The opinion
LAWRENCE G. GRAEV AND LORNA GRAEV, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 30638–08. Filed June 24, 2013.
Petitioner husband (‘‘P–H’’) contributed cash and a con-
servation easement to N, a charitable organization. Before the
contribution, N at P–H’s request issued to P–H a side letter
which promised that, in the event R disallows Ps’ charitable
contribution deductions, N ‘‘will promptly refund your entire
cash endowment contribution and join with you to imme-
diately remove the facade conservation easement from the
property’s title’’. Ps claimed charitable contribution deductions
for the cash and easement donations. R contends the side
letter made those contributions conditional gifts that are not
deductible under I.R.C. sec. 170, since the likelihood that N
would be divested of the cash and easement was not neg-
ligible. Held: Ps’ charitable contribution deductions are not
allowed because at the time of P–H’s contributions, the possi-
bility that the deductions would be disallowed and, as a
result, that N would return the contributions was not ‘‘so
remote as to be negligible’’, under 26 C.F.R. secs. 1.170A–1(e),
1.170A–7(a)(3), and 1.170A–14(g)(3), Income Tax Regs.
Frank Agostino, Eduardo S. Chung, Jeremy M. Klausner,
and Reuben G. Miller, for petitioners.
Shawna A. Early, for respondent.
CONTENTS
FINDINGS OF FACT ............................................................................. 379
NAT ...................................................................................................... 379
The property ........................................................................................ 380
Increased IRS scrutiny of easement contributions ........................... 380
NAT’s solicitation ................................................................................ 381
The side letter ..................................................................................... 383
Appraisal .............................................................................................. 384
Noncash contribution to NAT ............................................................ 384
377
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378 140 UNITED STATES TAX COURT REPORTS (377)
Cash contribution to NAT .................................................................. 385
Subsequent communications from NAT ............................................ 386
2004 and 2005 Federal income tax returns ...................................... 386
Notice of deficiency ............................................................................. 387
OPINION ................................................................................................. 387
I. Charitable contributions ..................................................................... 388
A. Generally ......................................................................................... 388
B. Conditional gifts ............................................................................. 388
C. Partial interests in general ........................................................... 390
D. Conservation easements ................................................................ 391
E. Construing ‘‘so remote as to be negligible’’ .................................. 393
II. Analysis .............................................................................................. 394
A. The possibility of disallowance by the IRS ................................... 394
1. The possibility of disallowance as a matter of fact ................... 394
a. Increased IRS scrutiny ............................................................ 395
b. The side letter .......................................................................... 398
2. Disallowance as a subsequent event .......................................... 398
B. The possibility of return of the contributions .............................. 401
1. Conservation easements under New York law ......................... 402
2. Merger doctrine ........................................................................... 405
3. Nullity .......................................................................................... 406
4. Voluntary removal of the easement ........................................... 408
III. Conclusion ......................................................................................... 409
GUSTAFSON, Judge: Pursuant to section 6212(a), 1 the
Internal Revenue Service (‘‘IRS’’) determined deficiencies in
tax for petitioners, Lawrence and Lorna Graev, in the
amounts of $237,481 for 2004 and $412,620 for 2005,
resulting from the disallowance of charitable contribution
deductions the Graevs claimed for those years. The IRS also
determined that Mr. and Mrs. Graev are liable for accuracy-
related penalties under section 6662(h) and alternatively
under section 6662(a) for 2004 and 2005. Mr. and Mrs. Graev
petitioned this Court, pursuant to section 6213(a), for
redetermination of these deficiencies and penalties. The issue
for decision at present is whether the deductions that the
Graevs claimed for charitable contributions of cash and a
conservation easement they donated to the National
1 Unless otherwise indicated, all section references are to the Internal
Revenue Code (26 U.S.C.; ‘‘the Code’’), as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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(377) GRAEV v. COMMISSIONER 379
Architectural Trust (‘‘NAT’’) should be disallowed because
they were conditional gifts. 2 We hold that the Graevs’ con-
tributions were conditional, non-deductible gifts.
FINDINGS OF FACT
The parties submitted this issue fully stipulated pursuant
to Rule 122, reflecting their agreement that the relevant
facts could be presented without a trial. 3 The stipulated facts
are incorporated herein by this reference. Mr. and Mrs.
Graev resided in the State of New York when they filed the
petition.
NAT
The parties have stipulated that, ‘‘[f]or purposes of the
Court’s decision regarding’’ the conditional gift issue, NAT is
a ‘‘qualified organization’’ under section 170(h)(3), to which a
charitable contribution can be made that is deductible for tax
purposes. NAT’s stated mission is to preserve historic
architecture in metropolitan areas across the United States.
NAT solicits the contribution of facade conservation ease-
ments by owners of property with historic significance as
determined by the National Park Service. When NAT solicits
potential donors, it features the potential charitable deduc-
2 In January 2010 the parties entered into a stipulation to be bound, by
which they agreed that if in this case the Court decides the conditional gift
issue in the Graevs’ favor, the outcome of some the other issues in this
case (chiefly, the valuation of the contributed easement) will follow the out-
come of a then-pending case. That case was decided in favor of respondent
in July 2010, appealed to the U.S. Court of Appeals for the Second Circuit,
vacated and remanded, and decided again in favor of respondent in Janu-
ary 2013. See Scheidelman v. Commissioner, T.C. Memo. 2010–151, va-
cated and remanded, 682 F.3d 189 (2d Cir. 2012), remanded to T.C. Memo.
2013–18. Decision in that case was entered April 12, 2013, and the time
to appeal has not yet expired; but we are able to resolve the issue ad-
dressed herein without awaiting the resolution of the Scheidelman issues.
We do not resolve here the issue of the Graevs’ liability for the penalties,
which will be a subject of future proceedings.
3 The burden of proof is generally on the taxpayer, see Rule 142(a)(1),
and the submission of a case under Rule 122 does not alter that burden,
see Borchers v. Commissioner, 95 T.C. 82, 91 (1990), aff ’d, 943 F.2d 22 (8th
Cir. 1991). However, the burden of proof can be shifted when the Commis-
sioner’s position implicates ‘‘new matter’’ not in the notice of deficiency.
See note 8 below, addressing the Graevs’ contention about supposed ‘‘new
matter’’ in this case.
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380 140 UNITED STATES TAX COURT REPORTS (377)
tions that owners may receive by contributing a facade con-
servation easement and a corresponding cash endowment to
NAT. In addition, NAT considered it ‘‘standard Trust policy’’,
regarding donors of easements and cash, to return a cash
contribution to the extent the IRS disallowed a deduction
therefor. In numerous instances NAT issued ‘‘comfort letters’’
assuring donors of this policy.
The property
In 1999 Mr. Graev purchased property in a historic
preservation district in New York, New York, for $4.3 mil-
lion. The property is listed on the National Register of His-
toric Places. During the years at issue Mr. Graev was the
sole fee simple owner of the property, and he held the prop-
erty subject to a mortgage.
Increased IRS scrutiny of easement contributions
On June 30, 2004, the IRS released IRS Notice 2004–41,
2004–2 C.B. 31, which addressed charitable contributions
and conservation easements and stated in part:
The Internal Revenue Service is aware that taxpayers who (1) transfer
an easement on real property to a charitable organization, or (2) make
payments to a charitable organization in connection with a purchase of
real property from the charitable organization, may be improperly
claiming charitable contribution deductions under § 170 of the Internal
Revenue Code. The purpose of this notice is to advise participants in
these transactions that, in appropriate cases, the Service intends to dis-
allow such deductions and may impose penalties and excise taxes. * * *
* * * * * * *
Some taxpayers are claiming inappropriate charitable contribution
deductions under § 170 for cash payments or easement transfers to
charitable organizations in connection with the taxpayers’ purchases of
real property.
In some of these questionable cases, the charitable organization pur-
chases the property and places a conservation easement on the property.
Then, the charitable organization sells the property subject to the ease-
ment to a buyer for a price that is substantially less than the price paid
by the charitable organization for the property. As part of the sale, the
buyer makes a second payment, designated as a ‘‘charitable contribu-
tion,’’ to the charitable organization. The total of the payments from the
buyer to the charitable organization fully reimburses the charitable
organization for the cost of the property.
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(377) GRAEV v. COMMISSIONER 381
In appropriate cases, the Service will treat these transactions in
accordance with their substance, rather than their form. Thus, the
Service may treat the total of the buyer’s payments to the charitable
organization as the purchase price paid by the buyer for the property.
Thus, the IRS publicly announced its awareness of abuses
related to easement contribution deductions, putting poten-
tial donors and donees on notice that easement contribution
deductions might be examined and challenged. We find that
there was at least a non-negligible possibility that the IRS
would challenge an easement contribution deduction there-
after claimed by Mr. Graev.
