377

LAWRENCE G. GRAEV AND LORNA GRAEV, PETITIONERS v. 

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 30638–08. Filed June 24, 2013. 

Petitioner husband (‘‘P–H’’) contributed cash and a conservation easement to N, a charitable organization. Before the 

contribution, N at P–H’s request issued to P–H a side letter 

which promised that, in the event R disallows Ps’ charitable 

contribution deductions, N ‘‘will promptly refund your entire 

cash endowment contribution and join with you to immediately remove the facade conservation easement from the 

property’s title’’. Ps claimed charitable contribution deductions 

for the cash and easement donations. R contends the side 

letter made those contributions conditional gifts that are not 

deductible under I.R.C. sec. 170, since the likelihood that N 

would be divested of the cash and easement was not negligible. Held: Ps’ charitable contribution deductions are not 

allowed because at the time of P–H’s contributions, the possibility that the deductions would be disallowed and, as a 

result, that N would return the contributions was not ‘‘so 

remote as to be negligible’’, under 26 C.F.R. secs. 1.170A–1(e), 

1.170A–7(a)(3), and 1.170A–14(g)(3), Income Tax Regs. 

Frank Agostino, Eduardo S. Chung, Jeremy M. Klausner, 

and Reuben G. Miller, for petitioners. 

Shawna A. Early, for respondent. 

CONTENTS 

FINDINGS OF FACT ............................................................................. 379 

NAT ...................................................................................................... 379 

The property ........................................................................................ 380 

Increased IRS scrutiny of easement contributions ........................... 380 

NAT’s solicitation ................................................................................ 381 

The side letter ..................................................................................... 383 

Appraisal .............................................................................................. 384 

Noncash contribution to NAT ............................................................ 384 

378 140 UNITED STATES TAX COURT REPORTS (377) 

1 Unless otherwise indicated, all section references are to the Internal 

Revenue Code (26 U.S.C.; ‘‘the Code’’), as amended, and all Rule references 

are to the Tax Court Rules of Practice and Procedure. 

Cash contribution to NAT .................................................................. 385 

Subsequent communications from NAT ............................................ 386 

2004 and 2005 Federal income tax returns ...................................... 386 

Notice of deficiency ............................................................................. 387 

OPINION ................................................................................................. 387 

I. Charitable contributions ..................................................................... 388 

A. Generally ......................................................................................... 388 

B. Conditional gifts ............................................................................. 388 

C. Partial interests in general ........................................................... 390 

D. Conservation easements ................................................................ 391 

E. Construing ‘‘so remote as to be negligible’’ .................................. 393 

II. Analysis .............................................................................................. 394 

A. The possibility of disallowance by the IRS ................................... 394 

1. The possibility of disallowance as a matter of fact ................... 394 

a. Increased IRS scrutiny ............................................................ 395 

b. The side letter .......................................................................... 398 

2. Disallowance as a subsequent event .......................................... 398 

B. The possibility of return of the contributions .............................. 401 

1. Conservation easements under New York law ......................... 402 

2. Merger doctrine ........................................................................... 405 

3. Nullity .......................................................................................... 406 

4. Voluntary removal of the easement ........................................... 408 

III. Conclusion ......................................................................................... 409 

GUSTAFSON, Judge: Pursuant to section 6212(a), 1 the 

Internal Revenue Service (‘‘IRS’’) determined deficiencies in 

tax for petitioners, Lawrence and Lorna Graev, in the 

amounts of $237,481 for 2004 and $412,620 for 2005, 

resulting from the disallowance of charitable contribution 

deductions the Graevs claimed for those years. The IRS also 

determined that Mr. and Mrs. Graev are liable for accuracyrelated penalties under section 6662(h) and alternatively 

under section 6662(a) for 2004 and 2005. Mr. and Mrs. Graev 

petitioned this Court, pursuant to section 6213(a), for 

redetermination of these deficiencies and penalties. The issue 

for decision at present is whether the deductions that the 

Graevs claimed for charitable contributions of cash and a 

conservation easement they donated to the National 

(377) GRAEV v. COMMISSIONER 379

2 In January 2010 the parties entered into a stipulation to be bound, by 

which they agreed that if in this case the Court decides the conditional gift 

issue in the Graevs’ favor, the outcome of some the other issues in this 

case (chiefly, the valuation of the contributed easement) will follow the outcome of a then-pending case. That case was decided in favor of respondent 

in July 2010, appealed to the U.S. Court of Appeals for the Second Circuit, 

vacated and remanded, and decided again in favor of respondent in January 2013. See Scheidelman v. Commissioner, T.C. Memo. 2010–151, vacated and remanded, 682 F.3d 189 (2d Cir. 2012), remanded to T.C. Memo. 

2013–18. Decision in that case was entered April 12, 2013, and the time 

to appeal has not yet expired; but we are able to resolve the issue addressed herein without awaiting the resolution of the Scheidelman issues. 

We do not resolve here the issue of the Graevs’ liability for the penalties, 

which will be a subject of future proceedings. 3The burden of proof is generally on the taxpayer, see Rule 142(a)(1), 

and the submission of a case under Rule 122 does not alter that burden, 

see Borchers v. Commissioner, 95 T.C. 82, 91 (1990), aff ’d, 943 F.2d 22 (8th 

Cir. 1991). However, the burden of proof can be shifted when the Commissioner’s position implicates ‘‘new matter’’ not in the notice of deficiency. 

See note 8 below, addressing the Graevs’ contention about supposed ‘‘new 

matter’’ in this case. 

Architectural Trust (‘‘NAT’’) should be disallowed because 

they were conditional gifts. 2 We hold that the Graevs’ contributions were conditional, non-deductible gifts. 

FINDINGS OF FACT 

The parties submitted this issue fully stipulated pursuant 

to Rule 122, reflecting their agreement that the relevant 

facts could be presented without a trial. 3 The stipulated facts 

are incorporated herein by this reference. Mr. and Mrs. 

Graev resided in the State of New York when they filed the 

petition. 

NAT 

The parties have stipulated that, ‘‘[f]or purposes of the 

Court’s decision regarding’’ the conditional gift issue, NAT is 

a ‘‘qualified organization’’ under section 170(h)(3), to which a 

charitable contribution can be made that is deductible for tax 

purposes. NAT’s stated mission is to preserve historic 

architecture in metropolitan areas across the United States. 

NAT solicits the contribution of facade conservation easements by owners of property with historic significance as 

determined by the National Park Service. When NAT solicits 

potential donors, it features the potential charitable deducVerDate Nov 24 2008 10:25 Jul 11, 2014 Jkt 372897 PO 20012 Frm 00003 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\GRAEV JAMIE
380 140 UNITED STATES TAX COURT REPORTS (377) 

tions that owners may receive by contributing a facade conservation easement and a corresponding cash endowment to 

NAT. In addition, NAT considered it ‘‘standard Trust policy’’, 

regarding donors of easements and cash, to return a cash 

contribution to the extent the IRS disallowed a deduction 

therefor. In numerous instances NAT issued ‘‘comfort letters’’ 

assuring donors of this policy. 

The property 

In 1999 Mr. Graev purchased property in a historic 

preservation district in New York, New York, for $4.3 million. The property is listed on the National Register of Historic Places. During the years at issue Mr. Graev was the 

sole fee simple owner of the property, and he held the property subject to a mortgage. 

Increased IRS scrutiny of easement contributions 

On June 30, 2004, the IRS released IRS Notice 2004–41, 

2004–2 C.B. 31, which addressed charitable contributions 

and conservation easements and stated in part: 

The Internal Revenue Service is aware that taxpayers who (1) transfer 

an easement on real property to a charitable organization, or (2) make 

payments to a charitable organization in connection with a purchase of 

real property from the charitable organization, may be improperly 

claiming charitable contribution deductions under § 170 of the Internal 

Revenue Code. The purpose of this notice is to advise participants in 

these transactions that, in appropriate cases, the Service intends to disallow such deductions and may impose penalties and excise taxes. * * * 

* * * * * * * 

Some taxpayers are claiming inappropriate charitable contribution 

deductions under § 170 for cash payments or easement transfers to 

charitable organizations in connection with the taxpayers’ purchases of 

real property. 

In some of these questionable cases, the charitable organization purchases the property and places a conservation easement on the property. 

Then, the charitable organization sells the property subject to the easement to a buyer for a price that is substantially less than the price paid 

by the charitable organization for the property. As part of the sale, the 

buyer makes a second payment, designated as a ‘‘charitable contribution,’’ to the charitable organization. The total of the payments from the 

buyer to the charitable organization fully reimburses the charitable 

organization for the cost of the property. 

