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2016 Trying Times: Important Lessons to BeLearned from Recent Federal Tax CasesNancy McLaughlinS.J. Quinney College of Law, University of Utah, nancy.mclaughlin@law.utah.edu

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Recommended CitationMcLaughlin, Nancy, "2016 Trying Times: Important Lessons to Be Learned from Recent Federal Tax Cases" (2016). Utah Law FacultyScholarship. 50.http://dc.law.utah.edu/scholarship/50

TRYINGTIMESIMPORTANTLESSONSTOBELEARNEDFROMFEDERALTAXCASES

INVOLVINGCONSERVATIONEASEMENTDONATIONS

ACTEC2016FALLMEETINGBELMONDCHARLESTONPLACEHOTEL

STATELAWSCOMMITTEEOCTOBER20,2016

by

NancyA.McLaughlinRobertW.SwensonProfessorofLaw

UniversityofUtahS.J.QuinneyCollegeofLawSaltLakeCity,Utah84108

nancy.mclaughlin@law.utah.eduThisoutline isaversionof theoutlinepreparedbyNancyA.McLaughlinandStephen J.Small for presentations at the Land Trust Alliance annual national conferences. Thisoutlineintendedforeducationalandinformationalpurposesonly.Nothinginthisoutlineis to be considered the renderingof legal advice. Readers are responsible for obtaininglegaladvicefromtheirownlegalcounsel.

©2016byNancyA.McLaughlin&StephenJ.Small,AllRightsReserved.

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TableofContentsI.Developments...........................................................1

A.IRC§170(h)......................................................1B.WashingtonPostArticles............................................1C.IRSNotice2004-41................................................2D.2005JointCommitteeonTaxationReport.............................2E.ProposaltoPenalizeCharitiesthatRemoveorFailtoEnforceEasements....2F.2005SenateFinanceCommitteeReport...............................3G.2005IRSTestimonyBeforeSenateFinanceCommittee..................4H.PensionProtectionActof2006......................................4I.DOJSuitAgainstTrustforArchitecturalEasements.......................4J.IRSConservationEasementAuditTechniquesGuide.....................5K.IRSForm990......................................................6L.Administration’sFiscalYear2013RevenueProposals....................6M.IRSGeneralInformationLetteronSwaps.............................7N.IRSGeneralInformationLetteronExtinguishment......................7O.DOJSuitAgainstFaçadeEasementAppraiser...........................7P.Administration’sFiscalYear2014RevenueProposals....................8Q.IRSChiefCounselAdviceonConservationEasementValuation............8R.Administration’sFiscalYear2015RevenueProposals....................9

S.IRSBarsAppraisersFromValuingEasementsforFiveYears...............9T.Administration’sFiscalYear2016RevenueProposals...................10U.EnhancedIncentivesMadePermanentWithoutModifications...........10V.Administration’sFiscalYear2017RevenueProposals...................11W.BroadIRSSummonsServedonAppraiserandCPA....................11X.Treasury’s2016-2017PriorityGuidancePlan..........................12Y.DeductionStatistics...............................................13Z.CaseLaw........................................................13

II.FilingaTaxReturnPackagetoMinimizeRiskofAudit........................14

A.CorrectlyDraftedConservationEasementDeed........................14 1.CopyofFinalConservationEasementDeed 2.ExtensiveRecitals

3.“ExclusivelyforConservationPurposes”4.ReservedRights5.TheConservationPurposesTest6.ExtinguishmentRequiresJudicialProceeding7.SwapsAreProhibited8.StateLawCanRenderConservationEasementsNondeductible9.InteractionBetweenFederalandStateLaw10.BenefitsofRestrictedGiftStatus11.SampleRestrictiononTransferandExtinguishmentClauses12.“Greaterof”ProceedsFormula

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13.Noncompliant“Proceeds”Clause14.ReimbursementofFundersonExtinguishment

B.QualifiedAppraisalandIRSForm8283(AppraisalSummary)..............441.ShortHistory2.Form8283,SectionB3.SupplementalStatement4.SpecialRulesforFaçadeEasementDonations

C.QualifiedAppraisalRequirements....................................47 1.GeneralRequirements

2.ConservationEasement-SpecificValuationRules3.FileQualifiedAppraisalwithIncomeTaxReturn

D.ContemporaneousWrittenAcknowledgment..........................55E.CompellingandTimelyBaselineDocumentation.......................56F.CorrectandTimelyLenderAgreement(ifapplicable)....................58

1.FullSubordinationisAdvisable2.MortgagesMustbeSubordinatedatTimeofDonation

III.OtherImportantIssues..................................................67

A.IRS’sRenewedFocusonValuation...................................671.PenaltyProvisions2.BattleoftheAppraisers3.ValuationCaseLaw

B.IRS’sFocusonPartnerships/SyndicatedDeals..........................731.IRSWeapons2.LandTrustAllianceonSyndicatedDeals

C.DateofDonationandRecordationDate...............................761.IRS’sPositiononRecordation2.CaseLaw3.TheFinerPointsofDeliveryandRecording

D.QuidProQuo.....................................................801.Pollard2.SeventeenSeventyShermanStreet3.Costello4.Pesky

E.SideAgreements..................................................86F.ReservedDevelopmentRights.......................................87G.PLRsRecommendingRevocationofTax-ExemptStatus..................90H.StateTaxCredits..................................................91

1.TaxTreatmentofSaleofStateTaxCredits2.NonprorataAllocationofStateTaxCreditswasDisguisedSale

Appendices

AppendixA:IRC§170(h)AppendixB:TreasuryRegulation§1.170A-14

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AppendixC:TableofDeductionCasesAppendixD:TreasuryRegulation§1.170A-13(c)AppendixE:IRC§170(f)(11)AppendixF:Form8283ExamplesAppendixG:Form8283SupplementalStatementExampleAppendixH:BlogPosts

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I.DevelopmentsA.IRC§170(h)

1. IRC§170(h) (attachedasAppendixA),whichauthorizesa federalcharitableincome tax deduction for the donation of a conservation easement meetingspecificrequirements,wasenactedin1980.2. Treasury Regulations interpreting § 170(h) (attached as Appendix B) wereissuedin1986.13. The Treasury Regulations are based, in large part, on the Senate Reportdescribing§170(h)(referredtoaslegislativehistory).2

B.WashingtonPostArticlesInMay2003,theWashingtonPostpublishedaseriesofarticlesquestioningsomeofthepracticesofTheNatureConservancy.3InDecemberofthatsameyear,theWashingtonPost published a follow-up article describing allegedly abusive conservation easementdonation transactions involving “wildly exaggerated” easement appraisals anddevelopers who received “shocking” tax deductions for donating conservationeasementsencumberinggolfcoursefairwaysorotherwiseundevelopableland.4InDecember2004, theWashingtonPostpublisheda second seriesof articlesallegingabuses in the facade easement donation context.5The articles described a surge infacadeeasementdonationsthatcoincidedwiththeemergenceoffor-profitfacilitatorsand nonprofit organizations that have "taken in millions of dollars for processingpaperwork and monitoring the easements." The articles also noted that facadeeasementsoftenmerelyduplicaterestrictionsalready imposedby local lawandfail todecreasethevalueofthebuildingstheyencumber,makingthetaxdeductionsbasedona 10% to 15% reduction in the value of the properties unwarranted. One promoterreportedly told property owners they would receive tax breaks for a drop in theirpropertyvalues,butstressedthattherewouldbenoactualdecline;that"[i]t'sapaperconcept."61Treas.Reg.§1.170A-14.2S.Rep.No.96-1007(1980).3SeeDavidB.Ottaway& JoeStephens,Nonprofit LandBankAmassesBillions,WASH.POST,May4,2003,atA1; JoeStephens & David B. Ottaway,How a Bid to Save a Species Came to Grief, WASH.POST, May 5, 2003, at A1; JoeStephens&David B.Ottaway,Nonprofit Sells ScenicAcreage toAllies at a Loss; BuyersGain Tax Breakswith FewCurbsonLandUse,WASH.POST,May6,2003,atA1.4JoeStephens&DavidB.Ottaway,DevelopersFindPayoffinPreservation,WASH.POST,Dec.21,2003,atA1.5SeeJoeStephens,ForOwnersofUpscaleHomes,LoopholePays;PledgingtoRetaintheFacadeAffordsaCharitableDeduction, WASH. POST, Dec. 12, 2004, at A1 [Loophole Pays]; Joe Stephens, Local Laws Already Bar Alterations;InterventionbyTrustsIsRareforPreservation,WASH.POST,Dec.12,2004,atA15;JoeStephens,TaxBreakTurnsIntoBigBusiness,WASH.POST,Dec.13,2004,atA1.6SeeLoopholePays,supranote5.

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C.IRSNotice2004-41InJune2004,theIRSissuedNotice2004-41statingthattheIRSisawarethattaxpayerswhotransferconservationeasementstocharitableorganizationsormakepaymentstocharitable organizations in connection with a purchase of real property from theorganizationmaybeimproperlyclaimingcharitabledeductionsunder§170.7TheNoticewarnedthattheIRSintendstodisallowimproperdeductionsandimposepenaltiesandexcisetaxesontaxpayers,promoters,andappraisersinvolvedinsuchtransactions.D.2005JointCommitteeonTaxationReportIn January 2005, the Joint Committee on Taxation issued a report to Congressrecommending,amongotherthings,that

1.thefederalcharitableincometaxdeductionofferedtoconservationeasementdonorsbeeliminatedwithrespecttoeasementsencumberingpropertyonwhichthedonormaintainsapersonalresidence,2.thedeductionbesubstantiallyreducedinallothercases,and3. new standards be imposed on appraisers and appraisalswith regard to thevaluationofeasements.8

E.ProposaltoPenalizeCharitiesthatRemoveorFailtoEnforceEasementsInMarch 2005, the Joint Committee on Taxation published a Description of RevenueProvisionsContainedinthePresident’sFiscalYear2006BudgetProposal,oneofwhichwas to impose significant penalties on any charity that removes or fails to enforce aconservation easement, or transfers such an easement without ensuring that theconservationpurposeswill be protected in perpetuity.9Theproposalwas intended toaddresstheconcernthatcharitablecontributionsofconservationeasements,whicharerequired to be in perpetuity, are being removed, or are being transferred withoutsecuringtheconservationpurpose.

7IRSNotice2004-41isavailableathttp://www.irs.gov/irb/2004-28_IRB/ar09.html.8SeeOptionstoImproveTaxComplianceandReformTaxExpenditures,preparedbytheJCT,JCS-2-05,281(Jan.27,2005),availableathttp://www.jct.gov/publications.html?func=showdown&id=1524.9SeeDescriptionofRevenueProvisionsContained in thePresident’sFiscalYear2006BudgetProposal,preparedbytheJCT,JCS-3-05,239–41(March2005),availableathttps://www.jct.gov/publications.html?func=startdown&id=1523.

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F.2005SenateFinanceCommitteeReportInJune2005,theSenateFinanceCommitteeheldahearingonthefederaltaxincentivesavailable with respect to conservation easement donations. In connection with thathearing, the Senate Finance Committee issued a report in which it recommendednumerousreforms,including:

1. revocation of the tax-exempt status of conservation organizations thatregularlyandcontinuouslyfailtomonitortheconservationeasementstheyhold(or thesuspensionof theabilityof suchorganizations toaccept tax-deductiblecontributions),2. implementation of an accreditation program for conservation organizationsacquiringeasements,3. limiting charitable contribution deductions for certain small easementdonations and providing the IRSwith the authority to pre-approve deductionsforsuchdonations,and4. IRS issuance of guidance regarding how a conservation organization canestablishthatitisappropriatelymonitoringtheeasementsitholds.10

TheSenateFinanceCommitteereportalsoexpressesconcernregardingamendmentstoconservationeasements.Thereportexplainsthat“[m]odificationstoaneasementheldby a conservation organization may diminish or negate the intended conservationbenefits, and violate the present law requirements that a conservation restrictionremaininperpetuity.”11Thereportnotesthatmodificationsmadetocorrectministerialor administrativeerrors arepermittedunderpresent federal tax law.12But the reportexpresses concern with regard to “trade-off” amendments, which both negativelyimpact and further the conservation purpose of an easement, but on balance arearguablyeitherneutralwithrespecttoorenhancesuchpurpose.13Thereportprovides,as an example, an amendment to an easement that would permit the owner of theencumberedlandtoconstructalargerhomeinexchangeforrestrictionsfurtherlimitingthe use of the land for agricultural purposes.14The report explains that trade-offamendments“maybedifficult tomeasure fromaconservationperspective,”and thatthe “weighing of increases and decreases [in conservation benefits] is difficult toperformby[theholder]andtoassessbytheIRS.”15

10See Report of Staff Investigation of The Nature Conservancy (Volume I), U.S. Senate Committee on Finance,Executive Summary 10-11 (June 2005), available under “Library,” then “Committee Prints” athttp://finance.senate.gov/.11Id.,ExecutiveSummary9.12Id.,ExecutiveSummary9,n.20.13Seeid.atPt.II5.14Seeid.15Id.

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G.2005IRSTestimonyBeforeSenateFinanceCommitteeIn his testimony before the Senate Finance Committee in June 2005, then IRSCommissioner of the Tax-Exempt and Government Entities Division, Steven T.Miller,discussed the steps the IRS was taking to enforce the law in this area. Such stepsincluded

1.modificationstoIRSForms1023,990,and8283,2. theformationofaspecialcross-functional teamto“attackallaspectsoftheproblemofconservationeasements,”and3.increasedauditsofeasementdonors.16

H.PensionProtectionActof2006Tocombatabuses,thePensionProtectionActof2006,17amongotherthings,

1. revised the rules in § 170(h) with respect to contributions of façadeeasements,2.providedstatutorydefinitionsoftheterms“qualifiedappraiser”and“qualifiedappraisal”inIRC§170(f)(11),and3. lowered the thresholds for accuracy-related penalties and made the grossvaluationmisstatementpenaltywith regard to charitable contributions a strictliabilitypenalty(seePartIII.Abelow).

At the same time, the Pension Protection Act increased the tax benefits offered toconservation easement donors for donationsmade in 2006 and 2007 bymaking thepercentage limitations on the resulting charitable deductionsmore favorable.18Theseenhancedincentiveswererepeatedlytemporarilyextendedandthenmadepermanentin2015(seePartI.Ubelow).I.DOJSuitAgainstTrustForArchitecturalEasementsInJune2011,theDepartmentofJusticefiledalawsuitagainsttheTrustforArchitecturalEasements(“TAE”).19Thelawsuitalleged,amongotherthings,thatTAEmadefalseandfraudulent statements to prospective donors about the tax benefits available fordonatingfaçadeeasements,steereddonorstoappraiserswhohadbeencoachedbyittogoalongwith itsquestionablepractices,helpeddonors to claimdeductionsbeforedonations were final, and allowed donors to terminate easements they had already

16 The testimony is available at http://www.finance.senate.gov/hearings/hearing/?id=e821cece-d9eb-1c66-4b9e-b4a6602a54f4. 17Pub.L.No.109–280,120Stat.780.18Foranexplanationof these changes, seeTechnical ExplanationOfH.R.4, The "PensionProtectionActOf2006,"preparedbytheJCT,JCX-38-06(August3,2006),availableathttps://www.jct.gov/publications.html?func=select&id=20.19ComplaintforPermanentInjunctionandOtherRelief,U.S.v.McClain,Civ.No.11-1087(U.S.Dist.Ct.D.C.June14,2011).TAEwasformerlyknownastheNationalArchitecturalTrustor“NAT.”

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granted.20InJuly2011,aU.S.DistrictCourtJudgeissuedapermanentinjunctionagainstTAEsettlingthecase.21TheinjunctionpermanentlyprohibitsTAEfromengaginginwhatthefederalgovernmentsaidwereabusiveandillegalpractices.TheinjunctionbarsTAEfrom,amongotherthings:

1.representingtoprospectivedonorsandothersthattheIRShasestablisheda“safeharbor”forthevalueofadonatedfaçadeeasementequalto10to15%ofthesubjectbuilding’svalue,2. participating in the appraisal process for a conservation easement in anyregard, including recommending or referring donors to an appraiser or TAE’spreferredlistofappraisers,3. accepting easements that lack a conservation purpose or do not satisfy the“protectedinperpetuity”requirementof§170(h),and4.requestingfeesorcashdonationstiedtoapercentageoftheestimatedvalueoftheeasementorthedeductiontobeclaimedwithregardtotheeasement’sdonation.

TAEwas alsoordered to pay an independentmonitor for two years to ensure that itcompliedwith the injunction. The injunction did not preclude the IRS from assessingpenaltiesagainstTAEforviolationsoftheInternalRevenueCode.TheinjunctionalsodidnotaddresswhetherTAEwasentitledtoretainitstax-exemptstatus.22J.IRSConservationEasementAuditTechniquesGuideThe IRS has issued a Conservation Easement Audit Techniques Guide.23The Guideprovidesthat it isnotanofficialpronouncementofthe laworthepositionofthe IRS,anditcannotbeused,cited,orrelieduponassuch.TheGuidenonethelessprovidesasummary ofmany of the requirements thatmust bemet to be eligible for a federalcharitable income tax deduction for the donation of a conservation easement under§170(h).TheGuidealsoalertsreaderstoissuesthatmaybeconsideredandraisedonaudit. The IRS has informally indicated that theGuidewill be periodically updated toreflectcaselawandotherdevelopments.

20Id.SeealsoJanetNovack,FedsSueTrustOverHistoricEasementTaxBreaks,TaxingMatters,FORBES,June16,2011.21StipulatedOrderofPermanentInjunction,U.S.v.McClain,Civ.No.11-1087(U.S.Dist.Ct.D.C.July,15,2011)(TAEagreedtothesettlementwithoutadmittinganywrongdoing).22Id.SeealsoD.C.FederalCourtBarsCompanyfromPromotingAllegedTaxSchemeInvolvingImproperEasementsonHistoric Buildings, Department of Justice Press Release (July 18, 2011), available athttp://www.justice.gov/opa/pr/2011/July/11-tax-933.html; Joe Stephens, Judge bars D.C. charity from promoting‘façadeeasement’taxdeductions,WASH.POST,July19,2011.23 See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Conservation-Easement-Audit-Techniques-Guide[hereinafterIRSCEAuditTechniquesGuide].

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K.IRSForm990IRC § 501(c)(3) organizations—as most land trusts are—must file an IRS Form 990(ReturnofOrganizationExemptFromIncomeTax)eachyear.24ScheduleDtoIRSForm990 requires a charitable organization holding a conservation easement to providecertaininformation,including:

1.thetotalnumberofconservationeasementsheldattheendoftheyear;2.thetotalacreagerestrictedbysucheasements;3.thenumberofeasementsmodified,transferred,released,orextinguished,bytheorganizationduringthetaxableyear;4.whether theorganizationhas awrittenpolicy regarding themonitoringandenforcementofeasements;5. the total numberofhoursdevoted tomonitoring, enforcing, and inspectingconservationeasementsduringthetaxyear;and6. the expenses incurred during the tax year tomonitor, inspect, and enforceeasements.

Foreacheasementmodified,transferred,released,orextinguished,inwholeorinpart,theorganizationmustexplainthechangesinaSupplementalStatementtoScheduleD.TheInstructionsforScheduleDexplain:

1. an easement is released, extinguished, or terminated when, among otherthings,allorpartofthepropertysubjecttotheeasementisremovedfromtheprotectionoftheeasementinexchangeforcashortheprotectionofsomeotherproperty,2. the use of synonyms does not avoid the application of the reportingrequirement (e.g., calling an action a “swap” or a “boundary line adjustment”doesnotmeantheactionisnotalsoamodification,transfer,orextinguishment),and3. “[t]axexemptionmaybeunderminedby themodification, transfer, release,extinguishment,orterminationofaneasement.”25

L.Administration’sFiscalYear2013RevenueProposals

In February 2012, the Treasury Department published General Explanations of theAdministration’s Fiscal Year 2013 Revenue Proposals. These proposals included aproposal to eliminate the charitable deduction for contributions of conservationeasementsongolfcourses.26

24IRSForm990isavailableathttp://www.irs.gov/uac/Form-990,-Return-of-Organization-Exempt-From-Income-Tax-.25InstructionsforScheduleD(Form990)areavailableathttp://www.irs.gov/uac/Form-990,-Return-of-Organization-Exempt-From-Income-Tax-.26SeeGeneralExplanationsof theAdministration’sFiscalYear2013RevenueProposals, Treas.Dep’t140 (February2012), available at http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf.

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M.IRSGeneralInformationLetteronSwapsInaMarch2012InformationLetter, the IRSadvisedthatconservationeasementsthataresubjecttoswapsotherthaninthevery limitedsituationofaswapthatmeetstheextinguishment and proceeds requirements of Treasury Regulation § 1.170A-14(g)(6)arenotdeductible.27A“swap”isdefinedastheremovalofsomeoralloftheoriginallyprotected property from the terms of the original deed of conservation easement inexchangeforeithertheprotectionofsomeotherpropertyorthepaymentofcash.N.IRSGeneralInformationLetteronExtinguishmentIn a September 2012 Information Letter, the IRS advised that, while state law mayprovideameansforextinguishingaconservationeasementforstatelawpurposes,therequirementsof § 170(h) and theTreasuryRegulations, includingTreasuryRegulation§1.170A-14(g)(6)(thejudicialextinguishmentanddivisionofproceedsregulation),mustnevertheless be satisfied for a contribution to be deductible for federal income taxpurposes.28O.DOJSuitAgainstFaçadeEasementAppraiserInJanuary2013,theUnitedStatesfiledacomplaintinDistrictCourtagainstanappraiserandthecompanyheownedwithhiswife.29Thecomplaintalleged,amongotherthings,that the appraiser had appraised more than ninety conservation easements forpurposes of the deduction under § 170(h) and had repeatedly and continuallymadematerial and substantive errors, distorted data, and provided misinformation andunsupportedpersonalopinionsintheappraisalstosignificantlyinflatethevalueoftheeasements for federal deduction purposes. The complaint also alleged that theappraiser attempted to obstruct IRS enforcement efforts by claiming not to have anywork files for his appraisal reports, which professional standards require that anappraiser maintain. “This sort of abuse of a high-dollar charitable contributiondeduction,” stated the complaint, “inspires contempt for the system of honest,voluntaryincometaxreporting.”In February 2013, the District Court issued an AgreedOrder of Permanent Injunctionthat, among other things, (i) barred the appraiser (who was 70 years old and hadretired) and the company from preparing any kind of appraisal report or otherwiseparticipating intheappraisalprocess foranypropertyrelatingtofederal taxesand(ii)orderedtheappraiserandthecompanytoprovidetocounselfortheUnitedStatesalist

27Information Letter from Karin Goldsmith Gross, Senior Technician Reviewer, IRS (March 5, 2012), available athttp://www.irs.gov/pub/irs-wd/12-0017.pdf.28Information Letter from Karin Goldsmith Gross, Senior Technician Reviewer, IRS (Sept. 18, 2012), available athttp://bit.ly/1VMfimR.29ComplaintforPermanentInjunctionandOtherRelief,U.S.v.Ehrmannetal.,Civ.No.1:13-cv-214(N.D.Ohio,Jan.30,2013).

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of clients for whom they prepared appraisal reports for tax purposes on or sinceNovember1,2009.30P.Administration’sFiscalYear2014RevenueProposalsIn April 2013, the Treasury Department published General Explanations of theAdministration’s Fiscal Year 2014 Revenue Proposals, one of which was the sameproposaltoeliminatethedeductionforcontributionsofconservationeasementsongolfcoursesthatwas included intheAdministration’s2013proposals.31Asecondproposalcalled for (i) disallowing thededuction for the valueof a façadeeasement associatedwith forgone upward development above a historic building and (ii) requiring thatcontributionsof façadeeasementsonbuildings listed in theNationalRegister complywithInternalRevenueCoderulesapplicabletofaçadeeasementsonbuildingslocatedinaregisteredhistoricdistrict.TheTreasuryDepartmentexplained,inpart:

The value of [a façade] easement may be zero if it does not restrict futuredevelopment more than the restrictions already imposed on the building, forexample, by local zoning or historic preservation authorities. Some taxpayers,however,havetakenlargedeductionsforcontributionsofeasementsrestrictingthe upward development of historic urban buildings even though suchdevelopmentwasalreadyrestrictedbylocalauthorities.Becauseofthedifficultyofdeterminingthevalueofthecontributedeasement,itisdifficultandcostlyforthe Internal Revenue Service to challenge deductions for historic preservationeasements. To prevent abuses, no deduction should be allowed for the valueassociatedwithforgoneupwarddevelopmentaboveanhistoricbuilding.

Q.IRSChiefCounselAdviceonConservationEasementValuationInAugust2012, the IRSOfficeofChiefCounselpublishedhelpful guidanceonvaluingconservationeasementsinaccordancewithsomeofthemoretechnicalrequirementsofTreasury Regulation § 1.170A-14(h)(3)(i). 32 The Chief Counsel Advice specificallyaddresses the "contiguous parcel" and "enhancement" rules, and provides twelveexamplesillustratingtheapplicationofthoserules.

30AgreedOrderofPermanentInjunction,U.S.v.Ehrmann,Civ.No.1:13-cv-00214-DAP(N.D.OhioFeb.12,2013)(theappraiser and company agreed to the settlementwithout admitting anywrongdoing).SeealsoOhio Federal CourtBarsAppraiserofHistoric-PreservationEasements,DepartmentofJusticePressRelease(Feb.13,2013),availableathttp://www.justice.gov/opa/pr/2013/February/13-tax-192.html.31SeeGeneralExplanationsof theAdministration’sFiscalYear2014RevenueProposals,Treas.Dep’t161-162 (April2013), available at http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf.32 IRS Chief Counsel Advice 201334039 (released Aug. 23, 2012), available at http://www.irs.gov/pub/irs-wd/1334039.pdf.SeealsoIRSonConservationEasementValuation,athttp://lawprofessors.typepad.com/nonprofit/2014/09/irs-on-conservation-easement-appraisals.html.

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R.Administration’sFiscalYear2015RevenueProposalsIn March 2014, the Treasury Department published General Explanations of theAdministration’s Fiscal Year 2015 Revenue Proposals.33In addition to eliminating thededuction for contributionsof conservationeasementsongolf coursesand restrictingthedeductionandharmonizingtherulesforcontributionsoffaçadeeasements(bothofwhich were part of the Administration’s 2014 proposals), the Administration’s 2015proposals also called formakingpermanent theenhanced incentives for conservationeasementdonationsthathadexpiredonDecember31,2013.S.IRSBarsAppraisersfromValuingEasementsforFiveYearsInMarch2014,theIRSissuedapressreleaseannouncingthatitsOfficeofProfessionalResponsibility (OPR) had entered into a settlement agreement with a group ofappraisers fromthesame firmaccusedofaiding in theunderstatementof federal taxliabilitiesbyovervaluingfacadeeasementsforcharitabledonationpurposes.34Tovaluethe facadeeasements, theappraisershad simplymultiplied the “before” valueof thepropertybyafixedpercentage,generally15%.Underthesettlementagreement,theappraisersadmittedtoviolatingrelevantsectionsofCircular230.AccordingtoKarenL.Hawkins,DirectorofOPR:

Appraisersneed tounderstand that theyare subject toCircular230,andmustexercise due diligence in the preparation of documents relating to federal taxmatters.Taxpayersexpectadvicerenderedwithcompetenceanddiligencethatgoes beyond the mere mechanical application of a rule of thumb based onconjectureandunsupportedconclusions.

The appraisers agreed to a five-year suspension of valuing facade easements andundertaking any appraisal services that could subject them to penalties under theInternalRevenueCode.TheappraisersalsoagreedtoabidebyallapplicableprovisionsofCircular230.

33SeeGeneralExplanationsoftheAdministration’sFiscalYear2015RevenueProposals,Treas.Dep’t193-196(March2014), available at http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf.34IRS,IRSBarsAppraisersfromValuingFacadeEasementsforFederalTaxPurposesforFiveYears,IR-2014-31(March19, 2014), available at http://www.irs.gov/uac/Newsroom/IRS-Bars-Appraisers-from-Valuing-Facade-Easements-for-Federal-Tax-Purposes-for-Five-Years.

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T.Administration’sFiscalYear2016RevenueProposalsIn February 2015, the Treasury Department published General Explanations of theAdministration’sFiscalYear2016RevenueProposals.35As intheAdministration’s2014and 2015 proposals, the 2016 proposals called for (i) eliminating the deduction forcontributions of conservation easements on golf courses and (ii) restricting thededuction and harmonizing the rules for contributions of the two types of façadeeasements. The Administration’s 2016 proposals also included two new conservationeasement-relatedproposals.First, the Administration proposed to make permanent the enhanced incentives forconservation easement donations that expired on December 31, 2014. However,because of concerns regarding abuse, the Administration also proposed a number ofreformsto§170(h),including:

• requiring all conservation easements to further a clearly delineated Federal orauthorized state or tribal governmental policy and yield a significant publicbenefit;

• requiring donors to provide detailed information about the conservationpurposesandpublicbenefitofcontributedeasements;

• requiringdonees tomeetminimumstandards, attest to theaccuracyofdonorrepresentationstotheIRS,andelectronicallyreportinformationaboutdonatedeasements,and

• subjecting donees to loss of “eligible donee” status and donees and theirmanagers to penalties for overvalued easements or easements that do notfurthereligibleconservationpurposes.

TheAdministrationalsoproposedtopilotanewtaxcredit forconservationeasementdonations “as an alternative” to the § 170(h) deduction.A Federal interagency boardwouldallocate$100millionofcreditsto“expert”doneesthatwouldthenallocatethecreditstodonors.TheproposalcalledforareporttoCongressfromtheSecretariesoftheTreasury,Agriculture,andtheInteriorontherelativemeritsofthecreditversusthededuction.U.EnhancedIncentivesMadePermanentWithoutModificationsOnDecember18,2015,PresidentObamasignedintolawtheProtectingAmericansfromTax Hikes Act of 2015 (the PATH Act).36Before the PATH Act, as a general rule, apropertyownercouldclaimthedeductiongeneratedbyaneasementdonationtothe

35SeeGeneralExplanationsof theAdministration’s Fiscal Year2016RevenueProposals, Treas.Dep’t188-192 (Feb.2015), available at http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf.36SeeTechnicalExplanationoftheProtectingAmericansFromTaxHikesActof2015,preparedbytheJCT,JCX-144-15(Dec.17,2015),availableathttps://www.jct.gov/publications.html?func=startdown&id=4861.

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extentof30%ofthepropertyowner’sadjustedgrossincome(AGI)ineachoftheyearof the donation and the following five years. Based on changesmade in 2006,whichwere temporary and repeatedly extended temporarily, easement donors werepermitted toclaimtheresultingdeduction to theextentof50%of thedonor’sAGI inthe year of the donation and the following 15 years, or, for qualifying farmer andrancherdonations,100%ofthedonor’sAGIforthe16-yearperiod.ThePATHActmadethese favorable rules for easement donations permanent. In addition, beginning in2016, theAct allows anAlaskaNative Corporationdonating a conservation easementwithrespecttocertainlandstoclaimtheresultingdeductiontotheextentof100%oftaxable income in the year of the donation and the following 15 years. Accordingly,farmers, ranchers, and Alaska Native Corporations that make qualifying easementdonationscouldpotentiallyavoidpayinganyincometaxforupto16years.The PATH Act made the enhanced incentives permanent without implementing anyreformsproposedbytheTreasuryorotherstocurbabuses.37V.Administration’sFiscalYear2017RevenueProposalsIn February 2016, the Treasury Department published General Explanations of theAdministration’sFiscalYear2017RevenueProposals.38The2017proposalsrepeatedthe2016 reform proposals regarding conservation and façade easements, and alsomadeclearthattheTreasuryisproposingtoreplacethe§170(h)deductionwithataxcreditprogram.39W.BroadIRSSummonsServedonAppraiserandCPAInApril2016,aU.S.DistrictJudgefortheNorthernDistrictofGeorgiagrantedtheIRS’spetition to enforce a summons served on an appraiser.40In the summons, the IRSrequested: (i) all of the appraiser’s marketing documents for the valuation ofconservation easements; (ii) all documents reflecting the customers for whom theappraiserpreparedorapprovedconservationorhistoriceasementappraisalsduringthe37See,e.g.,RogerColinvaux,ConservationEasements:DesignFlaws,EnforcementChallenges,andReform,2013UTAHLAW REVIEW 755, available at http://bit.ly/29K2Ual; Wendy C. Gerzog, Alms to the Rich: The Façade EasementDeduction, 34 VA. TAX REV. 229 (2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2447975;DanielHalperin,IncentivesforConservationEasements:TheCharitableDeductionoraBetterWay,74LAW&CONTEMP.PROBS.29(2011),availableathttp://bit.ly/29wYOS3;NancyA.McLaughlin,ConservationEasementsandtheValuationConundrum, 19FLA.TAXREV.225 (2016), availableathttp://bit.ly/29pyA0y;NancyA.McLaughlin,ExtinguishingandAmendingTax-DeductibleConservationEasements:ProtectingtheFederalInvestmentAfterCarpenter,Simmons,andKaufman,13FLA.TAXREV.217(2012),availableathttp://bit.ly/29x01Zq;JeffPidot,REINVENTINGCONSERVATIONEASEMENTS:ACRITICALEXAMINATIONANDIDEASFORREFORM(LINCOLNINSTITUTEOFLANDPOLICY2005),http://bit.ly/29FWoPx.38 See General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals, available athttps://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf.39Seeid.At213-216(“Ifthe[taxcreditpilotprogram]issuccessful,replacementofthedeductionwithaconservationeasementcreditof$475millionannually,indexedforinflation,isestimatedtobebudgetneutral”).40U.S.v.Clower,2016WL3144048(N.D.Ga.Apr.29,2016),adoptingJudge’sReportandRecommendationinU.S.v.Clower,2016WL3129451(N.D.Ga.March22,2016).

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periodbeginning January1,2010, through thepresent, (iii) all appraisalwork files forsuchappraisals;(iv)copiesofall8283Formsthatweresigned,reviewed,approved,orexecuted by the appraiser; and (v) all correspondence, including e-mails, related toconservationorhistoriceasementappraisalsnotedinitem(ii).TheDistrictJudgefoundthat thesummonshada legitimatepurpose (todeterminewhether theappraiserhadimproperlyappraisedconservationeasements), thesummonswasnotoverbroad,andtheIRSwasnotactinginbadfaith.InJune2016,aU.S.DistrictJudgefortheNorthernDistrictofGeorgiagrantedtheIRS’spetitiontoenforceasummonsservedonacertifiedpublicaccountant.41TheCPAhadpreparedorfiledapproximatelyeighttotenconservation-easementpartnershipfederaltaxreturnsforeachoftheyears2010,2011,and2012;participatedasaninvestorinatleast one conservation-easement partnership; and formed at least one conservation-easementpartnership,servingasthetax-matterspartner.Amongotherthings,theIRSwas seeking client files, tax returns, and supporting documentation for federal taxreturns prepared by the CPA for tax years 2010-2012 that were either conservation-easementpartnershipreturnsorfederalincome-taxreturnswheretheclientclaimedacharitable deduction arising from a conservation easement. Quoting the EleventhCircuit,whichwasquotingtheSupremeCourt,thejudgeexplained,inpart,that:

“[T]heGovernmentdependsuponthegoodfaithandintegrityofeachpotentialtaxpayer to disclose honestly all information relevant to tax liability.... Thepurpose of ... [a summons] is not to accuse, but to inquire. Although suchinvestigations unquestionably involve some invasion of privacy, they areessentialtoourself-reportingsystem,andthealternativescouldwellinvolvefarlessagreeableinvasionsofhouse,business,andrecords.”

X.Treasury’s2016-2017PriorityGuidancePlanThe Treasury’s 2016–2017 Priority Guidance Plan contains 281 projects that arepriorities for allocation of the resources of its offices from July 2016 through June2017.42TheplanrepresentsprojectstheTreasuryintendstoworkonactivelyduringtheplanyearanddoesnotplaceanydeadlineoncompletionofprojects.Oneofthelistedprojects is “[g]uidance under §170 regarding charitable contributions of conservationeasements.”

41U.S.v.Greenberger,2016WL3912060(N.D.Ga.June21,2016),adoptingJudge’sReportandRecommendationinU.S.v.Greenberger,2016WL391206(N.D.Ga.Jan.11,2016).42DepartmentoftheTreasury,2016–2017PriorityGuidancePlan,availableathttps://www.irs.gov/pub/irs-utl/2016-2017_pgp_initial.pdf.

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Y.DeductionStatisticsThefollowingchartindicatesestimatesofthenumberofeasementdonationsreportedon individual income tax returns in the year designated and the average donationamountperreturn.43

Year NumberDonations44 Avg.DonationAmountPerReturn2003 2,407(L&F) $684,7332004 3,365(L&F) §487,7852005 2,307(L) $830,4812005 1,132(F) $299,0802006 3,529(L) $437,8952006 1,145(F) $231,5722007 2,405(L) $875,8912007 242(F) $974,7792008 3,158(L) $380,5412008 1,396(F) $32,4622009 2,102(L) $483,5222009 103(F) $477,2252010 3,241(L&F) $261,0272011 2,202(L&F) $383,1792012 1,238(L&F)$872,250

Z.CaseLawAppendix C lists the cases involving challenges to deductions claimedwith respect toeasementdonationsasofOctober4,2016.Thecasesarereferredtointhisoutlinebycasenameandnumericaldesignationonly(e.g.,Belk III,Carpenter I,PalmerRanch II).Appendix H includes blog posts discussing the more recent cases and other selectdevelopments.Theblogpostsincludelivelinkstothecasesandothersourcematerials.43SeePearsonLiddell&JanetteWilson,IndividualNoncashContributions,2012,Stat.ofIncomeBull.,Spring2015,at1; Pearson Liddell& JanetteWilson, IndividualNoncashContributions, 2011, Stat. of IncomeBull., Spring 2014, at111;PearsonLiddell&JanetteWilson,IndividualNoncashContributions,2010,Stat.ofIncomeBull.,Winter2013,at64;PearsonLiddell&JanetteWilson,IndividualNoncashContributions,2009,Stat.ofIncomeBull.,Spring2012,at63;PearsonLiddell&JanetteWilson, IndividualNoncashContributions,2008,Stat.of IncomeBull.,Winter2011,at77;PearsonLiddell& JanetteWilson, IndividualNoncashContributions,2007,Stat.of IncomeBull.,Spring2010,at53;PearsonLiddell&JanetteWilson,IndividualNoncashContributions,2006,Stat.ofIncomeBull.,Summer2009,at68;JanetteWilson, IndividualNoncashContributions,2005, Stat.of IncomeBull., Spring2008,at69; JanetteWilson&MichaelStrudler,IndividualNoncashContributions,2004,Stat.ofIncomeBull.,Spring2007,at78;JanetteWilson&MichaelStrudler,IndividualNoncashContributions,2003,Stat.ofIncomeBull.,Spring2008,at69(2003wasthefirstyear detailed informationwas collected from individual income tax returns with noncash charitable contributionsgreaterthan$500andthestatisticsarebasedonasampleofindividualincometaxreturns).44“L” refers to conservation easements encumbering land and “F” refers to façade easements. In some years thestatisticsforthetwotypesofeasementswerecombinedintheStatisticsofIncomeBulletin.

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II.FilingaTaxReturnPackagetoMinimizeRiskofAudit

• CorrectlyDraftedConservationEasement• IRSForm8283&SupplementalStatement• QualifiedAppraisal• ContemporaneousWrittenAcknowledgment• CompellingandTimelyBaselineDocumentation• CorrectandTimelyLenderAgreement(ifapplicable)

A.CorrectlyDraftedConservationEasementDeed

1.Copyof FinalConservationEasementDeed.Acopyof thecorrectlydraftedand recorded conservation easement deed should be either (i) filed with IRSForm8283,sectionB(theappraisalsummary)or(ii)iftheeasementisvaluedatmorethan$500,000,includedinthequalifiedappraisalfiledwithIRSForm8283.

a.Bestpracticeistoeither(i)filethedatestampedcopyoftherecordedeasementdeedwiththeForm8283or(ii)havetheappraiserincludethedatestampedcopyoftherecordedeasementdeedintheappraisal.Itisimperativethattheappraiservaluestherestrictionsastheyappearinthefinalrecordedeasementdeedratherthaninanearlierdraft.

b.AsnotedinthediscussionofIRSForm8283inPartII.Bbelow,theIRShas informally suggested that a copy of the qualified appraisal beincluded in the package filed with the income tax return on which adeduction for the easement donation is first claimed even if theappraisedvalueoftheeasementis$500,000orless.

Façade easements on buildings in registered historic districts are subject tospecialrules.Thetaxpayermustincludewiththetaxpayer’sreturnfortheyearof the contribution, in addition to the Form 8283: (i) a qualified appraisal, (ii)photos of the entire exterior of the building, and (iii) a description of allrestrictions on thedevelopmentof thebuilding.45A date stamped copyof therecordedeasementdeedshouldbeincludedwiththeseitems. Ifthedeductionclaimedismorethan$10,000,itwillbeallowedonlyifthetaxpayeralsoincludesa$500filingfee.462.ExtensiveRecitals.Theconservationeasementdeedshouldincludeextensiverecitals clearly indicating the conservation or historic values of the propertyworthyofprotection.

45SeeIRC§170(h)(4)(B)(iii).46SeeIRC§170(f)(13);IRSForm8283-V,availableathttp://www.irs.gov/pub/irs-pdf/f8283v.pdf.

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3. “Exclusively for ConservationPurposes.” Tobeeligible foradeduction, thedonation of a conservation easement must, among other things, be acontribution made “exclusively” for one of more of the four “conservationpurposes” enumerated in § 170(h).47The contribution will not be treated asmadeexclusively for conservationpurposesunless theconservationpurpose is“protectedinperpetuity.”48Satisfyingthe“protectedinperpetuity”requirementrequiressatisfyingallofthefollowingrequirements:49

a.theeligibledoneerequirement,50b.therestrictionontransferrequirement,51c.thenoinconsistentusesrequirement,52d.thegeneralenforceableinperpetuityrequirement,53e.themortgagesubordinationrequirement,54f.themineralextractionrestrictionsrequirement,55g.thebaselinedocumentation,doneenotice,doneeaccess,anddoneeenforcementrequirements,56andh.theextinguishmentanddivisionofproceedsrequirements.57

Analysis by the IRS and the courts of satisfaction of the “exclusively forconservationpurposes”requirementgenerallyhasnotbeensystematic,makingthecasessomewhatdifficulttocategorize.Areasoffocushaveincludedwhetherthepurpose is“protectedinperpetuity”despitereservedrightsor inconsistentuses, satisfaction of the conservation purposes test generally, whether theextinguishment and division of proceeds requirements were satisfied, andwhetherthemortgagesubordinationrequirementwassatisfied.

47IRC§170(h)(4);Treas.Reg.§1.170A-14(d).Thefourconservationpurposesareprotectionofhabitat,protectionofopen space, historic preservation, and preservation of land for outdoor recreation by or education of the generalpublic.Id.§170(h)(4)(A).48IRC§170(h)(1)(C),(5)(A).49SeeIRC§170(h)(5)(B)(addressingsurfacemining);Treas.Reg.§1.170A-14(e)(1)(“Tomeettherequirementsofthissection,adonationmustbeexclusivelyforconservationpurposes.Seeparagraphs(c)(1)and(g)(1)through(g)(6)(ii)ofthissection.”).Inaddition,inexplainingthe“protectedinperpetuity”requirement,theSenateFinanceCommitteeprovided instructionsthatwere incorporated intotheregulationsas therestrictionontransferandno inconsistentuserequirementsofregulationsections1.170A-14(c)(2)and-14(e)(2).SeeS.Rep.No.96-1007,1980-2C.B.50Treas.Reg.§1.170A-14(c)(1).51Id.§1.170A-14(c)(2).52Id.§1.170A-14(e)(2),(3).53Id.§1.170A-14(g)(1).54Id.§1.170A-14(g)(2)(applicableonlyifthepropertyissubjecttoamortgageatthetimeofthedonation).55IRC§170(h)(5)(B);Treas.Reg.§1.170A-14(g)(4).56Id.§1.170A-14(g)(5)(i)and(ii).Theserequirementsareapplicableonlyifthe“donorreservesrightstheexerciseofwhichmayimpairtheconservationinterestsassociatedwiththeproperty.”However,thatwillalmostalwaysbethecase.Moreover,itiscommonpracticeandrecommendedthattheserequirementsbesatisfiedwithregardtoeveryconservation easement donation because they help to ensure the holderwill have the information aswell as thenotice,access,andenforcementrightsneededtoproperlyenforcetheeasement.57 Treas.Reg.§1.170A-14(g)(6)(i)and(ii).

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4.ReservedRights.Intwocases,GlassandButler,theIRSarguedunsuccessfullythat, at full exercise of all reserved rights, the conservation purposes of theeasementswouldnotbeprotectedinperpetuity.

a.Glass. InGlass, the 6th Circuit affirmed the Tax Court’s holding thattwo conservation easements protecting small portions of a ten-acreparcel located along the shoreline of Lake Michigan satisfied the“exclusively” for habitat protection “conservation purposes”requirement. The IRS argued, among other things, that the easementsfailed to satisfy this requirement because (i) the protected propertieswere too small, (ii) the taxpayers reserved too many rights in theeasements, and (iii) there were no limits on building on neighboringproperties. The 6th Circuit rejected those arguments, finding that (i)neither § 170(h) nor the Treasury Regulations require that the subjectproperty be a minimum size,58(ii) although the easements reservedvarioususe rights to the taxpayers, bothalso containedanoverarchingrestriction prohibiting “[a]ny activity on or use of the Property that isinconsistent with the purpose of this Conservation Easement,” andprovided that theeasement“shallbe liberallyconstrued in favorof thepurpose of [the easement, the land trust holder, and the stateconservationeasementenabling statute],”and (iii)neither§170(h)northe Treasury Regulations require consideration of neighboring propertyowners’buildingrightswhenassessingthedeductibilityofaconservationeasement.ThetaxpayersinGlassalsoprovidedcredibletestimonyattrialindicatingthatexerciseofthereservedrightswouldnotbe inconsistentwith the habitat protection conservation purposes of the conservationeasements,whiletheIRSfailedtoprovideanyevidencetothecontrary.SeealsoPartII.A.5.bbelow.The 6th Circuit concluded that the habitat protection conservationpurpose of the easements was “protected in perpetuity” because therequirements of Treasury Regulation 1.170A-14(c)(1), -14(e)(2) and (3),and-14g(1)through(6)weresatisfied.b. Butler. In Butler, the IRS asserted that the rights retained by thelandowners intheconservationeasementdeedsmeantthatthehabitatandopenspaceprotectionconservationpurposesoftheeasementswerenot“protected inperpetuity.”TheTaxCourtdisagreed, findingthat thehabitatprotectionconservationpurposetestwouldstillbesatisfiedevenif thepropertiesweredeveloped to the fullestextentpermittedby the

58For a critique of the 6th Circuit’s holding on this point, see Jonathan M. Burke, A Critical Analysis of Glass v.Commissioner:WhySizeShouldMatterforConservationEasements,61TAXLAWYER599(2008).

