Coal Is Not

And coal has to be forever, or their conservation easement tanks. So says Judge Albert G (“Scholar Al”) Lauber in Coal Property Holdings, LLC, Coal Land Manager, LLC, Tax Matters Partner, 153 T. C. 7, filed 10/28/19.

The Coalholders donated 3,713 acres of strip-mined TN they bought three (count ‘em, three) weeks before to a qualified organization, three (count ‘em, three) days after an investor bought 99% of the Coalholders for $32.5 million, and claimed a $155.5 million deduction.

The aim was to let the land recover from strip mining by natural means, and prevent strip mining from ever happening again.

Problems: the deed allows the present oil and gas lease, and any mineral extraction that the lessee chooses to remain in place, provided the 501(c)(3) donee doesn’t reasonably object. And the gas wells and cellphone towers can remain. Plus underground lines, utility lines, “roads and/or driveways for vehicular access to areas of the Property on which the existing and additional structures and related ancillary improvements are and may be constructed.” 153 T. C. 7, at p. 10.

And if the easement is judicially extinguished (the only way it can be), then out of any proceeds, the  Coalholders first get FMV (based on a formula), plus the amount of “any prior claims,” with a savings clause that this cannot torpedo the easement.

And there’s the usual appraisal.

The formula would allow the 501(c)(3) grantee to come up short in the event of judicial extinguishment, plus the “prior claims” language could guarantee that result.

“The Conservancy’s [501(c)(3)] share of the proceeds would thus be reduced by any amounts paid in satisfaction of prior claims–e.g., claims against Coal Holdings by the oil and gas lessees or cell tower operators–even if the easement’s fair market value were determined exactly as the regulation requires.” 153 T. C. 7, at p. 32.

The savings clause is a condition subsequent, and a dead loser. The Palmolives got torpedoed by a similar clause.  See my blogpost “No Joy Forever – Because Golsen,” 3/11/17.

Just when you thought the Coalholders had gone the limit, here’s the kicker.

“Petitioner discerns no fault in the ‘prior claims’ provision, asking rhetorically:  ‘How else would prior claims be addressed?’  It is not necessarily unreasonable for a deed to provide that prior claims may be paid from sale proceeds. What is unreasonable, and what violates the ‘judicial extinguishment’ regulation, is the requirement…that all prior claims be paid out of the Conservancy [501(c)(3)]’s share of the proceeds, even if those claims represent liabilities of Coal Holdings.” 153 T. C. 7, at p . 32, footnote 5. (Emphasis by the Court).

Ya gotta love these facts, and the gang that petitioned with a straight face. Tungsten? Titanium? You pick it.