Court Opinion

ID: 6318088
Source: CourtListenerOpinion
Date Created: 2022-02-28 20:01:35.34336+00
Date Added: 2024-06-11T09:00:47.129906
License: Public Domain

United States Tax Court

                               T.C. Memo. 2022-12

        CORNING PLACE OHIO, LLC, CORNING PLACE OHIO
          INVESTMENT, LLC, TAX MATTERS PARTNER,
                         Petitioner

                                          v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

                                     —————

Docket No. 12428-20.                                     Filed February 28, 2022.

                                     —————

Michelle M. Hervey, Guenther Karl Fanter, and Lucas L. Witters, for
petitioner.

Anita A. Gill, for respondent.

                          MEMORANDUM OPINION

       LAUBER, Judge: This case involves a charitable contribution de-
duction claimed by Corning Place Ohio, LLC (Corning Place), for a con-
servation easement. The Internal Revenue Service (IRS or respondent)
issued Corning Place a notice of final partnership administrative adjust-
ment (FPAA) disallowing this deduction. Currently before the Court is
respondent’s Motion for Partial Summary Judgment, which raises three
issues: (1) whether the easement deed failed to protect the conservation
purpose in perpetuity, in alleged violation of section 170(h)(5)(A); 1
(2) whether Corning Place’s appraisal and baseline documentation
failed to meet the substantiation requirements of section 170(h)(4)(B)(iii);

        1 Unless otherwise indicated, all statutory references are to the Internal Reve-

nue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation refer-
ences are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and Pro-
cedure.

                                 Served 02/28/22
                                         2

[*2] and (3) whether the deduction should be disallowed because Corn-
ing Place did not timely pay the $500 filing fee specified in sec-
tion 170(f)(13). We will deny respondent’s Motion. 2

                                   Background

       The following facts are derived from the parties’ pleadings, mo-
tion papers, and the exhibits and declarations attached thereto. They
are stated solely for purposes of deciding the Motion for Partial Sum-
mary Judgment and not as findings of fact in this case. See Sundstrand
Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th
Cir. 1994).

      Corning Place is an Ohio limited liability company that at all rel-
evant times has been treated as a partnership for Federal income tax
purposes. Petitioner Corning Place Ohio Investment, LLC, is its tax
matters partner. Corning Place had its principal place of business in
Ohio when the petition was filed.

      The easement at issue is a historic preservation easement associ-
ated with the Garfield Building, an 11-story building at 1965 E. Sixth
Street in Cleveland, Ohio. The building was constructed in 1893 for
Harry A. and James R. Garfield, sons of President James A. Garfield,
and built on land owned by John D. Rockefeller.

       The Garfield Building, built in the Renaissance Revival style, was
designed by Henry Ives Cobb, a noted Chicago architect. It exemplifies
an architectural trend of the late 19th and early 20th centuries, when
architects worked to adapt traditional styles to large-scale commercial
buildings then being erected in major American cities. The Garfield
Building is considered the first steel-frame “skyscraper” east of Cleve-
land’s Public Square, making it an early local example of a significant
technological shift in building construction. It has been listed on the
National Register of Historic Places since 2002. The Secretary of the
Interior has denominated the Garfield Building a “certified historic
structure” that contributes to integrity of the Euclid Avenue Historic
District.

        2 The FPAA also disallowed, for lack of substantiation, a $665,500 deduction

for business expenses, see § 162, and determined various penalties, see §§ 6662(a),
(b)(1)–(3), (e), and (h), 6662A. Those adjustments remain at issue. Respondent has
also reserved the right to advance additional theories to support disallowance of the
charitable contribution deduction.
                                    3

[*3] On January 23, 2015, Corning Place purchased the Garfield
Building and the land it occupies for $6 million. It then began a “certi-
fied rehabilitation” to convert the building from vacant office space to
residential apartments, while maintaining the building’s significant ex-
terior architectural features.

       On May 25, 2016, Corning Place recorded an easement deed in
Cuyahoga County donating a facade easement on the Garfield Building
to the Historic Gateway Neighborhood Corporation (HGNC), a “qualified
organization” within the meaning of section 170(h)(3). According to the
deed, the easement’s purpose is to ensure that the facade of the Garfield
Building

      will be retained and maintained forever in its rehabilitated
      condition and state[,] exclusively for conservation and
      preservation purposes, for the scenic, cultural and historic
      enjoyment of the general public, and to prevent any use or
      change of the Facade or air space directly above or adjacent
      to the Building that is inconsistent with the historical char-
      acter of the Facade.