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easementdeeds.59However,theholding inButlershouldnotbeviewedasagreen light for retainingextensivedevelopmentanduserights inaconservationeasementdeedforanumberofreasons.

• The burden of proof regarding satisfaction of the conservationpurposestest,whichnormallyfallsonthetaxpayer,hadshiftedtotheIRS.

• Thepartiesdisagreedaboutwhethertheconservationeasement

deeds restricted the location of the building sites. The donorsargued that thedeeds incorporated thebaselinedocumentationby reference, and the baseline included a map stipulating theplacement of the building sites in locations consistent with thepreservationoftheconservationpurposes.Thecourtfoundthat,under Georgia law, reference in the recorded deeds to thebaselineeffectivelymadethebaseline(includingthemap)partofthe recorded deeds, and the restrictions on the location of thelotsinthemapwerethereforebinding.

• Thedonorsofferedsome(albeit“sparse”)evidenceintheformof

testimony of environmental consultants to support theircontentionthatthereservedrightswerenotinconsistentwiththeconservationpurposesoftheeasementsand,asinGlass,theIRSfailedtointroduceanyevidencetothecontrary.

• After Butler was decided, the IRS informally indicated that in

future cases it intends to hire its own environmental experts totestify as to whether the conservation purpose of an easementwould be preserved upon full exercise of all reserved rights. Asdiscussed in Part II.A.5.e. below, the IRS hired its ownenvironmental expert in Atkinson and, as a result, was able toestablish that the easements at issue did not satisfy habitatprotectionconservationpurposetestdue,inpart,tothereservedrightsinthedeeds.

c. Overarching Restriction. To prevent uses inconsistent with theconservationpurposesofthedonation,aconservationeasementshould(1)specificallyreservetothegrantor(andthegrantor’ssuccessors)onlythose rights that, even if fully exercised, would allow the conservationpurpose of the easement to be accomplished, (2) specifically prohibitactivities that are inconsistent with the conservation purpose of the

59Becausethecourtfoundthattheeasementssatisfiedthehabitatprotectionconservationpurposestestitdidnotaddresstheopenspaceconservationpurposestest.

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easement (such as subdivision, mining, and industrial uses), and (3)becauseitisimpossibleatthetimeofconveyancetospecifyinthedeedeveryconceivablevariationofuse,activity,orpracticethatinthefuturemight have an adverse impact on the conservation purpose of theeasement, include an overarching restriction prohibiting any activitiesthatare inconsistentwiththeconservationpurposeof theeasementorthe perpetual protection of the property’s conservation values. Theoverarching restriction is necessary to prevent the present or a futurelandowner from claiming that she has the right to do anything notspecificallyprohibitedby theeasementeven if itwouldbe inconsistentwith the purpose of the easement or continued protection of theproperty’sconservationvalues.60d. Liberal Construction Provision. A conservation easement should alsoinclude a clause stating that the parties to the easement (and theirsuccessors) affirmatively agree and intend that, notwithstanding anygeneral rule of construction to the contrary, the easement shall beliberally construed in favor of permanently protecting the property’sconservation values and carrying out the conservation purposes of theeasement.61In the absence of such a provision, there is a danger thatambiguoustermsintheeasementwillbeconstruedinfavoroffreeuseoflandandthattheconservationpurposesoftheeasementmaynotbedeemed“protectedinperpetuity”asrequiredby§170(h).62Some state conservation easement enabling statutes mandate thatconservationeasementsbeliberallyconstruedinfavorofeffectingtheirconservation purposes.63However, given that statutes are subject to

60SeeGlass;Priv.Ltr.Rul.200836014.61See,e.g.,BYERS&PONTE,THECONSERVATIONEASEMENTHANDBOOK376,466-67(2ded.2005).62SeeWetlandsAmericaTrustv.WhiteCloudNineVentures,_S.E.2d_(Va.2016),2016WL550339(holdingthatthecommonlawruleofconstructionrequiringlanduserestrictionstobeinterpretedinfavoroffreeuseoflandappliedtotheconservationeasementatissueandtheenablingstatutesinVirginiadonotabrogatethatruleofconstruction).Therewasastrongdissent:

Contrarytothemajority’sconclusion,thecommonlawprincipleofstrictconstructioninfavoroffreeuseoflandnolongerappliestoconservationeasements.Thestrictconstructionprinciplewasappliedunderthecommon law because easements in gross, including negative easements in gross, were disfavored as amatterofpublicpolicy.Today,andforat leastthe last fourdecades,Virginiapublicpolicystronglyfavorsthe conservation of land and open spaces…. The oft-stated policy of the Commonwealth in favor ofconservationeasementssuchasthetypeatissueherecouldnotbeaclearerrejectionofthecommonlawstrictconstructionprinciple.

Seeid.SeealsoNancyA.McLaughlin,InterpretingConservationEasements,29PROB.&PROP.30(2015)(explainingwhyconservationeasementsshouldbeinterpretedinfavorofcarryingouttheirpublic-benefitingconservationpurposesratherthaninfavoroffreeuseofland),availableathttp://bit.ly/1KSyi2U.63See32PA.CONS.STAT.§5055(c)(2)(“Anygeneralruleofconstructiontothecontrarynotwithstanding,conservationorpreservationeasementsshallbeliberallyconstruedinfavorofthegrantscontainedthereintoeffectthepurposesofthoseeasementsandthepolicyandpurposeofthisact”);W.VA.CODE§20-12-5(b)(“Notwithstandingprovisionoflaw to the contrary, conservation and preservation easements shall be liberally construed in favor of the grantscontainedthereintoeffectthepurposesofthoseeasementsandthepolicyandpurposeofthisarticle”).

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change at any time, every conservation easement deed shouldnonetheless include a liberal-construction-in-favor-of-conservation-purposesprovision.e.ReservedDevelopmentRights.ForadiscussionofTreasuryRegulationrequirements regarding permissible and impermissible reserveddevelopmentrights,seePartIII.F.below.

5. The Conservation Purposes Test. Satisfaction of the conservation purposestestwasanissueinTurner,Glass,HermanI,RPGolf,LLC,Atkinson,andCarroll.

a.Turner. InTurner,theTaxCourtheldthattheIRSproperlydisalloweddeductions claimed with respect to the donation of a conservationeasementbecausethedonationdidnotsatisfyeithertheopenspaceorhistoric preservation conservation purposes tests. Turner involved apurported donation to Fairfax County, Virginia, of a conservationeasement encumbering a 29.3-acre parcel located in a historic overlaydistrict.64ThesubjectpropertyisinthegeneralvicinityofMountVernon,President GeorgeWashington’s 500-acre residential estate; adjacent toPresident Washington's Grist Mill; and in close proximity to theWoodlawn Plantation, which was built in 1805 on land owned byPresident Washington. In obtaining an appraisal of the easement, thedonor (an attorney whose practice concentrated on real estatetransactions)representedthat60residencescouldbebuiltonthe29.3-acre parcel and that the easement reduced the number of permittedresidences to30. In reality,however, zoning regulationsalready limiteddevelopment to 30 residences because slightly more than half of theparcel (15.04 acres) was situated within a designated 100-yearfloodplain.65The Tax Court held that the easement did not satisfy the open spaceconservation purpose test because it did not limit the size of theresidencesthatcouldbebuiltonthe15acres(eitherinsquarefootageorheight)anddidnotcontainanyprovisionstoprotecttheviewsfromthenearby historic sites. The easement also did not satisfy the historicpreservation conservation purpose test because it did not preserve ahistoricstructureorhistoricallyimportantlandarea.Thecourtexplained:

Heretherehasbeennopreservationofopenspace.Nor[hasthedonor] preserved anything that is historically unique about the

64Thedonation is referredtoas“purported”becauseFairfaxCountydidnotsignoracknowledgetheconservationeasementdeedorsigntheForm8283.65Althoughthedonorcouldhaveattemptedtoobtainapprovaltorezonetheparcel,thecourtnotedthatobtainingsuchapprovalwouldhavebeentime-consumingandcostlyandsuccesswasnotguaranteed.

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property or the surrounding historical areas. [The donor] simplydeveloped the property to its maximum yield within theproperty'szoningclassification.66

b.Glass. InGlass, the 6th Circuit affirmed the Tax Court’s holding thattwo conservation easements protecting small portions of a ten-acreparcel locatedalongtheshorelineofLakeMichigansatisfiedthehabitatprotection “conservation purposes” test. The IRS argued that theeasements failed to satisfy this test because, among other things,67threatenedspecieshadnotactuallybeensightedlivingontheproperties.The 6th Circuit rejected that argument, finding that (i) the habitatprotection conservation purposes test can be satisfied if the easementprotects property that is potential habitat for rare, threatened, orendangered species, and (ii) one of the taxpayers and the executivedirectorofthelandtrustholdercrediblytestifiedthatthepropertywasa“famousroostingspot”forbaldeaglesandtherewerethreatenedplantspeciesontheproperties.c.HermanI.InHermanItheTaxCourtsustainedtheIRS’sdisallowanceofa$21.8milliondeductionfortheconveyanceofafacadeeasementtotheNational Architectural Trust. The easement encumbered 10,000unspecified square feet of the approximately 22,000 square feet ofunuseddevelopmentrights(UDRs)aboveacertifiedhistoricstructure(or45 percent of the UDRs).68The easement did not, however, preventalteration or demolition of the structure or prohibit the building of sixstoriesoveranyhalf (front,back,or side)of the structure.Accordingly,thecourtfoundthattheeasementdidnotprotecteitherthestructureorthehistoricsignificanceof theunderlying landand, thus,didnotsatisfythehistoricpreservationconservationpurposes test.Section170(h)hassincebeenamendedtoexpresslyrequirethat,tobedeductible,afaçadeeasementwithrespecttoabuildinginaregisteredhistoricdistrictmustpreservetheentireexteriorofthebuilding,includingthespaceabovethebuilding,thesides,therear,andthefrontofthebuilding.69

66SeealsoJoeStephens,IRSGets‘FirstBigWin’inPushtoStemAbuseofConservationTool,WASH.POSTA01(June4,2006) (describing the transaction as a $3.1 million donation that promised not to overdevelop scenic land onceowned by GeorgeWashington and located down the road fromMount Vernon, but developers clear-cut acres oftreesonthepropertyanderected29sprawlinghomesthatpreservationiststodayderideas‘McMansions.’”).67SeealsodiscussionofreservedrightsinPartII.A.4.68Thecertifiedhistoric structurewasaneleven-storyapartmentbuilding locatedonFifthAvenue inNewYorkCitythat had been designed by the late Henry Otis Chapman in 1923 in the neo-Italianate Renaissance style ofarchitecture.69SeeIRC§170(h)(4)(B)(i).SeealsoTechnicalExplanationOfH.R.4,The"PensionProtectionActOf2006,"preparedbytheJCT,JCX-38-06at294-95(August3,2006),availableathttps://www.jct.gov/publications.html?func=select&id=20.

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d.RPGolf, LLC. InRPGolf, LLC, the IRS asserted that the conservationeasementdonationat issuewasnotmade“exclusively forconservationpurposes,”inpartbecausetheMissouriconservationpolicythetaxpayerreferencedintheeasementdeedwaslimitedtocertainareasofthestateandtherewasnoevidencethatthesubjectpropertywaslocatedinsuchanareaonthedateofthedonation.Thetaxpayerwasforcedtoconcedethat the easement was not made pursuant to a “clearly delineatedgovernmental conservationpolicy,”and theTaxCourtgranted the IRS’smotionforsummaryjudgmentonthatissue.70e.Atkinson.InAtkinson,theTaxCourtdenied$7.88millionofdeductionsclaimed with regard to the conveyance of conservation easementsencumbering land on and adjacent to golf courses located in a gatedresidential community west of Southport, North Carolina. The courtdetermined that the easements, which were conveyed to the NorthAmerican Land Trust (NALT), did not satisfy either the habitat or openspaceprotectionconservationpurposes tests.Theproperties subject totheeasements consistedofnoncontiguous tracts (i.e., fairways, greens,teeing grounds, ranges, roughs, ponds, and wetland areas); residentiallotsborderedmostofthetracts;andaconcretegolfcartpathwindeditsway through the tracts. The taxpayers argued that each of the subjectpropertieshadindependentconservationsignificanceandcontributedtothe ecological viability of surrounding conservation areas. The IRSfocusedontheoperationof thegolfcoursesandarguedthattherightsretainedintheeasementsnegatedanypurportedconservationpurpose.Although the taxpayer generally has the burden of proving that anasserted deficiency is incorrect, the burden of proof regardingsatisfactionof thehabitat (butnotopenspace)protectionconservationpurposetestshiftedtotheIRSunderIRC§7491.Unlike inGlass andButler, inAtkinson both the taxpayers and the IRSpresented expert environmental testimony to establish their respectivepositionsregardingthehabitatprotectionconservationpurposestest.Inholdingthattheconservationeasementsdidnotsatisfythistest,theTaxCourt noted, among other things, that the most significant ecologicalfeaturesonthesubjectproperties—thelongleafpine“remnants”—werenotmaintained in a relatively natural stateworthyof conservation andwere not protected in any event because the easements permittedcutting and removal of the trees; very few of the ponds had a naturaledge and the few edges that existed were regularly sprayed with

70Thecourtfoundthatmaterialfactsregardingtheeasement’spreservationofanaturalhabitatcontinuedtobeindisputeandthusdeniedtheIRS’smotionforsummaryjudgmentonthatissue.Thecourtultimatelydidnotruleonthat issue because it sustained the IRS’s disallowance of the deduction on the ground that the taxpayer failed toobtainmortgagesubordinationagreementsatthetimeoftheeasement’sdonation.SeePartII.F.2below.

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pesticides; there were no natural fruits and seeds for foraging on theproperties; the properties provided no cover for animals; and animalmigrationwasdeterredbytheresidentialdevelopmentsurroundingeachofthenoncontiguoustracts,thelevelofhumanactivity,andthefrequentwatering. In addition, the only birds the IRS’s environmental expertobserved on one of the properties were geese, which the communityattempted to “control” (i.e., eliminate) using a border collie. The courtalsofoundthattheuseofpesticidesandotherchemicalsintheoperationofthegolfcourseinjuredtheecosystemsonthesubjectpropertiesand,thus, violated the “no inconsistent use” requirement of TreasuryRegulation § 1.170A-14(e)(2). The court concluded that wildlife andplantswerenot“mostlikely”tobefoundanddidnot“normallylive”onthepropertiessubjecttotheeasements,butdeclinedtodecidewhetheroperating a golf course is inherently inconsistentwith the conservationpurposeofprotectingrelativelynaturalhabitat.Withregardtotheopenspaceconservationpurposestest,theTaxCourtnoted that the taxpayers did not mention or provide any analysis ofgovernmentalconservationpoliciesintheirbriefs,andthecourtdeemedthat argument abandoned. The taxpayers also failed to establish thatpreservation of the subject propertieswas for the scenic enjoyment ofthe general public. Since the golf courses were in a guarded gatedcommunityandringedbyhouses,thecourtfoundthatthegeneralpublicdidnothavevisual access to theproperties. The taxpayers argued thatthe general public had visual accessbecausemostof thepopulationofthe Town of St. James lived within the gated community. The court,however, did not deem the population of one town to constitute “thegeneralpublic”anddismissedthatargument.71f. Carroll. In Carroll, the Tax Court sustained the IRS’s disallowance ofdeductions claimed with regard to the donation of a conservationbecause the easement contained a noncompliant “proceeds” clause.72However,thecourtalsoheldthattheeasementsatisfiedtheopenspaceconservationpurposetestunderIRC§170(h)(4)(A)(iii)(II),whichrequiresthat preservation of the property be “pursuant to a clearly delineatedFederal, State, or local governmental conservation policy” and “yield asignificant public benefit.” The easement, which encumbers a 21-acreproperty located in a historic district in Maryland, was granted to theMaryland Environmental Trust (MET) and the Land Preservation Trust(LPT), as joint holders. MET is a quasi-public entity that the Marylandlegislatureestablishedin1967toconservetheenvironment; it isbotha

71Formedia coverage of the case, seeRichardRubin, IRS TeesOff onGolf Courses’Green Tax Claims,WALLSTREETJOURNAL(Jan.14,2016),athttp://www.wsj.com/articles/irs-tees-off-on-golf-courses-green-tax-claims-1451959008.72SeePartII.A.13.

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unitoftheMarylandDepartmentofNaturalResourcesandgovernedbyaboardoftrustees.LPTisacharitableconservationorganization.In interpreting the governmental conservation policy requirement,TreasuryRegulation§1.170A-14(d)(4)(iii)(B)providesthat

Acceptance of an easement by an agency of the FederalGovernmentorbyanagencyofastateorlocalgovernment(orbya commission, authority,or similarbodyduly constitutedby thestate or local government and acting on behalf of the state orlocal government) tends to establish the requisite clearlydelineated governmental policy, although such acceptance,without more, is not sufficient. The more rigorous the reviewprocessbythegovernmentalagency,themoretheacceptanceofthe easement tends to establish the requisite clearly delineatedgovernmentalpolicy.Forexample,inastatewherethelegislaturehasestablishedanEnvironmentalTrusttoacceptgiftstothestatewhichmeetcertainconservationpurposesandtosubmitthegiftsto a review that requires the approval of the state’s highestofficials, acceptanceof a gift by theTrust tends to establish therequisiteclearlydelineatedgovernmentalpolicy.However, if theTrust merely accepts such gifts without a review process, therequisite clearly delineated governmental policy is notestablished.

In finding that the easement in Carroll satisfied the open spaceconservation purpose test, the Tax Court explained that thethoroughnessofMET’seasement-reviewprocess,combinedwiththefactthatMaryland’shighestofficials(theGovernor,theComptroller,andtheTreasurer of Maryland) approved the easement, established that theeasement preserves open space pursuant to a clearly delineatedgovernmental conservation policy. The Tax Court also determined thatpreservationof the21-acrepropertyyieldeda significantpublicbenefitbecause (i) the property was in a highly desirable area underdevelopmentpressure,(ii)thepropertywassubjecttoarestrictivetypeof zoning established to foster and protect agricultural lands in certainareas, (iii) the valley inwhich thepropertywas locatedwas specificallydesignated in the County’sMaster Plan as an agricultural preservationarea,and(iv)fourpropertiesadjacenttothepropertywereencumberedbyconservationeasementsheldbyMETorastateagency.

6. Extinguishment Requires Judicial Proceeding. The conservation easementdeed should include provisions satisfying the restriction on transfer,

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extinguishment, division of proceeds requirements of Treasury Regulation §§1.170A-14(c)(2)and-14(g)(6).SeePartII.A.11belowforsampleprovisions.

a. Carpenter I. In Carpenter I, the Tax Court held that conservationeasements extinguishable by mutual agreement of the parties, even ifsubject to a standard such as “impossibility,” fail as amatter of law tosatisfythejudicialextinguishmentrequirementsinTreasuryRegulation§1.170A–14(g)(6)(i).

(i)Insupportofitsholding,theTaxCourtexplained:

Extinguishmentbymutualconsentofthepartiesdoesnotguarantee that the conservation purpose of the donatedpropertywillcontinuetobeprotectedinperpetuity.Asatleast one commentator has noted, the “restrictions [in adeed]aresupposedtobeperpetualinthefirstplace,andthe decision to terminate them should not be [made]solely by interested parties. With the decision-makingprocess pushed into a court of law, the legal tensioncreated by such judicial review will generally tend tocreate a fair result.” Small, Federal Tax Law ofConservationEasements16–4(1986).

The court referenced this passage again in reaffirming andsupplementingitsopinioninCarpenterII.(ii)Withregardto federalandstate law interaction, thecourt inCarpenterIexplained:

To determinewhether the conservation easement deedscomply with requirements for the … deduction underFederal tax law,wemust look to State law todeterminetheeffectofthedeeds.Statelawdeterminesthenatureofthe property rights, and Federal law determines theappropriatetaxtreatmentofthoserights.73

(iii)Thecourt inCarpenter Ialsoheldthat the“so-remote-as-to-be-negligible”standardofTreasuryRegulation§1.170A-14(g)(3)does not modify the extinguishment requirements of TreasuryRegulation § 1.170A–14(g)(6)(i). Accordingly, failure to complywith the extinguishment requirements cannot be cured by a

73SeealsoPatelv.Comm’r,138T.C.395(2012)(Statelawdeterminesonlywhichsticksareinaperson’sbundle....Once property rights are determined under State law, as announced by the highest court of the State, the taxconsequencesaredecidedunderFederallaw).

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showingthatthepossibilityofextinguishmentissoremoteastobenegligible.

b. Carpenter II. In Carpenter II, the Tax Court confirmed that“extinguishment by judicial proceedings is mandatory.” The courtspecifically rejected the taxpayers’ arguments that the TreasuryRegulationscontemplatealternatives to judicialextinguishmentand thejudicialproceedingrequirementis“merelyasafeharbor.”

(i) In Carpenter II, the Tax Court also rejected the taxpayers’argument that the 1st Circuit’s decision in Kaufman III was anintervening change in the law that required the court toreconsideritsholdinginCarpenterI.Thecourtexplainedthat,notonly is Kaufman III not binding in the 10th Circuit (to whichCarpenter would have been appealed), Kaufman III addressedlegalissuesdifferentfromthosepresentinCarpenter.74Thecourtalso noted that it does not read Kaufman III as sanctioning“putting into the hands of the parties to a conservationagreement the authority to determine when to extinguish theconservationeasementsolongasthedoneeorganizationgetsitssharesoftheproceedsofasubsequentsale.”

c.MitchellII.InMitchellII,theTaxCourtsimilarlyrejectedtheargumentthat Kaufman III was an intervening change in the law requiring it toreconsideritsholdinginMitchellI.75Thecourtexplainedthat,notonlyisKaufman III not binding in the 10th Circuit (to which Mitchell wasappealedandaffirmed),KaufmanIIIaddressedlegalissuesdifferentfromthosepresentinMitchell.76ThecourtreiteratedthatTreasuryRegulation1.170A-14(g)(6) is not "merely ... a safe harbor,” and the specificprovisions of Treasury Regulation § 1.170A-14(g)(1) through (g)(6) "aremandatory and may not be ignored." The court further rejected thetaxpayer’s argument that the court should "draw a general rule" withrespect to the in-perpetuity requirementof§170(h)(5)(A)andTreasuryRegulation§1.170A-14(g)fromtheanalysisinKaufmanIII.Thetaxpayerasserted: “The regulation emphasizes perpetuating an easement’spurpose as opposed to the conservation easement itself. The proceedsare protected which is the goal of the law.” The Tax Court disagreed,

74Kaufman III involved interpretation of Treasury Regulation § 1.170A-14(g)(1) (the “general enforceable inperpetuity” requirement) and Treasury Regulation § 1.170A-14(g)(6)(ii) (the “division of proceeds” requirement).Carpenter, on the other hand, involved interpretation of Treasury Regulation § 1.170A- 14(g)(6)(i) (the“extinguishment”requirement)).75InMitchellItheTaxCourtsustainedtheIRS’sdisallowanceofadeductionforaneasementdonationbecausethetaxpayerfailedtoobtainamortgagesubordinationagreementatthetimeofthegift.76 Mitchell involved interpretation of Treasury Regulation § 1.170A-14(g)(2) (the “mortgage subordination”requirement).

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stating: “Nowhere in Kaufman III did the Court of Appeals for the 1stCircuit state a general rule that protecting the proceeds from anextinguishment of a conservation easement would satisfy the in-perpetuityrequirementsofsection§1.170A-14(g)...generally.”Inotherwords, the court held that § 170(h) requires perpetuation of theconservationeasementitself,notconservationpurposesgenerally.d.TheholdingsinCarpenterIandIIandMitchellIIareconsistentwith:

(i)IRSGeneralInformationLetteronextinguishment,77and

(ii) the Land Trust Alliance’s 2007 amendment report, whichinstructs:

If the conservation easement was the subject of afederal income tax deduction, then Internal RevenueCode Section 170(h) and the Treasury RegulationsSection 1.170A-14 apply…. The easement must betransferable only to another government entity orqualified charitable organization that agrees tocontinue toenforce theeasement.Theeasementcanonly be extinguished by the holder through a judicialproceeding, upon a finding that continued use of theencumbered land for conservation purposes hasbecome “impossible or impractical,” and with thepayment to theholderof a shareofproceeds fromasubsequentsaleordevelopmentofthelandtobeusedfor similar conservation purposes. To the extent anamendment amounts to an extinguishment, the landtrustmustsatisfytheserequirements.78

e.ThetimeforappealofCarpenterhasrun.Mitchellwasappealedtothe10thCircuit,whichaffirmedtheTaxCourt(seePartII.F.2below).

7.SwapsAreProhibited.

a.Belk.InBelkIII,the4thCircuitaffirmedtheTaxCourtinholdingthataconservation easement that authorizes the parties to agree to“substitutions” or “swaps” (i.e., to remove some or all of the originalprotected land from the easement, or unencumber that land, inexchangefortheprotectionofsimilarcontiguouslandupontheapprovalof the donee land trust) is not eligible for a deduction. The 4th Circuit

77Seesupranote28andaccompanyingtext.78LandTr.Alliance,AmendingConservationEasements:EvolvingPracticesandLegalPrinciples24(2007).

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explained that such an easement is not “a restriction (granted inperpetuity) on the use which may be made of the real property” asrequiredunder§170(h)(2)(C).The4thCircuitagreedwiththeTaxCourtthat,tobeeligibleforadeductionunder§170(h),adonormustgrantaneasementwith regard to a “single, immutable” or “defined and static”parcel.

(i)TheEasement.TheeasementatissueinBelkencumbersa184-acre semi-private golf course located in a high-end residentialdevelopment near Charlotte, North Carolina. The Belks donatedthe easement to the Smoky Mountain National Land Trust andclaimed a $10.5 million deduction. 79 The easement deedauthorizes the landowner to remove land from theeasement inexchange for adding an equal or greater amount of contiguousland,providedthat,intheopinionofthegrantee:

• thesubstitutepropertyisofthesameorbetterecologicalstability,

• the substitution will have no adverse effect on theconservationpurposesoftheeasement,and

• thefairmarketvalueofthe“easementinterest”placedonthesubstitutelandwillbeatleastequaltoorgreaterthanthe fair market value of the “easement interest”extinguished with regard to the land removed from theeasement.

(ii) Single Narrow Exception to Perpetuity. In affirming the TaxCourt’s holding that theBelkswerenot eligible for a deduction,the 4th Circuit explained that the “Treasury Regulations offer asingle—and exceedingly narrow—exception to the requirementthat a conservation easement impose a perpetual userestriction”—i.e.:

[if a] subsequent unexpected change in the conditionssurroundingtheproperty…make[s]impossibleorimpracticalthecontinueduseofthepropertyforconservationpurposes,the conservation purpose can nonetheless be treated asprotectedinperpetuity iftherestrictionsareextinguishedbyjudicialproceedingandallof thedonee’sproceeds… fromasubsequentsaleorexchangeofthepropertyareusedbythedonee organization in a manner consistent with theconservationpurposesoftheoriginalcontribution.Treas.Reg.§1.170A-14(g)(6)(i)(emphasisaddedbythecourt).

79TheSmokyMountainNationalLandTrusthassincechangeditsnametoSouthwestRegionalLandConservancy.

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“[A]bsent these ‘unexpected’ and extraordinary circumstances,”explained the4thCircuit, “real propertyplacedunder easementmust remain there in perpetuity in order for the donor of theeasementtoclaimacharitablededuction.”

(iii) Critical Requirements. The 4th Circuit explained thatpermitting a deduction for the donation of the Belk easementwouldenabletaxpayerstobypassseveralrequirementscriticaltothe statutory and regulatory schemes governing deductions forcharitablecontributions.

• For example, permitting the Belks to change the

boundariesof theeasementwould render “meaningless”the requirement that an easement donor obtain aqualifiedappraisalbecausetheappraisalwouldno longerbe an accurate reflection of the value of the easement,partsofwhichcouldbeclawedback.“Itmattersnot,”saidthecourt, “that theEasement requires that the removedproperty be replaced with property of ‘equal or greatervalue,’becausethepurposeof theappraisal requirementistoenabletheCommissioner,notthedoneeordonor,toverifythevalueofadonation.TheEasement’ssubstitutionprovision places the Belks beyond the reach of theCommissionerinthisregard.”

• Similarly,thebaselinedocumentationrequirement“would

alsobeskirtedifthebordersofaneasementcouldshift.”“Notonlydoesthisregulationconfirmthataconservationeasement must govern a defined and static parcel,”explained the court, “it also makes clear that holdingotherwisewould deprive donees of the ability to ensureprotection of conservation interests by, for instance,examination of maps and photographs of ‘the protectedproperty.’”

(iv)KaufmanandSimmonsDistinguishable.TheBelksarguedthatKaufmanIIIandSimmonsIIsupportthenotionthat§170(h)doesnotrequirethateasementrestrictionsattachtoasingle,definedparcel. The 4th Circuit rejected that argument, explaining thatthose“out-of-circuit”cases:

plausibly stand only for the proposition that a donationwillnotberenderedineligiblesimplybecausethedoneereserves

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itsrightnottoenforcetheeasement.TheydonotsupporttheBelks’viewthatthegrantofaconservationeasementqualifiesfor a charitable deduction even if the easement may berelocated.Indeed,aswehaveexplained,suchaholdingwouldviolatetheplainmeaningof§170(h)(2)(C).80

(v) Federal Law Controls. The Belks argued that, because NorthCarolinalawpermitspartiestoamendorswapeasements, likearight-of-wayeasementbetweenneighbors,notpermittingswapswould render all conservation easements in North Carolinaineligible for a deduction under § 170(h). The 4th Circuit foundthisargument“unpersuasive,”explaining:

whether state property and contract law permits asubstitution in an easement is irrelevant to the question ofwhetherfederaltaxlawpermitsacharitabledeductionforthedonationof suchaneasement…§170(h)(2)(C) requires thatthegiftofaconservationeasementonaspecificparceloflandbe granted in perpetuity to qualify for a federal charitablededuction,notwithstandingthefactthatstatelawmaypermitaneasementtogovernforsomeshorterperiodoftime.Thus,aneasementthat,liketheoneathand,grantsarestrictionforlessthanaperpetualterm,maybeavalidconveyanceunderstatelaw,butisstillineligibleforacharitabledeductionunderfederallaw.

WiththeexceptionofNorthDakota,whichlimitsthedurationofanyeasementcreatedintheStateto99years,itappearsthattheparties toaconservationeasementcan includeprovisions in thedeedtocomplywiththefederaltaxlawperpetuityrequirementsand, provided the easement is drafted appropriately, thoseprovisionswillbe legallybindingonboththe landownerandtheholder even though they impose conditions on the transfer orextinguishment of the easement thatmay be different ormorerestrictivethanthoseimposedbystatelaw(seePartII.A.8and9below).

80InSimmonsII,theD.C.Circuit implicitlyrejectedtheargumentoftheamicicuriae (theNationalTrustforHistoricPreservationetal.)thatlandtrustsshouldbepermittedtoagreewithdeveloperstoextinguishperpetualeasementsonsomeproperties(toallowdevelopment)inexchangeforeasementsonotherproperties.TheD.C.Circuitheld,inpart,thatan“eligibledonee”musthavea“commitmenttoprotecttheconservationpurposesofthedonation”and“theresourcestoenforcetherestrictions”andthatatax-exemptorganizationwouldfail toenforceaconservationeasement “at its peril.” The D.C. Circuit also concluded that the donated easements at issue in Simmons II “willpreventinperpetuityanychangestothepropertiesinconsistentwithconservationpurposes.”

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(vi) Savings Clause Did Not Save Deduction. The substitutionprovision in the Belk conservation easement provided thatsubstitutions become final when they are reflected in a formalrecorded “amendment.” The amendment provision in theeasement provided that the land trust could not agree to anyamendment thatwould result in the easement failing to qualifyforadeductionunder§170(h).81TheBelksreferredtothislatterprovisionasa“savingsclause.”Theyarguedthat,ifthe4thCircuitfoundthatthesubstitutionprovisionviolatedtherequirementsof§ 170(h), the savings clause would render the substitutionprovision inoperable, thusmaking the easement eligible for thededuction. In other words, the Belks argued that the savingsclausewouldoperate tonegate a right clearly articulated in theeasement (theright tosubstituteproperty),butonly if triggeredbyanadversedeterminationbythecourt.

The 4th Circuit dismissed this argument, noting that the Belkswereaskingthecourttoemploythesavingsclausetorewritetheeasementinresponsetothecourt’sholding,whichthecourtwasunwillingtodo.Thecourtrefusedtocondonesuch“triflingwiththejudicialprocess.”ThecourtalsoexplainedthatholdingfortheBelks “would dramatically hamper the Commissioner’senforcement power. If every taxpayer could rely on a savingsclause to void, after the fact, a disqualifying deduction …enforcementoftheInternalRevenueCodewouldgrindtoahalt.”The 4th Circuit also rejected the Belks’ “last-ditch” argument—thatthesavingsclausewasdesigned“toaccommodateevolving…interpretationofSection170(h)”—explaining

the statutory language of § 170(h)(2)(C) has not “evolved”sincetheprovisionwasenactedin1980….Thesimpletruthisthis:theEasementwasneverconsistentwith§170(h),afactthatbringswithitadversetaxconsequences.TheBelkscannotnowsimplyreformtheEasementbecausetheydonotwishtosufferthoseconsequences.

81ArticleVIIIoftheBelkeasementdeedprovidedasfollowswithregardtoamendments:

OwnerandTrustrecognizethatcircumstancescouldarisewhichwouldjustifythemodificationofcertainoftherestrictionscontainedinthisConservationEasement.Tothisend,TrustandthelegalownerorownersoftheConservationAreaatthetimeofamendmentshallmutuallyhavetheright,intheirsolediscretion,toagree to amendments to this Conservation Easement which are not inconsistent with the ConservationValuesor thepurposesof this instrument;provided,however, thatTrust shallhaveno rightorpower toagree to any amendments hereto thatwould result in this Conservation Easement failing to qualify as avalid conservationagreementunder the“Act,”as the samemaybehereafteramended,orasaqualifiedconservationcontributionunderSection170(h)oftheInternalRevenueCodeandapplicableregulations.

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b. Balsam Mountain. In Balsam Mountain, the Tax Court held that aconservationeasementthatauthorizedtheparties,foraperiodofuptofive years, to remove up to 5% of the land from the easement inexchange for protecting a similar amount of contiguous land was noteligibleforadeductionunderIRC§170(h).

(i) The Easement. The easement at issue in Balsam Mountain,whichwasgrantedtotheNorthAmericanLandTrust(NALT)on22acres inNorthCarolina,allowedthe landownerto, for fiveyearsfollowingthedonation,makealterationstotheboundariesofthearea protected by the easement, subject to the followingconditions:

• thetotalamountoflandprotectedbytheeasementcouldnotbereduced,

• landadded to theeasementhad tobecontiguous to theoriginallyprotectedland,

• landaddedtotheeasementhadto, inNALT’sreasonablejudgment, make an equal or greater contribution to theeasement’sconservationpurpose,

• the “location and reconfiguration of a boundary” couldnot, in NALT’s judgment, result in any material adverseeffectontheeasement’sconservationpurposes,and

• nomorethan5%oftheoriginallyprotectedlandcouldberemoved from the easement as a result of suchalterations.

(ii) Belk Not Distinguishable. Based on Belk, the Tax Court heldthat the Balsam Mountain easement was not “a restriction(grantedinperpetuity)ontheusewhichmaybemadeoftherealproperty”as requiredby170(h)(2)(C)and, thus,wasnoteligibleforadeduction.Thedonorargued thatBelkwasdistinguishablebecause theBelk easementallowed for thesubstitutionofallofthe landoriginallyprotectedby theeasement,while theBalsamMountaineasementallowedforthesubstitutionofonly5%oftheoriginallyprotectedland.TheTaxCourtwasnotpersuaded.Whilethecourtagreed that theBelkandBalsamMountain easementsweredifferent, it said “thedifferencedoesnotmatter.”For fiveyears following the donation, the donor, with the approval ofNALT,couldchangetheboundariesoftheareaprotectedbytheeasement (i.e., extinguish the original easement in partwithoutsatisfying the judicial extinguishment, impossibility orimpracticality, or proceeds requirements). Accordingly, theeasementwasnotan interest inan identifiable,specificpieceofrealpropertyand,thus,wasnotdeductible.

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c.BosqueCanyonRanch.InBosqueCanyonRanch,theTaxCourtdenieddeductions claimed by partnerships for the donation of conservationeasements because, among other things, the easements permitted 47unencumbered 5-acre homesites to be moved around the subjectproperties with the holder’s (NALT’s) approval, which would result inunencumberingacreagepreviouslysubjecttotheeasements.Specifically,the easements permitted the homesite parcel owners and NALT tomutually agree to modify the boundaries of the homesite parcels,provided:

• in NALT’s “reasonable judgment,” the modification would notresultinanymaterialadverseeffectontheconservationpurposesoftheeasements,

• thesizeoftheHomesiteparcelswouldnotbeincreased,• theexteriorboundariesofthepropertysubjecttotheeasements

wouldnotbemodified,and• theoverall amount of property subject to the easementswould

notbedecreased.

The “boundary modifications” to the homesites could cause propertythat was protected by the easements at the time of their donation tosubsequently lose that protection without satisfaction of the judicialproceeding and other requirements in Treasury Regulation §1.170A-14(g)(6). Accordingly, citing the 4th Circuit’s opinion inBelk III, the TaxCourt held that the easements were not "restrictions (granted inperpetuity) on the use which may be made of the real property" asrequiredunderIRC§170(h)(2)(C).d.TheholdingsinBelk,BalsamMountain,andBosqueCanyonRanchareconsistentwith:

(i) Carpenter I and II, in which the Tax Court held thatextinguishment of a tax-deductible easement requires a judicialproceeding. Removing land from a conservation easement,whether in connectionwith a swaporotherwise, constitutes anextinguishmentoftheeasementwithregardtotheremovedland.It allows the removed land to be used for previously prohibitedpurposes,suchasdevelopment,thuspermittingtheconservationvaluesoftheremovedland,whichhadpreviouslybeenprotectedinperpetuity,tobedestroyed.

(ii) Congress’s admonition in the legislative history “thatprovisionsallowingdeductionsforconservationeasementsshouldbedirectedatthepreservationofuniqueorotherwisesignificantland areas or structures,” as well as the detailed threshold

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conservation purpose and other qualification and valuationrequirements that must be met to be eligible for a deductionunder§170(h),82

(iii)IRSGeneralInformationLetterregardingswaps,83and

(iv)InstructionsforScheduleDoftheForm990,which(i)explainthataneasementisreleased,extinguished,orterminated“whenall or part of the property subject to the easement is removedfrom the protection of the easement in exchange for theprotectionofsomeotherpropertyorcashtobeusedtoprotectsome other property,” and (ii) require nonprofits to annuallyreport their conservation easement transfer, modification, andterminationactivities.84

8.StateLawCanRenderConservationEasementsNondeductible. InWachter,the Tax Court held that North Dakota law, which limits the duration ofeasements created after July 1, 1977, to a maximum of 99 years, precludesconservationeasementdonorsinthestatefromqualifyingforadeductionunder§170(h)becauseeasementsinNorthDakotacannotbegranted“inperpetuity.”

a. Federal Law Controls. The Tax Court in Wachter reiterated thefundamental principle that, while state law determines the nature ofproperty rights, it is federal law that determines the federal taxtreatmentof thoserights.Wachterconfirmedthatstate lawcanrenderall conservationeasementdonations ina state ineligible for the federaldeductionifstate lawpreventsconservationeasementsfromcomplyingwithfederalrequirements.Some states have consideredmaking changes to their state codes thatcould render conservation easements in the state ineligible for federaltaxincentives.85Potentialeasementdonorsandtheiradvisorsshouldbeawareofthisissue.

b. Termination in 99 Years Not So Remote as to be Negligible. Thetaxpayers in Wachter argued that North Dakota’s 99-year limitationshouldbeconsideredtheequivalentofaremotefutureeventthatdoes

82S.Rep.No.96-1007,1980-2C.B.599,at603.83Seesupranote27andaccompanyingtext.84Seesupranote25andaccompanyingtext.85See,e.g.,KeepingthePerpetualinPerpetualConservationEasements,http://lawprofessors.typepad.com/nonprofit/2015/12/keeping-the-perpetual-in-perpetual-conservation-easements.html.

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not prevent an easement from being considered perpetual. They citedTreasuryRegulation§1.170A–14(g)(3),whichprovides,inpart,thata

deductionshallnotbedisallowed...merelybecausethe interestwhichpasses to, or is vested in, thedoneeorganizationmaybedefeated by the performance of some act or the happening ofsomeevent,ifonthedateofthegiftitappearsthatthepossibilitythatsuchactoreventwilloccurissoremoteastobenegligible.

TheTaxCourt inWachternotedthat thecourtshaveconstruedtheso-remote-as-to-be-negligiblestandardtomean

'a chance which persons generally would disregard as so highlyimprobable that it might be ignored with reasonable safety inundertaking a serious business transaction' or 'a chance whichevery dictate of reason would justify an intelligent person indisregardingassohighlyimprobableandremoteastobelackinginreasonandsubstance.'

TheTaxCourtexplainedthattheterm“remote”referstothe likelihoodof the event that could defeat the donee’s interest in the gift. It thenexplained that the likelihoodof theevent inWachter that coulddefeatthe donee’s interest in the charitable gifts of the conservationeasements—expiration of the easements after 99 years—was not“remote.” On the date of the donation of the easements, the courtexplained, it was not only possible, it was inevitable that the doneewouldbedivestedofitsinterestsintheeasementsbyoperationofNorthDakotalaw.Accordingly,theeasementswerenotrestrictionsgranted“inperpetuity”and,thus,werenotdeductibleunder§170(h).

9. Interaction Between Federal and State Law. Numerous courts haveaddressed the interaction between federal and state law in the conservationeasementcontext.AsnotedinthediscussionsofCarpenterIandWachterabove,whilestatelawdeterminesthenatureofthepropertyrightsinaneasement,itisfederal law that determines the tax treatment of those rights. Thus, indeterminingwhetheraneasementcomplieswithfederaltax lawrequirements,onemust lookto thetermsof thedeedandapplicablestate lawtodeterminehow a particular easement may, for example, be transferred or extinguished,and then ask whether the easement, so configured, satisfies federal tax lawrequirements.

a.InBelkIII,the4thCircuitheldthat§170(h)“requiresthatthegiftofaconservation easement on a specific parcel of land be granted inperpetuitytoqualifyforafederalcharitablededuction,notwithstanding

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the fact that state law may permit an easement to govern for someshorterperiodoftime.”Thus,whileaneasementthatgrantsrestrictionsforlessthanaperpetualterm,liketheeasementatissueinBelk,maybea valid conveyanceunder state law, itwill be ineligible for a deductionunderfederallaw.

b.WiththeexceptionofNorthDakota,which limitsthedurationofanyeasementcreatedintheStateto99years,itappearsthatthepartiestoaconservationeasementcanincludeprovisionsinthedeedtocomplywiththefederaltaxlawperpetuityrequirementsand,providedtheeasementisdraftedappropriately,thoseprovisionswillbeenforceableunderstatelaw even though they impose conditions on the transfer orextinguishment of the easement that are different or more restrictivethan those imposed by state law. As the Tax Court noted inWachter,“[b]othpartiesallegethattheState lawat issuehere isuniquebecause[North Dakota] is the only State that has a law that provides for amaximumdurationthatmaynotbeovercomebyagreement.”c. InCarpenterI,theTaxCourtheldthattheconservationeasementsatissue were restricted charitable gifts, or “contributions conditioned ontheuseofthegiftinaccordancewiththedonor’sprecisedirectionsandlimitations.”Restrictedgiftstatusmeansthatthepropertyownerandtheholderoftheeasement(andtheirsuccessors)willbeboundbythetermsof the deed under state law, including the restriction on transfer,extinguishment, division of proceeds, and other provisions included inthedeed to satisfy federal tax law requirements. Inotherwords, if theeasementisdraftedappropriately,theprovisionsincludedinthedeedtosatisfy federal tax law requirements should be binding on both partiesunder state law even though the state enabling statute may containdifferent or less restrictive provisions addressing transfer orextinguishment.d. To help ensure that all future parties, the IRS, and the courtsunderstandthattheconservationeasementwasconveyedinwholeorinpart as a restricted charitablegift and is intended tobebindingon thepropertyownerandtheholderoftheeasement(andtheirsuccessors),itissuggestedthatconsiderationbegiventoincludingaprovisionlikethefollowingintheeasement:

The grantor desires to preserve and protect forever theconservation values of the property for the benefit of thisgenerationandallgenerationstocome.TothatendtheGrantorconveysthiseasementasanirrevocablecharitablegifttobeheldin trust for the benefit of the public and administered and

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enforced in accordance with the terms and for the purposesspecifiedherein inperpetuity.Thegranteehasagreed toacceptthe gift of this easement upon the condition and affirmativeunderstandingthattheintentionsofthegrantorregardingfutureuse and preservation of the property as expressed herein shallforever be honored and defended. The grantor and granteefurther acknowledge and agree that the terms of this restrictedcharitable gift shall be binding upon each of them and theirrespective successors in interest in perpetuity, and such termsmust be complied with notwithstanding and in addition to anyapplicableprovisionsofstatelaw.

