                                            LAWRENCE G. GRAEV AND LORNA GRAEV, PETITIONERS v.
                                              COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
                                                         Docket No. 30638–08.                                 Filed June 24, 2013.

                                                    Petitioner husband (‘‘P–H’’) contributed cash and a con-
                                                 servation easement to N, a charitable organization. Before the
                                                 contribution, N at P–H’s request issued to P–H a side letter
                                                 which promised that, in the event R disallows Ps’ charitable
                                                 contribution deductions, N ‘‘will promptly refund your entire
                                                 cash endowment contribution and join with you to imme-
                                                 diately remove the facade conservation easement from the
                                                 property’s title’’. Ps claimed charitable contribution deductions
                                                 for the cash and easement donations. R contends the side
                                                 letter made those contributions conditional gifts that are not
                                                 deductible under I.R.C. sec. 170, since the likelihood that N
                                                 would be divested of the cash and easement was not neg-
                                                 ligible. Held: Ps’ charitable contribution deductions are not
                                                 allowed because at the time of P–H’s contributions, the possi-
                                                 bility that the deductions would be disallowed and, as a
                                                 result, that N would return the contributions was not ‘‘so
                                                 remote as to be negligible’’, under 26 C.F.R. secs. 1.170A–1(e),
                                                 1.170A–7(a)(3), and 1.170A–14(g)(3), Income Tax Regs.

                                        Frank Agostino, Eduardo S. Chung, Jeremy M. Klausner,
                                      and Reuben G. Miller, for petitioners.
                                        Shawna A. Early, for respondent.

                                                                                         CONTENTS
                                      FINDINGS OF FACT ............................................................................. 379
                                           NAT ......................................................................................................   379
                                           The property ........................................................................................        380
                                           Increased IRS scrutiny of easement contributions ...........................                                 380
                                           NAT’s solicitation ................................................................................          381
                                           The side letter .....................................................................................        383
                                           Appraisal ..............................................................................................     384
                                           Noncash contribution to NAT ............................................................                     384

                                                                                                                                                         377




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                                      378                    140 UNITED STATES TAX COURT REPORTS                                                     (377)


                                           Cash contribution to NAT ..................................................................               385
                                           Subsequent communications from NAT ............................................                           386
                                           2004 and 2005 Federal income tax returns ......................................                           386
                                           Notice of deficiency .............................................................................        387
                                      OPINION ................................................................................................. 387
                                      I. Charitable contributions .....................................................................              388
                                         A. Generally .........................................................................................      388
                                         B. Conditional gifts .............................................................................          388
                                         C. Partial interests in general ...........................................................                 390
                                         D. Conservation easements ................................................................                  391
                                         E. Construing ‘‘so remote as to be negligible’’ ..................................                          393
                                      II. Analysis .............................................................................................. 394
                                           A. The possibility of disallowance by the IRS ...................................                         394
                                             1. The possibility of disallowance as a matter of fact ...................                              394
                                                a. Increased IRS scrutiny ............................................................               395
                                                b. The side letter ..........................................................................        398
                                             2. Disallowance as a subsequent event ..........................................                        398
                                           B. The possibility of return of the contributions ..............................                          401
                                             1. Conservation easements under New York law .........................                                  402
                                             2. Merger doctrine ...........................................................................          405
                                             3. Nullity ..........................................................................................   406
                                             4. Voluntary removal of the easement ...........................................                        408
                                      III. Conclusion ......................................................................................... 409

                                        GUSTAFSON, Judge: Pursuant to section 6212(a), 1 the
                                      Internal Revenue Service (‘‘IRS’’) determined deficiencies in
                                      tax for petitioners, Lawrence and Lorna Graev, in the
                                      amounts of $237,481 for 2004 and $412,620 for 2005,
                                      resulting from the disallowance of charitable contribution
                                      deductions the Graevs claimed for those years. The IRS also
                                      determined that Mr. and Mrs. Graev are liable for accuracy-
                                      related penalties under section 6662(h) and alternatively
                                      under section 6662(a) for 2004 and 2005. Mr. and Mrs. Graev
                                      petitioned this Court, pursuant to section 6213(a), for
                                      redetermination of these deficiencies and penalties. The issue
                                      for decision at present is whether the deductions that the
                                      Graevs claimed for charitable contributions of cash and a
                                      conservation easement they donated to the National
                                        1 Unless otherwise indicated, all section references are to the Internal

                                      Revenue Code (26 U.S.C.; ‘‘the Code’’), as amended, and all Rule references
                                      are to the Tax Court Rules of Practice and Procedure.




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                                      (377)                           GRAEV v. COMMISSIONER                                       379


                                      Architectural Trust (‘‘NAT’’) should be disallowed because
                                      they were conditional gifts. 2 We hold that the Graevs’ con-
                                      tributions were conditional, non-deductible gifts.
                                                                          FINDINGS OF FACT

                                        The parties submitted this issue fully stipulated pursuant
                                      to Rule 122, reflecting their agreement that the relevant
                                      facts could be presented without a trial. 3 The stipulated facts
                                      are incorporated herein by this reference. Mr. and Mrs.
                                      Graev resided in the State of New York when they filed the
                                      petition.
                                      NAT
                                        The parties have stipulated that, ‘‘[f]or purposes of the
                                      Court’s decision regarding’’ the conditional gift issue, NAT is
                                      a ‘‘qualified organization’’ under section 170(h)(3), to which a
                                      charitable contribution can be made that is deductible for tax
                                      purposes. NAT’s stated mission is to preserve historic
                                      architecture in metropolitan areas across the United States.
                                      NAT solicits the contribution of facade conservation ease-
                                      ments by owners of property with historic significance as
                                      determined by the National Park Service. When NAT solicits
                                      potential donors, it features the potential charitable deduc-
                                        2 In January 2010 the parties entered into a stipulation to be bound, by

                                      which they agreed that if in this case the Court decides the conditional gift
                                      issue in the Graevs’ favor, the outcome of some the other issues in this
                                      case (chiefly, the valuation of the contributed easement) will follow the out-
                                      come of a then-pending case. That case was decided in favor of respondent
                                      in July 2010, appealed to the U.S. Court of Appeals for the Second Circuit,
                                      vacated and remanded, and decided again in favor of respondent in Janu-
                                      ary 2013. See Scheidelman v. Commissioner, T.C. Memo. 2010–151, va-
                                      cated and remanded, 682 F.3d 189 (2d Cir. 2012), remanded to T.C. Memo.
                                      2013–18. Decision in that case was entered April 12, 2013, and the time
                                      to appeal has not yet expired; but we are able to resolve the issue ad-
                                      dressed herein without awaiting the resolution of the Scheidelman issues.
                                      We do not resolve here the issue of the Graevs’ liability for the penalties,
                                      which will be a subject of future proceedings.
                                        3 The burden of proof is generally on the taxpayer, see Rule 142(a)(1),

                                      and the submission of a case under Rule 122 does not alter that burden,
                                      see Borchers v. Commissioner, 95 T.C. 82, 91 (1990), aff ’d, 943 F.2d 22 (8th
                                      Cir. 1991). However, the burden of proof can be shifted when the Commis-
                                      sioner’s position implicates ‘‘new matter’’ not in the notice of deficiency.
                                      See note 8 below, addressing the Graevs’ contention about supposed ‘‘new
                                      matter’’ in this case.




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                                      380                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      tions that owners may receive by contributing a facade con-
                                      servation easement and a corresponding cash endowment to
                                      NAT. In addition, NAT considered it ‘‘standard Trust policy’’,
                                      regarding donors of easements and cash, to return a cash
                                      contribution to the extent the IRS disallowed a deduction
                                      therefor. In numerous instances NAT issued ‘‘comfort letters’’
                                      assuring donors of this policy.
                                      The property
                                         In 1999 Mr. Graev purchased property in a historic
                                      preservation district in New York, New York, for $4.3 mil-
                                      lion. The property is listed on the National Register of His-
                                      toric Places. During the years at issue Mr. Graev was the
                                      sole fee simple owner of the property, and he held the prop-
                                      erty subject to a mortgage.
                                      Increased IRS scrutiny of easement contributions
                                        On June 30, 2004, the IRS released IRS Notice 2004–41,
                                      2004–2 C.B. 31, which addressed charitable contributions
                                      and conservation easements and stated in part:
                                             The Internal Revenue Service is aware that taxpayers who (1) transfer
                                           an easement on real property to a charitable organization, or (2) make
                                           payments to a charitable organization in connection with a purchase of
                                           real property from the charitable organization, may be improperly
                                           claiming charitable contribution deductions under § 170 of the Internal
                                           Revenue Code. The purpose of this notice is to advise participants in
                                           these transactions that, in appropriate cases, the Service intends to dis-
                                           allow such deductions and may impose penalties and excise taxes. * * *

                                                                 *   *   *   *    *   *   *
                                             Some taxpayers are claiming inappropriate charitable contribution
                                           deductions under § 170 for cash payments or easement transfers to
                                           charitable organizations in connection with the taxpayers’ purchases of
                                           real property.
                                              In some of these questionable cases, the charitable organization pur-
                                           chases the property and places a conservation easement on the property.
                                           Then, the charitable organization sells the property subject to the ease-
                                           ment to a buyer for a price that is substantially less than the price paid
                                           by the charitable organization for the property. As part of the sale, the
                                           buyer makes a second payment, designated as a ‘‘charitable contribu-
                                           tion,’’ to the charitable organization. The total of the payments from the
                                           buyer to the charitable organization fully reimburses the charitable
                                           organization for the cost of the property.




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                                      (377)                           GRAEV v. COMMISSIONER                                       381


                                             In appropriate cases, the Service will treat these transactions in
                                           accordance with their substance, rather than their form. Thus, the
                                           Service may treat the total of the buyer’s payments to the charitable
                                           organization as the purchase price paid by the buyer for the property.

