IRS Argues Partnership Can’t Claim Easement Donation Deduction

HANCOCK COUNTY LAND ACQUISITIONS, LLC, SOUTHEASTERN ARGIVE INVESTMENTS, LLC, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

07/08/21

MOTION FOR PARTIAL SUMMARY JUDGMENT

RESPONDENT MOVES, pursuant to Tax Court Rule 121, for a partial summary adjudication in respondent's favor on the issue of the deductibility of a noncash charitable contribution claimed by Hancock County Land Acquisitions, LLC (HCLA) of $180,177,000 for the 2016 taxable year, on two independent and alternative bases: (1) the failure to protect the conservation purpose in perpetuity; and (2) the defects, either individually or collectively, in the Form 8283 appraisal summary.

Respondent should prevail on issue (1) because HCLA's conservation easement donation failed to meet the perpetuity requirement in I.R.C. § 170(h)(5)(A) and Treas. Reg. § 1.170-14(g)(6) because the explicit language of the conservation easement deed allowed HCLA to reduce any proceeds received upon extinguishment by the amount of post-donation appreciation in value attributable to existing or future improvements. Respondent should also prevail on issue (2) because HCLA's Form 8283 (Noncash Charitable Contributions) attached to its 2016 return misrepresented two significant pieces of information — acquisition date and manner of acquisition — in violation of Treas. Reg. §§ 1.170A-13(c)(2)(i)(B) and 1.170A-13(c)(4)(ii)(D).

IN SUPPORT THEREOF, respondent respectfully states:

1. The pleadings in this case were closed on March 31, 2021. This case is not yet calendared for a trial session.

2. This motion is made at least 30 days after the date that the pleadings were closed and within such time as not to delay the trial. Tax Court Rule 121(a).

3. In the final partnership administrative adjustment (FPAA), dated July 23, 2020, upon which this case is based, respondent determined, among other things, that HCLA's deduction for the noncash charitable contribution of $180,177,000 is disallowed in full for the 2016 tax year.

4. If the Court were to grant this motion, the following issues would remain for trial:

5. Respondent does not concede that HCLA's noncash charitable contribution meets any of the requirements of I.R.C. § 170 or the regulations promulgated thereunder which are not discussed herein. Respondent reserves the right, should this motion be denied, to advance all theories supporting the adjustments determined in the FPAA.

Facts

The Syndicated Easement Transaction

6. On October 1, 2013, Mine Asset Holdings, LLC (“MAH”) purchased a tract of land consisting of approximately 1,700 acres located in Hancock County, Mississippi, for $4,000,000. The deed was recorded with the Chancery Clerk of Hancock County, Mississippi on October 1, 2013. (Ex. A-1)

7. On March 12, 2015, MAH contributed approximately 1,400 acres of land to Wet Mine Assets Holdings, LLC (“WMAH”) in exchange for 100 percent of the membership interest in WMAH. The deed was recorded with the Chancery Clerk of Hancock County, Mississippi on March 16, 2015. (Ex. A-2; Pet. ¶ 1.)

8. On March 17, 2016, Southeastern Argive Investments, LLC (“SAI”) was formed as a Georgia limited liability company. SAI's sole initial member was Webb Creek Capital Partners II, LLC. (Exs. A-3 and A-4, p. 2)

9. On April 28, 2016, Hancock County Land Acquisitions, LLC (“HCLA”) was formed as a Mississippi limited liability company. The initial members of HCLA with number of units owned included: WMAH (owned 98 units of HCLA), Hancock County Land Sales, LLC (owned 1 unit), BBR Holdings LLC (owned 0.5 unit), and Proscenium Hancock LLC (owned 0.5 unit). (Exs. A-5 and A-6, p. 43)

10. On June 8, 2016, SAI began offering membership interests in its partnership to prospective investors through a private placement memorandum. SAI sought to raise $23,374,575. Of that amount $18,247,575 would be used to purchase 97 units of HCLA from WMAH. (Ex. A-7, pp. 2, 7)

11. On June 15, 2016, WMAH contributed 236.12 acres of the 1,400 acre-parcel to HCLA (“Property”) as a capital contribution. (Ex. A-8; Pet. ¶¶ m., n., o.)

