153 T.C. No. 7
Tax Ct.2019Background
- Coal Property Holdings (Coal Holdings) acquired 3,713 acres in Tennessee in Sept. 2013 and donated a conservation easement to Foothills Land Conservancy three days after an investor bought a 99% partnership interest.
- Coal Holdings claimed a charitable contribution deduction of $155.5 million on its 2013 partnership return based on a before-and-after appraisal valuing the easement at $155.5M (before value ~$160.5M; after value ~$5M).
- The Easement Deed prohibited surface mining but expressly continued existing natural gas wells and cell towers and reserved rights to install additional improvements; it contained judicial-extinguishment provisions (Sections 9.1–9.2) that: (a) subtract “increase in value attributable to improvements” from sale proceeds before applying the proportionate fraction and (b) require payment of “prior claims” out of proceeds before the grantee’s share.
- Section 9.1 also stated the grantee’s share would be determined under section 9.2 or under Treasury Regulation §1.170A-14(g)(6) “if different from Section 9.2,” a clause the taxpayer argued would conform the deed to the regulation.
- The IRS issued an FPAA disallowing the deduction in full; the Tax Court granted the IRS’s motion for partial summary judgment holding the easement did not satisfy the regulation’s judicial-extinguishment requirement and therefore the conservation purpose was not “protected in perpetuity.”
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the easement complies with the judicial-extinguishment proceeds formula in §1.170A-14(g)(6) | Deed’s formula (Section 9.2) properly fixes the donee’s proportionate share; appraisal supports deduction | Deed impermissibly reduces the donee’s share by (1) subtracting appreciation attributable to improvements and (2) paying prior claims before computing the donee’s share, so donee won’t get required proportionate share | Court: Deed violates §1.170A-14(g)(6); donee not absolutely entitled to required proportionate share; deduction disallowed on perpetuity ground |
| Whether the deed’s “if different” / conforming clause is enforceable to cure defects | Clause is an interpretive directive meant to ensure conformity with the regulation | Clause is a condition subsequent that alters property rights only if a future adverse determination occurs and is unenforceable | Court: Clause is an unenforceable condition subsequent; will not be judicially enforced (follows Belk/Palmolive) |
| Ultimate availability of the charitable contribution deduction claimed ($155.5M) | Deduction supported by appraisal and deed language | Deduction invalid because easement fails the perpetuity requirement under §170(h)(5)(A) and §1.170A-14(g)(6) | Court: Deduction disallowed in full because the conservation purpose is not protected in perpetuity |
Key Cases Cited
- PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018) (holding easement clauses that subtract improvements from proceeds violate the judicial-extinguishment regulation)
- Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014) (holding savings clauses that impose a condition subsequent are unenforceable)
- Carroll v. Commissioner, 146 T.C. 196 (Tax Ct. 2016) (strict construction of §1.170A-14(g)(6); grantee must be absolutely entitled to proportionate share)
- Palmolive Bldg. Inv’rs, LLC v. Commissioner, 149 T.C. 380 (Tax Ct. 2017) (rejection of saving-clause cure where prior-claims preference violated the regulation)