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.

Dissent:

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.

Estate of Robbins v. Chebeague & Cumberland Land Trust

Supreme Judicial Court ME, 2017 ME 17, January 26, 2017: Maine landowner doesn’t have standing to seek enforcement of conservation easement on land of another.

This case interprets a Maine statute to decide whether an owner of land subject to a conservation easement has standing to ask the courts to enforce the restriction as to another parcel of land subject to the same restriction. Both parcels of land were portions of the larger parcel which was the original subject of the easement. The majority of the court ruled that the Maine statute does not give the owner of one parcel standing to seek enforcement as to land of another owner, but it left open the question of whether the plaintiff landowner has a breach of contract claim against the holder of the easement. Two justices dissented.

In Maine, 33 M.R.S. § 476 et. seq. define and govern “conservation easements.”  The parties who may initiate or intervene in a court action affecting a Maine conservation easement are identified in 33 M.R.S. § 478(1). Section 478(1)(A) identifies one of those parties as: “An owner of an interest in the real property burdened by the easement” [emphasis added]. Subsection (D) identifies the Attorney General (subject to certain exceptions) as another party.

Payson, acting by and through her attorney-in-fact Robbins, granted the conservation easement to the predecessor in interest of the current holder, The Chebeague & Cumberland Land Trust (Trust), on roughly 100 acres of land on the Maine coast. Subsequent conveyances left the Estate of Robbins (Estate), successor to the original grantee, owning only a portion of that land and the Town of Cumberland (Town) owning another portion. The Trust agreed that the Town could use its land for a public beach and make various physical changes to it (build a parking lot, resurface the existing access road, relocate an existing bath house and add portable toilets). The Estate sued and on summary judgment the trial court found that the Estate lacked standing to bring any claim. The Estate appealed.

The appellate decision turned on the meaning of the phrase in the statute, “the real property burdened by the easement.” The court found this phrase to be ambiguous as to whether “the” real property means “all of the real property burdened by the easement” or only “the parcel on which enforcement is sought.”  To resolve the ambiguity, the court looked to the common law of servitudes before the advent of the statutory conservation easement, the history of the creation of statutory protections for conservation easements (including the seminal article by William H. Whyte, Jr., Securing Open Space for Urban America: Conservation Easements, Urban Land Inst.-Tech. Bulletin, no. 36, Dec. 1959, at 11-14), the Uniform Conservation Easement Act (UCEA) and the legislative history of the particular Maine statute in question. The court concluded that “had the Legislature intended, in enacting section 478(1), for a broader group of private citizens to have standing to enforce conservation easements upon land that they do not own, it would have said so much more clearly.”  Accordingly, the court held that 33 M.R.S. § 478(1) does not confer standing on the Estate to bring an action to enforce the conservation easement as to the Town land.

Two justices dissented, saying they found no ambiguity in the phrase “the real property burdened by the easement.” They wrote, “‘[T]he real property burdened by the easement’ is a specific reference, and it is a reference to the property described in a conservation easement that is being burdened by that conservation easement. To conclude that ‘the real property burdened by the easement’ refers only to the parcel being altered would require this Court to add to the language of 478(1)(A).”

Both the court majority and the dissent agreed that the case should be remanded to the trial court for further proceedings on the Estate’s claim of breach of contract. The court found itself unable, based on the record before it, “to identify with precision what agreement the Estate alleges has been breached.” If the agreement allegedly breached was the conservation easement, the court’s ruling on the Estate’s standing to bring an enforcement action would mean the Estate lacked standing to bring the breach of contract claim; if the allegedly breached agreement were some other agreement, the Estate might not lack standing.

It should be noted that Maine statutes differentiate among conservation easements (33 M.R.S. § 476 – 479-C), historic “preservation agreements” (33 M.R.S. §1551 – §1555), “trail easements” (33 M.R.S. §1581 – §1585), and “working waterfront covenants” (33 M.R.S. §131 – §136).

Decision available at http://www.courts.maine.gov/opinions_orders/supreme/lawcourt/2017/17me17ro.pdf and eventually at http://courts.maine.gov/opinions_orders/supreme/index.shtml.

15 West 17th Street LLC v. Commissioner

U.S. Tax Court, T.C. Memo. 2016-233, December 22, 2016: Preservation easement donee’s 990 cannot substitute for contemporaneous written acknowledgment letter.

The Internal Revenue Code requires that to qualify for a federal income tax deduction for contribution of a historic preservation easement or conservation easement valued at $250 or more, the taxpayer must substantiate the contribution by (among other things) giving the IRS a “contemporaneous written acknowledgment” or CWA from the donee organization. I.R.C. §170(f)(8). (The CWA requirements are summarized below.) A subsection also says, however, that a CWA isn’t necessary “if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe,” (emphasis added) that includes the information required to be included in the CWA. I.R.C. §170(f)(8)(D).

