Jury Verdicts Are Rarely Overturned. It Was In This Case, In Favor of the University of Florida
The district court granted USFBOT’s motion for judgment as a matter of law, overturned the jury’s verdict on DeBose’s retaliation claim, and denied DeBose’s motion for sanctions.
Rewind 2008: The Home Snatchers Stole Millions of Homes, Lives and Citizen’s Trust By Unimaginable Fraud
Thieves, Drunks and Scoundrels. Florida Bar’s Lyin’ Lawyers (August 2021)
LIF Editorial: Drug Smugglin’ Coast Guard and Attorney Sentenced to Probation
Fla. Bar v. Dupee, 160 So. 3d 838 (Fla. 2015)
Another Magistrate, M.D. Fl.’s Anthony Porcelli, with a decade or more on the Federal bench, does not follow the Federal Guides and Procedures in this shocking video admission. He’s obviously never read Benchbook for U.S. District Court Judges (Sixth Ed., March 2013) Section 6.01 https://t.co/ykBa2Jh5tO pic.twitter.com/fOlaqoJEkR
— LawsInTexas (@lawsintexasusa) February 26, 2021
Oh, my my look… BLIND DRAW! 🧐
Filed 24th February 2021;
Howard, Ph.D. v. University of South Florida, Board of Trustees
Assigned: NEW CASE ASSIGNED to Judge Charlene Edwards Honeywell and Magistrate Judge ANTHONY E. PORCELLI. New case number: 8:21-cv-0442-CEH-AEP. (SJB) pic.twitter.com/EKaVaKF8eX
— LawsInTexas (@lawsintexasusa) February 26, 2021
UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
DeBose v. USF Bd. of Trs.
Decided Jan 21, 2021
Angela DeBose, proceeding pro se, appeals the denial of her post-trial Fed. R. Civ. P. 60(d) motion for fraud on the court, the denial of her request for an evidentiary hearing, and the denial of her motion to reassign or recuse the magistrate judge in an employment-discrimination lawsuit, No. 15-cv-02787 (DeBose I).
DeBose also challenges the dismissal of her “Independent Action for Relief from Judgment to Remedy Fraud on the Court,” which she filed in No. 19-cv-01132 (DeBose II).
DeBose presents five issues on appeal.
First, she argues that the district court erred in DeBose II by dismissing her claim without considering its merits.
Second, she argues that the district court abused its discretion by denying her Rule 60(d) motion because evidence in the record demonstrates the existence of fraud.
Third, DeBose argues that the district court abused its discretion by failing to hold an evidentiary hearing in conjunction with her Rule 60(d) motion for fraud on the court.
Fourth, DeBose argues that the magistrate judge abused his discretion when he delayed denying her motion to reassign or recuse him and then denied the motion as moot.
Finally, DeBose moves for sanctions.
For the reasons explained below, we affirm, and we deny DeBose’s motion for sanctions. *3
DeBose’s litigation has a long and eventful history, the relevant portions of which we discuss below.
DeBose filed a lawsuit in DeBose I against her former employer, the University of South Florida Board of Trustees (USFBOT) and Ellucian Company, for unlawful discrimination, retaliation, breach of contract, tortious interference with a business relationship, and civil conspiracy.
DeBose later filed a motion for sanctions against USFBOT for destroying discoverable documents, including her employment files and contracts. The magistrate judge denied the motion, holding that DeBose had not established bad faith on the part of USFBOT.
DeBose filed another motion for sanctions, which the magistrate judge again denied, citing DeBose’s failure to provide new or additional evidence that USFBOT acted in bad faith. Ellucian and USFBOT moved for summary judgment on several of DeBose’s claims, which the district court granted in part and denied in part.
DeBose then filed a “Motion for Relief from Judgment for Fraud” for the concealment of her 2015 employment contract. The district court denied the motion.
DeBose filed a third motion for sanctions, which the district court denied as a “thinly-veiled” attempt to challenge the district court’s summary-judgment order.
The case proceeded to trial, where the jury returned a verdict in favor of DeBose on her retaliation claim.
DeBose filed a fourth motion for sanctions against USFBOT.
The district court granted USFBOT’s motion for judgment as a matter of law, overturned the jury’s verdict on DeBose’s retaliation claim, and denied DeBose’s motion for sanctions.
Debose filed an “Independent Action for Relief from Judgment to Remedy Fraud on the Court” in DeBose II, alleging that USFBOT and others had engaged in a scheme to commit perjury and fraud.
The district court dismissed Debose II, holding that DeBose was seeking relief pursuant to Rule 60(b) based on fraud on the court and that the “crux” of DeBose II was that the judgment in DeBose I had been tainted by fraud.
The district court concluded that DeBose could file a motion in DeBose I pursuant to Rule 60(b). DeBose then filed an “Independent Action for Relief from Judgment to Remedy Fraud on the Court” under Rule 60(d)(1) and Rule 60(d)(3) in DeBose I.
DeBose also filed a “Motion for Reassignment of a New Magistrate or Alternatively Recusal of [Magistrate] Judge Anthony E. Porcelli” and a “Motion for Evidentiary Hearing with Witness Testimony.”
Because the district court denied the Rule 60(d) motion and the motion for an evidentiary hearing, the magistrate judge denied DeBose’s motion to reassign or recuse as moot. DeBose now appeals.
The first issue on appeal is whether this Court has jurisdiction to consider the district court’s order denying DeBose’s “Independent Action for Relief from Judgment to Remedy Fraud on the Court” in DeBose II. This Court must examine jurisdiction sua sponte, Adams v. Monumental Gen. Cas. Co., 541 F.3d 1276, 1277 (11th Cir. 2008), and it reviews jurisdictional issues de novo. Id.
Under 28 U.S.C.§ 1291, appellate courts “shall have jurisdiction of appeals from all final decisions of the district courts of the United States[.]” However, “a timely and properly filed notice of appeal is a mandatory prerequisite to appellate jurisdiction.” Holloman v. Mail-Well Corp., 443 F.3d 832, 844 (11th Cir. 2006). The Supreme Court, which has identified the timely filing of a notice of appeal as a jurisdictional requirement, has made clear that courts have “no authority to create equitable exceptions to jurisdictional requirements.” Bowles v. Russell, 551 U.S. 205, 214 (2007).
Federal Rule of Appellate Procedure 3(c)(1) sets out three requirements for a notice of appeal: it must (1) “specify the party or parties taking the appeal by naming each one in the caption or body of the notice”; (2) “designate the judgment, order, or part thereof being appealed”; and (3) “name the court to which the appeal is taken.” “Although we generally construe a notice of appeal liberally, we will not expand it to include judgments and orders not specified unless the overriding intent to appeal these orders is readily apparent on the face of the notice.” Osterneck v. E.T. Barwick Indus., Inc., 825 F.2d 1521, 1528 (11th Cir. 1987), aff’d sub nom. Osterneck v. Ernst & Whinney, 489 U.S. 169 (1989).
Here, DeBose never filed a notice of appeal in DeBose II. DeBose did file a notice of appeal in DeBose I, but that notice does not specify her intent to appeal the order in DeBose II, nor is such intent “readily apparent on the face of the notice.” Osterneck, 825 F.2d at 1528. Accordingly, this Court lacks jurisdiction to review the district court’s order dismissing DeBose’s “Independent Action for Relief from Judgment to Remedy Fraud on the Court” in DeBose II.
The Eleventh Circuit’s “White Out” Opinions
Rubbin’ Out Kaplan lawyers criminal fraudulent transfers via fake billing; https://t.co/gSlENYszUE
— LawsInTexas (@lawsintexasusa) November 7, 2020
Second, we consider whether the district court abused its discretion in denying DeBose’s Rule 60(d) motion in DeBose I. We review the denial of a Rule 60(b)(3) motion for an abuse of discretion. Cox Nuclear Pharm., Inc. v. CTI, Inc., 478 F.3d 1303, 1314 (11th Cir. 2007). We thus apply this same standard to our review of the denial of DeBose’s Rule 60(d)(3) motion, which, like Rule 60(b)(3), concerns “fraud on the court.”
A movant who seeks relief from the judgment based on fraud on the court must establish fraud by clear and convincing evidence. Id. at 1314.
Fraud on the court embraces “only that species of fraud which does or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of adjudging cases.”
Travelers Indem. Co. v. Gore, 761 F.2d 1549, 1551 (11th Cir. 1985) (holding that perjury does not constitute fraud on the court under Rule 60(d) (3)) (quotation marks omitted).
It is thus only egregious misconduct—such as an “unconscionable plan or scheme” to influence the court’s decision—that constitutes fraud on the court.
See Rozier v. Ford Motor Co., 573 F.2d 1332, 1338 (5th Cir. 1978). We have made clear that a plaintiff “cannot use an independent action as a vehicle for the relitigation of issues.” Travelers, 761 F.2d at 1552.
Here, DeBose has heavily litigated USFBOT’s alleged fraud, shredding of documents, and presenting false affidavits and perjurious testimony.
DeBose’s Rule 60(d)(3) motion concerns these same issues. DeBose would not be entitled to relief under Rule 60(d)(3) on this ground alone. See Travelers, 761 F.2d at 1552.
But even if DeBose’s Rule 60(d)(3) motion did not relitigate old issues, it fails for an independent reason—DeBose does not establish anything resembling an “unconscionable plan or scheme” by clear and convincing evidence.
Although DeBose claims that she has new evidence of fraud on the court, this evidence either duplicates existing evidence or could have been previously submitted to the district court. The district court therefore did not abuse its discretion in denying DeBose’s Rule 60(d) motion for fraud on the court.
We must also determine whether the district court erred by denying DeBose’s Rule 60(d) motion without an evidentiary hearing in DeBose I. We review a district court’s refusal to hold an evidentiary hearing for abuse of discretion. Cliff v. Payco Gen. Am. Credits, Inc., 363 F.3d 1113, 1121 (11th Cir. 2004).
We have held that where “[a]n evidentiary hearing would have served no useful purpose in aid of the court’s analysis,” a court does not abuse its discretion by failing to hold one. Cano v. Baker, 435 F.3d 133, 1342-43 (11th Cir. 2006).
Here, the issues that DeBose presented had been repeatedly litigated in the district court, and DeBose presented no new substantive evidence. Accordingly, an evidentiary hearing would have served no useful purpose and the district court did not abuse its discretion by failing to hold one.
We next determine whether the magistrate judge erred by denying DeBose’s motion to reassign or recuse as moot. We review the denial of a reassignment or recusal motion for abuse of discretion. Loranger v. Stierheim, 10 F.3d 776, 779 (11th Cir. 1994).
A federal court may not decide moot questions. See St. Pierre v. United States, 319 U.S. 41, 42 (1943). An action is generally considered moot when any determination of the matter will have no practical effect on the parties. See United States Parole Comm’n v. Geraughty, 445 U.S. 388, 396 (1980).
Here, DeBose filed a motion to reassign or recuse the magistrate judge prior to the rulings on her Rule 60(d) motion and her motion for an evidentiary hearing. Once rulings had been made on the Rule 60(d) motion and the motion for evidentiary hearing by the district court judge—and not, notably, by the magistrate judge — any ruling on the motion to reassign or recuse would have no practical effect on the parties.
The magistrate judge thus did not abuse his discretion by denying the motion as moot. Accordingly, we affirm.
Finally, we address DeBose’s motion for sanctions in this appeal. Rule 38 provides that “[i]f a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.” Fed. R. App. P. 38.
For purposes of Rule 38 sanctions, a claim is frivolous if it is “utterly devoid of merit.” Bonfiglio v. Nugent, 986 F.2d 1391, 1393 (11th Cir. 1993). By its plain terms, however, Rule 38 applies against appellants and in favor of appellees. Accordingly, we deny DeBose’s motion for sanctions.
To sum up, we conclude that:
(1) this Court lacks jurisdiction to review the district court’s order dismissing DeBose’s “Independent Action for Relief from Judgment to Remedy Fraud on the Court” in DeBose II;
(2) the district court did not abuse its discretion in denying DeBose’s Rule 60(d) motion;
(3) the district court did not abuse its discretion by denying DeBose’s Rule 60(d) motion without an evidentiary hearing;
(4) the magistrate judge did not abuse his discretion by denying DeBose’s motion to reassign or recuse as moot; and
(5) DeBose’s motion for sanctions is denied.
AFFIRMED and DENIED.
Here’s the Tax Deductible 11th Cir. Opinion Judge Jill Pryor Has Been Bayin’ Her Colleagues For
And it is an $17 million dollar windfall for Pryor care of her judicial colleagues, with Judge Babs Lagoa leading the line in this unanimous, 36 page published opinion.
David F. Hewitt, et al. v. Commissioner of IRS
You are about to read corruption at it’s highest level, and we’re not referring to the Hewitt’s, but the delayed and delayed and delayed again tax easement cases against Judge Jill Pryor et al in Tax Court which is about a $17M+ tax dodge.
Judge Jill A. Pryor desperately needed a published tax case opinion and after 2 long years waiting – and in the interim stalling her two tax cases – the 11th Circuit, where she sits as a judge, duly obliges.
This collegiate opinion by her judicial colleagues was predicted by LIT and LIF.
The opinion is unanimous, has a designated lower court hand-picked judge to sit on the panel and despite its length, a 36-page opinion on a considerably contentious matter, there is no concurring or dissenting opinion.
We find that disturbing and unusual in the Eleventh Circuit, when reviewing past published opinions.
This precedential opinion is issued as a new year gift to Ochlocracy and a Corrupt Federal Judiciary.
DEC 29, 2021 | REPUBLISHED BY LIT: DEC 30, 2021
Before WILSON, LAGOA, Circuit Judges, and MARTINEZ, District Judge (from MIAMI, SD Fl. District Court, of course, where Lagoa’s father-in-law is also a sitting judge).
David and Tammy Hewitt seek review of the Tax Court’s order determining that they were not entitled to carryover a char itable contribution deduction for the donation of a conservation easement (the “Easement”).
The Tax Court concluded that the Easement did not satisfy the “protected-in-perpetuity” require- ment, see I.R.C. § 170(h)(5), because the Easement deed violated the judicial extinguishment proceeds formula set forth in Treas. Reg. § 1.170A-14(g)(6)(ii).
Specifically, in the event of judicial extinguishment, the Easement deed subtracts the value of post-donation improvements to the property from the extinguishment proceeds before determining the donee’s share of the proceeds, which the Commissioner asserts violated § 1.170A-14(g)(6)(ii) and, thus, § 170(h)(5)’s protected-in-perpetuity requirement.
On appeal, the Hewitts make several arguments as to why the Tax Court erred.
They contend that the Commissioner’s inter- pretation of § 1.170A-14(g)(6)(ii) is incorrect, as subtraction of the value of post-donation improvements from the proceeds allocated to the donee is the “better reading” of the regulation.
As to this interpretation argument, we recently determined, in TOT Prop- erty Holdings, LLC v. Commissioner, that § 1.170A-14(g)(6)(ii) “does not indicate that any amount, including that attributable to improvements, may be subtracted out.” 1 F.4th 1354, 1363 (11th Cir. 2021) (quoting PBBM-Rose Hill, Ltd. v. Comm’r, 900 F.3d 193, 208 (5th Cir. 2018)).
But, based on the taxpayers’ concession in TOT, id. at 1362 & n.13, we did not address whether § 1.170A-14(g)(6)(ii) was procedurally valid under the Administrative Procedures Act (“APA”) or substantively valid under the framework in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).
Unlike the taxpayers in TOT, the Hewitts challenge the regulation’s validity on appeal.
Specifically, the Hewitts argue that the Commissioner’s interpretation of § 1.170A-14(g)(6)(ii)—prohibiting the subtraction of the value of post-donation improvements to the property on which a conservation easement exists from the proceeds in the event of judicial extinguishment—is arbitrary and capricious for violating the procedural requirements of the APA, see 5 U.S.C. § 706, because the U.S. Treasury Department failed to respond to significant comments as to the improvements issue in promulgating the regulation.
The Hewitts further argue that the regulation is substantively invalid under Chevron as an unreasonable interpretation of the statute.
After careful review, and for the reasons explained below, we conclude that the Commissioner’s interpretation of § 1.170A- 14(g)(6)(ii) is arbitrary and capricious and violates the APA’s procedural requirements.1
And because we find the Commissioner’s interpretation of § 1.170A-14(g)(6)(ii) to be invalid under the APA, the Easement deed’s subtraction of the value of post-donation improvements from the extinguishment proceeds allocated to the donee does not violate § 170(h)(5)’s protected-in-perpetuity requirement.
Accordingly, we reverse the Tax Court’s order disallowing the Hewitts’ carryover deduction for the conservation easement and remand for further proceedings.
I. FACTUAL AND PROCEDURAL BACKGROUND
David and Tammy Hewitt2 reside in Randolph County, Alabama, near Alabama’s border with Georgia. David’s father moved to Alabama in the early 1950s, acquiring land there to raise cattle, farm, and harvest timber. In the early 1990s, his father transferred a portion of this land to David’s sister.
David subsequently acquired 257.2 acres of land in Randolph County (the “Property”) in four transactions.
His sister transferred approximately 232 acres to David through a series of three warranty deeds dated January 27, 1997, January 23, 1998, and July 1, 1998. In 2001, David purchased 25 more acres of adjected land and bought out the interest of two unrelated persons who co- owned a 400-acre parcel with his father.
By 2012, David and his sister owned approximately 1,325 acres in Randolph and Cleburne Counties, Alabama.
The cumulative property owned between the two siblings had no zoning ordinances at the time of the
Easement’s grant and consisted of pastureland along a county road and wooded areas with steep topography, rough terrain, and limited road access. David has used, and continues to use, portions of the Property as a cattle ranch.
On December 28, 2012, David donated the Easement on the Property to and for the benefit of Pelican Coast Conservancy, Inc., a wholly owned subsidiary of the Atlantic Coast Conservancy, Inc. (collectively, “the Conservancy”), through a document entitled Deed of Conservation Easement, which was recorded with the Probate Judge for Randolph County the same day.
The Easement deed provides that the Easement’s purpose is “to assure that the Property will be retained forever predominately in its natural condition and to prevent any use of the Property that will impair or interfere with the Conservation Values as set forth in this Easement.”
The Easement deed sets forth a list of “prohibited uses” and permits the Conservancy the right to enter upon the Property at reasonable times to preserve and protect the conservation features. The deed also contains a “permitted uses” section, which reserved to the Hewitts the right to build certain types of improvements on certain areas of the Property.
Additionally, section 15 of the deed governs judicial extinguishment of the
Easement. Subsection 15.1 provides:
If circumstances arise in the future such as render the purpose of this Easement impossible to accomplish, this Easement can only be terminated or extinguished, whether in whole or in part, by judicial proceedings in a court of competent jurisdiction, and the amount of the proceeds to which Conservancy shall be entitled, after the satisfaction or prior claims, from any sale, exchange, or involuntary conversion of all or any portion of the Property subsequent to such termination or extinguishment (herein collectively “Extinguishment”) shall be determined to be at least equal to the perpetual conservation restriction’s proportionate value unless other- wise provided by Alabama law at the time, in accordance with Subsection 15.2 . . . .
In turn, subsection 15.2 provides:
This Easement constitutes a real property interest immediately vested in Conservancy. For the purposes of this Subsection, the parties stipulate that this Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Property unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improve- ments) by the ratio of the value of the Easement at the time of this grant to the value of the Property, without deduction for the value of the Easement, at the time of this grant For the purposes of this paragraph, the ratio of the value of the Easement to the value of the Property unencumbered by the Ease- ment shall remain constant. (emphasis added).
As stipulated by the parties, the Conservancy provided David with a contemporaneous written acknowledgement within the meaning of I.R.C. § 170(f)(8), and the Conservancy was a “qualified organization” within the meaning of I.R.C. § 170(h)(3) at the time of the Easement donation. The Commissioner also does not con- test that the Property complied with the requirements of I.R.C. § 170(h)(4)(A)(ii)–(iii).
While David is the sole owner of the Property, the Hewitts jointly filed their tax returns for the relevant tax years at issue— 2012, 2013, and 2014.
For the 2012 tax year, the Hewitts reported a noncash, charitable contribution for the donation of the Easement in the amount of $2,788,000.
An appraisal of the Easement was attached to their 2012 return, which the Commissioner—only for the purposes of this appeal—does not contest was a qualified appraisal prepared by a qualified appraiser as required by I.R.C. § 170(f)(11)(E).
However, the Hewitts and the Commissioner do not stipulate to the appraisal’s contents. Due to limitations on charitable contribution deductions, the deduction for the Easement contribution was $57,738.
The Hewitts timely filed their federal income tax returns for the 2013 and 2014 tax years.
