Graev v. Commissioner, 140 T.C. No. 17

Graevs donated cash and a facade conservation easement to NAT, a qualified conservation organization, in 2004; NAT issued a side letter promising to refund if deductions were disallowed and to remove the easement if so; the IRS announced heightened scrutiny of easement deductions in Notice 2004–41; the deed of easement was recorded in 2005, while the side letter remained separate and not recorded; the IRS disallowed the deductions, and the Graevs challenge, arguing the side letter did not render the gifts conditional under 1.170A–1(e) and related provisions.
NAT’s side letter stated: (1) partial reduction and refund if the deduction for the easement was challenged, and (2) full refund and removal of the easement if the deductions were disallowed entirely, with NAT’s aim to honor promises to donors.
The court held that the side letter created non-negligible risk of disallowance and return of funds, rendering the gifts conditional; the contributions were not deductible under sections 1.170A–1(e), 1.170A–7(a)(3), and 1.170A–14(g)(3).
New York law on conservation easements and merger did not defeat NAT’s ability to fulfill the side letter; the deed reserved NAT’s right to abandon the easement, and the side letter was enforceable or survivable under the recording and practice surrounding the instrument.
The decision concluded with disallowance of both cash and easement deductions for 2004 and 2005.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Are Graevs’ deductions for cash and the easement deductible if the gift is conditioned?	Graevs argue side letter does not negate deductibility under 1.170A–1(e).	IRS regulations treat conditional gifts as non-deductible unless conditions are negligible.	No; deductions disallowed as the condition was not negligible.
Does the side letter render the contributions non-deductible as a subsequent event?	Graevs contend O’Brien controls and contingencies are not treated as subsequent events.	Side letter indicates non-negligible possibility of return and removal.	Yes; side letter constitutes a non-negligible risk, defeating deductibility.
Can New York conservation-easement law and merger doctrine prevent enforcement of the side letter?	Graevs argue side letter unenforceable under NY law and merged into deed.	Court held NAT could honor promises; side letter survives merger and is enforceable.	No; side letter survives and NAT could be obligated to fulfill it.
Is the side letter a nullity under tax or public-policy concerns?	Graevs rely on Procter to argue nullity.	Procter distinguished; side letter not void as against public policy.	No; not a nullity; the side letter affects deductible status.

O’Brien v. Commissioner, 46 T.C. 583 (1966) (contingent charitable deductions under 1.170–1(e) distinguished; later addressed separately)
Briggs v. Commissioner, 72 T.C. 646 (1979) (remote contingencies; precedent on interpretation of 1.170–1(e))
Surface Combustion Corp. v. Commissioner, 9 T.C. 631 (1947) (early treatment of trust-like contingencies and donor promises)
Commissioner v. Estate of Sternberger, 348 U.S. 187 (1955) (regulatory framework for charitable deductions and “negligible” possibility)
Procter v. Commissioner, 142 F.2d 824 (1944) (public-policy concerns on tax-contingency provisions distinguished)
Kaufman v. Commissioner, 687 F.3d 21 (2012) (treatment of appraisals and conservation easement deductions; partial-interest issues)