                             T.C. Memo. 2017-115



                        UNITED STATES TAX COURT



               TEN TWENTY SIX INVESTORS, DOUGLAS OLIVER,
                    TAX MATTERS PARTNER, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29483-14.                       Filed June 15, 2017.



      Kathleen M. Pakenham, Clint E. Massengill, and Adriana L. Wirtz, for

petitioner.

      Michael D. Wilder, for respondent.



                          MEMORANDUM OPINION


      THORNTON, Judge: This case is before us on respondent’s motion for

partial summary judgment, which asserts that Ten Twenty Six Investors is not
                                         -2-

[*2] entitled to a section 1701 deduction for 2004 for the donation of a facade

easement.2

                                    Background

      Ten Twenty Six Investors is a New York State limited partnership subject to

the uniform partnership audit and litigation rules enacted as part of the Tax Equity

and Fiscal Responsibility Act of 1982. Throughout 2004 it owned a 10-story

warehouse in New York City (warehouse). The warehouse, built in 1928, was

designed by Cass Gilbert, who also designed the Woolworth Building and the

United States Supreme Court Building.

      On December 21, 2004, the partnership executed an easement deed (deed)

granting a facade easement (easement) on the warehouse to National Architectural

Trust, Inc. (NAT). The deed is titled “Conservation Deed of Easement” and

references itself as such repeatedly throughout the document. A representative of

NAT accepted and signed the deed on December 30, 2004. Not until December


      1
        All section references are to the Internal Revenue Code in effect for the
year at issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
      2
        At several points we refer to the “donation” of the easement at issue in this
case. When we discuss the “donation” of the easement, we mean delivery of the
deed to the National Architectural Trust, Inc. (NAT), and do not mean to suggest
that the easement was legally effective on the date of delivery or that donation of
the easement was a qualified conservation contribution under sec. 170 for 2004.
                                         -3-

[*3] 14, 2006, however, did NAT cause the deed to be recorded in the Office of

the City Register of the City of New York.

       On its 2004 Form 1065, U.S. Return of Partnership Income, the partnership

claimed deductions under section 170 of $11,355,000 for a noncash charitable

contribution of the easement (consistent with an appraisal the partnership had

obtained) and of $531,975 for a cash charitable contribution to NAT.3

       The Commissioner issued a timely notice of final partnership administrative

adjustment for the partnership’s 2004 taxable year, disallowing the noncash

charitable contribution deduction and $510,975 of the cash charitable contribution

deduction and determining a 40% gross valuation misstatement penalty under

section 6662(a) and (h) or, alternatively, a 20% penalty under section 6662(a) and

(b)(1), (2), or (3).

       Petitioner Douglas Oliver filed a timely petition on behalf of the

partnership, and respondent moved for partial summary judgment as to the

noncash charitable contribution deduction. Petitioner cross-moved for partial




       3
       The deed does not mention the cash contribution, and the record does not
reveal any further details about it.
                                           -4-

[*4] summary judgment regarding the 40% gross valuation misstatement penalty

under section 6662(a) and (h).4

                                       Discussion

       The Court may grant summary judgment when there is no genuine dispute

as to any material fact and a decision may be rendered as a matter of law. Rule

121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17

F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we

view the factual materials and inferences drawn from them in the light most

favorable to the nonmoving party. See Sundstrand v. Commissioner, 98 T.C. at

520.

       The moving party bears the burden of showing that there is no genuine

dispute of material fact. Id. Where the moving party properly makes and supports

a motion for summary judgment, “an adverse party may not rest upon the mere

allegations or denials of such party’s pleading,” but must set forth specific facts,

by affidavit or otherwise, showing that there is a genuine dispute for trial. Rule

121(d).




       4
           Petitioner’s cross-motion for summary judgment will be held in abeyance.
                                            -5-

[*5] I.         Deductions for Qualified Conservation Contributions

          A taxpayer is generally allowed a deduction for any charitable contribution

made during the taxable year. Sec. 170(a)(1). Although a taxpayer is generally

not allowed a charitable contribution deduction for a gift of property consisting of

less than an entire interest in that property, there is an exception for donation of 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) “exclusively for

conservation purposes.” Sec. 170(h)(1). Section 170(h)(2) defines “qualified real

property interest” as “any of the following interests in real property”:

                (A) the entire interest of the donor other than a qualified
          mineral interest,

                (B) a remainder interest, and

               (C) a restriction (granted in perpetuity) on the use which may
          be made of the real property.

The easement at issue in this case is not a section 170(h)(2)(A) or (B) interest.

Therefore, to be a qualified real property interest the easement must be granted in

perpetuity under section 170(h)(2)(C).

          Section 170(h)(5)(A) provides a separate and distinct perpetuity

requirement. See Belk v. Commissioner, 140 T.C. 1, 12 (2013), aff’d, 774 F.3d
                                         -6-

[*6] 221 (4th Cir. 2014). It provides that “[a] contribution shall not be treated as

exclusively for conservation purposes unless the conservation purpose is protected

in perpetuity.”

