                               149 T.C. No. 18



                      UNITED STATES TAX COURT



 PALMOLIVE BUILDING INVESTORS, LLC, DK PALMOLIVE BUILDING
INVESTORS PARTICIPANTS, LLC, TAX MATTERS PARTNER, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent


    Docket No. 23444-14.                         Filed October 10, 2017.



          In 2004 partnership PB transferred a facade easement by
    executing an easement deed in favor of a qualified organization. The
    easement deed places restrictions on PB and its successors with
    respect to the facade easement and the building. PB’s building was
    subject to two mortgages, but before executing the easement deed, PB
    obtained ostensible mortgage subordination agreements from its
    mortgagee banks. However, the easement deed provides that in the
    event the facade easement is extinguished through a judicial pro-
    ceeding, the mortgagee banks will have claims prior to that of the
    donee organization to any proceeds received from the condemnation
    proceedings, until the mortgage is satisfied. PB claimed a charitable
    contribution deduction for 2004 for the facade easement contribution.

           In a notice of final partnership administrative adjustment issued
    to PB, R disallowed PB’s claimed charitable contribution deduction
    for the donation of the facade easement and also determined that PB
    is liable for a gross valuation misstatement penalty under I.R.C. sec.
    6662(h) and (a) or alternatively for a substantial understatement of
                                 -2-

income tax, negligence or disregard of rules or regulations, or a
substantial valuation misstatement penalty under I.R.C. sec. 6662(a)
and (b)(1), (2), or (3). DK, PB’s TMP, filed a petition in this Court
challenging these determinations, and R filed a motion for partial
summary judgment under Rule 121.

       R argues that the easement deed does not satisfy the perpetuity
requirements of I.R.C. sec. 170 and 26 C.F.R. sec. 1.170A-
14(g)(6)(ii), Income Tax Regs., because it provides the mortgagees
with prior claims to extinguishment proceeds in preference to the
donee. PB argues the contrary, citing Kaufman v. Shulman, 687 F.3d
21 (1st Cir. 2012), aff’g in part, vacating in part, and remanding in
part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C.
182 (2010). Alternatively, PB argues that if the easement deed does
otherwise violate the perpetuity requirement of I.R.C. sec. 170 and
the regulation, the easement deed contains a saving clause that will
retroactively reform the deed to comply with the perpetuity require-
ments of sec. 1.170A-14(g)(6)(ii).

       Held: In this case, presumably appealable to the U.S. Court of
Appeals for the Seventh Circuit, we are not bound by the opinion of
the U.S. Court of Appeals for the First Circuit in Kaufman v.
Shulman, see Golsen v. Commissioner, 54 T.C. 742, 757 (1970),
aff’d, 445 F.2d 985 (10th Cir. 1971), and we will follow Kaufman v.
Commissioner; we will not follow Kaufman v. Shulman.

      Held, further, PB’s easement deed fails to satisfy the “in
perpetuity” requirement of I.R.C. sec. 170(h)(5) because, first, the
mortgages on the building were not fully subordinated to the
easement as required by sec. 1.170A-14(g)(2), and, second, because
the donee was not guaranteed to receive the share of proceeds
mandated by sec. 1.170A-14(g)(6)(ii) in the event that the easement
was extinguished and the donor subsequently conveyed the property
and received proceeds for it. Thus, the facade easement contribution
was not a qualified conservation contribution under I.R.C. sec.
170(h), and PB is not entitled to a charitable contribution deduction.
                                                           -3-

               Held, further, the defects in the easement deed are not cured by
         a provision that purports to retroactively amend the deed, because the
         requirements of I.R.C. sec. 170 must be satisfied at the time of the
         gift.



         Jeffrey H. Paravano and Michelle M. Hervey, for petitioner.

         David A. Lee, Thomas F. Harriman, Elizabeth Y. Williams, and Robert J.

Basso, for respondent.



                                                    CONTENTS


Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

         The property and the charitable donation . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
         The mortgage and its “subordination” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
         The Deed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
         The IRS’s examination, the FPAA, and the petition . . . . . . . . . . . . . . . . . . 14

Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

         I.        General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

                   A.       Summary judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
                   B.       Conservation contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
                   C.       Perpetuity requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

                            1.        Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
                            2.        Extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
                            3.        Proceeds from extinguishment . . . . . . . . . . . . . . . . . . . 20
                                                         -4-

         II.      The parties’ contentions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

                  A.       The Commissioner’s contentions . . . . . . . . . . . . . . . . . . . . . . 21
                  B.       Palmolive’s contentions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

         III.     Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

                  A.       The Deed does not satisfy the perpetuity requirement of
                           section 170(h)(5)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

                           1.        Section 1.170A-14(g)(2) of the regulations requires
                                     that the mortgages be subordinated . . . . . . . . . . . . . . . 24

                                     a.       Actual subordination is required. . . . . . . . . . . . . 24
                                     b.       Supposed prevention of the extinguishment of
                                              the easement by foreclosure is not an adequate
                                              substitute for subordination. . . . . . . . . . . . . . . . . 25
                                     c.       Subordination of a mortgage must include
                                              subordination as to insurance proceeds in the
                                              event the property is destroyed. . . . . . . . . . . . . . 27

                           2.        Section 1.170A-14(g)(6) of the regulations requires
                                     that the donee must receive a “property right” that
                                     entitles it to receive proceeds from any disposition
                                     after extinguishment.. . . . . . . . . . . . . . . . . . . . . . . . . . . 30

                           3.        Section 1.170A-14(g)(3) of the regulations does
                                     not excuse non-compliance with sections -14(g)(2)
                                     and (g)(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

                  B.       The “saving” clause does not cure the Deed. . . . . . . . . . . . . . 40

APPENDIX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
                                        -5-

                                     OPINION


       GUSTAFSON, Judge: On July 28, 2014, the Internal Revenue Service

(“IRS”) issued a notice of final partnership administrative adjustment (“FPAA”)

for the taxable year ending December 31, 2004, to DK Palmolive Building

Investors Participants, LLC, the tax matters partner (“TMP”) for Palmolive

Building Investors, LLC (“Palmolive”). This case is a TEFRA partnership-level

action based on a petition filed by the TMP pursuant to section 6226.1 At issue is

Palmolive’s entitlement to a charitable contribution deduction for its donation of a

facade easement. Now before the Court is a motion for partial summary judgment

filed by petitioner and a cross-motion for partial summary judgment filed by

respondent, the Commissioner of the IRS. These cross-motions present the

question whether Palmolive’s easement deed satisfied the perpetuity requirements

of section 170(h)(5) and 26 C.F.R. section 1.170A-14(g)(2) and (6), Income Tax

Regs.2 As explained below, we will deny Palmolive’s motion for partial summary


      1
        Unless otherwise indicated, all section references are to the Internal
Revenue Code (26 U.S.C.; “I.R.C.” or “the Code”), as amended and in effect for
the relevant year, and all Rule references are to the Tax Court Rules of Practice
and Procedure.
      2
        Because, in deciding this issue, we determine that Palmolive is not entitled
to the charitable contribution deduction at issue, we need not reach other issues the
                                                                       (continued...)
                                        -6-

judgment and grant the Commissioner’s cross-motion for partial summary

judgment.

                                   Background

The property and the charitable donation

      Palmolive owns the Palmolive Building on North Michigan Avenue in

Chicago, Illinois (the “building”), which it acquired for approximately $58.5

million in May 2001.3 On December 21, 2004, Palmolive executed an easement

deed (called a “Conservation Right”; hereinafter referred to as “the Deed”) in

favor of the Landmarks Preservation Council of Illinois (“LPCI” or “donee”), an

Illinois not-for-profit corporation and a qualified organization within the meaning




      2
        (...continued)
parties have presented--i.e., whether Palmolive satisfied the substantiation
requirements of section 170(f)(8) and whether the easement violated the perpetuity
requirements of section 170(h)(2)(C) and (5)(A) by allowing Palmolive to make
changes to the property.
      3
       Palmolive owned the building indirectly through three entities, each of
which owned separate portions of the building and related property: (1) Palmolive
Building Facade, LLC (“Facade LLC”), owned the facade and air rights;
(2) Palmolive Building Retail, LLC, owned floors 1 through 4, except for the
facade thereon and portions of floors 1 and 2; and (3) Palmolive Tower
Condominiums, LLC, owned the remainder of the building. Facade LLC signed
the Deed to LPCI, but Facade LLC was a “disregarded”, single-member LLC
wholly owned by Palmolive. Neither party suggests any different analysis if
Facade LLC rather than Palmolive is deemed the donor.
                                        -7-

of section 170(h)(3); and Palmolive filed the Deed with the Cook County Recorder

of Deeds.

