Defective Extinguishment Provision Again Dooms Easement Charitable Deduction

• Date: 01 March 2020
• Published date: 01 March 2020
• DOI: http://doi.org/10.1002/npc.30696

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 March 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

Congress intended to be inseverable from the individual

mandate.” The court stated that it does “not hold forth

on just how fine-toothed that comb should be — the

district court may use its best judgment to determine

how best to break the ACA down into constituent

groupings, segments, or provisions to be analyzed.” ◆

DEFECTIVE EXTINGUISHMENT

PROVISION AGAIN DOOMS

EASEMENT CHARITABLE

DEDUCTION

The US Tax Court, on November 22, issued a bench

opinion in a conservation easement case, which was

made public on December 13 (TOT Property Holdings,

LLC v. Commissioner). Although the IRS advanced three

grounds for denial of the deduction for the charitable

contribution of the easement, the court ruled the deduc-

tion was unavailable on the basis of one of the grounds.

The court held that the conservation purpose was not

protected in perpetuity because of a defective extin-

guishment provision and that an alternative provision

in the easement deed was an unenforceable condition

subsequent savings clause. Indeed, the proportionality

formula in the extinguishment provision in this case is, as

the court observed, identical to the formula in the Coal

Property Holdings case (summarized in the January 2020

issue). Thus, the court held that the formula in this case

“fails to accomplish the regulatory requirement that the

donee receive a proportionate share of the proceeds in

the event of a sale.”

Just as in Coal Property Holdings, the alternative

provision in the easement deed was defended as a

“Treasury Regulation override” and, just as occurred

in that case, the provision was held to constitute a

condition subsequent savings clause, which it declined

to enforce.

The Tax Court found that the value of the conservation

easement was $496,000. The value of the easement

claimed by the donor (based on an appraisal the court

decreed to be “greatly inflated”) was $6.9 million.

Because the claimed value is more than 200 percent

of the correct value, the court upheld application of

the 40-percent gross valuation misstatement penalty.

The court also approved imposition of the negligence

penalty, observing that the “enormous difference”

between the claimed deduction amount and the amount

paid for the underlying property “must have been and

surely was obvious” to the donor. [9.31] ◆

NATIONAL OUTREACH

FOUNDATION CASE

The January 2020 issue includes a brief summary of

Priv. Ltr. Rul. 201944017. This matter has moved to the

US Tax Court, where, on November 14, a petition was

filed on behalf of the National Outreach Foundation Inc.

The principal issue in this case reflects the unfortunate

propensity of increasing entanglement of the law of tax-

exempt organizations and the law of tax shelters.

The foundation is a sponsoring organization. The

petition states that the types of contributions the

foundation “primarily received consisted of interests in

limited liability companies.” The LLCs involved “typi-

cally hold passive, income-generating assets, such as

real estate, securities, and/or intellectual property.” The

foundation receives income distributions from the LLCs;

these funds are used to “make donations [grants] to

other public charities and charitable causes.”

The petition recites that the foundation will be

entitled to its capital account balance in an LLC on sale

of an interest in or dissolution of the LLC. It also states

that the foundation’s articles of incorporation require it

to transfer all such proceeds to public charities. It is said

that, since its inception, the foundation has granted over

$2 million in cash to public charities.

Based on the foregoing facts, there would not

seem to be a legal problem. The IRS, however, is

attempting to revoke this organization’s tax-exempt

status on the grounds that the entity is engaged in

a tax-avoidance transaction, in the form of a listed

transaction, because its acceptance of these noncash

contributions is an arrangement substantially similar to

the type of transaction described in IRS Notice 2004-30

(summarized in the June 2004 issue).

The essence of this notice is that, in this type of

transaction, shareholders of S corporations attempt

to transfer the incidence of taxation on S corporation

income by purportedly donating S corporation nonvoting

stock to a tax-exempt organization, while retaining the

economic benefits associated with that stock.

If the transfers involved in this case are truly gifts, the

notice-type transaction would not be involved because

the donors would not retain any economic benefits

associated with the LLC interests. That is the core

issue, not directly addressed by the IRS’s ruling or the

petition. The revenue agent’s report, however, asserts

that nonvoting membership interests were contributed,

with the donors retaining voting membership units,

thereby retaining control of the LLCs. The donors are

also said to retain the power to determine the amount

and timing of any distributions. [20.13(a)] ◆