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What Happened to the 72 Year Old Florida Criminal Lawyer’s Sexual Coercion of A 23 Yr Old Client Resulting in a Child?

Chief Judge Ellen S. Masters of the Tenth Judicial Circuit is the “referee” in the Florida Bar Complaint. One Year Suspension is recommended.

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UPDATE: June 17, 2021

Fl. Supreme Court rightly Rejects Chief Judge Masters Recommendation. 120 day extension of time requested to allow Masters to try again and recommend disbarment of this nasty lawyer.

v

Florida Lawyer Faces Suspension After Having Sex With and Impregnating Client

The lawyer is also a jail inmate, awaiting trial after allegedly being caught in a sting operation agreeing to pay $100 for sex with a 16-year-old.

DEC 17, 2020 | REPUBLISHED BY LIT: JUN 19, 2021

A Melbourne criminal defense attorney who admitted to having sex with and impregnating a client could end up receiving a one-year suspension.

That’s according to a recommendation from court-appointed referee Chief Judge Ellen S. Masters of the Tenth Judicial Circuit of Florida, who found attorney John Gillespie guilty of having a sexual relationship with a particularly vulnerable client.

The report, filed Monday, found that was a violation of six bar rules, governing misconduct, conflict of interest and bar admission.

Gillespie, 72, is also an Orange County jail inmate, awaiting trial after allegedly being caught in a sting operation agreeing to pay $100 for sex with a 16-year-old. He is accused of using his firm to run a prostitution ring, but has pleaded not guilty to all charges.

Attorney John Gillespie’s Jailhouse Response to Florida Bar

The bar’s July complaint, however, involves allegations from an Osceola County resident who hired Gillespie to represent her adult daughter in two criminal cases.

Gillespie knew the daughter had a history of drug abuse, and even argued she was incompetent to stand trial and had a history of mental illness, according to the referee’s report.

Yet, a year later in March 2019, the client gave birth to Gillespie’s son, who took the attorney’s surname, according to the referee’s report.

Gillespie initially denied having sex with the client. His answer to the bar’s complaint argued, ”However, even if this child were mine and even if I had had some kind of physical contact with her daughter, that would not be a violation of the Attorney’s Code of Ethics unless it had adversely affected her daughter’s case.”

The attorney walked that back after a paternity test revealed he was the father, but he maintained the sexual relationship never impaired his ability to represent the client. The referee’s report said the Department of Children and Families removed that child from Gillespie’s home in March 2019.

Gillespie also admitted to spreading rumors that his client was a police informant to ward off drug dealers, testifying that, “when she would walk into a place, like a drug — some type of drug place, people would scatter like roaches,” according to the report.

Masters found the attorney later represented the woman in a Brevard County misdemeanor case, again alleging she was incompetent to go to trial, and he remained her lawyer until February 2020.

Pointing to case law featuring similar sexual misconduct by attorneys, the referee recommended a one-year suspension, requiring Gillespie to provide proof of rehabilitation and cover nearly $4,000 in bar costs.

One of the cases the referee relied upon involved an attorney who was suspended for a year over allegations he’d had sex with two clients and sent money to their jail commissary accounts. Another attorney with a prior history of disciplinary action received a year’s suspension and two years of probation for allegedly trading legal services for sex.

The vulnerability of Gillespie’s victim worked against him in this instance, as did his pattern of misconduct and substantial experience since joining the bar in 1998. But Masters also considered some mitigating factors: that Gillespie has personal or emotional problems, a physical or mental disability or substance abuse disorder and no disciplinary history.

Gillespie is representing himself in the discipline case and signed a conditional guilty plea agreeing to the suspension.

His criminal defense attorney Dean Mosley did not immediately respond to a request for comment.

The Florida Supreme Court has the final say on attorney discipline and is yet to rule.

Judge Masters wins Jurist of the Year

MAR 26, 2021 | REPUBLISHED BY LIT: JUN 19, 2021

Chief Judge Ellen S. Masters was presented with the Jurist of the Year 2020-21 Award by the Polk Association of Women Lawyers at its third annual Women’s History Luncheon on March 12.

Masters was re-elected to serve a second term as the Chief Judge of the Tenth Judicial Circuit. Her second term will begin July 5

On July 1, 2019, Judge Ellen Sly Masters became Chief Judge of the Tenth Judicial Circuit, Florida, having been unanimously elected to the position by the judges serving in Hardee, Highlands, and Polk counties.

Judge Masters received her J.D. from Stetson University College of Law Cum Laude in 1989.

Melbourne defense attorney accused of using firm as prostitution front hit with more human trafficking charges

MAY 21, 2020 | REPUBLISHED BY LIT: JUN 19, 2021

A Melbourne criminal defense attorney accused of using his law firm as a prostitution front is facing more human trafficking charges, based on allegations that he had sex with an underage girl in exchange for legal services he provided to her pimp.