      Additionally, section 1.170A-14(g)(1), Income Tax Regs., provides:

      In the case of any donation under this section, any interest in the
      property retained by the donor (and the donor’s successors in interest)
      must be subject to legally enforceable restrictions (for example, by
      recordation in the land records of the jurisdiction in which the
      property is located) that will prevent uses of the retained interest
      inconsistent with the conservation purposes of the donation. * * *

      In a Federal tax controversy State law controls the determination of a

taxpayer’s interest in property while the tax consequences are determined under

Federal law. United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722 (1985)

(“In the application of a [F]ederal revenue act, [S]tate law controls in determining

the nature of the legal interest which the taxpayer had in the property[.]” (quoting

Aquilino v. United States, 363 U.S. 509, 513 (1960)); United States v. Mitchell,

403 U.S. 190, 197 (1971) (“[S]tate law creates legal interests, but [Federal law]

determines when and how they shall be taxed.” (quoting Burnet v. Harmel, 287

U.S. 103, 110 (1932)); Woods v. Commissioner, 137 T.C. 159, 162 (2011).

Therefore, New York State law determines whatever interest may have been
                                         -7-

[*7] conveyed pursuant to the agreement between the partnership and NAT, and

Federal law determines the tax consequences.

II.   The Parties’ Arguments

      Respondent contends that the easement is a “conservation easement” under

New York State law.5 A conservation easement is defined under N.Y. Envtl.

Conserv. Law (NYECL) sec. 49-0303(1) (McKinney Supp. 2017) as

      an easement, covenant, restriction or other interest in real property,
      created 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,
      archaeological, architectural, or natural condition, character,
      significance or amenities of the real property * * *.

      Respondent also argues that a conservation easement has no legal effect

until it is recorded. Respondent points to NYECL sec. 49-0305(4) (McKinney

Supp. 2017), which provides: “An instrument for the purpose of creating,

conveying, modifying or terminating a conservation easement shall not be

effective unless recorded.” On this basis respondent argues that the warehouse

was not subject to legally enforceable restrictions, as required by section 1.170A-

14(g)(1), Income Tax Regs., at any time in 2004, and that therefore the


      5
      N.Y. Envtl. Conserv. Law (NYECL) tit. 49 (McKinney 2008) governs
conservation easements. We will refer to these statutes collectively as title 49 of
the NYECL.
                                          -8-

[*8] partnership is not entitled to a deduction for 2004 attributable to donation of

the easement.

      In response petitioner argues that the easement is not a conservation

easement because the definition of conservation easement requires that the

restriction be “created under * * * the provisions of this title”, NYECL sec. 49-

0303(1), and the deed did not reference title 49 of the NYECL nor did the

partnership intend to create the easement under that title. More fundamentally,

petitioner points to NYECL sec. 49-0309 (McKinney 2008), which provides:

“This title shall not affect any interests or rights in real property which are not

conservation easements, and shall not affect the rights of owners to convey any

interests in real property which they could now create under existing law without

reference to the terms of this title.”

      Petitioner argues that--whether or not the easement is also a conservation

easement--the just-quoted language of NYECL sec. 49-0309 allows owners of

property to convey any interest that could have been conveyed before title 49 was

enacted. Petitioner contends that by delivery of the deed of easement to NAT, one

such common law interest was created--namely, a restrictive covenant. Restrictive

covenants are generally effective in New York upon delivery of a valid deed.

N.Y. Real Prop. Law sec. 244 (McKinney 2006).
                                         -9-

[*9] III.    Zarlengo, Rothman, and Mecox

       This Court addressed substantially identical facts and arguments in Zarlengo

v. Commissioner, T.C. Memo. 2014-161. Just as in the present case, in 2004 the

taxpayer in Zarlengo delivered a deed of easement to NAT which was intended to

grant an easement on a building in New York. NAT failed to record the deed until

a later year. The deed in Zarlengo and the deed in this case are nearly identical in

all relevant respects. In Zarlengo we found that the deed was effective on the date

it was recorded, not the date it was delivered. See also Rothman v. Commissioner,

T.C. Memo. 2012-163 (reaching the same result), supplemented by T.C. Memo.

2012-218.

       Moreover, petitioner’s arguments have recently been addressed at length in

Mecox Partners LP v. United States, 117 A.F.T.R.2d (RIA) 2016-593, 2016 WL

398216, at *5-*7 (S.D.N.Y. 2016), which also involves facts nearly identical to

those in this case. In 2004 the plaintiff in Mecox delivered to NAT a deed of

easement (which was nearly identical to the deed in this case) intended to grant a

facade easement on a building in New York. NAT failed to record the deed until a

later year. The District Court found that the deed was not effective until it was

recorded and denied the deduction claimed by the plaintiff.
                                         -10-

[*10] Petitioner contends that Zarlengo, Rothman, and Mecox were all wrongly

decided. In particular, petitioner believes that these cases all misconstrued title 49

of the NYECL and failed to consider relevant law which, according to petitioner,

would treat the conservation easement as being protected in perpetuity from the

date of the transfer of the easement deed even though it was not recorded until a

later year.

       We disagree. Zarlengo, Rothman, and Mecox were not wrongly decided.

