                            146 T.C. No. 13



                   UNITED STATES TAX COURT



DOUGLAS G. CARROLL, III AND DEIRDRE M. SMITH, Petitioners v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 5445-13.                          Filed April 27, 2016.



        In 2005 Ps contributed a conservation easement on a parcel of
 land to two qualified organizations. Ps’ conservation easement
 provides that, in the event that the conservation purpose is
 extinguished because of an unexpected change in circumstances
 surrounding the donated property, the donee organizations are
 entitled to a proportionate share of extinguishment proceeds at least
 equal to (1) the amount allowable as a deduction for Federal income
 tax purposes over (2) the fair market value of the property at the time
 of the contribution. Ps claimed a charitable contribution deduction on
 their 2005 Federal income tax return and carried forward the
 remaining deduction to their taxable years 2006, 2007, and 2008.

       I.R.C. sec. 170(h) allows a deduction for a “qualified
 conservation contribution.” A qualified conservation contribution
 requires that the contribution be exclusively for conservation
 purposes. I.R.C. sec. 170(h)(1)(C). For a contribution to be made
 exclusively for conservation purposes, the conservation purpose must
 be protected in perpetuity. I.R.C. sec. 170(h)(5)(A).
                                         -2-

             Sec. 1.170A-14(g)(6)(ii), Income Tax Regs., provides that the
      conservation purpose of a contribution is not protected in perpetuity
      unless the contribution “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. * * * Accordingly, when a change in conditions
      give rise to the extinguishment of a perpetual conservation restriction
      under paragraph (g)(6)(i) of this section, the donee organization, on a
      subsequent sale, exchange, or involuntary conversion of the subject
      property, must be entitled to a portion of the proceeds at least equal to
      that proportionate value of the perpetual conservation restriction”.

             Held: Ps’ easement provides that the value of the contribution
      for purposes of determining the donees’ rights to extinguishment
      proceeds is the amount of Ps’ allowable deductions rather than the
      fair market value of the easement and therefore does not comply with
      the requirements of sec. 1.170A-14(g)(6), Income Tax Regs. The
      conservation purpose is not protected in perpetuity as required by
      I.R.C. sec. 170(h)(5)(A).

             Held, further, Ps are liable for accuracy-related penalties under
      I.R.C. sec. 6662.



      Scott A. Schwartzberg, David J. Polashuk, and William J. Marchica, for

petitioners.

      Michael A. Raiken, Elizabeth C. Mourges, and Nancy M. Gilmore, for

respondent.
                                          -3-

      RUWE, Judge: Respondent determined deficiencies in petitioners’ Federal

income tax and accuracy-related penalties as follows:

                                                     Accuracy-related penalty
                Year               Deficiency             sec. 6662

                2006                $57,768                $11,553.60
                2007                103,771                 20,754.20
                2008                 17,777                  3,555.40

After concessions,1 the issues remaining for decision are: (1) whether petitioners

are entitled to carryforward charitable contribution deductions for the taxable

years 2006, 2007, and 2008 (years in issue) from their 2005 contribution of a

conservation easement to the Maryland Environmental Trust (MET) and the Land

Preservation Trust, Inc. (LPT), and (2) whether petitioners are liable for accuracy-

related penalties under section 6662(a) for the years in issue.2




      1
        The parties entered into a stipulation of settled issues for all of the other
issues regarding deficiencies for the years in issue.
      2
       In his pretrial memorandum respondent asserts that petitioners are liable for
substantial and/or gross valuation misstatement penalties for the years in issue.
Respondent indicates on page 2 of his pretrial memorandum that he anticipates
making a motion that the pleadings conform to the facts to increase the penalty
from 20% to 40%. Respondent never filed such motion.
                                         -4-

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.3

                                FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts, the supplemental stipulation of facts, the second supplemental stipulation of

facts, the stipulation of settled issues, and the attached exhibits are incorporated

herein by this reference.

      Petitioners resided in Maryland when they filed their petition.

      On June 1, 1985, petitioner Douglas G. Carroll III (Dr. Carroll) became the

sole owner of approximately 25.8533 acres of land on Greenspring Valley Road in

Lutherville, Maryland (subject property).4 The subject property consists of two

parcels, primarily of open pastureland and woodland, and is part of the Green



      3
       Pursuant to sec. 7491(a) the burden of proof on factual issues may shift to
the Commissioner where the taxpayer complies with certain requirements.
Petitioners argue that the burden of proof should shift to respondent. Respondent
argues that petitioners did not meet the requirements of sec. 7491(a) to shift the
burden of proof. Because our conclusions are based on a preponderance of the
evidence, the allocation of the burden of proof in this case is immaterial. See
Foster v. Commissioner, 138 T.C. 51, 53 n.4 (2012); McGowen v. Commissioner,
T.C. Memo. 2011-186, 2011 Tax Ct. Memo LEXIS 185, at *5 n.3.
      4
          The subject property has been owned by Dr. Carroll’s family since 1920.
                                           -5-

Spring Valley National Register Historic District. The first parcel (parcel 1) was

approximately 3.92 acres, and the second parcel (parcel 2) was approximately

21.83 acres. The diagram below illustrates the layout of the two parcels.


                                       Parcel 2
                                      21.83 acres




                             Parcel 1
                             3.92 acres




The subject property is zoned RC-2, Agricultural, which is a restrictive type of

zoning established to foster and protect agriculture in appropriate areas of

Baltimore County, Maryland, and permits a maximum of two development rights

on each parcel from 2 to 100 acres. On parcel 1 is a two-story residence which

serves as the primary residence for Dr. Carroll and his family (Carroll residence),

and on parcel 2 was an approximately 1,000-square-foot tenant house (tenant

house) where a farmhand resides. Four properties adjacent to the subject property

are encumbered by conservation easements held by either MET or the Maryland

Agricultural Land Preservation Foundation (MALPF).
                                         -6-

The Gift Deed

      On November 14, 2005, Dr. Carroll sent (via facsimile) a handwritten letter

to Attorney David Haile5 requesting that Mr. Haile draft a deed transferring

ownership of the subject property from Dr. Carroll to (1) Dr. Carroll, (2) Dr.

Carroll’s wife (Ms. Smith), and (3) petitioners’ three minor children, as tenants in

common. In his letter to Mr. Haile, Dr. Carroll instructs, in pertinent part:

            If it is possible not to define the % interests, that would be
      preferable. But they could be defined as the “maximum % interest
      allowed under the UGMA[]” or some equivalent language.

             It is my intent to create conservation easements on this property
      & then form a [sic] LLC or family partnership that further defines the
      interests & restrictions.

      On November 22, 2005, Dr. Carroll executed a deed (gift deed) transferring

his interest in the subject property to (1) himself, (2) Ms. Smith, and (3) himself as

custodian for each of petitioners’ three minor children under the Maryland

Uniform Transfer to Minors Act, as tenants in common.6 The gift deed does not

provide specific ownership percentages transferred to Dr. Carroll, Ms. Smith, or



      5
       Mr. Haile is a general practice attorney licensed to practice law in
Maryland who focuses on real property transfers. Mr. Haile does not answer tax
questions or give tax advice.
      6
       Dr. Carroll testified that when the gift deed was executed petitioners’ minor
children were ages 9, 13, and 15, respectively.
                                        -7-

petitioners’ three minor children. On November 29, 2005, the gift deed was

recorded in the land records for Baltimore County, Maryland.

Lot Line Adjustment

      On September 20, 2005, Dr. Carroll sent a letter to the Baltimore County

Agricultural Land Preservation Advisory Board (BCALPAB) requesting a lot line

adjustment for the subject property. Dr. Carroll’s request was to change the lot

line dividing parcels 1 and 2 to create one 18-acre parcel and one 7.8-acre parcel.

On October 19, 2005, BCALPAB recommended that parcel 1 be at least 20 acres.

