Court Opinion

ID: 4339501
Source: CourtListenerOpinion
Date Created: 2018-11-14 04:27:43.806736+00
Date Added: 2024-06-11T10:10:09.693745
License: Public Domain

REPORTS

                                                                                   OF THE

                                                         UNITED STATES TAX COURT

                                             B.V. BELK, JR., AND HARRIET C. BELK, PETITIONERS v.
                                                    COMMISSIONER OF INTERNAL REVENUE,
                                                                 RESPONDENT
                                                        Docket No. 5437–10.                    Filed January 28, 2013.

                                                  In 2004 Ps contributed a conservation easement on 184.627
                                               acres of a golf course to a qualified organization. The con-
                                               servation easement agreement permitted the parties, by
                                               agreement and subject to certain restrictions, to change what
                                               real property was subject to the conservation easement. Ps
                                               claimed a charitable contribution deduction on their 2004 Fed-
                                               eral income tax return. I.R.C. sec. 170 allows a deduction for
                                               a ‘‘qualified conservation contribution’’. A qualified conserva-
                                               tion contribution requires a contribution of a qualified real
                                               property interest. I.R.C. sec. 170(h)(1)(A). 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. sec.
                                               170(h)(2)(C). Held: I.R.C. sec. 170(h)(2)(C) precludes the
                                               deduction because Ps did not donate an interest in real prop-
                                               erty subject to a use restriction granted in perpetuity. The
                                               interest in real property was not subject to a use restriction
                                               granted in perpetuity because the conservation easement
                                               agreement permitted Ps to remove real property from the cov-
                                               erage of the conservation easement.

                                       David M. Wooldridge, Ronald A. Levitt, and Gregory P.
                                      Rhodes, for petitioners.
                                       Scott L. Little, for respondent.
                                        VASQUEZ, Judge: Respondent determined deficiencies of
                                      $806,375, $784,678, and $491,239 in petitioners’ Federal
                                                                                                                                      1

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                                      2                   140 UNITED STATES TAX COURT REPORTS                                      (1)

                                      income tax for 2004, 2005, and 2006, respectively. The issues
                                      for decision after partial settlement 1 are: (1) whether peti-
                                      tioners are entitled to a charitable contribution deduction
                                      with respect to the conservation easement they granted to
                                      Smoky Mountain National Land Trust (SMNLT); 2 and (2) if
                                      petitioners are entitled to a charitable contribution deduc-
                                      tion, the amount of the deduction. 3

                                                                          FINDINGS OF FACT

                                        Some of the facts have been stipulated and are so found.
                                      The stipulation of facts, the stipulation of settled issues, and
                                      the attached exhibits are incorporated herein by this ref-
                                      erence. At the time petitioners filed their petition, they lived
                                      in North Carolina.
                                      Background of the Easement Property
                                        During the mid-1990s petitioners accumulated approxi-
                                      mately 410 acres of land straddling Union County, North
                                      Carolina, and Mecklenburg County, North Carolina. The
                                      land is near Charlotte, North Carolina. In February 1996
                                      petitioners transferred the land to their newly formed com-
                                      pany, Olde Sycamore, LLC (Olde Sycamore). 4 On that prop-
                                      erty Olde Sycamore developed a residential community that
                                      comprised 402 single-family home lots 5 (residential develop-
                                      ment) and built Olde Sycamore Golf Plantation (golf course).

                                           1 In
                                             the stipulation of settled issues, petitioners and respondent agreed
                                      that petitioners are entitled to deductions for cash charitable contributions
                                      of $18,831 and $65,819 for 2004 and 2005, respectively, and a noncash
                                      charitable contribution of $90 for 2004 that was not claimed on their 2004
                                      amended return. On reply brief respondent concedes that Olde Sycamore,
                                      LLC, is entitled to deduct land trust expenses of $113,297 for 2004 and
                                      therefore concedes that petitioners’ share of income from Olde Sycamore,
                                      LLC, for 2004 does not need to be increased.
                                        2 SMNLT has since changed its name to Southwest Regional Land Con-

                                      servancy.
                                        3 The remaining adjustment to petitioners’ itemized deductions is com-

                                      putational and will be resolved by our holding herein.
                                        4 During the years at issue, B.V. Belk, Jr., owned 99% of Olde Sycamore

                                      and Harriet Belk owned 1%.
                                        5 As of December 2004 75% of the lots had been sold and many of those

                                      were developed into single-family residences.

