                                            RAMONA L. MITCHELL, PETITIONER v. COMMISSIONER                                         OF
                                                     INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 10891–10.                           Filed April 3, 2012.

                                                   In 2003 P contributed a conservation easement over 180
                                                acres of unimproved land to a qualified organization. The pur-
                                                chase of the unimproved land was seller financed. After a
                                                downpayment, P executed a promissory note for the
                                                remaining payments secured by a deed of trust on the unim-
                                                proved land. P failed to have the mortgagee subordinate the
                                                deed of trust to the conservation easement deed until two
                                                years later, in 2005. P claimed a charitable contribution
                                                deduction on her 2003 Federal income tax return. I.R.C. sec.
                                                170 allows a deduction for a ‘‘qualified conservation contribu-
                                                tion’’. A qualified conservation contribution must be made
                                                exclusively for conservation purposes. I.R.C. sec. 170(h). A
                                                contribution shall not be treated as exclusively for conserva-
                                                tion purposes unless the conservation purpose is protected in
                                                perpetuity. I.R.C. sec. 170(h)(5)(A). Pursuant to sec. 1.170A–
                                                14(g)(2), Income Tax Regs., no deduction is permitted for an

                                      324




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                                                interest in property which is subject to a mortgage unless the
                                                mortgagee subordinates its rights in the property to the right
                                                of the qualified organization to enforce the conservation pur-
                                                poses of the gift in perpetuity. P argues she has met the
                                                requirements of sec. 1.170A–14(g)(2), Income Tax Regs., and
                                                is eligible for a charitable contribution deduction under I.R.C.
                                                sec. 170. R argues that P failed to have the mortgagee
                                                subordinate his deed of trust to the conservation easement
                                                deed and therefore failed to meet the requirements of sec.
                                                1.170A–14(g)(2), Income Tax Regs., and I.R.C. sec. 170. As
                                                part of P’s argument that she has met the requirements of
                                                sec. 1.170A–14(g)(2), Income Tax Regs., P raises an issue of
                                                first impression: whether we must consider the so-remote-as-
                                                to-be-negligible standard of sec. 1.170A–14(g)(3), Income Tax
                                                Regs., in determining whether P satisfied the requirements of
                                                sec. 1.170A–14(g)(2), Income Tax Regs. Held: The so-remote-
                                                as-to-be-negligible standard of sec. 1.170A–14(g)(3), Income
                                                Tax Regs., does not apply to determine whether P satisfied
                                                the requirements of sec. 1.170A–14(g)(2), Income Tax Regs.
                                                Held, further, P has not met the requirements of sec. 1.170A–
                                                14(g)(2), Income Tax Regs., and is not eligible for the chari-
                                                table contribution deduction under I.R.C. sec. 170 for 2003.
                                                Held, further, P is not liable for the accuracy-related penalty
                                                under I.R.C. sec. 6662.

                                        Larry D. Harvey, for petitioner.
                                        Miles B. Fuller, Steven I. Josephy, and Joseph A. Peters, for
                                      respondent.
                                         HAINES, Judge: Respondent determined a deficiency of
                                      $142,600 in petitioner’s Federal income tax and an accuracy-
                                      related penalty under section 6662(a) 1 and (d) of $28,520 for
                                      2003. 2 The issues for decision after concessions are: (1)
                                      whether petitioner is entitled to a charitable contribution
                                      deduction with respect to the conservation easement she
                                      granted to Montezuma Land Conservancy (Conservancy); (2)
                                      if petitioner is entitled to a charitable contribution deduction,
                                      the amount of the deduction; and (3) whether petitioner is
                                      liable for the accuracy-related penalty under section 6662(a)
                                      and (d) or alternatively, if we determine petitioner is entitled
                                      to a charitable contribution deduction, whether she is liable
                                         1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as

                                      amended and in effect for the year at issue, and all Rule references are to the Tax Court Rules
                                      of Practice and Procedure. Amounts are rounded to the nearest dollar.
                                         2 Respondent first asserted that petitioner is liable for the accuracy-related penalty in his an-

                                      swer. Should we find in favor of petitioner on the first issue below, respondent claims she is
                                      liable for a gross valuation misstatement penalty under sec. 6662(h) of $50,973 for 2003.




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                                      for the gross valuation misstatement penalty under section
                                      6662(a) and (h).

