TOT Property Holdings, LLC v. Commissioner of Internal Revenue
1 F.4th 1354
11th Cir.2021Background:
- TOT Holdings (owned 652 acres in Van Buren County, TN) donated a conservation easement to Foothills on Dec. 27, 2013; the deed’s Section 9.2 reduced extinguishment proceeds by “any increase in value … attributable to improvements.”
- The deed also included a Treasury Regulation Override (Section 9.1 and a sentence in 9.2) stating Section 9.2 applies "or 26 C.F.R. §1.170A-14, if different," and that Section 9.2 was intended to adhere to the regulation.
- Seventeen days before the donation, PES Fund purchased 98.99% of TOT Holdings for ~$1.04M; TOT claimed a $6.9M charitable deduction (supported by an appraisal) on its partnership return.
- IRS disallowed the deduction (citing noncompliance with I.R.C. §170 and 26 C.F.R. §1.170A-14(g)(6)(ii)) and proposed accuracy‑related penalties; Tax Court sustained disallowance and penalties.
- Tax Court adopted the Commissioner’s valuation expert (finding highest‑and‑best use before donation was investment for recreation/timber) and found supervisory approval of penalties was satisfied by a signed transmittal letter.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the deed’s "Treasury Regulation Override" is an enforceable interpretive clause that cures Section 9.2's inconsistency with 26 C.F.R. §1.170A‑14(g)(6)(ii) | Override is interpretive and requires applying the regulatory formula, so the deed complies | Override functions as a condition‑subsequent savings clause and is unenforceable; Section 9.2 (which subtracts improvement value) controls and conflicts with the regulation | Override is an unenforceable condition‑subsequent savings clause; Section 9.2 is binding and violates the regulatory extinguishment‑proceeds formula; deduction disallowed |
| Proper valuation (highest and best use before donation) for assessing penalties | Before use highest & best was low‑density destination mountain‑residential development (Wingard), producing a high before value | Before use highest & best was investment holding for recreation/timber (Barber); the PES Fund arm’s‑length purchase shortly before donation corroborates a low before value | Tax Court not clearly erroneous in adopting Commissioner’s valuation and highest‑and‑best use; easement value much lower than TOT claimed; accuracy‑related penalties upheld |
| Whether supervisory "approval in writing" required by I.R.C. §6751(b)(1) occurred before penalty assessment | Transmittal letter was only a cover; actual written supervisory approval did not occur until a later penalty‑approval form signed after initial determination | The group manager’s signed transmittal letter enclosing the revenue agent’s report (which proposed adjustments and penalties) satisfies the "in writing" supervisory‑approval requirement | Signed transmittal letter constituted written supervisory approval under §6751(b)(1); penalties lawfully assessed |
Key Cases Cited
- Belk v. Comm’r, 774 F.3d 221 (4th Cir. 2014) (savings clauses conditioned on a future adverse determination are unenforceable for tax purposes)
- Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944) (condition‑subsequent clauses that nullify tax enforcement are contrary to public policy)
- PBBM‑Rose Hill, Ltd. v. Comm’r, 900 F.3d 193 (5th Cir. 2018) (interpretive clause distinction and regulatory extinguishment‑proceeds requirement)
- Coal Property Holdings, LLC v. Comm’r, 153 T.C. 126 (Tax Ct. 2019) (deed language subtracting improvements from condemnation proceeds violates §1.170A‑14(g)(6)(ii))
- Palmolive Bldg. Invs., LLC v. Comm’r, 149 T.C. 380 (Tax Ct. 2017) (refusal to enforce retroactive saving clauses that alter tax consequences)
- United States v. Woods, 571 U.S. 31 (2013) (framework for accuracy‑related penalties and valuation misstatements)