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                                      (1)                               BELK v. COMMISSIONER                                          3

                                      Golf Course
                                        The golf course is an 18-hole golf course on 184.627 acres
                                      of land. The golf course is a semiprivate golf course; it has
                                      members but allows the public to play for a fee. The golf
                                      course was built in the middle of the residential develop-
                                      ment. The entire golf course is not contiguous but lies in
                                      clusters throughout the residential development (e.g., holes
                                      2, 3, and 4 are grouped together, while hole 11 is by itself).
                                      Conservation Easement
                                         In December 2004 Olde Sycamore executed the conserva-
                                      tion easement agreement at issue with SMNLT, a nonprofit
                                      section 501(c)(3) organization. 6 The conservation easement
                                      covers the 184.627 acres of land on which the golf course is
                                      located. On December 30, 2004, the conservation easement
                                      was recorded in both Mecklenburg County, North Carolina,
                                      and Union County, North Carolina.
                                         The conservation easement agreement states that the golf
                                      course possesses ‘‘recreational, natural, scenic, open space,
                                      historic, and educational values’’. 7 Except for the rights
                                      reserved, the conservation easement agreement prohibits the
                                      golf course from being used for residential, commercial,
                                      institutional, industrial, or agricultural purposes. The con-
                                      servation easement agreement specifically provides that a
                                      golf course may be maintained on the easement property.
                                         The conservation easement agreement permits petitioners
                                      and SMNLT to change what property is subject to the con-
                                      servation easement. Specifically, Article III: Reserved Rights
                                      of the conservation easement agreement states the following:
                                             3. Owner may substitute an area of land owned by Owner which is
                                           contiguous to the Conservation Area for an equal or lesser area of land
                                           comprising a portion of the Conservation Area, provided that:
                                             a. In the opinion of Trust:

                                           6 All
                                               section references are to the Internal Revenue Code (Code) in effect
                                      for the years in issue, and all Rule references are to the Tax Court Rules
                                      of Practice and Procedure, unless otherwise indicated.
                                         7 Petitioners have stipulated that the easement property does not possess

                                      any historic value. At trial James Wright, executive director of SMNLT,
                                      explained that the statement regarding the historic values of the easement
                                      property is a blanket statement that covers the conservation values in sec.
                                      170(h).

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                                      4                   140 UNITED STATES TAX COURT REPORTS                                      (1)

                                              (1) the substitute property is of the same or better ecological stability
                                           as that found in the portion of the Conservation Area to be substituted;
                                              (2) the substitution shall have no adverse affect on the conservation
                                           purposes of the Conservation Easement or on any of the significant
                                           environmental features of the Conservation Area described in the Base-
                                           line documentation;
                                              (3) the portion of the Conservation Area to be substituted is selected,
                                           constructed and managed so as to have no adverse impact on the Con-
                                           servation Area as a whole;
                                              (4) the fair market value of Trust’s conservation easement interest in
                                           the substituted property, when subject to this Conservation Easement,
                                           is at least equal to or greater than the fair market value of the Con-
                                           servation Easement portion of the Conservation Area to be substituted;
                                           and
                                              (5) Owner has submitted to Trust sufficient documentation describing
                                           the proposed substitution and how such substitution meets the criteria
                                           set forth in subsections (1)–(4) above of this Section B.3.a. of this Article
                                           III.
                                              b. Trust shall render an opinion upon a proposed substitution request
                                           of the Owner within sixty (60) days of receipt of notice. A favorable
                                           opinion of Trust shall not be unreasonably withheld. However, should
                                           Trust render an unfavorable opinion, Trust shall provide a written
                                           explanation to Owner as to the reasoning and facts used in reaching
                                           such opinion within ten (10) days of the decision. In addition, Trust will
                                           undertake a reasonable good faith effort to help Owner identify property
                                           for such trade in which Trust believes will meet the above requirements
                                           but also accomplish the Owner’s objectives.
                                              c. No such substitution shall be final or binding upon Trust until made
                                           a subject of an amendment [8] to this Conservation Easement acceptable
                                           to and executed by Owner and Trust and recorded in the Register of
                                           Deeds Office of Mecklenburg County and/or Union County. The amend-
                                           ment shall include, among other things, a revised Conservation Ease-
                                           ment Plan or portion thereof showing the portions of the Conservation
                                           Area that are to be removed from the coverage of this Conservation