To the contrary, we believe that these closely analogous cases compel the

conclusion that the partnership is not entitled to a deduction for 2004 for

contributing the easement. Nevertheless, for the sake of completeness we address

below in greater detail petitioner’s key arguments against these earlier cases, in

particular as the arguments relate to: (1) whether the deed was legally effective so

as to convey a property interest in 2004 and (2) whether the failure to record the

deed in 2004 caused the easement to fail the perpetuity requirements of section

170(h)(2)(C) and (5)(A).

IV.    Effectiveness of the Deed in 2004

       A. Recording Requirement for Conservation Easements Under N.Y. Law

       As previously noted, NYECL sec. 49-0305(4) provides: “An instrument for

the purpose of creating, conveying, modifying or terminating a conservation
                                         -11-

[*11] easement shall not be effective unless recorded.” Under a plain reading of

this statute, if an instrument is intended to create a conservation easement, it has

no effect until and unless it is recorded, as held in Zarlengo, Rothman, and Mecox.

      Petitioner relies on O’Mara v. Town of Wappinger, 485 F.3d 693, 699 (2d

Cir. 2007), for the proposition that conservation easements are effective against

the grantor upon delivery and against successors in interest only after the deed is

recorded.6 The taxpayer made the same argument in Mecox, 2016 WL 398216, at

*7. Rejecting this argument, the District Court in Mecox explained why the

taxpayer’s reliance on O’Mara was misplaced:

      The Second Circuit [in O’Mara] was merely observing that other New
      York statutes “in other land use contexts” do require “restrictions to
      be recorded in order to be enforceable against subsequent
      purchasers.” Thus not only is the language cited by Mecox dicta, but
      it fails to indicate that recordation is unnecessary for a conservation
      easement to be effective--all it says is that recordation is necessary for


      6
        In O’Mara v. Town of Wappinger, 485 F.3d 693, 699 (2d Cir. 2007), the
legal issue--which had nothing to do with conservation easements--was whether
zoning restrictions imposed through a subdivision plat were enforceable against
subsequent purchasers. The statutory sections governing the zoning restrictions at
issue in O’Mara were silent regarding enforceability against successors in interest.
As part of its decision to certify the question to the New York Court of Appeals,
the court in O’Mara noted: “This silence is particularly notable when contrasted
with New York law in other land use contexts that requires restrictions to be
recorded in order to be enforceable against subsequent purchasers.” The court
then cited three New York State statutes, including NYECL sec. 49-0305(4)
(McKinney Supp. 2017).
                                         -12-

      [*12] a conservation easement to be effective against subsequent
      purchasers. [Citations and fn. ref. omitted.]

Id.

      Consequently, under the plain terms of NYECL sec. 49-0305(4), if the deed

was intended to convey a conservation easement, it was not effective until it was

recorded. Zarlengo, Rothman, and Mecox all reach this same conclusion, and

petitioner has not persuaded us that there is any reason for us to part ways with

their holdings.

      Petitioner argues that the deed was not intended to convey a conservation

easement because the definition of conservation easement requires that the

restriction be “created under * * * the provisions of this title”, NYECL sec. 49-

0303(1), and the partnership did not reference title 49 of the NYECL nor did

petitioner intend to create the easement under that title. Petitioner argues that the

deed instead created a common law property interest. We disagree for the reasons

explained below.

      As New York’s highest court has stated:

      At the outset we note that the policy of * * * [New York State] law is
      to favor the free and unobstructed use of realty and that covenants
      restricting the use of property will be strictly construed against those
      seeking to enforce them. The burden of proof is on the party
      endeavoring to enforce a restrictive covenant and must be met by
      more than a doubtful right. Only where it has been established
                                         -13-

      [*13] by clear and convincing proof will our court impose such a
      restriction. * * *

Huggins v. Castle Estates, Inc., 330 N.E.2d 48, 51 (N.Y. 1975) (citations omitted).

      Under New York State law, “[e]very instrument creating [or] transferring

* * * an estate or interest in real property must be construed according to the intent

of the parties, so far as such intent can be gathered from the whole instrument, and

is consistent with the rules of law.” N.Y. Real Prop. Law sec. 240(3) (McKinney

2006); see also Mecox, 2016 WL 398216, at *6; Mau v. Schusler, 1 N.Y.S.3d 609,

612 (App. Div. 2015). “The ‘intent’ to which the statute refers is the objective

intent of the parties as manifested by the language of the deed; unless the deed is

ambiguous, evidence of unexpressed, subjective intentions of the parties is

irrelevant.” Mecox, 2016 WL 398216, at *6; Mau, 1 N.Y.S.3d at 612 (citation

omitted).

      Consequently, petitioner’s arguments regarding the partnership’s lack of a

subjective intent to create a conservation easement are unavailing unless the deed

is ambiguous.7 The deed is not ambiguous.

      7
        For example, petitioner argues that, because the words “conservation
easement” were used by NAT in similar deeds in States other than New York, it is
clear that the partnership’s intent was not to create the deed at issue in this case
under the provisions of title 49 of the NYECL. But we cannot consider these
other deeds because, as we shall discuss, the partnership’s deed is not ambiguous.
                                                                          (continued...)
                                        -14-

[*14] The deed that the partnership delivered to NAT is titled “Conservation

Deed of Easement” and references itself as such repeatedly throughout the

document. For example, it states: “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 Facades, being an Open Space and

Architectural Facade Conservation Easement on the Property.” (Emphasis added.)