(377) GRAEV v. COMMISSIONER 381

4For pre-2004 cases involving facade easements, see Richmond v. United 

States, 699 F. Supp. 578 (E.D. La. 1988) (upholding partial disallowance 

Continued 

In appropriate cases, the Service will treat these transactions in 

accordance with their substance, rather than their form. Thus, the 

Service may treat the total of the buyer’s payments to the charitable 

organization as the purchase price paid by the buyer for the property. 

Thus, the IRS publicly announced its awareness of abuses 

related to easement contribution deductions, putting potential donors and donees on notice that easement contribution 

deductions might be examined and challenged. We find that 

there was at least a non-negligible possibility that the IRS 

would challenge an easement contribution deduction thereafter claimed by Mr. Graev. 

NAT’s solicitation 

In the summer of 2004, a representative from NAT contacted Mr. Graev regarding a potential easement donation to 

NAT. Mr. Graev became aware that he had a ‘‘neighbor 

across the street’’ who had contributed a facade easement to 

NAT and who had received from NAT a side letter that 

promised return of contributions if deductions were disallowed. Mr. Graev evidently expressed to NAT an interest 

in making an easement contribution like his neighbor’s, but 

on September 15, 2004, he sent an email to NAT explaining 

a concern that had arisen: 

My accountants have referred me to Notice 2004–41 * * * issued by the 

IRS on June 30, 2004, in which the IRS has indicated that it will, in 

‘‘appropriate cases’’, disallow charitable deductions to organizations that 

promote conservation easements and may impose penalties and excise 

taxes on the taxpayer. They have not advised me to abandon this idea, 

but they have advised me to be very cautious. What are your thoughts 

especially as it relates to the side letter, etc. 

(The ‘‘side letter’’ to which Mr. Graev referred was NAT’s 

comfort letter assuring that it would refund a contribution in 

the event that the favorable tax results anticipated from a 

contribution were not achieved.) Mr. Graev indicated that he 

had consulted his accountants, and in 2004 those accountants would surely have been aware of published court 

decisions issued over the past decade that disallowed deductions claimed for the contribution of facade easements. 4 On 

382 140 UNITED STATES TAX COURT REPORTS (377) 

of contribution deduction where the taxpayer’s valuation of facade easement was found excessive); Satullo v. Commissioner, T.C. Memo. 1993–614 

(upholding disallowance of contribution deduction where the facade easement was unenforceable in the year at issue because it had not been recorded, and where a mortgage had not been subordinated to the donee’s 

interest), aff ’d without published opinion, 67 F.3d 314 (11th Cir. 1995); 

Dorsey v. Commissioner, T.C. Memo. 1990–242 (upholding partial disallowance of contribution deduction where the taxpayer’s valuation of facade 

easement was found excessive); Griffin v. Commissioner, T.C. Memo. 1989– 

130 (same), aff ’d, 911 F.2d 1124 (5th Cir. 1990); Losch v. Commissioner, 

T.C. Memo. 1988–230 (same); and Hilborn v. Commissioner, 85 T.C. 677 

(1985) (same). For pre-2004 cases involving conservation easements generally, see Strasburg v. Commissioner, T.C. Memo. 2000–94 (upholding 

partial disallowance of contribution deductions where the deductions 

claimed exceeded the taxpayer’s pro rata basis in the property and valuation of the easement was found excessive); Fannon v. Commissioner, T.C. 

Memo. 1986–572 (upholding partial disallowance of contribution deductions where the taxpayer’s valuation of scenic easement was found excessive); Akers v. Commissioner, T.C. Memo. 1984–490 (same), aff ’d, 799 F.2d 

243 (6th Cir. 1986); and Great N. Nekoosa Corp. v. United States, 38 Fed. 

Cl. 645, 654 (1997) (holding that conservation easements were not exclusively for conservation purposes when the plaintiffs retained the right to 

extract sand and gravel). 

his tax returns Mr. Graev listed his occupation as ‘‘attorney’’, 

and we infer that he is an individual of above-average 

sophistication who, with the help of his accountants, was 

capable of identifying tax risks. We find that Mr. Graev did 

in fact identify non-negligible risks regarding the deductibility of facade easements, as evidenced by his September 15 

email and subsequent dealings with NAT. 

In a response to Mr. Graev’s concerns, NAT sent him an 

email dated September 16, 2004, that stated: 

The IRS notices to which you refer were prompted by recently exposed 

improprieties at the Nature Conservancy, the nation’s largest land conservation easement holding organization. The practice the IRS is concerned with here is when a non-profit acquires property, puts an easement on it and sells it for a reduced price plus a tax-deductible contribution. * * * 

It is important to distinguish between these activities, which certainly 

warrant scrutiny, and those engaged in by the National Architectural 

Trust. * * * We have been in contact with the IRS since the notices 

were issued and, based upon our discussion with them, have no reasons 

to expect that we or any of the donations we have received (easement 

or cash) will be reviewed. 

(377) GRAEV v. COMMISSIONER 383

Thus far not a single donation made to the Trust has been disallowed 

by the IRS (400+ in New York City alone). * * * 

With regard to side letters in particular, NAT wrote: 

[W]e don’t believe they compromise the tax-deductibility of cash donations in the present tax year, as they are simply a confirmation of 

standard Trust policy. However, we do not believe this would be the case 

with a legal agreement that explicitly made the cash donation contingent 

on the survival of the deduction. In such a case, we would recommend 

that the cash donation be treated as tax-deductible once the contingency 

period has expired. * * * 

That is, it was ‘‘standard Trust policy’’ to refund a cash contribution to the extent the IRS disallowed the donor’s deduction for the related easement. 

Evidently reassured, Mr. Graev executed a facade conservation easement application to NAT on September 20, 

2004. In a cover letter to NAT transmitting the application, 

Mr. Graev stated: ‘‘I will also be looking for the NAT to issue 

the ‘side’ letter we discussed (similar to the one being issued 

to my neighbor across the street).’’ 

The side letter 

On September 24, 2004 NAT sent the side letter to Mr. 

Graev. The side letter read in pertinent part: 

1. In the event the IRS challenges the appraisal of your facade conservation easement and the tax deductions derived therefrom are reduced as 

a result, we will make a proportionate reduction to your cash endowment contribution and promptly refund the difference to you. 

2. In the event the IRS disallows the tax deductions in their entirety, 

we will promptly refund your entire cash endowment contribution and 

join with you to immediately remove the facade conservation easement 

from the property’s title. 

Neither the side letter nor any other evidence in our record 

suggests that, in the event the IRS disallowed his contribution, Mr. Graev would have to sue NAT in order to induce 

it to ‘‘remove’’ the easement. Rather, NAT promised upon disallowance to ‘‘join with [him] * * * to immediately remove 

the facade conservation easement from the property’s title’’. 

Mr. Graev took NAT at its word, and so do we. That is, we 

find that there was at least a non-negligible possibility, if the 

IRS successfully disallowed Mr. Graev’s easement contribution deduction, that NAT would do what it said it would do. 

384 140 UNITED STATES TAX COURT REPORTS (377) 

5The deed recites that it was executed October 11, 2004, but Mr. Graev’s 

signature on the deed was notarized on December 16, 2004, and he delivered it to NAT one day later. NAT’s then president, James Kearns, signed 

the deed on NAT’s behalf on December 28, 2004. 

Appraisal 

Mr. Graev retained the firm of Miller Samuel, Inc. (‘‘MSI’’), 

to prepare an appraisal of the facade easement. In October 

2004, MSI issued its appraisal report to Mr. Graev 

appraising the property at $9 million and concluding that the 

easement would reduce the value by 11% (or $990,000). 

Thus, the report appraised the easement at $990,000. 

Noncash contribution to NAT 

In late 2004 5 Mr. Graev executed a conservation deed 

granting a facade easement on the property to NAT. The 

deed in pertinent part provides: 

The Property constitutes an important element in the architectural 

ensemble of the Treadwell Farms Historic District, and the grant of the 

Easement as set forth in this instrument will, inter alia, assist in preserving this certified historic structure and in preserving open space for 

the scenic enjoyment of the general public. 

* * * * * * * 

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 Facade, being an Open Space and 

Architectural Facade Conversation Easement on the Property * * * 

* * * * * * * 

A. * * * This Easement shall survive any termination of Grantor’s or 

the Grantee’s existence. The rights of the Grantee under this instrument 

shall run for the benefit of and may be exercised by its successor and 

assigns, or by its designees duly authorized in a deed of Easement. 

B. Grantee covenants and agrees that it will not transfer, assign or 

otherwise convey its rights under this Easement except to another 

‘‘qualified organization’’ described in Section 170(h)(3) of the Internal 

Revenue Code of 1986 and controlling Treasury regulations, and Grantee 

further agrees that it will not transfer this Easement unless the transferee first agrees to continue to carry out the conservation purposes for 

which this Easement was created, provided, however, that nothing 

herein contained shall be constructed to limit the Grantee’s right to give 

its consent (e.g., to changes in a Protected Facade(s)) or to abandon some 

or all of its rights hereunder. [Emphasis added.] 

