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Supreme Court of New Jersey,No. A-116 September Term 2010 065540, April 4, 2013: Inspection under wetlands permit on conservation easement constitutionally permitted.
The Hubers’ residence includes land subject to a wetlands permit under New Jersey’s Freshwater Wetlands Protection Act (FWPA; N.J.S.A. 13:9B-1 to -30) and a deed restriction/conservation easement to their Township. After a neighbor complained about fill within wetlands, a New Jersey Department of Environmental Protection (DEP) representative went to the Huber residence, identified himself, and was permitted to inspect the subject land. The inspector found violations and the DEP imposed a civil penalty and restoration remedy on Huber. After administrative appeals were exhausted, the penalty and remedy were upheld and the Hubers challenged them in court.
On appeal, the Hubers argued that the inspector’s testimony, based on observations made during that inspection, should not have been included in the record because it was a warrantless search that violated the protections against unreasonable search under the Fourth Amendment of the United States Constitution and Article I, Paragraph 7 of the New Jersey Constitution. Without that testimony, the Hubers said, the violations were not proven to exist. The NJ Appellate Division rejected that constitutional argument.
The NJ Supreme Court, the state’s highest court, initially refused to hear an appeal of that decision. The Hubers filed a petition for certiorari to the United States Supreme Court to hear the constitutional case. When the Supreme Court denied certiorari Justices Alito, Roberts, Scalia and Thomas questioned whether relevant federal precedent on this subject applied to residential property. Huber v. New Jersey Department of Environmental Protection, ___ U.S. ___, 131 S. Ct. 1308, 179 L. Ed. 2d 643 (2011). The NJ Supreme Court (referred to in this blog post as “the court”) then took up the appeal.
After reviewing the federal precedents allowing certain warrantless searches of commercial premises operated for a “pervasively regulated business” — New York v. Burger, 482 U.S. 691, 699-702, 107 S. Ct. 2636, 2642-44, 96 L. Ed. 2d 601, 612-14 (1987), applied in New Jersey in State v. Turcotte, 239 N.J. Super. 285, 291-94 (App. Div. 1990), and Camara v. Mun. Court of San Francisco, 387 U.S. 523, 87 S. Ct. 1727, 18 L. Ed. 2d 930 (1967) – the court held that those precedents do not extend to a private residence. The court wrote that the reasoning in Burger and the criteria it established by which to test the validity of a warrantless search “fail to provide support for a general extrapolation … to the more heightened privacy interests that are associated with a private, residential property”.
The court nevertheless held that because of the extent of the provisions in New Jersey’s statutes and regulations detailing the procedures for DEP wetlands inspections (including procedures for when the property owner doesn’t consent to inspection), the DEP inspector’s testimony could be constitutionally admissible. The court cited United States Supreme Court precedents for the proposition that “process to enforce a reasonable, non-arbitrary inspection scheme can be compliant with Fourth Amendment protections, despite the lack of consent by the property owner, provided the regulatory scheme advances important governmental interests, takes into account reasonable expectations of privacy, and avoids nonconsensual, forcible entry accomplished outside of the warrant framework.” Marshall v. Barlow’s, Inc., 436 U.S. 307, 98 S. Ct. 1816, 56 L. Ed. 2d 305 (1978) (workplace safety), Colonnade Corp. v. United States, 397 U.S. 72, 90 S. Ct. 774, 25 L. Ed. 2d 60 (1970) (liquor dealerships) and United States v. Biswell, 406 U.S. 311, 92 S. Ct. 1593, 32 L. Ed. 2d 87 (1972) (firearms).
The court wrote:
“[W]hen a private land owner takes property subject to a recorded deed restriction that allowed development to occur conditioned on the issuance of a carefully delineated wetlands permit and transition area waiver, the permittee cannot claim a full expectation of privacy to such protected lands…. In view of the vital importance of protecting freshwater wetlands in New Jersey, privacy expectations to freshwater wetlands and transition areas that are subject to a FWPA permit are diminished…. In effect, a property owner receives the right to develop restricted land in exchange for giving the right of reasonable entry to the DEP to inspect. To be sure, this bargained-for exchange is subject to the reasonableness of the entry and search.”
Having gone through this entire analysis, the court then decided the case on the basis of evidence in the record other than the inspector’s testimony. The court said it would be inappropriate on appeal for the court to weigh the credibility of the inspector’s and Huber’s different accounts of whether the inspector was refused access for inspection. Nevertheless, even excluding the inspector’s testimony, the court found “more than sufficient evidence” to sustain the findings of a violation by the Hubers. The court affirmed the Appellate Division’s judgment upholding the administrative order and penalty.
The court also declined to rule on whether the DEP has a right to enter and inspect land subject to a conservation easement under the New Jersey Conservation Restriction and Historic Preservation Restriction Act (Preservation Act). N.J.S.A. 13:8B-1 to -9, generally as a matter of law, and specifically as applied to the conservation easement in this matter. That Act allows the DEP to enforce a conservation restriction by entering the land to assure compliance with the restriction. N.J.S.A. 13:8B-3.
Decision available by search at http://www.judiciary.state.nj.us/opinions/index.htm (temporarily) or http://njlaw.rutgers.edu/collections/courts/search.php.
Md Court of Special Appeals, No. 1920, September Term, 2011, March 22, 2013: Agricultural Preservation Easement granted on separate adjoining lots in one ownership can’t be subdivided.
A predecessor in ownership of appellant Covered Bridge Farm II, LLC (CBF II) sold an agricultural preservation easement to the State of Maryland Agricultural Land Preservation Foundation (MALPF) on three contiguous lots the predecessor owned. The preservation easement said the Grantor gave up the right “to subdivide the above described land for any purpose” except upon written approval of MALPF. The land was eventually bought by an LLC and in 2007 that LLC was liquidated and conveyed three reconfigured parcels of the land to three separate entities, including CBF II, without getting MALPF’s approval. MALPF sued. The lower (circuit) court found for MALPF. CBF II appealed.
The Court of Special Appeals agreed with the circuit court and MALPF that the conveyance violated the agricultural preservation easement. It held that its decision in Stitzel v. Maryland, 195 Md. App. 443 (2010) was squarely on point. In Stitzel the court had held that the conveyance of a portion of land that was subjected to an agricultural preservation easement was a subdivision of land even though the land had been a separately described parcel before becoming part of the Maryland land preservation program. The same factors that pertained to Stitzel were present here.
The court said that as in Stitzel the relevant definition of subdivision is the state regulation defining it as “the division of land into two or more parts or parcels.” In Stitzel the court said this definition “simply contemplates the subtraction of a portion of land within an agricultural district or subject to an easement.” As in Stitzel, the land subject to the easement was already subdivided before it entered into the agricultural program, and the easement described the three separate parcels as one “land,” one agricultural district and refers to the three parcels as the “subject property” or “the land.” As in Stitzel, and MALPF representative put into evidence that MALPF routinely accepts into the state agricultural land preservation program farms composed of separately described parcels, that it considers the entirety of the multiple parcels covered in the easement as one “land” and one “parcel” subject to the subdivision prohibition and that the subdivision prohibition exists to prevent destroying the farm’s financial viability by dividing into pieces that would not be profitable agricultural units.
Although the purpose of maintaining financial viability that applies to agricultural land would not necessarily apply to open space conservation or historic preservation, the court had no reason to elaborate as to how important to its decision this one factor was.
The primary distinction between the facts in Stitzel and in this case was worse for CBF II’s case than the facts in Stitzel. Unlike in Stitzel, where the subdivided property lines were the same as they had been before the easement was granted, the three parcels in this case had different boundaries that the original parcels.
Accordingly the court found for MALPF that a prohibited subdivision had occurred without MALPF’s consent and upheld the circuit court ruling declaring the transfer null and void, requiring the land to be transferred to a common owner, and ordering the lot lines eliminated or restored to their original configuration. The court also awarded MALPF costs.
The decision is available at http://mdcourts.gov/opinions/cosa/2013/1920s11.pdf.
FL Dist. Court of Appeals, 5th Dist., No. 5D12-2563, March 15, 2013: Compensation for Florida city’s denial of demolition is based on date of denial, not date of ordinance.
Between 1998 and 2006, the Wendlers bought real property located in a National Register of Historic Places District in St. Augustine, Florida. At the time of their purchases, all structures were subject to historic preservation demolition review ordinances, and by 2005, the ordinance authorized the City’s Historic Architectural Review Board to deny demolition or relocation requests indefinitely for three types of structures, including those considered “contributing property to a National Register of Historic Places District.” The Wendlers applied to demolish seven structures and all seven demolition permit requests were denied.
