Tax Court Rejects Easement Gift Deduction, Unenforceable Savings Clause

Published date01 January 2020
Date01 January 2020
January 2020 3
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
regard. Another observation is that “emerging models”
for donor-advised funds, such as workplace giving using
them and low- or no-minimum donor-advised fund
accounts, “will play a significant role” as to the number
of individual accounts and consequently “drive down
the average donor-advised fund account size.” [11.8]
The US Tax Court, by decision dated October 28,
held that a charitable deduction for a contribution of
a conservation easement was properly disallowed in
its entirety by the IRS in that the conservation purpose
was not protected in perpetuity because of a defective
extinguishment provision and an alternative provision in
the easement deed was an unenforceable “condition
subsequent” savings clause (Coal Property Holdings, LLC
v. Commissioner).
The donor in this case (LLC) contributed a conserva-
tion easement to a qualified charitable organization,
claiming a charitable contribution deduction of $155.5
million. The easement deed provides that, if the prop-
erty were sold following a judicial extinguishment of
the easement, the donee would receive a share of the
proceeds, “after the satisfaction of prior claims,” deter-
mined by a formula.
Pursuant to this formula, the donee’s share is equal
to the property’s fair market value at the time of the sale,
“minus any increase in value after the date of th[e] grant
attributable to improvements,” multiplied by a fraction
specified in the tax regulations. Alternatively, if this for-
mula produced a result “different from” that required by
the regulation, the deed provides that the donee would
receive a share of the proceeds in accordance with the
Special rules as to gift deductibility apply in the case
of a qualified conservation contribution (IRC § 170(f)(3)
(B)(iii)). These rules apply where the contribution is of a
qualified real property interest, the donee is a qualified
organization, and the gift is exclusively for conservation
purposes (IRC § 170(h)(1)).
A contribution is not treated as made exclusively for
conservation purposes “unless the conservation purpose
is protected in perpetuity” (IRC § 170(h)(5)(A)). The
regulations accompanying this provision recognize that
a “subsequent unexpected change in the conditions
surrounding the [contributed] property . . . can make
impossible or impractical the continued use of the prop-
erty for conservation purposes” (Reg. § 1.170A-14(g)
(6)(i)). These regulations provide that, despite this pos-
sibility, the “conservation purpose can nonetheless be
treated as protected in perpetuity if the restrictions are
extinguished by judicial proceeding” and the easement
deed ensures that the charitable donee, following sale
of the property, will receive a proportionate share of
the proceeds and use the proceeds consistently with the
conservation purposes underlying the gift (Id.).
The tax regulations provide how the donee’s pro-
ceeds are to be determined. This regulation requires that
the donee’s proportionate share on extinguishment of a
conservation easement be a percentage determined by
a fraction, the numerator of which is the “fair market
value of the conservation easement on the date of the
gift” and the denominator of which is the “fair market
value of the property as a whole on the date of the gift”
(Reg. § 1.170A-14(g)(6)(ii)).
This regulation has been characterized as creating a
“single — and exceedingly narrow — exception to the
requirement that a conservation easement impose a per-
petual use restriction” on real property (Belk v. Commis-
sioner (4th Cir.) (opinion summarized in the February 2015
issue)). The Tax Court earlier held that the requirements
of this regulation “are strictly construed” (Carroll v. Com-
missioner (opinion summarized in the July 2016 issue).
“Condition subsequent” savings clauses have been
rejected by courts for decades (e.g., Commissioner v.
Proctor (4th Cir. 1944), with that court portraying them as
“trifling with the judicial process”). The appellate court in
Belk wrote that because the savings clause purported to
alter contract rights, it was triggered by a “determination
that c[ould] only be made by either the IRS or a court.”
The court examined the easement deed and con-
cluded that the charitable donee is not absolutely
entitled to a proportionate share of the proceeds in the
event the property is sold following judicial extinguish-
ment of the easement. It held that the deed grants the
LLC valuable property rights in the event of extinguish-
ment, valued at $9.7 million. That is, the LLC is to
receive all the sales proceeds to the extent the proceeds
are attributable to appreciation in the value of improve-
ments. The court accordingly concluded that the claimed
charitable deduction must be denied in its entirety
because the conservation purpose of the contribution is
not protected in perpetuity.
The LLC contended that the alternative provision in
the easement deed is a “Treasury Regulation override”
mandating that the deed’s provisions by interpreted
as conforming to the regulation’s formula, thus saving
the charitable deduction. But the court held that this
override constitutes a “condition subsequent” savings

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