(377) GRAEV v. COMMISSIONER 385

C. In the event this Easement is ever extinguished through a judicial 

decree, Grantor agrees on behalf of itself, its heirs, successors and 

assigns, that Grantee, or its successors and assigns, will be entitled to 

receive upon the subsequent sale, exchange or involuntary conversion of 

the Property, a portion of the proceeds from such sale, exchange or 

conversion equal to the same proportion that the value of the initial 

Easement donation bore to the entire value of the property at the time 

of donation * * *. Grantee agrees to use any proceeds so realized in a 

manner consistent with the conservation purposes of the original contribution. 

* * * * * * * 

Citimortgage Inc. (‘‘Mortgagee/Lender’’) hereby joins in the execution of 

this CONSERVATION DEED OF EASEMENT for the sole and limited 

purpose of subordinating its rights in the Property to the right of the 

Grantee, its successors or assigns, to enforce the conservation purposes 

of this Easement in perpetuity under the following conditions and stipulations: 

(a) The Mortgagee/Lender and its assignees shall have a prior claim to 

all insurance proceeds * * * and all proceeds from condemnation, and 

shall be entitled to same in preference to Grantee until the Mortgage/ 

the Deed of Trust is paid off and discharged, notwithstanding that the 

Mortgage/the Deed of Trust is subordinate in priority to the Easement. 

The deed did not expressly refer to the side letter or incorporate its terms. The City of New York recorded the deed on 

February 17, 2005. 

Cash contribution to NAT 

In conjunction with an easement donation, NAT asks a 

donor to make a cash contribution to NAT equal to 10% of 

the appraised easement value, in order to pay for NAT’s current operating costs and to fund its long-term monitoring and 

administration needs. In compliance with NAT’s request, Mr. 

Graev made an initial deposit of $1,000 to NAT on September 15, 2004. On December 17, 2004, the same day he 

delivered the signed deed to NAT, Mr. Graev made a $98,000 

cash contribution to NAT, bringing his cash contributions to 

NAT to a total of $99,000. On January 25, 2005, NAT gave 

Mr. Graev written acknowledgment of his 2004 cash and 

non-cash contributions. That correspondence also included a 

copy of Form 8283, executed by the appraiser, MSI, and 

NAT. 

386 140 UNITED STATES TAX COURT REPORTS (377) 

Subsequent communications from NAT 

Also on January 25, 2005, NAT sent a letter to Mr. Graev 

informing him that the U.S. Senate Committee on Finance 

had announced in a press release their ‘‘intent to implement 

reforms to the tax laws governing facade easements that will 

increase and create additional fines and penalties on promoters, taxpayers and appraisers who participate, aid or 

assist in the donation of facade easements that are found to 

be significantly overvalued.’’ Several months later, in August 

2005, NAT sent Mr. Graev another letter which read: 

The purpose of this letter is to bring to your attention a development 

that may be relevant to the tax deductibility of the cash contributions 

that you made to the National Architectural Trust * * * 

In connection with your donation of a facade conservation easement and 

cash contribution and per your request, we sent you a letter dated September 24, 2004, stating, among other things, that the cash contribution 

would be refunded in whole or in part if your tax deduction for the easement were reduced or disallowed by the Internal Revenue Service. It has 

recently been brought to our attention by our attorney that this offer of 

a refund may adversely affect the deductibility of the cash contribution 

as a charitable gift. * * * 

We urge you to contact your professional tax advisor to determine the 

actual impact of the refund offer. Of course, if you determine that you 

would prefer that we withdraw the refund offer, which according to our 

attorney should restore the deductibility of your cash contribution, the 

Trust will promptly do so. * * * 

Mr. Graev did not ask NAT to withdraw the refund offer. We 

find that NAT’s formal offer to withdraw the refund offer— 

made after NAT consulted with its attorney—further 

indicates that NAT intended to honor its promises in the side 

letter (even if the promises may not have been legally 

enforceable), unless Mr. Graev directed otherwise. 

2004 and 2005 Federal income tax returns 

Mr. and Mrs. Graev filed joint Forms 1040, U.S. Individual 

Income Tax Return, for taxable years 2004 and 2005. On 

their 2004 return, which they filed on or around October 10, 

2005 (i.e., after the January and August 2005 letters from 

NAT, discussed above), Mr. and Mrs. Graev reported a charitable contribution of $990,000 for the facade easement contribution and $99,000 for the cash contribution to NAT. Mr. 

(377) GRAEV v. COMMISSIONER 387

and Mrs. Graev claimed a deduction for the entire cash contribution in 2004, but because of the limitations on charitable 

contribution deductions in section 170(b)(1)(C), they claimed 

a charitable contribution deduction with respect to the facade 

easement of only $544,449 on their 2004 return. 

On their 2005 return, filed on or around October 6, 2006, 

Mr. and Mrs. Graev claimed a carryover charitable contribution deduction of $445,551 relating to the facade easement 

contribution in 2004. 

Notice of deficiency 

By a statutory notice of deficiency dated September 22, 

2008, the IRS disallowed Mr. and Mrs. Graev’s cash and noncash charitable contribution deductions relating to their contributions to NAT and determined deficiencies in tax for both 

2004 and 2005. In the notice of deficiency the IRS stated: 

‘‘[T]he noncash charitable contribution of a qualified conservation contribution is disallowed because it was made subject to subsequent event(s)’’. The notice disallowed the 

Graevs’ cash charitable contribution deduction for the same 

reason. The IRS also determined that Mr. and Mrs. Graev 

are liable for accuracy-related penalties under section 6662 

for 2004 and 2005. 

OPINION 

The question now before the Court is whether deductions 

for Mr. Graev’s contributions of cash and the easement to 

NAT should be disallowed because they were conditional 

gifts. The answer depends on whether NAT’s promises in the 

side letter made the gifts conditional and whether the chance 

that the condition would occur was ‘‘so remote as to be negligible’’. See 26 C.F.R. secs. 1.170A–1(e), 1.170A–7(a)(3), 

1.170A–14(g)(3), Income Tax Regs. 

The Graevs argue that under New York law the agreement 

in the side letter is unenforceable because conditions in the 

side letter were not included in the recorded deed and that 

under Federal tax law the side letter was a nullity. We conclude that NAT’s promises in the side letter were not a nullity and were not extinguished and that NAT could and 

would honor its promises both as to the easement and as to 

the cash contribution. 

388 140 UNITED STATES TAX COURT REPORTS (377) 

I. Charitable contributions 

A. Generally 

Section 170(a)(1) generally allows a deduction for any 

‘‘charitable contribution’’ made during the taxable year. Section 170(c)(2) defines a ‘‘charitable contribution’’ for this purpose to include ‘‘a contribution or gift to or for the use of ’’ 

a trust organized and operated exclusively for charitable or 

educational purposes. The parties agree for purposes of the 

conditional gift issue that NAT is such an organization. 

Application of the general rule in section 170(a)(1) may be 

complicated—especially with regard to the amount and 

timing of a charitable contribution deduction—if a donor 

contributes a property interest to a charity but, at the time 

of the contribution, there is uncertainty about the amount of 

property that will actually reach the charity—e.g., when a 

donor contributes a remainder interest in property to a 

charity, or (as in this case) the donor contributes property 

subject to a condition. Section 170 and the corresponding 

regulations provide instruction and limitations that, at least 

in part, ensure that the donor will be able to deduct only 

what the donee organization actually receives. See, e.g., sec. 

170(f)(2), (3), (11). Three such limitations are pertinent in 

this case: (1) 26 C.F.R. section 1.170A–1(e), which limits 

deductions for conditional gifts; (2) section 170(f)(3)(A) and 

the corresponding regulations, which limit deductions for 

contributions of partial interests in property; and (3) section 

170(f)(3)(B)(iii) and corresponding regulations, which provide 

special rules for conservation easements. 

B. Conditional gifts 

The general rule of section 170(a)(1) allows a deduction for 

a charitable contribution only when ‘‘payment * * * is made 

within the taxable year.’’ (Emphasis added.) Regulations corresponding to section 170(a) clarify this rule with a limitation particularly relevant in this case: 

If an interest in property passes to, or is vested in, charity on the date 

of the gift and the interest would be defeated by the subsequent performance of some act or the happening of some event, the possibility of occurrence of which appears on the date of the gift to be so remote as to be 

negligible, the deduction is allowable. [26 C.F.R. sec. 1.170A–1(e).] 