                                        8 Article VIII: Miscellaneous of the conservation easement agreement

                                      states the following with respect to amendment:
                                           Owner and Trust recognize that circumstances could arise which would
                                           justify the modification of certain of the restrictions contained in this
                                           Conservation Easement. To this end, Trust and the legal owner or own-
                                           ers of the Conservation Area at the time of amendment shall mutually
                                           have the right, in their sole discretion, to agree to amendments to this
                                           Conservation Easement which are not inconsistent with the Conserva-
                                           tion Values or the purposes of this instrument; provided, however, that
                                           Trust shall have no right or power to agree to any amendments hereto
                                           that would result in this Conservation Easement failing to qualify as a
                                           valid conservation agreement under the ‘‘Act,’’ as the same may be here-
                                           after amended, or as a qualified conservation contribution under Section
                                           170(h) of the Internal Revenue Code and applicable regulations.

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                                      (1)                               BELK v. COMMISSIONER                                          5

                                           Easement and the equal or greater area of contiguous land of the Owner
                                           to be made part of the Conservation Area, and thus, subject to the Con-
                                           servation Easement.

                                      Baseline and Monitoring Reports
                                        In connection with the easement biologist Karin Heiman, 9
                                      on behalf of SMNLT, prepared the report ‘‘Olde Sycamore
                                      Golf Plantation Easement Documentation Report Baseline
                                      Natural Areas & Botanical Inventory’’ dated November 2004
                                      (baseline report). The purpose of the baseline report was to
                                      establish the condition of the property at the time of the con-
                                      servation easement. The baseline report describes the prop-
                                      erty subject to the easement as ‘‘maintained golf course
                                      land’’. In addition to the baseline report Ms. Heiman pre-
                                      pared annual monitoring reports for SMNLT to verify the
                                      condition of the golf course and that the conservation ease-
                                      ment was not being violated. Each year Ms. Heiman found
                                      Olde Sycamore to be in compliance with the conservation
                                      easement.
                                      Petitioners’ Appraisal
                                        On behalf of petitioners and Olde Sycamore, F. Bruce
                                      Sauter prepared the report ‘‘Complete Appraisal Self-Con-
                                      tained Report of 184.627-Acre Conservation Easement’’ dated
                                      December 20, 2004. In the appraisal Mr. Sauter determined
                                      the value of the golf course before the easement to be
                                      $10,801,000. Mr. Sauter reached this amount after con-
                                      cluding the highest and best use of the property was a
                                      medium- and high-density residential development. After the
                                      easement Mr. Sauter determined the highest and best use of
                                      the property was use as a golf course and that its value was
                                      $277,000.
                                      Tax Return
                                         Olde Sycamore claimed a $10,524,000 charitable contribu-
                                      tion deduction on its 2004 Form 1065, U.S. Return of Part-
                                      nership Income, for its contribution of the conservation ease-
                                      ment to SMNLT. Petitioners attached Form 8283, Noncash
                                      Charitable Contributions, to Olde Sycamore’s partnership
                                        9 Ms. Heiman is an independent contractor and does not work exclu-

                                      sively for SMNLT.

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                                      6                   140 UNITED STATES TAX COURT REPORTS                                      (1)

                                      return. The Form 8283 listed the appraised fair market value
                                      of the conservation easement as $10,524,000.
                                         Petitioners claimed a $10,524,000 charitable contribution
                                      deduction on their Schedule A, Itemized Deductions, for
                                      2004. 10 Petitioners deducted $2,291,708 in 2004 and carried
                                      forward the remainder to 2005 and 2006.
                                         By a notice of deficiency, the Internal Revenue Service
                                      (IRS) disallowed the charitable contribution deduction (and
                                      made other adjustments) and determined deficiencies in peti-
                                      tioners’ 2004, 2005, and 2006 Federal income tax.
                                                                                  OPINION

