Lockner v. Pierce County

Supreme Court of Washington, No. 94643-4, April 19, 2018: Washington’s recreational use immunity not limited to sole use.

This decision clarifies that the scope of Washington’s recreational use immunity statute, RCW 4.24.210, does not require that the property in question is open to the public for “solely” recreational use, and that when the statute applies to a property it immunizes landowners from negligence actions as well as “premises liability.”

Washington’s recreational immunity statute reads in part:

“[e]xcept as otherwise provided . . . any public or private landowners, hydroelectric project owners, or others in lawful possession and control of any lands whether designated resource, rural, or urban, or water areas or channels and lands adjacent to such areas or channels, who allow members of the public to use them for the purposes of outdoor recreation . . . without charging a fee of any kind therefor, shall not be liable for unintentional injuries to such users.” RCW 4.24.210 (emphasis added).

Lockner was injured when she fell from her bicycle on a trail maintained by Pierce County (County). Lockner claimed her injury resulted from actions of a county employee or contractor and she sued the County for negligence. The trial court found that the statute bars her claim because the injury happened on land open to the public for recreational use without a fee, and dismissed Lockner’s claim on summary judgment. Lockner appealed and the Court of Appeals reversed, holding that a prior Washington Supreme Court decision, Camicia v. Howard S. Wright Constr. Co., 179 Wn.2d 684, 687, 317 P.3d 987 (2014), created the precedent that the statute only applies to properties open to the public for “solely” recreational use, and summary judgment shouldn’t be granted when a question of fact remained as to whether the trail was solely for recreational use.

The court said that the appeals court misread Camicia: the statute clearly and unambiguously mentions only outdoor recreation and does not say that land must be open for “only” recreational purposes. Thus, the court was able to find that the land met the test to qualify for immunity under RCW 4.24.210; the was (1) open to members of the public (2) for recreational purposes and that (3) no fee was charged.

The Court of Appeals had also held that the statute immunizes landowners from negligence actions. Lockner appealed this part of their decision, arguing that recreational immunity applies only to premises liability actions.  The court rejected Lockner’s appeal, saying, “the plain language of RCW 4.24.210 does not support this narrow reading. … To hold otherwise would undermine the legislative purpose of recreational use immunity as it would do little to limit a landowner’s liability for the ‘acts or omissions’ of public users. RCW 4.24.200.”

Decision available at http://www.courts.wa.gov/opinions/pdf/946434.pdf.

Wendell Falls Development, LLC v. Commissioner

Tax Court, 2018 T.C. Memo 45, April 4, 2018: Easement increases value of taxpayer’s land; no deduction allowed.

The court decided that donation of a conservation easement restricting 125 acres within a proposed 1,280 acre residential development created a substantial benefit to the taxpayer in the value or utility of the taxpayer’s remaining land, and such benefit was not merely incidental to a charitable purpose. Accordingly, the court denied any federal tax deduction to the donor. The court also decided that even if the donation had not created a substantial benefit to the taxpayer, the conservation easement should have been appraised at zero value and therefore no deduction would be allowed anyway. The court decided against imposing any penalty for a tax underpayment.

The taxpayer, Wendell Falls Development, LLC (Wendell), bought the unimproved 1,280 acres and planned to subdivide them into a master-planned community (PUD) with residential areas, commercial spaces, an elementary school, and a park. The park would be on the 125 acres. The PUD was approved by the town, which also agreed to buy the 125 acres subject to a conservation easement. The PUD as approved did not affect the 125 acres because it was outside the boundaries of the town and therefore not subject to the town’s zoning ordinances. Wendell Falls then granted a conservation easement to a land trust on the 125 acres before conveying the restricted land to the town.

Wendell obtained an appraisal of the 125 acres at $3,020,000.

Although the Internal Revenue Code, Section 170(a), provides for a tax deduction for a charitable contribution of a “qualified conservation contribution,” including contribution of a conservation easement that meets various tests, the U.S. Supreme Court has ruled that no deduction is allowed for a charitable contribution if the taxpayer expects a substantial benefit from the contribution. United States v. Am. Bar Endowment, 477 U.S. 105 (1986). The Tax Court has ruled that a substantial benefit may exist when the contribution creates a direct or indirect benefit to the taxpayer “in the form of enhancement in the value or utility of the taxpayer’s remaining land or otherwise to benefit the taxpayer” (Elrod v. Commissioner, 87 T.C. 1046, 1075 (1986); Sutton v. Commissioner, 57 T.C. 239, 243 (1971)) that is not merely incidental to a charitable purpose (McGrady v. Commissioner, T.C. Memo. 2016-233; McLennan v. United States, 24 Cl. Ct. 102, 107 (1991), aff’d, 994 F.2d 839 (Fed. Cir. 1993)).

The court in this case agreed with IRS that Wendell Falls got a substantial benefit from the conservation easement because creating the amenity of a public park on the 125 acres increased the value of the rest of the adjoining 1,280 acres owned by Wendell Falls. This substantial benefited negated the charitable purpose of the contribution, so the court ruled no deduction was allowable.

The court also ruled that even without the disallowance due to substantial benefit, no deduction was available because the conservation easement had zero monetary value. The value of a qualified conservation easement is equal to the value of the restricted real estate before grant of the easement minus the value of the real estate subject to the easement, valued at the real estate’s highest and best. Income Tax Regs., sec. 1.170A-14(h)(3)(i) and (ii).  The court, citing the plan developed by the taxpayer, found the best use of the 125 acres was as parkland within a master-planned community. Accordingly, the conservation easement “did not diminish the value of the 125 acres because it did not prevent it [sic] from being put to its best use.”

The court declined to impose any penalty on Wendell. The IRS sought a 20% penalty under code section 6662(a) for either negligence or a substantial understatement of income tax. Noting that the 20% penalty is not applicable when there was reasonable cause for the reporting of a deduction and the deduction was reported in good faith (Code sec. 6664(c)(1)), the court reasoned that the substantial benefit determination is something for which the court has broad discretion, therefore the taxpayer’s “failure to anticipate the adverse resolution” of that determination does not show that the taxpayer “did not make sufficient effort to assess the proper tax treatment of the easement,” and therefore no penalty should be imposed.

Decision available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11607.

Schwartz v. Chester County Agricultural Land Preservation Board

Commonwealth Court of Pennsylvania, Nos. 183 C.D. 2017, 226 C.D. 2017, March 2, 2018: Third-party can’t enforce easement or appeal county interpretation of easement.

This case concerns whether an industrial waste collection and processing facility comes within the definition of “agricultural production” in a Pennsylvania conservation easement and whether a third-party has rights to enforce the conservation easement.

The conservation easement (Easement) burdens a farm (Property) and was granted to the town and the Chester County Agricultural Land Preservation Board (Board) pursuant to a program to limit development and use of agricultural land for nonagricultural purposes. Arborganic Acres, LLP (Arborganic), after informing the Board of its plans, began operating an organic composting business on a portion of Easement land. (“The business accepts manure, yard waste, and some food processing waste from the surrounding area to create organic compost which is then used on the owner’s farm and other local properties.”)

Sally Schwartz (Appellant) submitted a “Formal Complaint” to the Board claiming that the operation is an industrial waste collection and processing facility in violation of the terms of the Easement and asking the Board to take action to enforce the Easement and bring the Property into compliance. Following an inspection visit and a meeting to allow members of the public to voice their concerns regarding Arborganic’s operations at the Property, the Board concluded, in a letter to the Appellant and Arborganic that “[t]he operations taking place upon the [Property] appear to be consistent with the terms of the [Easement] in place.”

Schwartz asked the county Court of Common Pleas (Trial Court) to review the Board’s action. The trial court denied the Board’s motion to dismiss the action but ruled that the composting business did not violate the Easement. The trial court reasoned that it is impossible to have agricultural production without normal farming operations and so the Easement necessarily permits normal farming operations, including composting.

Both sides appealed. The appellate court leaves in place the trial court’s interpretation of the Easement but also grants the Board’s motion to dismiss the petition for review of the Board’s decision not to take action against Arborganic.

The court agreed with the trial court that the composting use comes within the “ambit of `normal farming operations,’” as that term is defined by the Pennsylvania Agricultural Area Security Law (AASL; 3 P.S. §§ 901-915). The court also approved the trial court’s reliance

in part on the purpose identified in the Department of Agriculture Regulations in the Pennsylvania Code for this county easement purchase program, which includes to “protect normal farming operations in agricultural security areas from incompatible nonfarmland uses that may render farming impracticable,” and to “protect normal farming operations from complaints of public nuisance against normal farming operations.” (7 Pa. Code § 138e.14(3).)

The court also ruled that the Appellant does not have a third-party right to enforce the terms of the Easement or to appeal the Board’s decision embodied in its letter responding to Schwartz’s “Formal Complaint.”

The court noted that the terms of the Easement specifically provide the Board with the power to determine if there has been any actual or threatened violation of the Easement and the right to demand corrective action and other remedies, but they do not provide third-parties with an enforcement right. Similarly, the court said, the regulations governing the county’s easement program do not provide for a third-party right of enforcement, nor does the AASL or Pennsylvania’s Conservation and Preservation Easements Act (CPEA; 32 P.S. §§ 5051-5059).

