The Tax Court, in Coal Property Holdings, LLC v. Commissioner, 153 T.C. No. 7 (Oct. 28, 2019), held that an LLC was not entitled to a charitable contribution deduction because the conservation purpose of the easement was not “protected in perpetuity” as required by Code Sec. 170(h)(5)(A). The Court’s Abstract is as follows:
In 2013 P donated a conservation easement to a qualified organization. The easement deed provided that, if the property were sold following judicial extinguishment of the easement, the donee organization would receive a share of the proceeds, “after the satisfaction of prior claims,” determined by a formula. Under the formula, the donee’s share was equal to the property’s fair market value (FMV) at the time of sale, “minus any increase in value after the date of th[e] grant attributable to improvements,” multiplied by a fraction specified in sec. 1.170A-14(g)(6)(ii), Income Tax Regs. Alternatively, if this formula produced a result “different from” that required by the regulation, the deed provided that the donee would receive a share of the proceeds as determined by the regulation.
Held: The easement does not satisfy sec. 1.170A-14(g)(6), Income Tax Regs., because the portion of the proceeds to which the donee is entitled is improperly reduced by (a) amounts paid in satisfaction of prior claims against P and (b) amounts inuring to P that are attributable to (i) appreciation in the value of improvements existing when the easement was granted plus (ii) the FMV of any improvements P subsequently made to the property. PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018), followed.
Held, further, the alternative calculation of proceeds specified in the deed, which is applicable only if the deed’s formula is determined to be “different from” that required by the regulation, constitutes a “condition subsequent” saving clause that will not be judicially enforced. Belk v. Commissioner, 774 F.3d 221, 225 (4th Cir. 2014), aff’g 140 T.C. 1 (2013), followed.
Held, further, R properly disallowed in its entirety the charitable contribution deduction claimed by P because the conservation purpose of the easement was not “protected in perpetuity” as required by I.R.C. sec. 170(h)(5)(A).
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.