Montgomery-Alabama River LLC v. Commissioner

Montgomery-Alabama River LLC v. Commissioner
T.C. Memo. 2021-62

Posted on May 28, 2021

On May 17, 2021, the Tax Court issued a Memorandum Opinion in the case of Montgomery-Alabama River LLC v. Commissioner (T.C. Memo. 2021-62). The primary issue presented in Montgomery-Alabama River LLC v. Commissioner was whether the Tax Court should certify (to the Alabama Supreme Court) the question of whether, under Alabama law, the petitioner would be entitled to the full proceeds of any sale if the easement were extinguished.

Basic Legal Framework in Montgomery-Alabama River LLC v. Commissioner

The governing regulation requires that the grantee receive, in the event an easement is extinguished, a proportionate share of the proceeds upon any subsequent sale of the property. Treas. Reg. § 1.170A-14(g)(6)(ii). This regulation makes an exception, however, if the 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.” Id.

Basic Background and Wild Turkeys

In September 2014 the petitioner acquired, by capital contribution, 132 acres of land in Elmore County, Alabama (Property). On December 2, 2014, Montgomery River Group, LLC, an entity owned by a group of investors, purchased a 95% interest in Montgomery for $3.4 million. On December 15, 2014, Montgomery granted to the National Wild Turkey Federation Research Foundation (Foundation) a conservation easement over the Property.

The Extinguishment Clause

The easement deed recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 16 provides that “[t]he amount of the proceeds to which Grantee shall be entitled shall be determined in accordance with the Proceeds paragraph, unless state law provides otherwise.” Paragraph 18, captioned “Proceeds,” specifies that the deed granted the Foundation “a real property interest, immediately vested in Grantee,” and that this vested property interest entitled the Foundation to receive, in the event of an extinguishment, a specified share of any future proceeds.

The Certification Bloviation

Judge Lauber, not one for brevity, spends half of the opinion explaining how, when, and whether the Tax Court will certify a question of law to another court.

Bottom line: The Tax Court can certify, but it won’t here, because Alabama law is clear.

Alabama Law

Alabama law defines a conservation easement as a “nonpossessory interest of a holder in real property.” Ala. Code § 35-18-1(1) (1997). A conservation easement is thus a property right that entitles its holder to compensation in the event the property is taken by condemnation or otherwise. See Portersville Bay Oyster Co. v. Blankenship, 275 So. 3d 124, 134 (Ala. 2018). In Smith Lake, LLC v. Commissioner, T.C. Memo. 2020-107, the Tax Court observed that the donor of a conservation easement would not be entitled to the full amount of the proceeds from a judicial extinguishment under Alabama law. As such, no certification is necessary.