilities assigned by the express terms of the contributions. In each of those cases, the Commissioner's challenge was rejected as the courts uniformly recognized that the competing interests of the taxpayer and the "Hoffman's argument characterizes respondent's position as an "assertion that AAHP would not enforce its rights." ¹²Hoffman also invites us to analogize respondent's position with an alternative argument addressed in the dicta of Kaufman v. Shulman, 687 F.3d 21, 28 (1st Cir. 2012), aff'g in part, vacating in part, and remanding in part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010). To the extent Hoffman's Kaufman argument is not addressed, and may be construed as an request for us to conflate respondent's position with the portion of Kaufman that vacated this Court's initial holding, we observe that this case does not appear appealable to the U.S. Court of Appeals for the First Circuit, and accordingly we are not bound by that court's disposition. M Golsen v. Commissioner, 54 T.C. 742, 757 (1970), afcd, 445 F.2d 985 (10th Cir. 1971); see also Palmolive Bldg. Investors, LLC v. Commissioner, 149 T.C. at (slip op. at 31-32).

141 qualifying organization, as expressed in the terms of each respective contribution agreement, sufficiently guaranteed the protection of their subject conservation purposes. The courts also recognized that accepting the Commissioner's challenge required a factual finding establishing that the parties would or had collaborated to act in a manner contrary to the express terms of each agreement. The courts found, in each case, that such a proposition was wholly unsupported by the record. Accordingly, the courts rejected the Commissioner's speculative argument, and declined to ignore the express terms of the contributions that provided the qualified organizations their legal right to prevent or remedy any use of the property inconsistent with the contribution's conservation purpose. Simmons v. Commissioner, 646 F.3d at 8-11; Glass v. Commissioner, 471 F.3d at ; BC Ranch II, L.P. v. Commissioner, 867 F.3d at 552. Hoffman's argument misconstrues respondent's position. Respondent's position is unlike the positions advanced by the Commissioner in Glass, Simmons, and BC Ranch II, because, here, respondent's position does not require any factual finding or inference, or otherwise rely on a suggestion of mal- or misfeasance. Rather, in this case, respondent's position is that the express terms of the agreement fail to provide AAHP the legal rights and powers sufficient to enforce the agreement's conservation purpose in perpetuity. Respondent further argues that the language of the agreement contemplates a specific contingency, and the occasion of that contingency operates to limit AAHP's ability to prevent or remedy any use of the property inconsistent with statutory and regulatory requirements. Based on respondent's motion before us, we have no occasion to infer13 or otherwise presume that AAHP will fail to enforce its rights, or comply with its duties and obligations under the agreement. Instead, our holding derives from the express language of the agreement, and the contours of the legal rights and authority granted therein at the time of the contribution. Here, unlike the agreements in Glass, Simmons, and BC Ranch II, the express language of this agreement does not provide AAHP with legal rights sufficient to perpetually prevent or remedy a use of the property inconsistent with the contribution's conservation purpose. Accordingly, Hoffman's reliance on those cases is misguided. 13Contract interpretation is a matter of law. See e.g., Saunders, 801 N.E.2d at 454. To the extent Hoffman, as part of its alternative argument, here, suggests our reading of the agreement's plain language results in a "violation" of summary judgment standard (i.e., that we must construe all factual inferences in favor of the nonmoving party), Hoffman's is misguided.

142 The "So Remote as to be Negligible" Standard Hoffman argues that on the date of the contribution "the possibility that AAHP would not deny a request (within 45 days) by AAHP [sic] inconsistent with the Secretary's Standards was so remote as to be negligible." We construe this line of argument as Hoffman's attempt to avail itself of section 1.170A-14(g)(3), Income Tax Regs. Section 1.170A-14(g)(3), Income Tax Regs., provides that the deduction for an otherwise sufficient qualified conservation contribution will not be disallowed for a contribution's failure to protect its conservation purpose in perpetuity "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." A particular act or event will only be considered "so remote as to be negligible" when the parties would, generally, consider such an event so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction. See Palmolive Bldg. Investors, LLC v. Commissioner, 149 T.C. at (slip op. at 37-39). The parties drafted the agreement to address a specific contingency: AAHP's failure to complete a timely review of, and tender a decision with respect to, any RFP advanced by Hoffman. The parties agreed that the 45-day default provision should operate to assign a consequence for any such potential failure on the part of AAHP. The parties did not consider the operation of the 45-day default provision an improbable event. The parties did not choose to ignore or neglect the possibility that AAHP might spend more than 45 days reviewing a particular RFP. Instead the parties worked to address that specific circumstance, and assigned it a specific outcome. Accordingly, the contractual operation of the 45-day default provision cannot be considered so remote as to be negligible. Section 1.170A-14(g)(3), Income Tax Regs., will not operate to absolve the agreement of its otherwise insufficient language to preserve Hoffman's deduction.

143 Upon due consideration, it is hereby ORDERED that respondent's First Amended Motion for Partial Summary Judgment, filed August 25, 2017, is granted. (Signed) Joseph W. Nega Judge Dated: Washington, D.C. March 14, 2018

144 Case: Document: Page: 1 Date Filed: 08/14/2018 IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED August 14, 2018 No Lyle W. Cayce Clerk PBBM-ROSE HILL, LIMITED; PBBM CORPORATION, Tax Matters Partner, v. Petitioners - Appellants 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.

145 Case: Document: Page: 2 Date Filed: 08/14/2018 No 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 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 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, 2

146 Case: Document: Page: 3 Date Filed: 08/14/2018 No 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 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 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 1 Red 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. 3

147 Case: Document: Page: 4 Date Filed: 08/14/2018 No 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 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 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 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. 4

148 Case: Document: Page: 5 Date Filed: 08/14/2018 No 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 Paragraph 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 5

149 Case: Document: Page: 6 Date Filed: 08/14/2018 No ( 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. 6

150 Case: Document: Page: 7 Date Filed: 08/14/2018 No 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, (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 A-14. Compare 26 C.F.R A-14(d), with S. Rep. No , at (1980), as reprinted in 1980 U.S.C.C.A.N. 6736,

151 Case: Document: Page: 8 Date Filed: 08/14/2018 No 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 A-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 A-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). 8

152 Case: Document: Page: 9 Date Filed: 08/14/2018 No 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 A-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. 9

153 Case: Document: Page: 10 Date Filed: 08/14/2018 No 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 A-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 A-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 A-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 A- 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 A-14(d)(5)(v) ( Example 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)). 10

154 Case: Document: Page: 11 Date Filed: 08/14/2018 No 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 A-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 A- 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 A- 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 11

155 Case: Document: Page: 12 Date Filed: 08/14/2018 No amount. ); cf. id A-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 (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 ). 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 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 A-14(d)(2)(ii)). Against 12

156 Case: Document: Page: 13 Date Filed: 08/14/2018 No public access, paragraph 6.14 states that the easement does not create any right of public access, and paragraph 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-andmanner 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, (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 13

157 Case: Document: Page: 14 Date Filed: 08/14/2018 No 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 A-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 than its general language in paragraph See Restatement (Second) of Contracts 203(c) (Am. Law Inst. 1981). Paragraph 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 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 14

158 Case: Document: Page: 15 Date Filed: 08/14/2018 No 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 publicaccess 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 A-14(g). The extinguishment regulation 26 C.F.R A-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 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, (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. 15

159 Case: Document: Page: 16 Date Filed: 08/14/2018 No 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 A-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 A-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 16

160 Case: Document: Page: 17 Date Filed: 08/14/2018 No 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 A- 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 A-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 17

161 Case: Document: Page: 18 Date Filed: 08/14/2018 No Commissioner s interpretation in prior IRS private letter rulings. I.R.S. Priv. Ltr. Rul (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 (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 (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 (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 A-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 18

162 Case: Document: Page: 19 Date Filed: 08/14/2018 No 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 (Sept. 5, 2008). In response, the Commissioner argues that, under the plain terms of 26 C.F.R A-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.] 19

163 Case: Document: Page: 20 Date Filed: 08/14/2018 No (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 A- 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 A-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 A-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 20

164 Case: Document: Page: 21 Date Filed: 08/14/2018 No 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 (Sept. 5, 2008). The letter does not provide any rationale for this conclusion. Accordingly, even if the 7 The ruling was issued in 2008 so PBBM could not have relied on it when drafting the conservation easement deed. 21

165 Case: Document: Page: 22 Date Filed: 08/14/2018 No 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 managerialapproval 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, (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. 22

166 Case: Document: Page: 23 Date Filed: 08/14/2018 No 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 A-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 A- 14(h)(3)(ii). 23

167 Case: Document: Page: 24 Date Filed: 08/14/2018 No 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, 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 24

168 Case: Document: Page: 25 Date Filed: 08/14/2018 No 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 singlefamily 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 Consequently, the resulting Rose Hill PUD Master Plan was adopted and 25

169 Case: Document: Page: 26 Date Filed: 08/14/2018 No 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 26

170 Case: Document: Page: 27 Date Filed: 08/14/2018 No 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 nonenforceable 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 27

171 Case: Document: Page: 28 Date Filed: 08/14/2018 No 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. vicepresident) 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 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 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. 28

172 Case: Document: Page: 29 Date Filed: 08/14/2018 No 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 managerialapproval 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 We agree with the tax court s conclusion. PBBM argues that the Commissioner did not meet the managerialapproval 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. 29

173 Case: Document: Page: 30 Date Filed: 08/14/2018 No ). 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, 10 PBBM 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 burdenof-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). 30

174 Case: Document: Page: 31 Date Filed: 08/14/2018 No 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 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 31

175 Case: Document: Page: 32 Date Filed: 08/14/2018 No $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 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 32

176 Case: Document: Page: 33 Date Filed: 08/14/2018 No The tax court did not determine the values of the conservation easements, but instead assumed that the values were $0. See id. at & 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. 33

177 Case: Document: Page: 1 Date Filed: 08/14/2018 UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT BILL OF COSTS NOTE: The Bill of Costs is due in this office within 14 days from the date of the TH opinion, See FED. R. APP. P. & 5 CIR. R. 39. Untimely bills of costs must be accompanied by a separate motion to file out of time, which the court may deny. v. No. The Clerk is requested to tax the following costs against: COSTS TAXABLE UNDER th Fed. R. App. P. & 5 Cir. R. 39 REQUESTED ALLOWED (If different from amount requested) No. of Copies Pages Per Copy Cost per Page* Total Cost No. of Documents Pages per Document Cost per Page* Total Cost Docket Fee ($500.00) Appendix or Record Excerpts Appellant s Brief Appellee s Brief Appellant s Reply Brief Other: Total $ Costs are taxed in the amount of $ Costs are hereby taxed in the amount of $ this day of,. State of County of LYLE W.CAYCE, CLERK By Deputy Clerk I, do hereby swear under penalty of perjury that the services for which fees have been charged were incurred in this action and that the services for which fees have been charged were actually and necessarily performed. A copy of this Bill of Costs was this day mailed to opposing counsel, with postage fully prepaid thereon. This day of,. *SEE REVERSE SIDE FOR RULES GOVERNING TAXATION OF COSTS (Signature) Attorney for

178 Case: Document: Page: 2 Date Filed: 08/14/2018 FIFTH CIRCUIT RULE Taxable Rates. The cost of reproducing necessary copies of the brief, appendices, or record excerpts shall be taxed at a rate not higher than $0.15 per page, including cover, TH index, and internal pages, for any for of reproduction costs. The cost of the binding required by 5 CIR. R that mandates that briefs must lie reasonably flat when open shall be a taxable cost but not limited to the foregoing rate. This rate is intended to approximate the current cost of the most economical acceptable method of reproduction generally available; and the clerk shall, at reasonable intervals, examine and review it to reflect current rates. Taxable costs will be authorized for up to 15 copies for a brief and 10 copies of an appendix or record excerpts, unless the clerk gives advance approval for additional copies Nonrecovery of Mailing and Commercial Delivery Service Costs. Mailing and commercial delivery fees incurred in transmitting briefs are not recoverable as taxable costs. TH 39.3 Time for Filing Bills of Costs. The clerk must receive bills of costs and any objections within the times set forth in FED. R. APP. P. 39(D). See 5 CIR. R FED. R. APP. P. 39. COSTS (a) Against Whom Assessed. The following rules apply unless the law provides or the court orders otherwise; (1) if an appeal is dismissed, costs are taxed against the appellant, unless the parties agree otherwise; (2) if a judgment is affirmed, costs are taxed against the appellant; (3) if a judgment is reversed, costs are taxed against the appellee; (4) if a judgment is affirmed in part, reversed in part, modified, or vacated, costs are taxed only as the court orders. (b) Costs For and Against the United States. Costs for or against the United States, its agency or officer will be assessed under Rule 39(a) only if authorized by law. ) Costs of Copies Each court of appeals must, by local rule, fix the maximum rate for taxing the cost of producing necessary copies of a brief or appendix, or copies of records authorized by rule 30(f). The rate must not exceed that generally charged for such work in the area where the clerk s office is located and should encourage economical methods of copying. (d) Bill of costs: Objections; Insertion in Mandate. (1) A party who wants costs taxed must within 14 days after entry of judgment file with the circuit clerk, with proof of service, an itemized and verified bill of costs. (2) Objections must be filed within 14 days after service of the bill of costs, unless the court extends the time. (3) The clerk must prepare and certify an itemized statement of costs for insertion in the mandate, but issuance of the mandate must not be delayed for taxing costs. If the mandate issues before costs are finally determined, the district clerk must upon the circuit clerk s request add the statement of costs, or any amendment of it, to the mandate. (e) Costs of Appeal Taxable in the District Court. The following costs on appeal are taxable in the district court for the benefit of the party entitled to costs under this rule: (1) the preparation and transmission of the record; (2) the reporter s transcript, if needed to determine the appeal; (3) premiums paid for a supersedeas bond or other bond to preserve rights pending appeal; and (4) the fee for filing the notice of appeal.

179 Case: Document: Page: 1 Date Filed: 08/14/2018 LYLE W. CAYCE CLERK United States Court of Appeals FIFTH CIRCUIT OFFICE OF THE CLERK TEL S. MAESTRI PLACE NEW ORLEANS, LA August 14, 2018 MEMORANDUM TO COUNSEL OR PARTIES LISTED BELOW Regarding: Fifth Circuit Statement on Petitions for Rehearing or Rehearing En Banc No PBBM-Rose Hill, Limited, et al v. CIR USDC No Enclosed is a copy of the court's decision. The court has entered judgment under FED. R. APP. P. 36. (However, the opinion may yet contain typographical or printing errors which are subject to correction.) FED. R. APP. P. 39 through 41, and 5TH Cir. R.s 35, 39, and 41 govern costs, rehearings, and mandates. 5TH Cir. R.s 35 and 40 require you to attach to your petition for panel rehearing or rehearing en banc an unmarked copy of the court's opinion or order. Please read carefully the Internal Operating Procedures (IOP's) following FED. R. APP. P. 40 and 5 TH CIR. R. 35 for a discussion of when a rehearing may be appropriate, the legal standards applied and sanctions which may be imposed if you make a nonmeritorious petition for rehearing en banc. Direct Criminal Appeals. 5 TH CIR. R. 41 provides that a motion for a stay of mandate under FED. R. APP. P. 41 will not be granted simply upon request. The petition must set forth good cause for a stay or clearly demonstrate that a substantial question will be presented to the Supreme Court. Otherwise, this court may deny the motion and issue the mandate immediately. Pro Se Cases. If you were unsuccessful in the district court and/or on appeal, and are considering filing a petition for certiorari in the United States Supreme Court, you do not need to file a motion for stay of mandate under FED. R. APP. P. 41. The issuance of the mandate does not affect the time, or your right, to file with the Supreme Court. Court Appointed Counsel. Court appointed counsel is responsible for filing petition(s) for rehearing(s) (panel and/or en banc) and writ(s) of certiorari to the U.S. Supreme Court, unless relieved of your obligation by court order. If it is your intention to file a motion to withdraw as counsel, you should notify your client promptly, and advise them of the time limits for filing for rehearing and certiorari. Additionally, you MUST confirm that this information was given to your client, within the body of your motion to withdraw as counsel.

180 Case: Document: Page: 2 Date Filed: 08/14/2018 The judgment entered provides that petitioners-appellants pay to respondent-appellee the costs on appeal. Enclosure(s) Mr. George Asimos Mr. David A. Hubbert Mrs. Michelle Abroms Levin Mr. William M. Paul Mr. Gregory Philip Rhodes Mr. Gilbert Steven Rothenberg Ms. Jennifer Marie Rubin Ms. Ann Taylor Schwing Mr. Harry Dean Shapiro Ms. Francesca Ugolini Mr. David M. Wooldridge Sincerely, LYLE W. CAYCE, Clerk By: Debbie T. Graham, Deputy Clerk

181 UNITED STATES TAX COURT WASHINGTON, DC HOFFMAN PROPERTIES II, L.P., FIVE M ) ACQ I, LLC, TAX MATTERS PARTNER, ) ) Petitioner(s), ) ) v. ) Docket No ) COMMISSIONER OF INTERNAL REVENUE, ) ) Respondent ) ORDER This case is calendared for trial at a Special Session of the Court scheduled for October 30, 2017, in Cleveland, Ohio. By notice of final partnership administrative adjustment (FPAA) dated March 3, 2015, respondent disallowed a $15,025,463 deduction for a noncash charitable contribution for the taxable year ending December 31, 2007, (year at issue) of petitioner Hoffman Properties II, L.P (Hoffman), and imposed the accuracy-related penalty under section 6662.¹ On May 29, 2015, Five M Acq I LLC (TMP), the tax matters partner for Hoffman, filed a petition for readjustment of partnership items under section On August 5, 2016, respondent filed a Motion for Partial Summary Judgment, Memorandum in Support of Motion for Partial Summary Judgment, and Declaration of Attorney Christopher A. Fisher in Support of Motion for Partial Summary Judgment. Respondent's motion seeks summary judgement as to whether: (1) a portion of Hoffman's contribution fails to satisfy the section 170(h)(2)(C) perpetuity requirements; (2) a portion of Hoffman's contribution satisfied the section ¹All section references are to the Internal Revenue Code in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. SERVED Jul

182 (h)(4)(B)(i) requirements; (3) Hoffman and the recipient of its easement contribution entered into a written agreement satisfying the section 170(h)(4)(B)(ii) requirements; (4) the terms of Hoffman's contribution complied with the judicial extinguishment requirement of section 1.170A-14(g)(6)(i), Income Tax Regs.; (5) the terms of Hoffman's contribution contained provisions in compliance with section 1.170A-14(g)(6)(ii), Income Tax Regs., governing the allocation of casualty or condemnation proceeds. Petitioners have objected. At our request, the parties have also filed supplemental responses and replies. We will grant respondent's motion in part, with respect to issues (2) and (3), for the reasons addressed below. Regarding issues (1), (4) and (5), we will deny respondent's motion. Background Hoffman and TMP were formed and operate in the State of Ohio. Hoffman was formed as a partnership and is treated as such for Federal income tax purposes. Hoffman owns the Tremaine building (building), located at 1303 Prospect, Cleveland, Ohio. The building is located within a registered historic district known as the "Lower Prospect/Huron Historic District"; the National Park Service has certified the building as having historic significance to this district. On December 28, 2007, Hoffman conveyed an easement deed (easement) on the building to the American Association of Historic Preservation (AAHP). AAHP is a non-profit corporation organized under the laws of the State of Ohio, and at the time of the easement's conveyance was a recognized section 501(c)(3) public charity with the purpose of furthering historic preservation. The Easement Terms The easement contains a number of recitals both recognizing AAHP's nonprofit status and its eligibility to receive qualified conservation contributions under section 170(h), and expressing the parties' mutual desire to preserve the building's exterior for purposes of historical preservation. The easement broadly restricts Hoffman's ability to alter or modify the exterior of the building. The easement also provides AAHP with various rights, responsibilities, and obligations intended to allow AAHP to enforce the easement's terms. Notably, it imbues AAHP with the power to pursue any legal or equitable remedies following any "violation of the terms of [the] Easement" by Hoffman.