The question in this case was whether a description of the contribution in the donee’s tax return form 990 qualifies as a substitution of the CWA which would prevent the IRS from disqualifying the claimed deduction for failure to meet the substantiation requirement. The court majority ruled that the donee’s 990 cannot substitute for the CWA, but there were dissenting opinions.

Code §170(f)(8) requires a CWA as part of substantiation of the claimed contribution. The CWA is an acknowledgment from the donee to the taxpayer, dated on or before the earlier of the filing date of the tax return for the year in which the contribution was made or the due date (including extensions) for filing such return. The CWA must be written, state “[t]he amount of cash and a description (but not value) of any property other than cash contributed… Whether the donee organization provided any goods or services in consideration, in whole or in part” for the contribution, and if so, also give a “description and good faith estimate of the value of any [such] goods or services….”

In this case, in 2008 the donee (“Trust”) gave the taxpayer ( “LLC”) a letter acknowledging the 2007 contribution but did not state whether the Trust had provided any goods or services to the LLC, or whether the Trust had otherwise given the LLC anything of value, in exchange for the easement. The Trust’s 990 for 2007 summarized the easement donations it had received during 2007 but didn’t specifically describe a charitable contribution from the LLC or report any other information about the contribution that was supposed to be in a CWA. In 2014, after the deduction was already under review by the court, the Trust filed an amended 990 for 2007 which added, “One of the New York donations received during 2007 included the donation by [the LLC] of an Historic Preservation Deed of Easement * * *. The Trust provided no goods or services to [the LLC] in consideration for its donation of the Historic Preservation Deed of Easement.”

The court’s legal analysis focused on whether the language of Code §170(f)(8)(D) about the possible alternative to the CWA (“a return, on such form and in accordance with such regulations as the Secretary may prescribe”) created a “discretionary delegation of rulemaking authority” or created a provision that is “self-executing.” A “discretionary delegation of rulemaking authority” means that the Secretary of the Treasury has the discretion whether or not to make the provision operative by promulgating regulations. If the authority to issue regulations is discretionary, the absence of regulations has the effect of keeping in reserve, as it were, the possibility of allowing an alternative to the CWA but until the regulations are issued, there would be no substitute for the CWA. On the other hand, if the provision in §170(f)(8)(D) were “self-executing” that would mean that it went into effect even in the absence of the Secretary promulgating the regulations which the statute give the Secretary the authority to issue. If the court had held §170(f)(8)(D) was “self-executing,” then possibly the filing by the Trust of 990 which contained the information normally found in a CWA would save the LLC’s claimed deduction.

The court’s analysis reviewed precedents about discretionary delegation vs. self-executing provisions, the legislative history of this provision and the definition of the word “may” (as in “such regulations as the Secretary may prescribe”) and concluded this provision only created a discretionary delegation (no alternative exists to the CWA). The potential precedent that would be set by a ruling that a provision with this wording creates a self-executing statute of benefit to taxpayers (“taxpayer-friendly”) was significant to the court’s analysis.

The majority opinion was joined by nine judges and concurred in by two others. Six judges dissented in two dissenting opinions. Both dissenting opinions argued that the text of §170(f)(8)(D) should be read in two parts: the first part, self-executing, saying that a donee’s tax return would serve as a substitute for the CWA if it contains the information required of a CWA, and the second part, discretionary, saying that the Secretary may promulgate regulations about this. For the dissenters, the Secretary’s decision not to add to regulations around the filing of a 990 by issuing additional regulations on this subject does not mean that the self-executing part of §170(f)(8)(D) did not go into effect.

Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11075.

Ecotone Farm, LLC v. Ward (Ecotone IV)

U.S. Dist. Court, D. New Jersey, Civ. No. 2:11-5094(KM) (MAH), November 21, 2016: State law claims against conservation easement holder not dismissed.

The relevant cast of characters in this matter are Huff, managing member of Ecotone Farm LLC (Ecotone), the Plaintiffs; the Wards, neighbors to the farm property, Defendants; Fox, the Township Engineer, also a Defendant; and the New Jersey Conservation Foundation (NJCF), holder of a conservation easement on a portion of Huff’s property, also a Defendant.

This District Court decision denies a motion to dismiss state law claims against NJCF based on its involvement in a matter which began as a dispute between Huff and the Wards. The decision, issued as “not for publication,” does not address the substance of the claims but may be of interest to conservation and preservation easement holders. Readers should note that under the rules of federal court civil procedure, for the purposes of a motion to dismiss a claim the facts alleged in the complaint by the moving party — Huff, in this case — are accepted by the court as true.  These allegations are set out in a decision of the Court of Appeals, 3rd Circuit, in Ecotone Farm LLC v. Ward, No. 14-3625, 2016 WL 335837, January 28, 2016 (Ecotone III) (a non-precedential decision), and of the District Court in Ecotone Farm LLC v. Ward, Civ. No. 2:11-5094 (KM)(MAH), July 23, 2014 (Ecotone II), which the 3rd Circuit in part overruled in Ecotone III. The following report, therefore, states these alleged facts as presented by the court.  NJCF and the other Defendants undoubtedly have a different version of the events.