                                      Thus, the IRS publicly announced its awareness of abuses
                                      related to easement contribution deductions, putting poten-
                                      tial donors and donees on notice that easement contribution
                                      deductions might be examined and challenged. We find that
                                      there was at least a non-negligible possibility that the IRS
                                      would challenge an easement contribution deduction there-
                                      after claimed by Mr. Graev.
                                      NAT’s solicitation
                                        In the summer of 2004, a representative from NAT con-
                                      tacted Mr. Graev regarding a potential easement donation to
                                      NAT. Mr. Graev became aware that he had a ‘‘neighbor
                                      across the street’’ who had contributed a facade easement to
                                      NAT and who had received from NAT a side letter that
                                      promised return of contributions if deductions were dis-
                                      allowed. Mr. Graev evidently expressed to NAT an interest
                                      in making an easement contribution like his neighbor’s, but
                                      on September 15, 2004, he sent an email to NAT explaining
                                      a concern that had arisen:
                                           My accountants have referred me to Notice 2004–41 * * * issued by the
                                           IRS on June 30, 2004, in which the IRS has indicated that it will, in
                                           ‘‘appropriate cases’’, disallow charitable deductions to organizations that
                                           promote conservation easements and may impose penalties and excise
                                           taxes on the taxpayer. They have not advised me to abandon this idea,
                                           but they have advised me to be very cautious. What are your thoughts
                                           especially as it relates to the side letter, etc.

                                      (The ‘‘side letter’’ to which Mr. Graev referred was NAT’s
                                      comfort letter assuring that it would refund a contribution in
                                      the event that the favorable tax results anticipated from a
                                      contribution were not achieved.) Mr. Graev indicated that he
                                      had consulted his accountants, and in 2004 those account-
                                      ants would surely have been aware of published court
                                      decisions issued over the past decade that disallowed deduc-
                                      tions claimed for the contribution of facade easements. 4 On
                                           4 For
                                              pre-2004 cases involving facade easements, see Richmond v. United
                                      States, 699 F. Supp. 578 (E.D. La. 1988) (upholding partial disallowance
                                                                                                       Continued




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                                      382                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      his tax returns Mr. Graev listed his occupation as ‘‘attorney’’,
                                      and we infer that he is an individual of above-average
                                      sophistication who, with the help of his accountants, was
                                      capable of identifying tax risks. We find that Mr. Graev did
                                      in fact identify non-negligible risks regarding the deduct-
                                      ibility of facade easements, as evidenced by his September 15
                                      email and subsequent dealings with NAT.
                                        In a response to Mr. Graev’s concerns, NAT sent him an
                                      email dated September 16, 2004, that stated:
                                           The IRS notices to which you refer were prompted by recently exposed
                                           improprieties at the Nature Conservancy, the nation’s largest land con-
                                           servation easement holding organization. The practice the IRS is con-
                                           cerned with here is when a non-profit acquires property, puts an ease-
                                           ment on it and sells it for a reduced price plus a tax-deductible contribu-
                                           tion. * * *
                                           It is important to distinguish between these activities, which certainly
                                           warrant scrutiny, and those engaged in by the National Architectural
                                           Trust. * * * We have been in contact with the IRS since the notices
                                           were issued and, based upon our discussion with them, have no reasons
                                           to expect that we or any of the donations we have received (easement
                                           or cash) will be reviewed.

                                      of contribution deduction where the taxpayer’s valuation of facade ease-
                                      ment was found excessive); Satullo v. Commissioner, T.C. Memo. 1993–614
                                      (upholding disallowance of contribution deduction where the facade ease-
                                      ment was unenforceable in the year at issue because it had not been re-
                                      corded, and where a mortgage had not been subordinated to the donee’s
                                      interest), aff ’d without published opinion, 67 F.3d 314 (11th Cir. 1995);
                                      Dorsey v. Commissioner, T.C. Memo. 1990–242 (upholding partial disallow-
                                      ance of contribution deduction where the taxpayer’s valuation of facade
                                      easement was found excessive); Griffin v. Commissioner, T.C. Memo. 1989–
                                      130 (same), aff ’d, 911 F.2d 1124 (5th Cir. 1990); Losch v. Commissioner,
                                      T.C. Memo. 1988–230 (same); and Hilborn v. Commissioner, 85 T.C. 677
                                      (1985) (same). For pre-2004 cases involving conservation easements gen-
                                      erally, see Strasburg v. Commissioner, T.C. Memo. 2000–94 (upholding
                                      partial disallowance of contribution deductions where the deductions
                                      claimed exceeded the taxpayer’s pro rata basis in the property and valu-
                                      ation of the easement was found excessive); Fannon v. Commissioner, T.C.
                                      Memo. 1986–572 (upholding partial disallowance of contribution deduc-
                                      tions where the taxpayer’s valuation of scenic easement was found exces-
                                      sive); Akers v. Commissioner, T.C. Memo. 1984–490 (same), aff ’d, 799 F.2d
                                      243 (6th Cir. 1986); and Great N. Nekoosa Corp. v. United States, 38 Fed.
                                      Cl. 645, 654 (1997) (holding that conservation easements were not exclu-
                                      sively for conservation purposes when the plaintiffs retained the right to
                                      extract sand and gravel).




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                                      (377)                           GRAEV v. COMMISSIONER                                       383


                                           Thus far not a single donation made to the Trust has been disallowed
                                           by the IRS (400+ in New York City alone). * * *

                                      With regard to side letters in particular, NAT wrote:
                                           [W]e don’t believe they compromise the tax-deductibility of cash dona-
                                           tions in the present tax year, as they are simply a confirmation of
                                           standard Trust policy. However, we do not believe this would be the case
                                           with a legal agreement that explicitly made the cash donation contingent
                                           on the survival of the deduction. In such a case, we would recommend
                                           that the cash donation be treated as tax-deductible once the contingency
                                           period has expired. * * *

                                      That is, it was ‘‘standard Trust policy’’ to refund a cash con-
                                      tribution to the extent the IRS disallowed the donor’s deduc-
                                      tion for the related easement.
                                         Evidently reassured, Mr. Graev executed a facade con-
                                      servation easement application to NAT on September 20,
                                      2004. In a cover letter to NAT transmitting the application,
                                      Mr. Graev stated: ‘‘I will also be looking for the NAT to issue
                                      the ‘side’ letter we discussed (similar to the one being issued
                                      to my neighbor across the street).’’
                                      The side letter
                                        On September 24, 2004 NAT sent the side letter to Mr.
                                      Graev. The side letter read in pertinent part:
                                           1. In the event the IRS challenges the appraisal of your facade conserva-
                                           tion easement and the tax deductions derived therefrom are reduced as
                                           a result, we will make a proportionate reduction to your cash endow-
                                           ment contribution and promptly refund the difference to you.
                                           2. In the event the IRS disallows the tax deductions in their entirety,
                                           we will promptly refund your entire cash endowment contribution and
                                           join with you to immediately remove the facade conservation easement
                                           from the property’s title.

                                      Neither the side letter nor any other evidence in our record
                                      suggests that, in the event the IRS disallowed his contribu-
                                      tion, Mr. Graev would have to sue NAT in order to induce
                                      it to ‘‘remove’’ the easement. Rather, NAT promised upon dis-
                                      allowance to ‘‘join with [him] * * * to immediately remove
                                      the facade conservation easement from the property’s title’’.
                                      Mr. Graev took NAT at its word, and so do we. That is, we
                                      find that there was at least a non-negligible possibility, if the
                                      IRS successfully disallowed Mr. Graev’s easement contribu-
                                      tion deduction, that NAT would do what it said it would do.




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                                      384                 140 UNITED STATES TAX COURT REPORTS                                       (377)


                                      Appraisal
                                        Mr. Graev retained the firm of Miller Samuel, Inc. (‘‘MSI’’),
                                      to prepare an appraisal of the facade easement. In October
                                      2004, MSI issued its appraisal report to Mr. Graev
                                      appraising the property at $9 million and concluding that the
                                      easement would reduce the value by 11% (or $990,000).
                                      Thus, the report appraised the easement at $990,000.
                                      Noncash contribution to NAT
                                        In late 2004 5 Mr. Graev executed a conservation deed
                                      granting a facade easement on the property to NAT. The
                                      deed in pertinent part provides:
                                           The Property constitutes an important element in the architectural
                                           ensemble of the Treadwell Farms Historic District, and the grant of the
                                           Easement as set forth in this instrument will, inter alia, assist in pre-
                                           serving this certified historic structure and in preserving open space for
                                           the scenic enjoyment of the general public.

                                                                       *       *      *       *   *       *   *
                                           The Grantor does hereby grant and convey to the Grantee, TO HAVE
                                           AND TO HOLD, an Easement in gross, in perpetuity, in, on and to the
                                           Property, the Building and the Facade, being an Open Space and
                                           Architectural Facade Conversation Easement on the Property * * *

                                                                       *       *      *       *   *       *   *
                                           A. * * * This Easement shall survive any termination of Grantor’s or
                                           the Grantee’s existence. The rights of the Grantee under this instrument
                                           shall run for the benefit of and may be exercised by its successor and
                                           assigns, or by its designees duly authorized in a deed of Easement.
                                           B. Grantee covenants and agrees that it will not transfer, assign or
                                           otherwise convey its rights under this Easement except to another
                                           ‘‘qualified organization’’ described in Section 170(h)(3) of the Internal
                                           Revenue Code of 1986 and controlling Treasury regulations, and Grantee
                                           further agrees that it will not transfer this Easement unless the trans-
                                           feree first agrees to continue to carry out the conservation purposes for
                                           which this Easement was created, provided, however, that nothing
                                           herein contained shall be constructed to limit the Grantee’s right to give
                                           its consent (e.g., to changes in a Protected Facade(s)) or to abandon some
                                           or all of its rights hereunder. [Emphasis added.]

                                           5 The
                                               deed recites that it was executed October 11, 2004, but Mr. Graev’s
                                      signature on the deed was notarized on December 16, 2004, and he deliv-
                                      ered it to NAT one day later. NAT’s then president, James Kearns, signed
                                      the deed on NAT’s behalf on December 28, 2004.




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                                      (377)                           GRAEV v. COMMISSIONER                                           385


                                           C. In the event this Easement is ever extinguished through a judicial
                                           decree, Grantor agrees on behalf of itself, its heirs, successors and
                                           assigns, that Grantee, or its successors and assigns, will be entitled to
                                           receive upon the subsequent sale, exchange or involuntary conversion of
                                           the Property, a portion of the proceeds from such sale, exchange or
                                           conversion equal to the same proportion that the value of the initial
                                           Easement donation bore to the entire value of the property at the time
                                           of donation * * *. Grantee agrees to use any proceeds so realized in a
                                           manner consistent with the conservation purposes of the original con-
                                           tribution.