On December 7, 2005, Dr. Carroll sent (via facsimile) a letter dated October 20,

2005, to BCALPAB proposing a new lot line adjustment. The letter proposed to

create one 20.93-acre lot and one 4.8-acre lot. On December 13, 2005, BCALPAB

met and recommended approval of Dr. Carroll’s December 7, 2005, request for a

lot line adjustment. Following the lot line adjustment, both the Carroll residence

and the tenant house were located on parcel 1. The diagram below illustrates the

layout of the two parcels following the lot line adjustment.
                                         -8-


                                            Parcel 2
                                            4.8 acres




                                    Parcel 1
                                   20.93 acres




Deed of Conservation Easement

      On December 15, 2005, petitioners and Dr. Carroll as custodian of

petitioners’ three minor children executed a deed of conservation easement

(conservation easement) for no consideration on parcel 1 of the subject property in

favor of MET7 and LPT8 as joint easement holders.9 Respondent concedes that


      7
        MET is a land trust created by the Maryland General Assembly pursuant to
subtitle 2 of title 3 of the Natural Resources Article of the Annotated Code of
Maryland (1983 repl. vol.) in 1967 to conserve, improve, and perpetuate
Maryland’s natural environment. One of MET’s most active programs is
statewide work pertaining to conservation easements. The focus of MET is on
agricultural properties and properties that are considered environmentally sensitive
(such as critical areas, wildlife habitats, farms, and wetlands) and are larger than
25 acres.
      8
       LPT is a sec. 501(c)(3) organization whose mission is, among other things,
to preserve and encourage conservation easements.
      9
       The benefits of multiple agencies holding a conservation easement include
sharing the responsibilities of monitoring and enforcing the terms of the
                                                                       (continued...)
                                         -9-

both MET and LPT are qualified organizations as defined in section 170(h)(3).

The terms of the conservation easement provide that it was executed to “maintain

the significant conservation features * * * and the dominant scenic, cultural, rural,

agricultural, woodland and wetland characteristics of the Property, and to prevent

the use or development of the Property for any purpose or in any manner that

would conflict with these features and characteristics and the maintenance of the

Property in its open-space condition.” Article I of the conservation easement

provides:

             This Conservation Easement shall be perpetual. It is an
      easement in gross and as such is inheritable and assignable in
      accordance with Article VI and runs with the land as an incorporeal
      interest in the Property, enforceable with respect to the Property by
      Grantees against Grantors and their personal representatives, heirs,
      successors and assigns.

      Article II of the conservation easement sets forth activities that are restricted

and/or prohibited on the encumbered property. Article II authorizes the Carroll

residence to remain on the subject property and limits the tenant house to 2,000

square feet. Any construction or work contemplated by petitioners must be

approved in advance by MET and LPT and “[s]uch approval shall be granted or




      9
      (...continued)
conservation easement and accessing resources available to the coholding agency.
                                       - 10 -

denied based on the Grantees’ opinion as to whether or not the proposed location

conforms with the conservation values listed in Exhibit B”.

      Article III of the conservation easement authorizes MET and LPT to “enter

the Property at reasonable times for the purpose of inspecting the Property to

determine whether the Grantors are complying with the Terms of this

Conservation Easement”. In the event that petitioners are found to be in breach of

the terms of the conservation easement, Article III authorizes MET and LPT to

(1) institute a lawsuit to enforce the terms of the conservation easement or

(2) require that the subject property be restored promptly pursuant to the

conservation easement.

      Exhibit B attached to the conservation easement provides:

            The following public open space conservation values are
      associated with the Property:

      1.     Master Plan: This Conservation Easement is consistent with
             and supports the land use policy of the Baltimore County
             Master Plan, adopted in 2000 by the Baltimore County
             Planning Board. The Property lies within an Agricultural
             Preservation Area. County goals for Agricultural Preservation
             Areas include:

             (a)   Permanently preserve lands for agriculture and avoid
                   conflicts with incompatible uses.

             (b)   Actively pursue and promote easement and other
                   programs designed to preserve agriculture.
                               - 11 -

     (c)   Protect, conserve and restore all essential natural
           resources (including forests), with particular attention to
           groundwater.

     (d)   Preserve and enhance the County’s significant scenic
           resources as designated on the scenic resources map,
           including scenic corridors, scenic views and gateways, as
           an essential component contributing to the County’s
           quality of life.

2.   Area of Critical State Concern: The Property lies within the
     Jones Falls watershed, which was designated an Area of
     Critical State Concern for Baltimore County in 1977 by the
     Baltimore County Planning Board. Significant Critical Areas
     relating to the Jones Falls are trout waters, floodplain areas,
     and prime agriculture, forestry, and wildlife lands. (Source:
     Designation of Areas of Critical State Concern within
     Baltimore County, Baltimore County Planning Board, 1977).

3.   Agricultural Land and Woodland: The Property includes about
     19 acres of productive agricultural land and woodland.

4.   Historic Value: The Property is located in the Green Spring
     Valley National Register Historic District.

5.   Part of Larger Conservation Area: The Property is surrounded
     by easements held by either the Maryland Environmental Trust
     or the Maryland Agricultural Land Preservation Foundation.

6.   Vegetative Buffer Strip: A vegetative buffer strip will be
     maintained next to the tributary of Dipping Pond Run on the
     Property. Buffer strip standards are consistent with guidelines
     issued by the Maryland Department of Natural Resources for
     the protection of surface water quality.

7.   Maryland Environmental Trust Policy: The conservation
     values of the Property defined above are pursuant to the
                                       - 12 -

            conservation policies adopted by the Maryland Environmental
            Trust on February 6, 2002.

      Article VI of the conservation easement provides miscellaneous provisions,

including a provision concerning division of proceeds in the event that unexpected

changes in the conditions surrounding the subject property make it impossible or

impractical to continue using it for the intended conservation purposes. Article

VI.D, subparagraphs (1) and (2), of the conservation easement provides:

      (1) The granting of this Conservation Easement gives rise to a
      property right, immediately vested in Grantees, with a fair market
      value equal to the ratio of the value of this Conservation Easement on
      the effective date of this grant to the value of the Protected Property
      without deduction for the value of the Conservation Easement on the
      effective date of this grant. The value on the effective date of this
      grant shall be the deduction for federal income tax purposes
      allowable by reason of this grant, pursuant to Section 170(h) of the
      Code. The parties shall include the ratio of those values with the
      Baseline Determination and shall amend such values, if necessary, to
      reflect any final determination thereof by the Internal Revenue
      Service or a court of competent jurisdiction. For purposes of this
      paragraph, the ratio of the value of the Conservation Easement to the
      value of the Property unencumbered by the Conservation Easement
      shall remain constant, and the percentage interests of Grantors and
      Grantees in the fair market value of the Property thereby determinable
      shall remain constant.

             (2) If circumstances arise in the future that render the entire
      purpose of this Conservation Easement impossible to accomplish, this
      Conservation Easement may only be terminated or extinguished
      whether with respect to all or part of the Property, by judicial
      proceedings in a court of competent jurisdiction. In the event of any
      sale of all or a portion of the Property (or any other property received
                                       - 13 -

      in connection with an exchange or involuntary conversion of the
      Property) after such termination or extinguishment, and after
      satisfaction of prior claims and net of any costs or expenses
      associated with such sale, Grantors and Grantees shall divide the
      proceeds from such sale (minus any amount attributable to the value
      of additional improvements made by Grantors after the effective date
      of this Conservation Easement, which amount is reserved to Grantors)
      in accordance with their respective percentage interests in the fair
      market value of the Property, as such percentage interests are
      determined under the provisions of the preceding paragraph, adjusted,
      if necessary, to reflect a partial termination or extinguishment of this
      Conservation Easement. All such proceeds received by Grantees
      shall be used by Grantees in a manner consistent with Grantees’
      conservation purposes.