10.BenefitsofRestrictedGiftStatus. Inadditiontohelpingtoensurethattheparties to the easement and their successors will be bound by the easementterms,includingtherestrictionontransfer,extinguishment,divisionofproceeds,and other provisions included in the deed to satisfy federal tax lawrequirements,restrictedgiftstatusmayalsohavethefollowingbenefits:

a.restrictedcharitablegiftsarehighlyfavoredbythecourts,andcourtsmight interpret charitable gifts of conservation easements in favor ofaccomplishing their charitable conservation purposes, rather than infavorofthefreeuseofland,86b.restrictedgiftsmaybeexcludedfromthebankruptcyestatesofdoneecharitable corporations and transferred intact to new charitableholders,87c.actionstorecoverconservationeasementsthathavebeenimproperlytransferred, released, modified, or terminated may not be barred bylachesorthestatuteoflimitations,88

86See,e.g.,Jacksonv.Phillips,96Mass.539,550,556(1867)(“giftstocharitableusesarehighlyfavored,andwillbemostliberallyconstruedinordertoaccomplishtheintentandpurposeofthedonor”....“Ifthewordsofacharitablebequestareambiguousorcontradictory,theyaretobesoconstruedastosupportthecharity,ifpossible.”);BoardofTrusteesofUniv.ofN.C.v.UnknownHeirs,319S.E.2d239,242(N.C.1984)(“Itisawellrecognizedprinciplethatgiftsand trusts for charities arehighly favoredby the courts. Thus, thedonor’s intentions are effectuatedby themostliberal rules of construction permitted.”). See alsoNancy A.McLaughlin, Interpreting Conservation Easements, 29PROB.&PROP.30 (2015) (arguingthatconservationeasementsshouldbe interpreted in favorofaccomplishingtheirconservation purposes rather than free use of land). But see note 62 and accompanying text (cautioning that aconservationeasementshouldincludeclausestatingthatthepartiestotheeasement(andtheirsuccessors) intendthat,notwithstandinganygeneral ruleofconstructiontothecontrary, theeasementshallbe liberallyconstrued infavorofpermanentlyprotectingtheproperty’sconservationvaluesandcarryingouttheconservationpurposeoftheeasement).87SeeEvelynBrody,TheCharity inBankruptcyandGhostsofDonorsPast,Present,andFuture,29SETONHALLLEG.J.471 (2005) (“the courts will try to identify those charitable assets that are restricted in such amanner that theysurvivethebankruptcyproceeding”).88See, e.g., Tauber v. Commonwealth, 499 S.E.2d. 839, 845 (Va. 1998) (laches may not be pled successfully as adefenseinanequitableproceedingtobarthestateattorneygeneralfromassertingaclaimonbehalfofthepublicto

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d. conservation easements should not be extinguished pursuant to thedoctrineofmergerifthegovernmentornonprofitholderacquirestitletothesubjectlandbecausetherequired“unityofownership”generallywillnotbepresent(i.e.,thetwoestateswouldbe“inthesamepersonatthesametime,”buttheygenerallywouldnotbeheld“inthesameright”),89e. attempts by state legislatures to terminate or otherwise weaken orundermine existing conservation easements may be foundunconstitutional on a number of grounds, including the prohibition onimpairmentofprivatecontracts,90andf. the state attorney general may serve as a back-up enforcer ofconservationeasements.91

11. Sample Restriction on Transfer and Extinguishment Provisions. A conservationeasementdeedshouldincludetransferandextinguishmentprovisionsthatcomplywithTreasuryRegulationrequirements.Thefollowingaresampleprovisions.92

Article[x].TransferandExtinguishment

a.RestrictiononTransfer.93GranteecantransferthisEasement,whetheror not for consideration, only if (a) (i) as a condition of the transfer,Grantee requires that the conservation purposes of this Easement willcontinuetobecarriedout,(ii)thetransferee,atthetimeofthetransfer,

insurethatcharitableassetsaredistributedinaccordwiththecharitablepurposestowhichtheyshouldhavebeendevoted);TrusteesofAndoverTheological Seminaryv.VisitorsofTheological Inst. inPhillipsAcad. inAndover, 148N.E. 900, 918 (Mass. 1925) (“Generally it is true thatno lengthof timeofdiversion from theplainprovisionsof acharitablefoundationwillpreventitsrestorationtoitstruepurpose”).89SeeNancyA.McLaughlin,ConservationEasementsandTheDoctrineofMerger,74DUKEJ.L.&CONTEMP.PROBS279(2011). See also VA Attorney General advisory opinion (Aug. 13, 2012) (opining that conservation easements inVirginiaarenotextinguishedbyapplicationofthecommonlawdoctrineofmerger),availableathttp://ag.virginia.gov/Opinions%20and%20Legal%20Resources/Opinions/2012opns/11-140%20Rust.pdf.90SeeNancyA.McLaughlin&W.WilliamWeeks, InDefenseofConservationEasements:AResponse toTheEndofPerpetuity,9WYO.L.REV.1,88-91(2009)(gatheringtherelevantauthorities).91See, e.g.,Lyme LandConservationTrust, Inc. v. Planter, 2013WL3625348 (SuperiorCt. of Connecticut,May29,2013)(unpublished);KimberlyDrelich,AfterLengthyDispute,CourtFindsinFavorofLymeLandConservationTrust,THE DAY, Mar. 14, 2015, at A1, available at http://www.theday.com/article/20150314/NWS01/303149962(Connecticutattorneygeneralassisteda landtrust insuccessfullyenforcingaconservationeasementonbehalf thepublic).At leastsixstateenablingstatutesexpresslygranttheattorneygeneralenforcementrights.CONN.GEN.STAT.ANN.§47-42c(2012);765ILL.COMP.STAT.120/4(2012);ME.REV.STAT.ANN.tit.33,§478(1)(D)(2012);MISS.CODEANN.§89-19-7(1) (2012); R.I.GEN. LAWS § 34-39-3(f)(4) (2012); VA.CODEANN. § 10.1-1013 (2012). For a discussion of theattorneygeneral’scommonlawandstatutoryrightstoenforcecharitablegiftsandtrustsonbehalfofthepublic,seeCHESTER,BOGERT&BOGERT,THELAWOFTRUSTS&TRUSTEES§411(3rded.2005).92ThesesampleprovisionsaredraftedtotracktheTreasuryRegulationrequirements.However,neithertheIRSnorthecourtshaveblessedthesesampleprovisions.Readersareresponsibleforobtaining legaladvicefromtheirownlegalcounsel.93SeeTreas.Reg.§1.170A-14(c)(2).Thecross-referenceinthelastsentenceofthisregulationto(g)(5)(ii)isincorrectand should be to (g)(6)(ii); the Treasury failed to update the cross-references when it finalized the proposedregulationsin1986.Granteeshouldbedefinedintheeasementtoincludeallsuccessorsandassigns.

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is both a “qualified organization” under IRC § 170(h)(3) and eligible toreceive thisEasementunder [citation toStateXconservationeasementenablingstatute],and(iii)thetransfereehasthecommitmenttoprotectthe conservation purposes of this Easement and the resources toenforce, and agrees to enforce, this Easement; or (b) the transfercomplies with the extinguishment requirements in [this Article]. Anyattempted transfer by Grantee of all or a portion of this Easementcontrary to this paragraph shall be invalid but shall not operate toextinguishthisEasement.AnysubsequenttransferofthisEasementshallalsobesubjecttotheprovisionsofthisparagraph.b.Extinguishment;Proceeds.94

(1)GrantorandGranteeagreethatthedonationofthisEasementcreates a property right that immediately vests in Grantee.GrantorandGrantee furtheragreethat thisproperty righthasafairmarketvaluethatisatleastequaltotheproportionatevaluethatthisEasement,atthetimeofthegift,boretothevalueoftheProperty as a whole (unencumbered by this Easement) at thattime, and such minimum proportionate value of Grantee’sproperty right, expressed as a percentage (the “MinimumPercentage”),shallremainconstant.(2) This Easement can be extinguished in whole or in part(whether through release, termination, abandonment, swap,exchange,orotherwise)only(i)inajudicialproceedinginacourtof competent jurisdiction, (ii) upona findingby the court that asubsequentunexpectedchangeintheconditionssurroundingthePropertyhasmadeimpossibleorimpracticalcontinueduseoftheProperty (or the portion thereof to be removed from thisEasement)forconservationpurposes,and(iii)withapaymentofproceedstoGranteeasdescribedinthefollowing[subparagraph],whichproceedsmustbeusedbyGranteeinamannerconsistentwiththeconservationpurposesofthisEasement.(3)Intheeventofanextinguishment,Granteeshallbeentitledtoashareoftheproceedsfromasubsequentsale,exchange,lease,or involuntary conversion of the affected property equal to thegreater of: (i) theMinimum Percentage of such proceeds or (ii)the Extinguishment Percentage of such proceeds, with“ExtinguishmentPercentage”definedas theproportionatevaluethat this Easement, immediately before and ignoring the

94Seeid.§1.170A-14(g)(6).

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extinguishment, bore to the value of the Property as a whole(unencumbered by this Easement) at that time, expressed as apercentage.(4) Any attempted extinguishment of all or a portion of thisEasementcontrarytothisparagraphshallbeinvalid

c.SupplementtoStateLaw.TheprovisionsofthisArticleshallsurviveanytransferandanypartialorfullextinguishmentofthisEasementandshallapply notwithstanding, and in addition to, any provisions relating totransferorextinguishmentunderstatelaw.

12. “Greater of” Proceeds Formula. The “greater of” proceeds formula inparagraph b.(3) of the sample extinguishment provision above complies withfederaltaxlawrequirementsbecausetheholderwillalwaysreceiveatleasttheTreasury Regulation’s required minimum proportionate (or floor) share ofproceeds.The“greaterof” formulaalso (i)ensures that theholderwill receivethe appreciation (if any) in the value of easement to be used “in a mannerconsistentwith theconservationpurposesof theoriginalcontribution” (i.e., toreplace lost conservation or historic values) and (ii) eliminates the propertyowner’s perverse incentive to seek extinguishment to benefit from anyappreciation in the value of the easement (i.e., the “spread” between theMinimum Percentage and the Extinguishment Percentage), which may besignificant.

Whilethe“greaterof”formulamaycreateanincentivefortheeasementholderto seek extinguishment, holders have a fiduciary obligation to administer andenforce conservation easements consistent with their terms and purposes;“eligibledonees”musthaveacommitmenttoprotecttheconservationpurposesof the donation and the resources to enforce the restrictions; 95 andextinguishment is permitted only in a judicial proceeding and upon a court’sfindingthatasubsequentunexpectedchangeintheconditionssurroundingthepropertyhasmadeimpossibleor impracticalthecontinueduseofthepropertyforconservationpurposes.9613. Noncompliant “Proceeds” Clause. In Carroll, the Tax Court sustained theIRS’s disallowance of approximately $650,000 of carryover deductions claimedwithregardtothedonationofaconservationeasementbecausetheeasementcontained a noncompliant “proceeds” clause. The court explained that theminimumproportionate shareofproceeds thatmustbepayable to theholderfollowing extinguishment is equal to thepercentagedeterminedby (i) the fair

95Treas.Reg.§1.170A-14(c)(1).96SeeTreas.Reg.§1.170A-14(g)(6);BelkIII;CarpenterII.

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market value of the conservation easement on the date of the gift (thenumerator)over(ii)thefairmarketvalueofthepropertyasawholeonthedateof the gift (the denominator). For example, if the fair market value of aneasementonthedateofthegiftwas$300,000,andthefairmarketvalueoftheproperty as a whole on the date of the gift was $1,000,000, the easementrepresented30%of the valueof thepropertyon thedateof the gift, and theholdermustbeentitledtoatleast30%oftheproceedsfollowingtheeasement’sextinguishment.InCarroll,theconservationeasementdeedlimitedthenumeratoroftheformulanoted above to "the deduction for federal income tax purposes allowable" byreasonofthedonation.Thecourtexplainedthat,iftheIRSweretodisallowthededuction for reasons other than valuation and the easement were laterextinguished in a judicial proceeding, the numerator would be zero and theholderoftheeasementwouldnotreceivetheminimumproportionateshareofproceeds as is required. The court also noted that deductions are denied formany reasons unrelated to valuation, and, in fact, the IRS made numerousargumentsfordisallowanceofthetaxpayers’claimeddeductionsinCarrollthatwerenotbasedonvaluation.Althoughnotmentionedbythecourt,mandatingthattheholderreceiveatleasta minimum proportionate share of proceeds even if the donor’s deduction isdisallowed is appropriate from a policy perspective. Regardless of whetherdonors’deductionsareallowedordisallowed,charitablegiftsofeasementsareirrevocableandholdershaveanongoingobligationtomonitorandenforcetheeasementsonbehalfof thepublic.Given the investment thatwillbemadebythe public in monitoring and enforcement, the value attributable to theeasements should not be permitted to revert to the donors (or the donors’successorsininterest)uponextinguishment.Rather,suchvalueshouldremaininthecharitablesectorandbeusedtoreplacelostconservationvalues,asTreasuryRegulation§1.170A-14(g)(6) requires. Inaddition,as inmanyof thecases, theIRSchallengedtheclaimeddeductioninCarrollonnumerousgrounds(includingovervaluationandlackofacompletedgiftoftheeasementduetoapplicationofMaryland’sUniformTransferstoMinorsAct).Accordingly,evenifthecourthadfound that the proceeds clause passedmuster, the deductionmay have beendisallowedonothergrounds.TheTaxCourtdistinguisheditsholdinginCarrollfromthe1stCircuit’sholdinginKaufman.InKaufman,the1stCircuitheldthatthedonorsofafacadeeasementhad satisfied the proceeds requirement because the easement deed correctlystatedtheproceedsformulaandthedoneeorganizationhadanabsoluterightasagainstthedonorsfor itsshareofproceedsuponextinguishment. InCarroll, incontrast, the donee organizations would not be entitled to any proceeds incertain circumstances based on the formula included in the easement deed.

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Consistentwiththe1stCircuit’sreasoninginKaufman,failingtoguaranteethatthedoneeswouldbeentitled to at least the requiredminimumproportionateshareofproceedsuponextinguishment,andprovidingapotentialwindfalltothedonororthedonor’ssuccessorsasaresult,wasfataltothededuction.The Tax Court found that the donors’ deductions were not saved by the lastsentence in Treasury Regulation § 1.170A-14(g)(6)(ii), which provides anexceptiontotherequirementthattheholdermustreceiveat leastaminimumproportionateshareofproceedsuponextinguishmentif“statelawprovidesthatthedonorisentitledtothefullproceedsfromtheconversionwithoutregardtothe terms of the [easement].”Maryland has an unusual provision in its statecode.Pursuanttothisprovision,iflandsubjecttoaneasementheldbyMarylandEnvironmentalTrust(MET)iscondemned,damagesmustbeawarded“tothefeeowner...andshallbethefairmarketvalueofthelandorinterestinit,computedas though the easement ... did not exist.” This presumably means the holderwouldreceivenothingunlessthepartiesagreedthatthefeeownerwouldgiveaportionoftheproceedstotheholder.TheCarrolleasementhadbeengrantedtoMETandalocallandtrustasco-holders.TheTaxCourtheldthatthestatecodeprovisionabovedidnotsavethedeductionbecause(i)theprovisionappliesonlyto easements held by MET and, thus, the proceeds formula in the deed stillviolatedtheproceedsrequirementwithregardtothelocallandtrust,and(ii)theprovisionappliesonlytocondemnationsand,thus,theproceedsformulainthedeed still violated the proceeds requirement with regard to judicialextinguishmentsnotbasedoncondemnation.TheTaxCourtalsodismissedthetaxpayers’argumentthatnoncompliancewiththe proceeds requirement should be forgiven because the probability ofextinguishment of the easement was “so remote as to be negligible.” CitingKaufman III, the Tax Court explained that easement donors cannot satisfy therequirementsof theextinguishment regulationbymerely establishing that thepossibility of a change in conditions triggering judicial extinguishment isunexpected.Toacceptsuchanargument,explainedtheTaxCourt,wouldnullifythe requirements because the extinguishment regulation, by its terms, appliesonlyto“unexpected”conditions.The Tax Court further explained that, the taxpayers “could have avoided thisadverseoutcomebystrictlyfollowingtheproportionalityformulasetforthintheregulation.” In addition, in finding that the taxpayerswere liable for accuracy-relatedpenalties,thecourtnoted:

[Thetaxpayers]offerednoevidencewhichwouldexplainwhythetermsoftheconservationeasementvariedfromtherequirementsof[TreasuryRegulation§1.170A-14(g)(6)],nordotheyclarifywhyDr.Carrollfailedtoseekcompetentadvicefromataxattorneyorotheradvisertoensurethe

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conservation easement’s compliance with pertinent regulations. In thelight of Dr. Carroll’s high level of sophistication and experience withconservation easements, we conclude that [the taxpayers] have notdemonstratedthattheyactedwithreasonablecauseandingoodfaithinnotseekingcompetenttaxadviceregardingtheconservationeasement.

ThereareanumberoftakeawaysfromCarroll.

• Conservation easement donations generally involve high-dollardeductions and the requirements of § 170(h) and the regulations arenumerous and complex. Accordingly, prospective easement donorsshouldhireexperiencedtaxcounseltoassistthemwiththeirdonations.If they do not, they run the risk of not only having their deductionsdenied,butalsobeingsubjecttopenaltiesforfailuretoseektaxadvice.Tooofteneasementdonorsareeitherunrepresentedbylegalcounsel,orrepresentedbylegalcounselwithlittleornotaxexpertise.

• Donors of conservation easements should not rely on a donee

organization or its template or model easement to satisfy therequirements for the deduction. The risks of noncompliance (audit,litigation,denialofdeductions,and interestandpenalties) fall solelyontheshouldersofthedonor,and it istheresponsibilityofthedonorandthe donor’s tax counsel to ensure that all requirements are satisfied.Mostdoneesarecarefultoinstructdonorsthattheycannotanddonotprovidelegaladvice,anddonorsneedtotakethatwarningtoheart.

• Theamountof litigation in thiscontextcouldbesignificantly reduced if

the IRS developed safe harbor or “sample” conservation easementprovisionstosatisfy thekeyperpetuityrequirementsof§170(h).Whilemanyprovisionsofaneasementmustbetailoredtothespecificpropertyand situation, many of the perpetuity requirements, including thoseaddressingjudicialextinguishmentandproceeds,couldbesatisfiedwithprovisions that generally should not vary from easement to easement.Safe harbor provisions would facilitate both donor compliance and IRSreview, and would help to ensure that the public investment ineasements and their conservation purposes is actually “protected inperpetuity” as Congress intended. Moreover, developing sampleprovisionswouldnotbeanovelapproachtofacilitatingcomplianceandcurbing abuse. The Treasury developed sample trust provisions withannotations in the charitable remainder trust and charitable lead trustcontexts and those provisions, which are widely used, have greatlyfacilitatedcomplianceandreducedabuses.

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14. Reimbursement of Funders on Extinguishment. Irby analyzed TreasuryRegulation § 1.170A-14(g)(6)(ii) (the division of proceeds portion of theextinguishment regulation) as applied to conservation easements conveyed inbargain sale transactions. The conservation easements in Irby had beenconveyedtoalandtrust,butthreegovernmententitieshadsuppliedfundingtopay approximately 75%of the valueof theeasements to the landowners, andthe landowners made charitable gifts of the remaining 25%. The easementsprovide that the grantee (the land trust) is entitled to Treasury Regulation§ 1.170A-14(g)(6)(ii)’s mandated minimum proportionate share of proceedsfollowing extinguishment, but must pay 75% of those proceeds to thegovernmententities to reimburse themfor theircontributions to thepurchaseprice of the easements, which would leave the grantee with only 25% of theproceeds.

a. The IRS argued that the reimbursement obligation meant that thegrantee was not actually entitled to the mandated minimumproportionate shareofproceeds followingextinguishment—i.e., that itsentitlementwasmerely“superficial.”TheTaxCourtdisagreed.Thecourtexplained that, unlike the situation where a lender holding anoutstandingmortgageonthepropertyisgivenprioritytoproceedsuponextinguishment (which furthers the taxpayer’s interests because theproceedswillbeusedtopaydownthetaxpayer’sdebt),therewasnoriskthat the taxpayers in Irby could reap a similar windfall uponextinguishment because the proceeds payable by the grantee to thegovernmentalentities,eachofwhichhasaconservationmission,wouldbe used by such entities “in a manner consistent with the originalconservation purposes of the contribution” (as explained in the nextparagraph). Thus, the court found that the easement deeds met therequirementsofdivisionofproceedsregulation.

b. The Tax Court noted that the IRS’s concerns in Irby more properlyseemed to address the question of whether all of the extinguishmentproceedswouldbeusedbythegrantee“inamannerconsistentwiththeconservation purposes of the original contribution” as required byTreasuryRegulation§1.170A-14(g)(6)(i).Thecourtdeterminedthattheywould.Itexplainedthatallthreegovernmententities“wereestablishedto assist the conservation of open land” and are “legally obligated tofulfill their conservation purpose.” In addition, the court stated that itappeared that the reimbursements would enhance the ability of thegovernment entities “to conserve and protect more land, since thereimbursedfundswouldbeusedtodojustthat.”Accordingly,thecourtfound that the reimbursement provision in Irby did not violate the

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requirements of either the extinguishment or division of proceedsregulations.97c. The Tax Court issued stipulated decisions in Irby in December 2013orderingthetaxpayerstopayagreedupondeficienciesinincometaxfortaxableyears2003and2004,butnopenaltieswereimposed.

B.QualifiedAppraisalandIRSForm8283(AppraisalSummary)

1.ShortHistory.a. In 1984, as part of the Deficit Reduction Act of 1984 (DEFRA),98Congress required taxpayersclaimingdeductions fornoncashcharitablecontributionsinexcessof$5,000toobtainaqualifiedappraisalpreparedbyaqualifiedappraiser99andattachanappraisalsummarytothereturnon which the deduction is first claimed for the property contributed.DEFRA also directed the Secretary of the Treasury to prescriberegulations implementing the statutory requirements. Pursuant to thislegislativemandate, the IRS and the TreasuryDepartmentpromulgatedTreasury Regulation § 1.170A-13(c) (attached as Appendix D), whichprovidesthatnodeductionshallbeallowedforanoncashcontributioninexcessof$5,000unlessthetaxpayer

(i)obtainsaqualifiedappraisalpreparedbyaqualifiedappraiserand(ii)attachesafullycompletedappraisalsummary(IRSForm8283)to the tax returnonwhich the taxpayer first claimsadeductionforthecontribution.

b. In 2004, Congress added § 170(f)(11) to the Internal Revenue Codeeffective for contributions made after June 3, 2004 (§ 170(f)(11), asamended, is attached as Appendix E).100Section 170(f)(11) provides,amongotherthings,that

97SomehavearguedthatthecourtreachedthecorrectresultinIrby,butforthewrongreason.TreasuryRegulation§1.170A-14(g)(6)(ii)couldbeviewedasapplyingonlytotheportionoftheproceedsattributabletothecontributioncomponentofabargainsaletransaction,andnottotheportionoftheproceedsattributabletothesalescomponentofthetransaction.Allowingthefunderstobereimbursedforthefundstheycontributedtothepurchasepriceshouldthusnotrunafouloftheproceedsrequirement,althoughthepriorityofthepaymentsmightbeanissue.98Pub.L.No.98-369,98Stat.691(1984).99DEFRA § 155(a). Congress defined the term “qualified appraisal” to mean an appraisal prepared by a qualifiedappraiser that includes, among other information: (1) a description of the property appraised, (2) the fairmarketvalueofthepropertyonthecontributiondateandthespecificbasisforvaluation,(3)astatementthattheappraisalwaspreparedforincometaxpurposes,(4)thequalificationsoftheappraiser,and(5)anyadditionalinformationtheSecretarymayprescribebyregulation.Id.§155(a)(4).100See§883oftheAmericanJobsCreationActof2004,Pub.L.No.108-357,118Stat.1418.

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(i) inthecaseofcontributionsofpropertyforwhichadeductionof more than $5,000 is claimed, the taxpayer must obtain aqualifiedappraisalandattachtothereturnforthetaxableyearinwhichsuchcontributionismadesuchinformationregardingsuchpropertyandsuchappraisalastheSecretarymayrequire(i.e.,theForm8283,appraisalsummary),101and(ii)inthecaseofcontributionsofpropertyforwhichadeductionofmore than$500,000 is claimed, the taxpayermustattach thefull qualified appraisal to the return (i.e., the entire qualifiedappraisalmustbefiledwiththeForm8283).102

c.In2006,Congressamended§170(f)(11)toaddstatutorydefinitionsoftheterms“qualifiedappraiser”and“qualifiedappraisal.”103

d. Later in 2006, the IRS issuedNotice 2006-96,104which, among otherthings, provides transitional guidance regarding § 170(f)(11)(E)’sdefinitionsofqualifiedappraisalandqualifiedappraiser.

e. In 2008, the IRS and the Treasury Department issued proposedregulationsimplementingthesubstantiationandreportingrules.105Untiltheseregulationsarefinalizedandeffective,thetransitionalguidanceinIRSNotice2006-96applies.

f.Astheforegoing indicates, thequalifiedappraisal,qualifiedappraiser,andappraisal summary requirementsareboth statutoryand regulatoryrequirements.

2.Form8283,SectionB.Despitethe1stCircuit’sholdinginKaufmanIII,donorsshould correctly and completely fill out Form8283 and attach a SupplementalStatementasdescribedbelowandnotrelyonsubstantialcompliance.106

101IRC§170(f)(11)(C).102Id.§170(f)(11)(D).103IRC§170(f)(11)(E).See§1219ofthePensionProtectionActof2006,Pub.L.No.109–280,120Stat.780.Foranexplanation of the Pension Protection Act of 2006 changes, see Technical Explanation Of H.R. 4, The "PensionProtection Act Of 2006," prepared by the JCT, JCX-38-06 (August 3, 2006), available athttps://www.jct.gov/publications.html?func=select&id=20.104IRSNotice2006-96isavailableathttp://www.irs.gov/irb/2006-46_IRB/ar13.html.105See Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions, 73FederalRegister45908(proposedAugust7,2008).106InKaufmanIII,the1stCircuitheldthatfailuretoincludethedate,mannerofacquisition,andcostorotherbasisofthepropertycontributedontheForm8283wasnotfataltothededuction.However,inCostellotheTaxCourtheldthattheForm8283didnotcomplyorsubstantiallycomplywithTreasuryRegulationrequirementsbecauseitwasnotsignedbythedoneeanditfailedtodisclosetheconsiderationthetaxpayersreceivedinexchangeforthepurporteddonation. In Ney, the Tax Court similarly held that the Form 8283 did not comply or substantially comply withTreasuryRegulationrequirementsbecauseitwasnotsignedbyanappraiserorthedonee,itdidnotlistthedateofacquisitionoftheproperties,anditdidnotstatethatthecontributionsweremadeaspartofbargainsalesorindicate

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a. Appendix F contains examples of correctly filled-out sections of theForm8283relatingtoconservationeasementsinvariouscircumstances.b. The donee and the individual appraiser or appraisers (if more thanone)mustallsigntheForm8283.107c.DEFRAspecificallyrequirestaxpayerstoincludeonthereturnonwhicha deduction is first claimed such information as may be prescribed byTreasuryRegulations,includingthecostbasisandacquisitiondateofthedonated property. 108 The Treasury Regulations implement thisrequirement by providing that the appraisal summary must include,amongotherthings(i)themanneranddateofacquisitionofthepropertyby the donor and (ii) the cost or other basis of the property.109TheTreasuryRegulationsalsoprovidethat,ifataxpayerhasreasonablecausefor being unable to provide the foregoing information, an appropriateexplanationshouldbeattachedtotheappraisalsummary.Thetaxpayer'sdeduction will not be disallowed simply because of the inability—forreasonablecause—toprovidetheseitemsofinformation.110d.TheInstructionsforForm8283111state,withregardtoSectionB,PartI,Line5,Columns(d)through(f)(addressingdateacquired,howacquired,and basis): “If you have reasonable cause for not providing theinformation in columns (d), (e), or (f), attach an explanation so yourdeductionwillnotautomaticallybedisallowed”(emphasisadded).

3.SupplementalStatement.TheInstructionsforForm8283requirethedonortoattachasupplementalstatementtotheform.

a.Thesupplementalstatementmust:(i)identifytheconservationpurposesfurtheredbythedonation,(ii) show, if before and after valuation is used, the fair marketvalueoftheunderlyingpropertybeforeandafterthegift,(iii)statewhetherthedonationwasmadeinordertogetapermitor other approval froma local or other governing authority andwhetherthedonationwasrequiredbyacontract(i.e.,wasthereaquidproquo),and(iv) if the donor or a related person has any interest in otherpropertynearby,describethatinterest.

thecompensationreceived inexchange.SeealsoSeventeenSeventyShermanStreet (“failuretoproperlydiscloseabargainsale[onaForm8283]mayforecloseaclaimedcharitablecontributiondeductioninitsentirety”).107SeeTreas.Reg.§1.170A-13(c)(5)(iii).108DEFRA§155(a)(1)(C).109SeeTreas.Reg.§1.170A-13(c)(4)(ii)(D)and(E).110Seeid.§1.170A-13(c)(4)(iv)(C)(1).111InstructionsforForm8283areavailableathttp://www.irs.gov/pub/irs-pdf/i8283.pdf.

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b. The Supplemental Statement should be comprehensive and detailed(numerous pages long). An example of a supplemental statement isattachedasAppendixG.

4.SpecialRules forFaçadeEasementDonations.Forthedonationofa façadeeasementonabuilding ina registeredhistoricdistrict, inadditionto theForm8283 and Supplemental Statement, the taxpayer must include with thetaxpayer’s return for the yearof the contribution: (a) a qualified appraisal, (b)photosof theentireexteriorof thebuilding, (c)adescriptionofall restrictionson the development of the building, and (d) if the deduction claimed ismorethan$10,000,a$500filingfee.112In Gemperle, the Tax Court sustained the IRS’s disallowance of deductionsclaimed with regard to a 2007 donation of a façade easement because thetaxpayers,amarriedcouplewhorepresentedthemselvesinTaxCourt,failedtoincludeaqualifiedappraisalof theeasementwiththereturnthey filed for theyearofthecontribution.TheTaxCourtalsofoundtheGemperlesliablefor20%penalties for“disregardof rulesor regulations”under IRC§6662(a)and (b)(1).The court explained that the requirement that the full qualified appraisal beincludedwith the tax return filed for theyearof thecontribution is statednotonly inthe InternalRevenueCodebutalso inthe instructions forthe IRSForm8283,and the taxpayers“wereat leastcareless, ifnot reckless, in ignoring thewarningthatanappraisalwasrequired.”TheGemperleswerealternativelyliablefor40%strict liabilitypenaltiesunder IRC§6662(h) formakinggrossvaluationmisstatementsontheir2007and2008returnswithregardtotheeasement.

C.QualifiedAppraisalRequirements

1.GeneralRequirements.113

a. Strict ComplianceRecommended.Donors should strictly complywithall statutory and regulatory qualified appraisal requirements. While insome cases the courts have been willing to forgive failures to strictlycomplywithsomeoftherequirements,114inthefollowingcasesfailures

112See IRC §§ 170(h)(4)(B)(iii) and 170(f)(13). See also IRS Form 8283-V, available at http://www.irs.gov/pub/irs-pdf/f8283v.pdf.113See IRC § 170(f)(11) (attached as Appendix E); Treas. Reg. § 1.170A-13(c) (attached as Appendix D); IRSNotice2006-96,availableathttp://www.irs.gov/irb/2006-46_IRB/ar13.html.114InZarlengo, the TaxCourt held that the taxpayer compliedor substantially compliedwith the variousqualifiedappraisal requirementseventhough,amongother things, theappraisalwas“premature” (i.e.,preparedmorethansixtydayspriortothedateofthecontribution).InIrby,theTaxCourtheldthatanappraisalreport’sdiscussionofthepurpose of the appraisal (i.e., to value an easement for purposes of § 170(h)) was sufficient to satisfy TreasuryRegulation § 1.170A–13(c)(3)(ii)(G)’s requirement that the appraisal contain “[a] statement that the appraisalwaspreparedforincometaxpurposes.”InSimmonsII,ScheidelmanII,andFriedbergII,thecourtsheldthattheappraisalsobtainedtosubstantiatefaçadeeasementdonationssufficientlydetailedthe“methodused”and“basis”ofvaluation

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to strictly comply led to a complete disallowance of the claimeddeductions.

(i) Lord. In Lord, the Tax Court sustained the disallowance of adeduction for thedonationofa conservationeasementbecausethe taxpayer’s appraisal (which did not include the easementcontributiondate, thedate the appraisalwasperformed, or theappraisedfairmarketvalueoftheeasementonthecontributiondate) was not a qualified appraisal. The doctrine of substantialcompliance was not applicable because significant informationwasomitted.

(ii) Costello. In Costello, landowners conveyed a conservationeasementpermanentlyprohibitingdevelopmentof their73-acrefarm to Howard County,Maryland, in exchange for the right tosell 16 development rights to a developer for $2.5 million. Thedeveloper was able to use those rights to increase density onparcels located in a “receiving area” of the County (i.e., theexchangewaspursuant to theCounty’s transferofdevelopmentrights program). Seven months later, the landowners hired anappraiser to appraise their property before and after a“hypothetical” sale of development rights. The appraiser wasunawareoftheexistingconservationeasementandassumedtheproperty could be developed into a 25-lot subdivision. Heestimatedthevalueofthehypotheticaldevelopmentrightstobe$5.5 million and the taxpayers filed a tax return claiming acharitable incometaxdeductionofthatamount.HowardCountyrefused to sign an IRS Form 8283 as the “donee” because itquestionedwhethertheconveyanceoftheeasementconstitutedacharitabledonation.

The IRS disallowed the claimed deduction on a number ofgrounds,includingthatthetaxpayersfailedtoobtaina“qualifiedappraisal.” The Tax Court sustained the disallowance, finding,amongotherthings,thatthetaxpayer’sappraisalfailedtoincludethefollowingthreeelementsrequiredforaqualifiedappraisal:(a)the appraisal did not contain an accurate description of thecontributedproperty(i.e.,theappraiserdidn’tdescribeorpurportto value the conservation easement because the appraiser wasunaware of its existence), (b) the appraisal did not contain thedate of the contribution (unsurprising given that the appraiser

forpurposesofTreasuryRegulation§1.170A-13(c)(3)(ii)(J)and(K).ProvisionofthebasisofvaluationisalsorequiredbyDEFRA§155(a)(4)(B).

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wasunawareoftheeasementconveyance),and(c)theappraisaldid not contain the salient terms of any of the agreementsrelating to the contributed property (again, unsurprising giventhattheappraiserwasunawarethatthe landownershadagreedtogranttheeasementtotheCountyinexchangefortherighttoselldevelopmentrightsfor$2.5million).

After filing their initial income tax return and claiming a $5.5million deduction, the landowners apparently had secondthoughts. They had their appraiser prepare an addendum to hisappraisal thattook intoaccounttheirsaleofdevelopmentrightsto the developer for $2.5 million, and they filed an amendedincome tax return claiming a deduction of only $3 million.However,theappraiser’saddendumwasnotpreparedwithintherequiredtimeperiodforaqualifiedappraisal (i.e.,nomorethan60daysbeforethegiftandnolaterthantheduedate(includingextensions)ofthereturnonwhichadeductionisfirstclaimed).115TheTaxCourtheldthat theuntimelyaddendumdidnotconvertthe original appraisal into a qualified appraisal. The court alsoheld that the appraisal did not “substantially comply” with thereporting requirements because it omitted numerous categoriesofimportantinformationandappraisedthewrongasset.

The Tax Court further explained that, pursuant to IRC§ 170(f)(11)(A)(ii)(II) (see Appendix E), “[e]ven absent strict orsubstantialcompliancewiththe‘qualifiedappraisal’andreportingrequirements,adeductionwillnotbedeniedifthefailuretomeetthoserequirementsisdueto‘reasonablecauseandnottowillfulneglect.’” The burden of proving reasonable cause is on thetaxpayer,however,andthecourtheldthat,giventhemagnitudeof the omissions from the appraisal and the Form 8283,particularly the failure todisclose theprior saleof developmentrights for $2.5 million, the taxpayers could not show that theirfailureswereduetoreasonablecause.(iii)Mecox. InMecox, the U.S. District Court for the SouthernDistrictofNewYorksustainedtheIRS’scompletedisallowanceofa deduction claimed with regard to the donation of a façadeeasementbecause(i) theeasementwasfoundnottohavebeencontributed until the year it was recorded, which was the yearfollowing the year inwhich the taxpayer claimed the deductionand (ii) theappraisalwasuntimely (i.e., theappraisalwasmade

115SeeTreas.Reg.1.170A-13(c)(3)(i)(A)(attachedasAppendixD).

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more than60daysprior to thedateof the contribution116). SeePartIII.C.2belowforamoredetaileddiscussionofMecox.

b. Collective Defects. After the 2nd Circuit’s holding in Scheidelman II(discussedimmediatelybelow),theTaxCourtinRothmanIIreconsideredits earlier opinion and concluded that the Rothman appraisal met the“method used” and “basis” of valuation requirements of the TreasuryRegulations. However, the Tax Court noted that Treasury Regulation§1.170A-13,thequalifiedappraisalregulation(attachedasAppendixD),imposes15distinctrequirementsandtheappraisalinRothmanfailedtosatisfy8ofthe15requirements.Becauseofthe“collectivedefects,”thecourt reconfirmed its holding that the appraisal was not qualified. TheTax Court in Rothman II further noted that, because the qualifiedappraisal regulation was promulgated under an express delegation ofcongressionalauthorityandhasbeenfoundtobevalid,theU.S.SupremeCourtinstructsthatcourtsrespectthelinestheSecretaryoftheTreasuryhasdrawn thereinas a validexerciseof rulemakingauthority.WhetherthedonorinRothmanqualifiedforthe“reasonablecause”exceptionfornothavingaqualifiedappraisalunder§170(f)(11)(A)(ii)(II)wasan issuethatremainedtobetried,butthecasesettled.c. Qualified Appraisals That Are Not Credible. In a number of façadeeasement cases the courts held that the appraisals met the minimalrequirements of a qualified appraisal but did not provide credibleevidenceofvalue.

(i)Scheidelman.InScheidelmanII,the2ndCircuitexplained

[f]orthepurposeofgaugingcompliancewiththereportingrequirement, it is irrelevant that the IRS believes themethod employed [a mechanical application of apercentage diminution] was sloppy or inaccurate, orhaphazardly applied—it remains a method, and [theappraiser] described it. The regulation requires only thattheappraiseridentifythevaluationmethod“used”;itdoesnotrequirethatthemethodadoptedbereliable.

However, the 2nd Circuitwent on to explain that its conclusionthat the appraisal met the minimal requirements of a qualifiedappraisalmandatedneitherthattheTaxCourt findtheappraisalpersuasivenorthatScheidelmanbeentitledtoanydeductionforthedonatedfaçadeeasement,anditremandedtotheTaxCourt.

116Id.

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In Scheidelman III, the Tax Court held that, although thetaxpayers’ appraisal was a qualified appraisal: (a) the taxpayersdidnotprovidesufficientcredibleevidencetomeettheirburdenofestablishingentitlementtotheclaimedcharitablecontributiondeductionand(b) thepreponderanceof theevidencesupportedtheIRS'spositionthatthefaçadeeasementhadnovalue.InScheidelmanIVthe2ndCircuitaffirmedtheTaxCourt’sholdingthattheeasementhadnovalue.117Insupportof itsholding,the2ndCircuitquotedtheIRS’svaluationexpert,whoexplainedthat“in highly desirable, sophisticated home markets like historicbrownstoneBrooklyn,theimpositionofaneasement,suchastheonegranted...doesnotmateriallyaffectthevalueofthesubjectproperty.”The2ndCircuitalsofoundpersuasivethefactthatthedoneehadassuredoneofScheidelman'smortgagorsthat

[a]s a practical matter, the easement does not add anynew restrictions on the use of the property because thehistoricpreservationlawsoftheCityofNewYorkalreadyrequireaspecifichistoricreviewofanyproposedchangestotheexteriorofthisproperty.

(ii) Kaufman. In Kaufman III, the 1st Circuit vacated the TaxCourt’s opinions in Kaufman I and Kaufman II in part andremanded to the Tax Court on the issue of valuation. The 1stCircuitexplainedthattheKaufmanshadexpressedconcerntothedonee—the National Architectural Trust (NAT)—about the highappraised value of the façade easement they were donatingbecause it implied a substantial reduction in the resale value oftheir home, which was located in Boston’s South End HistoricDistrict. “In an effort to reassure them, a [NAT] representativetold theKaufmans thatexperience showed that sucheasementsdid not reduce resale value.” “This,” said the 1st Circuit, “could

117In Evans, Dunlap, Foster, Scheidelman, Kaufman, Chandler, and Reisner, façade easements on residentialpropertieswerefoundtohavenovalue(inReisnerthepartiessostipulated).However,courtshavedeterminedthatfaçadeeasements reduce thevalueof theproperties theyencumber,albeitby less thanthe taxpayers’claimed, insomecases. InSimmonsI,Zarlengo,andGorra,theTaxCourtheldthatfaçadeeasementsreducedthevalueofthesubjectresidentialpropertiesby5%,3.5%,and2%,respectively.InSeventeenSeventyShermanStreet,theIRSarguedthat a façade easement had no effect on the value of a historic shrine because of already existing local historicpreservationrestrictions.TheTaxCourtdisagreed,holdingthattheeasementwasmoreprotectiveoftheshrinethanlocal law. InWhitehouse Hotel, after two appeals, the 5th Circuit affirmed the Tax Court’s holding that a façadeeasementencumberingthehistoricMaisonBlanchebuilding(whichislocatedintheFrenchQuarterinNewOrleansandisnowusedasaRitzCarltonhotel)reducedthevalueofthebuildingby14.9%.Foracomprehensivediscussionofthevaluationcaselaw,seeNancyA.McLaughlin,ConservationEasementsandtheValuationConundrum,19FLA.TAXREV.225(2016),availableathttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2704576.

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easilybe the IRS'sopeningargument inavaluation trial.”118Andsoitapparentlywas.In Kaufman IV, on remand from the 1st Circuit, the Tax Courtsustained the IRS’s complete disallowance of the deductionsclaimed with regard to the façade easement donation on thegroundthat theeasementhadnovalue.AlthoughtheTaxCourtassumedtheKaufman’sappraisalwasa“qualifiedappraisal,”thecourtgavenoweighttotheappraisal’sestimateofvaluebecauseit found the appraiser’s method (application of a standarddiminution percentage to the value of the property before theeasement's donation) to be unreliable and his analysisunpersuasive.TheTaxCourtfoundtheIRS’svaluationexpert,whodeterminedthatthevalueoftheeasementwaszero,tobemorepersuasive.TheIRS’sexpertopined,amongotherthings,thatthetypicalbuyerwould find the restrictions in the façadeeasementnomoreburdensomethanlocalhistoricpreservationrestrictionsand,evenifthefaçadeeasementweremorerestrictive,itwouldnot necessarily reduce the value of the property becausehomeowners in historic districts place premium value on theassurance that the neighborhood surrounding their homes willremainunchangedovertime.

• In Kaufman IV the Tax Court also sustained the IRSimpositionofaccuracy-relatedpenalties.TheindefatigableKaufmans appealed that holding to the 1st Circuit. InKaufmanV(discussedinPartIII.A.1below),the1stCircuitaffirmed, noting that the Tax Court did not clearly errwhenitfoundthattheKaufmanswereliableforpenaltiesforclaimingadeduction for thedonationof“aworthlesshistoricpreservationeasementontheirhome.”

(iii) Chandler. In Chandler, the Tax Court sustained the IRS’scompletedisallowanceofdeductionsclaimedwithregardtotwofaçadeeasementdonations.As inKaufman, thepropertieswerelocatedinBoston’sSouthEndHistoricDistrictandtheeasementsweredonated toNAT.Relyingon itsanalysis inKaufman IV, thecourt explained that, although therewereminor differences (inscope, monitoring, and enforcement) between the easementrestrictions and the restrictions already imposed by local law,thosedifferencesdonotaffectpropertyvaluesbecauseatypical

118The 1st Circuit also noted “Section 170(h) does not allow taxpayers to obtain six-figure deductions for gifts oflesserornovalue.”

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buyer would perceive no difference between the two sets ofrestrictions.Thecourtdidnotfindthetaxpayer’sappraisal,whichasserted a 16% diminution in the value of the properties, to becredible. The appraiser who prepared the appraisal has beenbarred frompreparinganykindof appraisal reportorotherwiseparticipatingintheappraisalprocessforanypropertyrelatingtofederaltaxes.119

d. ImportanceofGoodAppraisals.Donors shouldnot relyonappraisalsthatdonot strictly complywith thequalifiedappraisal requirementsoruse questionable valuationmethods or bases.While failures to strictlycomplywith the ruleshavebeen forgiven insomecases, inothercasestheyhaveresulted incompletedisallowanceof theclaimeddeductions.Moreover, even though an appraisal might be found to be a qualifiedappraisal,ifitispoorlywritten,employsquestionablemethodsorbases,or isotherwiseunconvincing, itmaynonethelesstriggeranauditand, iflitigated, the donor may be found to have failed to provide sufficientcredibleevidenceofvalue.120Insituationswhereadonationhasalreadybeenmadeandsatisfactionofthequalifiedappraisalrequirementsisanissue on audit or in litigation, however, the decisions in Simmons II,ScheidelmanII,FriedbergII,Irby,andZarlengomaybehelpful.e. IRC § 170(f)(11).Most of the cases that have been decided to dateinvolved donations made before (i) the effective date of § 170(f)(11)(June 4, 2004), (ii) enactment of the Pension Protection Act of 2006,which amended § 170(f)(11) to add statutory definitions of the terms“qualifiedappraiser”and“qualifiedappraisal,”and(iii)theIRS’sissuanceof Notice 2006-96, which, among other things, provides transitionalguidanceregarding§170(f)(11)(E)’sdefinitionsofqualifiedappraisalandqualified appraiser. We can expect to see discussion of the statutoryrequirementsin§170(f)(11)infuturecases.121

2.ConservationEasement-SpecificValuationRules.Donorsshouldalsostrictlycomply with the conservation easement-specific valuation rules in TreasuryRegulation § 1.170A-14(h)(3), including the “contiguous parcel” and“enhancement”rules.

a.Pursuanttothecontiguousparcelrule,122theamountofthedeductioninthecaseofaconservationeasementcoveringaportionofcontiguous

119SeePartI.Oabove.120Forthe IRS’sviewofappraisals,seeNonprofitLawProfessorsBlog, IRSonConservationEasementAppraisals,athttp://bit.ly/1UqHbTl.121Seesupranotes100-104andaccompanyingtext(discussingthesestatutoryrequirements).122ThecontiguousparcelruleisfoundinthefourthsentenceofTreasuryRegulation§1.170A-14(h)(3)(i).

