Carpenter v. Commissioner of Internal Revenue (Carpenter I)

US Tax Court, T.C. Memo. 2012-1, January 3, 2012: Colorado conservation easement extinguishable by mutual consent of the parties does not guarantee protection in perpetuity under state law as required by Internal Revenue Code.

Petitioners (Carpenter) sought a federal qualified conservation contribution tax deduction for a conservation easement granted to a charitable nonprofit that the IRS agreed was a qualified organization for purposes of the deduction.  The easement said it could be extinguished by judicial proceedings or by mutual agreement of the parties to the easement. The IRS denied the tax deduction sought by the Petitioners on the grounds the mutual agreement part of the extinguishment provision did not meet the requirement of section 1.170A-14(g)(6)(i), Income Tax Regs., that the conservation easements be granted in perpetuity.

The Petitioners argued that the easement donation created a charitable trust or a restricted gift, either of which “implicates the cy pres doctrine, requiring a judicial proceeding to extinguish the easement” even if the language of the easement allowed for extinguishment either by judicial proceedings or agreement of the parties.

The Tax Court, saying these arguments require a determination of state law but finding no state court precedent on point, held no charitable trust was created and even though the easement did create a restricted gift, that did not necessarily require cy pres court action to extinguish the easement. Accordingly, the Court held that the perpetuity requirement was not met.

As to charitable trust, the Court analyzed the Colorado requirements for creation of a charitable trust and wrote, “We do not find any clear, explicit, definite, unequivocal, and unambiguous language in the conservation easement deeds to create a trust. We also do not find any intention to create a trust. As a result, we do not find that petitioners created charitable trusts under Colorado law with their conservation easement deeds.” Thus, no implied requirement for judicial proceedings existed on this grounds.

 

Regarding the restricted gift concept, the Court had no trouble concluding the easement was restricted in the sense of creating a restriction on the use of “the gift” to the conservation purposes stated in the easement.  The Court then interpreted Colorado law to apply the cy pres doctrine to restricted gifts only when “the donor manifested a more general intention to devote the property to charitable purposes” in addition to or overriding the specific charitable purpose that has become impossible or impractical to fulfill. The Court, taking note that the Petitioner retained all rights over “the donated property” not specifically granted to the donee and “demonstrated no intention to have the donated property put to some other general charitable use” in the event of extinguishment, found that the statements of purpose of the easement did not manifest an intent to donate “the property” to the donee “with a general charitable purpose”. As a result, cy pres would not apply, and the easement could be extinguished without judicial proceedings.

The matter did not end there, as the Court needed to decide whether the possibility of extinguishment by mutual agreement of the parties failed the perpetuity test. Here, the Court’s analysis walked a narrow line. On the one hand, the Court wrote that there is no absolute rule that an easement may allow extinguishment only by judicial proceedings (“In Kaufman v. Commissioner, 136 T.C. 294 (2011), we declined to rule that a conservation deed must require a judicial proceeding to extinguish an easement for the easement to be perpetual. Id. at 307 n. 7. We once again decline to create an absolute rule. Rather, we find that the extinguishment regulation provides taxpayers with a guide, a safe harbor, by which to create the necessary restrictions to guarantee protection of the conservation purpose in perpetuity.”) On the other hand, the Court wrote that allowing extinguishment simply by agreement of the parties to the easement, without any oversight by others, was insufficient to meet the perpetuity test (“Extinguishment by mutual consent of the parties does not guarantee that the conservation purpose of the donated property will continue to be protected in perpetuity.”)  The Court favorably quoted Stephen Small, in Federal Tax Law of Conservation Easements 16-4 (1986), “With the decision-making process pushed into a court of law, the legal tension created by such judicial review will generally tend to create a fair result.” It is not clear if the requisite oversight can come only from a court or if other, e.g., state administrative, oversight might satisfy the perpetuity test.

The Court also said that the Kaufman decision (at 311-313) holds “that the so-remote-as-to-be-negligible standard does not modify the extinguishment regulation.”

The Tax Court Memo is available at http://www.ustaxcourt.gov/InOpHistoric/CARPENTER.TCM.WPD.pdf.

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