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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 19-11795
________________________
Agency No. 008956-13
PINE MOUTAIN PRESERVE, LLLP,
f.k.a. Chelsea Preserve, LLLP,
Eddleman Properties, LLC,
Tax Matters Partner,
Petitioner - Appellant - Cross Appellee,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent - Appellee - Cross Appellant.
________________________
Petitions for Review of a Decision of the
U.S. Tax Court
________________________
(October 22, 2020)
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Before NEWSOM and BRANCH, Circuit Judges, and RAY,* District Judge.
NEWSOM, Circuit Judge:
This case requires us to assess the federal tax treatment of “conservation
easements”—so called because they are created when a landowner agrees to forgo
its absolute right to use its property as it sees fit and subjects itself, contractually,
to the oversight of a land-conservation organization. Although intimidating on its
face—situated as it is at the intersection of obscure common-law property concepts
and the often byzantine Internal Revenue Code—the case actually turns on a fairly
straightforward application of basic statutory-interpretation principles. Our focus
is I.R.C. § 170, which allows a landowner to take a deduction when it grants a
conservation easement to a qualified land trust. As relevant here, § 170 entails two
conditions. First, the easement must impose “a restriction (granted in perpetuity)
on the use which may be made of the real property.” I.R.C. § 170(h)(2)(C). And
second, the grant must ensure that the easement’s “conservation purposes” are
“protected in perpetuity.” Id. § 170(h)(5)(A).
In 2005, 2006, and 2007, Pine Mountain Preserve LLLP granted the North
American Land Trust conservation easements over large parcels of land near
Birmingham, Alabama. Pine Mountain claimed tax deductions for the easements
*
Honorable William M. Ray II, United States District Judge for the Northern District of Georgia,
sitting by designation.
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under § 170, but the IRS denied them. Pine Mountain challenged the IRS’s denials
in the Tax Court, which made three determinations that together have become the
subjects of this appeal. First, the court held that the 2005 and 2006 easements were
not “granted in perpetuity” within the meaning of § 170(h)(2)(C) because, although
Pine Mountain had agreed to extensive restrictions on its use of the land, it had
reserved to itself limited development rights within the conservation areas.
Second, the court concluded that the 2007 easement complied with
§ 170(h)(5)(A)’s requirement that the easement’s conservation purposes be
“protected in perpetuity,” notwithstanding its inclusion of a clause permitting the
contracting parties to bilaterally amend the grant. Finally, the court valued the
2007 easement at $4,779,500—which, it turns out, is almost exactly midway
between the parties’ wildly divergent appraisals.
We will affirm in part, reverse in part, and remand for further proceedings.
We hold (1) that the 2005 and 2006 easements satisfy § 170(h)(2)(C)’s granted-in-
perpetuity requirement, (2) that the existence of an amendment clause in an
easement does not violate § 170(h)(5)(A)’s protected-in-perpetuity requirement,
and (3) that the Tax Court applied the wrong method for valuing the 2007
easement.
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I
A
Before diving into the facts and procedural history of this particular case, we
set out in some detail the governing statutory framework. Section 170 of the
Internal Revenue Code allows tax deductions for charitable contributions and gifts
of interests in real property. As a general rule, the Code forbids deductions for
conveyances of partial—i.e., less than fee-simple—interests. In 1980, though,
Congress amended the Code to permit landowners a deduction for a “qualified
conservation contribution” of less than an entire interest in a parcel. See Tax
Treatment Extension Act, Pub. L. No. 96-541 § 6(b), 94 Stat. 3204, 3206 (1980),
codified at I.R.C § 170(f)(3)(B)(iii). To qualify as a “qualified conservation
contribution,” a grant must be “(A) of a qualified real property interest,” “(B) to a
qualified organization,” and “(C) exclusively for conservation purposes.” I.R.C.
§ 170(h)(1).
The parties here agree that the grants at issue were made to a “qualified
organization,” so our analysis will focus on the other two requirements—that the
grants be “qualified real property interest[s]” and “exclusively for conservation
purposes.” Section 170(h)(2) defines the former, and § 170(h)(5) defines the latter.