Essential to the court’s rejection of the Appellant’s argument that the Board’s letter decision should be appealable in court, the court held that the letter was not an “adjudication.” The court cited earlier decisions holding that “when an agency considers whether or not to take an enforcement action, it exercises prosecutorial discretion that is beyond judicial review” [emphasis added by PLD]. It noted that the Pennsylvania Agricultural Area Security Law (AASL) places the Board in a prosecutorial role (3 P.S. § 914.1(a), (b)(2)(C)(xv), (xvii)) and does not create a forum where a landowner or other party has an opportunity to be heard concerning either allegations of a violation or violations found by the Board following inspection. In addition, the court wrote, the Pennsylvania Agricultural Code (7 Pa. Code. § 138e.206) reserves the judicial function to the court of common pleas and does not place it in the county boards. The court reasoned that even if the letter was not beyond judicial review, it would not meet the criteria of an adjudication under the Local Agency Law (2 Pa. C.S. § 101).  The Local Agency Law, the court said, applies only to a “final” order, decree, decision, determination or ruling, and the letter is not final because “the Board has a continuing duty to inspect the Property and to ensure compliance with the terms of the Easement. Even if the Board had found a violation and issued a notice to the [Property owner], the notice of violation would still not be a final action because the AASL requires the Board to provide the [Property owner] with the opportunity to take corrective action.”

The decision is available at http://www.pacourts.us/assets/opinions/Commonwealth/out/183CD17_3-2-18.pdf?cb=1.

Caplan vs. Town Of Acton

Mass. Supreme Judicial Court, SJC-12274, March 9, 2018: Preliminary injunction warranted against grant to preserve active church’s stained glass.

In a case of first impression, this decision determined that the grant of public funds to renovate historic features of an active house of worship pursuant to a locally administered Massachusetts preservation funding statute is not categorically barred by the Massachusetts Constitution’s “anti-aid amendment,” but the constitutionality of such grants must be rigorously scrutinized under a three-factor test established in an earlier case involving a private school. (There was a majority opinion, a concurrence, and a dissent.)

The Massachusetts anti-aid amendment (Article 18 of the Amendments to the Massachusetts Constitution, as amended by arts. 46 and 103 of the Amendments), prohibits the “grant, appropriation or use of public money . . . for the purpose of founding, maintaining or aiding any church, religious denomination or society.”

The Massachusetts Community Preservation Act (the “CPA”; M.G. L. c. 44B) establishes a municipal mechanism for public funding of projects relating to open space, historic resources, and community housing. A church in the town of Acton was granted CPA funds for two projects involving three adjacent buildings it owns and maintains in the town historic district: to prepare a “Master Plan for Historic Preservation” for the house of worship and two buildings rented to local families as private residences (the Master Plan grant), and restoration and preservation of the main house of worship building’s stained glass windows, which were installed in 1898 and have explicitly Christian content (the stained glass grant).

The plaintiffs, as town taxpayers, sued in a lower court (Superior Court) under a law which permits taxpayers to act “as private attorneys general” to enforce laws designed to prevent abuse of public funds by local governments. (M.G. L. c. 40, § 53).

The trial judge applied the following three-factor test previously established for determining whether statutory aid to private schools violated the Constitution’s anti-aid amendment: “(1) whether the purpose of the challenged statute is to aid private schools; (2) whether the statute does in fact substantially aid such schools; and (3) whether the statute avoids the political and economic abuses which prompted the passage of [the anti-aid amendment].” (Commonwealth v. School Comm. of Springfield, 382 Mass. 665, 675 (1981).)

The trial court applied the Springfield test and found that the plaintiffs failed to meet the first and third factors and therefore denied the plaintiffs’ request for a preliminary injunction. The plaintiffs appealed.

The SJC first ruled that the three-factor Springfield test applies to public funding granted to an “active house of worship,” and the anti-aid amendment does not absolutely such a grant to churches. As with funding to private schools, the Court said, the language of the anti-aid amendment requires inquiry into the purpose of the grant. The court wrote, “[U]nder our three-factor test, whether a church can receive such a grant depends on the grant’s purpose, effect, and the risk that its award might trigger the risks that prompted the passage of the anti-aid amendment. Such an analysis would surely not bar the grant of public funds to a church preschool to provide a safer surface for its playground.”

The court then agreed with the plaintiffs that the trial judge had misapplied the three-factor test. The trial judges’ essential error, as identified by the court, was in her application of the Springfield test to the CPA statute, when what was at issue was the constitutionality of specific discretionary grants made pursuant to the CPA. (In defense of the CPA the court noted, “Nothing in the act itself specifically authorizes the expenditure of funds to assist churches or religious institutions.”) Further, while the statute has the benefit of a presumption of constitutionality, the grants under the statute do not.

The court applied the three-factor test to the grants as related to the plaintiffs’ claims and requests for relief.

On the first factor, whether there is a “hidden . . . purpose” to aid this particular church, the court found the record insufficient to determine whether a hidden purpose existed or not. Further trial proceedings would be required to make that determination. Nevertheless, the court pointed out that even if further discovery were to show that the purpose was not to aid this particular church, the other factors, especially the third factor, requires the conclusion that the stained glass grant (but not necessarily the Master Plan grant) violates the anti-aid amendment.

The second factor is whether the effect of the grants is to “substantially aid” a church in carrying out its “essential function,” rather than being “minimal.” That evaluation may focus on whether the aid that is provided contains certain “limiting features” designed to “cabin” the effect of the public funding to a use other than the church’s essential function. Here the church’s own application for funding worked against it. The application said that due to declining membership and contributions the church needed the grants to preserve its buildings while also “offering the congregation what draws them to their church” and that the grants would help pay costs the church would otherwise have to pay, allowing the money saved to be used to support its core religious activities. On this basis the court found that the stained glass grant substantially aids the church.

The third factor, which the court found the stained glass grant failed to meet, is whether it avoids “the risks that prompted the passage of the anti-aid amendment.” These risks, at least in this case, are the risk that “liberty of conscience” would be infringed by requiring some taxpayers to support the religious institutions of others; the risk that the historic preservation restriction on its building which, pursuant to the CPA, the church must grant the town as a quid pro quo for the grants, sets the stage for future improper government entanglement with religion; and the risk that the public support of religious institutions would threaten “civic harmony,” making the divisive “question of religion” a political question. “As centuries of experience have shown,” the court wrote, “government support of churches has always and inevitably been a politically divisive issue in Massachusetts.” At the same time, the court cautioned that “we can imagine various circumstances where such grants would survive careful scrutiny, including, for instance, where historical events of great significance occurred in the church, or where the grants are limited to preserving church property with a primarily secular purpose.”

The court therefore overruled the lower court and allowed the plaintiffs’ motion for a preliminary injunction against making the grants, and sent the case back to the trial court for more fact finding about the Master Plan grant and a determination whether that grant, in full or in part, should survive “careful scrutiny” under the third factor (avoiding “the risk that prompted the passage of the anti-aid amendment”). The court treated the Master Plan grant differently because it addresses not only the renovation of worship space but also plans to renovate the two residential buildings.
A concurring opinion (signed by two Justices) made the point that analysis of Massachusetts’ anti-aid amendment must take into account that the United States Supreme Court — in its interpretation of the religion clauses of the First Amendment to the United States Constitution — “has warned that only a very narrow category of exclusions are allowed by the free exercise clause from … generally available public benefit programs.” This concurrence offered that the preliminary injunction against the stained glass grant is consistent with this permitted exclusion, and that “the Master Plan grant requires further analysis to decide both the anti-aid and First Amendment questions.”

A dissenting Justice wrote she would uphold the trial court’s denial of the injunction against the stained glass grant. She focused her dissent on the majority’s idea that CPA grants to active religious institutions warrant particularly “careful scrutiny.” The dissent interprets the anti-aid amendment and the court’s precedents to require that religious and secular entities must not be treat differently from one another when applying the anti-aid amendment.

Regarding the test of the purpose of the grants, she wrote that the trial judge was correct not to inquire into the stated purpose of the recipient but rather the purpose of the governmental authority making the grant. In this case, she found that the grants have a public purpose of historic preservation and cited precedent that requires giving the “every presumption in favor of the honesty and sufficiency of the motives actuating public officers in actions ostensibly taken for the general welfare.”

The dissent approved of the trial judge’s assumption, for the purpose of analysis of the plaintiffs’ motion for an injunction, that the plaintiffs would be able to show that the grants fail the second factor of the three-pronged test, i.e., that the grants substantially aided the church. Accordingly, it was appropriate, the dissent would hold, for the trial judge to balance the factors and conclude that the grants did not violate the anti-aid amendment.

The majority’s analysis, the dissent wrote, puts a historic religious building used for a religious purpose “at a distinct disadvantage” in future courts’ anti-aid scrutiny of a grant application for that building. Such a disadvantage would force a church to choose between eligibility for a grants and disavowing the building’s “religious character.”

The opinion may be found at https://www.mass.gov/files/documents/2018/03/09/12274.pdf for now (as a new opinion) and eventually by searching at https://advance.lexis.com/container?config=0152JAAzMjQ0NTBmOS05ZmRhLTQ4NmQtOTk0NC1lNmQ1MzdmYmZlN2UKAFBvZENhdGFsb2dFqubrO2osfYY9MSag4F39&crid=7856d1ef-310f-477c-9935-5b5fbce907be.

Salt Point Timber v. Commissioner

U.S. Tax Court, 2017 TC Memo 245, December 11, 2017: Easement not deductible because holders not limited to “qualified organizations”.

Salt Point Timber granted the Lord Berkeley Conservation Trust a conservation easement for which Salt Point Timber received some payment but claimed a $2,130,000 deduction for the charitable contribution of the value of the easement in excess of the payment Salt Point received. The IRS denied the deduction and Salt Point fought the denial at the Tax Court.

Provisions in the conservation easement called for the easement to be replaced by (in the words of the easement) “a comparable conservation easement” encumbering an adjacent property if three conditions were met.  The Code, Sec. 170(h)(1)(A), defines a “qualified conservation contribution” as, among three things, a contribution to a “qualified organization.” “Qualified organization” is defined in Sec. 170(h)(3) of the Code. The easement did not expressly state that the holder of the replacement easement must be a “qualified organization” as defined by the Code. At issue was (1) whether the possibility of this replacement caused the easement to fail to meet the requirement of the Code that the easement must be contributed to a “qualified organization,” and (2) whether this possibility should nevertheless be overlooked because it is a possibility that is “so remote as to be negligible.” The court held that the conservation easement did not meet the definition of a “qualified conservation contribution” and therefore disallowed any federal tax deduction.