      The stated purpose of the Deed is to preserve the exterior perimeter walls of

the building’s facade (called “the protected elements”).4 The Deed (quoted below)

obligates Palmolive and any subsequent owner of the building to maintain in

perpetuity the protected elements of the building. The Deed prohibits Palmolive

from demolishing, removing, or altering the protected elements, from making any

horizontal or vertical expansion of the building, and from performing any

chemical cleaning or sandblasting of the protected elements without LPCI’s

permission.

The mortgage and its “subordination”

      At the time of the execution of the Deed, two mortgages encumbered the

building, one owed to Corus Bank, N.A. (“Corus”), and the other to the National

Electrical Benefit Fund (“NEBF”).5 Each mortgage had an outstanding balance of



      4
       The protected elements are defined as: “1. All visible exterior elevations,
including their rooflines; and, 2. The rooftop mast of the former Palmolive
Beacon.”
      5
       The NEBF loan appears to have originally been multiple loans, eventually
consolidated before 2004, entered into in connection with acquiring the Building,
and the Corus loan appears to have been a construction loan entered into in
October of 2003.
                                        -8-

approximately $55.6 million as of December 21, 2004. Both the Corus mortgage

and the NEBF mortgage6 obliged Palmolive to maintain insurance on the entire

property (including the facade) and granted to the mortgagees Palmolive’s right to

insurance proceeds.7

      Before executing the Deed with LPCI (and in accordance with Palmolive’s

undertaking in paragraph 20 of the Deed, quoted below), Palmolive secured an

ostensible agreement from both lenders to subordinate their mortgages in the

property to LPCI’s rights to enforce the purposes of the easement. Corus’s

“Mortgage Subordination” states:

      CORUS BANK, N.A. hereby acknowledges and agrees that it is the
      mortgagee and/or secured party under those mortgages and security
      documents (collectively, the “Security Documents”) described on
      Appendix I (CORUS) to this Mortgage Subordination, and that it
      hereby subordinates each and every of such Security Documents to
      this Conservation Right, as provided in, and subject to the terms,
      conditions and limitations of Paragraph 20 hereof. [Emphasis
      added.8]


      6
          See app. infra pp. 43-45.
      7
       While Palmolive contends that the Corus and NEBF mortgages differ
depending upon whether the Building’s rehabilitation has been completed at the
time of the casualty or damage, we do not address this point, because it is not
relevant to the legal principles by which we resolve this case.
      8
       Paragraph 20 of the Deed states: “Grantor represents and warrants that it
has provided a copy of this instrument to all lienholders as of the date hereof, and
                                                                        (continued...)
                                          -9-

The NEBF subordination consists of identical wording, other than referring to

NEBF rather than Corus. Thus, the nature and extent of the mortgagees’

“subordination” is limited by paragraph 20 of the Deed.

         Palmolive asserts (and the Commissioner has not disputed) that when Corus

first made the loan in 2003 the building had been valued at approximately

$190 million. On the basis of an appraisal, Palmolive asserts (and we assume, for

purposes of the Commissioner’s motion) that at the time of the donation of the

easement in 2004, the total value of the property had increased to $257 million, of

which 13%--i.e., $33.41 million--was attributable to the easement.

The Deed

         The relevant sections of the Deed provided as follows (with emphasis added

here):

                7.     Insurance. The Grantor shall keep the Property insured
         * * * for the full replacement value against loss from the perils com-
         monly insured under standard fire and-extended coverage policies
         and comprehensive general liability insurance against claims for
         personal injury, death, and property damage of a type and in such
         amounts as would, in the opinion of Grantee, normally be carried on a

         8
       (...continued)
the agreement of each lienholder to subordinate its mortgage to this Conservation
Right is attached hereto.” The executed subordinations, including the quoted
Corus mortgage subordination, are so attached to the Deed. Thus, each
subordination references the Deed, and the Deed references both subordination
documents.
                                       - 10 -

      structure such as the Property * * *. Such insurance shall include
      Grantee’s interest, name Grantee as an additional insured, provide for
      at least ten (10) days’ notice to Grantee before cancellation, provide
      that the act or omission of one insured will not invalidate the policy
      as to the other insured party and be in a form reasonably acceptable to
      Grantee in the exercise of its reasonable judgment; Grantee disclaims
      its right to direct use and application of insurance proceeds except as
      such application relates to the physical restoration of the Facade
      pursuant to the terms hereof and does not conflict with the provisions
      of Paragraph 20(a) hereof.

                    Furthermore, Grantor shall deliver to Grantee fully
      executed certificates evidencing the aforesaid insurance coverage at
      the commencement of this grant and copies of certificates for new or
      renewed policies at least ten (10) days prior to the expiration of such
      policy. Grantee shall have the right to provide insurance at the
      Grantor’s cost and expense, should Grantor fail to obtain same. In the
      event Grantee obtains such insurance, the cost of such insurance shall
      be a lien on the Property until repaid by Grantor. Whenever the
      Property or Building (or any portion thereof) is encumbered with any
      recorded mortgage given in connection with a promissory note
      secured by the Property and held by a Mortgagee (as defined in
      Paragraph 20), nothing contained in this paragraph shall jeopardize
      the prior claim, if any, of the mortgagee/lender to the insurance
      proceeds.

                     Notwithstanding anything to the contrary herein
      contained, the lien of any mortgage or deed of trust encumbering the
      Property or Building (or any portion thereof) and the provisions
      contained therein or in any loan document related thereto or in the
      REA[9] shall be superior to the rights of Grantee hereunder as they
      relate to (i) the right to use any insurance proceeds or condemnation

      9
       The “REA” is the “Amended and Restated Declaration of Covenants,
Conditions, Restrictions, and Easements” dated June 13, 2003, by which the
facade rights were initially conveyed to Facade LLC. The acronym REA,
unexplained in our record, may stand for “reciprocal easement agreement”.
                                - 11 -

awards to restore the Property or for application to the debt secured
thereby, and (ii) the manner in which any such proceeds or awards are
to be disbursed and (iii) the rights or claims to any such proceeds or
awards.

            *      *     *     *         *   *     *

       17. Stipulated Value of Grantee’s Interest. Grantor acknowl-
edges that upon execution and recording of this Conservation Right,
Grantee shall be immediately vested with a real property interest in
the Property and that such interest of Grantee shall have a stipulated
fair market value, for purposes of allocating net proceeds in an
extinguishment pursuant to Paragraph 19, equal to the ratio between
the fair market value of the Conservation Right and the fair market
value of the Property prior to considering the impact of the Conserva-
tion Right (hereinafter the “Conservation Right Percentage”) as deter-
mined in the Qualified Appraisal provided to the Grantee pursuant to
Paragraph 18. Upon submission of the Qualified Appraisal, the
Grantor and Grantee shall sign an instrument verifying the Conserva-
tion Right Percentage and record it as an amendment to this Conser-
vation Right; such Conservation Right Percentage may not be
changed, modified or amended without the execution by Grantor and
Grantee and recording of an amendment to this Conservation Right.