The dispute began between neighbors Huff and the Wards, about Huff’s efforts to renovate a house and two barns on the farm property, and a driveway shared by the Ecotone and Ward properties. The dispute escalated as the Wards involved the local Township and the Township engineer, Fox. During the dispute one of the Wards was elected to the Township Committee and thereby had some authority over Fox and allegedly enlisted Fox to interfere with Huff’s renovation. Ward made “baseless” reports to environmental authorities about Huff’s activities on the property “as a means of harassment and instructed … Fox, to do the same.”

The conservation easement held by NJCF permitted Huff to maintain and replace existing structures but prohibited “dumping or placing of soil or other substances or materials as landfill and … dumping or placing of trash, waste or unsightly or offensive materials … except for those materials generated from dredging the pond….” As the dispute continued, NJCF sent Huff a letter about a portion of the property near the barn where soil and materials involved in the renovation were temporarily stored, which NJCF claimed violated the conservation easement. Fox also received a copy of the NJCF’s letter and sent Huff a letter saying that the Township could not approve any improvements to the driveway area that would violate the conservation easement. Huff submitted a revised soil disturbance plan but then heard nothing from Fox for months. Meanwhile, Fox forwarded the revised plan to the NJCF to seek its position, and the NJCF wrote back to object to the plan. Fox continued to correspond with the NJCF and to seek its consent throughout the Township’s permitting process, which supposedly gave the NJCF potential leverage over Huff to renegotiate the terms of its conservation easement. Fox provided Ward and the NJCF with copies of documents relating to the renovation. Fox and Ward also forwarded documentation of the NJCF’s opposition to the renovation to other Township departments, including the Health Department, which would later deny Huff’s application to drill a new well on the property because of its location within the conservation easement. In summary, Huff seems to have alleged that NJCF was working in league with the Wards and Fox so NJCF could “maximize its influence over the property.” Huff alleged that the Wards, Fox, and NJCF “leveraged the easement to violate Huff’s property rights by impeding construction and allowing Fox and [Fox’s firm] to profit from baseless engineering charges.”

The current decision (Ecotone IV) is in response to the motion of NJCF and one of the Wards to dismiss the state law causes of action against them in Huff’s Complaint. The causes of action against NJCF were civil conspiracy; declaratory judgment as to the parties’ rights under the easement; and prima facie tort.

Huff’s Complaint alleged the existence of an understanding of which NJCF was a part having as its object the commitment of common law and constitutional torts. The Complaint alleged that NJCF “took baseless positions in relation to regulatory processing of Huff’s land use applications … [and] colluded with the [Fox] to further its own overbroad interpretation of the easement.” The court wrote that the idea that NJCF acted “in concert with Fox and Ward, to further their similar interest, is far from an inescapable inference, but it is sufficiently plausible at the pleading stage.” Thus, the civil conspiracy count against NJCF was allowed to proceed.

Huff’s motion for declaratory judgment could stand only if there was a genuine controversy about his rights under the conservation easement, and the court found that there was enough of a disagreement about interpreting the easement’s language that it was inappropriate to make a legal determination on that question at this stage, so that count also was allowed to proceed.

Lastly, NJCF (and Ward) argued that the count of prima facie tort should be dismissed because it really didn’t allege anything that wasn’t alleged by the rest of Huff’s complaint and therefore was superfluous. The court disagreed, saying that, “Because other counts are going forward, there is no pressing need to address the redundancy argument; there will be time enough [later in the proceedings] to narrow the theories.”

In summary, NJCF lost in its bid to have Huff’s Complaint against it dismissed, and the litigation will continue at the District Court.

Ecotone IV decision available at http://cases.justia.com/federal/district-courts/new-jersey/njdce/2:2011cv05094/263972/136/0.pdf?ts=1479820801.

Partita Partners LLC v. United States

U.S. District Court, S.D. New York, 15-cv-2561 (PKC), Oct. 25, 2016: Façade easement protection of entire exterior must be absolute.

At issue was whether a historic preservation easement on a building in a historic district could qualify for a federal charitable tax deduction even if the easement holder could grant an exception to the prohibition against alteration of the exterior. The court held such an easement would not qualify.

Partita donated a façade historic preservation easement to the Trust for Architectural Easements (“TAE”) and claimed an income tax deduction under §170(h)(4)(B) of the Internal Revenue Code. That section requires that in order to be a preservation easement in the façade of building located in a historic district must “preserve the entire exterior of the building …..” That Code section stipulate that such façade easement does not qualify as a conservation contribution “exclusively for conservation purposes,” unless it “(I) includes a restriction which preserves the entire exterior of the building (including the front, sides, rear, and height of the building), and (II) prohibits any change in the exterior of the building which is inconsistent with the historical character of such exterior …..”

