Source: http://openjurist.org/471/f3d/698/glass-v-commissioner-internal-revenue
Timestamp: 2016-05-05 16:33:02
Document Index: 654853657

Matched Legal Cases: ['§ 170', '§ 170', '§ 170', '§ 170', '§ 1', '§ 170', '§ 170', '§ 170', '§ 170', '§ 1', '§ 170', '§ 1', '§ 170', '§ 1', '§ 170', '§ 1', '§ 1', '§ 170', '§ 1', '§ 1', '§ 636', '§ 170', '§ 170', '§ 170', '§ 1', '§ 170', '§ 170', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1']

471 F3d 698 Glass v. Commissioner Internal Revenue | OpenJurist
471 F. 3d 698 - Glass v. Commissioner Internal Revenue HomeFederal Reporter, Third Series471 F.3d
471 F3d 698 Glass v. Commissioner Internal Revenue 471 F.3d 698
Charles and Susan GLASS, Petitioners-Appellees,v.COMMISSIONER of INTERNAL REVENUE, Respondent-Appellant.
No. 06-1398.
ARGUED: Bethany B. Hauser, United States Department of Justice, Washington, D.C., for Appellant. Charles F. Glass, Harbor Springs, Michigan, pro se. Stephen J. Small, Boston, Massachusetts, for Amicus Curiae. ON BRIEF: Bethany B. Hauser, Kenneth L. Green, United States Department of Justice, Washington, D.C., for Appellant. Charles F. Glass, Susan Glass, Harbor Springs, Michigan, pro se. Stephen J. Small, Boston, Massachusetts, for Amicus Curiae.
On 1992 and 1993 tax returns, Charles and Susan Glass ("Taxpayers") claimed charitable deductions for two conservation easements. The Commissioner of Internal Revenue (the "Commissioner") issued a notice of deficiency. Taxpayers filed a petition in the Tax Court challenging the Commissioner's decision. The Commissioner conceded that the 1992 and 1993 contributions met two of the three requirements for a "qualified conservation contribution" under the Internal Revenue Code ("I.R.C."), 26 U.S.C. § 170(h)(1); i.e., that the portions of the Glass property covered by each conservation easement is a "qualified real property interest" and that the donee, Little Traverse Conservancy ("LTC"), is a "qualified organization." The Commissioner's challenge focused on the third requirement, that the conservation easements be "exclusively for conservation purposes."
In 1988, Taxpayers purchased, for $283,000, a ten-acre parcel of land in Emmet County, Michigan, between Harbor Springs and Cross Village. Glass v. Comm'r, 124 T.C. 258, 260, 2005 WL 1231654 (2005). The property sits along the shoreline of Lake Michigan. Id. It was originally purchased and used as a vacation home. In 1994, Taxpayers began using the property as their primary residence. Id. at 261. From 1995 through 1999, Taxpayers lived part time at the Emmet property and part time in their secondary residence in Grosse Pointe Farms, Michigan. In 1999 or 2000, they began to live full time at the Emmet property. Id. The same three buildings that were on the property in 1988 remain. These include (1) Taxpayers' home, a 1,278 square foot, "single-story small handcrafted cabin that is made of hand-hewn logs and elm bark shaving"; (2) a 512 square foot, single-story guest cottage; and (3) a 525 square foot, single-story garage. Id.
The property's dimensions are generally 460 feet in width from north to south and 1,055 feet in depth from east to west. Its eastern edge is a straight line bordering Highway M-119 (M-119). Its western edge is a crooked line abutting Lake Michigan. Lake Michigan cannot be seen through the property from M-119 because many large trees and dense foliage grow throughout much of the property. Included among the trees on the property is a plantation of large (approximately 100-foot) old growth original white pine trees.
The nearest public access to the shoreline on the property is approximately 1.5 miles to the south at Readmond Township Park in Readmond. Readmond is approximately 40 square miles, is approximately 10 miles north of Harbor Springs (the nearest incorporated city), and is in Emmet County.. . . .
The LTC actively sought contributions of conservation easements in the area along the M119 corridor and the Lake Michigan shoreline. The executive director of the LTC testified that contributions of conservation easements to the LTC Conservation Trust ("Trust") were actively sought in the early 1990s because the LTC felt overdevelopment threatened the natural scenic beauty of the Lake Michigan bluffs, the return of bald eagles to the Lake Michigan shoreline, and survival of plant species like the Lake Huron tansy and pitcher's thistle along the area beaches. Id. As the Tax Court explained, "LTC believes that northern Michigan is relatively undeveloped as compared with other parts of the State. Significant and abundant natural resources are present in northern Michigan, particularly around M-119 and the nearby shoreline, and LTC believes that these resources may be threatened by overdevelopment." Id. at 273. It was LTC's goal "to balance a development of northern Michigan with a development of new nature preserves and the protection of areas for wildlife and scenic views." Id.