183 - 3 - Article 3 of the easement reserves to Hoffman a series of "Conditional Rights" (conditional rights), notably the right to construct lateral additions to the building or to otherwise modify and alter the appearance and construction of the building's exterior. Hoffman's exercise of these rights is generally conditioned upon Hoffman first seeking and receiving AAHP's permission to proceed with any proposed modifications to the building's exterior. In evaluating and determining whether or not to approve any modifications proposed by Hoffman, the easement requires AAHP to "apply" the Secretary's Standards.2 If AAHP fails to expressly reject Hoffman's proposal within 45 days of receiving such, the easement provides Hoffman with automatic approval to "undertake the proposed activity in accordance with the plan or request submitted" (45 day default). The easement is integrated by way of a merger clause stating that any prior or simultaneous understandings, agreements and representations are "null and void" unless reproduced within the executed easement. The easement requires that any revision or amendment thereto shall not be effective until it is recorded, and shall not be effective until so recorded. The easement, however, contains no declaration or other language reflecting that the parties certify, under penalty of perjury, any of the representations contained therein. Subsequent Events The easement was recorded on December 31, 2007, in Cuyahoga County, Ohio. Hoffman considered the easement conveyance a noncash charitable conservation contribution, and as such--on September 29, 2008, claimed a $15,025,463 deduction on its self-prepared, timely return for the year at issue. On October 26, 2009, a representative from Hoffman contacted AAHP, requesting execution of an agreement purporting to be a "correction" to the easement. The agreement is titled "Public Law 'Special Rules' Compliance Agreement" (subsequent agreement), and purports to be a section of the easement that was "inadvertently deleted" therefrom just before signing. Exclusive of its recitals, the subsequent agreement's terms mirror near identically section 170(h)(4)(B)(i) and (ii) as they purport to protect the entire exterior of the building; prohibit any change to the building's exterior that would be inconsistent 2The easement defines the Secretary's Standards by way of reference to those promulgated at 36 C.F.R. sec. 67. The standards for rehabilitation are specifically enumerated at 36 C.F.R. sec

184 - 4 - with the building's historical character; and certify--under penalty of perjury--that AAHP is a qualified easement-holding organization with the resources and commitment to manage and enforce the easement. The subsequent agreement was executed by representatives of Hoffman, the TMP, and AAHP. It has not been recorded as an amendment to the easement. Discussion I. Summary Judgment Standard of Review Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted with respect to all or any part of the legal issues in controversy "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, 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(a) and (b). The moving party bears the burden of proving there is no genuine issue of material fact. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). The factual materials and the inferences drawn therefrom will be considered in the light most favorable to the nonmoving party. Bond v. Commissioner, 100 T.C. 32, 36 (1993). When a motion for summary judgment is made and supported, the opposing party cannot rest upon mere allegations or denials, but must "set forth specific facts showing that there is a genuine dispute for trial." Rule 121(d). Respondent moves for partial summary judgment in his favor arguing that, pursuant to section 170(h)(1), the easement contribution was not a qualified conservation contribution made "exclusively for conservation purposes", as it failed to comply with the requirements of section 170(h)(4)(B). Accordingly, respondent argues, Hoffman is not entitled to a deduction for a noncash charitable contribution for the year at issue. We assume for purposes of this motion that section 170(h)(4)(B) is applicable.3 3Section 170(h)(4)(B) applies only with respect to conservation contributions qualifying under the terms of section 170(h)(4)(C)(ii). Hoffman does not dispute that these rules may be applicable, but argues in the alternative that the easement may constitute a qualified conservation contribution for the preservation of open space under section 170(h)(4)(A)(iii).

185 - 5 - Since we consider respondent's motion for summary judgment, we draw all factual inferences in favor of Hoffman. II. The Facade Easement Contribution and Section 170 A. General Section 170(a)(1) provides taxpayers a deduction for any charitable contribution made during the taxable year. Charitable contributions may include gifts of property to charitable organizations that are made with charitable intent and without the receipt or expectation of receipt of adequate consideration. Zarlengo v. Commissioner, T.C. Memo , at *18; see also sec A- 1(h)(1) and (2), Income Tax Regs. Section 170(f)(3)(A) disallows deductions for charitable contributions of property consisting of less than the donor taxpayer's entire interest in that property. An exception to the general all-or-nothing rule, however, is allowed for a "qualified conservation contribution". Sec. 170(f)(3)(B)(iii). A qualified conservation contribution is (1) a contribution of a "qualified real property interest", (2) to a "qualified organization", that is (3) made "exclusively for conservation purposes." Sec. 170(h)(1). These elements are conjunctive: if one is not satisfied the contribution will fail to entitle the taxpayer to a deduction. Carroll v. Commissioner, 146 T.C. 196, 205 (2016). For purposes of this motion for partial summary judgment, respondent does not dispute that the easement constitutes a qualified real property interest. Nor does respondent dispute that AAHP, at the time of the easement's grant, was a qualified organization. The only the question at issue here is whether the conveyance of the easement was "exclusively for conservation purposes". Contributions of an easement may be considered made for conservation purposes when the easement preserves a historically important land area or "certified historic structure". Sec. 170(h)(4)(A)(iv). The term certified historic structure is defined broadly to include any structure or land area listed in the Whether the contribution of the easement qualifies Hoffman for a deduction in the year at issue under any alternative statutory provision presents a genuine issue of fact for trial, and is therefore not appropriate for review on a motion for summary judgment. Accordingly, we decline to address this topic here.

186 - 6 - National Register, or any building located within a registered historic district that has been certified as significant thereto by the Secretary of the Interior (certified building). Sec. 170(h)(4)(C)(i), (ii); sec A-14(d)(5)(iii), Income Tax Regs.; see Gorra v. Commissioner, T.C. Memo , at *23-*25. A contribution under section 170(h)(4)(A)(iv) and (C)(ii), however, will not be considered "exclusively for conservation purposes" unless, as relevant here, (1) the easement contains restrictions perpetually preserving the entire building exterior and prohibiting any change thereto inconsistent with the building's historical character (preservation and prohibition requirements), and (2) the donor and donee--the parties to the easement--enter into an agreement certifying, under penalty of perjury, that the donee is a qualified organization with the resources and a commitment to manage and enforce the easement (sworn statement requirement). Sec. 170(h)(4)(B)(i) and (ii); see sec. 170(h)(5)(A); Belk v. Commissioner, 140 T.C. 1, 12 (2013) (the perpetuity requirements of section 170(h)(2)(C) are separate and distinct from those imposed by section 170(h)(5), supplemented by T.C. Memo , aff'd, 774 F.3d 221 (4th Cir. 2014)). Respondent argues that the easement fails to satisfy the Preservation and Prohibition requirements, and that petitioner and AAHP failed to satisfy the sworn statement requirement. Hoffman disagrees, arguing that the easement as drafted satisfies both the preservation and prohibition, and sworn statement requirements. B. The Preservation and Prohibition Requirement There is no dispute that the easement constitutes a qualified real property interest providing AAHP with a perpetual real property interest and legally enforceable rights by way of the use restrictions contained therein. Those legally enforceable property rights, however, must be sufficient to satisfy the preservation and prohibition requirements of section 170(h)(4)(B)(i). See Zarlengo v. Commissioner, T.C. Memo at *20. To determine interests in and rights over property for Federal tax purposes, we apply the relevant State law. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985); Woods v. Commissioner, 137 T.C. 159, 162 (2011). Under Ohio law, the language of an easement deed is subject to the rules of contract law. Zagrans v. Elek, 2009 WL , at *3 (Ohio Ct. App. June 22, 2009). A court's primary role in examining a contract is to ascertain and give effect to the intent of the parties. Saunders v. Mortensen, 801 N.E.2d 452, 454 (Ohio 2004). Absent an ambiguity, courts will ascertain intent of the parties only as expressed in

187 - 7 - the clear language they bargained to employ. Shifrin v. Forest City Enterprises, Ing, 594 N.E.2d 499, 501 (Ohio 1992). Contracts must be construed in a manner that gives effect to every provision. Saunders, 801 N.E.2d at 89. When interpreting a contract, courts presume that words are used for a specific purpose and will avoid interpretations that render portions of the agreement meaningless or unnecessary. Wohl v. Swinney, 888 N.E.2d 1062, 1066 (Ohio 2008). Where the general provisions of a contract conflict with a specific provision of the same document, the specific provision controls. Hilliard Props. v. Commonwealth Land Title Ins. Co., 1997 Ohio App. Lexis 5698, at *9 (Ohio Ct. App. Dec. 18, 1997)(citing Edmonson v. Motorists Mutual Ins. Co., 356 N.E.2d 722 (Ohio 1976)); Monsler v. Cincinnati Casualty C_o., 598 N.E.2d 1203, 1209 (Ohio Ct. App. 1991)("A fundamental principle of contract construction requires that the document be read as a whole in order to identify the intent of the parties. A specific provision controls over a general"). The construction of a contract is a matter of law. Saunders, 801 N.E.2d at 88. The easement provides AAHP with rights, powers, obligations, and duties meant to preserve the building's exterior. To this end, the easement broadly restricts Hoffman's ability to alter or modify the exterior of the building, and AAHP is imbued with the power to seek all possible legal or equitable remedies against Hoffman for any acts violating the easement's terms. The easement's use restrictions are, however, broad and not without exception. Specifically, the easement reserves to Hoffman a set of conditional rights allowing it to modify, alter, or expand the building and its exterior in any manner desired. Hoffman's ability to exercise these conditional rights is curtailed only by AAHP's right to evaluate and reject Hoffman's proposed course of action within the limited 45 day default period.4 The general provisions of the easement must give way to the specific provisions. The interplay of the conditional rights and 45 day default period is 4The easement does not constrain Hoffman's ability to propose changes to the building exterior: it does not require Hoffman to self-evaluate its proposed alterations against the historical character of the building or district, or against the Secretary of the Interior's standards prior to submitting the proposed modifications to AAHP. Such a review of any proposed modification is the exclusive responsibility of AAHP.

188 - 8 - facially obvious: if AAHP does not reject any proposed alterations to the building's exterior within a 45 days, then Hoffman's proposed alterations may proceed as proposed without regard for the building's historical character or exterior. As the easement provides AAHP the right to seek remedies only when petitioner violates the easement's terms there is no recourse available to AAHP if any alteration occurs by grace of the 45 day default provision, regardless of any potential detriment to or destruction of the historical character of the building's exterior. This Court has recognized that a contributed easement may reserve conditional rights to donor taxpayers that permit the alteration of a historic building's exterior, and that such a reservation of rights does not ab initio prevent the easement contribution from constituting a qualified conservation contribution. We have only done so, however, where the easement's conditions provide the qualified organization with unlimited discretionary authority to approve or deny changes arising from those reserved rights. Gorra v. Commissioner, T.C. Memo , at *25 (citing Hilborn v. Commissioner, 85 T.C. 677 (1985)). The 45 day default period is clearly meant to curtail AAHP's authority to approve alterations and modifications to the exterior of the building. The 45 day default period also strips AAHP of any right to legally or equitably remedy any alterations or modifications that may be inconsistent with the historical character of the exterior or otherwise jeopardize the easement's conservation purpose. See 1982 East, LLC v. Commissioner, T.C. Memo , 2011 Tax Ct. Memo LEXIS 81 at *20-21 (conservation easements only suffice when the donee has the ability to enforce its rights and satisfy the conservation purpose of the contribution and section 170(h)). Hoffman argues, in the alternative, that the subsequent agreement cures any section 170(h)(4)(B)(i) defects contained within the easement deed. Hoffman argues that to properly effectuate its intent we must read into the easement the language of the subsequent agreement--language near identical to that of section 170(h)(4)(B)(i)--which was agreed to, but omitted in error.5 We disagree. 5Hoffman unconvincingly alleges that the easement's failure to satisfy the requirements of section 170(h)(4)(B)(i) resulted from an accidental omission, and repeatedly characterizes any perceived omission as "scrivener's error" and argues this Court ought to effect a reformation of the easement. Hoffman has offered no affidavits, declarations, or other documentary evidence that would support this bare allegation with the specific facts sufficient to

189 - 9 - Assuming arguendo that the terms of the subsequent agreement ought to be read into the easement, we observe that the terms of the subsequent agreement--by mirroring the statutory language--speak broadly, and would add only minimal substance to the easement.6 The language of the subsequent agreement addresses neither the conditional rights, nor the 45 day default provision, and it certainly does not purport to excise them from the easement. Accordingly, to the extent the subsequent agreement might actually add contours to the general rules of the easement, these general statements would still be undercut by the specificity of the conditional rights and the 45 day default period. The subsequent agreement would do nothing to place the easement into compliance with section 170(h)(4)(B)(i). Additionally, the subsequent agreement is unrecorded and does not portend to amend the easement. Again assuming for argument that the language of the subsequent agreement satisfies the preservation and prohibition requirement, any legally enforceable rights and powers contained therein amount only to contract rights between AAHP and petitioner. The unrecorded terms of the subsequent agreement do nothing to modify the perpetually enforceable property rights enshrined in the recorded easement. Accordingly, the unrecorded subsequent agreement would fail to perpetually ensure the easement's conservation purpose as contemplated by section 170(h)(5)(A). The terms of the easement are insufficient to satisfy the preservation and prohibition requirements of section 170(h)(4)(B)(i), and its contribution to AAHP failed to qualify Hoffman for a deduction under 170(h) for the year at issue. C. The Sworn Statement Requirement Section 170(h)(4)(B)(ii) requires the donor taxpayer and donee to enter into a written agreement certifying, under penalty of perjury, that the donee is a qualified organization with the resources to manage and enforce the restriction, and a commitment to do so. Failure to satisfy this sworn statement requirement results survive summary judgment, or otherwise establish a prima facie case for scrivener's error, reformation. We discuss this matter further, infra, at note 6. 6Indeed Hoffman repeatedly characterizes this language "redundant" in its Response.

190 in a conservation contribution failing to be considered exclusively for conservation purposes. Sec. 170(h)(4)(B). In his motion for partial summary judgment, respondent argues that petitioner and AAHP did not satisfy the sworn statement requirement. Petitioner disagrees, arguing that the easement satisfies the sworn statement requirement. The language of the easement clearly avers that AAHP was a qualified organization, prepared to enforce the easement. The easement's terms, however, are devoid of anything resembling a jurat or other avowal that we might construe as a sworn statement or other certification under penalty of perjury. Hoffman argues, however, that the notarization of the easement by a notary public--an individual not party to the easement or the representations contained therein-- constitutes a statement made under penalty of perjury sufficient to satisfy the sworn statement requirement. Notarization is, generally, a means of preventing fraud and forgery, and authenticating documents. See Bartholemew v. Blevins, 679 F.3d 497, 502 (6th Cir. 2012)("[W]hen a notary public certifies a document, he attests that the document has been executed or is about to be executed, that the notary is confronted by the subscriber, and that the subscriber is asserting the fact of his execution."); see also Fed. R. Evid. 902(8); Ohio Rev. Code, secs and Hoffman cites no authority supporting its proposition that the notarization of a document places the representations contained therein "under oath" and subject to "penalty of perjury." Petitioner's contention in this regard is without merit. In the alternative, Hoffman argues that the subsequent agreement cures any perceived section 170(h)(4)(B)(ii) defect, as the language employed therein mirrors statutory language.7 Hoffman recognizes that the subsequent agreement was 7As mentioned, supra, at note 4, Hoffman alleges scrivener's error and functionally invites this Court to reform the easement, citing a set of cases wherein this Court exercised its equitable powers to do so. As reformation of a contract implicates the property rights of the parties thereto, the allegation of a scrivener's error requires a substantive review of applicable Ohio law. Ohio, having adopted the Restatement formulation, recognizes scrivener's error as a form of mutual mistake which may justify reformation. M Castle v. Daniels, 475 N.E.2d 149, 212 (Ohio Ct. App. Apr. 25, 1984) (applying Restatement (Second) of Contracts, sec. 155); ArcelorMittal Cleveland, Inc. v.