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propertyownedbythedonorandthedonor's“family” isthedifferencebetweenthefairmarketvalueoftheentirecontiguousparcelbeforeandafterthegrantingoftheeasement.b.Pursuanttotheenhancementrule,123ifthegrantingofaconservationeasement has the effect of increasing the value of any other propertyownedbythedonorora“relatedperson,”theamountofthedeductionmustbereducedbytheamountoftheincreaseinthevalueoftheotherproperty,whetherornotsuchpropertyiscontiguous.c. IRSOffice of Chief Counsel Advice 201334039 (CCA) provides helpfulguidanceon theapplicationof the contiguousparcel andenhancementrules.124

(i) The CCA discusses the meaning of the term “family” forpurposesofthecontiguousparcelrule, themeaningoftheterm“relatedperson”forpurposesoftheenhancementrule,andrulesrelating to constructive ownership and entity classification andtheir impact on both the contiguous parcel and enhancementrules. The CCA provides twelve examples of the application ofthese rules to various situations involving property owned byindividualsandentities(LLCs,partnerships,andcorporations).

(ii)TheCCAalsoexplains ina footnote that, forpurposesof thecontiguous parcel rule, whether the entire contiguous parcel isvalued as one large property or as separate properties dependsonthehighestandbestuseoftheentirecontiguousparcel.125

3. File Qualified Appraisal with Income Tax Return. Consistentwith the IRS’sinformalsuggestion,acopyofthequalifiedappraisalshouldbe includedinthepackagefiledwiththeincometaxreturnonwhichadeductionfortheeasementdonationisfirstclaimedeveniftheappraisedvalueoftheeasementis$500,000orless.Ifpossible,thequalifiedappraisalshouldincludeacopyoftherecorded(date stamped)conservationeasementdeed. Inall cases, theappraiser shouldhave valued the restrictions as they appear in the recorded easement deedratherthaninanearlierdraft.

123TheenhancementruleisfoundinthefifthsentenceofTreasuryRegulation§1.170A-14(h)(3)(i).124 IRS Chief Counsel Advice 201334039 (released Aug. 23, 2012), available at http://www.irs.gov/pub/irs-wd/1334039.pdf.125SeeNonprofitLawProfessorsBlog, IRSonConservationEasementAppraisals,athttp://bit.ly/1UqHbTl(discussingthisissue).

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D.ContemporaneousWrittenAcknowledgment1.Nodeductionisallowedforacharitablecontributionof$250ormoreunlessthe taxpayer substantiates the contribution with a contemporaneous writtenacknowledgment(CWA)obtainedfromthedonee.1262.ACWAmustincludethefollowinginformation:

a.theamountofcashandadescription(butnotvalue)ofanypropertyotherthancashcontributed,b.whetherthedoneeprovidedanygoodsorservicesinconsideration,inwholeorinpart,forthecontributedproperty,andc. if goods and services were provided, a description and good faithestimateofthevalueofsuchgoodsorservices.127

3.ACWAwillbecontemporaneousonly ifthetaxpayerobtains itonorbeforetheearlierof

a. thedateonwhich the taxpayer files a return for the taxable year inwhichthecontributionwasmade,orb.theduedate(includingextensions)forthefilingofsuchreturn.128

4.FailureofadonortoobtainaCWAcannotbecuredbyhavingthedoneefileaForm990oranyotherformcontainingtherequiredinformation.129

5.InSchrimsherandFrench,theTaxCourtheldthattheconservationeasementdeed could not serve as a CWA. See also Bruzewicz (letter identifying cashcontributionsrelatingtofaçadeeasementdonationwasnotaCWA;doctrineofsubstantial compliance inapplicable) andDidonato (settlement agreementwasnot aCWA). InSimmons I,130Averyt, andRPGolf, LLC, however, theTaxCourtheldthattheconservationeasementdeedcouldserveasaCWA.AndinIrby,theTax Court held that documents associated with the bargain sale of twoeasements collectively constitutedaCWA. InFrench,which is themost recentcaseaddressingthis issue, theTaxCourtdistinguishedAverytandRPGolf,LLC,and explained that a conservation easement deed can satisfy the “goods andservices”componentoftheCWArequirementintwoways:(i)thedeedcontainsa statement as to whether the donee provided goods or services for the

126IRC§170(f)(8)(A).Whilenotaconservationeasementdonationcase,VanDusenv.Comm’r,136T.C.515,availableat http://www.ustaxcourt.gov/InOpHistoric/VanDusen.TC.WPD.pdf, contains a detailed discussion of the CWArequirement.127IRC§170(f)(8)(B).128Id.§170(f)(8)(C).129SeeIRSChiefCounselAdvice201120022(May20,2011),availableathttp://www.us.kpmg.com/microsite/taxnewsflash/Exempt/2011/CCA201120022.pdf.130InSimmonsI,TaxCourtJudgeGoekestatedthattheeasementdeedcouldserveasaCWA.However,thedoneeinSimmonshadprovidedthedonorwithaseparateletterthatcompliedwiththestatutoryCWArequirements,soitisnot clearwhy the Judge addressed the issue. The judge did not fully discusswhether or how the easement deedsatisfiedthestatutoryCWArequirements.

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contributionor,(ii)ifthedeeddoesnotcontainsuchanexplicitstatement,thedeed as awhole contains sufficient information to allow the IRS to determinewhether taxpayers received consideration in exchange for the contribution.Given the different holdings in the cases, donors should not rely on aconservation easement deed or other documentation to serve as the CWA.Rather,donorsshouldalwaysobtainaseparateCWAfromthedonee.

6.SomegovernmententitiesacceptingconservationeasementdonationsrefusetoprovidedonorswithaCWA.Donorsandtheircounselshoulddiscussthisissueearly on with a prospective government holder. To address this issue and, ingeneral, to serveasbotha good “safety valve” anda reminder to theparties,somepractitioners includeastatement intheeasementdeedthat(i)nogoodsorserviceswereprovidedinconsiderationfortheeasement(ifthatisthecase)and(ii)thedoneeagreestoprovidethedonorwiththeCWArequiredbyIRC§170(f)(8).7. To justify the seemingharshnessof the rule that failure to complywith theCWArequirementisfataltoaclaimeddeduction,theTaxCourt inFrenchcitedAddisv.Commissioner,374F.3d881,887(9thCir.2004),inwhichthe9thCircuitexplained that “[t]he deterrence value of section 170(f)(8)’s total denial of adeduction comportswith theeffectiveadministrationofa self-assessmentandself-reportingsystem.”

E.CompellingandTimelyBaselineDocumentation

1.Theregulationsrequirethatthedonormakeavailabletothedonee,priortothe time the donation is made, documentation sufficient to establish theconditionofthepropertyatthetimeofthegift(“baselinedocumentation”).131

a. The baseline documentation must describe in detail the subjectproperty and its open space, habitat, scenic, historic, and otherconservation values. In addition, if the easement deed containsrestrictionswithregardtoaparticularnaturalresourcetobeprotected,suchaswaterqualityorairquality,thentheconditionofthatresourceator near the time of the gift must also be established in the baselinedocumentation.132

131SeeTreas.Reg.§1.170A-14(g)(5)(i).Althoughthisrequirementisapplicableonlyifthe“donorreservesrightstheexerciseofwhichmayimpairtheconservationinterestsassociatedwiththeproperty,”thatwillalmostalwaysbethecase.Moreover, it is common practice and recommended that this requirement be satisfiedwith regard to everyconservationeasementdonationbecauseithelpstoensuretheholderwillhavetheinformationneededtoproperlyenforcetheeasement.132Id.§1.170A-14(g)(5)(i)(D).

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b. The baseline documentation must be accompanied by a statementsignedbythedonorandarepresentativeofthedoneeclearlyreferencingthe documentation and in substance stating: "This natural resourcesinventoryisanaccuraterepresentationof[theprotectedproperty]atthetimeofthetransfer"(referredtohereinafterasa“certification”).133

• In some cases, the parties have drafted the certification toprovidethatthepartiesagreetheinventory(orbaseline)maybesupplementedinthefuture(e.g.,wherethebaselineispreparedwhen the property is covered with snow). This has causedproblemsonaudit.Thebaselinemustbefullycompletedpriortothetimethedonationismade.

• Assuming the baseline is timely completed, easement drafters

maywant to include language in theeasementdeed confirmingthat the baseline is complete and the parties agree that it is anaccuraterepresentationoftheprotectedpropertyatthetimeofthedonation.

c. The baseline documentation should be detailed and compelling; it isthedonor’sbestopportunity(aspartofthetaxfiling)topersuadetheIRSthatthepropertyhasimportantconservationorhistoricvaluesworthyofpreservation. In some instances, easement donees are hiring qualifiedconsultants to put together comprehensive and extensive baselinereports. Note that the Treasury Regulations actually put the burden ofdeliveryofthebaselineonthedonor(seeE.1.above).d.Thebaselinedocumentationisalsocriticalforenforcementpurposes;it provides evidence of the condition of the property, including anyimprovements, on the date of the donation. The Treasury Regulationsexplain that thepurposeof thebaseline is to“protect theconservationinterests associated with the property, which although protected inperpetuitybytheeasement,couldbeadverselyaffectedbytheexerciseofthereservedrights.”134Thebaseline isthusessentialtoensuringthatthe conservationpurposeof theeasement is “protected inperpetuity,”andfailuretotimelyprepareafullycompletedbaselinecouldbefataltothededuction.

2. InBosque Canyon Ranch, the Tax Court sustained the IRS’s disallowance ofdeductions claimed for the donation of conservation easements to the NorthAmericanLandTrust(NALT).Amongotherfailurestocomplywith§170(h)and

133Id.134Id.§1.170A-14(g)(5)(i).

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the Treasury Regulations, the baseline documentation NALT prepared withregard to the easements was not executed properly and was “unreliable,incomplete,and insufficient toestablish theconditionof the relevantpropertyon thedate the respective easementswere granted.” Thedocumentationwasalso untimely, parts having been prepared well before and parts having beenprepared well after the date of the donations. The court noted that, in“rambling, incoherent testimony,” NALT’s president “failed to clarify theseglaring inconsistencies.” The court also found meritless and rejected thetaxpayers’ argument that they had substantially complied with the baselinedocumentationrequirement.Thecourtfurtherfoundthatthetaxpayerswerenoteligibleforthereasonablecauseexception to thegross valuationmisstatementpenaltybecause theydidnotactreasonablyor ingoodfaithwithrespecttothebaselinedocumentationrequirement. The court noted that the taxpayers’ representative failed toeffectively supervise or review NALT’s “slipshod” preparation of the baselinedocumentationandtherebyfailedtosatisfythetaxpayers’responsibilityrelatingto preparation of the documentation. Any reliance on NALT by taxpayerswasthereforeunreasonable,saidthecourt.

3. The IRS routinely asks for the baseline documentation on audit and hasinformally recommended thateasementdonors includea copyof thebaselinedocumentation in the package filed with the income tax return on which adeduction for the easement donation is first claimed. The baselinedocumentationshouldbefiledalongwiththetaxreturnifitisagood,thorough,andcompellingreport.

F.CorrectandTimelyLenderAgreement(ifapplicable)

1.FullSubordinationisAdvisable.InKaufmanIII,the1stCircuitvacatedtheTaxCourt’sholding inKaufman I andKaufman II thatpriority language ina lenderagreement impermissibly limited the operation of the “proceeds” clauseincludedinafacadeeasementtosatisfytherequirementsofTreasuryRegulation§1.170A-14(g)(6)(ii).135The lenderagreement inKaufman provided that, if theeasementwere extinguished as a result of a casualty event (such as a fire orflood) or condemnation, the bank holding an outstanding mortgage on thepropertyhadfirstprioritytoany insuranceorcondemnationproceeds.The1stCircuitheldthatitwassufficientthatthedoneeinKaufmanhasarighttopost-extinguishment proceeds that is absolute against the owner of the burdenedproperty.Despitethisruling,donorsshouldstillobtainalenderagreementthatsubordinates the lender’s rights to all of the rights of the holder under theconservation easement, including the holder’s right to at least a minimum

135Treas. Reg. § 1.170A-14(g)(6)(ii) contains a limited exception to the proceeds requirement with respect toinvoluntary conversions if state law provides that the donor is entitled to all of the proceeds following such aconversion.

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proportionate share of the proceeds received following extinguishment asspecified in Treasury Regulation § 1.170A-14(g)(6)(ii), for the followingreasons.136

a.KaufmanIIIisgoodlawonlyinthe1stCircuit.b. In footnote 5 of Kaufman III, the 1st Circuit noted that TreasuryRegulation § 1.170A-14(g)(2) (the “mortgage subordination”requirement)couldbereadbroadlytorequirethatalendersubordinateits rights to the donee's right to post-extinguishment proceeds, which,pursuant to Treasury Regulation § 1.170A–14(g)(6)(i), must be used toadvance conservation purposes.137The 1st Circuit noted that it did notpursuethisissuebecausetheIRShad“disclaimed”thatbroadreadingofparagraph(g)(2)inKaufmanIII.c.InIrby,decidedafterKaufmanIII,theTaxCourtnoted

Incasesinvolvingaconservationeasementwherewedeterminedthattheregulation'srequirementswerenotmetandthusdeniedthe claimed charitable contribution deduction, the granteeorganizationhadbeenpreventedby thedeeds themselves fromreceiving the full proportionate value of the extinguishmentproceeds….Thefundsdivertedbythedeedswereusedtofurtherthedonortaxpayer's interests.Forexample, inWall,thedeedofconservation easement provided that if the property wascondemned, the grantee conservation organization would beentitledtotheeasement'sproportionatevalue,butonlyafteranyclaim of a mortgagee was satisfied. Hence, the first use of theextinguishment proceeds was to further the donor taxpayer'sinterest in repaying the mortgage on the property, with thegrantee conservation organization's receiving only a residual

136Foranexampleofsucha“full”subordinationclause,seethesubordinationagreementtemplateoftheCompactofCapeCodConservationTrusts,whichprovides:

[Name and address of financial institution] ("Mortgagee"), present holder of amortgage from, [donors]("Mortgagor"), recorded on [date] in the [County] Registry of Deeds in Deed Book [ ] Page [ ], forconsiderationpaid,herebyrecognizesandassentstothetermsandprovisionsofaConservationRestrictionrunningtothe___________ConservationTrust, toberecordedherewith,andagreestosubordinateandholditsmortgagesubjecttothetermsandprovisionsofsaidConservationRestrictiontothesameextentasifsaidmortgagehadbeenrecordedsubsequenttotherecordingoftheConservationRestriction,andtheundersigned shall, in the exercise of its rights pursuant to said instrument, recognize the terms andprovisionsoftheaforesaidConservationRestriction.

137The mortgage subordination regulation provides that no deduction will be permitted “unless the mortgageesubordinatesitsrightsinthepropertytotherightofthequalifiedorganizationtoenforcetheconservationpurposesofthegiftinperpetuity.”Toenforce“theconservationpurposesofthegiftinperpetuity”(ratherthanjusttheoriginaleasement)theholdermustreceiveashareofproceedsuponextinguishmenttobeused“inamannerconsistentwiththeconservationpurposesoftheoriginalcontribution.”Ifalenderisgivenpriority,itispossiblethattheholderwillreceivenothing.Eveniftheholderisgivenarightasagainstthedonor,thedonormaybejudgmentproof.

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amountofmoney….Ourconclusionsinthosecases(i.e.,denyingthededuction)reflectthepurposeoftheregulation.

Accordingly,itappearsthattheTaxCourtmightnotfollowKaufmanIIIincasesthatarenotappealabletothe1stCircuit.

2.MortgagesMustbeSubordinatedatTimeofDonation.

a. Mitchell. In Mitchell III, the 10th Circuit affirmed the Tax Court’sholding inMitchell I and II that, to be eligible for a deduction for thedonation of a conservation easement under § 170(h), any outstandingmortgagesontheunderlyingpropertymustbesubordinatedtotherightsof the holder of the easement at the time of the gift. Thismeans thelender agreement should be recorded at the same time as theconservationeasement.

(i)TheFacts.ThedonorinMitchelldidnotobtainasubordinationagreement fromthe lenderholdinganoutstandingmortgageonthesubjectpropertyuntilalmosttwoyearsfollowingthedateofthe donation. The IRS argued that the mortgage subordinationrequirement in the Treasury Regulations is a bright-linerequirement that requires any existing mortgage to besubordinated to the rightsof theholderof theeasementat thetimeofthegift,irrespectiveofthelikelihoodofforeclosureoranyalternate safeguards. The IRS also asserted that subordinationmustoccuratthetimeofthegiftbecause,withoutsubordination,the easement would be vulnerable to extinguishment uponforeclosure and, thus, the conservation purpose would not beprotected in perpetuity as required under § 170(h). The 10thCircuitagreed.

(ii)DeferencetoCommissioner.CitingtotheU.S.SupremeCourt’sholding in Mayo Found. for Med. Educ. & Research v. UnitedStates,131S.Ct.704,711(2011),the10thCircuitexplainedthat,because the Commissioner promulgated the regulations under§ 170(h) pursuant to the authority granted to him by Congress,the regulations are binding unless they are “arbitrary andcapricious in substance, or manifestly contrary to the statute.”WhereCongresshasdelegatedtotheCommissionerthepowertopromulgate regulations, said the court, “we must defer to hisregulatory interpretations of the Code so long as they arereasonable.’”Requiringexistingmortgagestobesubordinatedtoconservation easements prevents extinguishment of theeasementsintheeventthelandownersdefaultonthemortgages.

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In this way, said the 10th Circuit, the mortgage subordinationrequirement is “reasonably related” to Congress’s mandate in§170(h)(5)(A) that theconservationpurposeofaneasementbe“protectedinperpetuity.”

• The 10th Circuit also rejected the donor’s claim that the

mortgage subordination regulation is arbitrary andcapricious, and therefore unenforceable. Althoughdecliningtoconsiderthatargumentbecauseitwasraisedforthefirsttimeonappeal,the10thCircuitnotedthattheargument would fail because the regulation is “areasonable exercise of the Commissioner’s authority toimplementthestatute.”

(iii) SubordinationMustBeTimely.Thedonorargued that, sincethemortgage subordination regulation contains no explicit timeframe for compliance, it should be interpreted to allow forsubordinationtooccuratanytime.The10thCircuitrejectedthisargument, noting that the regulation “expressly provides thatsubordinationisaprerequisitetoallowingadeduction.”The10thCircuitfurthernotedthat,evenifitweretoviewtheregulationasambiguous with respect to timing, the result would be nodifferent because the court must defer to the Commissioner’sreasonableinterpretationonthispoint.(iv) Functional Subordination Not Sufficient. The donor arguedthat strict compliance with the mortgage subordinationrequirement was unnecessary because the easement deedallegedly contained sufficient safeguards to protect theconservationpurposeinperpetuity.The10thCircuitrejectedthisargumentasinconsistentwiththeplainlanguageofthemortgagesubordinationprovision.Thecourtpointedoutthattheregulationcontains one narrow exception to the “unambiguous”subordination requirement—for donations occurring prior to1986.138In the case of a pre-1986 donation, a taxpayermay beentitledtoadeductionwithoutsubordinationifthetaxpayercandemonstrate that the conservation purpose is otherwiseprotected inperpetuity.Thenegative implicationofthisexpress,time-limited exception, said the court, is that no alternative tosubordinationwillsufficeforpost–1986donations.Thecourtthus

138Themortgage subordination requirement first appearedwhen the Treasury Regulationswere finalized in 1986,hencethe1986effectivedate.

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declinedtoadopta“functional”subordinationrulefordonationsoccurringafter1986.

(v) Likelihood of Foreclosure Irrelevant. The donor argued thatstrict compliance with themortgage subordination requirementwasunnecessary inhercasebecausetheriskof foreclosurewas“soremoteastobenegligible”(thepartnershipthatdonatedtheeasement apparently paid its debts on time and had sufficientassetstosatisfyinfulltheamountsdue).139ThedonorpointedtoTreasury Regulation § 1.170A-14(g)(3), which provides that adeductionwillnotbedisallowedmerelybecausetheinterestthatpasses to the donee organization may be defeated by thehappening of some future event, “if on the date of the gift itappears that the possibility that such … event will occur is soremoteastobenegligible.”Shearguedthatthisprovisionactsasanexception to themortgagesubordinationprovision—i.e., thatbecausetheriskofforeclosureinhercasewasarguablysoremoteas tobenegligible, failure to satisfy themortgage subordinationrequirementshouldbeforgiven.

• The10thCircuit rejected this argument, holding that the“so-remote-as-to-be-negligible” provision cannot bereasonably read as modifying the strict mortgagesubordination requirement. In promulgating the rules,explained the court, the Commissioner specificallyconsideredtheriskofmortgageforeclosuretobeneitherremote nor negligible, and therefore chose to target theaccompanying risk of extinguishmentof the conservationeasementbystrictlyrequiringmortgagesubordination.

• The 10th Circuit also noted that, even if the regulations

were unclear with respect to the interplay between themortgage subordination and remote future eventprovisions,thedonorwouldnotprevailbecausethecourtis required todefer to theCommissioner’s interpretationtoresolveanyambiguityunless it is“plainlyerroneousorinconsistent with the regulations” or there is any other“reasontosuspecttheinterpretationdoesnotreflecttheagency’s fair and considered judgment on the matter.”“[I]t isreasonable,”saidthecourt,“fortheCommissionertoadoptaneasily-appliedsubordinationrequirementover

139ApartnershipofwhichMs.Mitchellwasapartnerdonatedtheeasement.Forconveniencepurposes,Ms.Mitchellisreferredtoasthedonorinthissummary.

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a case-by-case, fact-specific inquiry into the financialstrength or credit history of each taxpayer.” The courtquotedalawreviewarticleinsupportofitsholding:

ThespecificrequirementsintheCodeandTreasuryRegulationsestablishbright-linerulesthatpromoteefficient and equitable administration of thefederal tax incentive program. If individualtaxpayers could fail to comply with suchrequirements and claim that their donations arenonetheless deductible because the possibility ofdefeatof thegift is so remoteas tobenegligible,the Service and the courts would be required toengage in an almost endless series of factualinquiries with regard to each individualconservationeasementdonation.140

b.Minnick.InMinnickIII,the9thCircuitsimilarlyaffirmedtheTaxCourt’sholdinginMinnickIthat,tobeeligibleforadeductionforthedonationofaconservationeasement,anyoutstandingmortgagesontheunderlyingproperty must be subordinated to the rights of the holder of theeasementatthetimeofthegift.

(i) Citing toMitchell III, the 9th Circuit explained that the plainlanguageof themortgage subordination regulation supports theTax Court’s interpretation. The regulation specifies that “nodeductionwillbepermitted…unlessthemortgageesubordinatesitsrightsintheproperty.”Strictlyconstrued,saidthe9thCircuit,thatlanguagemakesclearthat“subordinationisaprerequisitetoallowingadeduction.”SincetherewasnodisputethatMinnick’slender had not subordinated its rights in the subject propertywhenMinnickdonatedtheeasementatissue(despitewarrantiesin theeasementdeed to thecontrary),under theplainmeaningoftheregulationnodeductionwaspermitted.(ii) The 9th Circuit further explained that, even if the regulationwas deemed ambiguous, that would not change the outcome.UnderAuer v. Robbins, 519U.S. 452 (1997), courts defer to theIRS’s reasonable interpretation of its own regulations and, asexplainedinMitchellIII,theIRS’sinterpretationisreasonableand

140NancyA.McLaughlin,InternalRevenueCodeSection170(h):NationalPerpetuityStandardsforFederallySubsidizedConservationEasementsPart1:TheStandards,45REALPROP.TR.&EST.L.J.473,505–06(2010).

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notplainlyerroneousorinconsistentwiththeregulation.The9thCircuitemphasized:

An easement can hardly be said to be protected ‘inperpetuity’ if it issubjecttoextinguishmentatessentiallyany time by amortgage holderwhowas not a party to,and indeed (as here)may not even have been aware of,theagreementbetweentheTaxpayersanda[land]trust.

(iii) InMinnickII,anunpublishedopinionissuedthesamedayasMinnick III, the 9th Circuit addressed the remaining issues inMinnick,holdingfortheIRSoneachpoint.• Likethe10thCircuitinMitchellIII,the9thCircuitinMinnickII

held that the taxpayer’s failure tocomplywith themortgagesubordination requirementcouldnotbeexcusedby invokingthe so-remote-as-to-be-negligible regulation; the so-remote-as-to-be-negligible provisiondoesnot override themortgagesubordinationrequirement.

• The Minnicks argued that their failure to obtain a timely

subordination agreement should be excused because therewas “verifiable evidence of original intent to enforce theeasement in perpetuity” in the easement deed, whichspecificallystatedthattherewere“nooutstandingmortgages... inthePropertythathavenotbeenexpresslysubordinatedto the Easement.” The 9th Circuit rejected this argument,explaining that,even if the statement in thedeedevidencedanintenttosubordinate,intentisirrelevant.Amortgagemustbesubordinatedatthetimeofthegift.

• The Minnicks argued that Idaho’s cy pres doctrine, which

“restricted the Minnicks from abandoning or otherwiseencumbering the easement,” adequately ensured that theeasement would continue in perpetuity and, thus, thesubordination requirement was satisfied. The 9th Circuitrejected this argument, noting that the “cy pres doctrine isinapplicableherebecauseithasnoeffectontheabilityofthebankholding theunsubordinatedmortgage toextinguish theeasement by foreclosure.” Cy pres would have no effect ontheabilityofthebanktoextinguishtheeasementintheeventofforeclosurebecausetheeasementhadbeengrantedtothelandtrustsubjecttothemortgageand,thus,thebank’srightshadpriorityoverthoseofthelandtrustandthepublic.

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• TheMinnicksarguedthattheTaxCourtimproperlyimposeda20%negligencepenaltyonthemunderIRC§6662(a).The9thCircuit rejected this argument, explaining that the Minnicksdid not have reasonable cause for claiming a deductionbecause Mr. Minnick had a law degree and reading theTreasury Regulations would have given him notice thatsubordinationmayhavebeenrequired.

(iv) Mr. Minnick (a former member of the U.S. House ofRepresentativesfromIdaho)issuinghisattorneyformalpractice.TheIdahoSupremeCourtrecentlyruledthatthesuitisnotbarredbythestatuteoflimitations.141

c. RP Golf, LLC. In RP Golf II, the Tax Court sustained the IRS’sdisallowance of a $16.4 million deduction for the donation of aconservation easement on two private golf courses in Kansas City,Missouri. Although the IRS challenged the claimed deduction on anumberofgrounds(includingfailuretosatisfytheconservationpurposestest,overvaluation,andthetaxpayer’s lackofownershipofaportionofthe subject property), the court denied the deduction because thetaxpayerfailedtoobtainsubordinationagreementsatthetimeofthegiftof the easement. The court considered and rejected the taxpayer’sargument that the lenders had orally agreed to subordinate theirinterestsbeforethedateofthegift,findingnoevidenceofabindingoralorwrittenagreementunderstatelaw.Thecourtexplainedthat,becausetheeasementcouldhavebeenextinguishedbyforeclosureafterthedateofthegift,theeasement“wasnotprotectedinperpetuityand,therefore,wasnotaqualifiedconservationcontribution.”d. So-Remote-As-To-Be-NegligibleUnlikely toCureNoncomplianceWithSpecific Requirements. Based on the holdings inMitchell,Minnick, andother cases,142it seems unlikely that taxpayers will be able to excuse

141LegalMalpracticeLawyerBlog,Minnickv.Ennis,No.41663:SupremeCourtof IdahoRemandsDismissalofLegalMalpracticeCase,http://www.legalmalpracticelawyer.com/2015/01/22/461/(lastvisitedApril25,2015).142InMitchellIII,the10thCircuitnotedthattheD.C.CircuitinSimmonsdidnotexcusethetaxpayerfromcomplyingwith themortgagesubordinationrequirement,orexcusenoncompliancewithanyexpressprecondition to takingadeduction contained in the regulations. Rather, it applied the so-remote-as-to-be-negligible provision to allow adeduction despite the risk of noncompliance with § 1.170A–14’s more general perpetuity requirements.ThusSimmons does not support an interpretation that the so-remote-as-to-be-negligible provision will excusenoncompliancewith themortgage subordinationprovision’splainand specificmandate that “nodeductionwillbepermitted ...unless” themortgage issubordinated.The10thCircuitalsonotedthatKaufman III similarly“provideslittleguidance.”InKaufmanIIIthe1stCircuitheldthatataxpayerwasentitledtoadeductionbecausethedonationsatisfied the in perpetuity requirement, but it specifically declined to addresswhether the taxpayer had compliedwith themortgagesubordinationprovisionor tobase itsholdingontheso-remote-as-to-be-negligibleprovision. InCarpenter I, the Tax Court held that the “so-remote-as-to-be- negligible” provision does not modify TreasuryRegulation§1.170A–14(g)(6)(i).Thus,failuretocomplywiththeextinguishmentrequirementsofTreasuryRegulation

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noncompliance with any of the specific requirements in the Code orTreasury Regulations by invoking the “so-remote-as-to-be-negligible”regulation.

§ 1.170A–14(g)(6)(i) cannot be cured by a showing that the possibility of extinguishment is so remote as to benegligible.AndinMitchellI,theTaxCourtexplainedthattheso-remote-as-to-be-negligiblestandardcannotbeusedto avoid any of the following specific requirements: (i) Treasury Regulation § 1.170A-14(g)(2)’s mortgagesubordination requirement, (ii) Treasury Regulation § 1.170A- 14(g)(6)(i)’s judicial proceeding requirement, or (iii)TreasuryRegulation§1.170A-14(g)(6)(ii)’sproceedsrequirement.

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III.OtherImportantIssuesA. IRS’s Renewed Focus on Valuation. Following the lead of the courts (see, e.g.,Scheidelman, Kaufman, Mountanos, and Gorra), the IRS has renewed its focus oneasementvaluation.Inaddition,aspartofthePensionProtectionActof2006(thePPA),Congress expanded the circumstances under which penalties can be imposed forovervaluations.

1.PenaltyProvisions.BeforetheenactmentofthePPA,asubstantialvaluationmisstatement(subjecttoa20%penalty)existedifthevalueofpropertyreportedonataxreturnwastwotimes(200%)ormoreoftheamountdeterminedtobethe correct value. A gross valuation misstatement (subject to a 40% penalty)existed if thevaluereportedonataxreturnwasfourtimes(400%)ormoreoftheamountdeterminedtobethecorrectvalue.143Taxpayerscouldavoidthesepenalties if they made the valuation misstatement in good faith and withreasonablecause.ThePPA lowered the threshold from200% to150% fora substantial valuationmisstatementand from400%to200%foragrossvaluationmisstatement.ThePPA also eliminated the reasonable cause exception for gross valuationmisstatements of charitable deduction property, making that penalty a strictliability penalty. The PPA further enacted new penalties for preparers of anappraisal to be used to support a tax position if the appraisal results in asubstantial or gross valuation misstatement. 144 The PPA changes apply to(i) returns filed after July 25, 2006, claiming deductions for façade easementdonations and (ii) returns filed after August 17, 2006, claiming deductions fordonationsofeasementsencumberingland.145Belowisasamplingofcourtholdingsregardingpenalties.

a. Kaufman V. In Kaufman V, the 1st Circuit affirmed the Tax Court’sholdinginKaufmanIVthattheKaufmanswereliableforgrossvaluationmisstatementpenaltiesforclaimingadeduction“foraworthlesshistoricpreservation easement on their home.” Because the Kaufmans’ returnswere filed before the effective date of the PPA, the gross valuationmisstatement penalty was not a strict liability penalty. However, theKaufmanswereunable toavoidpenaltiesby showing that theymadeagood-faith investigation of the value of the easement or acted with

143Ifthecorrectvalueofaneasementisdeterminedtobezero,thevalueclaimedonthetaxpayer’sreturnisdeemedtobe400%ormoreofthecorrectamountand,thus,agrossvaluationmisstatement.SeeTreas.Reg.§1.6662–5(g).144IRC§6695A.145ForanexplanationofthePensionProtectionActof2006(PPA)changes,seeTechnicalExplanationOfH.R.4,The"Pension Protection Act Of 2006," prepared by the JCT, JCX-38-06 (August 3, 2006), available athttps://www.jct.gov/publications.html?func=select&id=20.SeealsoChandler(discussingthePPAeffectivedates).

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reasonable cause and in good faith. Thiswas due, in large part, to thefollowingfactors.

• The Kaufmans represented in a letter to the lender holding an

outstanding mortgage on the subject property (for purposes ofobtaining a subordination agreement) that "[t]he easementrestrictionsareessentiallythesamerestrictionsasthoseimposedbycurrentlocalordinancesthatgovernthisproperty."

• The Kaufmans used an appraiser that the donee—the NationalArchitectural Trust (NAT)—both recommended and taught to dofaçade easement appraisals. NAT also suggested language for theappraisertoincludeinhisappraisals,whichheincorporated"almostverbatim"intoallofhisreports,regardlessofthepropertyinvolved.The1stCircuitfurthernotedthattheappraiser“atleastarguablyhadanincentivetocalculateahighvaluefortheeasement,giventhatheperformed appraisals for [NAT] and [NAT] received cash donationscorresponding to a set percentage of the assessed value of thedonatedeasements.”

• After receiving the appraisal indicating that the easement wouldreduce the value of their home by $220,800 (or by 12%), Dr.Kaufman, an emeritus professor of statistics at MIT, expressedconcern toNAT that the reduction in the resale value of the homewould be so large as to “overwhelm the tax savings” from thedonation. In a “smoking gun email,” NAT responded that façadeeasements do not actually reduce the value of the properties theyencumber.Amongotherthings,theemailnoted:

One of our directors, Steve McClain, owns fifteen or sohistoric properties and has taken advantage of this taxdeduction himself. He would never have granted anyeasement if he thought there would be a risk or loss ofvalueinhisproperties.

Despite the evidence indicating that the easement had no value, theKaufmans proceeded to claim a $220,800 deduction. The 1st Circuitagreedwith the Tax Court that “the Kaufmans should have recognizedobviouswarningsignsindicatingthattheappraisal'svaliditywassubjectto serious question, and should have undertaken further analysis inresponse.” The 1st Circuit further noted that the Tax Court did notpurport to equate “good faith investigation” with “exhaustiveinvestigation.” Rather, it “merely required that the Kaufmans do somebasic inquiry into thevalidityofanappraisalwhose resultwassquarely

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contradictedbyotheravailableevidenceglaringlyinfrontofthem.”TheKaufmans were highly intelligent and very well educated, said the 1stCircuit, 146 “and the Tax Court reasonably found that developmentscasting doubt on the … appraisal should have alerted them that theyneededtotakefurtherstepstoassesstheir‘propertaxliability.’”The 1st Circuit also noted that decisions in which the courts havedeclined to impose penalties (Whitehouse, Chandler, Zarlengo, andScheidelman) were not inconsistent with its conclusion to imposepenaltiesinKaufmanV.IncontrasttoKaufman,therewereno“redflags”inthoseothercasessuggestingthattheeasementshadnovalue.

b. Chandler. In Chandler, the Tax Court sustained the IRS’s completedisallowanceofdeductionsclaimedwithregardtotwofaçadeeasementdonationson thesamegroundsas inKaufman (i.e., theeasementshadnovaluebecausethetypicalbuyerwouldfindtheeasementrestrictionsnomore burdensome than local historic preservation restrictions). Thetaxpayers inChandler claimed deductionswith regard to the easementdonations on their 2004, 2005, and 2006 returns and, because the TaxCourt determined the easements had no value, the valuationmisstatement for each year was a gross valuation misstatement.Chandlerraisedthenovelissueofwhetherthetaxpayerscouldassertthereasonable cause defense for the underpayment on their 2006 return(despitethePPAhavingmadethegrossvaluationmisstatementpenaltyastrict liabilitypenaltywithregardtoreturnsfiledafterAugust17,2006)because theunderpaymentwas the resultof a carryoverofdeductionsfromtheir2004return.Thetaxpayersarguedthatdenyingtheirrighttoraiseareasonablecausedefensewithregardtotheir2006returnwouldamount to retroactively applying the PPA. The Tax Court disagreed,noting that (i) the penalty statute as revised by the PPA by its plainlanguage applies to returns filed after a certain date and (ii) when thetaxpayers filed their 2006 return they “reaffirmed” the easement’sgrosslymisstatedvalue.Forsimilarholdings,seeReisnerandMountanosIII.The court in Chandler did, however, find that the taxpayers were notliableforpenaltiesfortheir2004and2005underpaymentsbecausetheyunderpaidwithreasonablecauseandingoodfaith.TheIRSarguedthatMr. Chandler should have known the easements were overvaluedbecausehewaswelleducated(hehadaJDandanMBA).TheTaxCourtdisagreed, noting that even experienced appraisers find valuingconservation easements difficult, and the flaws in the appraisalswould

146Mrs.KaufmanwasacompanypresidentwithaPh.D.inpsychology.

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not have been evident to the Chandlers. The court also distinguishedKaufman because the Kaufmans had been assured by the donee thattheireasementwouldnotreducethevalueoftheproperty. InChandlerthere was no evidence that the taxpayers had similarly relied onappraisalsinbadfaith.c.Mountanos.InMountanosI,theTaxCourtheldthatthetaxpayerwasnot entitled to claim $3.39 million of carryover deductions for thedonationofaconservationeasementbecausehefailedtoshowthattheeasementhadanyvalue.Thestatuteoflimitationshadapparentlyrunonthereturnonwhichthetaxpayerclaimedadeductionfortheyearofthedonation.ThecourtalsosustainedIRS’simpositionofstrictliabilitygrossvaluationmisstatementpenalties.InMountanosII,inwhattheTaxCourtnotedwas“acalculatedmaneuvertoavoid theaccuracy-relatedpenalty,” the taxpayerasked the court toconsider the alternative grounds on which the IRS had argued fordisallowance of the deductions—namely that the taxpayer failed toobtain a contemporaneous written acknowledgment or a qualifiedappraisal. The Tax Court refused to consider these alternative grounds,noting, inpart,thatthecontinuedviabilityofthelineofcasesonwhichthetaxpayerreliedforthepropositionthatanovervaluationpenaltymaynot be imposed when there is some other ground for disallowing adeductionisinquestionaftertheU.S.SupremeCourt’sopinioninU.S.v.Woods,134S.Ct.557(2013).147Forasimilarholding,seeBosqueCanyonRanch.In a short unpublished opinion,Mountanos III, the 9th Circuit affirmedthe Tax Court’s holdings that the taxpayer was not eligible for thecontested carryover deductions and was liable for strict liability grossvaluation misstatement penalties. Citing to Chandler, the 9th Circuitrejected the landowner’s argument that not allowing him to raise thereasonablecausedefenseforgrossvaluationmisstatementswithregardto carryoverdeductions that related toa2005donation constitutedanimproperretroactiveapplicationofthestrictliabilitypenalty.d.BosqueCanyonRanch.InBosqueCanyonRanch,theTaxCourtdenied$15.9millionofdeductionsclaimedbypartnerships for thedonationofconservationeasementstotheNorthAmericanLandTrust(NALT)ontwogrounds: (i) the easements permitted 47 unencumbered 5-acrehomesites to be moved around the subject properties (i.e., partial

147In Woods, the Supreme Court held that the IRS's determination that a partnership was a sham was notindependentfromataxpayer'soverstatementforpurposesofthegrossvaluationmisstatementpenalty.

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extinguishments)with theholder’s approval (seePart II.A.7 above) and(ii)thepartnershipsfailedtoprovidethedoneewithadequateandtimelybaseline documentation (see Part II.E above). The court also sustainedthe IRS’s imposition of gross valuation misstatement penalties withregard to the claimed deductions. The fact that the deductions weredisallowed for failure of the easements to qualify under IRC § 170(h)rather than on overvaluation grounds did not matter. The Tax Courtexplainedthat,inU.S.v.Woods,134S.Ct.557(2013),theU.S.SupremeCourt “reject[ed] the distinction between legal and factual valuationmisstatements."Moreover, neither partnership was eligible for the reasonable causeexception.Oneof thepartnershipshad filed its return afterAugust 17,2006, and, thus, the gross valuationmisstatement penalty was a strictliability penalty. In addition, even though the other partnership wasentitledtoraisethereasonablecausedefense(becauseitfileditsreturnbeforeAugust17,2006),thecourtdeterminedthatitdidnotqualifyforthedefense.Althoughthecourtfoundthattheappraisalthepartnershipused to substantiate its deduction was a qualified appraisal and thepartnership’s reliance on the appraisal constituted a good faithinvestigation of the easement’s value, that was not good enough. Thecourtexplained that thepartnership“didnotact reasonablyor ingoodfaith with respect to the [baseline] documentation requirements.” Thebaseline,whichwaspreparedbyNALT,was“insufficient,unreliable,andincomplete.” The partnership failed to effectively supervise or reviewNALT’s “slipshod preparation” of the baseline and therefore “failed tosatisfy its responsibility relating to the preparation of thedocumentation.” The partnership also “failed to make any plausiblecontentionssufficienttoestablishreasonablecause."e.Gorra. InGorra, theTaxCourt rejected the taxpayers’argument thatthegrossvaluationmisstatementpenaltywasan“excessivefine”underthe Eighth Amendment to the United States Constitution, noting thatsuch penalties are remedial in nature, not “punishments,” and are animportant tool because they enhance voluntary compliance with taxlaws.

f.Legg.InLegg,theTaxCourtheldthattheIRS’sdeterminationthattheLeggs were liable for strict liability 40% gross valuation misstatementpenaltieswas proper. The Leggs argued that the IRS examiner had notmadean“initialdetermination”ofthe40%penaltiesasrequiredbyIRC§ 6751(b)(1) because the examination report calculated the penaltiesusing the 20% rate and the 40% penalties were posed only as analternative position. The Tax Court disagreed, explaining that Congress

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enactedIRC§6751(b)toensurethattaxpayersunderstandthepenaltiesimposedon themand the examination report sent to the Leggs clearlyexplainedwhytheLeggswere liable for the40%penalties.Accordingly,the IRS satisfied the procedural requirements of IRC § 6751(b) andimpositionofthe40%penaltieswasproper.g. Carroll. In Carroll, the Tax Court sustained the IRS’s disallowance ofdeductions claimed with regard to the donation of a conservationeasement because the easement contained a noncompliant “proceeds”clause. The court also found that the taxpayers were liable for 20%accuracy-relatedpenalties anddid not qualify for the reasonable causeexception to those penalties. The court explained that one of thetaxpayers was a highly educated medical school graduate who hadprevious experience with conservation easements; although thetaxpayers had hired an attorney to draft a related gift deed for thesubject property, that attorney was not a tax attorney and “d[id] notanswer tax-related questions or give tax advice;” the taxpayers offeredno evidence thatwould explainwhy the terms of the easement variedfrom the proceeds requirement in the Treasury Regulation; and thetaxpayersdidnotexplainwhytheyfailedtoseekcompetentadvicefroma tax attorney or other adviser to ensure that the easement compliedwith thepertinent regulations.Thecourtconcluded that, in the lightofthe high level of sophistication of one of the taxpayer's and hisexperience with conservation easements, the taxpayers did notdemonstratethattheyactedwithreasonablecauseandingoodfaith innot seeking competent tax advice regarding the donation. The courtdeclinedtoimposesubstantialorgrossvaluationmisstatementpenalties,however,becausetheIRSdidnotassertthosepenaltiesonatimelybasis.

2. Battle of the Appraisers. When the value of a conservation easement ischallenged,thecaseofteninvolvesa“battleoftheappraisers.”

a. Courts no longer take the two appraisals from the expert witnessesand“splitthebaby.”Instead,courtsgenerallyweightheevidenceofferedbyeachexpertandcometotheirownconclusionsregardingvalue. Inabattleoftheappraisers,thecredibilityoftheappraiserandtheappraisalreport is of paramount importance, and extensive experience in therelevantlocalmarket—“geographiccompetence”—canalsobekey.b. InBoltar,theTaxCourtgrantedtheIRS’smotionin liminetoexcludefromevidencethereportandtestimonyofthedonor’svaluationexpertasunreliableand irrelevant, citing to theFederalRulesofEvidenceandthedecisioninDaubertv.MerrellDowPharm.,Inc.,509U.S.579(1993),in which the United States Supreme Court stressed the “gatekeeper”

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function of a trial court. The court noted that the report was “so farbeyond the realm of usefulness that admission is inappropriate andexclusionservessalutarypurposes.”c.InU.S.v.Richey,632F.3d559(9thCir.2011),the9thCircuitheldthatthe attorney-client privilege did not extend to documents in aconservationeasementappraiser’sworkfilethatwerenotmadeforthepurposeofprovidinglegaladvice.Theworkfilewasalsonotprotectedbythe work-product doctrine because it was not “prepared or obtainedbecauseoftheprospectoflitigation.”d.InU.S.v.Clower,No.1:16-cv-651-TCB(N.D.Ga.April29,2016),aU.S.District Judge granted the IRS’s petition to enforce a broad summonsservedonanappraiser.Thesummonsrequested,amongotherthings,alldocumentsreflectingthecustomersforwhomtheappraiserpreparedorapprovedconservationorhistoriceasementappraisalsduringtheperiodbeginning January 1, 2010, through the present, and all appraisalworkfilesforsuchappraisals(seePartI.Wabove).