NAT’s solicitation
In the summer of 2004, a representative from NAT con-
tacted Mr. Graev regarding a potential easement donation to
NAT. Mr. Graev became aware that he had a ‘‘neighbor
across the street’’ who had contributed a facade easement to
NAT and who had received from NAT a side letter that
promised return of contributions if deductions were dis-
allowed. Mr. Graev evidently expressed to NAT an interest
in making an easement contribution like his neighbor’s, but
on September 15, 2004, he sent an email to NAT explaining
a concern that had arisen:
My accountants have referred me to Notice 2004–41 * * * issued by the
IRS on June 30, 2004, in which the IRS has indicated that it will, in
‘‘appropriate cases’’, disallow charitable deductions to organizations that
promote conservation easements and may impose penalties and excise
taxes on the taxpayer. They have not advised me to abandon this idea,
but they have advised me to be very cautious. What are your thoughts
especially as it relates to the side letter, etc.
(The ‘‘side letter’’ to which Mr. Graev referred was NAT’s
comfort letter assuring that it would refund a contribution in
the event that the favorable tax results anticipated from a
contribution were not achieved.) Mr. Graev indicated that he
had consulted his accountants, and in 2004 those account-
ants would surely have been aware of published court
decisions issued over the past decade that disallowed deduc-
tions claimed for the contribution of facade easements. 4 On
4 For
pre-2004 cases involving facade easements, see Richmond v. United
States, 699 F. Supp. 578 (E.D. La. 1988) (upholding partial disallowance
Continued
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382 140 UNITED STATES TAX COURT REPORTS (377)
his tax returns Mr. Graev listed his occupation as ‘‘attorney’’,
and we infer that he is an individual of above-average
sophistication who, with the help of his accountants, was
capable of identifying tax risks. We find that Mr. Graev did
in fact identify non-negligible risks regarding the deduct-
ibility of facade easements, as evidenced by his September 15
email and subsequent dealings with NAT.
In a response to Mr. Graev’s concerns, NAT sent him an
email dated September 16, 2004, that stated:
The IRS notices to which you refer were prompted by recently exposed
improprieties at the Nature Conservancy, the nation’s largest land con-
servation easement holding organization. The practice the IRS is con-
cerned with here is when a non-profit acquires property, puts an ease-
ment on it and sells it for a reduced price plus a tax-deductible contribu-
tion. * * *
It is important to distinguish between these activities, which certainly
warrant scrutiny, and those engaged in by the National Architectural
Trust. * * * We have been in contact with the IRS since the notices
were issued and, based upon our discussion with them, have no reasons
to expect that we or any of the donations we have received (easement
or cash) will be reviewed.
of contribution deduction where the taxpayer’s valuation of facade ease-
ment was found excessive); Satullo v. Commissioner, T.C. Memo. 1993–614
(upholding disallowance of contribution deduction where the facade ease-
ment was unenforceable in the year at issue because it had not been re-
corded, and where a mortgage had not been subordinated to the donee’s
interest), aff ’d without published opinion, 67 F.3d 314 (11th Cir. 1995);
Dorsey v. Commissioner, T.C. Memo. 1990–242 (upholding partial disallow-
ance of contribution deduction where the taxpayer’s valuation of facade
easement was found excessive); Griffin v. Commissioner, T.C. Memo. 1989–
130 (same), aff ’d, 911 F.2d 1124 (5th Cir. 1990); Losch v. Commissioner,
T.C. Memo. 1988–230 (same); and Hilborn v. Commissioner, 85 T.C. 677
(1985) (same). For pre-2004 cases involving conservation easements gen-
erally, see Strasburg v. Commissioner, T.C. Memo. 2000–94 (upholding
partial disallowance of contribution deductions where the deductions
claimed exceeded the taxpayer’s pro rata basis in the property and valu-
ation of the easement was found excessive); Fannon v. Commissioner, T.C.
Memo. 1986–572 (upholding partial disallowance of contribution deduc-
tions where the taxpayer’s valuation of scenic easement was found exces-
sive); Akers v. Commissioner, T.C. Memo. 1984–490 (same), aff ’d, 799 F.2d
243 (6th Cir. 1986); and Great N. Nekoosa Corp. v. United States, 38 Fed.
Cl. 645, 654 (1997) (holding that conservation easements were not exclu-
sively for conservation purposes when the plaintiffs retained the right to
extract sand and gravel).
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(377) GRAEV v. COMMISSIONER 383
Thus far not a single donation made to the Trust has been disallowed
by the IRS (400+ in New York City alone). * * *
With regard to side letters in particular, NAT wrote:
[W]e don’t believe they compromise the tax-deductibility of cash dona-
tions in the present tax year, as they are simply a confirmation of
standard Trust policy. However, we do not believe this would be the case
with a legal agreement that explicitly made the cash donation contingent
on the survival of the deduction. In such a case, we would recommend
that the cash donation be treated as tax-deductible once the contingency
period has expired. * * *
That is, it was ‘‘standard Trust policy’’ to refund a cash con-
tribution to the extent the IRS disallowed the donor’s deduc-
tion for the related easement.
Evidently reassured, Mr. Graev executed a facade con-
servation easement application to NAT on September 20,
2004. In a cover letter to NAT transmitting the application,
Mr. Graev stated: ‘‘I will also be looking for the NAT to issue
the ‘side’ letter we discussed (similar to the one being issued
to my neighbor across the street).’’
The side letter
On September 24, 2004 NAT sent the side letter to Mr.
Graev. The side letter read in pertinent part:
1. In the event the IRS challenges the appraisal of your facade conserva-
tion easement and the tax deductions derived therefrom are reduced as
a result, we will make a proportionate reduction to your cash endow-
ment contribution and promptly refund the difference to you.
2. In the event the IRS disallows the tax deductions in their entirety,
we will promptly refund your entire cash endowment contribution and
join with you to immediately remove the facade conservation easement
from the property’s title.
Neither the side letter nor any other evidence in our record
suggests that, in the event the IRS disallowed his contribu-
tion, Mr. Graev would have to sue NAT in order to induce
it to ‘‘remove’’ the easement. Rather, NAT promised upon dis-
allowance to ‘‘join with [him] * * * to immediately remove
the facade conservation easement from the property’s title’’.
Mr. Graev took NAT at its word, and so do we. That is, we
find that there was at least a non-negligible possibility, if the
IRS successfully disallowed Mr. Graev’s easement contribu-
tion deduction, that NAT would do what it said it would do.
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384 140 UNITED STATES TAX COURT REPORTS (377)
Appraisal
Mr. Graev retained the firm of Miller Samuel, Inc. (‘‘MSI’’),
to prepare an appraisal of the facade easement. In October
2004, MSI issued its appraisal report to Mr. Graev
appraising the property at $9 million and concluding that the
easement would reduce the value by 11% (or $990,000).
Thus, the report appraised the easement at $990,000.
Noncash contribution to NAT
In late 2004 5 Mr. Graev executed a conservation deed
granting a facade easement on the property to NAT. The
deed in pertinent part provides:
The Property constitutes an important element in the architectural
ensemble of the Treadwell Farms Historic District, and the grant of the
Easement as set forth in this instrument will, inter alia, assist in pre-
serving this certified historic structure and in preserving open space for
the scenic enjoyment of the general public.
* * * * * * *
The Grantor does hereby grant and convey to the Grantee, TO HAVE
AND TO HOLD, an Easement in gross, in perpetuity, in, on and to the
Property, the Building and the Facade, being an Open Space and
Architectural Facade Conversation Easement on the Property * * *
* * * * * * *
A. * * * This Easement shall survive any termination of Grantor’s or
the Grantee’s existence. The rights of the Grantee under this instrument
shall run for the benefit of and may be exercised by its successor and
assigns, or by its designees duly authorized in a deed of Easement.
B. Grantee covenants and agrees that it will not transfer, assign or
otherwise convey its rights under this Easement except to another
‘‘qualified organization’’ described in Section 170(h)(3) of the Internal
Revenue Code of 1986 and controlling Treasury regulations, and Grantee
further agrees that it will not transfer this Easement unless the trans-
feree first agrees to continue to carry out the conservation purposes for
which this Easement was created, provided, however, that nothing
herein contained shall be constructed to limit the Grantee’s right to give
its consent (e.g., to changes in a Protected Facade(s)) or to abandon some
or all of its rights hereunder. [Emphasis added.]
5 The
deed recites that it was executed October 11, 2004, but Mr. Graev’s
signature on the deed was notarized on December 16, 2004, and he deliv-
ered it to NAT one day later. NAT’s then president, James Kearns, signed
the deed on NAT’s behalf on December 28, 2004.
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(377) GRAEV v. COMMISSIONER 385
C. In the event this Easement is ever extinguished through a judicial
decree, Grantor agrees on behalf of itself, its heirs, successors and
assigns, that Grantee, or its successors and assigns, will be entitled to
receive upon the subsequent sale, exchange or involuntary conversion of
the Property, a portion of the proceeds from such sale, exchange or
conversion equal to the same proportion that the value of the initial
Easement donation bore to the entire value of the property at the time
of donation * * *. Grantee agrees to use any proceeds so realized in a
manner consistent with the conservation purposes of the original con-
tribution.