The deed continues by listing rights and conditions:

      [T]he Grantor will not undertake nor suffer nor permit to be
      undertaken with respect to the Protected Facades:

      1.    any alteration, construction or remodeling of existing exterior
            improvements on the Protected Facades, or the placement
            thereon or (on the Building) of signs or markers that would
            materially alter or change the appearances of the Facades[.]

The deed also explains the purpose of the conveyance:

      It is the intent of the parties that the Facades of the * * * [warehouse]
      that are visible from the street level on the opposite sides of Tenth

      7
         (...continued)
And even if we were to consider these other deeds, it is unclear why they would
indicate the partnership’s (or NAT’s) intent in this case. Many of these documents
list the name of a State or group of States in small print at the bottom, showing
that specific form documents were used for specific States. The only reason for
having different form documents for different States would be to comply with
differing provisions of law in those States, which would suggest that the document
used in the present case was drafted with New York State law in mind and not, as
petitioner suggests, that these other documents show some sort of generalized
usage.
                                         -15-

      [*15] Avenue, West 25th Street and West 26th Street are protected by
      this Easement so that they remain essentially unchanged and in full
      public view in perpetuity. The term “Facades” as used herein consists
      of all exterior surfaces of the improvements on the * * *
      [warehouse], including all walls, roofs, and chimneys * * *.

      The portions of the deed listed above, like the deed read as a whole,

manifest clear objective intent to create an easement or other property interest

which “limits or restricts development” of the warehouse facades “for the purpose

of preserving or maintaining the scenic, * * * historic, * * * architectural * * *

character, [or] significance” of the warehouse, within the meaning of NYECL

sec. 49-0303(1). Whatever the partnership’s subjective intent might have been,

the deed--viewed objectively--shows the parties’ intent to create an easement or

other property interest that “fits squarely within” the definition of a conservation

easement under New York State law. See Mecox, 2016 WL 398216, at *6.

      Additionally, and contrary to petitioner’s suggestion, the deed defies a

simple characterization at common law. It grants an easement to enter the

property for inspection and to repair violations of covenants in the deed. It sets

out a restrictive covenant prohibiting changes to the external facades. The deed

also requires that the partnership and its successors in interest maintain the

property--an affirmative covenant at common law. This mix of traditional

common law devices is precisely what NYECL sec. 49-0303(1) contemplates
                                        -16-

[*16] when it defines a conservation easement as an “easement, covenant,

restriction or other interest in real property”. See John C. Partigan, “New York’s

Conservation Easement Statute: The Property Interest and Its Real Property and

Federal Income Tax Consequences”, 49 Alb. L. Rev. 430, 435 (1984-1985) (“The

significance of this definition is that all three common law concepts[--easements,

covenants, and deed restrictions--]may be integrated into a single grant.”).

      In sum, the partnership’s deed repeatedly references itself as a

“Conservation Deed of Easement”, it purports to do what a conservation easement

would do, and it grants exactly the mix of easements, restrictions, and affirmative

responsibilities that a conservation easement would.8 Consequently, we conclude

that the deed is not ambiguous and is best read as intending to convey a




      8
        Petitioner argues that the deed does not objectively describe a conservation
easement because it states that NAT has the rights: (1) to enter and inspect; (2) to
sue for enforcement; (3) to collect costs and attorney’s fees in any enforcement
action; and (4) to enter and correct violations of the deed. Petitioner’s argument
appears to be that because the deed provides for enforcement on its face, it does
not “rely on the enforcement mechanism” provided by title 49 of the NYECL, and
therefore it conveys something other than a conservation easement. We disagree.
Nothing about the deed’s recitation of these rights suggests that the deed was
intended to convey anything other than a conservation easement. Furthermore, the
right to enter and inspect is guaranteed for conservation easements under NYECL
sec. 49-0305(6) (McKinney Supp. 2017), and if anything the presence of this right
in the deed supports the conclusion that this is a conservation easement under title
49 of the NYECL.
                                        -17-

[*17] conservation easement under title 49 of the NYECL. Accord Mecox, 2016

WL 398216; Zarlengo v. Commissioner, T.C. Memo. 2014-161.

      B. Enforceability of Easement as Common Law Interest

      Petitioner also argues that, even if we find that the intent behind the deed

was to convey a conservation easement, the deed was also simultaneously

enforceable as a common law interest from the time of delivery.

      Under New York State law, “[c]onservation easements are of a character

wholly distinct from the easements traditionally recognized at common law and

are excepted from many of the defenses that would defeat a common-law

easement, including that it be appurtenant to an interest in real property.” Argyle

Farm & Props., LLC v. Watershed Agric. Council, 24 N.Y.S.3d 436, 439 (App.

Div. 2016) (quoting Stonegate Family Holdings, Inc. v. Revolutionary Trails, Inc.,

900 N.Y.S.2d 494, 499 (App. Div. 2010)); see NYECL sec. 49-0305(5); Friends of

Shawangunks, Inc. v. Knowlton, 476 N.E.2d 988 (N.Y. 1985). These cases

support the conclusion that a conservation easement created under title 49 of the

NYECL is separate and distinct from anything created at common law.