3. Valuation Case Law. For a comprehensive discussion of conservation andfacade easement valuation rules and the relevant valuation case law through2015, see Nancy A. McLaughlin, Conservation Easements and the ValuationConundrum.148

B.IRSFocusonPartnerships/SyndicatedDeals.InNotice2004-41,theIRSstatedthatitintended to review promotions of transactions involving improper deductions forconservationeasementconveyances,andthatpromoters,appraisers,andotherpersonsinvolvedinthesetransactionsmaybesubjecttopenalties.149TheIRShasalsoinformallyindicated that it intends to focus attention on “syndicated” conservation easementdonationtransactions.TheIRShasanumberofweaponsinitsarsenalthatcanbeusedtoattacksuchsyndicatedtransactions.

1.IRSWeapons.

a. Economic Substance Doctrine. Most syndicated tax deductiontransactions are arguably nothing more than the sale of income taxdeductions, with no economic substance and no economic risk to theinvestors.PursuanttoIRC§7701(o),atransactiongenerallyistreatedashaving economic substance only if (i) the transaction changes in ameaningful way (apart from Federal income tax effects) the taxpayer’s

148Availableathttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2704576.149Seesupranote7andaccompanyingtext.

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economicpositionand(ii)thetaxpayerhasasubstantialpurpose(apartfromFederalincometaxeffects)forenteringintothetransaction.b. Partnership Allocation Rules. For partnership allocations to berespectedtheymusteither(i)bemadeinaccordancewiththepartners’interests in the partnership or (ii) meet the requirements for the“substantial economic effect” safe harbor. If allocations do not havesubstantial economic effect, they will be reallocated according to thepartners’ interests in the partnership. These rules are intended toprevent partners fromallocatingpartnership itemsbasedonpurely taxratherthaneconomicconsequences.150Many syndicated conservation easement donation transactions involve“special allocations”—i.e., an investor purchases a small percentageinterest in a partnership or limited liability company (LLC), but is thenallocatedamuchlargerpercentageofthededuction(or, insomecases,tax credits) generated by the partnership’s donation of a conservationeasement.Forexample,an investormightpurchasea10% interest inapartnership, but then be allocated 50% of the deduction generated bythe partnership’s easement donation. This could be referred to as an“explicit” special allocation; it occurs by virtue of specific terms in thepartnership or LLC agreement. In some syndicated conservationeasement donation transactions it could be argued that there is an“implicit” special allocation. For example, assume the asset in thepartnership (or LLC) has a fair market value of $5 million, an investorpurchases a 10% interest in the partnership (with a pro rata value of$500,000) for $100,000, and the investor is allocated 10% of theconservationeasementdeduction.Forthe$100,000purchaseprice,theinvestorarguablypurchasedonlya2%interestinthepartnershipbutwasnonetheless allocated 10% of the deduction. These types of specialallocations may be attacked on the ground that they lack “substantialeconomiceffect.”

c.DisguisedSalesRules.IneachofSWFRealEstate,LLC,andRoute231,LLCv.Comm’r,810F.3d247(4thCir.2016),theIRSsuccessfullyinvokedadifferenttaxavoidanceprinciple—the“disguisedsales”rulesunderIRC§707—to attack the special allocation of state income tax creditsgeneratedbyapartnership’sdonationofaconservationeasement.Thecourtsheldthateachpartnership’stransfertoa1%partnerofmorethan90% of the state income tax credits generated by the donation was ataxabledisguised sale. InRoute231, LLC, the4thCircuit explained that

150 See IRS, Partnership Audit Techniques Guide, Chapter 6 – Partnership Allocations, available athttp://www.irs.gov/Businesses/Partnerships/Partnership---Audit-Technique-Guide---Chapter-6---Partnership-Allocations-(Revised-12-2007).

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IRC § 707 “prevents use of the partnership provisions to rendernontaxablewhatwould insubstancehavebeena taxableexchange if ithadnotbeen‘runthrough’thepartnership.”Most recently, in Bosque Canyon Ranch, the Tax Court held that twopartnerships’transfersof5-acrehomesitesonashared-amenitiesranchto limited partners in exchange for purported “capital contributions”were, in fact, taxable disguised sales. The court found that thedistributionsofthe5-acrehomesitestothelimitedpartnersweremadeinexchangeforthe limitedpartners’paymentsandwerenotsubjecttotheentrepreneurialrisksofthepartnerships’operations.Accordingly,thepartnerships were required to recognize and include in their grossincome any gains relating to the disguised sales. The Tax Court alsodenied the deductions claimed by the partnerships for the donation ofconservation easementswith respect to the ranch for failure to satisfytheperpetuityandbaselinedocumentationrequirements.

2.LandTrustAllianceonSyndicatedDeals.TheLandTrustAlliancedistributedan“ImportantAdvisory”andotherinformationandresourcestoitsconstituentland trusts tohelp them identifyandmitigate threats fromabusive syndicatedtransactions.151TheAlliancenotesthat“[f]ederaltaxbenefitsresultingfromthedonation of a conservation easement cannot be sold by one taxpayer toanother” and “[t]he Alliance stands against such tax schemes….” The Alliancedescribestheabusivetransactionsasfollows:

outside investors fund land acquisition through various partnerships orlimited liability companies. After a short holding period, the entitiesdonate conservation easements to land trusts and claim deductionsbased on appraised values of the conservation easements that aresignificantly in excess (often by three to ten times) of the originalacquisitionprices.This results in exaggerated tax benefits to the investors that areworthsignificantly more than the investors’ initial investments. Typically,promotersorganizethesetransactionsinreturnforhighfees.Sometimespromotersofferextraordinarystewardshipdonationstotheparticipatinglandtrusts.152

TheAlliancehasrecommendedthat“memberlandtrustsevaluatetheirexistingeasement acquisition policies and procedures and incorporate…Cautionary

151SeeLandTrustAlliance,ForLandTrusts,Syndication,http://www.landtrustalliance.org/taxonomy/term/150.152LandTrustAlliance,ImportantAdvisory:Syndication,http://www.landtrustalliance.org/node/590.

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Measures to assure that they do not facilitate or participate in abusivetransactions.”153Foraproposedlegislativefixtothesyndicationproblem,seeStephenJ.Small,AModestLegislativeProposaltoShutDownSpecificTaxShelters,TaxNotesSpecialReport(May23,2016).154

C. Date of Donation and Recordation Date. Treasury Regulation § 1.170A-14(g)(1)providesthat

anyinterestinthepropertyretainedbythedonor(andthedonor’ssuccessorsininterest) must be subject to legally enforceable restrictions (for example, byrecordation in the land records of the jurisdiction in which the property islocated) that will prevent uses of the retained interest inconsistent with theconservationpurposesofthedonation.

Thedonorofaconservationeasementshouldseetoitthattheeasementisrecordedinthe year in which the donor intends to claim the donation was made. Absentrecordation of an easement, a purchaser of the subject property who records thepurchasedeedwillgenerallytakethepropertyfreeoftheeasement.Inaddition,manystate conservation easement enabling statutes specifically require recordation for aneasementtobelegallyenforceable.155Accordingly,absentrecordationintheyearofthepurported donation, the IRS can argue that the easement was not “granted inperpetuity”anditsconservationpurposewasnot“protectedinperpetuity”inthatyear.

1.IRS’sPositiononRecordation.TheIRS’spositiononrecordationissetforthintheConservationEasementAuditTechniquesGuide.156TheGuideinstructsthatthe complete deed of conservation easement (including all exhibits orattachments, suchasadescriptionof theeasement restrictions,diagrams,andlender agreements)must be recorded in the appropriate recordation office inthecountywheretheproperty is locatedand,understate law,aneasement isnotenforceableinperpetuitybeforeitisrecorded.157TheGuidefurtherinstructsthat the effective date of the gift is the recording date, and provides thefollowingasanexample:

153Id.(emphasisinoriginal).154Availableathttp://www.stevesmall.com/wordpress/wp-content/uploads/Small-05-23-2016.pdf.155For example, theUniformConservation EasementAct provides that “[n]o right or duty in favor of or against aholder and no right in favor of a person having a third-party right of enforcement arises under a conservationeasementbeforeitsacceptancebytheholderandarecordationoftheacceptance.”UniformConservationEasementAct§2(b)(LastRevisedorAmendedin2007),availableathttp://www.uniformlaws.org/shared/docs/conservation_easement/ucea_final_81%20with%2007amends.pdf.156SeeIRSCEAuditTechniquesGuide,supranote23.157Id.at15.

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A conservation easement was granted to a qualified organization onDecember 20, 2007, as evidenced by the dated signatures on theconservationeasementdeed.However,theeasementwasnotrecordedin the public records until March 12, 2008. The year of donation is2008.158

2.CaseLaw.

a.Gorra.Gorra involved a donation to theNational Architectural Trust(NAT) of a façade easement on a building in the Carnegie Hill HistoricDistrictofNewYorkCity.NATdeliveredtheeasementtotherecorder’soffice on December 28, 2006, paid the recording fees and taxes, andobtainedareceiptforthedelivery.Duetoacoversheeterror,however,theeasementwasnot recordeduntil January18, 2007. The IRSarguedthat the deed was not recorded until 2007. The Tax Court disagreed,holdingthat,underNewYorklaw,deliveryofthedeedtotherecorder’soffice,withreceiptacknowledged,constitutedrecordation,eventhoughtherewasadelayintheactualrecordinguntilthefollowingyearbecauseofthecoversheeterror.ThecourtcitedN.Y.RealProp.Law§317,whichprovides that every instrument entitled to be recorded is consideredrecordedfromthetimeofdeliverytotherecordingofficer.b.Zarlengo.Zarlengo involvedadonationtoNATofa façadeeasementonabuilding inaManhattanhistoricdistrict.TheeasementdonorsandNATsignedtheeasementin2004,NATsentthedonorsaletterthankingthem for the donation in 2004, and the donors claimed deductions forthedonationontheir2004returns.ForreasonsnotexplainedintheTaxCourt’sopinion,however, theeasementwasnotrecordeduntil January26, 2005. The IRS argued that the taxpayers were not entitled todeductions in 2004 because the façade easement was neither (i) a“qualified real property interest” as defined in § 170(h)(2)(C) (i.e., “arestriction(grantedinperpetuity)ontheusewhichmaybemadeoftherealproperty”)nor (ii)donatedexclusively forconservationpurposesasrequired under § 170(h)(5) (i.e., the conservation purpose of theeasementwasnot“protectedinperpetuity”)in2004.In analyzing these issues, the Tax Court first reiterated thewell settledrule that, “[i]n a Federal tax controversy, State law controls thedetermination of a taxpayer’s interest in property while the taxconsequencesaredeterminedunderFederallaw.”Accordingly,NewYorklawgovernedwhenthetaxpayers’donationofthefaçadeeasementwasregarded as complete, but Federal tax law determined the tax

158Id.at13.

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consequences. Because New York law provides that conservationeasementsinthestatehavenolegaleffectunlesstheyarerecorded,thecourtfoundthatthefaçadeeasementwasnoteffectiveuntilJanuary26,2005.159Unlike in Gorra, the façade easement in Zarlengo presumablywas not delivered to the recording office in 2004 and thus, was notconsideredrecordedinthatyear.

The Tax Court further explained that, even assuming the façadeeasement had been legally enforceable by NAT against the donors in2004becausebothpartiessignedtheeasementthatyear,theeasementstill would not have satisfied the perpetuity requirements in 2004“becauseneithertheuserestrictionnortheconservationpurposeoftheconservation easement was protected in perpetuity until January 26,2005.” The court explained that, if a buyer had purchased the subjecttownhouseandrecordedthepurchasedeedbeforeJanuary26,2005,thebuyer would have taken the townhouse free and clear of theconservation easement. Moreover, the possibility that this could haveoccurredwasnotsoremoteastobenegligible.TheTaxCourtconcludedthatthedonorsinZarlengowerenotentitledtodeductions on their 2004 returns because the perpetuity requirementswerenotsatisfiedin2004,anditfollowedthatthedonorswerealsonotentitledtocarryoverdeductionsonsubsequentyears’returns.However,theIRShadacknowledgedthattheeasementcouldbeconsidered“madeinperpetuity” in2005forpurposesof§170(h)(2)(C)and(5)(A)becausetheeasementwasrecorded inthatyear,andtheTaxCourtdeterminedthat “both the use restriction and the conservation purpose of theconservation easement were protected in perpetuity as of January 26,2005.”Accordingly,giventhattheotherrequirementsof§170(h)andthesubstantiation requirements were satisfied, the donors’ tax liability for2005,2006,and2007couldberedeterminedassumingthedonationhadbeenmadein2005.160c.Mecox.Mecox involvedadonationtoNATofafaçadeeasementonabuildinginNewYork’sGreenwichVillageHistoricDistrict.Thedonor(theMecoxpartnership)andNATsignedtheeasementinDecember2004andMecox claimed a $2.21million deduction for the donation on its 2004partnership tax return. However, the easementwas not recorded until

159TheTaxCourtheldsimilarlyinRothmanI.160SeealsoSatullo(althoughdecidedonlackofmortgagesubordinationgrounds,theTaxCourtstated“Georgialawclearlyprovidesthatuntilaneasementisrecordeditsintendedpropertyrestrictionsarelegallyunenforceable”and“although theDeedofGift created an easement thatwas acceptedby [the land trust] duringDecember 1985, itsterms were not enforceable as required by [Treas. Reg. § 1.170A- 14(g)(1)] until January 19, 1988, when it wasrecorded”).

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November 17, 2005, almost one year later. The IRS disallowed theclaimeddeductioninfull,arguingthat(i)thecontributionwasnotmadeuntil 2005, the year in which the easement was recorded, and (ii) theappraisalwasnottimelybecauseitwasmademorethan60daysbeforethe date of the contribution. The U.S. District Court for the SouthernDistrictofNewYorkheldfortheIRSonbothcounts.AsinZarlengoandRothmanI,theDistrictCourtfoundthat,asamatterof law, Mecox had not made a charitable contribution of the façadeeasement in 2004 because the easementwas not effective underNewYork law until it was recorded in November 2005. The District Courtfurtherexplainedthat,evenifthecourtweretoacceptthatthedatetheeasementwas contributedwas the date of the delivery of the deed toNAT,theeasementstilldidnotsatisfy§170(h)’sdefinitionofa“qualifiedconservationcontribution”untiltheeasementwasrecordedin2005(i.e.,the conservation purpose of the contribution was not “protected inperpetuity” and the underlying property was not “subject to legallyenforceablerestrictions”until2005).Absentrecordation,apurchaserofthepropertywhorecordedthepurchasedeedwould take thepropertyfreeoftheeasement.Mecoxarguedthat,becausetheeasementdidnotspecificallyreferencetheNewYork conservation easement enabling statute, that statute didnotapplyandtheeasementwasacommonlawrestrictivecovenantthatdoes not require recordation to be effective. The court dismissed thatargument, finding that therewas “no question” that the easement fellunder the New York enabling statute’s definition of a conservationeasement.Failure to record the easement until November 2005 also renderedMecox’sappraisaluntimely.TheappraisalwasdatedJune13,2005,andestimatedthevalueoftheeasementasofNovember1,2004.Thecourtfound that the appraisal was “conducted” on June 13, 2005, but theeasement was not “contributed” to the National Architectural Trust(NAT) until it was recorded on November 17, 2005 (5 months later).Accordingly, the appraisal “took place” more than 60 days before thecontribution date and thus, did not satisfy the timing requirement inTreasuryRegulation§1.170A-13(c)(3)(i).

3.TheFinerPointsofDeliveryandRecording.Inmanyjurisdictions,wheretherecordingofficesarebackedup,adocumentmaybedeliveredtotherecordingoffice in December but not recorded by the office staff until January or evenlater. As explained in the discussion ofGorra above, in some states, like NewYork,deliverytotherecordingofficeconstitutesrecording,butthatmaynotbe

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the rule in all states. In addition,many conservation easement deeds have an“effectivedate”provision that says theeasement iseffectivewhen it is signedand recorded. Legal counsel to donors should consider whether it would beprudent to instead include a provision in an easement deed stating that theeasementiseffectivewhenthedeedissignedand“deliveredforrecording.”Inaddition, the personwho delivers the signed easement deed to the recordingoffice should obtain a date-stamped copy indicating the delivery date. At theveryleast,easementholders,donors,andtheiradvisorsshouldbeawareofthisissue.

D.QuidProQuo.Acharitablecontributionisnotdeductibleifitisstructuredasaquidproquoexchange.161TreasuryRegulation§1.170A-14(h)(3)(i)provides:

• If,asaresultof thedonationofa [conservationeasement], thedonororarelated person receives, or can reasonably expect to receive, financial oreconomicbenefitsthataregreaterthanthosethatwill inuretothegeneralpublicfromthetransfer,nodeductionisallowableunderthissection.

• However,ifthedonororarelatedpersonreceives,orcanreasonablyexpect

toreceive,afinancialoreconomicbenefitthatissubstantial,butitisclearlyshown that the benefit is less than the amount of the transfer, then adeduction under this section is allowable for the excess of the amounttransferredovertheamountofthefinancialoreconomicbenefitreceivedorreasonablyexpectedtobereceivedbythedonorortherelatedperson.162

1. Pollard. In Pollard, the Tax Court sustained the IRS’s disallowance of adeduction of more than $1 million claimed with respect to a conservationeasement conveyance because the conveyance was part of a quid pro quo

161Hernandez v. Comm’r, 490 U.S. 680, 681 (1989) (“The legislative history of the ‘contribution or gift’ limitationreveals that Congress intended to differentiate between unrequited payments to qualified recipients, which aredeductible, andpaymentsmade to such recipientswith someexpectationof a quid pro quo in termsof goods orservices,whicharenotdeductible.”).162SeeRev.Rul.76-185(fromwhichtheTreasuryRegulationlanguageappearstobederived,andwhichprovidesthat“paymentsmadebythetaxpayerfortherestorationandmaintenanceofthehistoricmansionanditsgroundsarenotdeductibleascharitablecontributions ...unless thetaxpayercanestablishthat thepaymentsexceedthemonetaryvalueofallbenefitsreceivedorexpectedtobereceived”).SeealsoUnitedStatesv.Amer.BarEndowment,477U.S.105 (1986) (“The sine qua non of a charitable contribution is a transfer of money or property without adequateconsideration. The taxpayer, therefore,must at aminimumdemonstrate that he purposely contributedmoney orproperty in excessof the valueof anybenefit he received in return.”); Treas.Reg. §1.170A-1(h)(1) (“Nopartof apaymentthatataxpayermakestoorfortheuseofanorganizationdescribedinsection170(c)thatisinconsiderationfor ... goods or services ... is a contribution or gift within themeaning of section 170(c) unless the taxpayer—(i)Intendstomakeapaymentinanamountthatexceedsthefairmarketvalueofthegoodsorservices;and(ii)Makesapaymentinanamountthatexceedsthefairmarketvalueofthegoodsorservices.”);Treas.Reg.§1.170A-1(h)(2)(i)(“Thecharitablecontributiondeductionundersection170(a)forapaymentataxpayermakespartlyinconsiderationforgoodsorservicesmaynotexceedtheexcessof-(A)Theamountofanycashpaidandthefairmarketvalueofanyproperty(otherthancash)transferredbythetaxpayertoanorganizationdescribedinsection170(c);over(B)Thefairmarketvalueofthegoodsorservicestheorganizationprovidesinreturn.”).

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exchange. The taxpayer had purchased a 67-acre parcel in Boulder County,Colorado,andhadtoobtainapprovalfromthecountytoincreasetheproperty’sbuilding density. After public hearings, the board of county commissionersagreedtograntthetaxpayer’ssubdivisionexemptionrequest,whichallowedtheproperty to be split into two residential lots, provided the taxpayer granted aconservationeasementencumberingthepropertytothecounty.

a. The taxpayer in Pollardmaintained that no quid pro quo arrangementexisted, arguing, among other things, that approval of his subdivisionexemptionrequesthadbeen“virtuallyguaranteed,”thatthe landusecodesections governing his exemption request did not require the grant of aconservationeasement,andthatalldocuments relating to thegrantof theeasement referred to it as a “gift.”Oneof the county commissioners evenwrote a letter to the taxpayer (apparently at the taxpayer’s request inpreparation for the Tax Court trial) stating that, to the best of hisrecollection, he did not require the taxpayer to grant the easement inexchangeforthesubdivisionexemption.

TheTaxCourtwasnotpersuaded.Basedonitsexaminationofthe“externalfeaturesofthetransaction,”thecourtfoundthatthesubdivisionexemptionrequestwasfarfrombeingvirtuallyguaranteedand,infact,hadlittlechanceof being grantedwithout the taxpayer’s promise to grant theeasement.163The taxpayer also did not establish that the value of the easement heconveyed to the county exceeded the value of the subdivision exemptiongrantedtohim,orthatheintendedtomakeacharitablecontribution.164

b. The Tax Court sustained the IRS’s imposition of an accuracy-relatedpenalty in Pollard, finding that the taxpayer did not act with reasonablecauseandingoodfaithinclaimingthededuction.Theevidenceproducedattrial,saidthecourt,demonstratedthatallofthepartiesinvolvedunderstoodthat theeasementwascontributedfor theexpresspurposeofencouragingthe county togrant the taxpayera subdivisionexemption, and itwouldbeunreasonableforthecourttobelievethatanyoneinvolvedinthetransaction(i.e.,thetaxpayer,hisadvisers,orthecountycommissioners)believedtherewasanunrequitedcontribution.165

163Inascertainingwhetheragivenpaymentisacontributionorgift,orismadewiththeexpectationofquidproquo,the IRS and the courts examine “the external features of the transaction,” thus avoiding the need to conduct animpreciseinquiryintothemotivationsofindividualtaxpayers.Hernandezv.Comm’r,490U.S.680,701–702(1989).164Seesupranote162.165SeealsoBoonev.Comm’r,T.C.Memo2013-101(conveyanceoffilltocitynotadeductiblecharitablecontributionbecausetaxpayerfailedtomeetitsburdenofprovingthatthefairmarketvalueofthefillexceededthefairmarketvalueoftheconsiderationreceivedinexchange);Perlmutterv.Comm’r,45T.C.311(1965)(transfersoflandtoschooldistrictsanda recreationdistrict inaccordancewith zoning regulationswerenot charitable contributions);OttawaSilicaCo. v.U.S., (Ct. Cl. TrialDiv.), 49A.F.T.R.2d82-1162, 82-1USTCP9308 (“It is ... quite apparent thatplaintiffconveyed the land to the schooldistrict fullyexpecting thatasa consequenceof the constructionofpublicaccess

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2.SeventeenSeventyShermanStreet.InSeventeenSeventyShermanStreet,theTaxCourt sustained the IRS’s completedisallowanceof an LLC's claimed$7.15million deduction for the conveyance of interior and exterior easementsrestrictingtheuseofashrineinDenver,Colorado,becausetheconveyancewaspartofaquidproquoexchange.TheshrineislistedontheNationalRegisterofHistoricPlacesandasahistoriclandmarkbytheCityandCountyofDenver.TheLLCownedtwopropertiesonShermanStreet—theshrineandaparkinglot.Priorto granting the easements, the LLC and the City of Denver entered into adevelopmentagreementinwhich,amongotherthings,theLLCagreedtoconveythe easements to Historic Denver and rehabilitate the shrine in exchange forcertainzoningchangestotheshrineandtheparkinglot.

a.TheTaxCourt’sopiniondetailedthefollowingelementsofaquidproquoanalysisinthecharitabledeductioncontext.

• A taxpayer's contribution is deductible ‘only if and to the extent itexceedsthemarketvalueofthebenefitreceived.’

• ‘[t]hesinequanonofacharitablecontributionisatransferofmoneyorpropertywithoutadequateconsideration.’

• ‘a charitable gift or contribution must be a payment made fordetachedanddisinterestedmotives. This formulation isdesigned toensure that thepayor’sprimarypurpose is toassist the charity andnottosecuresomebenefitpersonaltothepayor.’

• The consideration received by the taxpayer need not be financial.Medical, educational, scientific, religious, or other benefits can beconsiderationthatvitiatescharitableintent.

• In ascertaining whether a given payment was made with theexpectation of anything in return, courts examine the externalfeatures of the transaction. This avoids the need to conduct animpreciseinquiryintothemotivationsofindividualtaxpayers.

• Thetaxpayerclaimingadeductionmust,ataminimum,demonstratethat “he purposely contributedmoney or property in excess of thevalueofanybenefithereceivedinreturn.”

• Thus, a taxpayer who receives goods or services in exchange for acontribution of property may still be entitled to a charitablededuction if the taxpayer (1)makesa contribution thatexceeds thefairmarketvalueofthebenefitsreceivedinexchangeand(2)makestheexcesspaymentwiththeintentionofmakingagift.166

• If the taxpayer satisfies these requirements, the taxpayer isentitledtoadeductionnottoexceedthefairmarketvalueofthepropertythe

roads through its property it would receive substantial benefits in return”); Small, Real Estate Developers andConservationEasements—NotasSimpleasitSounds,19-JUNPROB.&PROP.24(2005).166Seesupranote162.

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taxpayer transferred less the fair market value of the goods orservicesreceived.167

b.TheTaxCourtexplainedthataquidproquoanalysis in theconservationeasement donation context ordinarily requires two parts—(1) valuation ofthe contributed conservation easement and then (2) valuation of theconsideration received in exchange for the easement. The court explained,however,thatwhenataxpayergrantsaconservationeasementaspartofaquidproquoexchangeandfailsto identifyorvaluealloftheconsiderationreceived, the taxpayer is not entitled to a deduction because he failed tocomplywithIRC§170andtheregulations.Insuchacase,itisunnecessarytodetermineeitherthevalueoftheeasementorwhetherthetaxpayermadeanexcesspaymentwiththeintentionofmakingagift.Thetaxpayer’sfailuretoidentifyorvaluealloftheconsiderationreceivedand,thus,toprovethatthevalueoftheeasementexceededthevalueoftheconsiderationisfataltothededuction.168c.InSeventeenSeventyShermanStreet,theTaxCourtfoundthattheLLChadreceived two types of consideration in exchange for its conveyance of theinteriorandexterioreasements:

• azoningchangethateliminatedauthorizationtodevelopresidentialcondominiumunitswithintheshrinebutalsopermitteddevelopmentontheparkinglotupto650feet,subjecttoa“viewplane”restrictionof155feet(aviewplanerestrictionlimitstheheightofbuildingsfroma specified view point within Denver's city park and is meant topreserve the view of the Rocky Mountain Skyline from that viewpoint),and

• the Denver Community Planning and Development Agency’srecommendation to the Denver Planning Board to approve a viewplanevariance(whichvariancewasultimatelyapproved).

On its2003tax return,however, theLLCclaimeda$7.15millioncharitabledeductionforitsconveyanceoftheeasementsandmadenoadjustmentfortheconsideration it received inexchange.At trial, theLLCconceded that ithad received the zoning change in exchange for its conveyance of theeasementsandarguedthatitsdeductionshouldbereducedbyjustover$2

167SeeId.168SeealsoCohanv.Comm’r,T.C.Memo.2012-8,inwhichtheTaxCourtupheldtheIRS’scompletedisallowanceofacharitable income taxdeduction claimedwith respect to abargain sale transactionbecause the contemporaneouswrittenacknowledgment(CWA)thedoneeprovidedtothedonordidnotincludeadescriptionorgoodfaithestimateofthetotalconsiderationprovidedtothedonor,andthedonor’srelianceontheCWAwasthereforeunreasonable.Thecourtexplainedthat“thedeterrencevalueof§170(f)(8)’stotaldenialofadeductioncomportswiththeeffectiveadministrationofaself-assessmentandself-reportingsystem.”

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millionasaresult.TheLLCalsoassertedthatthePlanningandDevelopmentAgency’s recommendation to the Planning Board to approve a view planevariancewaseithernotconsiderationreceived inexchangeforthegrantofthe easements, orwas consideration but had no real value. The Tax Courtdisagreed, finding that the Agency’s view-plane-variance recommendationwas consideration andhad substantial value. The court concluded that theLLC’s failure to identify or value all of the consideration received, or toprovideanycredibleevidencetopermit thecourt toaccuratelyvaluealloftheconsiderationreceived,wasfataltothededuction.d.AlsonotableisthattheconsiderationtheLLCreceivedinexchangeforitsconveyanceoftheeasementsdidnotcomefromthedonee,HistoricDenver,butinsteadcamefromtheCityofDenver.TheIRSarguedthattheLLCfailedto substantiate its claimed deduction because it failed to (i) obtain acontemporaneous written acknowledgment (CWA) meeting therequirementsofIRC§170(f)(8)or(ii)disclosethatthecontributionwaspartofabargainsaleonForm8283.TheLLCarguedthatIRC§170(f)(8)requiresadonor toobtainaCWAprovidingagood-faithestimateof thevalueof theconsiderationreceivedfromthedonee(i.e.,HistoricDenver),anditreceivednoconsiderationfromHistoricDenver.TheLLCalsoarguedthatthegrantoftheeasementstoHistoricDenverwasnotabargainsalebecauseitreceivedno consideration from Historic Denver and, thus, it was not required toreport the conveyance as a bargain sale on the Form 8283. The Tax Courtfound these contentions “dubious.” The court noted that the grant of theeasementswasacomplexnegotiationamongtheLLC,thecity,andHistoricDenver,andHistoricDenver'srolewaslargelyasthecity'sdesigneetoholdtheeasements.ThecourtthusgenerallyfoundpersuasivetheIRS’sargumentthattheconsiderationreceivedshouldhavebeendisclosedontheCWAandtheForm8283.However,becausethecourtdeniedthedeductioninfullonquidproquogrounds,itdidnotdecidethesesubstantiationissues.e. The Tax Court also agreed with the IRS that the LLC was liable for theaccuracy-relatedpenaltybecause it actednegligentlyor indisregardof therequirementsof § 170and the regulations. “Negligence,” said the court, isstrongly indicatedwhere a taxpayer fails tomake a reasonable attempt toascertain the correctness of a deduction thatwould seem to a reasonableandprudentperson tobe “toogood tobe true.”Anda taxpayeractswith“disregard” when, among other things, he does not exercise reasonablediligence to determine the correctness of a return position. The LLCconveyedtheeasementsaspartofaquidproquoexchangebutreportedtheconveyanceon its2003 returnas a charitable contributionwithoutmakingany adjustment for the consideration it received in exchange. The courtfound that the LLC acted negligently or with disregard because it did notmakeareasonableattempttoascertainthecorrectnessofthededuction.

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TheLLCarguedthat itwaseligible for thereasonablecauseandgoodfaithexception to the penalty because it relied on professional advice. The TaxCourt disagreed. Although the LLC had consulted with a tax attorneyregardingtheconveyance,thatattorneytestifiedattrialthathehadadvisedtheLLCthatithadtoreducethevalueofitsdeductionbytheconsiderationreceivedinthequidproquoexchange.TheTaxCourtnotedthatitwouldbeunreasonableforthecourttobelievethatatthetimeofthecontributionorat the timeof filing the LLC’s returneither the LLCor its advisers believedthat the contribution of the easementswas an unrequited contribution orthat the consideration received had no value. Consequently, the LLC'sdisregardoftheattorney’sadvicewasnotreasonableandingoodfaith,andtheLLCcouldnot relyontheprofessionaladviceof theattorney tonegatethepenalty.

3.Costello.InCostello,taxpayersconveyedaconservationeasementtoHowardCounty,Maryland, inexchange for the right to sell16development rights toadeveloperpursuanttotheCounty’stransferofdevelopmentrightsprogram.Theright tosell thedevelopment rightswasconditionedontheconveyanceof theeasement,whichprohibitedanyfuturedevelopmentofthesubjectproperty.Infiling their tax return and claiming a deduction for the conveyance of theeasement,thetaxpayersfailedtoindicatethattheyhadreceivedtherighttosellthe development rights (and $2.5 million on their sale) as a result of theconveyance. TheTaxCourtheld that, even if the taxpayershad compliedwiththe qualified appraisal and appraisal summary requirements (which they didnot),thecourtwouldnonethelessdisallowthedeductionbecausetheeasementwasconveyedaspartofaquidproquoexchange.The taxpayers argued that easement’s value exceeded the $2.5 million ofconsideration they received in exchange for its conveyance (in the form ofproceedsfromtheirsaleofthe16developmentrights).TheTaxCourtdismissedthat argument because (i) the taxpayers failed to provide evidence that theproperty could have been developed into more than 16 lots and (ii) thetaxpayers could not sell the 16 development rights until they had placed theeasement on the property and, once they did, all future development wasprohibited,sotherewasno“excess”developmentpotentialthattheycouldhavecontributedtotheCountyintheformofabargainsale.The Tax Court sustained the IRS’s imposition of accuracy-related penalties inCostello,explaining,inpart,thatthetaxpayers“kneworreasonablyshouldhaveknown”thatthesaleofthedevelopmentrightsfor$2.5millionwasrelevantindeterminingthedeductiontowhichtheywouldbeentitled.

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4.Pesky.InPesky,theIRSassertednotonlythatthetaxpayer’sconveyanceofaconservationeasementwasmadeinexchangeforaquidproquo,butalsothatthe taxpayerwas liable for a civil fraud penalty under IRC § 6663. IRC § 6663imposesa75%penaltyontaxunderpaymentsduetofraud.Fraudisdefinedasan“intentionalwrongdoingonthepartofthetaxpayerwiththespecific intenttoavoidataxknowntobeowing.”Thegovernmentmustprovefraudbyclearandconvincingevidence,but intentcanbe inferred fromstrongcircumstantialevidence.After a review of the facts and circumstances surrounding the easementconveyance, the District Court was unable to conclude that a reasonable jurycould find it “highly likely” that the taxpayer’s deduction was due to fraud.Becausethegovernmentdidnotproducesufficientevidencetomeetitsburdenof showing fraud by clear and convincing evidence, the court granted thetaxpayer’smotion for summary judgment on the issue. The court determined,however, that other issues could not be resolved on summary judgment,includingwhether the conveyanceof theeasementwasmade inexchange forquid pro quo and whether the taxpayer obtained a contemporaneous writtenacknowledgment accurately reflecting any goods and services provided by thedoneeinexchangeforthecontribution.ItisunderstoodthatthepartiesinPeskysettledthecaseaftertheDistrictCourtrejectedthefraudclaim.

E. Side Agreements. In Graev, the Tax Court sustained the IRS’s disallowance ofdeductions claimed with regard to the donation to the National Architectural Trust(NAT) of both a façade easement valued at $990,000 and an accompanying $99,000cashcontribution.NAThadwrittenasidelettertoMr.Graev,thedonor,promisingthat,if thededuction for theeasementweredisallowed,NATwould“promptlyrefund[Mr.Graev’s] entire cash endowment contribution and join with [him] to immediatelyremove the facade conservation easement from the property’s title.” The Tax Courtdisallowed thedeductions forboth theeasementand cash contributionsbecause thegiftswereconditionaland,at the timetheyweremade, thepossibility theywouldbedefeatedwasnotsoremoteastobenegligible.

1.Section170andthecorrespondingTreasuryRegulationsprovideinstructionsandlimitationsthat,atleastinpart,ensurethatadonorwillbeabletodeductno more than what the donee organization actually receives. Three suchlimitationseffectivelyprovidethatnodeductionforacharitablecontributionwillbe allowed unless, on the date of the contribution, the possibility that thedonee’s interest in the contribution will be defeated is “so remote as to benegligible.”Thoselimitationsarefoundinregulation§1.170A-1(e)(pertainingtoconditionalgifts),regulation§1.170A-7(pertainingtopartialinterestgifts),andregulation§1.170A-14(g)(3)(pertainingtogiftsofconservationeasements).

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2. Based on the facts in Graev, the court found that, on the date of thecontributions,thepossibilitytheIRSwoulddisallowtheeasementdeductionandNATwouldreturnthecashtoMr.Graevandremovetheeasement(i.e.,thegiftswouldbedefeated)wasnot so remoteas tobenegligible.The facts thecourtfound persuasive included the IRS’s announced intention to scrutinizedeductionsforfacadeeasementdonations;Mr.Graev’sinsistencethatNATissuetheside letter;NAT’spracticeof issuingside letters, theveryessenceofwhich“implies anon-negligible risk;” theenforceabilityof the side letterunder statelaw; and NAT’s incentive to honor its promises in the side letter so as not toimpairitsabilitytoobtainfuturecontributions.3.Thepossibilitythatagiftwillbedefeatedwillbeconsideredsoremoteastobe negligible only if it is “so highly improbable that one might ignore it withreasonable safety in undertaking a serious business transaction” or “so highlyimprobableand remoteas tobe lacking in reasonandsubstance.”169InGraev,the court explained: “themere fact that he required the side letter is strongevidence that, at the time of Mr. Graev’s contribution, the risk that hiscorresponding deductions might be disallowed could not be (and was not)‘ignoredwithreasonablesafety inundertakingaseriousbusinesstransaction.’”ObtainingthesideletteralsoindicatedthatMr.Graevdidnotthinkthechanceofdisallowancewas“sohighlyimprobableandremoteastobelackinginreasonandsubstance.”Accordingly,themerefactofobtainingasidelettersuchasthatatissueinGraevmaybeatripwirethatdestroysdeductibility.

F. Reserved Development Rights. Several regulatory requirements apply to retaineddevelopmentrights.

• TreasuryRegulation§1.170A-14(d)(4)(v)containsaspecificlimitationonthe reservation of rights in an open space easement—a deductionwillnotbeallowed“ifthetermsoftheeasementpermitadegreeofintrusionor future development that would interfere with the essential scenicquality of the land or the governmental conservation policy beingfurtheredbythedonation.”

• TreasuryRegulation§1.170A-14(g)(1)providesthat“any interest in the

propertyretainedbythedonor...mustbesubjecttolegallyenforceablerestrictions...thatwillpreventusesoftheretainedinterestinconsistentwith the conservation purposes of the donation” (the “generalenforceableinperpetuity”requirement).

• TreasuryRegulation§1.170A-14(e)(2)providesthat“adeductionwillnot

beallowedifthecontributionwouldaccomplishoneoftheenumerated

169Briggsv.Comm’r,72T.C.646,656-57(1979).

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conservationpurposesbutwouldpermitdestructionofothersignificantconservationinterests”(the“noinconsistentuse”requirement).170

1.Examples3and4.TheTreasuryRegulationsprovidetwoexamplesaddressing“futuredevelopment”inanopenspaceeasement.171

Example 3 involves Greenacre, a 900-acre parcel of woodland, rollingpasture,andorchardsonthecrestofamountain,allofwhich isclearlyvisible from a nearby national park. The highest and best use ofGreenacre is as a subdivision of 40-acre tracts (potentially twenty-tworesidential lots).The landownerwishestodonateasceniceasementonGreenacreandwouldliketoreservetherighttosubdivideGreenacreinto90-acreparcelswithnomorethanonesingle-familyhomeallowableoneachparcel.Example3providesthat“[r]andombuildingontheproperty,evenaslittleasonehomeforeach90acres[atotalofonlytenhomes],would destroy the scenic character of the view. Accordingly, nodeductionwouldbeallowable.”

Example4assumesthesamefacts,exceptnotallofGreenacreisvisiblefrom the park and the deed of easement allows for limited clusterdevelopmentofnomorethanfivenine-acreclusterswithfourhousesoneachcluster(foratotaloftwentyhomes)locatedinareasgenerallynotvisible from the national park and subject to site and building planapprovalbythedoneeorganizationtopreservethescenicviewfromthepark. Example 4 further provides that the donor and the donee have“alreadyidentifiedsiteswherelimitedclusterdevelopmentwouldnotbevisible from the park or would not impair the view,” and owners ofhomes in the clusters will not have any rights with respect to thesurroundingGreenacrepropertythatarenotalsoavailabletothegeneralpublic.Example4concludesthatthedonationqualifiesforadeduction.

Example 3 evidences the Treasury Department’s dislike of reserved “floating”buildingsites,orrightstobuildthatcanbeexercisedanywhereontheproperty.Suchrightscould(i)interferewiththeessentialscenicqualityofthelandorthegovernmentalconservationpolicybeingfurtheredbythedonation,172(ii)permitdestructionofothersignificantconservationinterests,173and(iii)permitusesof

170Theregulationsprovide,asanexample,thatthepreservationoffarmlandwillnotqualifyforadeductionif,underthetermsof theeasement,asignificantnaturallyoccurringecosystemcouldbe injuredordestroyedbytheuseofpesticides in the operation of the farm. Treas. Reg. § 1.170A-14(e)(2). A use that is destructive of conservationinterestsispermittedonlyiftheuseisnecessaryfortheprotectionoftheconservationintereststhatarethesubjectof the contribution, such as allowing site excavation that may impair scenic values on property preserved as anarchaeologicalsite.Id.§1.170A-14(e)(3).171Treas.Reg.§1.170A-14(f),Examples3and4.172SeeTreas.Reg.§1.170A-14(d)(4)(v)(limitationonreservedrightsinopenspaceeasements).173SeeTreas.Reg.§1.170A-14(e)(2)(noinconsistentuserequirement).

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the retained interest inconsistent with the conservation purposes of thedonation.174Example 4 suggests that, even if the number of permitted homes is increased(fromten to twenty), if thehomesitesareclustered, located inareasgenerallynotvisiblefromthenearbypark,andsubjecttositeandbuildingplanapprovalby the donee to preserve the scenic view, the donation will be deductible.However,Example4providesthatthedonorandthedoneehad,atthetimeofthedonation,“alreadyidentifiedsiteswherelimitedclusterdevelopmentwouldnotbevisiblefromtheparkorwouldnotimpairtheview”—i.e.,itdidnotappearthatthedoneewasgrantedthediscretionto,atsomelatertime,approvesitesthat, in its judgment, would preserve the scenic view. Rather, it appears thatsiteswere identifiedat the timeof thedonation, thusallowing the IRS (and, iflitigated, a court) to assesswhether the reserved rights (i) interferedwith theessential scenic quality of the land or the governmental conservation policybeing furthered by the donation, (ii) would result in the destruction of othersignificant conservation interests, or (iii) would involve uses of the retainedinterestinconsistentwiththeconservationpurposesofthedonation.Reservedrightstodevelopcouldbeaddressedinanumberofways:

• thepartiescouldidentifythebuildingsitesintheconservationeasementdeed,

• the parties could identify more building sites in the conservation

easementdeed thanarepermitted tobeused (e.g., theeasementmayreserve to the grantor the right to build two additional single-familyresidences on the subject property, but four possible sites for the tworesidencesmaybeidentifiedinthedeed),

• thepartiescouldexcludethebuildingsitesfromthelegaldescriptionof

thepropertyencumberedby theconservationeasement (thedrawbacktothisapproachisthattheholderwouldhavenoabilitytolimitintensiveusesoftheexcludedland),or

• the parties could designate all sensitive areas as “no-build” areas,” but

theno-buildareasmustbemorethanjusttokensetbacks;theymustbesufficientlyprotectiveofthesubjectproperty’sconservationvalues.

It is not clear fromExample 4 if having rightswith respect to the surroundingGreenacre property available to the general public was necessary to theoutcome.

174SeeTreas.Reg.§1.170A-14(g)(1)(generalenforceableinperpetuityrequirement).

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G. PLRs Recommending Revocation of Tax-Exempt Status.175The IRS has issued anumber of Private Letter Rulings (PLRs) recommending revocation of the tax-exemptstatus of organizations holding conservation easements based on fairly egregiousfacts.176ThesePLRsillustratesomeoftheissuestheIRShasfocusedonwhenexaminingorganizationsthatacceptandholdconservationeasements.

1. Although the PLRs are impossible to accurately summarize in an outlinebecauseoftheirhighly factspecificnature,someoftheproblemsnoted inthePLRsinclude:

• theorganizationservedasavehicleforitsfounder,thefounder’sfamily,or other related parties to donate conservation easements and claimdeductions;

• the easements donated to the organization did not satisfy theconservationpurpose testunder§170(h)(4) (e.g., thepreservationwasnotpursuanttoaclearlydelineatedgovernmentconservationpolicy;theeasement encumbered ordinary farmland with no unique features likenativeplants, trees,oranimals;or theeasementencumbered land inagatedcondominiumtennisresortandcontainedaprivateminiaturegolfcourseusedforthepleasureoftheresidentsonly);

• the organization did not take steps to ensure that the easements itaccepts serve a conservation purpose (e.g., the organization’s officers,trustees, and employees did not have backgrounds or expertise inbotany, biology, ecological sciences, or other fields that would enablethemtocrediblyprocessorevaluatetheproperty,ornobaselineswereobtained or consisted of one page or one paragraph reports; or theorganization was unaware of the extensive retained rights in theeasementsitaccepted);

• theorganizationdidnotmonitortheeasementsitacceptedonaregularbasis(oratall),didnothavethecommitmenttoprotecttheconservationpurposes (if any) of the donations, and did not have the resources toenforcetheeasementsshouldenforcementbecomenecessary;

• therewasnooneassociatedwith theorganization thathadany formaleducation,training,orexpertiseinconservationmatters;

• theorganizationallowedoneof itseasement-encumberedpropertiestobedamagedby illegaldumpingandvehicles,andanother, locatedinanexclusive small waterfront residential development, to be encroached

175APrivateLetterRuling(PLR)isawrittenstatementissuedtoataxpayerthatinterpretsandappliestaxlawstothetaxpayer'sspecificsetoffacts.APLRmaynotbereliedonasprecedentbyothertaxpayersorIRSpersonnel.PLRsaregenerallymadepublicafterallinformationhasbeenremovedthatcouldidentifythetaxpayertowhomitwasissued.See IRS, Understanding IRS Guidance – A Brief Primer, available at http://www.irs.gov/uac/Understanding-IRS-Guidance-A-Brief-Primer.176See, e.g., PLR 201044026; PLR 201048045; PLR 201109030; PLR 201110020; PLR 201405018. See also PLR201234029 (organization created for the purpose of carrying on a for-profit hay farm on property that is notecologicallysignificantoropentothepublicisnotoperatedforanexemptpurpose).