            *      *     *     *         *   *     *

       19. Extinguishment. Grantor and Grantee hereby recognize
that an unexpected change in the conditions surrounding the Property
may make impossible the continued ownership or use of the Property
for the preservation and conservation purposes and necessitate extin-
guishment of the Conservation Right. Such a change in conditions
includes, but is not limited to, partial or total destruction of the
Property resulting from a casualty of such magnitude that Grantee
approves demolition as provided in Paragraph 5 and/or agrees that
repair or replacement is not practical. Such an extinguishment must
comply with the following requirements:
                                 - 12 -

           (a) The extinguishment must be the result of a final,
non-appealable judicial proceeding;

             (b) Grantee shall be entitled to a share in any net
proceeds to Grantor resulting from or related to the extinguishment in
an amount equal to the Conservation Right Percentage determined
pursuant to Paragraph 17 multiplied by the net proceeds actually paid
to the Grantor pursuant to the REA. Grantor hereby covenants and
agrees that, without the prior written consent of Grantee, it shall not
consent to or approve any amendment to the REA which would
reduce the amount of net proceeds payable to Grantor as currently
provided in the REA.

             *     *      *     *         *   *     *

              (d) Net proceeds shall include, without limitation,
insurance proceeds, condemnation proceeds or awards, proceeds from
a sale in lieu of condemnation, and proceeds from the sale, financing
or exchange by Grantor of any portion of the Property after the extin-
guishment, but shall specifically exclude any preferential claim of a
Mortgagee under Paragraph 20.

              (e) It is the intention of Grantor that the provisions of
this Paragraph 19 comply with all applicable requirements of the
Income Tax Regulations governing qualified conservation con-
tributions, particularly (without limitation) the requirements of
Section 1.170A-14(g)(6) thereof. In the event that any of the
provisions of this Paragraph 19 conflict or are inconsistent with or
otherwise do not comply with such Regulations, they shall be deemed
to be amended to the extent necessary to eliminate such conflict or
inconsistency and to bring them into full compliance with such
regulations; provided, however, that any such “deemed amendment”
which materially adversely affects a Mortgagee’s rights under this
Conservation Right or which materially increases the burdens or
obligations of a Mortgagee, if any, hereunder, shall require the
consent of any Mortgagee so affected.
                                 - 13 -

       20. Subordination of Mortgages. Grantor and Grantee agree
that all mortgages and rights in the Property of all mortgagees and
holders of other liens and encumbrances (collectively “lienholders”)
are subject and subordinate at all times to the rights of the Grantee to
enforce the purposes of this Conservation Right. Grantor represents
and warrants that it has provided a copy of this instrument to all
lienholders as of the date hereof, and the agreement of each lienholder
to subordinate its mortgage to this Conservation Right is attached
hereto. The following provisions apply to all Mortgagees (as defined
in Paragraph 20(f) below):

             (a) If a mortgage grants to a Mortgagee the right to
receive the proceeds of condemnation proceedings arising from any
exercise of the power of eminent domain as to all or any part of the
Property or the right to receive insurance proceeds as a result of any
casualty, hazard, or accident occurring to or about the Property, the
Mortgagee shall have a prior claim to the insurance and condemna-
tion proceeds and shall be entitled to same in preference to Grantee
until the mortgage is paid off and discharged, notwithstanding that
the mortgage is subordinate in priority to this Conservation Right.

             *     *      *     *         *   *     *

              (c) Until a Mortgagee or purchaser at foreclosure
obtains ownership of the Property following foreclosure of its
Mortgage or deed in lieu of foreclosure, the Mortgagee or purchaser
shall have no obligation, debt, or liability under this Conservation
Right and then only for obligations arising or matters occurring after
the transfer of title. In the event of foreclosure or deed in lieu of
foreclosure, the Conservation Right shall not be extinguished.

             *     *      *     *         *   *     *
                                        - 14 -

                    (e) Nothing contained in the above paragraphs or in
      this Conservation Right shall be construed to give any Mortgagee the
      right to extinguish this Conservation Right by taking title to the
      Property by foreclosure or otherwise.
             [Emphasis added.]

The IRS’s examination, the FPAA, and the petition

      The IRS examined Palmolive’s 2004 return, and in the FPAA the IRS

determined that Palmolive did not adequately substantiate the contribution and

that the deed did not meet the requirements of section 170. In the alternative, the

IRS asserted that even if the contribution of the easement met those requirements,

Palmolive did not establish that the easement had a value of $33,410,000. On

October 1, 2014, Palmolive’s petition was timely filed in this Court. Palmolive’s

principal place of business was in Illinois when the petition was filed.

                                     Discussion

I.    General principles

      A.     Summary judgment

      Where the material facts are not in dispute, a party may move for summary

judgment to expedite the litigation and avoid an unnecessary trial. Fla. Peach

Corp. v. Commissioner, 90 T.C. 678, 681 (1988). A partial summary adjudication

is appropriate if some but not all issues in the case are disposed of summarily. See

Rule 121(b); Turner Broad. Sys., Inc. v. Commissioner, 111 T.C. 315, 323-324
                                        - 15 -

(1998). The party moving for summary judgment bears the burden of showing

that there is no genuine dispute as to any material fact, and factual inferences are

to be drawn in the manner most favorable to the party opposing summary

judgment. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982). Whether the easement deed satisfied the

perpetuity requirements of section 170(h) of the Code and section 1.170A-

14(g)(6)(ii) and -14(g)(2) of the regulations is a legal question appropriate for

decision by summary judgment. See Tempel v. Commissioner, 136 T.C. 341, 344-

345 (2011), aff’d sub nom. Esgar Corp. v. Commissioner, 744 F.3d 648 (10th Cir.

2014). Both parties have moved for partial summary judgment; and since we will

grant the Commissioner’s motion for partial summary judgment, we draw factual

inferences in favor of Palmolive.

      B.     Conservation contributions

      A taxpayer is generally allowed a deduction for any charitable contribution

made during the taxable year. Sec. 170(a)(1). A charitable contribution is a gift of

property to a charitable organization made with charitable intent and without the

receipt or expectation of receipt of adequate consideration. See Hernandez v.

Commissioner, 490 U.S. 680, 690 (1989); United States v. Am. Bar Endowment,

477 U.S. 105, 116-118 (1986); see also 26 C.F.R. sec. 1.170A-1(h)(1) and (2),
                                         - 16 -

Income Tax Regs. The Code generally disallows a charitable contribution

deduction for a gift of property consisting of less than an entire interest in that

property, see sec. 170(f)(3)(A), but provides an exception for a “qualified

conservation contribution”, see sec. 170(f)(3)(B)(iii).

      Under section 170(h)(1), a qualified conservation contribution must be a

contribution of a “qualified real property interest * * * to a qualified organization

* * * exclusively for conservation purposes.” See also 26 C.F.R. sec. 1.170A-

14(a), Income Tax Regs. The Commissioner’s motion addresses the third

requirement--whether Palmolive’s contribution of the conservation easement to

LPCI was exclusively for conservation purposes.

      A contribution is made exclusively for conservation purposes only if, at the

time of the contribution, it meets the requirements of section 170(h)(5). See Glass

v. Commissioner, 124 T.C. 258, 277 (2005), aff’d, 471 F.3d 698 (6th Cir. 2006);

Mitchell v. Commissioner, T.C. Memo. 2013-204, aff’d, 775 F.3d 1243 (10th Cir.

2015). Section 170(h)(5)(A) provides that “[a] contribution shall not be treated as

exclusively for conservation purposes unless the conservation purpose is protected

in perpetuity”.10 (Emphasis added.)