Attorney General Ashley Moody’s Office of Statewide Prosecution confirmed Wednesday that John Gillespie, 71, is facing additional counts of trafficking a juvenile for commercial sex and trafficking an adult for commercial sex.

The 15-year-old girl first made the allegations against Gillespie in an interview she did with an investigator in December 2014.

In a second interview April 23 with agents from the Metropolitan Bureau of Investigation, the now-adult victim said she met the attorney in 2013, about two months after an Orlando man named Montavius Postell began trafficking her, according to redacted MBI records obtained by the Orlando Sentinel.

Without her knowledge, Postell arranged for the girl to have sex with Gillespie, who was Postell’s attorney, multiple times in exchange for legal fees.

The victim told investigators she was chosen because “everybody’s dream girl is blond hair and blue eyes, so I was everybody’s dream girl.”

After telling her to “dress nice,” Postell drove the teenager to Gillespie’s office, where he gave her a condom and told her to have sex with his lawyer, according to the report.

The victim began crying when she told investigators Gillespie didn’t ask her age. She said she didn’t speak to him as they had sex “because it was nasty.”

After she left the attorney’s office, the victim said she overheard Gillespie complaining to Postell that she was inexperienced, adding that he wanted another “blond with blue eyes,” the documents said.

“You better find somebody else better or pay,” Gillespie told his client, according to the victim.

Postell was angry after the girl didn’t satisfy Gillespie, telling her she had to “do better” if she wanted to stay, the victim told investigators. Although she wanted to leave, the victim said she could not tell Postell that or he would beat her.

The victim said Postell took other women to meet Gillespie at the lawyer’s office and a courthouse for sex multiple times, but she was never forced to have intercourse with the attorney again, the report said.

Postell and an accomplice were accused of physically and sexually abusing, drugging and prostituting a 15-year-old girl in 2013. He pleaded guilty to trafficking a minor and lewd or lascivious battery. Orange County court records show he was represented by Gillespie in a 2012 criminal traffic case.

MBI agents also interviewed another woman April 29 who told them Gillespie supplied her with drugs and let her live in his home in exchange for her prostituting herself and cleaning his house.

The woman said Gillespie promised her he would get her custody of her children and described him as “a monster, someone who takes advantage of any women in a bad situation,” according to the records.

Gillespie pleaded not guilty to the previous charges filed against him, including racketeering and human trafficking for commercial sexual activity with a child under 18, court records show.

Investigators say the attorney agreed to pay an undercover agent posing as an underage girl $100 for sex and used his law firm to recruit women into prostitution.

Gillespie’s attorney did not immediately respond to a request for comment.

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Thank you for your trust, belief and support in our conviction to help Floridian residents and citizens nationwide take back their freedom. Your Donations and your Voice are so important.



Florida

Secret and Sealed Attorney Discipline Case in SDFL

Florida attorney Kenneth Edward Walton II Suspended from the Practice of Law with immediate effect. It only took nearly a year from the complaint.

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Unknown Case Title

(1:22-mc-20028)

District Court, S.D. Florida

JAN 4, 2022 | REPUBLISHED BY LIT: JAN 4, 2022

Bookmark for updates.

Jan 19, 2022

ORDER OF SUSPENSION

On December 20, 2021, the Supreme Court of Florida entered an Order of Suspension, suspending Kenneth Edward Walton, II from the practice of law.

See The Florida Bar v. Walton, No. SC21-243, 2021 WL 6013465 (Fla. Dec. 20, 2021) [ECF No. 1].

The suspension was predicated on an uncontested report of the referee, which was based upon an Unconditional Guilty Plea for Consent Judgment. (See [ECF No. 2]).

Rule 9(b) of the Rules Governing the Admission, Practice, Peer Review, and Discipline of Attorneys, Local Rules of the United States District Court for the Southern District of Florida, provides that “[a]n attorney . . . who shall be suspended . . . on consent . . . from the bar of any state . . . while an investigation into allegations of misconduct is pending shall . . . cease to be permitted to practice before this Court and be stricken from the roll of attorneys admitted to practice before this Court.” Id. (alterations added).

Under these circumstances involving suspension on consent, service of an order to show cause is unnecessary, and the attorney may be immediately suspended.

In accordance with Rule 9(b) and the inherent authority of this Court to oversee officers admitted to membership in its bar, see Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991) (“[A] federal court has the power to control admission to its bar and to discipline attorneys who appear before it.” (alteration added)),

IT IS ORDERED that Mr. Walton is suspended from practice in this Court, effective immediately.

Mr. Walton may not resume the practice of law before this Court until reinstated by court order. See Rule 12(a).

The Clerk of Court shall strike this attorney from the roll of attorneys eligible to practice in the United States District Court for the Southern District of Florida and shall also immediately revoke the attorney’s CM/ECF password.

IT IS FURTHER ORDERED that Mr. Walton shall advise the Clerk of Court of all pending cases before this Court in which he is counsel or co-counsel of record.