                                                                       *       *      *       *   *       *   *
                                           Citimortgage Inc. (‘‘Mortgagee/Lender’’) hereby joins in the execution of
                                           this CONSERVATION DEED OF EASEMENT for the sole and limited
                                           purpose of subordinating its rights in the Property to the right of the
                                           Grantee, its successors or assigns, to enforce the conservation purposes
                                           of this Easement in perpetuity under the following conditions and stipu-
                                           lations:
                                           (a) The Mortgagee/Lender and its assignees shall have a prior claim to
                                           all insurance proceeds * * * and all proceeds from condemnation, and
                                           shall be entitled to same in preference to Grantee until the Mortgage/
                                           the Deed of Trust is paid off and discharged, notwithstanding that the
                                           Mortgage/the Deed of Trust is subordinate in priority to the Easement.

                                      The deed did not expressly refer to the side letter or incor-
                                      porate its terms. The City of New York recorded the deed on
                                      February 17, 2005.
                                      Cash contribution to NAT
                                        In conjunction with an easement donation, NAT asks a
                                      donor to make a cash contribution to NAT equal to 10% of
                                      the appraised easement value, in order to pay for NAT’s cur-
                                      rent operating costs and to fund its long-term monitoring and
                                      administration needs. In compliance with NAT’s request, Mr.
                                      Graev made an initial deposit of $1,000 to NAT on Sep-
                                      tember 15, 2004. On December 17, 2004, the same day he
                                      delivered the signed deed to NAT, Mr. Graev made a $98,000
                                      cash contribution to NAT, bringing his cash contributions to
                                      NAT to a total of $99,000. On January 25, 2005, NAT gave
                                      Mr. Graev written acknowledgment of his 2004 cash and
                                      non-cash contributions. That correspondence also included a
                                      copy of Form 8283, executed by the appraiser, MSI, and
                                      NAT.




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                                      386                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      Subsequent communications from NAT
                                        Also on January 25, 2005, NAT sent a letter to Mr. Graev
                                      informing him that the U.S. Senate Committee on Finance
                                      had announced in a press release their ‘‘intent to implement
                                      reforms to the tax laws governing facade easements that will
                                      increase and create additional fines and penalties on pro-
                                      moters, taxpayers and appraisers who participate, aid or
                                      assist in the donation of facade easements that are found to
                                      be significantly overvalued.’’ Several months later, in August
                                      2005, NAT sent Mr. Graev another letter which read:
                                           The purpose of this letter is to bring to your attention a development
                                           that may be relevant to the tax deductibility of the cash contributions
                                           that you made to the National Architectural Trust * * *
                                           In connection with your donation of a facade conservation easement and
                                           cash contribution and per your request, we sent you a letter dated Sep-
                                           tember 24, 2004, stating, among other things, that the cash contribution
                                           would be refunded in whole or in part if your tax deduction for the ease-
                                           ment were reduced or disallowed by the Internal Revenue Service. It has
                                           recently been brought to our attention by our attorney that this offer of
                                           a refund may adversely affect the deductibility of the cash contribution
                                           as a charitable gift. * * *
                                           We urge you to contact your professional tax advisor to determine                      the
                                           actual impact of the refund offer. Of course, if you determine that                    you
                                           would prefer that we withdraw the refund offer, which according to                     our
                                           attorney should restore the deductibility of your cash contribution,                   the
                                           Trust will promptly do so. * * *

                                      Mr. Graev did not ask NAT to withdraw the refund offer. We
                                      find that NAT’s formal offer to withdraw the refund offer—
                                      made after NAT consulted with its attorney—further
                                      indicates that NAT intended to honor its promises in the side
                                      letter (even if the promises may not have been legally
                                      enforceable), unless Mr. Graev directed otherwise.
                                      2004 and 2005 Federal income tax returns
                                         Mr. and Mrs. Graev filed joint Forms 1040, U.S. Individual
                                      Income Tax Return, for taxable years 2004 and 2005. On
                                      their 2004 return, which they filed on or around October 10,
                                      2005 (i.e., after the January and August 2005 letters from
                                      NAT, discussed above), Mr. and Mrs. Graev reported a chari-
                                      table contribution of $990,000 for the facade easement con-
                                      tribution and $99,000 for the cash contribution to NAT. Mr.




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                                      (377)                           GRAEV v. COMMISSIONER                                       387


                                      and Mrs. Graev claimed a deduction for the entire cash con-
                                      tribution in 2004, but because of the limitations on charitable
                                      contribution deductions in section 170(b)(1)(C), they claimed
                                      a charitable contribution deduction with respect to the facade
                                      easement of only $544,449 on their 2004 return.
                                         On their 2005 return, filed on or around October 6, 2006,
                                      Mr. and Mrs. Graev claimed a carryover charitable contribu-
                                      tion deduction of $445,551 relating to the facade easement
                                      contribution in 2004.
                                      Notice of deficiency
                                         By a statutory notice of deficiency dated September 22,
                                      2008, the IRS disallowed Mr. and Mrs. Graev’s cash and non-
                                      cash charitable contribution deductions relating to their con-
                                      tributions to NAT and determined deficiencies in tax for both
                                      2004 and 2005. In the notice of deficiency the IRS stated:
                                      ‘‘[T]he noncash charitable contribution of a qualified con-
                                      servation contribution is disallowed because it was made sub-
                                      ject to subsequent event(s)’’. The notice disallowed the
                                      Graevs’ cash charitable contribution deduction for the same
                                      reason. The IRS also determined that Mr. and Mrs. Graev
                                      are liable for accuracy-related penalties under section 6662
                                      for 2004 and 2005.

                                                                                  OPINION

                                         The question now before the Court is whether deductions
                                      for Mr. Graev’s contributions of cash and the easement to
                                      NAT should be disallowed because they were conditional
                                      gifts. The answer depends on whether NAT’s promises in the
                                      side letter made the gifts conditional and whether the chance
                                      that the condition would occur was ‘‘so remote as to be neg-
                                      ligible’’. See 26 C.F.R. secs. 1.170A–1(e), 1.170A–7(a)(3),
                                      1.170A–14(g)(3), Income Tax Regs.
                                         The Graevs argue that under New York law the agreement
                                      in the side letter is unenforceable because conditions in the
                                      side letter were not included in the recorded deed and that
                                      under Federal tax law the side letter was a nullity. We con-
                                      clude that NAT’s promises in the side letter were not a nul-
                                      lity and were not extinguished and that NAT could and
                                      would honor its promises both as to the easement and as to
                                      the cash contribution.




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                                      I. Charitable contributions
                                           A. Generally
                                         Section 170(a)(1) generally allows a deduction for any
                                      ‘‘charitable contribution’’ made during the taxable year. Sec-
                                      tion 170(c)(2) defines a ‘‘charitable contribution’’ for this pur-
                                      pose to include ‘‘a contribution or gift to or for the use of ’’
                                      a trust organized and operated exclusively for charitable or
                                      educational purposes. The parties agree for purposes of the
                                      conditional gift issue that NAT is such an organization.
                                         Application of the general rule in section 170(a)(1) may be
                                      complicated—especially with regard to the amount and
                                      timing of a charitable contribution deduction—if a donor
                                      contributes a property interest to a charity but, at the time
                                      of the contribution, there is uncertainty about the amount of
                                      property that will actually reach the charity—e.g., when a
                                      donor contributes a remainder interest in property to a
                                      charity, or (as in this case) the donor contributes property
                                      subject to a condition. Section 170 and the corresponding
                                      regulations provide instruction and limitations that, at least
                                      in part, ensure that the donor will be able to deduct only
                                      what the donee organization actually receives. See, e.g., sec.
                                      170(f)(2), (3), (11). Three such limitations are pertinent in
                                      this case: (1) 26 C.F.R. section 1.170A–1(e), which limits
                                      deductions for conditional gifts; (2) section 170(f)(3)(A) and
                                      the corresponding regulations, which limit deductions for
                                      contributions of partial interests in property; and (3) section
                                      170(f)(3)(B)(iii) and corresponding regulations, which provide
                                      special rules for conservation easements.
                                           B. Conditional gifts
                                         The general rule of section 170(a)(1) allows a deduction for
                                      a charitable contribution only when ‘‘payment * * * is made
                                      within the taxable year.’’ (Emphasis added.) Regulations cor-
                                      responding to section 170(a) clarify this rule with a limita-
                                      tion particularly relevant in this case:
                                           If an interest in property passes to, or is vested in, charity on the date
                                           of the gift and the interest would be defeated by the subsequent perform-
                                           ance of some act or the happening of some event, the possibility of occur-
                                           rence of which appears on the date of the gift to be so remote as to be
                                           negligible, the deduction is allowable. [26 C.F.R. sec. 1.170A–1(e).]




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                                      (377)                           GRAEV v. COMMISSIONER                                       389


                                      That is, the deduction may be considered ‘‘made’’ notwith-
                                      standing a possibility that the contribution will be defeated
                                      by a subsequent event, but only if that possibility is ‘‘so
                                      remote as to be negligible’’. Although the parties agree that
                                      the side letter recited conditions on Mr. Graev’s contribu-
                                      tions, the parties disagree about whether this regulation dis-
                                      allows deductions for those contributions.
                                         A brief discussion of the history of 26 C.F.R. section
                                      1.170A–1(e) is helpful in understanding the regulation’s
                                      application in this case. The Secretary promulgated the first
                                      version of this regulation in 1959 to correspond to section
                                      170(a) of the 1954 Code. 6 The operative language in that
                                      1959 regulation was identical to an older regulation that had
                                      limited deductions for estate tax purposes for certain condi-
                                      tional charitable bequests. See 26 C.F.R. sec. 81.46(a), Estate
                                      Tax Regs. (1949). 7 Given this similarity, we consider
                                      interpretations of 26 C.F.R. section 20.2055–2(b), Estate Tax
                                      Regs., and its history instructive in construing 26 C.F.R. sec-
                                           6 26   C.F.R. sec. 1.170–1(e), Income Tax Regs. (1959), provided:
                                           If as of the date of a gift a transfer for charitable purposes is dependent
                                           upon the performance of some act or the happening of a precedent event
                                           in order that it might become effective, no deduction is allowable unless
                                           the possibility that the charitable transfer will not become effective is so
                                           remote as to be negligible. If an interest passes to or is vested in charity
                                           on the date of the gift and the interest would be defeated by the per-
                                           formance of some act or the happening of some event, the occurrence of
                                           which appeared to have been highly improbable on the date of the gift,
                                           the deduction is allowable. The deduction is not allowed in the case of
                                           a transfer in trust conveying a present interest in income if by reason
                                           of all the conditions and circumstances surrounding the transfer it ap-
                                           pears that the charity may not receive the beneficial enjoyment of the
                                           interest. * * *
                                           7 26 C.F.R. sec. 81.46(a), Estate Tax Regs. (1949), provided:

                                           If as of the date of decedent’s death the transfer to charity is dependent
                                           upon the performance of some act or the happening of a precedent event
                                           in order that it might become effective, no deduction is allowable unless
                                           the possibility that charity will not take is so remote as to be negligible.
                                           If an estate or interest has passed to or is vested in charity at the time
                                           of decedent’s death and such right or interest would be defeated by the
                                           performance of some act or the happening of some event which appeared
                                           to have been highly improbable at the time of decedent’s death, the de-
                                           duction is allowable.
                                      The current version of this regulation is in 26 C.F.R. sec. 20.2055–2(b)(1),
                                      Estate Tax Regs.