                                                                          FINDINGS OF FACT

                                         Some of the facts have been stipulated and are so found.
                                      At the time petitioner filed her petition, she lived in Colo-
                                      rado.
                                         Charles Mitchell, his wife Ramona L. Mitchell, and their
                                      son, Blake Mitchell (Mitchells), resided in Mancos, Colorado,
                                      a ranching community established in 1876. Mancos is
                                      between Cortez, Colorado, 17 miles to the west, and
                                      Durango, Colorado, 30 miles to the east. Highway 160, at the
                                      base of the San Juan Mountains and known as the San Juan
                                      Skyway, connects the three towns. The towns are in the
                                      southwest corner of Colorado in the ‘‘Four Corners’’ area,
                                      where the boundaries of Colorado, New Mexico, Arizona, and
                                      Utah meet.
                                         The town of Mancos is in the northern part of Mancos
                                      Valley. Charles had owned a business in the town which
                                      began as a manufacturer of matches but eventually evolved
                                      into a manufacturer of erosion and flood control products.
                                      Charles had tried to buy 456 acres of ranchland in the
                                      southern part of the Mancos Valley from Clyde Sheek for
                                      over 20 years. The ranchland was approximately eight miles
                                      by road south of the town of Mancos.
                                         In 1998 Sheek finally agreed to sell the northerly 105-acre
                                      parcel to the Mitchells for $180,000. 3 The parcel was unim-
                                      proved; i.e., it had no buildings, only partial fencing, no utili-
                                      ties, and no domestic water. Access was from a two-lane
                                      gravel road maintained by the county. The land had been
                                      used by Sheek to graze cattle and was not in good condition
                                      when the Mitchells purchased it. The property also was used
                                      by wildlife for habitat.
                                         The Mitchells installed a two-inch water line from the
                                      northern boundary of the 105-acre parcel in 2000 with elec-
                                      trical lines added in 2001–02. The Mancos River channel
                                      running through the property was protected from further
                                      erosion, and fields were improved. Blake and his wife,
                                      Melody, built a home on the 105-acre parcel in 2000. Subse-
                                        3 Montezuma County assessors records describe the parcel as 95 acres. The land records de-

                                      scribe it as 105 acres. We will use 105 acres for purposes of the Opinion.




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                                      quently a 50- by 100-foot shop and a 900-square-foot guest-
                                      house were built on the parcel.
                                         In 2000 Charles sold his business. He again approached
                                      Sheek to buy the remaining 351 acres bordering the south
                                      boundary of the 105-acre parcel bought in 1998. Sheek
                                      agreed to sell the 351-acre parcel in 2001 for $683,000. He
                                      did not want all cash. He wanted retirement income. Con-
                                      sequently, after a downpayment of $83,000, the balance of
                                      $600,000 was to be paid in installments of $60,000 per year
                                      plus interest. A promissory note was signed and secured by
                                      a deed of trust recorded in the records of Montezuma County,
                                      Colorado, in January 2001.
                                         As a result of the two purchases, the Mitchells owned 456
                                      acres of ranchland in the southern portion of the Mancos
                                      Valley (Lone Canyon Ranch). The south and west sides of the
                                      Lone Canyon Ranch are bordered by the Mesa Verde
                                      National Park (park) where the Anasazi people, the
                                      cliffdwellers, had their communities. A portion of the ranch
                                      is actually within the park. To the south also is Ute Indian
                                      land and to the east is Bureau of Land Management land
                                      and a privately owned ranch. Charles and petitioner built
                                      their own home at Lone Canyon Ranch in 2001 and 2002.
                                         Charles began having health problems. In December 2002
                                      the Mitchells formed C. L. Mitchell Properties, L.L.L.P., a
                                      family limited partnership (partnership). 4 Lone Canyon
                                      Ranch was transferred to the partnership, subject to the deed
                                      of trust, as were other investments, including a rental prop-
                                      erty and cash and securities. Although Charles was named
                                      the general partner, it soon became evident that he could not
                                      carry out his management duties. Consequently, Blake took
                                      over the management duties. Charles eventually died of his
                                      illness in 2006.
                                         On December 31, 2003, the partnership granted a con-
                                      servation easement on the south 180 acres of unimproved
                                      land to Conservancy. The parties executed a deed of con-
                                      servation easement in gross. At the time the easement was
                                      granted, the deed of trust securing the debt to Sheek was not
                                      subordinated to the conservation easement held by Conser-
                                      vancy. From 2003 to 2005 the partnership had the money to
                                        4 The name of the limited partnership was changed at a later date to Lone Canyon Ranch

                                      Limited Liability Limited Partnership.