According to § 170(h)(2)(C), a “qualified real property interest” includes, as
relevant here, “a restriction (granted in perpetuity) on the use which may be made
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of the real property.” We’ll call this the “granted-in-perpetuity” requirement.
According to § 170(h)(5)(A), “[a] contribution shall not be treated as exclusively
for conservation purposes” within the meaning of § 170(h)(1) “unless the
conservation purpose is protected in perpetuity.” We’ll call this the “protected-in-
perpetuity” requirement.
To sum up, then: The Code permits taxpayers to claim deductions for
charitable contributions, including contributions of land. If a landowner donates
less than its entire interest in a piece of property, the Code allows a deduction, as
relevant here, where the landowner makes a “qualified conservation contribution.”
To qualify—again, as relevant for our purposes—a grant must be a “qualified real
property interest” and “exclusively for conservation purposes.” To constitute a
“qualified real property interest,” the grant must satisfy § 170(h)(2)(C)’s granted-
in-perpetuity requirement, and to be “exclusively for conservation purposes,” the
grant must satisfy § 170(h)(5)(A)’s protected-in-perpetuity requirement.
Deep breath.
B
Next, the facts. Pine Mountain owns 6,224 contiguous acres of unimproved
land near Birmingham, Alabama. In each of 2005, 2006, and 2007, Pine Mountain
granted the North American Land Trust (NALT)—which all agree is a “qualified
organization” within the meaning of I.R.C. § 170(h)(3)—conservation easements
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over large tracts of its land. Under the easements, Pine Mountain gives up its right
to develop its land as it sees fit and cedes to NALT private contractual rights to
police its use of the property; in return for its forbearance, Pine Mountain hoped
for substantial tax deductions.
Each grant gives NALT a “perpetual easement in gross” over a specified
conservation area “for the purpose of preserving and protecting” defined
“conservation purposes.” In accordance with the Internal Revenue Code, those
purposes—memorialized in the easements themselves—include the preservation of
the areas as “relatively natural habitat[s] of fish, wildlife, or plants or similar
ecosystem” and “open space[s]” which provide “scenic enjoyment to the general
public” and “yield a significant public benefit.” Cf. I.R.C. § 170(h)(4)(A). As a
means of protecting these purposes, the easements empower NALT to enforce the
restrictive covenants contained therein. Each easement contains a declaration of
covenants and restrictions whereby Pine Mountain promises—for the most part,
anyway (more on that later)—not to develop the conservation areas for commercial
or residential use.
The 2005 easement restricts 559 acres, the 2006 easement 499 acres, and the
2007 easement 224 acres; together, the three restrict 1,282 of Pine Mountain’s
6,224 acres of property—more than 20%. Each of the three easements broadly
restricts Pine Mountain’s use of the conservation area—including, among others,
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prohibitions on building structures, roads and driveways, collecting ground or
surface water, removing trees, posting signs, mining, dumping, modifying
topography and water courses, introducing non-native plant species, and
subdividing the land. Boiled down, each easement aims to prohibit development
that could interfere with the Code-authorized conservation purposes.
In each of the three easements, Pine Mountain retains a targeted set of
“reserved rights.” The 2005 easement, for instance, reserves to Pine Mountain the
right to build a single-family structure on each of ten one-acre lots designated as
“Building Area[s]” and marked on an attached plan, as well as a barn within 1000
feet of each Building Area. Although the presumptive Building Areas are clearly
defined, the easement authorizes the parties to modify the locations so long as (1)
the Building Areas’ total acreage remains unchanged and (2) NALT doesn’t
conclude that a modification would “result in any material adverse effect on any of
the Conservation Purposes.” Pine Mountain further reserves rights to build one
additional barn on an area not to exceed ten acres, two scenic overlooks with
attendant structures, a road and driveways, five ponds, and an unspecified number
of hunting blinds—all subject to NALT’s approval—as well as a few limited
exemptions from other restrictions.