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                                      tion 1.170A–1(e). See Briggs v. Commissioner, 72 T.C. 646,
                                      657 (1979), aff ’d without published opinion, 665 F.2d 1051
                                      (9th Cir. 1981).
                                         The Supreme Court in Commissioner v. Estate of
                                      Sternberger, 348 U.S. 187, 194 (1955), discussed the estate
                                      tax regulations at length, stating:
                                           The predecessor of [26 C.F.R.] s[ec.] 81.46 confined charitable deductions
                                           to outright, unconditional bequests to charity. It expressly excluded
                                           deductions for charitable bequests that were subject to conditions, either
                                           precedent or subsequent. While it encouraged assured bequests to
                                           charity, it offered no deductions for bequests that might never reach
                                           charity. Subsequent amendments have clarified and not changed that
                                           principle. Section 81.46(a) today yields to no condition unless the possi-
                                           bility that charity will not take is ‘‘negligible’’ or ‘‘highly improbable.’’
                                           * * *

                                      Similarly, a fundamental principle underlying the charitable
                                      contribution deduction is that the charity actually receive
                                      and keep the contribution. 26 C.F.R. section 1.170A–1(e)
                                      clarifies that principle: no deduction for a charitable con-
                                      tribution that is subject to a condition (regardless of what the
                                      condition might be) is allowable, unless on the date of the
                                      contribution the possibility that a charity’s interest in the
                                      contribution ‘‘would be defeated’’ is ‘‘negligible’’.
                                         Accordingly, under section 1.170A–1(e) of the regulations
                                      (construing the statutory requirement of section 170(a)(1)
                                      that a gift actually ‘‘is made’’), the Graevs’ deductions are not
                                      allowable unless the possibility that NAT’s interests in the
                                      easement and cash would be defeated was ‘‘so remote as to
                                      be negligible’’.
                                           C. Partial interests in general
                                        Logically related to but distinct from the disallowance of
                                      deductions for conditional gifts is the limitation in section
                                      170(f)(3) on deductions for contributions of partial interests
                                      in property. One is generally allowed a deduction only for the
                                      contribution of one’s entire interest in property. Congress
                                      enacted what is now section 170(f)(3)(A) as part of the Tax
                                      Reform Act of 1969, Pub. L. No. 91–172, sec. 201, 83 Stat.
                                      at 549. Section 170(f)(3)(A) allows a deduction for a chari-
                                      table contribution ‘‘of an interest in property [not made in
                                      trust] which consists of less than the taxpayer’s entire
                                      interest in such property’’ only to the extent it would be




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                                      (377)                           GRAEV v. COMMISSIONER                                       391


                                      allowable under section 170 ‘‘if such interest had been trans-
                                      ferred in trust’’. This is a narrow allowance, since the rules
                                      that allow charitable contribution deductions for partial
                                      interests transferred in trust allow deductions only for
                                      interests that can be valued using prescribed methods (e.g.,
                                      actuarial tables promulgated in the regulations) and that
                                      have assurances that the charity will receive payments from
                                      the trust. See, e.g., sec. 170(e)(2); 26 C.F.R. sec. 1.170A–6,
                                      Income Tax Regs.
                                        In this case, since Mr. Graev reserved the right to have
                                      NAT return the easement and the cash if certain events
                                      occurred, the contributions of both the easement and the
                                      cash were less than Mr. Graev’s entire interest in the
                                      contributed property. Accordingly, Mr. Graev’s contributions
                                      appear subject to the limitation in section 170(f)(3). However,
                                      26 C.F.R. section 1.170A–7(a)(3) provides the following miti-
                                      gation of this limitation:
                                           A deduction shall not be disallowed under section 170(f)(3)(A) * * *
                                           merely because the interest which passes to, or is vested in, the charity
                                           may be defeated by the performance of some act or the happening of
                                           some event, if on the date of the gift it appears that the possibility that
                                           such act or event will occur is so remote as to be negligible. * * *

                                      Thus, under this regulation, even though the contributions
                                      did not consist of Mr. Graev’s entire interest in the cash and
                                      the easement, the Graevs’ deductions for contributions would
                                      not be disallowed under section 170(f)(3)(A) if the likelihood
                                      that NAT’s interests in the cash and the easement would be
                                      defeated was ‘‘so remote as to be negligible’’.
                                           D. Conservation easements
                                        An easement is ‘‘[a]n interest in land owned by another
                                      person, consisting in the right to use or control the land, or
                                      an area above or below it, for a specific limited purpose’’.
                                      Black’s Law Dictionary 585–586 (9th ed. 2009). Consequently,
                                      an easement—whether or not it is subject to any condition—
                                      is by definition a partial interest in property, and it would
                                      therefore be non-deductible under section 170(f)(3)(A), apart
                                      from any further statutory provision. However, further provi-
                                      sion is made in subsections (f)(3)(B)(iii) and (h) of section
                                      170, the history of which we briefly survey:




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                                      392                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                         The disallowance of a deduction for partial interests was
                                      added to the Code as section 170(f)(3) by the Tax Reform Act
                                      of 1969. In that provision’s original form, the only exceptions
                                      to disallowance of a deduction for contributions of partial
                                      interests were for contributions of ‘‘a remainder interest in a
                                      personal residence or farm’’ and ‘‘an undivided portion of the
                                      taxpayer’s entire interest in property’’. That is, no exception
                                      was made for a qualified conservation contribution. However,
                                      the Staff of the Joint Committee on Taxation opined in its
                                      General Explanation of the Tax Reform Act of 1969, at 80 (J.
                                      Comm. Print 1970), that ‘‘a gift of an open space easement
                                      in gross is to be considered a gift of an undivided interest in
                                      property where the easement is in perpetuity.’’
                                         Congress made explicit an exception for (i.e., permitted a
                                      deduction for) certain easements in the Tax Reform Act of
                                      1976, Pub. L. No. 94–455, sec. 2124(e), 90 Stat. at 1919,
                                      which amended section 170(f)(3)(B) to provide in clause (iii)
                                      that a donor may claim a deduction for the contribution of
                                      an ‘‘easement with respect to real property of not less than
                                      30 years’ duration granted to * * * [a charitable organiza-
                                      tion] exclusively for conservation purposes’’. The following
                                      year Congress revised that exception, eliminating the ‘‘30
                                      years’ duration’’ provision and limiting deductibility to an
                                      ‘‘easement with respect to real property granted in per-
                                      petuity’’. (Emphasis added.) Tax Reduction and Simplification
                                      Act of 1977, Pub. L. No. 95–30, sec. 309(a), 91 Stat. at 154.
                                      In the Tax Treatment Extension Act of 1980, Pub. L. No. 96–
                                      541, sec. 6(a), 94 Stat. at 3206, Congress amended section
                                      170(f)(3) and added subsection (h), which have remained in
                                      effect since then and work in tandem to keep the perpetuity
                                      requirement for conservation easement donations.
                                         Section 170(f)(3)(B)(iii) exempts, from the general disallow-
                                      ance of deductions for contributions of partial interests, con-
                                      tributions of ‘‘a qualified conservation contribution’’—a term
                                      defined in section 170(h)(1) as a contribution of a ‘‘qualified
                                      real property interest,’’ to a ‘‘qualified organization’’, ‘‘exclu-
                                      sively for conservation purposes.’’ A ‘‘qualified real property
                                      interest’’ must have ‘‘a restriction (granted in perpetuity) on
                                      the use which may be made of the real property.’’ Sec.




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                                      (377)                           GRAEV v. COMMISSIONER                                       393


                                      170(h)(2)(C) (emphasis added). 8 Regulations describing the
                                      perpetuity requirement provide:
                                           A deduction shall not be disallowed under section 170(f)(3)(B)(iii) * * *
                                           merely because the interest which passes to, or is vested in, the donee
                                           organization may be defeated by the performance of some act or the hap-
                                           pening of some event, if on the date of the gift it appears that the possi-
                                           bility that such act or event will occur is so remote as to be negligible.
                                           * * * [26 C.F.R. sec. 1.170A–14(g)(3).]