      The deed recognizes the possibility that the easement might be
extinguished at some future date if fulfillment of the conservation pur-
pose became impossible or impractical. In the event the Garfield Build-
ing (Property) were sold following judicial extinguishment of the ease-
ment, the deed directs that the sale proceeds shall be shared between
Corning Place (Grantor) and HGNC (Grantee) as follows:

      Percentage Interests. In accordance with Treas. Reg.
      § 1.170A-14(g)(6)(ii) for purposes of allocating proceeds
      . . . , Grantor and Grantee stipulate that as of the Record-
      ing Date, Grantor and Grantee are each vested with real
      property interests in the Property and that such interests
      have a stipulated percentage in the fair market value of the
      Property. Grantee’s percentage interest shall be deter-
      mined as the fair market value of this Easement as of the
      Recording Date divided by the fair market value of the
      Property as a whole as of the Recording Date. Grantor’s
      percentage interest shall be the difference between 100%
      and the Grantee’s percentage interest. The values upon
      the Recording Date of this Deed shall be those values used
      to calculate the deduction for federal income tax purposes
      allowable by reason of this grant pursuant to Section
                                     4

[*4]   170(h) of the Code. The percentage interests of Grantor
       and Grantee in the fair market value of the Property shall
       remain constant.

       On September 15, 2017, Corning Place timely filed Form 1065,
U.S. Return of Partnership Income, for its short taxable year beginning
July 7 and ending December 31, 2016. On this return it claimed a char-
itable contribution deduction of $22,601,000 for the conservation ease-
ment. It attached to this return an appraisal of the easement, see
§ 170(h)(4)(B)(iii)(I), photographs of the building’s exterior taken before
rehabilitation, see § 170(h)(4)(B)(iii)(II), and a Baseline Data Report.
The latter report described the historic and architectural significance of
the Garfield Building.

        In a letter dated August 13, 2018, the IRS advised Corning Place
that its 2016 return had been selected for examination. During the ex-
amination the IRS noted that the appraisal accompanying the return
did not include certain “addenda,” listed in the table of contents, that set
forth the appraiser’s qualifications. At the IRS’s request, Corning Place
sent the IRS the “addenda.” On September 14, 2018, Corning Place also
paid, and the IRS accepted, a $500 filing fee that is required when claim-
ing this type of deduction. See § 170(f)(13). Corning Place alleges that
it filed an amended return on November 1, 2018, although the return
does not appear in the record.

      On July 23, 2020, the IRS issued petitioner an FPAA that disal-
lowed in full the claimed charitable contribution deduction. Petitioner
timely petitioned this Court for review. Respondent moved for partial
summary judgment on July 29, 2021, and further briefing ensued.

                                Discussion

A.     Summary Judgment Standard

       The purpose of summary judgment is to expedite litigation and
avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp.
v. Commissioner, 90 T.C. 678, 681 (1988). We may grant summary judg-
ment or partial summary judgment when there is no genuine dispute as
to any material fact and a decision may be rendered as a matter of law.
Rule 121(b); Sundstrand Corp., 98 T.C. at 520. Where the moving party
properly makes and supports a motion for summary judgment, “an ad-
verse party may not rest upon the mere allegations or denials of such
party’s pleading” but must set forth specific facts, by affidavit or other-
wise, showing that there is a genuine dispute for trial. Rule 121(d).
                                     5

[*5] B.      “Protected in Perpetuity” Requirement

       Section 170 allows a deduction for charitable contributions made
in the taxable year. Deductions for donations of partial interests in
property are generally prohibited. § 170(f)(3). However, the Code has
exceptions for specific types of partial interests, one of which is a “qual-
ified conservation contribution.” § 170(f)(3)(B)(iii). For the donation of
an easement to be a “qualified conservation contribution,” the conserva-
tion purpose must be “protected in perpetuity.” § 170(h)(5)(A).