The IRS did not dispute that Lord Berkeley Trust, the initial grantee, is a “qualified organization.”

The easement provision in question, Part 6.22, provides in part:

“Notwithstanding any provision to the contrary, in the event that (i) any of the Protected Property is transferred to the owner of an adjacent property * * *, (ii) the adjacent property is encumbered by a comparable conservation easement [emphasis added] and (iii) the owner of the adjacent property and the holder of the conservation easement agree to modify the conservation easement on the adjacent property to encumber the transferred property by the adjacent property’s conservation easement, the parties agree to amend this easement to release the transferred property from this easement.”

The easement does not define a “comparable conservation easement”.

The court found that the above-quoted language contained no express condition that the holder of the replacement easement be a “qualified organization.”  The court also rejected Salt Point’s arguments that the text of Part 6.22 should be understood to mean that the holder of the easement must always be a qualified organization.

Salt Point tried to say that the definition of “holder” of a “conservation easement” in the South Carolina Conservation Easement Act of 1991, S.C. Code Ann. secs. 27-8-10 to 27-8-120 (1991), effectively limits such holders to qualified organizations and that the easement must be understood to incorporate that definition. The court rejected that argument because (1) the statutory definition is, by its own terms, only for the purposes of “this chapter,” and (2) even assuming for the sake of argument that the statutory definition governs who can hold a replacement easement under part 6.22 of the easement, that statutory definition does not equate “holder” to “qualified organization”.  The court pointed out that the statutory definition of holder did not require the organization to meet the specific Code requirements for a nongovernmental organization to be deemed a “qualified organization,” namely, the organization must be described either in Code sections 501(c)(3) or 170(b)(1)(A)(vi). As examples of what these Code requirements demand that the South Carolina statutory definition does not, the court cited requirements that the organization refrain from (1) lobbying or (2) intervening in political campaigns.

Salt Point also argued that any easement not held by a “qualified organization” would not be comparable to the original easement and therefore not eligible to replace that easement under Part 6.22 of the easement.  They supported this argument by pointing to the assignment provisions of the easement which say that Salt Point could assign the holder’s interest in the easement only to a “qualified organization.” The court reasoned that the assignment provisions of the easement actually proved the opposite, that is, because the assignment provisions specifically limited assignees to qualified organizations, whereas Part 6.22 does not, that “suggests that there is no such restriction” in Part 6.22.

The court also rejected Salt Point’s position for additional reasons:

(1)  “The reference to ‘comparable’ easements is most naturally interpreted as a reference to the comparability of the terms of the easements, not the owner of the easements.”

(2)   “[E]ven if one thinks that a ‘comparable’ easement can be held only by an entity that is ‘comparable’ to the Lord Berkeley trust, it is difficult to say which of the Lord Berkeley trust’s qualities another entity must share to make the other entity its ‘comparable’.”

(3)  “Even if we assume that the easement requires the holder of a replacement easement to be a ‘non-profit charitable corporation’…that would not be the same thing as a ‘qualified organization’.”

(4)  “Had the parties to the easement intended a replacement easement to be held only by a ‘qualified organization’, they could have easily written such a restriction into part 6.22 of the easement.”

Salt Point finally argued that even if the court’s reasoning were correct, the possibility that the easement would ever be held by anything other than a qualified organization is so remote as to be negligible.  Section 1.170A-14(g)(3) of the Income Tax Regulations  says, “A deduction shall not be disallowed under … this section merely because the interest which passes to, or is vested in, the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.” If a possibility is so remote as to be negligible, that possibility should not be grounds for disallowing a deduction.

The court found that the three conditions for replacing the easement under Part 6.22 are not sufficiently unlikely that they can reasonably be ignored and said that if these conditions were really improbable enough to be ignored the parties would not have bothered to put Part 6.22 in the easement.

The IRS had also argued against the easement based on the extinguishment provisions of the Treasury Regulations but, because the court held that the easement failed to meet the requirements regarding “qualified organization,” it need not discuss the extinguishment question.

Decision available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11512.


(Salt point is often referred to in the court’s opinion as “Hood,” the name of Salt Point’s tax partner.)

Save America’s Clocks v. New York

App Div of the NY Supreme Court, 1st Department, 101109/15, 3422, November 30, 2017: NYC interior landmark designation allows Landmarks Preservation Comm. to reject interior alterations and require public access.

The court held that the New York City Landmarks Preservation Commission (LPC) has the power under the City’s Landmarks Preservation and Historic Districts Law (Administrative Code of City of NY § 25-301 et seq; “NYC Landmarks Law”) to require an owner to preserve the historic character and operation of an interior landmark and to continue to allow at least minimal public access to it, pursuant to a landmark designation in place when the owner purchased the property.

The interior landmark in this case is a room in the clocktower of a neo-Italian Renaissance style building designed by the McKim, Mead & White architectural firm and built in the 1890s. The room contains the mechanisms of a clock which is “the largest of the few purely mechanical tower clocks of its kind in New York. Indeed, the only other clock in the world with a similar mechanism is the one atop Westminster Palace known as Big Ben.”

In 1968, New York City acquired the building and while the building was still owned by the City, the LPC designated it as an Interior Landmark. In December 2013, the City sold the building to Civic Center Community Group Broadway LLC (owner) and the deed provided that the purchase was subject, inter alia, to a recorded Notice of the Landmark Designation.  In October 2014, the owner applied to the LPC for a Certificate of Appropriateness (COA) seeking permission to alter the exterior and interior of the building, including permission to convert the clocktower into a triplex private apartment, to disconnect the clock from its mechanism, and to electrify the clock. The court noted that “[t]his case marks the first time an owner has asked to convert an interior landmark into a private residence.”

At the COA hearing the LPC’s counsel stated that the LPC does not have “power under the Landmarks law to require interior-designated spaces to remain public” and “to require that [the clock] mechanism remain operable.” All but one of the LPC commissioners voted to approve the COA allowing the proposed changes to the clocktower and stated that they wanted to require that the historic mechanism continue to operate, but that they accepted the LPC counsel’s opinion. The one commissioner who said she did not accept the counsel’s opinion voted against the COA.

Notwithstanding the LPC counsel’s opinion, the approved COA also directed that the owner execute and record a restrictive declaration requiring that the owner provide public access to the “main Banking Hall,” another of the building’s interior landmarks, and not use it for residential purposes.

At the request of Save America’s Clocks, a lower court granted a petition to partially annul the COA because the approval of the COA was “affected by a mistake of law, to the extent that it approved the electrification of the clock and the elimination of public access to the clocktower, and that it lacked a rational basis for its decision on the public access issue.” The City appealed.

The court held that the LPC’s approval of the COA was both irrational and affected by an error of law, upholding the lower court’s annulment of the COA. The error of law was in reliance on the opinion of counsel that the LPC had no authority to require public access of any kind to an interior landmark, and to require that the clock’s historic mechanism continue to operate. The court found the LPC’s authority in the purposes of the NYC Landmarks Law and the statutory language.

Paraphrasing the purposes of the Landmarks Law (Landmarks Law § 25-301[b]) the court wrote, “[P]reserving the public’s access to landmarked spaces furthers the statutory purpose. It is difficult to see how an interior landmark located in a private home can foster civic pride in the city’s past, educate our citizens, enhance tourism and provide the stimulus to business and industry that tourism provides. Thus, the statutory purposes are thwarted if the public is denied access to the clocktower and the opportunity to view its historic mechanism.”

Regarding the statutory language, the court held that Landmarks Law § 25-304[b] gives the LPC broad authority to regulate, limit or condition proposed alterations to landmarked interiors, noting that the LPC used this very same authority by requiring that the building’s landmarked banking hall remain open to the public and not be used for residential purposes. The court said that when Landmarks Law § 25-302[m] provides that a previously designated interior landmark “is” customarily open to the public, or the public “is” customarily invited to such spaces, the Landmarks Law contemplates that interior landmarks shall remain accessible to the public in the future. “[T]he plain language of the Landmarks Law,” the court wrote, “requires that, once designated, an interior landmark is and shall remain accessible by the public.”

The court rejected the City’s assertion that requiring some continued public access to the clocktower would constitute a “taking,” both because this regulation of private property meets the Penn Central standard of “reasonably necessary to effectuate a substantial public purpose” while still allowing the owner the reasonable beneficial use of the property (Penn Cent. Transp. Co. v City of New York, 438 US 104, 138 [1978]) and because the owner purchased the building by a deed that specifies that the transfer is subject to the landmark designation.

The decision was by a three-to-two majority. The minority wrote a dissent.

Decision available at http://www.nycourts.gov/reporter/3dseries/2017/2017_08457.htm, (2017 NY Slip Op 08457)

City of Sidney v. Spring Creek Corporation

Court of Appeals of Ohio, Third District, Shelby County, No. 17-17-07, December 4, 2017: Easement not a valid Ohio conservation easement.

The City of Sidney (“Sidney”) began an eminent domain action against Washington Township (“the Township”) and Spring Creek Corporation (“Spring Creek”) for land owned by Spring Creek that sit above part of a large aquifer which provides water for the Township’s residents. Previously, Spring Creek had granted a purported conservation easement on the property to Sidney when the parties couldn’t agree on a sale of the property.

In the eminent domain action, Sidney asserted that the conservation easement was invalid because its purpose and language were contrary to public policy and Ohio law. The trial court agreed with Sidney and Spring Creek appealed.

Although the easement’s purpose is stated, in part, as, “retain, respect, and preserve the Aquifer area … predominantly in its current, natural condition,” the easement also permitted mining and mineral extraction by two methods. Both methods involve clearing the land and substantial disturbance of the land.