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uponbytheresidentswhoconstructed,amongotherthings,largepondsandaboatandrecreationalvehiclestoragefacilityfortheexclusiveuseoftheresidents;

• theorganization amended a conservation easement to allowadditionaldevelopmentforafee;

• the easements the organization acquired violated the perpetuityrequirement under § 170(h) because the organization had the right toterminatetheeasements;

• the organization did not develop or sponsor any educational events,solicit thegeneralpublic forsupport,orappeartohold itselfouttothepublicasacharitableconservationorganization;and

• the organization was not operated in accordance with it bylaws (e.g.,therewerenomeetingsofofficersorboardmembers,noelections,andnointernalcontrols,andtherewasonlythebareminimumwithregardtorecordsandrecordkeeping).

2.PLR201048045explains:

To establish that it operates exclusively for charitable conservationpurposes under section 501(c)(3), an organization must do more thanmerely accept and hold easements for which donors are claimingcharitable contribution deductions under section 170(h). Theorganizationmustestablishthatanyacceptedeasementsactuallyserveaconservationpurpose.Theorganizationmustalsooperateasaneffectivestewardtoensurethattheeasementcontinuestofurtheraconservationpurpose.Theeasement isasetof legalrights. Itcanserveconservationpurposes only if enforced where necessary. The need for enforcementcan be determined only through monitoring. The extent of anorganization'sduediligenceandmonitoringactivities,combinedwithitscapacityforandcommitmenttoenforcementwhennecessary,becomeshighly significant in determining whether accepting and holdingeasementsactually furthersa charitableconservationpurposeand thuswhether an organization with the primary purpose of accepting andholdingeasementsqualifiesforexemptionundersection501(c)(3).

H. State Tax Credits. A number of states offer state income tax credits to donors ofconservationeasements.

1. TaxTreatmentof Saleof StateTaxCredits.Esgar involved three taxpayers,each ofwhomdonated a conservation easement on land located in Colorado,received transferable income tax credits from Colorado as a result of thedonation,andsoldaportionofthecreditstothirdpartieswithintwoweeks.Thetaxpayersreportedtheproceedsfromthecreditsalesaslong-termcapitalgain,short-termcapitalgain,andordinaryincome,respectively.Afteranauditofthe

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taxpayers’ income tax returns, the IRSdetermined that theproceeds from thesalesofthecreditsshouldhavebeenreportedasordinaryincome.InTempelv.Comm’r,136T.C.341(2011),theTaxCourtheldthatthetaxpayers’state tax credits were zero-basis capital assets and, given the short holdingperiods, income from the sale of such credits was short-term capital gain.Severalmonths later, the IRS releasedChiefCounselAdvice201147024,whichaddressesthetaxconsequencesofthesaleofstatetaxcreditstoboththesellerandthebuyer.177The taxpayers appealed both Esgar I (in which the Tax Court held that thetaxpayershadsubstantiallyovervaluedtheconservationeasements)andTempeltothe10thCircuit.InEsgarII,thetaxpayersarguedthattheirstatetaxcredits,whichtheyheld foronlyabouttwoweeks,werenonetheless long-termcapitalassetsbecausetheyheldtheunderlyingrealpropertiesforlongerthanoneyear,theyrelinquisheddevelopmentrights inthosepropertiesthroughthedonationof theeasements, and they received the tax creditsbecauseof thedonations.The 10th Circuit disagreed, noting that the Tax Court correctly concluded inTempel that the taxpayers had no property rights in the tax credits until theeasement donations were complete and the credits were granted, and thecredits neverwere, nor did they become, part of the taxpayers' real propertyrights. The 10th Circuit also agreed with the Tax Court that the taxpayers’holding period in the credits began at the time the credits were granted andendedwhentaxpayerssoldthem,andsincethetaxpayerssoldthecreditsinthesamemonthinwhichtheyreceivedthem,thegainsfromthesaleofthecreditswereshort-termcapitalgains.The 10th Circuit also summarily rejected the argument that the transactionsamountedtosomesortoflike-kindexchangeofconservationeasementsfortaxcredits thatmight result in the “tacking” of holding periods. The court furthernoted that if these were like-kind exchanges it would negate the charitablenatureofthetaxpayers’contributionsoftheeasements.2.NonprorataAllocationofStateTaxCreditswasDisguisedSale.AsnotedinPartIII.B.1above,ineachofSWFRealEstate,LLC,andRoute231,LLCv.Comm’r,810 F.3d 247 (4th Cir. 2016), the IRS successfully invoked the “disguised sales”rulesunder IRC§707 toattack thenonpro rataallocationof state income taxcreditsgeneratedbyapartnership’sdonationofaconservationeasement.

177ChiefCounselAdvice201147024isavailableathttp://www.irs.gov/pub/irs-wd/1147024.pdf.

AppendixA 1

AppendixAInternalRevenueCode§170(h)

(h)Qualifiedconservationcontribution.

(1)Ingeneral.Forpurposesofsubsection(f)(3)(B)(iii),theterm"qualifiedconservationcontribution"meansacontribution--

(A)ofaqualifiedrealpropertyinterest,(B)toaqualifiedorganization,(C)exclusivelyforconservationpurposes.

(2)Qualifiedrealpropertyinterest.Forpurposesofthissubsection,theterm"qualifiedrealpropertyinterest"meansanyofthefollowinginterestsinrealproperty:

(A)theentireinterestofthedonorotherthanaqualifiedmineralinterest,(B)aremainderinterest,and(C)arestriction(grantedinperpetuity)ontheusewhichmaybemadeoftherealproperty.

(3)Qualifiedorganization.Forpurposesofparagraph(1),theterm"qualifiedorganization"meansanorganizationwhich--

(A)isdescribedinclause(v)or(vi)ofsubsection(b)(1)(A),or(B)isdescribedinsection501(c)(3)[IRCSec.501(c)(3)]and--

(i)meetstherequirementsofsection509(a)(2)[IRCSec.509(a)(2)],or(ii)meetstherequirementsofsection509(a)(3)[IRCSec.509(a)(3)]andiscontrolledbyanorganizationdescribedinsubparagraph(A)orinclause(i)ofthissubparagraph.

(4)Conservationpurposedefined.

(A)Ingeneral.Forpurposesofthissubsection,theterm"conservationpurpose"means--

(i)thepreservationoflandareasforoutdoorrecreationby,ortheeducationof,thegeneralpublic,(ii)theprotectionofarelativelynaturalhabitatoffish,wildlife,orplants,orsimilarecosystem,(iii)thepreservationofopenspace(includingfarmlandandforestland)wheresuchpreservationis--

(I)forthescenicenjoymentofthegeneralpublic,or(II)pursuanttoaclearlydelineatedFederal,State,orlocalgovernmentalconservationpolicy,

andwillyieldasignificantpublicbenefit,or(iv)thepreservationofanhistoricallyimportantlandareaoracertifiedhistoricstructure.

AppendixA 2

(B)Specialruleswithrespecttobuildingsinregisteredhistoricdistricts.Inthecaseofanycontributionofaqualifiedrealpropertyinterestwhichisarestrictionwithrespecttotheexteriorofabuildingdescribedinsubparagraph(C)(ii),suchcontributionshallnotbeconsideredtobeexclusivelyforconservationpurposesunless--

(i)suchinterest--(I)includesarestrictionwhichpreservestheentireexteriorofthebuilding(includingthefront,sides,rear,andheightofthebuilding),and(II)prohibitsanychangeintheexteriorofthebuildingwhichisinconsistentwiththehistoricalcharacterofsuchexterior,

(ii)thedonoranddoneeenterintoawrittenagreementcertifying,underpenaltyofperjury,thatthedonee--

(I)isaqualifiedorganization(asdefinedinparagraph(3))withapurposeofenvironmentalprotection,landconservation,openspacepreservation,orhistoricpreservation,and(II)hastheresourcestomanageandenforcetherestrictionandacommitmenttodoso,and

(iii)inthecaseofanycontributionmadeinataxableyearbeginningafterthedateoftheenactmentofthissubparagraph[Aug.17,2006],thetaxpayerincludeswiththetaxpayer'sreturnforthetaxableyearofthecontribution--

(I)aqualifiedappraisal(withinthemeaningofsubsection(f)(11)(E))ofthequalifiedpropertyinterest,(II)photographsoftheentireexteriorofthebuilding,and(III)adescriptionofallrestrictionsonthedevelopmentofthebuilding.

(C)Certifiedhistoricstructure.Forpurposesofsubparagraph(A)(iv),theterm"certifiedhistoricstructure"means--

(i)anybuilding,structure,orlandareawhichislistedintheNationalRegister,or(ii)anybuildingwhichislocatedinaregisteredhistoricdistrict(asdefinedinsection47(c)(3)(B)andiscertifiedbytheSecretaryoftheInteriortotheSecretaryasbeingofhistoricsignificancetothedistrict.

Abuilding,structure,orlandareasatisfiestheprecedingsentenceifitsatisfiessuchsentenceeitheratthetimeofthetransferorontheduedate(includingextensions)forfilingthetransferor'sreturnunderthischapterforthetaxableyearinwhichthetransferismade.

AppendixA 3

(5)Exclusivelyforconservationpurposes.Forpurposesofthissubsection--(A)Conservationpurposemustbeprotected.Acontributionshallnotbetreatedasexclusivelyforconservationpurposesunlesstheconservationpurposeisprotectedinperpetuity.(B)Nosurfaceminingpermitted.

(i)Ingeneral.Exceptasprovidedinclause(ii),inthecaseofacontributionofanyinterestwherethereisaretentionofaqualifiedmineralinterest,subparagraph(A)shallnotbetreatedasmetifatanytimetheremaybeextractionorremovalofmineralsbyanysurfaceminingmethod.(ii)Specialrule.Withrespecttoanycontributionofpropertyinwhichtheownershipofthesurfaceestateandmineralinterestshasbeenandremainsseparated,subparagraph(A)shallbetreatedasmetiftheprobabilityofsurfaceminingoccurringonsuchpropertyissoremoteastobenegligible.

(6)Qualifiedmineralinterest.Forpurposesofthissubsection,theterm"qualifiedmineralinterest"means--

(A)subsurfaceoil,gas,orotherminerals,and(B)therighttoaccesstosuchminerals

AppendixB

AppendixB

TreasuryRegulation§1.170A-14

§1.170A-14QualifiedConservationContributions.(a)QualifiedConservationContributions................................................3(b)QualifiedRealPropertyInterest.....................................................3

(1)Entireinterestofdonorotherthanqualifiedmineralinterest(2)Perpetualconservationrestriction

(c)QualifiedOrganization............................................................3(1)Eligibledonee(2)Transfersbydonee

(d)ConservationPurposes...........................................................4(1)Ingeneral................................................................4(2)Recreationoreducation....................................................4

(i)Ingeneral(ii)Access

(3)Protectionofenvironmentalsystem..........................................5(i)Ingeneral(ii)Significanthabitatorecosystem(iii)Access

(4)Preservationofopenspace.................................................5(i)Ingeneral(ii)Scenicenjoyment

(A)Factors(B)Access

(iii)Governmentalconservationpolicy(A)Ingeneral(B)Effectofacceptancebygovernmentalagency(C)Access

(iv)Significantpublicbenefit(A)Factors(B)Illustrations

(v)Limitation(vi)Relationshipofrequirements

(A)Clearlydelineatedgovernmentalpolicyandsignificantpublicbenefit(B)Scenicenjoymentandsignificantpublicbenefit(C)Donationsmaysatisfymorethanonetest

(5)Historicpreservation.......................................................9(i)Ingeneral(ii)Historicallyimportantlandarea(iii)Certifiedhistoricstructure

Appendix B 2

(iv)Access(v)Examples

(e)ExclusivelyforConservationPurposes............................................11(1)Ingeneral(2)Inconsistentuse(3)Inconsistentusepermitted

(f)Examples.....................................................................12(g)EnforceableInPerpetuity.......................................................13

(1)Ingeneral(2)Protectionofaconservationpurposeincaseofdonationofpropertysubjecttoamortgage(3)Remotefutureevent(4)Retentionofqualifiedmineralinterest

(i)Ingeneral(ii)ExceptionforqualifiedconservationcontributionsafterJuly1984(iii)Examples

(5)Protectionofconservationpurposewheretaxpayerreservescertainrights(i)Documentation(ii)Donee’srighttoinspectionandlegalremedies

(6)Extinguishment(i)Ingeneral(ii)Proceeds

(h)Valuation.....................................................................17(1)Entireinterestofdonorotherthanqualifiedmineralinterest(2)Remainderinterestinrealproperty(3)Perpetualconservationrestriction

(i)Ingeneral(ii)Fairmarketvalueofpropertybeforeandafterrestriction(iii)Allocationofbasis

(4)Examples(i)SubstantiationRequirement......................................................21(j)Effectivedate..................................................................21

Appendix B 3

§1.170A-14Qualifiedconservationcontributions. (a) Qualified conservation contributions. A deduction under section 170 is generally notallowed for a charitable contribution of any interest in property that consists of less than thedonor'sentireinterestinthepropertyotherthancertaintransfersintrust(see§1.170A-6relatingtocharitablecontributionsintrustand§1.170A-7relatingtocontributionsnotintrustofpartialinterestsinproperty).However,adeductionmaybeallowedundersection170(f)(3)(B)(iii)forthevalue of a qualified conservation contribution if the requirements of this section are met. Aqualified conservation contribution is the contribution of a qualified real property interest to aqualifiedorganizationexclusivelyforconservationpurposes.Tobeeligibleforadeductionunderthissection,theconservationpurposemustbeprotectedinperpetuity.

(b)Qualifiedrealproperty interest -- (1)Entire interestofdonorotherthanqualifiedmineralinterest. (i)Theentire interestof thedonorotherthanaqualifiedmineral interest isaqualifiedrealpropertyinterest.Aqualifiedmineralinterestisthedonor'sinterestinsubsurfaceoil,gas,orothermineralsandtherightofaccesstosuchminerals.

(ii) A real property interest shall not be treated as an entire interest other than a qualifiedmineralinterestbyreasonofsection170(h)(2)(A)andthisparagraph(b)(1)ifthepropertyinwhichthedonor's interestexistswasdividedprior to thecontribution inorder toenable thedonor toretain control ofmore than a qualifiedmineral interest or to reduce the real property interestdonated. See Treasury regulations § 1.170A-7(a)(2)(i). An entire interest in real property mayconsistofanundividedinterest intheproperty.Butseesection170(h)(5)(A)andtheregulationsthereunder(relatingtotherequirementthattheconservationpurposewhichisthesubjectofthedonationmust be protected in perpetuity).Minor interests, such as rights-of-way, thatwill notinterfere with the conservation purposes of the donation, may be transferred prior to theconservationcontributionwithoutaffectingthetreatmentofapropertyinterestasaqualifiedrealpropertyinterestunderthisparagraph(b)(1).

(2)Perpetualconservationrestriction.A"perpetualconservationrestriction"isaqualifiedrealproperty interest.A"perpetualconservationrestriction" isarestrictiongranted inperpetuityontheusewhichmaybemadeof realproperty -- including, aneasementorother interest in realpropertythatunderstatelawhasattributessimilartoaneasement(e.g.,arestrictivecovenantorequitable servitude). Forpurposesof this section, the termseasement, conservation restriction,and perpetual conservation restriction have the same meaning. The definition of perpetualconservationrestrictionunderthisparagraph(b)(2)isnotintendedtoprecludethedeductibilityofadonationofaffirmativerightstousea landorwaterareaunder§ 1.170A-13(d)(2).Anyrightsreservedbythedonorinthedonationofaperpetualconservationrestrictionmustconformtotherequirementsofthissection.Seee.g.,paragraph(d)(4)(ii),(d)(5)(i),(e)(3),and(g)(4)ofthissection.

(c)Qualifiedorganization--(1)Eligibledonee.Tobeconsideredaneligibledoneeunderthissection, an organization must be a qualified organization, have a commitment to protect theconservation purposes of the donation, and have the resources to enforce the restrictions. Aconservationgrouporganizedoroperatedprimarilyor substantially foroneof the conservationpurposesspecifiedinsection170(h)(4)(A)willbeconsideredtohavethecommitmentrequiredbythe preceding sentence. A qualified organization need not set aside funds to enforce the

Appendix B 4

restrictions that are the subject of the contribution. For purposes of this section, the termqualifiedorganizationmeans:

(i)Agovernmentalunitdescribedinsection170(b)(1)(A)(v);

(ii)Anorganizationdescribedinsection170(b)(1)(A)(vi);

(iii)Acharitableorganizationdescribedinsection501(c)(3)thatmeetsthepublicsupporttestofsection509(a)(2);

(iv)A charitable organizationdescribed in section501(c)(3) thatmeets the requirements ofsection509(a)(3)andiscontrolledbyanorganizationdescribedinparagraphs(c)(1)(i),(ii),or(iii)ofthissection.

(2)Transfersbydonee.Adeductionshallbeallowedforacontributionunderthissectiononlyifintheinstrumentofconveyancethedonorprohibitsthedoneefromsubsequentlytransferringthe easement (or, in the case of a remainder interest or the reservation of a qualifiedmineralinterest, the property), whether or not for consideration, unless the donee organization, as acondition of the subsequent transfer, requires that the conservation purposes which thecontributionwasoriginallyintendedtoadvancecontinuetobecarriedout.Moreover,subsequenttransfersmustberestrictedtoorganizationsqualifying,atthetimeofthesubsequenttransfer,asaneligibledoneeunderparagraph(c)(1)of thissection.Whena laterunexpectedchange intheconditionssurroundingthepropertythatisthesubjectofadonationunderparagraph(b)(1),(2),or (3) of this section makes impossible or impractical the continued use of the property forconservationpurposes, the requirementof this paragraphwill bemet if theproperty is soldorexchangedandanyproceedsareusedbythedoneeorganizationinamannerconsistentwiththeconservation purposes of the original contribution. In the case of a donation under paragraph(b)(3)ofthissectiontowhichtheprecedingsentenceapplies,seealsoparagraph(g)(5)(ii)ofthissection.

(d)Conservationpurposes -- (1) Ingeneral.Forpurposesofsection170(h)andthissection,thetermconservationpurposesmeans--

(i)Thepreservationoflandareasforoutdoorrecreationby,ortheeducationof,thegeneralpublic,withinthemeaningofparagraph(d)(2)ofthissection,

(ii) The protection of a relatively natural habitat of fish, wildlife, or plants, or similarecosystem,withinthemeaningofparagraph(d)(3)ofthissection,

(iii) The preservation of certain open space (including farmland and forest land)within themeaningofparagraph(d)(4)ofthissection,or

(iv) The preservation of a historically important land area or a certified historic structure,withinthemeaningofparagraph(d)(5)ofthissection.

(2)Recreationoreducation--(i)Ingeneral.Thedonationofaqualifiedrealpropertyinteresttopreservelandareasfortheoutdoorrecreationofthegeneralpublicorfortheeducationofthegeneral public will meet the conservation purposes test of this section. Thus, conservationpurposeswouldinclude,forexample,thepreservationofawaterareafortheuseofthepublicforboatingorfishing,oranatureorhikingtrailfortheuseofthepublic.

Appendix B 5

(ii)Access.Thepreservationoflandareasforrecreationoreducationwillnotmeetthetestofthissectionunlesstherecreationoreducationisforthesubstantialandregularuseofthegeneralpublic.

(3) Protection of environmental system -- (i) In general. The donation of a qualified realpropertyinteresttoprotectasignificantrelativelynaturalhabitatinwhichafish,wildlife,orplantcommunity,or similarecosystemnormally liveswillmeet theconservationpurposes testof thissection. The fact that the habitat or environment has been altered to some extent by humanactivitywillnotresultinadeductionbeingdeniedunderthissectionifthefish,wildlife,orplantscontinuetoexistthereinarelativelynaturalstate.Forexample,thepreservationofalakeformedby aman-made damor a salt pond formedby aman-made dikewouldmeet the conservationpurposestestifthelakeorpondwereanaturefeedingareaforawildlifecommunitythatincludedrare,endangered,orthreatenednativespecies.

(ii)Significanthabitatorecosystem.Significanthabitatsandecosystems include,butarenotlimitedto,habitatsforrare,endangered,orthreatenedspeciesofanimal,fish,orplants;naturalareasthatrepresenthighqualityexamplesofaterrestrialcommunityoraquaticcommunity,suchas islands that are undeveloped or not intensely developed where the coastal ecosystem isrelatively intact; andnatural areaswhich are included in, orwhich contribute to, theecologicalviability of a local, state, or national park, nature preserve, wildlife refuge, wilderness area, orothersimilarconservationarea.

(iii)Access.Limitationsonpublicaccesstopropertythatisthesubjectofadonationunderthisparagraph (d)(3) shall not render the donation nondeductible. For example, a restriction on allpublicaccesstothehabitatofathreatenednativeanimalspeciesprotectedbyadonationunderthisparagraph(d)(3)wouldnotcausethedonationtobenondeductible.

(4) Preservation of open space -- (i) In general. The donation of a qualified real propertyinterest topreserveopenspace (including farmlandand forest land)willmeet theconservationpurposestestofthissectionifsuchpreservationis--

(A)PursuanttoaclearlydelineatedFederal,state,orlocalgovernmentalconservationpolicyandwillyieldasignificantpublicbenefit,or

(B)Forthescenicenjoymentofthegeneralpublicandwillyieldasignificantpublicbenefit.

AnopenspaceeasementdonatedonorafterDecember18,1980,mustmeettherequirementsofsection170(h)inordertobedeductible.

(ii)Scenicenjoyment -- (A)Factors.Acontributionmade for thepreservationofopenspacemaybeforthescenicenjoymentofthegeneralpublic.Preservationoflandmaybeforthescenicenjoymentofthegeneralpublicifdevelopmentofthepropertywouldimpairthesceniccharacterof the local rural or urban landscape or would interfere with a scenic panorama that can beenjoyedfromapark,naturepreserve,road,waterbody,trail,orhistoricstructureorlandarea,andsuchareaortransportationwayisopento,orutilizedby,thepublic."Scenicenjoyment"willbeevaluated by considering all pertinent facts and circumstances germane to the contribution.Regionalvariationsintopography,geology,biology,andculturalandeconomicconditionsrequireflexibility in the application of this test, but do not lessen the burden on the taxpayer to

Appendix B 6

demonstrate the scenic characteristics of a donationunder this paragraph. The applicationof aparticularobjectivefactortohelpdefineaviewas"scenic"inonesettingmayinfactbeentirelyinappropriateinanothersetting.Amongthefactorstobeconsideredare:

(1)Thecompatibilityofthelandusewithotherlandinthevicinity;

(2)Thedegreeofcontrastandvarietyprovidedbythevisualscene;

(3)Theopennessoftheland(whichwouldbeamoresignificantfactorinanurbanordenselypopulatedsettingorinaheavilywoodedarea);

(4)Relieffromurbancloseness;

(5)Theharmoniousvarietyofshapesandtextures;

(6)Thedegreetowhichthelandusemaintainsthescaleandcharacteroftheurbanlandscapetopreserveopenspace,visualenjoyment,andsunlightforthesurroundingarea;

(7)Theconsistencyoftheproposedscenicviewwithamethodicalstatescenicidentificationprogram,suchasastatelandscapeinventory;and

(8)Theconsistencyoftheproposedscenicviewwitharegionalor local landscapeinventorymadepursuanttoasufficientlyrigorousreviewprocess,especiallyifthedonationisendorsedbyanappropriatestateorlocalgovernmentalagency.

(B)Access.Tosatisfytherequirementofscenicenjoymentbythegeneralpublic,visual(ratherthanphysical)accesstooracrossthepropertybythegeneralpublicissufficient.Underthetermsof an open space easement on scenic property, the entire property need not be visible to thepublicforadonationtoqualifyunderthissection,althoughthepublicbenefitfromthedonationmaybeinsufficienttoqualifyforadeductionifonlyasmallportionofthepropertyisvisibletothepublic.

(iii)Governmentalconservationpolicy--(A)Ingeneral.Therequirementthatthepreservationofopenspacebepursuant toaclearlydelineatedFederal, state,or localgovernmentalpolicy isintended toprotect the typesof property identifiedby representativesof the general public asworthy of preservation or conservation. A general declaration of conservation goals by a singleofficialorlegislativebodyisnotsufficient.However,agovernmentalconservationpolicyneednotbe a certification program that identifies particular lots or small parcels of individually ownedproperty.Thisrequirementwillbemetbydonationsthatfurtheraspecific,identifiedconservationproject, such as the preservation of landwithin a state or local landmark district that is locallyrecognized as being significant to that district; the preservation of a wild or scenic river, thepreservation of farmland pursuant to a state program for flood prevention and control; or theprotection of the scenic, ecological, or historic character of land that is contiguous to, or anintegral part of, the surroundings of existing recreation or conservation sites. For example, thedonationofaperpetualconservationrestrictiontoaqualifiedorganizationpursuanttoa formalresolutionorcertificationbyalocalgovernmentalagencyestablishedunderstatelawspecificallyidentifyingthesubjectpropertyasworthyofprotectionforconservationpurposeswillmeettherequirementofthisparagraph.Aprogramneednotbefundedtosatisfythisrequirement,buttheprogram must involve a significant commitment by the government with respect to the

Appendix B 7

conservationproject.Forexample,agovernmentalprogramaccordingpreferentialtaxassessmentorpreferentialzoningforcertainpropertydeemedworthyofprotectionforconservationpurposeswouldconstituteasignificantcommitmentbythegovernment.

(B)Effectofacceptancebygovernmentalagency.Acceptanceofaneasementbyanagencyofthe Federal Government or by an agency of a state or local government (or by a commission,authority,orsimilarbodydulyconstitutedbythestateorlocalgovernmentandactingonbehalfofthe state or local government) tends to establish the requisite clearly delineated governmentalpolicy, although suchacceptance,withoutmore, isnot sufficient. Themore rigorous the reviewprocessbythegovernmentalagency,themoretheacceptanceoftheeasementtendstoestablishtherequisiteclearlydelineatedgovernmentalpolicy.Forexample,inastatewherethelegislaturehas established an Environmental Trust to accept gifts to the state which meet certainconservationpurposesandtosubmitthegiftstoareviewthatrequirestheapprovalofthestate'shighestofficials,acceptanceofagiftbytheTrusttendstoestablishtherequisiteclearlydelineatedgovernmentalpolicy.However,iftheTrustmerelyacceptssuchgiftswithoutareviewprocess,therequisiteclearlydelineatedgovernmentalpolicyisnotestablished.

(C) Access. A limitation on public access to property subject to a donation under thisparagraph(d)(4)(iii)shallnotrenderthedeductionnondeductibleunlesstheconservationpurposeof the donation would be undermined or frustrated without public access. For example, adonationpursuant toagovernmentalpolicy toprotect the scenic characterof landneara riverrequires visual access to the sameextentaswouldadonationunderparagraph (d)(4)(ii)of thissection.

(iv)Significantpublicbenefit--(A)Factors.Allcontributionsmadeforthepreservationofopenspacemust yield a significant public benefit. Public benefitwill be evaluated by considering allpertinentfactsandcircumstancesgermanetothecontribution.Factorsgermanetotheevaluationof public benefit from one contribution may be irrelevant in determining public benefit fromanothercontribution.Nosinglefactorwillnecessarilybedeterminative.Amongthefactorstobeconsideredare:

(1)Theuniquenessofthepropertytothearea;

(2) The intensity of land development in the vicinity of the property (both existingdevelopmentandforeseeabletrendsofdevelopment);

(3)Theconsistencyoftheproposedopenspaceusewithpublicprograms(whetherFederal,stateorlocal)forconservationintheregion,includingprogramsforoutdoorrecreation,irrigationor water supply protection, water quality maintenance or enhancement, flood prevention andcontrol,erosioncontrol,shorelineprotection,andprotectionoflandareasincludedin,orrelatedto,agovernmentapprovedmasterplanorlandmanagementarea;

(4) The consistency of the proposed open space use with existing private conservationprograms in the area, as evidenced by other land, protected by easement or fee ownership byorganizationsreferredtoin§1.170A-14(c)(1),incloseproximitytotheproperty;

(5) The likelihood that development of the property would lead to or contribute todegradationofthescenic,natural,orhistoriccharacterofthearea;

Appendix B 8

(6) The opportunity for the general public to use the property or to appreciate its scenicvalues;

(7)Theimportanceofthepropertyinpreservingalocalorregionallandscapeorresourcethatattractstourismorcommercetothearea;

(8) The likelihood that the donee will acquire equally desirable and valuable substitutepropertyorpropertyrights;

(9)Thecosttothedoneeofenforcingthetermsoftheconservationrestriction;

(10)Thepopulationdensityintheareaoftheproperty;and

(11)Theconsistencyoftheproposedopenspaceusewitha legislativelymandatedprogramidentifyingparticularparcelsoflandforfutureprotection.

(B)Illustrations.Thepreservationofanordinarytractoflandwouldnotinandofitselfyieldasignificant public benefit, but the preservation of ordinary land areas in conjunctionwith otherfactors thatdemonstratesignificantpublicbenefitor thepreservationofaunique landarea forpublic employmentwould yield a significant public benefit. For example, the preservation of avacantdowntownlotwouldnotbyitselfyieldasignificantpublicbenefit,butthepreservationofthedowntownlotasapublicgardenwould,absentcountervailingfactors,yieldasignificantpublicbenefit. The following are other examples of contributions which would, absent countervailingfactors,yieldasignificantpublicbenefit:Thepreservationoffarmlandpursuanttoastateprogramfor flood prevention and control; the preservation of a unique natural land formation for theenjoymentofthegeneralpublic;thepreservationofwoodlandalongapublichighwaypursuanttoagovernmentprogramtopreservetheappearanceoftheareasoastomaintainthescenicviewfromthehighway;andthepreservationofastretchofundevelopedpropertylocatedbetweenapublichighwayandtheoceaninordertomaintainthescenicoceanviewfromthehighway.

(v) Limitation. A deduction will not be allowed for the preservation of open space undersection 170(h)(4)(A)(iii), if the terms of the easement permit a degree of intrusion or futuredevelopment that would interfere with the essential scenic quality of the land or with thegovernmentalconservationpolicythatisbeingfurtheredbythedonation.See§1.170A-14(e)(2)forrulesrelatingtoinconsistentuse.

(vi)Relationshipofrequirements --(A)Clearlydelineatedgovernmentalpolicyandsignificantpublic benefit. Although the requirements of "clearly delineated governmental policy" and"significant public benefit" must be met independently, for purposes of this section the tworequirementsmayalsoberelated.Themorespecificthegovernmentalpolicywithrespecttotheparticular site tobeprotected, themore likely thegovernmentaldecision,by itself,will tend toestablishthesignificantpublicbenefitassociatedwiththedonation.Forexample,whileastatuteinStateXpermittingpreferentialassessmentforfarmlandis,bydefinition,governmentalpolicy,itis distinguishable froma state statute, accompaniedbyappropriations,naming theXRiver as avaluableresourceandarticulatingthelegislativepolicythattheXRiverandtherelativelynaturalqualityof itssurroundingbeprotected.Onthese facts,anopenspaceeasementon farmland inStateXwouldhavetodemonstrateadditionalfactorstoestablish"significantpublicbenefit."Thespecificity of the legislative mandate to protect the X River, however, would by itself tend to

Appendix B 9

establishthesignificantpublicbenefitassociatedwithanopenspaceeasementon landfrontingtheXRiver.

(B)Scenicenjoymentandsignificantpublicbenefit.Withrespecttotherelationshipbetweenthe requirements of "scenic enjoyment" and "significant public benefit," since the degrees ofscenicenjoymentofferedbyavarietyofopenspaceeasementsaresubjectiveandnotaseasilydelineatedasareincreasinglyspecificlevelsofgovernmentalpolicy,thesignificantpublicbenefitofpreservingascenicviewmustbeindependentlyestablishedinallcases.

(C)Donationsmaysatisfymorethanonetest. Insomecases,openspaceeasementsmaybebothforscenicenjoymentandpursuanttoaclearlydelineatedgovernmentalpolicy.Forexample,thepreservationofaparticularscenicviewidentifiedaspartofasceniclandscapeinventorybyarigorous governmental review process will meet the tests of both paragraphs (d)(4)(i)(A) and(d)(4)(i)(B)ofthissection.

(5)Historicpreservation--(i)Ingeneral.Thedonationofaqualifiedrealpropertyinteresttopreserve an historically important land area or a certified historic structure will meet theconservationpurposestestof thissection.Whenrestrictionstopreserveabuildingor landareawithin a registered historic district permit future development on the site, a deductionwill beallowed under this section only if the terms of the restrictions require that such developmentconform with appropriate local, state, or Federal standards for construction or rehabilitationwithinthedistrict.Seealso,§1.170A-14(h)(3)(ii).

(ii)Historicallyimportantlandarea.Thetermhistoricallyimportantlandareaincludes:

(A) An independently significant land area including any related historic resources (forexample, an archaeological site or a Civil War battlefield with related monuments, bridges,cannons,orhouses)thatmeetstheNationalRegisterCriteriaforEvaluationin36CFR60.4(Pub.L.89-665,80Stat.915);

(B)Anylandareawithinaregisteredhistoricdistrictincludinganybuildingsonthelandareathatcanreasonablybeconsideredascontributingtothesignificanceofthedistrict;and

(C) Any land area (including related historic resources) adjacent to a property listedindividuallyintheNationalRegisterofHistoricPlaces(butnotwithinaregisteredhistoricdistrict)inacasewherethephysicalorenvironmentalfeaturesofthelandareacontributetothehistoricorculturalintegrityoftheproperty.

(iii) Certified historic structure. The term certified historic structure, for purposes of thissection,meansanybuilding,structureorlandareawhichis--

(A)ListedintheNationalRegister,or

(B)Locatedinaregisteredhistoricdistrict(asdefinedinsection48(g)(3)(B))andiscertifiedbytheSecretaryoftheInterior(pursuantto36CFR67.4)totheSecretaryoftheTreasuryasbeingofhistoricsignificancetothedistrict.

A structure for purposes of this sectionmeans any structure, whether or not it is depreciable.Accordingly easements on private residences may qualify under this section. In addition, astructurewouldbeconsideredtobeacertifiedhistoricstructureifitwerecertifiedeitheratthe

Appendix B 10

timethetransferwasmadeorattheduedate(includingextensions)forfilingthedonor'sreturnforthetaxableyearinwhichthecontributionwasmade.

(iv)Access. (A) Inorder for a conservation contributiondescribed in section170(h)(4)(A)(iv)andthisparagraph (d)(5) tobedeductible, somevisualpublicaccess to thedonatedproperty isrequired.Inthecaseofanhistoricallyimportantlandarea,theentirepropertyneednotbevisibleto thepublic for adonation toqualifyunder this section.However, thepublicbenefit from thedonationmaybeinsufficienttoqualifyforadeductionifonlyasmallportionofthepropertyissovisible. Where the historic land area or certified historic structure which is the subject of thedonation is not visible from a public way (e.g., the structure is hidden from view by a wall orshrubbery,thestructureistoofarfromthepublicway,orinteriorcharacteristicsandfeaturesofthestructurearethesubjectoftheeasement),thetermsoftheeasementmustbesuchthatthegeneralpublicisgiventheopportunityonaregularbasistoviewthecharacteristicsandfeaturesofthepropertywhicharepreservedbytheeasementtotheextentconsistentwiththenatureandconditionoftheproperty.

(B) Factors to be considered in determining the type and amountof public access requiredunder paragraph (d)(5)(iv)(A) of this section include the historical significance of the donatedproperty, the nature of the features that are the subject of the easement, the remoteness oraccessibilityof thesiteof thedonatedproperty, thepossibilityofphysicalhazards to thepublicvisitingtheproperty(forexample,anunoccupiedstructureinadilapidatedcondition),theextenttowhichpublicaccesswouldbeanunreasonableintrusiononanyprivacyinterestsofindividualslivingontheproperty,thedegreetowhichpublicaccesswouldimpairthepreservationinterestswhicharethesubjectofthedonation,andtheavailabilityofopportunitiesforthepublictoviewthepropertybymeansotherthanvisitstothesite.

(C) The amount of access afforded the public by the donation of an easement shall bedeterminedwithreferencetotheamountofaccesspermittedbythetermsoftheeasementwhichareestablishedby thedonor, rather than theamountofaccessactuallyprovidedby thedoneeorganization.However,ifthedonorisawareofanyfactsindicatingthattheamountofaccessthatthedoneeorganizationwillprovideissignificantlylessthantheamountofaccesspermittedunderthe termsof theeasement, then theamountof accessafforded thepublic shall bedeterminedwithreferencetothislesseramount.

(v)Examples.Theprovisionsofparagraph (d)(5)(iv)of this sectionmaybe illustratedby thefollowingexamples:

Example1.AandhisfamilyliveinahouseinacertifiedhistoricdistrictintheStateofX.Theentirehouse,includingitsinterior,hasarchitecturalfeaturesrepresentingclassicVictorianperiodarchitecture. A donates an exterior and interior easement on the property to a qualifiedorganizationbutcontinuestoliveinthehousewithhisfamily.A'shouseissurroundedbyahighstonewallwhich obscures the public's viewof it from the street. Pursuant to the termsof theeasement,thehousemaybeopenedtothepublicfrom10:00a.m.to4:00p.m.ononeSundayinMayandoneSunday inNovembereachyear forhouseandgardentours.Thesetoursaretobeunderthesupervisionofthedoneeandopentomembersofthegeneralpublicuponpaymentofasmallfee.Inaddition,underthetermsoftheeasement,thedoneeorganizationisgiventheright

Appendix B 11

to photograph the interior and exterior of the house and distribute such photographs tomagazines,newsletters,orotherpubliclyavailablepublications.Thetermsof theeasementalsopermit persons affiliatedwith educational organizations, professional architectural associations,and historical societies to make an appointment through the donee organization to study theproperty.Thedonorisnotawareofanyfactsindicatingthatthepublicaccesstobeprovidedbythedoneeorganizationwillbesignificantlylessthanthatpermittedbythetermsoftheeasement.The2opportunitiesforpublicvisitsperyear,whencombinedwiththeabilityofthegeneralpublictoviewthearchitecturalcharacteristicsandfeaturesthatarethesubjectoftheeasementthroughphotographs, theopportunity for scholarly studyof theproperty,and the fact that thehouse isused as an occupied residence, will enable the donation to satisfy the requirement of publicaccess.

Example2. Bownsanunoccupied farmhousebuilt in the1840's and locatedonapropertythatisadjacenttoaCivilWarbattlefield.DuringtheCivilWarthefarmhousewasusedasquartersforUniontroops.Thebattlefieldisvisitedyearroundbythegeneralpublic.Theconditionofthefarmhouse issuchthatthesafetyofvisitorswillnotbe jeopardizedandopening it tothepublicwillnotresultinsignificantdeterioration.Thefarmhouseisnotvisiblefromthebattlefieldoranypublicway. It isaccessibleonlybywayofaprivate roadownedbyB.Bdonatesaconservationeasementonthefarmhousetoaqualifiedorganization.Thetermsoftheeasementprovidethatthe donee organization may open the property (via B's road) to the general public on fourweekendseachyear from8:30a.m. to4:00p.m.Thedonationdoesnotmeet thepublicaccessrequirement because the farmhouse is safe, unoccupied, and easily accessible to the generalpublicwhohavecometothesitetovisitCivilWarhistoriclandareas(andrelatedresources),butwillonlybeopentothepubliconfourweekendseachyear.However,thedonationwouldmeetthepublicaccessrequirementifthetermsoftheeasementpermittedthedoneeorganizationtoopenthepropertytothepubliceveryotherweekendduringtheyearandthedonorisnotawareofanyfacts indicatingthatthedoneeorganizationwillprovidesignificantly lessaccessthanthatpermitted.

(e)Exclusivelyforconservationpurposes --(1) Ingeneral.Tomeettherequirementsofthissection,adonationmustbeexclusivelyforconservationpurposes.Seeparagraphs(c)(1)and(g)(1)through(g)(6)(ii)ofthissection.Adeductionwillnotbedeniedunderthissectionwhenincidentalbenefit inures to the donormerely as a result of conservation restrictions limiting the uses towhichthedonor'spropertymaybeput.

(2)Inconsistentuse.Exceptasprovidedinparagraph(e)(4)ofthissection,adeductionwillnotbeallowed if the contributionwould accomplishoneof theenumerated conservationpurposesbut would permit destruction of other significant conservation interests. For example, thepreservationoffarmlandpursuanttoaStateprogramforfloodpreventionandcontrolwouldnotqualifyunderparagraph(d)(4)of thissection ifunderthetermsofthecontributionasignificantnaturally occurring ecosystem could be injured or destroyed by the use of pesticides in theoperationofthefarm.However,thisrequirementisnotintendedtoprohibitusesoftheproperty,suchasselectivetimberharvestingorselectivefarmingif,underthecircumstances,thoseusesdonotimpairsignificantconservationinterests.

Appendix B 12

(3) Inconsistent use permitted. A use that is destructive of conservation interests will bepermittedonlyifsuchuseisnecessaryfortheprotectionoftheconservationintereststhatarethesubjectofthecontribution.Forexample,adeductionforthedonationofaneasementtopreservean archaeological site that is listed on the National Register of Historic Places will not bedisallowed if siteexcavation consistentwith soundarchaeological practicesmay impair a scenicviewofwhichthelandisapart.Adonormaycontinueapre-existinguseofthepropertythatdoesnotconflictwiththeconservationpurposesofthegift.

(f) Examples. The provisions of this section relating to conservation purposes may beillustratedbythefollowingexamples.

Example1.StateScontainsmanylargetractforeststhataredesirablerecreationandscenicareas for the general public. The forests' scenic values attract millions of people to the State.However,duetotheincreasingintensityoflanddevelopmentinStateS,thecontinuedexistenceofforestlandparcelsgreaterthan45acresisthreatened.Jgrantsaperpetualeasementona100-acreparcelofforestlandthatispartofoneoftheState'sscenicareastoaqualifyingorganization.The easement imposes restrictions on the use of the parcel for the purpose ofmaintaining itsscenic values. The restrictions include a requirement that the parcel be maintained forever asopenspacedevotedexclusivelytoconservationpurposesandwildlifeprotection,andthattherebe no commercial, industrial, residential, or other development use of such parcel. The law ofStateSrecognizesalimitedpublicrighttoenterprivateland,particularlyforrecreationalpursuits,unless such land is posted or the landowner objects. The easement specifically restricts thelandowner fromposting theparcel, or fromobjecting, therebymaintainingpublic access to theparcelaccordingtothecustomoftheState.J'sparcelprovidestheopportunityforthepublictoenjoytheuseofthepropertyandappreciateitsscenicvalues.Accordingly,J'sdonationqualifiesforadeductionunderthissection.

Example2.AqualifiedconservationorganizationownsGreenacreinfeeasanaturepreserve.Greenacre contains a high quality example of a tall grass prairie ecosystem. Farmacre, anoperatingfarm,adjoinsGreenacreandisacompatiblebuffertothenaturepreserve.Conversionof Farmacre toamore intenseuse, suchas ahousingdevelopment,wouldadversely affect thecontinued use of Greenacre as a nature preserve because of human traffic generated by thedevelopment.TheownerofFarmacredonatesaneasementpreventingany futuredevelopmenton Farmacre to the qualified conservation organization for conservation purposes. NormalagriculturaluseswillbeallowedonFarmacre.Accordingly,thedonationqualifiesforadeductionunderthissection.

Example3.HownsGreenacre,a900-acreparcelofwoodland,rollingpasture,andorchardsonthecrestofamountain.AllofGreenacreisclearlyvisiblefromanearbynationalpark.Becauseofthestrictenforcementofanapplicablezoningplan,thehighestandbestuseofGreenacreisasasubdivisionof40-acretracts.HwishestodonateasceniceasementonGreenacretoaqualifyingconservationorganization,butHwould like toreservetheright tosubdivideGreenacre into90-acreparcelswithnomorethanonesingle-familyhomeallowableoneachparcel.Randombuildingontheproperty,evenaslittleasonehomeforeach90acres,woulddestroythesceniccharacteroftheview.Accordingly,nodeductionwouldbeallowableunderthissection.

Appendix B 13

Example4.Assumethesamefactsasinexample(3),exceptthatnotallofGreenacreisvisiblefromtheparkandthedeedofeasementallowsforlimitedclusterdevelopmentofnomorethanfivenine-acreclusters(withfourhousesoneachcluster)locatedinareasgenerallynotvisiblefromthenationalparkandsubjecttositeandbuildingplanapprovalbythedoneeorganizationinordertopreservethescenicviewfromthepark.Thedonorandthedoneehavealreadyidentifiedsiteswhere limited clusterdevelopmentwouldnotbe visible from theparkorwouldnot impair theview.Ownersof homes in the clusterswill nothaveany rightswith respect to the surroundingGreenacre property that are not also available to the general public. Accordingly, the donationqualifiesforadeductionunderthissection.

Example5.InordertoprotectStateS'sdecliningopenspacethatissuitedforagriculturalusefromincreasingdevelopmentpressurethathas ledtoamarkeddecline insuchopenspace, theLegislatureofStateSpassedastatuteauthorizingthepurchaseof"agriculturallanddevelopmentrights"onopenacreage.AgriculturallanddevelopmentrightsallowtheStatetoplaceagriculturalpreservation restrictions on land designated asworthy of protection in order to preserve openspaceand farm resources.Agricultural preservation restrictionsprohibit or limit constructionorplacement of buildings except thoseused for agricultural purposes or dwellings used for familylivingbythefarmerandhisfamilyandemployees;removalofmineralsubstancesinanymannerthatadverselyaffects the land'sagriculturalpotential;orotherusesdetrimental to retentionofthelandforagriculturaluse.Moneyhasbeenappropriatedforthisprogramandsomelandownershave in fact sold their "agricultural landdevelopment rights" toStateS.Kownsandoperatesasmall dairy farm in State S located in an area designated by the Legislature as worthy ofprotection. K desires to preserve his farm for agricultural purposes in perpetuity. Rather thanselling the development rights to State S, K grants to a qualified organization an agriculturalpreservation restriction on his property in the form of a conservation easement. K reserves tohimself,hisheirsandassignstherighttomanagethefarmconsistentwithsoundagriculturalandmanagement practices. The preservation of K's land is pursuant to a clearly delineatedgovernmental policy of preserving open space available for agricultural use, and will yield asignificantpublicbenefitbypreservingopenspaceagainstincreasingdevelopmentpressures.