       The regulations set forth detailed rules for determining whether
this “protected in perpetuity” requirement is met. Key to our analysis
here are the rules governing the mandatory division of proceeds in the
event the property is sold following a judicial extinguishment of the
easement. See Treas. Reg. § 1.170A-14(g)(6).

       These regulations recognize that “a subsequent unexpected
change in the conditions surrounding the property . . . can make impos-
sible or impractical the continued use of the property for conservation
purposes.” Id. subdiv. (i). Despite that possibility, “the conservation
purpose can nonetheless be treated as protected in perpetuity if the re-
strictions are extinguished by judicial proceeding” and the easement
deed ensures that the charitable donee, following the sale of the prop-
erty, will receive a proportionate share of the proceeds and use those
proceeds consistently with the conservation purposes underlying the
original gift. Ibid. This requirement is strictly construed; if a donee is
not absolutely entitled to a proportionate share of extinguishment pro-
ceeds, then the conservation purpose of the contribution is not protected
in perpetuity. Carroll v. Commissioner, 146 T.C. 196, 212 (2016).

       The regulations implement this “proportionate share” rule by re-
quiring that the easement deed vest the donee with “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.” Treas. Reg.
§ 1.170A-14(g)(6)(ii). The “proportionate value of the donee’s property
rights,” as thus computed, “shall remain constant.” Ibid. In effect, the
regulation determines an apportionment fraction, calculated as of the
date of the gift, that is multiplied by the sale proceeds to ascertain the
donee’s share. See Coal Prop. Holdings, LLC v. Commissioner, 153 T.C.
126, 137 (2019).
                                   6

[*6] Upon initial inspection the easement deed at issue seems to track
the regulation precisely. It provides that “Grantee’s percentage interest
shall be determined as the fair market value of this Easement as of the
Recording Date divided by the fair market value of the Property as a
whole as of the Recording Date.” But respondent views as problematic
the sentence that appears two lines later: “The values upon the Record-
ing Date of this Deed shall be those values used to calculate the deduc-
tion for [F]ederal income tax purposes allowable by reason of this grant
pursuant to Section 170(h) of the Code.”

       In elaborating his argument respondent relies principally on Car-
roll. The deed there provided that the numerator of the apportionment
fraction—i.e., the value of the donee’s property right—was “the deduc-
tion for federal income tax purposes allowable by reason of this grant,
pursuant to Section 170(h) of the Code.” Carroll, 146 T.C. at 215 (em-
phasis omitted). We held that this formula violated the regulation, not-
ing that, if the IRS denied the deduction for reasons other than valua-
tion—in which case no deduction would be “allowable”—the numerator
of the apportionment fraction “will be zero.” Id. at 217. In the event of
extinguishment the taxpayers could argue that they “never received a
tax deduction” and hence that the donee was entitled to no share, rather
than to a proportionate share, of the sale proceeds. Id. at 218. Such an
argument, we found, would be “supported by the literal terms of the
easement, and there is no evidence of a different intent.” Ibid.

       Our resolution of this question turns on the proper interpretation
of the Corning Place easement deed. State law governs this inquiry. See
Hoffman Props. II, LP v. Commissioner, 956 F.3d 832, 834 (6th Cir.
2020). A contract should be “read as a whole and the intent of each part
gathered from a consideration of the whole.” Saunders v. Mortensen,
801 N.E.2d 452, 455 (Ohio 2004). A court applying Ohio contract law
should attempt to “harmonize all the provisions rather than produce
conflict in them.” Lincoln Elec. Co. v. St. Paul Fire & Marine Ins. Co.,
210 F.3d 672, 685 (6th Cir. 2000) (quoting Ottery v. Bland, 536 N.E.2d
651, 654 (Ohio Ct. App. 1987)).

       The extinguishment provision in Carroll was drafted quite differ-
ently from the one here, and we think respondent errs in equating them.
The deed in Carroll defined the numerator as “the deduction . . . allow-
able” for Federal income tax purposes, and we construed this phrase
(consistently with its context) to mean the deduction allowable to the
taxpayer in that case. The deduction allowable to the taxpayer, in other
words, was itself the numerator, and that deduction could be zero.
                                      7

[*7] Here, the deed defines the numerator as “the fair market value of
this easement as of the Recording Date.” It then says that this value
(and the value appearing in the denominator) “shall be those values used
to calculate the deduction . . . allowable . . . pursuant to Section 170(h).”
Grammatically speaking, the “allowable” phrase here does not define
the numerator. It simply specifies the deduction in question—namely,
the deduction that is allowable to taxpayers generally under section
170(h).