The 2013 return claimed a noncash, charitable contribution carry-forward deduction from the 2012 charitable contribution deduction for the Easement in the amount of $1,868,782, and the 2014 return carried the same deduction in the amount of $861,480.
On August 16, 2017, the Commissioner timely mailed a statutory notice of deficiency (“NOD”) for the 2013 and 2014 taxable years to the Hewitts.
The NOD provided that the Hewitts owed:
(1) a $336,894 tax deficiency and an I.R.C. § 6662 penalty of $134,757.60 for the 2013 year;
(2) a $347,878 tax deficiency and $136,458.40 penalty for the 2014 year.
The NOD disallowed $2,730,262 of the charitable contribution carryover deduction from 2012 for 2013 and 2014.On November 14, 2017, the Hewitts timely filed a petition for redetermination with the Tax Court, challenging the disallowances for the carryover deductions related to the Easement in the NOD.
In a pretrial memorandum, the Commissioner argued that the Easement deed failed to comply with Treas. Reg. § 1.170A- 14(g)(6) due to an “improvements clause” included therein.
The case proceeded to trial.
In their post-trial brief, the Hewitts contended, among other things, that § 1.170A-14(g)(6)(ii), as interpreted by the Commissioner, was not a valid exercise of Treasury’s rulemaking authority.
On June 17, 2020, the Tax Court issued a memorandum opinion determining that the Hewitts were not entitled to carryover the charitable contribution deduction for the donation of the Easement.3
The Tax Court explained that section 15 of the deed “subtracts the value of posteasement improvements before determining the Conservancy’s share of the extinguishment proceeds and fails to allocate the extinguishment proceeds in accordance with” § 1.170A-14(g)(6), as that regulation “does not permit the value of posteasement improvements to be subtracted from the proceeds before determining the donee’s share.”
The Tax Court rejected the Hewitts’ argument that an easement donee’s right to any extinguishment proceeds is limited to those from the property as it existed at the time of the grant as contrary to the regulation’s text.
Therefore, the Tax Court explained that “[f]or purposes of the extinguishment provisions, the subject property may change, but the donee’s property right to the extinguishment proceeds may not.”
The Tax Court also rejected the Hewitts’ challenge to § 1.170A-14(g)(6)(ii)’s procedural and substantive validity based on its decision in Oakbrook Land Holdings, LLC v. Comm’r, 154 T.C. 180 (2020).
This appeal ensued.
II. STANDARD OF REVIEW
We review the Tax Court’s legal conclusions de novo and its factual findings for clear error. Kardash v. Comm’r, 866 F.3d 1249, 1252 (11th Cir. 2017).
Under the APA, a “reviewing court shall hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).
Our review standard is “narrow,” and we “will not substitute [our] judgment for that of the agency.” Lloyd Noland Hosp. & Clinic v. Heckler, 762 F.2d 1561, 1565 (11th Cir. 1985). However, “[i]n employing this defer- ential standard of review,” we do “not rubber stamp the action of the agency.” Port of Jacksonville Mar. Ad Hoc Comm., Inc. v. U.S. Coast Guard, 788 F.2d 705, 708 (11th Cir. 1986).
Rather, “we must determine whether the decision was based on a consideration of the relevant factors and whether there was a clear judgment error.” Lloyd Noland, 762 F.2d at 1565 (citing Motor Vehicles Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).
Furthermore, “we may not supply a reasoned basis for the agency’s ac- tion that the agency itself has not given,” although we will “uphold a decision of less than ideal clarity if the agency’s path may reason- ably be discerned.” State Farm, 463 U.S. at 43 (first quoting SEC v. Chenery Corp., 332 U.S. 194, 196 (1974), then quoting Bowman Transp. Inc. v. Ark.-Best Freight Sys., 419 U.S. 281, 286 (1974)); ac- cord Judulang v. Holder, 565 U.S. 42, 52–55 (2011). And “courts may not accept . . . counsel’s post hoc rationalizations for agency actions,” as “an agency’s action must be upheld, if at all, on the basis articulated by the agency itself.” State Farm, 565 U.S. at 50.
The APA “prescribes a three-step procedure for so-called ‘notice-and-comment rulemaking.’” Perez v. Mortg. Bankers Ass’n, 575 U.S. 92, 96 (2015); accord 5 U.S.C. § 553.
First, an agency “must issue a ‘[g]eneral notice of proposed rulemaking,’ ordinarily by publication in the Federal Register.” Perez, 575 U.S. at 96 (alter- ation in original) (quoting § 553(b)).
Second, “if ‘notice [is] re- quired,’ the agency must ‘give interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments,’” and the agency “must consider and respond to significant comments received during the period for public comment.” Id. (alteration in original) (quoting § 553(c)).
Third, in promulgating the final rule, the agency “must include in the rule’s text ‘a concise general statement of [its] basis and pur- pose.’” Id. (alteration in original) (quoting § 553(c)). As the Su- preme Court has explained, “Rules issued through the notice-and- comment process are often referred to as ‘legislative rules’ because they have the ‘force and effect of law.’” Id. (quoting Chrysler Corp. v. Brown, 441 U.S. 281, 302–03 (1979)).
Thus, “[t]he APA requires the agency to incorporate into a new rule a concise general statement of its basis and purpose.” Lloyd Noland, 762 F.2d at 1566. As we have explained, “state- ment[s] may vary, but should fully explain the factual and legal ba- sis for the rule.” Id.
Indeed, “[b]asis and purpose statements must enable the reviewing court to see the objections and why the agency reacted to them as it did,” id., as “
And, in the statement, the agency must rebut “vital relevant” or significant comments. See Lloyd Noland, 762 F.2d at 1567; Hussion v. Madigan, 950 F.2d 1546, 1554 (11th Cir. 1992) (“Under the ‘arbitrary and capricious’ standard of review, an agency is required to respond to significant comments that cast doubt on the reasonableness of the rule the agency adopts.” (quoting Balt. Gas & Elec. Co. v. United States, 817 F.2d 108, 116 (D.C. Cir. 1987))).
The purpose of notice-and- comment rulemaking is to “give affected parties fair warning of potential changes in the law and an opportunity to be heard on those changes” while “afford[ing] the agency a chance to avoid er- rors and make a more informed decision.” Azar v. Allina Health Servs., 139 S. Ct. 1804, 1816 (2019).
Turning to the statutory and regulatory tax provisions at hand, I.R.C. § 170(a) generally allows taxpayers to deduct certain charitable contributions.
While a taxpayer normally is not entitled to deduct the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property,” id. § 170(f)(3)(A), an exception is made for a “qualified conservation contribution,” id. § 170(f)(3)(B)(iii), (h); accord TOT, 1 F.4th at 1361.
Congress created this exception, codified at I.R.C.§ 170(f)(3)(B)(iii), (h), in 1980.
Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, § 6, 94 Stat. 3204, 3206; Oakbrook, 154 T.C. at 185. Under § 170(h), for a contribution to be a “qualified conservation contribution,” the contribution must be “(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes.” § 170(h)(1).
A “qualified real property interest” includes “a restriction (granted in perpetu- ity) on the use which may be made of the real property.” 170(h)(2)(C). Additionally, § 170(h)(5)(A) provides that, for pur- poses of subsection (h), “[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation pur- pose is protected in perpetuity.”
The statute, however, does not define the “protected in perpetuity” requirement. TOT, 1 F.4th at 1362.
On May 23, 1983, Treasury issued a notice of proposed rule- making with “proposed regulations relating to contributions of partial interests in property for conservation purposes.”
Qualified Conservation Contribution; Proposed Rulemaking, 48 Fed. Reg. 22,940, 22,940 (May 23, 1983). Then, on January 14, 1986, Treasury issued final regulations, including the regulation at issue in this case—Treas. Reg. § 1.170A-14(g)(6)—governing the allocation of proceeds between the donor and donee in the event of judicial ex- tinguishment of a donated conservation easement. Income Taxes; Qualified Conservation Contributions, 51 Fed. Reg. 1496 (Jan. 14, 1986). Section 1.170A-14(g)(6), titled “Extinguishment,” provides:
(i) In general. If a subsequent unexpected change in the conditions surrounding the property that is the subject of a donation under this paragraph can make impossible or impractical the continued use of the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and all of the donee’s proceeds (deter- mined under paragraph (g)(6)(ii) of this section) from a subsequent sale or exchange of the property are used by the donee organization in a manner con- sistent with the conservation purposes of the original contribution.
(ii) Proceeds. [F]or a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time. . . .
For purposes of this para- graph (g)(6)(ii), that proportionate value of the do- nee’s property rights shall remain constant. Accordingly, when a change in conditions give rise to the ex- tinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee or- ganization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.
To summarize, “the regulations require that the donee of an easement be granted a vested right to the value of judicial sale proceeds (e.g. in condemnation) multiplied by ‘a fraction equal to the value of the conservation easement at the time of the gift, divided by the value of the property as a whole at that time.’” TOT, 1 F.4th at 1362 (quoting PBBM-Rose Hill, 900 F.3d at 207).
And, in TOT, we found that § 1.170A-14(g)(6)(ii)’s proceeds formula “does not al- low for ‘any increase in value after the date of th[e] grant attribut- able to improvements’ to be subtracted from the extinguish- ment proceeds before the fraction is applied to the proceeds.”
Id. at 1363 (alteration in original).
But while we agreed with the Commissioner’s interpretation of the proceeds regulation in TOT, we expressly did not consider the validity of the regulation under the APA, as the taxpayers there did not make such a challenge. Id. at 1362 n.13; see also PBBM-Rose Hill, 900 F.3d at 209 n.8 (declining to address a challenge to § 1.170A-14(g)(6)(ii)’s validity as the tax- payer failed to make the argument below).
Unlike TOT, the Hewitts assert that Treasury failed to com- ply with the procedural requirements of the APA in promulgating Treas. Reg. § 1.170A-14(g)(6)(ii). Specifically, the Hewitts contend that the administrative record demonstrates that comments raising concerns with § 1.170A-14(g)(6)(ii) were filed during the rulemaking process, that those comments were “significant” such that they required a response from Treasury, and that Treasury failed to adequately respond to those significant comments in the final regulation’s “basis and purpose” statement, in violation of the APA’s procedural requirements.
As such, the Hewitts contend that § 1.170A-14(g)(6)(ii), as interpreted by the Commissioner to prohibit the subtraction of the value of post-donation improvements to the easement property in the proceeds allocated to the donee in the event of judicial extinguishment, is arbitrary and capricious un- der the APA.
As previously noted, Treasury issued a notice of proposed rulemaking following Congress’s enaction of § 170(h) for “proposed regulations relating to contributions of partial interests in property for conservation purposes” and to clarify “the statutory rules in effect under [the Tax Treatment Extension Act of 1980].” 48 Fed. Reg. at 22,940. One of the subparagraphs in the proposed regulations ultimately became § 1.170A-14(g)(6). Id. at 22,946–47.
Of relevance here, the preamble to the proposed rulemaking explained that section 6 of that act “made extensive changes in the existing statute, eliminated the expiration date, and incorporated the relevant language into a new section 170(h).” Id. at 22,940. It further provided that “[t]he regulations reflect[ed] the major policy decisions made by the Congress and expressed in committee reports.” Id.
And Treasury stated that it would consider any writ- ten comments submitted before adopting the proposed regulations. Id. at 22,941.
Following Treasury’s request for public comments, it re- ceived more than 700 pages of commentary from ninety organiza- tions and individuals. Of the ninety commenters, thirteen offered comments as to the proposed extinguishment proceeds regulation. Oakbrook, 154 T.C. at 186.
The Hewitts contend that seven of those thirteen commenters “expressed concern that allocation of post-extinguishment proceeds under the proposed Proceeds Regulation was unworkable, did not reflect the reality of the donee’s in- terest, or could result in an unfair loss to the property owner and a corresponding windfall for the donee.”
Turning to the most detailed comment, the New York Landmarks Conservancy (“NYLC”) urged Treasury to delete the proposed proceeds regulation because it contained pervasive “prob- lems of policy and practical application.” NYLC stated that while Congress enacted the statute “to encourage the protection of [the]
. . . environment through the donation of conservation restrictions,” the proposed regulation “would thwart the purpose of the statute by deterring prospective donors,” as those donors would “likely . . . be discouraged from making a donation which may tie themselves or future owners to share proceeds of a sale or exchange with the charitable organization [donee] under circumstances which cannot possibly be foreseen.”
NYLC explained that prospective donors frequently were concerned about “perpetuity” issues, which were “mollified upon the donor’s recognition that common law permits the extinguishment of restrictions when they no longer serve the original intended purposes.”
But NYLC believed “[t]he prospect of extinguishment would no longer mol- lify these fears if a split of proceeds under unknown circumstances would be required.” As such, and because “the possibility of extin- guishment is relatively remote,” NYLC stated it was “unnecessary” for Treasury “to provide for allocation of proceeds after extinguishment.”
NYLC also specifically commented on the issue of whether the value of post-donation improvements to the easement property should be included or excluded from the extinguishment pro- ceeds formula contained in the regulation. NYLC stated that the regulation’s structure “contemplates that a ratio of value of the conservation restriction to value of the fee will be fixed at the time of the donation and will remain in effect forever thereafter.”
But NYLC asserted that the formula “fail[ed] to take into account that improvements may be made thereafter by the owner which should properly alter the ratio.”
In support of its concern, NYLC pre- sented a mathematical example, which was based on a fact pattern in the proposed regulations, see 48 Fed. Reg. at 22,945, to show that requiring the prospective donor to turn over extinguishment proceeds attributable to post-donation improvements to the donee “would obviously be undesirable to the prospective donor and would constitute a windfall to the donee organization.” See Oak- brook, 154 T.C. at 224 (Toro, J., concurring in result).
Thus, “in light of the potential inequities,” NYLC recommended “that the proposed proceeds formula be revised to prevent such inequities should the . . . Treasury decide to retain the provision” but “strongly recommend[ed] deletion of the entire extinguishment provision.” (emphasis added).
While NYLC offered the most extensive comments on the proposed proceeds regulation—including being the only com- menter that addressed the allocation of the value of proceeds at- tributable to future improvements by the donor—other commenters expressed criticism or urged caution as to the proposed extin- guishment regulations.
The Landmarks Preservation Council of Illinois, for example, “urge[d] caution in the treatment of the concept of ‘extinguishment’ in the regulations,” as “[t]he discussion in the regulations of the conditions under which that binding agreement may be abrogated lends an undesirable air of legitimacy to the concept of ‘extinguishment.’”
It also warned that the regulations could “create a potential disincentive to the donation of easements,” noting that “[t]he obligation imposed on the donor or sub- sequent owner to pay to the donee organization an amount at least equal to the original proportionate value of the easement” could place “the donor at risk for an amount of money” —e.g., payments to a third party lender— “for which he may not be compensated by the disposition of the proceeds of sale.”
The Land Trust Exchange stated that the proposed proceeds regulation “may result in donors or donees having to pay real estate transfer taxes” and that it was “unnecessary.”
The Trust for Public Land stated that it had “serious doubts whether the provision . . . could be enforced against anyone other than the original donor of the easement” and that “the tax benefit rule is a satisfactory means of meeting any concern the IRS may have that a donor might receive the double benefit of an easement deduction followed by later recovery of the value donated.”
The Brandywine Conservancy cautioned that the regulation “may unnecessarily restrict the amount, payable to the holder of an easement, if changes in surrounding territory have made the easement proportionately more valuable than the retained interest” and that “[t]he donee should be entitled to proceeds equal to the greater of its original proportionate value or its proportionate value at the time of the extinguishment.”
And the Nature Conservancy and the Maine Coast Heritage Trust both mentioned that the regulation should be “clear” that the original proportionate value is the minimum that a donee will receive in extinguishment proceeds.4
After a public hearing, Treasury adopted the proposed regulations with revisions. 51 Fed. Reg. at 1496. In the preamble to the final rulemaking, Treasury stated that “[t]hese regulations provide necessary guidance to the public for compliance with the law and affect donors and donees of qualified conservation contributions” and that it had “consider[ed] all comments regarding the proposed amendments.” Id.
In the subsequent “Summary of Comments” section, however, Treasury did not discuss or respond to the comments made by NYLC or the other six commenters concerning the extinguishment proceeds regulation.
See id. at 1497– 98; Oakbrook, 154 T.C. at 188 (“The ‘judicial extinguishment’ provision is not among the amendments specifically addressed in the ‘Summary of Comments.’”).
And Treasury stated that “[a]lthough a notice of proposed rulemaking which solicited public comments was issued, the Internal Revenue Service concluded when the notice was issued that the regulations are interpretative and that the notice and public comment procedure requirement of 5 U.S.C. [§] 553 [of the APA] did not apply.” 51 Fed. Reg. at 1498.
The Hewitts assert that these seven comments—in particular, NYLC’s comment—were significant such that they warranted a response from Treasury in promulgating the final extinguish- ment proceeds regulation.
In response, the Commissioner asserts that none of the thirteen comments were significant to require a response from Treasury because they did not raise any point casting doubt on the regulation’s reasonableness.
Thus, the issue before us is whether Treasury’s failure to re- spond to NYLC’s and the other commenters’ concerns about the extinguishment proceeds regulation was in violation of the proce- dural requirements of the APA.
Phrased differently, we must determine whether § 1.170A-14(g)(6)(ii), as interpreted by the Commissioner to prohibit the subtraction of any amount of proceeds attributable to post-donation improvements to the easement property in the event of judicial extinguishment, is procedurally valid under the APA where:
(1) one commenter—NYLC—made specific comments raising the improvements issue as it relates to extinguishment proceeds and recommended deletion of the provision;
(2) six other organizations submitted comments criticizing or urging caution as to the regulation;
(3) Treasury failed to specifically respond to any of those comments, instead simply stating that it had considered “all comments.”
Below, the Tax Court found that the regulation was procedurally valid under the APA, relying on its decision in Oakbrook.
In Oakbrook, the Tax Court considered the comments Treasury received as to “the fact that the ‘proportionate share’ formula [in § 1.170A-14(g)(6)(ii)] does not account for the possibility of donor improvements.” 154 T.C. at 192.
The Tax Court concluded that the proceeds regulation as to the post-donation improvements was procedurally valid under the APA. Id. at 195.
The court first noted that it had found the statement “[a]fter consideration of all com- ments,” coupled with an administrative record, to be “sufficient to find that Treasury had considered the relevant matter presented to it.” Id. at 191–92 (alteration in original) (citing Wing v. Comm’r, 81 T.C. 17, 31–32 (1983)).
The Tax Court stated that “[t]he APA ‘has never been interpreted to require the agency to respond to every comment, or to analy[z]e every issue or alternative raised by the comments, no matter how insubstantial.’” Id. at 192 (quoting Thompson v. Clark, 741 F.2d 401, 408 (D.C. Cir. 1984)).
The Tax Court further noted that “only one of the 90 commenters”— NYLC—“mentioned donor improvements, and it devoted exactly one paragraph to this subject.” Id.
The Tax Court stated that NYLC’s point that donors “are likely to be discouraged from making a donation” was “a supposition that Treasury may reasonably have discounted.” Id.
And it stated that, as to the improvements issue, “[t]he administrative record reflects that no substantive alter- natives to the final rules were presented for Treasury’s consideration.” Id. at 193 (alteration in original) (quoting SIH Partners LLLP v. Comm’r, 150 T.C. 28, 44 (2018)).
The Tax Court found that “NYLC offered no suggestion about how the subject of donor improvements might be handled; it simply recommended ‘deletion of the entire extinguishment provision.’” Id.
As to the final regulations’ preamble, the Tax Court rejected the argument that Treasury did not comply with the APA because the preamble “did not discuss the ‘basis and purpose’ of the judicial extinguishment provision specifically.” Id. at 193–94.
The court explained that “[e]ven where a regulation contains no statement of basis and purpose whatsoever, it may be upheld ‘where the basis and purpose . . . [are] considered obvious.’” Id. at 194 (quoting Cal- Almond, Inc. v. U.S. Dep’t of Agric., 14 F.3d 429, 443 (9th Cir. 1993)).
The court noted the final regulations’ preamble “explains that they were being promulgated to ‘provide necessary guidance to the public for compliance with the law,’ as recently amended by Congress, ‘relating to contributions of partial interests in property for conservation purposes,’” with the proposed regulations’ preamble stating, “the requirement that conservation easements ‘be perpetual in order to qualify for a deduction.’” Id. (first quoting 51 Fed. Reg. at 1496, then quoting 48 Fed. Reg. at 22,940).
And it found that “[t]he purpose of the ‘judicial extinguishment’ rule is plain on its face—to provide a mechanism to ensure that the conservation purpose can be deemed ‘protected in perpetuity’ not-withstanding the possibility that the easement might later be extinguished.” Id. (quoting § 1.170A-14(g)(6)(i)).