The 2006 easement similarly reserves to Pine Mountain the right to build a
single-family residence on each of six Building Areas. Unlike the 2005 easement,
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the 2006 easement doesn’t delineate the Building Areas’ precise locations; instead,
the easement gives NALT the right to approve in advance where Pine Mountain
places the Building Areas and to determine whether the chosen locations would
adversely affect the easement’s conservation purposes. Like the 2005 easement,
the 2006 easement also reserves to Pine Mountain the right to build other structures
on the Building Areas, subject to NALT’s advance approval.
The 2007 easement doesn’t allow for single-family residences, but it does
reserve to Pine Mountain the right to build a water tower on a site subject to
NALT’s approval.
Each grant also contains a provision allowing the parties to bilaterally amend
the easement’s terms. In particular, the clause specifies that both Pine Mountain
and NALT “mutually have the right, in their sole discretion, to agree to
amendments to th[e] Conservation Easement”—provided, that is, that the changes
are “not inconsistent” with the easement’s conservation purposes. The amendment
provision also expressly forbids NALT to “agree to any amendments . . . that
would result in th[e] Conservation Easement failing to qualify . . . as a qualified
conservation contribution under Section 170(h).”
C
In 2005, 2006, and 2007, Pine Mountain claimed tax deductions under I.R.C.
§ 170(h) for the conservation easements in the amounts of $16,550,000,
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$12,726,000, and $4,100,000, respectively. After an audit, the IRS denied the
deductions in their entirety. Pine Mountain filed a petition in the Tax Court
contesting the IRS’s denials.
Following a trial, the Tax Court issued two separate opinions. In the first,
the court held (1) that the reserved rights to build residential units and other
structures in the 2005 and 2006 grants disqualified the conservation easements
from being “granted in perpetuity” within the meaning of § 170(h)(2)(C), but (2)
that the 2007 grant’s reservation of Pine Mountain’s right to build a water tower
did not violate the granted-in-perpetuity requirement. The Tax Court’s first
opinion separately determined that the amendment clause contained in all three
easements—which permitted the parties “in their sole discretion” to modify the
grant’s terms—did not cause the 2007 easement to violate § 170(h)(5)(A)’s
protected-in-perpetuity requirement.
Having concluded that a deduction for the 2007 easement was proper, the
Tax Court proceeded in its second opinion to value that easement using what can
only be described as a “split-the-baby” approach. Pine Mountain estimated the
easement’s value of $9,110,000, while the Commissioner estimated its value at
$449,000. After considering both sides’ experts—but without applying the
valuation methodology specified in the governing regulations or explaining its own
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methodology or math—the court settled on a number right at the numerical mean,
$4,779,500.
Pine Mountain now appeals the Tax Court’s decision that the 2005 and 2006
easements violate § 170(h)(2)(C)’s granted-in-perpetuity requirement. The
Commissioner, in turn, cross-appeals (1) the Tax Court’s decision that the 2007
easement’s amendment clause complies with § 170(h)(5)(A)’s protected-in-
perpetuity requirement and (2) the court’s valuation of the 2007 easement. 1
II
A
We’ll start with Pine Mountain’s appeal. The Tax Court held that the 2005
and 2006 easements violated § 170(h)(2)(C). It did so because it concluded that
each easement’s reservation to Pine Mountain of rights to build a limited number
of residential homes and accompanying structures meant that it no longer qualified
as “a restriction (granted in perpetuity) on the uses which may be made of the real
property.” Relying heavily on its own precedent, the Tax Court held that because
the homesite-development areas were not subject to the conservation easement’s
1
We review the Tax Court’s legal conclusions de novo and its findings of fact for clear error.
See Ocmulgee Fields, Inc. v. C.I.R., 613 F.3d 1360, 1364 (11th Cir. 2010). In this case, there
aren’t any material facts in dispute—the parties have stipulated that Pine Mountain’s
conservation easements satisfied conservation purposes. What are in dispute, and up for our
review on appeal, are the Tax Court’s construction of I.R.C. § 170(h)’s granted-in-perpetuity and
protected-in-perpetuity requirements and that court’s choice of valuation method for the 2007
easement. These issues present questions of law that we review de novo.