(g)Enforceableinperpetuity--(1)Ingeneral.Inthecaseofanydonationunderthissection,anyinterestinthepropertyretainedbythedonor(andthedonor'ssuccessorsininterest)mustbesubjecttolegallyenforceablerestrictions(forexample,byrecordationinthelandrecordsofthejurisdiction in which the property is located) that will prevent uses of the retained interestinconsistentwith the conservation purposes of the donation. In the case of a contribution of aremainder interest, thecontributionwillnotqualify if thetenants,whethertheyaretenants forlifeoratermofyears,canusethepropertyinamannerthatdiminishestheconservationvalueswhichareintendedtobeprotectedbythecontribution.

(2) Protection of a conservation purpose in case of donation of property subject to amortgage.InthecaseofconservationcontributionsmadeafterFebruary13,1986,nodeductionwill be permitted under this section for an interest in propertywhich is subject to amortgageunless the mortgagee subordinates its rights in the property to the right of the qualifiedorganization to enforce the conservation purposes of the gift in perpetuity. For conservationcontributionsmadepriortoFebruary14,1986,therequirementofsection170(h)(5)(A)issatisfied

Appendix B 14

inthecaseofmortgagedproperty(withrespecttowhichthemortgageehasnotsubordinateditsrights)onlyifthedonorcandemonstratethattheconservationpurposeisprotectedinperpetuitywithoutsubordinationofthemortgagee'srights.

(3) Remote future event. A deduction shall not be disallowed under section 170(f)(3)(B)(iii)and this section merely because the interest which passes to, or is vested in, the doneeorganizationmaybedefeatedbytheperformanceofsomeactorthehappeningofsomeevent,ifonthedateofthegiftitappearsthatthepossibilitythatsuchactoreventwilloccurissoremoteastobenegligible.Seeparagraph(e)of§1.170A-1.Forexample,astate'sstatutoryrequirementthatuserestrictionsmustbererecordedevery30yearstoremainenforceableshallnot,byitself,renderaneasementnonperpetual.

(4) Retention of qualifiedmineral interest -- (i) In general. Except as otherwise provided inparagraph(g)(4)(ii)ofthissection,therequirementsofthissectionarenotmetandnodeductionshall be allowed in the case of a contribution of any interestwhen there is a retention by anypersonof aqualifiedmineral interest (asdefined inparagraph (b)(1)(i) of this section) if at anytimetheremaybeextractionsorremovalofmineralsbyanysurfaceminingmethod.Moreover,inthe caseof aqualifiedmineral interest gift, the requirement that the conservationpurposesbeprotected in perpetuity is not satisfied if any method of mining that is inconsistent with theparticular conservationpurposesofa contribution ispermittedatany time.Seealso§ 1.170A-14(e)(2). However, a deduction under this section will not be denied in the case of certainmethodsofminingthatmayhavelimited, localizedimpactontherealpropertybutthatarenotirremediablydestructiveofsignificantconservationinterests.Forexample,adeductionwillnotbedeniedinacasewhereproductionfacilitiesareconcealedorcompatiblewithexistingtopographyandlandscapeandwhensurfacealterationistoberestoredtoitsoriginalstate.

(ii)ExceptionforqualifiedconservationcontributionsafterJuly1984.(A)AcontributionmadeafterJuly18,1984,ofaqualifiedrealpropertyinterestdescribedinsection170(h)(2)(A)shallnotbe disqualified under the first sentence of paragraph (g)(4)(i) of this section if the followingrequirementsaresatisfied.

(1)TheownershipofthesurfaceestateandmineralinterestwereseparatedbeforeJune13,1976,andremainsoseparateduptoandincludingthetimeofthecontribution.

(2)Thepresentownerofthemineralinterestisnotapersonwhoserelationshiptotheownerof the surface estate is described at the time of the contribution in section 267(b) or section707(b),and

(3)Theprobabilityofextractionor removalofmineralsbyanysurfaceminingmethod is soremoteastobenegligible.

Whethertheprobabilityofextractionorremovalofmineralsbysurfaceminingissoremoteastobenegligibleisaquestionoffactandistobemadeonacasebycasebasis.Relevantfactorstobeconsideredindeterminingiftheprobabilityofextractionorremovalofmineralsbysurfaceminingis so remote as to be negligible include: Geological, geophysical or economic data showing theabsenceofmineralreservesontheproperty,orthe lackofcommercial feasibilityatthetimeofthecontributionofsurfaceminingthemineralinterest.

Appendix B 15

(B) If theownershipof the surfaceestateandmineral interest firstbecameseparatedafterJune 12, 1976, no deduction is permitted for a contribution under this section unless surfaceminingonthepropertyiscompletelyprohibited.

(iii)Examples.Theprovisionsofparagraph(g)(4)(i)and(ii)ofthissectionmaybeillustratedbythefollowingexamples:

Example1.Kowns5,000acresofbottomlandhardwoodpropertyalongamajorwatershedsysteminthesouthernpartoftheUnitedStates.AgencieswithintheDepartmentoftheInteriorhavedeterminedthatsouthernbottomlandhardwoodsarearapidlydiminishingresourceandacriticalecosysteminthesouthbecauseof the intensepressuretocutthetreesandconvert theland to agricultural use. These agencies have further determined (and have indicated incorrespondence with K) that bottomland hardwoods provide a superb habitat for numerousspecies and play an important role in controlling floods and purifying rivers. K donates to aqualifiedorganizationhisentireinterestinthispropertyotherthanhisinterestinthegasandoildepositsthathavebeenidentifiedunderK'sproperty.Kcovenantsandcanensurethat,althoughdrilling for gas and oil on the propertymay have some temporary localized impact on the realproperty,thedrillingwillnotinterferewiththeoverallconservationpurposeofthegift,whichistoprotect the unique bottomland hardwood ecosystem. Accordingly, the donation qualifies for adeductionunderthissection.

Example2.Assumethesamefactsasinexample(1),exceptthatin1979,Ksellsthemineralinterest to A, an unrelated person, in an arm's-length transaction, subject to a recordedprohibition on the removal of any minerals by any surface mining method and a recordedprohibition against anymining technique that will harm the bottomland hardwood ecosystem.After the sale to A, K donates a qualified real property interest to a qualified organization toprotectthebottomlandhardwoodecosystem.Sinceatthetimeofthetransfer,surfaceminingandany mining technique that will harm the bottomland hardwood ecosystem are completelyprohibited,thedonationqualifiesforadeductionunderthissection.

(5) Protection of conservation purpose where taxpayer reserves certain rights. (i)Documentation. In the case of a donationmade after February 13, 1986, of any qualified realproperty interest when the donor reserves rights the exercise of which may impair theconservation interests associatedwith the property, for a deduction to be allowable under thissection the donormustmake available to the donee, prior to the time the donation is made,documentationsufficient toestablish theconditionof thepropertyat the timeof thegift. Suchdocumentation is designed to protect the conservation interests associated with the property,which although protected in perpetuity by the easement, could be adversely affected by theexerciseofthereservedrights.Suchdocumentationmayinclude:

(A) The appropriate survey maps from the United States Geological Survey, showing thepropertylineandothercontiguousornearbyprotectedareas;

(B) A map of the area drawn to scale showing all existing man-made improvements orincursions (suchas roads,buildings, fences,orgravelpits), vegetationand identificationof floraandfauna(including,forexample,rarespecieslocations,animalbreedingandroostingareas,and

Appendix B 16

migration routes), land use history (including present uses and recent past disturbances), anddistinctnaturalfeatures(suchaslargetreesandaquaticareas);

(C)Anaerialphotographofthepropertyatanappropriatescaletakenascloseaspossibletothedatethedonationismade;and

(D)On-sitephotographs takenat appropriate locationson theproperty. If the termsof thedonationcontainrestrictionswithregardtoaparticularnaturalresourcetobeprotected,suchaswaterqualityorairquality,theconditionoftheresourceatornearthetimeofthegiftmustbeestablished.Thedocumentation,includingthemapsandphotographs,mustbeaccompaniedbyastatement signed by the donor and a representative of the donee clearly referencing thedocumentation and in substance saying "This natural resources inventory is an accuraterepresentationof[theprotectedproperty]atthetimeofthetransfer.".

(ii)Donee'srightto inspectionandlegalremedies. Inthecaseofanydonationreferredtoinparagraph (g)(5)(i) of this section, the donormust agree to notify the donee, inwriting, beforeexercisinganyreservedright,e.g.therighttoextractcertainmineralswhichmayhaveanadverseimpact on the conservation interests associated with the qualified real property interest. Thetermsofthedonationmustprovidearightofthedoneetoenterthepropertyatreasonabletimesforthepurposeof inspectingthepropertytodetermineifthereiscompliancewiththetermsofthedonation.Additionally,thetermsofthedonationmustprovidearightofthedoneetoenforcethe conservation restrictions by appropriate legal proceedings, including but not limited to, therighttorequiretherestorationofthepropertytoitsconditionatthetimeofthedonation.

(6) Extinguishment. (i) In general. If a subsequent unexpected change in the conditionssurrounding the property that is the subject of a donation under this paragraph can makeimpossible or impractical the continued use of the property for conservation purposes, theconservationpurposecannonethelessbetreatedasprotectedinperpetuityiftherestrictionsareextinguishedbyjudicialproceedingandallofthedonee'sproceeds(determinedunderparagraph(g)(6)(ii)ofthissection)fromasubsequentsaleorexchangeofthepropertyareusedbythedoneeorganizationinamannerconsistentwiththeconservationpurposesoftheoriginalcontribution.

(ii) Proceeds. In case of a donation made after February 13, 1986, for a deduction to beallowedunderthissection,atthetimeofthegiftthedonormustagreethatthedonationoftheperpetualconservationrestrictiongivesrisetoapropertyright,immediatelyvestedinthedoneeorganization,with a fairmarket value that is at least equal to theproportionate value that theperpetualconservationrestrictionatthetimeofthegift,bearstothevalueofthepropertyasawholeatthattime.See§ 1.170A-14(h)(3)(iii) relatingtotheallocationofbasis.Forpurposesofthis paragraph (g)(6)(ii), that proportionate value of the donee's property rights shall remainconstant.Accordingly,whenachangeinconditionsgiverisetotheextinguishmentofaperpetualconservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on asubsequentsale,exchange,orinvoluntaryconversionofthesubjectproperty,mustbeentitledtoaportionoftheproceedsatleastequaltothatproportionatevalueoftheperpetualconservationrestriction, unless state law provides that the donor is entitled to the full proceeds from theconversionwithoutregardtothetermsofthepriorperpetualconservationrestriction.

Appendix B 17

(h)Valuation--(1)Entireinterestofdonorotherthanqualifiedmineralinterest.Thevalueofthecontributionundersection170inthecaseofacontributionofataxpayer'sentireinterestinpropertyotherthanaqualifiedmineralinterestisthefairmarketvalueofthesurfacerightsintheproperty contributed. The value of the contribution shall be computed without regard to themineralrights.Seeparagraph(h)(4),example(1),ofthissection.

(2)Remainderinterestinrealproperty.Inthecaseofacontributionofanyremainderinterestin real property, section 170(f)(4) provides that in determining the value of such interest forpurposesofsection170,depreciationanddepletionofsuchpropertyshallbetakenintoaccount.See § 1.170A-12. In the case of the contribution of a remainder interest for conservationpurposes,thecurrentfairmarketvalueoftheproperty(againstwhichthelimitationsof§1.170A-12 are applied)must take into account any pre-existing or contemporaneously recorded rightslimiting,forconservationpurposes,theusetowhichthesubjectpropertymaybeput.

(3) Perpetual conservation restriction -- (i) In general. The value of the contribution undersection170inthecaseofacharitablecontributionofaperpetualconservationrestriction isthefairmarketvalueoftheperpetualconservationrestrictionatthetimeofthecontribution.See§1.170A-7(c). If there is a substantial record of sales of easements comparable to the donatedeasement(suchaspurchasespursuanttoagovernmentalprogram),thefairmarketvalueofthedonatedeasement isbasedon thesalespricesof suchcomparableeasements. Ifnosubstantialrecordofmarket-placesalesisavailabletouseasameaningfulorvalidcomparison,asageneralrule(butnotnecessarilyinallcases)thefairmarketvalueofaperpetualconservationrestrictionisequal to thedifferencebetween the fairmarket valueof theproperty it encumbersbefore thegrantingoftherestrictionandthefairmarketvalueoftheencumberedpropertyafterthegrantingof the restriction. The amount of the deduction in the case of a charitable contribution of aperpetual conservation restriction covering a portion of the contiguous property owned by adonorandthedonor's family (asdefined insection267(c)(4)) is thedifferencebetweenthe fairmarket value of the entire contiguous parcel of property before and after the granting of therestriction. IfthegrantingofaperpetualconservationrestrictionafterJanuary14,1986,hastheeffectofincreasingthevalueofanyotherpropertyownedbythedonororarelatedperson,theamountofthedeductionfortheconservationcontributionshallbereducedbytheamountoftheincrease in thevalueof theotherproperty,whetherornotsuchproperty is contiguous. If,asaresult of the donation of a perpetual conservation restriction, the donor or a related personreceives,orcanreasonablyexpecttoreceive,financialoreconomicbenefitsthataregreaterthanthosethatwillinuretothegeneralpublicfromthetransfer,nodeductionisallowableunderthissection.However,ifthedonororarelatedpersonreceives,orcanreasonablyexpecttoreceive,afinancialoreconomicbenefitthatissubstantial,butitisclearlyshownthatthebenefitislessthantheamountofthetransfer,thenadeductionunderthissectionisallowablefortheexcessoftheamounttransferredovertheamountofthefinancialoreconomicbenefitreceivedorreasonablyexpected to be received by the donor or the related person. For purposes of this paragraph(h)(3)((i),relatedpersonshallhavethesamemeaningasineithersection267(b)orsection707(b).(Seeexample(10)ofparagraph(h)(4)ofthissection.)

(ii)Fairmarketvalueofpropertybeforeandafterrestriction. Ifbeforeandaftervaluation isused, the fair market value of the property before contribution of the conservation restriction

Appendix B 18

musttakeintoaccountnotonlythecurrentuseofthepropertybutalsoanobjectiveassessmentofhowimmediateorremotethe likelihoodisthattheproperty,absenttherestriction,would infactbedeveloped,aswellasanyeffect fromzoning,conservation,orhistoricpreservation lawsthatalreadyrestricttheproperty'spotentialhighestandbestuse.Further,theremaybeinstanceswhere the grant of a conservation restrictionmay have nomaterial effect on the value of theproperty or may in fact serve to enhance, rather than reduce, the value of property. In suchinstancesnodeductionwouldbeallowable.Inthecaseofaconservationrestrictionthatallowsforanydevelopment,howeverlimited,onthepropertytobeprotected,thefairmarketvalueoftheproperty after contribution of the restriction must take into account the effect of thedevelopment.Inthecaseofaconservationeasementsuchasaneasementonacertifiedhistoricstructure,thefairmarketvalueofthepropertyaftercontributionoftherestrictionmusttakeintoaccounttheamountofaccesspermittedbythetermsoftheeasement.Additionally,ifbeforeandaftervaluationisused,anappraisalofthepropertyaftercontributionoftherestrictionmusttakeintoaccount theeffectof restrictions thatwill result ina reductionof thepotential fairmarketvaluerepresentedbyhighestandbestusebutwill,nevertheless,permitusesofthepropertythatwillincreaseitsfairmarketvalueabovethatrepresentedbytheproperty'scurrentuse.Thevalueof a perpetual conservation restriction shall not be reduced by reason of the existence ofrestrictions on transfer designed solely to ensure that the conservation restriction will bededicatedtoconservationpurposes.See§1.170A-14(c)(3).

(iii)Allocation of basis. In the case of the donation of a qualified real property interest forconservationpurposes,thebasisofthepropertyretainedbythedonormustbeadjustedbytheeliminationofthatpartofthetotalbasisofthepropertythatisproperlyallocabletothequalifiedreal property interest granted. The amount of the basis that is allocable to the qualified realproperty interest shall bear the same ratio to the total basis of theproperty as the fairmarketvalueofthequalifiedrealpropertyinterestbearstothefairmarketvalueofthepropertybeforethe granting of the qualified real property interest. When a taxpayer donates to a qualifyingconservationorganizationaneasementonastructurewithrespecttowhichdeductionsaretakenfor depreciation, the reduction requiredby this paragraph (h)(3)(ii) in the basis of the propertyretainedbythetaxpayermustbeallocatedbetweenthestructureandtheunderlyingland.

(4)Examples.Theprovisionsof thissectionmaybe illustratedbythefollowingexamples. Inexamples illustrating the value or deductibility of donations, the applicable restrictions andlimitations of § 1.170A-4, with respect to reduction in amount of charitable contributions ofcertainappreciatedproperty,and§1.170A-8,withrespecttolimitationsoncharitabledeductionsbyindividuals.mustalsobetakenintoaccount.

Example1.AownsGoldacre,apropertyadjacenttoastatepark.AwantstodonateGoldacretothestatetobeusedaspartofthepark,butAwantstoreserveaqualifiedmineralinterestintheproperty,toexploitcurrentlyandtodeviseatdeath.ThefairmarketvalueofthesurfacerightsinGoldacreis$200,000andthefairmarketvalueofthemineralrightsin$100.000.Inordertoensurethatthequalityoftheparkwillnotbedegraded,restrictionsmustbeimposedontherighttoextractthemineralsthatreducethefairmarketvalueofthemineralrightsto$80,000.Underthissection,thevalueofthecontributionis$200,000(thevalueofthesurfacerights).

Appendix B 19

Example2. In1984B,who is 62,donatesa remainder interest inGreenacre toaqualifyingorganization for conservation purposes. Greenacre is a tract of 200 acres of undevelopedwoodlandthatisvaluedat$200,000atitshighestandbestuse.Under§1.170A-12(b),thevalueofaremainderinterestinrealpropertyfollowingonelifeisdeterminedunder§25.2512-5ofthischapter(GiftTaxRegulations).(See§25.2512-5Aofthischapterwithrespecttothevaluationofannuities, interests for lifeor termofyears,andremainderorreversionary interests transferredbefore May 1, 1999.) Accordingly, the value of the remainder interest, and thus the amounteligibleforanincometaxdeductionundersection170(f),is$55,996($200,000x.27998).

Example3.Assume the same facts as inexample (2), except thatGreenacre isB's 200-acreestate with a home built during the colonial period. Some of the acreage around the home iscleared; the balance of Greenacre, except for access roads, is wooded and undeveloped. Seesection170(f)(3)(B)(i).However,BwouldlikeGreenacretobemaintainedinitscurrentstateafterhis death, so he donates a remainder interest in Greenacre to a qualifying organization forconservationpurposespursuanttosection170(f)(3)(B)(iii)and(h)(2)(B).Atthetimeofthegiftthelandhasavalueof$200,000andthehousehasavalueof$100,000.Thevalueoftheremainderinterest, and thus the amount eligible for an income tax deduction under section 170(f), iscomputedpursuantto§1.170A-12.See§1.170A-12(b)(3).

Example4.Assumethesamefactsasinexample(2),exceptthatatage62insteadofdonatinga remainder interest B donates an easement in Greenacre to a qualifying organization forconservation purposes. The fair market value of Greenacre after the donation is reduced to $110,000. Accordingly, the value of the easement, and thus the amount eligible for a deductionundersection170(f),is$90,000($200,000less$110,000).

Example5.Assumethesamefactsasinexample(4),andassumethatthreeyearslater,atage65, B decides to donate a remainder interest in Greenacre to a qualifying organization forconservationpurposes.Increasingrealestatevaluesintheareahaveraisedthefairmarketvalueof Greenacre (subject to the easement) to $ 130,000. Accordingly, the value of the remainderinterest,andthustheamounteligibleforadeductionundersection170(f),is$41,639($130,000x.32030).

Example6.Assumethesamefactsasinexample(2),exceptthatatthetimeofthedonationof a remainder interest in Greenacre, B also donates an easement to a different qualifyingorganizationforconservationpurposes.Basedonallthefactsandcircumstances,thevalueoftheeasementisdeterminedtobe$100,000.Therefore,thevalueofthepropertyaftertheeasementis$100,000andthevalueoftheremainderinterest,andthustheamounteligiblefordeductionundersection170(f),is$27,998($100,000x.27998).

Example7.CownsGreenacre,a200-acreestatecontainingahousebuiltduringthecolonialperiod.Atitshighestandbestuse,forhomedevelopment,thefairmarketvalueofGreenacreis$300,000.Cdonatesaneasement(tomaintainthehouseandGreenacreintheircurrentstate)toaqualifying organization for conservation purposes. The fairmarket value ofGreenacre after thedonationisreducedto$125,000.Accordingly,thevalueoftheeasementandtheamounteligibleforadeductionundersection170(f)is$175.000($300,000less$125,000).

Appendix B 20

Example 8. Assume the same facts as in example (7) and assume that three years later, CdecidestodonatearemainderinterestinGreenacretoaqualifyingorganizationforconservationpurposes.IncreasingrealestatevaluesintheareahaveraisedthefairmarketvalueofGreenacreto$180.000.Assumethatbecauseoftheperpetualeasementprohibitinganydevelopmentoftheland,thevalueofthehouseis$120,000andthevalueofthelandis$60,000.Thevalueoftheremainderinterest,andthustheamounteligibleforanincometaxdeductionundersection170(f),iscomputedpursuantto§1.170A-12.See§1.170A-12(b)(3).

Example9.Downspropertywithabasisof$20,000andafairmarketvalueof$80,000.Ddonates to a qualifyingorganization an easement for conservationpurposes that is determinedunderthissectiontohavea fairmarketvalueof$60,000.Theamountofbasisallocabletotheeasement is $ 15,000 ($ 60,000/$ 80,000 = $ 15,000/$ 20,000). Accordingly, the basis of thepropertyisreducedto$5,000($20,000minus$15,000).

Example10.Eowns10one-acrelotsthatarecurrentlywoodsandparkland.ThefairmarketvalueofeachofE's lotsis$15,000andthebasisofeachlotis$3,000.Egrantstothecountyaperpetualeasementforconservationpurposestouseandmaintaineightoftheacresasapublicparkandtorestrictanyfuturedevelopmentonthoseeightacres.Asaresultoftherestrictions,the value of the eight acres is reduced to $ 1,000 an acre. However, by perpetually restrictingdevelopmentonthisportionoftheland,Ehasensuredthatthetworemainingacreswillalwaysbeborderedbyparkland,thusincreasingtheirfairmarketvalueto$22,500each.IftheeightacresrepresentedallofE'sland,thefairmarketvalueoftheeasementwouldbe$112,000,anamountequaltothefairmarketvalueofthelandbeforethegrantingoftheeasement(8x$15,000=$120,000)minusthefairmarketvalueoftheencumberedlandafterthegrantingoftheeasement(8x$1,000=$8,000).However,becausetheeasementonlycoveredaportionofthetaxpayer'scontiguousland,theamountofthedeductionundersection170isreducedto$97,000($150,000-$53,000),thatis,thedifferencebetweenthefairmarketvalueoftheentiretractoflandbefore($150,000)andafter((8x$1,000)+(2x$22,500))thegrantingoftheeasement.

Example11.Assumethesamefactsasinexample(10).SincetheeasementcoversaportionofE'sland,onlythebasisofthatportionisadjusted.Therefore,theamountofbasisallocabletotheeasement is$22,400((8x$3,000)x ($112,000/$120,000)).Accordingly, thebasisof theeightacresencumberedbytheeasementisreducedto$1,600($24,000-$22,400),or$200foreachacre.Thebasisofthetworemainingacresisnotaffectedbythedonation.

Example 12. F owns and uses as professional offices a two-story building that lieswithin aregisteredhistoricdistrict.F'sbuildingisanoutstandingexampleofperiodarchitecturewithafairmarketvalueof$125,000.Restrictedtoitscurrentuse,whichisthehighestandbestuseofthepropertywithoutmaking changes to the facade, the building and lotwould have a fairmarketvalueof$100,000,ofwhich$80,000wouldbeallocabletothebuildingand$20,000wouldbeallocable to the lot. F's basis in the property is $ 50,000, ofwhich $ 40,000 is allocable to thebuilding and $ 10,000 is allocable to the lot. F's neighborhood is a mix of residential andcommercialuses,anditispossiblethatF(oranotherowner)couldenlargethebuildingformoreextensivecommercialuse,whichisitshighestandbestuse.However,thiswouldrequirechangesto the facade. F would like to donate to a qualifying preservation organization an easementrestricting any changes to the facade and promising tomaintain the facade in perpetuity. The

Appendix B 21

donationwouldqualifyforadeductionunderthissection.Thefairmarketvalueoftheeasementis$25,000(thefairmarketvalueofthepropertybeforetheeasement,$125,000,minusthefairmarketvalueofthepropertyaftertheeasement,$100,000).Pursuantto§ 1.170A-14(h)(3)(iii),thebasisallocabletotheeasementis$10,000andthebasisoftheunderlyingproperty(buildingandlot)isreducedto$40,000.

(i)Substantiationrequirement.Ifataxpayermakesaqualifiedconservationcontributionandclaims a deduction, the taxpayermustmaintainwritten records of the fairmarket value of theunderlyingpropertybeforeandafterthedonationandtheconservationpurposefurtheredbythedonationandsuch informationshallbestated inthetaxpayer's incometaxreturn ifrequiredbythereturnoritsinstructions.Seealso§1.170A-13(c)(relatingtosubstantiationrequirementsfordeductions inexcessof$5,000 forcharitablecontributionsmadeafter1984),andsection6659(relatingtoadditionstotaxinthecaseofvaluationoverstatements).

(j)Effectivedate. Exceptasotherwiseprovided in§ 1.170A-14(g)(4)(ii), this sectionappliesonlytocontributionsmadeonorafterDecember18,1980.

AppendixC 1

AppendixC

Tableof§170(h)DeductionCases

I.TableStructureTheTablebelowliststhecasesinvolvingchallengestocharitableincometaxdeductionsclaimedwithrespecttoconservationeasementdonations.Giventhat§170(h)andtheTreasury Regulations are effective only for transfersmade on or after December 18,1980,1thecasesareseparatedintotwogroups:

1. those involvingdonationsmadebefore theeffectivedateof§170(h) (pre-§170(h)cases)and2. those involving donations made on or after the effective date of §170(h)(post-§170(h)cases).

Substantial changes were made to the deduction provision with the enactment of§170(h)in1980.Accordingly,thelawineffectonthedateofthedonationmaybeanimportantfactorinanalyzingtherelevanceofanoldercasetoacurrentcontroversy.2

II.PrecedentialValueofTaxCourtCases

TheTaxCourtissuesseveraldifferenttypesofopinions,theprecedentialvalueofwhichdiffers.

1. Summary Opinions. Certain disputes (for example, disputes involvingdeficienciesof$50,000orlessforeachyearatissue)qualifyforsimplifiedor“Scase” procedures. The Tax Court generally issues Summary Opinions in thesecases,andSummaryOpinionscannotbereliedonasprecedentorappealed.2.RegularOpinionsandMemorandumOpinions.TheTaxCourtgenerallyissuestwotypesofopinionsincasesthatarenot“S”cases.

1Pub.L.96-541,94Stat.3206,§6(d).Treas.Reg.§1.170A-14(j).Themortgagesubordination,divisionofproceeds,baselinedocumentation,anddoneenotification,access,andenforcementrightsrequirementsapplyonlytodonationsmadeafterFebruary13,1986.SeeTreas.Reg.§§1.170A-14(g)(2),-14(g)(6)(ii),-14(g)(5)(i), -14(g)(5)(ii). Theprovision requiringa reduction inamountof thedonor’sdeduction foranyincrease in the value of certain property owned by the donor or a related person as a result of thedonationappliesonlytodonationsmadeafterJanuary14,1986.Seeid.§1.170A-14(h)(3)(i).2For example, cases involving interpretation of the deduction provision in effect before § 170(h) wasenactedshouldnotberelieduponininterpretingnewrequirementsaddedtothedeductionprovisionin1980 to curb abuses and ensure protection of the federal investment, such as § 170(h)(5)(A)’s new“protected-in-perpetuity”requirement.Ontheother,hand,someofthegeneralrulesgoverningvaluationdiscussedintheoldercasesarestillrelevanttocurrentcontroversies.

AppendixC 2

a. Opinions, sometimes referred to as “Regular Opinions,” (cited as“T.C.”) are generally issued in cases that theTaxCourtbelieves involvesufficiently important legal issuesorprinciples.RegularOpinionscanbecitedas legalauthorityandappealed,andtheTaxCourt treats themasbindingprecedent.b.MemorandumOpinions(citedat“T.C.Memo.”)aregenerallyissuedincases that do not involve novel legal issues and, instead, addresssituations where the law is settled or factually driven. MemorandumOpinionscanbecitedaslegalauthorityandappealed,buttheTaxCourtdoesnottreatthemasbindingprecedent.

TheChiefJudgeoftheTaxCourtdecideswhetheranopinionwillbeissuedasaRegularOpinionoraMemorandumOpinion.

3.BenchOpinions.ATaxCourt judgeisauthorizedtoissueaBenchOpinioninan S case or a regular case when the judge is “satisfied as to the factualconclusionstobereachedinthecaseandthatthelawtobeappliedtheretoisclear.”ToissueaBenchOpinion,thejudgeorallystatesthefindingsoffactandthe opinion in court during the trial session and a transcript reflecting thefindings of fact and opinion is sent to the parties. Bench Opinions cannot berelieduponasprecedent.

III.TaxCourtOpinions

T.C. and T.C. Memo. Opinions starting 09/25/95 and Summary Opinions starting01/01/01areavailableathttps://www.ustaxcourt.gov/UstcInOp/OpinionSearch.aspx.

AppendixC 3

Pre-§170(h)Cases(InOrderofFinalOpinionDate)

DateofDonation

Thayerv.Comm'r,T.C.Memo.1977-370 1969Toddv.U.S.,617F.Supp.253(W.D.Pa.1985) 1979Hilbornv.Comm'r,85T.C.677(1985) 1979StanleyWorksv.Comm’r,87T.C.389(1986) 1977Akersv.Comm’r,799F.2d243(6thCir.1986),aff’gT.C.Memo.1984-490

1977

Symingtonv.Comm'r,87T.C.892(1986) 1979Stotlerv.Comm'r,T.C.Memo.1987-275 1979Fannonv.Comm'r,842F.2d1290(4thCir.1988)(unpublished),modifyingT.C.Memo.1986-572

1979

Fannonv.Comm'r,T.C.Memo.1989-136 1978Dennisv.U.S.,70A.F.T.R.2d92-5946(E.D.Va.1992) Nov.8,1980McLennanv.U.S.,994F.2d839(Fed.Cir.1993),aff’g24Cl.Ct.102(1991)and23Cl.Ct.99(1991)

Nov.10,1980

Post-§170(h)Cases(InOrderofFinalOpinionDate)§170(h)andtheTreasuryRegulationsareeffectiveonlyfortransfersmadeonorafterDec.18,1980.3

1988through2000

Nicoladisv.Comm’r,T.C.Memo.1988-163 1981Loschv.Comm'r,T.C.Memo.1988-230 Dec.24,1980Richmondv.U.S.,699F.Supp.578(E.D.La.1988) Dec.29,1980Higginsv.Comm’r,T.C.Memo.1990-103 1981Dorseyv.Comm'r,T.C.Memo.1990-242 1981Griffinv.Comm’r,911F.2d1124(5thCir.1990),aff’gT.C.Memo.1989-130

1981

Schapirov.Comm’r,T.C.Memo.1991-128 1981,1984Clemensv.Comm'r,T.C.Memo.1992-436 1982Schwabv.Comm’r,T.C.Memo.1994-232 1983Satullov.Comm’r,67F.3d314,76A.F.T.R.2d6536(11thCir.1995),aff’gT.C.Memo.1993-614

1985

GreatNorthernNekoosav.U.S.,38Fed.Cl.645(1997) 1981Johnstonv.Comm'r,T.C.Memo.1997-475 1989Browningv.Comm'r,109T.C.303(1997) 1990Strasburgv.Comm'r,T.C.Memo.2000-94 1993,1994

3Seesupranote1forexceptionstotheeffectivedateforsomeoftheTreasuryRegulationprovisions.

AppendixC 4

2006

Turnerv.Comm’r,126T.C.299(2006) 1999Neyv.Comm’r,T.C.Summ.Op.2006-154(2006) 2001Glassv.Comm’r,471F.3d698(6thCir.2006)(GlassII),aff’g124T.C.258(2005)(GlassI)

1992,1993

Goldsbyv.Comm’r,T.C.Memo.2006-274 2000

2009Bruzewiczv.U.S.,604F.Supp.2d1197(N.D.Ill.2009) 2002Hughesv.Comm’r,T.C.Memo.2009-94 2000KivaDunesv.Comm’r,T.C.Memo.2009-145 2002

2010

Lordv.Comm’r,T.C.Memo.2010-196 1999Evansv.Comm’r,T.C.Memo.2010-207 2004

2011

Schrimsherv.Comm’r,T.C.Memo.2011-71 2004Boltarv.Comm’r,136T.C.326(2011) 20031982EastLLCv.Comm’r,T.C.Memo.2011-84 2004Comm’rv.Simmons,646F.3d6(D.C.Cir.2011)(SimmonsII),aff’gSimmonsv.Comm’r,T.C.Memo.2009-208(SimmonsI)

2003,2004

Didonatov.Comm’r,T.C.Memo.2011-153 2004Hermanv.Comm’r,T.C.BenchOp.(Sept.22,2011)(HermanII),addressingremainingissuesinT.C.Memo.2009-205(HermanI)

2003

2012

Butlerv.Comm’r,T.C.Memo.2012-72 2003,2004Dunlapv.Comm’r,T.C.Memo.2012-126 2003Wallv.Comm’r,T.C.Memo.2012-169 2003Averytv.Comm’r,T.C.Memo.2012-198 2004Rothmanv.Comm’r,T.C.Memo.2012-218(RothmanII),vacatinginpartT.C.Memo.2012-163(RothmanI)

2004

TroutRanchv.Comm’r,493Fed.Appx.944(10thCir.2012)(unpublished)(TroutRanchII),aff’gT.C.Memo.2010-283(TroutRanchI)

2003

Fosterv.Comm’r,T.C.Summ.Op.2012-90 2003Irbyv.Comm’r,139T.C.371(2012) 2003,2004

2013

Pollardv.Comm’r,T.C.Memo.2013-38 2003

AppendixC 5

Graevv.Comm’r,140T.C.377(2013) 2004Peskyv.U.S.,2013WL3457691(D.Idaho,July8,2013),following2013WL97752(D.Idaho,Jan.7,2013)

2002

Carpenterv.Comm’r,T.C.Memo.2013-172(CarpenterII),denyingreconsiderationofandsupplementingT.C.Memo.2012-1(CarpenterI)

2003

Friedbergv.Comm’r,T.C.Memo.2013-224(FriedbergII),reversinginpartandsupplementingT.C.Memo.2011-238(FriedbergI)

2003

Gorrav.Comm’r,T.C.Memo.2013-254 200661YorkAcquisition,LLCv.Comm’r,T.C.Memo.2013-266 2006

2014EsgarCorp.v.Comm’r,744F.3d648(10thCir.2014)(EsgarII),aff’gT.C.Memo.2012-35(EsgarI)andTempelv.Comm'r,136T.C.341(2011)

2004

Wachterv.Comm’r,142T.C.140(2014) 2004,2005,2006

Chandlerv.Comm’r,142T.C.279(2014) 2004,2005WhitehouseHotel,LPv.Comm’r,755F.3d236(5thCir.2014)(WhitehouseIV),aff’ginpartandvacatinginpart139T.C.304(2012)(WhitehouseIII),onremandfrom615F.3d321(5thCir.2010)(WhitehouseII),vacatingandremanding131T.C.112(2008)(WhitehouseI)

1997

Scheidelmanv.Comm’r,755F.3d148(2dCir.2014)(ScheidelmanIV),aff’gT.C.Memo.2013-18(ScheidelmanIII),onremandfrom682F.3d189(2dCir.2012)(ScheidelmanII),vacatingandremandingT.C.Memo.2010-151(ScheidelmanI)

2004

SeventeenSeventyShermanStreetv.Comm’r,T.C.Memo.2014-124 2003Schmidtv.Comm’r,T.C.Memo.2014-159 2003Zarlengov.Comm’r,T.C.Memo.2014-161 2005Reisnerv.Comm’r,T.C.Memo.2014-230 2004Belkv.Comm’r,774F.3d221(4thCir.2014)(BelkIII),aff’gT.C.Memo2013-154(BelkII),denyingreconsiderationofandsupplementing140T.C.1(2013)(BelkI)

2004

2015

Mitchellv.Comm’r,775F.3d1243(10thCir.2015)(MitchellIII),aff’gT.C.Memo.2013-204(MitchellII),denyingreconsiderationandsupplementing138T.C.324(2012)(MitchellI)

2003

BalsamMountainv.Comm’r,T.C.Memo.2015-43 2003

AppendixC 6

SWFRealEstateLLCv.Comm’r,T.C.Memo.2015-63 2005Kaufmanv.Comm’r,784F.3d.56(1stCir.2015)(KaufmanV),aff’gT.C.Memo.2014-52(KaufmanIV),onremandfrom687F.3d.21(1stCir.2012)(KaufmanIII),vacatingandremandinginpart136T.C.294(2011)(KaufmanII)and134T.C.182(2010)(KaufmanI)

2003

Costellov.Comm’r,T.C.Memo.2015-87 2006BosqueCanyonRanchv.Comm'r,T.C.Memo.2015-130 2005

2007Minnickv.Comm’r,796F.3d1156(9thCir.2015)(MinnickIII)and611Fed.Appx.477(9thCir.2015)(unpub)(MinnickII),aff’gT.C.Memo.2012-345(MinnickI)

2006

Leggv.Comm’r,145T.C.No.13(2015) 2007Atkinsonv.Comm’r,T.C.Memo.2015-236 2003,2005

2016Gemperlev.Comm’r,T.C.Memo.2016-1 2007Mecoxv.U.S.,_F.Supp._(S.D.N.Y.2016) 2004PalmerRanchHoldings,Ltd.v.Comm’r,812F.3d982(11thCir.2016)(PalmerRanchII),aff’ginpartandreversingandremandinginpart,T.C.Memo2014-79(PalmerRanchI)

2006

Frenchv.Comm’r,T.C.Memo.2016-53 2005Carrollv.Comm’r,146T.C.No.13(2016) 2005RPGolf,LLC,T.C.Memo.2016-80andT.C.Memo.2012-282 2003Mountanosv.Comm’r,No.14-71580(9thCir.,June1,2016)(unpublished)(MountanosIII),aff’gT.C.Memo.2013-138(MountanosI),reconsiderationdeniedandopinionsupplementedinT.C.Memo.2014-38(MountanosII).

2005

AppendixD 1

AppendixD

TreasuryRegulation§1.170A-13(c)Treas. Reg. § 1.170A-13(c). Deductions in excess of $5,000 for certain charitablecontributionsofpropertymadeafterDecember31,1984.(1)Generalrule.

(i) Ingeneral.Thisparagraphapplies toanycharitablecontributionmadeafterDecember31,1984,byan individual,closelyheldcorporation,personalservicecorporation, partnership, or S corporation of an item of property (other thanmoneyandpubliclytradedsecuritiestowhich§1.170A-13(c)(7)(xi)(B)doesnotapply)iftheamountclaimedorreportedasadeductionundersection170withrespect to such itemexceeds$5,000. Thisparagraphalso applies to charitablecontributionsbyCcorporations(asdefinedinsection1361(a)(2)oftheCode)totheextentdescribed inparagraph (c)(2)(ii)of this section.Nodeductionundersection170shallbeallowedwithrespect toacharitablecontributiontowhichthis paragraph applies unless the substantiation requirements described inparagraph(c)(2)ofthissectionaremet.Forpurposesofthisparagraph(c),theamount claimed or reported as a deduction for an item of property is theaggregate amount claimed or reported as a deduction for a charitablecontributionundersection170forsuchitemsofpropertyandallsimilaritemsofproperty(asdefinedinparagraph(c)(7)(iii)ofthissection)bythesamedonorforthesametaxableyear(whetherornotdonatedtothesamedonee).***

(2)Substantiationrequirements.

(i) Ingeneral.Exceptasprovided inparagraph (c)(2)(ii)of this section,adonorwhoclaimsor reportsadeductionwith respect toa charitable contribution towhich this paragraph (c) applies must comply with the following threerequirements:

(A) Obtain a qualified appraisal (as defined in paragraph (c)(3) of thissection) for such property contributed. If the contributed property is apartialinterest,theappraisalshallbeofthepartialinterest.(B)Attachafullycompletedappraisalsummary(asdefinedinparagraph(c)(4)ofthissection)tothetaxreturn(or,inthecaseofadonorthatisapartnership or S corporation, the information return) on which thedeductionforthecontributionisfirstclaimed(orreported)bythedonor.

AppendixD 2

(C)Maintain records containing the information required by paragraph(b)(2)(ii)ofthissection.

***

(3)Qualifiedappraisal.

(i) Ingeneral.Forpurposesofthisparagraph(c), theterm“qualifiedappraisal”meansanappraisaldocumentthat—

(A)Relatestoanappraisalthatismadenotearlierthan60dayspriortothedateofcontributionoftheappraisedpropertynorlaterthanthedatespecifiedinparagraph(c)(3)(iv)(B)ofthissection;(B) Is prepared, signed, and dated by a qualified appraiser (within themeaningofparagraph(c)(5)ofthissection);(C) Includes the information required by paragraph (c)(3)(ii) of thissection;and(D) Does not involve an appraisal fee prohibited by paragraph (c)(6) ofthissection.

(ii)Informationincludedinqualifiedappraisal.Aqualifiedappraisalshallincludethefollowinginformation:

(A)Adescriptionof theproperty insufficientdetail forapersonwho isnot generally familiar with the type of property to ascertain that theproperty that was appraised is the property that was (or will be)contributed;(B) In the case of tangible property, the physical condition of theproperty;(C)Thedate(orexpecteddate)ofcontributiontothedonee;(D) The terms of any agreement or understanding entered into (orexpectedtobeenteredinto)byoronbehalfofthedonorordoneethatrelatestotheuse,sale,orotherdispositionofthepropertycontributed,including, for example, the terms of any agreement or understandingthat—

(1)Restrictstemporarilyorpermanentlyadonee'srighttouseordisposeofthedonatedproperty,

AppendixD 3

(2) Reserves to, or confers upon, anyone (other than a doneeorganization or an organization participating with a doneeorganization in cooperative fundraising) any right to the incomefrom the contributed property or to the possession of theproperty,includingtherighttovotedonatedsecurities,toacquirethepropertybypurchaseorotherwise,ortodesignatethepersonhavingsuchincome,possession,orrighttoacquire,or(3)Earmarksdonatedpropertyforaparticularuse;

(E) The name, address, and (if a taxpayer identification number isotherwiserequiredbysection6109andtheregulationsthereunder)theidentifying number of the qualified appraiser; and, if the qualifiedappraiserisactinginhisorhercapacityasapartnerinapartnership,anemployeeofanyperson(whetheranindividual,corporation,orpartner-ships),oranindependentcontractorengagedbyapersonotherthanthedonor, the name, address, and taxpayer identification number (if anumber is otherwise required by section 6109 and the regulationsthereunder) of the partnership or the personwho employs or engagesthequalifiedappraiser;(F)Thequalificationsof thequalifiedappraiserwhosigns theappraisal,including the appraiser's background, experience, education, andmembership,ifany,inprofessionalappraisalassociations;(G)Astatementthattheappraisalwaspreparedforincometaxpurposes;(H)Thedate(ordates)onwhichthepropertywasappraised;(I) The appraised fair market value (within the meaning of §1.170A-1(c)(2))ofthepropertyonthedate(orexpecteddate)ofcontribution;(J)Themethodofvaluationusedtodeterminethefairmarketvalue,suchas the income approach, the market-data approach, and thereplacement-cost-less-depreciationapproach;and(K)Thespecificbasisforthevaluation,suchasspecificcomparablesalestransactions or statistical sampling, including a justification for usingsamplingandanexplanationofthesamplingprocedureemployed.

(iii) Effect of signature of the qualified appraiser. Any appraiserwho falsely orfraudulently overstates the value of the contributed property referred to in aqualifiedappraisalorappraisalsummary(asdefinedinparagraphs(c)(3)and(4),respectively,of this section) that theappraiserhas signedmaybe subject toa

AppendixD 4

civilpenaltyundersection6701foraidingandabettinganunderstatementoftaxliability and,moreover,mayhave appraisals disregardedpursuant to 31U.S.C.330(c).(iv)Specialrules.

(A)Numberofqualifiedappraisals.Forpurposesofparagraph(c)(2)(i)(A)ofthissection,aseparatequalifiedappraisalisrequiredforeachitemofpropertythatisnotincludedinagroupofsimilaritemsofproperty.Seeparagraph (c)(7)(iii) of this section for the definition of similar items ofproperty.Onlyonequalifiedappraisal is required for a groupof similaritems of property contributed in the same taxable year of the donor,althoughadonormayobtainseparatequalifiedappraisalsforeachitemof property. A qualified appraisal prepared with respect to a group ofsimilar items of property shall provide all the information required byparagraph (c)(3)(ii) of this section for each item of similar property,exceptthattheappraisermayselectanyitemswhoseaggregatevalueisappraisedat$100orlessandprovideagroupdescriptionofsuchitems.(B)Timeofreceiptofqualifiedappraisal.Thequalifiedappraisalmustbereceivedbythedonorbeforetheduedate(includingextensions)ofthereturnonwhichadeductionisfirstclaimed(orreportedinthecaseofadonor that is a partnership or S corporation) under section 170 withrespect to the donated property, or, in the case of a deduction firstclaimed (or reported) on an amended return, the date on which thereturnisfiled.(C)Retentionofqualifiedappraisal.Thedonormustretainthequalifiedappraisal in thedonor's records forso longas itmayberelevant in theadministrationofanyinternalrevenuelaw.(D)Appraisaldisregardedpursuantto31U.S.C.330(c). Ifanappraisal isdisregardedpursuantto31U.S.C.330(c)itshallhavenoprobativeeffectas to thevalueof theappraisedproperty.Suchappraisalwill,however,otherwise constitute a “qualified appraisal” for purposes of thisparagraph(c)iftheappraisalsummaryincludesthedeclarationdescribedinparagraph(c)(4)(ii)(L)(2)andthetaxpayerhadnoknowledgethatsuchdeclarationwasfalseasofthetimedescribedinparagraph(c)(4)(i)(B)ofthissection.