                                      (The ‘‘so remote as to be negligible’’ phrase is the familiar
                                      term first used in the 1949 estate tax regulations cited
                                      above.) Accordingly, a conservation easement fails to be ‘‘in
                                      perpetuity’’—and is therefore not excepted from the general
                                      rule of section 170(f)(3)(A) disallowing deductions for con-
                                      tributions of partial interests—if, on the date of the donation,
                                      the possibility that the charity may be divested of its interest
                                      in the easement is not so remote as to be negligible.
                                           E. Construing ‘‘so remote as to be negligible’’
                                        Each of the issues discussed above—i.e., whether a chari-
                                      table contribution was effectively ‘‘made’’, whether it con-
                                      sisted of an ‘‘entire interest’’, and whether it was a ‘‘qualified
                                      conservation contribution’’—essentially turns on the same
                                      question: At the time of Mr. Graev’s contributions, was the
                                      possibility that NAT’s interest in the cash and the easement
                                      would be defeated ‘‘so remote as to be negligible’’? In prior
                                      cases, we have defined ‘‘so remote as to be negligible’’ as ‘‘ ‘a
                                      chance which persons generally would disregard as so highly
                                      improbable that it might be ignored with reasonable safety
                                      in undertaking a serious business transaction.’ ’’ 885 Inv. Co.
                                         8 In his reply brief, Mr. Graev complains that an IRS argument invoking

                                      the perpetuity requirement is ‘‘new matter’’ as to which the IRS should
                                      bear the burden of proof under Rule 142(a)(1). We do not believe that the
                                      burden of proof affects the resolution of this issue, since the material facts
                                      are not actually in dispute, and the outcome is the same no matter which
                                      party has the burden. See Dagres v. Commissioner, 136 T.C. 263, 279
                                      (2011). More important, however, the argument that the gifts were subject
                                      to a subsequent event—an issue plainly stated in the notice of deficiency—
                                      is by its nature an argument that the gifts failed to be perpetual. One rea-
                                      son a conservation easement may fail to be a perpetual gift to the donee,
                                      and may thus fail to be deductible, is that it is subject to a condition that
                                      creates a non-remote possibility that the easement may revert to the
                                      donor. See 26 C.F.R. sec. 1.170A–14(g)(3), Income Tax Regs. The issue of
                                      perpetuity is not new matter in this case.




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                                      v. Commissioner, 95 T.C. 156, 161 (1990) (quoting United
                                      States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955)). Stated dif-
                                      ferently, it is ‘‘a chance which every dictate of reason would
                                      justify an intelligent person in disregarding as so highly
                                      improbable and remote as to be lacking in reason and sub-
                                      stance.’’ Briggs v. Commissioner, 72 T.C. at 657. What is
                                      determinative under the section 170 ‘‘remote’’ regulations is
                                      the possibility, after considering all the facts and cir-
                                      cumstances, that NAT’s reception and retention of the ease-
                                      ment and cash would be defeated.
                                      II. Analysis
                                        The side letter provides that the occurrence that would
                                      defeat NAT’s interest in the easement and cash is the IRS’s
                                      successful disallowance of the Graevs’ charitable contribution
                                      deductions and NAT’s consequent promised ‘‘removal’’ of the
                                      easement and return of the cash. We hold that at the date
                                      of the contribution the possibility that the IRS would dis-
                                      allow the deductions and that NAT would return the cash to
                                      Mr. Graev and ‘‘remove’’ the easement was not ‘‘so remote as
                                      to be negligible’’.
                                           A. The possibility of disallowance by the IRS
                                           1. The possibility of disallowance as a matter of fact
                                         The Graevs argue that as of December 2004, the caselaw
                                      supported an easement valuation of 10% to 15% of Mr.
                                      Graev’s property and that it was therefore reasonable to con-
                                      clude that Mr. Graev’s easement donation had a value of
                                      $990,000 (i.e., 11% of the appraised value of the property).
                                      They assert that the possibility the IRS would disallow their
                                      deductions was so remote as to be negligible. However, on
                                      the undisputed facts of this case, it is self-evident that the
                                      risk of IRS disallowance was not negligible. 9 A substantial
                                      risk obviously arose from the IRS’s then-announced intention
                                      to scrutinize charitable contribution deductions for facade
                                      easement contributions, and that risk is evident from Mr.
                                      Graevs’ insistence on NAT’s issuing the side letter. We need
                                        9 We do not address the circumstance in which a hyper-cautious donor

                                      conditions his gift on non-disallowance where there is no non-negligible
                                      possibility of disallowance.




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                                      (377)                           GRAEV v. COMMISSIONER                                       395


                                      not wonder how a donor or donee would have responded to
                                      this risk if he had foreseen it; we know how Mr. Graev did
                                      respond when he did foresee it: He did not ‘‘disregard’’ or
                                      ‘‘ignore[]’’ it, see 885 Inv. Co. v. Commissioner, 95 T.C. at 161;
                                      Briggs v. Commissioner, 72 T.C. at 657, but rather went out
                                      of his way to address it and hedge against it.
                                           a. Increased IRS scrutiny
                                        The Graevs note that at the time of their contribution in
                                      December 2004, no charitable contribution deduction arising
                                      from a contribution to NAT had been disallowed (to their
                                      knowledge). However, the enforcement landscape regarding
                                      deductions for facade easement donations was visibly
                                      changing at the time of his contribution. As is discussed
                                      above, the IRS released Notice 2004–41, supra, on June 30,
                                      2004. In that notice the IRS stated:
                                             The Internal Revenue Service is aware that taxpayers who (1) transfer
                                           an easement on real property to a charitable organization, or (2) make
                                           payments to a charitable organization in connection with a purchase of
                                           real property from the charitable organization, may be improperly
                                           claiming charitable contribution deductions under § 170 of the Internal
                                           Revenue Code. The purpose of this notice is to advise participants in
                                           these transactions that, in appropriate cases, the Service intends to dis-
                                           allow such deductions and may impose penalties and excise taxes. * * *

                                      Notice 2004–41 goes on to give a specific example of the
                                      second instance, i.e., a taxpayer makes a cash contribution to
                                      a charitable organization in addition to purchasing (at a dis-
                                      count) from the same organization real property that was
                                      subject to a conservation easement, where the total amount
                                      of contribution and purchase price equals the charity’s initial
                                      cost of the real property. The Graevs argue that since Notice
                                      2004–41 specifically described a transaction that did not
                                      apply in their case, the notice was not applicable to them.
                                         We disagree. While Notice 2004–41 did list one specific
                                      transaction that the Commissioner had determined was
                                      inappropriate, the Commissioner’s general warning against
                                      ‘‘improperly claiming charitable contribution deductions’’ con-
                                      nected with transfers of conservation easements to charities
                                      was still very much applicable to the Graevs. Notice 2004–
                                      41 made clear before Mr. Graev’s transfer that his trans-
                                      action with NAT would be subject to heightened scrutiny and




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                                      396                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      that if any of the Graevs’ positions were susceptible to chal-
                                      lenge, the Commissioner would likely enforce a contrary posi-
                                      tion. Mr. Graev’s September 15, 2004, email to NAT reflects
                                      his understanding of this possibility, stating that in light of
                                      Notice 2004–41 his accountants ‘‘have advised * * * [him] to
                                      be very cautious.’’
                                         The Graevs argue that their valuation of the contributed
                                      easement was reasonable. Since the valuation issue will be
                                      resolved by the parties’ stipulation to be bound by the out-
                                      come of another case that is still pending, see note 2 above,
                                      we do not decide valuation now but assume that the Graevs’
                                      valuation was reasonable. However, the fact that a valuation
                                      is reasonable does not mean that it is correct; a reasonable
                                      but incorrect valuation may be challenged and disallowed;
                                      consequently, someone who assigns a reasonable value to his
                                      donation may nonetheless face a non-negligible risk of dis-
                                      allowance.
                                         Moreover, valuation is not the only potential issue faced by
                                      a taxpayer claiming a deduction for a contributed easement,
                                      and it was not the only issue as to which NAT promised to
                                      return Mr. Graev’s contributions. The first numbered para-
                                      graph of the side letter did address valuation (‘‘In the event
                                      the IRS challenges the appraisal’’), but the second numbered
                                      paragraph made the distinct promise to return the contribu-
                                      tions ‘‘[i]n the event the IRS disallows the tax deductions in
                                      their entirety’’. There are multiple requirements in section
                                      170 and the corresponding regulations that, if not followed,
                                      may lead to disallowance—and valuation is only one of them.
                                      For example, an easement contribution may be disallowed
                                      where—
                                        • The donee fails to be a ‘‘qualified organization’’ described
                                      in section 170(h)(3).
                                         • The property subject to the easement fails to be of a
                                      ‘‘historically important land area’’ or a ‘‘certified historic
                                      structure.’’ Sec. 170(h)(4)(iv); see Turner v. Commissioner,
                                      126 T.C. 299, 316 (2006).
                                        • The taxpayer fails to contribute a ‘‘qualified real property
                                      interest’’. Sec. 170(a)(2); see Belk v. Commissioner, 140 T.C.
                                      1 (2013).




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                                      (377)                           GRAEV v. COMMISSIONER                                       397


                                        • The easement fails to preserve conservation purposes ‘‘in
                                      perpetuity’’. Sec. 170(h)(5); see Carpenter v. Commissioner,
                                      T.C. Memo. 2012–1; Herman v. Commissioner, T.C. Memo.
                                      2009–205.
                                        • The parties fail to subordinate the rights of a mortgagee
                                      in the property ‘‘to the right of the qualified organization to
                                      enforce the conservation purposes of the gift in perpetuity.’’
                                      26 C.F.R. sec. 1.170A–14(g)(2); see Mitchell v. Commissioner,
                                      138 T.C. 324, 331–332 (2012).
                                        • The taxpayer fails to ‘‘[a]ttach a fully complete appraisal
                                      summary * * * to the tax return’’. 26 C.F.R sec. 1.170A–
                                      13(c)(2)(B). But see Kaufman v. Shulman, 687 F.3d 21, 28–
                                      30 (1st Cir. 2012), aff ’g in part, vacating and remanding in
                                      part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134
                                      T.C. 182 (2010).
                                        • The appraisal fails to be a ‘‘qualified appraisal’’. 26
                                      C.F.R. sec. 1.170A–13(c)(3); see Friedberg v. Commissioner,
                                      T.C. Memo. 2011–238.
                                        • The appraiser fails to be a ‘‘qualified appraiser’’. 26
                                      C.F.R. sec. 1.170A–13(c)(5); see Rothman v. Commissioner,
                                      T.C. Memo. 2012–218 (reserving the question on whether an
                                      appraiser was ‘‘qualified’’).
                                        • The parties fail to record the easement or otherwise fail
                                      to effect ‘‘legally enforceable restrictions’’. 26 C.F.R. sec.
                                      1.170A–14(g)(1); see Satullo v. Commissioner, T.C. Memo.
                                      1993–614, aff ’d without published opinion, 67 F.3d 314 (11th
                                      Cir 1995).
                                        • The taxpayer fails to ‘‘[m]aintain records’’ necessary to
                                      substantiate the charitable contribution. 26 C.F.R. sec.
                                      1.170A–13(c)(2)(C), Income Tax Regs.
                                        Mr. Graev’s September 15, 2004, correspondence with NAT
                                      reflects his clear understanding that charitable contribution
                                      deductions for contributions ‘‘to organizations that promote
                                      conservation easements’’ were going to be the subject of IRS
                                      scrutiny and could be disallowed for failing to satisfy any one
                                      of the requirements in section 170. Mr. Graev’s accountants
                                      advised him ‘‘to be very cautious’’ with such transactions.
                                      Clearly, the risk that the IRS might disallow a deduction for
                                      the contribution of an easement was well above ‘‘negligible’’.