      On February 24, 2006, Terry Dunkin of Colliers Pinkard visited the subject

property to appraise the easement. By letter dated May 4, 2006, Mr. Dunkin

determined the value of the easement to be $1.2 million.

      On March 8, 2006, MET mailed petitioners a letter acknowledging receipt

of the conservation easement. On a date not included in the record, the

conservation easement was accepted by MET’s board of directors and ratified by

the Maryland board of public works (which is composed of the Governor of

Maryland, the Comptroller of Maryland, and the Treasurer of Maryland) as being

consistent with MET’s policies and procedures. On a date not included in the

record, the conservation easement was accepted by LPT’s board of trustees as
                                         - 14 -

being consistent with its mission to preserve and encourage conservation

easements in Baltimore County, Maryland.

      On October 17, 2006, respondent received petitioners’ 2005 Federal income

tax return reporting their donation of the conservation easement valued at $1.2

million. This was 100% of Mr. Dunkin’s value undiminished by any amount

attributable to the interests of petitioners’ children in the property. Petitioners

attached to their 2005 Federal income tax return a Form 8283, Noncash Charitable

Contributions, signed by Mr. Dunkin. Petitioners claimed a $495,356 noncash

charitable contribution deduction on Schedule A, Itemized Deductions, of their

2005 return and carried forward $704,644 of the remaining $1.2 million easement

contribution to subsequent tax years. On October 23, 2007, October 20, 2008, and

October 19, 2009, respondent received petitioners’ 2006, 2007, and 2008 tax

returns, respectively. On their respective Schedules A petitioners claimed

carryover noncash charitable contribution deductions of $196,008 for 2006,

$406,467 for 2007, and $55,539 for 2008.

Notice of Deficiency

      On January 30, 2013, respondent issued to petitioners a notice of deficiency

for the years in issue. In the notice of deficiency respondent disallowed

petitioners’ claimed noncash charitable contribution deductions for the years in
                                        - 15 -

issue. Petitioners timely filed a petition with this Court disputing the

determinations in the notice of deficiency.

                                      OPINION

I. Conservation Easements Generally

      Any charitable contribution made during a taxable year is allowed as a

deduction only if the contribution is verified under regulations prescribed by the

Secretary. Sec. 170(a)(1). Section 170(f)(3) generally does not allow an

individual to deduct as a charitable contribution the gift of property consisting of

less than his or her entire interest in that property. An exception applies in the

case of a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii). Section

170(h)(1) defines a “qualified conservation contribution” as follows:

            (1) In general.--For purposes of subsection (f)(3)(B)(iii), the
      term “qualified conservation contribution” means a contribution--

                    (A) of a qualified real property interest,

                    (B) to a qualified organization,

                    (C) exclusively for conservation purposes.

All three requirements must be satisfied for a donation to be a qualified

conservation contribution. See Irby v. Commissioner, 139 T.C. 371, 379 (2012);
                                        - 16 -

Simmons v. Commissioner, T.C. Memo. 2009-208, 2009 Tax Ct. Memo LEXIS

213, at *9, aff’d, 646 F.3d 6 (D.C. Cir. 2011).

      Respondent concedes that petitioners’ conservation easement was granted to

qualified organizations--i.e., MET and LPT--in satisfaction of section

170(h)(1)(B). However, respondent argues that petitioners’ conservation easement

does not constitute a qualified real property interest under section 170(h)(1)(A)

and was not contributed exclusively for conservation purposes under section

170(h)(1)(C). We begin our discussion by addressing whether petitioners’

donation of the conservation easement is a qualified real property interest.

      A. Qualified Real Property Interest

      The term “qualified real property interest” includes “a restriction (granted in

perpetuity) on the use which may be made of the real property.” Sec.

170(h)(2)(C). Section 1.170A-14(b)(2), Income Tax Regs., provides the following

with respect to section 170(h)(2)(C):

      A perpetual conservation restriction is a qualified real property
      interest. A “perpetual conservation restriction” is a restriction
      granted in perpetuity on the use which may be made of real property--
      including, an easement or other interest in real property that under
      state law has attributes similar to an easement (e.g., a restrictive
      covenant or equitable servitude). * * *
                                         - 17 -

      Article I of petitioners’ conservation easement provides that the easement is

perpetual, inheritable, and assignable, runs with the land as an incorporeal interest,

and is “enforceable with respect to the Property by Grantees against Grantors and

their personal representatives, heirs, successors and assigns.” Article II of the

conservation easement imposes numerous restrictions on the use of the subject

property which are consistent with the conservation purposes of the easement,

including: limitations on development rights, prohibition on transferring

development rights from the encumbered property, and limitations on the number

and size of structures that may be built on the subject property. Article II.K of the

conservation easement requires that all rights reserved by petitioners and Dr.

Carroll as custodian of petitioners’ minor children “shall be exercised so as to

prevent or to minimize damage to water quality, air quality, land/soil stability and

productivity, wildlife, scenic and cultural values, and the natural topographic and

open-space character of the Property.” Moreover, representatives of MET and

LPT testified that both agencies will continue to conduct inspections of the subject

property to ensure compliance and will litigate violations of the terms of the

conservation easement. The express terms of the conservation easement satisfy

the requirements of section 1.170A-14(b)(2), Income Tax Regs., by providing

legally enforceable restrictions that will prevent uses of the retained interest in the
                                         - 18 -

subject property that are inconsistent with the conservation purposes of the

contribution. Accordingly, we hold that petitioners’ contribution of the

conservation easement is a qualified real property interest pursuant to section

170(h)(2)(C).

      B. Conservation Purpose

      In order for a contribution of property to constitute a “qualified conservation

contribution” it must be donated “exclusively for conservation purposes”. Sec.

170(h). A contribution is made “exclusively for conservation purposes” if it meets

the requirements of section 170(h)(4) and (5). Section 170(h)(4)(A) provides that

a contribution is for conservation purposes only if it serves one of four delineated

conservation purposes:

            (A) In general.--For purposes of this subsection, the term
      “conservation purpose” means--

                    (i) the preservation of land areas for outdoor recreation
             by, or the education of, the general public,

                    (ii) the protection of a relatively natural habitat of fish,
             wildlife, or plants, or similar ecosystem,

                   (iii) the preservation of open space (including farmland
             and forest land) where such preservation is--

                           (I) for the scenic enjoyment of the general public,
                    or
                                         - 19 -

                           (II) pursuant to a clearly delineated Federal, State,
                    or local governmental conservation policy,

             and will yield a significant public benefit, or

                   (iv) the preservation of an historically important land
             area or a certified historic structure.

Under section 170(h)(4)(A), each of these four prongs is a conservation purpose in

and of itself, and a taxpayer’s satisfaction of one of these prongs is sufficient to

establish the existence of a conservation purpose. See S. Rept. No. 96-1007, at 10

(1980), 1980-2 C.B. 599, 604. Petitioners contend that their contribution satisfies

the third prong of section 170(h)(4)(A), i.e., that it preserves open space pursuant

to a clearly delineated Federal, State, or local government conservation policy and

yields a significant public benefit.

      The general requirements necessary to establish that the contribution of a

conservation easement preserves open space pursuant to a clearly delineated

Federal, State, or local governmental policy are set forth in section 1.170A-

14(d)(4)(iii)(A), Income Tax Regs., which provides:

      (A) In general.--The requirement that the preservation of open space
      be pursuant to a clearly delineated Federal, state, or local
      governmental policy is intended to protect the types of property
      identified by representatives of the general public as worthy of
      preservation or conservation. A general declaration of conservation
      goals by a single official or legislative body is not sufficient.
      However, a governmental conservation policy need not be a
                                       - 20 -

      certification program that identifies particular lots or small parcels of
      individually owned property. This requirement will be met by
      donations that further a specific, identified conservation project, such
      as the preservation of land within a state or local landmark district
      that is locally recognized as being significant to that district; the
      preservation of a wild or scenic river, the preservation of farmland
      pursuant to a state program for flood prevention and control; or the
      protection of the scenic, ecological, or historic character of land that
      is contiguous to, or an integral part of, the surroundings of existing
      recreation or conservation sites. For example, the donation of a
      perpetual conservation restriction to a qualified organization pursuant
      to a formal resolution or certification by a local governmental agency
      established under state law specifically identifying the subject
      property as worthy of protection for conservation purposes will meet
      the requirement of this paragraph. A program need not be funded to
      satisfy this requirement, but the program must involve a significant
      commitment by the government with respect to the conservation
      project. For example, a governmental program according preferential
      tax assessment or preferential zoning for certain property deemed
      worthy of protection for conservation purposes would constitute a
      significant commitment by the government.