(377) GRAEV v. COMMISSIONER 389

6 26 C.F.R. sec. 1.170–1(e), Income Tax Regs. (1959), provided: 

If as of the date of a gift a transfer for charitable purposes is dependent 

upon the performance of some act or the happening of a precedent event 

in order that it might become effective, no deduction is allowable unless 

the possibility that the charitable transfer will not become effective is so 

remote as to be negligible. If an interest passes to or is vested in charity 

on the date of the gift and the interest would be defeated by the performance of some act or the happening of some event, the occurrence of 

which appeared to have been highly improbable on the date of the gift, 

the deduction is allowable. The deduction is not allowed in the case of 

a transfer in trust conveying a present interest in income if by reason 

of all the conditions and circumstances surrounding the transfer it appears that the charity may not receive the beneficial enjoyment of the 

interest. * * * 

7 26 C.F.R. sec. 81.46(a), Estate Tax Regs. (1949), provided: 

If as of the date of decedent’s death the transfer to charity is dependent 

upon the performance of some act or the happening of a precedent event 

in order that it might become effective, no deduction is allowable unless 

the possibility that charity will not take is so remote as to be negligible. 

If an estate or interest has passed to or is vested in charity at the time 

of decedent’s death and such right or interest would be defeated by the 

performance of some act or the happening of some event which appeared 

to have been highly improbable at the time of decedent’s death, the deduction is allowable. 

The current version of this regulation is in 26 C.F.R. sec. 20.2055–2(b)(1), 

Estate Tax Regs. 

That is, the deduction may be considered ‘‘made’’ notwithstanding a possibility that the contribution will be defeated 

by a subsequent event, but only if that possibility is ‘‘so 

remote as to be negligible’’. Although the parties agree that 

the side letter recited conditions on Mr. Graev’s contributions, the parties disagree about whether this regulation disallows deductions for those contributions. 

A brief discussion of the history of 26 C.F.R. section 

1.170A–1(e) is helpful in understanding the regulation’s 

application in this case. The Secretary promulgated the first 

version of this regulation in 1959 to correspond to section 

170(a) of the 1954 Code. 6 The operative language in that 

1959 regulation was identical to an older regulation that had 

limited deductions for estate tax purposes for certain conditional charitable bequests. See 26 C.F.R. sec. 81.46(a), Estate 

Tax Regs. (1949). 7 Given this similarity, we consider 

interpretations of 26 C.F.R. section 20.2055–2(b), Estate Tax 

Regs., and its history instructive in construing 26 C.F.R. secVerDate Nov 24 2008 10:25 Jul 11, 2014 Jkt 372897 PO 20012 Frm 00013 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\GRAEV JAMIE
390 140 UNITED STATES TAX COURT REPORTS (377) 

tion 1.170A–1(e). See Briggs v. Commissioner, 72 T.C. 646, 

657 (1979), aff ’d without published opinion, 665 F.2d 1051 

(9th Cir. 1981). 

The Supreme Court in Commissioner v. Estate of 

Sternberger, 348 U.S. 187, 194 (1955), discussed the estate 

tax regulations at length, stating: 

The predecessor of [26 C.F.R.] s[ec.] 81.46 confined charitable deductions 

to outright, unconditional bequests to charity. It expressly excluded 

deductions for charitable bequests that were subject to conditions, either 

precedent or subsequent. While it encouraged assured bequests to 

charity, it offered no deductions for bequests that might never reach 

charity. Subsequent amendments have clarified and not changed that 

principle. Section 81.46(a) today yields to no condition unless the possibility that charity will not take is ‘‘negligible’’ or ‘‘highly improbable.’’ 

* * * 

Similarly, a fundamental principle underlying the charitable 

contribution deduction is that the charity actually receive 

and keep the contribution. 26 C.F.R. section 1.170A–1(e) 

clarifies that principle: no deduction for a charitable contribution that is subject to a condition (regardless of what the 

condition might be) is allowable, unless on the date of the 

contribution the possibility that a charity’s interest in the 

contribution ‘‘would be defeated’’ is ‘‘negligible’’. 

Accordingly, under section 1.170A–1(e) of the regulations 

(construing the statutory requirement of section 170(a)(1) 

that a gift actually ‘‘is made’’), the Graevs’ deductions are not 

allowable unless the possibility that NAT’s interests in the 

easement and cash would be defeated was ‘‘so remote as to 

be negligible’’. 

C. Partial interests in general 

Logically related to but distinct from the disallowance of 

deductions for conditional gifts is the limitation in section 

170(f)(3) on deductions for contributions of partial interests 

in property. One is generally allowed a deduction only for the 

contribution of one’s entire interest in property. Congress 

enacted what is now section 170(f)(3)(A) as part of the Tax 

Reform Act of 1969, Pub. L. No. 91–172, sec. 201, 83 Stat. 

at 549. Section 170(f)(3)(A) allows a deduction for a charitable contribution ‘‘of an interest in property [not made in 

trust] which consists of less than the taxpayer’s entire 

interest in such property’’ only to the extent it would be 

(377) GRAEV v. COMMISSIONER 391

allowable under section 170 ‘‘if such interest had been transferred in trust’’. This is a narrow allowance, since the rules 

that allow charitable contribution deductions for partial 

interests transferred in trust allow deductions only for 

interests that can be valued using prescribed methods (e.g., 

actuarial tables promulgated in the regulations) and that 

have assurances that the charity will receive payments from 

the trust. See, e.g., sec. 170(e)(2); 26 C.F.R. sec. 1.170A–6, 

Income Tax Regs. 

In this case, since Mr. Graev reserved the right to have 

NAT return the easement and the cash if certain events 

occurred, the contributions of both the easement and the 

cash were less than Mr. Graev’s entire interest in the 

contributed property. Accordingly, Mr. Graev’s contributions 

appear subject to the limitation in section 170(f)(3). However, 

26 C.F.R. section 1.170A–7(a)(3) provides the following mitigation of this limitation: 

A deduction shall not be disallowed under section 170(f)(3)(A) * * * 

merely because the interest which passes to, or is vested in, the charity 

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. * * * 

Thus, under this regulation, even though the contributions 

did not consist of Mr. Graev’s entire interest in the cash and 

the easement, the Graevs’ deductions for contributions would 

not be disallowed under section 170(f)(3)(A) if the likelihood 

that NAT’s interests in the cash and the easement would be 

defeated was ‘‘so remote as to be negligible’’. 

D. Conservation easements 

An easement is ‘‘[a]n interest in land owned by another 

person, consisting in the right to use or control the land, or 

an area above or below it, for a specific limited purpose’’. 

Black’s Law Dictionary 585–586 (9th ed. 2009). Consequently, 

an easement—whether or not it is subject to any condition— 

is by definition a partial interest in property, and it would 

therefore be non-deductible under section 170(f)(3)(A), apart 

from any further statutory provision. However, further provision is made in subsections (f)(3)(B)(iii) and (h) of section 

170, the history of which we briefly survey: 

392 140 UNITED STATES TAX COURT REPORTS (377) 

The disallowance of a deduction for partial interests was 

added to the Code as section 170(f)(3) by the Tax Reform Act 

of 1969. In that provision’s original form, the only exceptions 

to disallowance of a deduction for contributions of partial 

interests were for contributions of ‘‘a remainder interest in a 

personal residence or farm’’ and ‘‘an undivided portion of the 

taxpayer’s entire interest in property’’. That is, no exception 

was made for a qualified conservation contribution. However, 

the Staff of the Joint Committee on Taxation opined in its 

General Explanation of the Tax Reform Act of 1969, at 80 (J. 

Comm. Print 1970), that ‘‘a gift of an open space easement 

in gross is to be considered a gift of an undivided interest in 

property where the easement is in perpetuity.’’ 

Congress made explicit an exception for (i.e., permitted a 

deduction for) certain easements in the Tax Reform Act of 

1976, Pub. L. No. 94–455, sec. 2124(e), 90 Stat. at 1919, 

which amended section 170(f)(3)(B) to provide in clause (iii) 

that a donor may claim a deduction for the contribution of 

an ‘‘easement with respect to real property of not less than 

30 years’ duration granted to * * * [a charitable organization] exclusively for conservation purposes’’. The following 

year Congress revised that exception, eliminating the ‘‘30 

years’ duration’’ provision and limiting deductibility to an 

‘‘easement with respect to real property granted in perpetuity’’. (Emphasis added.) Tax Reduction and Simplification 

Act of 1977, Pub. L. No. 95–30, sec. 309(a), 91 Stat. at 154. 

In the Tax Treatment Extension Act of 1980, Pub. L. No. 96– 

541, sec. 6(a), 94 Stat. at 3206, Congress amended section 

170(f)(3) and added subsection (h), which have remained in 

effect since then and work in tandem to keep the perpetuity 

requirement for conservation easement donations. 