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                                      pay off the promissory note, which the deed of trust secured,
                                      at any time. There were no lawsuits, potential or otherwise;
                                      all bills were paid; payments on the promissory note to
                                      Sheek were current, and casualty insurance was in place.
                                      Two years after the conservation easement was granted,
                                      Sheek agreed to subordinate his deed of trust to the con-
                                      servation easement but received no consideration for the
                                      subordination. On December 22, 2005, Sheek signed the
                                      Subordination to Deed of Conservation Easement in Gross
                                      (subordination agreement).
                                         In 2004 the Mitchells hired William B. Love Appraisals,
                                      Inc. (Love), to appraise the conservation easement granted to
                                      Conservancy as of December 31, 2003. Love determined that
                                      the conservation easement had a market value of $504,000.
                                      Love issued an appraisal report for the partnership on Feb-
                                      ruary 17, 2004 (Love appraisal). The partnership claimed a
                                      $504,000 charitable contribution deduction, which flowed
                                      through to its two partners, Charles and petitioner, equally.
                                      Charles and petitioner claimed a $504,000 5 charitable con-
                                      tribution deduction on their 2003 joint Federal income tax
                                      return dated April 13, 2004 (2003 return). Charles and peti-
                                      tioner attached Form 8283, Noncash Charitable Contribu-
                                      tions, to their 2003 return along with a copy of the Love
                                      appraisal.
                                         A notice of deficiency was mailed to petitioner on February
                                      23, 2010, disallowing her 2003 charitable contribution deduc-
                                      tion. Respondent determined that petitioner had not met the
                                      requirements of section 170. Alternatively, respondent deter-
                                      mined that if petitioner had met the requirements of section
                                      170, the amount of the charitable contribution deduction was
                                      $100,100. 6 Petitioner timely filed a petition with this Court
                                      on May 12, 2010.
                                                                                  OPINION

                                         The issues before this Court are whether petitioner made
                                      a qualified conservation contribution to Conservancy and if
                                      so, whether she substantiated the reported charitable con-
                                      tribution deduction in the manner required by section
                                         5 Because of limitations on itemized deductions claimed on Schedule A, Itemized Deductions,

                                      only $447,236 of the charitable contribution deduction could be claimed on the 2003 return.
                                         6 Respondent in his pretrial memorandum concedes that, if a charitable contribution deduction

                                      is allowed, the amount of the deduction is $122,000.




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                                      170(f)(8). If we find that petitioner made a qualified con-
                                      servation contribution and that she substantiated it, we then
                                      must determine its value. Finally, we must determine
                                      whether petitioner is liable for certain penalties under sec-
                                      tion 6662.
                                      I. Qualified Conservation Contribution
                                         A taxpayer is generally allowed a deduction for any chari-
                                      table contribution made during the taxable year. Sec.
                                      170(a)(1). A charitable contribution is a gift of property to a
                                      charitable organization, made with charitable intent and
                                      without the receipt or expectation of receipt of adequate
                                      consideration. See Hernandez v. Commissioner, 490 U.S. 680,
                                      690 (1989); United States v. Am. Bar Endowment, 477 U.S.
                                      105, 116–118 (1986); see also sec. 1.170A–1(h)(1) and (2),
                                      Income Tax Regs. While a taxpayer is generally not allowed
                                      a charitable contribution deduction for a gift of property con-
                                      sisting of less than an entire interest in that property, an
                                      exception is made for a ‘‘qualified conservation contribution.’’
                                      See sec. 170(f)(3)(A), (B)(iii).
                                         A ‘‘qualified conservation contribution’’ is a contribution (1)
                                      of a ‘‘qualified real property interest’’, (2) to a ‘‘qualified
                                      organization’’, (3) which is made ‘‘exclusively for conservation
                                      purposes’’. Sec. 170(h)(1); see also sec. 1.170A–14(a), Income
                                      Tax Regs. Respondent concedes that there was a contribution
                                      of a qualified real property interest and that at the time of
                                      the contribution the Conservancy was a qualified organiza-
                                      tion under section 170(h)(3). Therefore, we focus on the third
                                      requirement; i.e., whether petitioner’s contribution of the
                                      conservation easement to Conservancy was exclusively for
                                      conservation purposes.
                                         A contribution is made exclusively for conservation pur-
                                      poses only if it meets the requirements of section 170(h)(5).
                                      Glass v. Commissioner, 124 T.C. 258, 277 (2005), aff ’d, 471
                                      F.3d 698 (6th Cir. 2006). Section 170(h)(5)(A) provides that
                                      ‘‘A contribution shall not be treated as exclusively for con-
                                      servation purposes unless the conservation purpose is pro-
                                      tected in perpetuity.’’ Section 1.170A–14(g), Income Tax
                                      Regs., elaborates on the enforceability-in-perpetuity require-
                                      ment. Paragraph (g)(1) provides generally that in order for a
                                      conservation easement to be enforceable in perpetuity, the