* * * * * * *
Citimortgage Inc. (‘‘Mortgagee/Lender’’) hereby joins in the execution of
this CONSERVATION DEED OF EASEMENT for the sole and limited
purpose of subordinating its rights in the Property to the right of the
Grantee, its successors or assigns, to enforce the conservation purposes
of this Easement in perpetuity under the following conditions and stipu-
lations:
(a) The Mortgagee/Lender and its assignees shall have a prior claim to
all insurance proceeds * * * and all proceeds from condemnation, and
shall be entitled to same in preference to Grantee until the Mortgage/
the Deed of Trust is paid off and discharged, notwithstanding that the
Mortgage/the Deed of Trust is subordinate in priority to the Easement.
The deed did not expressly refer to the side letter or incor-
porate its terms. The City of New York recorded the deed on
February 17, 2005.
Cash contribution to NAT
In conjunction with an easement donation, NAT asks a
donor to make a cash contribution to NAT equal to 10% of
the appraised easement value, in order to pay for NAT’s cur-
rent operating costs and to fund its long-term monitoring and
administration needs. In compliance with NAT’s request, Mr.
Graev made an initial deposit of $1,000 to NAT on Sep-
tember 15, 2004. On December 17, 2004, the same day he
delivered the signed deed to NAT, Mr. Graev made a $98,000
cash contribution to NAT, bringing his cash contributions to
NAT to a total of $99,000. On January 25, 2005, NAT gave
Mr. Graev written acknowledgment of his 2004 cash and
non-cash contributions. That correspondence also included a
copy of Form 8283, executed by the appraiser, MSI, and
NAT.
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386 140 UNITED STATES TAX COURT REPORTS (377)
Subsequent communications from NAT
Also on January 25, 2005, NAT sent a letter to Mr. Graev
informing him that the U.S. Senate Committee on Finance
had announced in a press release their ‘‘intent to implement
reforms to the tax laws governing facade easements that will
increase and create additional fines and penalties on pro-
moters, taxpayers and appraisers who participate, aid or
assist in the donation of facade easements that are found to
be significantly overvalued.’’ Several months later, in August
2005, NAT sent Mr. Graev another letter which read:
The purpose of this letter is to bring to your attention a development
that may be relevant to the tax deductibility of the cash contributions
that you made to the National Architectural Trust * * *
In connection with your donation of a facade conservation easement and
cash contribution and per your request, we sent you a letter dated Sep-
tember 24, 2004, stating, among other things, that the cash contribution
would be refunded in whole or in part if your tax deduction for the ease-
ment were reduced or disallowed by the Internal Revenue Service. It has
recently been brought to our attention by our attorney that this offer of
a refund may adversely affect the deductibility of the cash contribution
as a charitable gift. * * *
We urge you to contact your professional tax advisor to determine the
actual impact of the refund offer. Of course, if you determine that you
would prefer that we withdraw the refund offer, which according to our
attorney should restore the deductibility of your cash contribution, the
Trust will promptly do so. * * *
Mr. Graev did not ask NAT to withdraw the refund offer. We
find that NAT’s formal offer to withdraw the refund offer—
made after NAT consulted with its attorney—further
indicates that NAT intended to honor its promises in the side
letter (even if the promises may not have been legally
enforceable), unless Mr. Graev directed otherwise.
2004 and 2005 Federal income tax returns
Mr. and Mrs. Graev filed joint Forms 1040, U.S. Individual
Income Tax Return, for taxable years 2004 and 2005. On
their 2004 return, which they filed on or around October 10,
2005 (i.e., after the January and August 2005 letters from
NAT, discussed above), Mr. and Mrs. Graev reported a chari-
table contribution of $990,000 for the facade easement con-
tribution and $99,000 for the cash contribution to NAT. Mr.
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(377) GRAEV v. COMMISSIONER 387
and Mrs. Graev claimed a deduction for the entire cash con-
tribution in 2004, but because of the limitations on charitable
contribution deductions in section 170(b)(1)(C), they claimed
a charitable contribution deduction with respect to the facade
easement of only $544,449 on their 2004 return.
On their 2005 return, filed on or around October 6, 2006,
Mr. and Mrs. Graev claimed a carryover charitable contribu-
tion deduction of $445,551 relating to the facade easement
contribution in 2004.
Notice of deficiency
By a statutory notice of deficiency dated September 22,
2008, the IRS disallowed Mr. and Mrs. Graev’s cash and non-
cash charitable contribution deductions relating to their con-
tributions to NAT and determined deficiencies in tax for both
2004 and 2005. In the notice of deficiency the IRS stated:
‘‘[T]he noncash charitable contribution of a qualified con-
servation contribution is disallowed because it was made sub-
ject to subsequent event(s)’’. The notice disallowed the
Graevs’ cash charitable contribution deduction for the same
reason. The IRS also determined that Mr. and Mrs. Graev
are liable for accuracy-related penalties under section 6662
for 2004 and 2005.
OPINION
The question now before the Court is whether deductions
for Mr. Graev’s contributions of cash and the easement to
NAT should be disallowed because they were conditional
gifts. The answer depends on whether NAT’s promises in the
side letter made the gifts conditional and whether the chance
that the condition would occur was ‘‘so remote as to be neg-
ligible’’. See 26 C.F.R. secs. 1.170A–1(e), 1.170A–7(a)(3),
1.170A–14(g)(3), Income Tax Regs.
The Graevs argue that under New York law the agreement
in the side letter is unenforceable because conditions in the
side letter were not included in the recorded deed and that
under Federal tax law the side letter was a nullity. We con-
clude that NAT’s promises in the side letter were not a nul-
lity and were not extinguished and that NAT could and
would honor its promises both as to the easement and as to
the cash contribution.
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388 140 UNITED STATES TAX COURT REPORTS (377)
I. Charitable contributions
A. Generally
Section 170(a)(1) generally allows a deduction for any
‘‘charitable contribution’’ made during the taxable year. Sec-
tion 170(c)(2) defines a ‘‘charitable contribution’’ for this pur-
pose to include ‘‘a contribution or gift to or for the use of ’’
a trust organized and operated exclusively for charitable or
educational purposes. The parties agree for purposes of the
conditional gift issue that NAT is such an organization.
Application of the general rule in section 170(a)(1) may be
complicated—especially with regard to the amount and
timing of a charitable contribution deduction—if a donor
contributes a property interest to a charity but, at the time
of the contribution, there is uncertainty about the amount of
property that will actually reach the charity—e.g., when a
donor contributes a remainder interest in property to a
charity, or (as in this case) the donor contributes property
subject to a condition. Section 170 and the corresponding
regulations provide instruction and limitations that, at least
in part, ensure that the donor will be able to deduct only
what the donee organization actually receives. See, e.g., sec.
170(f)(2), (3), (11). Three such limitations are pertinent in
this case: (1) 26 C.F.R. section 1.170A–1(e), which limits
deductions for conditional gifts; (2) section 170(f)(3)(A) and
the corresponding regulations, which limit deductions for
contributions of partial interests in property; and (3) section
170(f)(3)(B)(iii) and corresponding regulations, which provide
special rules for conservation easements.
B. Conditional gifts
The general rule of section 170(a)(1) allows a deduction for
a charitable contribution only when ‘‘payment * * * is made
within the taxable year.’’ (Emphasis added.) Regulations cor-
responding to section 170(a) clarify this rule with a limita-
tion particularly relevant in this case:
If an interest in property passes to, or is vested in, charity on the date
of the gift and the interest would be defeated by the subsequent perform-
ance of some act or the happening of some event, the possibility of occur-
rence of which appears on the date of the gift to be so remote as to be
negligible, the deduction is allowable. [26 C.F.R. sec. 1.170A–1(e).]
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(377) GRAEV v. COMMISSIONER 389
That is, the deduction may be considered ‘‘made’’ notwith-
standing a possibility that the contribution will be defeated
by a subsequent event, but only if that possibility is ‘‘so
remote as to be negligible’’. Although the parties agree that
the side letter recited conditions on Mr. Graev’s contribu-
tions, the parties disagree about whether this regulation dis-
allows deductions for those contributions.
A brief discussion of the history of 26 C.F.R. section
1.170A–1(e) is helpful in understanding the regulation’s
application in this case. The Secretary promulgated the first
version of this regulation in 1959 to correspond to section
170(a) of the 1954 Code. 6 The operative language in that
1959 regulation was identical to an older regulation that had
limited deductions for estate tax purposes for certain condi-
tional charitable bequests. See 26 C.F.R. sec. 81.46(a), Estate
Tax Regs. (1949). 7 Given this similarity, we consider
interpretations of 26 C.F.R. section 20.2055–2(b), Estate Tax
Regs., and its history instructive in construing 26 C.F.R. sec-
6 26 C.F.R. sec. 1.170–1(e), Income Tax Regs. (1959), provided:
If as of the date of a gift a transfer for charitable purposes is dependent
upon the performance of some act or the happening of a precedent event
in order that it might become effective, no deduction is allowable unless
the possibility that the charitable transfer will not become effective is so
remote as to be negligible. If an interest passes to or is vested in charity
on the date of the gift and the interest would be defeated by the per-
formance of some act or the happening of some event, the occurrence of
which appeared to have been highly improbable on the date of the gift,
the deduction is allowable. The deduction is not allowed in the case of
a transfer in trust conveying a present interest in income if by reason
of all the conditions and circumstances surrounding the transfer it ap-
pears that the charity may not receive the beneficial enjoyment of the
interest. * * *
7 26 C.F.R. sec. 81.46(a), Estate Tax Regs. (1949), provided:
If as of the date of decedent’s death the transfer to charity is dependent
upon the performance of some act or the happening of a precedent event
in order that it might become effective, no deduction is allowable unless
the possibility that charity will not take is so remote as to be negligible.