After the Wendlers lost challenges to the permit denial, they sought compensation from the City under Florida’s Harris Act. § 70.001, Fla. Stat. (2010). That state law allows property owners to be compensated by a governmental entity if a government regulation “inordinately burdens” an existing or vested property right. The Wendlers rejected a settlement offer from the City and brought suit under the Harris Act. The court had previously decided in another case, Citrus County v. Halls River Development, 8 So. 3d 413 (2009), that the Harris Act clock starts running when the impact of a governmental regulation can be determined; sometimes that occurs only with government action on a particular development plan, and sometimes that occurs regardless of the owner’s specific development plans.
The main question in this appeal was when the effect of the City demolition control ordinance was first applied to the Wendlers’ structures so as to make the damage ascertainable.
The court concluded, “Given the significant discretion retained by the City to grant or deny a demolition or relocation request, the impact of the Ordinance, as amended, was not reasonably ascertainable to property owners, including the Wendlers at the time of enactment. … As such, we conclude that the impact of the Ordinance was not readily ascertainable until the Wendlers’ demolition applications were denied….”
The next question was whether the Wendlers’ court challenge was brought in time. A different Florida appeals court district decision, Russo Associates, Inc. v. City of Dania Beach Code Enforcement Board, 920 So. 2d 716 (Fla. 4th DCA 2006), previously held that the statute of limitations to file suit under the Harris Act was four years, beginning from the date of the government action complained of. This state appeals court agreed with that federal decision and therefore, taking the facts in this case into consideration, and held the Wendlers had timely filed their Harris Act well before the four-year period ended.
Decision available at http://www.5dca.org/Opinions/Opin2013/031113/5D12-2563.op.pdf.
Mass. Supreme Judicial Court, SJC-11134, March 15, 2013: Public pavilion on land taken for urban renewal is not covered by Mass. Constitution’s environmental protection provision.
This case concerns the state’s oversight and control of the use of what has been a public space on land owned by the Boston Redevelopment Authority (BRA). In 1964 the BRA, in its role as an urban renewal agency, adopted an urban renewal plan on certain Boston waterfront land including Long Wharf, which projects into Boston Harbor. The plan listed a variety of goals, one of which was “[t]o provide public ways, parks and plazas which encourage the pedestrian to enjoy the harbor and its activities.” In 1970, the BRA took Long Wharf (and other land) by eminent domain and continues to hold title. Long Wharf is a designated national historic landmark and now has multiple uses including water transportation, public transportation, hotels, retail establishments, restaurants and a portion of the Boston Harborwalk, a pedestrian walkway that lines the waterfront. The BRA built an open-air brick structure at the seaward end of the property known as Long Wharf Pavilion, open to the public.
In 2008 the BRA proposed to redevelop and expand the Pavilion and lease most of it to a private restaurant, while still allowing public use of some of it. Because Long Wharf is located on filled tidelands, the BRA was required to obtain a so-called chapter 91 license from the state Department of Environmental Protection (DEP). The DEP issued the license. After exhausting administrative appeals, plaintiffs (ten residents of Boston) challenged the issuance of the chapter 91 license in court, arguing that the license should not have been issued without the DEP first obtaining a two-thirds roll call vote of each branch of the state legislature under article 97 of the Massachusetts Constitution.
Article 97 is the provision of the state Constitution that codifies certain environmental rights of the people of Massachusetts and declares “the protection of the people in their right to the conservation, development and utilization of the agricultural, mineral, forest, water, air and other natural resources is hereby declared to be a public purpose.” Art. 97 goes on to say, “Lands and easements taken or acquired for such purposes shall not be used for other purposes or otherwise disposed of except by laws enacted by a two-thirds vote, taken by yeas and nays, of each branch” of the legislature. (Emphases added.)
The plaintiffs contended that the Pavilion was subject to art. 97 and that the issuance of the chapter 91 license by DEP improperly “disposed” of art. 97 land without a legislative vote.
The lower court judge found for the plaintiffs that the 1964 urban renewal plan “aimed to create parkland, open space, and a means of utilizing and enjoying the harbor,” that these were art. 97 purposes and therefore the land taken pursuant to the plan is subject to art. 97. The judge further held that issuing the chapter 91 license on land subject to art. 97 required a legislative vote because the issuance amounted to a transfer of legal control from the DEP to the BRA “sufficient to effect a disposition, as well as a change in use of the land, both of which triggered the two-thirds vote requirement.”
The Supreme Judicial Court (SJC) granted direct appellate review of the case and held that the Pavilion is not subject to art. 97, but that even if art. 97 had applied, the issuance of a chapter 91 license is not a disposition that triggers an art. 97 vote requirement.
The SJC focused on whether the 1970 BRA taking was for art. 97 purposes. The court, quoting the state statute enabling takings for urban renewal, said that land taken for urban renewal purposes is “generally understood to be taken ‘for the purpose of eliminating decadent, substandard or blighted open conditions.’” While the court noted that those purposes “may accomplish goals similar to those outlined in art. 97,” the “overarching purpose” of the taking is distinguishable from art. 97 purposes. The court wrote, “The critical question to be answered is not whether the use of the land incidentally serves purposes consistent with art. 97, or whether the land displays some attributes of art. 97 land, but whether the land was taken for those purposes, or subsequent to the taking was designated for those purposes in a manner sufficient to invoke the protection of art. 97.” (Emphasis in original.)
In reaching this conclusion the court expressly disagreed with the breadth of a 1973 published Opinion of the Commonwealth’s Attorney General on the scope of art. 97, which had been a primary source of guidance on this subject. Contrary to the Attorney General’s Opinion, the court said it was looking for a “specific and particularized invocation of art. 97 purposes unique to” the taken area. Nevertheless the court also said that the wording of the taking was not necessarily dispositive but that, “Under certain circumstances not present here, the ultimate use to which the land is put may provide the best evidence of the purposes of the taking, notwithstanding the language of the original order of taking or accompanying urban renewal plan.” The court also noted that a conservation easement (“conservation restriction” in Massachusetts) granted “subsequent to a taking may also place land within the protections of art. 97.”
Despite having held that the Pavilion was not subject to art. 97, the court went on to hold that even if the land were protected by art. 97, the issuance of a chapter 91 license would not trigger the need for a legislative vote. The court clearly stated, “Although the granting of an easement over art. 97 land constitutes a disposition triggering the two-thirds vote requirement, a disposition of any lesser property interest does not.” Despite certain attributes of a chapter 91 license that bear similarity to an easement (e.g., it is not revocable at will but only for noncompliance, lasts thirty years, runs with the land, must be recorded to be valid, any revocation of the license is considered a taking that requires just compensation for improvements built, made or continued in compliance with the license, and it is declared a mortgageable interest by law) the court said the license doesn’t rise to the level of an easement, nor does its issuance of itself change the use of the affected land. In this case, the court said, it would be the BRA lease that changes the use, not the DEP license. Despite the plaintiffs’ assertion to the contrary, the court held that the license does not effect a transfer of control from the DEP to the BRA.
The decision is available as of March 19, 2013, at the Massachusetts SJC website, http://www.massreports.com/ (search under Slip Opinions or later under Opinion Archive).
Massachusetts Supreme Judicial Court, 464 Mass. 400, February 8, 2013: Upland boundary of beach parcel or easement does not move with landward erosion of shoreline.
The Nortons (plaintiffs and appellants) claimed that their fractional interest in a beach on Martha’s Vineyard conveyed rights in a moveable beach parcel that shifts upland with the northerly migration of the beach. The Flynns, owners of the upland parcel, claim that the Nortons title is only to the beach as it existed in 1841, not as the beach is located currently. There was no dispute that due to erosion, “the beach as it existed in 1841, and even as late as 1938, is now submerged beneath the Atlantic Ocean.” The trial judge interpreted the Nortons’ deed as creating a parcel with a fixed landward boundary.
The Supreme Judicial Court reviewed the Massachusetts precedents regarding the shoreline and upland boundaries of shoreline properties. They noted, “There is well-settled authority for the proposition that littoral (shoreline) boundaries are not fixed, because natural processes of accretion or erosion change them,” and “if a body of water moves landward through erosion, littoral property will decrease in size in order to keep the water as its boundary, even to the point of ceasing to exist.” (Internal quotation marks omitted). “A littoral property thus contains a moveable shoreline boundary, but its other boundaries ordinarily are fixed.”