Section 170(f)(3)(B)(iii) exempts, from the general disallowance of deductions for contributions of partial interests, contributions of ‘‘a qualified conservation contribution’’—a term 

defined in section 170(h)(1) as a contribution of a ‘‘qualified 

real property interest,’’ to a ‘‘qualified organization’’, ‘‘exclusively for conservation purposes.’’ A ‘‘qualified real property 

interest’’ must have ‘‘a restriction (granted in perpetuity) on 

the use which may be made of the real property.’’ Sec. 

(377) GRAEV v. COMMISSIONER 393

8 In his reply brief, Mr. Graev complains that an IRS argument invoking 

the perpetuity requirement is ‘‘new matter’’ as to which the IRS should 

bear the burden of proof under Rule 142(a)(1). We do not believe that the 

burden of proof affects the resolution of this issue, since the material facts 

are not actually in dispute, and the outcome is the same no matter which 

party has the burden. See Dagres v. Commissioner, 136 T.C. 263, 279 

(2011). More important, however, the argument that the gifts were subject 

to a subsequent event—an issue plainly stated in the notice of deficiency— 

is by its nature an argument that the gifts failed to be perpetual. One reason a conservation easement may fail to be a perpetual gift to the donee, 

and may thus fail to be deductible, is that it is subject to a condition that 

creates a non-remote possibility that the easement may revert to the 

donor. See 26 C.F.R. sec. 1.170A–14(g)(3), Income Tax Regs. The issue of 

perpetuity is not new matter in this case. 

170(h)(2)(C) (emphasis added). 8 Regulations describing the 

perpetuity requirement provide: 

A deduction shall not be disallowed under section 170(f)(3)(B)(iii) * * * 

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. 

* * * [26 C.F.R. sec. 1.170A–14(g)(3).] 

(The ‘‘so remote as to be negligible’’ phrase is the familiar 

term first used in the 1949 estate tax regulations cited 

above.) Accordingly, a conservation easement fails to be ‘‘in 

perpetuity’’—and is therefore not excepted from the general 

rule of section 170(f)(3)(A) disallowing deductions for contributions of partial interests—if, on the date of the donation, 

the possibility that the charity may be divested of its interest 

in the easement is not so remote as to be negligible. 

E. Construing ‘‘so remote as to be negligible’’ 

Each of the issues discussed above—i.e., whether a charitable contribution was effectively ‘‘made’’, whether it consisted of an ‘‘entire interest’’, and whether it was a ‘‘qualified 

conservation contribution’’—essentially turns on the same 

question: At the time of Mr. Graev’s contributions, was the 

possibility that NAT’s interest in the cash and the easement 

would be defeated ‘‘so remote as to be negligible’’? 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.’ ’’ 885 Inv. Co. 

394 140 UNITED STATES TAX COURT REPORTS (377) 

9We do not address the circumstance in which a hyper-cautious donor 

conditions his gift on non-disallowance where there is no non-negligible 

possibility of disallowance. 

v. Commissioner, 95 T.C. 156, 161 (1990) (quoting United 

States v. Dean, 224 F.2d 26, 29 (1st Cir. 1955)). 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.’’ Briggs v. Commissioner, 72 T.C. at 657. What is 

determinative under the section 170 ‘‘remote’’ regulations is 

the possibility, after considering all the facts and circumstances, that NAT’s reception and retention of the easement and cash would be defeated. 

II. Analysis 

The side letter provides that the occurrence that would 

defeat NAT’s interest in the easement and cash is the IRS’s 

successful disallowance of the Graevs’ charitable contribution 

deductions and NAT’s consequent promised ‘‘removal’’ of the 

easement and return of the cash. We hold that at the date 

of the contribution the possibility that the IRS would disallow the deductions and that NAT would return the cash to 

Mr. Graev and ‘‘remove’’ the easement was not ‘‘so remote as 

to be negligible’’. 

A. The possibility of disallowance by the IRS 

1. The possibility of disallowance as a matter of fact 

The Graevs argue that as of December 2004, the caselaw 

supported an easement valuation of 10% to 15% of Mr. 

Graev’s property and that it was therefore reasonable to conclude that Mr. Graev’s easement donation had a value of 

$990,000 (i.e., 11% of the appraised value of the property). 

They assert that the possibility the IRS would disallow their 

deductions was so remote as to be negligible. However, on 

the undisputed facts of this case, it is self-evident that the 

risk of IRS disallowance was not negligible. 9 A substantial 

risk obviously arose from the IRS’s then-announced intention 

to scrutinize charitable contribution deductions for facade 

easement contributions, and that risk is evident from Mr. 

Graevs’ insistence on NAT’s issuing the side letter. We need 

(377) GRAEV v. COMMISSIONER 395

not wonder how a donor or donee would have responded to 

this risk if he had foreseen it; we know how Mr. Graev did 

respond when he did foresee it: He did not ‘‘disregard’’ or 

‘‘ignore[]’’ it, see 885 Inv. Co. v. Commissioner, 95 T.C. at 161; 

Briggs v. Commissioner, 72 T.C. at 657, but rather went out 

of his way to address it and hedge against it. 

a. Increased IRS scrutiny 

The Graevs note that at the time of their contribution in 

December 2004, no charitable contribution deduction arising 

from a contribution to NAT had been disallowed (to their 

knowledge). However, the enforcement landscape regarding 

deductions for facade easement donations was visibly 

changing at the time of his contribution. As is discussed 

above, the IRS released Notice 2004–41, supra, on June 30, 

2004. In that notice the IRS stated: 

The Internal Revenue Service is aware that taxpayers who (1) transfer 

an easement on real property to a charitable organization, or (2) make 

payments to a charitable organization in connection with a purchase of 

real property from the charitable organization, may be improperly 

claiming charitable contribution deductions under § 170 of the Internal 

Revenue Code. The purpose of this notice is to advise participants in 

these transactions that, in appropriate cases, the Service intends to disallow such deductions and may impose penalties and excise taxes. * * * 

Notice 2004–41 goes on to give a specific example of the 

second instance, i.e., a taxpayer makes a cash contribution to 

a charitable organization in addition to purchasing (at a discount) from the same organization real property that was 

subject to a conservation easement, where the total amount 

of contribution and purchase price equals the charity’s initial 

cost of the real property. The Graevs argue that since Notice 

2004–41 specifically described a transaction that did not 

apply in their case, the notice was not applicable to them. 

We disagree. While Notice 2004–41 did list one specific 

transaction that the Commissioner had determined was 

inappropriate, the Commissioner’s general warning against 

‘‘improperly claiming charitable contribution deductions’’ connected with transfers of conservation easements to charities 

was still very much applicable to the Graevs. Notice 2004– 

41 made clear before Mr. Graev’s transfer that his transaction with NAT would be subject to heightened scrutiny and 

396 140 UNITED STATES TAX COURT REPORTS (377) 

that if any of the Graevs’ positions were susceptible to challenge, the Commissioner would likely enforce a contrary position. Mr. Graev’s September 15, 2004, email to NAT reflects 

his understanding of this possibility, stating that in light of 

Notice 2004–41 his accountants ‘‘have advised * * * [him] to 

be very cautious.’’ 

The Graevs argue that their valuation of the contributed 

easement was reasonable. Since the valuation issue will be 

resolved by the parties’ stipulation to be bound by the outcome of another case that is still pending, see note 2 above, 

we do not decide valuation now but assume that the Graevs’ 

valuation was reasonable. However, the fact that a valuation 

is reasonable does not mean that it is correct; a reasonable 

but incorrect valuation may be challenged and disallowed; 

consequently, someone who assigns a reasonable value to his 

donation may nonetheless face a non-negligible risk of disallowance. 

Moreover, valuation is not the only potential issue faced by 

a taxpayer claiming a deduction for a contributed easement, 

and it was not the only issue as to which NAT promised to 

return Mr. Graev’s contributions. The first numbered paragraph of the side letter did address valuation (‘‘In the event 

the IRS challenges the appraisal’’), but the second numbered 

paragraph made the distinct promise to return the contributions ‘‘[i]n the event the IRS disallows the tax deductions in 

their entirety’’. There are multiple requirements in section 

170 and the corresponding regulations that, if not followed, 

may lead to disallowance—and valuation is only one of them. 

For example, an easement contribution may be disallowed 

where— 

• The donee fails to be a ‘‘qualified organization’’ described 

in section 170(h)(3). 

• The property subject to the easement fails to be of a 

‘‘historically important land area’’ or a ‘‘certified historic 

structure.’’ Sec. 170(h)(4)(iv); see Turner v. Commissioner, 

126 T.C. 299, 316 (2006). 

• The taxpayer fails to contribute a ‘‘qualified real property 

interest’’. Sec. 170(a)(2); see Belk v. Commissioner, 140 T.C. 