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                                      ‘‘interest in the property retained by the donor * * * must
                                      be subject to legally enforceable restrictions * * * that will
                                      prevent uses of the retained interest inconsistent with the
                                      conservation purposes of the donation.’’ The various subpara-
                                      graphs of paragraph (g) set forth many of these legally
                                      enforceable restrictions.
                                         Paragraph (g)(2) addresses mortgages and in pertinent
                                      part provides that ‘‘no deduction will be permitted * * * for
                                      an interest in property which is subject to a mortgage unless
                                      the mortgagee subordinates its rights in the property to the
                                      right of the * * * [donee] organization to enforce the con-
                                      servation purposes of the gift in perpetuity.’’
                                         Paragraph (g)(3) is entitled ‘‘Remote future event’’ and
                                      addresses events that may defeat the property interest that
                                      has passed to the donee organization. It provides that a
                                      deduction will not be disallowed merely because on the date
                                      of the gift there is the possibility that the interest will be
                                      defeated so long as on that date the possibility of defeat is
                                      so remote as to be negligible.
                                         Paragraph (g)(6) is entitled ‘‘Extinguishment’’ and recog-
                                      nizes that after the donee organization’s receipt of an
                                      interest in property, an unexpected change in the conditions
                                      surrounding the property can make impossible or impractical
                                      the continued use of the property for conservation purposes.
                                      Subdivision (i) of paragraph (g)(6) provides that those pur-
                                      poses will nonetheless be treated as protected in perpetuity
                                      if the restrictions limiting use of the property for conserva-
                                      tion purposes ‘‘are extinguished by judicial proceeding and all
                                      of the donee’s proceeds * * * from a subsequent sale or
                                      exchange of the property are used by the donee organization
                                      in a manner consistent with the conservation purposes of the
                                      original contribution.’’
                                         Subdivision (ii) of paragraph (g)(6) is entitled ‘‘Proceeds’’
                                      and, in pertinent part, provides:
                                      for a deduction to be allowed under this section, at the time of the gift the
                                      donor must agree that the donation of the perpetual conservation restric-
                                      tion gives rise to a property right, immediately vested in the donee
                                      organization, with a fair market value that is at least equal to the propor-
                                      tionate value that the perpetual conservation restriction at the time of the
                                      gift bears to the value of the property as a whole at that time. * * * For
                                      purposes of this paragraph (g)(6)(ii), that proportionate value of the donee’s
                                      property rights shall remain constant. Accordingly, when a change in




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                                      conditions gives rise to the extinguishment of a perpetual conservation
                                      restriction under paragraph (g)(6)(i) of this section, the donee organization,
                                      on a subsequent sale, exchange, or involuntary conversion of the subject
                                      property, must be entitled to a portion of the proceeds at least equal to
                                      that proportionate value of the perpetual conservation restriction * * *.

                                         Respondent argues that petitioner’s conservation easement
                                      was not protected in perpetuity and thus it is not a qualified
                                      conservation contribution. Specifically, respondent argues
                                      that petitioner failed to satisfy the requirements of section
                                      1.170A–14(g)(2), Income Tax Regs. (subordination regula-
                                      tion), and section 1.170A–14(g)(6)(ii), Income Tax Regs. (pro-
                                      ceeds regulation). We will address each of these arguments
                                      in turn.
                                           A. Whether Petitioner Satisfied the Requirements of the
                                              Subordination Regulation
                                         Respondent argues that the conservation purpose of the
                                      donated property is not protected in perpetuity because peti-
                                      tioner failed to meet the requirements of the subordination
                                      regulation, which required Sheek to subordinate his deed of
                                      trust to the deed of conservation easement. Petitioner argues
                                      that Sheek entered into a subordination agreement in 2005
                                      which complies with the requirements of the subordination
                                      regulation. Petitioner also argues that in determining
                                      whether the requirements of the subordination regulation
                                      are met this Court must consider the so-remote-as-to-be-neg-
                                      ligible standard in section 1.170A–14(g)(3), Income Tax Regs.
                                      Finally, petitioner argues that she entered into an oral agree-
                                      ment with Sheek with respect to the use of Lone Canyon
                                      Ranch and that the oral agreement provides the necessary
                                      protection required by section 170(h)(1)(c).
                                           1. Whether Petitioner’s Obtaining a Subordination Agree-
                                              ment in 2005 Satisfies the Requirements of the Sub-
                                              ordination Regulation
                                         Petitioner claims her grant of a conservation easement to
                                      Conservancy satisfies the requirements of the subordination
                                      regulation because Sheek subordinated his deed of trust to
                                      Conservancy’s deed of conservation easement in 2005. Peti-
                                      tioner argues that it is irrelevant that the subordination
                                      agreement was signed almost two years after the grant of the