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                                      398                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                           b. The side letter
                                         Informed by his accountants’ warning, Mr. Graev initially
                                      asked NAT about the possibility of a side letter from NAT
                                      that promised the return of contributions if deductions were
                                      disallowed. NAT eventually gave Mr. Graev such a letter on
                                      September 24, 2004. The mere fact that he required the side
                                      letter is strong evidence that, at the time of Mr. Graev’s con-
                                      tribution, the risk that his corresponding deductions might
                                      be disallowed could not be (and was not) ‘‘ignored with
                                      reasonable safety in undertaking a serious business trans-
                                      action.’’ 885 Inv. Co. v. Commissioner, 95 T.C. at 161.
                                         Mr. Graev was not alone in his assessment of the risk of
                                      disallowance. NAT considered it ‘‘standard Trust policy’’ to
                                      return a cash contribution to the extent a deduction therefor
                                      was disallowed by the IRS. In numerous instances NAT
                                      issued ‘‘comfort letters’’ assuring donors of this policy. The
                                      very essence of a comfort letter implies a non-negligible risk;
                                      and the author uses the letter to induce the recipient to enter
                                      into a transaction. In this case the risk was either partial or
                                      complete disallowance of Mr. Graev’s claimed charitable con-
                                      tribution deductions. NAT’s course of dealing confirms that
                                      the possibility that the IRS might disallow Mr. Graev’s
                                      deductions was not ‘‘so remote as to be negligible’’. See 26
                                      C.F.R. secs. 1.170A–1(e), 1.170A–7(a)(3), 1.170A–14(g)(3).
                                           2. Disallowance as a subsequent event
                                           The Graevs argue:
                                           Forty-four years ago, this Court ruled that the [subsequent] events
                                           referred to by Treas. Reg. §1.170A–l(e) do not include contingencies cre-
                                           ated by Respondent’s examination or contingencies within Respondent’s
                                           control. O’Brien v. Commissioner, 46 T.C. 583, 592 (1966), acq., 1968–1
                                           C.B. 2.[10]

                                      O’Brien v. Commissioner, 46 T.C. 583 (1966), did involve a
                                      charitable contribution that was contingent on subsequent
                                      favorable tax treatment; but the Graevs’ characterization of
                                        10 The Graevs also cite an IRS private letter ruling. We decline to con-

                                      sider it, in light of section 6110(k)(3), which provides: ‘‘(3) Precedential sta-
                                      tus.—Unless the Secretary otherwise establishes by regulations, a written
                                      determination may not be used or cited as precedent.’’ See Abdel-Fattah v.
                                      Commissioner, 134 T.C. 190, 202 (2010); Vons Cos. v. United States, 51
                                      Fed. Cl. 1, 12 (2001).




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                                      (377)                           GRAEV v. COMMISSIONER                                       399


                                      our ruling in O’Brien is flatly incorrect, and their reliance on
                                      it is therefore mistaken.
                                         O’Brien addressed two issues—a charitable remainder
                                      trust issue (which we describe here first) and a related but
                                      distinct tax-treatment contingency issue. The taxpayers cre-
                                      ated a charitable remainder trust in June 1964—of which
                                      they made themselves trustees with broad powers to manage
                                      the trust—and then made contributions to the trust in
                                      December 1964. Id. at 584. The Commissioner argued that
                                      the taxpayers were not entitled to charitable contribution
                                      deductions derived from the taxpayers’ contributions to the
                                      trust because the complete management power given to the
                                      donor-trustees enabled them to defeat the remainder
                                      interests and therefore prevented the deduction. Id. at 591.
                                      We rejected that argument and concluded—
                                           that it is highly improbable that the petitioners in their fiduciary
                                           capacity will ever perform an act which will defeat the charitable remain-
                                           ders they have created in the trust. All of the conditions and cir-
                                           cumstances surrounding the transfers of property interests to the trust
                                           persuade us that the named charities, or other qualified ones, will
                                           eventually receive the beneficial enjoyment thereof. * * * [Id. at 596;
                                           emphasis added.]

                                      We thus decided this remainder trust issue under ‘‘[t]he
                                      guidelines * * * set forth in section 1.170–1(e), Income Tax
                                      Regs.’’ 11 Id. at 594.
                                         The Commissioner’s tax contingency argument (discussed
                                      first in O’Brien) was based on paragraph 16 of the trust
                                      instrument, under which contributions to the trust were
                                      ‘‘subject to the condition that such contribution shall be
                                      repaid to the contributor by the Trustees * * * only in the
                                      event and to the extent that the Commissioner of Internal
                                      Revenue does not allow [it] as a deduction’’. Id. at 588. In the
                                      notice of deficiency issued in September 1965, the Commis-
                                      sioner had disallowed the charitable contribution deductions
                                      (for the sole reason that the donor-trustees had power over
                                      the trust). We ‘‘disposed of [the contingency issue] sum-
                                           11 For
                                               the remainder trust issue we cited 26 C.F.R. section 1.170–1(e)
                                      (1961) (see note 6 above for the 1959 version which was identical to the
                                      1961 regulation); but the limitations now set forth in 26 C.F.R. sections
                                      1.170A–1(e), 1.170A–7(a)(3), and 1.170A–14(g)(3), Income Tax Regs., are
                                      equivalent.




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                                      400                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      marily’’, id. at 591, so it is not entirely clear what the
                                      Commissioner had argued; but it appears that the Commis-
                                      sioner’s contention was simply that ‘‘the literal meaning of
                                      paragraph 16’’, id., called for return of the contributions upon
                                      the mere act of disallowance by the Commissioner, whether
                                      or not the Commissioner’s position was valid or was upheld.
                                      This position would have put the contingency ‘‘ ‘within the
                                      control * * * of the Commissioner’ ’’, id. at 591 (quoting Sur-
                                      face Combustion Corp. v. Commissioner, 9 T.C. 631, 655
                                      (1947), aff ’d, 181 F.2d 444 (6th Cir. 1950)), 12 without regard
                                      to the merits of the Commissioner’s decision. We held, to the
                                      contrary, that despite ‘‘the narrow wording of the trust
                                      instrument’’, ‘‘[t]he petitioners have a right to litigate
                                      respondent’s determination’’, so that the contributions would
                                      not be subject to return ‘‘unless the petitioners are
                                      unsuccessful in this litigation.’’ Id. at 592.
                                        That is, in O’Brien the Commissioner evidently argued
                                      that the charitable contribution deductions were improper
                                      simply because, under the trust instrument, the charitable
                                      contributions were defeated by the IRS’s mere disallowance
                                      (whether or not that disallowance was upheld in litigation).
                                      We held, however, that if the taxpayers successfully chal-
                                      lenged that disallowance, then the contributions were not
                                      defeated (and the contribution deductions could therefore be
                                      allowed). We thus held that a contingency expressed in terms
                                      of ‘‘disallowance’’ of a deduction actually looked to the merits
                                      of the deduction. Contrary to the Graevs’ argument, our
                                      O’Brien Opinion did not analyze the tax contingency issue
                                      under the section 170 regulations, 13 and we did not hold that
                                         12 In Surface Combustion Corp. v. Commissioner, 9 T.C. 631 (1947),

                                      aff ’d, 181 F.2d 444 (6th Cir. 1950), we held that a provision in an em-
                                      ployee trust allowing an employer to reclaim his contributions to the trust
                                      if the contributions were determined to be nondeductible did not prevent
                                      the employer from deducting his contributions to the trust since the con-
                                      tingency was in the control of the Commissioner. Surface Combustion did
                                      not involve charitable contributions, section 170, nor any regulations with
                                      a ‘‘so remote as to be negligible’’ standard.
                                         13 Our Opinion in O’Brien v. Commissioner, 46 T.C. 583, 592 (1966), indi-

                                      cates that the Commissioner also cited—but we distinguished—Jones v.
                                      United States, 252 F. Supp. 256 (N.D. Ohio 1966), aff ’d in part, rev’d in
                                      part, 395 F.2d 938 (6th Cir. 1968), a case not involving a tax-treatment-
                                      contingent contribution, in which (as we noted) the District Court held
                                      that the possibility that a contribution at issue there would be defeated




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                                      (377)                           GRAEV v. COMMISSIONER                                       401


                                      a tax-treatment contingency can never be a subsequent event
                                      that will defeat a contribution and a deduction. We simply
                                      did not address that issue.
                                         This case, unlike O’Brien, clearly presents the issue of
                                      whether the promised return of a charitable contribution
                                      upon the disallowance of the charitable contribution deduc-
                                      tion can constitute a subsequent event the possibility of
                                      which, if not negligible, renders the deduction not allowable.
                                      O’Brien sheds no light on that question.
                                           B. The possibility of return of the contributions
                                         If the risk of IRS disallowance was non-negligible, then so
                                      was the prospect that NAT would be called on to honor its
                                      side letter and ‘‘promptly refund * * * [Mr. Graev’s] entire
                                      cash endowment contribution and join with * * * [Mr.
                                      Graev] to immediately remove the facade conservation ease-
                                      ment from the property’s title’’. Given that non-negligible
                                      risk, Mr. Graev’s contributions fell afoul of the section 170
                                      regulations implementing the statutory requirements that a
                                      gift be effectively ‘‘made’’, that it consist of an ‘‘entire
                                      interest’’, and that it be a ‘‘qualified conservation contribu-
                                      tion’’. The Graevs argue, however, that as a matter of law
                                      NAT could not be held to the promises it made in its side
                                      letter, so that there was in fact no possibility that the prop-
                                      erty would be returned.
                                         The Graevs contend that NAT could not be divested of its
                                      interest in the easement because the side letter is not
                                      enforceable under New York law and that, as a result, the
                                      contributions were not really conditional. 14 In particular, the
                                      ‘‘was not ‘so remote as to be negligible’ under section 1.170–1(e), Income
                                      Tax Regs.’’ This description of Jones includes our only mention of that reg-
                                      ulation in our discussion of this issue in the O’Brien Opinion, and our dis-
                                      cussion does not address any relation between the regulation and the tax-
                                      treatment-contingent deduction at issue in O’Brien.
                                         14 In this argument the Graevs do not distinguish between the contribu-

