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Tax Court In Brief | Sparta Pink Property, LLC v. Comm’r | Conservation Easement And Additional Fodder For Circuit Split – Tax Authorities

The Tax Court in Brief – August 29th – September
2nd, 2022

Freeman Law‘s “The Tax Court in Brief” covers every
substantive Tax Court opinion, providing a weekly brief of its
decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief,
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The Freeman Law Project.

Tax Litigation: The Week of August 29th, 2022, through
September 2nd, 2022

Sparta Pink Property, LLC v. Comm’r, T.C. Memo.
2022-88 | August 29, 2022 | Lauber, J. | Dkt. No.

Summary: This case involves a
charitable contribution deduction claimed by Sparta Pink Property,
LLC (Sparta), for the donation of a conservation easement. In
August 2016 WASCO, LLC, acquired a 99% interest in Sparta by
contributing to it roughly 286 acres of land (Property). In
December 2016 Sparta granted to the Southern Conservation Trust
(grantee) a conservation easement over the Property. On its 2016
Form 1065, U.S. Return of Partnership Income, Sparta claimed a
charitable contribution deduction of $15,632,748 (appraised value)
for its donation of the easement. The easement deed recited the
conservation purposes and generally prohibits commercial or
residential development. But it reserved certain rights to Sparta,
including the rights to repair, improve, enlarge, and replace
existing improvements on the Property. The deed also provided that,
“[i]f circumstances arise in the future that render the
Purpose of this Conservation Easement impossible to
accomplish,” giving rise to a judicial extinguishment of the
easement, then on any subsequent sale or conversion the grantee is
entitled to its fair market value (FMV) portion of the proceeds,
defined as equal to the current FMV of the easement determined by
multiplying the sale proceeds by a fraction specified in the
regulations. But before this fraction is applied, the sale proceeds
were to be reduced by “any increase in value after the date of
this Conservation Easement attributable to improvements.” The
IRS disallowed most (all but $44,748) of the deduction claimed by
Sparta because, according to the IRS, the easement’s
conservation purpose was not “protected in perpetuity,”
see 26
U.S.C. § 170
(h)(5)(A), and the IRS determined penalties
for gross valuation misstatement. Id. at §§ 6662(e), (h), 6662(b)(1)-(3),
(c)-(e), 6662A(b). Sparta challenged the IRS’s decision on the
deduction and contended that the IRS did not comply with
supervisory approval for the penalties determined.

Key Issues:

Whether, as a matter of law: (1) the easement’s conservation
purpose was not “protected in perpetuity” due to the FMV
calculation formula in the underlying deed; and (2) the IRS proved
it proved its compliance with determination procedures for penalty

Primary Holdings:

No and Yes. The Court denied the Motion on the section
170(h)(5)(A) question but granted it with respect to section

Following Hewitt v. Commissioner, 21 F.4th 1336 (11th
Cir. 2021), rev’g and remanding T.C. Memo. 2020-89,
the Tax Court denied the IRS’s motion as to section
170(h)(5)(A). As for statutory compliance with determination
procedures, the IRS presented sworn declarations in support of
compliance with assessment determination procedures, and that was
sufficient for summary judgment on that issue.

Key Points of Law:

Summary Judgment Standard – The purpose
of summary judgment is to expedite litigation and avoid costly,
unnecessary, and time-consuming trials. See FPL Grp., Inc.
& Subs. v. Commissioner
, 116 T.C. 73, 74 (2001). The Tax
Court may grant partial summary judgment regarding an issue as to
which there is no genuine dispute of material fact and a decision
may be rendered as a matter of law. See Rule 121(b). In
deciding whether to grant partial summary judgment, the Court
construes factual materials and inferences drawn from them in the
light most favorable to the nonmoving party. Where the moving party
properly makes and supports a motion for summary judgment, “an
adverse party may not rest upon the mere allegations or denials of
such party’s pleading” but must set forth specific facts,
by affidavit or otherwise, showing that there is a genuine dispute
for trial. Rule 121(d).