The court noted that the meaning of the term “conservation easement” as codified in Ohio R.C. 5301.67(A) is, in part, “an incorporeal right or interest in land that is held for the public purpose of retaining land, water, or wetland areas predominantly in their natural, scenic, open, or wooded condition … or retaining their use predominantly as suitable habitat for fish, plants, or wildlife….”

The court held that the easement at issue is not a conservation easement because its provisions “make clear that it is not intended to preserve the property predominantly in its natural condition.”

Decision available at http://www.supremecourt.ohio.gov/rod/docs/pdf/3/2017/2017-Ohio-8785.pdf.

Woolford v. Virginia Department of Taxation

Supreme Court of Virginia, Record No. 161095, November 22, 2017: Appraiser qualified due to experience with similar properties, even if experience is weak.

At issue was whether the appraiser of a Virginia conservation easement donation was a “qualified appraiser” under relevant Virginia and federal law.

The Woolfords donated a conservation easement to the Virginia Outdoors Foundation. The easement prohibits the Woolfords from mining the sand and gravel on the property, a key factor in the property’s value. The Woolfords applied for land preservation tax credits pursuant to Virginia Code §§ 58.1-512 and 58.1-513. To prepare for the application they used a professional appraiser, Michael J. Simerlein, to appraise the property. The Virginia Department of Taxation at first awarded the Woolfords a tax credit, basing the amount on Simerlein’s assessment. The Tax Department later rescinded the tax credits. When the Woolfords appealed that decision to the circuit court the Department moved for summary judgment arguing, among other things, that Simerlein was not a qualified appraiser under Virginia law and, accordingly, the entire appraisal should be disregarded. At a hearing, evidence concerning Simerlein’s qualifications showed that he was licensed by Virginia as a real estate appraiser, holds a master’s degree in real estate appraisal and investment analysis from the University of Wisconsin-Madison, has appraised commercial and residential properties since 1992, has appraised approximately 100 conservation easement donations and has participated in four prior appraisals involving mineral rights. Simerlein acknowledged, however, that he has not taken any coursework on the subject of mineral appraisals.

The governing statute, VA Code § 58.1-512(B), requires that the fair market value of qualified conservation easement donation must be made by a “qualified appraisal” prepared by a “qualified appraiser,” as those terms are defined under applicable federal law and regulations governing charitable contributions. The relevant federal law definition of “qualified appraiser,” is at 26 U.S.C. § 170(f)(11)(E)(ii), which states:

“Except as provided in clause (iii), the term `qualified appraiser’ means an individual who — (I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary, (II) regularly performs appraisals for which the individual receives compensation, and (III) meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.”

In addition, 26 U.S.C. § 170(f)(11)(E)(iii) specifies that,

“An individual shall not be treated as a qualified appraiser with respect to any specific appraisal unless — (I) the individual demonstrates verifiable education and experience in valuing the type of property subject to the appraisal. . . .”

The circuit court agreed with the Department that Simerlein was not a “qualified appraiser” as defined by the statute.  Citing Simerlein’s acknowledgment he was not formally educated in appraising minerals, and distinguishing his four prior appraisals from the appraisal in contention, the circuit court held that “the Plaintiffs’ appraiser lacks the necessary education and experience, as required by applicable federal law incorporated by. . . . Code § 58.1-512.B, to offer an appraisal of mineral property.”

On appeal, Supreme Court of Virginia disagreed, holding that Simerlein was a “qualified appraiser,” though not for the reasons put forward by the Woolfords. The court found that even if “verifiable education” under 26 U.S.C. § 170(f)(11)(E)(iii)(I) equates to formal classroom education, Simerlein was nevertheless “qualified by virtue of his experience in evaluating properties that contained sand and gravel deposits.” The court reasoned that the appraiser’s “weaknesses in his experience” in this regard did not mean that he was altogether unqualified under VA Code § 58.1-512(B). The court found relevant that he had been involved in a number of prior appraisals where sand and gravel mines or comparable mineral deposits were at issue and that he spoke with colleagues and other relevant professionals in the industry in crafting his appraisal, concluding that the appraiser “expended considerable effort in learning about sand and gravel mines in general and about the local and regional market for those products in particular.” The court also wrote that while a qualified appraiser needed “verifiable education and experience in valuing” the kind of property which was donated, “the property need not be identical, however, to properties appraised in the past. It is sufficient if the appraiser can, from education and/or experience, make an informed and accurate appraisal of the property.”

The court reversed the trial court’s determination that Simerlein was not a “qualified appraiser” of the Woolford’s property and remanded the case for further proceedings.

The court rejected other arguments made by the Woolfords in support of the appraiser being “qualified.” Merely being licensed, the court wrote, does not make him qualified. The court also disagreed with the Woolfords that the reference in federal law, 26 U.S.C. § 170(f)(11)(E)(iii)(I), to “the type of property subject to the appraisal,” simply refers to real property, saying that, “An appraiser who specializes in one particular type of real property may not be in a position to make a knowledgeable appraisal of a completely different kind of property.” Additionally, the Woolfords argued that IRS Notice 2006-96, 2006-2 C.B. 902, 2006 IRB LEXIS 596, at *6 (Oct. 19, 2006, effectively made Simerlein qualified. That Notice said that, “An appraiser will be treated as having met the minimum education and experience requirements [of federal law] if . . . [f]or real property . . . the appraiser is licensed . . . for the type of property being appraised in the state in which the appraised real property is located.” The Woolfords argued that because there is no Virginia licensing subspecialty for appraising real estate, Simerlein’s general license to appraise real property should mean that he is a qualified appraiser. The court rejected this argument, saying that under federal law such guidance does not carry the force of law, and that relevant VA Code does not incorporate such guidance into Virginia law.

The decision also addressed whether the Department may audit an appraisal after the fact even if the appraisal is not false or fraudulent, and held that it may do so.

Decision available at http://www.courts.state.va.us/opinions/opnscvwp/1161095.pdf.

Revised Analysis on Amending Mass. Restrictions Now Available

Amending Massachusetts Conservation and Preservation Restrictions 2017, now available is this year’s update of the detailed analysis of the law in Massachusetts about amending an existing conservation restriction or historic preservation restriction  and drafting the amendments provisions of a new restriction. Among the 2017 changes is an entirely revised section about the federal income tax deduction for a qualified conservation contribution, including recent developments in federal courts.

Palmolive Building Investors v. Commissioner

U.S. Tax Court, 149 T.C. No. 18, October 10, 2017: Outside 1st Circuit, full subordination of mortgagee’s right to insurance proceeds is required to qualify for charitable deduction.

Contrary to the ruling of the U.S. Court of Appeals for the 1st Circuit in Kaufman v. Shulman, 687 F.3d 21 (2012) (Kaufman III), the Tax Court holds in this case that donation of a historic preservation easement or conservation easement does not qualify for a federal charitable tax deduction if a mortgagee’s rights to the property’s insurance proceeds are not fully subordinate to the easement. A mortgagee retention of any rights to the insurance proceeds fails the perpetuity requirement of Treasury Regulations Section 1.170A-14(g)(6) which requires that the donee receive a “property right” that entitles it to receive proceeds from any disposition of the property after extinguishment of the easement.

Palmolive Building Investors donated a historic preservation facade easement on a property in Chicago to a qualified organization. At the time of the donation the property was subject to two mortgages. Although the mortgagees each granted a subordination of their mortgage to the easement, the subordinations stated that they were subject to the terms of the easement. The easement provided that in the event the facade easement were extinguished, the mortgage holders would have claims prior to that of the donee organization to any proceeds received from the condemnation proceedings, until the mortgage is satisfied.

The Kaufman III decision had overruled the Tax Court (Kaufman I and Kaufman II) in circumstances very similar to the Palmolive facts. Kaufman III held that the mortgagee’s reservation of rights in insurance proceeds did not disqualify the easement as long as the donee had a contractual right against the property owner for insurance and sale proceeds after extinguishment of the easement. The Tax Court explained that because this Palmolive case is appealable to a U.S. Court of Appeals (the 7th Circuit for this Chicago property) other than the 1st Circuit in which Kaufman III was decided, the court does not consider itself bound in this case by the Kaufman III opinion. Perhaps in deference to the 1st Circuit, the court went to some length to explain why in its understanding of the law the reservation of mortgagee rights fails the perpetuity requirement and Kaufman III was wrongly decided.

The court gave the example of a mortgage debt of $87 million on a property worth $100 million at the time of easement donation where the mortgage was superior to the donee’s easement right: “if the value of the property decreased to $87 million by the time of a condemnation or forced sale, then the mortgagee could be made whole upon foreclosure, but the donee’s subordinate right to the easement would be worth nothing. The presence of a mortgage can thus threaten the perpetuity of the donee’s interest in the property.”

To quote at length from the Opinion:

“If the property (along with the facade) were destroyed by fire or otherwise, the unsubordinated mortgagees would stand at the head of the line to receive insurance proceeds; and if the proceeds were not adequate to pay off the loans, then [the donee] might in the end receive nothing. [The donee’s] supposedly perpetual interest in the facade would in fact have served [the donor] and the mortgagees (by serving as collateral and supporting insurance coverage) but would result in no benefit to [the donee].

“Where an owner of property subject to a mortgage and covered by insurance would seek to donate a perpetual easement interest in a facade, the owner may not surreptitiously hold back an interest in the facade by using it as collateral for mortgage loans and exploiting insurance coverage on it to repay the owner’s mortgage debt. Rather, the mortgagee’s “rights in the property” (as collateral for its loans and as predicate for insurance proceeds) must be subordinated to the interests of the donee.