The 1992 Conservation Easement covers the "northernmost 150 feet of shoreline and all portions landward for 120 feet from the ordinary high water mark" of Taxpayers' property. Id. at 268. It provides that: (1) the encumbered property "`contains a relatively intact forested ecosystem, providing wildlife habitat, as well as habitat for old growth white pine trees'"; (2) "`lake front property in and around the area of the [encumbered] Property is under intense development pressure, thereby causing or at least exacerbating the impact on rare and protected flora and fauna of the area such as the piping plover . . . and Huron Tansy'"; (3) Taxpayers and LTC "`recognize the scenic and natural resource values of the Property and share the common intention to conserve these values in perpetuity by the conveyance of a Conservation Easement to protect the use or development of the Property for any purpose or in any manner which would conflict with the maintenance of these scenic and natural resource values'"; and (4) Taxpayers intend to convey to LTC "`the right to preserve and protect the scenic and natural resource values of the Property in perpetuity.'" Id. (quoting 1992 Conservation Easement at 1.)
Id. (quoting 1992 Conservation Easement, ¶ 1.0.) It precludes "[a]ny activity on or use of the Property that is inconsistent with" the above-stated purpose. Joint Appendix ("JA") at 121 (1992 Conservation Easement, ¶ 2.0). It also includes a non-exhaustive list of restricted uses; e.g., mining activities and, except as otherwise provided therein, "development, construction, improvement, or similar acts that would destroy any part" of the encumbered property. Id. The encumbered property may not be partitioned or divided for any purpose; no rights-of-way, easements of ingress or egress, driveways or roads can be constructed, developed or maintained; no trash, garbage, toxic or hazardous waste, or unsightly materials can be placed on or stored there; the surface cannot be disturbed, except to perform permitted uses described in ¶ 3.0; no living trees, shrubs or other vegetation can be cut or removed except as permitted under ¶ 3.0; no all-terrain or similar vehicles can use the property; and there can be no manipulation or alteration of the natural water courses through the property; e.g., a dike, drain or fill. Id.
Certain uses not inconsistent with the above-stated purpose were permitted including, e.g., limited rights "to selectively move, prune, trim or cut trees, shrubs or other vegetation" for purposes of preserving the view of Lake Michigan or for safety; "to maintain, repair and replace the existing foot path to the beach" or "to construct, maintain, repair and replace additional foot paths to the beach;" "to construct, maintain, repair and replace a day shelter, storage shed, scenic overlook deck, patio" or "a wooden boat house in a manner and location which minimizes interference with the scenic and natural resource value of the Property;" and "to make wildlife habitat improvements." Id. at 122 (1992 Conservation Easement, ¶ 3.0). As to the existing cottage located outside the Conservation Easement, the Taxpayers retained:
To ensure Taxpayers' compliance and to accomplish its purpose, the Conservation Easement granted LTC certain rights: to enter the encumbered Property to document its condition, to monitor compliance, to enforce its terms, "to conduct scientific or related investigations," "to undertake corrective action" if there is a violation, "to prevent any activity on or use of" the encumbered Property "that is or may be inconsistent with" its provisions, and "to require restoration of all areas or features" of the encumbered Property damaged by any inconsistent use or activity. JA at 122 (1992 Conservation Easement, ¶ 4.0). The document "generally states that [Taxpayers] are liable for any cost incurred by LTC to enforce" the Conservation Easement and that it will be terminated "`[i]f subsequent, unexpected changes in the Property, or nearby property, render the Purpose of this Conservation Easement impossible to achieve.'" Glass, 124 T.C. at 269 (quoting 1992 Conservation Easement, ¶¶ 5.0, 10.0).
JA. at 124 (1992 Conservation Easement, ¶ 8.0.1).
On December 28, 1993, Taxpayers signed a document entitled "Lakefront Conservation Easement # 2" which was recorded at the Register of Deeds for Emmet County on December 30, 1993, and re-recorded there on November 24, 1994. LTC prepared Easement # 2 contemporaneously with Taxpayers' contribution of Conservation Easement # 2 in perpetuity to the LTC Trust. At the same time, Taxpayers also contributed $2,000 to the LTC Trust. "On December 30, 1993, a mortgagee of the property agreed to subordinate its mortgage on the property to the extent necessary to permit LTC to enforce the purpose of the conservation easement 2 in perpetuity." Glass, 124 T.C. at 270.