The façade historic preservation easement which Partita donated to TAE provided that there would be no alteration, construction, remodeling or exterior extension without the express written consent of TAE, and that while 2,700 square feet of development rights associated with the property “shall be reserved for the future expansion of the Property in accordance with the terms of this Easement,” any exercise of development rights may not interfere with the preservation and conservation purposes of the easement, and must be approved by TAE. The IRS denied Partita’s claim for a deduction, asserting that these provisions failed to met the requirements of Code §170(h)(4)(B).

Partita offered two arguments: that §170(h)(4)(B) does not forbid alterations which do not exceed the highest point of the roof; and that the Code does not forbid alterations to the exterior if the alteration requires the consent of the easement holder. The court rejected both these arguments. It said that the provisions of the Code unambiguously require a restriction that (a) “preserves the entire exterior of the building…,” without exception as to the boundaries of the envelope of the exterior, and (b) is absolute, and not “a conditional restriction that delegates to the grantee future decisions on development of the exterior.”

Decision available at http://cases.justia.com/federal/district-courts/new-york/nysdce/1:2015cv02561/440497/70/0.pdf?ts=1477484579.

Thanks to Jess Phelps for alerting PLD to this decision.

Boston Redevelopment Authority v. National Park Service (BRA II)

US Court of Appeals, First Circuit, No. 15-2270, September 23, 2016: Upholds NPS disapproval of Long Wharf restaurant use.

On appeal the court upheld the District Court decision in Boston Redevelopment Authority v. National Park Service (BRA I) 125 F.Supp.3d 325 (2015) in favor of the National Park Service (NPS), forbidding the Boston Redevelopment Authority (BRA) from using as a private restaurant certain land on the Boston Harbor waterfront designated for public recreational use under an NPS grant.

As reported here in connection with BRA I, the NPS is involved in the BRA’s attempt to place the restaurant on what is now a public open pavilion at the end of Long Wharf because the Commonwealth of Massachusetts received federal funds put toward the BRA’s redevelopment of the pier in the 1980s. The funds were a grant from the federal Land and Water Conservation Fund (LWCF) under the Land and Water Conservation Fund Act (LWCF Act), 54 U.S.C. §§ 200301-200310, for public outdoor recreation use. To get the LWCF grant the Commonwealth had to designate a project area (the “Section 6(f) Area”) which could not be converted to “other than public outdoor recreation use” without prior NPS approval. (In this sense, the acceptance of the LWCF grant acted like the grant by the BRA of a conservation easement on the Section 6(f) Area.)

When the BRA sought NPS approval for the restaurant use in 2009, the NPS approved because the pavilion area was outside the Section 6(f) Area as shown on the only plan of the Section 6(f) Area of which NPS was aware when making that decision. That was a 1983 map furnished to it by the Commonwealth, though the date of the map was after the date of the LWCF grant.  In 2014, however, NPS discovered a 1980 map clearly showing the Section 6(f) boundary area established at the time of the LWCF grant to include the pavilion. NPS reversed itself and denied approval for the restaurant.

The BRA went to federal court to try to get a ruling that NPS failed to comply with the federal Administrative Procedure Act (APA) on the grounds that NPS, in relying on the 1980 map and in reversing itself, was arbitrary and capricious. The lower court denied that request.

On appeal the court concluded that the record in the lower court supports the NPS’s view that the 1980 was the definitive map, and that NPS’s actions were reasonable and their determinations plausible, supported by substantial evidence and neither arbitrary nor capricious.

The court also dispatched with the BRA’s attempt to change its basis for attacking the NPS decision. The BRA tried to argue on appeal that NPS’s decision was not subject to APA review but, instead, an ultra vires “attempt to encumber land,” and also, according to the court, implied that the traditional APA standard of review does not apply to claims brought under either the LWCF Act or the Declaratory Judgment Act. The court said that these arguments were waived by the BRA because it did not make them in the lower court. “Having urged one standard of review in the district court,” the court wrote, “it [BRA] cannot now repudiate its earlier position and seek sanctuary in a different standard.” The court also noted, however, that in any event, these arguments by the BRA got the law wrong.

The BRA further argued that the LWCF grant was used only for planning purposes, while the Section 6(f) requirement are applicable only to land “acquired or developed” with LWCF grants and not to project “planning” undertaken with those grants. The court rejected the distinction between acquisition and development, on the one hand, and planning, on the other hand, as “artificial.”  Quoting from federal regulations, 36 C.F.R. § 59.3(a), that Section 6(f) is the “cornerstone of Federal compliance efforts to ensure that the Federal investments in [LWCF] assistance are being maintained in public outdoor recreation use,” the court said the BRA’s argument was an attempt to “chip away at this cornerstone. For example, grant recipients could skirt Section 6(f) entirely by allocating their LWCF stipends wholly for ‘planning’ rather than for acquisition or development. We refuse to read such a gaping loophole into the statute.” This argument was also rejected on procedural grounds.