      Furthermore, petitioner’s argument that the deed created or attempted to

create two different but entirely coextensive interests--a conservation easement

and a separate restrictive covenant at common law--fails to take into account the
                                         -18-

[*18] recording requirement in NYECL sec. 49-0305(4): “An instrument for the

purpose of creating, conveying, modifying or terminating a conservation easement

shall not be effective unless recorded.” (Emphasis added.) If petitioner’s

argument were correct, every deed intending to create a conservation easement

under title 49 of the NYECL would also simultaneously create other interests at

common law, which would all be enforceable between the parties and their

successors in interest at common law (assuming that no superior interest should

arise). Consequently, all conservation easements would be effective between the

parties and their successors at common law from the date of delivery, and the just-

quoted recording requirement would have no meaningful effect. Since we must

construe statutes to have some effect, we must reject petitioner’s argument that the

deed created common law property interests.

      Moreover, petitioner’s argument ignores a fundamental aspect of New York

State law: “Restrictive covenants * * * are construed strictly * * * against those

who formulate or seek to enforce them and doubts and ambiguities are resolved in

favor of free use of the property so that the restrictions are narrowed rather than

broadened in their application.” Silverstein v. Shell Oil Co., 337 N.Y.S.2d 442,

445 (App. Div. 1972) (citing Single v. Whitmore, 122 N.E.2d 918, 922 (N.Y.

1954), Buffalo Acad. of Sacred Heart v. Boehm Bros., 196 N.E. 42, 44 (N.Y.
                                         -19-

[*19] 1935), and Clark v. Devoe, 26 N.E. 275, 276 (N.Y. 1891)). “[I]t is

established that where a restrictive agreement is reasonably capable of two

constructions, the construction which limits the restriction, rather than the one

which extends it, should be adopted.” Single, 122 N.E.2d at 922; Schoonmaker v.

Heckscher, 157 N.Y.S. 75, 77 (App. Div. 1916) (“But if * * * the language used is

reasonably capable of two constructions, the one that limits, rather than the one

that extends, the restriction should be adopted, for the reason that the law will

always favor the free and unrestricted use of property, and therefore all doubts and

ambiguities must be resolved in favor of the natural right to the free use and

enjoyment of property and against restrictions.”).

      Having carefully reviewed the deed, we conclude that while it clearly

manifests an intention to create a conservation easement, it is ambiguous as to

whether there was any intent--from an objective viewpoint--to create a common

law restrictive covenant alongside the conservation easement. Because New York

State law requires that ambiguity be construed against enforcement, we conclude

that this deed did not create a common law restrictive covenant.

      Consequently, no property interest was conveyed in 2004, there was no

qualified real property interest in 2004, and the partnership is not entitled to a
                                         -20-

[*20] section 170 deduction for 2004 for donation of a qualified conservation

contribution.

V.    Perpetuity Requirements

      Even if we were to assume, for the sake of argument, that the deed

effectively created an easement or, as petitioner argues, a restrictive covenant at

common law, we would nevertheless conclude that the perpetuity requirements of

section 170(h)(2)(C) and (5)(A) are not met because the deed was not recorded in

2004. This provides another, independently sufficient reason why the partnership

is not entitled to a deduction for donation of the easement in 2004.

      Petitioner argues--with the benefit of hindsight--that it was unlikely that the

deed would not be enforceable (or would become unenforceable) at common law

by NAT and its successors in interest against the partnership and its successors in

interest. However, section 1.170A-14(g)(3), Income Tax Regs., provides:

      A deduction shall not be disallowed under section 170(f)(3)(B)(iii)
      and this section merely because the interest which passes to, or is
      vested in, the donee organization may be defeated by the performance
      of some act or the happening of some event, if on the date of the gift
      it appears that the possibility that such act or event will occur is so
      remote as to be negligible. See paragraph (e) of § 1.170A-1. * * *
      [Emphasis added.]

This regulation makes clear that the relevant date for the purpose of testing the

perpetuity requirement is the date of the alleged transfer. See, e.g., Graev v.
                                         -21-

[*21] Commissioner, 140 T.C. 377, 393 (2013). And the regulations do not ask

whether it is likely that a particular event would defeat the transfer. Rather, the

regulations ask whether “it appears that the possibility that such act or event will

occur is so remote as to be negligible”. Sec. 1.170A-14(g)(3), Income Tax Regs.

      In Graev v. Commissioner, 140 T.C. at 393-394, we said:

      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.’” * * * Stated differently,
      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 substance.” * * * [Citations omitted.]

Therefore, donation of the easement is a qualified conservation contribution only

if the restriction on the warehouse was legally enforceable in perpetuity by NAT

and its successors in interest, see sec. 1.170A-14(c)(2), Income Tax Regs., against

the partnership and its successors in interest, and the risk of any event which

would prevent such enforcement must be “so highly improbable that it might be

ignored with reasonable safety in undertaking a serious business transaction”,

Graev v. Commissioner, 140 T.C. at 393--all as of the date of donation.

