T.C. Mem o. 2 01 5- 43

UNITED STAT ES TAX COURT

BALSAM M OUNTAIN INVE STMENTS, LLC, BALSAM MOUNTAIN MANAGEMENT COMPANY, LLC, f.k.a. BALSAM M OUNTAIN COMPANY,

LLC, TAX MATTERS PARTNER, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 20 54 5- 11
. Fi le d M arch 12 , 20 15
.

In20 03 B, a pa rtn ers hi p, g ran te d ape rp etua l co ns erv at io n eas em en t o n a22 -acr e p arce l o f la ndto a no np ro fitco rp or at io n. Fo r th e n ex t fi ve y ears B ha d the rig htto ch an ge th e b ou nd ari es of t he res tri ct edarea . B’ s ri gh t t o c ha ng e th e b ou nd ari es was s ub ject t o the fo ll owi ng co nd it io ns . Firs t, the to ta l ar ea re st ric te d b y th e eas em en t ha d t o re m ai n 2 2 a cres . Seco nd , at l eas t 9 5% o f th e o rig in al 22 -acr e pa rcel ha d t o re m ai n wi th in th e b ou nd ari es of t he res tri ct edarea . Held : Th e eas em en t i s n ota “ qu al ifi edreal pro pe rty int eres t” of th e type d es cri be d i n I.R .C. se c. 17 0( h) (2 )(C)
.

Dav idDem os s Dah l an d B rad le y S. W oo ldrid ge , forpe ti ti on er. Dav idM. McC al lu m

an d M at th ew E. Epp s, fo r res po nd en t.- 2 -

[* 2] MEMORANDUM OPINI ON
MORR ISON, Ju dg e: The re sp on de nt(refe rredto he re as th e “ IRS” ) is su ed
a n ot ic e o f fi na l p artne rs hi p a dm in is tra ti ve ad jus tm en t fo r th e 2 00 3 t ax ab le y ear o f Bal sa m Mo un ta in Inv es tm en ts , LLC (referredto he re as “ Bal sa m Inv es tm en ts ”). The no ti ce d is al lo weda ch ari tabl e-co nt rib ut io n d educ ti on fora pe rp etua l
co ns erv at io n e as em en t an d d et erm in eda pe na lty un de r se ct io n 6 66 2. (Al l refe ren ces to sec ti on s ar e to th e In te rn al Rev enue Co de of 1 98 6, as am en de d.) We ha ve juri sd ic ti on un de r se ct io n 6 22 6( f). The IRS fi le d am ot io n fo r pa rti al su m m ary jud gm en t. Itco nt en ds th atth e
eas em en t i s n ota “ qu al ifi edreal pro pe rty int eres t” of t he type d es cri be d i n s ect io n 17 0( h) (2 )(C) . W e g ran t the IRS’s m ot io n. Bac kg ro un d The fact s s etforth be lo w are b as edup on ex am in at io n o f th e p art ie s’ pl ead in gs , m ov in g p ap ers , res po ns es , andatt ach m en ts . In20 03 , Bal sam

Inv es tm en ts ex ecu te d ape rp etua l co ns erv at io n e as em en t ag reem en t wi th th e NorthAm eri canLandTrus t, a n onpr of itco rp or at io n. Un de r th e eas em en t ag reem en t, Ba ls am Inv es tm en ts an d “ it s s uc ces so rs or a ss ig ns ” were
res tri ct ed“ in pe rp etui ty” from de ve lo pi ng or a lt eri ng th e la ndinth e “ Co ns erv at io n- 3 -

[* 3] Area” . The “ Co ns erv at io n Are a” was de fin edinth e eas em en t ag reem en t as a sp eci fic 22 -acr e p arce l o f la ndinJac ks on Co un ty, North Caro li na , th e ex act bo un da rie s o f whi chwere d es cri be d i n apl atatt ach edto th e eas em en t ag reem en t. At the ti m e, Bal sa m

Inv es tm en ts own edth e 2 2- acre pa rcel of l an d. Art ic le 3.5 of th e eas em en t ag reem en t re se rv edth e ri gh t o f Bal sa m Inv es tm en ts to m ak e bo un da ry ch an ge s t o the “ Co ns erv at io n Are a”: 3.5 Owner[i.e ., Bals am