If an estate or interest has passed to or is vested in charity at the time
of decedent’s death and such right or interest would be defeated by the
performance of some act or the happening of some event which appeared
to have been highly improbable at the time of decedent’s death, the de-
duction is allowable.
The current version of this regulation is in 26 C.F.R. sec. 20.2055–2(b)(1),
Estate Tax Regs.
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390 140 UNITED STATES TAX COURT REPORTS (377)
tion 1.170A–1(e). See Briggs v. Commissioner, 72 T.C. 646,
657 (1979), aff ’d without published opinion, 665 F.2d 1051
(9th Cir. 1981).
The Supreme Court in Commissioner v. Estate of
Sternberger, 348 U.S. 187, 194 (1955), discussed the estate
tax regulations at length, stating:
The predecessor of [26 C.F.R.] s[ec.] 81.46 confined charitable deductions
to outright, unconditional bequests to charity. It expressly excluded
deductions for charitable bequests that were subject to conditions, either
precedent or subsequent. While it encouraged assured bequests to
charity, it offered no deductions for bequests that might never reach
charity. Subsequent amendments have clarified and not changed that
principle. Section 81.46(a) today yields to no condition unless the possi-
bility that charity will not take is ‘‘negligible’’ or ‘‘highly improbable.’’
* * *
Similarly, a fundamental principle underlying the charitable
contribution deduction is that the charity actually receive
and keep the contribution. 26 C.F.R. section 1.170A–1(e)
clarifies that principle: no deduction for a charitable con-
tribution that is subject to a condition (regardless of what the
condition might be) is allowable, unless on the date of the
contribution the possibility that a charity’s interest in the
contribution ‘‘would be defeated’’ is ‘‘negligible’’.
Accordingly, under section 1.170A–1(e) of the regulations
(construing the statutory requirement of section 170(a)(1)
that a gift actually ‘‘is made’’), the Graevs’ deductions are not
allowable unless the possibility that NAT’s interests in the
easement and cash would be defeated was ‘‘so remote as to
be negligible’’.
C. Partial interests in general
Logically related to but distinct from the disallowance of
deductions for conditional gifts is the limitation in section
170(f)(3) on deductions for contributions of partial interests
in property. One is generally allowed a deduction only for the
contribution of one’s entire interest in property. Congress
enacted what is now section 170(f)(3)(A) as part of the Tax
Reform Act of 1969, Pub. L. No. 91–172, sec. 201, 83 Stat.
at 549. Section 170(f)(3)(A) allows a deduction for a chari-
table contribution ‘‘of an interest in property [not made in
trust] which consists of less than the taxpayer’s entire
interest in such property’’ only to the extent it would be
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(377) GRAEV v. COMMISSIONER 391
allowable under section 170 ‘‘if such interest had been trans-
ferred in trust’’. This is a narrow allowance, since the rules
that allow charitable contribution deductions for partial
interests transferred in trust allow deductions only for
interests that can be valued using prescribed methods (e.g.,
actuarial tables promulgated in the regulations) and that
have assurances that the charity will receive payments from
the trust. See, e.g., sec. 170(e)(2); 26 C.F.R. sec. 1.170A–6,
Income Tax Regs.
In this case, since Mr. Graev reserved the right to have
NAT return the easement and the cash if certain events
occurred, the contributions of both the easement and the
cash were less than Mr. Graev’s entire interest in the
contributed property. Accordingly, Mr. Graev’s contributions
appear subject to the limitation in section 170(f)(3). However,
26 C.F.R. section 1.170A–7(a)(3) provides the following miti-
gation of this limitation:
A deduction shall not be disallowed under section 170(f)(3)(A) * * *
merely because the interest which passes to, or is vested in, the charity
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. * * *
Thus, under this regulation, even though the contributions
did not consist of Mr. Graev’s entire interest in the cash and
the easement, the Graevs’ deductions for contributions would
not be disallowed under section 170(f)(3)(A) if the likelihood
that NAT’s interests in the cash and the easement would be
defeated was ‘‘so remote as to be negligible’’.
D. Conservation easements
An easement is ‘‘[a]n interest in land owned by another
person, consisting in the right to use or control the land, or
an area above or below it, for a specific limited purpose’’.
Black’s Law Dictionary 585–586 (9th ed. 2009). Consequently,
an easement—whether or not it is subject to any condition—
is by definition a partial interest in property, and it would
therefore be non-deductible under section 170(f)(3)(A), apart
from any further statutory provision. However, further provi-
sion is made in subsections (f)(3)(B)(iii) and (h) of section
170, the history of which we briefly survey:
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392 140 UNITED STATES TAX COURT REPORTS (377)
The disallowance of a deduction for partial interests was
added to the Code as section 170(f)(3) by the Tax Reform Act
of 1969. In that provision’s original form, the only exceptions
to disallowance of a deduction for contributions of partial
interests were for contributions of ‘‘a remainder interest in a
personal residence or farm’’ and ‘‘an undivided portion of the
taxpayer’s entire interest in property’’. That is, no exception
was made for a qualified conservation contribution. However,
the Staff of the Joint Committee on Taxation opined in its
General Explanation of the Tax Reform Act of 1969, at 80 (J.
Comm. Print 1970), that ‘‘a gift of an open space easement
in gross is to be considered a gift of an undivided interest in
property where the easement is in perpetuity.’’
Congress made explicit an exception for (i.e., permitted a
deduction for) certain easements in the Tax Reform Act of
1976, Pub. L. No. 94–455, sec. 2124(e), 90 Stat. at 1919,
which amended section 170(f)(3)(B) to provide in clause (iii)
that a donor may claim a deduction for the contribution of
an ‘‘easement with respect to real property of not less than
30 years’ duration granted to * * * [a charitable organiza-
tion] exclusively for conservation purposes’’. The following
year Congress revised that exception, eliminating the ‘‘30
years’ duration’’ provision and limiting deductibility to an
‘‘easement with respect to real property granted in per-
petuity’’. (Emphasis added.) Tax Reduction and Simplification
Act of 1977, Pub. L. No. 95–30, sec. 309(a), 91 Stat. at 154.
In the Tax Treatment Extension Act of 1980, Pub. L. No. 96–
541, sec. 6(a), 94 Stat. at 3206, Congress amended section
170(f)(3) and added subsection (h), which have remained in
effect since then and work in tandem to keep the perpetuity
requirement for conservation easement donations.
Section 170(f)(3)(B)(iii) exempts, from the general disallow-
ance of deductions for contributions of partial interests, con-
tributions of ‘‘a qualified conservation contribution’’—a term
defined in section 170(h)(1) as a contribution of a ‘‘qualified
real property interest,’’ to a ‘‘qualified organization’’, ‘‘exclu-
sively for conservation purposes.’’ A ‘‘qualified real property
interest’’ must have ‘‘a restriction (granted in perpetuity) on
the use which may be made of the real property.’’ Sec.
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(377) GRAEV v. COMMISSIONER 393
170(h)(2)(C) (emphasis added). 8 Regulations describing the
perpetuity requirement provide:
A deduction shall not be disallowed under section 170(f)(3)(B)(iii) * * *
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 hap-
pening of some event, if on the date of the gift it appears that the possi-
bility that such act or event will occur is so remote as to be negligible.
* * * [26 C.F.R. sec. 1.170A–14(g)(3).]
(The ‘‘so remote as to be negligible’’ phrase is the familiar
term first used in the 1949 estate tax regulations cited
above.) Accordingly, a conservation easement fails to be ‘‘in
perpetuity’’—and is therefore not excepted from the general
rule of section 170(f)(3)(A) disallowing deductions for con-
tributions of partial interests—if, on the date of the donation,
the possibility that the charity may be divested of its interest
in the easement is not so remote as to be negligible.
E. Construing ‘‘so remote as to be negligible’’
Each of the issues discussed above—i.e., whether a chari-
table contribution was effectively ‘‘made’’, whether it con-
sisted of an ‘‘entire interest’’, and whether it was a ‘‘qualified
conservation contribution’’—essentially turns on the same
question: At the time of Mr. Graev’s contributions, was the
possibility that NAT’s interest in the cash and the easement
would be defeated ‘‘so remote as to be negligible’’? In prior
cases, we have defined ‘‘so remote as to be negligible’’ as ‘‘ ‘a
chance which persons generally would disregard as so highly
improbable that it might be ignored with reasonable safety
in undertaking a serious business transaction.’ ’’ 885 Inv. Co.