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restrictions “in any meaningful sense,” the entire easement failed § 170(h)(2)(C)’s
granted-in-perpetuity requirement. See Pine Mountain Pres., LLLP v. Comm'r of
Internal Revenue, 151 T.C. 247, 277 (2018). According to the Tax Court—using a
Swiss-cheese metaphor to which we shall return—the building sites represented
“holes” in the conservation area, such that the easement’s restrictions didn’t attach
to a “defined parcel of real property.” Id. at 278.
We disagree with the Tax Court’s determination. We hold that the plain
language of § 170(b)(2)(C), the statutory structure more generally, and relevant
precedent all demonstrate that the 2005 and 2006 easements satisfy the granted-in-
perpetuity requirement.
B
1
“As always, we begin with the text of the statute.” Limtiaco v. Camacho,
549 U.S. 483, 488 (2007). On its face, § 170(b)(2)(C) doesn’t require much—only
that a grant embody “a restriction (granted in perpetuity) on the uses which may be
made of the real property.” It seems to us clear that a conservation easement of the
sort at issue here qualifies. It constitutes “a restriction” on “the use . . . of the real
property” because it burdens what would otherwise be the landowner’s fee-simple
enjoyment of—and absolute discretion over—the use of its property. And it does
so “in perpetuity” because nothing in the grant envisions a reversion of the
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easement interest to the landowner, its heirs, or assigns. A broad limitation on the
use of the property that applies to the parcel as a whole satisfies the statutory test,
even if within that parcel there exist certain narrow exceptions to that limitation.
I.R.C. § 170(h)(2)(C).
The Commissioner contends, by contrast, that an aggregate restriction on the
use of the land isn’t enough; rather, he asserts, every inch of land must be subject
to the restriction in perpetuity—such that, his argument goes, even a limited
reservation of development rights violates the granted-in-perpetuity requirement.
“[T]he whole point of § 170(h)(2)(C),” the Commissioner argues, “is to ensure that
a conservation easement’s restriction on the use that may be made of the real
property is perpetual, meaning that the restriction cannot be subsequently
removed, weakened, or diminished . . . .” Br. of Appellee at 45–46 (emphasis
original). But the Commissioner misunderstands both the plain language of the
statute and the common-law provenance of the term “perpetuity.” As for the
language, the word that precedes the term “restriction” is “a,” and it seems to us
indisputable that the 2005 and 2006 easements impose “a restriction”—singular—
on the uses to which the subject parcels may be put because they broadly restrict
Pine Mountain’s preexisting development rights. And they impose that restriction
“in perpetuity,” as that term is understood in the common law, because Pine
Mountain, its heirs, or assigns remain indefinitely subject to the restriction and
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because nothing in the grants will cause the easements, either automatically or
upon the happening of some event, to revert back to the Pine Mountain or its
successors. See The Law of Easements & Licenses in Land § 10:1. “[A]
restriction” on the landowner’s use of its land, “granted in perpetuity”—that’s all
§ 170(h)(2)(C) requires. 2
2
Not only does the Tax Court’s interpretation of § 170(h)(2)(C) defy the
provision’s straightforward language, but it also renders § 170(h)(5)(A)
superfluous. The Tax Court recognized—correctly—that § 170(h)(2)(C) and
§ 170(h)(5)(A) impose separate requirements. Even so, in the court’s view, a grant
violates § 170(h)(2)(C) if even a single sub-parcel of property is exempted from
the overall restriction. The Tax Court constructed a “Swiss cheese” analogy—the
entire conservation area serving as the slice and the development zones the holes.
As the Tax Court saw it, § 170(h)(2)(C) demands that the entire slice (the
conservation area) be protected from development in perpetuity, such that the
2
The Tax Court’s holding that the 2005 and 2006 easements violated § 170(h)(2)(C)’s granted-
in-perpetuity requirement makes even less sense in light of its contrary decision regarding the
2007 easement. The court concluded that the 2007 easement complied with § 170(h)(2)(C)
because it reserved to Pine Mountain only the right to construct a water tower. We fail to see
how that distinction—homes and barns vs. a water tower—bears on the dispositive question
under § 170(h)(2)(C), whether the easement imposes “a restriction” in “perpetuity.” The fact
that the 2007 easement’s water-tower reservation may seem less significant, in a quantitative or
qualitative sense, than the 2005 and 2006 easements’ homesite-and-barns reservation is
irrelevant. As explained below, that distinction may matter for § 170(h)(5)(A) protected-in-
perpetuity purposes, but it has no bearing on § 170(h)(2)(C).