Decision available at http://media.ca1.uscourts.gov/pdf.opinions/15-2270P-01A.pdf.

Smith vs. Westfield

Massachusetts Appeals Court, No. 15-P-773, August 25, 2016: Concurring opinion calls for change of test whether government designation gives land Mass. constitutional protection.

At issue here was the whether the City of Westfield had taken steps sufficient to make a playground subject to the protections of Massachusetts’ Constitution Article 97, which protects various conservation and historic preservation interests as rights of the public.

Article 97 (ratified in 1972) proclaims “The people shall have the right to … the natural, scenic, historic, and esthetic qualities of their environment; and 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.” As a brake on any effort to dispossess the people of this right, Article 97 goes on to require a two thirds majority roll call vote by each branch of the state legislature for “Lands and easements taken or acquired for such purposes … [to] be used for other purposes or otherwise disposed of …” (emphasis added).

In 1939 Westfield took title to certain land to satisfy a tax debt. In 1957, the city passed an ordinance recognizing the land as a playground. In 1979, a Federal grant was awarded the city that, in part, was used to upgrade the playground. A Statewide Comprehensive Outdoor Recreation Plan (SCORP) required for that grant was adopted by the Commonwealth and stated: “Land acquired or developed with [the grant] funds become protected under” Article 97.  In 2010, Westfield endorsed an open space and recreation plan of its own that designated the playground as “open space.” In August, 2011, however, the playground was determined to be surplus property, and the Westfield city council transferred control to the school department to construct an elementary school.

A group of residents took the city to court arguing among other things that, assuming a playground is within the environmental purposes protected by Article 97, the playground use was sufficiently dedicated to invoke the protection of Article 97 and the requisite vote of the legislature should be required to convert the property to non-playground use. The trial court found that no documents were ever recorded that dedicated the land for Article 97 purposes and therefore there was no designation in a manner sufficient to invoke the protection of Article 97. The residents appealed but the Appeals Court agreed with the lower court.

The court cited the 2013 Massachusetts Supreme Judicial Court decision in Mahajan vs. Department of Environmental Protection stating that Article 97 jurisdiction is not determined by “whether the use of the land incidentally serves purposes consistent with Article 97, or whether the land displays some attributes of Article 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 Article 97.” The court also said the city’s action did not meet the test as set out in another Massachusetts decision that Article 97 protection also may arise where, following the taking for purposes other than Article 97, the land is specifically designated for Article 97 purposes by deed or other recorded restriction.

A concurring opinion called for a change to these tests when it comes to land used for an Article 97 purpose and somehow so designated but for which the restricted use has not been recorded at the registry of deeds either in the original deed to the government entity or through other means such as a conservation or historic preservation easement. “Nothing in the language or purpose of Article 97,” the Judge wrote, “suggests that its application should turn on whether the underlying deed provides record notice that the land has been committed to an Article 97 use.”

Decision available by search at https://www.lexisnexis.com/clients/macourts/.

Lake Oswego Preservation Society v. City of Lake Oswego

Supreme Court of Oregon, 360 Or. 115, August 4, 2016: New owner can’t remove historic designation imposed during previous ownership under OR law.

The property in question, the Carman House, was built circa 1856. In 1992, when the property was owned by Richard Wilmot, the City of Lake Oswego placed a historic designation on the Carman House. Wilmot, who had previously challenged a designation as to the house and the land around it, did not challenge the city’s decision.

Subsequently, , in 1995, the State of Oregon adopted a statute saying that local governments must allow “a property owner” whose property is under consideration for local historic designation to refuse the designation. ORS 197.772(1). The statute also included a removal provision for properties already designated, which provided that “a property owner” may “remove from the property a historic property designation that was imposed on the property by the local government.” ORS 197.772(3). Wilmot still owned the property at that time and did not ask for the removal of the Carman House designation. In 2001, when the Carman House was still on Lake Oswego’s Landmark Designation List, the property was conveyed to a new owner, the trustee of the Mary Cadwell Wilmot Trust.

The issue presented in this case was whether the phrase “a property owner” in ORS 197.772(3) refers only to persons who owned a property at the time a local historic designation was imposed on that property, or could a successor owner remove a local historic designation put in place during a predecessor’s ownership. The court concluded that the statute applies only to the owner at the time of the local historic designation.