      10
       Section 170(h)(5)(A), which addresses the perpetuity of the conservation
purpose, thus echoes the prior provision of section 170(h)(2)(C) that an easement
                                                                       (continued...)
                                        - 17 -

      C.     Perpetuity requirement

      Section 1.170A-14(g)(1) of the regulations11 provides generally that, in

order for the conservation purpose of a donation to be enforceable in perpetuity,

the “interest in the property retained by the donor * * * must be subject to legally

enforceable restrictions * * * that will prevent uses of the retained interest

inconsistent with the conservation purposes of the donation.” The various

subparagraphs of section 1.170A-14(g) set forth many of these legally enforceable




      10
         (...continued)
can be a “qualified real property interest” only if it is “a restriction (granted in
perpetuity) on the use which may be made of the real property”. (Emphasis
added.) Thus, the “perpetuity” of the grant is essential both for the donated
property to be a “qualified real property interest” (under subsection (h)(2)(C)) and
for the purpose of the grant to be “exclusively for conservation purposes” (under
subsection (h)(5)(A)). See also 26 C.F.R. sec. 1.170A-14(b)(2), (g), Income Tax
Regs. “Though both requirements speak in terms of ‘perpetuity,’ they are not one
and the same.” Belk v. Commissioner, 774 F.3d 221, 228 (4th Cir. 2014), aff’g
140 T.C. 1 (2013). The “perpetuity” regulations at issue here are elaborations on
the latter requirement--“exclusively for conservation purposes”--and we analyze
them as such.
      11
        The principles implicated in this case are founded on the “perpetuity”
requirements in the statute (section 170), but the specific rules to be analyzed
appear in the regulations (section 1.170A-14(g)), promulgated pursuant to
section 7805(a). We defer to such regulations. See Altera Corp. & Subs. v.
Commissioner, 145 T.C. 91, 114-115 (2015) (citing Chevron, U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 842 (1984), and Mayo Found. for
Med. Educ. & Research v. United States, 562 U.S. 44, 55-58 (2011)). Palmolive
has not disputed the validity of these regulations.
                                        - 18 -

restrictions, see Mitchell v. Commissioner, 138 T.C. 324, 330 (2012), three of

which we now outline.

             1.    Mortgages

      Whether a mortgage on property exists can obviously affect whether a

donation of an easement on the property has any lasting value. If a piece of

property were worth $100 million, and if 13% of its value--i.e., $13 million--were

attributable to an easement that was donated to a qualifying organization, the

donee organization’s retention of 13% of the property’s value over time could be

much affected by a mortgage if the donee’s easement was subordinate to that

mortgage. If the property were “under water”--with mortgage debt in an amount

that equaled or exceeded its value of $100 million--then a donee who received an

easement right that was subordinate to that mortgage would have received a

donation worth zero. Similarly, if the mortgage debt on the $100 million property

were only $87 million but that mortgage was superior to the donee’s easement

right, and if the value of the property decreased to $87 million by the time of a

condemnation or forced sale, then the mortgagee could be made whole upon

foreclosure, but the donee’s subordinate right to the easement would be worth

nothing. The presence of a mortgage can thus threaten the perpetuity of the

donee’s interest in the property.
                                       - 19 -

      Section 1.170A-14(g)(2) of the regulations therefore addresses mortgages,

and it provides:

             (2) Protection of a conservation purpose in case of donation
      of property subject to a mortgage.--In the case of conservation
      contributions made after February 13, 1986, no deduction will be
      permitted under this section for an interest in property which is
      subject to a mortgage unless the mortgagee subordinates[12] its rights
      in the property to the right of the qualified organization to enforce the
      conservation purposes of the gift in perpetuity. For conservation
      contributions made prior to February 14, 1986, the requirement of
      section 170(h)(5)(A) is satisfied in the case of mortgaged property
      (with respect to which the mortgagee has not subordinated its rights)
      only if the donor can demonstrate that the conservation purpose is
      protected in perpetuity without subordination of the mortgagee's
      rights. [Emphasis added.]

The different regime for contributions before February 1986 should be noted:

Literal subordination was not required, as long as “protect[ion] in perpetuity” by

other means could be demonstrated. For subsequent contributions, “no deduction

will be permitted” without subordination.




      12
        “[A] subordination agreement is simply a contract in which a creditor (the
‘subordinated’ or ‘junior’ creditor [here, the mortgagee]) agrees that the claims of
specified senior creditors [here, the donee] must be paid in full before any
payment on the subordinated debt may be made to, and retained by, the
subordinated creditor.” New York Stock Exch. v. Pickard & Co., 296 A.2d 143,
147 (Del. Ch. 1972).
                                        - 20 -

             2.     Extinguishment

      Section 1.170A-14(g)(6)(i) of the regulations entitled “Extinguishment”,

recognizes that after the donee organization’s receipt of an interest in property, an

unexpected change in the conditions surrounding the property may make

impossible or impractical the continued use of the property for conservation

purposes, and a court may “extinguish” the conservation restrictions. Section

1.170A-14(g)(6)(i) provides:

      If a subsequent unexpected change in the conditions surrounding the
      property that is the subject of a donation under this paragraph can
      make impossible or impractical the continued use of the property for
      conservation purposes, the conservation purpose can nonetheless be
      treated as protected in perpetuity if the restrictions are extinguished
      by judicial proceeding and all of the donee’s proceeds * * * from a
      subsequent sale or exchange of the property are used by the donee
      organization in a manner consistent with the conservation purposes of
      the original contribution.

             3.     Proceeds from extinguishment

      Subdivision (ii) of section 1.170A-14(g)(6) is entitled “Proceeds” and

requires that, at the time of the gift, the donor must agree that the donation of the

perpetual conservation restriction gives rise to a property right, immediately

vested in the donee organization, with a fair market value that, at the time of the

gift, is at least equal to the proportionate value that the perpetual conservation
                                        - 21 -

restriction bears to the value of the property as a whole. Moreover, section

1.170A-14(g)(6)(ii) states in pertinent part:

      In case of a donation made after February 13, 1986, for a deduction to
      be allowed under this section, at the time of the gift the donor must
      agree that the donation of the perpetual conservation restriction gives
      rise to a property right, immediately vested in the donee organization,
      with a fair market value that is at least equal to the proportionate
      value that the perpetual conservation restriction at the time of the gift
      bears to the value of the property as a whole at that time. * * * Ac-
      cordingly, when a change in conditions gives rise to the extinguish-
      ment of a perpetual conservation restriction under paragraph (g)(6)(i)
      of this section, the donee organization, on a subsequent sale, ex-
      change, or involuntary conversion of the subject property, must be
      entitled to a portion of the proceeds at least equal to that propor-
      tionate value of the perpetual conservation restriction * * *.
      [Emphasis added.]

II.   The parties’ contentions

      A.     The Commissioner’s contentions

      The Commissioner argues that Palmolive’s easement deed does not satisfy

the perpetuity requirements of section 170(h)(5)(A) and section 1.170A-

14(g)(6)(ii) because the Deed provides that Palmolive’s mortgagees, Corus and

NEBF, have prior claims to any extinguishment proceeds in preference to LPCI

and that this priority violates the requirement that LPCI have a guaranteed right to

a proportionate share of future proceeds.
                                        - 22 -

      The Commissioner also argues that those same provisions in the Deed

render the subordinations of NEBF and Corus insufficient to satisfy section

1.170A-14(g)(2), which requires that if the underlying property of a donated

conservation easement is subject to a mortgage, then that mortgage must be

subordinated to the right of the donee to enforce the conservation purposes of the

gift in perpetuity. Both parties’ arguments as to that section focus on what it

means that a donee has the right to enforce the “conservation purposes of the gift

in perpetuity”.

      B.     Palmolive’s contentions

      Palmolive argues that, as to section 1.170A-14(g)(6), the Commissioner’s

position was expressly rejected in Kaufman v. Shulman (Kaufman III), 687 F.3d

21 (1st Cir. 2012), aff’g in part, vacating in part, and remanding in part Kaufman

v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010), and that this

Court should follow the Court of Appeals’ interpretation of the perpetuity

requirement. In the alternative, Palmolive argues that even if the Deed does

otherwise violate the proceeds requirement of section 1.170A-14(g)(6)(ii), the
                                        - 23 -

Deed contains a saving clause13 that retroactively reforms the deed to comply with

the regulation.

       As to section 1.170A-14(g)(2), Palmolive argues that: first, the mortgages

burden the facade only incidentally; second, that the purpose of this rule is

fulfilled by the Deed’s prohibition of “extinguishment” by the mortgagee; third,

that the chain of events necessary for a priority problem to affect LPCI renders

such a problem so remote as to be negligible, so that the priority provisions should

not defeat the deduction; and fourth, that any liens which might burden the

building after the execution of the Deed do not come within the purview of section

170(h).