191 executed long after the easement itself was executed and recorded, but argues that there is "nothing in the Code" requiring the sworn statement requirement be satisfied contemporaneously with the execution of the easement deed. We point out that such a statement ignores outright that there is similarly "nothing in the Code" providing a donor taxpayer a deduction for a conservation contribution when the donor-taxpayer has yet to qualify for such by satisfying the prescribed statutory prerequisites, such as the sworn statement requirement. Jewell Coke Co., L.P., 750 F. Supp. 2d 839, (N.D. Ohio. 2010)(collecting Ohio law). A mutual mistake is one where the parties to the agreement have identical intentions as to the terms to be embodied in an proposed writing, but the resultant executed writing is materially at variance with that intention. See Restatement (Second) of Contracts, sec. 155; see also Riser Foods Co. v. Shoregate Props., LLC, 2011 U.S. Dist. LEXIS at *33-*38 (N.D. Ohio 2011) (applying Ohio law of mutual mistake in the context of a motion for summary judgment). Materiality, here, exists when the language in question involves the legal rights and obligations between the parties to the agreement. See Restatement (Second) of Contracts, sec. 155, cmts. a and e (reformation is meant to ensure the parties' reach the intended legal effect of their agreement, and is unavailable when the effect of the mistake is trivial thereto). Where the record before us might give rise to a factual inference suggesting the parties unintentionally omitted the language satisfying the sworn statement requirement, there is no evidence in the record nor facts alleged by Hoffman giving rise to even the remotest inference that the absence of the subsequent agreement's language from the easement stood to deprive AAHP and Hoffman of the material benefit of their bargain. The easement, as a recorded document conveying a real property interest under the laws of Ohio, could not possibly fail for want of the language contained within the subsequent agreement. See, e.g., Ohio Rev. Code, sec ; see also Belk v. Commissioner, T.C. Memo , at *12 (citing Garcia v. Commissioner, 80 T.C. 491, 498 (1983)). To survive summary judgment, petitioners must establish that there is a genuine issue of material fact as to whether a scrivener's error exists. Seg Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (the party opposing summary judgment must "do more than simply show that there is some metaphysical doubt as to the material facts"). Petitioner's mere allegation of a mutual mistake and failure to present any factual material in support of the elements thereof fails to establish a genuine issue requiring trial.

192 The most basic tenet of statutory construction is to begin with the language of the statute itself. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). The statutory text is the most persuasive evidence of Congressional intent. United States v. Am. Trucking Ass'ns. Inc., 310 U.S. 534, (1940). When the plain language of the statute is clear and unambiguous, that is where the inquiry ends. Ron Pair Enters., Inc., 489 U.S. at 241. Statutory provisions that provide taxpayers with a deduction are narrowly construed. INDOPCO v. Commissioner, 503 U.S. 79, 84 (1992). As discussed above, section 170(a)(1) provides in relevant part that a deduction is allowed for any charitable contributions made by the taxpayer within t_hat taxable year. Section 170(f)(3) generally proscribes any deduction for charitable contributions comprising less than the donor taxpayer's entire interest in the subject property. Section 170(f)(3)(B), however, provides an exception to this prohibition by providing taxpayers a deduction for a "qualified conservation contribution." A contribution will only be considered a qualified conservation contribution if the contribution is "exclusively for conservation purposes." Sec. 170(h)(1)(C). The contribution of an easement encumbering a certified building "shall not be considered to be exclusively for conservation purposes unless," among other prerequisites, the sworn statement requirement is satisfied. Sec. 170(h)(4)(B) (emphasis added). Hoffman contributed the easement to AAHP on December 28, The easement did not represent Hoffman's entire interest in the subject real property, the building. Therefore, in order to be eligible for a charitable contribution deduction for the year at issue, Hoffman needed its contribution to meet the requirements of section 170(h)(1)(C), specifically it needed to be made "exclusively for conservation purposes". As relevant to this motion, the easement could not be exclusively for conservation purposes until Hoffman satisfied all the prerequisites of section 170(h)(4)(B), including the sworn statement requirement. S_e_e sec. 170(h)(4)(A)(iv), (C)(ii). The language of the easement itself lacks anything resembling a jurat or other avowal that might be construed as Hoffman and AAHP executing a sworn statement, or any making any other certification under penalty of perjury, of the veracity and truthfulness of the representations contained therein. The only material in the record establishing that Hoffman and AAHP at any point satisfied

193 the sworn statement requirement is the subsequent agreement that was executed long after the close of the tax year at issue.8 At the close of Hoffman's tax year at issue, Hoffman had not satisfied the Sworn Statement requirement of section 170(h)(4)(B)(ii). Hoffman's contribution, therefore, did not constitute a qualified conservation contribution as it was not made exclusively for conservation purposes. Accordingly, Hoffman was not entitled to a deduction for the year at issue. III. Conclusion For the reasons stated above, we will grant respondent's motion in part. With respect to the remaining issues, we determine that respondent has not met his burden under Rule 121. Accordingly, the remainder of respondent's motion for summary judgment will be denied without prejudice. Upon due consideration, it is hereby ORDERED that respondent's Motion for Partial Summary Judgment, filed August 5, 2016, as supplemented, is granted as to issues (2) and (3), as described herein, and denied as to issues (1), (4) and (5) without prejudice. (Signed) Joseph W. Nega Judge Dated: Washington, D.C. July 12, The subsequent agreement was executed by representatives of Hoffman and AAHP on or about October 28, The execution of the subsequent agreement was approximately 22 months after the easement was executed and recorded, and 13 months after Hoffman filed its tax return claiming an approximately $15 million dollar noncash charitable contribution arising from the easement grant.

194 UNITED STATES TAX COURT WASHINGTON, DC PA PBBM-ROSE HILL, LTD., PBBM ) CORPORATION, TAX MATTERS PARTNER, ) ) Petitioner ) v. ) Docket No COMMISSIONER OF INTERNAL REVENUE, ) ) Respondent ) ) ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Richard T. Morrison, at Washington, D.C., on September 9, 2016, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, an appropriate order and decision will be entered under Rule 155. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. October 7, 2016 SERVED Oct

195 Capital Reporting Company 3 1 Bench Opinion by Judge Richard T. Morrison 2 September 9, PBBM-Rose Hill, Ltd., PBBM Corporation, Tax Matters 4 Partner v. Commissioner 5 Docket No THE COURT: The Court has decided to render 7 oral findings of fact and opinion in this case (a 8 bench opinion), and the following represents the 9 Court's oral findings of fact and opinion. 10 References to sections are to sections of the 11 Internal Revenue Code of 1986, as amended. 12 References to Rules are to the Tax Court Rules of 13 Practice and Procedure. This bench opinion is made 14 under the authority of section 7459(b) and Rule Findings of Fact 16 The petitioner is PBBM Corporation. Petitioner is the Tax Matters partner of PBBM-Rose Hill, Ltd., a partnership referred to here as PBBM. 19 When the petition was filed, PBBM's principal place 20 of business was in Texas. Therefore, an appeal of 21 this case would go to the U.S. Court of Appeals for the Fifth Circuit unless the parties designate a different circuit in writing. See sec (b) (1) (E), (b) (2) DEPO twww.capitalreportingcompany.com

196 Capital Reporting Company 4 1 In 2002, PBBM bought a 241-acre golf 2 course, consisting of 27 holes, from Rose Hill 3 Country Club, Inc., for $2,442,148. The 241 acres is 4 located in Beaufort County, South Carolina. The golf 5 course was largely interspersed among the houses of a 6 gated community. 7 In January 2006, PBBM ceased all business 8 operations on the golf course. 9 On March 2, 2006, Carolina First Bank filed 10 a foreclosure action with respect to the golf-course 11 property. 12 On March 21, 2006, PBBM, whose only major 13 asset was the golf-course property, filed a voluntary 14 chapter 11 bankruptcy petition. 15 On December 28, 2007, PBBM contributed a 16 conservation easement to the North American Land 17 Trust, or NALT, with respect to the golf-course 18 property except for 2 acres of golf course maintenance areas and 5 acres of clubhouse acreage. 20 Thus, the burdened acreage was 234 acres. The 21 easement generally prohibited development of the 22 property. 23 On December 31, 2007, PBBM sold the golf 24 course to a subsidiary of the Rose Hill Plantation 25 Property Owners Association, a homeowners association DEPO twww.capita1reportingcompany.com

197 Capital Reporting Company 5 1 referred to here as the POA, for $2,300, Petitioner and Respondent agree that the sale was not 3 completed for income-recognition purposes until 4 January In 2008, PBBM timely filed its partnership tax return on Form PBBM claimed a 7 charitable contribution deduction for the easement of 8 $15,160,000. The deduction was premised on the value 9 of the easement being $15,160, In 2014 the IRS issued a notice of final 11 partnership administrative adjustment for PBBM for In this notice, referred to here as the FPAA, 13 the IRS determined that PBBM was not entitled to a 14 deduction for the contribution of the easement to 15 NALT. It also determined that all underpayments 16 attributable to the claimed $15,160,000 deduction are 17 subject to the 40 percent penalty of section 6662(h) 18 or alternatively the 20 percent penalty of section (a). 20 Petitioner filed a petition challenging the 21 determinations in the FPAA. At trial Petitioner 22 takes the position that the value of the easement was 23 $13,380,000. Respondent takes the position that the 24 value of the easement was $100,000. We hold that the 25 value was $100,000. We also hold that no deduction DEPO twww.capitalreportingcompany.com

198 Capital Reporting Company 6 1 for the contribution of the easement is allowed by 2 the Code for two reasons other than valuation: the 3 extinguishment requirement and the protected-in- 4 perpetuity requirement. We also hold that the 5 underpayments corresponding to the difference between 6 a $15,160,000 deduction and a $100,000 deduction are 7 subject to the 40 percent penalty and that the 8 underpayments corresponding to the difference between 9 a $100,000 deduction and a $0 deduction are not 10 subject to any penalty under section Opinion 12 As a preliminary matter, we consider 13 Petitioner's contention that the burden of proof with 14 respect to the deductibility of the charitable 15 contribution has shifted to Respondent pursuant to 16 section 7491(a). We need not resolve whether it is 17 Petitioner or respondent who bears the burden of 18 proof because our findings with respect to the deduction are supported by the preponderance of the evidence. The burden of proof as to the penalty is discussed later in the context of the penalty. 1. Does the easement fail to satisfy the perpetuity requirements of sections 170(h) (2)(C) and 170(h)(5)(A) because it was a voidable gift made DEPO twww.capitalreportingcompany.com

199 Capital Reporting Company 7 1 without bankruptcy court approval while PBBM was in 2 bankruptcy proceedings? 3 Respondent argues that the grant of the 4 easement is not a qualified conservation contribution 5 because the bankruptcy trustee could have voided the 6 grant of the easement as of December 31, 2007, the 7 close of PBBM's 2007 tax year. 8 On March 21, 2006, PBBM filed for chapter 9 11 bankruptcy. 10 On October 1, 2007, the bankruptcy court 11 confirmed the plan of reorganization. 12 On December 28, 2007, PBBM granted the 13 conservation easement. 14 Section 549 of the Bankruptcy Code allows a 15 bankruptcy trustee to avoid unauthorized post- 16 petition transfers of the property of the bankruptcy 17 estate. It is unclear whether the transfer of the 18 easement could have been avoided. First, the 19 contribution of the easement was arguably not made 20 out of the property of the estate because it was made 21 by the reorganized debtor. Second, even if the 22 contribution was made out of the property of the 23 estate, it was arguably authorized by the plan of 24 reorganization. We need not reach the question of 25 whether the possibility of avoidance causes the DEPO twww.capita1reportingcompany.com

200 Capital Reporting Company 8 1 easement to fail to satisfy section 170 because we 2 hold that it fails for the two other reasons Does the easement fail to satisfy the 4 perpetuity requirements of sections 170(h)(2)(C) and 5 170(h)(5)(A) because certain rights reserved by the 6 easement to the landowner allow for inconsistent 7 uses? 8 section 170(h)(1) defines a qualified 9 conservation contribution as a contribution of a 10 qualified real property interest exclusively for 11 conservation purposes. Under section 170(h) (2) (C), a 12 qualified real property interest includes an interest 13 in real property that is a perpetual restriction on 14 the use of the real property. Section 170(h)(5) (A) 15 provides that a contribution is not treated as 16 exclusively for conservation purposes unless the 17 conservation purpose is protected in perpetuity. 18 Respondent argues that the restrictions of the easement are not perpetual because the easement 20 reserves rights to the owner of the underlying property, including the rights to alter the golf course, build 12 clay tennis courts, build a tennis pro shop, build two houses, create a driveway, create 6,000 square feet of parking areas, and build sixfoot high fences. The easement permits the majority DEPO twww.capitalreportingcompany.com

201 Capital Reporting Company 9 1 of the acreage to be used as a golf course. These 2 reserved rights do not impair the conservation 3 purpose any more than the use of the property as a 4 golf course, which is also permitted by the easement. 5 Therefore, these reserved rights alone do not cause 6 the easement to fall outside the definition of a 7 qualified conservation contribution Does the easement fail to satisfy the 9 perpetuity requirement of section 170(h)(5)(A) 10 because it does not comply with the extinguishment 11 requirement of Treas. Reg. sec A-14(g)(6)? 12 Treas. Reg. sec A-14(g) elaborates on 13 the protected-in-perpetuity requirement of section (h)(5)(A) by setting forth substantive rules to 15 safeguard the conservation purpose of a contribution. 16 Subdivision - 14(g)(6)(ii) of this regulation 17 requires that at the time of the gift the donor must give the donee the right, in the event the conservation restriction is extinguished by a judicial proceeding, to a portion of the proceeds received for the whole property that is at least equal to the proceeds received for the whole property ajhi multiplied by the value of the restriction at the time of the gift, and divided by the value of the property as a whole at the time of the gift. K DEPO twww.capitalreportingcompany.com

202 Capital Reporting Company 10 1 The easement provides that in the event the 2 easement is extinguished by a judicial proceeding, 3 NALT would be entitled to an amount determined by a 4 formula. The formula is written such that under some 5 circumstances NALT would not receive the minimum 6 amount required by the regulation. We hold that the 7 easement does not meet the requirement of the 8 regulation. As a result, PBBM is not entitled to a 9 charitable contribution deduction for the 10 contribution of the easement to NALT. See Treas. 11 Reg. sec A-14(g)(4)(ii) Does the easement fail to protect any 13 conservation purpose within the meaning of section (h)(4) (A)? 15 One conservation purpose under section (h) is the preservation of land areas for outdoor 17 recreation of the general public. Sec. 170(h)(4)(A)(iii). Examples of outdoor recreation 19 include boating, fishing, and the use of hiking 20 trails by the public. Treas. Reg. sec A (d)(2)(i). The question is whether this 22 conservation purpose is protected by the easement in perpetuity. Sec. 170(h)(5)(A). The golf 24 course was closed in January PBBM granted the 25 conservation easement in December 2007 and sold the DEPO twww.capitalreportingcompany.com

203 Capital Reporting Company 11 1 golf course shortly thereafter. The easement 2 requires that the underlying property be open for 3 substantial and regular use by the general public for 4 outdoor recreation, whether for golf or otherwise. 5 According to the easement, this requirement can be 6 enforced by NALT in court. However, the easement 7 also provides that it does not create any right of 8 access by the public to the easement area. 9 After the sale, the new owner, a subsidiary 10 of the POA, converted 9 holes of the golf course into 11 a driving range and a park. It operates the 12 remaining 18 holes as a golf course. The entire area 13 covered by the easement is accessible by car only by 14 a single road. The road is controlled by a gatehouse 15 owned and operated by the POA. A car is allowed past 16 the gatehouse only after the guard at the gatehouse 17 ascertains that the occupants of the car are in the 18 area to play golf, play tennis at tennis courts 19 constructed by the new owner, or eat at the 20 clubhouse. The guard gives the driver of the car a 21 restricted pass that reflects the purpose of the 22 visit. The restricted pass contains a warning that 23 any use of the pass for another purpose is not 24 authorized and constitutes trespassing. The 25 restricted pass must be displayed on the vehicle. A DEPO twww.capita1reportingcompany.com

204 Capital Reporting Company 12 1 car must get past the gatehouse to get to the road to 2 the park. A sign on the road to the park reads 3 "Property owners, residents & guests only beyond this 4 point." Thus, a significant portion of the property 5 governed by the easement, the park, is relatively 6 inaccessible to the public. The creation of a 7 private park out of a substantial part of the 8 property subject to the easement demonstrates to us 9 that the easement fails to protect the use of the 10 land for outdoor recreation of the general public. 11 Another conservation purpose under section (h) is the preservation of open space, including 13 farmland and forest land, where such preservation is 14 (1) for the scenic enjoyment of the general public or 15 (2) pursuant to a clearly delineated federal, state, 16 or local government conservation policy. Sec (h)(4)(A) (iii). The preservation must yield a 18 significant public benefit. Id. Regulations provide that all pertinent facts and circumstances germane to the contribution, including eight particular factors, are considered in determining whether the preservation is for the scenic enjoyment of the general public. Treas. Reg. sec A- 14(d) (4) (ii) (A) DEPO twww.capita1reportingcompany.com

205 Capital Reporting Company 13 1 We find that the easement does not preserve 2 the land for the scenic enjoyment of the general 3 public. Only a small part of the property is visible 4 from off the property. See Treas. Reg. sec A- 5 14(d)(4)(ii)(B). The non-golfing general public is 6 not allowed vehicular access to the golf course. The 7 general public is not allowed to drive to the park. 8 We find that the easement preserves open space mainly 9 for the benefit of the owners of the houses abutting 10 the golf course. The benefit to the public is not 11 significant. 12 We also find that the easement does not 13 preserve open space pursuant to a clearly delineated 14 federal, state, or local government conservation 15 policy. There are several government programs that 16 evince a policy to protect ecology, including the 17 Beaufort County Rural and Critical Land Preservation 18 Program, the Federal Coastal and Estuarine Land Conservation Program, and the South Carolina Coastal 20 and Estuarine Land Conservation Plan. Whether the easement pursues any of these policies involves 22 the question of how much ecological value the 23 easement has. As explained shortly, we agree with 25 respondent's expert ecologist witness that the ecological value is low. We also consider the DEPO twww.capita1reportingcompany.com

206 Capital Reporting Company 14 1 explanation by petitioner's expert ecologist witness 2 that the walking trails on the restricted property 3 are compatible with the Southern Beaufort Greenway 4 Plan, which contains projects for developing walking 5 trails along the highway bordering the property on 6 the north side of the property. However, the 7 easement has not prevented the POA from blocking 8 automobile access to the park. We see no guarantee 9 that the POA could not also impede pedestrian access 10 to portions of the property subject to the easement. 11 We find that the easement fails to preserve 12 open space as defined by section 170(h)(4) (A)(iii). 13 Another conservation purpose is the 14 protection of a relatively natural habitat of fish, 15 wildlife, or plants, or similar ecosystem. Sec (h)(4) (A)(ii). Each party called an ecologist as 17 an expert witness. The experts disagreed as to the 18 value of the easement in protecting this conservation 19 purpose. Respondent's expert ecologist witness 20 testified credibly and with corroboration from the record. In particular he made the following points: most of the bird species on the property are common backyard species; the wood stork, a threatened species, forages on the property but the data showed that the wood stork does not visit the easement area DEPO twww.capitalreportingcompany.com