1 (2013). 

(377) GRAEV v. COMMISSIONER 397

• The easement fails to preserve conservation purposes ‘‘in 

perpetuity’’. Sec. 170(h)(5); see Carpenter v. Commissioner, 

T.C. Memo. 2012–1; Herman v. Commissioner, T.C. Memo. 

2009–205. 

• The parties fail to subordinate the rights of a mortgagee 

in the property ‘‘to the right of the qualified organization to 

enforce the conservation purposes of the gift in perpetuity.’’ 

26 C.F.R. sec. 1.170A–14(g)(2); see Mitchell v. Commissioner, 

138 T.C. 324, 331–332 (2012). 

• The taxpayer fails to ‘‘[a]ttach a fully complete appraisal 

summary * * * to the tax return’’. 26 C.F.R sec. 1.170A– 

13(c)(2)(B). But see Kaufman v. Shulman, 687 F.3d 21, 28– 

30 (1st Cir. 2012), aff ’g in part, vacating and remanding in 

part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 

T.C. 182 (2010). 

• The appraisal fails to be a ‘‘qualified appraisal’’. 26 

C.F.R. sec. 1.170A–13(c)(3); see Friedberg v. Commissioner, 

T.C. Memo. 2011–238. 

• The appraiser fails to be a ‘‘qualified appraiser’’. 26 

C.F.R. sec. 1.170A–13(c)(5); see Rothman v. Commissioner, 

T.C. Memo. 2012–218 (reserving the question on whether an 

appraiser was ‘‘qualified’’). 

• The parties fail to record the easement or otherwise fail 

to effect ‘‘legally enforceable restrictions’’. 26 C.F.R. sec. 

1.170A–14(g)(1); see Satullo v. Commissioner, T.C. Memo. 

1993–614, aff ’d without published opinion, 67 F.3d 314 (11th 

Cir 1995). 

• The taxpayer fails to ‘‘[m]aintain records’’ necessary to 

substantiate the charitable contribution. 26 C.F.R. sec. 

1.170A–13(c)(2)(C), Income Tax Regs. 

Mr. Graev’s September 15, 2004, correspondence with NAT 

reflects his clear understanding that charitable contribution 

deductions for contributions ‘‘to organizations that promote 

conservation easements’’ were going to be the subject of IRS 

scrutiny and could be disallowed for failing to satisfy any one 

of the requirements in section 170. Mr. Graev’s accountants 

advised him ‘‘to be very cautious’’ with such transactions. 

Clearly, the risk that the IRS might disallow a deduction for 

the contribution of an easement was well above ‘‘negligible’’. 

398 140 UNITED STATES TAX COURT REPORTS (377) 

10The Graevs also cite an IRS private letter ruling. We decline to consider it, in light of section 6110(k)(3), which provides: ‘‘(3) Precedential status.—Unless the Secretary otherwise establishes by regulations, a written 

determination may not be used or cited as precedent.’’ See Abdel-Fattah v. 

Commissioner, 134 T.C. 190, 202 (2010); Vons Cos. v. United States, 51 

Fed. Cl. 1, 12 (2001). 

b. The side letter 

Informed by his accountants’ warning, Mr. Graev initially 

asked NAT about the possibility of a side letter from NAT 

that promised the return of contributions if deductions were 

disallowed. NAT eventually gave Mr. Graev such a letter on 

September 24, 2004. The mere fact that he required the side 

letter is strong evidence that, at the time of Mr. Graev’s contribution, the risk that his corresponding deductions might 

be disallowed could not be (and was not) ‘‘ignored with 

reasonable safety in undertaking a serious business transaction.’’ 885 Inv. Co. v. Commissioner, 95 T.C. at 161. 

Mr. Graev was not alone in his assessment of the risk of 

disallowance. NAT considered it ‘‘standard Trust policy’’ to 

return a cash contribution to the extent a deduction therefor 

was disallowed by the IRS. In numerous instances NAT 

issued ‘‘comfort letters’’ assuring donors of this policy. The 

very essence of a comfort letter implies a non-negligible risk; 

and the author uses the letter to induce the recipient to enter 

into a transaction. In this case the risk was either partial or 

complete disallowance of Mr. Graev’s claimed charitable contribution deductions. NAT’s course of dealing confirms that 

the possibility that the IRS might disallow Mr. Graev’s 

deductions was not ‘‘so remote as to be negligible’’. See 26 

C.F.R. secs. 1.170A–1(e), 1.170A–7(a)(3), 1.170A–14(g)(3). 

2. Disallowance as a subsequent event 

The Graevs argue: 

Forty-four years ago, this Court ruled that the [subsequent] events 

referred to by Treas. Reg. §1.170A–l(e) do not include contingencies created by Respondent’s examination or contingencies within Respondent’s 

control. O’Brien v. Commissioner, 46 T.C. 583, 592 (1966), acq., 1968–1 

C.B. 2.[10]

O’Brien v. Commissioner, 46 T.C. 583 (1966), did involve a 

charitable contribution that was contingent on subsequent 

favorable tax treatment; but the Graevs’ characterization of 

(377) GRAEV v. COMMISSIONER 399

11For the remainder trust issue we cited 26 C.F.R. section 1.170–1(e) 

(1961) (see note 6 above for the 1959 version which was identical to the 

1961 regulation); but the limitations now set forth in 26 C.F.R. sections 

1.170A–1(e), 1.170A–7(a)(3), and 1.170A–14(g)(3), Income Tax Regs., are 

equivalent. 

our ruling in O’Brien is flatly incorrect, and their reliance on 

it is therefore mistaken. 

O’Brien addressed two issues—a charitable remainder 

trust issue (which we describe here first) and a related but 

distinct tax-treatment contingency issue. The taxpayers created a charitable remainder trust in June 1964—of which 

they made themselves trustees with broad powers to manage 

the trust—and then made contributions to the trust in 

December 1964. Id. at 584. The Commissioner argued that 

the taxpayers were not entitled to charitable contribution 

deductions derived from the taxpayers’ contributions to the 

trust because the complete management power given to the 

donor-trustees enabled them to defeat the remainder 

interests and therefore prevented the deduction. Id. at 591. 

We rejected that argument and concluded— 

that it is highly improbable that the petitioners in their fiduciary 

capacity will ever perform an act which will defeat the charitable remainders they have created in the trust. All of the conditions and circumstances surrounding the transfers of property interests to the trust 

persuade us that the named charities, or other qualified ones, will 

eventually receive the beneficial enjoyment thereof. * * * [Id. at 596; 

emphasis added.] 

We thus decided this remainder trust issue under ‘‘[t]he 

guidelines * * * set forth in section 1.170–1(e), Income Tax 

Regs.’’ 11 Id. at 594. 

The Commissioner’s tax contingency argument (discussed 

first in O’Brien) was based on paragraph 16 of the trust 

instrument, under which contributions to the trust were 

‘‘subject to the condition that such contribution shall be 

repaid to the contributor by the Trustees * * * only in the 

event and to the extent that the Commissioner of Internal 

Revenue does not allow [it] as a deduction’’. Id. at 588. In the 

notice of deficiency issued in September 1965, the Commissioner had disallowed the charitable contribution deductions 

(for the sole reason that the donor-trustees had power over 

the trust). We ‘‘disposed of [the contingency issue] sumVerDate Nov 24 2008 10:25 Jul 11, 2014 Jkt 372897 PO 20012 Frm 00023 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\GRAEV JAMIE
400 140 UNITED STATES TAX COURT REPORTS (377) 

12 In Surface Combustion Corp. v. Commissioner, 9 T.C. 631 (1947), 

aff ’d, 181 F.2d 444 (6th Cir. 1950), we held that a provision in an employee trust allowing an employer to reclaim his contributions to the trust 

if the contributions were determined to be nondeductible did not prevent 

the employer from deducting his contributions to the trust since the contingency was in the control of the Commissioner. Surface Combustion did 

not involve charitable contributions, section 170, nor any regulations with 

a ‘‘so remote as to be negligible’’ standard. 13Our Opinion in O’Brien v. Commissioner, 46 T.C. 583, 592 (1966), indicates that the Commissioner also cited—but we distinguished—Jones v. 

United States, 252 F. Supp. 256 (N.D. Ohio 1966), aff ’d in part, rev’d in 

part, 395 F.2d 938 (6th Cir. 1968), a case not involving a tax-treatmentcontingent contribution, in which (as we noted) the District Court held 

that the possibility that a contribution at issue there would be defeated 

marily’’, id. at 591, so it is not entirely clear what the 

Commissioner had argued; but it appears that the Commissioner’s contention was simply that ‘‘the literal meaning of 

paragraph 16’’, id., called for return of the contributions upon 

the mere act of disallowance by the Commissioner, whether 

or not the Commissioner’s position was valid or was upheld. 