Finally, the Tax Court minimized the importance of the extinguishment proceeds provision in the context of the final regulations—“one subparagraph of a regulation project consisting of 10 paragraphs, 23 subparagraphs, 30 subdivisions, and 21 examples”—as the APA did not “mandate that an agency explain the basis and purpose of each individual component of a regulation separately.” Id.
Thus, the court concluded that “[t]he broad statements of purpose contained in the preambles to the final and proposed regulations, coupled with obvious inferences drawn from the regulations themselves, [were] more than adequate.” Id.
The Oakbrook decision was not unanimous. Judge Toro, in a concurring in result opinion, found that, if the proceeds regulation was read in the way proposed by the Commissioner, i.e., to bar subtraction of the value of post-donation improvements from the extinguishment proceeds, it failed to comply with the APA’s procedural requirements. See id. at 216 (Toro, J., concurring).
Judge Toro explained that the “Treasury received more than 700 pages of comments” during the comment period and that, in the final regulations, Treasury responded to those comments and other administrative matters in just two of the twelve pages—“six columns in the Federal Register”—consisting of the final regulations. Id. at 221.
In his view, it was likely that Treasury “was simply following its historical position that the APA’s procedural requirements did not apply to these types of regulations,” noting that the final regulations referenced Treasury’s belief that they did not require notice and comment and that this belief was mistaken. Id. at 222.
Judge Toro then found that the “Treasury failed to ‘respond to “significant points” and consider “all relevant factors” raised by the public comments.’” Id. at 223 (quoting Carlson v. Postal Regul. Comm’n, 938 F.3d 337, 334 (D.C. Cir. 2019)).
Pointing specifically to NYLC’s comment, Judge Toro explained that NYLC “made clear that, in its view, it would be inappropriate to condition the availability of the deduction for a conservation easement on the donor’s agreement to turn over to the donee proceeds attributable to improvements on the real property interest that the Code permitted the donor to retain.” Id. at 224.
He further noted that NYLC:
(1) “expressly tied its comments” to a specific rule and a specific fact pattern in the proposed regulations;
(2) explained that the proposed proceeds regulation would “thwart the purpose of the statute,” which NYLC stated was to “encourage the protection of our significant natural and built environment through the donation of conservation restrictions”;
(3) recommended the deletion of the provision “or, at the very least, ‘be revised to prevent . . . [the] inequities’ it had identified.” Id. (alterations in original).
As such, Judge Toro explained that the administrative record left “no doubt” that NYLC’s comment “‘can be thought to challenge a fundamental premise’ underlying the proposed agency decision.” Id. (quoting Carlson, 938 F.3d at 344).
The proposed regulations’ preamble explained that they reflected Congress’s “major policy decisions,” and NYLC “in effect countered that the proposed rule on future donor improvements was contrary to those policy decisions, would lead to inequitable results that were inconsistent with the statute, and would deter future contributions.” Id. at 225 (quoting 48 Fed. Reg. at 22,940).
In other words, Judge Toro found that NYLC “offered comments that, ‘if adopted, would require a change in an agency’s proposed rule,’” and that “were both ‘rele- vant and significant,’ [as to] require[e] a response.” Id. (first quoting Home Box Office, Inc. v. FCC, 567 F.2d 9, 35 n.58 (D.C. Cir. 1977), then quoting Grand Canyon Air Tour Coal. v. FAA, 154 F.3d 455, 468 (D.C. Cir. 1998)).
Because Treasury did not provide a response to NYLC’s comments, Judge Toro concluded that its actions failed to provide “an explanation [that] is clear enough that its ‘path may reasonably be discerned’” or “provide any insight on ‘what major issues of policy were ventilated . . . and why the agency reacted to them as it did’ on this point.” Id. at 225–26 (alterations in original) (first quot- ing Encino Motorcars, 579 U.S. at 221, then quoting Carlson, 938 F.3d at 344).
And it was “not the role of the courts to speculate on reasons that might have supported” Treasury’s decision. Id. at 226 (quoting Encino Motorcars, 579 U.S. at 224).
Judge Toro also explained that the Oakbrook majority’s reasoning as to the issue was flawed for several reasons. He explained that courts were “not re- quired to ‘take the agency’s word that it considered all relevant matters,’” as the majority asserted. Id. at 226–27 (quoting PPG In- dus., Inc. v. Costle, 630 F.2d 462, 466 (6th Cir. 1980)).
He further noted that “[a] ‘relevant and significant comment’ requires a re- sponse, regardless of whether the point is made by many, a few, or even a single commenter,” and “a comment does not lose its significance because it is presented succinctly.” Id. at 227 (quoting Carlson, 938 F.3d at 347). And, if the scope of the project “was too large to permit an appropriate response to all ‘relevant and signifi- cant comments,’ then Treasury could have broken the project down into smaller parts.” Id.
In his dissenting opinion, Judge Holmes reached a similar conclusion to Judge Toro on the regulation’s procedural invalidity under the APA.
He concluded that comments from NYLC and other organizations “were significant and [were] entitled to an agency response.” See id. at 245 (Holmes, J., dissenting).
Judge Holmes explained that Treasury’s statement that it considered “all comments” was not sufficient under the APA, noting that the Federal Circuit, in Dominion Resources, Inc. v. United States, 681 F.3d 1313, 1319 (Fed. Cir. 2012), found a Treasury regulation procedurally invalid even though Treasury explicitly stated that “it rejected the commentators’ recommendation and brief explanation in general terms of how one of the provisions worked.”5 Oakbrook, 154 T.C. at 245–46 (Holmes, J., dissenting).
He further explained that the final regulations at issue provided even less explanation than those in Dominion Resources, as Treasury failed to “even acknowledge the relevant comments or expressly state its disagreement with them” such that there was not even “a minimal level of analysis.” Id. at 248 (quoting Encino Motorcars, 579 U.S. at 2120).
After careful consideration of the agency record before us, the several opinions in Oakbrook and precedent from the Supreme Court, and this Court’s interpretation of procedural validity under the APA, we conclude that § 1.170A-14(g)(6)(ii)—as read by the Commissioner to prohibit subtracting the value of post-donation improvements to the easement property from the proceeds allocated to the donor and donee in the event of judicial extinguishment—is arbitrary and capricious under the APA for failing to com- ply with the APA’s procedural requirements and is thus invalid. See §§ 553(c), 706(2)(A).
Our decision in Lloyd Noland is instructive.
In that case, the plaintiffs challenged a malpractice insurance rule related to Medicare reimbursements that was promulgated by the Secretary of Health and Human Services. 762 F.2d at 1563.
In addressing the plaintiffs’ challenge, we concluded that the malpractice insurance rule was procedurally inadequate under the APA; specifically, it violated § 553(c), which we explained requires an agency “to incorporate into a new rule a concise general statement of its basis and purpose.” Id. at 1566.
The Secretary had failed to respond to com- ments that a study the agency relied on, which contained limited data that the authors cautioned against generalizing, was unreliable. Id.
While the Secretary asserted that the objections were ir- relevant, we concluded otherwise, such that those comments formed the basis of our holding that the malpractice insurance rule was arbitrary. Id. at 1566, 1568.
We also rejected the Secretary’s argument that she addressed certain hospitals’ comments based on the rule’s preamble, stating that “
While the Secretary suggested “that drawing a conclusion contrary to the comments does not mean they were not con- sidered,” we explained that “[b]asis and purpose statements must enable the reviewing court to see the objections and why the agency reacted to them as it did” and that agencies should rebut relevant comments. Id. at 1566–67.
Because the Secretary’s response to the rule’s comments were inadequate, we affirmed the district courts’ invalidation of the rule. Id. at 1567, 1569; cf. Encino Motorcars, 579 U.S. at 2126–27 (“The [agency] said that, in reach- ing its decision, it had ‘carefully considered all of the comments, analyses, and arguments made for and against the proposed changes.’
But when it came to explaining the ‘good reasons for the new policy,’ the [agency] said almost nothing [T]he[agency’s] conclusory statements do not suffice to explain its decision.” (first quoting 76 Fed. Reg. 18,832, 18,832 (Apr. 5, 2011), then quoting FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009))).
The Commissioner argues that Lloyd Noland should be dis- tinguished because, in that case, we reviewed “a factual, evidence- based rule,” while the extinguishment proceeds regulation is based on Treasury’s interpretation of § 170(h)(5)’s statutory protected-in-perpetuity requirement.
But, in Lloyd Noland, we did not hold that the requirement that “[b]asis and purpose statements must enable the reviewing court to see the objections and why the agency reacted to them as it did”—including responding to significant comments—only applies when there is “erroneous data or fact finding” underlying the proposed regulation, as the Commissioner suggests, and we decline to do so here.
As in Lloyd Noland, in promulgating the final extinguish- ment proceeds regulation, Treasury failed to respond to the rele- vant and significant comment from NYLC as to the post-donation improvements issue.
In the proposed regulations’ preamble, Treasury stated that the “regulations reflect the major policy deci- sions made by the Congress and expressed in the committee re- ports” to the Tax Treatment Extension Act of 1980. 48 Fed. Reg. at 22,940.
One of the policy decisions reflected in those “committee reports,” expressly referenced by Treasury, provided that “the preservation of our country’s natural resources and cultural heritage is important,” that “conservation easements now play an important role in preservation efforts,” and that “provisions allowing deductions for conservation easements should be directed at the preservation of unique or otherwise significant land areas or structures.” S. Rep. No. 96-1007, at 9 (1980).
NYLC’s comment recognized as much, stating that “[t]he statute was enacted by Congress to encourage the protection of our significant natural and built en- vironment through the donation of conservation restrictions.”
As to the proposed regulation overall, NYLC stated that the proposed regulation “would thwart the purpose of the statute by deterring prospective donors” concerned about tying themselves to share proceeds of a sale with the donee “under circumstances which cannot possibly be foreseen.”
Additionally, NYLC specifi- cally commented that the regulation’s proceeds formula:
(1) “contemplates that a ratio of value of the conservation restriction to value of the fee will be fixed at the time of the donation and will remain in effect forever thereafter”;
(2) “fail[ed] to take into account that improvements may be made thereafter by the owner which should properly alter the ratio.”
And NYLC warned that this outcome “would obviously be undesirable to the prospective donor and would constitute a windfall to the donee organization” and “strongly recommend[ed] deletion of the entire extinguish- ment provision,” or at least revised “to prevent such inequities.”
In other words, NYLC challenged a fundamental premise underlying Treasury’s proposed regulations by “in effect counter[ing] that the proposed rule on future donor improvements was contrary to those policy decisions [mentioned in the proposed regulations], would lead to inequitable results that were inconsistent with the statute, and would deter future contributions.”
See Oakbrook, 154 T.C. at 225 (Toro, J., concurring).
Simply put, NYLC’s comment was significant and required a response by Treasury to satisfy the APA’s procedural requirements.
And the fact that Treasury stated that it had considered “all comments,” without more discussion, does not change our analysis, as it does not “enable [us] to see [NYLC’s] objections and why [Treasury] reacted to them as it did.” Lloyd Noland, 762 F.2d at 1566.
But the Commissioner contends that the APA only required Treasury “to respond to significant comments that cast doubt on the reasonableness of the rule” it adopted.
See Hussion, 950 F.2d at 1554 (quoting Balt. Gas, 817 F.2d at 116);
see also Vt. Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 553 (1978)
(“[C]omments must be significant enough to step over a threshold requirement of materiality before any lack of agency response or consideration becomes of concern.
The comment cannot merely state that a particular mistake was made . . . ; it must show why the mistake was of possible significance.” (alteration in original) (quoting Portland Cement Ass’n v. Ruckelhaus, 486 F.2d 375, 394 (D.C. Cir. 1973))).
And the Commissioner claims that Treasury’s “primary (if not exclusive) consideration in crafting the proceeds regulation was the meaning of the statutory perpetuity requirement” and that, as such, NYLC was required “to explain why the rule would not further the goal of ensuring that the con- servation purpose embodied in the perpetual use restriction would be protected in perpetuity as required by the statute.”
The Commissioner argues that NYLC’s comment as to post-donation im- provements did not address this consideration, and therefore was not a significant comment, because the comment was limited to
(1) the “observation that the regulation would require the donee to receive a proportionate amount of the full proceeds,” including any proceeds attributable to the donor’s improvements,
(2) NYLC’s belief that this situation would be “‘undesirable’ to the do- nor” and would result in a “windfall” for the donee.
While we agree with the Commissioner that Treasury was only required to respond to significant comments to comply with the APA’s procedural requirements, we disagree with the Commissioner’s argument that NYLC’s comment was not significant.
The Commissioner’s claim that the “primary (if not exclusive)” purpose in crafting the proceeds regulation was only to interpret § 170(h)(5)’s “protected-in-perpetuity” requirement is inconsistent with the committee reports Treasury purportedly relied on.
As identified by NYLC, one of the purported purposes set forth in the committee reports, was to allow deductions for the donation of conservation easements to encourage donation for such easements. See S. Rep. No. 96-1007, at 9.
And NYLC raised the post- donation improvements issue, as to extinguishment proceeds, and warned that its exclusion in the regulatory scheme would discourage prospective donors from donating conservation easements.
In other words, NYLC’s comment was specific to, and casted doubt on, the reasonableness of the proceeds regulation in light of one of Congress’s committee reports which, according to Treasury, was “reflected” in the final regulations. 48 Fed. Reg. at 22,940 (“The regulations reflect the major policy decisions made by the Con- gress and expressed in the committee reports.”).
Furthermore, the final regulations did not limit the purpose of the proceeds regulation in the way the Commissioner suggests.
We thus decline to classify NYLC’s comment as insignificant based on the Commissioner’s interpretation of Treasury’s primary purpose in crafting the proceeds regulation.6
See State Farm, 463 U.S. at 43, 50 (“‘[W]e may not supply a reasoned basis for the agency’s action that the agency itself has not given.’ [C]ourts may not accept appellate counsel’s post hoc rationalizations for agency action.” (quoting
Chenery, 332 U.S. at 196)).
The Commissioner additionally asserts that Treasury’s revi- sions to the proposed proceeds regulation in the final regulation support Treasury’s representation that it considered “all com- ments” in the final regulations’ preamble.
But, as the Commissioner concedes, the revisions were simply “clarifications” in response to other comments “expressing uncertainty” about the regulation’s meaning “rather than substantive changes.”
Indeed, the proceeds regulation was revised from vesting the donee with a property right having a fair market value “that is a minimum ascertainable proportion of the fair market value to the entire property” to a fair market value “that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time.”
See Oakbrook, 154 T.C. at 188 (comparing the proposed and final proceeds regulations).
But this revision does not provide any indication that Treasury was responding to NYLC’s significant comment about the post-donation improvements issue.
See Lloyd Noland, 762 F.2d at 1567; Hussion, 950 F.2d at 1554. We therefore reject this argument.
Because Treasury, in promulgating the extinguishment proceeds regulation, failed to respond to NYLC’s significant comment concerning the post-donation improvements issue as to proceeds, it violated the APA’s procedural requirements.
See Lloyd Noland, 762 F.2d at 1566; see also Oakbrook, 154 T.C. at 225–27 (Toro, J., concurring).
We thus conclude that the Commissioner’s interpretation of § 1.170A-14(g)(6)(ii), to disallow the subtraction of the value of post-donation improvements to the easement property in the extinguishment proceeds allocated to the done, is arbitrary and capricious and therefore invalid under the APA’s procedural requirements.
Accordingly, we reverse the Tax Court’s order disallowing the Hewitts’ carryover charitable deductions as to the donation of the conservation easement and remand for further proceedings.
REVERSED AND REMANDED.
Conservation Easement Deed Fails Perpetuity Requirement
David F. Hewitt et ux. v. Commissioner;
No. 23809-17; T.C. Memo. 2020-89
DAVID F. HEWITT AND TAMMY K. HEWITT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
UNITED STATES TAX COURT
Filed June 17, 2020
Michelle A. Levin, David M. Wooldridge, Ronald A. Levitt, and Gregory P. Rhodes, for petitioners.
Edwin B. Cleverdon, Jerrika C. Anderson, and Horace Crump, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In 2012 petitioner David Hewitt granted a conservation easement to a qualified organization under section 170(h)(3) on rural farm land [*2] that has been in his family for nearly 60 years.1
Growing up, he worked on the farm with his father, and he has lived on the property throughout his life.
Petitioners claimed a charitable contribution deduction of approximately $2.8 million for the easement donation on their joint 2012 tax return and carried over portions of the contribution for 2013 and 2014.
Respondent has not challenged the deduction claimed on the 2012 return but has disallowed the carryover deductions for 2013 and 2014.
The primary issue for decision is whether petitioners are entitled to carryover of the charitable contribution deduction for the donation of the conservation easement; we hold they are not.2
The easement does not protect the conservation purposes of the contribution in perpetuity as required by section 170(h)(5) because the deed would not allocate to the donee a share of the proceeds in the event the property is sold following a judicial extinguishment of the easement, in violation of section 1.170A-14(g)(6)(ii), Income Tax Regs.3
[*3] Respondent determined 40% accuracy-related penalties against petitioners for gross valuation misstatements under section 6662(e) and (h) and 20% accuracy-related penalties for negligence or disregard of rules and regulations or substantial understatements of income tax under section 6662(a) and (b)(1) and (2) for 2013 and 2014. We find petitioners not liable for the penalties.
FINDINGS OF FACT
Petitioners resided in Alabama when they filed their petition. Mr. Hewitt was the sole owner of the easement property but filed joint returns with his wife for the years at issue.
Mr. Hewitt’s father moved to Alabama in the early 1950s and acquired land to raise cattle, farm, and harvest timber.4 When Mr. Hewitt was [*4] a child, his family lived on the land, and he grew up helping his father on the farm and continued to work on the farm while in college.
In the early 1990s Mr. Hewitt’s father transferred a large portion of his land to Mr. Hewitt’s sister.
In 1997 and 1998 the sister transferred a portion of the land, 232 acres, to Mr. Hewitt as a gift. In 2001 Mr. Hewitt purchased 25 more acres of adjacent land. He bought out the interests of two unrelated persons who co-owned a 400-acre parcel with his father.
He granted the conservation easement on a portion of the land he acquired in these transfers. In 2012 Mr. Hewitt and his sister owned approximately 1,325 acres in Randolph and Cleburne Counties, Alabama, near Alabama’s border with Georgia (Hewitt property).
The Hewitt property consisted of pastureland along a county road and wooded areas with steep topography, rough terrain, and limited road access. It is approximately a one-hour drive from Atlanta, Georgia, and a little more than one [*5] hour from Birmingham, Alabama. There were no zoning ordinances on the property when Mr. Hewitt granted the easement.
In 2012 the father’s health had begun to decline.
Mr. Hewitt saw that his father continued to enjoy the land as his health failed and he had difficulty communicating. Mr. Hewitt decided that he wanted to preserve the land because of his father. He also wanted his children and future generations to have the same opportunity that he had had to enjoy and live on the land.
He decided to place a conservation easement on the property.
A business acquaintance referred him to the accounting firm Large & Gilbert, P.C. (Large & Gilbert), because of its experience with the donation of conservation easements. Mr. Hewitt met with members of Large & Gilbert. He believed that Large & Gilbert was well respected in the tax community.
Large & Gilbert recommended that Mr. Hewitt grant the easement to Atlantic Coast Conservancy, Inc. (Conservancy), a qualified organization under section 170(h)(3). Mr. Hewitt met with Robert Keller, a conservation biologist and the Conservancy’s founder and chief executive officer, to discuss the possible donation of the easement.
Dr. Keller visited the Hewitt property to gather information about it. The Conservancy prepared baseline reports on the easement’s conservation goals.
Mr. Hewitt decided to grant an easement on 257 acres of his property that contained pastureland and was accessible from paved roadways. He chose this area because he believed that it was the most likely to be developed and he wanted to protect it. He understood that development of the wooded, hilly area would be costly and believed it was less necessary to protect that portion of the Hewitt property.
In his opinion the pastureland was significantly more valuable than the wooded area. He intended to protect the easement property in perpetuity.
On December 28, 2012, Mr. Hewitt granted a conservation easement over 257 acres to Pelican Coast Conservancy, Inc., a wholly owned subsidiary of the Conservancy (collectively, Conservancy), through a deed of conservation easement.
According to the deed the easement’s purposes are to preserve and protect the scenic enjoyment of the land, agricultural land and production, and a creek within the Tallapoosa Basin watershed.
The deed states that the easement will maintain the amount and diversity of natural habitats, protect scenic views from the roads, and restrict the construction of buildings and other structures, the removal or destruction of native vegetation, changes to the habitat, and the exploration of minerals, oil, gas, or other materials.