The Tax Court's findings of fact are reviewed for clear error, and its application of the law to the facts is reviewed de novo. Ekman v. Comm'r, 184 F.3d 522, 524 (6th Cir.1999). This appeal arises from Taxpayers' challenge of deficiency determinations by the Commissioner. "The Commissioner's deficiency determinations are presumed correct and the taxpayer bears the burden of proving otherwise." Id. Moreover, "[d]eductions are a matter of legislative grace, and the taxpayer must satisfy the specific statutory requirements claimed to reduce a tax liability." Id. at 524-25.
The definition of a "qualified conservation contribution" is provided in Section 170(h). To constitute a qualified conservation contribution, the taxpayer must show that three requirements have been satisfied: "(1) [t]he real property is a `qualified real property interest'; (2) the donee is a `qualified organization'; and (3) the contribution is `exclusively for conservation purposes.'" Turner v. Comm'r, 126 T.C. 299, 311, 2006 WL 1330084 (2006) (citing I.R.C. § 170(h)(1) and 26 C.F.R. 1.170A-14(g)(1)). Only the third requirement is at issue in this appeal.
This third requirement, that a contribution is made "exclusively for conservation purposes," is met if the taxpayer shows that the contribution satisfies I.R.C. § 170(h)(4) and (5). Id. As to Section 170(h)(4), subsection (h)(4)(A)(ii) is at issue here. It defines "conservation purpose" as "the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem." I.R.C. § 170(h)(4)(A)(ii). See also 26 C.F.R. ("Treas.Reg.") § 1.170A14(d)(1)(ii). The Treasury Regulations implementing this section further provide that:
(1) In general. To meet the requirements of this section, a donation must be exclusively for conservation purposes. See paragraphs (c)(1) [Qualified Organization — Eligible donee] and (g)(1) through (g)(6)(ii) of this section [Conservation Purpose Enforceable in perpetuity]. . . .
The Tax Court held that Taxpayers' contributions of the 1992 and 1993 Conservation Easements were qualified conservation contributions under I.R.C. § 170(h)(1). Glass, 124 T.C. at 259. It observed that the Commissioner had conceded that the first and second requirements of § 170(h)(1) were satisfied, id. at 280, and concluded that Taxpayers met the third requirement — that the contribution be "exclusively for conservation purposes" — because "they protect a relatively natural habitat of wildlife and plants," as required under § 170(h)(4)(A)(ii), and "are exclusively for conservation purposes," as required under § 170(h)(5). Id. at 280-84.
The Commissioner first argues that the Tax Court's construction of Treas. Reg. § 1.170A-14(d)(3)(i) and (ii) was erroneous because it read the word "significant" out of the Treasury Regulation and thus erred in concluding that the encumbered property satisfied I.R.C. § 170(h)(4)(A)(ii). The Commissioner next argues that the Tax Court's findings that the encumbered property fell within Treas. Reg. § 1.170A14(d)(3)(i) were clearly erroneous because the encumbered property was too small, allowed Taxpayers too many retained rights, and failed to restrict the building rights of neighboring property owners thus precluding the Easements from serving their stated conservation purpose. Finally, using these same arguments, the Commissioner asserts that the Tax Court erred in finding that the Easements' conservation purpose was protected in perpetuity and that the deductions were "exclusively for conservation purposes" as required under I.R.C. § 170(h)(5)(A) and Treas. Reg. § 1.170A-14(e), (g).
The Tax Court examined Taxpayers' claim that the Conservation Easements protect a relatively natural habitat of wildlife or plants thus falling within the acceptable conservation purposes of I.R.C. § 170(h)(4)(A)(ii). Glass, 124 T.C. at 280. It observed that the Treasury Regulation implementing that statutory provision provides that "a qualified real property interest will meet the conservation purpose test, and thus satisfy the third requirement . . ., if that interest is contributed `to protect a significant relatively natural habitat in which a fish, wildlife, or plant community, or similar ecosystem, normally lives'." Id. (quoting Treas. Reg. § 1.170A14(d)(3)(i)). The Tax Court further observed that the Regulation lists examples of significant habitats and ecosystems and expressly includes habitats for rare, endangered, or threatened species of animals, fish, or plants. Id. (citing Treas. Reg. § 1.170A14(d)(3)(ii)).