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                                      conservation easement because the subordination regulation
                                      has no requirement as to when the mortgagee must subordi-
                                      nate its claim to that of the donee organization. Respondent
                                      argues that in order to comply with the requirements of the
                                      subordination regulation, the mortgagee’s rights in the prop-
                                      erty must be subordinate to the conservation easement on
                                      the date the conservation easement is granted. We agree
                                      with respondent.
                                         Though the subordination regulation is silent as to when
                                      a taxpayer must subordinate a preexisting mortgage on
                                      donated property, we find that the regulation requires that
                                      a subordination agreement be in place at the time of the gift.
                                      In order to be eligible for the charitable contribution deduc-
                                      tion for 2003, petitioner had to meet all the requirements of
                                      section 170(h) and the underlying regulations, including the
                                      requirement that the Sheek deed of trust be subordinate to
                                      the conservation easement deed of trust. See sec. 1.170A–
                                      14(g)(2), Income Tax Regs. Sheek did not subordinate his
                                      deed of trust to the conservation easement deed of trust until
                                      December 22, 2005. Had petitioner defaulted on the promis-
                                      sory note before that date, Sheek could have instituted fore-
                                      closure proceedings and eliminated the conservation ease-
                                      ment. The conservation easement was therefore not protected
                                      in perpetuity at the time of the gift. As a result, petitioner
                                      failed to meet the requirements of section 170(h) and the
                                      underlying regulations for 2003.
                                         Petitioner argues that notwithstanding the fact that
                                      Sheek’s deed of trust took priority over the conservation
                                      easement until December 22, 2005, the conservation ease-
                                      ment was still protected in perpetuity because the probability
                                      of petitioner’s defaulting on her promissory note was so
                                      remote as to be negligible.
                                           2. Whether This Court Must Consider the So-Remote-as-To-
                                              Be-Negligible Standard When Determining Whether
                                              Petitioner Satisfied the Requirements of the Subordi-
                                              nation Regulation
                                        Petitioner argues that we must read the subordination
                                      regulation in tandem with the so-remote-as-to-be-negligible
                                      standard of section 1.170A–14(g)(3), Income Tax Regs. She
                                      argues that the probability of her defaulting on the Sheek




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                                      promissory note on December 31, 2003, was so remote as to
                                      be negligible. Thus, petitioner argues that possibility should
                                      be disregarded under the so-remote-as-to-be-negligible
                                      standard in determining whether the conservation easement
                                      is enforceable in perpetuity. Respondent argues that the so-
                                      remote-as-to-be-negligible standard is irrelevant to our
                                      inquiry. We agree with respondent.
                                           a. Prior Caselaw
                                        This Court has previously considered on a number of occa-
                                      sions taxpayer arguments about the applicability of section
                                      1.170A–14(g)(3), Income Tax Regs., to the rest of para-
                                      graph (g). Kaufman v. Commissioner, 136 T.C. 294 (2011)
                                      (Kaufman II); Kaufman v. Commissioner, 134 T.C. 182
                                      (2010) (Kaufman I); Carpenter v. Commissioner, T.C. Memo.
                                      2012–1; Simmons v. Commissioner, T.C. Memo. 2009–208,
                                      aff ’d, 646 F.3d 6 (D.C. Cir. 2011).
                                        In Kaufman II, the taxpayers contributed to a donee
                                      organization a facade easement on a single-family rowhouse
                                      which they owned in a historic preservation district in
                                      Boston. At the time of contribution, the property was subject
                                      to a mortgage which entitled the mortgagee to a ‘‘prior claim’’
                                      to all proceeds of condemnation and to all insurance proceeds
                                      resulting from any casualty of the property. The taxpayers
                                      claimed a charitable contribution deduction equal to the
                                      value they assigned to the facade easement. The Commis-
                                      sioner disallowed the deduction, because the taxpayers had
                                      failed to meet the requirement of section 1.170A–14(g)(6)(ii),
                                      Income Tax Regs., that the charity receive a proportionate
                                      share of proceeds following judicial extinguishment of the
                                      facade easement and a subsequent sale of the property.
                                        The taxpayers argued that section 1.170A–14(g)(6), Income
                                      Tax Regs., should be read in tandem with section 1.170A–
                                      14(g)(3), Income Tax Regs. The taxpayers hypothesized a
                                      very low probability of occurrence of a set of events that
                                      would deprive the charity of its proportional share of pro-
                                      ceeds following judicial extinguishment of the facade ease-
                                      ment and subsequent sale of the property. They concluded
                                      that the possibility of such deprivation was ‘‘so remote as to
                                      be negligible’’ and, thus, had to be disregarded under the so-




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                                      remote-as-to-be-negligible standard in determining whether
                                      the facade easement was enforceable in perpetuity.
                                        This Court found that the so-remote-as-to-be-negligible
                                      standard does not modify section 1.170A–14(g)(6)(ii), Income
                                      Tax Regs. Specifically, we held that
                                      [i]t is not a question as to the degree of improbability of the changed condi-
                                      tions that would justify judicial extinguishment of the restrictions. Nor is
                                      it a question of the probability that, in the case of judicial extinguishment
                                      following an unexpected change in conditions, the proceeds of a condemna-
                                      tion or other sale would be adequate to pay both the bank and * * * [ the
                                      charity]. As we said in * * * [Kaufman I], 134 T.C. at 186, the require-
                                      ment in section 1.170A–14(g)(6)(ii), Income Tax Regs., that * * * [the
                                      charity] be entitled to its proportionate share of the proceeds is not condi-
                                      tional: ‘‘Petitioners cannot avoid the strict requirement in section 1.170A–
                                      14(g)(6)(ii), Income Tax Regs., simply by showing that they would most
                                      likely be able to satisfy both their mortgage and their obligation to * * *
                                      [the charity].’’ [Kaufman II, 136 T.C. at 313.]