IT IS FURTHER ORDERED that the Clerk of Court attempt to serve by certified mail a copy of this Order of Suspension upon Mr. Walton at his court record and Florida Bar addresses.

DONE AND ORDERED in Miami, Florida, this 19th day of January, 2022.

CECILIA M. ALTONAGA
CHIEF UNITED STATES DISTRICT JUDGE

 

c:         All South Florida Eleventh Circuit Court of Appeals Judges

All Southern District of Florida District Judges, Bankruptcy Judges, and Magistrate Judges United States Attorney

Circuit Executive Federal Public Defender

Clerks of Court – District, Bankruptcy, and 11th Circuit Florida Bar and National Lawyer Regulatory Data Bank Library

Kenneth Edward Walton, II

IN THE SUPREME COURT OF FLORIDA

THE FLORIDA BAR,

Supreme Court Case No. SC-
Complainant,

The Florida Bar File Nos.

2019-70,668 (11P)
2020-70,037 (11P)

v.

KENNETH EDWARD WALTON II, 2020-70,203 (11P)

Respondent.
2020-70,204 (11P)

COMPLAINT

The Florida Bar, complainant, files this Complaint against Kenneth Edward Walton II, respondent, pursuant to the Rules Regulating The Florida Bar and alleges:

1. Respondent is and was at all times mentioned herein a member of The Florida Bar admitted on September 29, 1999, and is subject to the jurisdiction of the Supreme Court of Florida.

2. Respondent practiced law in Miami-Dade County, Florida, at all times material to this complaint.

3. The Eleventh Judicial Circuit Grievance Committee P found probable cause to file this complaint pursuant to Rule 3-7.4, of the Rules Regulating The Florida Bar, and this complaint has been approved by the presiding member of that committee.

COUNT I

THE FLORIDA BAR FILE NO. 2019-70, 668

4. Salenna Burgess originally retained respondent for a file review related to a bankruptcy matter. Respondent completed the file review promptly and well by all accounts.

5. In or around April 2018, Ms. Burgess decided to retain respondent to handle her bankruptcy matter, following a bad experience with her prior attorney and based on recommendations respondent made during the file review.

6. Ms. Burgess paid respondent $6,000.00 for the representation.

7. Although communication was good at the outset of the representation, respondent became more difficult to reach as time went by.

8. On June 7, 2018, respondent forwarded correspondence dealing with Ms. Burgess’ matter to the client.

9. Roughly three months later, Ms. Burgess emailed respondent on September 5, 2018, requesting an update on the status of her case.

10. When she did not hear from respondent for about ten days, Ms. Burgess followed up with him on September 13, 2018.

11. Respondent replied that same day and represented to Ms.Burgess that he would work on her case over the weekend. Notably, at that time, respondent apologized to Ms. Burgess for not being more prompt in his reply “or communicating better.” He stated in his email to her that his lack of communication was “unacceptable, inexcusable, and embarrassing.”

12. Afterward, respondent ceased communication with Ms. Burgess, even though Ms. Burgess emailed him on October 2, 2018; October 5, 2018; October 9, 2018; and October 22, 2018.

13. Months later, respondent finally replied to Ms. Burgess on December 21, 2018. Respondent wanted to discuss with his client what he characterized as “everything that has and hasn’t happened” in her case.

14. Following that email, Ms. Burgess and respondent spoke about her case. According to her bar grievance, Ms. Burgess said respondent apologized to her for what respondent described as his own unacceptable behavior.

15. Ms. Burgess communicated with respondent once more in January 2019. However, at the end of the month, when Ms. Burgess resumed requesting updates on her case, communication ceased until March 12, 2019.

16. In the March 12, 2019, email, respondent forwarded an email to Ms. Burgess regarding her bankruptcy case and stated he was on his way to court. He promised to download and email the docket to her that day.

17. When Ms. Burgess filed her grievance with the bar on May 7, 2019, she had still not heard from respondent regarding her case.

18. On January 15, 2020, respondent provided a statement to the bar where he admitted he “initially did a poor job of helping her understand that the work was completed and explaining the meaning of the all of the final documents we received back from the bankruptcy court.”

19. Additionally, respondent stated Ms. Burgess “successfully completed her 60 months in Chapter 13, however she could not enjoy it as soon as it happened because of my poor communication.”

20. Significantly, in that same January 15, 2020, communication to the bar, respondent stated he was medically incapacitated for the majority of his representation of Ms. Burgess. He stated to the bar, “[t]o this day, I am still under doctor’s care for one of the conditions that seriously affected how I represented Ms. Burgess and will be treating for the rest of my life it appears. Although, I am lightyears ahead of where I was most of the past two years, I am still improving as each week passes.”

21. By reason of the foregoing, respondent has violated the following Rules Regulating The Florida Bar: 4-1.3 (Diligence); (4-1.4 Communication); and 4-1.16(a) (When Lawyer Must Decline or Terminate Representation).

COUNT II

THE FLORIDA BAR FILE NO. 2020-70,037

22. Respondent was hired as the closing agent by the buyer for the preparation of documents related to a real estate transaction for 429 NW 43rd Street in Miami, Florida.