      As of the date of the donation, at least two future events were possible,

either of which, under certain circumstances, could have prevented enforcement of

the restrictions on the warehouse: (1) transfer by NAT of the benefits of the deed
                                         -22-

[*22] to a successor in interest and (2) sale (or mortgage) of the warehouse by the

partnership.

      A. Transfer by NAT

      Legal entities are often dissolved and their rights and affairs transferred to

other entities. See, e.g., Urgent Care Nurses Registry, Inc. v. Commissioner, T.C.

Memo. 2016-198, at *5. And the possibility that the donee’s rights might be

transferred is specifically addressed at section 1.170A-14(c)(2), Income Tax Regs.,

which provides restrictions governing the type of entity to which the donee’s

rights may be transferred. In fact, the partnership’s deed allows for such a

transfer, subject to certain conditions. We do not believe that the possibility that

NAT might someday transfer, assign, or otherwise convey its rights in the deed to

another entity was so remote as to be negligible.

      Petitioner argues that, although the deed was not effective as a conservation

easement under title 49 of the NYECL, it was effective at common law as a

restrictive covenant. But for petitioner’s argument to succeed, any such common

law interest (whether an easement, a covenant, or something else) would have to

be enforceable in perpetuity by successors to NAT.

      As a matter of law, easements in gross--i.e., easements the benefit of which

is held personally rather than as an incident to ownership of a particular parcel of
                                         -23-

[*23] land--are not enforceable in New York by successors to the holder of the

benefit (NAT here) because they are not assignable or inheritable. See, e.g., Gross

v. Cizauskas, 385 N.Y.S.2d 832, 834 (App. Div. 1976) (“This easement * * * must

be in gross and, therefore, is neither assignable nor inheritable[.]”); Sturges v.

Tetlow, 350 N.Y.S.2d 226, 227 (App. Div. 1973), aff’d without published opinion,

322 N.E.2d 272 (N.Y. 1974); Banach v. Home Gas Co., 199 N.Y.S.2d 858 (Sup.

Ct. 1960), aff’d, 211 N.Y.S.2d 443 (App. Div. 1961);9 see also Philip Weinberg, et

al., 9A N.Y. Practice Series - Environmental Law and Regulation in New York,

sec. 12.3 (2016 update to the 2d ed.) (“Restricting property through the use of

deed covenants has several limitations, both legal and practical. * * * As

discussed above, if the grantor retains no land, or disposes of the remaining land,

the right to enforce the restrictions (assuming the grantor has any interest in doing

so) is neither inheritable nor assignable, and will terminate with the grantor’s

death.”).

      9
        Banach v. Home Gas Co., 199 N.Y.S.2d 858, 861-862 (Sup. Ct. 1960), lists
two possible exceptions to this general rule: (1) a profit a prendre, which is a right
to take a part of the soil or product thereof from the land of another and (2)
easements in gross of a commercial character, which the court defined as an
easement where “the use authorized by it results primarily in economic benefit
rather than personal satisfaction.” The property interest at issue in this case is
clearly not a profit a prendre; and we have found no authority to suggest that a
conservation easement is commercial in character (in fact, the use authorized by a
conservation easement seems clearly noneconomic).
                                        -24-

[*24] We have not found, nor has petitioner cited, any case where a New York

court held a covenant in gross enforceable at common law by a successor to the

original benefited party.10 In fact, New York’s Court of Appeals has said that “no

right to enforce even a restrictive covenant has been sustained in this State where

the plaintiff did not own property which would benefit by such enforcement”.

Neponsit Prop. Owners’ Ass’n v. Emigrant Indus. Sav. Bank, 15 N.E.2d 793, 798

(N.Y. 1938); see also Place v. Cummiskey, 176 N.Y.S.2d 806, 809 (App. Div.

1958); New York v. Turnpike Dev. Corp., 233 N.Y.S.2d 887, 892 (Sup. Ct. 1962).

Consequently, we conclude that the partnership’s deed would not be enforceable

by NAT’s successors at common law because NAT’s easement is not appurtenant

to any interest in property.

      There is one case (and as far as we can tell, only one) where a New York

court enforced the terms of a covenant in gross using its equitable power. See Bill


      10
         The sole possible exception involves a class of cases--not at issue here--
where there was a common plan or scheme to subdivide an original property into
residential plots and a homeowner’s association sued for enforcement of reciprocal
interests (sometimes referred to as implied reciprocal servitudes). But even in
those cases, the benefit of the covenants is an incident to property ownership; that
is, New York courts have held, not that a covenant in gross is enforceable by
successors to the original benefit holder, but that a homeowner’s association has
standing to sue for owners of homes in subdivisions. See, e.g., Neponsit Prop.
Owners’ Ass’n v. Emigrant Indus. Sav. Bank, 15 N.E.2d 793, 798 (N.Y. 1938).
Such cases have little relevance to the matter presently before us.
                                         -25-

[*25] Wolf Petroleum Corp. v. Chock Full of Power Gasoline Corp., 344 N.Y.S.2d

30 (App. Div. 1973), rev’g 333 N.Y.S.2d 472 (Sup. Ct. 1972). In that case, a

gasoline distributor sold land on which the buyer intended to build a gas station.

