In Battelle Glover Investments LLC v. Commissioner, Tax Ct. Dkt. No. 6904-19 (Sept. 12, 2022), the Tax Court vacated its decision to disallow a $151 million deduction claimed by Battelle Glover Investments LLC (Battelle) for its charitable conveyance of an easement.
In 2015, Battelle granted a conservation easement over 97.8 acres of property in DeKalb County, Ala., to Southeast Regional Land Conservancy Inc., claiming a $151 million deduction for the contribution. The Internal Revenue Service audited Battelle’s partnership return (Form 1065) and denied the charitable deduction.
The IRS explained that the deed didn’t comply with the requirements of Internal Revenue Code Sec. 170 because it provided that, in the event of a judicial termination, the donee would receive only the fair market value (FMV) of the easement at the time of the donation. Such a fixed amount, the court stated, wasn’t consistent with Treasury Reg. Sec. 1.170A-14(g)(6)(ii), which requires that the donation give rise to a property right at least equal to the proportionate value of the perpetual conservation restriction. As a result, the conservation purpose of the contribution (the easement) wasn’t “protected in perpetuity” as required by the IRC. Battelle argued that the regulation was substantively and procedurally invalid, but the court rejected that argument and issued an order in favor of the government.
Battelle also moved for reconsideration arguing that the deed could be reformed under Alabama law, a corrected and compliant deed had been executed and recorded and the risk of the judicial termination was so remote as to be negligible. However, the court denied the motion.
The basis for the disallowance, however, was undercut when several months later, the U.S. Court of Appeals for the 11th Circuit issued its decision in Hewitt v. Comm’r, 21 F.4th 1336 (11th Cir. 2021), declaring the Treasury regulation procedurally invalid under the Administrative Procedure Act (APA). In Hewitt it was revealed that the Treasury Department failed to respond to significant comments filed while promulgating the regulation, constituting a violation of the APA’s “notice and comment” rule-making process. Because the Battelle Glover case would be appealable to the 11th Circuit, the Tax Court was bound to correct its initial ruling and vacated its order.