Contrary to the Commissioner's arguments, the Tax Court properly construed the plain language of I.R.C. § 170(h)(4)(A)(ii) and Treas. Reg. § 1.170A14(d)(3)(i) and (ii). While it is true that the relatively natural habitat where a wildlife or plant community normally lives must be significant to meet the "conservation purposes" test, habitats for rare, endangered, or threatened species of animals or plants are expressly recognized as significant. Treas. Reg. § 1.170A-14(d)(3)(i) and (ii). Moreover, it was not error for the Tax Court to give the words "habitat" and "community" their plain meaning. The Tax Court properly observed that "[a] habitat denotes `The area or environment where an organism or ecological community normally lives or occurs' or `The place where a person or thing is most likely to be found.'" Id. at 281-82 (quoting American Heritage Dictionary of the English Language 786 (4th ed.2000) and citing 7 C.F.R. § 636.3 (2002)). It also properly observed that "[a] community may be defined in this context as `A group of plants and animals living and interacting with one another in a specific region under relatively similar environmental conditions.'" Id. at 282 (quoting American Heritage Dictionary of the English Language 374).
The Tax Court found that LTC's executive director, Thomas Bailey, and Taxpayer Susan Glass, testified credibly that the encumbered property (1) "is a `famous' roosting spot for bald eagles"; (2) "that the conservation easements establish a proper place for the growth and existence of Lake Huron tansy and pitcher's thistle"; (3) that Bailey had toured the property on various occasions and had concluded that "the habitat on the encumbered shoreline is a proper and normal environment for Lake Huron tansy, pitcher's thistle, and bald eagles"; (4) "that the staff of LTC had seen Lake Huron tansy growing on the property"; and (5) that Susan Glass had observed "Lake Huron tansy growing on the property and that she has regularly seen bald eagles there as well." Id. at 281. The Tax Court also found, based on evidence in the record, that "both Lake Huron tansy and pitcher's thistle are considered threatened species which are worthy of special attention towards the goal of preservation and that LTC . . . has agreed through the conservation easements to attempt to preserve those species by giving them that special attention." Id. Contrary to the Commissioner's arguments on appeal, these findings are supported by the record.
The Tax Court next found that the encumbered shoreline property fell within the plain meaning of the words "habitat" and "community." Id. at 282. "In its natural undeveloped state, it is a `relatively natural habitat' for a community of Lake Huron tansy, of pitcher's thistle, and of bald eagles, among other species of plants and wildlife." Id. This finding is supported by Mr. Bailey's testimony.
The Easements first recognize that development in the area is having a negative impact on rare and protected flora and fauna like the Huron tansy as well as wildlife habitat. They then state that their purpose is to conserve plant and wildlife habitat on the Property and provide a non-exhaustive list of prohibited and restricted list of permitted uses that do not conflict with that stated purpose. Finally, they grant to LTC rights necessary to enforce compliance consistent with their stated conservation purpose so as to protect it in perpetuity. Each Easement also provides that it "shall be liberally construed in favor of the purpose of this Conservation Easement, the [LTC], and the Conservation and Historic Preservation Easement Act, MCL 399.251, et seq." JA at 125, 135 (1992 and 1993 Conservation Easements).
The stated purpose of both Easements is identical: "to ensure that the scenic and natural resource values of the Property will be retained forever . . . . to prevent the use or development of the Property for any purpose or in any manner which conflicts with the perpetual maintenance of these scenic and natural resource values . . . ." JA at 121, 131 (1992 and 1993 Conservation Easements). Their provisions as to restricted uses are identical and provide that "[a]ny activity on or use of the Property that is inconsistent with the purpose of this Conservation Easement is prohibited . . . ." Id. Their provisions as to permitted uses are substantially similar and both provide that Taxpayers "retain all rights . . . which are not prohibited by or inconsistent with the Purpose and other provisions" of the Conservation Easements. Id. at 122, 132. The provisions as to reserved rights include further limitations. For example, there is a limited right to prune or cut trees or shrubs to preserve the view or for safety. Id. The right to "construct, maintain, repair and replace a day shelter, storage shed, scenic overlook deck, patio or similar structures" and a wooden boathouse are required to be "in a manner and location which minimizes interference with the scenic and natural resource values of the Property." Id.
The Easements grant to LTC certain rights to "accomplish the purpose of and to assure compliance with" the Easements' stated purpose. These include the right to enter the Property "to monitor compliance . . ., to enforce the terms of this Conservation Easement . . . , to undertake corrective action on the Property in the event of a violation . . . . to prevent any activity on or use of the Property that is or may be inconsistent with the provisions . . . and to require restoration of all areas or features of the Property damaged by such activity or use. . . ." Id. at 123, 133. The easements also grant LTC extensive enforcement rights, including legal action against Taxpayers or any subsequent landowner who violates their terms and the right to be reimbursed for "all reasonable costs incurred as a result of noncompliance," including attorneys fees and restoration costs. Id.