It prohibits Mr. Hewitt from undertaking any activity that is inconsistent with the easement’s purposes and grants to the Conservancy the right to prevent any activity or use of the easement [*7] property that is inconsistent with the easement’s purposes or adversely affects its conservation values.
Notwithstanding the above restrictions, Mr. Hewitt reserved the right to locate five one-acre homesites with one dwelling on each homesite.
He intended the homesites to be used by his children if they wanted to live on the family property some day.
The deed does not designate the locations of the homesites and allows them to be located on a substantial portion of the 257-acre easement property.
The deed requires Mr. Hewitt to provide written notice to the Conservancy that he intends to exercise his right to designate a homesite.
The notice must describe the chosen location “in sufficient detail to permit [the] Conservancy to make an informed judgment as to its consistency with the purpose of this Easement”.
The Conservancy has the right to grant or withhold its approval within 60 days of receiving Mr. Hewitt’s written notice. It may withhold approval only if it reasonably determines that the proposed location is inconsistent with or impairs the easement’s purposes.
Mr. Hewitt and the Conservancy must set the homesite location 60 days before construction begins.
The Conservancy believed that the delay in designating the homesite locations would give it flexibility to take into account the natural changes to the land from wildlife [*8] migration and topography over the time before the homes are constructed and would better protect the easement’s conservation purposes.
The deed provides for the allocation of proceeds from an involuntary extinguishment as follows:
[T]his Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Property unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the Easement at the time of this grant to the value of the Property, without deduction for the value of the Easement, at the time of this grant. * * * [T]he ratio of the value of the Easement to the value of the Property unencumbered by the Easement shall remain constant.
The Conservancy drafted the deed relying on published guidance from Land Trust Alliance, a national land trust organization. Large & Gilbert reviewed the deed and advised Mr. Hewitt that it complied with the requirements of the Code and the accompanying regulations.
Mr. Hewitt did not grant an easement over all the property that he owned, and he and his sister continued to own 1,070 acres unencumbered and contiguous with the easement property (contiguous property).
After granting the easement Mr. Hewitt continued to live on the land and use it for cattle ranching.
On their 2012 joint tax return petitioners claimed a charitable contribution deduction for the easement donation of $2,788,000. Their deduction for 2012 was [*9] limited to $57,738 by section 170(b)(1)(A).5
They timely filed their joint tax returns for 2013 and 2014 and claimed carryover deductions from the 2012 easement donation of $1,868,782 and $861,480, respectively. Large & Gilbert prepared petitioners’ 2012, 2013, and 2014 returns. Petitioners attached Form 8283, Noncash Charitable Contributions, to their 2012 return but did not report the basis in the easement property on the form.
Mr. Hewitt attempted to determine his basis in the easement property, which was primarily a carryover basis from his father. He asked his father how much he had paid for the property and tried to find the original purchase documents. He was unable to obtain any cost basis information.
He provided Large & Gilbert with the deeds for his sister’s gifts of the land.
Large & Gilbert advised Mr. Hewitt that he could attach a statement to Form 8283 stating that basis information was not available and the deduction would not be disallowed on this basis. Petitioners attached the following statement prepared by Large & Gilbert to Form 8283:
A declaration of the taxpayer’s basis in the property is not included because of the fact that the basis of the property remains to be determined with accuracy; in addition, the basis [is] not taken into [*10] consideration when computing the amount of the deduction. Furthermore, the taxpayer has a holding period in the property in excess of 12 months and the property otherwise qualifies as capital gains property.
Petitioners attached an appraisal of the easement prepared by Jim Clower. Large & Gilbert had recommended Mr. Clower. Mr. Hewitt understood that Mr. Clower was competent and experienced. Mr. Clower used a before and after valuation method and determined that the easement property had a value of $3,214,000 unencumbered by the easement (before value) and a value of $420,000 encumbered by the easement (after value).
He determined that the value of the contiguous property increased by $6,500 as a result of the easement (enhancement value). He concluded that the easement had a fair market value of $2,787,500, the difference between the before and after values less the enhancement value.
Mr. Hewitt reviewed the appraisal report and believed that the appraised value was reasonable and consistent with his own opinion of the land’s value. Subsequently, he purchased 79 acres of nearby wooded land with steep topography and limited public access comparable to the contiguous property for $1,582 per acre and a.72-acre parcel adjacent to the easement property and with topography comparable to the easement property for $12,000.
Mr. Clower did not testify at trial, and his appraisal was not received into evidence for purposes of its [*11] valuation. The parties stipulated that Mr. Clower’s appraisal was a qualified appraisal by a qualified appraiser.
Respondent did not issue a notice of deficiency for 2012 and did not challenge petitioners’ use of $57,738 of the easement deduction for that year.
Respondent issued a notice of deficiency for 2013 and 2014, disallowing the carryover deductions on the basis of a lack of substantiation and determining section 6662(h) 40% penalties for a gross valuation misstatement and, alternatively, section 6662(a) 20% penalties for negligence or disregard of the rules and regulations or substantial understatements of income tax.
Respondent has not asserted or argued that the easement had no value.
After 2012 Mr. Hewitt continued his land purchases. He granted conservation easements on some of the land with the help of Large & Gilbert. He held that land through pass-through entities that would grant the easements. Petitioners recognized gain of over $3.5 million on the sale of interests in these entities to investors who could claim shares in the easement deductions.
Respondent alleges that these entities overvalued the conservation easements for purposes of the deductions. Individuals from Large & Gilbert invested in the entities and claimed easement deductions.
[*12] Both parties presented expert witnesses. Petitioners presented three expert witnesses, Beau Bevis, Grant McCaleb, and Raymond Veal. Mr. Bevis opined the highest and best use of the easement property was the development of a mobile home community.
Mr. McCaleb provided estimates of construction costs for the mobile home community. Mr. Veal is a valuation expert and opined that the easement’s fair market value was approximately $3.1 million.
Respondent presented George Petkovich as a valuation expert. He opined the easement’s fair market value was $190,000.
Section 170(a)(1) allows taxpayers to deduct charitable contributions made within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the donated property’s fair market value at the time of the donation. Sec. 1.170A-1(c)(1), Income Tax Regs.
Generally, a taxpayer is not entitled to deduct the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property”. Sec. 170(f)(3)(A).
An exception is made for a contribution of a partial interest in property that constitutes a “qualified conservation contribution”. Id. subpara. (B)(iii). The exception applies where: (1) the taxpayer donates a “qualified real property interest”, (2) the donee is “a [*13] qualified organization”, and (3) the contribution is “exclusively for conservation purposes.” Id. subsec. (h)(1). The donation must satisfy all three requirements. Irby v. Commissioner, 139 T.C. 371, 379 (2012).
Respondent argues that the contribution is not exclusively for conservation purposes. A contribution is “exclusively for conservation purposes” if its conservation purpose is “protected in perpetuity”. Sec. 170(h)(5)(A) (perpetuity requirement).
I. Perpetuity Requirement
The regulations interpreting the perpetuity requirement recognize that “a subsequent unexpected change in the conditions surrounding the property * * * can make impossible or impractical the continued use of the property for conservation purposes”. Sec. 1.170A-14(g)(6)(i), Income Tax Regs.
In such an event the easement would not be protected in perpetuity. However, the regulation (extinguishment regulation) provides a means that the perpetuity requirement may be deemed satisfied:
“[T]he conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the donee uses “all of the donee’s proceeds * * * from a subsequent sale or exchange of the property * * * in a manner consistent with the conservation purposes of the original contribution.” Id.
[*14] Section 1.170A-14(g)(6)(ii), Income Tax Regs. (proceeds regulation), determines the donee’s share of the extinguishment proceeds as follows:
[A]t the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time. * * * [T]hat proportionate value of the donee’s property rights shall remain constant. Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction * * * the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds * * *
The deed subtracts the value of posteasement improvements before determining the Conservancy’s share of the extinguishment proceeds and fails to allocate the extinguishment proceeds in accordance with the proceeds regulation.
See Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 138-139 (2019);
see also PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 208 (5th Cir. 2018).
The proceeds regulation does not permit the value of posteasement improvements to be subtracted from the proceeds before determining the donee’s share.
Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. at 138-139 (holding that a deed that subtracts the value of posteasement improvements fails the section [*15] 150(h)(5) perpetuity requirement); Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, at *40-*41.
The proceeds regulation is not satisfied, and the easement’s conservation purposes are not protected in perpetuity.
Accordingly, petitioners are not entitled to the carryover deductions for 2013 and 2014 for the easement donation.
A. Petitioners’ Interpretation of the Regulation
Petitioners argue that our caselaw misinterprets the proceeds regulation.6 In making this argument, they maintain that we should liberally construe the proceeds regulation in the favor of taxpayers. Generally, we consider deductions a matter of legislative grace and strictly construe their provision.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
However, courts have liberally construed statutory provisions for charitable contribution deductions in the taxpayer’s favor or have interpreted them under the ordinary standard of statutory construction because such deductions are an expression of public policy rather than legislative grace.
See Helvering v. Bliss, 293 U.S. 144, 150-151 (1934); PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d at 200 (applying ordinary standard of construction [*16] and agreeing with our interpretation); Green v. United States, 880 F.3d 519, 529 (10th Cir. 2018); BC Ranch II, L.P. v. Commissioner, 867 F.3d 547, 553-554 (5th Cir. 2017), vacating and remanding Bosque Canyon Ranch, L.P. v. Commissioner, T.C. Memo. 2015-130; Weingarden v. Commissioner, 825 F.2d 1027, 1030 (6th Cir. 1987) (interpreting “redundant, ambiguous, and opaque nature” of the statute in the taxpayer’s favor), rev’g 86 T.C. 669 (1986); Rockefeller v. Commissioner, 676 F.2d 35, 42 (2d Cir. 1982) (“Courts have consistently reaffirmed that public policy demands a broad and flexible interpretation of statutes governing charitable contributions.”), aff’g 76 T.C. 178 (1981).
We are interpreting a regulatory provision, not a statute.
The statute is silent as to the effect of a possible extinguishment of the conservation easement. In the event of an extinguishment the perpetuity requirement could not be met even if we liberally construed section 170(h)(5). Section 1.170A-14(g)(6), Income Tax Regs., provides a means by which the perpetuity requirement is deemed satisfied.
Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. at 135-136.
We are interpreting a regulation that creates “a single — and exceedingly narrow — exception” to the statutory requirements for a conservation easement deduction.
Belk v. Commissioner, 774 F.3d 221, 225 (4th Cir. 2014), aff’g T.C. Memo. [*17] 2013-154, supplementing 140 T.C. 1 (2013). For this reason we strictly construe section 1.170A-14(g)(6), Income Tax Regs.7 Carroll v. Commissioner, 146 T.C. 196, 212 (2016).
Turning to petitioners’ interpretation of the regulation, they argue that references to “the property” and “the subject property” in subdivisions (i) and (ii), respectively, of section 1.170A-14(g)(6), Income Tax Regs., mean the donee’s right to any extinguishment proceeds is limited to the proceeds from the property as it existed at the time of the easement’s grant, which necessarily excludes posteasement improvements.
They argue that the donee has a property right only to the proceeds attributable to “a defined parcel” at the easement’s grant, borrowing a phrase used by the Court of Appeals for the Fourth Circuit in Belk v. Commissioner, 774 F.3d 221, to interpret section 170(h)(2), which requires a use restriction to be placed on the donated property in perpetuity.
See Pine Mountain Pres., LLLP v. Commissioner, 151 T.C. 247, 275 (2018) (adopting the “defined parcel” terminology), appeal filed (11th Cir. May 7, 2019). To further support their interpretation, they cite the statement in the proceeds regulation that the donee is to receive a “property right, immediately vested” and argue that a donee [*18] cannot receive an immediately vested property right in improvements that do not exist.
The extinguishment regulation requires the donee to use its “proceeds * * * from a subsequent sale or exchange of the property * * * in a manner consistent with the conservation purposes of the original contribution.” Sec. 1.170A-14(g)(6)(i), Income Tax Regs. Petitioners argue that “the original contribution” limits the donee’s share of the proceeds to the value of the property as it existed when the easement was granted.
The extinguishment regulation does not support petitioners’ argument. It refers to the original contribution to determine for what purpose the donee must use its share of the proceeds. It does not define the donee’s share of the proceeds.
Likewise, petitioners misinterpret “the subject property” in the proceeds regulation. The proceeds regulation provides the manner to determine the donee’s share of the proceeds “on a subsequent sale, exchange, or involuntary conversion of the subject property”. Section 1.170A-14(g)(6), Income Tax Regs., addresses two separate events: a judicial extinguishment of the easement followed by the sale of the property.
The subject property refers to the property that is sold that generates the proceeds after the easement is extinguished. It does not refer to the property that existed at the outset. Nor does it define the donee’s property right to [*19] the proceeds. The donee’s property right is the right to the perpetual conservation restriction; this is the right that is immediately vested.
That property right is defined as the proportionate value without any limitation to the property that existed at the outset. The proceeds regulation does not limit the donee’s share to the value of the real property as it existed when the easement was granted. We adhere to our caselaw.
The value of posteasement improvements may not be subtracted out of the proceeds before determining the donee’s proportionate share. See Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126; Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54.
Finally, there is no defined parcel requirement for section 170(h)(5). Section 170(h)(2) and (5) sets forth separate and distinct but not “wholly unrelated” requirements. Carter v. Commissioner, T.C. Memo. 2020-21, at *19; see Belk v. Commissioner, 140 T.C. at 12. Section 170(h)(2)(C) requires a perpetual restriction “on the use which may be made of the real property.” Quite simply, there cannot be a perpetual use restriction if the property to which the restriction applies is not defined at the outset.
Section 170(h)(5) requires that the contribution be exclusively for conservation purposes; it does not concern a defined parcel.
In fact the regulations recognize that the donor’s right to make changes to the property. Sec. 1.170A-14(g)(1), Income Tax Regs.
The donee’s [*20] immediately vested property right is to the perpetual restrictive covenant, not a defined parcel of land. For purposes of the extinguishment provisions, the subject property may change, but the donee’s property right to the extinguishment proceeds may not.
B. Deference to Private Letter Ruling
Petitioners argue that respondent has improperly changed his interpretation of the proceeds regulation from that in a 2008 private letter ruling, to the detriment of taxpayers without any notice.
Priv. Ltr. Rul. 200836014 (June 3, 2008).
We have refused to give any weight to the 2008 private letter ruling, finding the proceeds regulation unambiguous.
Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. at 143-144; see also PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d at 208 (finding the proceeds regulation unambiguous in its use of the word “proceeds” does not permit subtracting the value of posteasement improvements when determining the donee’s share).
Petitioners argue that this refusal was in error because private letter rulings can be “significant” where the Internal Revenue Service (IRS) later reverses its position.
Hanover Bank v. Commissioner, 369 U.S. 672, 686-687 (1962); see Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 156 (2012) (“[A]gencies should provide regulated parties ‘fair warning of the conduct [a regulation] prohibits or requires.’” (alteration in original) [*21] (quoting Gates & Fox Co. v. Occupational Safety & Health Review Comm’n, 790 F.2d 154, 156 (D.C. Cir. 1986))).
Our caselaw has not addressed the impact of the IRS’ purported reversal of the position of a private letter ruling.
Petitioners further argue that we should consider the 2008 private letter ruling because the Court of Appeals for the Eleventh Circuit, to which this case is appealable, has recognized that while not binding precedent under section 6110(k)(3) courts may treat private letter rulings as “persuasive authority because they ‘do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws.’”
Davis v. Commissioner, 716 F.3d 560, 569 n.26 (11th Cir. 2013) (quoting Hanover Bank v. Commissioner, 369 U.S. at 687), aff’g T.C. Memo. 2011-286; see sec. 6110(k)(3) (providing that written determinations such as private letter rulings cannot be cited as precedent).
The 2008 private letter ruling is neither persuasive nor relevant.
While it involves an easement deed that subtracted the value of posteasement improvements from the extinguishment proceeds, it makes no more than a passing reference to the deed’s proceeds provision and does not evaluate whether the subtraction violates the perpetuity requirement of section 170(h)(5).
There is no indication that its author analyzed the proceeds regulation or the deed’s proceeds provision.
To warrant deference the agency’s interpretation must reflect “the [*22] agency’s fair and considered judgment on the matter in question.”
Auer v. Robbins, 519 U.S. 452, 462 (1997).
The 2008 private letter ruling does not indicate that the author considered the text of the proceeds regulation or interpreted it to allow the subtraction of the value of posteasement improvements. Respondent’s current position is not a new or different interpretation.
We adhere to our prior position that the 2008 private letter ruling is not entitled to any weight.
C. State Law Exception
The proceeds regulation provides an exception to the proportionate share requirement if applicable State law allows the donor to receive “the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.” Sec. 1.170A-14(g)(6)(ii), Income Tax Regs. Petitioners argue that Alabama law allocates the full amount of any extinguishment proceeds to the donor, citing Burma Hills Dev. Co. v. Marr, 229 So. 2d 776 (Ala. 1969), making the proportionality formula irrelevant.
Burma Hills involved a mutually restrictive covenant applicable to all property within a residential subdivision. A neighboring landowner sued the condemning authority for violating the restrictive covenant on another person’s property.
The court refers to a mutually restrictive covenant as an equitable easement in favor of the property owners who have the right to enforce the covenant. Id. at 778.
However, such a covenant does not [*23] create a property right entitling the restricted property owners to compensation in a condemnation proceeding of the servient estate. Id. at 782.
The Conservancy has a property right granted by a deed of easement, not a mere covenant.
Under Alabama law a conservation easement is defined as “[a] nonpossessory interest of a holder in real property”. Ala. Code. sec. 35-18-1(1) (1997). Such an easement is a property right that entitles the easement holder to compensation for the taking of the easement.8
Portersville Bay Oyster Co. v. Blankenship, 275 So. 3d 124, 134 (Ala. 2018); see Ala. Code sec. 35-18-2(e) (1997) (“A conservation easement may be condemned * * * through eminent domain in the same manner as any other property interest.”).
Under Alabama law where property that is held in multiple estates is taken by eminent domain, each estate owner has a corresponding right to share in the condemnation award and the award is apportioned among the estate holders in accordance with their respective ownership interests.
Harco Drug, Inc. v. Notsla, Inc., 382 So. 2d 1, 3 (Ala. 1980) (holding a lessee and a lessor are both estate holders and entitled to damages in a condemnation proceeding).
The donor would not be entitled to the full amount of the proceeds from a judicial extinguishment under Alabama law.
The State law exception of the proceeds regulation does not apply.
Accordingly, for the donor to qualify for the charitable contribution deduction for the conservation easement, the deed must satisfy the allocation of the extinguishment proceeds set forth in the proceeds regulation.
The deed did not properly allocate the extinguishment proceeds in accordance with the regulation, and the deduction is disallowed.
II. Accuracy-Related Penalties
Respondent determined that petitioners are liable for 40% penalties for gross valuation misstatements under section 6662(h) and, alternatively, 20% penalties under section 6662(a) and (b)(1) and (2) for negligence or disregard of rules or regulations and substantial understatements of income tax for 2013 and 2014.
A. Gross Valuation Misstatement Penalty
Taxpayers who meet the technical requirements for a charitable contribution of a conservation easement may deduct the easement’s fair market value. Sec. 170(c)(1). A gross valuation misstatement occurs when a taxpayer reports a value for the donated property that is 200% or more of the correct amount. Sec. 6662(h)(2).
On their 2012 return petitioners claimed an easement deduction of [*25] $2,788,000. If we find that the easement’s fair market value is $1,394,000 or less, there is a gross valuation misstatement as the claimed deduction is more than 200% of the correct amount. Respondent has the burden of production with respect to the penalties.
RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 37 (2017), aff’d sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019).
Reasonable cause is not available as a defense to the gross valuation misstatement penalty with respect to the deduction of a charitable contribution of property. Sec. 6664(c)(3).
When there is a substantial record of sales of the comparable easements, the donated easement’s fair market value is based on the sale prices of those comparable easements. Sec. 1.170A-14(h)(3)(i), Income Tax Regs. Because sales of conservation easements are rare, the regulations provide a “before and after” method to value the easement. Id. subdiv. (ii).
Under the before and after method, the easement’s fair market value is the difference between the fair market value of the property unencumbered by the easement (before value) and its fair market value after the easement’s grant (after value). Id.
When the donor owns additional unencumbered property contiguous with the easement property, the before and after method valuation must take into account any enhancement value of the contiguous property as a result of the easement. Id.
When ascertaining the before and after values of easement property, an appraiser may use the comparable sales method or another accepted method. Hilborn v. Commissioner, 85 T.C. 677, 688-689 (1985).