23. Sandor Urban was the realtor on behalf of the seller in this transaction.

24. Mr. Urban and his client were notified of the closing date, time and location. They went to respondent’s office at the agreed-upon time on or around October 18, 2019, at 4:00 p.m.

25. Respondent’s staff was unaware of the appointment.

Nonetheless, Mr. Urban and his client waited until 5:30 p.m., at which point office staff asked them to leave since the office was closing.

26. Respondent’s paralegal told them to wait in the lobby. Mr. Urban and his clients waited until 7:00 p.m., at which point the sellers decided to leave.

27. Respondent never made it to the agreed-upon appointment for the scheduled closing.

28. Shortly thereafter, Mr. Urban and the sellers were able to speak to respondent, who agreed to send the seller the documents to be signed and notarized. The seller printed and executed the documents.

29. As the closing agent, respondent was responsible for making sure all the funds were disbursed to finalize the transaction. Respondent was also responsible for sending Mr. Urban his commission as part of his duties as closing agent, as well as creating a closing statement, which turned out to be rife with errors.

30. Respondent completed the closing on October 18, 2018.

31. On October 22, 2018, respondent sent what appeared to be Mr.

Urban’s commission to him only to stop payment on the check minutes after Mr. Urban’s office received it.

32. Shortly after the closing, it was discovered that the closing statement had errors. Respondent overpaid the seller by approximately
$6,586.00, the approximate amount due Sandor Urban. Respondent produced the final corrected closing statement in May 2020, approximately 18 months later.

33. Between April 14, 2020, and August17, 2020, Mr. Urban sent no fewer than 14 requests for an update on the status of his payment for commission. Several of these emails also requested updates about the status of respondent’s corrections to the seller’s closing statement.

34. Respondent sporadically replied to Mr. Urban’s desperate requests eight times. Notably, respondent rarely gave updates other than to excuse himself by saying he was in the process of completing some task.

35. Respondent used the back and forth of the emails between himself and Mr. Urban to delay and string Mr. Urban along while he waited for payment for work, which had been completed, he was entitled to, and that respondent was obligated to provide.

36. Respondent never provided the payment to Mr. Urban.

37. Instead, Mr. Urban, through his office, requested his commission directly from the seller when Mr. Urban failed to keep his promises.

38. Ultimately, Mr. Urban received his commission from the seller after he sent his own demand letter.

39. Additionally, respondent failed to maintain technical trust accounting records. The bar served a subpoena upon respondent requesting the following documents covering the period of time between January 1, 2018, to February 29, 2020: copies of bank statements for two Bank of America bank accounts; copies of trust accounting records required by Rule 5-1.2 of the Rules Regulating The Florida Bar; copies of HUD-1 statements and balance sheets for all real estate transactions; and a complete copy of respondent’s closing file for the purchase/sale of the property that is the subject of this complaint.

40. Respondent’s response to the bar’s subpoena was deficient. He did not provide trust account bank statements and cancelled checks for January 1, 2018 through February 29, 2020; any client ledger cards, any cash receipts and disbursement journals; any trust account bank reconciliations; and any reconciliations of the trust account bank balances to the individual client ledger card balances.

41. Respondent is required on a monthly basis to maintain the records outlined in paragraph 36 of this complaint, and he failed to do so.

42. By reason of the foregoing, respondent has violated the following Rules Regulating The Florida Bar: 4-4.4(a) (In representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third or knowingly use methods of obtaining evidence that violate the legal rights of such a person); and 5-1.2 (Failure to maintain technical trust accounting records).

COUNT III

THE FLORIDA BAR FILE NO. 2020-70,203

43. Dmitri Mikhailov and Maritza Lagos retained respondent in or about August 2018 to remove a lien over a Sunny Isles Beach, Florida, property for which they were being charged a daily $500.00 fine.

44. Respondent charged a $5,000.00 fee but failed to perform the agreed-upon services.

45. Ultimately, Mr. Mikhailov ended up owing the City of Sunny Isles Beach $700,000.00 in daily fines because of respondent’s failure to pursue the matter at all, let alone in a timely matter.

46. Between October 15, 2018, and July 1, 2019, Mr. Mikhailov initiated correspondence requesting status updates with respondent no fewer than 15 times only to encounter silence on respondent’s end.

47. The 15th email from Mr. Mikhailov on July 1, 2019, stated that he would initiate a complaint with The Florida Bar due to respondent’s failure to communicate with him throughout the case.

48. The next day, on July 2, 2019, respondent replied to Mr. Mikhailov. In that email, respondent apologized to Mr. Mikhailov.

49. Incredibly, after apologizing, respondent inappropriately thanks his client “for your email versus responding in a different manner, such as waiting in the shadows near my house or office with a baseball bat and then using it.”