207 Capital Reporting Company 15 1 frequently compared to other areas of the county; 2 most of the easement area is golf-course area; the 3 diversity of species on the golf course and park is 4 limited; the golf course is dominated by non-native 5 grass species; the golf course requires continued 6 application of fungicides and pesticides, resulting 7 in pollution; the golf course is not conducive to 8 wildlife; although alligators live on the protected 9 property, this is a relatively unimportant species 10 ecologically; the quality of the ponds in the 11 easement area is similar to that of waterways in 12 urban areas; and many of the trees in the easement 13 areas are in isolated patches or thin strips. 14 In addition to these observations made by 15 Respondent's expert ecologist witness, the record 16 shows that although much of the golf course is 17 covered by tree canopy, many of the trunks of the 18 trees providing the canopy are outside the easement area. Therefore, these trees are not protected by 20 the easement. 21 On this record, we find that the easement area is not a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem. And we find that the easement does not protect in perpetuity a relatively natural habitat of fish, wildlife, or DEPO twww.capitalreportingcompany.com

208 Capital Reporting Company 16 1 plants, or a similar ecosystem. See sec (h)(4)(A)(iii); (5) (A). We specifically reject 3 the proposition that the easement area is a habitat 4 for wood storks. Although wood storks forage on the 5 property, this foraging activity does not convince us 6 that the property is a habitat for the wood stork. 7 This finding is relevant to Treas. Reg. sec A- 8 14A(d)(3)(ii), which states "Significant habitats and 9 ecosystem include, but are not limited to, habitats, 10 for rare, endangered, or threatened species of 11 animal, fish or plants." 12 In conclusion we hold that the easement 13 does not protect any conservation purpose in 14 perpetuity. No deduction is therefore allowable to 15 PBBM under section 170 for the contribution of the 16 easement to NALT. See sec. 170(f) (3), (h) (1) Did PBBM fail to attach a completed summary 18 appraisal, Form 8283, to its 2007 Form 1065? 19 Section 170(a)(1) allows as a deduction any 20 charitable contribution verified under regulations 21 prescribed by the Treasury Secretary. Section (f)(11) (A) provides that no deduction is allowed 23 in the case of an individual, partnership, or 24 corporation, under section 170(a), for any 25 contribution of property for which a deduction of DEPO twww.capitalreportingcompany.com

209 Capital Reporting Company 17 1 more than $500 is claimed unless such person meets 2 the requirements of section 170(f)(11) (B), (C), or 3 (D) as the case may be, unless the failure to meet 4 such requirements is due to reasonable cause and not 5 willful neglect. Section 170(f)(11)(C) provides that 6 in the case of a contribution of property for which a 7 deduction of more than $5,000 is claimed, the person 8 must obtain a qualified appraisal of the property and 9 attach to the return for the taxable year in which 10 such contribution is made such information regarding 11 such property and regarding the appraisal of the 12 property as the Secretary may require. A regulation, 13 Treas. Reg. sec A-13(c)(1), provides that no 14 deductions are available with respect to a charitable 15 contribution of property by a partnership, and other 16 types of persons, unless the three substantiation 17 requirements in subparagraph -13(c)(2) are met. The 18 second substantiation requirement of subparagraph 19-13(c)(2) is that the donor must attach a fully 20 completed appraisal summary to its tax return Treas. Reg. sec A-13(c) (2) (i) (B). The appraisal summary must include, among other things, a brief summary of the overall physical condition of the property (in the case of tangible property), the manner and date of acquisition, and the cost or other DEPO twww.capitalreportingcompany.com

210 Capital Reporting Company 18 1 basis of the property. Treas. Reg. sec A- 2 13(c)(4)(ii). The IRS has designated Form 8283 to be 3 used for this appraisal summary. The Form contains blanks for the information referred to 5 above, as well as a blank for the amount claimed as a 6 deduction. 7 PBBM attached to its 2007 partnership 8 return a Form 8283 signed by Raymond Veal as 9 appraiser. It also attached Veal's appraisal. 10 Respondent contends that the Form omitted the following items: a summary of the 12 physical condition of the property, the date the 13 property was acquired, how the property was acquired, 14 the donor's cost, and the amount claimed as a 15 deduction. These items of information are indeed 16 missing from the Form 8283 attached to the return. 17 Form 8283, Section B, Part I contains blanks for the taxpayer to enter the information. PBBM did not fill in these blanks. However, we agree with 5 e 20 Petitioner that it is unclear whether a taxpayer donating an intangible right should fill out Section B, Part I, and if so, how these blanks should be filled out for such a contribution. Furthermore, we find that the missing information could be found on other parts of the Form 1065 and attachments DEPO twww.capita1reportingcompany.com

211 Capital Reporting Company 19 1 Therefore, we hold that PBBM substantially complied 2 with the requirement that a completed appraisal 3 summary be attached to the return Did PBBM fail to obtain a qualified 5 appraisal as required by section 170(f)(11)(C)? 6 A qualified appraisal is any appraisal 7 considered to be a qualified appraisal for the 8 purpose of section 170(f)(11) under regulations or 9 other guidance prescribed by the Secretary. Sec (f) (11) (E) (i) ( ). A regulation, Treas. Reg. sec A-13(c)(3)(ii), contains a list of information 12 that must be in a qualified appraisal. Respondent 13 contends that Veal's appraisal attached to the Form fails to conform to this regulation because his 15 appraisal "fails to provide a description of the 16 easement itself or the date or expected date of 17 contribution", "fails to properly describe the real 18 estate", "fails to address the easements and restrictions already associated with the property 20 prior to the conservation easement", "fails to 21 address the terms of the agreement relating to the 22 use, sale or disposition of the property", "fails to 23 include a statement that it was prepared for income 24 tax purposes", and "fails to use the proper measure 25 of value" because the appraisal refers to market DEPO twww.capitalreportingcompany.com

212 Capital Reporting Company 20 1 value and not the fair market value definition as set 2 forth in Treas. Reg A-1(c) (2)." We disagree. 3 We find that the Veal appraisal contains all the 4 information required in the regulation What is the value of the easement? 6 petitioner called Veal as an expert 7 witness. In a deviation from his vappraisal that was 8 attached to PBBM's return, he testified that the 9 value of the easement was $13,380, Mathematically this is the difference between 11 $15,680,000, which he testified was the pre-easement 12 value of the 241-acre property, minus $2,300,000, 13 which he testified was the post-easement value of the 14 property. Veal assumed that before the easement it 15 was legally permissible to use significant portions 16 of the property for commercial and residential uses. 17 He concluded that the highest and best of the P d 18 property was to convert portions of the property to 19 commercial use, multifamily use, and single-family 20 use. 21 Respondent's expert witness, Terry Dunkin, 22 concluded that the value of the easement was 23 $100,000. He determined that the value of the acres before the easement was $2,400,000. In 25 arriving at his conclusion about the pre-easement DEPO twww.capita1reportingcompany.com

213 Capital Reporting Company 21 1 value, he assumed that zoning restrictions allowed 2 the property to be used only for open space or 3 recreational use, that it was highly unlikely it 4 could be rezoned for development, and that the owners 5 of the adjoining houses would likely oppose 6 development. He therefore concluded that the highest 7 and best use of the property was a golf course. 8 The two expert valuation witnesses thus 9 disagreed about whether the property could have been 10 developed. On this important question, there was 11 conflicting evidence on whether the owner of the 12 property would have been permitted to develop the 13 property and whether the adjoining homeowners Sau..Lgl 14 oppose development of the property. Weighing the 15 conflicting evidence, we find: first, it was 16 uncertain that the owner of the property could have 17 developed the property without permission of the 18 county; second, it was uncertain that the county 19 would have given its permission had such permission 20 been required; third, the adjoining homeowners were 21 opposed to development of the property; fourth, this opposition would have reduced the chance that the county would have permitted development had its permission been required; and fifth, this opposition would have also put economic pressure on the property DEPO twww.capitalreportingcompany.com

214 Capital Reporting Company 22 1 owner to leave the property undeveloped. Moreover, 2 we find these uncertainties about the possibility of 3 developing the property were so great that an owner 4 would have been discouraged from pursuing development 5 of the property. 6 Our finding is supported by the fact that 7 PBBM, which owned the property until January 2008, 8 chose not to develop the property or sell the 9 property to a property developer. Instead, PBBM sold 10 the property to a subsidiary of the POA. We believe 11 that if PBBM had thought the property was worth 12 $15,680,000 because of its development potential, it 13 would not have sold the property to the subsidiary of 14 the POA for only $2,300,000. Although petitioner 15 suggests that PBBM was motivated by environmental 16 concerns to give up $15,680,000 of value, we believe 17 PBBM made a business decision that development was not feasible. PBBM bought and operated the golf course to make money. Its business decisions were ultimately made by Pat Bolin. Bolin was the majority partner of PBBM and the owner of PBBM Corporation, which was PBBM's general partner. Although there was vague testimony that Bolin was interested in conservation, Petitioner did not call Bolin as a DEPO twww.capitalreportingcompany.com

215 Capital Reporting Company 23 1 witness to explain why he contributed the easement to 2 NALT. 3 We conclude the easement was contributed to 4 NALT because he did not think that developing the 5 property or selling the property to a developer was 6 feasible. This is consistent with the explanation 7 that PBBM supplied to the bankruptcy court when it 8 asked the bankruptcy court permission to sell the 9 property to a subsidiary of the POA for only 10 $2,300,000. PBBM assured the bankruptcy court that 11 selling the property at such a price was in the best 12 interests of the bankruptcy estate and the creditors. 13 We find that an objective value of the 14 property before the easement would not include the 15 development potential of the land. We agree with 16 Dunkin that the pre-easement value of the property 17 was only $2,400,000. We find that the easement was 18 worth only $100, Should the section 6662 penalty be imposed? 20 Section 6662(a) imposes a penalty equal to percent of an underpayment due to specified 22 causes. These causes include negligence or disregard 23 of rules or regulations, substantial understatement 24 of income tax, and substantial valuation 25 misstatement. Sec. 6662(b)(1), (2), (4). To the DEPO twww.capitalreportingcompany.com

216 Capital Reporting Company 24 1 extent that any portion of an underpayment is 2 attributable to a gross valuation misstatement, the 3 penalty is increased to 40 percent under section (h). 5 A gross valuation misstatement exists if 6 the value of property claimed on the tax return is percent or more of the amount determined to be 8 the correct amount of such valuation. Sec (e) (1), (e)(1) (A), (h)(1), (h)(2). The value of 10 the easement reported on PBBM's return, $15,160,000, 11 was 15,160 percent of the amount we determine to be 12 its value, $100,000. Therefore, there was a gross 13 valuation misstatement. The law allows no reasonable 14 cause/good faith exception to the penalty on gross 15 valuation misstatements. Sec. 6664(c)(2). 16 Petitioner contends that respondent's 17 assertion of the 40 percent penalty for a gross valuation misstatement does not comply with section (b). Section 6751(b) provides that no penalty 20 shall be assessed unless the initial determination of 21 such assessment is personally approved in writing by 22 the immediate supervisor of the individual making 23 such determination or such higher level official as 24 the Secretary may designate DEPO twww.capita1reportingcompany.com

217 Capital Reporting Company 25 1 We recite the facts regarding respondent's TAI 2 assertion of the 40 percent penalty. 3 In 2008 PBBM filed its Form 1065, claiming 4 a charitable-contribution deduction of $15,160, On November 16, 2011, Gaylon Berg, an IRS manager, 6 sent to PBBM Corporation a so-called 30-day letter 7 regarding PBBM. Berg attached to the 30-day letter 8 " ur summary report on the examination of PBBM" and 9 stated that the report "explains all proposed 10 adjustments including facts, law and conclusion." 11 The examination report attached to the 30-day letter 12 included a document entitled "Gross Valuation 13 Overstatement Penalty Issue Lead Sheet" stating that 14 examiner Jerry Walker had determined that the percent penalty applies to underpayments attributable 16 to the $15,160,000 claimed deduction for the 17 conservation easement. This lead sheet was dated 18 November 14, 2011, two days before the date of the day letter. Walker's manager was Berg. 20 on May 8, 2014, the IRS Appeals Office 21 prepared a document entitled "Appeals Transmittal and 22 Case Memo". The document was signed by Appeals 23 Officer Robert Wolff and Appeals Team Manager Carla 24 Washington. The document stated "Assessment is fully 25 supported by Compliance's development." It further DEPO twww.capitalreportingcompany.com

218 Capital Reporting Company 26 1 stated "Please use the standard language for 40 2 percent penalty under IRC 6662(h) and the alternative 3 position of the 20 percent penalty under IRC 6662." 4 On August 11, 2014, the IRS issued the FPAA 5 determining that PBBM's $15,160,000 deduction for the 6 easement was attributable to a gross valuation 7 misstatement under section 6662(h) and that the 40 8 percent penalty should be imposed on the 9 underpayments resulting from the claiming of the 10 entire deduction. 11 Respondent argues that an assessment of the percent penalty has not yet occurred and therefore 13 it is premature to consider whether section 6751(b) 14 has been satisfied. This argument rests upon the 15 observation that assessment of the 40 percent penalty 16 is suspended by the Internal Revenue Code until this 17 partnership proceeding is over. Respondent has also 18 made this argument in another pending case. We need not determine whether the argument has merit. Even 20 assuming that an initial determination of an 21 assessment of a 40 percent penalty can occur during a 22 period in which assessment is barred (and thus 23 rejecting respondent's argument), the initial {gna 24 determination to assert the 40 percent penalty as to 25 PBBM's deduction would have been made by Walker in DEPO twww.capitalreportingcompany.com

219 Capital Reporting Company 27 1 the examination report dated November 14, See 2 Legg v. Commissioner, 145 T.C. No. 13, slip op. at 11 3 (2015). 4 The November 16, 2011 cover letter by Berg 5 is the personal written approval of Walker's 6 determination to impose the 40 percent penalty. Berg 7 was Walker's supervisor. Therefore, we find that 8 Walker's determination was personally approved by his 9 immediate supervisor in writing. Alternatively even 10 if the initial determination were considered not have 11 been made by Walker, the examiner, but by Wolff, the 12 appeals officer, the determination by Wolff that the 13 penalty was appropriate was approved in writing by 14 Wolff's superior, Washington. We therefore conclude 15 that the IRS's assertion of the 40 percent penalty 16 did not violate section 6751(b) We now consider the significance of our holding that there was a gross valuation misstatement on PBBM's return for 2007 because PBBM valued the easement at $15,160,000 rather than $100,000. PBBM's reporting of a charitable contribution deduction of $15,160,000 means that there were underpayments of taxes by PBBM's partners. The amounts of these underpayments are of two types. First, there are the amounts of underpayments resulting from PBBM's DEPO twww.capita1reportingcompany.com

220 Capital Reporting Company 28 1 reporting of a $15,160,000 deduction instead of a 2 $100,000 deduction. Second, there are additional 3 amounts of underpayments that correspond to the 4 difference between a $100,000 deduction and a $0 5 deduction. The amounts corresponding to the first 6 type of underpayment are attributable to a gross 7 valuation misstatement. These amounts are subject to 8 the 40 percent penalty. The amounts corresponding to 9 the second type of underpayment, the IRS concedes, 10 are not subject to the 40 percent penalty. 11 Respondent contends that the amounts corresponding to 12 the second type of underpayment are subject to the percent penalty. 14 Respondent determined that the 20% penalty 15 was appropriate because of negligence or disregard of 16 rules or regulations, or alternatively, because of a 17 substantial understatement of income tax. See sec (b)(1) and (2), (c), (d). Respondent bears the 19 burden of production on the applicability of this percent penalty in that he must come forward with 21 sufficient evidence indicating that it is proper to 22 impose it. See sec. 7491(c); see also Higbee v. 23 Commissioner, 116 T.C. 438, 446 (2001). Once 24 Respondent meets this burden, the burden of proof 25 remains with Petitioner, including the burden of DEPO twww.capitalreportingcompany.com

221 Capital Reporting Company 29 1 proving that the penalty is inappropriate because of 2 reasonable cause and good faith. See Higbee v. 3 Commissioner, supra at Even if Respondent 4 has met his burden of production, we hold that the 20 5 percent penalty is inappropriate because of 6 reasonable cause and good faith. 7 Pursuant to section 6664(c)(1), the 20 8 percent penalty under section 6662 does not apply to 9 any portion of an underpayment for which a taxpayer 10 establishes that the taxpayer (1) had reasonable 11 cause and (2) acted in good faith. Whether a 12 taxpayer acted with reasonable cause and in good 13 faith depends on the pertinent facts and 14 circumstances, including the taxpayer's efforts to 15 assess the proper tax liability, and including the 16 taxpayer's knowledge and experience. Treas. Reg. 17 sec (b)(1). We agree with Petitioner that Brad Ayres, on behalf of PBBM, made a reasonable attempt to comply with the Internal Revenue Code and 20 that he acted in good faith. Although Respondent contends that the 22 deduction for the easement is unavailable because the 23 bankruptcy trustee could have avoided the easement 24 during the last few days of 2007, it is questionable 25 that the transfer could have been avoided. See part DEPO twww.capitalreportingcompany.com

222 Capital Reporting Company We find that the possibility of avoidance does 2 not demonstrate that PBBM operated in bad faith. 3 As discussed in part 3, we hold that the 4 amount that NALT would receive in the event of the 5 judicial extinguishment of the easement would be 6 insufficient to meet the regulatory requirement in 7 some circumstances. However, it appears that the 8 amount would meet the regulatory requirement in many 9 circumstances. We conclude that the formula in the easement was an imperfect, but good faith, attempt to satisfy the regulation. As discussed in part 4, we hold that the easement failed to protect conservation purposes in perpetuity. Although the easement is ineffectual at protecting conservation purposes, it appears to have been good faith attempt to meet the requirements of the Internal Revenue Code. In summary we hold that the 40 percent penalty of section 6664(h) is applicable to the underpayments corresponding to the difference between a deduction of $15,160,000 and a deduction of $100,000. We hold that no penalty is applicable to the underpayments corresponding to the difference between a deduction of $100,000 and a deduction of $ DEPO twww.capitalreportingcompany.com

223 Capital Reporting Company 31 1 A decision will be entered under Rule This concludes the bench opinion and this 3 trial session is adjourned. 4 THE CLERK: All rise. 5 (Whereupon, at 3:42 p.m. the above- 6 entitled matter was concluded.) DEPO twww.capitalreportingcompany.com

224 T.C. Memo UNITED STATES TAX COURT TRIUMPH MIXED USE INVESTMENTS III, LLC, FOX RIDGE INVESTMENTS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No Filed May 15, Michael C. Walch, for petitioner. Rebekah A. Myers, Charles B. Burnett, and S. Mark Barnes, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION BUCH, Judge: Triumph Mixed Use Investments III, LLC (Triumph), is subject to the partnership provisions of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No , sec. 402(a), 96 Stat. at 648. Triumph was one of a group of entities that were developing a master-planned community on their real

225 -2- [*2] property in Lehi, Utah, during 2010 and 2011, the years in issue. In an earlier agreement with the city of Lehi, Triumph s parent entities received additional development credits (rights to develop units), which doubled the number of units that they could develop. However, to develop these additional units, these entities were required to follow the city of Lehi s development procedures and receive specific development approvals from the city council. In following these development procedures the entities development plan was approved by the city council. However, the city council s approval was contingent on the parent entities dedicating real property to the city and reducing density. Triumph subsequently transferred acres and 1,958 development credits to the city of Lehi. After the transfer the entities received another development approval, which allowed them to develop some of the additional units pursuant to the earlier agreement with the city. On its 2011 return Triumph claimed an $11,040,000 charitable contribution deduction for the transfer. The Commissioner issued a notice of final partnership administrative adjustment (FPAA) for Triumph s 2010 and 2011 returns. The Commissioner determined that Triumph could not deduct the charitable contribution reported for The Commissioner also determined that Triumph had unreported gross receipts and net earnings from self-employment in the same amount for 2010 and

226 -3- [*3] The Commissioner determined that Triumph could not deduct a longterm capital loss or a bad debt for The Commissioner also determined that section 6662(a) and (b) accuracy-related penalties should apply for the years in issue. 1 Triumph is not entitled to a charitable contribution deduction for Triumph transferred the real property and development credits in exchange for a development plan approval and with the expectation of a future development plan approval. Because these benefits have substantial value and the tax matters partner did not report or value these benefits, Triumph is not entitled to a charitable contribution deduction. With respect to the other adjustments we find that the Commissioner failed to show some substantive evidence of unreported gross receipts for 2010, and therefore Triumph does not have unreported gross receipts for Conversely, the gross receipts were reported for 2011, and we find that the tax matters partner failed to meet its burden to show that Triumph did not have taxable gross receipts. Because the tax matters partner failed to establish the basis of the property 1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years 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.

