Carpenter v. Commissioner (Carpenter II)

US Tax Court, 2013 T.C. Memo 172, July 25, 2013: Reconsideration denied, Kaufman III not applicable. Judicial extinguishment mandatory for conservation easements.

In Carpenter v. Commissioner, 2012 T.C. Memo 1 (Carpenter I), the Tax Court held that a 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, and therefore a federal tax deduction for a “qualified conservation contribution” could not be claimed for the donation of that easement. The petitioners asked the court to reconsider its decision because, they asserted, the Court of Appeals for the First Circuit decision in Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012) (Kaufman III), partially overturning the Tax Court’s Kaufman decision — Kaufman v. Commissioner, 136 T.C. 294 (2011) (Kaufman I) — was an intervening change in the relevant law that warranted reconsideration. The court, however, held that Kaufman III does not apply to the Carpenter case and is not an intervening change in law which would justify reconsider.

The court wrote that the petitioners made two arguments. First, they said Kaufman III held that the Kaufman historic preservation easement satisfied the perpetuity requirement of the Tax Code (§170(h)(5)(A)) and Treasury Regulations (§1.170A-14(g)) so long as the easement guaranteed to the easement holder its appropriate share of insurance or condemnation proceeds post-extinguishment. They asserted that notwithstanding any extinguishment of the Carpenter easement by mutual consent, that easement also guaranteed post-extinguishment proceeds to the holder and therefore the perpetuity requirement, as interpreted by Kaufman III, was satisfied. Second, the petitioners argued that regardless of what the easement said, Colorado law protects post-extinguishment proceeds in a manner that is even stronger than the protection in Kaufman III, thereby providing another way the perpetuity requirement, as interpreted by Kaufman III, was satisfied. Petitioners said that in these two ways, the change in the law resulting from the holding in Kaufman III should change the outcome as to their easement and deduction.

The court countered that the holder’s right to post-extinguishment proceeds in the Carpenter easement was irrelevant to the flaws in its provision allowing extinguishment by mutual consent.

 The court tried to distinguish the situation in Carpenter from Commissioner v. Simmons, 646 F.3d 6, 10 (D.C. Cir.  2011), which was cited by the Appeals Court in Kaufman III as precedent for its decision. In Simmons the historic preservation easements allowed the holders to give consent to facade changes or to abandon some or all of its rights. Simmons said that provision did not violate the perpetuity requirement but is “needed to allow the donee organization to accommodate such change as may become necessary to make a building livable or usable for future generations while still ensuring the change is consistent with the conservation purpose of the easement.” In Carpenter II the court said that the easement’s provision allowing extinguishment by mutual consent was not similar.

The court also reinterpreted its own words in Carpenter I regarding the necessity under the Code and Regulations for a judicial proceeding to extinguish an easement. In Carpenter I the Tax Court wrote that in Kaufman I, “[W]e declined to rule that a conservation deed must require a judicial proceeding to extinguish an easement for the easement to be perpetual. [citation omitted] 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.” But in Carpenter II the court wrote, “To make our position clear, extinguishment by judicial proceedings is mandatory. Therefore, we reject petitioners’ argument that section 1.170A-14(g)(6), Income Tax Regs., contemplates any alternative to judicial extinguishment.”

The court also rejected the petitioners’ argument based on Colorado law, saying that it was only a rehash of an argument they made in Carpenter I using a new legal theory and therefore not an appropriate basis to grant reconsideration.  

 In a footnote, the court explained its holding that, even apart from the applicability of the Kaufman III analysis, Kaufman III, which was decided by the Court of Appeals for the First Circuit is not binding law as to Carpenter. It wrote, “[T]he Court will follow the clearly established position of a Court of Appeals to which a case is appealable. However, we will give effect to our own views in cases appealable to courts that have not yet decided the issue. This case is appealable to the Court of Appeals for the Tenth Circuit absent stipulation otherwise. … The Court of Appeals for the Tenth Circuit has not yet ruled on the issue of whether a taxpayer may mutually agree with a donee organization to terminate a conservation easement when it becomes impossible to carry out the purpose of the conservation easement and still meet the requirements of sec. 1.170A-14(g)(6)(i), Income Tax Regs.”

 Decision available at

For some commentary on this decision, with which PLD does not necessarily agree, see by Prof. Nancy McLaughlin.

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