8 In his reply brief, Mr. Graev complains that an IRS argument invoking
the perpetuity requirement is ‘‘new matter’’ as to which the IRS should
bear the burden of proof under Rule 142(a)(1). We do not believe that the
burden of proof affects the resolution of this issue, since the material facts
are not actually in dispute, and the outcome is the same no matter which
party has the burden. See Dagres v. Commissioner, 136 T.C. 263, 279
(2011). More important, however, the argument that the gifts were subject
to a subsequent event—an issue plainly stated in the notice of deficiency—
is by its nature an argument that the gifts failed to be perpetual. One rea-
son a conservation easement may fail to be a perpetual gift to the donee,
and may thus fail to be deductible, is that it is subject to a condition that
creates a non-remote possibility that the easement may revert to the
donor. See 26 C.F.R. sec. 1.170A–14(g)(3), Income Tax Regs. The issue of
perpetuity is not new matter in this case.
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394 140 UNITED STATES TAX COURT REPORTS (377)
v. Commissioner, 95 T.C. 156, 161 (1990) (quoting United
States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955)). Stated dif-
ferently, it is ‘‘a chance which every dictate of reason would
justify an intelligent person in disregarding as so highly
improbable and remote as to be lacking in reason and sub-
stance.’’ Briggs v. Commissioner, 72 T.C. at 657. What is
determinative under the section 170 ‘‘remote’’ regulations is
the possibility, after considering all the facts and cir-
cumstances, that NAT’s reception and retention of the ease-
ment and cash would be defeated.
II. Analysis
The side letter provides that the occurrence that would
defeat NAT’s interest in the easement and cash is the IRS’s
successful disallowance of the Graevs’ charitable contribution
deductions and NAT’s consequent promised ‘‘removal’’ of the
easement and return of the cash. We hold that at the date
of the contribution the possibility that the IRS would dis-
allow the deductions and that NAT would return the cash to
Mr. Graev and ‘‘remove’’ the easement was not ‘‘so remote as
to be negligible’’.
A. The possibility of disallowance by the IRS
1. The possibility of disallowance as a matter of fact
The Graevs argue that as of December 2004, the caselaw
supported an easement valuation of 10% to 15% of Mr.
Graev’s property and that it was therefore reasonable to con-
clude that Mr. Graev’s easement donation had a value of
$990,000 (i.e., 11% of the appraised value of the property).
They assert that the possibility the IRS would disallow their
deductions was so remote as to be negligible. However, on
the undisputed facts of this case, it is self-evident that the
risk of IRS disallowance was not negligible. 9 A substantial
risk obviously arose from the IRS’s then-announced intention
to scrutinize charitable contribution deductions for facade
easement contributions, and that risk is evident from Mr.
Graevs’ insistence on NAT’s issuing the side letter. We need
9 We do not address the circumstance in which a hyper-cautious donor
conditions his gift on non-disallowance where there is no non-negligible
possibility of disallowance.
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(377) GRAEV v. COMMISSIONER 395
not wonder how a donor or donee would have responded to
this risk if he had foreseen it; we know how Mr. Graev did
respond when he did foresee it: He did not ‘‘disregard’’ or
‘‘ignore[]’’ it, see 885 Inv. Co. v. Commissioner, 95 T.C. at 161;
Briggs v. Commissioner, 72 T.C. at 657, but rather went out
of his way to address it and hedge against it.
a. Increased IRS scrutiny
The Graevs note that at the time of their contribution in
December 2004, no charitable contribution deduction arising
from a contribution to NAT had been disallowed (to their
knowledge). However, the enforcement landscape regarding
deductions for facade easement donations was visibly
changing at the time of his contribution. As is discussed
above, the IRS released Notice 2004–41, supra, on June 30,
2004. In that notice the IRS stated:
The Internal Revenue Service is aware that taxpayers who (1) transfer
an easement on real property to a charitable organization, or (2) make
payments to a charitable organization in connection with a purchase of
real property from the charitable organization, may be improperly
claiming charitable contribution deductions under § 170 of the Internal
Revenue Code. The purpose of this notice is to advise participants in
these transactions that, in appropriate cases, the Service intends to dis-
allow such deductions and may impose penalties and excise taxes. * * *
Notice 2004–41 goes on to give a specific example of the
second instance, i.e., a taxpayer makes a cash contribution to
a charitable organization in addition to purchasing (at a dis-
count) from the same organization real property that was
subject to a conservation easement, where the total amount
of contribution and purchase price equals the charity’s initial
cost of the real property. The Graevs argue that since Notice
2004–41 specifically described a transaction that did not
apply in their case, the notice was not applicable to them.
We disagree. While Notice 2004–41 did list one specific
transaction that the Commissioner had determined was
inappropriate, the Commissioner’s general warning against
‘‘improperly claiming charitable contribution deductions’’ con-
nected with transfers of conservation easements to charities
was still very much applicable to the Graevs. Notice 2004–
41 made clear before Mr. Graev’s transfer that his trans-
action with NAT would be subject to heightened scrutiny and
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396 140 UNITED STATES TAX COURT REPORTS (377)
that if any of the Graevs’ positions were susceptible to chal-
lenge, the Commissioner would likely enforce a contrary posi-
tion. Mr. Graev’s September 15, 2004, email to NAT reflects
his understanding of this possibility, stating that in light of
Notice 2004–41 his accountants ‘‘have advised * * * [him] to
be very cautious.’’
The Graevs argue that their valuation of the contributed
easement was reasonable. Since the valuation issue will be
resolved by the parties’ stipulation to be bound by the out-
come of another case that is still pending, see note 2 above,
we do not decide valuation now but assume that the Graevs’
valuation was reasonable. However, the fact that a valuation
is reasonable does not mean that it is correct; a reasonable
but incorrect valuation may be challenged and disallowed;
consequently, someone who assigns a reasonable value to his
donation may nonetheless face a non-negligible risk of dis-
allowance.
Moreover, valuation is not the only potential issue faced by
a taxpayer claiming a deduction for a contributed easement,
and it was not the only issue as to which NAT promised to
return Mr. Graev’s contributions. The first numbered para-
graph of the side letter did address valuation (‘‘In the event
the IRS challenges the appraisal’’), but the second numbered
paragraph made the distinct promise to return the contribu-
tions ‘‘[i]n the event the IRS disallows the tax deductions in
their entirety’’. There are multiple requirements in section
170 and the corresponding regulations that, if not followed,
may lead to disallowance—and valuation is only one of them.
For example, an easement contribution may be disallowed
where—
• The donee fails to be a ‘‘qualified organization’’ described
in section 170(h)(3).
• The property subject to the easement fails to be of a
‘‘historically important land area’’ or a ‘‘certified historic
structure.’’ Sec. 170(h)(4)(iv); see Turner v. Commissioner,
126 T.C. 299, 316 (2006).
• The taxpayer fails to contribute a ‘‘qualified real property
interest’’. Sec. 170(a)(2); see Belk v. Commissioner, 140 T.C.
1 (2013).
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(377) GRAEV v. COMMISSIONER 397
• The easement fails to preserve conservation purposes ‘‘in
perpetuity’’. Sec. 170(h)(5); see Carpenter v. Commissioner,
T.C. Memo. 2012–1; Herman v. Commissioner, T.C. Memo.
2009–205.
• The parties fail to subordinate the rights of a mortgagee
in the property ‘‘to the right of the qualified organization to
enforce the conservation purposes of the gift in perpetuity.’’
26 C.F.R. sec. 1.170A–14(g)(2); see Mitchell v. Commissioner,
138 T.C. 324, 331–332 (2012).
• The taxpayer fails to ‘‘[a]ttach a fully complete appraisal
summary * * * to the tax return’’. 26 C.F.R sec. 1.170A–
13(c)(2)(B). But see Kaufman v. Shulman, 687 F.3d 21, 28–
30 (1st Cir. 2012), aff ’g in part, vacating and remanding in
part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134
T.C. 182 (2010).
• The appraisal fails to be a ‘‘qualified appraisal’’. 26
C.F.R. sec. 1.170A–13(c)(3); see Friedberg v. Commissioner,
T.C. Memo. 2011–238.
• The appraiser fails to be a ‘‘qualified appraiser’’. 26
C.F.R. sec. 1.170A–13(c)(5); see Rothman v. Commissioner,
T.C. Memo. 2012–218 (reserving the question on whether an
appraiser was ‘‘qualified’’).
• The parties fail to record the easement or otherwise fail
to effect ‘‘legally enforceable restrictions’’. 26 C.F.R. sec.
1.170A–14(g)(1); see Satullo v. Commissioner, T.C. Memo.
1993–614, aff ’d without published opinion, 67 F.3d 314 (11th
Cir 1995).
• The taxpayer fails to ‘‘[m]aintain records’’ necessary to
substantiate the charitable contribution. 26 C.F.R. sec.
1.170A–13(c)(2)(C), Income Tax Regs.