227 -4- [*4] transferred in a settlement, Triumph is not entitled to a long-term capital loss deduction. However, Triumph is entitled to a bad debt deduction because the debt was proximately related to Triumph s trade or business and became worthless. Because Triumph had gross receipts for 2011 that were not reported as net earnings from self-employment, Triumph must recognize the gross receipts as net earnings from self-employment. With respect to the accuracy-related penalty the Commissioner established that Triumph acted negligently with respect to the portion of the underpayment attributable to the charitable contribution deduction, but the Commissioner did not show that it acted negligently with respect to the other adjustments. The penalty for an underpayment due to a substantial understatement of income tax is applicable as it relates to an adjustment to partnership items if the statutory threshold for that penalty is met at the partner level. The tax matters partner did not show that Triumph had reasonable cause and acted in good faith. FINDINGS OF FACT Triumph s principal place of business was in Utah when it timely petitioned. I. The Traverse Entities During the years in issue Triumph was one of a group of related companies that were developing real property (Traverse property) in Lehi, Utah. Triumph

228 -5- [*5] was a limited liability company organized in the State of Utah. Triumph was formed in 2003 to own, purchase, acquire, and finance commercial real estate projects. Fox Ridge Investments, LLC (Fox Ridge), is the tax matters partner of Triumph. Triumph was owned % by Fox Ridge and.1452% by Mountain Home Development Corp. (Mountain Home). Fox Ridge was a limited liability company that was classified as a partnership, and Mountain Home was a corporation. Ted Heap was the chief executive officer of Triumph, Fox Ridge, and Mountain Home. 2 Triumph owned 97.89% of Mountain Cove Investments II, LLC (Mountain Cove). Triumph, Fox Ridge, and Mountain Home (collectively Traverse entities) owned the Traverse property. The Traverse property consisted of approximately 2,800 acres, which encompassed a mixture of relatively flat land, gentle rolling foothills, and steep mountains including a central canyon, which was in the center of the Traverse property. The Traverse entities were developing the Traverse property into a masterplanned community in a multiyear development that became known as the Traverse Mountain Development. The Traverse property was zoned as a planned community. 2 Mr. Heap indirectly owned 16%-17% of Fox Ridge and Mountain Home.

229 -6- [*6] II. The City of Lehi Development Procedures Planned community zones are reserved for large master-planned areas that have a mixture of land uses, including commercial and mixed residential. When the city of Lehi zones an area as a planned community, the developers must follow a set of procedures before developing the property. For instance, the property cannot exceed a maximum density of 4.2 units per acre. Additionally, the property must maintain at least 10% as open space, which is defined as undeveloped, natural grounds. The city of Lehi s preference is for the property owner to contribute open space to the city; however, other options are available for open space. The city council must approve development plans. The Development Review Committee and the Planning Commission first review the plans before they are submitted to the city council. The Development Review Committee reviews, comments on, and recommends suggestions for the proposed plan. The proposed plan version is then sent to the Planning Commission. The Planning Commission reviews applications, hears testimony, and recommends to the city council whether to approve the proposed plan. The city council reviews the proposed plan submitted by the Planning Commission and then makes a determination.

230 -7- [*7] Developers must have three plans approved by the city council before they can develop a property: a concept plan, an area plan, and a subdivision plat or site plan. A concept plan is a basic, general land use guide for the property. The concept plan sets the density of the residential areas, commercial areas, and open space areas. The city of Lehi s policy is to take a concept plan through a public hearing process, which allows residents to voice their concerns, because it sets the framework for the future development. After the concept plan is approved, a developer can proceed with an area plan. An area plan is a detailed and technical land use plan. It is based on an approved concept plan. The area plan uses maps, figures, and tables to show the specific residential uses, commercial uses, and open space. Area plans lay out the density levels in each development zone. Every zone has a maximum number of units that can be built. This number cannot be changed unless the zone is a flex zone. A flex zone is an area where the lot size is not defined and the number of units allocated to it can be transferred to a different part of the area plan. Transferring credits from a flex zone to another designated area or changing the layout of a flex zone are the only revisions that can be made to an area plan without the city council s approval.

231 -8- [*8] After the city council has adopted the area plan, a developer can prepare a subdivision plat or site plan. The subdivision plats or site plans are the most detailed; they define the boundaries for streets and lots for the development. After these plans are approved, the developer can move forward with construction. III. Purchase of the Property In 2000 Fox Ridge purchased the Traverse property and other noncontiguous property from Utah Valley Land Co. for $29,606,962. When Fox Ridge purchased the Traverse property, Fox Ridge and Mountain Home succeeded Utah Valley Land Co. under its annexation and development agreement with the city of Lehi. In this agreement the city of Lehi annexed the property and zoned it as a planned community. The city of Lehi agreed that the property owner could develop 3,500 residential units and 370,000 square feet of commercial space. The parties attached a concept plan to the annexation and development agreement, which followed the parties agreement. IV. Development of the Property After purchasing the Traverse property, the Traverse entities frequently interacted with the city of Lehi and the city council regarding the development of the Traverse property. Mountain Home represented Triumph before the city.

232 -9- [*9] A. The 2000 Area Plan In 2000 the city council approved and adopted the Traverse entities area plan (2000 area plan). The 2000 area plan reflected a master-planned development. The plan designated the land to be developed in different phases and included areas designated as commercial, mixed-residential, communityfacility, and open space. The 2000 area plan showed that approximately half of the Traverse property would be developed into residential and commercial use and that the other half of the property would remain open space. The plan used all 3,500 units in a mixture of low-, medium-, and high-density development, primarily in the lower, flat half of the property. The plan also provided roughly 1,450 acres of open space in the northern portion of the property. The central canyon was carved out of the open space and designated for 903 high- and low-density residential units. In approving the 2000 area plan the city council provided that [i]f a conflict exists between the Annexation and Development Agreement and this Area Development Plan, the Area Development Plan controls.

233 -10- [*10] B. The Cabela s Retail, Inc. Deal After purchasing the Traverse property, the Traverse entities wanted an initial buyer to start the commercial portion of the development. They found Cabela s Retail, Inc. (Cabela s). The Traverse entities, Cabela s, and the city of Lehi entered into an agreement in which the Traverse entities transferred real property to Cabela s. 3 After this transfer, Fox Ridge, Mountain Home, and the city of Lehi amended the annexation and development agreement. By this amendment, the city of Lehi increased the Traverse entities development credits. Fox Ridge, Mountain Home, and the city of Lehi agreed that the Traverse property had 1,595 acres approved for development and that Fox Ridge and Mountain Home could develop 6,700 residential units with an additional 1,000 bonus units if the units were developed in the commercial area. The city council increased the density again in approving two new concept plans for the Traverse property in 2007 and In the amended concept plans Fox Ridge and Mountain Home received additional acreage and development credits. The two concept plans increased the total acreage to 2,801 and the total number of units to 7, Mr. Heap believed the real property to be worth $20 million.

234 -11- [*11] By 2011 the Traverse entities had either built or platted 1,900 units. The Traverse entities had received loans, totaling more than $8,992,307, to develop these units from a group of entities collectively called the Perry entities. 4 These loans were secured by trust deeds, which encumbered portions of the Traverse property. C. Approval of the New Concept Plan The Traverse entities needed a new concept plan to develop the additional development credits granted in connection with the Cabela s deal. By 2011 Fox Ridge and Mountain Home had rights to develop 7,982 units; however, the 2000 area plan approved only 3,500 units for development. To develop the additional units the Traverse entities were required to follow the development procedures. To comply with the development procedures, Mountain Home created a new concept plan in 2011 (2011 concept plan). The 2011 concept plan proposed to develop 7,025 units. In this plan the central canyon was designated as a flex area, meaning that units could be transferred to the central canyon from other designated areas. 4 The Perry entities consisted of L.H. Perry Investments, LLC, L.R.H. Perry Investment, LLC, Perry Homes Utah, Inc., Perry Development, LLC, Perryhomes, Inc., Perry & Associates, Inc., and Perry & Associates, Inc. Employee Profit Sharing Plan.

235 -12- [*12] During a meeting on June 1, 2011, 5 Mountain Home requested that the Development Review Committee review the 2011 concept plan. After reviewing the 2011 concept plan, the Development Review Committee stated that the city of Lehi wanted all open space areas [to] be dedicated to the City and [the areas] will be defined by the Area Plan - the open space dedication should occur concurrently with the recording of the new area plan. Following that meeting the city of Lehi residents ed the city s planning director for the project to convey their objections to the 2011 concept plan. The residents were upset because the 2011 concept plan doubled the number of units from the 2000 area plan. Mr. Heap viewed the residents concerns as typical of residents in a master-planned development because they don t want anybody else to develop after their house is built. On July 14, 2011, the Planning Commission met but did not approve the 2011 concept plan. Dozens of the residents of the Traverse Mountain development attended and spoke in opposition to the 2011 concept plan. One resident brought a petition with 150 to 200 signatures of residents opposing the 5 The record is inconsistent regarding when the 2011 concept plan was reviewed by the Development Review Committee. The parties stipulated that the review took place at the June 1, 2011, meeting. Because of the discrepancies, we will use the date in the parties stipulation.

236 -13- [*13] 2011 concept plan. The Planning Commission tabled the item to allow time to understand the issues better. Mountain Home created an amended 2011 concept plan (amended 2011 concept plan). Mr. Heap believed that the concept plan needed to decrease density in order to move forward. The amended 2011 concept plan included the same units as the original plan, but it provided that if the Traverse entities decided to transfer units into the flex area, the total units would not exceed 6,024. Two weeks later the Planning Commission reconvened and approved the recommendation for the city council to approve the amended 2011 concept plan. The Planning Commission agreed to recommend approval of the amended 2011 concept plan with a total density of up to 6,024 units in accordance with the proposed plan and with the following recommendations: (1) the City look into a density buy down over a twenty year period and (2) [t]he approximate 1,000 acres of open space identified in the Concept Plan, * * * be dedicated to the city for open space and passive recreation such as hiking. On August 9, 2011, the city council held a hearing at which it discussed the amended 2011 concept plan. Mr. Heap believed that the only thing that matters is the city council approval. During this meeting Mr. Heap explained that he was

237 -14- [*14] trying to find the best solution for everyone. He stated that he had been working on the new area plan since 2010 and needed to start construction. The city council approved the amended 2011 concept plan. However, in approving the plan the city council explicitly rejected Mountain Home s request to exceed 6,024 units if no units were transferred into the flex area. Instead, the city council approved the amended 2011 concept plan based on the following conditions: 1) That the open space in the canyon areas be dedicated to the City as proposed in the Development Review Committee s General Comment * * * and by the Planning Commission. * * * 2) That the total number of units is not to exceed 6,024, which number is to be used in totality even if units are transferred to the business park/flex area. If any units are transferred to the business park/flex area, those units are to be taken from the Central Canyon area. At the time the city council granted conditional approval, all of the Traverse entities loans from the Perry entities were in default. The Traverse entities entered into a global settlement agreement with the Perry entities on September 23, In the global settlement agreement the Perry entities agreed to not foreclose and to discharge all of the Traverse entities obligations in exchange for conveyance of the encumbered property. In the agreement the Traverse entities agreed to diligently pursue the completion and approval by Lehi city (with a goal

238 -15- [*15] of achieving final approval prior to December 31, 2011) of the new Area Plan * * * in accordance with the approved Concept Land Use Plan. And they agreed that if the Traverse entities failed to receive approval within eight months, the Perry entities could take over the area plan process. Fox Ridge, Mountain Home, and the city of Lehi negotiated and agreed to decrease density in exchange for water rights to the Traverse Mountain development. They amended their annexation and development agreement on October 18, The parties submitted that they have worked together to reduce the overall density in the Traverse Mountain Area Plan in exchange for the City s agreement to provide water rights for additional residential dwelling units within the Traverse Mountain Project. 6 They agreed that [t]he number of residential units in the Traverse Mountain Concept Plan adopted by the Lehi City Council * * * are hereby reduced from 6,024 to 5,812, a 212-unit reduction. The city of Lehi agreed to increase the water rights to the units in the Traverse Mountain development from 3,227 to 5,812 units. 6 Fox Ridge, Mountain Home, and the city of Lehi entered into several agreements related to water rights for the units in the Traverse Mountain development. The city of Lehi agreed in September 2010 to provide water for up to 3,227 units.

239 -16- [*16] Mountain Home finished its amended area plan (2012 area plan), and the Traverse entities needed to get that plan approved. The 2012 area plan provided that the development would not exceed 5,812 units. Mr. Heap believed that the 2012 area plan gave the developer the right to start developing the Traverse property. He explained that the Traverse entities want[ed] to move forward, but it was difficult. He said that he wanted to end any conflicts in the City and those relating issues. The Planning Commission met on December 8, 2011, and approved the recommendation for the city council to approve the 2012 area plan. During this meeting Mr. Heap explained that [w]e are desperately trying to move this forward; it s in everybody s best interest to move this forward--there are significant financial impacts. At trial Mr. Heap explained that his desperation was also related to wanting to make sure that the residents were happy. At the end of the meeting the Planning Commission agreed to approve Mountain Home s request for the 2012 area plan if the 2012 area plan included all revised Development Review Committee comments. 7 The Traverse entities submitted the 2012 area plan to the city council. evidence. 7 The revised Development Review Committee comments are not in

240 [*17] D. Transfer to the City of Lehi -17- On December 29, 2011, the following transactions occurred: Fox Ridge, Mountain Home, and the city of Lehi amended their annexation and development agreement. They agreed that the October 18, 2011, amendment contained factual errors in that the parties agreed only to reduce the number of units by 212. They agreed that the correct number of units immediately following the October 18, 2011, amendment was 7,770 units. Fox Ridge transferred acres to Triumph. 8 The Traverse entities and the city of Lehi entered into an agreement for a charitable donation, describing the terms of the agreement. In this agreement the Traverse entities recited that Triumph owns real property and that the Traverse entities have disposed of portions of the Traverse Property and Units, and have now determined to seek approval of plans for development of their property which would not use all of the Units remaining available to them for such development, and although such Units have value and could be so used, the Traverse Entities now desire to cause the Property to be donated to the City in connection and together with an agreed upon reduction of the Units available for development of the 8 The tax matters partner submitted various deeds showing Triumph s ownership of the Traverse property. Triumph owned parcel No We take judicial notice of the Utah County Parcel Maps. See Fed. R. Evid. 201(b)(2). We find that following the transfer from Fox Ridge, Triumph owned the Traverse property transferred to the city of Lehi.

241 [*18] -18- Traverse Property of 1,958 (the Donated Units ), and the City wishes to accept the Property and the Donated Units from the Traverse Entities * * * [9] The city of Lehi and the Traverse entities did not include any value for any consideration received and instead stated that the Traverse entities received [n]o consideration. This no consideration clause provided: The donation of the Property and the Donated Units by Triumph Mixed Use to the City is a voluntary charitable donation. None of the Traverse Entities nor any party related to any of the Traverse Entities has received, is receiving, or proposes to receive any compensation, development benefits, concessions, or approvals of any kind whatsoever, including enhancement of any land owned by any of them, from the City as consideration for Triumph Mixed Use s donation of the Property and the Donated Units. Approval of plans for development of real property other than the Property by the Traverse Entities is in no way contingent upon or subject to the donation of the Property or the Donated Units to the City. Under the terms of the documents, the city of Lehi did not incur any obligations in connection with the transfer and the Traverse entities did not have any recourse if they did not get plan approvals. The attorney for the city of Lehi agreed that the city did not incur any obligations to provide future approvals to the property owner. Triumph executed three quitclaim deeds to the city of Lehi, by which it transferred acres to the city of Lehi. 9 This transfer returned the units to 5,812.