50. After the July 2, 2019, correspondence, respondent was asked to draft and mail a proposal to Mr. Mikhailov indicating how he plans to resolve the matter he was retained for. Additionally, Mr. Mikhailov requested that respondent forward all communications between Sunny Isles Beach and respondent.

51. Respondent was given a deadline of July 8, 2019, to provide this information. He never responded to Mr. Mikhailov’s request.

52. Shortly thereafter, Mr. Mikhailov requested updates on his case no fewer than seven more times between July 11, 2019, and September 23, 2019, with no response from respondent, save for one letter respondent sent to Mr. Mikhailov on or around August 9, 2019, related to a conversation between respondent and another party in the matter.

53. After August 2019, respondent did not speak to Mr. Mikhailov again.

54. In a January 15, 2020, letter to the bar, respondent stated that he “[agreed] with Mr. Mikhailov that he should receive a refund of the money tendered to me.”

55. Respondent in that letter to the bar also stated he suffered from “multiple medical conditions that rendered me unable to fully complete services and to stay in close communication with Mr. Mikhailov.”

56. However, respondent neither communicated any limitation to rendering services to his client nor withdrew from the representation.

57. By reason of the foregoing, respondent has violated the following Rules Regulating The Florida Bar: 4-1.3 (Diligence); 4-1.4 (Communication); 4-1.5 (Fees and Costs for Legal Services); and 4-1.16(a) (When Lawyer Must Decline or Terminate Representation).

COUNT IV

THE FLORIDA BAR FILE NO. 2020-70,204

58. Roy Collins retained respondent in or about June 2019 to represent him in a foreclosure defense case and to provide him with potential bankruptcy assistance.

59. Mr. Collins paid respondent a $5,000.00 retainer fee on June 18, 2019. Mr. Collins did not hear from respondent again until late August 2019.

60. Between August 10, 2019, and August 17, 2019, Mr. Collins attempted communication with respondent by calling his office and mobile phone, sending emails and text messages, and leaving several messages every day during that time period.

61. On August 16, 2019, Mr. Collins emailed respondent and terminated their relationship. He requested a refund in that email.

62. On August 21, 2019, respondent sent Mr. Collins a text message apologizing to him for being “out of pocket,” explaining that he had been “recovering from an injury.” He asked if he could call Mr. Collins around 8:00 p.m. that evening.

63. However, respondent did not call. Instead, respondent sent a text message to Mr. Collins at 10:39 p.m. with a promise to call the next day.

64. That was the last time Mr. Collins ever heard from respondent.

65. In a letter to the bar, dated February 27, 2020, respondent admits he did not communicate with Mr. Collins as he should have.

66. In that letter, respondent also admitted he was not healthy enough to represent Mr. Collins, stating that he “probably should not have accepted Mr. Collis [sic] case at that time [sic] I see that I was overly optimistic that I would soon make a full recovery.”

67. By reason of the foregoing, respondent has violated the following Rules Regulating The Florida Bar: 4-1.4 (Communication); 4-1.5 (Fees and Costs for Legal Services); and 4-1.16(a) (When Lawyer Must Decline or Terminate Representation).

WHEREFORE, The Florida Bar prays respondent will be appropriately disciplined in accordance with the provisions of the Rules Regulating The Florida Bar as amended.

Rita Elizabeth Florez,

Bar Counsel The Florida Bar
Miami Branch Office 444 Brickell Avenue
Rivergate Plaza, Suite M-100 Miami, Florida 33131-2404
(305) 377-4445
Florida Bar No. 1011307 rflorez@floridabar.org

Patricia Ann Toro Savitz, Staff Counsel The Florida Bar
651 E. Jefferson Street Tallahassee, Florida 32399-2300
(850) 561-5839
Florida Bar No. 559547 psavitz@floridabar.org

CERTIFICATE OF SERVICE

I certify that this document has been efiled with The Honorable John A. Tomasino, Clerk of the Supreme Court of Florida, with a copy provided via email to Kenneth Edward Walton II, at kenneth@waltonlawfirm.com; and that a copy has been furnished by United States Mail via certified mail No. 7017 1450 0000 7821 0285, return receipt requested to Kenneth Edward Walton II, whose record bar address is Bank of America Financial Center, 701 Brickell Avenue, Suite 1550, Miami, FL 33131-2824 and via email to Rita Elizabeth Florez, Bar Counsel, rflorez@floridabar.org, on this 16th day of February, 2021.

Patricia Ann Toro Savitz Staff Counsel

NOTICE OF TRIAL COUNSEL AND DESIGNATION OF PRIMARY EMAIL ADDRESS

PLEASE TAKE NOTICE that the trial counsel in this matter is Rita Elizabeth Florez, Bar Counsel, whose address, telephone number and primary email address are The Florida Bar, Miami Branch Office, 444 Brickell Avenue Rivergate Plaza, Suite M-100Miami, Florida 33131-2404,
(305) 377-4445 and rflorez@floridabar.org. Respondent need not address pleadings, correspondence, etc. in this matter to anyone other than trial counsel and to Staff Counsel, The Florida Bar, 651 E Jefferson Street, Tallahassee, Florida 32399-2300, psavitz@floridabar.org.