       Three other features of the instant deed distinguish this case from
Carroll. The first is the phrase “values used to calculate,” which does
not appear in the Carroll deed. As often happens with the passive voice,
one is forced to ask, “Used by whom?” Respondent appears to contend
that the phrase means “the values used by the IRS or a court to calculate
the deduction ultimately allowed to the taxpayer.” On this reading, the
provision would resemble that in Carroll. But this phrase could also
mean “the values used by the taxpayer to calculate the deduction
claimed on its return.” On that reading the numerator would be very
large and consistent with the regulation.

       We find the latter interpretation more plausible because of a sec-
ond feature of the Corning Place deed, namely, its repeated references
to “the recording date.” As noted earlier, the deed initially says that the
“Grantee’s percentage interest shall be determined as the fair market
value of this Easement as of the Recording Date divided by the fair mar-
ket value of the Property as a whole as of the Recording Date.” This
phrase appears again in the sentence respondent views as problematic:
“The values upon the Recording Date of this Deed shall be those values
used to calculate the deduction . . . allowable . . . pursuant to Section
170(h).” The only values known “as of the Recording Date” would be the
values that Corning Place intended to use in preparing its tax return,
which would appear on the face of the appraisal.

       A third feature of the instant deed distinguishes this case even
more sharply from Carroll. The deed in Carroll initially defined the nu-
merator as the deduction allowable for Federal income tax purposes. It
then stated that “[t]he parties shall include the ratio of those values [i.e.,
the numerator and the denominator] with the Baseline Documentation
and shall amend such values, if necessary, to reflect any final determi-
nation thereof by the Internal Revenue Service or a court of competent
jurisdiction.” Carroll, 146 T.C. at 215 (emphasis omitted). This final
clause made it absolutely clear that the parties intended the numerator
                                           8

[*8] to be the deduction ultimately allowed to the taxpayer granting the
easement. No such clause appears in the Corning Place deed.

       In sum, applying contract interpretation principles of Ohio law,
we conclude that our holding in Carroll does not apply to the judicial
extinguishment provision involved here. In Carroll we found “no
evidence” that the parties intended to give the donee a proportionate
share whose value was fixed on the date of the grant. Id. at 218. Here
the opposite is true. The Corning Place deed specifies that the donee’s
percentage interest “shall be determined as the fair market value of this
Easement . . . divided by the fair market value of the Property as a
whole.” That formula is fully consistent with the regulation. The deed
makes clear that these values are fixed “as of the Recording Date” and
“shall remain constant.” These values are not contingent on (or
modifiable in the light of) an IRS audit or other future event. And in
referring to the “deduction . . . allowable . . . pursuant to Section 170(h),”
the deed does not define the numerator, as in Carroll, but simply
specifies the deduction that Corning Place will claim on its tax return
using the values determined as of the recording date—namely, the
deduction allowable to taxpayers generally under section 170(h) of the
Code. We will accordingly deny respondent’s Motion for Partial
Summary Judgment on this point. 3

C.      Substantiation Requirements

       Respondent next contends that Corning Place failed to submit
timely all the items required to substantiate the deduction. Section
170(h)(4)(B) establishes special rules for historic preservation facade
easements. A taxpayer claiming a deduction for donating such an ease-
ment must include with its return a “qualified appraisal” as defined in
section 170(f)(11)(E). See § 170(h)(4)(B)(iii)(I). A qualified appraisal