The sale was conditioned on a requirements agreement that the buyer “and ‘any

subsequent owner, tenant, subtenant or occupant,’” would purchase all gasoline

products from the seller for 10 years. Id. at 31. The requirements agreement was

recorded and “provided for termination after 10 years ‘or sooner in accordance

with any written agreement between the parties.’” Id.

      A gas station was built, leased, and operated under the terms of the

requirements agreement. Id. Six years later, the property was sold once more to

the Bill Wolf defendant, who purchased the property despite having negotiated

unsuccessfully for modification or termination of the requirements contract. Id.

The defendant also refused to assume the requirements agreement as a contract

obligation. Id. The plaintiff, a successor in interest to the gasoline distributor,

sued to enforce the requirements agreement as an affirmative covenant. Id.

      The New York Supreme Court held that the covenant was not enforceable at

law because a requirements agreement does not touch and concern the land. But

over a dissent, the Appellate Division held that the requirements agreement was

enforceable in equity “since this requirements [agreement] * * *, which is of
                                         -26-

[*26] reasonable duration, constitutes an equitable obligation which is enforceable

against * * * [the defendant] as a taker with actual notice.” Id. at 32.11

      In short, the one covenant in gross we have found that was enforced at

equity in New York had only four years left to run and was enforced against a

defendant who had purchased with actual notice of the obligation. Given New

York’s policy of “favor[ing] the free and unobstructed use of realty”, which

requires courts to “strictly” construe property restrictions “against those seeking to

enforce them”; and considering that “[t]he burden of [clear and convincing] proof

is on the party endeavoring to enforce a restrictive covenant and must be met by

more than a doubtful right”, Huggins v. Castle Estates, Inc., 330 N.E.2d 48, 51

(N.Y. 1975), we think it is highly unlikely, as a matter of law, that New York’s

courts would enforce the partnership’s deed at equity in perpetuity, as required by

section 170(h) and section 1.170A-14(g), Income Tax Regs.




      11
        The dissent criticized the majority’s application of equity, noting: “[I]n
every case in this jurisdiction in which the doctrine of equitable servitudes has
been applied, the equitable incorporeal interest in the burdened land has been
appurtenant to a dominant parcel of benefited land. No authority exists for
enforcement of equitable servitudes where the reciprocal benefit is in gross.” Bill
Wolf Petroleum Corp. v. Chock Full of Power Gasoline Corp., 344 N.Y.S.2d 30,
33 n.* (App. Div. 1973) (Brennan and Bejamin, JJ., dissenting) (citations omitted),
rev’g 333 N.Y.S.2d 472 (Sup. Ct. 1972).
                                         -27-

[*27] Finally, there is further support for our conclusion in the fact that title 49 of

the NYECL was enacted to overcome this barrier to enforcement (among others).

See NYECL sec. 49-0305(5) (“It is not a defense in any action to enforce a

conservation easement that * * * [the conservation easement] is not appurtenant to

an interest in real property”); Philip Weinberg, Editor’s Notes to NYECL sec. 49-

0301 (McKinney 2008) (“This title [49 of the NYECL], of major significance, was

adopted in 1983 to enable not-for-profit conservation groups to obtain easements

to protect scenic and historic areas, open space, and other environmental

resources. At common law easements did not run with the land and therefore were

not binding on subsequent owners, unless “appurtenant”--benefitting contiguous

property owned by the holder of the easement. This statute abolished that

anachronistic vestige of ancient English landholding doctrine.”). See generally

John C. Partigan, “New York’s Conservation Easement Statute: The Property

Interest and Its Real Property and Federal Income Tax Consequences”, 49 Alb. L.

Rev. 430 (1985) (discussing the various impediments to enforcement of property

interests before enactment of title 49 of the NYECL).

      For all these reasons, therefore, we hold that, as of the date of the easement

donation, the risk that the deed would be unenforceable by successors in interest to

NAT was not “so remote as to be negligible.”
                                         -28-

[*28] B. Sale by Petitioner

      Similarly, we do not think that, as of the date of the donation, the risk that

NAT’s interest in any easement could have been defeated by a subsequent

purchaser was so remote as to be negligible

      Under N.Y. Real Prop. Law sec. 291 (McKinney 2006), a purchaser of real

property who pays value for the property and does not have notice of an

unrecorded interest in the property when the property is purchased will take the

property free of that unrecorded interest, provided that the purchaser’s interest is

recorded before the unrecorded interest is recorded. See, e.g., Vanderbilt

Brookland, LLC v. Vanderbilt Myrtle, Inc., 48 N.Y.S.3d 433, 437 (App. Div.

2017). Therefore, the relevant question is whether--as of the date of donation--

there was a nonnegligible possibility that a recorded sale might have occurred

without notice of the easement deed and before it was recorded. If so, then the

perpetuity requirements are not met.

      Petitioner has not argued or set forth facts to show that (1) the partnership

was under any obligation not to sell the warehouse or that (2) NAT was under any

obligation to record the easement deed. Therefore, it was quite possible that a sale

could have occurred at some point after donation of the easement but before the
                                         -29-

[*29] easement deed was recorded.12 And given that property sales are almost

always recorded, the possibility of a recorded sale before the easement deed was

recorded was not so remote as to be negligible.13

      Petitioner contends that if the partnership had sold the property it would

have been obliged to inform the buyer that the easement had been conveyed.