The comparable sales method requires that the comparable properties be similar in nature to the donated property and that the sales be in arm’s-length transactions within a reasonable time of the donation. Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19 (1979).
It may be appropriate to make adjustments to the sale prices of the comparable properties to account for differences in the time of the sale and the size or other features of the donated property. Id.
Fair market value is generally determined on the basis of the highest and best use of the donated property. Hilborn v. Commissioner, 85 T.C. at 689-690. The highest and best use is “[t]he highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future”. Olson v. United States, 292 U.S. 246, 255 (1934); Symington v. Commissioner, 87 T.C. 892, 897 (1986) (quoting Olson).
It does not depend on whether the owner has actually put the property to such use or whether he ever intends to do so. Stanley Works & Subs. v. Commissioner, 87 T.C. 389, 400 (1986). However, absent proof to the contrary the property’s current use is presumed its highest and best use. Estate of Pulling v. Commissioner, T.C. Memo. [*27] 2015-134, at *14.
Highest and best use is a question of fact. Stanley Works & Subs. v. Commissioner, 87 T.C. at 408. But it requires an objective assessment of the likelihood that the donated property would be put to its highest and best use. Sec. 1.170A-14(h)(3)(ii), Income Tax Regs.
The differences between the parties’ experts center on their opinions of the highest and best use of the easement property before the easement’s grant, in particular whether easement and noneasement portions of the Hewitt property had different highest and best uses.9
We consider expert opinions to assist us with understanding the evidence or determining facts in issue. Fed. R. Evid. 702. We evaluate expert opinions on the fair market value of property in the light of the experts’ demonstrated qualifications and all other evidence in the record. See Parker v. Commissioner, 86 T.C. 547, 561 (1986).
When experts offer competing estimates of fair market value, we decide how to weigh those estimates by examining the factors the experts considered in reaching their conclusions. See Casey v. Commissioner, 38 T.C. 357, 381 (1962).
We are not bound by the opinion of any expert witness and may accept or reject expert testimony in the exercise of sound judgment. [*28] Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938); Estate of Newhouse v. Commissioner, 94 T.C. 193, 217 (1990).
Respondent’s expert, Mr. Petkovich, valued the easement on the basis of the highest and best use of the entire Hewitt property rather than the highest and best use of the easement property. He opined that the highest and best use before and after the easement’s grant were generally the same, agricultural and low-density residential use on the pastureland and timber cultivation, passive recreation, and hunting in the wooded areas.
He valued the entire Hewitt property (the contiguous and easement portions) at the same per-acre price of $1,850, or $2.6 million for the 1,325 acres, despite significant differences in the topography of the property and public access.
He determined that there was no change to the after value of the noneasement portion. For his after value of the easement portion, he used a comparable sales method of properties subject to restrictive easements.
He determined an after value for the easement portion of $1,100 per acre, or $282,920. He opined that the entire Hewitt property had an after value of $2.41 million, resulting in a $190,000 value for the easement.
Petitioners provided three expert witnesses. Mr. Bevis is the president of a local real estate company and has a master’s degree in real estate development. He has over 20 years of experience in the commercial and residential real estate [*29] business including experience in determining the highest and best use of land.
He opined that the highest and best use of the easement property before the easement’s grant was as a mobile home community, which could be sold to an investor once completed and leased. He opined its highest and best use after the easement’s grant was agriculture and recreation.
Mr. Bevis commissioned a market study and a proposed site plan for a mobile home community with 210 lots which he incorporated into his report. He testified that there was a need for affordable housing within 30 miles of the easement property. He testified that approximately 2,000 individuals commute to Randolph County daily.
He opined that the proposed community would be fully occupied within three years.
Mr. Bevis opined that the proposed mobile home community could charge a monthly rent of $235 to $285. We find this range reasonable. He considered the monthly rents in Randolph County, which ranged from $125 to $200.
He also considered the average monthly rents for mobile home communities in Birmingham and Atlanta of $267 and $379, respectively.
He adjusted these rents downward to account for the rural location of the easement property and upward to account for the newness and better quality of the proposed mobile homes and amenities offered as compared to existing housing.
Respondent objects to Mr. Bevis’ testimony because he did not provide a detailed analysis of housing needs [*30] or trends or provide supporting data for the three-year full occupancy assumption.
However, we find his testimony reliable and helpful as he testified on the basis of his significant experience and knowledge of the market in which he worked.
Mr. McCaleb estimated construction costs of approximately $1.6 million for the proposed mobile home community with a club house and a pool. His estimate did not include all amenities proposed in Mr. Bevis’ report. Respondent also objects to the site plan and cost estimate as vague and generalized.
However, we find Mr. McCaleb’s estimates sufficient for the limited purpose for which we rely on them, determining whether petitioners grossly misstated the easement’s fair market value.
Petitioners offered Mr. Veal as a valuation expert. Mr. Veal valued only the 257-acre easement property, which he opined had a per-acre value different from the remainder of the Hewitt property. He opined that the easement property’s highest and best use was as a mobile home community, relying, in part, on Mr. Bevis’ conclusions. Mr. Veal determined the easement property had a before value of $3.5 million, approximately $13,600 per acre, and an after value of $340,000, approximately $1,200 per acre plus $5,000 for each homesite. He [*31] determined an enhancement value of $55,000 for the Hewitt property not subject to the easement.
Mr. Veal used two valuation methods, income capitalization and comparable sales. For the income capitalization method, he used a monthly rent of $275 to project the net annual rental income for the proposed mobile home community for 2013 through 2015.
Although $275 is on the higher end of Mr. Bevis’ range for monthly rents, we find the amount reasonable. Mr. Veal also identified other sources of income such as wireless internet service fees that he included in his income computation.
He opined that the revenue stream from the mobile home community had a discounted present value of $5.1 million, then deducted the construction costs estimated by Mr. McCaleb, resulting in a before value of $3.5 million for the easement, which he later revised to $3.4 million.
See Trout Ranch, LLC v. Commissioner, T.C. Memo. 2010-283 (valuing real property by discounting the expected future cashflow from the property), aff’d, 493 F. App’x 944 (10th Cir. 2012).
Using the comparable sales method, Mr. Veal determined that the proposed mobile home community could be sold for at least $7 million within three years of its construction. He then deducted $3.6 million for estimated construction costs and profit to the developer for a before value of $3.4 million. Reconciling his two methods, he determined a before value of $3.5 [*32] million. He did not change this conclusion in his supplement to his report despite the reduction of the before value to $3.4 million under the income capitalization method.
Respondent identified issues with Mr. Veal’s assumptions in both his valuation methods, such as the occupancy rate, and the lack of supporting data for Mr. Bevis’ opinion on local housing needs. Respondent also argues that the mobile home parks in Mr. Veal’s comparable sales are not appropriate comparable properties because they had been in existence for 20 to 56 years.
We are convinced by respondent’s argument that such established communities would sell for more than a newly constructed one.
Respondent did not consider the age of the mobile homes themselves or the age in relation to the useful lives of the mobile homes, which could negatively affect the values of the comparable properties. Mr. Veal submitted a supplement to his report and admitted to errors in his analysis at trial.
At times he relied on incorrect or optimistic assumptions for the dates related to construction, leasing, and full occupancy of the mobile home community. We find the incorrect assumptions and errors are not sufficient to discredit Mr. Veal’s valuations in their entirety.
Furthermore, we find Mr. Petkovich’s valuation significantly flawed.
He applied the same per-acre value to all 1,325 acres of the Hewitt property despite [*33] significant differences in the topography of and public access to the easement and noneasement portions. We find this improper.
Mr. Bevis testified that only the easement portion with its pastureland and public access was suitable for development and development in noneasement portion was cost prohibitive because of its wooded, rougher terrain and limited public access.
At trial Mr. Petkovich acknowledged that the pastureland could have a different highest and best use from the timberland and is more valuable.
We find that Mr. Petkovich’s comparable sales were problematic.
He used sales of land similar in topography to the contiguous property and not significantly similar to the easement property, making his valuation unreliable. Each comparable property was wooded and lacked pastureland.
We find on the basis of Mr. Hewitt’s testimony and petitioners’ experts’ opinions that the pastureland differs significantly in value from the wooded land with steep or rough terrain where development is likely cost prohibitive.
None of the comparable properties appears suitable for residential development. Mr. Petkovich identified the principal use of the comparable properties as recreation. Furthermore, two comparable properties sold in foreclosure.
Mr. Petkovich made adjustments to the sale prices of the comparable properties to account for qualitative differences with the Hewitt property, for [*34] example, for location, shape, size, topography, and road and utility access.
However, we find that the adjustments were inappropriate or insufficient to compensate for the differences between the comparable properties and the easement property especially in the light of the fact that Mr. Petkovich valued the entire Hewitt property.
Moreover, while Mr. Petkovich listed over 10 characteristics of the properties for which he made price adjustments, he did not adequately explain the amount of the price adjustment for each characteristic or the method he used to determine the price adjustment.
Finally, some adjustments are clearly inappropriate because he compared the entire Hewitt property rather than only the easement property.
For example, he adjusted the sale prices of four comparable properties downward because of their relatively small sizes (approximately 200 acres) as compared to the 1,325-acre Hewitt property; but the easement property was only 257 acres.
As part of our analysis, we must consider the probability that the property would be developed as proposed and the market demand for the proposed community.
Respondent has raised some legitimate concerns in this regard. However, we do not need to determine the easement’s fair market value.
We are determining whether petitioners overstated the value by 200%.
We take into account the issues with Mr. Veal’s valuation. However, significant elements of [*35] his valuation and the proposed mobile home community were conservative. The proposed plan would place only 210 homes on 257 acres of land. This is a low-density residential use. Mr. Petkovich opined that the property was suitable for low-density residential use.
The county’s population of approximately 22,380 is stable, and the proposed community would add a small number of homes relative to the population. The median income in the county, approximately $35,000, would support the monthly rent that Mr. Veal used in the income capitalization method.
We find that petitioners did not grossly misstate the value of the easement by claiming a deduction of $2,788,000.
Mr. Petkovich was unduly pessimistic in his valuation and incorrectly applied a uniform value to the entire Hewitt property. Our decision not to impose the gross valuation misstatement penalty does not depend solely on expert valuations. Mr. Hewitt gave credible testimony that the easement property was the most valuable part of the Hewitt property, confirming Mr. Bevis’ and Mr. Veal’s opinions.
Mr. Hewitt believed that the easement property was the portion of his family’s land that most needed protection from development. He has lived in Randolph County his entire life and has experience in land acquisition. We find his testimony helpful and reliable. He believed that the easement property had a before value of $12,000 to $15,000 per acre, a value [*36] that would clearly make any penalty inapplicable.
Mr. Hewitt purchased 79 acres of nearby wooded land with steep topography and limited public access, comparable to the unencumbered Hewitt property, for $1,582 per acre. This sale price aligns with Mr. Veal’s valuation of the contiguous Hewitt property. In June 2014 Mr. Hewitt purchased a.72-acre parcel of land adjacent and comparable to the topography of the easement property for $12,000, which supports Mr. Veal’s before value.
We find Mr. Hewitt’s testimony regarding the value of his property persuasive.
“[A] landowner is competent to offer opinion testimony with respect to the value of his or her property.” Schmidt v. Commissioner, T.C. Memo. 2014-159, at *28. We have observed that a property owner “is qualified, by his ownership alone, to testify as to its value” and “the special knowledge accorded a property owner rests on a presumed familiarity with the property, knowledge or acquaintance with its uses and purposes, and experience in dealing with it.” Estate of McCampbell v. Commissioner, T.C. Memo. 1991-141, 1991 WL 40519; see also LaCombe v. A-T-O, Inc., 679 F.2d 431, 433 (5th Cir. 1982) (“[T]he owner of property is qualified by his ownership alone to testify as to its value.”).
We find that the correct value of the easement was at least $1.4 million and petitioners are not liable for the section 6662(h) penalties.
B. 20% Accuracy-Related Penalties
Respondent determined that petitioners are liable under section 6662(a) and (b)(1) and (2) for 20% accuracy-related penalties for 2013 and 2014 for underpayments attributable to negligence or disregard of rules and regulations and substantial understatements of income tax.
Negligence is “any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.” Sec. 1.6662-3(b)(1), Income Tax Regs.
A substantial understatement of income tax is defined as the greater of 10% of the tax required to be shown on a return for the year or $5,000. Sec. 6662(d)(1)(A).
Section 6662(a) accuracy-related penalties do not apply where the taxpayers establish that they acted with reasonable cause and in good faith. Sec. 6664(c)(1); Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).
We determine reasonable cause and good faith on a case-by-case basis taking into account all pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
The most important factor is the extent of the taxpayer’s effort to assess his proper tax liability. Id. The taxpayer’s education and business experience are also relevant. Id. para. (c)(1).
Reliance on professional advice may constitute reasonable cause and good faith if the reliance was reasonable. Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff’d on another issue, 904 F.2d 1011 (5th Cir. 1990), aff’d, 501 U.S. 868 (1991); see sec. 1.6664-4(b)(1), (c)(1), Income Tax Regs. Reliance on professional advice is reasonable if (1) the professional was independent and had the expertise to justify reliance, (2) the taxpayers provided necessary and accurate information to the adviser, and (3) the taxpayers actually relied in good faith on the advice. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 98-99.
Taxpayers cannot rely on professional advice as a defense if they knew or should have known that the adviser had a conflict of interest; such an adviser is not independent. Id. at 98; see Paschall v. Commissioner, 137 T.C. 8, 22 (2011).
An independent adviser follows his regular course of professional conduct in rendering advice, does not give unsolicited advice, and does not have a stake in the transaction besides his regular hourly rate. 106 Ltd. v. Commissioner, 136 T.C. 67, 80 (2011), aff’d, 684 F.3d 84 (D.C. Cir. 2012).
Mr. Hewitt first had the idea to protect his family’s land when his father’s health began to decline.
Mr. Hewitt began to appreciate the land in a new way. He had lived on the land his entire life and worked on the farm with his father.
He credibly testified that he wanted to protect the property so that his children could [*39] one day have the same opportunity.
An acquaintance recommended Large & Gilbert because of its experience with conservation easements.
Mr. Hewitt understood that Large & Gilbert had a good reputation in the tax community and had been in business for approximately 50 years.
He did not solicit or initiate a tax strategy. His motivation was to protect his family’s property, not to obtain a tax benefit.
Mr. Hewitt reasonably believed that his contacts at Large & Gilbert were competent tax professionals and their advice was in compliance with tax law. He provided Large & Gilbert with the necessary and accurate information to prepare the returns to the extent the information was available. He did not know or have reason to know that the easement deduction would be disallowed.
Mr. Hewitt also reasonably and in good faith relied on Mr. Clower’s qualified appraisal.
He reviewed Mr. Clower’s appraisal and found it consistent with his own opinion of the land’s value and his opinion that the pastureland was more valuable than the wooded areas. He credibly testified that he believed the easement property was worth between $12,000 and $15,000 per acre before the easement’s grant.
He also credibly testified that he tried to find out how much his father had paid for the property but could not. The land had been in his family for nearly 60 years.
We find that Mr. Hewitt’s reliance on Mr. Clower also supports a [*40] finding that petitioners acted with reasonable cause and in good faith in claiming the deduction. See Dunlap v. Commissioner, T.C. Memo. 2012-126, slip op. at 76 (finding that reasonable and good-faith reliance on a qualified appraiser is sufficient to establish reasonable cause).
Finally, we note that Mr. Hewitt also received conservation advice from Dr. Keller. Mr. Hewitt trusted Large & Gilbert’s recommendation of the Conversancy. Dr. Keller has a doctorate in conservation biology.
Mr. Hewitt credibly testified that he understood that Dr. Keller was knowledgeable and experienced in conservation issues.
We find that Mr. Hewitt reasonably believed that Dr. Keller was knowledgeable and experienced in advising on the preservation of land through conservation easements. Mr. Hewitt personally met with Dr. Keller to discuss his desire to protect the family’s land from development, and Dr. Keller visited the property.
The Conservancy drafted the easement deed. Dr. Keller’s involvement contributed to Mr. Hewitt’s belief that he could rely on Large & Gilbert’s advice. When Mr. Hewitt granted the easement in 2012, he did not understand Dr. Keller to be promoting a tax strategy.
We find Mr. Hewitt sincere in his testimony that he wanted to protect his family’s farm land.
We also note that he did not claim an excessive value for the deduction on the 2012 return.
However, after 2012 Mr. Hewitt began a troubling [*41] practice of purchasing rural, undeveloped land and selling interests in pass-through entities that he created to hold the land.
Numerous entities associated with Mr. Hewitt granted conservation easements on the recently purchased land, and the investors, including Mr. Hewitt, claimed charitable contribution deductions for the easement donations far in excess of the original purchase prices for the recently purchased, underlying properties.
Respondent asserts that Mr. Hewitt has realized over $3.5 million in gain from these transactions and the investors claimed millions of dollars of improper charitable contribution deductions.
Petitioners claimed the carryover deductions at issue here for years during which Mr. Hewitt was engaging in this activity.
Large & Gilbert assisted in these transactions, and individuals from Large & Gilbert invested in the entities and claimed easement deductions.
Respondent argues that Large & Gilbert is a promoter of conservation easement transactions.
Taxpayers cannot rely on the advice of a professional who has a conflict of interest or is a promoter of the investment.
Mortensen v. Commissioner, 440 F.3d 375, 387 (6th Cir. 2006), aff’g T.C. Memo. 2004-279.
We find that Large & Gilbert was not a promoter and did not have a conflict of interest with respect to the easement donation on Mr. Hewitt’s family farm.
Mr. Hewitt did not want to donate the easement on his family farm to obtain the tax benefits. He had a [*42] genuine desire to protect the land for future generations. Large & Gilbert did not promote the easement at issue.
Mr. Hewitt’s activities of land purchases and conservation easements after 2012 are problematic.
However, we find that under the circumstances of the easement donation of his family’s farm land Mr. Hewitt reasonably and in good faith relied on Large & Gilbert’s experienced advice.
We have weighed Mr. Hewitt’s post-2012 activities against his sincere intent to preserve his family’s farm land for his father and children. The reasonable cause defense depends on the particular facts and circumstances of each case.
Petitioners claimed a deduction for the easement that aligned with Mr. Hewitt’s opinion of the easement property’s fair market value.
We disallowed the easement deduction because the deed did not satisfy technical requirements for a conservation easement deduction.
We do not expect petitioners to understand these technical requirements.
They made a sufficient good-faith effort to assess their tax liability and reasonably relied on professional advice when claiming the easement deduction.
We have not addressed petitioners’ omission of cost basis information on Form 8283 and the attached statement as a basis to deny the easement deduction.
Omission of cost basis information is a failure to strictly or substantially comply [*43] with the regulatory reporting requirements.10 RERI Holdings I, LLC v. Commissioner, 149 T.C. at 16-17.
Failure to substantially comply with the reporting requirements generally precludes a charitable contribution deduction. Bond v. Commissioner, 100 T.C. 32, 41 (1993); see sec. 170(a)(1) (“A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.”).
Section 170(f)(11)(A)(ii)(II) provides a reasonable cause defense for a failure to comply with the reporting requirements if “the failure to meet such requirements is due to reasonable cause and not to willful neglect.” In such a case, the deduction will not be disallowed.
We find that the omission of the basis information does not preclude a reasonable cause defense to the section 6662(a) penalties.
Mr. Hewitt explained to Large & Gilbert the reason that he could not obtain the necessary basis information, and Large & Gilbert advised him that the deduction would not be disallowed for failing to provide basis information that is not reasonably obtainable.
Mr. Hewitt provided accurate information to Large & Gilbert to prepare the Form 8283.
We find that Mr. Hewitt’s efforts to determine his basis in [*44] the property were sufficient and the basis information was not reasonably obtainable.
However, the attachment does not sufficiently restate the explanation that Mr. Hewitt provided to Large & Gilbert or at trial.
It states that the basis “remains to be determined with accuracy”.
It also contains wording similar to that which we have previously identified as inadequate explanation, that the basis is not taken into consideration when computing the amount of the deduction and the donor had a holding period in excess of 12 months, qualifying the property as capital gains property.
See Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, at *11-*12.
Despite the inadequacy of the explanation, we find that petitioners reasonably relied on Large & Gilbert to prepare the Form 8283 in a correct and sufficient manner to explain the omission of the basis information.
Petitioners’ failure to provide basis information and the inadequate explanation do not negate their reasonable cause and good faith in claiming the easement deduction.
Accordingly, we find petitioners not liable for the section 6662(a) accuracy-related penalties for 2013 and 2014.
In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.
[*45] To reflect the foregoing,
Decision will be entered for respondent on the tax deficiencies and for petitioners on the penalties.