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landowner cannot under any circumstances relocate any of the holes (reserved
rights).
But whether exceptions to restrictions in a conservation easement poke holes
in the slice runs, we think, to whether the easement adequately protects the
conservation purposes, which is a question to be answered by reference to
§ 170(h)(5)(A), not § 170(h)(2)(C). Using the Tax Court’s own cheese metaphor,
all that § 170(h)(2)(C)’s granted-in-perpetuity condition requires is that the
landowner grant a slice (i.e., a restrictive easement) in the first place, which here
Pine Mountain plainly did. We agree with Pine Mountain that the better cheese
analogy is to Pepper Jack. Here, the reserved rights don’t introduce holes into the
conservation-easement slice, because the entire slice remains subject to “a
restriction”—i.e., the conservation easement. Instead, the reserved rights are
embedded pepper flakes, and, so long as they don’t alter the actual boundaries of
the easement, § 170(h)(2)(C) is satisfied.
At bottom, the Tax Court and the Commissioner challenge the quality—the
substance, or merits—of Pine Mountain’s easements. That challenge, though,
implicates § 170(h)(5)(A)’s protected-in-perpetuity requirement, not
§ 170(h)(2)(C)’s granted-in-perpetuity requirement. For now, the sole question is
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whether the 2005 and 2006 easements imposed “a restriction” on the use of Pine
Mountain’s parcels “in perpetuity.” They did. 3
3
In rejecting the deductions for the 2005 and 2006 easements, the Tax Court
relied heavily on a series of its own previous decisions that the Fourth Circuit
subsequently affirmed in Belk v. C.I.R., 774 F.3d 221 (4th Cir. 2014). Belk
concerned a conservation easement in which the landowner had reserved a right,
subject to the donee organization’s approval, to “substitute an area of land . . .
contiguous to the Conservation Area for an equal or lesser area of land comprising
a portion of the Conservation Area.” Belk v. C.I.R., 140 T.C. 1, 3 (2013), aff'd, 774
F.3d 221 (4th Cir. 2014). The reviewing courts held that this provision
disqualified the property interest under § 170(h)(2)(C) “because the real property
contributed to the Trust is not subject to a use restriction in perpetuity.” Belk, 774
F.3d at 226. As the Fourth Circuit interpreted that provision, “[t]he placement of
the article ‘the’ before ‘real property’ makes clear that a perpetual use restriction
must attach to a defined parcel of real property rather than simply some or any (or
3
The Treasury Department’s own regulations indicate that the mere presence of movable
building sites does not render a conservation easement non-deductible. 26 C.F.R. § 1.170A-
14(f)’s Example 4 depicts a conservation easement that allows for “limited cluster development
of no more than five nine-acre clusters (with four houses on each cluster) . . . subject to site and
building plan approval by the donee organization in order to preserve the scenic view from the
park.” Although the example aims to illustrate § 170(h)(5)(A)’s protected-in-perpetuity
requirement, it shows that movable building sites do not alone disqualify a donation for a
deduction.
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interchangeable parcels of) real property.” Id. at 225 (emphasis in original). It
held that if the grant permits land from outside the easement to be swapped for
easement land—thus freeing the easement land from the attendant restrictions—
then “the restriction on ‘the real property’ is not” perpetual because the boundaries
of the restricted property have shifted. Id. at 226.