Petitioner argues that if the partnership had not met this obligation to the buyer, it

would have been subject to liability for fraud. Consequently, petitioner claims that

the likelihood of a sale without notice was so remote as to be negligible.

      To begin with we are unaware of any reason a seller could not contract

around any duty to disclose by contracting to convey the warehouse via a bargain




      12
         Petitioner argues that Zarlengo v. Commissioner, T.C. Memo. 2014-161, is
factually distinguishable because the taxpayer in that case was actively marketing
the property at issue before the deed in that case was recorded, whereas in the
present case petitioner represents that the warehouse has never been offered for
sale. But as we noted earlier, under sec. 1.170A-14(g)(3), Income Tax Regs., we
are to test the possibility--as of “the date of the gift”--that the donee’s rights might
be defeated. That is, the question we must consider is whether the property was
prospectively marketable in 2004, not whether it happens to have been
subsequently marketed. The fact that the warehouse has not been marketed since
2004 does not mean that in 2004 the likelihood of a sale was so remote as to be
negligible.
      13
       For one example of a similar sequence of events, see 21 Park Place LLC v.
Granado Serv., Inc., 29 N.Y.S.3d 850 (table) (Sup. Ct. 2015), where a sale was
recorded before a tax lien that predated the sale was recorded.
                                          -30-

[*30] and sale deed without covenants against grantor or via a quitclaim deed,14 in

a sale contract containing a merger clause, disclaiming representations, and

promising only insurable title.15 But assuming for the sake of argument that an

effectively inalienable duty to disclose the easement deed did fall on the

partnership, it still cannot prevail: The possibility of inadvertent failure to

disclose is still not so remote as to be negligible.

      Section 170(h) requires restrictions that are legally enforceable by NAT and

its successors in perpetuity. As time passes, memories fade; partnerships change

hands; documents are lost. Petitioner’s argument requires not only that the

partnership remember to inform a purchaser about the easement deed but also that

such a purchaser remember to inform its successor, and so on, for so long as the

warehouse should stand (or at least until NAT recorded the easement deed, which

might never happen). Title insurance and the recording act, N.Y. Real Prop. Law




      14
      See N.Y. Real Prop. Law sec. 258, schedules C, D, G (McKinney 2017);
4-37 Warren’s Weed New York Real Property, sec. 37.04 (2017).
      15
        New York State law allows parties to contract around a buyer’s default
entitlement to marketable title by contracting for delivery of insurable title, rather
than marketable title. See, e.g., O’Mara v. Town of Wappinger, 879 N.E.2d 148,
149 (N.Y. 2007); Donerail Corp. N.V. v. 405 Park LLC, 958 N.Y.S.2d 645 (table)
(Sup. Ct. 2011), aff’d, 952 N.Y.S.2d 137 (App. Div. 2012); Creative Living, Inc.
v. Steinhauser, 355 N.Y.S.2d 897, 900-901 (Sup. Ct. 1974).
                                         -31-

[*31] sec. 291, protect buyers against such failures to disclose, indicating that the

possibility of such failures is not so remote as to be negligible.

      For all of these reasons, therefore, we conclude--consistent with our holding

in Zarlengo--that the risk that the partnership would fail to inform a purchaser

about the easement deed, and that such a purchaser would record the sale before

the easement deed was recorded, was not so remote as to be negligible.

      C. Conclusion

      In sum, as of the date of the easement donation in 2004 there was a

possibility--which was not so remote as to be negligible--that either (1) the

benefits of the easement deed would be unenforceable by NAT’s successors, or

that (2) someone might purchase the warehouse without notice of the easement

and record that conveyance before the easement was recorded. Therefore, the

perpetuity requirements of section 170(h)(2)(C) and (5)(A) were not met for 2004

because neither the use restriction nor the conservation purpose of the

conservation easement was protected in perpetuity as of the date of donation.16

      16
        Petitioner also argues that the conservation purpose is protected in
perpetuity because the deed provides that the partnership (or its successors) must
pay to NAT (or its successors) a portion of the proceeds of any sale following
extinguishment of the conservation easement by judicial decree. See sec. 1.170A-
14(g)(6), Income Tax Regs. Judicial extinguishment follows an “unexpected
change in the conditions surrounding the property” which makes “impossible or
                                                                       (continued...)
                                        -32-

[*32] The partnership is not entitled to a deduction for 2004 for contribution of the

easement.

      Consequently, we will grant respondent’s motion for partial summary

judgment.

      To reflect the foregoing,


                                               An appropriate order will be issued.




      16
         (...continued)
impractical the continued use of the property for conservation purposes”. See id.
But if the deed conveying the easement is ineffective or unenforceable, there is
nothing to extinguish. Our reasons for holding against the partnership are all
related to the ineffectiveness or potential for unenforceability of its deed.
Therefore petitioner’s proceeds argument fails because the proceeds clause of the
deed applies only in the event of judicial extinguishment; furthermore, if the
interest is ineffective or unenforceable, the proceeds clause would also be
ineffective or unenforceable.