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Rewind 2008: The Home Snatchers Stole Millions of Homes, Lives and Citizen’s Trust By Unimaginable Fraud
Wall Street and the Government decided, if they were to make it through the Greatest Depression, they’d have to spin their biggest lie in the history of the United States of America. It worked.
Invasion of the Home Snatchers
How foreclosure courts are helping big banks screw over homeowners
NOV 10, 2010 | REPUBLISHED BY LIT: DEC 4, 2021
The foreclosure lawyers down in Jacksonville had warned me, but I was skeptical. They told me the state of Florida had created a special super-high-speed housing court with a specific mandate to rubber-stamp the legally dicey foreclosures by corporate mortgage pushers like Deutsche Bank and JP Morgan Chase.
This “rocket docket,” as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and labyrinthine derivative deals of a type that didn’t even exist when most of them were active members of the bench.
Their stated mission isn’t to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000s, perhaps the most complex Ponzi scheme in human history — an epic mountain range of corporate fraud in which Wall Street megabanks conspired first to collect huge numbers of subprime mortgages, then to unload them on unsuspecting third parties like pensions, trade unions and insurance companies (and, ultimately, you and me, as taxpayers) in the guise of AAA-rated investments.
Selling lead as gold, shit as Chanel No. 5, was the essence of the booming international fraud scheme that created most all of these now-failing home mortgages.
Indymac “Liar Loans” An audit found 87% fraudulent. Federal Courts are protecting OneWest and Wall St Banks by attempting to steal the elder Burkes Home.
— LawsInTexas (@lawsintexasusa) November 27, 2021
Looting Main Street
The rocket docket wasn’t created to investigate any of that. It exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork.
The judges, in fact, openly admit that their primary mission is not justice but speed.
One Jacksonville judge, the Honorable A.C. Soud, even told a local newspaper that his goal is to resolve 25 cases per hour.
Given the way the system is rigged, that means His Honor could well be throwing one ass on the street every 2.4 minutes.
Foreclosure lawyers told me one other thing about the rocket docket. The hearings, they said, aren’t exactly public.
“The judges might give you a hard time about watching,” one lawyer warned. “They’re not exactly anxious for people to know about this stuff.”
Inwardly, I laughed at this — it sounded like typical activist paranoia. The notion that a judge would try to prevent any citizen, much less a member of the media, from watching an open civil hearing sounded ridiculous.
Fucked-up as everyone knows the state of Florida is, it couldn’t be that bad. It isn’t Indonesia. Right?
Well, not quite.
When I went to sit in on Judge Soud’s courtroom in downtown Jacksonville, I was treated to an intimate, and at times breathtaking, education in the horror of the foreclosure crisis, which is rapidly emerging as the even scarier sequel to the financial meltdown of 2008:
Invasion of the Home Snatchers II.
In Las Vegas, one in 25 homes is now in foreclosure.
In Fort Myers, Florida, one in 35.
In September, lenders nationwide took over a record 102,134 properties; that same month, more than a third of all home sales were distressed properties.
All told, some 820,000 Americans have already lost their homes this year, and another 1 million currently face foreclosure.
Throughout the mounting catastrophe, however, many Americans have been slow to comprehend the true nature of the mortgage disaster. They seemed to have grasped just two things about the crisis:
One, a lot of people are getting their houses foreclosed on.
Two, some of the banks doing the foreclosing seem to have misplaced their paperwork.
For most people, the former bit about homeowners not paying their damn bills is the important part, while the latter, about the sudden and strange inability of the world’s biggest and wealthiest banks to keep proper records, is incidental.
Just a little office sloppiness, and who cares?
Those deadbeat homeowners still owe the money, right?
“They had it coming to them,” is how a bartender at the Jacksonville airport put it to me.
But in reality, it’s the unpaid bills that are incidental and the lost paperwork that matters.
It turns out that underneath that little iceberg tip of exposed evidence lies a fraud so gigantic that it literally cannot be contemplated by our leaders, for fear of admitting that our entire financial system is corrupted to its core — with our great banks and even our government coffers backed not by real wealth but by vast landfills of deceptively generated and essentially worthless mortgage-backed assets.
You’ve heard of Too Big to Fail — the foreclosure crisis is Too Big for Fraud.
Think of the Bernie Madoff scam, only replicated tens of thousands of times over, infecting every corner of the financial universe. The underlying crime is so pervasive, we simply can’t admit to it — and so we are working feverishly to rubber-stamp the problem away, in sordid little backrooms in cities like Jacksonville, behind doors that shouldn’t be, but often are, closed.
And that’s just the economic side of the story.
The moral angle to the foreclosure crisis — and, of course, in capitalism we’re not supposed to be concerned with the moral stuff, but let’s mention it anyway — shows a culture that is slowly giving in to a futuristic nightmare ideology of computerized greed and unchecked financial violence.
The monster in the foreclosure crisis has no face and no brain.
The mortgages that are being foreclosed upon have no real owners. The lawyers bringing the cases to evict the humans have no real clients. It is complete and absolute legal and economic chaos.
No single limb of this vast man-eating thing knows what the other is doing, which makes it nearly impossible to combat — and scary as hell to watch.
What follows is an account of a single hour of Judge A.C. Soud’s rocket docket in Jacksonville.
Like everything else related to the modern economy, these foreclosure hearings are conducted in what is essentially a foreign language, heavy on jargon and impenetrable to the casual observer.
It took days of interviews with experts before and after this hearing to make sense of this single hour of courtroom drama. And though the permutations of small-time scammery and grift in the foreclosure world are virtually endless — your average foreclosure case involves homeowners or investors being screwed at least five or six creative ways — a single hour of court and a few cases is enough to tell the main story.
Because if you see one of these scams, you see them all.
A Message to US Supreme Court Justice Stephen Breyer @stephen_breyer from LIT; @StephenAtHome @TuckerCarlson @POTUS @nbcsnl @netflix @PrimeVideo @TexasTribune @ariannahuff @HarvardFedSoc @HarvardLawProf @WSJopinion @ReutersLegal #txlege #appellatetwitter #OperationWhiteout pic.twitter.com/qahobp4Hq0
— LawsInTexas (@lawsintexasusa) November 22, 2021
It’s early on a sunny Tuesday morning when I arrive at the chambers of Judge Soud, one of four rotating judges who preside over the local rocket docket.
These special foreclosure courts were established in July of this year, after the state of Florida budgeted $9.6 million to create a new court with a specific mandate to clear 62 percent of the foreclosure cases that were clogging up the system.
Rather than forcing active judges to hear thousands of individual cases, this strategy relies on retired judges who take turns churning through dozens of cases every morning, with little time to pay much attention to the particulars.
What passes for a foreclosure court in Jacksonville is actually a small conference room at the end of a hall on the fifth floor of the drab brick Duval County Courthouse. The space would just about fit a fridge and a pingpong table.
At the head of a modest conference table this morning sits Judge Soud, a small and fussy-looking man who reminds me vaguely of the actor Ben Gazzara.
On one side of the table sits James Kowalski, a former homicide prosecutor who is now defending homeowners.
A stern man with a shaved head and a laconic manner of speaking, Kowalski has helped pioneer a whole new approach to the housing mess, slowing down the mindless eviction machine by deposing the scores of “robo-signers” being hired by the banks to sign phony foreclosure affidavits by the thousands.
For his work on behalf of the dispossessed, Kowalski was recently profiled in a preposterous Wall Street Journal article that blamed attorneys like him for causing the foreclosure mess with their nuisance defense claims.
The headline: “Niche Lawyers Spawned Housing Fracas.”
On the other side of the table are the plaintiff’s attorneys, the guys who represent the banks.
On this level of the game, these lawyers refer to themselves as “bench warmers” — volume stand-ins subcontracted by the big, hired-killer law firms that work for the banks.
One of the bench warmers present today is Mark Kessler, who works for a number of lenders and giant “foreclosure mills,” including the one run by David J. Stern, a gazillionaire attorney and all-Universe asshole who last year tried to foreclose on 70,382 homeowners.
Which is a nice way to make a living, considering that Stern and his wife, Jeanine, have bought nearly $60 million in property for themselves in recent years, including a 9,273-square-foot manse in Fort Lauderdale that is part of a Ritz-Carlton complex.
Kessler is a harried, middle-aged man in glasses who spends the morning perpetually fighting to organize a towering stack of folders, each one representing a soon-to-be-homeless human being. It quickly becomes apparent that Kessler is barely acquainted with the names in the files, much less the details of each case.
“A lot of these guys won’t even get the folders until right before the hearing,” says Kowalski.
When I arrive, Judge Soud and the lawyers are already arguing a foreclosure case; at a break in the action, I slip into the chamber with a legal-aid attorney who’s accompanying me and sit down. The judge eyes me anxiously, then proceeds.
He clears his throat, and then it’s ready, set, fraud!
Judge Soud seems to have no clue that the files he is processing at a breakneck pace are stuffed with fraudulent claims and outright lies.
“We have not encountered any fraud yet,” he recently told a local newspaper. “If we encountered fraud, it would go to [the state attorney], I can tell you that.”
But the very first case I see in his court is riddled with fraud.
Kowalski has seen hundreds of cases like the one he’s presenting this morning.
It started back in 2006, when he went to Pennsylvania to conduct what he thought would be a routine deposition of an official at the lending giant GMAC.
What he discovered was that the official — who had sworn to having personal knowledge of the case — was, in fact, just a “robo-signer” who had signed off on the file without knowing anything about the actual homeowner or his payment history.
(Kowalski’s clients, like most of the homeowners he represents, were actually making their payments on time; in this particular case, a check had been mistakenly refused by GMAC.)
Following the evidence, Kowalski discovered what has turned out to be a systemwide collapse of the process for documenting mortgages in this country.
A #Thanksgiving Message to Justice Neil Gorsuch from LIT:@TheBushCenter @laurawbush @JebBush @KarlRove @NathanLHecht @BrettBusby @SupremeCourt_TX @statebaroftexas @HoustonChron @dallasnews @statesman @thesundaytimes @guardian @Telegraph @BorisJohnson @10DowningStreet #txlege pic.twitter.com/TRH14ytDeJ
— LawsInTexas (@lawsintexasusa) November 25, 2021
If you’re foreclosing on somebody’s house, you are required by law to have a collection of paperwork showing the journey of that mortgage note from the moment of issuance to the present.
You should see the originating lender (a firm like Countrywide) selling the loan to the next entity in the chain (perhaps Goldman Sachs) to the next (maybe JP Morgan), with the actual note being transferred each time.
But in fact, almost no bank currently foreclosing on homeowners has a reliable record of who owns the loan; in some cases, they have even intentionally shredded the actual mortgage notes.
That’s where the robo-signers come in.
To create the appearance of paperwork where none exists, the banks drag in these pimply entry-level types — an infamous example is GMAC’s notorious robo-signer Jeffrey Stephan, who appears online looking like an age-advanced photo of Beavis or Butt-Head — and get them to sign thousands of documents a month attesting to the banks’ proper ownership of the mortgages.
This isn’t some rare goof-up by a low-level cubicle slave: Virtually every case of foreclosure in this country involves some form of screwed-up paperwork.
“I would say it’s pretty close to 100 percent,”
says Kowalski. An attorney for Jacksonville Area Legal Aid tells me that out of the hundreds of cases she has handled, fewer than five involved no phony paperwork.
“The fraud is the norm,” she says.
Kowalski’s current case before Judge Soud is a perfect example.
The Jacksonville couple he represents are being sued for delinquent payments, but the case against them has already been dismissed once before. The first time around, the plaintiff, Bank of New York Mellon, wrote in Paragraph 8 that “plaintiff owns and holds the note” on the house belonging to the couple.
But in Paragraph 3 of the same complaint, the bank reported that the note was “lost or destroyed,” while in Paragraph 4 it attests that “plaintiff cannot reasonably obtain possession of the promissory note because its whereabouts cannot be determined.”
The bank, in other words, tried to claim on paper, in court, that it both lost the note and had it, at the same time. Moreover, it claimed that it had included a copy of the note in the file, which it did — the only problem being that the note (a) was not properly endorsed, and (b) was payable not to Bank of New York but to someone else, a company called Novastar.
Now, months after its first pass at foreclosure was dismissed, the bank has refiled the case — and what do you know, it suddenly found the note. And this time, somehow, the note has the proper stamps.
“There’s a stamp that did not appear on the note that was originally filed,” Kowalski tells the judge. (This business about the stamps is hilarious. “You can get them very cheap online,” says Chip Parker, an attorney who defends homeowners in Jacksonville.)
The bank’s new set of papers also traces ownership of the loan from the original lender, Novastar, to JP Morgan and then to Bank of New York.
The bank, in other words, is trying to push through a completely new set of documents in its attempts to foreclose on Kowalski’s clients.
There’s only one problem: The dates of the transfers are completely fucked.
According to the documents, JP Morgan transferred the mortgage to Bank of New York on December 9th, 2008. But according to the same documents, JP Morgan didn’t even receive the mortgage from Novastar until February 2nd, 2009 — two months after it had supposedly passed the note along to Bank of New York.
Such rank incompetence at doctoring legal paperwork is typical of foreclosure actions, where the fraud is laid out in ink in ways that make it impossible for anyone but an overburdened, half-asleep judge to miss.
“That’s my point about all of this,”
Kowalski tells me later.
“If you’re going to lie to me, at least lie well.”
The dates aren’t the only thing screwy about the new documents submitted by Bank of New York.
Having failed in its earlier attempt to claim that it actually had the mortgage note, the bank now tries an all-of-the-above tactic.
“Plaintiff owns and holds the note,” it claims, “or is a person entitled to enforce the note.”
Soud sighs. For Kessler, the plaintiff’s lawyer, to come before him with such sloppy documents and make this preposterous argument — that his client either is or is not the note-holder — well, that puts His Honor in a tough spot.
The entire concept is a legal absurdity, and he can’t sign off on it.
With an expression of something very like regret, the judge tells Kessler,
“I’m going to have to go ahead and accept [Kowalski’s] argument.”
Now, one might think that after a bank makes multiple attempts to push phony documents through a courtroom, a judge might be pissed off enough to simply rule against that plaintiff for good.
As I witness in court all morning, the defense never gets more than one chance to screw up. But the banks get to keep filing their foreclosures over and over again, no matter how atrocious and deceitful their paperwork is.
Thus, when Soud tells Kessler that he’s dismissing the case, he hastens to add:
“Of course, I’m not going to dismiss with prejudice.” With an emphasis on the words “of course.”
Instead, Soud gives Kessler 25 days to come up with better paperwork.
Kowalski fully expects the bank to come back with new documents telling a whole new story of the note’s ownership.
“What they’re going to do, I would predict, is produce a note and say Bank of New York is not the original note-holder, but merely the servicer,” he says.
This is the dirty secret of the rocket docket
The whole system is set up to enable lenders to commit fraud over and over again, until they figure out a way to reduce the stink enough so some judge like Soud can sign off on the scam.
“If the court finds for the defendant, the plaintiffs just refile,” says Parker, the local attorney.
“The only way for the caseload to get reduced is to give it to the plaintiff. The entire process is designed with that result in mind.”
Now all of this — the obviously cooked-up documents, the magically appearing stamp and the rest of it — may just seem like nothing more than sloppy paperwork. After all, what does it matter if the bank has lost a few forms or mixed up the dates?
The homeowners still owe what they owe, and the deadbeats have no right to keep living in a house they haven’t paid for.
But what’s going on at the Jacksonville rocket docket, and in foreclosure courts all across the country, has nothing to do with sloppiness.
All this phony paperwork was actually an essential part of the mortgage bubble, an integral element of what has enabled the nation’s biggest lenders to pass off all that subprime lead as AAA gold.
In the old days, when you took out a mortgage, it was probably through a local bank or a credit union, and whoever gave you your loan held on to it for life.
If you lost your job or got too sick to work and suddenly had trouble making your payments, you could call a human being and work things out.
It was in the banker’s interest, as well as yours, to make a modified payment schedule.
From his point of view, it was better that you pay something than nothing at all.
But that all changed about a decade ago, thanks to the invention of new financial instruments that magically turned all these mortgages into high-grade investments.
Now when you took out a mortgage, your original lender — which might well have been a big mortgage mill like Countrywide or New Century — immediately sold off your loan to big banks like Deutsche and Goldman and JP Morgan.
The banks then dumped hundreds or thousands of home loans at a time into tax-exempt real estate trusts, where the loans were diced up into securities, examined and graded by the ratings agencies, and sold off to big pension funds and other institutional suckers.
Even at this stage of the game, the banks generally knew that the loans they were buying and reselling to investors were shady.
A company called Clayton Holdings, which analyzed nearly 1 million loans being prepared for sale in 2006 and 2007 by 23 banks, found that nearly half of the mortgages failed to meet the underwriting standards being promised to investors.
Citigroup, for instance, had 29 percent of its loans come up short, but it still sold a third of those mortgages to investors.
Goldman Sachs had 19 percent of its mortgages flunk the test, yet it knowingly hawked 34 percent of the risky deals to investors.
D. Keith Johnson, the head of Clayton Holdings, was so alarmed by the findings that he went to officials at three of the main ratings agencies — Moody’s, Standard and Poor’s, and Fitch’s — and tried to get them to properly evaluate the loans.
“Wouldn’t this information be great for you to have as you assign risk levels?” he asked them.
(Translation: Don’t you ratings agencies want to know that half these loans are crap before you give them a thumbs-up?)
But all three agencies rejected his advice, fearing they would lose business if they adopted tougher standards. In the end, the agencies gave large chunks of these mortgage-backed securities AAA ratings — which means “credit risk almost zero.”
Since these mortgage-backed securities paid much higher returns than other AAA investments like treasury notes or corporate bonds, the banks had no trouble attracting investors, foreign and domestic, from pension funds to insurance companies to trade unions.
The demand was so great, in fact, that they often sold mortgages they didn’t even have yet, prompting big warehouse lenders like Countrywide and New Century to rush out into the world to find more warm bodies to lend to.
In their extreme haste to get thousands and thousands of mortgages they could resell to the banks, the lenders committed an astonishing variety of fraud,
from falsifying income statements to making grossly inflated appraisals to misrepresenting properties to home buyers.
Most crucially, they gave tons and tons of credit to people who probably didn’t deserve it, and why not?
These fly-by-night mortgage companies weren’t going to hold on to these loans, not even for 10 minutes.
They were issuing this credit specifically to sell the loans off to the big banks right away, in furtherance of the larger scheme to dump fraudulent AAA-rated mortgage-backed securities on investors.
If you had a pulse, they had a house to sell you.
As bad as Countrywide and all those lenders were, the banks that had sent them out to collect these crap loans were a hundred times worse.
To sell the loans, the banks often dumped them into big tax-exempt buckets called REMICs, or Real Estate Mortgage Investment Conduits. Each one of these Enron-ish, offshore-like real estate trusts spelled out exactly what kinds of loans were supposed to be in the pool, when they were to be collected, and how they were to be managed.
In order to both preserve their tax-exempt status and deserve their AAA ratings, each of the loans in the pool had to have certain characteristics. The loans couldn’t already be in default or foreclosure at the time they were sold to investors.
If they were advertised as nice, safe, fixed-rate mortgages, they couldn’t turn out to be high-interest junk loans. And, on the most basic level, the loans had to actually exist.
In other words, if the trust stipulated that all the loans had to be collected by August 2005, the bank couldn’t still be sticking in mortgages months later.
Yet that’s exactly what the banks did. In one case handled by Jacksonville Area Legal Aid, a homeowner refinanced her house in 2005 but almost immediately got into trouble, going into default in December of that year.
Yet somehow, this woman’s loan was placed into a trust called Home Equity Loan Trust Series AE 2005-HE5 in January 2006 — five months after the deadline for that particular trust.
The loan was not only late, it was already in foreclosure — which means that, by definition, whoever the investors were in AE 2005-HE5 were getting shafted.
A Message to Justice Elena Kagan from LIT:#OperationWhiteout@uscourts @WSJopinion @HarvardLaw_ @YaleLawSch @PBS @WisconsinLaw @stetsonlaw @UNLVLaw @sjquinney @kulawschool @TempleLaw @TulaneLaw @reason @MotherJones @Pontifex @Princeton @Cornell @Stanford @abc #appellatetwitter pic.twitter.com/S1VqvLU6jN
— LawsInTexas (@lawsintexasusa) November 24, 2021
Why does stuff like this matter?
Because when the banks put these pools together, they were telling their investors that they were putting their money into tidy collections of real, performing home loans.
But frequently, the loans in the trust were complete shit. Or sometimes, the banks didn’t even have all the loans they said they had. But the banks sold the securities based on these pools of mortgages as AAA-rated gold anyway.
In short, all of this was a scam — and that’s why so many of these mortgages lack a true paper trail.