242 -19- [*19] The Traverse entities and the city of Lehi entered into an assignment of development rights agreement. In this agreement the Traverse entities agreed that Mountain Home and Fox Ridge were joining to the extent of any interest any of them hold or may hold in the Donated Units, and agree and represent to the City that Triumph Mixed Use is the sole owner of the Donated Units with full rights to transfer same to the City. With the completion of all of these events, Fox Ridge and Mountain Home had returned their development credits to 7,700 from 5,812; Fox Ridge transferred real property to Triumph; and Triumph transferred acres and 1,958 development credits to the city of Lehi, which had the effect of returning the development credits to 5,812. The contingencies of the amended 2011 concept plan being satisfied, the amended 2011 concept plan was approved. E. Approval of the Area Plan On January 24, 2012, the city council held a hearing in which it approved the 2012 area plan after a finding that the 2012 area plan was consistent with the amended 2011 concept plan and the numerous items to be accomplished as part of approving the 2012 area plan.

243 -20- [*20] V. Appraisal of the Transfer In January 2012 Triumph retained J. Philip Cook & Associates, LLC, to appraise the transfer. J. Philip Cook and Travis E. Reeves prepared an appraisal, dated February 1, They concluded that as of December 29, 2011, the market value of the property and the development credits was $11,040,000 using the before and after approach for valuation. They did not include any value for consideration received. VI. Triumph s Other Business Transactions Triumph made deals with other corporations involved in the development of the Traverse property while awaiting approval of the 2012 area plan. In 2010 Triumph pledged its separately owned property to the Perry entities to enable Mountain Home to receive a loan. Triumph transferred this property to the Perry entities when Mountain Home defaulted on this loan in In 2011 Triumph made payments on behalf of Mountain Cove for property taxes and settlement costs. Mountain Cove gave Triumph a promissory note in the amount of $51,868, certifying it would repay Triumph. Later in 2011 Mountain Cove s property was foreclosed upon. Mountain Cove did not repay Triumph.

244 -21- [*21] VII. Return Preparation and Returns In 2011 Triumph turned to its accountant to file its returns. Scott Rasmuson had been preparing Triumph s Forms 1065, U.S. Return of Partnership Income, since He has 25 years of experience as a public accountant and is a certified public accountant. His clients include real estate developers and construction contractors. To prepare Triumph s returns Mr. Rasmuson reviewed Triumph s general ledger, its trial balances, and its subsidiaries and parent entities returns. He also discussed the returns with Triumph s internal accounting team. A Return Several entries on Triumph s 2010 return are relevant to issues before us. On its 2010 Form 1065 Triumph reported that it was an investor and that its principal investment was real estate. Triumph reported a capital contribution of $8,833,645. It did not report gross receipts or net earnings from self-employment. On a previous 2008 return Triumph had reported a $12,145,000 installment sale. For 2010 Triumph did not report any payment with respect to that installment sale. Mr. Rasmuson testified that this installment sale had been improperly reported on Triumph s 2008 return. He claimed that no sale ever occurred and that Triumph s books and records did not reflect such sale.

245 -22- [*22] B Return As with its 2010 return, several entries on Triumph s 2011 return are relevant to issues before us. On its 2011 Form 1065 Triumph reported that it was an investor and that its principal investment was real estate. 1. Charitable Contribution Triumph included a Form 8283, Noncash Charitable Contributions. On the Form 8283 Triumph claimed an $11,040,000 noncash charitable contribution deduction for transferring acres and 1,958 development credits to the city of Lehi. Triumph attached the appraisal report prepared by J. Philip Cook & Associates, LLC, to its 2011 return. Triumph did not report any consideration received. 2. Gross Receipts Triumph did not report gross receipts or net earnings from self-employment. Triumph included a Form 6252, Installment Sale Income, and reported that it sold real estate on December 31, 2007, that it had acquired in Triumph reported that it had $332,054 of installment income based on a $586,800 payment and a computed gross profit percentage of %. Triumph also reported that it received investment income of $48,648. Triumph had previously reported on its

246 -23- [*23] 2010 return that it sold this property to Mountain Home and that Triumph had a cost basis of $254,746. During trial Mr. Rasmuson testified that the transaction was not an installment sale between Triumph and a related party; instead, as he saw it, it was a transaction between a related party and Chapel Ridge Investments III (Chapel Ridge) and the obligation was contributed to Triumph as a capital contribution in He explained that in 2011 the installment obligation was paid by a property transfer that satisfied the installment obligation with principal and interest. The tax matters partner did not provide any documentation regarding this transaction. 3. Long-Term Capital Loss Triumph included a Schedule D, Capital Gains and Losses, on which it reported an $806,745 long-term capital loss. Triumph reported that it acquired the real property in 2000, that the property had a cost basis of $873,897, and that it sold it on September 15, 2011, for $67,152. Triumph used the $806,745 loss to offset the installment sale income of $332,054. Thus, Triumph reported a $474,691 net long-term capital loss. This loss relates to the real property that Triumph had pledged to the Perry entities in 2010 as collateral that enabled Mountain Home to receive a loan from the Perry entities. Mountain Home defaulted on the loan in 2011, and the Traverse

247 -24- [*24] entities (and related parties) and the Perry entities entered into an agreement whereby Triumph transferred the pledged property to the Perry entities in Short-Term Capital Loss Triumph reported a $51,869 short-term capital loss on the Schedule D. This loss relates to a bad debt deduction. In 2011 Triumph made payments on behalf of Mountain Cove. In exchange Triumph received a promissory note. Mountain Cove defaulted on that note. Triumph claimed a short-term capital loss deduction in the amount of the promissory note. VIII. FPAA On June 5, 2014, the Commissioner issued an FPAA for 2010 and 2011 to Triumph s tax matters partner. In the FPAA the Commissioner made various adjustments and determined penalties. For 2010 the Commissioner increased gross receipts by $8,833,645 and increased net earnings from self-employment by the same amount. For 2011 the Commissioner disallowed a charitable contribution deduction of $11,040,000, increased gross receipts by $636,608 and increased net earnings from self-employment by the same amount, disallowed a long-term capital loss deduction of $541,843, and disallowed a short-term capital loss deduction of $51,869. The Commissioner also determined that accuracy-

248 -25- [*25] related penalties apply. The tax matters partner timely filed a petition disputing each adjustment. IX. Trial Trial was held in Salt Lake City, Utah, on October 25 and 26, At trial the Court recognized Jeremie Snowder as a real estate valuation expert. Mr. Snowder submitted an expert report in which he concluded that the value of the property transferred was $5,050,000. During trial the tax matters partner submitted copies of certain of Triumph s accounting records to show tax bases of its property. However, these records combine the tax bases of all the property owned by the entities. OPINION With respect to the charitable contribution deduction, the parties principally dispute whether Triumph had the requisite donative intent. We must also decide whether Triumph had unreported gross receipts; whether Triumph had a long-term capital loss; whether Triumph was entitled to a bad debt deduction; whether Triumph failed to report net earnings from self-employment; and whether Triumph is liable for accuracy-related penalties. We address each in turn.

249 -26- [*26] I. Burden of Proof In general, the Commissioner s determinations are presumed correct, and a taxpayer bears the burden of proving otherwise. 10 The burden of proof includes the burden of proving entitlement to any claimed deduction. 11 When a case involves unreported income, the U.S. Court of Appeals for the Tenth Circuit, to which this case is appealable, has held that the Commissioner s determination of unreported income is entitled to a presumption of correctness once some substantive evidence is introduced demonstrating that the taxpayer received unreported income. 12 Once the Commissioner introduces some substantive evidence linking the taxpayer with the income, the presumption of correctness applies and the burden shifts to the taxpayer to produce substantial evidence overcoming it Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). 11 Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (explaining that deductions are a matter of legislative grace). 12 United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991); Erickson v. Commissioner, 937 F.2d 1548, 1551 (10th Cir. 1991), aff g T.C. Memo ; Green v. Commissioner, T.C. Memo , at *24; Lamb v. Commissioner, T.C. Memo , at * McMullin, 948 F.2d at 1192; Erickson v. Commissioner, 937 F.2d at 1551; Green v. Commissioner, at *24; Lamb v. Commissioner, at *13.

250 -27- [*27] Section 7491(a) provides an exception that shifts the burden of proof to the Commissioner as to any factual issue relevant to a taxpayer s liability if the taxpayer provides credible evidence with respect to that issue and also substantiates the item, maintains records, and cooperates with the Commissioner s reasonable requests for information. Taxpayers bear the burden of proving that they have met the section 7491(a) requirements. 14 The tax matters partner raised section 7491 for the first time in its reply brief. Its attempt to raise this argument on reply brief is untimely and thus prejudicial to the Commissioner. 15 Moreover, even if the tax matters partner had properly raised this argument, the tax matters partner has not shown that Triumph has met the requirements of section 7491(a), and therefore the tax matters partner has not met its burden. 16 Cir. 2012). 924 (2007). 14 Rolfs v. Commissioner, 135 T.C. 471, 483 (2010), aff d, 668 F.3d 888 (7th 15 Kansky v. Commissioner, T.C. Memo , 93 T.C.M. (CCH) 921, 16 By separate order dated May 7, 2018, denying a motion to reopen the record we have addressed the effect of section 7491(c) on this case.

251 -28- [*28] II. Charitable Contribution Triumph claimed a charitable contribution deduction of $11,040,000. We must determine whether Triumph actually made a charitable contribution or whether the transfer was part of a quid pro quo arrangement as the Commissioner alleges. If Triumph is entitled to the deduction, we must determine the value of that transfer. A. Charitable Contribution Principles Section 170(a)(1) provides that a taxpayer may deduct any charitable contribution made in the taxable year. A charitable contribution is defined as a contribution or gift to or for the use of a qualified recipient. 17 If a taxpayer makes a charitable contribution of property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution. 18 The fair market value is equal to the price at which the property would change hands between a willing buyer and willing seller having no 17 Sec. 170(c). The parties do not dispute that the city of Lehi is a qualified recipient. 18 Rolfs v. Commissioner, 135 T.C. at 480; sec A-1(c)(1), Income Tax Regs.

252 -29- [*29] obligation to buy or sell and having reasonable knowledge of the relevant facts. 19 A contribution of property generally will not constitute a charitable contribution if the contributor expects a substantial benefit in return. 20 However, a taxpayer may still deduct a contribution of property if (1) the value of the property transferred to charity exceeds the fair market value of any goods or services received in exchange and (2) the excess payment is made with the intention of making a gift. 21 If the taxpayer claims a deduction for a charitable contribution, then the taxpayer must meet substantiation requirements. If the value of the property contributed is $250 or more, then the contribution must be substantiated with a contemporaneous written acknowledgment from the qualified recipient. 22 The doctrine of substantial compliance does not apply to excuse compliance with the Tax Regs. 19 Rolfs v. Commissioner, 135 T.C. at ; sec A-1(c)(2), Income 20 United States v. Am. Bar Endowment, 477 U.S. 105, (1986) ( The sine qua non of a charitable contribution is a transfer of money or property without adequate consideration. ); Rolfs v. Commissioner, 135 T.C. at Am. Bar Endowment, 477 U.S. at 117; Rolfs v. Commissioner, 135 T.C. at 486; sec A-1(h)(1), Income Tax Regs. 22 Sec. 170(f)(8)(A).

253 -30- [*30] substantiation requirements of section 170(f)(8)(B). 23 Moreover, if the contributed property is valued in excess of $500,000, the taxpayer must obtain a qualified appraisal and attach the appraisal to the return. 24 The Commissioner challenges Triumph s deduction on several grounds, asserting: (1) the transfer was not a charitable contribution in that it was part of a quid pro quo arrangement in which the Traverse entities received development approvals; (2) the transfer was not valid because Triumph did not own the property or development credits; (3) the contemporaneous written acknowledgment was not valid because it did not value the consideration received; (4) the appraisal was not a qualified appraisal; and (5) the value of the transfer was overstated. The tax matters partner disagrees with the Commissioner s arguments and alleges that Triumph is entitled to the deduction. Because we find that the transfer to the city of Lehi was part of a quid pro quo arrangement and that Triumph has not proven that it made any excess payment, the transfer does not qualify as a charitable contribution. Therefore, we do not need to address the other grounds raised by the Commissioner West 17th St. LLC v. Commissioner, 147 T.C. 557, (2016); Durden v. Commissioner, T.C. Memo , 103 T.C.M. (CCH) 1762, 1764 (2012). 24 Sec. 170(f)(11).

254 -31- [*31] B. Quid Pro Quo Exchange In determining whether a payment is a contribution or gift, the relevant inquiry is whether the transaction in which the payment is involved is structured as a quid pro quo exchange. 25 In ascertaining whether a given payment was made with the expectation of any quid pro quo, courts examine the external features of the transaction. 26 This determination avoids the imprecise inquiry into the subjective motivations of the taxpayer. 27 The relevant question is whether the taxpayer expected a benefit in return for the payment; deductibility does not depend on what type of benefit the taxpayer received. 28 Moreover, in determining whether a quid pro quo existed that defeats donative intent, we will not disregard consideration actually received 25 Hernandez v. Commissioner, 490 U.S. 680, (1989); Rolfs v. Commissioner, 135 T.C. at 480; McGrady v. Commissioner, T.C. Memo , at * Hernandez v. Commissioner, 490 U.S. at ; Christiansen v. Commissioner, 843 F.2d 418, 420 (10th Cir. 1988). 27 Hernandez v. Commissioner, 490 U.S. at ; Christiansen v. Commissioner, 843 F.2d at 420; Seventeen Seventy Sherman St., LLC v. Commissioner, T.C. Memo , at * Christiansen v. Commissioner, 843 F.2d at 420.

255 -32- [*32] simply because it is hard to quantify. 29 On the other hand mere incidental benefits will not defeat a charitable contribution deduction. 30 The benefit that the taxpayer receives does not have to be financial. 31 We have observed that medical, educational, scientific, religious, or some other benefits or privileges may constitute consideration that defeats charitable intent. 32 We have found that a transfer of real property in exchange for development approvals or the expectation of future development approvals is a benefit and precludes a finding of the requisite donative intent for a charitable gift. 33 In Seventeen Seventy Sherman St., LLC v. Commissioner, T.C. Memo , we denied a taxpayer s charitable contribution deduction because the taxpayer received a zoning change and because the taxpayer expected that a recommendation from the community planning agency would increase the 29 Derby v. Commissioner, T.C. Memo , 95 T.C.M. (CCH) 1177, 1190 (2008). 30 Sutton v. Commissioner, 57 T.C. 239, 243 (1971); McGrady v. Commissioner, at * Seventeen Seventy Sherman St., LLC v. Commissioner, at *23-* Seventeen Seventy Sherman St., LLC v. Commissioner, at *23-* See Pettit v. Commissioner, 61 T.C. 634, (1974); Sutton v. Commissioner, 57 T.C. at 243; Seventeen Seventy Sherman St., LLC v. Commissioner, T.C. Memo ; Pollard v. Commissioner, T.C. Memo ; Forkan v. Commissioner, T.C. Memo

256 -33- [*33] likelihood that the taxpayer would receive a plan approval. In that case, the taxpayer owned both a shrine that had previously been designated a landmark and a nearby parking lot. The taxpayer wanted to develop the parking lot for commercial use but needed new zoning permits to do so. The community planning agency and the taxpayer negotiated and agreed that the community planning agency would recommend approval of a zoning change to allow the taxpayer to develop the parking lot. They further agreed that if the zoning change was approved, the taxpayer would grant conservation easements to preserve the shrine. The zoning application was approved, and the taxpayer executed a conservation easement. We denied a deduction for the conservation easement because the taxpayer granted the easement in exchange for zoning changes and with the expectation that the planning agency s recommendation would substantially increase the likelihood that the planning board would approve the permit. 34 We found that the taxpayer highly valued and negotiated for this recommendation and used the easement as leverage to obtain it. Because the taxpayer did not value the benefit as part of the quid pro quo exchange, we denied the taxpayer s deduction. 34 Seventeen Seventy Sherman St., LLC v. Commissioner, at *30-*31.

257 -34- [*34] Likewise, in Pollard v. Commissioner, T.C. Memo , we denied the taxpayer s charitable contribution deduction because the external features of the transaction showed that the taxpayer granted the easement in exchange for approval for his subdivision exemption request. In Pollard the taxpayer wanted to develop a second home on his property. Because building a new home would increase the density beyond what was allowed, the taxpayer first needed subdivision exemption approval. Before the Board of County Commissioners would approve the exemption plat documents, the taxpayer had to grant conservation easements. The taxpayer granted the easements, and the county exempted his land and approved the development of a second home. Although the approval of the request was not the final step in the subdivision exemption process, the taxpayer conveyed the easements in order to get this approval. The Court held that the taxpayer s contribution was part of a quid pro quo exchange and was conveyed as a bargaining chip for approval of the subdivision exemption. 35 Upon finding that a taxpayer has received a benefit in exchange for the transfer, we employ a two-part test to determine whether the taxpayer may claim any portion as a deduction: We must value the transfer, and we must value the 35 Pollard v. Commissioner, at *20-*21.

258 -35- [*35] consideration received in exchange. 36 But if a taxpayer fails to specify the value of any benefit received, then the taxpayer fails to comply with section 170 and the regulations, and no deduction is allowed. 37 Because we find that Triumph s transfer was part of a quid pro quo arrangement in which Triumph received substantial value, and the tax matters partner failed to value the consideration received, we hold that Triumph is not entitled to a deduction. 1. The External Factors Demonstrate Consideration The tax matters partner argues that Triumph is entitled to a deduction because it transferred the acres of real property and 1,958 development credits without consideration. The tax matters partner argues that the agreement for charitable contribution demonstrates that Triumph did not receive any consideration, or that even if Triumph did receive some consideration, it was incidental. We disagree. In exchange for transferring this property, Triumph received the city council s approval of the concept plan and the expectation that the city council would approve the area plan. 36 See Rolfs v. Commissioner, 135 T.C. at ; Seventeen Seventy Sherman St., LLC v. Commissioner, at *27; sec A-1(h)(1), Income Tax Regs. 37 Seventeen Seventy Sherman St., LLC v. Commissioner, at *27; Pollard v. Commissioner, at *19 n.9; Derby v. Commissioner, 95 T.C.M. (CCH) at 1189.