“Protected in Perpetuity”. The
Internal Revenue Code generally restricts a taxpayer’s
charitable contribution deduction for the donation of “an
interest in property which consists of less than the taxpayer’s
entire interest in such property.” § 170(f)(3)(A). But
there is an exception for a “qualified conservation
contribution.” § 170(f)(3)(B)(iii), (h)(1). For the
donation of an easement to be a “qualified conservation
contribution,” the conservation purpose must be
“protected in perpetuity.” § 170(h)(1)(C),

Hewitt v. Commissioner and
Mandatory Division of Proceeds.
The Treasury Regulations
recognize that “a subsequent unexpected change in the
conditions surrounding the [donated] property . . . can make
impossible or impractical the continued use of the property for
conservation purposes.” See Treas. Reg. § 1.170A-14(g)(6)(i).

“[T]he conservation purpose can nonetheless be treated as
protected in perpetuity if the restrictions are extinguished by
judicial proceeding” and the easement deed ensures that the
charitable grantee, following sale of the property, will receive a
proportionate share of the proceeds and use those proceeds
consistently with the conservation purposes underlying the original
gift. Id.; see 26 U.S.C. § 170(h)(5)(A). In
Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021),
rev’g and remanding T.C. Memo. 2020-89, the U.S. Court
of Appeals for the Eleventh Circuit held that “the
Commissioner’s interpretation of § 1.170A-14(g)(6)(ii), to
disallow the subtraction of the value of post-donation improvements
. . . , is arbitrary and capricious and therefore invalid under the
[Administrative Procedure Act’s] procedural requirements.”
Id. at 1353. Contra Oakbrook Land Holdings,
LLC v. Commissioner
, 28 F.4th 700, 717–18 (6th Cir.
2022) (disagreeing with Hewitt), aff’g 154
T.C. 180 (2020).

Appeal of this Sparta case would lie to the Eleventh
Circuit; thus, the Tax Court was obligated to follow the law as
established by the Eleventh Circuit on this question. Therefore,
the IRS’s motion on this issue was denied.

Penalty Approval, § 6751(b)(1). “No
penalty under this title 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.” In a TEFRA case
such as this, supervisory approval generally must be obtained
before the IRS issues an FPAA to the partnership. See Palmolive
Bldg. Invs., LLC v. Commissioner
, 152 T.C. 75, 83 (2019).

Once the IRS introduces evidence sufficient to show that written
supervisory approval was obtained by that date, the partnership
must establish that the approval was untimely, i.e., “that
there was a formal communication of the penalty before the
proffered approval” was secured. See Frost v.
, 154 T.C. 23, 35 (2020). “The written
supervisory approval requirement . . . requires just that: written
supervisory approval.” See Pickens Decorative Stone, LLC
v. Commissioner
, T.C. Memo. 2022-22, at *7. And, the penalty
approval form or similar document need not demonstrate the depth or
comprehensiveness of the supervisor’s review.

A group manager’s signature on a civil penalty approval
form, without more, is sufficient to satisfy the statutory
requirements. Sworn declarations submitted to the Tax Court in
support of compliance with assessment determination procedures is
sufficient to entitle the IRS to summary judgment on statutory
compliance with determinations procedure. Examining agents and
their supervisors are not required to be subjected to
cross-examination. See Thompson v. Commissioner, T.C.
Memo. 2022- 80, at *8; Raifman v. Commissioner, T.C. Memo.
2018-101, 116 T.C.M. (CCH) 13, 27–28.

Insights: Sparta is an additional U.S.
Tax Court opinion that should help set the stage for the eventual
(or potential) United States Supreme Court evaluation of the split
among various U.S. Circuit Courts of Appeals on the application and
interpretation of 26 C.F.R. § 1.170A-14(g)(6)(ii). See and
compare Hewitt v. Commissioner
, 21 F.4th 1336 (11th Cir.
2021), rev’g and remanding T.C. Memo. 2020-89,
with Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th
700, 717–18 (6th Cir. 2022) (disagreeing with Hewitt
on this issue), aff’g 154 T.C. 180 (2020).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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