                                      tion of the easement (which was subject to the statutes that the Graevs
                                      cite) and the contribution of the cash (which was not). Reliance on New
                                      York real estate principles to argue that the side letter is not enforceable
                                      as to the cash contribution is misplaced. Even if the side letter were not
                                      enforceable as to the easement, for the reasons the Graevs advance, so
                                      that they could not require NAT to ‘‘remove’’ it, the Graevs show no reason
                                      that the side letter would not be enforceable so as to require the return
                                                                                                       Continued




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                                      402                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      Graevs argue that New York’s environmental conservation
                                      statutes, N.Y. Envtl. Conserv. Law secs. 49–0301 to 49–0311
                                      (McKinney 2008 & Supp. 2013), would prevent the side letter
                                      from being enforced, and alternatively, that the common law
                                      doctrine of merger extinguished the side letter upon NAT’s
                                      recording the easement deed. They also contend that under
                                      principles of tax law the promises in the side letter were a
                                      nullity. We disagree.
                                           1. Conservation easements under New York law
                                         In general, property interests are determined by State law.
                                      United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722
                                      (1985). In 1983 New York enacted the New York Conserva-
                                      tion Easement Statute. See N.Y. Envtl. Conserv. Law secs.
                                      49–0301 to 49–0311. For purposes of these statutes a ‘‘con-
                                      servation easement’’ is defined as:
                                           an easement, covenant, restriction or other interest in real property, cre-
                                           ated under and subject to the provisions of this title which limits or
                                           restricts development, management or use of such real property for the
                                           purpose of preserving or maintaining the scenic, open, historic, archae-
                                           ological, architectural, or natural condition, character, significance or
                                           amenities of the real property * * * [Id. sec. 49–0303(1).]

                                      Under these New York statutes, a conservation easement is
                                      enforceable even though ‘‘[i]t is not appurtenant to an
                                      interest in real property’’ and even though ‘‘[i]t can be or has
                                      been assigned to another holder’’. 15 N.Y. Envtl. Conserv.
                                      Law sec. 49–0305(5). Since an easement with these
                                      characteristics would not have been enforceable under New
                                      York common law, see Gross v. Cizauskas, 385 N.Y.S.2d 832
                                      (App. Div. 1976), a conservation easement in New York is
                                      authorized only by statute and thus is subject to several
                                      statutory restrictions. We assume the easement in this case
                                      is enforceable only under New York’s Environmental Con-
                                      servation Law and (as the Graevs contend) is subject to the

                                      of the cash.
                                         15 The legislative history of these provisions suggests that they were in-

                                      cluded in the statutes so that the conservation easements would satisfy the
                                      perpetuity requirement of 26 C.F.R. sec. 1.170A–14(g). See John C.
                                      Partigan, ‘‘New York’s Conservation Easement Statute: The Property In-
                                      terest and Its Real Property and Federal Income Tax Consequences’’, 49
                                      Albany L. Rev. 430, 452 n.87 (1985).




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                                      (377)                           GRAEV v. COMMISSIONER                                       403


                                      restrictions therein, especially restrictions on how an ease-
                                      ment can be extinguished.
                                        The manner and circumstances in which parties can
                                      modify or extinguish a conservation easement under New
                                      York’s Environmental Conservation statutes are clear:
                                           A conservation easement shall be modified or extinguished only pursu-
                                           ant to the provisions of section 49–0307 of this title. Any such modifica-
                                           tion or extinguishment shall be set forth in an instrument which com-
                                           plies with the requirements of section 5–703 of the general obligations
                                           law or in an instrument filed in a manner prescribed for recording a
                                           conveyance of real property pursuant to section two hundred ninety-one
                                           of the real property law. [N.Y. Envtl. Conserv. Law sec. 49–0305(2).]

                                      The Graevs argue that NAT’s promise in the side letter to
                                      ‘‘remove the facade conservation easement from the prop-
                                      erty’s title’’ purports to retain for Mr. Graev a right to extin-
                                      guish the easement that does not comply with the provisions
                                      of N.Y. Envtl. Conserv. Law section 49–0307, and as a result,
                                      any attempt to remove the easement pursuant to the promise
                                      in the side letter would be unlawful.
                                         Pursuant to N.Y. Envtl. Conserv. Law section 49–0307,
                                      cross-referenced in the statute quoted above, a conservation
                                      easement held by a ‘‘not-for-profit conservation organiza-
                                      tion’’ 16 may be modified or extinguished only: (1) ‘‘as pro-
                                      vided in the instrument creating the easement’’; (2) ‘‘in a pro-
                                      ceeding pursuant to section nineteen hundred fifty-one of the
                                      real property actions and proceedings law’’; or (3) ‘‘upon the
                                      exercise of the power of eminent domain.’’ NAT’s promise in
                                      the side letter to remove the easement, standing alone, does
                                      not appear to comply with any of the three permissible modi-
                                      fication or extinguishment methods provided in N.Y. Envtl.
                                      Conserv. Law section 49–0307.
                                         The Commissioner argues that the side letter should be
                                      considered part of ‘‘the instrument creating the easement’’.
                                      That argument fails because the side letter was not ‘‘sub-
                                      scribed by the person * * * granting [the deed]’’, N.Y. Gen.
                                      Oblig. Law sec. 5–703 (McKinney 2012), nor was it recorded,
                                      which are both required under N.Y. Envtl. Conserv. Law sec-
                                      tion 49–0305 (cross-referencing N.Y. Gen. Oblig. Law sec. 5–
                                        16 The Commissioner does not dispute that NAT is a ‘‘not-for-profit con-

                                      servation organization’’ for purposes of New York’s Environmental Con-
                                      servation Law.




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                                      404                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      703) in order for a document to be considered an ‘‘instrument
                                      creating the easement’’.
                                         However, we hold that NAT had the ability to honor its
                                      promises in the side letter because the subscribed and
                                      recorded deed—which clearly is ‘‘the instrument creating the
                                      easement’’—reserved for NAT the power to do so. Paragraph
                                      IV.B. of the duly recorded deed granting the easement explic-
                                      itly gives NAT the right to ‘‘abandon’’ the easement, and that
                                      deed does comply with one of the three permissible
                                      methods—i.e., the first (allowing modification or extinguish-
                                      ment ‘‘as provided in the instrument creating the easement’’).
                                      The recorded deed provides:
                                           Grantee further agrees that it will not transfer this Easement unless the
                                           transferee first agrees to continue to carry out the conservation purposes
                                           for which this Easement was created, provided, however, that nothing
                                           herein contained shall be constructed to limit the Grantee’s right to give
                                           its consent (e.g., to changes in a Protected Facade(s)) or to abandon some
                                           or all of its rights hereunder. [Emphasis added.]

                                         We have found that at the time Mr. Graev made the con-
                                      tribution, NAT intended to honor its promise to ‘‘join with
                                      * * * [Mr. Graev] to immediately remove the facade con-
                                      servation easement from the property’s title’’, and we hold
                                      that NAT had the ability to honor this promise by exercising
                                      its right to abandon the easement as set forth in paragraph
                                      IV.B. of the recorded deed. 17
                                           17 Our
                                                holding here is distinguishable from Commissioner v. Simmons,
                                      646 F.3d 6, 10 (D.C. Cir. 2011), aff ’g T.C. Memo. 2009–208, which looked
                                      at similar abandonment language in an easement deed and concluded ‘‘de-
                                      ductions cannot be disallowed based upon the remote possibility * * * [the
                                      charity] will abandon the easements.’’ See also Kaufman v. Shulman, 687
                                      F.3d 21, 28 (1st Cir. 2012), aff ’g in part, vacating and remanding in part
                                      Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010).
                                      In Commissioner v. Simmons, 646 F.3d at 10, the Court of Appeals for the
                                      D.C. Circuit stated that ‘‘the Commissioner has not shown the possibility
                                      * * * [the charity] will actually abandon its rights is more than negligible.
                                      [The charity] * * * has been holding and monitoring easements in the Dis-
                                      trict of Columbia since 1978, yet the Commissioner points to not a single
                                      instance of its having abandoned its right to enforce.’’ In the instant case,
                                      however, NAT gave Mr. Graev an explicit, written promise that it would
                                      abandon its rights in the easement if certain events occurred. We find
                                      nothing to indicate that NAT did not intend to comply with its written
                                      promises.




