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PARTNERS & PARTNERSHIPS

regulation. However, in this case, the some circumstances to allow insurance property. The amount the organization
court determined that language in the proceeds arising from damage to the received in this case would be calculated
deed was used differently and that the building or the proceeds from its using the easement’s FMV at the time
formula used was consistent with the condemnation to be used to repair of the sale less any increase in value
regulation. The court also found that or restore the building. In other that was attributable to improvements
the question of whether the taxpayer circumstances, the lenders could apply made after the easement was granted.
provided appropriate documentation the proceeds to satisfy the indebtedness The amount attributed to improvements
for the appraisal would have to be secured by the deeds of trust. The would go back to the LLC.
determined at trial since, even though easement deed provided that, in the The IRS disallowed the charitable
the taxpayer did not literally comply event of casualty or condemnation, contribution deduction because of the
with the substantiation requirement, the partnership, the lenders, and the way the conservation easement deed
there were questions that could not be qualified organization were entitled to handled the possibility of any future
resolved in a summary judgment. share any net proceeds remaining after extinguishment proceeds. The Tax Court
In a related case,36 the IRS again the satisfaction of prior claims. concluded that the LLC had not prop-
disallowed the charitable contribution The IRS denied the deduction erly taken the charitable contribution
deduction claimed for a conservation because the easement did not meet the deduction because the easement deed
easement. Here, the easement deed requirements of Sec. 170. The IRS said violated Regs. Sec. 1.170A-14(g)(6) and,
did not explicitly address judicial that the easement failed because the as such, failed Sec. 170’s in-perpetuity
extinguishment; rather, it only mortgages were not subordinated. In requirement. The LLC appealed the
expressed the parties’ intent that no this case, the deeds of trust provided decision to the Eleventh Circuit.39
change in conditions would at any lenders with priority rights to use insur- In 2022, the Eleventh Circuit vacated
time or in any event result in the ance or condemnation proceeds in speci- and remanded the case for reconsidera-
easement’s extinguishment and that fied circumstances to satisfy underlying tion, guided by its own recent decision in
if circumstances arose that justified a indebtedness, and the lenders did not Hewitt,40 where the court had invalidat-
modification of the restrictions, the subordinate their rights to the quali- ed the regulation in question by deter-
parties would agree to an appropriate fied organization’s right to enforce in mining that the IRS’s interpretation of
amendment but that in no event would perpetuity the easement’s conservation the regulation was arbitrary and capri-
the amendment violate Sec. 170(h). The purposes. Thus, the easement did not cious and violated the APA’s procedural
court found that the partnership had a qualify as having been made exclusively requirement. However, taxpayers should
reasonable argument that the deed did for conservation purposes and, as a be aware that cases brought in other cir-
not violate the regulation or statute, even result, was not a qualified conservation cuits may or may not follow Hewitt.
though it did refer to a possibility of contribution under Sec. 170(h). In this In another situation, two taxpayers
eminent domain. The court determined situation, the court agreed with the IRS. formed a partnership that donated a
the language was ambiguous and In Glade Creek Partners, LLC, the conservation easement to a qualified
allowed the deduction. partnership donated a conservation ease- organization. The conservation deed,
In another case,37 a partnership ment for which it took a charitable con- however, retained various rights for
granted a qualified organization a tribution deduction.38 When it executed the donors. The partnership reported
façade easement on a building that the deed of easement, the LLC included a charitable contribution for the ease-
was a certified historic structure, for a provision addressing what would hap- ment, and the taxpayers deducted their
which the partnership took a charitable pen if it became impossible to use the share of the charitable contribution
contribution deduction. The building property for conservation purposes. The on their personal tax returns. The IRS
in question was subject to five deeds deed provided that, in that situation, a audited the individual tax returns and
of trust securing loans made to the court could terminate or extinguish the disallowed the charitable deductions. As
partnership. The terms of the loans easement, and the qualified organization part of the investigation, the IRS mailed
made the lenders beneficiaries of the that received the easement would be en- each partner a letter and the revenue
deeds of trust on the building. The titled to a portion of the proceeds from agent’s report proposing penalties under
deeds of trust required the lenders in any subsequent sale or exchange of the Sec. 6662 related to the underpayment

36. Morgan Run Partners, LLC, T.C. Memo. 2022-61. 39. Glade Creek Partners, LLC, No. 21-11251 (11th Cir. 8/22/22).
37. 901 South Broadway Limited, T.C. Memo. 2021-132. 40. Hewitt, 21 F.4th 1336 (11th Cir. 2021).
38. Glade Creek Partners, LLC, T.C. Memo. 2020-148.

36 February 2023 The Tax Adviser