Section 1.170A-14(d)(4)(iii)(B), Income Tax Regs., explains the effect of

governmental agency review in establishing whether a conservation easement is

pursuant to a clearly delineated governmental policy:

             (B) Effect of acceptance by governmental agency.--Acceptance
      of an easement by an agency of the Federal Government or by an
      agency of a state or local government (or by a commission, authority,
      or similar body duly constituted by the state or local government and
      acting on behalf of the state or local government) tends to establish
      the requisite clearly delineated governmental policy, although such
      acceptance, without more, is not sufficient. The more rigorous the
      review process by the governmental agency, the more the acceptance
      of the easement tends to establish the requisite clearly delineated
                                       - 21 -

      governmental policy. For example, in a state where the legislature
      has established an Environmental Trust to accept gifts to the state
      which meet certain conservation purposes and to submit the gifts to a
      review that requires the approval of the state’s highest officials,
      acceptance of a gift by the Trust tends to establish the requisite
      clearly delineated governmental policy. However, if the Trust merely
      accepts such gifts without a review process, the requisite clearly
      delineated governmental policy is not established.

      Petitioners have established that the contribution of their conservation

easement was accepted by a State government agency after a thorough review

process. At trial petitioners offered the testimony of Megan Benjamin, a

conservation easement planner with MET. Ms. Benjamin testified that MET does

not accept every conservation easement proposed to the agency and adheres to a

thorough review policy in determining which easements are suitable for

acceptance. According to Ms. Benjamin, a prospective property is first evaluated

by an MET conservation easement planner; if the property does not satisfy MET’s

policies, it is not accepted by the agency. However, if an easement is deemed

suitable by an MET conservation easement planner, it is submitted for approval to

the MET board of directors and then subsequently to the board of public works

which consists of the Governor of Maryland, the Comptroller of Maryland, and the

Treasurer of Maryland. Ms. Benjamin also testified that MET consults with local

governments to obtain opinions regarding whether prospective easements are
                                       - 22 -

consistent with local master plans and zoning. In addition, MET works with the

Department of Natural Resources and the Maryland Historical Trust to research

prospective conservation easements. Petitioners’ conservation easement was

subject to this multistep evaluation process before it was accepted by MET.10

Accordingly, we conclude that the thoroughness of MET’s easement-review

process, combined with the requisite approval from Maryland’s highest officials,

establishes that petitioners’ conservation easement preserves open space

(including farmland and forest land) pursuant to a clearly delineated Federal,

State, or local governmental conservation policy pursuant to section

170(h)(4)(A)(iii)(II).

      C. Significant Public Benefit

      In order for petitioners’ conservation easement to satisfy the conservation

purpose requirement of section 170(h)(4)(A)(iii) the easement must also “yield a

significant public benefit”. The regulations under section 170(h)(4)(A) provide

factors to be considered when evaluating whether the contribution of a


      10
        Ms. Benjamin further stated that, in MET’s opinion, petitioners’
conservation easement serves many conservation purposes, including: being
consistent with the county master plan and various other government policies and
plans, being productive agricultural land, having historic value, being within the
Green Spring Valley Historic District, being part of a larger conservation area,
providing a vegetative buffer strip, and being consistent with MET policy.
                                       - 23 -

conservation easement yields a significant public benefit. Section 1.170A-

14(d)(4)(iv)(A), Income Tax Regs., provides:

            (iv) Significant public benefit.--(A) Factors.--All contributions
      made for the preservation of open space must yield a significant
      public benefit. Public benefit will be evaluated by considering all
      pertinent facts and circumstances germane to the contribution.
      Factors germane to the evaluation of public benefit from one
      contribution may be irrelevant in determining public benefit from
      another contribution. No single factor will necessarily be
      determinative. Among the factors to be considered are:

                   (1) The uniqueness of the property to the area;

                   (2) The intensity of land development in the vicinity of
      the property (both existing development and foreseeable trends of
      development);

                    (3) The consistency of the proposed open space use with
      public programs (whether Federal, state, or local) for conservation in
      the region, including programs for outdoor recreation, irrigation or
      water supply protection, water quality maintenance or enhancement,
      flood prevention and control, erosion control, shoreline protection,
      and protection of land areas included in, or related to, a government
      approved master plan or land management area;

                    (4) The consistency of the proposed open space use with
      existing private conservation programs in the area, as evidenced by
      other land, protected by easement or fee ownership by organizations
      referred to in § 1.170A-14(c)(1), in close proximity to the property;

                   (5) The likelihood that development of the property
      would lead to or contribute to degradation of the scenic, natural, or
      historic character of the area;
                                        - 24 -

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

                    (7) The importance of the property in preserving a local
      or regional landscape or resource that attracts tourism or commerce to
      the area;

                   (8) The likelihood that the donee will acquire equally
      desirable and valuable substitute property or property rights;

                  (9) The cost to the donee of enforcing the terms of the
      conservation restriction;

                   (10) The population density in the area of the property;
      and

                    (11) The consistency of the proposed open space use
      with a legislatively mandated program identifying particular parcels
      of land for future protection.

      Petitioners’ conservation easement yields a significant public benefit for the

following reasons. First, the record before us indicates that the subject property is

located in the Green Spring Valley, which is a highly desirable area of Baltimore

County, Maryland, and is under development pressure due to its close proximity to

Interstate 695, Interstate 83, and the urban centers of Towson, Pikesville, and

Lutherville. In the market area analysis attached to the May 4, 2006, appraisal

report, Mr. Dunkin states: “It is unusual that a property the size of the subject

property still exists in this area.” Second, the subject property is zoned RC-2,

Agricultural, which is a restrictive type of zoning established to foster and protect
                                        - 25 -

agriculture in certain areas of Baltimore County, Maryland. Third, the Green

Spring Valley is specifically designated by the Baltimore County, Maryland,

Master Plan 2010 as an agricultural preservation area “created to protect the

county’s agricultural industry, as well as its natural resources, and areas of scenic

and historical significance.” Fourth, four properties adjacent to the subject

property are encumbered by easements held by either MET or MALPF.

Accordingly, on the basis of the record before us, we conclude that petitioners’

conservation easement yields a significant public benefit as required by section

170(h)(4)(A)(iii) and section 1.170A-14(d)(4)(iv)(A), Income Tax Regs.

II. Protected in Perpetuity

      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.”11 If the conservation purpose is not protected in perpetuity, the

      11
         The perpetuity requirement of sec. 170(h)(5)(A) is separate and distinct
from the perpetuity requirement discussed in sec. 170(h)(2)(C). See Belk v.
Commissioner, 140 T.C. 1, 12 (2013) (“Section 170(h)(2)(C) requires that the
interest in real property donated by taxpayers be subject to a use restriction in
perpetuity, whereas section 170(h)(5) requires that the conservation purpose of the
conservation easement be protected in perpetuity.”), supplemented by T.C. Memo.
2013-154, aff’d, 774 F.3d 221 (4th Cir. 2014).

       The Court of Appeals for the Fourth Circuit further noted this distinction by
stating: “Though both requirements speak in terms of ‘perpetuity,’ they are not
                                                                       (continued...)
                                       - 26 -

contribution is not a “qualified conservation contribution” and the taxpayers are

therefore not entitled to a deduction under section 170.