III.   Analysis

       We agree with the Commissioner’s application of the regulation and

reaffirm our holdings in Kaufman v. Commissioner (Kaufman I), 134 T.C. 182

(2010), and Kaufman v. Commissioner (Kaufman II), 136 T.C. 294 (2011).




       13
        The Commissioner refers to paragraph 19(e) of the easement deed as an
“escape clause” because “saving clause” and “formula clause” are terms of art
whose definitions the clause at issue does not meet. See Estate of Petter v.
Commissioner, T.C. Memo. 2009-280, slip op. at 25-33, aff’d, 653 F.3d 1012 (9th
Cir. 2011). We will refer to this clause as a saving clause but we do so without
deciding whether the clause at issue is a disfavored saving clause or a favored
formula clause as explained in Estate of Petter.
                                        - 24 -

       A.      The Deed does not satisfy the perpetuity requirement of
               section 170(h)(5)(A).

               1.    Section 1.170A-14(g)(2) of the regulations requires that the
                     mortgages be subordinated.

                     a.    Actual subordination is required.

       In sum, the mortgages on Palmolive’s property were not subordinated to the

easement. Of course, the subordination requirement of section 1.170A-14(g)(2),

i.e., that--

       no deduction will be permitted * * * for an interest in property which
       is subject to a mortgage unless the mortgagee subordinates its rights
       in the property to the right of the * * * [donee] organization to
       enforce the conservation purposes of the gift in perpetuity. * * *
       [Emphasis added.]

--is not satisfied simply by including in the Deed a section captioned

“Subordination of Mortgages”, without regard to what the Deed actually provides

and what the mortgagee actually agrees to. Rather, the mortgagee must actually

subordinate its interest. The incorporation of the Deed at issue in the mortgagees’

purported subordination documents does not do so, and in significant respects it

does the opposite. Paragraph 20(a) of the Deed provides:

       [T]he Mortgagee shall have a prior claim to the insurance and con-
       demnation proceeds and shall be entitled to same in preference to
       Grantee until the mortgage is paid off and discharged, notwithstand-
       ing that the mortgage is subordinate in priority to this Conservation
       Right. [Emphasis added.]
                                        - 25 -

In these documents, “subordinate” is defined to include its opposite: The

mortgage is said to be “subordinate”, but in fact the mortgagee has “a prior claim”.

This does not satisfy the regulation.

                   b.     Supposed prevention of the extinguishment of the
                          easement by foreclosure is not an adequate substitute for
                          subordination.

      Palmolive argues that “[Palmolive] satisfied * * * [section 1.170A-

14(g)(2)], because it expressly subordinates all of the Mortgagees’ property rights

in the façade, so that they cannot extinguish the Easement through foreclosure.”

Palmolive proposes that “the Regulation simply requires that the mortgage

subordination to be [sic] in place at the time the easement is granted, to ensure the

mortgage holder is at no point able to extinguish the easement by foreclosing on

the underlying property”. That is, in Palmolive’s view the purpose of the

subordination requirement is satisfied as long as extinguishment of the easement

by foreclosure is prevented.14 For this proposition Palmolive cites our opinion in

      14
        Palmolive cites two section 170 subordination cases--Mitchell v.
Commissioner, 775 F.3d 1243 (10th Cir. 2015), aff’g T.C. Memo. 2013-204, and
Minnick v. Commissioner, 796 F.3d 1156 (9th Cir. 2015), aff’g T.C. Memo 2012-
345,--in which mortgagees did not subordinate their mortgages until after the
easements were donated and in which section 1.170A-14(g)(2) was therefore held
not to have been satisfied; and Palmolive distinguishes these cases with the
assertion that its own subordination documents, executed contemporaneously with
the easement Deed, do not present the timing problem that was present in Minnick
                                                                      (continued...)
                                        - 26 -

Minnick v. Commissioner, T.C. Memo. 2012-345, aff’d, 796 F.3d 1156 (9th Cir.

2015), and argues:

      In Minnick this Court explained that the Regulation was specifically
      intended to prevent extinguishment through foreclosure by the
      mortgagee (U.S. Bank): “Without a subordination agreement, U.S.
      Bank would have been able to seize the land in the event of default on
      the mortgage, thus owning the land free of the conservation
      easement.” T.C. Memo 2012-345 at *7.

In fact, in Minnick we did not thus reduce the significance of the regulation to the

mere prevention of extinguishment. We did observe (as Palmolive quotes) that the

failure to subordinate would have enabled the mortgagee in Minnick to “own[] the

land free of the conservation easement” (an arrangement obviously contrary to the

regulation), but we did not hold that the regulation is satisfied as long as

extinguishment by foreclosure is avoided.

      If section 1.170A-14(g)(2) was intended to mean “subordinates its right to

foreclose on the property” rather than “subordinates its rights in the property”

(emphasis added) (as it actually does), then it would read accordingly. It does not.

The supposedly subordinate mortgagee’s actual priority in this deed includes a


      14
        (...continued)
and Mitchell. See also RP Golf, LLC v. Commissioner, T.C. Memo. 2016-80,
aff’d, 860 F.3d 1096 (8th Cir. 2017). The assertion is accurate, but it does not
address the problem that is present here, viz, Palmolive’s purported subordination
documents do not actually effect a subordination.
                                        - 27 -

prior claim with respect to insurance proceeds, a priority that is at odds with true

subordination.

                   c.     Subordination of a mortgage must include subordination
                          as to insurance proceeds in the event the property is
                          destroyed.

      It is true that the mortgage provisions of section 1.170A-14(g)(2), unlike the

extinguishment provisions of paragraph (g)(6) (discussed below in part III.A.2),

do not explicitly mention proceeds. It is evidently this fact that prompts Palmolive

to argue that--

      the subordination requirement of Section 1.170A-14(g)(2) * * * does
      not require or permit consideration of the use of insurance proceeds
      prior to extinguishment. In addition, because a donee has no rights to
      insurance or other proceeds prior to extinguishment, a mortgagee’s
      priority to such proceeds has no impact on the donee's rights under
      the easement.

We assume arguendo that there is no absolute and universal requirement that the

donee of a facade easement must necessarily have a right to share in insurance

proceeds on the property. Perhaps an owner of property free and clear of any

mortgage could make a valid contribution of a facade easement, could thereafter

pay for insurance on only its retained interest in the property (minus the facade),

could leave it to the donee to decide whether to purchase insurance on the donee’s

interest in the facade, and could retain the entire amount of any subsequent
                                       - 28 -

proceeds from its insurance on the retained property. But that hypothetical

circumstance is quite different from the circumstance at issue.15

      Rather, here the property was not free and clear. Instead, the owner had

borrowed money and had used the property--the entire property, including the

facade--as collateral for his loans. Consequently, the entire property was subject

to mortgages. Likewise, the entire property (including the facade) was insured.

That insurance (on the entire property) became part of the mortgagees’ assurance

that their loans (on the entire property) would be repaid. Thus, notwithstanding

Palmolive’s donation of the facade easement, the facade continued to benefit

Palmolive by serving as collateral for Palmolive’s loans, and continued to benefit

Palmolive and its lenders by supporting insurance coverage16 that might yield



      15
         Likewise, we need not address the hypothetical circumstance in which a
donor (or mortgagee) retained a higher priority to insurance proceeds to be paid
for repairs and maintenance, but conferred on the donee of an easement a higher
priority claim to insurance proceeds in the event of a complete destruction. Unlike
section 1.170A-14(g)(6)(ii) see infra pt. III.A.2, section -14(g)(2) does not
explicitly require that the donee receive a “property right”. Whether paragraph
(g)(2) could be satisfied by the donee's receiving instead the mere contractual
obligation of the donor (or his mortgagee) to make repairs from insurance
proceeds, as long as the donee received true priority in the event the property was
destroyed, is a question that does not arise in this case, where the problem is a
wholesale failure to subordinate the mortgagees’ rights to insurance proceeds.
      16
        Palmolive does not dispute that the owner of a facade easement has an
insurable interest in the property.
                                          - 29 -

proceeds to repay Palmolive’s loans from the mortgagees. This circumstance

would leave the donee, LPCI, at risk: If the property (along with the facade) were

destroyed by fire or otherwise, the unsubordinated mortgagees would stand at the

head of the line to receive insurance proceeds; and if the proceeds were not

adequate to pay off the loans, then LPCI might in the end receive nothing. LPCI’s

supposedly perpetual interest in the facade would in fact have served Palmolive

and the mortgagees (by serving as collateral and supporting insurance coverage)

but would result in no benefit to LPCI.