Had these transfers been done legally, the actual mortgage note and detailed information about all of these transactions would have been passed from entity to entity each time the mortgage was sold.
But in actual practice, the banks were often committing securities fraud (because many of the mortgages did not match the information in the prospectuses given to investors) and tax fraud (because the way the mortgages were collected and serviced often violated the strict procedures governing such investments).
Having unloaded this diseased cargo onto their unsuspecting customers, the banks had no incentive to waste money keeping “proper” documentation of all these dubious transactions.
“You’ve already committed fraud once,” says April Charney, an attorney with Jacksonville Area Legal Aid. “What do you have to lose?”
Sitting in the rocket docket, James Kowalski considers himself lucky to have won his first motion of the morning.
To get the usually intractable Judge Soud to forestall a foreclosure is considered a real victory, and I later hear Kowalski getting props and attaboys from other foreclosure lawyers.
In a great deal of these cases, in fact, the homeowners would have a pretty good chance of beating the rap, at least temporarily, if only they had lawyers fighting for them in court.
But most of them don’t.
In fact, more than 90 percent of the cases that go through Florida foreclosure courts are unopposed.
Either homeowners don’t know they can fight their foreclosures, or they simply can’t afford an attorney.
These unopposed cases are the ones the banks know they’ll win — which is why they don’t sweat it if they take the occasional whipping.
That’s why all these colorful descriptions of cases where foreclosure lawyers like Kowalski score in court are really just that — a little color.
The meat of the foreclosure crisis is the unopposed cases; that’s where the banks make their money. They almost always win those cases, no matter what’s in the files.
This becomes evident after Kowalski leaves the room.
“Who’s next?” Judge Soud says. He turns to Mark Kessler, the counsel for the big foreclosure mills. “Mark, you still got some?”
“I’ve got about three more, Judge,” says Kessler.
Kessler then drops three greenish-brown files in front of Judge Soud, who spends no more than a minute or two glancing through each one.
Then he closes the files and puts an end to the process by putting his official stamp on each foreclosure with an authoritative finality:
Each one of those kerchunks means another family on the street.
There are no faces involved here, just beat-the-clock legal machinery.
Watching Judge Soud plow through each foreclosure reminds me of the scene in Fargo where the villain played by Swedish character actor Peter Stormare pushes his victim’s leg through a wood chipper with that trademark bored look on his face.
Mechanized misery and brainless bureaucracy on the one hand, cash for the banks on the other.
FACING THE TURNCOATS
An Incredible True Story.
“The significant and distressing difference is the Burkes battle is not just with the opposing parties, but with the judicial machinery itself.”
IT’S TIME.@WSJ @nytimes @Reuters @SupremeCourt_TX @flcourts #txlege #appellatetwitter pic.twitter.com/ORqzoqOuaP
— LawsInTexas (@lawsintexasusa) November 20, 2021
What’s sad is that most Americans who have an opinion about the foreclosure crisis don’t give a shit about all the fraud involved. They don’t care that these mortgages wouldn’t have been available in the first place if the banks hadn’t found a way to sell oregano as weed to pension funds and insurance companies.
They don’t care that the Countrywides’ of the world pushed borrowers who qualified for safer fixed-income loans into far more dangerous adjustable-rate loans, because their brokers got bigger commissions for doing so.
They don’t care that in the rush to produce loans, people were sold houses that turned out to have flood damage or worse, and they certainly don’t care that people were sold houses with inflated appraisals, which left them almost immediately underwater once housing prices started falling.
The way the banks tell it, it doesn’t matter if they defrauded homeowners and investors and taxpayers alike to get these loans.
All that matters is that a bunch of deadbeats aren’t paying their fucking bills.
“If you didn’t pay your mortgage, you shouldn’t be in your house — period,” is how Walter Todd, portfolio manager at Greenwood Capital Associates, puts it.
“People are getting upset about something that’s just procedural.”
Jamie Dimon, the CEO of JP Morgan, is even more succinct in dismissing the struggling homeowners that he and the other megabanks scammed before tossing out into the street.
“We’re not evicting people who deserve to stay in their house,” Dimon says.
There are two things wrong with this argument. (Well, more than two, actually, but let’s just stick to the two big ones.)
The first reason is: It simply isn’t true.
Many people who are being foreclosed on have actually paid their bills and followed all the instructions laid down by their banks. In some cases, a homeowner contacts the bank to say that he’s having trouble paying his bill, and the bank offers him loan modification. But the bank tells him that in order to qualify for modification, he must first be delinquent on his mortgage.
“They actually tell people to stop paying their bills for three months,” says Parker.
The authorization gets recorded in what’s known as the bank’s “contact database,” which records every phone call or other communication with a homeowner. But no mention of it is entered into the bank’s “number history,” which records only the payment record.
When the number history notes that the homeowner has missed three payments in a row, it has no way of knowing that the homeowner was given permission to stop making payments. “One computer generates a default letter,” says Kowalski. “Another computer contacts the credit bureaus.”
At no time is there a human being looking at the entire picture.
Which means that homeowners can be foreclosed on for all sorts of faulty reasons: misplaced checks, address errors, you name it. This inability of one limb of the foreclosure beast to know what the other limb is doing is responsible for many of the horrific stories befalling homeowners across the country.
Patti Parker, a local attorney in Jacksonville, tells of a woman whose home was seized by Deutsche Bank two days before Christmas. Months later, Deutsche came back and admitted that they had made a mistake: They had repossessed the wrong property.
In another case that made headlines in Orlando, an agent for JP Morgan mistakenly broke into a woman’s house that wasn’t even in foreclosure and tried to change the locks.
Terrified, the woman locked herself in her bathroom and called 911. But in a profound expression of the state’s reflexive willingness to side with the bad guys, the police made no arrest in the case. Breaking and entering is not a crime, apparently, when it’s authorized by a bank.
The second reason the whole they still owe the fucking money thing is bogus has to do with the changed incentives in the mortgage game.
In many cases, banks like JP Morgan are merely the servicers of all these home loans, charged with collecting your money every month and paying every penny of it into the trust, which is the real owner of your mortgage.
If you pay less than the whole amount, JP Morgan is now obligated to pay the trust the remainder out of its own pocket. When you fall behind, your bank falls behind, too. The only way it gets off the hook is if the house is foreclosed on and sold.
That’s what this foreclosure crisis is all about: fleeing the scene of the crime.
Add into the equation the fact that some of these big banks were simultaneously betting big money against these mortgages — Goldman Sachs being the prime example — and you can see that there were heavy incentives across the board to push anyone in trouble over the cliff.
Things used to be different.
Asked what percentage of struggling homeowners she used to be able to save from foreclosure in the days before securitization,
Charney is quick to answer.
“Most of them,” she says. “I seldom came across a mortgage I couldn’t work out.”
In Judge Soud’s court, I come across a shining example of this mindless rush to foreclosure when I meet Natasha Leonard, a single mother who bought a house in 2004 for $97,500.
Right after closing on the home, Leonard lost her job. But when she tried to get a modification on the loan, the bank’s offer was not helpful.
“They wanted me to pay $1,000,” she says. Which wasn’t exactly the kind of modification she was hoping for, given that her original monthly payment was $840.
“You’re paying $840, you ask for a break, and they ask you to pay $1,000?” I ask.
“Right,” she says.
Leonard now has a job and could make some kind of reduced payment. But instead of offering loan modification, the bank’s lawyers are in their fourth year of doggedly beating her brains out over minor technicalities in the foreclosure process.
That’s fine by the lawyers, who are collecting big fees.
And there appears to be no human being at the bank who’s involved enough to issue a sane decision to end the costly battle.
“If there was a real client on the other side, maybe they could work something out,” says Charney, who is representing Leonard.
In this lunatic bureaucratic jungle of securitized home loans issued by transnational behemoths, the borrower-lender relationship can only go one of two ways: full payment, or total war.
Watch the video, made for the purpose of public interest as congress aligns with ochlocracy.@SenatorDurbin @ewarren @uscourts @WSJopinion @ReutersLegal @netflix @IMDb #SCOTUS pic.twitter.com/8RLKSaGvhM
— LawsInTexas (@lawsintexasusa) December 2, 2021
The extreme randomness of the system is exemplified by the last case I see in the rocket docket.
While most foreclosures are unopposed, with homeowners not even bothering to show up in court to defend themselves, a few pro se defendants — people representing themselves — occasionally trickle in.
At one point during Judge Soud’s proceeding, a tallish blond woman named Shawnetta Cooper walks in with a confused look on her face.
A recent divorcee delinquent in her payments, she has come to court today fully expecting to be foreclosed on by Wells Fargo. She sits down and takes a quick look around at the lawyers who are here to kick her out of her home.
“The land has been in my family for four generations,” she tells me later. “I don’t want to be the one to lose it.”
Judge Soud pipes up and inquires if there’s a plaintiff lawyer present; someone has to lop off this woman’s head so the court can move on to the next case.
But then something unexpected happens: It turns out that Kessler is supposed to be foreclosing on her today, but he doesn’t have her folder.
The plaintiff, technically, has forgotten to show up to court.
Just minutes before, I had watched what happens when defendants don’t show up in court: kerchunk! The judge more or less automatically rules for the plaintiffs when the homeowner is a no-show.
But when the plaintiff doesn’t show, the judge is suddenly all mercy and forgiveness. Soud simply continues Cooper’s case, telling Kessler to get his shit together and come back for another whack at her in a few weeks.
Having done this, he dismisses everyone.
Stunned, Cooper wanders out of the courtroom looking like a person who has stepped up to the gallows expecting to be hanged, but has instead been handed a fruit basket and a new set of golf clubs.
I follow her out of the court, hoping to ask her about her case. But the sight of a journalist getting up to talk to a defendant in his kangaroo court clearly puts a charge into His Honor, and he immediately calls Cooper back into the conference room.
Then, to the amazement of everyone present, he issues the following speech:
“This young man,” he says, pointing at me, “is a reporter for Rolling Stone. It is your privilege to talk to him if you want.” He pauses. “It is also your privilege to not talk to him if you want.”
I stare at the judge, open-mouthed. Here’s a woman who still has to come back to this guy’s court to find out if she can keep her home, and the judge’s admonition suggests that she may run the risk of pissing him off if she talks to a reporter.
Worse, about an hour later, April Charney, the lawyer who accompanied me to court, receives an e-mail from the judge actually threatening her with contempt for bringing a stranger to his court.
Noting that “we ask that anyone other than a lawyer remain in the lobby,” Judge Soud admonishes Charney that “your unprofessional conduct and apparent authorization that the reporter could pursue a property owner immediately out of Chambers into the hallway for an interview, may very well be sited [sic] for possible contempt in the future.”
Let’s leave aside for a moment that Charney never said a word to me about speaking to Cooper.
And let’s overlook entirely the fact that the judge can’t spell the word cited.
The key here isn’t this individual judge — it’s the notion that these hearings are not and should not be entirely public. Quite clearly, foreclosure is meant to be neither seen nor heard.
After Soud’s outburst, Cooper quietly leaves the court.
Once out of sight of the judge, she shows me her file. It’s not hard to find the fraud in the case.
For starters, the assignment of mortgage is autographed by a notorious robo-signer — John Kennerty, who gave a deposition this summer admitting that he signed as many as 150 documents a day for Wells Fargo.
In Cooper’s case, the document with Kennerty’s signature on it places the date on which Wells Fargo obtained the mortgage as May 5th, 2010. The trouble is, the bank bought the loan from Wachovia — a bank that went out of business in 2008.
All of which is interesting, because in her file, it states that Wells Fargo sued Cooper for foreclosure on February 22nd, 2010.
In other words, the bank foreclosed on Cooper three months before it obtained her mortgage from a nonexistent company.
There are other types of grift and outright theft in the file.
As is typical in many foreclosure cases, Cooper is being charged by the bank for numerous attempts to serve her with papers.
But a booming industry has grown up around fraudulent process servers; companies will claim they made dozens of attempts to serve homeowners, when in fact they made just one or none at all. Who’s going to check?
The process servers cover up the crime using the same tactic as the lenders, saying they lost the original summons.
From 2000 to 2006, there was a total of 1,031 “affidavits of lost summons” here in Duval County; in the past two years, by contrast, more than 4,000 have been filed.
LIT respectfully wishes to remind y’all over there at Congress – you are now fully aware of the poison and ochlocracy pervading Texas Federal Courts, incl. Circuit COA5, incl. the #SB8 debacle and the @WSJ article re failure to recuse/disclose and much more. Please ACT NOW. pic.twitter.com/GKtTuzJNev
— LawsInTexas (@lawsintexasusa) November 4, 2021
Cooper’s file contains a total of $371 in fees for process service, including one charge of $55 for an attempt to serve process on an “unknown tenant.”
But Cooper’s house is owner-occupied — she doesn’t even have a tenant, she tells me with a shrug.
If Mark Kessler had had his shit together in court today, Cooper would not only be out on the street, she’d be paying for that attempt to serve papers to her nonexistent tenant.
Cooper’s case perfectly summarizes what the foreclosure crisis is all about.
Her original loan was made by Wachovia, a bank that blew itself up in 2008 speculating in the mortgage market. It was then transferred to Wells Fargo, a megabank that was handed some $50 billion in public assistance to help it acquire the corpse of Wachovia.
And who else benefited from that $50 billion in bailout money?
Billionaire Warren Buffett and his Berkshire Hathaway fund, which happens to be a major shareholder in Wells Fargo.
It was Buffett’s vice chairman, Charles Munger, who recently told America that it should “thank God” that the government bailed out banks like the one he invests in, while people who have fallen on hard times — that is, homeowners like Shawnetta Cooper — should “suck it in and cope.”
Look: It’s undeniable that many of the people facing foreclosure bear some responsibility for the crisis. Some borrowed beyond their means. Some even borrowed knowing they would never be able to pay off their debt, either hoping to flip their houses right away or taking on mortgages with low initial teaser rates without bothering to think of the future.
The culture of take-for-yourself-now, let-someone-else-pay-later wasn’t completely restricted to Wall Street. It penetrated all the way down to the individual consumer, who in some cases was a knowing accomplice in the bubble mess.
But many of these homeowners are just ordinary Joes who had no idea what they were getting into. Some were pushed into dangerous loans when they qualified for safe ones.
Others were told not to worry about future jumps in interest rates because they could just refinance down the road, or discovered that the value of their homes had been overinflated by brokers looking to pad their commissions.
And that’s not even accounting for the fact that most of this credit wouldn’t have been available in the first place without the Ponzi-like bubble scheme cooked up by Wall Street, about which the average homeowner knew nothing — hell, even the average U.S. senator didn’t know about it.
At worst, these ordinary homeowners were stupid or uninformed — while the banks that lent them the money are guilty of committing a baldfaced crime on a grand scale.
These banks robbed investors and conned homeowners, blew themselves up chasing the fraud, then begged the taxpayers to bail them out.
And bail them out we did:
We ponied up billions to help Wells Fargo buy Wachovia, paid Bank of America to buy Merrill Lynch, and watched as the Fed opened up special facilities to buy up the assets in defective mortgage trusts at inflated prices.
And after all that effort by the state to buy back these phony assets so the thieves could all stay in business and keep their bonuses, what did the banks do?
They put their foot on the foreclosure gas pedal and stepped up the effort to kick people out of their homes as fast as possible, before the world caught on to how these loans were made in the first place.
Why don’t the banks want us to see the paperwork on all these mortgages?
Because the documents represent a death sentence for them.
According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued.
Think about what that would do to Bank of America’s bottom line the next time you wonder why they’re trying so hard to rush these loans into someone else’s hands.
When you meet people who are losing their homes in this foreclosure crisis, they almost all have the same look of deep shame and anguish.
Nowhere else on the planet is it such a crime to be down on your luck, even if you were put there by some of the world’s richest banks, which continue to rake in record profits purely because they got a big fat handout from the government.
That’s why one banker CEO after another keeps going on TV to explain that despite their own deceptive loans and fraudulent paperwork, the real problem is these deadbeat homeowners who won’t pay their fucking bills.
And that’s why most people in this country are so ready to buy that explanation.
Because in America, it’s far more shameful to owe money than it is to steal it.
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Don’t Show Us The Note, Give Us The Note
We hold that MTGLQ as assignee and substituted plaintiff is authorized to receive the original note and mortgage from the court file.
The issue before us is whether Appellant MTGLQ Investors can retrieve the original note and mortgage from the court file of a foreclosure action the trial court dismissed without a merits disposition.
MTGLQ was an assignee and substituted plaintiff in that action, and moved for release of the documents, but the trial court denied the motion.
We hold that on the facts presented, MTGLQ can retrieve the original note and mortgage.
I. Foreclosure Proceedings.
Appellee, the Borrower, entered into a $417,000 purchase-money mortgage and note in June 2007, securing his acquisition of a residential condominium in Pensacola. He defaulted on his payments less than two years later, failing to make the April 2009 payment or, as far as our record shows, any other payments in the nearly twelve years since.
The original lender sued for foreclosure in 2009, but dismissed that proceeding without resolution.
JPMorgan Chase Bank filed the present foreclosure action in 2013, alleging a default date of April 1, 2009 and ongoing default thereafter.
The complaint alleged that the Federal National Mortgage Association (FNMA) owned the note, and that JPMorgan as the loan servicer and holder was authorized to bring the foreclosure action.
JPMorgan filed the original note and mortgage in 2013. The original note had an allonge with a blank indorsement.
In 2014, JPMorgan filed a verified motion to substitute FNMA as plaintiff.
This motion asserted that JPMorgan had transferred to FNMA the right to enforce the subject loan, FNMA was the real party in interest, and no party would be prejudiced.
Borrower did not object, and the trial court granted the motion.
In 2016, FNMA assigned to MTGLQ the mortgage and “the certain note(s) described therein.”
FNMA recorded the assignment. FNMA also executed a power of attorney giving MTGLQ “full power and authority” to take any action that FNMA could take with respect to “mortgage loans, deeds of trust, promissory notes and allonges.”
In 2018, MTGLQ moved to substitute itself as plaintiff in the foreclosure action, attaching a copy of the recorded assignment from FNMA.
Again, Borrower did not object to the substitution of plaintiff, and the trial court granted this motion.
The trial court initially scheduled trial for August 13, 2018; then continued it to December 3, 2018.
MTGLQ amended its witness list five days before trial, asserting that the witnesses who would testify had changed (though the testimony would not).
Although Borrower had not deposed the earlier-named witnesses, the trial court dismissed the case with prejudice after the late amendment.
Early in 2019, MTGLQ filed a motion and then an amended motion to retrieve from the court file the original mortgage and the original note with its allonge, citing Florida Rule of Judicial Administration 2.430(h).
This rule provides that courts have ongoing authority “to release exhibits or other parts of court records that are the property of the person or party initially placing the items in the court records.”
MTGLQ argued that it was entitled to the original note and mortgage on two grounds.
The first was its status as substituted plaintiff in the foreclosure action.
The second was the September 8, 2016 assignment from FNMA reciting that it assigned the mortgage to MTGLQ “together with the certain note(s) described therein.”
Borrower argued that no right to enforce the note survived this Court’s dismissal of MTGLQ’s appeal from the trial court’s order dismissing the foreclosure action.
Borrower also argued that MTGLQ could not obtain the note in any event because it was not the original plaintiff and could not establish a chain of ownership.
Borrower argued that a substituted plaintiff does not necessarily own the note or have standing to enforce it.
The trial court held a telephonic hearing, and orally denied MTGLQ’s motion.
No court reporter recorded the hearing.
MTGLQ moved for reconsideration, noting the court’s oral denial.
The parties argued their positions at a second, transcribed hearing.
Borrower’s attorney asserted that he had located a public record in which FNMA rescinded a June 23, 2014 assignment of the mortgage (not the note) to JPMorgan. Borrower did not give MTGLQ prior notice or a copy of this document, and did not enter it into evidence—but he has included it in his appendix here.
Borrower argued that to remove the original note and mortgage from the court file and give MTGLQ physical possession of them would make MTGLQ a holder in possession, thus giving MTGLQ more rights than it had during the foreclosure suit.
Borrower claimed this would prejudice him.
Borrower also argued that it was not necessary to remove the original note and mortgage from the court file, because “someone” who might file another foreclosure action could simply reference the filed documents.
The trial court rendered the unelaborated order on appeal, stating “Plaintiff’s Motion to Return Original Loan Documents is DENIED.”
MTGLQ timely appealed.
II. Legal Analysis.
A. Jurisdiction and Standard of Review.
We have jurisdiction over the order denying MTGLQ’s motion to remove the original note and mortgage from the court file. Fla. R. App. P. 9.130(a)(3)(C)(ii) (recognizing jurisdiction to review non-final orders determining the right to immediate possession of property). The issues raised are questions of law, for which our review is de novo. See Wells Fargo Bank, N.A. v. Ousley , 212 So. 3d 1056, 1057 (Fla. 1st DCA 2016).