The court then had to evaluate the Nortons’ argument that the upland boundary of their interest in the beach should be understood to shift too because, the Nortons claimed, “the deeds in their chain of title contain either no landward … boundary or reference as a landward boundary only moveable natural monuments.” The question of “whether a littoral property may contain a moveable landward boundary, thus shielding the parcel from the legal effects of erosion” was one of first impression for the court.
Citing New York and Delaware decisions, the court reasoned that recognizing moveable landward boundaries, absent a clear intent manifest in the deed, “would result both in instability and confusion as to ownership of property that erodes beyond landward boundaries and in inequitable loss of property for upland property owners.” Reviewing the controlling deed, the court found, “Because there is no language in the 1841 deed expressly stating that the beach parcel created was moveable, nor is there evidence to indicate the grantor intended to convey a moveable interest, the Nortons hold title to a ‘fixed and stable’ beach parcel” with ascertainable upland boundaries. The court granted the Flynns’ motion for summary judgment on this issue.
In a footnote, the court distinguished certain cases holding that easements appurtenant to beaches moved as the beach shifted by noting that the easements in those cases were granted “explicitly to enable particular uses of the shoreline, such as swimming, bathing, and harvesting seaweed, and thus of necessity shifted with the movement of the shore.” [Editorial note: This writer wonders if this concept of necessity for a particular use might apply to a shoreline conservation easement.]
The Nortons also asserted a prescriptive easement claim, which the court remanded to the trial court because the trial record didn’t contain sufficient subsidiary findings of fact necessary to allow appellate review of the trial judge’s conclusion denying that claim.
The decision is available at http://law.justia.com/cases/massachusetts/supreme-court/2013/sjc-11072.html or by searching for “White & Hartigan” at http://www.massreports.com/opinionarchive/default.aspx.
US Tax Court, T.C. Memo. 2013-38, February 6, 2013: Conservation easement granted to get subdivision permit is quid pro quo, not deductible.
The reader is referred to the excellent summary of this decision at the Nonprofit Law Prof Blog, February 7, 2013, contributed by Prof. Nancy A. McLaughlin. “The Tax Court sustained the IRS’s disallowance of a charitable income tax deduction claimed with respect to a conservation easement donated to Boulder County, Colorado in 2003. The court found that the grant of the easement had been part of a quid pro quo exchange and, thus, was not a charitable gift eligible for a deduction. …”
The decision is available at http://www.ustaxcourt.gov/InOpHistoric/PollardMemo.TCM.WPD.pdf.
US Tax Court, 140 T.C. No. 1, January 28, 2013: Conservation easement with swap provision does not protect property in perpetuity; deduction denied.
At issue was the IRS’s denial of a “qualified conservation contribution” tax deduction for donation of a conservation easement on 184.627 acres of a golf course to Smoky Mountain National Land Trust. The legal issue addressed in the court decision was solely based on the provisions in the conservation easement that conditionally reserved the donor’s right to cause new contiguous land to be added to the easement’s protection in exchange for release of an equal or lesser area of land originally subject to the easement. The donor’s conditional right was subject to the Trust’s determinations, inter alia, that: the new land is of the same or better “ecological stability” as the relinquished land; there would be no adverse effect on the conservation purposes of the conservation easement or on any of the significant environmental features; the new land is “selected, constructed and managed so as to have no adverse impact on the Conservation Area as a whole”; and the fair market value of Trust’s interest in the new land is at least equal to or greater than the fair market value of its interest in the relinquished property. The easement also required the swap to be set out in an amendment to the easement. The IRS asserted that this swap provision did not comply with the perpetuity requirements of the Internal Revenue Code and Treasury Regulations.
The court analyzed this situation from a perspective that it said it had not previously addressed, namely the requirement of Code Section 170(h)(2)(C) defining a “real property interest”. The Code requires that a “qualified conservation contribution” be a contribution of a “qualified real property interest” (§170(h)(1)(A)). That phrase is defined in §170(h)(2)(C) as “a restriction (granted in perpetuity) on the use which may be made of the real property” (among three possible types of interests).
The court concluded that this section creates a requirement that is separate and distinct from the requirement of Code §170(h)(5), which requires that the “conservation purpose is protected in perpetuity”. The court’s analysis was that even if an easement protects the conservation purpose in perpetuity, it could still fail to protect the property in perpetuity.
The IRS argued that by allowing swaps, regardless of how they may be limited to protect the conservation purposes of the easement, a “conservation easement that does not relate to a specific piece of property” does not protect a specific piece of property in perpetuity and therefore fails the 170(h)(2)(C) test. The court agreed.
The court acknowledged that a swap may be allowed when continued use of the relinquished property for the conservation purposes of the easement is impossible or impractical.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/BelkDiv.TC.WPD.pdf.
Court of Appeals of New Mexico,No. 30,865, January 11, 2013: Open space conservation land owned by conservation nonprofit exempt from property tax.
In a case of first impression, the Appeals Court held that property owned by a conservation organization, subject to a conservation easement prohibiting all construction, for the purpose of open space conservation constitutes a “charitable use” that is exempt from property taxes under Article VIII, Section 3 of the New Mexico Constitution.
The state Constitution provides that “all property used for educational or charitable purposes [among various other uses]… shall be exempt from taxation.”
The County taxing authority (Board) had argued that that conservation was not a charitable use because the “land that is idle, unimproved and not in actual use” and there “is no direct and immediate charitable use, and for which the claimed environmental benefit—even if construed to be a charitable purpose—is, at best, remote and consequential.” The Court disagreed.
The Court had little trouble concluding that, in general, conservation is a charitable use under the state Constitution if conservation of the particular land at issue meets the test of providing a substantial benefit to the public. Citing a case the Board offered as precedent for denying the exemption (NRA Special Contribution Fund v. Bd. of Cnty. Comm’rs, 92 N.M. 541, 549, 591 P.2d 672, 680 (Ct. App. 1978)), the Court said substantial benefit to the public means, “[a] benefit of real worth and importance to an indefinite class of persons who are a part of the public, which benefit comes to these persons from the use of property” with the “direct and immediate use of the property” rather than the “remote and consequential benefit derived from its use”.
The Court found New Mexico’s “strong public policy encouraging conservation” and the County’s “goal of conservation within its borders” showed that “conservation of land in its natural and undeveloped state generally benefits the public in the context of environmental preservation and beautification of the State of New Mexico.”
The Board offered the NRA Special Contribution Fund case and another to argue that to be tax exempt there has to be some observable charitable activity. The Court distinguished these cases, saying that they were about the religious or educational exemption, where vacant unused land was found not to be an integral part of those uses. (To quote at length from the opinion: “[W]e cannot expect ‘use’ to be characterized in the same way for different kinds of exemptions. The evidence required to show that the Property is being used for purposes of conservation for the substantial benefit of the public is very different from the proof needed to show that a given property is used for religious or educational purposes. Defendant appears to contend that by not specifically performing activities on the Property, Plaintiff cannot claim a charitable use. In making this claim, Defendant ignores the fact that the way conservation benefits the public is through maintaining the Property for the public’s benefit in its natural, pristine state without any particular human activities or construction.”)
The Court emphasized that each exemption case is unique to some degree, noting that the New Mexico Supreme Court had said, “no case can be said to constitute a controlling precedent for another case in this area.” The Court listed the relevant factors in this case: “the land’s proximity to the Pecos River, the natural and undisturbed quality of the land, Plaintiff’s objective to preserve the land in its natural state, San Miguel County’s public policy for conservation of the Pecos River, and the land’s significance as an important habitat area or as an area containing significant natural, open space, or historic resources”. The Court also seemed to try to preempt misapplication of its holding by writing, “we additionally emphasize that the exemption from property taxes … in this context is not applicable to routine activity or inactivity summarily denoted to be ‘conservation,’ but which benefits only the owner or a limited number of people or interested parties. Nor is every act of conservation of a parcel or piece of property inherently suitable to be classified as substantially beneficial to the public, and thus charitable. Such determinations entail inquiries and determinations of fact by the county boards that consider valuation protests in New Mexico.”
Decision available at http://www.nmcompcomm.us/nmcases/nmca/slips/CA30,865.pdf.
U.S. Tax Court, T.C. Memo. 2013-18, January 16, 2013: Finds historic preservation façade easement in historic district did not diminish value of property.