259 -36- [*36] The transfer of real property and development credits was integral to the city council s approval of both plans. 38 The external features of the transaction demonstrate that the real property and development credits were transferred in exchange for the concept plan approval. The Traverse entities desperately wanted to have their new area plan approved to allow them to develop the additional units received in the Cabela s deal. However, before the city council would approve the area plan, the Traverse entities needed to get a new concept plan approved. When the Traverse entities submitted the new concept plan, they were met with public opposition and resistance from the Planning Commission. The obstacles that the Traverse entities needed to overcome were the demands for more open space and a reduction in density. The city council s solution was to require the Traverse entities to dedicate open space and reduce density before the concept plan was approved. After receiving contingent approval, the Traverse entities finished the area plan; and the Planning Commission approved the Traverse entities request for 38 Although Triumph was a distinct entity from Mountain Home, which was presenting the plans to the city of Lehi, Mountain Home represented Triumph before the city. Moreover, the record demonstrates that the Traverse entities were working together to develop the Traverse property.

260 -37- [*37] recommendation of area plan approval. 39 Triumph subsequently executed the agreement for charitable contribution thus satisfying the city council s demand for more open space. 40 At its next meeting the city council approved the 2012 area plan. Thus, the Traverse entities entire course of dealing with the city of Lehi shows that Triumph transferred the real property and development credits as part of a negotiation in which the city of Lehi received open space and the Traverse entities received as a quid pro quo concept plan approval. Triumph also transferred the real property and development credits with the expectation that the Traverse entities would receive an area plan approval. Because an area plan was required to closely follow the concept plan, the Traverse 39 The tax matters partner argues that the city council s condition was dropped because it was not re-raised at this hearing. We disagree. The amended 2011 concept plan was explicitly approved with conditions. Moreover, the Traverse entities completed the contingencies, which shows that they did not treat the condition as having been dropped. 40 The Commissioner has a continuing objection to Exhibit 10-P, the December 29, 2011, amended annexation and development agreement. The Commissioner argues that this document lacks authenticity. We follow the Federal Rules of Evidence. Sec. 7453; see also Rule 143(a). Fed. R. Evid. 901(b)(1) provides that testimony of a witness with knowledge satisfies the authentication requirements. Both Mr. Heap and the attorney for the city of Lehi identified this document. The document is admitted. The Commissioner s remaining evidentiary objections are not discussed in his briefs. We deem these objections abandoned. See Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).

261 -38- [*38] entities expected the city council to approve the area plan after satisfaction of the contingencies that they had negotiated for the concept plan. Indeed, the city council approved the area plan on the finding that the Traverse entities had satisfied the contingencies in the concept plan approval. Accordingly, we also find that the Traverse entities transferred the real property and development credits because they believed that this transfer would lead to the city council s approving their area plan. The linchpin of the tax matters partner s argument is that the agreement for charitable contribution provides that Triumph received no consideration. 41 We give little or no weight to this provision. As explained above, we do not look only to the transfer documents; we examine the external features of the transaction. 42 And the external features of this transaction leave no doubt that Triumph 41 The tax matters partner asserts that the witnesses testimony shows that Triumph did not receive any consideration. Mr. Heap and the attorney for the city of Lehi testified that the city council was not required to approve the Traverse entities development plans. We are not persuaded. We look to the external features of the transaction to see whether the taxpayer received consideration. Hernandez v. Commissioner, 490 U.S. at ; Christiansen v. Commissioner, 843 F.2d at Hernandez v. Commissioner, 490 U.S. at ; Christiansen v. Commissioner, 843 F.2d at 420.

262 -39- [*39] transferred the real property and the development credits for consideration in the form of approval of the concept plan and the 2012 area plan. The tax matters partner argues that, even if we find that Triumph received a benefit in exchange for the transfer, we should find that it was an incidental benefit of little or no value. The tax matters partner relies on McGrady v. Commissioner, T.C. Memo , in which we held that the gift was not conditioned on a return benefit. In McGrady, the taxpayers owned two parcels that were surrounded by three other parcels that would be developed into residential units. A township in Bucks County, Pennsylvania, was committed to conserving the land. The taxpayers, the township, the owner of the surrounding land, and a developer discussed conservation and development plans. Following these negotiations, the parties executed a six-step plan in which the taxpayers granted a conservation easement on the parcel that held their residence, made a contribution to a qualified recipient of the second parcel, and bought back a U-shaped portion of conserved land that surrounded their residence. We found that the taxpayers were entitled to the deduction because they did not receive any return benefit. 43 We held that the Township acted single-mindedly for a conservation purpose and the taxpayers had no power to manipulate the 43 McGrady v. Commissioner, at *21.

263 -40- [*40] negotiation. 44 We explained that [w]henever a homeowner places a conservation easement over his property * * *, the homeowner in a sense benefits by having natural landscapes rather than suburban sprawl in his immediate surroundings * * * [b]ut petitioners were mere incidental beneficiaries of this action. 45 We disagree that the benefit Triumph received was merely incidental. In McGrady the only benefit we found was that the taxpayer received a small benefit of privacy. 46 In this case the Traverse entities requested and received approval of their concept plan and expected that their area plan would be approved. This is a benefit of considerable value to a real estate developer. Thus, we conclude that Triumph transferred the real property and the development credits to the city of Lehi in exchange for the benefit of their concept plan s approval and the expectation that it would lead to approval of their area plan. We find that this benefit was not incidental to the transfer. 44 McGrady v. Commissioner, at * McGrady v. Commissioner, at *24-* McGrady v. Commissioner, at *24-*25.

264 -41- [*41] 2. Value of the Consideration Received When a taxpayer makes a charitable contribution and receives a benefit, the taxpayer s deduction is limited to the portion of the payment that exceeds the fair market value of the goods or services received. 47 The tax matters partner argues that the plan approvals had no value and that the transfer reduced the value of their property. We disagree. The immediate approval of the concept plan and the ensuing approval of the 2012 area plan had significant value. The concept plan approval was necessary to enable the Traverse entities to develop additional units. The approval of the concept plan moved the Traverse entities closer to developing the units they acquired in the Cabela s deal. Indeed, Mr. Heap explained that the transaction was beneficial because it was good to move forward. The Traverse entities also anticipated that their donation to the city would ensure approval of the area plan. This approval also had significant value. The area plan approval would allow the Traverse entities to develop 5,812 units instead of 3,500 units. And following the transfer, the area plan was approved. Because we find that Triumph received a significant benefit and the tax matters partner failed to report or establish the value Regs. 47 Rolfs v. Commissioner, 135 T.C. at 486; sec A-1(h)(1), Income Tax

265 -42- [*42] of the consideration received, we find that Triumph is not entitled to a charitable contribution deduction. 48 In conclusion, the Traverse entities entire course of dealings with the city of Lehi demonstrates that Triumph received a development plan approval and the expectation of a future development plan approval in exchange for transferring the real property and development credits. We find that Triumph received a substantial benefit and also failed to show the value of the consideration. Thus Triumph may not deduct a charitable contribution. III. Gross Receipts Triumph did not report gross receipts on its 2010 return and did not report the disputed gross receipts for 2011 as taxable on its 2011 return. In the FPAA the Commissioner adjusted Triumph s gross receipts by $8,833,645 and $636,608 for 2010 and 2011, respectively. 48 In failing to value the consideration received, Triumph may not have satisfied the requirements of section 170(f)(8)(B)(ii). See Viralam v. Commissioner, 136 T.C. 151, (2011) (denying a charitable contribution deduction for failure to comply with section 170(f)(8) when the taxpayer received goods or services but the contemporaneous written acknowledgment did not report any consideration received).

266 -43- [*43] A Unreported Income The tax matters partner alleges that Triumph had no gross receipts for When a case involves unreported income, the U.S. Court of Appeals for the Tenth Circuit requires the Commissioner to provide substantive evidence that the taxpayer received unreported income. 49 The Commissioner determined that Triumph had unreported income for 2010 of $8,833, The Commissioner contends that a $12,145,000 installment sale occurred in At trial Mr. Rasmuson testified that he improperly reported that amount as an installment sale in 2008 and that Triumph s books and records did not reflect the sale. The Commissioner alleges in his answering brief that Triumph s general ledger shows that in 2010 Triumph s receivables from Mountain Home were reduced from $12,731,800 to $2,183,793. The Commissioner explains that the FPAA erroneously determined that the amount of the reduction was $8,833,645; the reduction was actually $10,548, McMullin, 948 F.2d at 1192; Erickson v. Commissioner, 937 F.2d at 1551; Green v. Commissioner, at *24; Lamb v. Commissioner, at * This is the same amount as a capital contribution that Triumph reported on its 2010 return. The parties do not raise any arguments that the capital contribution should be adjusted.

267 -44- [*44] We disagree with the Commissioner. There is no evidence of unreported income whether $10,548,007 or $8,833,645 or some other amount for Moreover, there is no evidence of a 2008 transaction that would lead to this income. The only discussion of the adjustment comes from Mr. Rasmuson who credibly testified that he improperly reported an installment sale but that Triumph s books and records did not reflect the sale. We hold that the Commissioner did not provide substantive evidence linking Triumph with any unreported income. Accordingly, Triumph does not have unreported gross receipts for B Additional Income The tax matters partner alleges that Triumph has no unreported gross receipts for The Commissioner determined that Triumph had unreported gross receipts of $636,608 for 2011 from the sale of property to Mountain Home and that the tax matters partner did not establish any basis in the property. The tax matters partner acknowledges that in 2011 there was a transfer of property to Triumph for $636,608 and that Triumph reported the payment as installment sale income and interest. The parties agree this payment stems from a 2007 installment sale of real property for $585,000. However, the tax matters partner claims that

268 -45- [*45] the 2007 installment sale occurred between a related party and Chapel Ridge and that the indebtedness on that sale was contributed to Triumph in We find that the tax matters partner has not met its burden. Although the tax matters partner alleges that Triumph was not involved in the installment sale until the obligation was contributed to Triumph in 2010, the tax matters partner did not produce any evidence other than uncorroborated testimony of Mr. Rasmuson. We are not required to accept such testimony. 51 The tax matters partner did not produce any evidence of a novation of the installment obligation or any evidence that Triumph replaced the seller in the transaction. Thus, we find that the tax matters partner has not met its burden. We sustain the Commissioner s determination. IV. Long-Term Capital Loss The tax matters partner alleges that Triumph sustained a long-term capital loss in Section 165(a) generally permits taxpayers to deduct any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 1001(a) provides that the loss is the excess of the adjusted basis over the amount realized. Losses from sales or exchanges of capital assets 51 See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

269 -46- [*46] are allowed as deductions only to the extent provided in sections 1211 and The tax matters partner asserts that Triumph had a long-term capital loss of $806,745 in The tax matters partner alleges that Triumph is entitled to deduct a long-term capital loss because it provided Mountain Home real property to be used as collateral, Mountain Home defaulted on that loan, the Perry entities went to foreclose, and Triumph conveyed the property in lieu of foreclosure. We disagree. Triumph is not entitled to a long-term capital loss deduction because the tax matters partner did not establish Triumph s basis. To claim a loss deduction the taxpayer must establish its basis. 53 Although the tax matters partner alleges that it tracked basis, the evidence shows total basis tracked by entity rather than by specific properties. There is no evidence of Triumph s basis in the property transferred to the Perry entities. Triumph may not deduct the loss. V. Bad Debt Deduction The tax matters partner asserts that Triumph had a short-term capital loss of $51,868 in 2011 from worthlessness of a promissory note executed in its favor by 52 Sec. 165(f). 53 Sec. 1001(a).

270 -47- [*47] Mountain Cove. 54 Section 166(a) allows taxpayers to deduct any debt that becomes worthless within the taxable year. 55 Section 166(d) limits the general rule and provides that noncorporate taxpayers must treat nonbusiness bad debts as losses from the sale or exchange of a short-term capital asset and can claim the loss only for the year in which the debt becomes wholly worthless. 56 The parties agree that the Mountain Cove note was a nonbusiness debt. For Triumph to be entitled to a deduction, the tax matters partner must show identifiable events occurred to render the debt worthless during the year for which Triumph claimed the deduction. 57 Whether a debt has become worthless is a facts and circumstances determination. 58 Legal action to enforce payment is not 54 In his answering brief the Commissioner conceded that the transfer was a loan rather than a capital contribution. 55 Sec. 166(a)(1). Regs. 56 Secs. 166(d)(1)(B), 1211(b), 1212(b); sec (a)(2), Income Tax 57 See Am. Offshore, Inc. v. Commissioner, 97 T.C. 579, 593 (1991). 58 Am. Offshore, Inc. v. Commissioner, 97 T.C. at ; see also sec (a), Income Tax Regs.

271 -48- [*48] required where the surrounding circumstances indicate that a debt is worthless and legal action would likely not result in satisfactory relief. 59 The tax matters partner showed identifiable events that rendered the debt worthless. Mr. Rasmuson explained that Mountain Cove went out of existence in He determined that the debt was worthless on the basis of his familiarity with the books and records of Mountain Cove. He reviewed the entries for both entities to make sure they reflected the same information. We find his testimony credible. Accordingly, we hold that Triumph may deduct the loss. VI. Self-Employment Tax The Commissioner asserts that Triumph should have reported the $636,608 of gross receipts attributable to the sale of property to Mountain Home in 2011 as self-employment income instead of installment income. Section 1401(a) and (b) imposes a tax on self-employment income. Self-employment income generally means net earnings from self-employment, 60 which in turn includes gross income from a taxpayer s trade or business. 61 Triumph excluded the 2011 gross 59 Am. Offshore, Inc. v. Commissioner, 97 T.C. at 595; sec (b), Income Tax Regs. 60 Sec. 1402(b). 61 Sec. 1402(a); see also SI Boo, LLC v. Commissioner, T.C. Memo (continued...)

272 -49- [*49] receipts from the net earnings computation and reported the sale as generating a capital gain. 62 The tax matters partner argues, in one sentence in its reply brief, that Triumph held property for investment instead of in its trade or business. We disagree. The Traverse entities were actively engaged in the Traverse Mountain development during 2011; by the end of that year they had developed 1,900 units. On the basis of our finding that Triumph had income from the proceeds of sale of real property in 2011, which was related to its trade or business, we hold that Triumph should have included that income in its reported net earnings from selfemployment. VII. Accuracy-Related Penalties Section 6221 provides that the applicability of any penalty that relates to an adjustment to a partnership item is determined at the partnership level. 63 The determination of partnership items in a partnership-level proceeding is 19, at * (...continued) 62 Because we find that Triumph did not have unreported gross receipts for 2010, Triumph did not fail to report net earnings from self-employment for See also sec. 6226(f); sec (c), Proced. & Admin. Regs.

273 -50- [*50] conclusive. 64 But a partner may file a claim for refund to challenge the amount of the computational adjustment or to assert any partner-level defenses that may apply. 65 Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty on any portion of an underpayment of tax that is due to, among other things, any negligence or disregard of rules or regulations or a substantial understatement of income tax. The term negligence includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term disregard includes any careless, reckless, or intentional disregard. 66 A taxpayer is negligent if he fails to maintain sufficient records to substantiate the items in question. 67 Negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit, or exclusion on a return that would seem to a reasonable and prudent person to be too good to be true 64 Sec. 6230(c)(4). 65 Sec (c) and (d), Proced. & Admin. Regs. 66 Sec. 6662(c); Higbee v. Commissioner, 116 T.C. 438, 448 (2001). 67 See Higbee v. Commissioner, 116 T.C. at 449; sec (b)(1), Income Tax Regs.

274 -51- [*51] under the circumstances. 68 An understatement of income tax is substantial when it exceeds the threshold set forth in section 6662(d)(1). Triumph acted negligently or with disregard of the requirements of section 170 and the regulations thereunder. We have found that the transfer to the city of Lehi was a quid pro quo exchange. Triumph received the concept plan approval and expected approval of its area plan. Nevertheless, Triumph reported that the transfer was a charitable contribution at a fair market value determined by an appraisal with no adjustment for the significant consideration received in the development approvals. Accordingly, we find that Triumph did not make a reasonable attempt to ascertain the correctness of the charitable contribution deduction because it did not adjust the deduction for the consideration received. 69 The substantial understatement penalty is applicable as it relates to an adjustment to partnership items. 70 Whether the understatement exceeds the applicable threshold for a substantial understatement of income tax is a 68 Sec (b)(1)(ii), Income Tax Regs. 69 See Seventeen Seventy Sherman St., LLC v. Commissioner, at *42-* Sec. 6221; VisionMonitor Software, LLC v. Commissioner, T.C. Memo , at *16.

275 -52- [*52] computational determination based on the partners information. 71 Accordingly, we sustain the Commissioner s section 6662(b)(2) accuracy-related penalty on any portion of an underpayment of tax that is due to a substantial understatement of income tax. The accuracy-related penalty will not apply to any portion of the underpayment where the taxpayer establishes that it had reasonable cause for that portion and acted in good faith. 72 The tax matters partner alleges that Triumph had reasonable cause and acted in good faith. However, the tax matters partner failed to present any evidence that Triumph had reasonable cause and acted in good faith. Accordingly, we find that the tax matters partner did not establish reasonable cause and good faith at the partnership level. To reflect the foregoing, Decision will be entered under Rule Sec (c) and (d), Proced. & Admin. Regs. 72 Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448; Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff d, 299 F.3d 221 (3d Cir. 2002).

276 T.C. Memo UNITED STATES TAX COURT WENDELL FALLS DEVELOPMENT, LLC, GREGORY ALAN FERGUSON, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No Filed April 4, David M. Wooldridge and Thomas Allen Worth, for petitioner. Scott Lyons and Johnny Craig Young, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION MORRISON, Judge: Wendell Falls Development, LLC was a limited liability corporation treated as a partnership for federal tax purposes. For Wendell Falls 2007 taxable year, the respondent (hereinafter the IRS ) issued a notice of final partnership administrative adjustment. The notice disallowed a charitablecontribution deduction of $1,798,000 for the contribution of a conservation

277 - 2 - [*2] easement by Wendell Falls. The notice determined a 40% penalty under section 6662(a), 1 (b)(3), and (h); or, in the alternative, a 20% penalty under section 6662(a) and (b)(1), (2), or (3). A timely petition for readjustment of partnership items was filed by Greg Ferguson, the tax matters partner of Wendell Falls. 2 See sec. 6226(a). The Court has jurisdiction under section 6226(f). We hold that no charitable-contribution deduction is allowable for the donation of the conservation easement by Wendell Falls. We hold that no penalty is applicable. 1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the appropriate times. 2 Sec. 7482(b) governs the venue for appeal from a decision of this Court. Where our decision involves a partnership-level determination, such as in this case, the appellate venue is the U.S. Court of Appeals for the circuit in which the partnership s principal place of business is located at the time of the filing of the petition. Sec. 7482(b)(1)(E). If, however, the partnership has no principal place of business when the petition is filed, the appellate venue will be the U.S. Court of Appeals for the D.C. Circuit. Sec. 7482(b)(1) (flush language); AHG Invs., LLC v. Commissioner, 140 T.C. 73, 82 (2013). The petition was filed on February 24, Two years before, on January 12, 2012, Wendell Falls was dissolved. Wendell Falls therefore had no principal place of business on February 24, 2014, when Ferguson filed the petition. Therefore, the appellate venue for this case will be the U.S. Court of Appeals for the D.C. Circuit (unless the parties stipulate another circuit under sec. 7482(b)(2)).