                                      I. Burden of Proof
                                        The Commissioner’s determinations in the notice of defi-
                                      ciency are presumed correct, and taxpayers bear the burden
                                      of proving that the Commissioner’s determinations are incor-
                                      rect. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
                                      (1933). Deductions are a matter of legislative grace, and the
                                      taxpayer bears the burden of proving his entitlement to the
                                      claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commis-
                                      sioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
                                      Helvering, 292 U.S. 435, 440 (1934).
                                      II. Qualified Conservation Contribution
                                           A. Overview
                                         Taxpayers may deduct the values of any charitable con-
                                      tributions made during the tax year pursuant to section
                                      170(a)(1). Generally, taxpayers are not entitled to deduct
                                      gifts of property that consist of less than the taxpayers’
                                      entire interest in that property. Sec. 170(f)(3). However, tax-
                                      payers are permitted to deduct the value of a contribution of
                                      a partial interest in property that constitutes a ‘‘qualified
                                      conservation contribution’’ as defined in section 170(h)(1).
                                           10 Olde
                                                Sycamore’s charitable contribution passed through to petitioners
                                      under sec. 702(a)(4). The Court assumes that respondent determined Olde
                                      Sycamore was a small partnership within the meaning of the small part-
                                      nership exception, see sec. 6231(a)(1)(B)(i), and that it was not subject to
                                      the unified partnership audit and litigation procedures of the Tax Equity
                                      and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97–248, sec.
                                      402(a), 96 Stat. at 648. Even if that determination were erroneous, the
                                      TEFRA provisions would not apply. See sec. 6231(g)(2).

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                                      (1)                               BELK v. COMMISSIONER                                          7

                                      Sec. 170(f)(3)(B)(iii). The policy for allowing this exception
                                      and the reasons for limiting the exception are discussed in
                                      the legislative history underlying section 170(h):
                                             The committee believes that the preservation of our country’s natural
                                           resources and cultural heritage is important, and the committee recog-
                                           nizes that conservation easements now play an important role in
                                           preservation efforts. The committee also recognizes that it is not in the
                                           country’s best interest to restrict or prohibit the development of all land
                                           areas and existing structures. Therefore, the committee believes that
                                           provisions allowing deductions for conservation easements should be
                                           directed at the preservation of unique or otherwise significant land areas
                                           or structures. * * * [S. Rept. No. 96–1007, at 9 (1980), 1980–2 C.B. 599,
                                           603.]

                                        For a contribution to constitute a qualified conservation
                                      contribution, the taxpayer must show that the contribution is
                                      (1) of a ‘‘qualified real property interest’’ (2) to a ‘‘qualified
                                      organization’’ (3) ‘‘exclusively for conservation purposes.’’ Sec.
                                      170(h)(1). Respondent argues that petitioners are not entitled
                                      to a deduction because the contribution was not of a qualified

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                                      8                   140 UNITED STATES TAX COURT REPORTS                                      (1)

                                      real property interest 11 and it was not exclusively for con-
                                      servation purposes. 12
                                           B. Qualified Real Property Interest
                                         The Court has not previously addressed what constitutes a
                                      ‘‘qualified real property interest’’. In the prior cases involving
                                      conservation easements either the IRS has conceded the
                                         11 On brief petitioners state that it is uncontested whether the ‘‘Ease-

                                      ment property was a qualified real property interest’’. However, when list-
                                      ing what issues are contested petitioners state: ‘‘The donation was ‘exclu-
                                      sively’ for conservation purposes, including being granted in perpetuity.
                                      (See Section 170(h)(2)(C)) (perpetuity contested)’’. Thus, even though peti-
                                      tioners state that it is uncontested whether there is a qualified real prop-
                                      erty interest, they acknowledge that it is contested whether sec.
                                      170(h)(2)(C) is satisfied. Petitioners’ contribution must meet all the re-
                                      quirements of sec. 170(h)(2)(C) in order to be a qualified real property in-
                                      terest.
                                         Moreover, we find this issue to be contested because we have found noth-
                                      ing in the record that establishes respondent conceded it. In the notice of
                                      deficiency, the Internal Revenue Service disallowed petitioners’ deduction
                                      for the conservation easement because ‘‘[i]t has not been established that
                                      all the requirements of IRC Section 170 and the corresponding Treasury
                                      Regulations have been satisfied to enable you to deduct the noncash chari-
                                      table contribution of a qualified conservation contribution.’’
                                         In his pretrial memorandum and his original brief respondent argues
                                      that petitioners failed to satisfy the perpetuity requirement of sec.
                                      170(h)(2)(C). On brief respondent states: ‘‘Petitioners are not entitled to a
                                      deduction with respect to the donation of the easement, because petitioners
                                      have failed to establish that the easement protects the subject property in
                                      perpetuity.’’ Respondent combined his sec. 170(h)(2)(C) argument with his
                                      argument that petitioners also failed to satisfy the perpetuity requirement
                                      of sec. 170(h)(5) (relating to the requirement that the conservation purpose
                                      of the conservation easement be protected in perpetuity).
                                         Furthermore, on reply brief respondent objected to petitioners’ proposed
                                      findings of fact regarding the property being protected in perpetuity. For
                                      example, petitioners’ proposed finding of fact No. 61 states: ‘‘Under the
                                      conservation Easement Deed, Olde Sycamore granted to SMNLT a restric-
                                      tion over the Conservation Easement Property in perpetuity. The Con-
                                      servation Easement Deed gives SMNLT a real property right and interest,
                                      which was immediately vested in SMNLT.’’ Respondent objected ‘‘to the ex-
                                      tent petitioners contend that SMNLT was granted an interest in the sub-
                                      ject property in perpetuity, because it is a conclusory statement, inappro-
                                      priate for inclusion in a finding of fact, and is not supported by the record.’’
                                         12 Because we ultimately hold that petitioners have not satisfied the first