The court’s effort to figure out the legislative intent began with analysis of the wording of the statute. Using the ordinary dictionary definition and basic principles of grammar didn’t help – the court said that using these tools of analysis, “the text in this case is susceptible to at least two plausible interpretations.” The court was persuaded, however, that the legislature’s use of the same phrase in another subsection of the statute supports the interpretation that in the subsection in question, the legislature meant the owner at the time of the designation.

The court also looked at the legislative and regulatory context and concluded that this subsection most likely was intended to protect the investment-based expectations of the party who acquired the property without a historic designation, not a party who acquired a property with a designation in place at the time of acquisition.

Lastly, looking at legislative history, the court found no definitive answers but thought that, “Overall, that history weighs in favor of interpreting the phrase “a property owner” as referring only to owners at the time of designation.”

Decision available at http://www.publications.ojd.state.or.us/docs/S063048.pdf.

Thanks to Jess Phelps, Esq. for first bringing this decision to my attention.

Crain v. Hardin County Water District No. 2

Court of Appeals of Kentucky, No. 2015-CA-000499-MR, June 17, 2016: Ag conservation easement does not create public use protected from taking.

The issues in this case are (1) whether a taking of an easement on private land for a sewer line by the Water District is prohibited because of an agricultural conservation easement which the landowner previously conveyed to the Commonwealth of Kentucky, and (2) whether the District acted in good faith when negotiating a payment for the sewer easement. This PLD report focuses only on the agricultural conservation easement question.

The Crains conveyed an agricultural conservation easement to the Purchase of Agricultural Conservation Easement Corporation (PACE), which is administratively part of the Kentucky Department of Agriculture that was established to administer and hold title to the agricultural preservation easements. KRS 262.906. Hardin County Water District No. 2 (the District) is pursuing a wastewater project in connection with a large economic development project. The wastewater project requires the installation of sewer lines, one of which the District proposes to run through the Crains’ land. To do that, the District proposed to use eminent domain power to take an easement across the Crain property.

The Crains challenged the District’s right to take the sewer easement. In part, they argued that the agricultural conservation easement precluded the District from condemning any portion of the property for non-agricultural purposes. PACE, holder of the easement, did not object to the proposed easement. The trial court found for the District, saying the agricultural conservation easement did not preclude a taking by eminent domain, although the District’s easement would be secondary to the agricultural conservation easement.

On appeal the court held, first, that the Kentucky statute on agricultural conservation easements “clearly permitted” use of such easement areas for a sewer line, citing language saying the Commonwealth is permitted to grant rights of way through restricted land “for the installation of, transportation of, or use of, lines for water, sewage, electric, telephone, gas, oil or oil products….” KRS 262.910(4)(e). The court’s opinion does not discuss the text of the easement, as the Crains evidently did not assert that the text itself prohibited granting a sewer line easement, other than by application of the statute.

The Crains had argued in the alternative that the condemnation is prohibited by the “prior public use doctrine.” As explained by the court, “the doctrine provides that land devoted to a public use may not be taken for another public use under the power of eminent domain.” The court said that the applicability of the doctrine in this case depended on the distinction between public use and public purpose, and held that while the easement had a public purpose, it did not create a public use.

The Crains’ position was that the agricultural conservation easement created a real property interest held by the Commonwealth for a public use. The Court disagreed, quoting Kipling v. City of White Plains, 80 S.W.3d 776 (Ky. App. 2001): “for purposes of condemnation and eminent domain, the fact that the public receives some sort of benefit from a certain use of land does not mean that the land is being used for a public purpose.” (Comment: although this quote says public benefit does not necessarily create a “public purpose,” it seems the court cited it for the principle that public benefit does not equate to public purpose or public use.) The Crains tried to say that an easement is different because it is “a privilege or an interest in land upon the dominant tenement to enjoy a right to enter the servient tenement,” and this interest constitutes a dedication to a prior public use. The court again disagreed, saying that the agricultural conservation easement simply grated the right to PACE to “restrict certain future development of the property” but did not grant either the Commonwealth or the public a right to come onto the Crains’ property. This right, while “clearly a public purpose … does not constitute a prior public use.”

The decision on appeal does not discuss whether the Crains, as grantors of the easement rather than holders, had standing to try to protect the agricultural purpose of the conservation easement.

The court also found against the Crains as to the good faith negotiations issue.

The decision is available at http://law.justia.com/cases/kentucky/court-of-appeals/2016/2015-ca-000499-mr.html and should eventually be available at http://kycourtreport.com/category/court-of-appeals/ and/or http://opinions.kycourts.net/.

Mountanos v. Commissioner (Mountanos II)

U.S. Court of Appeals, 9th Circuit, No. 14-71580, June 1, 2016: Upholds Tax Court decision about highest and best use.

In the Tax Court decision Mountanos v. Commissioner, T.C. Memo. 2013-138, June 3, 2013 (Mountanos I), the tax court agreed with the IRS that a federal tax deduction should not be allowed for a conservation easement Mountanos donated, finding that Mountanos failed to prove that the property’s highest and best use before the grant of the easement was higher that after the grant of the easement.