                                         In Carpenter, the taxpayers contributed to a donee
                                      organization a conservation easement on open land in Colo-
                                      rado. The conservation easement deed allowed the parties to
                                      extinguish the conservation easement by mutual written
                                      agreement if circumstances arose in the future that would
                                      render the purpose of the conservation easement impossible
                                      to accomplish. The taxpayers claimed a charitable contribu-
                                      tion deduction equal to the value they assigned to the con-
                                      servation easement. The Commissioner disallowed the deduc-
                                      tion, because the taxpayers had failed to meet the require-
                                      ment of section 1.170A–14(g)(6)(i), Income Tax Regs., that
                                      the conservation easement be extinguished by a judicial pro-
                                      ceeding.
                                         The taxpayers argued that section 1.170A–14(g)(6)(i),
                                      Income Tax Regs., should be read in tandem with section
                                      1.170A–14(g)(3), Income Tax Regs. They claimed that the
                                      conditions necessary for extinguishment of the conservation
                                      easement were not possible or the possibility was so remote
                                      as to be negligible. Thus, the taxpayers argued that the
                                      possibility of extinguishment by mutual agreement of the
                                      parties had to be disregarded under the so-remote-as-to-be-
                                      negligible standard in determining whether the conservation
                                      easement was enforceable in perpetuity. This Court, relying
                                      on its previous holding in Kaufman II, found that the so-




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                                      remote-as-to-be-negligible standard does not modify section
                                      1.170A–14(g)(6)(i), Income Tax Regs.
                                         At least one court has applied the so-remote-as-to-be-neg-
                                      ligible standard to find that a gift of a facade easement was
                                      protected in perpetuity. In Simmons, the taxpayer contrib-
                                      uted to a donee organization a facade easement on two
                                      rowhouses which the taxpayer owned in Washington, D.C. At
                                      the time of contribution, the properties were subject to a
                                      mortgage. The conservation easement deed provided that the
                                      mortgagees subordinate their rights in the properties to the
                                      right of the donee and its successors or assigns to enforce the
                                      conservation purposes of the easements in perpetuity. The
                                      deed also provided that nothing contained in the deed should
                                      be construed to limit the donee’s right to give its consent to
                                      changes in the facade or to abandon some or all of its rights
                                      under the deed. The taxpayers claimed a charitable contribu-
                                      tion deduction equal to the value they assigned to the facade
                                      easements, and the Commissioner disallowed that deduction.
                                         First, the Commissioner argued that the taxpayer had
                                      failed to meet the conservation purpose described in section
                                      170(h)(4) because the donee organization had the right not to
                                      exercise its obligations under the easement. Second, the
                                      Commissioner argued that the requirements of section
                                      1.170A–14(g), Income Tax Regs., had not been met because
                                      the restrictions on the easement allowed the donee organiza-
                                      tion to consent to changes in the facades. Finally, the
                                      Commissioner argued that the taxpayer was not entitled to
                                      the charitable contribution deduction because she failed to
                                      subordinate the mortgage on the property as required by the
                                      subordination regulation.
                                         We held that the easements granted to the donee organiza-
                                      tion were valid conservation easements. The donee’s right to
                                      consent to changes in the facades was subject to local, State,
                                      and Federal law. Section 1.170A–14(d)(5), Income Tax Regs.,
                                      specifically allows a donation to satisfy the conservation pur-
                                      pose test even if future development is allowed, as long as
                                      that future development is subject to local, State, and Fed-
                                      eral laws and regulations. Further we held that the taxpayer
                                      had satisfied the requirements of the subordination regula-
                                      tion because the mortgagees had agreed to subordinate their
                                      interest in the property within the conservation easement
                                      deed. We, however, did not address the Commissioner’s argu-