                                      requirement, there is no need to consider the third requirement or the
                                      easement’s value.

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                                      (1)                               BELK v. COMMISSIONER                                          9

                                      issue 13 or the Court has disallowed the deduction on other
                                      grounds. 14
                                        Section 170(h)(2) defines ‘‘qualified real property interest’’
                                      as:
                                           [A]ny of the following interests in real property:
                                               (A) the entire interest of the donor other than a qualified mineral
                                             interest,
                                               (B) a remainder interest, and
                                               (C) a restriction (granted in perpetuity) on the use which may be
                                             made of the real property.

                                         The regulations provide the following with respect to sec-
                                      tion 170(h)(2)(C):
                                           A ‘‘perpetual conservation restriction’’ is a qualified real property
                                           interest. A ‘‘perpetual conservation restriction’’ is a restriction granted in
                                           perpetuity on the use which may be made of real property—including,
                                           an easement or other interest in real property that under state law has
                                           attributes similar to an easement (e.g., a restrictive covenant or equi-
                                           table servitude). * * * [Sec. 1.170A–14(b)(2), Income Tax Regs.]

                                        Petitioners did not donate their entire interest in real
                                      property or a remainder interest in real property. Therefore,
                                      petitioners must satisfy section 170(h)(2)(C), which
                                      respondent argues they have not. Respondent argues that
                                         13 See, e.g., Mitchell v. Commissioner, 138 T.C. 324, 329 (2012) (IRS con-

                                      cession that there was a contribution of a qualified real property interest);
                                      Glass v. Commissioner, 124 T.C. 258, 280 (2005) (IRS concession that the
                                      conservation easements were qualified real property interests), aff ’d, 471
F.3d 698 (6th Cir. 2006); Butler v. Commissioner, T.C. Memo. 2012–72
                                      (noting parties’ agreement that the contributions were of qualified real
                                      property interests); Carpenter v. Commissioner, T.C. Memo. 2012–1 (IRS
                                      concession that there was a contribution of a qualified real property inter-
                                      est).
                                         14 See, e.g., Turner v. Commissioner, 126 T.C. 299, 312 n.9 (2006) (dis-

                                      allowing the deduction because it was not exclusively for conservation pur-
                                      poses and not determining whether there was a qualified real property in-
                                      terest); Wall v. Commissioner, T.C. Memo. 2012–169 (disallowing the de-
                                      duction because it was not exclusively for conservation purposes and not
                                      determining whether there was a qualified real property interest); 1982
                                      East, LLC v. Commissioner, T.C. Memo. 2011–84 (disallowing the deduc-
                                      tion because it was not exclusively for conservation purposes and not de-
                                      termining whether there was a qualified real property interest); Satullo v.
                                      Commissioner, T.C. Memo. 1993–614 (disallowing the deduction because it
                                      was not exclusively for conservation purposes and assuming without decid-
                                      ing that the easement was a qualified real property interest), aff ’d without
                                      published opinion, 67 F.3d 314 (11th Cir. 1995).