“Receiving proceeds in the event of a condemnation is a critical right and interest of the mortgagee; and if that right and interest is not subordinated, then the donee’s ‘property right’ to proceeds is undermined. Palmolive’s arrangement does not reflect the actual subordination of the mortgage.”

Palmolive also argued that a “savings clause” in the easement had the effect of preempting the insurance proceeds provision and curing whatever defect might be found there. The savings clause said that any provision of the easement that conflicts or is inconsistent with or otherwise doesn’t comply with tax law requirements “shall be deemed to be amended to the extent necessary to eliminate such conflict or inconsistency.”  The provision went on, however, to say that any such change “which materially adversely affects a Mortgagee’s rights under this Conservation Right … shall require the consent of any Mortgagee so affected.” The court rejected Palmolive’s argument, saying that the exception for mortgagee’s rights undoes whatever benefit the savings provision conferred and, besides, the clause purports to retroactively amend the deed, while the requirements of the Code and Treasury Regulations must be satisfied at the time of the gift.

For practitioners, it’s worth reading the court’s decision to see the exact language of the easement that reserved the mortgagee’s rights to insurance proceeds.

Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11415.

Thanks to Leslie Ratley-Beach for bringing this decision to my attention so quickly.

Smith v. Westfield

Mass. Supreme Judicial Court, SJC-12243, October 2, 2017: Recorded restriction not needed for MA park’s constitutional protection.

Massachusetts highest court (SJC) held that state Constitution Article 97 protects land as a public park where there is a clear and unequivocal intent to dedicate the land permanently as a public park and where the public accepts such use by actually using the land as a public park, even if there has been no eminent domain taking or a recorded instrument limiting use to conservation or recreational purposes. This decision overruled an Appeals Court and changed or clarified a line of Massachusetts decisions.

At issue was whether the City could convert a public playground to school use without the state legislative approval required by Article 97. Article 97 (ratified in 1972) says that when land or an easement was taken or acquired by government action (understood to mean state or local action) for conservation purposes (interpreted by courts to include parklands), before the real estate may be used for another purpose or otherwise dispose of, the action must be approved by a two thirds majority roll call vote by each branch of the state legislature. (Exact text available here, scroll down to Article XCVII.)

When this case came before the MA Appeals Court in Smith v. Westfield, 90 Mass. App. Ct. 80 (2016), that court held for the City (i.e., no Article 97 vote required). That court explained the law as it understood it from a line of Massachusetts cases, including the SJC’s decision in Mahajan v. Department of Envtl. Protection, 464 Mass. 604 (2013). The earlier cases seemed to hold that land would not be protected by Article 97 if use of the land had not been restricted to a use protected by Article 97, by an instrument recorded at the registry of deeds either in the original deed to the government entity, a restriction pursuant to the statute enabling perpetual conservation and historic preservation easements (M. G. L. c. 184, §§ 31-33), or a deed by the government entity to itself for conservation purposes. (A concurring opinion expressed the hope the SJC would revisit this interpretation.) The appeals court said the absence of a recorded use restriction for the Westfield playground meant there was no Article 97 protection.

The SJC said that Article 97 should be understood to mean that even if an Article 97 purpose was not designated by such recorded instrument, other actions, including actions subsequent to the taking or acquisition, could designate such a purpose so as to bring the land within Article 97 protections. Their opinion went on to explain how such other action(s) could amount to an Article 97 designation. To make this analysis, the court examined common law doctrines about the dedication of land for public use and “prior public use.”

The court noted that in a landmark case involving the Boston Common and Public Garden about dedication of land for public use, it had held that, “even though title to the Boston Common and the Public Garden ‘vested in fee simple in the town free from any trust,’ the city did not possess title to this parkland ‘free from any restriction, for it is plain that the town has dedicated the Common and the Public Garden to the use of the public as a public park.’” Accordingly, “the beneficial use [of the land] is in the public.”

The court also said that Article 97 had been ratified to expand on the doctrine of “prior public use.” That doctrine had required that dedicated parkland could not be sold or devoted to another public use without the approval of the Legislature. Article 97 increased this protection by requiring a two-thirds vote of each branch before use could be changed, rather than the simple majority required by the common law.

Under our these common law doctrines, the court explained, “land is dedicated to the public as a public park when the landowner’s intent to do so is clear and unequivocal, and when the public accepts such use by actually using the land as a public park,” not merely “temporarily or until a better use has emerged or ripened” but “the intent must be to use the land permanently as a public park….” and “upon completion of the dedication it becomes irrevocable.” This intent should be determined “consider[ing] the totality of the circumstances.”

In Westfield, the court found most persuasive that in 1979 the City accepted Federal conservation funds to improve the playground. The funds were granted under the Land and Water Conservation Fund Act of 1965 (LWCFA) (P.L. 88-578, 78 Stat. 900 (1964), at the time codified as 16 U.S.C. § 460l-8 (1976), now at 54 U.S.C. § 200305 (2012 & Supp. II)). The grant was expressly conditioned on compliance with the LWCFA. The LWCFA required the approval of the U.S. Secretary of the Interior (Secretary) to convert property acquired or developed with assistance of that act to other than public outdoor recreation uses. The LWCFA further stated that to give such approval the Secretary had to find that the conversion would be “in accord with the then existing comprehensive statewide outdoor recreation plan…” (the “SCORP”).  (“Then existing” refers to the time when the Secretary makes the decision.) The record showed that the 2006 Massachusetts SCORP stated explicitly that “[l]and acquired or developed with [LWCFA] funds become[s] protected under the Massachusetts Constitution (Article 97).” By accepting the grant, “the city forfeited the ability to convert any part of the Cross Street Playground to a use other than public outdoor recreation unilaterally.”

The “totality of the circumstances” subsequent to the City’s taking of the land to foreclose a tax lien also included:

  • City Council vote to turn over “full charge and control” of the property to the City playground commission (1948);
  • Transfer of funds to the commission to cover costs of “work to be done on Cross [Street] Playground” (1949);
  • Passage of an ordinance declaring that the “parcel of land heretofore designated as a public playground” would be known as the John A. Sullivan Memorial Playground; and
  • The City’s mayor endorsed an open space plan which noted that, although not all public land is “permanently committed for conservation purposes,” this playground was public land with a “full” degree of protection and “active” recreation potential (2010).

Decision available at http://www.mass.gov/courts/docs/sjc/reporter-of-decisions/new-opinions/12243.pdf.

Thanks to Buzz Constable for bringing this decision to my attention.

BC Ranch II, LP v. Commissioner (Bosque Canyon II)

U.S. Court of Appeals, Fifth Circuit, No. 16-60068, Cons. w/16-60069, August 11, 2017: Conservation easement may OK boundary changes.

The Bosque Ranch’s two conservation easements were disallowed as charitable deductions by the Tax Court in 2015 because that Court held the conservation easements failed the perpetuity requirements of the Tax Code, § 170(h)(2)(C). Bosque Canyon Ranch LP v. Commissioner, T.C. Memo. 2015-130 (Bosque I). Disqualification was based on the easements’ provision allowing the grantor a limited right, exercisable only with the grantee’s consent, to change the boundaries of land protected by the easements to the extent needed to modify the boundaries of reserved five-acre homesite parcels, if there would be no increase in the homesite parcels above five acres. The Tax Court held that an easement fails the perpetuity requirements if the boundaries of the property subject to the easement may be modified; not only must the easement purposes be enforceable in perpetuity but the particular property protected by the easement must be protected in perpetuity. (The Tax Court also held sales of certain limited partnership interests were actually disguised sales of partnership property, and the gross valuation misstatement penalty was applicable, but the decision of the Court of Appeals on those subjects is not reviewed in this post.)

BC Ranch I, L.P. and B.C. Ranch II, L.P. appealed the Tax Court decision. The Appeals Court vacated it and remanded the case back to consider the IRS challenges to the easements not previously addressed by the Tax Court.

Perpetuity of Place:

The Bosque I Tax Court decision had been based on Belk v. Commissioner, 140 T.C. 1, (2013) (Belk I), aff’d, 774 F.3d 221 (4th Cir. 2014) (Belk III).  The Belk easement allowed the parties to amend the easement to remove land from the original defined real property and substitute other land of “equal or greater value.” Code § 170(h)(2)(C)  says, “…the term ‘qualified real property interest’ means [inter alia]… (C) a restriction (granted in perpetuity) on the use which may be made of the real property.” (Emphasis added.) The Fourth Circuit Court of Appeals reasoned in Belk that the word “the” before “real property” “makes clear that a perpetual use restriction must attach to a defined parcel of real property rather than simply some or any (or interchangeable parcels of) real property.”  The Belk Court also felt the need to distinguish two other decisions from other federal circuits: Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) and Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011)(regarding historic preservation façade easements).  Those decisions were distinguishable, the Belk Court said, because they were about whether the easements satisfied the requirement of a different section of the Code about perpetuity of conservation purpose, not perpetuity of “the parcel.” (“A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.” § 170(h)(5)(A))

In the Bosque appeal, the Fifth Circuit said the Bosque easements and the configuration of the protected land were different enough from Belk to make Belk III inapplicable. The Bosque easements, unlike the Belk easement, allow only the homesite parcels’ boundaries to be changed, the court said, and then only (1) within the tracts that are subject to the easements and (2) without increasing the acreage of the homesite parcel in question, plus they do not allow any change in the exterior boundaries of the easements or in their acreages. In Belk, by contrast, the easement “could be moved, lock, stock, and barrel, to a tract or tracts of land entirely different and remote from the property originally covered by that easement.” The Bosque court also found it significant that the Belk court had also reasoned that such parcel-swapping could undermine the “qualified appraisal of [the] property.”

