Salt Point Timber v. Commissioner

U.S. Tax Court, 2017 TC Memo 245, December 11, 2017: Easement not deductible because holders not limited to “qualified organizations”.

Salt Point Timber granted the Lord Berkeley Conservation Trust a conservation easement for which Salt Point Timber received some payment but claimed a $2,130,000 deduction for the charitable contribution of the value of the easement in excess of the payment Salt Point received. The IRS denied the deduction and Salt Point fought the denial at the Tax Court.

Provisions in the conservation easement called for the easement to be replaced by (in the words of the easement) “a comparable conservation easement” encumbering an adjacent property if three conditions were met.  The Code, Sec. 170(h)(1)(A), defines a “qualified conservation contribution” as, among three things, a contribution to a “qualified organization.” “Qualified organization” is defined in Sec. 170(h)(3) of the Code. The easement did not expressly state that the holder of the replacement easement must be a “qualified organization” as defined by the Code. At issue was (1) whether the possibility of this replacement caused the easement to fail to meet the requirement of the Code that the easement must be contributed to a “qualified organization,” and (2) whether this possibility should nevertheless be overlooked because it is a possibility that is “so remote as to be negligible.” The court held that the conservation easement did not meet the definition of a “qualified conservation contribution” and therefore disallowed any federal tax deduction.

The IRS did not dispute that Lord Berkeley Trust, the initial grantee, is a “qualified organization.”

The easement provision in question, Part 6.22, provides in part:

“Notwithstanding any provision to the contrary, in the event that (i) any of the Protected Property is transferred to the owner of an adjacent property * * *, (ii) the adjacent property is encumbered by a comparable conservation easement [emphasis added] and (iii) the owner of the adjacent property and the holder of the conservation easement agree to modify the conservation easement on the adjacent property to encumber the transferred property by the adjacent property’s conservation easement, the parties agree to amend this easement to release the transferred property from this easement.”

The easement does not define a “comparable conservation easement”.

The court found that the above-quoted language contained no express condition that the holder of the replacement easement be a “qualified organization.”  The court also rejected Salt Point’s arguments that the text of Part 6.22 should be understood to mean that the holder of the easement must always be a qualified organization.

Salt Point tried to say that the definition of “holder” of a “conservation easement” in the South Carolina Conservation Easement Act of 1991, S.C. Code Ann. secs. 27-8-10 to 27-8-120 (1991), effectively limits such holders to qualified organizations and that the easement must be understood to incorporate that definition. The court rejected that argument because (1) the statutory definition is, by its own terms, only for the purposes of “this chapter,” and (2) even assuming for the sake of argument that the statutory definition governs who can hold a replacement easement under part 6.22 of the easement, that statutory definition does not equate “holder” to “qualified organization”.  The court pointed out that the statutory definition of holder did not require the organization to meet the specific Code requirements for a nongovernmental organization to be deemed a “qualified organization,” namely, the organization must be described either in Code sections 501(c)(3) or 170(b)(1)(A)(vi). As examples of what these Code requirements demand that the South Carolina statutory definition does not, the court cited requirements that the organization refrain from (1) lobbying or (2) intervening in political campaigns.

Salt Point also argued that any easement not held by a “qualified organization” would not be comparable to the original easement and therefore not eligible to replace that easement under Part 6.22 of the easement.  They supported this argument by pointing to the assignment provisions of the easement which say that Salt Point could assign the holder’s interest in the easement only to a “qualified organization.” The court reasoned that the assignment provisions of the easement actually proved the opposite, that is, because the assignment provisions specifically limited assignees to qualified organizations, whereas Part 6.22 does not, that “suggests that there is no such restriction” in Part 6.22.

The court also rejected Salt Point’s position for additional reasons:

(1)  “The reference to ‘comparable’ easements is most naturally interpreted as a reference to the comparability of the terms of the easements, not the owner of the easements.”

(2)   “[E]ven if one thinks that a ‘comparable’ easement can be held only by an entity that is ‘comparable’ to the Lord Berkeley trust, it is difficult to say which of the Lord Berkeley trust’s qualities another entity must share to make the other entity its ‘comparable’.”

(3)  “Even if we assume that the easement requires the holder of a replacement easement to be a ‘non-profit charitable corporation’…that would not be the same thing as a ‘qualified organization’.”

(4)  “Had the parties to the easement intended a replacement easement to be held only by a ‘qualified organization’, they could have easily written such a restriction into part 6.22 of the easement.”

Salt Point finally argued that even if the court’s reasoning were correct, the possibility that the easement would ever be held by anything other than a qualified organization is so remote as to be negligible.  Section 1.170A-14(g)(3) of the Income Tax Regulations  says, “A deduction shall not be disallowed under … this section merely because the interest which passes to, or is vested in, the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.” If a possibility is so remote as to be negligible, that possibility should not be grounds for disallowing a deduction.

The court found that the three conditions for replacing the easement under Part 6.22 are not sufficiently unlikely that they can reasonably be ignored and said that if these conditions were really improbable enough to be ignored the parties would not have bothered to put Part 6.22 in the easement.

The IRS had also argued against the easement based on the extinguishment provisions of the Treasury Regulations but, because the court held that the easement failed to meet the requirements regarding “qualified organization,” it need not discuss the extinguishment question.

Decision available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11512.

 

(Salt point is often referred to in the court’s opinion as “Hood,” the name of Salt Point’s tax partner.)

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