12. On June 17, 2016, SAI's offering closed. That same day, WMAH sold 97 of its 98 units of HCLA to SAI for $18,247,575 as contemplated in the private placement memorandum. (Exs. A-7 and A-9)

The Conservation Easement Deed

13. On August 2, 2016, by deed recorded with the Chancery Clerk of Hancock County (“Deed”), HCLA donated a conservation easement over the 236.12-acre tract to the Atlantic Coast Conservancy, Inc. (“ACC”). (Ex. A-10; Pet. ¶¶ au., av., be.)

14. The Deed purports to restrict certain uses of the property but permits HCLA (or any subsequent property owner or lessor) to make certain improvements. Specifically, the Deed allows HCLA to make the following improvements:

15. The Deed provides the amount of proceeds ACC will receive if the easement is terminated or extinguished by a judicial proceeding. Section 15.2 of the Deed, entitled Proceeds, provides:

This Easement constitutes a real property interest immediately vested in Conservancy. For the purposes of this Subsection and pursuant to Treasury Regulation 1.170A-14(g)(6)(ii), the Parties stipulate that this Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Property unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the Easement at the time of this grant to the value of the Property, without deduction for the value of the Easement, at the time of this grant. The value at the time of this grant shall be the donation value used to calculate the deduction for federal income tax purposes allowable by reason of this grant, pursuant to Section 170(h) of the Code. Grantor shall within ninety (90) days of this grant provide to the Conservancy copies of all appraisals seeking to establish the value of the donated Easement at the time of this grant. For purposes of this paragraph, the ratio of the value of the Easement to the value of the Property unencumbered by the Easement shall remain constant.

(Ex. A-10, p. 24, sec. 15.2)

Tax Reporting

16. On its 2016 tax return, HCLA claimed a noncash charitable contribution deduction of $180,177,000 for the donation of the conservation easement. (Ex. A-11, pp. 4, 17; Pet. ¶ en.)

17. HCLA attached to its 2016 tax return a Form 8283 reporting the noncash charitable contribution of $180,177,000 and a document entitled “Supporting Documentation for Form 8283” (“Supporting Documentation”). (Ex. A-12; Pet. ¶¶ es., et.)

18. HCLA represented on the Form 8283 that the type of property being donated was a “Qualified Conservation Contribution.” (Ex. A-12, p. 2)

19. HCLA reported to respondent in Section B, Part I, Box 5(d) of the Form 8283 that it had acquired the donated property in October 2013. No additional information regarding when HCLA acquired the Property was disclosed in the Supporting Documentation. (Ex. A-12, p. 2)

20. HCLA acquired the donated property on June 15, 2016, not in October 2013. (Ex. A-8; Pet. ¶ o.)

21. HCLA reported to respondent in Section B, Part I, Box 5(e) of the Form 8283 that it had acquired the donated property by “Purchase.” No additional information regarding how HCLA acquired the Property was disclosed in the Supporting Documentation. (Ex. A-12, p. 2)

22. HCLA acquired the donated property by capital contribution rather than by purchase. (Ex. A-8; Pet. ¶ o.)

Arguments

I. Summary Judgment Standard

Tax Court Rule 121(a) allows either party to move for a summary adjudication of all or any part of the legal issues in controversy. Summary judgment enables the parties to avoid unnecessary and expensive trials and to otherwise expedite litigation. Elec. Arts, Inc, v. Commissioner, 118 T.C. 228, 238 (2002). The Court may grant summary judgment when there is no genuine issue of any material fact and a decision may be rendered as a matter of law. T.C. Rule 121(b); Sundstrand Corp, v. Commissioner, 98 T.C. 518, 520 (1992), aff'd 17 F.3d 965 (7th Cir. 1994). An adverse party may not rest upon mere allegations or denials but must set forth specific facts showing that there is a genuine issue for trial. T.C. Rule 121(d); Dahlstrom v. Commissioner, 85 T.C. 812, 820-21 (1985).