B. Rights of a Substituted Plaintiff.
On appeal, MTGLQ continues to argue it has the right to obtain the original documents, either as substituted plaintiff or as assignee of the note and mortgage. MTGLQ argues it need not prove previous physical possession of the documents.
Borrower acknowledges that the court can release the original documents to a substituted plaintiff that is a holder in possession, or a nonholder in possession that has the rights of a holder.
Borrower argues that MTGLQ is neither of those, and that MTGLQ’s status as substituted plaintiff is insufficient to authorize it to obtain the original documents from the court file.
Borrower further argues that giving MTGLQ the documents will prejudice him. We reject both arguments.
The core issue on appeal is whether an assignee that becomes a substituted plaintiff in a foreclosure action can retrieve an original note and mortgage from the court file after the court dismisses the case without entering a merits judgment.
Courts have general authority to “release exhibits or other parts of court records that are the property of the person or party initially placing the items in the court records.” Fla. R. Jud. Admin. 2.430(h).
We conclude that MTGLQ is entitled to receive the original loan documents from the court file for several reasons.
Significantly, notes are different from most documents in court files, because notes are negotiable instruments.
See § 673.2011, Fla. Stat. (defining negotiation of instruments).
Notes do not belong to the court, nor do they belong to the borrower.
See U.S. Bank Nat’l Ass’n v. Rodriguez , 256 So. 3d 882, 884–85 (Fla. 4th DCA 2018) (recognizing that original notes remain negotiable instruments after entering court file).
In Rodriguez , parties to a foreclosure action entered an agreed order to keep the note in the court file after a non-merits dismissal against the original foreclosure plaintiff. 256 So. 3d at 882.
Several years later, a substituted plaintiff sought to remove the loan documents.
The Fourth District held that because no judgment had cancelled the note or taken it out of the stream of commerce,
“it should be returned … if judgment is not entered in a foreclosure case, as it does not belong to the court and it remains negotiable and valuable to its holder.” 256 So. 3d at 884.
Here, Borrower’s argument against giving MTGLQ the documents would defeat the note’s negotiability, since there is no other party to the foreclosure action that could remove them for further negotiation.
Other courts also have held that foreclosure plaintiffs are entitled to remove original loan documents from the court file even without proving entitlement to foreclose.
See, e.g., Santiago v. U.S. Bank Nat’l Ass’n as Tr. for Banc of Am. Funding Corp. , 257 So. 3d 1145, 1147–48 (Fla. 5th DCA 2018) (“Whether a party is entitled to foreclose the note and mortgage is not relevant to its right to have the note released from the court records.”);
Kajaine Estates, LLC, v. U.S. Bank Nat’l Ass’n , 198 So. 3d 1010, 1011 (Fla. 5th DCA 2016) (requiring trial court to release original note to plaintiff that had failed to prove predecessor’s standing, and finding that proof of standing is “not relevant” to releasing the note).
The note is property, a valuable negotiable instrument, and MTGLQ as plaintiff is entitled to remove it from the court file.
(2) Transferability and Assignment.
Beyond the negotiability problem, Borrower’s arguments are contrary to settled principles of transferability and the rights of transferees.
The law allows assignment and transfer of both notes and mortgages. See § 701.01, Fla. Stat. (authorizing subsequent assignees and transferees of mortgages, as well as original mortgagees, to assign and transfer such mortgages, and providing that all such persons, assigns, and subsequent assignees have all lawful rights of the original mortgagee to foreclose and “for the recovery of the money secured thereby”).
MTGLQ filed the assignment and power of attorney documents from FNMA, which on their face gave MTGLQ all of FNMA’s rights in the mortgage and note.
The court properly substituted MTGLQ as plaintiff based on these documents.
See Fla. R. Civ. P. 1.260(c) (“In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.”).
Borrower as the debtor under a promissory note remains obligated to the party entitled to enforce the note. See § 673.4121(1), Fla. Stat. (obligating issuer of a note to pay according to its terms “at the time it first came into possession of a holder”).
On this record, MTGLQ is a “person entitled to enforce” the note under section 673.3011.
This section defines that status as including “[t]he holder of the instrument” and “[a] nonholder in possession of the instrument who has the rights of a holder.” § 673.3011(1), (2), Fla. Stat.
This section also states that a person may be entitled to enforce an instrument without being its owner. § 673.3011, Fla. Stat. Under section 673.2013, MTGLQ is a transferee of the note and mortgage because it received the right to enforce it, which “vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course,” absent fraud or illegality. § 673.2031(2), Fla. Stat.
MTGLQ as transferee would not have to prove previous physical possession of the note to have the rights of a holder. Constructive possession in the form of the authority to exercise control is sufficient.
Deutsche Bank Nat’l Tr. Co. v. Noll , 261 So. 3d 656, 658 (Fla. 2d DCA 2018).
MTGLQ therefore has the rights of a holder, and it is entitled to obtain the loan documents from the court file. See also Kajaine , 198 So. 3d at 1011 (holding court should release note to transferee under valid assignment).
(3) Standing in the shoes of original plaintiff.
In addition, once the court enters an order substituting a new party in the place of the earlier plaintiff, the substituted plaintiff stands in the shoes of the original plaintiff.
See Wilmington Tr. v. Moon , 238 So. 3d 425, 428 (Fla. 5th DCA 2018) (“In the case of a substituted plaintiff, the substituted plaintiff may rely on the standing (if any) of the original plaintiff at the time the case was filed. … Significantly, there is no requirement that a substituted plaintiff must prove its standing at the time of the substitution.”);
see also Wilmington Sav. Fund Soc’y, FSB v. Stevens , 290 So. 3d 115, 118 (Fla. 4th DCA 2020) (noting substituted plaintiff has the right to obtain the original note by moving for its release from the court file);
Spicer v. Ocwen Loan Servicing, LLC , 238 So. 3d 275 (Fla. 4th DCA 2018) (holding substituted plaintiff had constructive possession of the original note because it was in the court file of the case when the new plaintiff came in, and was necessary for proof of standing at trial).
(4) No prejudice.
Borrower nevertheless argues that he will be prejudiced if MTGLQ gets the original note. The Fifth District rejected an argument similar to Borrower’s in PMT NPL Financing 2015-1 v. Centurion Systems, LLC , 257 So. 3d 516 (Fla. 5th DCA 2018).
Recognizing the right of a substituted plaintiff to have physical possession of original loan documents the original plaintiff had filed, the court aptly observed that a substituted plaintiff inevitably must have physical possession to authenticate the loan documents and enter them into evidence at trial. See id. at 518–19.
Otherwise, the substituted plaintiff could never meet its obligation to prove standing at enforcement. At a minimum, and in addition to the reasoning already discussed, MTGLQ as substituted plaintiff has the right to possess the note to prove standing if it goes to trial.
It receives no greater right upon removing the loan documents from the court file.
It can then elect to foreclose again, or to transfer the negotiable instrument to another entity that may foreclose.
In either case, Borrower retains his defenses and procedural rights.
In sum, a substituted plaintiff becomes a holder entitled to receive payments under the note and entitled to pursue remedies for nonpayment, including foreclosure.
A substituted plaintiff is not required to prove that it previously had physical possession of the original note, in order to have holder status.
Thus, MTGLQ’s receipt of the original documents will not add to its rights or prejudice Borrower.
If MTGLQ or any other party files a new foreclosure action, or if more than one entity attempts to foreclose on the same note, Borrower’s defenses remain intact.
C. Rejecting Borrower’s Other Arguments.
(1) The Purported Rescission.
Borrower argues FNMA’s transfer to MTGLQ was ineffective because FNMA purportedly rescinded assignment of the mortgage to JPMorgan, making it impossible for JPMorgan to have assigned the mortgage back to FNMA before FNMA assigned both note and mortgage to MTGLQ.
We reject this argument because Borrower failed to prove it.
This case had been set for trial twice, but Borrower raised this argument only orally and for the first time at the reconsideration hearing.
He did not give MTGLQ advance notice, and he did not authenticate the document or enter it into evidence. This was improper.
A court cannot rely on unsworn argument of counsel and an unauthenticated document to determine the substantive rights of an opposing party—neither is competent evidence.
See, e.g. , Shaffer v. Deutsche Bank Nat’l Tr. , 235 So. 3d 943, 946 (Fla. 2d DCA 2017) (Villanti, C.J., concurring specially) (collecting cases holding that documents not authenticated or entered into evidence are “not properly before the court and cannot constitute evidence” as to a legal issue before the court);
Chase Home Loans LLC v. Sosa , 104 So. 3d 1240, 1241 (Fla. 3d DCA 2012) (“[U]nsworn representations of counsel about factual matters do not have any evidentiary weight in the absence of a stipulation.”).
(2) Lack of a Transcript.
We also reject Borrower’s argument that we must affirm without addressing the merits because MTGLQ did not get a transcript of the initial telephone hearing.
Borrower misplaces his reliance on Applegate v. Barnett Bank of Tallahassee, Inc. , 377 So. 2d 1150, 1152 (Fla. 1979).
Applegate holds that lack of a transcript can prevent meaningful appellate review. It does not mean that absence of a transcript is always fatal to an appeal.
Instead, the issue is whether the appeal turns on dispositive questions of fact that were, or could have been, established only in the proceedings not transcribed.
That is not the case here, where Borrower does not assert that any dispositive question of fact was resolved at the initial, untranscribed telephonic hearing. To the contrary, Borrower’s counsel stated at the transcribed hearing on MTGLQ’s motion for reconsideration that “there is not anything that’s been presented new from the prior hearing.”
While that comment referenced legal arguments, Borrower also did not identify then, and has not identified here, any relevant and dispositive evidence or question of fact presented solely at the earlier untranscribed hearing.
The absence of that transcript is irrelevant.
(3) Procedural Objections to Reconsideration.
We likewise reject Borrower’s argument that we must affirm because MTGLQ’s motion for reconsideration was untimely or improper.
Borrower did not raise these arguments below, and the trial court did not address them.
Without deciding that Borrower’s arguments would have had any merit, we find that his participation in the hearing without objection constituted a waiver.
See Correa v. U.S. Bank N.A ., 118 So. 3d 952, 954 (Fla. 2d DCA 2013) (finding waiver of procedural objections where party proceeds at hearing without objection).
We hold that MTGLQ as assignee and substituted plaintiff is authorized to receive the original note and mortgage from the court file. We therefore reverse the order on appeal, and remand with instructions that the clerk of the lower tribunal securely transmit those original documents to counsel of record for MTGLQ.
REVERSED and REMANDED with instructions.
Osterhaus and Nordby, JJ., concur.
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Rachel Nordby was appointed to the First District Court of Appeal on October 16, 2019 by Governor Ron DeSantis; she took office on October 23, 2019.
Before her appointment to the bench, Judge Nordby was a partner in the Tallahassee office of Shutts & Bowen LLP and served as Vice-Chair of the firm’s Appellate Practice Group. Before joining Shutts & Bowen, Judge Nordby served as the Senior Deputy Solicitor General for Florida Attorney General Pam Bondi. In this role, she represented the State, its agencies, and public officials in cases involving constitutional challenges and issues of statewide impact.
Before joining the Office of the Attorney General, Judge Nordby clerked for Judge Bradford L. Thomas on Florida’s First District Court of Appeal. Judge Nordby is a 2008 graduate of the Florida State University College of Law, where she served as Editor-in-Chief of The Florida State University Law Review and interned in the chambers of Florida Supreme Court Justice Harry Lee Anstead. She earned her undergraduate degree in Classical Studies, summa cum laude, from the University of Florida.
- Juris Doctor, magna cum laude, Florida State University College of Law, 2008
- Bachelor of Arts (Classical Studies), summa cum laude, University of Florida, 2003
Legal Offices & Positions:
- Judge, First District Court of Appeal, October 2019 to present
- Partner & Vice-Chair of Appellate Practice Group, Shutts & Bowen, September 2018–October 2019
- Florida Department of Legal Affairs, Office of the Solicitor General
- Senior Deputy Solicitor General, December 2017–September 2018
- Deputy Solicitor General, March 2012–December 2017
- Law Clerk, Judge Bradford Thomas, First District Court of Appeal, May 2008–October 2009
Honors & Awards
- Recognized by Florida Super Lawyers in its Appellate category (2019)
- Recognized by Florida Trend in Florida 500 (2019), an annual publication highlighting Florida’s 500 most influential business leaders
- Recognized by Florida Trend in its Legal Elite Government and Non-Profit Attorneys category (2016, 2017 & 2018)
Florida State University College of Law:
- Order of the Coif (class rank: 3 out of 314)
- Florida State University Law Review
- Editor-In-Chief, Vol. 35
- Notes & Comments Editor, Vol. 34
- Citation of Honor (2008)
- Best Overall Student Article (2008)
- Meritorious Service Award (2007)
- Journal of Land Use and Environmental Law
- Outstanding Subciter (2007, 2008)
- Florida Supreme Court Internship Program for Distinguished Florida Law Students
- Book Awards:
- (1) Florida, the Constitution & the Supreme Court
- (2) Topics in Appellate Practice
- (3) Legal Writing & Research II
- (4) Worker’s Compensation
- (5) Professional Responsibility
- (6) Natural Resources Law
- (7) Law & the Arts
- Dean’s List (every semester)
- Distinguished Pro Bono Service Award
- Phi Delta Phi (Legal Honor Society)
University of Florida:
- Phi Beta Kappa
- College of Liberal Arts & Sciences Hall of Fame
- Dean’s List
- Eta Sigma Phi (Classics Honor Society)
- Florida Bright Futures Scholarship
- Golden Key Honor Society
- Anderson Scholar
- Maria Marees Leadership Award
- Nutter Scholar
Judicial & Bar Activities:
- The Florida Bar, Member No. 56606
- Appellate Court Rules Committee, 2016 to present
- Parliamentarian 2018 to present
- Second Judicial Circuit Grievance Committee A, 2018–2019
- Continuing Legal Education Committee, 2013–2016
- Appellate Practice Section
- Government Lawyers Section
- Appellate Court Rules Committee, 2016 to present
- Judicial Management Council, Direct Appointment by Chief Justice Canady, March 2019–present
- First District Appellate Inn of Court, 2013–present
- Executive Committee, 2017–present
- Treasurer, 2019–2020
- Chair, Mentorship Committee, 2017–2019
- William H. Stafford Inn of Court, 2019–present
- Federalist Society for Law and Public Policy Studies, 2005 to present
- Tallahassee Lawyers Chapter Steering Committee, 2012 to present
- Vice President, FSU Student Chapter, 2006–2007
- Tallahassee Women Lawyers (Chapter of Florida Association of Women Lawyers), 2013 to present
- Director, 2014 Judicial Reception
- Secretary, 2015–2016
- President-Elect, 2016–2017
- President, 2017–2018
- Immediate Past-President, 2018–2019
- Statewide Nominating Commission for Judges of Compensation Claims, Direct Gubernatorial Appointee, March 2010–October 2019
- Panelist, Reflections from Year One on the Bench, Jacksonville Women Lawyers Association, Lunchtime CLE Webinar, July 2020
- Panelist, Judicial Perspective: Remote Oral Arguments, Appellate Practice Section, Lunchtime CLE Webinar, June 2020
- Presenter, 2019 Appellate Practice Section Monthly Webinar CLE Series,
Recurring Issues in Constitutional Litigation, April 2019
- Panelist, 2018 Annual Education Program of Florida Conference of District Court of Appeal Judges, Emerging Trends in the Practice of Law, September 2018
- Panelist, Practicing Before the Florida Supreme Court, Panel on Oral Argument, June 2018
- Panelist, Institute for Justice’s Center for Judicial Engagement, Practitioner Perspectives on the Judicial Duty, February 2018
- Panelist, First District Appellate Inn of Court, Florida’s Office of the Solicitor General: 20 Years, January 2018
- Moderator Introduction, The Federalist Society, 2017 Annual Florida Chapters Conference, Combatting Federal Overreach, February 2017
- Panelist, Appellate Practice Section Monthly Telephonic CLE, Reply Briefs, March 2016
- Panelist, Appellate Practice Section Tallahassee Outreach CLE, Reply Briefs, March 2016
- Guest Lecturer on Florida Supreme Court Review of Citizens Initiative Petitions, FSU Law School Course on Appellate Practice: The Florida Solicitor General’s Perspective, February 2016
- Moderator, Practicing Before the Florida Supreme Court, Panel on Discretionary Review, June 2014
- Panelist, Practicing Before the Florida Supreme Court, Panel Discussion on Briefs in Support and in Opposition to Requests for Discretionary Review; Ethics, June 2013
- Panelist, Practicing With Professionalism, Young Lawyer Professionalism Panel, Fall 2014 & Fall 2013
Articles & Publications:
- Florida’s Office of the Solicitor General: The First Ten Years, 37 Fla. St. U. L. Rev. 219 (2009)
- Off of the Pedestal and Into the Fire: How Phillips Chips Away at the Rights of Site-Specific Artists, 35 Fla. St. U. L. Rev. 167 (2007) (awarded best overall student article by Florida State University Law Review)
Judge Timothy Osterhaus was appointed to the First District Court of Appeal by Governor Rick Scott on May 20, 2013.
Before his appointment Judge Osterhaus served as the Solicitor General of Florida. As Florida’s SG, and as Deputy SG before that, he handled appeals on behalf of the State and its agencies in Florida’s district courts of appeal and in the Florida Supreme Court, as well in the federal courts, including in the United States Supreme Court. He also worked as counsel at the Florida Department of Education; worked in private practice in Washington, D.C.; and served as a law clerk to U.S. District Court Judge Kenneth Ryskamp in West Palm Beach (with a co-clerk who later became his wife).
Judge Osterhaus spent his childhood in South Florida, where he attended Westminster Christian School. After moving away from Florida with his family, he attended high school at Charlotte Christian School in North Carolina, before moving again and graduating from Bristol Tennessee High School in 1989.
Judge Osterhaus received his bachelor’s degree with highest honors from King College (Bristol, Tenn.) in 1993, and his law degree from the University of Virginia in 1997.
J.D. 1988, University of Florida College of Law, Law Review Editor-in-Chief; B.A. Communications 1980, Freed-Hardeman University, Henderson, TN, magna cum laude.
Legal Offices & Positions:
Judge, First District Court of Appeal, April 2015 – present; Kelsey Appellate Law Firm, P.A., 2007 – 2015 (solo appellate practice); Anchors Smith Grimsley, P.L. Litigation Group, 2005 – 2007; Holland & Knight LLP, 1988 – 2005.
Honors & Awards:
Best Lawyers In America, 2013-14; Florida Super Lawyers, 2006-15; Florida Legal Elite, 2004-11, 2015; Bar Register of Preeminent Women Lawyers, 2013; Martindale-Hubbell AV rating, 2000-present; Pro Bono Award co-recipient, The Florida Bar Appellate Practice Section, 2004; Award for Outstanding Contribution by an Attorney to the Guardian Ad Litem program, Second Judicial Circuit, Leon County, Florida, 1990; Leadership Tallahassee Class 8 graduate, 1991.
Judicial & Bar Activities:
First District Appellate American Inn of Court: President and Master, 2009-10, and Executive Committee Officer and Master member, 2008-16; Member, The Florida Bar Appellate Practice Section and past member, The Florida Bar General Practice, Small Firm and Solo Practice Section; Vice Chair, The Florida Bar Appellate Rules Committee, 1999-2004, Subcommittees: Administrative Practice, Transition/Term Limits (chair); University of Florida Law Review Editor in Chief, summer & fall 1987; Title Standards Editor, spring 1987; Assistant Research Editor, 1986-87; UF College of Law Legal Research & Writing Instructor, 1987-88; Florida Blue Key 1987-88.
Articles & Publications:
Improving Appellate Oral Arguments Through Tentative Opinions and Focus Orders, The Florida Bar Journal (December 2014); Florida Appellate Practice, Jurisdiction and Review (The Florida Bar, 6thed. 2006); Florida Appellate Practice Guide, Jurisdiction (The Florida Bar, 2002/03 ed.) (rewritten); The New & Improved APA: Another Question Answered, The Florida Bar Admin. L. S. Newsletter (Dec. 2001); The New And Improved APA: Three Questions, Three Answers, The Florida Bar Admin. L. S. Newsletter (Mar. 2001); The Hidden Diversity, Florida Association of Women Lawyers’ Journal (Spring 2001); The Record on Appeal: The Foundation for Appellate Review, Florida Association of Women Lawyers’ Journal (Winter 2000); Revising the Role of the Florida Supreme Court in Constitutional Initiatives, The Florida Bar J. (April 1997).
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