Mr. Graev’s September 15, 2004, correspondence with NAT
reflects his clear understanding that charitable contribution
deductions for contributions ‘‘to organizations that promote
conservation easements’’ were going to be the subject of IRS
scrutiny and could be disallowed for failing to satisfy any one
of the requirements in section 170. Mr. Graev’s accountants
advised him ‘‘to be very cautious’’ with such transactions.
Clearly, the risk that the IRS might disallow a deduction for
the contribution of an easement was well above ‘‘negligible’’.
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398 140 UNITED STATES TAX COURT REPORTS (377)
b. The side letter
Informed by his accountants’ warning, Mr. Graev initially
asked NAT about the possibility of a side letter from NAT
that promised the return of contributions if deductions were
disallowed. NAT eventually gave Mr. Graev such a letter on
September 24, 2004. The mere fact that he required the side
letter is strong evidence that, at the time of Mr. Graev’s con-
tribution, the risk that his corresponding deductions might
be disallowed could not be (and was not) ‘‘ignored with
reasonable safety in undertaking a serious business trans-
action.’’ 885 Inv. Co. v. Commissioner, 95 T.C. at 161.
Mr. Graev was not alone in his assessment of the risk of
disallowance. NAT considered it ‘‘standard Trust policy’’ to
return a cash contribution to the extent a deduction therefor
was disallowed by the IRS. In numerous instances NAT
issued ‘‘comfort letters’’ assuring donors of this policy. The
very essence of a comfort letter implies a non-negligible risk;
and the author uses the letter to induce the recipient to enter
into a transaction. In this case the risk was either partial or
complete disallowance of Mr. Graev’s claimed charitable con-
tribution deductions. NAT’s course of dealing confirms that
the possibility that the IRS might disallow Mr. Graev’s
deductions was not ‘‘so remote as to be negligible’’. See 26
C.F.R. secs. 1.170A–1(e), 1.170A–7(a)(3), 1.170A–14(g)(3).
2. Disallowance as a subsequent event
The Graevs argue:
Forty-four years ago, this Court ruled that the [subsequent] events
referred to by Treas. Reg. §1.170A–l(e) do not include contingencies cre-
ated by Respondent’s examination or contingencies within Respondent’s
control. O’Brien v. Commissioner, 46 T.C. 583, 592 (1966), acq., 1968–1
C.B. 2.[10]
O’Brien v. Commissioner, 46 T.C. 583 (1966), did involve a
charitable contribution that was contingent on subsequent
favorable tax treatment; but the Graevs’ characterization of
10 The Graevs also cite an IRS private letter ruling. We decline to con-
sider it, in light of section 6110(k)(3), which provides: ‘‘(3) Precedential sta-
tus.—Unless the Secretary otherwise establishes by regulations, a written
determination may not be used or cited as precedent.’’ See Abdel-Fattah v.
Commissioner, 134 T.C. 190, 202 (2010); Vons Cos. v. United States, 51
Fed. Cl. 1, 12 (2001).
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(377) GRAEV v. COMMISSIONER 399
our ruling in O’Brien is flatly incorrect, and their reliance on
it is therefore mistaken.
O’Brien addressed two issues—a charitable remainder
trust issue (which we describe here first) and a related but
distinct tax-treatment contingency issue. The taxpayers cre-
ated a charitable remainder trust in June 1964—of which
they made themselves trustees with broad powers to manage
the trust—and then made contributions to the trust in
December 1964. Id. at 584. The Commissioner argued that
the taxpayers were not entitled to charitable contribution
deductions derived from the taxpayers’ contributions to the
trust because the complete management power given to the
donor-trustees enabled them to defeat the remainder
interests and therefore prevented the deduction. Id. at 591.
We rejected that argument and concluded—
that it is highly improbable that the petitioners in their fiduciary
capacity will ever perform an act which will defeat the charitable remain-
ders they have created in the trust. All of the conditions and cir-
cumstances surrounding the transfers of property interests to the trust
persuade us that the named charities, or other qualified ones, will
eventually receive the beneficial enjoyment thereof. * * * [Id. at 596;
emphasis added.]
We thus decided this remainder trust issue under ‘‘[t]he
guidelines * * * set forth in section 1.170–1(e), Income Tax
Regs.’’ 11 Id. at 594.
The Commissioner’s tax contingency argument (discussed
first in O’Brien) was based on paragraph 16 of the trust
instrument, under which contributions to the trust were
‘‘subject to the condition that such contribution shall be
repaid to the contributor by the Trustees * * * only in the
event and to the extent that the Commissioner of Internal
Revenue does not allow [it] as a deduction’’. Id. at 588. In the
notice of deficiency issued in September 1965, the Commis-
sioner had disallowed the charitable contribution deductions
(for the sole reason that the donor-trustees had power over
the trust). We ‘‘disposed of [the contingency issue] sum-
11 For
the remainder trust issue we cited 26 C.F.R. section 1.170–1(e)
(1961) (see note 6 above for the 1959 version which was identical to the
1961 regulation); but the limitations now set forth in 26 C.F.R. sections
1.170A–1(e), 1.170A–7(a)(3), and 1.170A–14(g)(3), Income Tax Regs., are
equivalent.
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400 140 UNITED STATES TAX COURT REPORTS (377)
marily’’, id. at 591, so it is not entirely clear what the
Commissioner had argued; but it appears that the Commis-
sioner’s contention was simply that ‘‘the literal meaning of
paragraph 16’’, id., called for return of the contributions upon
the mere act of disallowance by the Commissioner, whether
or not the Commissioner’s position was valid or was upheld.
This position would have put the contingency ‘‘ ‘within the
control * * * of the Commissioner’ ’’, id. at 591 (quoting Sur-
face Combustion Corp. v. Commissioner, 9 T.C. 631, 655
(1947), aff ’d, 181 F.2d 444 (6th Cir. 1950)), 12 without regard
to the merits of the Commissioner’s decision. We held, to the
contrary, that despite ‘‘the narrow wording of the trust
instrument’’, ‘‘[t]he petitioners have a right to litigate
respondent’s determination’’, so that the contributions would
not be subject to return ‘‘unless the petitioners are
unsuccessful in this litigation.’’ Id. at 592.
That is, in O’Brien the Commissioner evidently argued
that the charitable contribution deductions were improper
simply because, under the trust instrument, the charitable
contributions were defeated by the IRS’s mere disallowance
(whether or not that disallowance was upheld in litigation).
We held, however, that if the taxpayers successfully chal-
lenged that disallowance, then the contributions were not
defeated (and the contribution deductions could therefore be
allowed). We thus held that a contingency expressed in terms
of ‘‘disallowance’’ of a deduction actually looked to the merits
of the deduction. Contrary to the Graevs’ argument, our
O’Brien Opinion did not analyze the tax contingency issue
under the section 170 regulations, 13 and we did not hold that
12 In Surface Combustion Corp. v. Commissioner, 9 T.C. 631 (1947),
aff ’d, 181 F.2d 444 (6th Cir. 1950), we held that a provision in an em-
ployee trust allowing an employer to reclaim his contributions to the trust
if the contributions were determined to be nondeductible did not prevent
the employer from deducting his contributions to the trust since the con-
tingency was in the control of the Commissioner. Surface Combustion did
not involve charitable contributions, section 170, nor any regulations with
a ‘‘so remote as to be negligible’’ standard.
13 Our Opinion in O’Brien v. Commissioner, 46 T.C. 583, 592 (1966), indi-
cates that the Commissioner also cited—but we distinguished—Jones v.
United States, 252 F. Supp. 256 (N.D. Ohio 1966), aff ’d in part, rev’d in
part, 395 F.2d 938 (6th Cir. 1968), a case not involving a tax-treatment-
contingent contribution, in which (as we noted) the District Court held
that the possibility that a contribution at issue there would be defeated
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(377) GRAEV v. COMMISSIONER 401
a tax-treatment contingency can never be a subsequent event
that will defeat a contribution and a deduction. We simply
did not address that issue.
This case, unlike O’Brien, clearly presents the issue of
whether the promised return of a charitable contribution
upon the disallowance of the charitable contribution deduc-
tion can constitute a subsequent event the possibility of
which, if not negligible, renders the deduction not allowable.
O’Brien sheds no light on that question.
B. The possibility of return of the contributions
If the risk of IRS disallowance was non-negligible, then so
was the prospect that NAT would be called on to honor its
side letter and ‘‘promptly refund * * * [Mr. Graev’s] entire
cash endowment contribution and join with * * * [Mr.
Graev] to immediately remove the facade conservation ease-
ment from the property’s title’’. Given that non-negligible
risk, Mr. Graev’s contributions fell afoul of the section 170
regulations implementing the statutory requirements that a
gift be effectively ‘‘made’’, that it consist of an ‘‘entire
interest’’, and that it be a ‘‘qualified conservation contribu-
tion’’. The Graevs argue, however, that as a matter of law
NAT could not be held to the promises it made in its side
letter, so that there was in fact no possibility that the prop-
erty would be returned.