The Commissioner also argues that the Tax Court erred by not considering the building rights of neighboring property owners. This argument similarly fails. There is no statutory or regulatory provision requiring consideration of neighboring property owners' building rights when determining whether a conservation easement is a "qualified conservation contribution." Congress likely recognized the common sense truth that Taxpayers/Donors cannot realistically limit building on property outside of their control. Adoption of the Commissioner's position would unnecessarily preclude conservation donations permitted under the Tax Code. It would also preclude larger conservation benefits achieved by aggregate donations of relatively small conservation easements, each serving their own stated conservation purpose. As discussed above, the terms of the 1992 and 1993 Conservation Easements are consistent with the conservation purpose for which they were created — the protection and preservation of threatened plant and wildlife habitats from the increased development that led to the conservation donation in the first instance.
Finally, the Commissioner's reliance on Turner v. Commissioner, 126 T.C. 299, 2006 WL 1330084 (2006), is misplaced. Although a portion of Taxpayers encumbered property is already protected by Emmet County's 60-foot setback requirement, the Easements in essence double that protection to 120 feet. Unlike the facts in Turner, here there is no evidence in the record that this set-back requirement or building on adjacent properties precludes Taxpayers from satisfying the natural habitat requirements of I.R.C. § 170(h). In Turner, the Tax Court expressly distinguished the decision in Glass because in Turner the issue was whether the taxpayers had satisfied the open space requirement of section 170(h). "Satisfaction of this requirement requires both the preservation of open space and the incurement of a significant public benefit." Id. at 313 (citing I.R.C. § 170(h)(4)(A)(iii)). As the Turner Court observed, these requirements are different than those that had to be satisfied in Glass. Id.
We now address the Commissioner's argument that the Tax Court erred in finding that the Taxpayers' deductions were "exclusively for conservation purposes" as required under I.R.C. § 170(h)(5)(A) and Treas. Reg. § 1.170A14(e), (g). Section 170(h)(5)(A) provides that "[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 Treasury Regulations implementing § 170(h)(5)(A) reference subsections 1.170A-14(g)(1) through (g)(6)(ii) and provide that "a donation must be exclusively for conservation purposes." Treas. Reg. § 1.170A-14(e)(1). They also address inconsistent uses and clarify that the requirement that a donation be exclusively for conservation purposes "is not intended to prohibit uses of the property, . . . if, under the circumstances, those uses do not impair significant conservation interests." Treas. Reg. § 1.170A-14(e)(2). Pre-existing uses of the property are likewise permitted if they do not "conflict with the conservation purposes of the gift." Treas. Reg. § 1.170A-14(e)(3).
Subsections 1.170A-14(g)(1) through (g)(6)(ii), referenced in § 1.170A-14(e)(1), also address inconsistent uses and emphasize the donee's ability to prevent the donor or his successor's use of retained rights in a manner that is inconsistent with the donation's conservation purposes. For example, the donor's retained rights in the encumbered property "must be subject to enforceable restrictions (for example, by recordation in the land records of the jurisdiction in which the property is located) that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation. . . ." Treas. Reg. § 1.170A-14(g)(1). If the donated property interest is subject to a mortgage, the mortgagee must subordinate "its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity. . . ." Treas. Reg. § 1.170A-14(g)(2). If the donor retains any rights in the encumbered property that "may impair the conservation interests," the donor must provide the donee with "documentation sufficient to establish the condition of the property at the time of the gift" and "designed to protect the conservation interests associated with the property, which although protected in perpetuity by the easement, could be adversely affected by the exercise of reserved rights. . . ." Treas. Reg. § 1.170A-14(g)(5)(i). Moreover, "[t]he terms of the donation must provide a right of the donee to enter the property at all reasonable times for the purpose of inspecting the property to determine if there is compliance" and "the terms of the donation must provide a right of the donee to enforce the conservation restrictions by appropriate legal proceedings, including but not limited to, the right to require the restoration of the property to its condition at the time of the donation." Treas. Reg. § 1.170A-14(g)(5)(ii). Finally, if unforeseen consequences make it "impossible or impractical" to continue using the encumbered property for conservation purposes, "the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceedings and all of the donee's proceeds . . . from a subsequent sale or exchange of property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution." Treas. Reg. § 1.170A-14(g)(6)(i).
The 1990 Conservation Easement "covers the approximately 2.64 acres of [Taxpayers'] property consisting of the width of the property at M-119 and 250 feet inland towards Lake Michigan."Glass, 124 T.C. at 267. It "generally restricts the building, construction, development, or removal of trees on the" encumbered property but "allows for the building of (and removal of trees for) a 3,200-square-foot garage/work space/studio and related access road." Id.