Inv es tm en ts ] res erv es th e ri gh t t o m ak e m in or al te rat io ns to th e b ou nd ary of th e Co ns erv at io n Are a if all of t he fo ll owi ng requi rem en ts are s at is fie d: 3.5 .1 Th e cal cu la te d a rea o f la ndwithi n the Co ns erv at io n Are a aft er al te rat io n o f th e b ou nd ary of th e Co ns erv at io n Are a sh al l no t b e reduc edfro m

th atwhi chwas m ad e subjec t t o thi s Co ns erv at io n Eas em en t atth e ti m e th is Co ns erv at io n Eas em en t was gra nt ed
. 3.5 .2 Th e la ndad de d t o the Co ns erv at io n Are a sh al l b e co nt ig uo us with a ndco nn ect edby an are a o f subs tant ia l wi dth to th e Co ns erv at io n Are a as itex is ts on th e d at e o f th is Co ns erv at io n Eas em en t. 3.5 .3. The lan d a dd edto th e Co ns erv at io n Are a sh al l, i n the Trus t’s [i .e., North Am eri canLandTrus t’s] reas on ab le jud gm en t, b e la ndwhi chm ak es anequa l o r gr eat er co nt rib ut io n to th e Co ns erv at io n P ur

po se s tha n tha t wh ic h i s re m ov edfro m th e Co ns erv at io n Are a. 3.5 .4. The ag gr eg at e la ndrem ov edfro m th e Co ns erv at io n Area (a ndsubs ti tu te d wi th othe r co nt ig uo us lan d) as ares ul t o f al l b ou nd ary li ne alt erat io ns sh al l n otex ceedfiv e p erce nt(5%)- 4 - [* 4] of t he areawithi n the Co ns erv at io n Are a as of t he da te of t hi s Co ns erv at io n Eas em en t. 3.5 .5. No bo un da ry

li ne ad jus tm en ts withi n the Co ns erv at io n Area m ay be m ad e und er the pro vi si on s o f th is sec ti on aft er the fif th an ni ve rs ary of

th e d at e o f th is Co ns erv at io n Eas em en t. 3.5 .6. The pro po se d b ou nd ary li ne s s ha ll be su rv ey edan d pr op os edinsu rv ey

pl anform

by O wne r bu t s ha ll be subjec t t o th e p rio r rev ie w andap pr ov al of t he Trus t. 3.5 .7. The lo cat io n a ndreco nf ig ur at io n o f a b ound ary of th e Co ns erv at io n Are a sh al l n otbe ap pr ov edby T ru stif, i n Tru st ’s jud gm en t, i t wo ul d d ire ct ly or in di rect ly resu ltinan y m at eri al adve rs e eff

ecton any

of t he Co ns erv at io n P ur

po se s. 3.5 .8. The ne w Con se rv at io n Are a b ou nd ary sh al l b e * * * set fo rth ina writ te n am en dm en t t o thi s C on se rv at io n Eas em en t * * *. The term “ Co ns erv at io n P ur

po se s” was d efi ne d i n the eas em en t ag reem en t as (1) th e p res erv at io n o f th e “ Co ns erv at io n Are a” as a na tu ral habi tat, an d (2 ) th e pr es erv at io n o f th e “ Co ns erv at io n Are a” as op ensp ace. In20 04 Bal sa m

Inv es tm en ts fil eda Fo rm 10 65 , U.S. Retu rnof P artne rs hi p In co m e, fo r it s 2 00 3 t ax ab le y ear. Itrep orte d i ts gra ntof t he co ns erv at io n
eas em en t as a ch ari tabl e-co nt rib ut io n d educ ti on . In 2 00 6 B al sa m Inv es tm en ts 1

Altho ug h ade du ct ib le ch ari tabl e co nt rib ut io n b y a pa rtn ers hi p i s re po rte d 1 on th e p artne rs hi p’s re tu rn , su cha co nt rib ut io n d oe s n otaffe ctth e p artne rs hi p’s ta xabl e in co m e. Secs . 70 3( a)(2 )(C) , 60 31 (a); sec . 1.7 03 -1 (a)( 1) an d (2 ), In co m e Tax Reg s. Ra th er, i t af

fect s the pa rtn ers ’ ta xabl e in co m e. See s ec. 7 02 (a).- 5 -

[* 5] di ss ol ve d. In20 11 th e IRS is su edit s p artne rs a no ti ce o f fi na l p artne rs hi p adm in is tra ti ve ad

jus tm en t fo r 20 03 . The n ot ic e d is al lo wedth e ch ari tabl eco nt rib ut io n d educ ti on an d a ss ert eda se ct io n- 66 62 pe na lty . In 2 01 1 the tax
m at te rs pa rtn er fi le d ati m el y pe ti ti on ch al le ng in g the no ti ce u nd er s ect io n 62 26 (a). Th e ta x m at te rs pa rtn er was Bal sa m Mo un ta inMan ag em en t Co ., LLC (ref erre d t o h ere a s “ Bal sa m