      Section 1.170A-14(g), Income Tax Regs., elaborates on the protected-in-

perpetuity requirement of section 170(h)(5)(A) by setting forth substantive rules to

safeguard the conservation purpose of a contribution. Most pertinent to the instant

case, section 1.170A-14(g)(6), Income Tax Regs., addresses subsequent

unexpected changes in the conditions surrounding the donated property that make

it impossible or impractical to continue using the property for the intended

conservation purpose. Section 1.170A-14(g)(6), Income Tax Regs., provides as

follows:

            (6) Extinguishment.--(i) In general.--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 (determined under
      paragraph (g)(6)(ii) of this section) 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.


      11
        (...continued)
one and the same. The provision at issue here, §170(h)(2)(C), governs the grant of
the easement itself, while the provision at issue in * * * Kaufman, § 170(h)(5)(A),
governs its subsequent enforcement.” Belk v. Commissioner, 774 F.3d at 228.
                                        - 27 -

             (ii) Proceeds.--In the 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. See § 1.170A-14(h)(3)(iii) relating to the
      allocation of basis. For purposes of this paragraph (g)(6)(ii), that
      proportionate value of the donee’s property rights shall remain
      constant. Accordingly, when a change in conditions gives rise to the
      extinguishment of a perpetual conservation restriction under
      paragraph (g)(6)(i) of this section, the donee organization, on a
      subsequent sale, exchange, or involuntary conversion of the subject
      property, must be entitled to a portion of the proceeds at least equal to
      that proportionate value of the perpetual conservation restriction,
      unless state law provides that the donor is entitled to the full proceeds
      from the conversion without regard to the terms of the prior perpetual
      conservation restriction. [Emphasis added.]

      These regulations have been described as “a single--and exceedingly

narrow--exception to the requirement that a conservation easement impose a

perpetual use restriction” on real property. Belk v. Commissioner, 774 F.3d 221,

225 (4th Cir. 2014), aff’g 140 T.C. 1 (2013). The requirements of section 1.170A-

14(g)(6)(i) and (ii), Income Tax Regs., are strictly construed; if a grantee is not

absolutely entitled to a proportionate share of extinguishment proceeds, then the

conservation purpose of the contribution is not protected in perpetuity. Kaufman

v. Commissioner (Kaufman I), 134 T.C. 182, 186-187 (2010), reconsideration

denied by Kaufman v. Commissioner (Kaufman II), 136 T.C. 294, 309 (2011),
                                        - 28 -

aff’d in part, vacated in part and remanded in part sub nom. Kaufman v. Shulman

(Kaufman III), 687 F.3d 21 (1st Cir. 2012). In Kaufman III the Court of Appeals

for the First Circuit affirmed in part, vacated in part, and remanded in part our

Opinions in Kaufman I and Kaufman II. After remand by the Court of Appeals we

issued our opinion in Kaufman v. Commissioner, T.C. Memo. 2014-52, aff’d, 784

F.3d 56 (1st Cir. 2015). As subsequently explained, we rely only on those parts of

our Opinions in Kaufman I and Kaufman II that are consistent with the opinion of

the Court of Appeals in Kaufman III.

      The taxpayers in Kaufman claimed a charitable contribution deduction for

their donation of a facade easement on their Boston rowhouse to a nonprofit

organization. Kaufman I, 134 T.C. at 184. Consistent with section 1.170A-

14(g)(6), Income Tax Regs., the facade easement granted the nonprofit

organization a proportionate share of future extinguishment proceeds, as follows:

      In the event this Agreement is ever extinguished, whether through
      condemnation, judicial decree or otherwise, Grantor agrees on behalf
      of itself, its heirs, successors and assigns, that Grantee, or its
      successors and assigns, will be entitled to receive upon the
      subsequent sale, exchange or involuntary conversion of the Property,
      a portion of the proceeds from such sale, exchange or conversion
      equal to the same proportion that the value of the initial easement
      donation bore to the entire value of the property at the time of the
      donation * * * unless controlling state law provides that the Grantor
      is entitled to the full proceeds in such situations, without regard to the
      Agreement. Grantee agrees to use any proceeds so realized in a
                                        - 29 -

      manner consistent with the preservation purposes of the original
      contribution.

Kaufman II, 136 T.C. at 299 (alteration in original). However, the taxpayers’

property was subject to a mortgage, and a “lender agreement” recorded with the

facade easement granted the mortgagee a “prior claim” to any condemnation or

insurance proceeds in preference to the nonprofit organization. Id. at 299-300.

We held that the taxpayers’ facade easement contribution failed as a matter of law

to comply with the perpetuity requirement of section 1.170A-14(g)(6), Income Tax

Regs., because the nonprofit organization was not absolutely guaranteed its

proportionate share of extinguishment proceeds. Kaufman I, 134 T.C. at 187. We

explained that the taxpayers “cannot avoid the strict requirement in section

1.170A-14(g)(6)(ii), Income Tax Regs., simply by showing that they would most

likely be able to satisfy both their mortgage and their obligation to * * * [the

nonprofit organization].” Id. at 186. In other words, although the taxpayers in

Kaufman granted the nonprofit organization a proportionate share of

extinguishment proceeds, and thus seemingly complied with section 1.170A-

14(g)(6), Income Tax Regs., the subsequently executed lender agreement undercut

this commitment by stipulating that the mortgagee and its assignees had a prior

claim to certain insurance and condemnation proceeds.
                                        - 30 -

      The taxpayers in Kaufman appealed to the Court of Appeals for the First

Circuit. Kaufman III, 687 F.3d at 21. Although absent a stipulation to the

contrary an appeal of the instant case lies with the Court of Appeals for the Fourth

Circuit, the Court of Appeals for the First Circuit’s opinion in Kaufman III is

instructive on several points. The Court of Appeals in Kaufman III upheld as

valid section 1.170A-14(g)(6), Income Tax Regs., and explained that the

regulation is “designed in case of extinguishment both (1) to prevent taxpayers

from reaping a windfall if the property is destroyed or condemned and they get the

proceeds from insurance or condemnation and (2) to assure that the donee

organization can use its proportionate share of the proceeds to advance the cause

of historic preservation elsewhere.” Id. at 26 (fn. ref. omitted). In vacating our

decision the Court of Appeals found that the Government’s interpretation of

section 1.170A-14(g)(6), Income Tax Regs., was unreasonable, explaining that

“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.” Id. at 27. The Court of Appeals

further explained that section 1.170A-14(g)(6), Income Tax Regs., did not require

that the donee have an absolute right to the extinguishment proceeds. Rather, it
                                          - 31 -

was sufficient that the donee have an absolute right against the donor for its

proportion. Id.12

      Although the issue in the instant case involves the application of section

1.170A-14(g)(6), Income Tax Regs., the determinative facts are distinguishable

from those in Kaufman, which involved the claim priority of a donee organization

and a mortgagee with respect to extinguishment proceeds. In the instant case the

issue is whether the donee has an absolute right against the donor upon

extinguishment. The matter sub judice involves the method of determining the

numerator of the formula in section 1.170A-14(g)(6)(ii), Income Tax Regs., for

purposes of calculating the donees’ entitlement to extinguishment proceeds.

      12
           As the Court of Appeals for the First Circuit later explained:

      The Tax Court held that, because the Kaufmans’ mortgage lender had
      retained a “claim to all insurance proceeds * * * and all proceeds of
      condemnation” superior to the claim of the Trust, the Trust was not
      guaranteed to receive its due proportion of the proceeds in the event
      of a condemnation of the Kaufmans’ residence. We held that this was
      error because it was sufficient that the Trust retained a claim to its
      due proportion of the proceeds as against the owner-donor; the
      regulation did not require the Trust to have an absolute right to those
      proceeds as against the rest of the world.