Jan 4, 2022

SYSTEM ENTRY – Docket Entry 1 restricted/sealed until further notice. (tah)

SYSTEM ENTRY – Docket Entry 2 restricted/sealed until further notice. (tah)

Order (none of these entries or the order are available on PACER).

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• Continue to provide this website, content, resources, community and help center for free to the many homeowners, residents, Texans and as we’ve expanded, people nationwide who need access without a paywall or subscription.

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Thank you for your trust, belief and support in our conviction to help Floridian residents and citizens nationwide take back their freedom. Your Donations and your Voice are so important.



U.S. District Court
Southern District of Florida (Miami)
CIVIL DOCKET FOR CASE #: 1:22-mc-20028

 

Assigned to: Attorney Discipline
Cause: Attorney Discipline
Date Filed: 01/04/2022
Jury Demand: None
Nature of Suit: 890 Other Statutory Actions
Jurisdiction: Federal Question
In Re
2022-AD-01

U.S. District Court
Southern District of Florida (Miami)
CIVIL DOCKET FOR CASE #: 1:22-mc-20028

Create an Alert for This Case on RECAP

Assigned to: AttorneyDiscipline
Cause: Attorney Discipline
Date Filed: 01/04/2022
Jury Demand: None
Nature of Suit: 890 Other Statutory Actions
Jurisdiction: Federal Question
In Re
2022-AD-01

 

Date Filed # Docket Text
01/19/2022 4 Administrative Order 2022-10 In re Order of Suspension of Attorney Kenneth Edward Walton, II, Florida Bar #183997. Signed by Chief United States District Judge Cecilia M. Altonaga on 1/19/2022. See attached document for full details. (cw) (Entered: 01/19/2022)
Continue Reading

Federal Judges

You’re Too Early to Dismiss the Judicial Complaint Sayeth the All-Gal Panel at Eleventh Circuit

The magistrate judge sua sponte dismissed Makere’s complaint because, as an administrative law judge, Judge Early is entitled to absolute judicial immunity.

Published

on

Judicial Immunity Delayed Due to Hasty Dismissal

DEC 30, 2021 | REPUBLISHED BY LIT: DEC 31, 2021

Before ROSENBAUM, BRANCH, and GRANT, Circuit Judges. PER CURIAM:

Elias Makere appeals from the district court’s dismissal of his pro se amended complaint alleging violations of his civil rights un- der 42 U.S.C. § 1983, on the ground that the defendant was entitled to absolute judicial immunity.

Makere argues that the district court erred when it sua sponte dismissed his complaint against Judge E. Gary Early—who had ruled previously against Makere in an employment discrimination case—because Makere paid the filing fee for his complaint, Judge Early had not been served process, and the district court lacked the authority to assert absolute judicial immunity on behalf of Judge Early.

After de novo review,1 we agree with Makere that the district court erred by sua sponte dismissing his complaint at this stage.2

1 The record is unclear as to what rule or statute the district court was relying upon when it sua sponte dismissed Makere’s complaint—it appears that the district court may have been proceeding under 28 U.S.C. § 1915(e)(2) or possibly Federal Rule of Civil Procedure 12(b)(6). S

ua sponte dismissals under § 1915(e)(2) or Rule 12(b)(6) are reviewed de novo.

Hughes v. Lott, 350 F.3d 1157, 1159–60 (11th Cir. 2003) (explaining that we review a district court’s sua sponte dismissal under § 1915(e)(2) de novo);

Timson v. Sampson, 518 F.3d 870, 872 (11th Cir. 2008) (explaining that we review de novo a Rule 12(b)(6) dismissal.

2 Because we vacate and remand this case due to the district court’s procedural error, we deny as moot Makere’s accompanying motion to take judicial notice of twelve public records relating to the merits of his case.

In February 2021, Makere filed a complaint in the U.S. District Court for the Northern District of Florida against Judge Early, along with an application to proceed in forma pauperis (“IFP”).

Consequently, the case was referred to a magistrate judge for further processing.3

The magistrate judge then issued an order explaining that Makere’s complaint and IFP motion could not be considered because they failed to comply with the local rules — both documents lacked the required handwritten signature and the IFP motion was not submitted on the correct form.

The magistrate judge directed the clerk’s office to send Makere the correct IFP form and ordered that Makere file an amended complaint and amended IFP motion that complied with the referenced local rules by a certain date.

The magistrate judge cautioned that “[f]ailure to comply with this

[c]ourt [o]rder may result in a recommendation of dismissal of this action.”

3 Although the record does not reflect the basis for referring the case to the magistrate judge, we presume that the district court was operating under its Local Rule 5.3, which provides that where a party files a civil action and moves to proceed IFP, “the Clerk must open the case and refer any motion for leave to proceed in forma pauperis to an assigned judge.”