The IRS denied Scheidelman a charitable deduction for a façade easement on a property in a New York City historic district. The Tax Court sided with the IRS in Scheidelman v. Commissioner, T.C. Memo. 2010-151 (Scheidelman I), saying that Scheidelman’s appraisal was not a “qualified appraisal”. On appeal in the Second Circuit the Appeals Court vacated the Tax Court decision as to the qualification of the appraisal and remanded the case for further proceeding as to the fair market value of the easement for deduction purposes. Scheidelman v. Commissioner, 682 F.3d 189 (2d Cir. 2012) (Scheidelman II). On remand the Tax Court agreed with the IRS that the easement did not diminish the value of Scheidelman’s property and therefore no deduction could be taken.
The burden of proof standard the Tax Court used, citing Evans v. Commissioner, T.C. Memo. 2010-207, slip op. at 15, was that the taxpayer had to provide “sufficient credible evidence to shift the burden of proof to the Commissioner”.
The appraisal Scheidelmans submitted at the time of claiming the deduction said, “In the subject’s market area, the appraiser cannot precisely estimate the extent to which this ‘loss in value’ will result from the facade easement due to the lack of market data. In this situation it is the appraiser’s conclusion that the value of the facade conservation easement … on the subject property would be estimated at $115,000, which is approximately 11.33% of the fee simple value of $1,015,000. This conclusion is based on consideration of range of value that the I.R.S. has historically found to be acceptable as well as historical precedents.”
The IRS presented evidence that ninety-one appraisals prepared by the same company as employed Scheidelman’s appraiser used “almost identical language and percentages without regard to specific facts and circumstances regarding the property subject to the easement and preexisting restraints on changes to the property.”
The Tax Court found Scheidelman’s appraisal “was not based on sufficient facts or data and was not the product of a reliable methodology, and [the] methodology was not reliably applied to the facts of the case. For those reasons, it was not credible.”
The Court also found less than reliable the testimony of another appraiser whose testimony Scheidelman presented at trial, due to “factual and calculation mistakes”. Among other shortcomings, this second appraiser testified his valuation was not based on Scheidelman’s actual easement but on “a summary of my knowledge about the easement program that I’ve gotten over the years,” relied on outdated information, and used “comparables from outside the geographical area of petitioner’s property”.
With these evaluations of Scheidelman’s evidence, the Court said that the burden of proof did not shift to the IRS, so the Court looked to the preponderance of the evidence, but the Court also said it found the IRS’s expert testimony that the easement had no value as a charitable contribution more persuasive regardless of the burden of proof.
One aspect of the IRS’s expert testimony that the Court particularly noted had to do with the comparison of, on the one hand, restrictions imposed by the easement and their enforcement by the holder, National Architectural Trust (NAT), and on the other hand, the restrictions imposed in this historic district by the New York City Landmarks Preservation Commission (LPC) and its enforcement. The IRS argued that the easement had “no material effect”. Their expert also said that enforcement of the LPC controls was better than easement enforcement generally because the LPC controls require, “the homeowner to go to court and seek an exception, in the first instance” while the private easement put the burden on the holder to go to court to enforce its restriction. Scheidelman argued that NAT enforces its restrictions more effectively than the LPC enforces the law but the Court did not find that assertion supported by evidence. (Editorial note: the Court’s view of NAT’s enforcement record may have been influenced by its reputation as evidenced by the facts that lead it to be barred from certain activities regarding the valuation of historic preservation easements in a civil suit brought by the Justice Department on behalf of the IRS.)
Decision available at http://www.ustaxcourt.gov/InOpHistoric/ScheidelmanMemo.TCM.WPD.pdf.
U.S. Dist. Court, D. Idaho, No. Civ. 1:10-186 WBS, January 7, 2013: Refuses to dismiss IRS claim for 75% penalty for conservation easement tax fraud.
The Peskys were denied a charitable deduction from income tax for the grant of a conservation easement to The Nature Conservancy (TNC) on land owned by the Peskys, and the IRS imposed a deficiency penalty. The Peskys paid the deficiency and the penalty and then sued the U.S. seeking a refund. The U.S. filed counterclaims for a 75% civil fraud penalties under Treasury Regulations § 6663(a) due to “conservation easement fraud” (and Schedule C expense fraud). In the current matter, the Peskys asked the Court to dismiss the counterclaims.
The U.S. alleged that the grant to TNC of the conservation easement on a certain parcel of land (the Ketchum Property), along with a cash contribution, pursuant to a Pledge Agreement was a quid pro quo for TNC granting the Peskys an option to buy the Ketchum Property under an Assignment Agreement, and claimed that the Peskys committed tax fraud by structuring these agreements with the intent to hide the connection of the two grants and by in fact trying to hide this connection from the IRS and trying to hide the Pledge Agreement.
The Court wasn’t deciding whether to impose the penalties, only whether the U.S. complaint could go to trial for a decision on the merits. The Peskys’ motion to dismiss comes under Federal Rule of Civil Procedure 12(b)(6), under which the Court would have to accept the allegations in the government’s complaint as true and “draw all reasonable inferences in favor of the [government]”. The standard by which the Court said the U.S. complaint could survive such a motion is if the complaint states “only enough facts to state a claim to relief that is plausible on its face” but “[w]here a complaint pleads facts that are `merely consistent with’ a defendant’s liability, it `stops short of the line between possibility and plausibility of entitlement to relief.’”
The Court then had to look at the elements of establishing fraud to decide if the government’s case met the plausibility standard if the facts alleged by the government were accepted as true. It defined fraud (citing other cases) as the “intentional wrongdoing on the part of the taxpayer with the specific intent to avoid a tax known to be owing,” and said that to establish liability for the civil fraud penalty, “the Government must establish: (1) a knowing falsehood; (2) an intent to evade taxes; and (3) an underpayment of tax.”
The Court found that the government had pled sufficient allegations to allow the fraud claim to proceed. Among the allegation of the government that the Court weighed were: the existence of the two agreements; certain memoranda titled “Nature Conservancy Transaction” that the Peskys knew of prior to their tax filing that said that both agreements “were drafted around the same time … [and] discuss the terms of the [agreements] in the same memoranda…”; that the Pledge Agreement said that it “arises out of” and is “integral with” the Assignment Agreement; “the minutes from a zoning board meeting [that] include a statement from Mark Elsbree, a TNC employee, that TNC ‘had agreed to grant Mr. Pesky a reformed easement, conditioned upon the fact that he can build one house (and one guest house) there’”; the Mr. Pesky’s initial refusal, through his attorney, to share the Pledge Agreement and other documents with the IRS; and Mr. Pesky’s claim of “a near total lack of recall as to anything related to the Pledge Agreement” when first questioned about it by the IRS. The Court found that the government had more than met an even higher standard than usually required (a “9(b) standard”) by pleading “facts of particular misconduct … so that the Peskys can adequately defend against the charge.” (A 2011 court decision about admitting certain evidence the IRS sought was previously reported in the Digest.)
Accordingly, the Court did not dismiss the United States’ counterclaim for fraud penalties related to the conservation easement deduction. The Court dismissed the government’s second counterclaim about business expense deductions, however, finding its pleadings “conspicuously devoid of factual allegations”.
The decision can be found at http://www.leagle.com/xmlresult.aspx?page=6&xmldoc=In%20FDCO%2020130108B93.XML&docbase=CsLwAr3-2007-Curr&SizeDisp=7.
California Court of Appeals, 1st District, Division 4, No. A133472, January 4, 2013: California county’s resolution clarifying conservation easement not subject to environmental impact review. (Unpublished)
In connection with a proposed quarry operation on adjacent land, a conservation district adopted a resolution interpreting an existing conservation easement to permit the establishment of a wildlife preserve on agricultural land. The easement prohibits “any nonagricultural commercial or industrial activity or use” on the restricted land. The preserve was proposed as one possible mitigation of the impact the commercial quarry project would have on certain protected species. The quarry’s proponent’s attorney asked that the easement be clarified or amended to allow the preserve. The District’s staff and general manager concluded that the preserve should not be allowed without an amendment to the easement. The District board adopted an interpretive Resolution rather than an amendment.
Opponents of the quarry (appellants in this case) then brought suit claiming for a variety of reasons that the District’s adoption of the Resolution constituted “approval of a project” within the meaning of the California Environmental Quality Act (CEQA) (Pub. Resources Code, §§ 21000 et seq.) and therefore required compliance with CEQA. They also sought to “enjoin the District from interpreting conservation easements similar to the one at issue in this case in such a way as to permit similar mitigation in order to benefit other development projects, without first complying with CEQA.”