The 2005 and 2006 easements here bear no resemblance to the one at issue
in the Belk litigation. The easements that Pine Mountain granted only allow
building areas to be moved around within the fixed boundaries of the easement—
they don’t permit outside-territory swapping. Pine Mountain’s easements more
closely resemble those in BC Ranch II v. C.I.R., 867 F.3d 547 (5th Cir. 2017). In
that case, landowners had deeded perpetual conservation easements to a land trust
but reserved rights to build homesites on select five-acre plots, subject to the trust’s
consent. The Fifth Circuit held that the easements satisfied § 170(h)(2)(C)’s
granted-in-perpetuity requirement because “[o]nly discrete five-acre residential
parcels, entirely within the exterior boundaries of the easement property,” could be
moved within the conservation area. Id. at 553. In so holding, the court
distinguished Belk on grounds that apply equally here. The Fifth Circuit explained
that the problem in Belk arose “because the donor of the easement could develop
the same land that it had promised to protect, simply by lifting the easement and
moving it elsewhere,” even to “tracts of land entirely different and remote from the
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property originally covered by that easement”—that, the court recognized, is what
violated the granted-in-perpetuity requirement. Id. at 553. The Fifth Circuit also
observed that parcel-swapping would complicate valuations because an appraiser
would have to value a moving target. Id.
By contrast, there are no such dangers where, as in BC Ranch—and here—
an easement only permits the relocation of building areas within the conservation
area without changings the easement’s boundaries. Id. at 552. First, such an
arrangement can’t be used to release the real property from the easement in a
wholesale manner. And second, so long as “the unencumbered homesite parcels
have roughly the same per-acre value as the rest of the” easement territory, then
appraisal is feasible because “changing the boundaries of some of the homesite
parcels would not return any value to the easement donors.” Id. at 553.
* * *
In brief, we hold that § 170(h)(2)(C) means just what it says it means—that
to qualify for a deduction, a conservation easement must grant “a restriction”
(meaning at least one) on the use to which the subject property can be put, and
must do so “in perpetuity,” as that term has traditionally been used and understood
in common-law practice. An easement granted in perpetuity over a defined
conservation area clears § 170(h)(2)(C)’s relatively low threshold, even if it
reserves targeted development rights for homesite construction. Based on those
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metrics, the 2005, 2006, and 2007 easements all qualify. The Tax Court, of course,
hasn’t yet addressed whether the 2005 and 2006 easements satisfy § 170(h)(5)(A)’s
protected-in-perpetuity requirement. On remand, it will need to do so.4
III
We turn, then, to consider the Commissioner’s cross-appeal. He raises two
arguments. First, he contends that the Tax Court erred in concluding that the 2007
easement’s provision allowing the contracting parties to amend the grant doesn’t
violate § 170(h)(5)(A)’s protected-in-perpetuity requirement. Second, even
assuming the 2007 easement is valid, he argues that the Tax Court erred in its
valuation. We will consider the Commissioner’s arguments in turn.
A
First, the 2007 easement’s amendment provision. (In fact, all three
easements contain substantially identical amendment clauses, but because the Tax
Court had already held that the 2005 and 2006 easements’ reservations of rights
4
Lest anyone worry that our interpretation of § 170(h)(2)(C) gives the Pine Mountains of the
world a free pass, we make two observations in closing our discussion of the 2005 and 2006
easements. First, we have dealt only with § 170(h)(2)(C). Even after passing through the
granted-in-perpetuity gateway, a conservation easement must still satisfy § 170(h)(5)(A)’s
protected-in-perpetuity requirement; that, it seems to us, is likely where Congress envisioned the
heavy lifting—the more rigorous analysis of the degree to which the grant protects conservation
purposes—should occur. Second, recall that NALT has extensive advance-approval rights under
these easement contracts. NALT is a sophisticated land-conservation organization, and we have
little doubt that when it comes to negotiating conservation easements, it is well positioned and
equipped to look after conservation interests.
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violated § 170(h)(2)(C), it addressed only the 2007 easement’s amendment clause
under § 170(h)(5)(A).) We agree with the Tax Court that the amendment clause in
the 2007 easement—and, by extension, the 2005 and 2006 easements—doesn’t
violate § 170(h)(5)(A)’s protected-in-perpetuity requirement.