      Where an owner of property subject to a mortgage and covered by insurance

would seek to donate a perpetual easement interest in a facade, the owner may not

surreptitiously hold back an interest in the facade by using it as collateral for

mortgage loans and exploiting insurance coverage on it to repay the owner’s

mortgage debt. Rather, the mortgagee’s “rights in the property” (as collateral for

its loans and as predicate for insurance proceeds) must be subordinated to the

interests of the donee.
                                        - 30 -

             2.    Section 1.170A-14(g)(6) of the regulations requires that
                   the donee receive a “property right” that entitles it to receive
                   proceeds from any disposition after extinguishment.

      Section 1.170A-14(g)(6)(ii) allows a donation only where a contribution

“gives rise to a property right”, and the regulation provides that “the donee

organization * * * must be entitled to a portion of the proceeds [from sale,

exchange, or involuntary conversion after extinguishment] at least equal to that

proportionate value of the perpetual conservation restriction”; but here the Deed

assures its mortgagees that this need not be the case. The supposedly prior

easement donee will not receive proceeds unless and until the supposedly

subordinate mortgages have been fully satisfied. If there were any doubt,

section 19 (“Extinguishment”) provides, to the same effect, that the “[n]et

proceeds” in which the donee will be entitled to share “shall specifically exclude

any preferential claim of a Mortgagee under Paragraph 20.” (Emphasis added.)

      To propose that the mortgagee is subordinate except as to proceeds from

extinguishment is to create an exception that might overwhelm the proposition.

Receiving proceeds in the event of a condemnation is a critical right and interest

of the mortgagee; and if that right and interest is not subordinated, then the

donee’s “property right” to proceeds is undermined. Palmolive’s arrangement

does not reflect the actual subordination of the mortgage.
                                        - 31 -

      This is not the first time we have faced the question of deductibility of a

donated facade easement where the building was subject to a mortgage that was

not properly subordinated with respect to proceeds in the event of condemnation

or extinguishment. We applied section 1.170A-14 regulations to such a case in

Kaufman I, and found that the donated easement failed to satisfy the proceeds

requirement of paragraph (g)(6)(ii). Kaufman I, 134 T.C. 182. We denied the

Kaufmans’ motion for reconsideration in Kaufman II. Kaufman II, 136 T.C. 294.

      The taxpayers appealed our decision, and the Court of Appeals for the First

Circuit held that the Kaufmans had satisfied section 1.170A-14(g)(6)(ii), Kaufman

III, 687 F.3d 21. That court held that “the IRS’s reading of its regulation [section

1.170A-14(g)(6)(ii)] would appear to doom practically all donations of easements,

which is surely contrary to the purpose of Congress”, since it believed that, under

the same reasoning, it could be argued that in the case of virtually any easement

donation possible future tax liens might end up taking priority over an easement

holder’s proceeds claim. Id. at 27 (an argument we will address below).17 This

      17
        The Court of Appeals reversed in part and remanded. On remand, we
applied the court’s interpretation of the regulation as directed in Kaufman III, but
we found that the Kaufmans’ donated easement had no value and consequently
they were not entitled to a deduction in any case. Kaufman v. Commissioner
(Kaufman IV), T.C. Memo. 2014-52. The Court of Appeals affirmed that
conclusion in Kaufman v. Commissioner (“Kaufman V”), 784 F.3d 56 (1st Cir.
                                                                        (continued...)
                                        - 32 -

Court “follow[s] a Court of Appeals decision which is squarely in point where

appeal from our decision lies to that Court of Appeals and to that court alone.”

Golsen v. Commissioner, 54 T.C. at 757. However, in this case, appealable to a

different Court of Appeals, we are not bound to follow this decision of the Court

of Appeals for the First Circuit, and we respectfully decline to do so, for the

reasons explained herein.

      In Kaufman II, 136 T.C. at 313, we explained as follows our reading of

section 1.170A-14(g)(6):

      [S]ection 1.170A-14(g)(6), Income Tax Regs., provides that the
      donee must ab initio have an absolute right to compensation from the
      postextinguishment proceeds for the restrictions judicially extin-
      guished. It is Lorna Kaufman’s failure to accord [the easement
      donee] an absolute right to a fixed share of the postextinguishment
      proceeds that causes her gift to fail the extinguishment provision. It
      is not a question as to the degree of improbability of the changed
      conditions that would justify judicial extinguishment of the restric-
      tions. Nor is it a question of the probability that, in the case of
      judicial extinguishment following an unexpected change in con-
      ditions, the proceeds of a condemnation or other sale would be
      adequate to pay both the [mortgagee] bank and * * * [the easement
      donee]. As we said in * * * [Kaufman I], the requirement in section
      1.170A-14(g)(6)(ii), Income Tax Regs., that * * * [the easement
      donee] be entitled to its proportionate share of the proceeds is not
      conditional: “Petitioners cannot avoid the strict requirement in section
      1.170A-14(g)(6)(ii), Income Tax Regs., simply by showing that they


      17
       (...continued)
2015), where the Kaufmans did not dispute that finding.
                                        - 33 -

      would most likely be able to satisfy both their mortgage and their
      obligation to NAT.”

      In Kaufman III, 687 F.3d at 27, the Court of Appeals took issue with our

conclusion that taxpayers are obligated to show “an absolute right” to proceeds of

a condemnation or other sale and explained its key disagreement as follows:

      The IRS reads the word “entitled” in the extinguishment regulation to
      mean “gets the first bite” as against the rest of the world, a view the
      Tax Court accepted in reading “entitled” to mean “ha[s] an absolute
      right.” * * * But a grant that is absolute against the owner-donor is
      also an entitlement, Black’s Law Dictionary (7th ed. 1999) (“entitle”
      defined as “[t]o grant a legal right to”); Collins English Dictionary
      (10th ed.2009) (“to give (a person) the right to do or have some-
      thing”), and almost the same as an absolute one where third-party
      claims (here, the bank’s or the city’s) are contingent and unlikely.

      Equally important, given the ubiquity of super-priority for tax liens,
      the IRS’s reading of its regulation would appear to doom practically
      all donations of easements, which is surely contrary to the purpose of
      Congress. * * *

That is, the Court of Appeals observed that if any owner donates a facade

easement and thereafter fails to pay taxes, a lien on the property may arise--

notwithstanding the facade easement--in favor of the Government. Such tax liens

(the court noted) have a “super-priority” that would not be subordinated to the

facade easement donee’s interest. If the Government thereafter were to collect the

tax by levy upon the property--selling it and using the proceeds to satisfy the tax
                                          - 34 -

liability--the conservation purpose of the contribution might not be protected “in

perpetuity” but might instead be overwhelmed by the tax lien. Since that

possibility exists in virtually any instance, no donee has ever had an absolute

entitlement to proceeds (the court reasons), so either no deduction can ever be

allowed for any easement (an outcome supposedly required by the position of the

IRS and this Court) or instead all that the regulation requires is that the donee be

“entitled” to proceeds vis-a-vis the donor (and not vis-a-vis third parties, such as

the Government or a mortgagee). The Court of Appeals thus viewed the word

“entitled” as ambiguous, resorted to congressional intent in deciding how to

construe the regulation, determined that it could not prefer the reading that yielded

an extreme outcome “surely contrary to the purpose of Congress”, and concluded

that “entitled” must mean entitled “as against the grantor” rather than entitled “as

against all other parties in interest”.