The Court explained CEQA this way: “CEQA generally prohibits governmental agencies from approving projects that have significant impacts on the environment without first completing the environmental review process, and either mitigating those impacts or finding mitigation to be infeasible and the impacts to be justified by overriding considerations. (§§ 21002, 21002.1, 21006, 21081.) CEQA defines a ‘project’ as ‘an activity which may cause either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment,’ and which is undertaken, financially supported, or permitted by a public agency. (§ 21065.)”
In an unpublished opinion (not citable as precedent unless published) the Court refused to require CEQA review because it did not find that the Resolution was in any way a “project” within the applicable definition. The Court concluded that “All it [the Resolution] does is confirm that the terms of the Easement do not preclude the possibility that the Preserve, in some form, could be established on the Wilson property. … [W]hile the Resolution clarifies that establishment of the Preserve is permissible in principle under the existing terms of the Easement, the Resolution neither requires nor permits any specific action, or any physical change to the Wilson property.”
As already noted, appellants argued, in the alternative, that the Resolution was a project because of its potential use as precedent for the use of conservation property for the benefit of commercial projects. Evidently the appellants had no precedent to cite for this argument. The Court found it significant that apart from the idea of benefitting a commercial project, the physical changes “contemplated” by the use allowed under the Resolution were “already expressly permitted under the existing terms of the Easement.”
Because the Court held that that the Resolution did not constitute “approval of a project” the request for an injunction was denied.
Decision available at http://www.courts.ca.gov/opinions/nonpub/A133472.PDF.
U.S. Tax Court, 2012 T.C. Memo 345, December 17, 2012: Conservation easement deduction denied because mortgage not timely subordinated; 20% penalty upheld.
In 2006, Minnick granted a conservation easement to a land trust on a 74-acre parcel of land near Boise, Idaho. The land was subject to a mortgage that was not subordinated to the conservation easement until five years later. Minnick initially did not claim a deduction for tax year 2006, but later amended his return to do so, and claimed deductions in his 2007 and 2008 returns for the carryover portion of the alleged value of the easement contribution that exceeded his deduction limit for 2006. The IRS disallowed Minnick’s carryover deductions and imposed a 20% accuracy-related penalty under Internal Revenue Code section 6662(a), which they increased to 40% under section 6662(h) for an alleged gross valuation misstatement.
The IRS challenged the deduction on several grounds, but the Court did not address most of them because it decided that the deduction was not allowed because the mortgage was not subordinated at the time of the grant of the conservation easement. The Court noted that Treasury Regulations sec. 1.170A-14(g)(2) requires that the holder of any mortgage on a donated easement property must “subordinate its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity,” which the Court in Mitchell v. Commissioner, 138 T.C. 324, 332 (2012), held requires that the subordination must be in place at the time that the conservation easement is granted.
Minnick tried to distinguish the Mitchell holding by arguing that his intention to obtain the subordination at the time of the grant (as evidenced by his grantor’s warranty in the easement that there was no unsubordinated mortgage) was sufficient, and that his mortgagee “would have been willing to freely subordinate its mortgage at the time the conservation easement was granted”. The Court rejected these arguments, writing, “Intention and willingness are not what matters.”
Minnick also argued that Mitchell should not apply because in this case, unlike in Mitchell, Idaho law (the Uniform Conservation Easement Act, Idaho Code Ann. secs. 55-2101 to 55-2109 (2012)) imposes the doctrine of cy pres on all conservation easements in Idaho and, they argued, the cy pres doctrine has the effect of subordinating the mortgage.The Court rejected the theory that cy pres subordinates the mortgage.
The Court also rejected Minnick’s attempt to use the “remote possibility” defense, writing that, as in Mitchell, the likelihood of default is irrelevant.
Regarding penalties, the Court found Minnick liable for a 20% accuracy related penalty but not a 40% penalty for gross valuation misstatement. Given the Court’s determination that the deduction failed because of the absence of a timely subordination, without getting to the valuation questions, the IRS dropped its request for the gross valuation misstatement penalty. The Court found Minnick was negligent in his underpayment of taxes (i.e., in claiming the deduction) in that his acts and omissions show a “lack of due care or the failure to do what a reasonably prudent person would do under like circumstances. Hofstetter v. Commissioner, 98 T.C. 695, 704 (1992).” Minnick’s warranty in the easement that there was no unsubordinated mortgage was held against Minnick as putting him on notice that a subordination was required, thereby demonstrating both his negligence and his ineligibility for the good-faith-and-reasonable-cause defense under code Section 6664(c). The Court gave Minnick the benefit of the doubt that the warranty was not fraudulent, but merely an inadvertent error.
The Court also addressed procedural matters regarding the admissibility of certain evidence for valuation purposes as distinct from the bearing of such evidence on the subordination question.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/MinnickMemo.TCM.WPD.pdf.
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U.S. District Court, E.D. Louisiana,Civil Action No. 11-3064, November 19, 2012: No willful or malicious failure to warn of danger; tort claim dismissed under Louisiana Recreational Use Immunity Statutes.
Plaintiff Darla Dhillon suffered personal injuries when she visited Oak Alley Plantation, a national historic landmark, operated by Defendant Oak Alley Foundation (“Oak Alley”), a tax exempt nonprofit company. While walking “straight out” from the mansion’s entrance through an opening between the pillars of the veranda to the front of the house to view the alley of oak trees, Plaintiff lost her balance — allegedly because of a difference in height between the veranda and the surrounding ground, “which [she claimed] was not discernible” — and broke both ankles.
Defendants Oak Alley moved for summary judgment to have the claim dismissed, claiming (1) immunity under the Louisiana Recreational Use Immunity Statutes (La. Rev. Stat. § 9:2791 and § 9.2795), and (2) that the “willful or malicious failure to warn” exception to such immunity did not apply in the facts of this case. Plaintiff Dhillon argued that Oak Alley is not entitled to immunity, and even if it were, there is a genuine issue of material fact with respect to whether the failure to warn was willful or malicious (meaning that summary judgment would not be appropriate at this stage of the legal proceedings).
The Court stated that the nature of the Defendant’s operations, such as charging a fee, did not exclude it from coverage under the Recreational Use Immunity Statutes.
The Court characterized the first part of the disagreement between the parties as whether Dhillon “was injured while engaged in a recreational activity within the coverage of the statutes”. The Court said her activity was covered under “viewing or enjoying historical . . . sites”, one of the definitions of “[r]ecreational purposes,” in La. Rev. Stat. § 9:2795(A)(3), and that attached “buildings” and “structures” are within the statutes definition of “[l]and,” (§ 9:2795(A)(1)).
The Court stated that due to amendments in the Immunity Statutes since a 1985 Supreme Court of Louisiana decision established a three-pronged test for applicability of those Statutes, the only part of those tests that may remain applicable is whether “the instrumentality that caused the injury had to be ‘of the type normally encountered in the `true outdoors’ and not `of the type usually found in someone’s backyard.’” Oak Valley asserted, and the Court agreed, that viewing a historic alley of oak trees is a type of activity that can be pursued only in the outdoors, so even under the remaining test, Oak Alley is entitled to immunity under the Recreational Use Immunity Statutes in this case.
The Court then turned to whether Oak Valley lost that immunity by a “willful or malicious failure to warn against a dangerous condition [or] structure”. The Court defined that standard as,
“[A] failure to warn of a dangerous condition connotes a conscious course of action, and is deemed willful or malicious when action is knowingly taken or not taken, which would likely cause injury, with conscious indifference to consequences thereof.” (Citing Lambert v. State, 912 So.2d 426, 434 (La. Ct. App. 2005).) The Plaintiff argued that similar injuries have occurred on the veranda, and therefore Oak Valley’s knew of a dangerous condition but didn’t act to remedy it or warn of it.
Finding no genuine issue of material fact, the Court concluded that because there were less than a handful of other guests “out of the millions of visitors since 1976 had previously tripped in the same vicinity as the Plaintiff in this case does not render Oak Alley’s failure to warn ‘willful or malicious”… Instead, this case resembles Robinson v. Jefferson Parish School Board, 9 So.3d 1035 (La. Ct. App. 2009), in which the court held that mere evidence of awareness of a dangerous condition did not suffice to prove willful or malicious failure to warn of that condition. Id. at 1046.”
Accordingly, the Court granted Oak Valley’s summary judgment motion and dismissed the case.
Decision available at http://la.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20121119_0001468.ELA.htm/qx.