N.D. Fla. Local Rule 5.3.

Furthermore, under the Local Rules, a party seeking to proceed IFP is prohibited from serving process on the defendants until the district court “enters an order authorizing” service. Id. Rule 4.1(A).

Thus, Judge Early was not served at this time.

When Makere failed to file the amended pleadings by the specified date, the magistrate judge issued a report and recommendation (“R&R”), recommending that the district court dismiss the case for Makere’s failure to comply with its prior order.

Approximately twelve days later, Makere filed an amended complaint, objected to the magistrate judge’s R&R, and, on the following day, paid the filing fee in full.

On April 9, 2021, the magis- trate judge, recognizing that Makere had filed an amended com- plaint and paid the filing fee, treated Makere’s objections to the R&R as a motion for reconsideration, which it granted, and vacated the R&R.

Later that same day, however, the magistrate judge issued a second R&R recommending that the district court sua sponte dis- miss Makere’s complaint because, as an administrative law judge, Judge Early is entitled to absolute judicial immunity.

While the magistrate judge did not reference 28 U.S.C. § 1915, presumably — as there is nothing in the record that indicates that the defendant was ever served or filed his own motion to dismiss—the magistrate judge was screening the case pursuant to § 1915, which governs in forma pauperis proceedings.4

4 Section 1915 provides that in IFP proceedings, the court:

shall dismiss the case . . . if the court determines that . . . (B) the action or appeal—(i) is frivolous or malicious; (ii) fails to state a claim on which relief may be granted; or (iii) seeks monetary relief against a defendant who is immune from such relief.

28 U.S.C. § 1915 (e)(2).

Although the magistrate judge did not specify the § 1915 provision under which he proceeded, his repeated references to judicial immunity suggest § 1915(e)(2)(B)(iii).

Makere objected to the second R&R, arguing that he filed an amended complaint and paid the filing fee, and that the magistrate judge failed to cite a rule or statute that authorized the sua sponte dismissal of his civil action under these circumstances.

The district court adopted the second R&R it in a one-page order over Makere’s objections and dismissed the case.

The district court erred when it dismissed this case. After paying the filing fee, Makere was not subject to 28 U.S.C. § 1915,5 and the district court could not sua sponte dismiss his case under the screening provisions of § 1915.

See 28 U.S.C. § 1915(e)(2)(B)(ii)- (iii).

Furthermore, to the extent the district court dismissed the complaint sua sponte under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim—because again it is not clear what rule or statute the district court was proceeding under—we have prohibited such dismissals where, as here, the defendant has not filed an answer (indeed, here, the defendant was never served), “and the district court failed to provide the plaintiff with notice of its intent to dismiss or an opportunity to respond.”

See American United Life Ins. Co. v. Martinez, 480 F.3d 1043, 1057 (11th Cir. 2007); Jefferson Fourteenth Assocs. v. Wometco de Puerto Rico, Inc., 695 F.2d 524, 527 (11th Cir. 1983).

In short, the district court erred in sua sponte dismissing the case at this preliminary stage of the proceedings.6

Accordingly, we vacate and remand the case.

VACATED AND REMANDED.

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Appellate Judges

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.

Published

on

David F. Hewitt, et al. v. Commissioner of IRS

LIF COMMENT

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

KPMG (UK) Partner Hewitt (no, not this Hewitt, but tweet is highly relevant)

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).

LAGOA, Circuit Judge (Jones Day Partner and attorney husband Paul Huck Jr., is known as the “GodFather” of the Federalist Society in MIAMI):

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.

1 Because we conclude that § 1.170A-14(g)(6)(ii) is procedurally invalid under the APA, we do not reach the Hewitts’ Chevron-related arguments.

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

2 We refer to the Hewitts individually by their first names where relevant.

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:

Extinguishment.

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:

Proceeds.

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;

and

(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.

3 The Tax Court found the Hewitts were not liable for the penalties assessed against them in the NOD, and the Commissioner does not challenge this rul- ing on appeal.

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).

III. ANALYSIS

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 “

[o]ne of the basic procedural requirements of administrative rulemaking is that an agency must give adequate reasons for its decisions,” Encino Motorcars, LLC v. Navarro, 579 U.S. 211, 221 (2016).

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

4 As to the comments from the Brandywine Conservancy, the Nature Conservancy, and the Maine Coast Heritage Trust, the Tax Court in Oakbrook presumed that Treasury responded to those organizations’ comments by changing the language of the regulation from the donee of the easement being vested 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.” 154 T.C. at 188 (first quoting 48 Fed. Reg. at 22,946, then quoting § 1.170A-14(g)(6)(ii)).

But Treasury did not specifically explain in the final regulation that its change in the language was in response to those organizations’ comments.

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;

and

(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”;

and

(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).

5 Specifically, the preamble to the regulation at issue in Dominion Resources provided that “commentators suggested that the regulations provide that property is taken out of service only if the property is taken out of service for depreciation purposes” and that “[t]he final regulations do not adopt the suggestion concerning when property should be considered taken out of service.”