In a very brief opinion, the appeals court agreed with the tax court about the valuation, and also upheld the tax court’s decision to impose an accuracy-related penalty.

Decision available at https://cdn.ca9.uscourts.gov/datastore/memoranda/2016/06/01/14-71580.pdf as a “not for publication” document.

Telzrow v. US

U.S. Court of Federal Claims, No. 15-1359C, May 26, 2016: Trial may proceed on US liability for failure to remove mechanic’s lien.

This decision is about procedural matters but is reported here as an illustration of a problem that may not be addressed by the provisions commonly found in most historic preservation and conservation easements: mechanics liens.

The United States Department of Agriculture, acting through the Natural Resources Conservation Service (“Conservation Service” or “government”), purchased a conservation easement on Telzrows’ land under the Wetlands Reserve Program for the purpose of restoring and protecting wetlands. Food Security Act of 1985, Pub. L. No. 99-198, Title XII, § 1237, 99 Stat. 1354 (1985), as added by Pub. L. No. 101-624, Tit. XIV, § 1438 (formerly codified at 16 U.S.C. § 3837), repealed by Agricultural Act of 2014, Pub. L. No. 113-79, § 2703(a), 128 Stat. 767 (2014).

The easements generally allow federal officers and their contractors to enter the land and perform wetlands restoration work. This particular deed of easement granted the United States, “the right to enter unto the easement area to undertake, at its own expense or on a cost share basis with the [l]andowner or other entity, any activities to restore, protect, manage, locate and mark the boundaries, maintain, enhance, and monitor the wetland and other natural values of the easement area.”

The US awarded a contract for restoration work on the Telzrows’ land to a contractor who did the work using materials purchased on credit from a subcontractor. The government paid the contractor but he then filed for bankruptcy and never paid his subcontractor. The subcontractor then obtained a mechanic’s lien on the Telzrows’ farm pursuant to Illinois law. The Telzrows asked the Conservation Service to pay the subcontractor’s claim but it refused. Ultimately the Telzrows sued the government in federal court for breach of contract (the conservation easement), demanding damages.

The procedural argument arose because the government failed to answer the Telzrows’  complaint by the deadline imposed by the Rules of the Court of Federal Claims (“RCFC”). The Telzrows filed a motion for the government to lose by default, and the government opposed the entry of default and asked for additional time to respond to the complaint. The government also asked the court to dismiss the Telzrows’ claim for a couple of reasons, including failure to state a claim under applicable procedural federal rules.

The court allowed the government additional time to respond but to rule on the government’s motion to dismiss, the court had to decide if the Telzrows had plausibly alleged a breach of contract, assuming the facts were as alleged by the Telzrows.

The court then had to interpret the contractual language of the conservation easement. It found that the easement language contemplates that restoration work is “undertake[n]” by the United States at its sole option and does not give the landowner any rights or responsibilities in the restoration work, citing a Ninth Circuit decision holding that this form of Conservation Service deed “nowhere grants [a landowner] the power to veto a conservation plan of which it disapproves.” Big Meadows Grazing Ass’n v. United States ex rel. Veneman, 344 F.3d 940, 943 n.4 (9th Cir. 2003). The court interpreted Big Meadows to mean that the United States “can and does assume sole responsibility to perform and pay for restoration.” The court said that is follows from that that landowners “are or should be shielded from the burdens of restoration absent a separate and further agreement.”

Based on the facts alleged by the Telzrows, the court found that in this instance part of the cost of restoration ultimately was imposed on the Telzrows, despite the United States’ obligation to pay for such costs. The court held that is sufficient to state a plausible claim for breach of contract, either in terms of breach of warranty or failure to perform an affirmative obligation. Accordingly the court denied the government’s motion to dismiss for failure to state a claim, which means that a trial on the merits may proceed.

Decision available at https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2015cv1359-14-0.

Carroll V. Commissioner

U.S. Tax Court, 146 T.C. 13, April 27, 2016: Formula for sharing post-extinguishment proceeds must conform exactly to IRS Regs.

Despite the federal Tax Code and Treasury Regulations’ requirement that to be eligible for a tax deduction a donated conservation easement must be enforceable in forever and always (“in perpetuity”), the law recognizes the possibility that even a qualified conservation easement could be extinguished by a court in unusual circumstances. When a conservation or preservation easement is extinguished, that presumably increases the fair market value of the property because it could be sold without the burden of the easement. To assure that the property owner will never recoup the value of the gift that gave rise to a tax benefit (and reduced Treasury revenue) and that the value of that easement will always be used for conservation purposes, the Tax Code and Regulations require that to be eligible for the deduction, a donated conservation easement must spell out a certain formula for how the property owner and the conservation organization that holds the easement (various called the “grantee,” “donee” or “holder”) will divide the proceeds of the first sale of the property after extinguishment. The holder will then continue to have the cash value of the easement, to use for conservation purposes.

