No deduction allowed for contribution of easement.

• Author: Beavers, James A.

The Tax Court held that a taxpayer was not entitled to a charitable deduction for a contribution of a conservation easement on land subject to a mortgage because the mortgagee's rights in the land had not been subordinated to the rights of the charitable organization that received the easement.

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Background

Charles and Ramona Mitchell purchased a large tract of ranchland in Mancos, Colo., in two separate transactions from a rancher, Clyde Sheek. In the second transaction (which comprised the bulk of the land) the Mitchells made a down payment to Sheek and executed a promissory note for the remaining amount of the purchase price secured by a deed of trust on the land. The Mitchells later transferred all the land to a family limited partnership in which they were equal partners.

On Dec. 31, 2003, the partnership granted a conservation easement on 180 acres of unimproved land in the tract to a qualified organization. At the time the easement was granted, the deed of trust securing the debt to Sheek was not subordinated to the easement. From 2003 to 2005, the partnership had the money to pay off the promissory note, which the deed of trust secured, at any time. There were no lawsuits, potential or otherwise; all bills were paid; payments on the promissory note to Sheek were current; and casualty insurance was in place. Two years after the partnership granted the conservation easement, Sheek agreed to subordinate his deed of trust to the conservation easement but received no consideration for the subordination. On Dec. 22, 2005, Sheek signed a subordination agreement.

In 2004, the Mitchells had the conservation easement appraised as of Dec. 31, 2003. The appraiser determined the conservation easement's fair market value was $504,000. The partnership claimed a $504,000 charitable contribution deduction, which flowed through to Charles and Ramona equally. The couple claimed a $504,000 charitable contribution deduction on their 2003 joint federal income tax return.

The IRS disallowed the 2003 charitable contribution deduction in 2010 with respect to Ramona Mitchell (Charles had died in 2006). It disallowed the deduction on the grounds that the transfer of the easement had not met the requirements of Sec. 170 because the mortgage on the land was not subordinated to the right of the organization that received the easement to enforce the conservation purposes of the easement in perpetuity as required by Regs. Sec. 1.170A-14(g)(2)...