II. Proportionality Requirement

This is one of many cases involving a conservation easement that fails to protect the purported conservation purpose in perpetuity because the Deed allows the donor to reduce any extinguishment proceeds by an amount that represents the post-donation increases to the value of existing improvements and fair market value of new improvements. As discussed below, this Court has repeatedly held that easement deeds — including ones with the exact language found in this Deed — that allow such reduction are contrary to the requirement in Treas. Reg. § 1.170A-14(g)(6) that the donee receive a certain proportionate share of proceeds upon extinguishment. This Court must reach the same conclusion here.

I.R.C. § 170(a)(1) generally allows a deduction for any charitable contribution, subject to certain limitations, that the taxpayer makes during the taxable year. I.R.C. § 170(g)(3) generally denies a deduction for charitable contributions of a partial interest in property. One exception to that general rule is for a “qualified conservation contribution.” I.R.C. § 170(f)(3)(B)(iii). A “qualified conservation contribution” means a contribution of a “qualified real property interest” to a “qualified organization” made “exclusively for conservation purposes.” I.R.C. § 170(h)(1). A “qualified real property interest” includes “a restriction (granted in perpetuity) on the use which may be made of the real property.” I.R.C. § 170(h)(2)(C). “A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.” I.R.C. § 170(h)(5)(A).

The regulations prescribe the criteria that must be present in order for a contribution to satisfy the protected in perpetuity requirement in the event the restrictions are extinguished. Treas. Reg. § 1.170A-14(g)(6)(ii) states in part:

[F]or a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. . . . For purposes of this paragraph (g)(6)(ii), that proportionate value of the donee's property rights shall remain constant. Accordingly, when a change in conditions gives rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation easement.

Accordingly, the donee organization, upon extinguishment, must be entitled to receive at least:

The courts have described this regulation as creating “a single — and exceedingly narrow — exception to the requirement that a conservation easement impose a perpetual use restriction” on real property. Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126, 136 (2019) (citing Belk v. Commissioner, 774 F.3d 221, 225 (4th Cir. 2014), aff'g 140 T.C. 1 (2013)). The requirements of this regulation “are strictly construed.” Id. (citing Carroll v. Commissioner, 146 T.C. 196, 212 (2016)). If the charitable grantee “is not absolutely entitled to a proportionate share of the extinguishment proceeds, then the conservation purpose of the contribution is not protected in perpetuity.” Id. ; see also TOT Property Holdings, LLC v. Commissioner, __ F.4th __, 2021 WL 2559088, at *6 (11th Cir. June 23, 2021); PBBM-Rose Hill, Ltd, v. Commissioner, 900 F.3d 193, 207-208 (5th Cir. 2018); Palmolive Building Investors, LLC v. Commissioner, 149 T.C. 380 (2017).

TOT Property Holdings, PBBM-Rose Hill and Coal Property Holdings each involved a charitable contribution of a conservation easement that failed to satisfy these requirements because the easement deeds provided that the donor would receive no share of any extinguishment proceeds attributable to post-donation increases to the value of improvements on the property. In those cases, the courts held that the charitable contribution deduction must be denied in its entirety because the conservation purpose of the contribution was not protected in perpetuity. TOT Property Holdings, 2021 WL 2559088, at *6; PBBM-Rose Hill, 900 F.3d at 207-208; Coal Property Holdings, 153 T.C. at 145. In numerous other cases, this Court has consistently disallowed charitable deductions on this basis. See e.g„ Sells v. Commissioner, T.C. Memo. 2021-12, at *14-20; Glade Creek Partners, LLC v. Commissioner, T.C. Memo. 2020-148, at *25; Red Oak Estates, LLC v. Commissioner, T.C. Memo. 2020-116, at *14-15; Cottonwood Place, LLC v. Commissioner, T.C. Memo. 2020-115, at *14-15; Village at Effingham, LLC v. Commissioner, T.C. Memo. 2020-102, at *10-11.

Likewise, the Court must also deny HCLA's charitable contribution deduction. ACC is not absolutely entitled to a proportionate share of the proceeds if the Property is sold following judicial extinguishment of the easement because ACC would receive no share of proceeds attributed to the post-donation appreciation in value of existing improvements and the fair market value of new improvements. The Deed, like the deeds in the cases mentioned above, allows the donor to subtract from the extinguishment proceeds the increase in value attributable to all improvements (existing and future) before ACC would be entitled to its share. Since the Deed permits upgrades to be made to existing improvements on the property and new improvements to be constructed, ACC could stand to receive less than the minimum amount required under the extinguishment regulation.