Kaufman v. Commissioner, 784 F.3d 56, 63 n.5 (1st Cir. 2015) (alteration in
original) (internal citations omitted) (quoting Kaufman v. Shulman, 687 F.3d 21,
27 (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)), aff’g T.C.
Memo. 2014-52.
                                          - 32 -

         For purposes of deciding this case, we will follow the principles of the

Kaufman opinions upon which both this Court and the Court of Appeals agree

with respect to the application of section 1.170A-14(g)(6), Income Tax Regs. No

reported cases have specifically addressed the formula in section 1.170A-

14(g)(6)(ii), Income Tax Regs., and thus this is an issue of first impression in this

Court.

         Article VI.D, subparagraphs (1) and (2), of petitioners’ conservation

easement provides:

         D. (1) The granting of this Conservation Easement gives rise to a
         property right, immediately vested in Grantees, with a fair market
         value equal to the ratio of the value of this Conservation Easement on
         the effective date of this grant to the value of the Protected Property
         without deduction for the value of the Conservation Easement on the
         effective date of this grant. The value on the effective date of this
         grant shall be the deduction for federal income tax purposes
         allowable by reason of this grant, pursuant to Section 170(h) of the
         Code. The parties shall include the ratio of those values with the
         Baseline Documentation and shall amend such values, if necessary, to
         reflect any final determination thereof by the Internal Revenue
         Service or a court of competent jurisdiction. For purposes of this
         paragraph, the ratio of the value of the Conservation Easement to the
         value of the Property unencumbered by the Conservation Easement
         shall remain constant, and the percentage interests of Grantors and
         Grantees in the fair market value of the Property thereby determinable
         shall remain constant.

               (2) If circumstances arise in the future that render the entire
         purpose of this Conservation Easement impossible to accomplish, this
         Conservation Easement may only be terminated or extinguished
                                        - 33 -

      whether with respect to all or part of the Property, by judicial
      proceedings in a court of competent jurisdiction. In the event of any
      sale of all or a portion of the Property (or any other property received
      in connection with an exchange or involuntary conversion of the
      Property) after such termination or extinguishment, and after
      satisfaction of prior claims and net of any costs or expenses
      associated with such sale, Grantors and Grantees shall divide the
      proceeds from such sale (minus any amount attributable to the value
      of additional improvements made by Grantors after the effective date
      of this Conservation Easement, which amount is reserved to Grantors)
      in accordance with their respective percentage interests in the fair
      market value of the Property, as such percentage interests are
      determined under the provisions of the preceding paragraph, adjusted,
      if necessary, to reflect a partial termination or extinguishment of this
      Conservation Easement. All such proceeds received by Grantees
      shall be used by Grantees in a manner consistent with Grantees’
      conservation purposes. [Emphasis added.]

      Section 1.170A-14(g)(6)(ii), Income Tax Regs., requires the grantee’s

proportionate interest upon extinguishment of a conservation easement to be a

percentage determined by (1) the fair market value of the conservation easement

on the date of the gift (numerator), over (2) the fair market value of the property as

a whole on the date of the gift. However, Article VI.D, subparagraph (1), of

petitioners’ conservation easement provides that the value of the easement on the

effective date “shall be the deduction for federal income tax purposes allowable by

reason of this grant, pursuant to Section 170(b) of the Code”. (Emphasis added.)

Respondent argues that petitioners’ conservation easement violates section

1.170A-14(g)(6)(ii), Income Tax Regs., because the conservation purpose is not
                                        - 34 -

protected in perpetuity and consequently is not a qualified conservation

contribution. We agree with respondent.

      The issue is whether, in the event of an extinguishment of petitioners’

conservation easement, MET and LPT would be guaranteed a proportionate share

of extinguishment proceeds as required by section 1.170A-14(g)(6)(ii), Income

Tax Regs. According to the express terms of Article VI.D, subparagraph (1), of

the conservation easement, the grantors (i.e., petitioners) agree that in the event of

a change in circumstances giving rise to an extinguishment of the conservation

easement, the grantees (i.e., MET and LPT) would be entitled to a proportionate

share of the proceeds arising from the extinguishment. However, the value of

MET’s and LPT’s proportionate interest is specifically defined in Article VI.D,

subparagraph (1), to be determined by the ratio of “the deduction for federal

income tax purposes allowable by reason of this grant, pursuant to Section 170(h)

of the Code” over the value of the subject property as a whole on the date of the

gift. This provision does not comply with the requirement of section 1.170A-

14(g)(6)(ii), Income Tax Regs., that the proportionate share of extinguishment
                                        - 35 -

proceeds be determined by the fair market value of the easement on the date of the

gift over the fair market value of the whole property on the date of the gift.

      The Court of Appeals for the First Circuit in Kaufman III, 687 F.3d at 26,

explained that section 1.170A-14(g)(6), Income Tax Regs., was designed to

prevent taxpayers from reaping a windfall if encumbered property was

subsequently destroyed or condemned. Inconsistent with this purpose, Article

VI.D, subparagraph (1), of petitioners’ conservation easement violates section

1.170A-14(g)(6)(ii), Income Tax Regs., by providing petitioners (or petitioners’

heirs) with a potential windfall in the event that a change of conditions

extinguishes the conservation easement. For example, if the Internal Revenue

Service denies petitioners’ charitable contribution deduction for Federal income

tax purposes for reasons other than valuation and the easement is extinguished in a

subsequent judicial proceeding, the numerator used pursuant to Article VI.D,

subparagraph (1), of the conservation easement will be zero, and MET and LPT

will not receive a proportionate share of extinguishment proceeds.

      Petitioners appear to argue on brief that the deduction referenced in the

conservation easement was simply a method of determining the value of the

easement. But there is no evidence of why this provision was in the conservation

easement. Deductions for conservation easements can be denied for many reasons
                                        - 36 -

unrelated to valuation. At the time the conservation easement was granted,

petitioners’ deduction faced many hurdles that were unrelated to the value of the

easement.13 Indeed, in this case respondent has made many arguments for

      13
           In Graev v. Commissioner, 140 T.C. 377, 396-397 (2013), we stated:

      There are multiple requirements in section 170 and the corresponding
      regulations that, if not followed, may lead to disallowance--and
      valuation is only one of them. For example, an easement contribution
      may be disallowed where--

            •The donee fails to be a “qualified organization” described in
      section 170(h)(3).

             •The property subject to the easement fails to be of a
      “historically important land area” or a “certified historic structure.”
      Sec. 170(h)(4)(iv); see Turner v. Commissioner, 126 T.C. 299, 316
      (2006).

             •The taxpayer fails to contribute a “qualified real property
      interest”. Sec. 170(a)(2); see Belk v. Commissioner, 140 T.C. 1
      (2013).

            •The easement fails to preserve conservation purposes “in
      perpetuity”. Sec. 170(h)(5); see Carpenter v. Commissioner, T.C.
      Memo. 2012-1; Herman v. Commissioner, T.C. Memo. 2009-205.

            •The parties fail to subordinate the rights of a mortgagee in the
      property “to the right of the qualified organization to enforce the
      conservation purposes of the gift in perpetuity.” 26 C.F.R. sec.
      1.170A-14(g)(2); see Mitchell v. Commissioner, 138 T.C. 324, 331-
      332 (2012).


                                                                        (continued...)
                                        - 37 -

disallowance that are not based on valuation.

      In the event of extinguishment, if the deductions were disallowed,

petitioners or their heirs could argue that petitioners never received a tax

deduction and, therefore, MET and LPT would not be entitled to extinguishment

proceeds. This argument is supported by the literal terms of the easement, and

there is no evidence of a different intent. This would provide petitioners or their


      13
       (...continued)
             •The taxpayer fails to “[a]ttach a fully complete appraisal
      summary * * * to the tax return”. 26 C.F.R. sec. 1.170A-13(c)(2)(B).
      But see Kaufman v. Shulman, 687 F.3d 21, 28-30 (1st Cir. 2012),
      aff’g in part, vacating and remanding in part Kaufman v.
      Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010).