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                                      (377)                           GRAEV v. COMMISSIONER                                       405


                                        Accordingly, we find that the Commissioner has shown
                                      that the possibility that NAT would actually abandon its
                                      rights was more than negligible.
                                           2. Merger doctrine
                                         Alternatively, the Graevs argue that the entire side letter
                                      was extinguished under the common law doctrine of merger.
                                      This argument is also without merit. While the doctrine of
                                      merger generally extinguishes terms of preliminary contracts
                                      or negotiations upon the recording of a deed, so that only the
                                      terms in the recorded deed remain, there are exceptions to
                                      this general rule. 91 N.Y. Jur. 2d Real Property Sales and
                                      Exchanges, sec. 140 (2011). Assuming the doctrine of merger
                                      applies to the side letter, the provisions in the side letter
                                      would fall within one of these exceptions and survive the
                                      deed.
                                         The merger rule does not apply where there is a clear
                                      intent evidenced by the parties that a particular provision of
                                      the contract shall survive the deed. See Novelty Crystal Corp.
                                      v. PSA Institutional Partners, L.P., 850 N.Y.S.2d 497, 500
                                      (App. Div. 2008). ‘‘Intention of the parties may be derived
                                      from the instruments alone or from the instruments and the
                                      surrounding circumstances’’. Goldsmith v. Knapp, 637
                                      N.Y.S.2d 434, 436 (App. Div. 1996). In Seibros Fin. Corp. v.
                                      Kirman, 249 N.Y.S. 497, 499 (App. Div. 1931), a New York
                                      court held that because an agreement giving the purchaser
                                      a right to reconvey property that was claimed to be the
                                      ‘‘inducing cause which persuaded the plaintiff to purchase
                                      the property * * * [, t]he contract clearly shows that there
                                      was no intention on the part of the parties to merge the con-
                                      tract in the deed. A contract for the sale of real estate is
                                      merged in the deed only when the latter is intended to be
                                      accepted in full performance of the former.’’
                                         Likewise, we find that the side letter was an inducing
                                      cause that persuaded Mr. Graev to contribute the conserva-
                                      tion easement and cash to NAT. Before he even filled out his
                                      application to NAT, Mr. Graev emailed NAT asking for its
                                      thoughts on the side letter; and after receiving NAT’s assur-
                                      ances that the side letter would not affect the deductibility
                                      of his contribution, he specifically requested the side letter.
                                      Moreover, after the donation, when NAT recognized that the




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                                      406                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      side letter might be detrimental to Mr. Graev’s tax deduc-
                                      tions, NAT offered to rescind the side letter and Mr. Graev
                                      did not accept NAT’s offer, indicating that the parties under-
                                      stood the side letter had survived the deed. Accordingly, we
                                      find that NAT’s promises in the side letter to return to the
                                      easement and cash were enforceable because we find a clear
                                      intent evidenced by the parties that the side letter would
                                      survive the deed.
                                           3. Nullity
                                         The Graevs appear to argue that NAT’s side letter is a nul-
                                      lity and should be disregarded for tax purposes because it
                                      provides for the donor’s potential recovery of the contribu-
                                      tions in the event of unwanted tax consequences. In support
                                      of this argument the Graevs rely primarily on Commissioner
                                      v. Procter, 142 F.2d 824, 827–828 (4th Cir. 1944), rev’g a
                                      Memorandum Opinion of this Court. The holding of the
                                      Court of Appeals in Procter, however, is inapposite to this
                                      case.
                                         In Procter the donors assigned to their children gifts of
                                      remainder interests in two trusts, subject to the following
                                      clause:
                                           [I]n the event it should be determined by final judgment or order of a
                                           competent federal court of last resort that any part of the transfer in
                                           trust hereunder is subject to gift tax, it is agreed by all the parties
                                           hereto that in that event the excess property hereby transferred which
                                           is decreed by such court to be subject to gift tax, shall automatically be
                                           deemed not to be included in the conveyance in trust hereunder and
                                           shall remain the sole property of * * * [the taxpayer] * * *. [Id. at 827.]

                                      Under that clause, if the gifts were held by the courts to be
                                      taxable, then the gifts would be undone, and the donors
                                      would then be not liable for the tax for which the courts had
                                      held them liable. The clause purported not only to undo the
                                      gifts but also to undo the judicial decision.
                                         The Court of Appeals for the Fourth Circuit held that the
                                      clause in Procter was ‘‘clearly a condition subsequent and
                                      void because contrary to public policy’’, id., for three reasons:
                                         (1) Such a clause ‘‘has a tendency to discourage the collec-
                                      tion of the tax by the public officials charged with its collec-
                                      tion’’, thereby discouraging efforts to collect the tax. Id.




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                                      (377)                           GRAEV v. COMMISSIONER                                       407


                                         (2) ‘‘[T]he effect of the condition would be to obstruct the
                                      administration of justice by requiring the courts to pass upon
                                      a moot case’’. Id.
                                         (3) ‘‘[T]he condition is to the effect that the final judgment
                                      of a court is to be held for naught because of the provision
                                      of an indenture necessarily before the court when the judg-
                                      ment is rendered.’’ Id. That is, a final judgment would cause
                                      the condition to be operative, but the condition should not be
                                      allowed to operate to undo the judgment, since the
                                      instrument containing the condition was before the court,
                                      and all matters pertaining thereto merged in the judgment.
                                      Id. at 827–828.
                                         None of these three reasons would apply to nullify NAT’s
                                      side letter:
                                         First, the conditions in NAT’s side letter would not discour-
                                      age the collection of tax. This Opinion decides that the
                                      Graevs are not entitled to charitable contribution deductions
                                      (and that there are therefore deficiencies in their income
                                      tax), and the return of the contributions to the Graevs would
                                      not at all undo or contradict that holding but would instead
                                      be consistent with that holding. In order for the condition in
                                      the side letter to be triggered, the deductions must be dis-
                                      allowed, and income tax will thereafter be owing whether or
                                      not the contribution is returned.
                                         Second, the possibility of the subsequent return of the con-
                                      tributions does not render this case moot. The Graevs
                                      claimed deductions; the IRS disallowed them and determined
                                      deficiencies of tax; the Graevs challenged that determination,
                                      and we must decide the matter. If we had upheld the deduc-
                                      tions, the condition in the side letter would never have been
                                      met, the gift would be complete, the contribution would be
                                      deductible (assuming other qualifications are met), and we
                                      would enter decision in favor of the Graevs to overturn the
                                      IRS’s deficiency determination. Because instead we disallow
                                      the deductions and enter decision in the IRS’s favor,
                                      upholding the deficiency determination, the condition in the
                                      side letter is triggered and the gift presumably reverts to the
                                      donor. However, in this case, unlike Procter, the reversion to
                                      the donor would not be inconsistent with the court’s
                                      holding—i.e., the tax collector in our case, unlike Proctor,
                                      would collect the tax consistent with the judgment even if




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                                      408                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                      the condition become operative and the gift were returned to
                                      the donor.
                                         Third, although the final judgment in the IRS’s favor
                                      would cause the side letter to be operative, the return of the
                                      contribution pursuant to the side letter would not operate to
                                      undo the judgment, as was the case in Procter. The return
                                      would have no effect on the Graevs’ tax liabilities.
                                         Other cases have similarly distinguished Procter and have
                                      held that certain tax contingency provisions are not void as
                                      against public policy. See Estate of Christiansen v. Commis-
                                      sioner, 130 T.C. 1, 8 n.7, 17–18 (2008) (a clause that
                                      ‘‘increases the amount donated to charity should the value of
                                      the estate be increased’’, ‘‘would not make us opine on a moot
                                      issue [i.e., the value of the estate], and wouldn’t in any way
                                      upset the finality of our decision in this case’’), aff ’d, 586
                                      F.3d 1061 (8th Cir. 2009); Estate of Dickinson v. Commis-
                                      sioner, 63 T.C. 771, 777 (1975) (stating that the ‘‘agreement
                                      makes no attempt to nullify * * * [the Court’s] determina-
                                      tion’’ (citing Surface Combustion Corp. v. Commissioner, 9
                                      T.C. 631, and O’Brien v. Commissioner, 46 T.C. 583)); Estate
                                      of Petter v. Commissioner, T.C. Memo. 2009–280 (‘‘a judg-
                                      ment adjusting the value of each unit will actually trigger a
                                      reallocation of the number of units between the trusts and
                                      the foundation under the formula clause. So we are not
                                      issuing a merely declaratory judgment’’), aff ’d, 653 F.3d 1012
                                      (9th Cir. 2011).
                                           4. Voluntary removal of the easement
                                         The event that might defeat the contribution to NAT is the
                                      ‘‘removal’’ of the easement and the return of the cash pursu-
                                      ant to NAT’s side letter. Even if, as a matter of law, the side
                                      letter was not enforceable for any of the reasons the Graevs
                                      advance, the question would remain whether, as a matter of
                                      fact, in December 2004 there was a non-negligible possibility
                                      that the IRS would disallow the Graevs’ contribution deduc-
                                      tion and NAT would voluntarily remove the easement. We
                                      have found that there was. Mr. Graev evidently concluded
                                      that NAT’s promise should be believed; he took deliberate
                                      steps to obtain its promise; and his conclusion is evidence of
                                      what was likely. NAT made such promises to Mr. Graev and
                                      others precisely because it was soliciting contributions from




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                                      (377)                           GRAEV v. COMMISSIONER                                       409


                                      within a community of potential donors, and the ability of
                                      such an organization to obtain solicitations might well be
                                      undermined if it got a reputation for failing to keep its prom-
                                      ises. To decide that there was no non-negligible possibility
                                      that NAT would voluntarily extinguish the easement and
                                      return the cash would require us to find that, in order to
                                      induce Mr. Graev to make his contribution, NAT made cyn-
                                      ical promises that it fully intended to break. Our record will
                                      not support such a finding; the stipulated evidence simply
                                      shows a non-profit organization going about accomplishing
                                      its purpose. If we speculate (without evidence) that NAT
                                      might have reneged on its promise, or even if we assume that
                                      NAT probably would have reneged on its promise, that still
                                      leaves us with at least a non-negligible possibility that NAT
                                      would have done what it said it would do. That possibility is
                                      fatal to the Graevs’ contribution deductions.
                                      III. Conclusion
                                        Thus, on the evidence before us, we find that there was a
                                      substantial possibility that the IRS would challenge the
                                      Graevs’ easement contribution deductions. We hold that nei-
                                      ther State nor Federal law would prevent enforcement of the
                                      side letter. And we find that apart from any legal enforce-
                                      ability of the side letter, it reflected what NAT was likely to
                                      do in the event of IRS disallowance.
                                        For these reasons, we conclude that at the time of Mr.
                                      Graev’s contributions to NAT, the possibility that the IRS
                                      would disallow the Graevs’ deductions for the contributions
                                      and, as a result, that NAT would ‘‘promptly refund * * *
                                      [Mr. Graev’s] entire cash endowment contribution and join
                                      with * * * [Mr. Graev] to immediately remove the facade
                                      conservation easement from the property’s title’’ (as it prom-
                                      ised) was not ‘‘so remote as to be negligible’’. Accordingly,
                                      under 26 C.F.R. sections 1.170A–1(e) and 1.170A–7(a)(3) the
                                      deduction relating to the cash contributions is disallowed.
                                      Likewise, under 26 C.F.R. sections 1.170A–1(e), 1.170A–
                                      7(a)(3), and 1.170A–14(g)(3), the easement contribution
                                      deductions are disallowed.




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                                      410                 140 UNITED STATES TAX COURT REPORTS                                   (377)


                                           To reflect the foregoing,
                                                                                 An appropriate order will be issued.
                                                                               f




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