Cal. Court of Appeal, 3rd Appellate Dist., No. C068816, November 26, 2012: Validates conservation easement hunting ban despite failure to post land.
Plaintiff/appellant Wooster’s 4,535 acre property is subject to a conservation easement deed and agreement held by the Department of Fish and Game, granted by prior owners. The easement granted the Department “full hunting rights” on the land. Among many “conditions” listed in the easement, the Department was required to “post the property at all points of entry to inform the public that said property is a State wildlife area and that no trespassing or hunting is allowed.” The Department did not keep the property posted. Wooster sought to remove the easement by making three arguments.
Condition Subsequent: Wooster claimed that the posting requirement was a “condition subsequent” – meaning that because the Department failed to comply with the condition after the easement was granted, the Department must forfeit the easement. The Court cited prior California cases as holding that in general the law will try to interpret an instrument so as not to destroy or extinguish “estates”, including but not limited to easements. Thus, “no provision in a deed relied on to create a condition subsequent will be so interpreted if the language of the provision will bear any other reasonable construction. While no precise form of words is necessary to create a condition subsequent, still it must be created by express terms or by clear implication.” (Citing Hawley v. Kafitz (1905) 148 Cal. 393, 394).
The Court noted that other provisions listed in this easement as “conditions” “cannot be reasonably interpreted as conditions subsequent”, and concluded that merely listing this requirement as a condition did not make it a condition subsequent. The Court found no other indications in the document to support Wooster’s contention. Wooster also tried to argue that ”[t]he law provides that a condition subsequent is created in situations, such as here, where damages from breach are difficult or impossible to establish.” The Court responded that in this case, the direct damages resulting from the Department’s failure (the cost of posting signs) would not be difficult to determine, and that Wooster identified “no authority supporting his contention that the difficulty in proving consequential damages supports construing language in a deed as a condition subsequent” [emphasis added].
Rescission for Breach of a Covenant: Wooster’s second argument was that even if this condition didn’t rise to the level of a condition subsequent, the easement should be rescinded because the Department breached a covenant that was “consideration” for the easement. The Court rebuffed this by citing California precedent that a deed without fraud in its inception conveys title and is not void for any failure of consideration, either in whole or in part, regardless of whether the consideration was an oral promise or a written promise contained in a recorded deed. The reason for this, the Court explained, is that otherwise there would be constant uncertainty about the validity of titles, because a title search could never reveal whether a particular promise that served as consideration for the conveyance, whether written or oral, had or had not been fulfilled.
Authority to Accept Grant of Hunting Rights: Wooster’s third claim was that the easement was void “from the outset” and should be rescinded because the Department was “not authorized to accept a grant of `full hunting rights’” as such a grant was inconsistent with public policy about hunting and the purposes of a conservation easement.
The Court rejected Wooster’s attempt to “cobble together a public policy in favor of hunting” and concluded that California’s “Fish and Game Code section 1801 supports, rather than forbids, the creation of areas where wildlife can be safe from depredation by hunters.” The Court then rejected Wooster’s argument that accepting a grant of hunting rights is contrary to the purposes for which the Department can acquire property under the California Wildlife Conservation Law of 1947 (Fish & G. Code, § 1300 et seq.) (the 1947 law). The Court wrote, “What Wooster’s argument ignores is the self-evident fact that creating pockets of land in which wildlife can be safe from hunting actually does serve to increase the recreational use of wildlife, including as objects of the sport of hunting.”
Wooster next argument was that because the California Civil Code makes him the owner of wildlife while it is on his property, the Department should not be able to acquire the right to hunt wildlife on his property. The Court responded that the “agreed-upon ban” in the easement doesn’t take away ownership but merely says that no one can lawfully hunt the animals.
Lastly Wooster claimed that the easement must be appurtenant to and benefit other property to be enforceable against him. In essence, the Court said, he argued that “the extinguishment of hunting rights has no place in a conservation easement”. Citing the California conservation easement statute’s (Civ. Code, § 815.1) purpose ” to retain land predominantly in its natural, scenic, historical, agricultural, forested, or open-space condition” the Court held that “using a conservation easement to ban hunting most certainly does help retain land in this sort of unspoiled condition. As such, a hunting ban is unquestionably a legitimate aspect and aim of a conservation easement.”
Decision available at http://www.courts.ca.gov/opinions/nonpub/C068816.PDF.
District Court, E.D. Virginia, No. 4:12cv111, November 21, 2012: Complaint of plaintiff in ADA historic property claim need not show remedy is readily achievable.
The historic preservation issue in this case is whether, at time of filing a claim in court under the Americans with Disabilities Act (“ADA”) for removal of architectural barriers at a historically significant building, the person filing the claim has the burden of showing that the barrier removal is “readily achievable” without threatening the historic significance of the property.
Plaintiff Flaum is assumed, for the purposes of this case, to be a “qualified individual with a disability” under the ADA. He brought this action alleging that that he encountered various architectural barriers at the “18th century style retail village” that is part of a Historic District in Williamsburg, Virginia, operated by Defendant Colonial Williamsburg Foundation (“Colonial Williamsburg”). Flaum claimed that the architectural barriers limited his access to the goods, services, facilities, and privileges offered at the property in violation of the ADA.
Title III of the ADA prohibits discrimination against the disabled in the full and equal enjoyment of public accommodations. 42 U.S.C. § 12182(a). Entities that provide public accommodations must remove architectural and structural barriers, or if barrier removal is not readily achievable [emphasis added], must ensure equal access for the disabled through alternative methods, §§ 12182(b)(2)(A)(iv)-(v) and 12184(b)(2)(C). According to the ADA Title III Technical Assistance Manual § III-4.4200, “[b]arrier removal would not be considered `readily achievable’ if it would threaten or destroy the historic significance of a building or facility that is . . . designated as historic under State or local law.”
Defendant Colonial Williamsburg asked the Court to dismiss Flaum’s complaint saying, among other reasons, it fails to state a cause of action on which relief can be granted. Colonial Williamsburg argued that Flaum did not allege any facts that show that the alleged architectural barriers could be removed in a readily achievable manner that does not threaten the historic significance of the property. Colonial Williamsburg argued that several courts have held that Flaum, as the initial complainant, has the burden of showing that “any method of readily achievable barrier removal would not threaten the historic significance of the property”.
For the purposes of a motion to dismiss, a court assumes that all of the factual allegations in the Plaintiff’s complaint are true, but the facts alleged “must be enough to raise a right to relief above the speculative level and must provide enough facts to state a claim to relief that is plausible on its face.” The Court held that while it is correct that at a trial the Plaintiff has the burden on the “readily achievable” question, the “readily achievable” inquiry is premature at the pleading stage. The Court wrote, “The law does not require that Plaintiff request some specific form of modification as a prerequisite to a valid ADA claim. Plaintiff need only allege facts sufficient to permit a court to infer that all the elements of the cause of action exist. Plaintiff has satisfied his burden by pleading that ‘it is readily achievable for Defendant to correct the ADA violations . . . without threatening or destroying the historical significance of any facility…’. The question of what specific modifications may be necessary for full compliance is a factual issue reserved for trial.” Accordingly, and because the Court found against all the other grounds for dismissal alleged by Colonial Williamsburg, the Court denied Colonial Williamsburg’s motion to dismiss the complaint.
Memorandum decision available at http://docs.justia.com/cases/federal/district-courts/virginia/vaedce/4:2012cv00111/282378/25/0.pdf?ts=1353599450.
US Tax Court, 139 T.C. 14, October 25, 2012: Allows deduction for conservation easement despite technical anomalies of easement, appraisal and gift acknowledgment.
The issues in this tax case were: (1) Were the conservation purposes of a conservation easement protected in perpetuity even though the easement required that in the event of judicial extinguishment, most of the proceeds from a future property sale paid to the donee land trust had to be paid to certain government entities? (2) Was petitioners’ appraisal “qualified” even though it did not explicitly contain a statement that it was “prepared for income tax purposes”? and (3) Did multiple documents signed by the donee land trust, taken together, constitute a “contemporaneous written acknowledgment” of the donation, even though there was not one document that by itself met all the requirements for such acknowledgment?
Irby Ranches, LLC (Irby or Petitioner) conveyed to Colorado Open Lands (COL), the donee land trust, two conservation easements on two parcels, as part of a bargain sale transaction. The cost of the transaction to COL was supported by grants from three governmental agencies to COL: (1) the Farm and Ranchland Protection Program (FRPP) of the National Resources Conservation Service (NRCS), an agency of the U.S. Department of Agriculture (USDA); (2) Great Outdoors Colorado (GOCO), a voter-created trust fund organization of the State of Colorado; and (3) the Gunnison County Land Preservation Board.