       We disagree with the Court of Appeals’ view that our interpretation of the

regulations would “doom practically all donations of easements” because the

donor can never subordinate possible future tax liens. First, a hypothetical tax lien

that may arise in the future is very different from the actual security interest of a

mortgagee that exists--and precedes the facade easement--at the time of the

donation. We and at least two Courts of Appeals have consistently analyzed
                                         - 35 -

conservation restrictions on the basis of property rights and interests that exist

when the easement is granted, rather than conducting an analysis based on

speculations of property interests that might arise in the future (as the court

appears to have hypothesized in Kaufman III). See Minnick v. Commissioner, 796

F.3d 1156; Mitchell v. Commissioner, 775 F.3d 1243. The “absolute” entitlement

to proceeds that we held necessary in Kauffman I and II was the donee’s

entitlement vis-a-vis the donor and her mortgagee--i.e., the parties who had

interests in the property at the time of the donation.

      Second, we believe that this analogy to hypothetical third-party claims such

as tax liens is inapposite. The donation of easements to property subject to

mortgages is a matter of explicit concern in the regulations, which provide specific

rules governing the subordination of mortgages, and taxpayers must comply with

those rules to be entitled to a deduction for such contributions. The regulations

prescribe no equivalent rules relating to tax liens, and we would not expect

taxpayers to imagine and comply with nonexistent regulations requiring

subordination of tax liens which are nonexistent at the time of the contribution.

      We also disagree with the Court of Appeals that its construction of the

regulation (i.e., that it requires only that the donee be “entitled [to proceeds] as

against the donor” and not as against third parties with interests in the property) is
                                         - 36 -

more consistent with “the purpose of Congress.” Kaufman III, 687 F.3d at 27.

The court did not cite legislative history to demonstrate congressional purpose,

and we believe the legislative history shows otherwise.18 The Senate Finance

Committee report for the Tax Treatment Extension Act of 1980, Pub. L. No. 96-

541, sec. 6, 94 Stat. at 3206 (which added section 170(h)(5)(A) to the Code),

states, with regard to section 170(h)(5)(A): “By requiring that the conservation

purpose be protected in perpetuity, the committee intends that the perpetual

restrictions must be enforceable by the donee organization (and successors in

interest) against all other parties in interest (including successors in interest.)”

S. Rept. No. 96-1007, at 14 (1980), 1980-2 C.B. 599, 605 (emphasis added).19


      18
        See Caltex Oil Venture v. Commissioner, 138 T.C. 18, 34 (2012) (“It is
well settled that where a statute is ambiguous, we may look to legislative history
to ascertain its meaning” (citing Burlington N.R.R. v. Okla. Tax Comm’n, 481
U.S. 454, 461 (1987))); see also Palahnuk v. Commissioner, 544 F.3d 471, 474 (2d
Cir. 2008) (“Extrinsic materials have a role in statutory interpretation only to the
extent they shed a reliable light on the enacting legislature’s understanding of
otherwise ambiguous terms.”), aff’g 127 T.C. 118 (2006).
      19
         This sentence in the Senate report is mirrored in a report on H.R. 7956,
96th Cong. (1980) by the House Ways and Means Committee. H.R. Rept. No. 96-
1278, at 18-19 (1980). H.R. 7956, when passed, did not amend section 170 of the
Code. However, a Senate Finance Committee report explains that the latter
committee removed the section 170 amendments from H.R. 7956 because they had
already been passed in H.R. 6975, 96th Cong., sec. 6 (1980). H.R. 6975, when
enacted, became the Tax Treatment Extension of Act of 1980, Pub. L. No. 96-541,
sec. 6, 94 Stat. at 3206, which did enact the section 170 provisions with which this
                                                                        (continued...)
                                        - 37 -

      We think this tends against the Court of Appeals’ conclusion that reading

“entitled” to mean only “a grant that is absolute against the owner-donor” would

be more consistent with “the purpose of Congress.” Kaufman III, 687 F.3d at 27.

Rather, it was evidently the intention of Congress that the donee stand at the head

of the line against “all other parties in interest”, including the donor’s mortgagees.

             3.     Section 1.170A-14(g)(3) of the regulations does not excuse
                    non-compliance with section -14(g)(2) and (g)(6).

      Section 1.170A-14(g)(3) provides:

      A deduction shall not be disallowed under section 170(f)(3)(B)(iii)
      [i.e., for “a qualified conservation contribution”] and this section [i.e.,
      section 1.170A-14 (“Qualified conservation contributions”)] merely
      because the interest which passes to, or is vested in, the donee
      organization may be defeated by the performance of some act or the
      happening of some event, if on the date of the gift it appears that the
      possibility that such act or event will occur is so remote as to be
      negligible. * * *

      Palmolive argues that the chances of the Building’s being destroyed by a

casualty and LPCI’s not receiving its proportionate share of insurance proceeds

are slim enough to render them “so remote as to be negligible”. This line of

argument misses the mark.


      19
         (...continued)
case is concerned. S. Rept. No. 96-1036, at 2 (1980), 1980-2 C.B. 723, 724. In
short, the House Ways and Means Committee and the Senate Finance Committee
agreed on the meaning of “protected in perpetuity”.
                                         - 38 -

      Paragraph (g)(3) of section 1.170A-14 is not an alternative provision on

which taxpayers may rely if they otherwise fail to satisfy the express requirements

of paragraph (g)(2)20 or (g)(6).21 As to “some act” or “some event” not specified in

the regulations that might be in tension with a “perpetual conservation restriction”,

paragraph (g)(3) provides that the charitable contribution deduction is not defeated

if “the possibility that such act or event will occur is so remote as to be

negligible”. However, regularly occurring circumstances that are expressly

foreseen and are explicitly provided for in the regulations (i.e., mortgages and

extinguishment proceeds) are by their nature not “remote”, and the specific

requirements in the regulations as to those contingencies are not affected by

paragraph (g)(3).




      20
     See Mitchell v. Commissioner, 775 F.3d at 1252; Carpenter v.
Commissioner, T.C. Memo. 2012-1, slip op. at 8-9.
      21
         See Kaufman II, 136 T.C. at 313; cf. Kaufman III, 687 F.3d at 27 (“In
reaching our conclusion, we do not rely on the general provision of subparagraph
(g)(3) that aims to prevent deductions from being lost by improbable events,
26 C.F.R. § 1.170A-14(g)(3), because, as the Tax Court noted, ‘[o]ne does not
satisfy the extinguishment provision . . . merely by establishing that the possibility
of a change in conditions triggering judicial extinguishment is unexpected.’”)
(internal citations omitted); Carpenter v. Commissioner, T.C. Memo. 2012-1, slip
op. at 9 (“This Court has previously found that the so-remote-as-to-be-negligible
standard does not modify [sec. 1.170A-14(g)(6)(i)]”).
                                       - 39 -

      Even if analyzing the “remote[ness]” of the contingencies were appropriate

here, it would not save Palmolive’s deduction, since the relevant contingencies

were manifestly not remote. “[S]o remote as to be negligible” has been defined to

refer to “a chance which persons generally would disregard as so highly

improbable that it might be ignored with reasonable safety in undertaking a

serious business transaction.” United States v. Dean, 224 F.2d 26, 29 (1st Cir.

1955). In this case, however, the parties did foresee, and in the Deed they did

make provision for, the contingency that it would not be possible both to satisfy

outstanding mortgage obligations and to pay the easement donee the full amount

of the “Conservation Right Percentage”; otherwise, the Deed would not provide

(in paragraph 19(d)) that the “net proceeds” from which the donee’s “Conservation

Right Percentage” would be funded “shall specifically exclude any preferential

claim of a Mortgagee”. The parties themselves--Palmolive and the mortgagees--

did not disregard or ignore these contingencies but addressed them explicitly.