Each easement’s amendment clause “recognize[s] that circumstances could
arise which would justify the modification of certain restrictions” in the grant. The
clause thus states that NALT, as the “Holder,” and Pine Mountain, as the “legal
owner,” “shall mutually have the right, in their sole discretion, to agree to
amendments to this Conservation Easement, which are not inconsistent with the
Conservation Purposes.” The Commissioner asserts that the amendment provision
gives so much discretion to the parties that it causes the 2007 easement—and
again, by extension the others as well—to violate the “double-perpetuity
requirement” of § 170(h)(2)(C) and § 170(h)(5)(A).
We disagree. For starters, to the extent that the Commissioner’s position
equates “perpetuity” with inalienability, unreleasability, or unamendability, we
reject it. As we have explained, “perpetuity”—as used in connection with
conservation easements—draws on the term’s common-law meaning and denotes
only that the granted property won’t automatically revert to the grantor, his heirs,
or assigns. See supra at 12–13.
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Separately, it seems to us that the Commissioner’s position proves entirely
too much. Parties to a bilateral contract—which is all a conservation easement
is—can always agree after the fact to amend their agreement, whether or not they
expressly reserve that right to themselves in writing. If the possibility of
amendment were a deal-killer, then there could be no such thing as a tax-
deductible conservation easement.
As the Tax Court correctly observed, the easements at issue here are
conveyances with respect to which Pine Mountain and NALT contracted. It is
(literally) hornbook contract law that contracting parties are free to amend their
agreements after the fact. See 28 Williston on Contracts § 70:154 (4th ed.) (“A
promise modifying a duty under an executory contract is binding if the
modification is fair and equitable in view of circumstances not anticipated by the
parties when the contract was made.”); see also Restatement (Second) of Contracts
§ 89 (1981) (similar). More particularly, traditional servitude doctrine has long
allowed for the amendment of easements. See Restatement (Third) of Property
(Servitudes) § 7.1 (2000) (observing that a property servitude “may be modified or
terminated by agreement of the parties, pursuant to its terms”).5 And indeed, even
5
The Restatement has a special rule that addresses when changed circumstances justify
modification by a court, but it is clear that any servitude may be modified by mutual consent of
the parties. Compare Restatement (Third) of Property (Servitudes) § 7.10 (2000) with
Restatement (Third) of Property (Servitudes) § 7.11 (2000).
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the Uniform Conservation Easement Act—the act that enabled landowners to grant
perpetual easements to conservation trusts—provides for the possibility of bilateral
amendments. See UCEA § 2(a) (“Except as otherwise provided . . . , a
conservation easement may be created, conveyed, recorded, assigned, released,
modified, terminated, or otherwise altered or affected in the same manner as other
easements.” (emphasis added)).
In short, we agree with the Tax Court that the 2007 easement’s amendment
provision does not cause it to violate § 170(h)(5)(A)’s protected-in-perpetuity
requirement.6
B
Finally, we address the Tax Court’s valuation of the 2007 easement. It
seems to us obvious that in valuing the easement the court simply “split the baby”
and picked a number that was almost exactly midway between the parties’ (wildly
6
Separately, the notion that an amendment clause alone renders a conservation easement neither
granted-in-perpetuity nor protected-in-perpetuity on the ground that the parties will agree to
amendments that undermine the conservation purposes of the entire grant is a risk that is, we
think, “so remote as to be negligible.” 26 C.F.R. § 1.170A-14(g)(3). As a land trust that
regularly deals in these types of conservation easements and whose purpose is to protect
conservation areas, NALT would be quite unlikely to agree to amendments that would clearly
violate a grant’s conservation purposes.
We note in closing that although the Tax Court didn’t reach the issue, on appeal the
Commissioner has separately argued that the amendment provision causes the 2007 easement to
violate § 170(h)(2)(C)’s granted-in-perpetuity requirement. We reject that contention for
essentially the same reasons that we have concluded that the moveable-homesite provisions of
the 2005 and 2006 easements don’t run afoul of § 170(h)(2)(C). Amendment clause or no, the
2007 easement embodies “a restriction” on land use that is “granted in perpetuity.” See supra at
17–18.
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divergent) estimates. While we appreciate the difficulty of determining the exact
value of a conservation easement, we must insist that the Tax Court apply a
discernible methodology that is appropriately tied to the standard set out in the
governing regulations.