This violates Treas. Reg. § 1.170A-14(g)(6)(ii) and the perpetuity requirement under I.R.C. § 170(h)(5). Thus, HCLA's deduction for the easement donation to ACC must be denied in its entirety as a matter of law. See Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, at *37 (holding that a donor must strictly comply with the perpetuity requirements of the regulations); see also Kaufman v. Commissioner, 134 T.C. 182, 186 (2010), vacated in part by 687 F.3d21 (1st Cir. 2012).

III. Appraisal Summary Requirements

There is another reason this Court should uphold respondent's disallowance of HCLA's deduction as a matter of law. HCLA misrepresented key information about the easement donation — specifically, the acquisition date and manner of acquisition — on the Form 8283 appraisal summary attached to its 2016 return.

In RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), aff'd sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019), this Court held that where a taxpayer failed to report its cost or other adjusted basis in the contributed asset on the Form 8283, it failed to satisfy the substantiation requirement and the deduction must be disallowed. See also, Village at Effingham, LLC v. Commissioner, T.C. Memo. 2020-102, at *15; Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24, at *11-12; Loube v. Commissioner, T.C. Memo. 2020-3, at *17; Belair Woods, LLC v. Commissioner, T.C. Memo. 2018159, at *20-21.

This Court in RERI Holdings I focused on the needs Congress articulated for heightened substantiation requirements to support deductions for charitable contributions and the Service's responses to those directives. RERI Holdings I, 149 T.C. at 14-15. Among the requirements set forth to address those directives was the need for a “fully completed” appraisal summary. Id. at 15. RERI's Form 8283 did not satisfy this requirement as it showed no amount in the space provided for the donor's cost or adjusted basis. This omission prevented the appraisal summary from achieving its intended purpose of alerting the Service in advance of audit of potential overvaluations of contributed property. Id. at 17. The significant disparity between the claimed fair market value (about $33 million) and the price RERI paid to acquire the contributed property (about $3 million) just 17 months before, had it been disclosed, would have alerted the Service to a potential overvaluation. Id.

Here, HCLA failed to disclose two significant pieces of information. First, HCLA in its appraisal summary did not include the date it acquired the property. The Form 8283 represented HCLA acquired the property in October 2013 when in fact it acquired the property on June 15, 2016, less than two months before the donation to ACC. Second, HCLA misrepresented that it acquired the property by “purchase” when it was through a capital contribution. A donation that occurs shortly after a partnership acquires property by capital contribution is more likely to be scrutinized by the Service as an improper attempt to shift tax benefits among partners. As in RERI Holdings I and the other cases cited above, HCLA's failure to disclose correct information on the appraisal summary prevented the appraisal summary from achieving its intended purpose.

A. Congress's Mandate to Require an Appraisal Summary

A deduction is generally allowed for a charitable contribution made during the taxable year “only if verified under regulations prescribed by the Secretary.” I.R.C. § 170(a)(1). The amount allowable as a deduction for a noncash charitable contribution is the fair market value of the property at the time of the contribution, reduced by the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value at the time of contribution. I.R.C. § 170(e)(1)(A); Treas. Reg. § 1.170A-1(c)(1). Long-term capital gain is the gain realized from the sale or exchange of a capital asset held for more than one year. I.R.C. § 1222(3). Thus, to determine the amount of the charitable contribution deduction allowable, it is necessary to know the fair market value of the property, the acquisition date (which bears on the holding period), and, if the holding period is one year or less, the property's basis (which bears on the gain and potential reduction). Also, how an asset was acquired is relevant in determining the holding period under I.R.C. § 1223.

The ability to obtain a deduction at fair market value while simultaneously avoiding taxation on the property's appreciation provides a strong incentive to unscrupulous taxpayers to overvalue contributed property. Respondent experienced a serious administrative burden with the increased prevalence of tax shelters in the 1970s and 1980s, one type of which involved the overvaluation of charitable contributions. See e.g., Scott v. Commissioner, 61 T.C. 654, 661 (1974).