AppendixD 5

(4)Appraisalsummary.

(i)Ingeneral.Forpurposesofthisparagraph(c),exceptasprovidedinparagraph(c)(4)(iv)(A)ofthissection,theterm“appraisalsummary”meansasummaryofaqualifiedappraisalthat—

(A)IsmadeontheformprescribedbytheInternalRevenueService;(B) Is signed and dated (as described in paragraph (c)(4)(iii) of thissection)bythedonee(orpresentedtothedoneeforsignature incasesdescribedinparagraph(c)(4)(iv)(C)(2)ofthissection);(C)Issignedanddatedbythequalifiedappraiser(withinthemeaningofparagraph (c)(5) of this section) who prepared the qualified appraisal(withinthemeaningofparagraph(c)(3)ofthissection);and(D) Includes the information required by paragraph (c)(4)(ii) of thissection.

(ii) Information included in an appraisal summary. An appraisal summary shallincludethefollowinginformation:

(A) The name and taxpayer identification number of the donor (socialsecuritynumber if thedonor isan individualor,employer identificationnumberifthedonorisapartnershiporcorporation);(B)Adescriptionof theproperty insufficientdetail forapersonwho isnot generally familiar with the type of property to ascertain that thepropertythatwasappraisedisthepropertythatwascontributed;(C) In the case of tangible property, a brief summary of the overallphysicalconditionofthepropertyatthetimeofthecontribution;(D)Themannerofacquisition(e.g.,purchase,exchange,gift,orbequest)and the date of acquisition of the property by the donor, or, if thepropertywascreated,produced,ormanufacturedbyorforthedonor,astatement to that effect and the approximate date the property wassubstantiallycompleted;(E) The cost or other basis of the property adjusted as provided bysection1016;(F)Thename,address,andtaxpayeridentificationnumberofthedonee;

AppendixD 6

(G)Thedatethedoneereceivedtheproperty;(H) For charitable contributions made after June 6 1988, a statementexplaining whether or not the charitable contribution was made bymeans of a bargain sale and the amount of any consideration receivedfromthedoneeforthecontribution;(I) The name, address, and (if a taxpayer identification number isotherwiserequiredbysection6109andtheregulationsthereunder)theidentifying number of the qualified appraiser who signs the appraisalsummary and of other persons as required by paragraph (c)(3)(ii)(E) ofthissection;(J) The appraised fair market value of the property on the date ofcontribution;(K) The declaration by the appraiser described in paragraph (c)(5)(i) ofthissection;(L)Adeclarationbytheappraiserstatingthat—

(1)Thefeechargedfortheappraisalisnotofatypeprohibitedbyparagraph(e)(6)ofthissection;and(2) Appraisals prepared by the appraiser are not beingdisregardedpursuantto31U.S.C.330(c)onthedatetheappraisalsummaryissignedbytheappraiser;and

(M)Suchotherinformationasmaybespecifiedbytheform.

(iii)Signatureoftheoriginaldonee.Thepersonwhosignstheappraisalsummaryfor the donee shall be an official authorized to sign the tax or informationreturns of the donee, or a person specifically authorized to sign appraisalsummariesbyanofficialauthorizedtosignthetaxorinformationreturnsofsuchdone.Inthecaseofadoneethatisagovernmentalunit,thepersonwhosignsthe appraisal summary for such donee shall be the official authorized by suchdoneetosignappraisalsummaries.Thesignatureofthedoneeontheappraisalsummary does not represent concurrence in the appraised value of thecontributed property. Rather, it represents acknowledgment of receipt of theproperty described in the appraisal summary on the date specified in theappraisal summary and that the donee understands the information reportingrequirementsimposedbysection6050Land§1.6050L-1.Ingeneral,§1.6050L-1requires the donee to file an information return with the Internal RevenueServiceintheeventthedoneesells,exchanges,consumes,orotherwisedisposes

AppendixD 7

of the property (or any portion thereof) described in the appraisal summarywithin2yearsafterthedateofthedonor'scontributionofsuchproperty.(iv)Specialrules.

***

(B) Number of appraisal summaries. A separate appraisal summary foreach itemofpropertydescribed inparagraph(c)(1)ofthissectionmustbeattachedtothedonor'sreturn.If,duringthedonor'staxableyear,thedonorcontributessimilaritemsofpropertydescribedinparagraph(c)(1)of this section tomore than one donee, the donor shall attach to thedonor's return a separate appraisal summary for each donee. Seeparagraph (c)(7)(iii) of this section for the definition of similar items ofproperty. If, however, during the donor's taxable year, a donorcontributessimilaritemsofpropertydescribedinparagraph(c)(1)ofthissectiontothesamedonee,thedonormayattachtothedonor'sreturnasingle appraisal summary with respect to all similar items of propertycontributedtothesamedonee.Suchanappraisalsummaryshallprovidealltheinformationrequiredbyparagraph(c)(4)(ii)ofthissectionforeachitemofproperty,exceptthattheappraisermayselectany itemswhoseaggregate value is appraised at $100 or less and provide a groupdescriptionforsuchitems.(C)Mannerofacquisition,costbasisanddonee'ssignature.

(1)Ifataxpayerhasreasonablecauseforbeingunabletoprovidetheinformationrequiredbyparagraph(c)(4)(ii)(D)and(E)ofthissection (relating to the manner of acquisition and basis of thecontributed property), an appropriate explanation should beattachedtotheappraisalsummary.Thetaxpayer'sdeductionwillnotbedisallowedsimplybecauseofthe inability (forreasonablecause)toprovidetheseitemsofinformation.(2)Inrareandunusualcircumstancesinwhichitisimpossibleforthetaxpayertoobtainthesignatureofthedoneeontheappraisalsummaryasrequiredbyparagraph(c)(4)(i)(B)ofthissection,thetaxpayer's deduction will not be disallowed for that reasonprovidedthatthetaxpayerattachesastatementtotheappraisalsummaryexplaining, indetail,why itwasnotpossible toobtainthedonee'ssignature.Forexample,ifthedoneeceasestoexistasanentitysubsequenttothedateofthecontributionandpriortothe date when the appraisal summarymust be signed, and thedonoractedreasonablyinnotobtainingthedonee'ssignatureat

AppendixD 8

the time of the contribution, relief under this paragraph(c)(4)(iv)(C)(2)wouldgenerallybeappropriate.

(D) Information excluded from certain appraisal summaries. Theinformationrequiredbyparagraph(c)(4)(i)(C),paragraph(c)(4)(ii)(D),(E),(H) through (M), andparagraph (c)(4)(iv)(A)(3), and theaverage tradingpricereferredto inparagraph(c)(4)(iv)(A)(4)ofthissectiondonothavetobe includedontheappraisalsummaryat thetime it issignedbythedonee or a copy is provided to the donee pursuant to paragraph(c)(4)(iv)(E)ofthissection.(E) Statement to be furnished by donors to donees. Every donor whopresents an appraisal summary to a donee for signature after June 6,1988, inorder tocomplywithparagraph (c)(4)(i)(B)of this sectionshallfurnishacopyoftheappraisalsummarytosuchdonee.(F) Appraisal summary required to be provided to partners and Scorporationshareholders. IfthedonorisapartnershiporScorporation,thedonorshallprovideacopyoftheappraisalsummarytoeverypartneror shareholder, respectively, who receives an allocation of a charitablecontribution deduction under section 170with respect to the propertydescribedintheappraisalsummary.(G)PartnersandScorporationshareholders.Apartnerofapartnershipor shareholder of an S corporation who receives an allocation of adeductionundersection170foracharitablecontributionofpropertytowhichthisparagraph(c)appliesmustattachacopyofthepartnership'sor S corporation's appraisal summary to the tax return on which thedeductionforthecontributionisfirstclaimed.Ifsuchappraisalsummaryis not attached, the partner's or shareholder's deduction shall not beallowedexceptasprovidedforinparagraph(c)(4)(iv)(H)ofthissection.(H)Failuretoattachappraisalsummary.Intheeventthatadonorfailstoattach to the donor's return an appraisal summary as required byparagraph (c)(2)(i)(B) of this section, the Internal Revenue Servicemayrequestthatthedonorsubmittheappraisalsummarywithin90daysoftherequest. If sucharequest ismadeandthedonorcomplieswiththerequestwithinthe90-dayperiod,thedeductionundersection170shallnotbedisallowed for failure toattach theappraisal summary,providedthatthedonor'sfailuretoattachtheappraisalsummarywasagoodfaithomissionandtherequirementsofparagraph(c)(3)and(4)ofthissectionaremet(includingthecompletionofthequalifiedappraisalpriortothedatespecifiedinparagraph(c)(3)(iv)(B)ofthissection).

AppendixD 9

(5)Qualifiedappraiser.

(i) Ingeneral.Theterm“qualifiedappraiser”meansan individual (otherthanaperson described in paragraph (c)(5)(iv) of this section) who includes on theappraisal summary (described inparagraph (c)(4)of this section),adeclarationthat—

(A)The individualeitherholdshimselforherselfouttothepublicasanappraiserorperformsappraisalsonaregularbasis;(B)Becauseoftheappraiser'squalificationsasdescribedintheappraisal(pursuant to paragraph (c)(3)(ii)(F) of this section), the appraiser isqualifiedtomakeappraisalsofthetypeofpropertybeingvalued;(C) The appraiser is not one of the persons described in paragraph(c)(5)(iv)ofthissection;and(D) The appraiser understands that an intentionally false or fraudulentoverstatement of the value of the property described in the qualifiedappraisal or appraisal summary may subject the appraiser to a civilpenaltyundersection6701foraidingandabettinganunderstatementoftax liability, and, moreover, the appraiser may have appraisalsdisregardedpursuantto31U.S.C.330(c)(seeparagraph(c)(3)(iii)ofthissection).

(ii) Exception. An individual is not a qualified appraiser with respect to aparticulardonation,evenifthedeclarationspecifiedinparagraph(c)(5)(i)ofthissection is provided in the appraisal summary, if the donor had knowledge offacts that would cause a reasonable person to expect the appraiser falsely tooverstatethevalueof thedonatedproperty (e.g., thedonorandtheappraisermakeanagreementconcerningtheamountatwhichthepropertywillbevaluedand the donor knows that such amount exceeds the fair market value of theproperty).(iii)Numbersofappraisers.Morethanoneappraisermayappraisethedonatedproperty.Ifmorethanoneappraiserappraisestheproperty,thedonordoesnothave to use each appraiser's appraisal for purposes of substantiating thecharitable contribution deduction pursuant to this paragraph (c). If the donoruses the appraisal of more than one appraiser, or if two or more appraiserscontribute to a single appraisal, each appraiser shall comply with therequirementsofthisparagraph(c), includingsigningthequalifiedappraisalandappraisal summary as requiredbyparagraphs (c)(3)(i)(B) and (c)(4)(i)(C) of thissection,respectively.

AppendixD 10

(iv) Qualified appraiser exclusions. The following persons cannot be qualifiedappraiserswithrespecttoparticularproperty:

(A)Thedonororthetaxpayerwhoclaimsorreportsadeductionsundersection170forthecontributionofthepropertythatisbeingappraised.(B)Apartytothetransaction inwhichthedonoracquiredthepropertybeing appraised (i.e., the person who sold, exchanged, or gave theproperty to the donor, or any person who acted as an agent for thetransferororforthedonorwithrespecttosuchsale,exchange,orgift),unlessthepropertyisdonatedwithin2monthsofthedateofacquisitionanditsappraisedvaluedoesnotexceeditsacquisitionprice.(C)Thedoneeoftheproperty.(D) Any person employed by any of the foregoing persons (e.g., if thedonoracquiredapaintingfromanartdealer,neithertheartdealernorpersonsemployedbythedealercanbequalifiedappraiserswithrespecttothatpainting).(E) Any person related to any of the foregoing persons under section267(b),or,withrespecttoappraisalsmadeafterJune6,1988,marriedtoapersonwhoisinarelationshipdescribedinsection267(b)withanyoftheforegoingpersons.(F) An appraiser who is regularly used by any person described inparagraph (c)(5)(iv)(A), (B), or (C) of this section and who does notperformamajorityofhisorherappraisalsmadeduringhisorhertaxableyearforotherpersons.

(6)Appraisalfees.

(i)Ingeneral.Exceptasotherwiseprovidedinparagraph(c)(6)(ii)ofthissection,nopartofthefeearrangementforaqualifiedappraisalcanbebased,ineffect,onapercentage(orsetofpercentages)oftheappraisedvalueoftheproperty.Ifafeearrangementforanappraisalisbasedinwholeorinpartontheamountoftheappraisedvalueoftheproperty,ifany,thatisallowedasadeductionundersection170,afterInternalRevenueServiceexaminationorotherwise,itshallbetreatedasafeebasedonapercentageoftheappraisedvalueoftheproperty.For example, an appraiser's fee that is subject to reduction by the samepercentage as the appraised value may be reduced by the Internal RevenueServicewouldbetreatedasafeethatviolatesthisparagraph(c)(6).

AppendixD 11

(ii)Exception.Paragraph(c)(6)(i)ofthissectiondoesnotapplytoafeepaidtoagenerally recognized association that regulates appraisers provided all of thefollowingrequirementsaremet:

(A) The association is not organized for profit and no part of the netearnings of the association inures to the benefit of any privateshareholder or individual (these terms have the same meaning as insection501(c)),(B) The appraiser does not receive any compensation from theassociationoranyotherpersonsformakingtheappraisal,and(C)Thefeearrangementisnotbasedinwholeorinpartontheamountoftheappraisedvalueofthedonatedproperty,ifany,thatisallowedasa deduction under section 170 after Internal Revenue Serviceexaminationorotherwise.

(7)Meaningofterms.Forpurposesofthisparagraph(c)—

***

AppendixE 1

AppendixE

InternalRevenueCode§170(f)(11)IRC§170Charitable,etc.,contributionsandgifts....(f)Disallowanceofdeductionincertaincasesandspecialrules.

...(11)Qualifiedappraisalandotherdocumentationforcertaincontributions.

(A)Ingeneral.

(i) Denial of deduction. In the case of an individual, partnership, orcorporation,nodeductionshallbeallowedundersubsection(a) foranycontribution of property for which a deduction of more than $500 isclaimed unless such person meets the requirements of subparagraphs(B),(C),and(D),asthecasemaybe,withrespecttosuchcontribution.(ii)Exceptions.

(I) Readily valued property. Subparagraphs (C) and (D) shall notapply to cash, property described in subsection (e)(1)(B)(iii) orsection1221(a)(1),publiclytradedsecurities(asdefinedinsection6050L(a)(2)(B)), andanyqualifiedvehicledescribed inparagraph(12)(A)(ii) for which an acknowledgement under paragraph(12)(B)(iii)isprovided.(II)Reasonablecause.Clause(i)shallnotapplyif it isshownthatthefailuretomeetsuchrequirementsisduetoreasonablecauseandnottowillfulneglect.

(B) Property description for contributions of more than $500. In the case ofcontributionsofproperty forwhichadeductionofmore than$500 is claimed,therequirementsof thissubparagrapharemet if the individual,partnershiporcorporation includes with the return for the taxable year in which thecontributionismadeadescriptionofsuchpropertyandsuchotherinformationas theSecretarymay require. The requirementsof this subparagraph shallnotapplytoaCcorporationwhichisnotapersonalservicecorporationoracloselyheldCcorporation.(C) Qualified appraisal for contributions of more than $5,000. In the case ofcontributionsofpropertyforwhichadeductionofmorethan$5,000isclaimed,

AppendixE 2

therequirementsofthissubparagrapharemetiftheindividual,partnership,orcorporation obtains a qualified appraisal of such property and attaches to thereturnforthetaxableyearinwhichsuchcontributionismadesuchinformationregardingsuchpropertyandsuchappraisalastheSecretarymayrequire.(D) Substantiation for contributions of more than $500,000. In the case ofcontributions of property for which a deduction of more than $500,000 isclaimed, the requirements of this subparagraph are met if the individual,partnership,orcorporationattachestothereturnforthetaxableyearaqualifiedappraisalofsuchproperty.(E)Qualifiedappraisalandappraiser.Forpurposesofthisparagraph-

(i)Qualifiedappraisal.Theterm‘qualifiedappraisal‘means,withrespecttoanyproperty,anappraisalofsuchpropertywhich-

(I)istreatedforpurposesofthisparagraphasaqualifiedappraisalunderregulationsorotherguidanceprescribedbytheSecretary,and(II) is conducted by a qualified appraiser in accordance withgenerally accepted appraisal standards and any regulations orotherguidanceprescribedundersubclause(I).

(ii) Qualified appraiser. Except as provided in clause (iii), the term‘qualifiedappraiser‘meansanindividualwho-

(I) has earned an appraisal designation from a recognizedprofessional appraiser organization or has otherwise metminimum education and experience requirements set forth inregulationsprescribedbytheSecretary,(II)regularlyperformsappraisalsforwhichtheindividualreceivescompensation,and(III)meetssuchotherrequirementsasmaybeprescribedbytheSecretaryinregulationsorotherguidance.

(iii) Specific appraisals. An individual shall not be treated as a qualifiedappraiserwithrespecttoanyspecificappraisalunless-

(I) the individual demonstrates verifiable education andexperience in valuing the type of property subject to theappraisal,and(II)the individualhasnotbeenprohibitedfrompracticingbeforethe Internal Revenue Service by the Secretary under section330(c) of title 31,United StatesCode, at any timeduring the3-yearperiodendingonthedateoftheappraisal.

(F) Aggregation of similar items of property. For purposes of determining

AppendixE 3

thresholds under this paragraph, property and all similar items of propertydonatedto1ormoredoneesshallbetreatedas1property.(G) Special rule for pass-thru entities. In the case of a partnership or Scorporation, thisparagraphshallbeappliedat theentity level,except that thedeductionshallbedeniedatthepartnerorshareholderlevel.(H)Regulations.TheSecretarymayprescribesuchregulationsasmaybenecessaryorappropriatetocarryoutthepurposesofthisparagraph,includingregulationsthatmayprovidethatsomeoralloftherequirementsofthisparagraphdonotapplyinappropriatecases.

1

IRS Form 8283 (appraisal summary) and Supplemental Statement

Appendix F

Appendix F

Rule 1: Contiguous ParcelTreas. Reg. § 1.170A-14(h)(3)(i) - 4th sentence

If land contiguous to the land encumbered by the easement is owned by the donor or a member of the donor’s family, the deduction is equal to the difference between the before-easement and after-easement values of the entire contiguous parcel.

The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

Appendix F

2

Rule 2: EnhancementTreas. Reg. § 1.170A-14(h)(3)(i) - 5th sentence.

If the easement enhances the value of any other property owned by the donor or a “related person,” the donor’s deduction must be reduced by an amount equal to the value of any such enhancement, whether or not such other property is contiguous.

“Related person” is defined to include family members and certain entities

Appendix F

IRS Form 8283Noncash Charitable Contributions

Filling out the form correctly and completely . . .

Appendix F

3

Example 1: Simple Donation

CE Protected Land

Before easement value: $1,000,000After easement value: $ 700,000Easement value: $ 300,000

Deduction is$300,000

Appendix F

Example 1: Simple DonationBefore easement value: $1,000,000After easement value: $ 700,000Easement value: $ 300,000

Appendix F

4

Example 2: Simple Bargain Sale

CE Protected Land

Before easement value: $1,000,000After easement value: $ 700,000Easement value: $ 300,000

Landowner is paid $150,000 for easement

Deduction is$150,000

Appendix F

Example 2: Simple Bargain SaleBefore easement value: $1,000,000After easement value: $ 700,000Easement value: $ 300,000

Landowner is paid $150,000 for easement

Appendix F

5

Example 3: Rule 1 Contiguous Parcel

Parcel 1CE Protected Land

Parcel 2Contiguous Parcel

Before-easement value of entire contiguous parcel: $1,500,000After-easement value of entire contiguous parcel: $ 900,000Easement value: $ 600,000

Deduction is$600,000

Appendix F

Example 3: Rule 1 Contiguous ParcelBefore easement value of entire contiguous parcel: $1,500,000After easement value of entire contiguous parcel: $ 900,000Easement value: $ 600,000

Appendix F

6

IRS Chief Counsel Memorandum 201334039

Footnote 1

“Whether the entire contiguous parcel is valued as one large property or as separate properties depends on the [HBU] of the entire contiguous parcel.”

Appendix F

Example 4: Rule 2 Enhancement

CE Protected Land Noncontiguous Parcel

value enhanced $50,000 by

easement donation

Before easement value: $1,000,000After easement value: $ 700,000Easement value: $ 300,000

Deduction is$250,000

Appendix F

7

Example 4: Rule 2 EnhancementBefore easement value: $1,000,000After easement value: $ 700,000Easement value: $ 300,000

CE enhances valueof noncontiguous parcel by $50,000

*Address $50,000 Enhancement in

Supplemental Statement

Appendix F

Treas. Reg. § 1.170A-13(c)(5)(iii)If two or more appraisers contribute to a single appraisal, each appraiser must comply with the [Treasury Regulation requirements] …, including signing the qualified appraisal and appraisal summary.

Appendix F

AppendixG 1

AppendixG

Name(s)shownonincometaxreturn IdentifyingNumberRobertT.Landowner 021-34-1234SusanB.Landowner 083-23-5555

IRSFORM8283

SUPPLEMENTALSTATEMENTDONATIONOFCONSERVATIONEASEMENT

On November 12, 2010, the taxpayers/donors completed the donation of aconservation easement (in Massachusetts, a “conservation restriction”) under theprovisionsofSection170(h)oftheInternalRevenueCodeof1986,asamended,andtheregulationsthereunder(the“Code”).Theconservationrestrictionencumbers55acres,moreorless(the“Property”),ofalargerparcelof65acres,moreorless,ownedbythetaxpayersintheTownofBarnstable,BarnstableCounty,Massachusetts.

Pursuant to theTreasuryRegulations, thevalueof the conservation restrictionwas determined by appraising all of the contiguous property owned by the donorsbeforeandaftertheconservationrestriction.

There are currently no residences or other habitable dwellings on theencumbered Property. The conservation restriction prohibits any commercial orindustrialactivities,ortheconstructionofanynewresidenceorhabitabledwelling,onthe Property. The donationwasmade to the Barnstable Land Trust (the “donee”), a“qualifiedorganization”asdefinedatSection170(h)oftheCode.

The Property is within (i)the Barnstable Harbor/Sandy Neck Area of CriticalEnvironmentalConcern; (ii)aMassachusettsNaturalHeritageandEndangeredSpeciesProgram Priority Habitat for rare and endangered species; and (iii)a MassachusettsDepartment of Fisheries, Wildlife and Environmental Law Enforcement BioMap CoreHabitatareaandaBioMapSupportingNaturalLandscapearea,allasfurtherdescribedbelow.Further,thePropertyiswithinareasdeclaredbytheTownofBarnstableandtheCape Cod Regional Policy Plan as important and deserving of protection andpreservation,asfurtherdescribedbelow.

Thedonationwillprotectanumberofimportantconservationvalues,including

thefollowing:accordingtotheBaselineDocumentationReport,certifiedbythedonorsandthe

doneeasaccurateasoftheeffectivedateoftheconservationrestriction,thePropertyencompassessaltmarsh,tidalcreek,coastalbank,culturalfield,pine-oakwoodlandandmaple/blueberryswamphabitats;and

AppendixG 2

theCommonwealthofMassachusetts,throughtheauthorityoftheSecretaryofEnergy and Environmental Affairs under General Law Chapter 21A, Section 2(7) maydesignate Areas of Critical Environmental Concern (“ACEC”), which are places inMassachusetts thatreceivespecial recognitionbecauseof thequality,uniquenessandsignificanceoftheirnaturalandculturalresources;and,

the1997MassachusettsCoastalZoneManagementPlanpromotesaProtectedAreas Policy #1 to preserve, restore, and enhance complexes of coastal resources ofregionalorstatewidesignificancethroughtheAreasofCriticalEnvironmentalConcernprogram;and,

in 1978, the Barnstable Harbor/Sandy Neck ecosystem in the Towns ofBarnstableandSandwichwasdesignatedasanAreaofCriticalEnvironmentalConcern(ACEC);and,

the Property is locatedwithin the Barnstable Harbor/SandyNeck ACEC, and acopy of the Massachusetts Geographic Information System (MassGIS) map of suchACEC,showingthelocationoftheProperty,isincludedintheBaselineDocumentation;and,

theMassachusettsEndangeredSpeciesAct,M.G.L.c.131A,protectsrarespeciesand their habitats, and the Massachusetts Natural Heritage and Endangered SpeciesProgram(“MNHESP”)hasdesignatedasPriorityHabitatstheknowngeographicalextentofhabitatforstate-listedrareplantandanimalspecies;and,

the Property is located within an MNHESP Priority Habitat for rare andendangeredspecies,andacopyoftheMassGISmapofsuchPriorityHabitats,showingthelocationoftheProperty,isincludedintheBaselineDocumentation;and,

in2001theMassachusettsDepartmentofFisheries,WildlifeandEnvironmentalLaw Enforcement published a report entitledBioMap: Guiding Land Conservation forBiodiversityinMassachusetts,whichidentifiedcriticalhabitat“areas,thatifprotected,would provide suitable habitat over the long term for the maximum number ofMassachusetts’terrestrialandwetlandplant,animalspecies,andnaturalcommunities;”anddevelopedaBioMap to identify theareasmost inneedofprotection inorder toprotectthenativebiodiversityoftheCommonwealth;and,

theBioMapcontainsCoreHabitatareas,whichdepict themostviablehabitats

for rare species and natural communities in Massachusetts, and Supporting NaturalLandscapeareas,whichbufferandconnectCoreHabitatareasandwhichidentifylarge,naturallyvegetatedblocks thatare relatively free fromthe impactof roadsandotherdevelopment;and,

the Property is located within a BioMap Core Habitat area and a BioMap

Supporting Natural Landscape area, and a copy of theMassGISmap of such BioMapareas,showingthelocationoftheProperty,isincludedintheBaselineDocumentation;and,

AppendixG 3

in 1998, MNHESP published a report entitled Our Irreplaceable Heritage:Protecting Biodiversity in Massachusetts,which stated, “We believe that [there are]eightecosystemtypesornaturalcommunityassemblages[thatare]themostimportanttargets for biodiversity conservation. They represent the most threatened orecologicallyessential areas for rareplants andanimals inMassachusetts,” (p. 29) andspecificallyidentifiedcoastalnaturalcommunitiesasstandingout“assomeofthemostbiologicallydiverselandsintheCommonwealth”andsingledoutsaltmarshinparticularasimportanttoconserveandrestore(p.30),andthePropertycontainsapproximately4.49acresofsaltmarshhabitat;and,

in 2003, a Statewide LandConservation Planwas drafted,which identifies the

most significant available, undeveloped andunprotectedopen space lands needed toprotect,amongotherthings,biodiversityhabitats;and,

thePropertyisincludedintheStatewideLandConservationPlan,andacopyof

theMassGISmapofsuchStatewideLandConservationPlan,showingthelocationoftheProperty,isincludedintheBaselineDocumentation;and,

the 1997 Massachusetts Coastal Zone Management Plan promotes a CoastalHazardsPolicy#1topreserve,protect,restore,andenhancethebeneficialfunctionsofstormdamagepreventionandfloodcontrolprovidedbynaturalcoastallandforms,suchas dunes, beaches, barrier beaches, coastal banks, land subject to coastal stormflowage,saltmarshes,andlandundertheocean;and,

thePropertyconsistsofcoastalbanks,landsubjecttocoastalstormflowage,saltmarshesand landunder theoceanand liespartiallywithin FEMAZoneAandZoneVcoastal floodplain,ahighhazardarea,andacopyoftheofficialFEMAflood insurancerate map, showing the location of the Property, is included in the BaselineDocumentation;and,

in August 2001, the Association for the Preservation of Cape Cod (APCC)

producedamapdepicting,amongotherthings,residentiallandof2.5acresormoreonwhichapotentialconservationrestrictioncouldbeplaced,andthePropertyisidentifiedonAPCC’smapasfallingwithinthiscategory;and,

in2003,TheCompactofCapeCodConservationTrusts,Inc.completeditsCapeCod Wildlife Conservation Project (“Wildlife Project”), a wildlife habitat analysis andparcel ranking for all vacant or underdeveloped parcels on Cape Cod,Massachusetts;and,

the Property was included in the Wildlife Project, and was ranked “High” intermsofitshabitatprotectionpriority,and“Maximum,”thehighestpossibleranking,intermsofitswildlifehabitatvalue;and,

AppendixG 4

theTownofBarnstabledevelopedaLocalComprehensivePlan,approvedbytheCape Cod Commission in 1998,which plan’s stated objectives included, among otherthings:

• To“preserveandimprovetheecological integrityoffreshsurfacewaterbodies

andmarinewaters”(Goal2.1.1;p.2-13);• To “minimize contamination of water resources with nitrogen, in order to

maintain…the ecological integrity of streams, ponds and coastal embayments”(Goal2.1.3;p.2-23);

• To“preserveandrestorethearea,qualityandfunctionsofBarnstable’scoastalandinlandwetlands”(Goal2.3.1;p.2-86);

• To“preventlossordegradationofcriticalwildlifeandplanthabitat,tominimizethe impact of new development on wildlife and plant habitat, to maintainexisting populations and species diversity, and to maintain areas which willsupportwildlife’snaturalbreeding,feedingandmigrationpatterns”(Goal2.4.1;p.2-93);

• To “protect and increase the wildlife population and habitats of Barnstable”(Goal6.5;p.6-22)and“preservethosewildlifecorridors that fosterdiversityofhabitatandlinkknownwildliferesourceareas”(Policy6.5.1;p.6-22);

• To “encourage the preservation of open space…through creative means ofconservationrestrictions”(Goal6.1.2;p.6-13);and

• To “identify, protect and preserve Barnstable’s historic…landscapes andarchaeologicalresources”(Goal7.5;page7-24);and,

the Local Comprehensive Plan included a Greenbelt and Fingerlinks Corridors

Map identifying potential parcels of vacant and underdeveloped land for its creation,andamapidentifyingArchaeologicalSensitivityAreas;and,

thePropertyisidentifiedontheGreenbeltandFingerlinksCorridorsMapasone

ofthepotentialparcelsforthecreationofsuchcorridorwithintheTownofBarnstable;and,

the Property is located within a Town of Barnstable primary area of

archaeological sensitivity, defined as an areawithin 1000 feet of amarine ormarinerelated ecosystem and which has a high probability of containing prehistoricarchaeologicalsites;and,

the Townof Barnstable developed anOpen SpacePlan (1984, amended1987,1998, and2005)witha goalofpreserving “qualityopen spaces throughout theTownwhich protect and enhance its visual heritage...” and which identified, among otherthings,thefollowingcommunityobjectives:

• Toacquire,retain,preserveandprotectamaximumamountofopenspacefor

AppendixG 5

thecommunityanditsnaturalandwildlifehabitats(Goal1,2005),withprioritiesfocusedon,among things, landsadjacent todesignatedprotectedorpotentialopen space, lands adjacent towetlands, and landsprovidingwildlife corridors,including areas within and abutting Core Habitats identified by theMassachusetts Natural Heritage and Endangered Species Program, andencourage the use of creative regulatory and non-regulatory land protectiontoolssuchasconservationrestrictions;

• To protect the environmental health of Barnstable’s surface water resources(Goal2,2005);

• To protect and enhance Barnstable’s unique and fragile natural and culturalresources including scenic beauty, historic areas and unique habitats (Goal 6,2005);

• Toprotectandincreasewildlifepopulationandhabitats(Goal10,2005);and,

in 1981 the Town of Barnstable adopted a Conservation Restriction Programconsistingofpoliciesandguidelines,inparticularanOpenSpacePolicy,approvedbytheBoardofSelectmen,AssessorsandConservationCommission,whichencouragestheuseof conservation restrictions in perpetuity to protect natural resources in accordancewiththepurposesoftheOpenSpacePlan,andwhichfurtherspecifiedthatpurposesofaconservationrestrictioncouldincludethefollowing:

• preventdisturbanceofwetlands,• preserveopenspace,• preserveimportantnaturalhabitatsoffish,wildlifeorplants,• protectmarinewaterquality,• limitorpreventconstructiononlandofnaturalresourcevalue;and,

in July,1991, theBarnstableAssemblyofDelegates,pursuant to theCapeCodCommission Act (Chapter 716 of the Acts of 1989), adopted a Regional Policy Plan,amended in1996and furtheramended in2002and2009 ,whichprovided, interalia(referencesaretothe2009Plan):

• aWetlandsGoalto“preserveandrestorethequalityandquantityofinlandand

coastalwetlandsandtheirbuffersonCapeCod”(p.52);• a Wildlife and Plant Habitat Goal to “prevent loss or degradation of critical

wildlifeandplanthabitat,tominimizetheadverseimpactofnewdevelopmentonwildlife and plant habitat and tomaintain existing populations and speciesdiversity” (p. 55), stating that “renewed commitment to protect the mostecologically sensitive undeveloped lands through land acquisition and otherpermanentconservationmeasuresisalsowarranted”;

AppendixG 6

• anOpenSpaceandRecreationGoalto“preserveandenhancetheavailabilityofopen space that provides wildlife habitat…and protects the region’s naturalresourcesandcharacter” (p.57),witha recommendedTownActionofworkingwith“local landconservationorganizationstoidentify,acquirebyfeesimpleorconservationrestriction,andmanageopenspacetomeetprojectedcommunityneeds. Priority should be given “to the protection of significant natural andfragileareasas identifiedon theCapeCodSignificantNaturalResourcesAreasmap.”(p.58);and,

• aHeritagePreservation/CommunityCharacterGoalto“protectandpreservetheimportanthistoricandculturalfeaturesofCapeCod’slandscape…thatarecriticalcomponentsoftheregion’sheritageandeconomy”(p.80);and,

the Regional Policy Plan includes a Significant Natural Resources Areas Map,

which shows, among other things, rare species habitat, priority natural communities,wetlands,andcriticaluplandareas;and,

thePropertyislocatedwithinaRegionalPolicyPlanSignificantNaturalResource

Area,anda copyof themap, showing the locationof theProperty, is included in theBaselineDocumentation;and,

the Great and General Court of Massachusetts established the Old KingsHighwayRegionalHistoricDistrictonthenorthernshoreofBarnstableCountythroughChapter740oftheActsof1973;and,

the Property is located on the north side of Route 6A within the Old Kings

HighwayRegionalHistoricDistrict;and,thePropertyisvisiblefromBarnstableHarbor,theGreatMarshandSandyNeck,

andthereforeisseenbyBarnstableresidentsandtouristsonaregularbasis;and,the Property is a substantial contributing element to the overall scenic and

cultural character of the area by maintaining the land predominantly in its naturalcondition.

Therefore, the conservation purposes under Section 170(h) of the Code

furtheredbythedonationoftheconservationrestrictionincludethefollowing:(i)thepreservation of significant relatively natural habitat of plants and similar ecosystems,under Section 170(h)(4)(A)(ii); (ii) the preservation of open space for the scenicenjoymentofthegeneralpublic,whichyieldsasignificantpublicbenefit,underSection170(h)(4))(A)(iii)(I); and (iii) the preservation of open space pursuant to clearlydelineated local governmental policy, which yields a significant public benefit, underSection170(h)(4)(A)(iii)(II).

AppendixG 7

Thetaxpayersacquiredaportionofthepropertybypurchasein1996,andotherportionsof thepropertybygift,beginning in the1970s. Therefore, thetaxpayersareunableatthistimetodeterminewithaccuracythebasisoftheProperty.

Applying the Direct Sales Comparison Approach combined with the Cost of

Development or “Subdivision” Approach, the appraisers concluded that the marketvalueoftheconservationrestrictionwasderivedasfollows:

a. Market value of the entire contiguous 65 acres before donation of the

conservationrestriction:$____________b. Market value of the entire contiguous 65 acres after donation of the

conservationrestriction:$____________c. Marketvalueoftheconservationrestriction:$____________

AcopyofthequalifiedappraisalthatsubstantiatesthesevaluesandverifiestheappraisalmethodologyisfiledwiththisForm8283andthedonor’staxreturn.Acopyoftherecordedconservationrestrictionisincludedintheappraisalreport.

Neitherthedonors,relatedfamilymembers,norrelatedentities(asdefinedbythe Treasury Regulations) own any other contiguous property or nearby property thevalue of which is enhanced by the donation of this conservation restriction, so nofurther adjustment was required to the conclusion of value. The donation of theconservationrestrictionwasnotmadetoobtainapermitorotherapprovalfromalocalor other governing authority, nor was the donation required by any contractualobligation. The Property was not encumbered by a mortgage at the time of thedonationoftheconservationrestriction.

The condition of the Property was documented and established throughextensive baseline documentation acknowledged by the donors and the donee as anaccurate representation of the condition of the Property on the effective date of thedonation. The Baseline Documentation Report is filed with this Form 8283 and thedonor’s tax return, as is a copy of the letter from the donee to the taxpayers sentpursuanttotheprovisionsofSection170(f)(8)oftheCode.

The conservation restriction was recorded on November 12, 2010, at the

BarnstableCountyRegistryofDeeds,BarnstableCounty,Massachusetts.

AppendixH 1

AppendixH

McLaughlinBlogPostsonCaseLawandOtherDevelopments(withlivelinkstosources)

§170(h)DeductionCasesAtkinsonv.Comm’r—GolfCourseConservationEasementsNotDeductiblehttp://bit.ly/1RHkbyNBalsamMountain v. Comm’r—ConservationEasementAuthorizingLimitedSwapsNotDeductiblehttp://bit.ly/1VMeyyhBelk v. Comm’r—4th Circuit Confirms Swappable Conservation Easements Are NotDeductiblehttp://bit.ly/1SGLYPlBosqueCanyonRanchv.Comm’r—PartnershipsDeniedDeductionsforConservationEasementsAllowingMovableHomesitesandTaxedonDisguisedSalesofHomesiteshttp://bit.ly/1V3PVPbCarroll v. Comm’r—Conservation Easement Deduction Denied for Noncompliant“Proceeds”Clausehttp://bit.ly/1QFURnrCarpenter v. Comm’r Revisited—Federally-Deductible Conservation EasementsExtinguishableOnlyinaJudicialProceedinghttp://bit.ly/1mDKVDjChandler v. Comm’r—Façade Easements Had No Value and Strict Liability PenaltyAppliedfor2006http://bit.ly/1oi4L8nEsgar v. Comm’r—10th Circuit Affirms Tax Court: Conservation Easements WereOvervalued,IncomeFromStateTaxCreditSalesWasShortTermCapitalGainhttp://bit.ly/1okBOZUFrenchv.Comm’r—ConservationEasementDeductionDeniedforLackofContemporaneousWrittenAcknowledgmenthttp://bit.ly/1RjMJxPFriedbergv.Comm’rRevisited—QuestionableAppraisalCanBea“QualifiedAppraisal”http://bit.ly/1LqltHU

AppendixH 2

Gemperlev.Comm’r—TaxCourtDeniesDeductionforFaçadeEasementDonationForFailuretoIncludeAppraisalInTaxReturnFilinghttp://bit.ly/1SPSPrRGorra v. Comm’r—Facade Easement Deductible but Gross Valuation MisstatementPenaltyAppliedhttp://bit.ly/1KSn7qOGraevv.Comm’r—SideLetterKillsDeductionsforaFaçadeEasementDonationhttp://bit.ly/1QhD4sWKaufmanv.Comm’r(Again)—FaçadeEasementHadNoValueandPenaltiesImposedhttp://bit.ly/245TpoALegg v. Comm’r—Conservation Easement Donor Liable for Gross ValuationMisstatementPenaltieshttp://bit.ly/1PXxj1tMecox v. U.S—District Court Denies Deduction for Façade Easement Donation; DeedRecordedinWrongYearandAppraisalUntimelyhttp://bit.ly/1PWHK7tMinnick v. Comm’r – 9thCircuitAffirmsTaxCourt,MortgagesMustBe SubordinatedWhenConservationEasementisDonatedhttp://bit.ly/1oOOrNaMinnick v. Comm’r—9th Circuit’s Unpublished Holdings in Conservation EasementDonationCasehttp://bit.ly/24uler2Mitchellv.Comm’r—10thCircuitAffirmsTaxCourt,MortgagesMustBeSubordinatedWhenConservationEasementisDonatedhttp://bit.ly/1UqGae3Mitchellv.Comm’rRevisited—170(h)RequiresPerpetuationofConservationEasementItself,NotJustConservationPurposeshttp://bit.ly/1RalthgMountanos v. Comm’r—9th Circuit Affirmed Tax Court’s Denial of ConservationEasementDonationDeductionsandImpositionofPenaltieshttp://bit.ly/1Ultilv

AppendixH 3

PalmerRanch v. Comm’r—11thCircuitRemandsConservationEasementValuation toTaxCourthttp://bit.ly/1U4cJOQPeskyv.U.S.—DeductionforConservationEasementDonationNotFraudulenthttp://bit.ly/1Qk55OBPollardv.Comm’r—ConservationEasementConveyedForQuidProQuoNotDeductiblehttp://bit.ly/21q7DlxReisnerv.Comm’r—StrictLiabilityPenaltyforFacadeEasementDeductionhttp://bit.ly/1QNPV6yRPGolf,LLCv.Comm’r—ConservationEasementDeductionDeniedBecauseMortgagesNotSubordinatedatTimeofDonationhttp://bit.ly/1TlfzL3Scheidelman v. Comm’r (Again)—Second Circuit Affirms Tax Court’s Holding thatFaçadeEasementHadNoValuehttp://bit.ly/1Qk5fpmScheidelmanv.Comm’r—ALongJourneytotheDenialofaDeductionforaFacadeEasementDonationhttp://bit.ly/1pfAFDgSchmidtv.Comm’r—ConservationEasementOvervaluedButNoPenaltiesImposedhttp://bit.ly/1n4TdUYSeventeenSeventyShermanStreet,LLCv.Comm’r—ConservationEasementConveyedforQuidProQuoNotDeductibleandNegligencePenaltyAppliedhttp://bit.ly/1QmGQw3SWFRealEstatev.Comm'r—SpecialAllocationofTaxCreditGeneratedbyConservationEasementDonationwasDisguisedSale,butEasementValuationLargelyUpheldhttp://bit.ly/1ODrHEqWachterv.Comm’r—NorthDakotaConservationEasementsNotDeductiblehttp://bit.ly/1Qb3MR0WhitehouseHotelv.Comm’r(Again)—5thCircuitAffirmsTaxCourt’sFaçadeEasementValuationButVacatesonPenaltieshttp://bit.ly/1Ramk1n

AppendixH 4

Zarlengo v. Comm’r—Conservation Easement Overvalued and Not Protected InPerpetuityUntilRecordedhttp://bit.ly/1TJVUJO61 York Acquisition, LLC v. Comm’r—$10.7mFacade EasementDeductionDenied forFailuretoRestrictEntireExteriorhttp://bit.ly/21q8fHQOtherFederalTax-RelatedIssuesConservationEasementsandtheValuationConundrumhttp://bit.ly/1S8qThAEnhancedIncentivesforEasementDonationsMadePermanentWithoutReformshttp://bit.ly/1oOPJb1IRSonConservationEasementAppraisalshttp://bit.ly/1UqHbTlIRSChiefCounselMemorandumAddressesConservationEasementValuationhttp://bit.ly/1pfBQ5tIRSRulesTax-ExemptStatusofOrganizationAcceptingConservationEasementsShouldbeRevokedhttp://bit.ly/1XRv4icIRSBarsAppraisersfromValuingFacadeEasementsforFiveYearshttp://bit.ly/1Ran1rsFaçadeEasementAppraiserBarredFromPreparingAppraisalReportsandOrderedtoTurnOverListofClientshttp://bit.ly/1n4UDPtIncome From Charitable Organization’s Sale of Mitigation Bank Credits is notUnrelatedBusinessTaxableIncomehttp://bit.ly/1WQSF1gRoute 231, LLC v. Comm’r—4th Circuit Affirms Allocation of 97% of Tax CreditsGeneratedbyConservationDonationsto1%PartnerWasDisguisedSalehttp://bit.ly/1JZ0JvQ

AppendixH 5

StateLawDevelopmentsKeepingthePerpetualinPerpetualConservationEasementshttp://bit.ly/1Qk6pB5MontanaTrialCourtUpholdsTNC’sEnforcementofaConservationEasementhttp://bit.ly/1KSE0SFConservationEasementValidDespiteReferencingIncorrectGrantorhttp://bit.ly/1n4UZp9Registerv.TNC—$1MillionDonationConstitutedaRestrictedCharitableGifthttp://bit.ly/24umladMarylandAppellateCourtUpholdsConservationEasementhttp://bit.ly/1RanqKoMarylandLandTrustandAttorneyGeneralEnforceaConservationEasementhttp://bit.ly/1RanvxJMESupremeCourt:ConservationLandsOpentoPublicExemptfromPropertyTaxhttp://bit.ly/1Qb4dulMASupremeCourt:ConservationLandOpentoPublicExemptfromPropertyTaxhttp://bit.ly/1Rvro2TGlassv.VanLokeren—ConservationEasementDonorsSueLandTrusthttp://bit.ly/1Qb4a1IGrowingMarijuanaas“Agriculture”onConservation-EasementProtectedLandhttp://bit.ly/1S8qH1OFederally-FundedConservationEasementThwartsMarijuanaProductionhttp://bit.ly/1Qk5KzRSymposiumPerpetualConservationEasements:WhatHaveWeLearnedandWhereShouldWeGoFromHere?http://bit.ly/1KSDeVJ