According to those regulations, the value of a conservation easement
donated under § 170 “is the fair market value of the perpetual conservation
restriction at the time of the contribution.” 26 C.F.R. § 1.170A-14(h)(3)(i). The
regulations go on to specify alternative methods of valuing such contributions:
[1] If there is a substantial record of sales of easements comparable to
the donated easement (such as purchases pursuant to a governmental
program), the fair market value of the donated easement is based on the
sales prices of such comparable easements. [2] If no substantial record
of market-place sales is available to use as a meaningful or valid
comparison, as a general rule (but not necessarily in all cases) the fair
market value of a perpetual conservation restriction is equal to the
difference between the fair market value of the property it encumbers
before the granting of the restriction and the fair market value of the
encumbered property after the granting of the restriction.
Id.
On its tax returns, Pine Mountain claimed that the 2005, 2006, and 2007
easements were worth $16.5 million, $12.7 million, and $4.1 million, respectively.
In the Tax Court, Pine Mountain’s valuations ballooned to $54.7 million, $33.6
million, and $9.1 million—totaling $97 million in deductions for a property that it
purchased for only $37 million. The Commissioner, in stark contrast, valued the
tracts at $1,119,000, $998,000, and $449,000.
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The Tax Court declined to use either the comparable-sales or before-and-
after methodologies specified in the regulations. Instead, after reviewing reports
from both sides’ valuation experts, the court concluded that Pine Mountain’s
expert had overvalued the 2007 easement, that the Commissioner’s expert had
undervalued it, and that their errors simply cancelled one another out. On the one
hand, the court said that Pine Mountain’s expert had “overestimated the value of
the 2007 easement by ignoring the beneficial effects the easement had on the
unrestricted Pine Mountain property” and by using “diminution of the underlying
land’s value,” which was “an imperfect proxy for the market value of this
particular easement that restricts the use of highly valuable developable land.”
Pine Mountain Preserve, LLLP v. C.I.R., 116 T.C.M. (CCH) 597 (T.C. 2018). On
the other hand, the court found that the Commissioner’s expert had “assumed
incorrectly that the Pine Mountain property would not be developed.” Id. These
errors offset, the court reasoned, “because the magnitude of all three errors is
proportional to the probability that the Pine Mountain property would be
developed.” Id. Oddly, the court observed (we think correctly) that “[t]he mere
fact that the magnitude of the two experts’ errors vary proportionally does not
mean that the magnitudes are equal”—but it nonetheless proceeded to conclude
(albeit without explanation) that “on our review of the entire record, we are
convinced that the errors are roughly equal in magnitude.” Id.
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Without quantifying the magnitude of the experts’ respective
miscalculations, the Tax Court then combined the two experts’ estimates and gave
each equal weight. Using a “pox on both your houses” methodology, the court
divided each estimate by two and added the resulting two numbers together to
reach a valuation: $9,110,000/2 + $449,000/2 = $4,779,500.
Again, under I.R.C. § 170, the correct measure of an easement’s value is the
“fair market value of the perpetual conservation restriction at the time of the
contribution.” 26 C.F.R. § 1.170(A)-14(h)(3)(i) The calculation requires
reviewing comparable sales of similar easements or, if no substantial record of
such sales exists, gauging the difference between the fair market value of the
property pre- and post-encumbrance. Id. The Tax Court neither engaged in that
exercise nor gave any justification for its own “methodology,” which weighted
exactly equally the two sides’ competing values.
On remand, the Tax Court must evaluate the fair market value of the
conservation restriction at the time of the contribution, as § 1.170(A)-14(h)(3)(i)
requires.
V
To summarize, we hold as follows:
1. The 2005 and 2006 easements satisfy I.R.C. § 170(h)(2)(C)’s granted-
in-perpetuity requirement;
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2. The existence of an amendment clause in an easement does not violate
I.R.C. § 170(h)(5)(A)’s protected-in-perpetuity requirement; and
3. The Tax Court applied an improper method for valuing the 2007
easement and, on remand, should value the easement using the standards set forth
in the governing regulations.
REVERSED in part, AFFIRMED in part, and VACATED and
REMANDED.
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