        3 We note a recent opinion of the U.S. Court of Appeals for the Eleventh Circuit
concluding that the Department of the Treasury did not comply with the notice-and-
comment requirements of the Administrative Procedure Act when promulgating the
“judicial extinguishment” regulation. See Hewitt v. Commissioner, 21 F.4th 1336 (11th
Cir. 2021), rev’g and remanding T.C. Memo. 2020-89. It is not entirely clear whether
that opinion invalidated the regulation in its entirety, or only insofar as it is inter-
preted to disallow a charitable contribution deduction where the deed’s judicial extin-
guishment provision includes a carve-out for donor improvements. See id. at 1342–53.
No such carve-out appears in the Corning Place deed. However, to the extent the Elev-
enth Circuit’s reasoning is interpreted broadly, it would offer additional support for
denying respondent’s motion for partial summary judgment. (Absent stipulation to
the contrary, the instant case would be appealable to the U.S. Court of Appeals for the
Sixth Circuit. See § 7482(b)(1).)
                                    9

[*9] must set forth (among other things) the qualifications of the ap-
praiser. Treas. Reg. § 1.170A-13(c)(3)(ii)(F). The taxpayer must also in-
clude with its return photographs of the building’s exterior.
§ 170(h)(4)(B)(iii)(II).

       Respondent contends that Corning Place did not meet these re-
quirements. The appraisal listed, in the table of contents, an addendum
setting forth the appraiser’s qualifications. But that addendum was
missing from the copy of the appraisal submitted with the return and
was supplied to the IRS subsequently. Respondent asserts that photo-
graphs of the Garfield Building, which were submitted with the return,
were inadequate because they were insufficiently detailed, were un-
dated, and neglected to capture the building’s rooftop.

        Viewing the facts and the inferences drawn from them in the light
most favorable to petitioner, see Sundstrand, 98 T.C. at 520, we conclude
that summary judgment on these points should be denied. To be entitled
to a charitable contribution deduction, a taxpayer need not be in literal
compliance with every single reporting requirement. In Bond v. Com-
missioner, 100 T.C. 32, 41 (1993), we held that some of these require-
ments, while “helpful to respondent in the processing and auditing of
returns,” are “directory and not mandatory.” In appropriate circum-
stances, these requirements can be satisfied by substantial rather than
literal compliance. Id. at 42. And even if a taxpayer cannot demonstrate
substantial compliance, he may be able to show that any shortfall was
due to reasonable cause and not willful neglect.                      See
§ 170(f)(11)(A)(ii)(II); Crimi v. Commissioner, T.C. Memo. 2013-51, 105
T.C.M. (CCH) 1330, 1353. Reasonable cause can include relying on the
advice of a professional. See Neonatology Assocs., P.A. v. Commissioner,
115 T.C. 43, 98–99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). We con-
clude that these issues would benefit from further elaboration at trial.
See Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, 116
T.C.M. (CCH) 325, 330.

D.    Filing Fee

       Section 170(f)(13)(A) provides that “[n]o deduction shall be al-
lowed with respect to any contribution [of a facade easement] unless the
taxpayer includes with the return for the taxable year of the contribu-
tion a $500 filing fee.” The statute specifies that such filing fees “shall
be used for the enforcement of the provisions of subsection (h)” dealing
with qualified conservation contributions. § 170(f)(13)(C). Respondent
contends that the deduction must be denied in its entirety because
                                    10

[*10] Corning Place omitted a $500 filing fee when filing its original re-
turn for 2016.

       However, Corning Place did submit the $500 filing fee as soon as
this omission was brought to its attention, and the IRS accepted the fil-
ing fee. Surmising that the fee has now been dedicated to the Commis-
sioner’s section 170(h) enforcement program, petitioner contends that it
substantially complied with the statutory mandate because the statute’s
purpose has been accomplished. Neither this Court nor any other court
has yet considered whether section 170(f)(13) can be satisfied by sub-
stantial compliance.

        Petitioner also contends that the reference in section 170(f)(13) to
“the return” could be interpreted to mean either the original return or
an amended return for the taxable year. Cf. Treas. Reg. § 1.170A-
13(c)(2)(i)(B) (explicitly requiring that appraisal summary be attached
to the tax return “on which the deduction . . . is first claimed”); id. sub-
para. (4)(iv)(G) (same). Petitioner contends that Corning Place submit-
ted its $500 filing fee together with (or in advance of) an amended return
for 2016, allegedly filed on November 1, 2018. But no copy of the
amended return is included in the record. For these reasons we conclude
that this issue, like the reporting issues discussed above, would benefit
from further elaboration at trial.

      To reflect the foregoing,

    An order will be issued denying respondent’s Motion for Partial
Summary Judgment.