In Uncategorized on 02/05/2020 at 16:02

Once again I refer to an old Texas maxim, that derails the conservation easement of Railroad Holdings, LLC, Railroad Land Manager, LLC, Tax Matters Partner, 2020 T. C. Memo. 22, filed 2/5/20. More about that maxim later.

And that Obliging Jurist, Judge David Gustafson, decides that the Railroaders break down where the Coalholders did. See my blogpost “Diamonds Are Forever,” 10/28/19.

The Railroaders’ extinguishment clause, the track on which these syndicated piracies derail, provides in this case that the 501(c)(3) protector gets only the FMV of the easement as of the date of granting, not the proportionate share of the proceeds at the date of extinguishment. It’s a fixed ceiling, not a moveable one.

Judge Gustafson: “Though the deed incorporates from the regulation the phrase ‘proportionate value’, the deed does not create a proportion or fraction that represents the donee’s share of the property right, and hence a corresponding fraction of proceeds to which the donee is perpetually entitled.  See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 205-206 (5th Cir. 2018).  Rather, the deed determines instead a ‘proportionate value * * * at the time of the gift’- meaning a dollar value that ‘shall remain constant’– and guarantees only that ‘constant’ amount (i.e., that fixed dollar amount) for the donee.  The defect can be illustrated as follows:

“If the easement contributed by Railroad Holdings’ deed were, at the time of the contribution, worth 10% of the value of a $10 million property, then the ‘proportionate value’ of the easement (as the deed uses that term) would be $1 million, and that dollar value–rather than the fraction of value it did represent- ‘shall remain constant’.  Thus, if a court extinguished the easement many years later after the property had appreciated to $20 million, the donee’s share of extinguishment proceeds would be not 10% of $20 million (i.e., the fractional share represented by $2 million) but rather the ‘constant’ $1 million.  The regulation requires that the donee ‘must be entitled to a portion of the proceeds at least equal to that proportionate value” (in this example, 10% of $20 million, or $2 million), 26 C.F.R. sec. 1.170A-14(g)(6)(ii), but Railroad Holdings’ deed would give the donee only ‘at least’ a constant 10% of the $10 million value ‘as of the date of’ the contribution, or $1 million.” 2020 T. C. Memo. 22, at pp. 11-12.

As for Rose Hill, see my blogposts “Thanks a Lot, Judge,” 10/11/16, and “Chop Early, Chop Often,” 2/28/19.

The “at least” language in the easement deed is no saver, because the “at least” amount is constant, and ignores future appreciation.

And what the 501(c)(3) says was intended is irrelevant, because it’s what the donor said that counts, not what the donee thought.

The “broad construction” clause relates to conservation purpose, not conservation protection.

Finally, and here’s the core: “A donor cannot reserve in an easement deed a right that section 170(h) does not permit (such as a right to more than his share of extinguishment proceeds) but then save his charitable contribution by mentioning the rule he has violated and calling for that rule to kick in and save the day if his violation subsequently comes to light.” 2020 T. C. Memo. 22, at p. 18.

Now for the old Texas maxim. All these cases come unglued over an event that is singularly unlikely to arise, at least during the relevant tax years, if not the lifetimes, of the taxpayers, namely and to wit, extinguishment.

The most likely of the unlikely chances of extinguishment is exercise of eminent domain. But the chances of any governmental authority spending tax dollars to buy up the servient boondocks is minimal to the point of extinction. Even if it happens, the donors are still in the game for fighting over the whack-up of the condemnation proceeds.

So why try to grab more, if all that does is take off the table the one issue that summary J can’t resolve? I mean the valuation question, the dueling appraisals. There’s always a chance to settle when numbers are at issue, or to get a mix-and-match between your appraisers and IRS’ on the trial. But fiddle with fancy extinguishment language, and IRS has summary J, so you never get to argue valuation.

Taishoff says invoking savings clauses and fancy-pants arithmetical lawyerbabble to try grabbing a few utterly hypothetical, speculative bucks is nonsense.

The maxim: “Pigs git fat, hogs git et.” See my blogpost “Cullifer’s Travails,” 10/8/14.

  1. […] Taishoff has The Old Texas Maxim. It turns out that the maxim is a variation of Reilly’s Eleventh Law of Tax […]


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