Man ag em en t” ). Its pri nc ip al off ic e was inNort h Caro li naat t he ti m e th e p et it io n was fil ed
. Dis cu ss io n Tax Co urt Ru le of P ract ic e an d P ro cedur e 1 21 (a) p ro vi de s tha t ei th er p arty
m ay m ov e fo r su m

m ary jud gm en t upo n a ll or a ny partof t he leg al is su es in
co nt ro ve rs y . Ful l o r pa rti al su m m ary jud gm en t m ay

be gra nt edon ly if itis de m on st rat edth atno ge nu in e d is pu te ex is ts as t o a ny m at eri al factan d tha t the is su es pre se nt edby the m ot io n m ay be de ci de d a s a m at te r of law. See Tax C t. R. Prac t. & Pr oc . 12 1( b) ; Su nd st ran d C or p. v . Comm is si on er, 9 8 T.C. 5 18 , 52 0 (1 99 2) , aff’d, 1 7 F .3d96 5 (7 th Cir . 19 94 ). As t o wh ethe r th e eas em en t g ran te d b y Bal sa m Inv es tm en ts is a “ qu al ifi edreal pro pe rty int eres t” of the type d es cri be d i n
se ct io n 1 70 (h )(2 )(C) , we con cl ud e th atth ere i s n o g enui ne di sp ut e as to any
m at eri al factan d tha t the eas em en t i s n otsu chanin te res t as a m atte r of law.- 6 -

[* 6] The va lu e o f an y

ch ari tabl e co nt rib ut io n m ad e dur in g the tax ab le y ear i s al lo wedas ade du ct io n. Se c. 17 0( a)(1 ). If th e ch ari tabl e co nt rib ut io n i s o f a pa rti al in te res t i n p ro pe rty--“ anin te res t i n p ro pe rty whic h c on si st s o f le ss th anth e ta xp ay er’s en ti re i nt eres t i n s uc h p ro pe rty”--the Co de all ows a de du ct io n o nl y in li mit edcir cu m st an ces . Id. s ub se c. (f)( 3) . One s uc h c irc um st an ce ex is ts if the
co nt rib ut edin te res t i s a “ qu al ifi edco ns erv at io n c on tri bu ti on .” Id . subp ara. (B)( ii i). A “ qu al ifi edco ns erv at io n c on tri bu ti on ” is de fin edby sect io n 1 70 (h )(1 ). Sect io n 1 70 (h )(1 ) pr ov id es :

(1 ) Inge ne ral .--Fo r pu rp os es of s ub se ct io n (f )(3 )(B) (ii i), the te rm “ qu al ifi edco ns erv at io n c on tri bu ti on ” m ean s a c on tri bu ti on -- (A) o f a qua li fie d re al pro pe rty int eres t, (B) t o aqu al ifi edorg an iz at io n, (C) e xc lu si ve ly for co ns erv at io n p ur po se s. Sect io n 1 70 (h )(2 ) pr ov id es :

(2 ) Qua li fie d re al pro pe rty int eres t.-- Fo r pu rp os es of thi s subs ect io n, the term

“ qu al ifi edreal pro pe rty int eres t” m ean s an y of th e fo ll owi ng in te res ts inreal pro pe rty:

(A) th e en ti re i nt eres t o f th e d on orothe r th ana qu al ifi ed m in eral in te res t, (B) arem ai nd er i nt eres t, an d- 7 -

[* 7] (C) ares tri ct io n (g ran te d i n p erp etui ty) onth e u se whi ch

m ay be m ad e o f th e rea l p ro pe rty. The IRS co nt en ds th atth e eas em en t Ba ls am Inv es tm en ts gra nt edto th e NorthAm eri canLandTrus t i s n ota “ qu al ifi edreal pro pe rty int eres t” of t he type de sc rib edinsec ti on 17 0( h) (2 )(C) an d, the refo re, i s n ota “ qu al ifi edco ns erv at io n
co nt rib ut io n.” Bal sa m

Man ag em en t co nt en ds th atth e eas em en t i s a “ qu al ifi ed
co ns erv at io n c on tri bu ti on ” b ecau se itis a “ qu al ifi edreal pro pe rty int eres t” of t he type d es cri be d i n s ect io n 1 70 (h )(2 )(C)
. W e h ol d tha t the eas em en t i s n ota “ qu al ifi edreal pro pe rty int eres t” of t he type d es cri be d i n s ect io n 1 70 (h )(2 )(C) . Belkv. Co m m is si on er, 1 40 T.C. 1, 1 0- 11 (2 01 3) , supp le m en te d b y