They were not “so remote as to be negligible”.
                                       - 40 -

      B.     The “saving” clause does not cure the Deed.

      Alternatively, Palmolive argues that even if the Commissioner’s

interpretation of the regulation is correct, paragraph 19(e) of the Deed contains a

saving clause that would apply to retroactively reform the Deed to comply with the

regulations. Paragraph 19(e) seems to sound good at the start--

      In the event that any of the provisions of this Paragraph 19 conflict or
      are inconsistent with or otherwise do not comply with such
      Regulations, they shall be deemed to be amended to the extent
      necessary to eliminate such conflict or inconsistency and to bring
      them into full compliance with such regulations * * *.[22]

--but then, by this immediately following proviso, the Deed expressly takes away

any effect that it might have had on the subordination and proceeds issues:

      provided, however, that any such “deemed amendment” which
      materially adversely affects a Mortgagee’s rights under this
      Conservation Right or which materially increases the burdens or
      obligations of a Mortgagee, if any, hereunder, shall require the
      consent of any Mortgagee so affected.

Taken in its entirety, this clause purports to correct the subordination and proceeds

provisions, but only if the mortgagee consents. The easement donee is therefore

not assured in perpetuity of its right to insurance or condemnation proceeds, but

      22
        As additional evidence of Palmolive’s intent that the easement be granted
in perpetuity, Palmolive points to paragraph 30(b), which provides that the Deed
“shall be interpreted broadly to effect its preservation and conservation purposes.”
Palmolive says that paragraphs 19(e) and 30(b) demonstrate the parties’ intent that
the easement be granted in perpetuity.
                                         - 41 -

instead is given a contingent prospect of receiving proceeds only if the eventual

value of the property permits it or if the mortgagee agrees to suffer loss, to forfeit

the repayment of its loan, and to gratuitously let the donee move to the front of the

line.

        Palmolive argues, however, that the saving clause can act as a deemed

amendment to the Deed without the mortgagees’ consent because Palmolive has

sufficient equity in the property that the mortgagees’ interests would not be

“materially adversely effect[ed]” by altering the insurance proceeds terms in the

Deed, and as a result, the mortgagees’ consent was not necessary “prior to an

automatic reformation of the Easement Deed.” (This could only be true if the

property did not decline in value and thereby diminish Palmolive’s equity.)

        Palmolive’s attempted use of a saving clause to reform the Deed to comply

with the regulation is not valid. We have previously held that the requirements of

section 170 must be satisfied at the time of the gift. See Kaufman II, 136 T.C. at

309; Mitchell v. Commissioner, at *13-*14. Additionally, this Court and others

have held that “[w]hen a savings clause provides that a future event alters the tax

consequences of a conveyance, the savings clause imposes a condition subsequent

and will not be enforced.” Belk v. Commissioner, 774 F.3d 221, 229 (4th Cir.

2014), aff’g T.C. Memo. 2013-154; see also Commissioner v. Procter, 142 F.2d
                                        - 42 -

824, 827 (4th Cir. 1944); Estate of Christiansen v. Commissioner, 130 T.C. 1, 13,

(2008), aff’d, 586 F.3d 1061 (8th Cir. 2009). The saving clause cannot

retroactively modify the Deed to comply with section 170 and its regulations.

      Because the requirements of section 170 and its regulations were not

satisfied at the time of the gift, the conservation easement is not protected in

perpetuity and fails to qualify under section 170(h)(5)(A).23

      To reflect the foregoing,


                                                       An appropriate order will be

                                                 issued.

      Reviewed by the Court.

    MARVEL, FOLEY, VASQUEZ, GALE, THORNTON, GOEKE,
HOLMES, PARIS, MORRISON, KERRIGAN, BUCH, NEGA, PUGH, and
ASHFORD, JJ., agree with this opinion of the Court.


      LAUBER, J. did not participate in the consideration of this opinion.




      23
        We note that the Commissioner has alternatively argued that the saving
clause cannot reform the Deed because the saving clause is a disfavored saving
clause that should be disallowed under Commissioner v. Procter, 142 F.2d 824
(4th Cir. 1944), because it would take back property from the mortgagee. We
need not reach the merits of this argument.
                                       - 43 -

                                    APPENDIX

      The relevant sections of the mortgage executed between Palmolive and

Corus stated:

      MORTGAGOR [(Palmolive)] HEREBY HYPOTHECATES,
      MORTGAGES, CONVEYS, TRANSFERS AND ASSIGNS TO
      LENDER [(Corus)] AND ITS SUCCESSORS AND ASSIGNS,
      FOREVER, AND HEREBY GRANTS TO LENDER AND ITS
      SUCCESSORS AND ASSIGNS FOREVER A CONTINUING
      SECURITY INTEREST IN, TO, AND UNDER ALL OF THE
      FOLLOWING, WHETHER NOW OWNED OR HEREAFTER
      ACQUIRED OR ARISING:

                    (a) Real Property. The Property, together with all
      * * * rights, easements, * * * now or hereafter belonging or in
      anywise appertaining to the Property * * *; all air rights * * * relating
      to the Property * * *

                   *      *     *      *        *   *      *

                   (f)    Insurance. * * * all proceeds of the conversion,
      voluntary or involuntary, of the Collateral or any part thereof into
      cash or liquidated claims, including, without limitation, proceeds of
      hazard and title insurance and all awards and compensation * * * by
      any governmental or other lawful authorities for the taking by
      eminent domain, condemnation or otherwise, of all or any part of the
      Collateral or any easement therein * * *

                   (g) Awards. All judgments, awards of damages and
      settlements which may result from any damage to the Property or any
      part thereof or to any rights appurtenant thereto; all compensation,
      awards, damages, claims, rights of action and proceeds of, or on
      account of (i) any damage or taking pursuant to any Condemnation
      Proceeding of the Property or any part thereof, or (ii) * * * all
                                       - 44 -

     proceeds of any sales or other dispositions of the Property or any part
     thereof;

     The relevant sections of the mortgage executed between Palmolive and

NEBF stated:

     Mortgagor [(Palmolive)], its successors and assigns, intending to be
     legally bound, does by these presents, irrevocably grant, transfer,
     assign, bargain, mortgage, warrant, hypothecate, pledge, set over and
     convey to Mortgagee [(NEBF)], with right of entry and possession as
     provided herein, with covenants of further assurances, all of its right,
     title and interest in and to the Real Estate * * *

             TOGETHER with all the right, title and interest of Mortgagor
     * * * of, in and to * * * (b) all and singular the rights * * * appertain-
     ing to the Real Estate or any part thereof, including, but not limited
     to, (i) all rights, interests and benefits arising under or related to the
     Reciprocal Easement Agreement (as defined in the Loan Agreement
     and referred to herein as the “REA”) * * *

                  *      *      *      *        *   *      *

           TOGETHER with all of Mortgagor’s right, title and interest in
     and to * * * (e) all rights of Mortgagor to receive proceeds of any
     insurance, indemnity, warranty or guaranty with respect to the
     Related Contracts or the Mortgaged Property, * * * and (h) all
     proceeds of * * * all payments under insurance (whether or not the
     Mortgagee is the loss payee thereof) * * *

                  *      *      *      *        *   *      *

            TOGETHER with any and all payments, proceeds, settlements
     or other compensation heretofore or hereafter made, including any
     interest thereon, and the right to collect and receive the same, subject
     to the provisions of the Loan Documents, from any and all insurance
     policies required to be carried by Mortgagor pursuant to the Loan
                                 - 45 -

Agreement or hereunder covering the Mortgaged Property or any
portion thereof.

             *     *      *     *         *   *     *

      8        Insurance.
               8.1 Policies. Mortgagor shall maintain in full force
and effect, at Mortgagor’s sole cost and expense, the insurance
required to be maintained by it pursuant to the provisions of Section
8.8 of the Loan Agreement and pursuant to the Reciprocal Easement
Agreement. The insurance policies must be approved by Mortgagee
in its sole discretion as to amount, form, deductibles and insurer, must
cover all risks Mortgagee requires * * *