The Graevs contend that NAT could not be divested of its
interest in the easement because the side letter is not
enforceable under New York law and that, as a result, the
contributions were not really conditional. 14 In particular, the
‘‘was not ‘so remote as to be negligible’ under section 1.170–1(e), Income
Tax Regs.’’ This description of Jones includes our only mention of that reg-
ulation in our discussion of this issue in the O’Brien Opinion, and our dis-
cussion does not address any relation between the regulation and the tax-
treatment-contingent deduction at issue in O’Brien.
14 In this argument the Graevs do not distinguish between the contribu-
tion of the easement (which was subject to the statutes that the Graevs
cite) and the contribution of the cash (which was not). Reliance on New
York real estate principles to argue that the side letter is not enforceable
as to the cash contribution is misplaced. Even if the side letter were not
enforceable as to the easement, for the reasons the Graevs advance, so
that they could not require NAT to ‘‘remove’’ it, the Graevs show no reason
that the side letter would not be enforceable so as to require the return
Continued
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402 140 UNITED STATES TAX COURT REPORTS (377)
Graevs argue that New York’s environmental conservation
statutes, N.Y. Envtl. Conserv. Law secs. 49–0301 to 49–0311
(McKinney 2008 & Supp. 2013), would prevent the side letter
from being enforced, and alternatively, that the common law
doctrine of merger extinguished the side letter upon NAT’s
recording the easement deed. They also contend that under
principles of tax law the promises in the side letter were a
nullity. We disagree.
1. Conservation easements under New York law
In general, property interests are determined by State law.
United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722
(1985). In 1983 New York enacted the New York Conserva-
tion Easement Statute. See N.Y. Envtl. Conserv. Law secs.
49–0301 to 49–0311. For purposes of these statutes a ‘‘con-
servation easement’’ is defined as:
an easement, covenant, restriction or other interest in real property, cre-
ated under and subject to the provisions of this title which limits or
restricts development, management or use of such real property for the
purpose of preserving or maintaining the scenic, open, historic, archae-
ological, architectural, or natural condition, character, significance or
amenities of the real property * * * [Id. sec. 49–0303(1).]
Under these New York statutes, a conservation easement is
enforceable even though ‘‘[i]t is not appurtenant to an
interest in real property’’ and even though ‘‘[i]t can be or has
been assigned to another holder’’. 15 N.Y. Envtl. Conserv.
Law sec. 49–0305(5). Since an easement with these
characteristics would not have been enforceable under New
York common law, see Gross v. Cizauskas, 385 N.Y.S.2d 832
(App. Div. 1976), a conservation easement in New York is
authorized only by statute and thus is subject to several
statutory restrictions. We assume the easement in this case
is enforceable only under New York’s Environmental Con-
servation Law and (as the Graevs contend) is subject to the
of the cash.
15 The legislative history of these provisions suggests that they were in-
cluded in the statutes so that the conservation easements would satisfy the
perpetuity requirement of 26 C.F.R. sec. 1.170A–14(g). See John C.
Partigan, ‘‘New York’s Conservation Easement Statute: The Property In-
terest and Its Real Property and Federal Income Tax Consequences’’, 49
Albany L. Rev. 430, 452 n.87 (1985).
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(377) GRAEV v. COMMISSIONER 403
restrictions therein, especially restrictions on how an ease-
ment can be extinguished.
The manner and circumstances in which parties can
modify or extinguish a conservation easement under New
York’s Environmental Conservation statutes are clear:
A conservation easement shall be modified or extinguished only pursu-
ant to the provisions of section 49–0307 of this title. Any such modifica-
tion or extinguishment shall be set forth in an instrument which com-
plies with the requirements of section 5–703 of the general obligations
law or in an instrument filed in a manner prescribed for recording a
conveyance of real property pursuant to section two hundred ninety-one
of the real property law. [N.Y. Envtl. Conserv. Law sec. 49–0305(2).]
The Graevs argue that NAT’s promise in the side letter to
‘‘remove the facade conservation easement from the prop-
erty’s title’’ purports to retain for Mr. Graev a right to extin-
guish the easement that does not comply with the provisions
of N.Y. Envtl. Conserv. Law section 49–0307, and as a result,
any attempt to remove the easement pursuant to the promise
in the side letter would be unlawful.
Pursuant to N.Y. Envtl. Conserv. Law section 49–0307,
cross-referenced in the statute quoted above, a conservation
easement held by a ‘‘not-for-profit conservation organiza-
tion’’ 16 may be modified or extinguished only: (1) ‘‘as pro-
vided in the instrument creating the easement’’; (2) ‘‘in a pro-
ceeding pursuant to section nineteen hundred fifty-one of the
real property actions and proceedings law’’; or (3) ‘‘upon the
exercise of the power of eminent domain.’’ NAT’s promise in
the side letter to remove the easement, standing alone, does
not appear to comply with any of the three permissible modi-
fication or extinguishment methods provided in N.Y. Envtl.
Conserv. Law section 49–0307.
The Commissioner argues that the side letter should be
considered part of ‘‘the instrument creating the easement’’.
That argument fails because the side letter was not ‘‘sub-
scribed by the person * * * granting [the deed]’’, N.Y. Gen.
Oblig. Law sec. 5–703 (McKinney 2012), nor was it recorded,
which are both required under N.Y. Envtl. Conserv. Law sec-
tion 49–0305 (cross-referencing N.Y. Gen. Oblig. Law sec. 5–
16 The Commissioner does not dispute that NAT is a ‘‘not-for-profit con-
servation organization’’ for purposes of New York’s Environmental Con-
servation Law.
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404 140 UNITED STATES TAX COURT REPORTS (377)
703) in order for a document to be considered an ‘‘instrument
creating the easement’’.
However, we hold that NAT had the ability to honor its
promises in the side letter because the subscribed and
recorded deed—which clearly is ‘‘the instrument creating the
easement’’—reserved for NAT the power to do so. Paragraph
IV.B. of the duly recorded deed granting the easement explic-
itly gives NAT the right to ‘‘abandon’’ the easement, and that
deed does comply with one of the three permissible
methods—i.e., the first (allowing modification or extinguish-
ment ‘‘as provided in the instrument creating the easement’’).
The recorded deed provides:
Grantee further agrees that it will not transfer this Easement unless the
transferee first agrees to continue to carry out the conservation purposes
for which this Easement was created, provided, however, that nothing
herein contained shall be constructed to limit the Grantee’s right to give
its consent (e.g., to changes in a Protected Facade(s)) or to abandon some
or all of its rights hereunder. [Emphasis added.]
We have found that at the time Mr. Graev made the con-
tribution, NAT intended to honor its promise to ‘‘join with
* * * [Mr. Graev] to immediately remove the facade con-
servation easement from the property’s title’’, and we hold
that NAT had the ability to honor this promise by exercising
its right to abandon the easement as set forth in paragraph
IV.B. of the recorded deed. 17
17 Our
holding here is distinguishable from Commissioner v. Simmons,
646 F.3d 6, 10 (D.C. Cir. 2011), aff ’g T.C. Memo. 2009–208, which looked
at similar abandonment language in an easement deed and concluded ‘‘de-
ductions cannot be disallowed based upon the remote possibility * * * [the
charity] will abandon the easements.’’ See also Kaufman v. Shulman, 687
F.3d 21, 28 (1st Cir. 2012), aff ’g in part, vacating and remanding in part
Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010).
In Commissioner v. Simmons, 646 F.3d at 10, the Court of Appeals for the
D.C. Circuit stated that ‘‘the Commissioner has not shown the possibility
* * * [the charity] will actually abandon its rights is more than negligible.
[The charity] * * * has been holding and monitoring easements in the Dis-
trict of Columbia since 1978, yet the Commissioner points to not a single
instance of its having abandoned its right to enforce.’’ In the instant case,
however, NAT gave Mr. Graev an explicit, written promise that it would
abandon its rights in the easement if certain events occurred. We find
nothing to indicate that NAT did not intend to comply with its written
promises.
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(377) GRAEV v. COMMISSIONER 405
Accordingly, we find that the Commissioner has shown
that the possibility that NAT would actually abandon its
rights was more than negligible.
2. Merger doctrine
Alternatively, the Graevs argue that the entire side letter
was extinguished under the common law doctrine of merger.
This argument is also without merit. While the doctrine of
merger generally extinguishes terms of preliminary contracts
or negotiations upon the recording of a deed, so that only the
terms in the recorded deed remain, there are exceptions to
this general rule. 91 N.Y. Jur. 2d Real Property Sales and
Exchanges, sec. 140 (2011). Assuming the doctrine of merger
applies to the side letter, the provisions in the side letter
would fall within one of these exceptions and survive the
deed.
The merger rule does not apply where there is a clear
intent evidenced by the parties that a particular provision of
the contract shall survive the deed. See Novelty Crystal Corp.
v. PSA Institutional Partners, L.P., 850 N.Y.S.2d 497, 500
(App. Div. 2008). ‘‘Intention of the parties may be derived
from the instruments alone or from the instruments and the
surrounding circumstances’’. Goldsmith v. Knapp, 637
N.Y.S.2d 434, 436 (App. Div. 1996). In Seibros Fin. Corp. v.