At the time former Commissioner Rosco Egger repeatedly voiced concerns about the overvaluation of charitable contributions. See Commissioner Egger's Remarks on Abusive Tax Shelters, IRS News Release, IR-81-122, 1981 WL 176410, at 1 (Oct. 6, 1981) (“[A] taxpayer may buy $10,000 worth of bibles 'wholesale' from a promoter. The taxpayer holds them for one year to qualify as an appreciated capital gain and then donates them to a religious group. Come tax time, the taxpayer deducts $40,000 as the so-called fair-market value of his charitable donation.”); Roscoe L. Egger, Warning: Abusive Tax Shelters Can be Hazardous, 68 A.B.A. J. 1674, 1676 (1982) (“A promoter may provide an appraisal of four or five times the amount paid by the investor for the art work, thus creating a 100 per cent or greater return on investment for a taxpayer in a 50 per cent tax bracket when the object is subsequently donated.”)

Congress acted to address those concerns in the Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a), 98 Stat. 494, 691-92, which provides in part:

SEC. 155. SUBSTANTIATION OF CHARITABLE CONTRIBUTIONS; MODIFICATIONS OF INCORRECT VALUATION PENALTY.

(a) Substantiation Contribution of Property. —

(1) In General. — Not later than December 31, 1984, the Secretary shall prescribe regulations under section 170(a)(1) of the Internal Revenue Code of 1954, which require any individual, closely held corporation, or personal service corporation claiming a deduction under section 170 of such Code for a contribution described in paragraph (2) —

(A) to obtain a qualified appraisal for the property contributed,

(B) to attach an appraisal summary to the return on which such deduction is first claimed for such contribution, and

(C) to include on such return such additional information (including the cost basis and acquisition date of the contributed property) as the Secretary may prescribe in such regulations.

Such regulations shall require the taxpayer to retain any qualified appraisal.

(2) Contributions to Which Paragraph (1) Applies. — For purposes of paragraph (1), a contribution is described in this paragraph —

(A) if such contribution is of property (other than publicly traded securities), and

(B) if the claimed value of such property (plus the claimed value of all similar items of property donated to 1 or more donees) exceeds $5,000.

(3) Appraisal Summary. — For purposes of this subsection, the appraisal summary shall be in such form and include such information as the Secretary prescribes by regulations. Such summary shall be signed by the qualified appraiser preparing the qualified appraisal and shall contain the TIN of such appraiser. Such summary shall be acknowledged by the donee of the property appraised in such manner as the Secretary prescribes in such regulations.

DEFRA § 155(a)(1)-(3), 98 Stat, at 691 (emphasis added).

Although the requirements of DEFRA § 155(a) were not codified in I.R.C. § 170, Congress instructed respondent to incorporate in regulations the substantiation requirements imposed by the statute. H.R. Conf. Rep. No. 98-861, 995 (“[T]he Treasury Department must issue temporary or final regulations under section 170 before January 1, 1985 incorporating the substantiation requirements as set forth in this section of the conference agreement.”). Congress intended that the failure to comply with the substantiation requirements would result in the disallowance of the claimed deduction. See id.

The importance of the disclosure to respondent of the cost basis and acquisition date is highlighted by the specificity with which Congress addressed these two items of information. DEFRA § 155(a)(1)(C) specifically requires the inclusion of the acquisition date, as opposed to the more generic mandate of “such additional information . . . as the Secretary may prescribe in such regulations.” Like the language included in DEFRA § 155(a), the House Conference Report highlights the requirement to include “the acquisition date of the donated property.” H.R. conf. Rep. No. 98-861, 997. Special treatment is accorded this requirement and the one to disclose cost basis in the House Conference Report, which provided for the inclusion of a statement of reasonable cause to explain why the donor did not provide the required information relating to the acquisition date or cost basis. Id.

Respondent satisfied Congress' mandate by promulgating regulations pursuant to DEFRA § 155(a). The relevant regulations reiterate Congress' understanding that “No deduction under section 170 shall be allowed with respect to a charitable contribution to which this paragraph applies unless the substantiation requirements described in paragraph (c)(2) of this section are met.” Treas. Reg. § 1.170A-13(c)(1)(i).