Perpetuity: One of the easements said that, of the portion paid to COL of proceeds of a post-extinguishment sale or condemnation, the various government agencies that funded the transaction were entitled to receive 75%, a figure determined by their portion of the funding.
The Internal Revenue Code requires that an easement must be granted “in perpetuity” for the contribution to be tax deductible. The IRS argued that the division of the post-extinguishment proceeds between COL and the government funders failed the perpetuity test. The IRS said it didn’t comply with Treasury Regulations sections 1.170A-14(g)(6) (i) and (ii) that require that for an easement to be considered as perpetual, the donee of the easement “must be entitled to a portion of the proceeds [of a post-extinguishment sale or exchange of the property] at least equal to that proportionate value of the perpetual conservation restriction,” and the payment to the donee must be “used by the donee organization in a manner consistent with the conservation purposes of the original contribution.” The IRS argued that the payment of proceeds to COL was merely “superficial” because of COL’s obligation to repay grant money to the government funders, and therefor the easement didn’t meet the requirement as to payment of proceeds or use of proceeds.
The Court held for Irby on both points. First, the Court said that COL would indeed receive its proportionate share of the extinguishment proceeds. The Court distinguished several other cases (Wall v. Commissioner, T.C. Memo. 2012-169, Mitchell v. Commissioner, 138 T.C. 16 (Apr. 3, 2012); 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84., Kaufman v. Shulman, 687 F.3d 21, 26 (1st Cir. 2012), aff’g in part, vacating in part, and remanding in part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010)). While in those cases, the Court wrote, “the funds diverted by the deeds were used to further the donor taxpayer’s interests,” in this matter COL “holds an absolute right to the condemnation proceeds vis-à-vis” the taxpayer, who could never “reap a windfall should the east Irby and/or west Irby parcels be condemned.” Second, the Court found that all of the extinguishment proceeds would be used by COL “in a manner consistent with the conservation purposes of the original contribution.” It noted that all of the entities to which COL must pay a share of the proceeds are governmental entities, qualified to be the donee of deductible charitable contributions, and “established to assist in the conservation of open land, and … legally obligated to fulfill their conservation purpose.” It was not significant that these entities are not required to use the proceeds for the conservation purposes of the Irby easement parcels.
(The Court noted that there was evidence that the grant makers required non-negotiable, “take it or leave it” reimbursement provisions as conditions of making their grants, but the relevance of that to the deductibility of the donation of the easement by the taxpayer was not clear to this reader.)
Appraisal prepared for income tax purposes: The Petitioners’ appraisal did not contain the explicit statement that it was prepared for use for income tax purposes. Treasury Regs. section 1.170A-13(c)(3)(ii)(G) says that such statement is required. The Court held this was not a fatal flaw. It wrote that the circumstances in this case were like those in Simmons v. Commissioner, T.C. Memo. 2009-208, aff’d, 646 F.3d 6 (D.C. Cir. 2011), in which the appraisal likewise did not include the explicit statement but did say that the property owner was contemplating donating the easements to a charitable entity, discussed relevant IRS practice and Tax Court cases, and “included all of the required information either in the appraisal or in the appraisal summaries attached to petitioners’ respective returns”.
Contemporaneous written acknowledgment: The Code requires that to qualify for a charitable deduction for any contribution of $250 or more, a taxpayer must obtain a contemporaneous written acknowledgment from the donee organization. The IRS argued that there was no single writing from COL to Irby that met the requirements for a contemporaneous written acknowledgment. The Court, however, agreed with the Petitioner that there is nothing that says the contemporaneous written acknowledgment can’t be made up of a series of documents. The Court said the requirements were met by the contents of several documents signed by COL: Option Agreements, the Forms 8283, letters from COL to Irby, the settlement statements prepared by the title company in the bargain sale transaction, and deeds.
The Court noted that even though COL did not state in any of these documents that no goods or services were provided by the donee organization in exchange for the gift, such statement from the donee is required only “[i]f the donee organization provided no goods or services to the taxpayer in consideration of the taxpayer’s contribution”. In this bargain sale transaction, goods were provided “in the form of cash”, which was disclosed on the option agreement and the settlement statements.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/IrbyDiv.TC.WPD.pdf.
US Tax Court, 139 T.C. No. 13, October 23, 2012: On remand from Appeals Court, historic preservation deduction reduced, penalty imposed.
The US Tax Court took another look at the objections of the Whitehouse Limited Partnership (Petitioner) to the IRS’ reduction of Whitehouse’s claimed charitable deduction for donation of a historic preservation easement, and the imposition of an accuracy penalty for gross valuation misstatement. The case was heard on remand from the U.S. Court of Appeals for the Fifth Circuit, per its opinion in Whitehouse Hotel Ltd. P’ship v. Commissioner, 615 F.3d 321 (5th Cir. 2010) (Whitehouse II), vacating and remanding 131 T.C. 112 (2008) (Whitehouse I). Whitehouse II was reported in Preservation Law Digest, but Whitehouse I was decided before PLD began publication.
The matter was remanded to the Tax Court for it take another look at several issues as to which the Court of Appeals overruled its decision or that required further adjudication because of the overruling.
Easement’s affect on Kress Building Value: The preservation easement was imposed on the Maison Blanche building but not on the Kress building, two contiguous buildings owned by Whitehouse. The day after Whitehouse donated the easement, it converted the Maison Blanche and Kress buildings into a single condominium. The Appeals Court wrote, “… as a matter of valuation, the tax court erred by not considering the effect on market value of the [two] buildings’ pending combination….” Therefore the Tax Court’s new decision takes into account the effect on both buildings.
Highest and Best Use: The appraisal of the easement’s value as it affected the value of the property before and after the donation had to include a conclusion about the property’s highest and best use. If the property’s value was determined by looking at so-called comparable sales, the appraiser’s decision about which properties are comparable would be determined by selecting the appropriate use of the property being appraised. The Tax Court therefore addressed this question in Whitehouse I but the Appeals Court found the Tax Court’s consideration “ambiguous” and ordered the Tax Court to reconsider it.
The Tax Court in Whitehouse III repeated that it did not need to decide whether the highest and best use was as the Whitehouse’s appraiser said (a luxury hotel) or as the IRS’ appraiser said (a nonluxury hotel) because “the determination of fair market value incorporates the highest and best use of a piece of property only if the demand for that use will affect the market price… The point to be taken is that, although the highest and best use of property may determine a ceiling on how much a willing buyer would pay for the property, it does not necessarily determine a floor on how little a willing seller would accept”. Citing Van Zelst v. Commissioner, 100 F.3d 1259 (7th Cir. 1996), aff’g T.C. Memo. 1995-396, the Court said that “the equilibrium price at which the willing buyer and the willing seller would meet would be somewhere between the value of the property taking into account its most productive use (i.e., its highest and best use) and the value of the property taking into account its second most profitable use”. The value would depend on demand: greater the demand for the property would skew value to the highest and best use; low demand would skew value to the second most profitable use.
In this case, the Court found no evidence that demand for the property at the date of donation was higher than it had been at the time of Whitehouse’s purchase of the property three years before, and the burden of proof was on Whitehouse to show otherwise. Significantly, at both dates the buildings were unrenovated shells. (This point also was significant in the Court’s weighing of Whitehouse’s appraisal and the accuracy-related penalty, discussed below.) Accordingly, the Court decided, “we are accepting …[the IRS’ appraiser’s] view that the value of the subject property under the comparable-sales approach is to be determined on the basis of sales of buildings suitable for conversion into hotels — luxury or not…. We do not need to choose between the two experts’ opinions of highest and best use, since, even if we were to agree with … [the Whitehouse’s appraiser], it would make no difference.”