This position would have put the contingency ‘‘ ‘within the 

control * * * of the Commissioner’ ’’, id. at 591 (quoting Surface Combustion Corp. v. Commissioner, 9 T.C. 631, 655 

(1947), aff ’d, 181 F.2d 444 (6th Cir. 1950)), 12 without regard 

to the merits of the Commissioner’s decision. We held, to the 

contrary, that despite ‘‘the narrow wording of the trust 

instrument’’, ‘‘[t]he petitioners have a right to litigate 

respondent’s determination’’, so that the contributions would 

not be subject to return ‘‘unless the petitioners are 

unsuccessful in this litigation.’’ Id. at 592. 

That is, in O’Brien the Commissioner evidently argued 

that the charitable contribution deductions were improper 

simply because, under the trust instrument, the charitable 

contributions were defeated by the IRS’s mere disallowance 

(whether or not that disallowance was upheld in litigation). 

We held, however, that if the taxpayers successfully challenged that disallowance, then the contributions were not 

defeated (and the contribution deductions could therefore be 

allowed). We thus held that a contingency expressed in terms 

of ‘‘disallowance’’ of a deduction actually looked to the merits 

of the deduction. Contrary to the Graevs’ argument, our 

O’Brien Opinion did not analyze the tax contingency issue 

under the section 170 regulations, 13 and we did not hold that 

(377) GRAEV v. COMMISSIONER 401

‘‘was not ‘so remote as to be negligible’ under section 1.170–1(e), Income 

Tax Regs.’’ This description of Jones includes our only mention of that regulation in our discussion of this issue in the O’Brien Opinion, and our discussion does not address any relation between the regulation and the taxtreatment-contingent deduction at issue in O’Brien. 14 In this argument the Graevs do not distinguish between the contribution of the easement (which was subject to the statutes that the Graevs 

cite) and the contribution of the cash (which was not). Reliance on New 

York real estate principles to argue that the side letter is not enforceable 

as to the cash contribution is misplaced. Even if the side letter were not 

enforceable as to the easement, for the reasons the Graevs advance, so 

that they could not require NAT to ‘‘remove’’ it, the Graevs show no reason 

that the side letter would not be enforceable so as to require the return 

Continued 

a tax-treatment contingency can never be a subsequent event 

that will defeat a contribution and a deduction. We simply 

did not address that issue. 

This case, unlike O’Brien, clearly presents the issue of 

whether the promised return of a charitable contribution 

upon the disallowance of the charitable contribution deduction can constitute a subsequent event the possibility of 

which, if not negligible, renders the deduction not allowable. 

O’Brien sheds no light on that question. 

B. The possibility of return of the contributions 

If the risk of IRS disallowance was non-negligible, then so 

was the prospect that NAT would be called on to honor its 

side letter and ‘‘promptly refund * * * [Mr. Graev’s] entire 

cash endowment contribution and join with * * * [Mr. 

Graev] to immediately remove the facade conservation easement from the property’s title’’. Given that non-negligible 

risk, Mr. Graev’s contributions fell afoul of the section 170 

regulations implementing the statutory requirements that a 

gift be effectively ‘‘made’’, that it consist of an ‘‘entire 

interest’’, and that it be a ‘‘qualified conservation contribution’’. The Graevs argue, however, that as a matter of law 

NAT could not be held to the promises it made in its side 

letter, so that there was in fact no possibility that the property would be returned. 

The Graevs contend that NAT could not be divested of its 

interest in the easement because the side letter is not 

enforceable under New York law and that, as a result, the 

contributions were not really conditional. 14 In particular, the 

402 140 UNITED STATES TAX COURT REPORTS (377) 

of the cash. 15The legislative history of these provisions suggests that they were included in the statutes so that the conservation easements would satisfy the 

perpetuity requirement of 26 C.F.R. sec. 1.170A–14(g). See John C. 

Partigan, ‘‘New York’s Conservation Easement Statute: The Property Interest and Its Real Property and Federal Income Tax Consequences’’, 49 

Albany L. Rev. 430, 452 n.87 (1985). 

Graevs argue that New York’s environmental conservation 

statutes, N.Y. Envtl. Conserv. Law secs. 49–0301 to 49–0311 

(McKinney 2008 & Supp. 2013), would prevent the side letter 

from being enforced, and alternatively, that the common law 

doctrine of merger extinguished the side letter upon NAT’s 

recording the easement deed. They also contend that under 

principles of tax law the promises in the side letter were a 

nullity. We disagree. 

1. Conservation easements under New York law 

In general, property interests are determined by State law. 

United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722 

(1985). In 1983 New York enacted the New York Conservation Easement Statute. See N.Y. Envtl. Conserv. Law secs. 

49–0301 to 49–0311. For purposes of these statutes a ‘‘conservation easement’’ is defined 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 * * * [Id. sec. 49–0303(1).] 

Under these New York statutes, a conservation easement is 

enforceable even though ‘‘[i]t is not appurtenant to an 

interest in real property’’ and even though ‘‘[i]t can be or has 

been assigned to another holder’’. 15 N.Y. Envtl. Conserv. 

Law sec. 49–0305(5). Since an easement with these 

characteristics would not have been enforceable under New 

York common law, see Gross v. Cizauskas, 385 N.Y.S.2d 832 

(App. Div. 1976), a conservation easement in New York is 

authorized only by statute and thus is subject to several 

statutory restrictions. We assume the easement in this case 

is enforceable only under New York’s Environmental Conservation Law and (as the Graevs contend) is subject to the 

(377) GRAEV v. COMMISSIONER 403

16The Commissioner does not dispute that NAT is a ‘‘not-for-profit conservation organization’’ for purposes of New York’s Environmental Conservation Law. 

restrictions therein, especially restrictions on how an easement can be extinguished. 

The manner and circumstances in which parties can 

modify or extinguish a conservation easement under New 

York’s Environmental Conservation statutes are clear: 

A conservation easement shall be modified or extinguished only pursuant to the provisions of section 49–0307 of this title. Any such modification or extinguishment shall be set forth in an instrument which complies with the requirements of section 5–703 of the general obligations 

law or in an instrument filed in a manner prescribed for recording a 

conveyance of real property pursuant to section two hundred ninety-one 

of the real property law. [N.Y. Envtl. Conserv. Law sec. 49–0305(2).] 

The Graevs argue that NAT’s promise in the side letter to 

‘‘remove the facade conservation easement from the property’s title’’ purports to retain for Mr. Graev a right to extinguish the easement that does not comply with the provisions 

of N.Y. Envtl. Conserv. Law section 49–0307, and as a result, 

any attempt to remove the easement pursuant to the promise 

in the side letter would be unlawful. 

Pursuant to N.Y. Envtl. Conserv. Law section 49–0307, 

cross-referenced in the statute quoted above, a conservation 

easement held by a ‘‘not-for-profit conservation organization’’ 16 may be modified or extinguished only: (1) ‘‘as provided in the instrument creating the easement’’; (2) ‘‘in a proceeding pursuant to section nineteen hundred fifty-one of the 

real property actions and proceedings law’’; or (3) ‘‘upon the 

exercise of the power of eminent domain.’’ NAT’s promise in 

the side letter to remove the easement, standing alone, does 

not appear to comply with any of the three permissible modification or extinguishment methods provided in N.Y. Envtl. 

Conserv. Law section 49–0307. 

The Commissioner argues that the side letter should be 

considered part of ‘‘the instrument creating the easement’’. 

That argument fails because the side letter was not ‘‘subscribed by the person * * * granting [the deed]’’, N.Y. Gen. 

Oblig. Law sec. 5–703 (McKinney 2012), nor was it recorded, 

which are both required under N.Y. Envtl. Conserv. Law section 49–0305 (cross-referencing N.Y. Gen. Oblig. Law sec. 5– 

404 140 UNITED STATES TAX COURT REPORTS (377) 

17Our holding here is distinguishable from Commissioner v. Simmons, 

646 F.3d 6, 10 (D.C. Cir. 2011), aff ’g T.C. Memo. 2009–208, which looked 

at similar abandonment language in an easement deed and concluded ‘‘deductions cannot be disallowed based upon the remote possibility * * * [the 

charity] will abandon the easements.’’ See also Kaufman v. Shulman, 687 

F.3d 21, 28 (1st Cir. 2012), aff ’g in part, vacating and remanding in part 

Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010). 

In Commissioner v. Simmons, 646 F.3d at 10, the Court of Appeals for the 

D.C. Circuit stated that ‘‘the Commissioner has not shown the possibility 

* * * [the charity] will actually abandon its rights is more than negligible. 