The court considered the physical configuration of the property (the original protected land and the homesites) important enough to attach a plan, prepared as an exhibit in the trial. The court wrote, “Given this subdivision-like layout and the homesites’ contiguity or close proximity to each other and to the only interior road providing ingress and egress to and from the public roads, the Conservation Easement Plan of the ranch visually eschews any realistic likelihood of significant future changes in homesite location — at most, only theoretical or hypothetical changes…. We are satisfied that any potential future tweaking of the boundaries of one or a few homesite locations cannot conceivably detract from the conservation purposes [emphasis added] for which these easements were granted….” This conclusion seems to be based on “the facts that (1) the vast majority of the homesites are tightly clustered, largely contiguous…; (2) together, they closely resemble a typical suburban subdivision; (3) almost every homesite shares one or two common side line boundaries with one or more other homesites; and (4) most homesites are located on or in close proximity to the only road inside the easements, which road provides the sole access to the nearest public roads (Route 22 and County Road 1070).”

The Bosque court, like the Belk court, compared the case at hand with the Simmons and Kaufman decisions, but for the purpose of likening Bosque to those cases.   The court dismissed the distinction between the Code section at issue in Belk (§ 170(h)(2)) versus that in Simmons and Kaufman (§ 170(h)(5(A)), saying the latter two cases stand for the “common sense” proposition that an easement may be modified to promote the underlying conservation interests, reflecting “[t]he need for flexibility to address changing or unforeseen conditions on or under property subject to a conservation easement….”

The court also justified its analysis of tax deductions for the grant of conservation easements under the “ordinary standard” of statutory construction, rather than strict construction usual for intentionally adopted “tax loopholes”.  It justified this on the basis of what it saw as the adoption of Code §170(h) “at the behest of conservation activists, not property-owning, potential-donor taxpayers … by an overwhelming majority of Congress … in the hope of adding untold thousands of acres of primarily rural property for various conservation purposes….”

Baseline Documentation:

The Bosque Tax Court had also agreed with the IRS that the deduction should be denied because of improprieties in the baseline documentation prepared by the grantee. (Treasury Regulations sec. 1.170A-14(g)(5)(i) require that “when the [easement] donor reserves rights the exercise of which may impair the conservation interests associated with the property … the donor must make available to the donee, prior to the time the donation is made, documentation sufficient to establish the condition of the property at the time of the gift.”) On appeal the court found “the Tax Court failed to consider significant information contained in the record” and characterized the Tax Court’s analysis as “hyper-technical requirements” that “would create uncertainty by imposing ambiguous and subjective standards for such documentation and are contrary to the very purpose of the statute.” The Tax Court’s holding regarding the baseline documentation was thus also vacated.


One Judge (James L. Dennis) filed a separate opinion, dissenting in part and concurring in part. After rejecting the majority’s “impermissibly lax standard” for statutory interpretation, the dissent opined that the Bosque easement allowed for more than de minimis changes as to which property was protected and therefore failed the Belk test that “a conservation easement must govern a defined and static parcel.” (Belk III at 774 F.3d 227.)

Decision available at http://www.ca5.uscourts.gov/opinions/pub/16/16-60068-CV0.pdf.

Partita Partners LLC v. US (Partita II)

U.S. District Court, S.D. New York, No. 15-cv-2561(PKC), July 10, 2017: Disqualification of façade donation opens door to valuation misstatement penalty.

In 2008, plaintiff Partita Partners LLC (“Partita”) claimed a federal tax deduction of $4,186,000 for the donation of a preservation easement to the Trust for Architectural Easements in the façade of a building that Partita owns. The IRS disallowed the deduction and assessed a “gross valuation” underpayment penalty against Partita of 40%, or in the alternative, a 20% underpayment penalty for negligence, substantial understatement of income tax or a substantial valuation misstatement. See 26 U.S.C. § 6662.

In Partita Partners LLC v. United States, 216 F. Supp. 3d 337 (S.D.N.Y. 2016) (“Partita I”) U.S. District Court for the Southern District of New York granted the government’s motion for partial summary judgment, agreeing with the IRS that, as a matter of law, Partita’s donation of the façade easement did not preserve the building’s entire exterior, as required by 26 U.S.C. § 170(h)(4)(B), and that Partita therefore was ineligible for the $4,186,000 deduction that it claimed.

The remaining issue is Partita’s motion for partial summary judgment on the issue of underpayment penalties. The court rejected the motion and agreed with the government that a trial is needed to resolve plaintiffs’ challenge to the penalties.

Under the Internal Revenue Code, a valuation misstatement penalty “shall apply to the portion of any understatement which is attributable to” the valuation misstatement. 26 U.S.C. § 6662(b)(3), (h)(1), emphasis added. The 20% penalty applies when underpayment “is attributable to “[n]egligence or disregard of rules or regulations,” “[a]ny substantial understatement of income tax” or “[a]ny substantial valuation misstatement under chapter 1,” among other things. 26 U.S.C. § 6662(b)(1)-(3).  A “substantial valuation misstatement” occurs when the value of property claimed on a return is misstated by 150% or more than the amount determined by the IRS. The 40% penalty for “gross valuation misstatements” occurs when the misstatement exceeds the IRS’s determined amount by 200% or more. 26 U.S.C. §§ 6662(h)(1), 6662(e)(1)(A).

According to Partita, the underpayment was not found by Partita I to be “attributable to” a valuation misstatement but was in fact attributed to a different cause, because Partita I concluded that the charitable deduction did not satisfy the criteria for a qualified conservation contribution, not that Partita’s statement of the value of the contribution was wrong.

The court said Partita’s position misstates the law since the U.S. Supreme Court’s decision in United States v. Woods, 134 S. Ct. 557 (2013). In that case, and in some prior lower court decisions, the use of a valuation misstatement penalty has been upheld when the taxpayer’s claimed deduction was denied in its entirety because it lacked a foundation in fact or law. In Woods, a partnership was found to have engaged in sham transactions  solely for tax benefits and the IRS imposed a penalty. The taxpayer argued that because the partnerships themselves were deemed to be shams, the underpayment of taxes could not be “attributable” to a valuation misstatement. The Supreme Court disagreed, and concluded that because the existence of the sham tax shelters was intertwined with inaccurate deductions claims, a valuation misstatement of basis was inherently part of the sham. The Supreme Court also stated “that the valuation-misstatement penalty encompasses legal as well as factual misstatements of adjusted basis . . . .” To the court, Woods thus stands for the proposition that a valuation misstatement penalty may be applied when the taxpayer’s claimed deduction was denied in its entirety because it lacked a foundation in fact or law, not just when the valuation misstatement is intertwined with the underlying sham transaction.

The court agreed with the government that a valuation misstatement penalty may be imposed if an underpayment, like Partita’s, “is attributable to” — meaning “capable of being attributed” to — a misstatement of value, and not only when the understatement in fact “was attributed to” a misstatement of value. As precedent for this, the court cited Irom v. Comm’r of Internal Revenue, 866 F.2d 545 (2d Cir. 1989), in which the Second Circuit concluded that because the penalty applied to underpayments “attributable” to tax-motivated transactions, the Tax Court should separately consider whether underpayment was “capable of being attributed to” tax-motivated transactions for the purpose of establishing the penalty. Although Irom involved a different penalty statute, the court was persuaded by Irom’s interpretation of the word “attributable.”

The court also denied Partita’s motion for partial summary judgment as to the 20 percent penalties despite Partita’s argument that the IRS had not shown that the penalties were approved in writing as required by 26 U.S.C. § 6751(b)(1).

Decision available at https://scholar.google.com/scholar?q=Partita+Partners+LLC+v.+US+2017&hl=en&as_sdt=6&as_vis=1&oi=scholart&sa=X&ved=0ahUKEwj0v4-JvJHWAhVI4oMKHQN2AisQgQMIJDAA.

Reri Holdings I, LLC v. Commissioner

U.S. Tax Court, 149 T.C. 1, July 3, 2017: Donor’s basis in donated property must be stated on Form 8283.

This decision does not involve a charitable donation of a conservation easement or historic preservation easement but does involve the same substantiation rules applicable to such donations.

Section 1.170A-13 of the Treasury Regulations includes substantiation requirements that apply to charitable contributions made after December 31, 1984, of property worth more than $5,000. This requirement is made applicable to donation of qualified conservation contributions pursuant to Tr. Regs, section 1.170A-14(i), “substantiation requirement.” To meet the requirements, the donor must attach the Form 8283, the appraisal summary, to the tax return on which the donor claims the deduction. The Regulations required the appraisal summary to include the adjusted cost or other basis of the donated property (Sec. 1.170A-13(c)(4)(ii)(E)) and Form 8283 has a blank to fill in for this information.

The taxpayer paid $2.95 million in March 2002 to acquire a remainder interest in property. On Aug. 27, 2003, the taxpayer assigned the remainder interest to a university. On its 2003 tax return, the taxpayer claimed a multi-million dollar deduction(under Tax Code section 170(a)(1)).  Such a claim requires filing Form 8283, Noncash Charitable Contributions, with the tax return. The taxpayer attached the required Form 8283 to its return but left blank the space for the “Donor’s cost or other adjusted basis”.

The court found that this omission did not satisfy the requirement of section 1.170A-13(c)(4)(ii)(E). Further, because the court opined that the omission prevented the appraisal summary from achieving its intended purpose, it held that the omission cannot be excused as “substantial compliance.” Accordingly the court held the taxpayer did not meet the substantiation requirements provided in section 1.170A-13(c)(2), Income Tax Regs., and was not entitled to any deduction under section 170 for its contribution.

Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11286.

RP Golf V. Commissioner (RP Golf III)

U.S. Court of Appeals, Eighth Circuit, No. 16-3277, June 26, 2017: Upholds requirement of binding subordination at time of easement recording.