See Dominion Res., Inc. v. United States, 97 Fed. Cl. 239, 256 (2011) (quoting 59 Fed. Reg. 67,187, 67,192–93 (Dec. 29, 1994)), rev’d, 681 F.3d 1313 (Fed. Cir. 2012).

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 “

[w]e are aware that insurance companies generally do not determine insurance rates for malpractice insurance based upon the financial status of the patients,” and that “premiums are ‘incurred primarily for the benefit of the total overall patient population and for the protection of facility assets.’” Id. at 1566.

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”;

and

(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,

and

(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

6 The Commissioner also points to Treasury’s statements, in discussing dona- tions of mortgaged property in the final regulations, that § 170(h)(5) “provides that the conservation purposes of the donation must be protected in perpetuity” and that “[i]n response to comments received, . . . the mortgagee must subordinate its rights under the mortgage to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.” 51 Fed. Reg. at 1498.

The Commissioner argues that these statements show that Treasury viewed “the protected-in-perpetuity requirement as requiring express protection of the full value of the donee’s interest in order to adequately protect the easement’s conservation purposes,” which is “the approach taken

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).

in the proceeds regulation.”

But Treasury’s discussion of donations of mortgaged property in the final regulations does not reference the proceeds regulation nor give any indication that Treasury considered the post-donation improvements issue raised by NYLC.

We thus find this argument, which speculates as to the reason of Treasury’s actions, without merit.

See State Farm, 463 U.S. at 43.

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.

IV. CONCLUSION

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

GOEKE, Judge:

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.

[*6]

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.

OPINION

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).

[*24]

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.

[*26]

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.

[*37]

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).

[*38]

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.

FOOTNOTES

1. Unless otherwise indicated, section references are to the Internal Revenue Code (Code) in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. Some dollar and acreage amounts are rounded.

2. Petitioners concede to $31,771 in unreported long-term capital gain as determined in the notice of deficiency. Respondent has conceded any penalty related to this amount.

3. Respondent alternatively argues that the deed fails sec. 170(h)(5) because it allows a merger of the estates and fails sec. 170(h)(2) because it does not designate the location for five homesites reserved in the deed. Sec. 170(h)(2)(C) requires the deed to place “a restriction (granted in perpetuity) on the use” of the property. Mr. Hewitt intended the homesites for his children so that they may be able to live on the property one day. Petitioners contend that the delay in designating the homesite locations would better protect the easement’s conservation purposes. We have held that a reserved right to construct a residential subdivision without designating the location at the outset violates sec. 170(h)(2). Pine Mountain Pres., LLLP v. Commissioner, 151 T.C. 247 (2018), appeal filed (11th Cir. May 7, 2019); Carter v. Commissioner, T.C. Memo. 2020-21, at *19. Petitioners seek to distinguish Pine Mountain. However, for them to qualify for the deduction, the deed must satisfy both sec. 170(h)(2) and (5). Accordingly, we do not address the sec. 170(h)(2) issue.

4. Petitioners’ opening brief lists no proposed findings of fact in the form of numbered statements as required by Rule 151(e)(3) and includes some recital of testimony. Respondent argues that because of this noncompliance with our Rules we should adopt his proposed findings of fact as fully and fairly presenting all relevant facts. We have considered petitioners’ noncompliance but do not fully adopt respondent’s proposed findings. See Beane v. Commissioner, T.C. Memo. 2009-152, slip op. at 7 (adopting the Commissioner’s proposed findings because the taxpayer’s briefs did not comply with Rule 151(e) and “did not assist the Court in making sense of a voluminous and confusing record”).

5. An individual taxpayer’s charitable contribution deductions are limited to 50% of his adjusted gross income, and the taxpayer may carry over the excess contributions for five years. Sec. 170(b)(1)(A), (d).

6. Alternatively, petitioners challenge the regulation’s procedural and substantive validity. We upheld the procedural and substantive validity of the proceeds regulation in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __, __ (slip op. at 25, 28-31) (May 12, 2020).

7. The Court of Appeals for the Fifth Circuit disallowed the deduction under the ordinary standard of construction of the proceeds regulation. PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 200 (5th Cir. 2018).

8. A conservation easement may be condemned through eminent domain. Ala. Code sec. 35-18-2(e) (1997). The statute does not expressly state that the easement holder is entitled to compensation.

9. Both valuation experts used incorrect acreage for the contiguous property, and they used different acreage. After the parties submitted the expert reports, the parties stipulated the size of the contiguous property. See Rule 91(a). We find the errors insignificant to our determination of whether petitioners are liable for the gross valuation misstatement penalty.

10. Respondent argues that petitioners are not entitled to deduct the easement donation because they did not satisfy the reporting requirements of sec. 1.170A-13(c), Income Tax Regs. We have not disallowed the easement on this basis but address the reporting requirements in our consideration of petitioners’ liability for sec. 6662(a) accuracy-related penalties.

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