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                                      10                  140 UNITED STATES TAX COURT REPORTS                                      (1)

                                      the interest in real property petitioners donated is not sub-
                                      ject to a use restriction granted in perpetuity because the
                                      conservation easement agreement permits substitutions. As
                                      discussed supra p. 3, under the terms of the conservation
                                      easement, if SMNLT approves and subject to certain restric-
                                      tions, petitioners can change what property is subject to the
                                      conservation easement. Respondent characterizes petitioners’
                                      easement as a ‘‘floating easement’’ and argues that a con-
                                      servation easement that does not relate to a specific piece of
                                      property cannot be a qualified conservation contribution.
                                         The most basic tenet of statutory construction is to begin
                                      with the language of the statute itself. United States v. Ron
                                      Pair Enters., Inc., 489 U.S. 235, 241 (1989). The statutory
                                      text is the most persuasive evidence of Congress’ intent.
                                      United States v. Am. Trucking Ass’ns, Inc., 310 U.S. 534,
                                      542–543 (1940). When the plain language of the statute is
                                      clear and unambiguous, that is where the inquiry should
                                      end. Ron Pair Enters., Inc., 489 U.S. at 241. Additionally, it
                                      is a well-settled rule of statutory construction that deduc-
                                      tions should be narrowly construed. INDOPCO, Inc. v.
                                      Commissioner, 503 U.S. at 84.
                                         As discussed above, in order for a donation to constitute a
                                      qualified conservation contribution, section 170(h)(2)(C)
                                      requires that the contribution be an interest in real property
                                      that is subject to a use restriction granted in perpetuity. The
                                      real property in which petitioners have donated an interest
                                      is the golf course. 15 Petitioners agreed to restrict their use
                                      of the golf course; specifically, petitioners agreed not to
                                      develop the golf course. However, because the conservation
                                      easement agreement permits petitioners to change what
                                      property is subject to the conservation easement, the use
                                      restriction was not granted in perpetuity. 16 Petitioners did
                                        15 Petitioners claimed a $10.5 million deduction for restricting their use

                                      of the golf course. Petitioners determined the value of the deduction by
                                      comparing ‘‘the market values of the 184.627-acres immediately before and
                                      after the establishment of the easement’’. Petitioners’ appraisal did not ad-
                                      dress their ability to substitute land.
                                        16 We note that petitioners’ right to change the real property subject to

                                      the conservation easement is not limited to circumstances where continued
                                      use of the golf course has become impossible or impractical. Sec. 1.170A–
                                      14(c)(2), Income Tax Regs., provides that
                                           [w]hen a later unexpected change in the conditions surrounding the

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                                      (1)                               BELK v. COMMISSIONER                                         11

                                      not agree never to develop the golf course. Under the terms
                                      of the conservation easement, petitioners are able to remove
                                      portions of the golf course and replace them with property
                                      currently not subject to the conservation easement. Thus,
                                      petitioners have not donated an interest in real property
                                      which is subject to a use restriction granted in perpetuity. To
                                      conclude otherwise would permit petitioners a deduction for
                                      agreeing not to develop the golf course when the golf course
                                      can be developed by substituting the property subject to the
                                      conservation easement.
                                        Respondent combined his argument that the contribution
                                      was not a qualified real property interest with his argument
                                      that the conservation purpose was not protected in per-
                                      petuity. 17 As the following excerpt demonstrates, the Court
                                      has also combined its discussion of these requirements in
                                      prior cases: 18
                                              A ‘‘qualified real property interest’’ must consist of the donor’s entire
                                           interest in real property (other than a qualified mineral interest) or con-
                                           sist of a remainder interest, or of a restriction granted in perpetuity con-
                                           cerning way(s) the real property may be used. Sec. 170(h)(2). A restric-
                                           tion granted in perpetuity on the use of the property must be based upon
                                           legally enforceable restrictions (such as by recording the deed) that will
                                           prevent uses of the retained interest in the property that are incon-
                                           sistent with the conservation purpose of the contribution. See sec.

                                           property that is the subject of a donation under paragraphs (b)(1), (2),
                                           or (3) [relating to qualified real property interests] of this section makes
                                           impossible or impractical the continued use of the property for conserva-
                                           tion purposes, the requirement of this paragraph will be met if the prop-
                                           erty is sold or exchanged and any proceeds are used by the donee organi-
                                           zation in a manner consistent with the conservation purposes of the
                                           original contribution. * * *
                                      While the regulations permit property to be substituted when continued
                                      use is impossible or impractical, there is nothing in the regulations to sug-
                                      gest that taxpayers may substitute property for other reasons. The con-
                                      servation easement agreement in this case does not limit substitutions to
                                      circumstances where use is impossible or impractical but allows petitioners
                                      to substitute property for any reason.
                                         17 It appears petitioners may have also combined the perpetuity require-

                                      ments. See supra note 11 (petitioners’ citing sec. 170(h)(2)(C) when identi-
                                      fying whether conservation purpose protected in perpetuity as a contested
                                      issue).
                                         18 However, the Court did not address what constitutes a qualified real

                                      property interest in these cases. See supra p. 8.