The regulations require a “fully completed appraisal summary” to be attached to the tax return. Treas. Reg. § 1.170A-13(c)(2)(i)(B). The information required to be included in the appraisal summary includes the “manner of acquisition (e.g., purchase, exchange, gift, or bequest) and the date of acquisition of the property by the donor” as well as the “cost or other basis of the property adjusted as provided by section 1016,” in addition to other information not specifically mandated by DEFRA § 155(a). Treas. Reg. § 1.170A-13(c)(4)(ii). The IRS has prescribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38; Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, at *10.

Respondent also adopted in the regulations the House Conference Report's provision permitting an explanation of reasonable cause to be attached to the appraisal summary for not providing the acquisition date or the cost basis of the contributed property. Treas. Reg. § 1.170A-13(c)(4)(iv)(C).

B. Date of Acquisition

HCLA failed to identify the date HCLA acquired the property and instead misrepresented the “Date acquired by donor” in Section B, Part I, Box 5(d) of Form 8283 by inputting “10-2013” to suggest that HCLA acquired the property in October 2013, almost three years before the donation. But HCLA actually acquired the property on June 15, 2016, less than two months before the donation, when its partner, WMAH, contributed the property to HCLA. HCLA did not clarify or attempt to correct this false representation in its Supporting Documentation.

Form 8283's reference to October 2013 as the date of acquisition is objectively misleading. October 2013 is when MAH acquired the larger parcel from a third party. This was a year and a half before MAH conveyed the 1,400 acres to WMAH, who then held the property for over a year after that before subdividing it and conveying the subject property to HCLA. Although HCLA's holding period for the property may or may not be determined by reference to WMAH's or MAH's holding periods, see I.R.C. § 1223(2) and Treas. Reg. § 1.1223-1(b), its date of acquisition is not the same as when MAH acquired the larger parcel. DEFRA § 155(a), the regulation, and Form 8283 specifically call for the date of acquisition, as opposed to the holding period. The purpose is simple: a contribution occurring shortly after an acquisition is subject to scrutiny by the 1RS, both as to potential reduction under I.R.C. § 170(e)(1)(A) and to the difference between the claimed value and the cost basis. In the partnership context, a charitable contribution occurring shortly after a capital contribution of the property to the partnership may alert respondent to an attempt to improperly shift tax benefits among partners.

A representation on the Form 8283 that HCLA owned the contributed property for almost three years when in fact it was only for less than two months disguised a red flag that would have alerted respondent to the potential for abuse of the I.R.C. § 170 rules. That is the reason Congress mandated in DEFRA that respondent require donors to identify on their tax returns the acquisition date, as well as cost basis. As this Court held in RERI Holdings I with respect to the omission of cost basis, HCLA's omission of the true acquisition date “prevented the appraisal summary from achieving its intended purpose” and “cannot be excused by substantial compliance.” RERI Holdings I, 149 T.C. at 16.

C. Manner of Acquisition

In another instance where HCLA disguised the nature of the transaction on the Form 8283, HCLA typed the word “PURCHASE” in Section B, Part I, Box 5(e), which requires information concerning “How acquired by donor,” referring to the contributed property. This reporting is objectively false. HCLA acquired the property as a capital contribution from WMAH, one of its partners, not by purchase. Thus, HCLA failed to disclose the true manner in which it acquired the donated property, despite the clear and easily understood requirement in Treas. Reg. § 1.170A-13(c)(4)(ii)(D).

HCLA acquired the Property as a capital contribution less than two months before its donation to ACC. Assuming the 236-acre property indeed had appreciated by almost $180 million in three years — as unbelievable as that is — the appreciation would have accrued in the hands of WMAH and/or MAH, not HCLA. In reality, WMAH used HCLA to “sell” a tax write-off of $180,177,000 to SAI's investors for $18,247,575. HCLA's reporting that it acquired the Property by purchase rather than a capital contribution concealed the heightened potential for abuse in these types of deals. This, along with the failure to disclose the acquisition date, obscured the nature and complexity of this abusive transaction to respondent's detriment in the administration of the tax laws.

