Court Summarizes Fiduciary Duties Involving Supporting Organizations

• Published date: 01 February 2018
• Date: 01 February 2018
• DOI: http://doi.org/10.1002/npc.30429

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 20186THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

Facts

The donor of this easement executed an easement

agreement with a charitable donee that is a qualified

organization. This easement was timely recorded. The

agreement provides that, if any of the protected property

is transferred to an owner of an adjacent property, the

adjacent property is to be encumbered by a “comparable

conservation easement.” This phrase is not defined

in the easement agreement. Another provision in the

agreement, concerning assignment of the easement,

requires that the assignee be a qualified organization.

Several properties close to the property involved in

this case are encumbered by conservation easements.

State and local entities encourage and subsidize the con-

tribution of conservation easements in the geographic

area.

Law

A charitable contribution deduction is available in

the case of a qualified conservation contribution (IRC §

170(h)(1)). One of the elements of this type of contribu-

tion is that the recipient of the easement be a qualified

organization (IRC § 170(h)(1)(B)). A qualified organiza-

tion is required to be one of four categories of public

charities (IRC § 170(h)(3)).

A charitable deduction for a contribution of an ease-

ment is not disallowed merely because the interest that

passes to the donee entity may be defeated by the hap-

pening of an event if it appears, as of the date of gift,

that the possibility that the event will occur is so remote

as to be negligible (Reg. § 1.170A-14(g)(3)).

Analysis

The court observed that the offending provision in

the easement agreement “contains no express condition

that the holder of the replacement easement be a ‘quali-

fied organization.’” When three conditions are met, the

initial donee is required by the agreement to release the

transferred portion of the property from the easement.

The court concluded that the “omission of any restriction

regarding the type of entity that can hold the replace-

ment easement” in the gift agreement “suggests that

there is no such restriction.”

The court wrote of its belief “that no limitation was

intended to be placed on the type of entity that can hold

a replacement easement.” At most, the easement docu-

ment can be read to require that the successor holder be

a “non-profit charitable corporation” but, the court said,

that is not the “same thing” as a qualified organization.

The assignment provision was held inapplicable, inas-

much as an “assignment of the easement . . . is different

from a replacement of the easement.”

The court also held that the donor failed to adduce

persuasive evidence that the three conditions for replac-

ing the easement “are so highly improbable or remote

that they would be ignored.” To that end, the court

noted the extensive use of conservation easements in

the geographic area and the fact that the parties “both-

ered” to place the easement replacement provision in

the agreement. [9.7(b)] ◆

COURT SUMMARIZES

FIDUCIARY DUTIES INVOLVING

SUPPORTING ORGANIZATIONS

A December 14 court decision brings a reminder that,

in the context of supporting organizations, not only

must the voluminous federal tax regulations be followed

but also the applicable trust law must be considered

(assuming one of the parties is a trust) (Cohen v. Min-

neapolis Jewish Federation (W.D. Wis.)).

In 1980, the Melvin S. Cohen Trust for the Minneap-

olis Federation for Jewish Service was created, structured

as a Type III supporting organization with respect to what

is presently named the Minneapolis Jewish Federation.

The purpose of the Trust is to “benefit or carry out the

charitable, education[al], and religious purposes” of the

Federation. The Trust is directed to annually distribute

“substantially all” of its net income to the Federation,

allowing the trustees to designate one or more program

activities to be funded. Over the years, the Federation

granted Trust funds to various charitable recipients.

Some years ago, the trustees began insisting that the

Trust has the authority to determine the ultimate grant-

ees of its grants, in accordance with the notion that the

Federation is, in this regard, a “conduit.” The Federation

resisted that approach. Eventually, the Federation started

holding the Trust’s grant funds in reserve until the issue

was resolved. The trustees sued the Federation over this

and several other issues.

The court reviewed the terms of the trust agreement

and the law of supporting organizations, concluding

that there are “important limitations on the discretion”

of the Trust and that the Trust has a duty to “serve the

interests” of the Federation. State trust law caused the

court to reiterate that “trustees have fiduciary duties to

beneficiaries.” The court emphasized the trustees’ duty

of loyalty and duty of disclosure. The court ruled that the

trust agreement does not give the Trust the right to des-

ignate funds to specific charities and that the Federation

had the right to place the funds in reserve.

The court also rejected the trustees’ claim that they

have the authority to substitute another organization

as the supported entity. Still another breach of fiduciary

duty was held to occur when the trustees drafted an

amended trust agreement, in secret, without notifying

the Federation. (Hence the breach of the duty of disclo-

sure.) The court wrote that the “purpose and effect of

most of the amendments in dispute are to undermine

the Federation and limit its influence over the [T]rust,”