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                                      12                  140 UNITED STATES TAX COURT REPORTS                                      (1)

                                           1.170A–14(g)(1), Income Tax Regs. [Turner v. Commissioner, 126 T.C.
299, 311 (2006).]

                                      See also Glass v. Commissioner, 124 T.C. 258, 276–277 (2005)
                                      (suggesting that section 1.170A–14(g)(1), Income Tax Regs.,
                                      may be used to interpret section 170(h)(2)(C)), aff ’d, 471 F.3d
698 (6th Cir. 2006); Simmons v. Commissioner, T.C. Memo.
                                      2009–208 (using language similar to that in Turner), aff ’d,
                                      646 F.3d 6 (D.C. Cir. 2011). Both section 170(h)(2)(C) and (5)
                                      require perpetuity; however, they are separate and distinct
                                      requirements. Section 170(h)(2)(C) requires that the interest
                                      in real property donated by taxpayers be subject to a use
                                      restriction in perpetuity, whereas section 170(h)(5) requires
                                      that the conservation purpose of the conservation easement
                                      be protected in perpetuity. 19 Thus, section 170(h)(2)(C)
                                      relates to the real property interest donated and section
                                      170(h)(5) relates to the conservation purpose.
                                         Petitioners argue it does not matter that the conservation
                                      easement agreement permits substitution because it permits
                                      only substitutions that will not harm the conservation pur-
                                      poses of the conservation easement. However, as discussed
                                      above, the section 170(h)(5) requirement that the conserva-
                                      tion purpose be protected in perpetuity is separate and dis-
                                      tinct from the section 170(h)(2)(C) requirement that there be
                                      real property subject to a use restriction in perpetuity. Satis-
                                      fying section 170(h)(5) does not necessarily affect whether
                                      there is a qualified real property interest. 20 Section
                                      170(h)(2), as well as the corresponding regulations and the
                                      legislative history, when defining qualified real property
                                      interest does not mention conservation purpose. There is
                                      nothing to suggest that section 170(h)(2)(C) should be read to
                                      mean that the restriction granted on the use which may be
                                      made of the real property does not need to be in perpetuity
                                      if the conservation purpose is protected.
                                           19 Sec.
                                                1.170A–14(g), Income Tax Regs., cited by Turner, relates to sec.
                                      170(h)(5). See Mitchell v. Commissioner, 138 T.C. 329 (‘‘Section
                                      170(h)(5)(A) provides that ‘A contribution shall not be treated as exclu-
                                      sively for conservation purposes unless the conservation purpose is pro-
                                      tected in perpetuity.’ Section 1.170A–14(g), Income Tax Regs., elaborates
                                      on the enforceability-in-perpetuity requirement.’’).
                                        20 Similarly, whether a conservation purpose is protected in perpetuity

                                      would not affect whether SMNLT qualified as a ‘‘qualified organization’’
                                      under sec. 170(h)(3).

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                                      (1)                               BELK v. COMMISSIONER                                         13

                                         We find it is immaterial that SMNLT must approve the
                                      substitutions. There is nothing in the Code, the regulations,
                                      or the legislative history to suggest that section 170(h)(2)(C)
                                      is to be read to require that the interest in property donated
                                      be a restriction on the use of the real property granted in
                                      perpetuity unless the parties agree otherwise. The require-
                                      ments of section 170(h) apply even if taxpayers and qualified
                                      organizations wish to agree otherwise.
                                         We also find it immaterial that SMNLT cannot agree to an
                                      amendment that would result in the conservation easement’s
                                      failing to qualify as a qualified conservation contribution
                                      under section 170(h). The substitution provision states that
                                      a substitution is not final or binding on SMNLT until the
                                      conservation easement agreement is amended to reflect the
                                      substitution. We reject the argument that, because substi-
                                      tution is effected by amendment and the conservation ease-
                                      ment agreement seemingly prohibits amendments not per-
                                      mitted by section 170(h), the conservation easement does not
                                      permit substitutions.
                                         Here we have a conflict between a specific provision and a
                                      general provision in the conservation easement agreement.
                                      Petitioners’ right to substitute property is a specific provi-
                                      sion; it is one of the enumerated rights reserved in ‘‘Article
                                      III: Reserved Rights’’, and it contains several paragraphs
                                      with specific, detailed language. The amendment provision is
                                      a general provision; it is included in ‘‘Article VIII: Miscella-
                                      neous’’, and contains only one paragraph with broad, general
                                      language. Thus, we have a specific contract provision stating
                                      that substitution is permitted and a general provision which
                                      seemingly says substitution cannot be permitted because it is
                                      not permitted under section 170(h). It is a rule of law that
                                      ‘‘when general terms and specific statements are included in
                                      the same contract and there is a conflict, the general terms
                                      should give way to the specifics.’’ Wood-Hopkins Contracting
                                      Co. v. N.C. State Port Auth., 202 S.E.2d 473, 476 (N.C.
                                      1974); 21 see also Janow v. Commissioner, T.C. Memo. 1996–
                                      289 (‘‘There is no dispute with respect to the proposition that
                                      when two contract provisions are in apparent conflict, the
                                      specific provision overrides the more general provision.’’),
                                        21 We apply State law in interpreting the provisions of a contract. Peco