             •The appraisal fails to be a “qualified appraisal”. 26 C.F.R.
      sec. 1.170A-13(c)(3); see Friedberg v. Commissioner, T.C. Memo.
      2011-238.

             •The appraiser fails to be a “qualified appraiser”. 26 C.F.R.
      sec. 1.170A-13(c)(5); see Rothman v. Commissioner, T.C. Memo.
      2012-218 (reserving the question on whether an appraiser was
      “qualified”).

             •The parties fail to record the easement or otherwise fail to
      effect “legally enforceable restrictions”. 26 C.F.R. sec. 1.170A-
      14(g)(1); see Satullo v. Commissioner, T.C. Memo 1993-614, aff’d
      without published opinion, 67 F.3d 314 (11th Cir. 1995).

            •The taxpayer fails to “[m]aintain records” necessary to
      substantiate the charitable contribution. 26 C.F.R. sec. 1.170A-
      13(c)(2)(C), Income Tax Regs.
                                        - 38 -

heirs with a windfall and deprive the donees of their ability to use a share of the

extinguishment proceeds for conservation purposes. See Kaufman III, 687 F.3d at

26. We conclude that Article VI.D, subparagraphs (1) and (2), of petitioners’

conservation easement violates the requirements of section 1.170A-14(g)(6)(ii),

Income Tax Regs., by not guaranteeing MET and LPT a proportionate share of

extinguishment proceeds based on the fair market value of the conservation

easement at the time of the gift. Because the purpose of petitioners’ contribution

is not protected in perpetuity, it does not qualify as a qualified conservation

contribution, and therefore petitioners are not entitled to a carryforward charitable

contribution deduction for the years in issue.

      Petitioners argue that respondent ignores the last sentence of section

1.170A-14A(g)(6)(ii), Income Tax Regs., which provides an exception to the

proportionality requirement if “state law provides that the donor is entitled to the

full proceeds from the conversion without regard to the terms of the prior

perpetual conservation restriction.” According to petitioners, Maryland law

requires that extinguishment proceeds be distributed to easement donors without

regard to the conservation easement. Specifically, petitioners cite Md. Code Ann.,

Real Prop. sec. 12-104(g) (LexisNexis 2016), which provides:
                                        - 39 -

      (g) Land over which easement donated to Maryland Historical Trust
      or Maryland Environmental Trust.--If any easement in gross or other
      right to restrict use of land or any interest in land has been donated to
      the Maryland Historical Trust or the Maryland Environmental Trust,
      damages shall be awarded in any condemnation proceedings under
      this title to the fee owner and leasehold owner, as their interests may
      appear, and shall be the fair market value of the land or interest in it,
      computed as though the easement or other right did not exist.
      [Emphasis added.]

      Petitioners are correct that Maryland law mandates that, with respect to an

easement donated to MET, the extinguishment proceeds in any condemnation

proceeding be “computed as though the easement or other right did not exist.” Id.

However, there are two problems with petitioners’ position. First, by its own

terms, Md. Code Ann., Real Prop. sec. 12-104(g) applies only to “the Maryland

Historical Trust or [the] Maryland Environmental Trust.” Petitioners’

conservation easement provides both MET and LPT with coextensive rights in the

subject property. While MET is specifically covered by Md. Code Ann., Real

Prop. sec. 12-104(g), LPT is not mentioned. Thus, in the event that the

conservation easement is judicially extinguished in a condemnation proceeding,

MET’s extinguishment proceeds would be controlled by State statute. However,

LPT would still be entitled to proceed under the conservation easement whose

terms fail the proportionality requirement of section 1.170A-14(g)(6)(ii), Income

Tax Regs. The second problem with petitioners’ argument is that Md. Code Ann.,
                                        - 40 -

Real Prop. sec. 12-104 applies narrowly to condemnation proceedings, and section

1.170A-14(g)(6), Income Tax Regs., applies broadly to any “subsequent

unexpected change in the conditions surrounding the property that is the subject of

a donation * * * mak[ing] impossible or impractical the continued use of the

property for conservation purposes”. Although Maryland law would apply to

MET in a condemnation proceeding, it would not apply to either MET or LPT in a

extinguishment proceeding that was not based on condemnation (e.g., the

destruction of the subject property or where the characteristics of the

neighborhood render the conservation purpose impractical). For these reasons,

Md. Code Ann., Real Prop. sec. 12-104 does not satisfy the State law exception in

section 1.170A-14(g)(6), Income Tax Regs.

      Petitioners also contend that respondent’s rationale is “circular in nature”,

arguing that the disallowance of their charitable contribution deduction under

section 1.170A-14(g)(6), Income Tax Regs., hinges on the possibility that

respondent may disallow petitioners’ deduction on another ground. This argument

is unpersuasive. The regulatory requirements set forth in section 1.170A-14(g),

Income Tax Regs., are designed to protect the conservation purpose of a

conservation contribution and must be satisfied at the outset for a contribution to

be deductible. Although section 1.170A-14(g)(6)(ii), Income Tax Regs., imposes
                                         - 41 -

a technical requirement, it is a requirement intended to preserve the conservation

purpose, and petitioners could have avoided this adverse outcome by strictly

following the proportionality formula set forth in the regulation. This Court is

obligated to apply statutes as written and follow accompanying regulations when

consistent therewith. See Michaels v. Commissioner, 87 T.C. 1412, 1417 (1986).

      Petitioners also argue that respondent “ignores the safe harbor from unlikely

events” in section 1.170A-14(g)(3), Income Tax Regs.14 Petitioners emphasize

that “[r]espondent has not cited to a single instance where a conservation easement

actually has been extinguished, nor has [r]espondent offered any potential reasons

why the Easement donated by [p]etitioners ever would be extinguished.” In

Kaufman III, 687 F.3d at 27, the Court of Appeals for the First Circuit specifically

agreed with our rationale in Kaufman II, 136 T.C. at 313, that “[o]ne does not

satisfy the extinguishment provision [in section 1.170A-14(g)(6), Income Tax

Regs.] * * * merely by establishing that the possibility of a change in conditions


      14
           Sec. 1.170A-14(g)(3), Income Tax Regs., provides, in pertinent part:

             (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 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. * * *
                                       - 42 -

triggering judicial extinguishment is unexpected.” (Alteration in original.) To

accept petitioners’ argument would effectively nullify the proportionality

requirement of section 1.170A-14(g)(6), Income Tax Regs., because, by its own

terms, the regulation applies to “unexpected” changes in conditions, which likely

encompass events that are “so remote as to be negligible”. See sec. 1.170A-

14(g)(3), Income Tax Regs. Thus, petitioners cannot circumvent the strict

requirement of section 1.170A-14(g)(6), Income Tax Regs., by showing that the

probability of extinguishment is so remote as to be negligible under section

1.170A-14(g)(3), Income Tax Regs.

III. Alternative Issues

      Respondent raised various other issues, including the valuation of

petitioners’ conservation easement, petitioners’ ownership percentages of the

subject property at the time the conservation easement was granted to MET and

LPT,15 and whether petitioners’ appraisal attached to their return was a qualified


      15
        Respondent argues that, before executing the easement, Dr. Carroll had
conveyed the subject property to himself, his wife, and his three minor children as
tenants in common, and therefore “petitioners only had a 40% interest in the
Property at the time they executed the Easement, thereby limiting any deduction to
40% of the deemed value of the donation.” Thus, respondent in effect argues that,
even if we accept petitioners’ valuation of the easement, petitioners’ conservation
easement deduction should be limited to $480,000 (40% of the $1.2 million that
petitioners claimed).
                                        - 43 -

appraisal as required by section 1.170A-13(c)(3)(ii)(I), Income Tax Regs. Our

decision, supra, that petitioners’ conservation easement fails to satisfy the

proportionality requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.,

resolves this case, and therefore we will not address the parties’ other arguments.