The court reviewed the facts and the tax court’s findings and holding in RP Golf v. Commissioner, 2016 T.C. Memo 80 (RP Golf II), and upheld the Tax Court. RP Golf, LLC claimed a charitable deduction on its 2003 tax return for donating an easement to the Platte County Land Trust (PLT). The tax courtagreed with the IRS that the easement failed the perpetuity requirement for a qualified conservation contribution under Tax Code 170(h)(5)(A) because subordinations of the recorded mortgages on the easement property were not recorded until after the easement was conveyed to the grantee. The court cited Mitchell v. Comm’r, 775 F.3d 1243, 1247 (10th Cir. 2015) in support.

In addition the court held that the tax court’s finding that RP Golf failed to prove the existence of oral subordination agreements was not clearly erroneous, and therefore the tax court’s decision could not be challenged on that ground.

Decision available at http://media.ca8.uscourts.gov/opndir/17/06/163277P.pdf.

RP Golf, LLC v. Commissioner (RP Golf II)

U.S. Tax Court, 2016 T.C. Memo 80, April 28, 2016: Mortgage subordination after recording of easement fails perpetuity test.

RP Golf, LLC (LLC) developed two private golf clubs. The purchase and development of the property was financed by loans secured by deeds of trust (mortgages) to Hillcrest and Great Southern banks. In December 2003, LLC (through its wholly owned subsidiary, National Golf, to which it conveyed a portion of the property) granted a permanent conservation easement to Platte County Land Trust (PLT). Subsequently, on April 14, 2004, Great Southern and Hillcrest signed subordinations of their mortgages to PLT’s right to enforce the easement.  Both subordinations state an effective date of December 31, 2003. Also on April 14, LLC filed its 2003 partnership tax return claiming a tax deduction for the easement.

The IRS disallowed the charitable deduction, claiming it did not meet the requirements for a “qualified conservation contribution” under 26 U.S.C. § 170(b)(1)(E).  The key issue before the court was whether the easement met the perpetuity requirements of section 170(h) of the Tax Code for a qualified conservation easement in light of the recording of the mortgage subordinations after the grant and recording of the easement. The court found that it did not.

The court cited Mitchell v. Commissioner (Mitchell I), 138 T.C. 324 (2012), supplemented by T.C. Memo. 2013-204 (Mitchell II), aff’d, 775 F.3d 1243 (10th Cir. 2015), where a 2003 conveyance failed as a qualified conservation easement when a subordination agreement was not signed until almost two years after the grant of the conservation easement. In Mitchell the courts held that Treasury Regulation 1.170A-14(g) requires that a subordination agreement must be in place at the time of the gift and that an oral agreement failed to meet the perpetuity requirements.

The court found that LLC failed to establish that RP Golf and Great Southern Bank and Hillcrest Bank entered into any agreements, oral or written, binding under Missouri law, regarding subordination to the easement on or before December 29, 2003, the date of the PLT agreement.  Accordingly, the court held LLC was not entitled to a deduction on its 2003 tax return for a qualified conservation contribution.

Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10754.

Ten Twenty Six Investors V. Commissioner

US Tax Court, 2017 TC Memo 115, June 15, 2017: Date of recording conservation easement determines year of eligibility for tax deduction.

The Tax Court agreed with the IRS that a conservation easement donated in 2004 but not recorded until 2006 did not create a qualified conservation contribution in 2004 and therefore did not entitle the donor to a federal tax deduction for 2004.

On December 21, 2004, Ten Twenty Six Investors (partnership) executed an easement deed (deed) granting a facade easement (easement) on a New York warehouse to National Architectural Trust, Inc. (NAT). NAT accepted and signed the deed on December 30, 2004, but it was not recorded until December 14, 2006. The partnership claimed a tax deduction under Internal Revenue Code section 170 for the donation on their 2004 return but the IRS denied it, also hitting the partnership with a 40% gross valuation misstatement penalty under section 6662(a) and (h) or, alternatively, a 20% penalty under section 6662(a) and (b)(1), (2), or (3).

The IRS said the deed created a “conservation easement” under New York State law (N.Y. Envtl. Conserv. Law (NYECL) sec. 49-0303(1) (McKinney Supp. 2017) and that as such the deed had no legal effect until it was recorded (NYECL sec. 49-0305(4) (McKinney Supp. 2017). The IRS therefore concluded there was no legally enforceable restriction as required by section 1.170A-14(g)(1), Income Tax Regs., in 2004: without a legally enforceable restriction in 2004, there could be no deduction for 2004 for an easement donation.

The partnership argued that the easement was not a conservation easement because it was not intended to be such by the parties, that even if the easement created a conservation easement it also created a restrictive covenant at common law (which, the partnership argued, NYECL sec. 49-0309 allows) and that restrictive covenants are generally effective in New York upon delivery of a valid deed. N.Y. Real Prop. Law sec. 244 (McKinney 2006).

The court rejected the partnership’s arguments, saying that in Zarlengo v. Commissioner, T.C. Memo. 2014-161, Rothman v. Commissioner, T.C. Memo. 2012-163, supplemented by T.C. Memo. 2012-218, and Mecox Partners LP v. United States, 117 A.F.T.R.2d (RIA) 2016, substantially identical or similar arguments had been rejected in closely analogous cases.  The court nevertheless went over the partnership’s arguments, “for the sake of completeness.”

First the court addressed whether the deed could be construed as legally effective to convey a property interest in 2004.  The court said that under the plain terms of NYECL sec. 49-0305(4), if the deed was intended to convey a conservation easement, it was not effective until it was recorded. The partnership argued that the subjective intent of the parties was not to create a conservation easement as defined by statute, but the court said subjective intent would only come into play if the deed were ambiguous. The court said there was no ambiguity because the deed was titled “Conservation Deed of Easement,” references itself as such repeatedly throughout the document, purports to do what a conservation easement would do, and grants exactly the mix of easements, restrictions, and affirmative responsibilities that a conservation easement would.

The partnership argued in the alternative that even if the deed created a conservation easement it also created a restriction which was enforceable as a common law interest from the time of delivery.  The court rejected this argument saying precedents support the conclusion that a conservation easement created under title 49 of the NYECL, which that statute says must be recorded to be effective, is separate and distinct from anything created at common law, that if recording were not required for the instrument to take effect the statute’s recording requirement “would have no meaningful effect,” and to avoid finding that a portion of the statute has no meaningful effect, the partnership’s argument must be rejected.

Thus, the court concluded there was no property interest conveyed in 2004.

The court next addressed whether the failure to record the deed in 2004 caused the easement to fail the perpetuity requirements of Code section 170(h)(2)(C) and (5)(A), even if the court were to assume for the sake of argument that the deed effectively created an easement or a restrictive covenant at common law.

The court said it is clear that the perpetuity requirement should be tested as of the date of the alleged transfer (section 1.170A-14(g)(3), Income Tax Regs.), citing, e.g., Graev v. Commissioner, 140 T.C. 377, 393 (2013). If on that date perpetuity could be defeated by possible future events, the perpetuity requirement would not be satisfied. The court said there were two such possible events here:  (1) transfer by NAT of the benefits of the deed to a successor in interest which was not a donee qualified under applicable law to receive a conservation easement eligible for a deduction or which could not enforce a common law easement in gross, and (2) sale (or mortgage) of the property by the partnership to a third party who acquired the property in good faith for value and who did not know of the unrecorded easement (and against whom the instrument could therefore not be enforced). The court judged that the probability of neither of these circumstances was so remote as to be negligible, so the perpetuity requirement was not satisfied.

Accordingly, the court held the partnership was not entitled to a deduction for 2004 for contribution of the easement.

Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11275.

Faisal v. Historic Boston Inc.

Mass. Appeals Court, No. 16-P-814, June 13, 2017: Signature by one authorized corporate officer sufficient for restriction grant.

A church granted a historic preservation easement (called a “preservation restriction” in Massachusetts) and then sold the church property. The easement was signed for the church only by its president, who had been authorized to do so by a church corporate vote. A later owner of the property challenged the easement’s enforceability.  Mass. GL c. 156B, sec. 115, says that if a conveyance instrument by a corporation is signed by a certain combination of two corporate officers , the conveyance is binding on the corporation in favor of a purchaser or other person relying in good faith on that instrument. At trial, the judge found that precedents led to the conclusion that the statute created requirements for enforceability when it came to charitable corporations, not merely a safe harbor. The appeals court disagreed.

The court’s analysis of the precedents cited by the trial judge was that those cases turned on three key points which did not apply to this case: (1) it was the charitable entity, not the grantee, seeking to disavow the transaction; (2) the corporate officer who signed the document was relying on his or her general powers, not on a specific grant of authority to enter into the transaction in question; and (3) the transaction, if enforced, would have “transformed” how the entity operated. The appeals court said the trial judge was wrong to apply those precedents to the facts in this case.

The court wrote: “More importantly, the [church, grantor of the preservation easement] board itself expressly endorsed placing its property under a … historic preservation restriction and specifically authorized its president to negotiate and to execute one. Put differently, from all that appears before us, [the ACC president] acted exactly as the [church] wanted him to act and consistent with its mission. This is not at all a case where the officer of the charitable entity was attempting to exercise independent ‘control of the very essence of the [entity's] corporate existence.’ [citation omitted] The judge erred in concluding that the absence of a second signature invalidated the Historic Boston restriction.”

The courts also wrote in a footnote, “…it does not follow that real estate transactions signed by only one corporate officer therefore automatically are invalid as being without authority. The fact that a ship has not reached safe harbor when a storm hits does not, without more, mean that it will be lost at sea.”

(The appellate Memorandum and Order was “primarily directed to the parties” and “may be cited for its persuasive value but… not as binding precedent.”)

The decision can be found at http://www.mass.gov/courts/docs/sjc/reporter-of-decisions/new-opinions/16p0814.pdf.

(Disclosure: the writer has represented Historic Boston Inc. but not in connection with the easement in question.)