At issue in this case, which the Tax Court described as its first on this question, was how closely the formula for sharing post-extinguishment proceeds must conform to the text of the IRS regulations. The court’s answer was the formula must guarantee that the holder will get exactly what it would get using the precise words of the regulations; i.e., the court rejected the Carroll formula and therefore said the Carroll Easement did not qualify for a federal tax deduction.

Sec. 1.170A-14(g)(6)(ii) of the Income Tax Regs. says that the holder’s share of post-extinguishment proceeds must be “at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift [the numerator] bears to the value of the property as a whole at that time [the denominator].” These values are determined by an appraisal closely contemporaneous with the gift. Even as these dollar values might change over time, this fraction (the numerator divided by the denominator as determined by this formula at the time of the gift) never changes; it remains the same in perpetuity.

The conservation easement in this case (the Carroll Easement) used a different numerator.  Instead of the “value [of] the perpetual conservation restriction at the time of the gift,” the Carroll Easement used the amount allowable as a deduction for Federal income tax. In other words, regardless of what the donor’s appraisal might have said at the time of the gift, the Carroll Easement said that the value of the easement was what the IRS said the value was. This presumably reflects the fact that the IRS has often contested the donor’s appraised value and the Tax Court has sometimes agreed that the value of the easement at the time of the gift was some number lower than the donor’s appraised value, sometimes down to zero value.  The Carroll Easement also said that once there was a final determination of value by the IRS or a court of competent jurisdiction, the holder’s share of post-extinguishment proceeds would remain constant.

In disqualifying the Carroll Easement, the court relied on the federal Third Circuit Court of Appeals and district court decisions in the Kaufman cases. Kaufman v. Commissioner (Kaufman I), 134 T.C. 182 (2010), reconsideration denied by Kaufman v. Commissioner (Kaufman II), 136 T.C. 294 (2011), aff’d in part, vacated in part and remanded in part sub nom, Kaufman v. Shulman (Kaufman III), 687 F.3d 21 (1st Cir. 2012).  Although the facts in Kaufman were different, the principle cited by the court was that the nonprofit easement holder must be absolutely guaranteed its proportionate share of post-extinguishment proceeds. Kaufman I, 134 T.C. at 187.

The court understood this principle to mean that the holder’s proportionate share of post-extinguishment proceeds must be determinable exactly as the IRS Regulations state at the time of the gift (or perhaps when the deduction is claimed). The Carroll Easement left open the possibility that the holder’s proportionate share would appear to be one thing at the time of the gift and another thing by the time the IRS could no longer challenge the deduction claim or the IRS challenge was finally resolved.

(The court noted that if the Carroll case were appealed, the appeal would be heard by different Court of Appeals Circuit than the circuit which decided Kaufman, and so might reach a conclusion different from Kaufman’s, “the Court of Appeals for the First Circuit’s opinion in Kaufman III is instructive on several points.”)

Not surprisingly, Carroll objected that the court’s reasoning was circular:  was it logical to say that the Carroll Easement was disqualified for a charitable deduction because it might be disqualified for a charitable deduction for a reason other than the reason for which the court wanted to disqualify it? The Carroll Easement either would or would not be disqualified for a reason other than the post-extinguishment proceeds clause (indeed, the court rejected other IRS objections to the Easement; see below). If the Carroll Easement were disqualified for a reason other than the post-extinguishment proceeds clause, what possible difference could it make what the proceeds clause said? And if it were not disqualified on other grounds, then didn’t the Carroll Easement’s proceeds clause have the effect of guaranteeing the holder a certain share of proceeds that, once determined, would remain constant in perpetuity?

The court found this argument “unpersuasive. The regulatory requirements set forth in section 1.170A-14(g), Income Tax Regs., are designed to protect the conservation purpose of a conservation contribution and must be satisfied at the outset for a contribution to be deductible.”

The court also upheld the IRS decision to hold the taxpayer liable for accuracy-related penalties under I.R.C. sec. 6662. Although Tax Code Section 6664(c)(1) provides that the penalty under section 6662(a) do not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer’s position and that the taxpayer acted in good faith, the taxpayer in this case did not consult with an attorney or other adviser in the drafting of the easement, and therefore could not claim reasonable cause and good faith.

The IRS also challenged the deduction on the basis that easement the did not constitute a qualified real property interest under section 170(h)(1)(A), and was not contributed exclusively for conservation purposes under section 170(h)(1)(C) because it did not preserves open space pursuant to a clearly delineated Federal, State, or local government conservation policy and yield a significant public benefit. The court found the Carroll Easement met these requirements.

The opinion is available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10767.