IV. Section 6662(a) Accuracy-Related Penalties

      In the notice of deficiency respondent determined that petitioners are liable

for section 6662(a) accuracy-related penalties for 2006, 2007, and 2008 of

$11,553.60, $20,754.20, and $3,555.40, respectively. Section 6662(a) and (b)(2)

imposes a 20% accuracy-related penalty on any portion of an underpayment

attributable to a substantial understatement of income tax. Section 7491(c)

provides that the Commissioner bears the burden of production with regard to

penalties and must come forward with sufficient evidence indicating that it is

appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438,

446 (2001). However, once the Commissioner meets his burden of production, the

burden of proof remains with the taxpayer, including the burden of proving that

the penalty is inappropriate because of reasonable cause under section 6664. See

Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

      There is a substantial understatement of income tax for any taxable year if

the amount of the understatement of income tax for the taxable year exceeds the
                                        - 44 -

greater of 10% of the tax required to be shown on the return for the taxable year or

$5,000. Sec. 6662(d)(1)(A). On their 2005 tax return petitioners claimed a $1.2

million charitable contribution deduction for their donation of a conservation

easement on the subject property. A portion of that deduction was carried over to

each of petitioners’ 2006, 2007, and 2008 returns. We have concluded that

petitioners are not entitled to a carryforward charitable contribution deduction for

any of the years in issue, and therefore, their understatement of income tax for

each of the years in issue exceeds the greater of 10% of the tax required to be

shown on their return or $5,000. Thus, respondent has met his burden of

production with respect to the section 6662(a) substantial understatement penalty.

      Section 6664(c)(1) provides that the penalty under section 6662(a) shall not

apply to any portion of an underpayment if it is shown that there was reasonable

cause for the taxpayer’s position and that the taxpayer acted in good faith. See

Higbee v. Commissioner, 116 T.C. at 448. The determination of whether a

taxpayer acted with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all of the pertinent facts and circumstances. Sec.

1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is the

extent of the taxpayer’s effort to assess his or her tax liability. Id. Reliance on

professional advice may constitute reasonable cause and good faith, but “it must
                                       - 45 -

be established that the reliance was reasonable.” Freytag v. Commissioner, 89

T.C. 849, 888 (1987), aff’d on other grounds, 904 F.2d 1011 (5th Cir. 1990), aff’d,

501 U.S. 868 (1991). We have previously held that a taxpayer must satisfy a

three-prong test to be found to have reasonably relied on professional advice to

negate a section 6662(a) accuracy-related penalty: (1) the adviser was a

competent professional who had sufficient expertise to justify the reliance; (2) the

taxpayer provided necessary and accurate information to the adviser; and (3) the

taxpayer actually relied in good faith on the adviser’s judgment. Neonatology

Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d

Cir. 2002).

      Petitioners argue that they had reasonable cause because their conservation

easement deduction “was based on a qualified appraisal by a qualified appraiser,

and the taxpayer made a good-faith investigation of the value of the contributed

property.” We agree with petitioners that their conservation easement deduction

was based on an appraisal by a qualified appraiser. However, we have held that it

is the language found in Article VI.D, subparagraph (1), of the conservation

easement, not the valuation of the subject property, which caused the disallowance

of petitioners’ carryforward contribution deductions. Petitioners do not qualify for

the section 6664(c)(1) reasonable cause exception because they have not shown
                                        - 46 -

that they acted with reasonable cause and in good faith with respect to the

protected-in-perpetuity requirement of section 1.170A-14(g)(6), Income Tax Regs.

Dr. Carroll testified that he personally handled the conservation easement and did

not consult with an attorney or other adviser.

      The testimony and other evidence presented at trial demonstrate that Dr.

Carroll is a highly educated medical school graduate and had previous experience

with conservation easements. Although Dr. Carroll did hire Mr. Haile in 2005 to

draft a gift deed for the subject property, Mr. Haile is not a tax attorney and does

not answer tax-related questions or give tax advice. Petitioners offered no

evidence which would explain why the terms of the conservation easement varied

from the requirements of section 1.170A-14(g)(6), Income Tax Regs., nor do they

clarify why Dr. Carroll failed to seek competent advice from a tax attorney or

other adviser to ensure the conservation easement’s compliance with pertinent

regulations. In the light of Dr. Carroll’s high level of sophistication and

experience with conservation easements, we conclude that petitioners have not

demonstrated that they acted with reasonable cause and in good faith in not

seeking competent tax advice regarding the conservation easement.16

      16
        Petitioners concede that they failed to report: (1) $2,545 of taxable State
refunds, credits, or offsets for 2006; (2) $8,496 of ordinary dividends, $6,000 of
                                                                        (continued...)
                                        - 47 -

Accordingly, we hold that petitioners are liable for accuracy-related penalties

under section 6662(a).

Substantial and/or Gross Valuation Misstatement Penalties

      Respondent did not determine an accuracy-related penalty under section

6662(e) or (h) in the notice of deficiency17 or in his answer. In his pretrial

memorandum respondent asserts that petitioners are liable for substantial and/or

gross valuation misstatement penalties. Respondent also indicates in his pretrial

memorandum that he anticipates making a motion that the pleadings conform to




      16
         (...continued)
rental income, $7,397 of qualified dividends, and $107,227 of long-term capital
gains for 2007; and (3) $14,826 of rental income, $958 of qualified dividends, and
$4,944 of interest income for 2008. Respondent concedes that petitioners are
entitled to additional capital losses of $30,772 for 2008.
      17
        On Form 4089, Notice of Deficiency--Waiver, attached to the notice of
deficiency, respondent states:

      Since all or part of the underpayment of tax for the taxable years
      ended December 31, 2006, December 31, 2007, and December 31,
      2008 is attributable to one or more of (1) negligence or disregard of
      rules or regulations, (2) any substantial understatement of income tax,
      or (3) any substantial valuation overstatement, an addition to the tax
      is charged as provided by Section 6662(a) of the Internal Revenue
      Code. The penalty is twenty (20) percent of the portion of the
      underpayment of tax attributable to each component of this penalty.
      In addition, interest is computed on this penalty from the due date(s)
      of the returns, including any extensions.
                                       - 48 -

the facts to increase the accuracy-related penalty from 20% to 40%; however,

respondent never filed such motion.

      Rule 41(a) provides that, when more than 30 days have passed after an

answer has been served, “a party may amend a pleading only by leave of Court or

by written consent of the adverse party, and leave shall be given freely when

justice so requires.” Whether a party may amend his pleading lies within the

sound discretion of the Court. Estate of Quick v. Commissioner, 110 T.C. 172,

178 (1998). In determining whether to allow a proposed amendment, the Court

must consider, among other things, whether an excuse for the delay exists and

whether the opposing party would suffer unfair surprise, substantial

inconvenience, or other prejudice. See Foman v. Davis, 371 U.S. 178, 182 (1962).

The Court looks with disfavor on untimely requests for amendment that, if

granted, would prejudice the other party. See, e.g., Farr v. Commissioner, 11 T.C.

552, 566-567 (1948), aff’d sub nom. Sloane v. Commissioner, 188 F.2d 254 (6th

Cir. 1951).

      Respondent has not explained his delay in asserting the section 6662(e) and

(h) penalties. In his pretrial memorandum respondent indicates that he anticipates

filing a motion to amend the pleadings to assert the substantial and/or gross

valuation misstatement penalties. Without further explanation respondent argues
                                       - 49 -

in his pretrial memorandum that petitioners are liable for substantial and/or gross

valuation misstatement penalties. However, at no time did respondent file a

motion with this Court requesting leave to amend his answer as required by our

Rules. Accordingly, we will not consider respondent’s assertion of substantial

and/or gross valuation misstatement penalties under section 6662(e) or (h).

      In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit.

      To reflect the foregoing,


                                                           Decision will be entered

                                                    under Rule 155.
