Attorney-at-Law

KEEPING THINGS IN PROPORTION

In Uncategorized on 05/12/2020 at 20:12

Here’s the second half of Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner, 2020 T. C. Memo. 54, filed 5/12/20.

Judge Mark V Holmes finds IRS interpreted reg 1.170A-14(g)(6)(ii) correctly; the 501(c)(3) guardian of the conservation easement must get the proportion of the FMV of the property at the date of judicial extinguishment that is the worth of the easement, and not the absolute value at date of granting.

Conservation easements are special, because of the public interest (tax-subsidized) in keeping them. Ordinary easements can be extinguished by mutual agreement; these can’t be. But circumstances may arise where the easement cannot be preserved.

What to do? Split the proceeds. But how?

“The Commissioner would be happier with a regulation that said ‘proportionate share’ instead of ‘proportionate value,’ and Oakbrook would be happier with a regulation that deleted the word ‘proportionate’ from the phrase ‘proportionate value.’ It argues that we should hold that an easement’s conservation purpose would be protected in perpetuity so long as the FMV of a donee’s property interest equals the value of the perpetual conservation restriction at the time of the gift. But ‘proportionate’ isn’t the only part of the regulation that Oakbrook’s reading would have us cut out–it would also force us to excise the rest of the key sentence—‘bears to the value of the property as a whole at that time.’ Sec. 1.170A-14(g)(6)(ii), Income Tax Regs. This reading would have us allocate proceeds through the use of subtraction, not multiplication. Treasury’s regulation writers, however, know how to command subtraction. See, e.g., sec. 1.422-1(a)(2)(ii), Income Tax Regs. (‘[C]apital gain or loss must be recognized * * * to the extent of the difference between the amount realized from such transfer and the adjusted basis of such share’ (emphasis added)). And reading “proportionate” out of “proportionate value”–much less effectively excising an entire chunk of a sentence of the regulation–runs afoul of the traditional rule that courts should attempt to give meaning to every word of a regulation.” 2020 T. C. Memo. 54, at pp. 22-23. (Citation omitted).

Whatever the scenario, the deed falls foul of the reg. “Oakbrook’s Deed violates the regulation because the Conservancy must be entitled to any proceeds from extinguishment or condemnation that are at least equal to the total proceeds (unadjusted by the value of any of Oakbrook’s improvements), multiplied by a fraction defined by the ratio of the FMV of the easement to the FMV of the unencumbered property determined as of the date of the Deed.” 2020 T. C. Memo. 54, at pp. 40-41.

But, of course, Oakbrook isn’t done if 6 Cir reverses 154 T. C. 10. Judge Holmes wrote their decision for them. See my blogpost “They Always Must Be With Us,” of even date herewith, as my high-priced colleagues would say.

Howbeit, Oakbrook and Billy D reasonably relied on the old PLRs, and did everything they could to make sure the deal was OK. So no chops, whatever happens.

 

 

 

 

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