D. Strict or Substantial Compliance

HCLA cannot be excused from the false representations it made on its Form 8283 under the strict compliance or substantial compliance standards. This Court discussed the applicability of these standards in Taylor v. Commissioner, 67 T.C. 1071 (1977), as follows:

The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases. The critical question to be answered is whether the requirements relate to the substance or essence of the statute. If so, strict adherence to all statutory and regulatory requirements is a precondition to an effective election. On the other hand, if the requirements are procedural or directory in that they are not of the essence of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict, compliance.

67 T.C. at 1077-78 (internal quotations and citations omitted).

HCLA's omission of the true acquisition date should be evaluated under a strict compliance standard because this requirement goes to the essential Congressional purpose underlying DEFRA § 155, which is “to alert the Commissioner, in advance of audit, of potential overvaluations of contributed property and thereby deter taxpayers from claiming excessive deductions in the hope that they would not be audited.” RERI Holdings I, 149 T.C. at 16-17. The Conference Report makes clear that, absent the explanatory statement described therein and incorporated into the regulation, the deduction should be disallowed for the failure to disclose either the acquisition date or the cost basis information. The acquisition date and cost basis are not discretionary categories of information the IRS chose to require (or could have chosen not to require), but rather are explicitly mandated by DEFRA § 155(a). By providing inaccurate and misleading information about the acquisition date on its Form 8283, HCLA has not strictly complied with the statutory requirements.

Even if the Court were to apply the substantial compliance doctrine in this case, HCLA would still fail to meet it. The Court in RERI Holdings I held that the taxpayer failed to substantially comply with the requirements of Treas. Reg. § 1.170A-13(c)(2)(i)(B) and 1.170A-13(c)(4)(ii)(E) for failing to provide its basis in the property as required by the regulation and Form 8283. HCLA's failure to disclose the true acquisition date is a failure to substantially satisfy the regulatory requirements of Treas. Reg. § 1.170A-13(c)(2)(i)(B) and 1.170A-13(c)(4)(ii)(D), in the same way this Court viewed RERI's failure to disclose the cost basis. Both pieces of information were mandated by Congress and are equally significant.

As to the failure to disclose the manner of acquisition on the Form 8283, HCLA should also not be excused on the basis of substantial compliance. Form 8283 reported false information about the manner of acquisition. If the correct acquisition date and manner of acquisition had been disclosed, the syndicated nature and structure of the transaction would have “alert[ed] the Commissioner, in advance of audit, of potential overvaluations of contributed property.” RERI Holdings I, 149 T.C. at 16.

HCLA's misrepresentations are distinguishable from Bond v. Commissioner, 100 T.C. 32 (1993), where the Court found substantial compliance when all the regulatory requirements were met with the exceptions of the qualifications of the appraiser. The defects in the instant case (whether individually or combined) to comply with the requirements of DEFRA § 155(a) and Treas. Reg. § 1.170A-13(c)(2), (4) cannot fairly be excused as trivial.

Conclusion

The noncash charitable contribution deduction claimed by HCLA of $180,177,000 should be disallowed in its entirety as a matter of law on two independent and alternative bases: the failure to protect the conservation purpose in perpetuity; and the defects, either individually or collectively, in the appraisal summary. Accordingly, respondent is entitled to summary judgment on the issue of the deductibility of the HCLA's noncash charitable contribution.

Respondent respectfully states that counsel of record has reviewed the administrative file and on the basis of the review of the file and the pleadings, concludes that there remains no genuine issue of material fact for trial upon the issue of the deductibility of the noncash charitable contribution.

Counsel for petitioner objects to the granting of this motion.

WHEREFORE, it is prayed that this motion be granted.

WILLIAM M. PAUL
Acting Chief Counsel
Internal Revenue Service

Date: July 8, 2021

By: TERI L. JACKSON
Senior Counsel
(Large Business & International)
Tax Court Bar No. ET0105
Wells Fargo Place, Suite 1130
30 E. 7th Street, MS2000STP
St. Paul, MN 55101
Telephone: (651)361-1811
teri.l.jackson@irscounsel.treas.gov

OF COUNSEL:
ROBIN GREENHOUSE
Division Counsel
(Large Business & International)
WILLIAM G. MERKLE
Area Counsel
(Large Business & International)