Tax Court Rejects Easement Gift Deduction, Unenforceable Savings Clause

• DOI: http://doi.org/10.1002/npc.30670
• Published date: 01 January 2020
• Date: 01 January 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

January 2020 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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] ◆

TAX COURT REJECTS

EASEMENT GIFT DEDUCTION,

UNENFORCEABLE SAVINGS

CLAUSE

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).

Facts

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

regulation.

Law

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.”

Analysis

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