                                      Foods, Inc. v. Commissioner, T.C. Memo. 2012–18.

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                                      14                  140 UNITED STATES TAX COURT REPORTS                                      (1)

                                      aff ’d without published opinion, 172 F.3d 38 (2d Cir. 1996).
                                      Therefore, the general amendment provision must give way
                                      to the specific provision permitting substitution.
                                         Furthermore, in interpreting a contract, the parties’
                                      intention controls. Jones v. Palace Realty Co., 37 S.E.2d 906,
                                      907 (N.C. 1946) (‘‘The heart of a contract is the intention of
                                      the parties.’’); Bueltel v. Lumber Mut. Ins. Co., 518 S.E.2d
205, 209 (N.C. Ct. App. 1999) (‘‘The court is to interpret a
                                      contract according to the intent of the parties to the contract,
                                      unless such intent is contrary to law.’’). The intention of the
                                      parties ‘‘is to be gathered from the entire instrument,
                                      viewing it from its four corners.’’ Jones, 37 S.E.2d at 907. We
                                      find petitioners and SMNLT did not intend for the amend-
                                      ment provision to prohibit substitutions. They specifically
                                      included the right to substitute real property as one of the
                                      reserved rights and placed specific requirements on SMNLT
                                      with respect to substitution. Particularly, SMNLT cannot
                                      unreasonably withhold its approval of a substitution, and it
                                      must make a reasonable good-faith effort to help petitioners
                                      identify property that is appropriate for substitution and
                                      accomplishes their objectives. It seems unlikely that peti-
                                      tioners and SMNLT would have placed such requirements on
                                      SMNLT if they thought the amendment provision prohibited
                                      substitutions. Furthermore, the detailed substitution provi-
                                      sion does not limit the reasons for substitutions, 22 and there
                                      is nothing in it to suggest that petitioners and SMNLT
                                      intended substitutions to be limited to circumstances where
                                      continued use is impossible or impractical. 23 We find peti-
                                      tioners and SMNLT did not intend for the conservation ease-
                                      ment agreement to prohibit substitutions or to limit substi-
                                      tutions to where continued use is impossible or impractical.
                                      To find otherwise would render the substitution provision
                                      meaningless, and such a result is contrary to the well-estab-
                                      lished rule of construction that ‘‘each and every part of the
                                      contract must be given effect, if this can be done by any fair
                                      or reasonable interpretation’’. Davis v. Frazier, 64 S.E. 200,

                                        22 Not only does the substitution provision not limit the reasons for sub-

                                      stitutions; it also requires that SMNLT help petitioners identify property
                                      that meets ‘‘the Owner’s objectives’’, whatever those objectives may be.
                                        23 See supra note 16.

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                                      (1)                               BELK v. COMMISSIONER                                         15

                                      202 (N.C. 1909). Thus, the conservation easement agreement
                                      permits substitution.
                                        Petitioners have not satisfied section 170(h)(2)(C) and,
                                      therefore, are not entitled to a deduction for a qualified con-
                                      servation contribution. We have considered all of petitioners’
                                      contentions, arguments, requests, and statements. To the
                                      extent not discussed herein, we conclude that they are
                                      meritless, moot, or irrelevant.
                                        To reflect the foregoing,
                                                                           Decision will be entered under Rule 155.

                                                                                f

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