Save Our Heritage Organisation v. City of San Diego

CA Court of Appeals, 4th District, Div. 1, No. D070006, April 27, 2017: No attorney fee award against unsuccessful public interest litigant.

This decision is about whether a public interest advocacy organization should be responsible under California law for the attorney fees of a developer after the advocacy group lost its legal fight against the developer’s project. Save Our Heritage Organisation [sic] (SOHO) lost on appeal on its request for a writ of mandamus against the City of San Diego’s (City) approval of a site development permit for a project in Balboa Park proposed by Plaza de Panama Committee (Committee).  SOHO challenged the City’s decision on multiple grounds related to the project’s effects on the environment, historical resources, and land use. When a trial court directed the City to rescind the project approval, the City didn’t appeal but the Committee and SOHO each appealed aspects of the trial court’s decision. The appellate court reversed the trial court judgment (i.e., upheld the project approval) on the grounds that SOHO had not established the City abused its discretion in approving the project. The Committee then sought its attorney fees from SOHO under Code of Civil Procedure section 1021.5.

Section 1021.5 states in part: “Upon motion, a court may award attorneys’ fees to a successful party against one or more opposing parties in any action which has resulted in the enforcement of an important right affecting the public interest if: (a) a significant benefit, whether pecuniary or nonpecuniary, has been conferred on the general public or a large class of persons, (b) the necessity and financial burden of private enforcement . . . are such as to make the award appropriate, and (c) such fees should not in the interest of justice be paid out of the recovery, if any.”

The current decision addresses two issues: “whether the Committee, as a project proponent, may obtain a section 1021.5 attorney fees award and, if so, whether the court may impose such an award against SOHO.” The court concluded that while “a project proponent may obtain a section 1021.5 attorney fees award if the project proponent satisfies the award’s requirements …. SOHO is not the type of party against whom the court may impose such an award because SOHO did nothing to compromise public rights.”

The court said that Section 1021.5 codifies a California common law doctrine that recognized “that privately initiated lawsuits are often essential to the effectuation of the fundamental public policies embodied in constitutional or statutory provisions, and that, without some mechanism authorizing the award of attorney fees, private actions to enforce such important public policies will as a practical matter frequently be infeasible.” The court determination of whether to award fees under section 1021.5 to the “successful party” applies a three-prong test: (1) did the litigation result in the enforcement of an important right affecting the public interest, (2) was a significant benefit conferred on the general public or a large class of individuals, and (3) does the necessity and financial burden of private enforcement renders the award appropriate.

SOHO did not dispute that the Committee satisfied the three-prong test and the court found that the Committee’s status as a project proponent does not categorically bar it from obtaining a section 1021.5 attorney fees award if it otherwise satisfies the award’s requirements. Nevertheless the court needed to determine whether the award in this situation came within an exception to 1021.5 established by the California Supreme Court when, even though all three factors are satisfied, “a section 1021.5 fee award may not be imposed on a litigant who did nothing to adversely affect the public interest.” The CA Supreme Court recognized this exception in part because the statutory language suggests that the Legislature had in mind “that those on whom attorney fees are imposed have acted, or failed to act, in such a way as to violate or compromise … [an important public] right, thereby requiring its enforcement through litigation.”

Thus, the court said, the question to ask in this type of case is “whether the litigation was detrimental to the public interest because it sought to curtail or compromise rights.” If the litigation was not detrimental to such rights, then attorney fees should not be awarded to the project proponent.

The court then found that, “By filing the petition for writ of mandamus, SOHO did not seek to curtail or compromise important public rights or exonerate SOHO’s violation of such rights. [citation omitted] Rather, the litigation sought to correct what SOHO perceived to be violations of state and local environmental, historic preservation, and land use laws by the City. While ultimately unsuccessful, the litigation was precisely the type of enforcement action section 1021.5 was enacted to promote. [citation omitted] We, therefore, cannot conclude the litigation was detrimental to the public interest such that imposing a fee award on SOHO would be appropriate.” Accordingly, the court held that SOHO did not have to pay attorney fees to the Committee.

Decision available at http://www.courts.ca.gov/opinions/documents/D070006.PDF.

Mount Aldie, LLC, v. Land Trust of Virginia, Inc.

Supreme Court of Virginia, Record No. 160305, March 2, 2017: Court picks which of 2 easement sections controls owner’s actions.

This decision resulted from a request for summary judgment as to whether a landowner had violated a conservation easement on its land. Each side in the dispute asserted that a different section of the easement controlled certain activities of the owner. The court had to decide which of the two sections of the easement was controlling. If the section which the easement holder pointed to controlled, then the undisputed facts led to the conclusion that there was a violation. If the section pointed to by the owner controlled, then additional fact finding would be needed to determine if there was a violation.

Land Trust of Virginia, Inc. (“LTV”) holds a conservation easement (“Easement”) on land owned by Mount Aldie, LLC (“MA”). The Easement covers a 60-acre tract of forested land bounded in part by the Little River. The Easement designates a 100-foot wide strip of the property running along the edge of the river as a “riparian buffer” (the “buffer”). MA performed tree removal and grading work within the buffer for a distance of approximately 1,100 feet along what is known as the “Indian Spring Trail.”

Among the reserved rights of the owner, Article II, Section 5(i) of the Easement says, “No more than one new opening or clearing, and no new opening or clearings greater than 1,000 square feet, in the forest are permitted for noncommercial purposes, unless approved in advance and in writing by [LTV].” LTV argued that this is the controlling provision regarding MA’s tree removal and grading and that, because MA had not sought or received LTV’s permission for the work, MA had violated the Easement.

Article II, Section 3, subsection (i) establishes the buffer and a part of subsection (ii) states the following limitation and exceptions governing the landowner’s activities within the buffer: “Within the buffer strip there shall be no . . . earth disturbing activity conducted, except as may be reasonably necessary for . . . (c) removal of individual trees presenting a danger to persons or property and removal of diseased, dead or invasive trees, shrubs or plants . . . or (d) creation and maintenance of foot or horse trails with unimproved surfaces.”  This provision contains no requirement that the owner give notice to and/or receive permission from LTV regarding the excepted activities. MA argued that this should be the controlling provision in this case and therefore that no violation had occurred.

The court reviewed the rules established by precedent for interpreting a conservation easement in Virginia:

  • “[o]ur function in construing a deed is to give effect to the parties’ intention as expressed by them in the words they have used”;
  •  ”`[w]here the language of [the] deed clearly and unambiguously expresses the intention of the parties, no rules of construction should be used to defeat that intention.’”
  • “`the whole of a deed and all its parts should be considered together’ in order to determine the controlling intent.”
  • “When the deed, so construed, is plain and unambiguous, we are `not at liberty to search for its meaning beyond the instrument itself.’”
  • “[a]n instrument will be deemed unambiguous if its provisions are `capable of only one reasonable construction.’”
  • “give the words used by the parties `their usual, ordinary, and popular meaning’” in the context in which they are being used.
  • always presume that the parties “were trying to accomplish something rational. Common sense is as much a part of contract interpretation as is the dictionary or the arsenal of canons.”

The court then parsed the words of the two relevant sections.  The court looked at the meaning of “clearing.” In Section 5(i), the landowner is explicitly limited within “the forest” to creating “[n]o more than one new opening or clearing, and no new opening or clearings greater than 1,000 square feet . . . unless approved in advance and in writing by Grantee.” Citing the Webster’s Third New International Dictionary (1993), the court said that as applicable in the context of Section 5(i), “clearing” is defined as “a tract of land cleared of wood or brush.” In turn, “wood” is defined as “a tract of land on which stand growing trees,” and “brush” is defined as “land covered with scrub vegetation.” An “opening” is defined as “an area without trees.”

Based on these definitions the court agreed with MA that “the term ‘new opening or clearing’ as used in Section 5(i) means a newly created area that has been cleared of standing timber and/or brush, and not merely the act of disturbing the earth or doing so while in the act of selective cutting and/or removing dead and diseased trees from an existing clearing or opening, i.e., an existing path, trail or road (or indeed any other existing clearing or opening in the forest).” Accordingly, the court said that just because MA’s actions “disturbed” more than 1,000 square feet of earth within the buffer without prior notice to or approval from LTV, that did not necessarily mean that MA breached Section 5(i).

Turning to Section 3(ii), the court said it was contrary to the plain language of the provisions at issue to think that Section 3(ii) is subject to Section 5(i).The court understood Section 3 as having “a completely different explicit objective within the buffer, which is ‘[t]o protect [the] water quality’ of the Little River.” This Section, the court said, treats the buffer differently from the rest of the tract and uses terms ‘that uniquely apply to it [the buffer]” and not the rest of the property. The absence of any notice or approval requirement in Section 3(ii) was intentional, in the court’s opinion, given that the Easement explicitly included such requirement in several other Easement sections (Article II, Sections 1, 2(ii), 5(i) and 5(ii), and Article V, 6(i) and 6(ii)).

Additionally, the court said it would make no sense, in the context of the landowner’s rights under Section 3(ii) to create and maintain horse trails within the buffer, to say that “earth disturbing activity” within the buffer under Section 3(ii) should be limited to 1,000 square feet. “Such an interpretation would mean that the landowner is allowed to construct a horse trail without prior approval so long as the trail is no longer than 167 feet where, for example, the average width of the trail is six feet.”

The court conclude that it “strains credulity to believe that the parties to the Easement intended for the provisions of Section 5(i) to control the landowner’s permitted activities within the buffer under Section 3(ii).” Saying that the issue is therefore not whether MA had a right to perform work within the buffer but rather whether the nature of that work was in compliance with the Easement, the court said that genuine issues of disputed material fact remained to be resolved and therefore summary judgment was not appropriate.  The case was remanded for further proceedings.

Decision available at http://www.courts.state.va.us/opinions/opnscvwp/1160305.pdf.