278 - 3 - [*3] FINDINGS OF FACT The Court adopts the stipulations of fact entered into by the parties. Wendell Falls was organized as a North Carolina LLC by two individual land developers--greg Ferguson and Mike Jones--and a corporation based in Myrtle Beach, South Carolina. These were the only three members of Wendell Falls. Ferguson and Jones were primarily responsible for the day-to-day operation of Wendell Falls, while the Myrtle Beach corporation was a passive investor. Between 2004 and 2007, Wendell Falls bought 27 contiguous parcels of unimproved land, comprising 1,280 acres. The 1,280 acres is in Wake County, North Carolina. When Wendell Falls bought the parcels, they were outside the boundaries of the town of Wendell. The town of Wendell is roughly 15 miles east of Raleigh, North Carolina. Wendell Falls planned to subdivide the 1,280 acres into a master-planned community with residential areas, commercial spaces, an elementary school, and a park. Wendell Falls planned to then sell the residential lots to homebuilders and commercial lots to commercial builders. Wendell Falls identified 125 acres of the 1,280 acres as the land upon which the park would be placed. The 125 acres is on the eastern shore of Lake Myra, a

279 - 4 - [*4] man-made lake owned by a landowner other than Wendell Falls. The 125 acres includes both sides of Marks Creek, a creek that runs into Lake Myra. In mid-2005, Wendell Falls and Wake County began discussing the possibility of Wake County s purchasing the 125 acres for use as a county park. Wendell Falls planned to have the remainder of the 1,280 acres annexed by the town of Wendell before it was developed. Sometime after discussions regarding the purchase of the 125 acres began, Wendell Falls proposed placing a conservation easement on the 125 acres before the sale. Wendell Falls wanted the easement, which would be held by a conservation organization, in order to restrict the 125 acres to park use. Throughout much of 2006, Wendell Falls and Wake County exchanged s regarding what restrictions the conservation easement would include and which charitable organization would hold the easement. On March 17, 2006, Wendell Falls submitted for approval to the town of Wendell a planned unit development ( PUD ) on the 1,280 acres. When the PUD was originally submitted, Wendell Falls did not yet own all 1,280 acres. Some of the acreage Wendell Falls did not yet own was under contract; the rest it anticipated buying in the short term. The PUD was revised on four occasions between March and October 2006 to reflect Wendell Falls acquisitions of the rest

280 - 5 - [*5] of the 1,280 acres. At some point, the town of Wendell annexed the 1,280 acres except for the 125 acres. On October 9, 2006, the PUD was approved by the town of Wendell. The PUD documented the proposed master-planned community, including: the subdivision plan, installment sites for utilities, and amenities. As described in the PUD, the master-planned community, when completed, would have up to 4,000 residential lots. The PUD stated that the 125 acres would be dedicated to the creation of Wendell Falls Park. There was a map of the 125 acres in the PUD. The 125 acres was labeled on the map as Wendell Falls Park. However, a portion of the PUD other than the map inadvertently stated that the area of Wendell Falls Park was 160 acres. The approval of the PUD by the town of Wendell meant that the town would permit under its zoning ordinances the uses of the land described by the PUD. The only part of the 1,280 acres unaffected by the town s approval of the PUD was the 125 acres described as Wendell Falls Park, which, even though described in the PUD, was outside the boundaries of the town and therefore not subject to the town s zoning ordinances. The PUD stated that Wendell Falls received no preferential zoning in exchange for setting aside the 125 acres for use as a park. This statement is consistent with the rest of the record.

281 - 6 - [*6] On November 27, 2006, an appraiser named C.P. Shaw appraised the 125 acres at $3,219,000. Shaw had been hired by Wake County to inform itself of the value of the 125 acres in connection with its negotiations with Wendell Falls to buy the land. Because the PUD inadvertently referred to 160 acres, rather than 125 acres, Shaw incorrectly valued the land as if it were 160 acres rather than 125. On December 4, 2006, the Wake County Board of Commissioners authorized the county to buy land for a future park facility. The minutes of the board meeting recorded the decision. It appears that the county intended to authorize the purchase of the 125 acres identified in the map in the PUD as Wendell Falls Park. However, because of the incorrect reference in the PUD to 160 acres, or perhaps because of Shaw s using the incorrect acreage in his appraisal, the minutes reflect that the county commissioners authorized the purchase of 160 acres rather than 125 acres. The minutes state: Interest has been expressed for a future public park facility on approximately 60 acres of this acre parcel. The proposed park would over look [sic] the privately owned Lake Myra. This request is for approval of acquisition of 160 acres of open space on Lake Myra/Marks Creek from in [sic] Wendell Falls Development, LLC. [sic] with a sale price of $3,186,000 with a restriction that the property be developed only for park use. Upon motion by Commissioner Bryan, seconded by Commissioner Brown, the Board of Commissioners voted unanimously to authorize the County Manager to execute a purchase agreement for the Wendell

282 - 7 - [*7] Falls Open Space tract of acres for $3.186 million, subject to terms and conditions acceptable to the County Attorney. On December 14, 2006, Wake County and Wendell Falls entered into a purchase agreement regarding the 125 acres. The purchase agreement described the land by reference to the map in the PUD, which accurately depicted the 125 acres. However, because of the incorrect reference in the PUD to 160 acres (or perhaps because of either Shaw s using the incorrect acreage in his appraisal or the reference in the county board minutes to 160 acres rather than 125 acres), the purchase agreement inadvertently stated that the acreage of the mapped land was 160 acres. The purchase agreement stated that placing a mutually agreeable conservation easement on the land was a precondition to the sale. Under the purchase agreement, Wake County agreed to buy the land for $3,186,000. This amount was very close to Shaw s appraised value of $3,219,000. After they executed the purchase agreement, Wendell Falls and Wake County discovered the mistake about the acreage. To correct this mistake, the county ordered a new appraisal of the 125 acres. This time, the county turned to the appraisal firm of Cushman & Wakefield.

283 - 8 - [*8] On May 20, 2017, Cushman & Wakefield prepared its appraisal of the 125 acres. It appraised the land as a fee simple interest, unrestricted by any conservation easement. It valued the land at $3,020,000. On June 4, 2007, the Wake County Board of Commissioners reauthorized the purchase of the 125 acres for $3,020,000. Sometime thereafter, Wendell Falls and Wake County amended the December 2006 purchase agreement. Under the amended purchase agreement, Wake County agreed to buy the 125 acres from Wendell Falls for $3,020,000. The donation of a mutually agreeable conservation easement was a precondition to the sale of the 125 acres under the amended purchase agreement. On June 7, 2007, the Wake County Register of Deeds recorded the following two instruments in its deed book: (1) a conservation easement on the 125 acres granted by Wendell Falls in favor of Smokey Mountain National Land Trust and (2) a general warranty deed transferring ownership of the 125 acres from Wendell Falls to Wake County. The two instruments were recorded in the deed book in that order. Each instrument bears a time and date stamp with the same time and date: 11:30:01 a.m., June 7, These stamps were presumably made by the register of deeds.

284 - 9 - [*9] The easement permitted only the following structures to be built on the 125 acres: (1) an environmental education center, (2) an overnight lodge, (3) one or more recreational day-use facilities, (4) sports fields, (5) an elevated wooden walkway, and (6) related maintenance facilities. The location and size of each type of structure was also restricted under the terms of the easement. On October 3, 2008, Wendell Falls filed a timely Form U.S. Return of Partnership Income --for the 2007 tax year. It attached Schedule K-- Partners Distributive Share Items. On line 13a of Schedule K--a line labeled Contributions --Wendell Falls reported a $1,798,000 charitable-contribution deduction for its contribution of the conservation easement. Attached to the return was an appraisal of the conservation easement, which was prepared by Bruce Sauter. The appraisal valued the easement at $4,818,000. The return reported the resulting deduction as if Wake County had paid $3,020,000 to Wendell Falls for a $4,818,000 easement. Therefore, the return reported that the amount of the deduction was $1,798,000 ($4,818,000 $3,020,000 = $1,798,000). In actuality, Wake County paid the $3,020,000 to Wendell Falls for the land, not the easement. On April 23, 2009, Wendell Falls filed an amended Form 1065 and an attached Schedule K. On line 13a of Schedule K, Wendell Falls reported that the charitable-contribution deduction for the contribution of the conservation

285 [*10] easement was $4,818,000. Wendell Falls also attached a form titled Explanation of Changes on Amended Return to the amended Form On this form, Wendell Falls stated that the deduction had been incorrectly reported on the original Form 1065, and that the correct amount of the deduction was the fair market value of the conservation easement, $4,818,000. On November 25, 2013, the IRS sent Ferguson (in his capacity as the tax matters partner of Wendell Falls) a notice of final partnership administrative adjustment. In the notice, the IRS determined that the amount of the charitablecontribution deduction was zero. Ferguson called Michael Smith as an expert witness to value the easement. He valued the easement at $5,919,000. The IRS called Robert Duckett as an expert witness to value the easement. He valued the easement at $1,600,000. OPINION 1. Charitable-contribution deduction for the easement Section 170(a) allows a deduction for a charitable contribution. A charitable contribution is defined by section 170(c) as a contribution or gift to or for the use of various specified charitable organizations and governments. No deduction for a charitable contribution is allowed if the taxpayer expects a

286 [*11] substantial benefit from the contribution. United States v. Am. Bar Endowment, 477 U.S. 105, 116 (1986); see also Elrod v. Commissioner, 87 T.C. 1046, 1075 (1986) ( The charitable contribution deduction is not allowed where a taxpayer intends to obtain a direct or indirect benefit in the form of enhancement in the value or utility of the taxpayer s remaining land or otherwise to benefit the taxpayer. (quoting Sutton v. Commissioner, 57 T.C. 239, 243 (1971))). However, if the benefit received is merely incidental to a charitable purpose, then a deduction is allowable. See McGrady v. Commissioner, T.C. Memo , at *25 (citing McLennan v. United States, 24 Cl. Ct. 102, 107 (1991), aff d, 994 F.2d 839 (Fed. Cir. 1993)). In addressing whether a taxpayer expected a substantial benefit from the contribution, we look to the external features of the transaction. See Hernandez v. Commissioner, 490 U.S. 680, (1989); Rolfs v. Commissioner, 135 T.C. 471, 487 (2010), aff d, 668 F.3d 888 (7th Cir. 2012). The IRS argues that (1) Wendell Falls contribution of the conservation easement on the 125 acres to Smokey Mountain National Land Trust ensured that Wake County, as the owner of the underlying land, could practically use the 125 acres only for a county park and (2) Wendell Falls expected a substantial benefit from the easement because the prospect of a public park on the 125 acres would

287 [*12] increase the value of the rest of the adjoining 1,280 acres owned by Wendell Falls. That Wendell Falls expected a substantial benefit from the contribution of the easement is supported by the record. When it donated the easement, Wendell Falls owned land adjoining the eased property; i.e., the unencumbered portion of the 1,280 acres. On the unencumbered portion of the 1,280 acres, Wendell Falls planned to create a master-planned community, which was designed so that all of the clusters of residential areas would have access to the 125-acre park through a system of greenways. These plans were evidenced by the PUD approved by the town of Wendell. As the prospective seller of the residential lots in the clusters, Wendell Falls would benefit from the increased value to the lots from the park as an amenity. It is uncontested that the easement restricts the 125 acres to uses related to establishing a park. Ferguson, one of the two managing members of Wendell Falls, wrote in an to Wake County that Wendell Falls need[ed] to ensure that the County uses the park for its intended use. This confirms that Wendell Falls expected to receive value from the park and intended the easement to ensure that there would be a park on the 125 acres.

288 [*13] We therefore find that Wendell Falls donated the easement with the expectation of receiving a substantial benefit. 3 A charitable-contribution deduction is not allowable because of this expectation. In the alternative, we also consider the value of the easement. The easement must have value in order for it to generate a charitable-contribution deduction. See Am. Bar Endowment, 477 U.S. at 118; sec A-14(h)(3)(i), Income Tax Regs. As explained below, the value of the easement is zero. The amount of the allowable charitable-contribution deduction is the value of the contributed property. See sec A-1(a), (c)(1), Income Tax Regs. This is also the case when the contributed property is a conservation easement. See sec A-14(h)(3)(i), Income Tax Regs. Because there is no evidence in the record of sales of easements comparable to the easement contributed by Wendell Falls to Smokey Mountain National Land Trust, the value of the easement is equal to the value of the land before the easement minus the value of the land after the easement. See id. (third sentence). The land itself is valued at its highest and best 3 We make this factual determination (and all other factual determinations regarding the allowance of the charitable-contribution deduction) on the preponderance of the evidence. Therefore, we need not resolve the dispute between the parties as to which party has the burden of persuasion. Estate of Turner v. Commissioner, 138 T.C. 306, 309 (2012), supplementing T.C. Memo

289 [*14] use. Olson v. United States, 292 U.S. 246, 255 (1934); sec A- 14(h)(3)(i) and (ii), Income Tax Regs. As evidenced by the plan developed by Wendell Falls--which owned the entire 1,280 acres, including the 125 acres--the best use of the 125 acres was as parkland in the midst of a master-planned community. The conservation easement therefore did not diminish the value of the 125 acres because it did not prevent it from being put to its best use. See Mountanos v. Commissioner, T.C. Memo , at *17, aff d, 651 F. App x 592 (9th Cir. 2016). The value of the easement is therefore zero. 4 Our answer does not change if the land valued before and after the easement is the entire 1,280 acres rather than the 125 acres. See sec A-14(h)(3)(i), Income Tax Regs. (fourth sentence). We believe, as Wendell Falls did, that using the 125 acres as a park would make the master-planned community more desirable and therefore increase the value of the residential and commercial lots that Wendell Falls eventually intended to sell. Taking this enhancement into account, the total value of the 1,280 acres would be undiminished by the easement, and this undiminished 4 That the easement did not diminish the value of the 125 acres is confirmed by Wake County s actions. Wake County valued the 125 acres without the easement at $3,020,000; it then bought the 125 acres for that amount even though it was burdened by the easement.

290 [*15] value leads to the conclusion that the value of the easement is zero. 5 Because Wendell Falls received a substantial benefit from the donation of the easement, and because the easement was worth nothing anyway, we hold that no charitable-contribution deduction for the easement is allowable. We need not resolve the other arguments the IRS makes against the deduction. 2. Penalty We must also consider whether there should be a penalty for the reporting of the charitable-contribution deduction for the easement. Section 6662(a) imposes a penalty of 20% on an underpayment of tax attributable to any of the following: negligence, a substantial understatement of income tax, or a substantial valuation misstatement. See sec. 6662(b)(1), (2), and (3). Section 6662(h) increases the penalty to 40% if the underpayment is attributable to a gross valuation misstatement. The final notice of partnership adjustment determined a 5 Neither valuation expert witness accounted for the enhancement to the surrounding land created by access to the park. The IRS s expert s failure to consider the enhancement is inconsistent with the evidence in this case, which, as the IRS points out, includes a PUD showing that the park was linked to the residential units. A court is not required to accept an opinion of an expert witness that is contrary to the evidence. See Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 335 (2011); see also Estate of Newhouse v. Commissioner, 94 T.C. 193, 244 (1990).

291 [*16] 40% penalty for gross valuation misstatement, or, in the alternative, a 20% penalty for negligence, a substantial understatement of income tax, or a substantial valuation misstatement. After trial, the IRS conceded the 40% penalty. It also conceded the 20% penalty to the extent it is based on a substantial valuation misstatement. The IRS continues to assert a 20% penalty based on either negligence or a substantial understatement of income tax. The 20% penalty is not applicable when there was reasonable cause for the reporting of a deduction and the deduction was reported in good faith. See sec. 6664(c)(1). Ferguson has the burden of proving by a preponderance of the evidence that there was reasonable cause for Wendell Falls reporting of the charitable-contribution deduction and that the deduction was reported in good faith. See Higbee v. Commissioner, 116 T.C. 438, (2001). The most important factor in determining reasonable cause and good faith is the extent of the effort to ascertain the proper tax treatment of the transaction in question. Sec (b)(1), Income Tax Regs. Our determinations regarding substantial benefit depend on the resolution of tests for which the factfinder has broad discretion--(1) whether there was a substantial expected benefit to Wendell Falls, and if so, (2) whether the benefit was incidental. We do not think that Wendell Falls failure to anticipate the adverse resolution of these tests shows that it did not

292 [*17] make sufficient effort to assess the proper tax treatment of the easement. See Bunney v. Commissioner, 114 T.C. 259, 266 (2000); Lemishow v. Commissioner, 110 T.C. 110, 114 (1998), supplemented by 110 T.C. 346 (1998). As to the value of the easement, Wendell Falls retained two different statecertified real estate appraisers, Sauter and Smith, to appraise the easement. Although neither appraiser correctly accounted for the enhancement conferred by the easement on the unencumbered property, neither did the IRS s trial expert. Under the narrow circumstances of this case, we hold that there was reasonable cause for reporting the charitable-contribution deduction for the easement and that the deduction was reported in good faith. We therefore hold that the section 6662(a) penalty does not apply to an underpayment of tax resulting from the adjustment to the partnership item, the charitable-contribution deduction. On February 8, 2018, the IRS filed a motion to reopen the record to admit evidence that the initial determination of the section 6662(a) penalty, to the extent it was based on negligence or a substantial understatement of income tax, had been approved by a supervisor as required by section 6751(b). Because of our holding regarding reasonable cause and good faith, reopening the record would not change the outcome of the case. Therefore, we will deny the motion.

293 [*18] To reflect the foregoing, Decision will be entered for respondent on the deduction and for petitioner on the penalty. An order will be issued denying respondent s February 8, 2018, motion to reopen the record.

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