T.C. Mem o. 2 01 3- 15 4, af f’d, 77 4 F .3d22 1 (4 th Cir
. 20 14 ), he ldth ata co ns erv at io n e as em en t i s n ota “ qu al ifi edreal pro pe rty int eres t” of th e type d es cri be d i n s ect io n 1 70 (h )(2 )(C) if the eas em en t ag reem en t p erm it s th e g ran to r to ch an ge whatpro pe rty is s ub ject t o the eas em en t. Thi s i s b ecau se an in te res t i n re al pro pe rty is a“ qu al ifi edreal pro pe rty int eres t” of t he type d es cri be d in sec ti on 17 0( h) (2 )(C) on ly if itis anin te res t i n a n i de nt ifi ab le , sp eci fic pi ece o f real pro pe rty. See Be lkv. Co m m is si on er, 1 40 T.C. at 1 0. Th e eas em en t g ran te d 2 Thi s re ad in g o f Bel k i s co ns is te ntwith the Supp le m en ta l M em or an du m 2 Opi ni on de nyin g the tax pa y ers ’ m ot io n fo r rec on si de rat io n o f Bel k. Se e Bel k v
. Co m m is si on er, T.C. Mem o. 2 01 3- 15 4, s up pl em en ti ng 14 0 T.C. 1 (20 13 ), aff’d, (co nt in ue d...)- 8 -

[* 8] by Bals am

Inv es tm en ts pe rm it te d i t t o c ha ng e th e b ou nd ari es of the

“ Co ns erv at io n Are a”. The refo re, the eas em en t i s n otanin te res t i n an i de nt ifi ab le , sp eci fic pi ece o f rea l p ro pe rty. Und er Be lk , th e eas em en t i s n ota “ qu al ifi edreal pr op erty in te res t” of t he type d es cri be d i n s ect io n 1 70 (h )(2 )(C)
. Bal sa m Man ag em en t co nt en ds th atBel k v . Comm is si on er, 1 40 T.C. at 3 -5 , is di st in gu is habl e b ecau se th e eas em en t ag reem en t i n B el k a ll owe d the do no r to
subs ti tu te othe r la ndforall of the lan d i ni ti al ly sub ject t o the eas em en t. By
co nt ras t, the eas em en t g ran te d b y Bal sa m Inv es tm en ts all owe d s ub st itut io n fo r
on ly 5% of t he lan d i ni ti al ly sub ject t o the eas em en t. Thi s m ak es th e eas em en t di ffer en t fr om

th e o ne inBel k, b utth e d iff eren ce d oe s n otm at te r. The ea se m en t gr an te d b y

Bal sam Inv es tm en ts in20 03 was n otanin te res t i n an i de nt ifi ab le , sp eci fic pi ece o f rea l p ro pe rty. For fi ve y ears aft er 2 00 3 B al sa m Inv es tm en ts
co ul d c ha ng e th e b ou nd ari es of t he “ Co ns erv at io n Are a” b ur de ne d b y th e
(...co nt inue d) 2 77 4 F .3d22 1 (4 thCir . 20 14 ). In t he Supp le m en ta l M em or an du m Opi ni on , we st at edth atth e Co urt i n the fir stBel k Op in io n h ad“ fo un d tha t s ect io n 1 70 (h )(2 )(C) requi res th attax pay ers do na te anin te res t i n a n i de nt ifi ab le , sp eci fic pi ece o f rea l pr op erty .” See i d. at*7 -* 8. The U.S. Cou rt o f App eal s fo r th e Fo urth Cir cu ithe ldth atth e eas em en t i n Bel k d idno t re st ric t a “ de fin edan d s ta ti c p arce l” of r eal pro pe rty and , th eref or e, was no t a “ qu al ifi edreal pro pe rty int eres t” un de r se c. 17 0( h) (2 )(C) . Belkv. Co m m is si on er, 7 74 F.3dat 2 27
.- 9 -

[* 9] eas em en t. As o f 20 03 th e eas em en t d idno t co ns ti tu te a “ qu al ifi edreal pr op erty in te res t” of t he type d es cri be d i n s ect io n 1 70 (h )(2 )(C)
. Alt ern at iv el y , Bal sam

Man ag em en t ar gu es th atwe sh ou ldov erru le Bel k. W e d ecl in e to do so . The eas em en t i s n ota “ qu al ifi edreal pro pe rty int eres t” of t he type d es cri be d in sec ti on 17 0( h) (2 )(C) . Giv enth e arg um en ts pre se nt ed , th e eas em en t i s n ota

“ qu al ifi edco ns erv at io n c on tri bu ti on ”.
An o rd er wi ll be is su edgra nt in g
res po nd en t’s m ot io n fo r parti al su m m ary jud gm en t.