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                                      ment that the taxpayer failed to meet the conservation pur-
                                      pose because the donee organization had the right to not
                                      exercise its obligations under the easements.
                                         The Commissioner appealed, arguing once again that the
                                      conservation easement was not protected in perpetuity
                                      because the donee organization was free to abandon its right
                                      to enforce the restrictions set out in the deed. Commissioner
                                      v. Simmons, 646 F.3d 6. The Court of Appeals for the District
                                      of Columbia Circuit found that the Commissioner had not
                                      shown the possibility that the donee would actually abandon
                                      its rights. The Court of Appeals noted that the donee had
                                      been monitoring easements since 1978, yet the Commissioner
                                      had failed to point to a single instance where the donee had
                                      abandoned its right to enforce those easements. Relying on
                                      the so-remote-as-to-be-negligible standard, the Court of
                                      Appeals rejected the Commissioner’s argument that the con-
                                      tribution failed the perpetuity requirement because it had
                                      concluded that the possibility the donee would abandon the
                                      conservation easement was so remote as to be negligible. Id.
                                      at 10–11.
                                           b. Our Case
                                         As discussed above, this Court has previously decided that
                                      the so-remote-as-to-be-negligible standard should not be
                                      applied when determining whether a taxpayer has met the
                                      requirement of section 1.170A–14(g)(6)(i) and (ii), Income Tax
                                      Regs. See Kaufman II, 136 T.C. 294; Carpenter v. Commis-
                                      sioner, T.C. Memo. 2012–1. However, the so-remote-as-to-be-
                                      negligible standard has been used to determine whether a
                                      conservation deed which allows a donee organization to
                                      abandon its rights under the deed is a gift in perpetuity. See
                                      Commissioner v. Simmons, 646 F.3d 6. We are now pre-
                                      sented with an issue of first impression: whether we must
                                      consider the so-remote-as-to-be-negligible standard in deter-
                                      mining whether petitioner satisfied the subordination regula-
                                      tion.
                                         We briefly discussed the promulgation of section 1.170A–
                                      14, Income Tax Regs., in Kaufman II. We found that
                                        [t]he drafters of section 1.170A–14, Income Tax Regs., undoubtedly
                                      understood the difficulties (if not impossibility) under State common or
                                      statutory law of making a conservation restriction perpetual. They




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                                      required legally enforceable restrictions preventing inconsistent use by the
                                      donor and his successors in interest. See sec. 1.170A–14(g)(1), Income Tax
                                      Regs. They defused the risk presented by potentially defeasing events of
                                      remote and negligible possibility. See sec. 1.170A–14(g)(3), Income Tax
                                      Regs. * * * They did not, however, consider the risk of mortgage fore-
                                      closure per se to be remote and negligible and required subordination to
                                      protect from defeasance. See sec. 1.170A–14(g)(2), Income Tax Regs. * * *
                                      [Kaufman II, 136 T.C. at 306–307; emphasis added.]

                                      The drafters of section 1.170A–14(g), Income Tax Regs., saw
                                      taxpayers defaulting on their mortgages as more than a
                                      remote possibility. Therefore they drafted a specific provision
                                      which would absolutely prevent a default from destroying a
                                      conservation easement’s grant in perpetuity.
                                         Similarly the drafters included section 1.170A–14(g)(6)(i)
                                      and (ii), Income Tax Regs., to address similar albeit different
                                      concerns. We refused to apply the so-remote-as-to-be-neg-
                                      ligible standard in both Carpenter and Kaufman II. Both
                                      were cases where the taxpayer attempted to use the so-
                                      remote-as-to-be-negligible standard to avoid a specific
                                      requirement of the regulations (i.e., the judicial proceeding
                                      requirement of section 1.170A–14(g)(6)(i), Income Tax Regs.,
                                      and the proceeds requirement of section 1.170A–14(g)(6)(ii),
                                      Income Tax Regs).
                                         Though the Court of Appeals for the District of Columbia
                                      Circuit applied the so-remote-as-to-be-negligible standard in
                                      Simmons, that case is distinguishable from our case. The
                                      Court of Appeals applied the so-remote-as-to-be-negligible
                                      standard to defeat a general argument made by the Commis-
                                      sioner as to the conservation easement’s grant in perpetuity.
                                      The standard was not used to defeat a specific subparagraph
                                      of section 1.170A–14(g), Income Tax Regs., as petitioner
                                      argues in our case.
                                         Given our prior rulings in this area, we find that the
                                      subordination regulation should not be read in tandem with
                                      the so-remote-as-to-be-negligible standard. In other words,
                                      petitioner cannot avoid meeting the strict requirement of the
                                      subordination regulation with respect to the Sheek deed of
                                      trust by making a showing that the possibility of foreclosure
                                      on that deed of trust is so remote as to be negligible. The
                                      requirements of the subordination regulation are strict
                                      requirements that may not be avoided by use of the so-
                                      remote-as-to-be-negligible standard.