Rejecting Replacement Cost and Income Valuation Methods: In Whitehouse I the Tax Court rejected the income and replacement-cost valuation methods and said comparable sales should be used. The Appeals Court did not decide whether the Tax Court was wrong but ordered reconsideration of all three easement valuation methods. The Tax Court in Whitehouse III again rejected the Whitehouse appraiser’s use of the reproduction cost method as inappropriate for this type of historic structure (in part because of the unlikelihood that anyone would reproduce it if it were destroyed), citing United States v. Benning Housing Corp., 276 F.2d 248, 250 (5th Cir. 1960) and Estate of Palmer v. Commissioner, 839 F.2d 420, 424 (8th Cir. 1988). The Court also rejected the income method for this property. It noted, “Certainly, we are not hostile to the income approach to determining value, and we have accepted (and applied) it in determining the value of conservation easements, see, e.g., id. (subdivision method), although it is not favored if comparable-sales data are available… We have no difficulty with the process [whereby Whitehouse’s appraiser used a computer model employing a discounted cashflow analysis to arrive at both before- and after-restriction present values for the Maison Blanche-Kress parcel]. Where we have difficulty is with petitioner’s call to trust on their face … [Whitehouse’s appraiser’s] judgments as to values to be input to his model.”
Comparable-sales Valuation Method: The Court again rejected the Whitehouse appraisal’s reduction by 10% of each comparable’s price to reflect the effect of the easement in the “after” because it was supported only by the appraiser’s opinion, which the Court did not find persuasive. The Court also rejected that appraisal’s use of nonlocal properties as comparables, in part because it found local comparables were available and because the adjusted values the Whitehouse appraisal calculated for nonlocal properties were significantly higher than the adjusted values that appraisal determined for local properties.
Extent of the Easement, Affect on Value: Whitehouse claimed that the historic preservation easement included the Kress building by prohibiting an increase in its height that otherwise could have been changed to allow 60 additional rooms atop that building. Whitehouse said that prohibition negatively affected the Kress building’s value and had to be taken into account in the easement’s value. Although the Court opined that the promise not to increase the height of the Kress building was not a qualified conservation contribution under the Internal Revenue Code and Treasury Regulations because under Louisiana law it was not a preservation easement enforceable in perpetuity – and therefore did not affect the value of the contributed easement – nevertheless the Court thought it should recalculate the value of the easement (which it referred to as a servitude) “on the assumptions that, in fact, it does obligate the partnership not to build atop the Kress Building and that separate ownership of the Maison Blanche and Kress Buildings is unlikely”. (The Court may have been trying to avoid an appeal on this point.)
(As a drafting point, it’s worthwhile to report that Whitehouse’s argument in support of its position was based in part on language in the preamble of the easement, one of “whereas” paragraphs. The Court noted, “Petitioner’s reliance on the preamble of the conveyance is misplaced. ‘Generally, a preamble does not create rights beyond those conveyed by the contract’s operative terms.’ Chevron U.S.A., Inc. v. Santa Fe Snyder Corp., 69 Fed. Appx. 658 (5th Cir. 2003) (citing Grynberg v. FERC, 71 F.3d 413, 416 (D.C. Cir. 1995)”. But the Court went on to say that even if the preamble had an affect on how the body of the easement should be understood, “it must be that the preamble does so by implication, since neither the term ‘servitude of view’ nor any description of a servitude of view appears in the preamble. To accept that a servitude of view (a predial servitude) is established by implication, however, is prohibited.”)
Valuation: The Court used the comparable-sales method of valuation. Whitehouse had claimed a charitable deduction of $7.445 million. Its appraisal had valued the easement at $10 million, relying primarily on the replacement cost approach. Although Whitehouse paid $11 million for the property in 1995, the 1997 appraisal calculated a “before” value of $41 million. The IRS would have reduced the deduction $1.15 million. The Court calculated the “before” value of the combined Maison Blanche-Kress property at $12.473 million, and the “after” value as $10.615 million, resulting in a value of the easement and deduction at $1.858 million.
Accuracy-Related Penalty: The deduction claimed by Whitehouse was 401% more than the deduction allowed by the Court. If a taxpayer overstates the value of a property claimed as a deduction by 400% or more, it’s a “gross valuation misstatement” for which a penalty may be imposed under section 6662(a) of the Code of 40% of any underpayment of tax. Whitehouse argued that the penalty should not be imposed, under the “reasonable cause” exception of section 6664(c) of the Code. To claim the reasonable cause exception the taxpayer must show that it acted with good faith to assess the proper tax liability, and for a substantial or gross valuation misstatement the exception also requires the taxpayer to show that the claimed value was based on “a qualified appraisal made by a qualified appraiser” and that “the taxpayer made a good-faith investigation of the value of the contributed property” [emphasis added]. Here the issue was whether Whitehouse made a good faith investigation. Whitehouse argued that it satisfied that burden because it relied on a qualified appraisal and professional tax advice it received from its accountants and lawyers.
The Court found that the reliance on the appraisal could not be considered as having been done in good faith and did not demonstrate a good faith investigation where that appraisal gave a before value of $96 million on a building purchased not long before for $9 million, and which valued it as if fully developed and not as the shell that it actually was. The Court wrote, “a reasonably prudent taxpayer attempting to assess its proper tax liability would no doubt have further investigated [the appraiser’s] methodology and conclusions. Lack of further investigation would be counterindicative that the partnership acted with reasonable cause and in good faith in the face of the facts before it.” The Court gave no weight to Whitehouse’s comparison of that appraisal to another appraisal because the other appraisal appraised the property and not the easement. While there was testimony in the record that Whitehouse relied on the advice of its accountant and lawyer, that testimony did not show what that advice was or whether it was based on an investigation into the value of the easement. (The Court said it was not implying a duty on the part of an accountant who prepares a tax return to conduct such an investigation or to ensure that the taxpayer had done so “unless the information furnished it appeared incorrect, incomplete, or inconsistent”.) Accordingly the court imposed the 40% accuracy related penalty.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/WhitehouseDiv.TC.WPD.pdf.
KY Court of Appeals, Nos. 2009-CA-002343-MR, 2009-CA-002394-MR, October 12, 2012: Nominating process for National Register fundamentally flawed and subject to review in state court.
This appeal turns on state court jurisdiction and process. The appeal arose in response to the process of nominating a property to the National Register of Historic Places, specifically the way the state government counts the number of owners of property nominated to the National Register for the purpose of determining whether a majority of owners object to the nomination. Norton and others (Appellants) objected to the nomination of their property, known as the “Upper Reaches of Boone Creek” by the Kentucky Historic Preservation Review Board to the National Register.
Appellants sought injunctive and declaratory relief in state court, claiming that the way owners were counted in this case resulted in an unconstitutional taking, due process violations, trespass, conversion, defamation, and unjust enrichment. The state trial court dismissed the case, deciding it lacked jurisdiction to hear the case, even though that court also said that the federal nomination regulations were arbitrary and unclear, that the process potentially deprived property owners of rights, and that the regulations violated due process. The Appellants appealed the dismissal to the Kentucky Court of Appeals.
The Court of Appeals decided that the issues in the case could be categorized as “(1) jurisdictional issues including personal jurisdiction and subject matter jurisdiction, as well as the concurrent jurisdiction of state and federal courts to hear their claims; and whether the doctrines of mootness and failure to exhaust administrative remedies apply; (2) constitutional issues including unconstitutional taking and due process violations, both substantive and procedurally; (3) governmental immunity; and (4) common law claims including trespass and defamation.”
The Court held that the trial court did have concurrent jurisdiction to hear the common law claims presented at trial, because the government did not convince the Court that there is an explicit provision or implicit recognition by Congress confining jurisdiction to federal courts.
The Court then rejected the government’s contention that the Appellants were seeking to have a state court remove a property from the National Register. Instead, the Court understood the Appellants to seek a determination whether “procedural irregularities occurred in the nomination process in order to provide a ground for removal when petitioning the Keeper”. As such, under applicable federal regulations (36 C.F.R. § 60.15(a)(4)), the Appellants were not required to exhaust administrative remedies before they could obtain judicial relief.
Regarding the unconstitutional taking claim, the Court held that the Appellants were entitled to discovery on this issue before the trial court could entertain a motion to dismiss.
Regarding the due process violation claim, the Court held that the process used to assess the number of property owners and the number of objections was “fundamentally flawed … arbitrary and unclear because there is no fixed time at which the number and names of the landowners are determined at a reasonable time prior to the hearing, thus leading to a continual fluctuation in the number of landowners and required objections.” In addition the Court found it arbitrary and in violation of Appellants’ due process rights that the government counts properties owned by trusts, estates, LLCs, and LPs as entitled to “a single vote” (i.e., as owned by one single owner) while a husband and wife each count as owners regardless of how the title is held.
Decision available at http://law.justia.com/cases/kentucky/court-of-appeals/2012/2009-ca-002343-mr.html and http://www.leagle.com/xmlResult.aspx?xmldoc=In%20KYCO%2020121012273.xml&docbase=CSLWAR3-2007-CURR.