Kirman, 249 N.Y.S. 497, 499 (App. Div. 1931), a New York
court held that because an agreement giving the purchaser
a right to reconvey property that was claimed to be the
‘‘inducing cause which persuaded the plaintiff to purchase
the property * * * [, t]he contract clearly shows that there
was no intention on the part of the parties to merge the con-
tract in the deed. A contract for the sale of real estate is
merged in the deed only when the latter is intended to be
accepted in full performance of the former.’’
Likewise, we find that the side letter was an inducing
cause that persuaded Mr. Graev to contribute the conserva-
tion easement and cash to NAT. Before he even filled out his
application to NAT, Mr. Graev emailed NAT asking for its
thoughts on the side letter; and after receiving NAT’s assur-
ances that the side letter would not affect the deductibility
of his contribution, he specifically requested the side letter.
Moreover, after the donation, when NAT recognized that the
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406 140 UNITED STATES TAX COURT REPORTS (377)
side letter might be detrimental to Mr. Graev’s tax deduc-
tions, NAT offered to rescind the side letter and Mr. Graev
did not accept NAT’s offer, indicating that the parties under-
stood the side letter had survived the deed. Accordingly, we
find that NAT’s promises in the side letter to return to the
easement and cash were enforceable because we find a clear
intent evidenced by the parties that the side letter would
survive the deed.
3. Nullity
The Graevs appear to argue that NAT’s side letter is a nul-
lity and should be disregarded for tax purposes because it
provides for the donor’s potential recovery of the contribu-
tions in the event of unwanted tax consequences. In support
of this argument the Graevs rely primarily on Commissioner
v. Procter, 142 F.2d 824, 827–828 (4th Cir. 1944), rev’g a
Memorandum Opinion of this Court. The holding of the
Court of Appeals in Procter, however, is inapposite to this
case.
In Procter the donors assigned to their children gifts of
remainder interests in two trusts, subject to the following
clause:
[I]n the event it should be determined by final judgment or order of a
competent federal court of last resort that any part of the transfer in
trust hereunder is subject to gift tax, it is agreed by all the parties
hereto that in that event the excess property hereby transferred which
is decreed by such court to be subject to gift tax, shall automatically be
deemed not to be included in the conveyance in trust hereunder and
shall remain the sole property of * * * [the taxpayer] * * *. [Id. at 827.]
Under that clause, if the gifts were held by the courts to be
taxable, then the gifts would be undone, and the donors
would then be not liable for the tax for which the courts had
held them liable. The clause purported not only to undo the
gifts but also to undo the judicial decision.
The Court of Appeals for the Fourth Circuit held that the
clause in Procter was ‘‘clearly a condition subsequent and
void because contrary to public policy’’, id., for three reasons:
(1) Such a clause ‘‘has a tendency to discourage the collec-
tion of the tax by the public officials charged with its collec-
tion’’, thereby discouraging efforts to collect the tax. Id.
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(377) GRAEV v. COMMISSIONER 407
(2) ‘‘[T]he effect of the condition would be to obstruct the
administration of justice by requiring the courts to pass upon
a moot case’’. Id.
(3) ‘‘[T]he condition is to the effect that the final judgment
of a court is to be held for naught because of the provision
of an indenture necessarily before the court when the judg-
ment is rendered.’’ Id. That is, a final judgment would cause
the condition to be operative, but the condition should not be
allowed to operate to undo the judgment, since the
instrument containing the condition was before the court,
and all matters pertaining thereto merged in the judgment.
Id. at 827–828.
None of these three reasons would apply to nullify NAT’s
side letter:
First, the conditions in NAT’s side letter would not discour-
age the collection of tax. This Opinion decides that the
Graevs are not entitled to charitable contribution deductions
(and that there are therefore deficiencies in their income
tax), and the return of the contributions to the Graevs would
not at all undo or contradict that holding but would instead
be consistent with that holding. In order for the condition in
the side letter to be triggered, the deductions must be dis-
allowed, and income tax will thereafter be owing whether or
not the contribution is returned.
Second, the possibility of the subsequent return of the con-
tributions does not render this case moot. The Graevs
claimed deductions; the IRS disallowed them and determined
deficiencies of tax; the Graevs challenged that determination,
and we must decide the matter. If we had upheld the deduc-
tions, the condition in the side letter would never have been
met, the gift would be complete, the contribution would be
deductible (assuming other qualifications are met), and we
would enter decision in favor of the Graevs to overturn the
IRS’s deficiency determination. Because instead we disallow
the deductions and enter decision in the IRS’s favor,
upholding the deficiency determination, the condition in the
side letter is triggered and the gift presumably reverts to the
donor. However, in this case, unlike Procter, the reversion to
the donor would not be inconsistent with the court’s
holding—i.e., the tax collector in our case, unlike Proctor,
would collect the tax consistent with the judgment even if
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408 140 UNITED STATES TAX COURT REPORTS (377)
the condition become operative and the gift were returned to
the donor.
Third, although the final judgment in the IRS’s favor
would cause the side letter to be operative, the return of the
contribution pursuant to the side letter would not operate to
undo the judgment, as was the case in Procter. The return
would have no effect on the Graevs’ tax liabilities.
Other cases have similarly distinguished Procter and have
held that certain tax contingency provisions are not void as
against public policy. See Estate of Christiansen v. Commis-
sioner, 130 T.C. 1, 8 n.7, 17–18 (2008) (a clause that
‘‘increases the amount donated to charity should the value of
the estate be increased’’, ‘‘would not make us opine on a moot
issue [i.e., the value of the estate], and wouldn’t in any way
upset the finality of our decision in this case’’), aff ’d, 586
F.3d 1061 (8th Cir. 2009); Estate of Dickinson v. Commis-
sioner, 63 T.C. 771, 777 (1975) (stating that the ‘‘agreement
makes no attempt to nullify * * * [the Court’s] determina-
tion’’ (citing Surface Combustion Corp. v. Commissioner, 9
T.C. 631, and O’Brien v. Commissioner, 46 T.C. 583)); Estate
of Petter v. Commissioner, T.C. Memo. 2009–280 (‘‘a judg-
ment adjusting the value of each unit will actually trigger a
reallocation of the number of units between the trusts and
the foundation under the formula clause. So we are not
issuing a merely declaratory judgment’’), aff ’d, 653 F.3d 1012
(9th Cir. 2011).
4. Voluntary removal of the easement
The event that might defeat the contribution to NAT is the
‘‘removal’’ of the easement and the return of the cash pursu-
ant to NAT’s side letter. Even if, as a matter of law, the side
letter was not enforceable for any of the reasons the Graevs
advance, the question would remain whether, as a matter of
fact, in December 2004 there was a non-negligible possibility
that the IRS would disallow the Graevs’ contribution deduc-
tion and NAT would voluntarily remove the easement. We
have found that there was. Mr. Graev evidently concluded
that NAT’s promise should be believed; he took deliberate
steps to obtain its promise; and his conclusion is evidence of
what was likely. NAT made such promises to Mr. Graev and
others precisely because it was soliciting contributions from
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(377) GRAEV v. COMMISSIONER 409
within a community of potential donors, and the ability of
such an organization to obtain solicitations might well be
undermined if it got a reputation for failing to keep its prom-
ises. To decide that there was no non-negligible possibility
that NAT would voluntarily extinguish the easement and
return the cash would require us to find that, in order to
induce Mr. Graev to make his contribution, NAT made cyn-
ical promises that it fully intended to break. Our record will
not support such a finding; the stipulated evidence simply
shows a non-profit organization going about accomplishing
its purpose. If we speculate (without evidence) that NAT
might have reneged on its promise, or even if we assume that
NAT probably would have reneged on its promise, that still
leaves us with at least a non-negligible possibility that NAT
would have done what it said it would do. That possibility is
fatal to the Graevs’ contribution deductions.
III. Conclusion
Thus, on the evidence before us, we find that there was a
substantial possibility that the IRS would challenge the
Graevs’ easement contribution deductions. We hold that nei-
ther State nor Federal law would prevent enforcement of the
side letter. And we find that apart from any legal enforce-
ability of the side letter, it reflected what NAT was likely to
do in the event of IRS disallowance.
For these reasons, we conclude that at the time of Mr.
Graev’s contributions to NAT, the possibility that the IRS
would disallow the Graevs’ deductions for the contributions
and, as a result, that NAT would ‘‘promptly refund * * *
[Mr. Graev’s] entire cash endowment contribution and join
with * * * [Mr. Graev] to immediately remove the facade
conservation easement from the property’s title’’ (as it prom-
ised) was not ‘‘so remote as to be negligible’’. Accordingly,
under 26 C.F.R. sections 1.170A–1(e) and 1.170A–7(a)(3) the
deduction relating to the cash contributions is disallowed.
Likewise, under 26 C.F.R. sections 1.170A–1(e), 1.170A–
7(a)(3), and 1.170A–14(g)(3), the easement contribution
deductions are disallowed.
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410 140 UNITED STATES TAX COURT REPORTS (377)
To reflect the foregoing,
An appropriate order will be issued.
f
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