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                                         Petitioner argues that Kaufman II is distinguishable from
                                      this case and instead we should follow this Court’s ruling in
                                      Simmons. Petitioner argues that Simmons stands for the
                                      proposition that the subordination regulation must be read in
                                      tandem with the so-remote-as-to-be negligible standard. As
                                      we have explained above, Simmons stands for no such thing.
                                      The Court of Appeals never addressed the subordination
                                      regulation arguments raised in this Court because this Court
                                      in Simmons held that the mortgage holder had subordinated
                                      its mortgage to the conservation easement deed.
                                           3. Whether Petitioner’s Oral Agreement With Sheek Pro-
                                              vided the Necessary Protection Required by Section
                                              170(h)(1)(c)
                                         Petitioner finally argues that in an oral agreement with
                                      Sheek the Mitchells agreed that they would not subdivide or
                                      develop Lone Canyon Ranch. Petitioner argues that these
                                      were the same rights relinquished under the conservation
                                      easement deed of trust and thus the oral agreement protects
                                      the conservation easement purpose in perpetuity as required
                                      by section 170(h)(1)(c) and (5). We disagree. The oral agree-
                                      ment had no effect on Sheek’s ability to foreclose on the prop-
                                      erty and extinguish the conservation agreement had peti-
                                      tioner defaulted on her promissory note. Thus, the oral
                                      agreement fails to comply with the requirements of section
                                      1.170A–14(g)(2), Income Tax Regs.
                                           B. Whether Petitioner Satisfied the Requirements of the
                                              Proceeds Regulation
                                         Having found that petitioner failed to meet the require-
                                      ments of the subordination regulation, we need not further
                                      determine whether petitioner satisfied the requirements of
                                      the proceeds regulation to make our decision. Having found
                                      that petitioner failed to comply with the requirements of the
                                      subordination regulation, we find that petitioner did not
                                      make a qualified conservation contribution and thus is not
                                      eligible for a charitable contribution deduction for 2003.




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                                      II. Substantiation Requirement and Value of Charitable Con-
                                          tribution Deduction
                                         Having found that petitioner failed to comply with the
                                      requirements of the subordination regulation and thus is not
                                      eligible for a charitable contribution deduction under section
                                      170, we need not address respondent’s argument that peti-
                                      tioner failed to meet the substantiation requirements of sec-
                                      tion 170(f)(8) or inquire into the value of petitioner’s claimed
                                      charitable contribution.
                                      III. Accuracy-Related Penalty
                                         Respondent determined that petitioner is liable for the
                                      accuracy-related penalty under section 6662(a) for 2003. Sec-
                                      tion 6662(a) and (b)(2) imposes a 20% accuracy-related pen-
                                      alty upon any underpayment of tax resulting from a substan-
                                      tial understatement of income tax. An understatement is
                                      substantial if it exceeds the greater of 10% of the tax
                                      required to be shown on the return or $5,000. Sec.
                                      6662(d)(1)(A).
                                         Generally, a taxpayer bears the burden of proving the
                                      Commissioner’s determinations incorrect. Rule 142(a)(1);
                                      Welch v. Helvering, 290 U.S. 111, 115 (1933). However, the
                                      Commissioner bears the burden of proof with respect to any
                                      new matter raised in the answer. Rule 142(a). Because he
                                      first raised the issue in his answer, respondent bears the
                                      burden of proof with respect to petitioner’s liability for the
                                      accuracy-related penalty and must therefore prove that it is
                                      appropriate to impose that penalty. Respondent calculated
                                      that petitioner understated her income tax by $142,600. Peti-
                                      tioner had reported tax of $351,076 on her 2003 return. The
                                      amount of the understatement was substantial because it
                                      exceeded the greater of (1) 10% of the tax required to be
                                      shown on the return for the taxable year, or (2) $5,000.
                                         The accuracy-related penalty is not imposed, however, with
                                      respect to any portion of the underpayment if the taxpayer
                                      can establish that she acted with reasonable cause and in
                                      good faith. Sec. 6664(c)(1). The decision as to whether the
                                      taxpayer acted with reasonable cause and in good faith
                                      depends upon all the pertinent facts and circumstances. Sec.
                                      1.6664–4(b)(1), Income Tax Regs. Circumstances indicating
                                      that a taxpayer acted with reasonable cause and in good




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                                      faith include ‘‘an honest misunderstanding of fact or law that
                                      is reasonable in light of all of the facts and circumstances,
                                      including the experience, knowledge, and education of the
                                      taxpayer.’’ Id.
                                         We found all of petitioner’s witnesses to be credible and
                                      truthful. Petitioner attempted to comply with the require-
                                      ments for making a charitable contribution of a conservation
                                      easement. Petitioner hired an accountant and an appraiser;
                                      however, she inadvertently failed to obtain a subordination
                                      agreement from Sheek. That said, upon being made aware of
                                      the need for a subordination agreement she promptly
                                      obtained one. Given the circumstances, we find that peti-
                                      tioner acted with reasonable cause and in good faith. There-
                                      fore we hold that petitioner is not liable for the accuracy-
                                      related penalty under section 6662(a) for 2003.
                                         In reaching our holdings herein, we have considered all
                                      arguments made, and, to the extent not mentioned above, we
                                      conclude they are moot, irrelevant, or without merit.
                                         To reflect the foregoing,
                                                                          Decision will be entered under Rule 155.

                                                                               f




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