[The charity] * * * has been holding and monitoring easements in the District of Columbia since 1978, yet the Commissioner points to not a single 

instance of its having abandoned its right to enforce.’’ In the instant case, 

however, NAT gave Mr. Graev an explicit, written promise that it would 

abandon its rights in the easement if certain events occurred. We find 

nothing to indicate that NAT did not intend to comply with its written 

promises. 

703) in order for a document to be considered an ‘‘instrument 

creating the easement’’. 

However, we hold that NAT had the ability to honor its 

promises in the side letter because the subscribed and 

recorded deed—which clearly is ‘‘the instrument creating the 

easement’’—reserved for NAT the power to do so. Paragraph 

IV.B. of the duly recorded deed granting the easement explicitly gives NAT the right to ‘‘abandon’’ the easement, and that 

deed does comply with one of the three permissible 

methods—i.e., the first (allowing modification or extinguishment ‘‘as provided in the instrument creating the easement’’). 

The recorded deed provides: 

Grantee further agrees that it will not transfer this Easement unless the 

transferee first agrees to continue to carry out the conservation purposes 

for which this Easement was created, provided, however, that nothing 

herein contained shall be constructed to limit the Grantee’s right to give 

its consent (e.g., to changes in a Protected Facade(s)) or to abandon some 

or all of its rights hereunder. [Emphasis added.] 

We have found that at the time Mr. Graev made the contribution, NAT intended to honor its promise to ‘‘join with 

* * * [Mr. Graev] to immediately remove the facade conservation easement from the property’s title’’, and we hold 

that NAT had the ability to honor this promise by exercising 

its right to abandon the easement as set forth in paragraph 

IV.B. of the recorded deed. 17

(377) GRAEV v. COMMISSIONER 405

Accordingly, we find that the Commissioner has shown 

that the possibility that NAT would actually abandon its 

rights was more than negligible. 

2. Merger doctrine 

Alternatively, the Graevs argue that the entire side letter 

was extinguished under the common law doctrine of merger. 

This argument is also without merit. While the doctrine of 

merger generally extinguishes terms of preliminary contracts 

or negotiations upon the recording of a deed, so that only the 

terms in the recorded deed remain, there are exceptions to 

this general rule. 91 N.Y. Jur. 2d Real Property Sales and 

Exchanges, sec. 140 (2011). Assuming the doctrine of merger 

applies to the side letter, the provisions in the side letter 

would fall within one of these exceptions and survive the 

deed. 

The merger rule does not apply where there is a clear 

intent evidenced by the parties that a particular provision of 

the contract shall survive the deed. See Novelty Crystal Corp. 

v. PSA Institutional Partners, L.P., 850 N.Y.S.2d 497, 500 

(App. Div. 2008). ‘‘Intention of the parties may be derived 

from the instruments alone or from the instruments and the 

surrounding circumstances’’. Goldsmith v. Knapp, 637 

N.Y.S.2d 434, 436 (App. Div. 1996). In Seibros Fin. Corp. v. 

Kirman, 249 N.Y.S. 497, 499 (App. Div. 1931), a New York 

court held that because an agreement giving the purchaser 

a right to reconvey property that was claimed to be the 

‘‘inducing cause which persuaded the plaintiff to purchase 

the property * * * [, t]he contract clearly shows that there 

was no intention on the part of the parties to merge the contract in the deed. A contract for the sale of real estate is 

merged in the deed only when the latter is intended to be 

accepted in full performance of the former.’’ 

Likewise, we find that the side letter was an inducing 

cause that persuaded Mr. Graev to contribute the conservation easement and cash to NAT. Before he even filled out his 

application to NAT, Mr. Graev emailed NAT asking for its 

thoughts on the side letter; and after receiving NAT’s assurances that the side letter would not affect the deductibility 

of his contribution, he specifically requested the side letter. 

Moreover, after the donation, when NAT recognized that the 

406 140 UNITED STATES TAX COURT REPORTS (377) 

side letter might be detrimental to Mr. Graev’s tax deductions, NAT offered to rescind the side letter and Mr. Graev 

did not accept NAT’s offer, indicating that the parties understood the side letter had survived the deed. Accordingly, we 

find that NAT’s promises in the side letter to return to the 

easement and cash were enforceable because we find a clear 

intent evidenced by the parties that the side letter would 

survive the deed. 

3. Nullity 

The Graevs appear to argue that NAT’s side letter is a nullity and should be disregarded for tax purposes because it 

provides for the donor’s potential recovery of the contributions in the event of unwanted tax consequences. In support 

of this argument the Graevs rely primarily on Commissioner 

v. Procter, 142 F.2d 824, 827–828 (4th Cir. 1944), rev’g a 

Memorandum Opinion of this Court. The holding of the 

Court of Appeals in Procter, however, is inapposite to this 

case. 

In Procter the donors assigned to their children gifts of 

remainder interests in two trusts, subject to the following 

clause: 

[I]n the event it should be determined by final judgment or order of a 

competent federal court of last resort that any part of the transfer in 

trust hereunder is subject to gift tax, it is agreed by all the parties 

hereto that in that event the excess property hereby transferred which 

is decreed by such court to be subject to gift tax, shall automatically be 

deemed not to be included in the conveyance in trust hereunder and 

shall remain the sole property of * * * [the taxpayer] * * *. [Id. at 827.] 

Under that clause, if the gifts were held by the courts to be 

taxable, then the gifts would be undone, and the donors 

would then be not liable for the tax for which the courts had 

held them liable. The clause purported not only to undo the 

gifts but also to undo the judicial decision. 

The Court of Appeals for the Fourth Circuit held that the 

clause in Procter was ‘‘clearly a condition subsequent and 

void because contrary to public policy’’, id., for three reasons: 

(1) Such a clause ‘‘has a tendency to discourage the collection of the tax by the public officials charged with its collection’’, thereby discouraging efforts to collect the tax. Id. 

(377) GRAEV v. COMMISSIONER 407

(2) ‘‘[T]he effect of the condition would be to obstruct the 

administration of justice by requiring the courts to pass upon 

a moot case’’. Id. 

(3) ‘‘[T]he condition is to the effect that the final judgment 

of a court is to be held for naught because of the provision 

of an indenture necessarily before the court when the judgment is rendered.’’ Id. That is, a final judgment would cause 

the condition to be operative, but the condition should not be 

allowed to operate to undo the judgment, since the 

instrument containing the condition was before the court, 

and all matters pertaining thereto merged in the judgment. 

Id. at 827–828. 

None of these three reasons would apply to nullify NAT’s 

side letter: 

First, the conditions in NAT’s side letter would not discourage the collection of tax. This Opinion decides that the 

Graevs are not entitled to charitable contribution deductions 

(and that there are therefore deficiencies in their income 

tax), and the return of the contributions to the Graevs would 

not at all undo or contradict that holding but would instead 

be consistent with that holding. In order for the condition in 

the side letter to be triggered, the deductions must be disallowed, and income tax will thereafter be owing whether or 

not the contribution is returned. 

Second, the possibility of the subsequent return of the contributions does not render this case moot. The Graevs 

claimed deductions; the IRS disallowed them and determined 

deficiencies of tax; the Graevs challenged that determination, 

and we must decide the matter. If we had upheld the deductions, the condition in the side letter would never have been 

met, the gift would be complete, the contribution would be 

deductible (assuming other qualifications are met), and we 

would enter decision in favor of the Graevs to overturn the 

IRS’s deficiency determination. Because instead we disallow 

the deductions and enter decision in the IRS’s favor, 

upholding the deficiency determination, the condition in the 

side letter is triggered and the gift presumably reverts to the 

donor. However, in this case, unlike Procter, the reversion to 

the donor would not be inconsistent with the court’s 

holding—i.e., the tax collector in our case, unlike Proctor, 

would collect the tax consistent with the judgment even if 

408 140 UNITED STATES TAX COURT REPORTS (377) 

the condition become operative and the gift were returned to 

the donor. 

Third, although the final judgment in the IRS’s favor 

would cause the side letter to be operative, the return of the 

contribution pursuant to the side letter would not operate to 

undo the judgment, as was the case in Procter. The return 

would have no effect on the Graevs’ tax liabilities. 

Other cases have similarly distinguished Procter and have 

held that certain tax contingency provisions are not void as 

against public policy. See Estate of Christiansen v. Commissioner, 130 T.C. 1, 8 n.7, 17–18 (2008) (a clause that 

‘‘increases the amount donated to charity should the value of 

the estate be increased’’, ‘‘would not make us opine on a moot 

issue [i.e., the value of the estate], and wouldn’t in any way 

upset the finality of our decision in this case’’), aff ’d, 586 

F.3d 1061 (8th Cir. 2009); Estate of Dickinson v. Commissioner, 63 T.C. 771, 777 (1975) (stating that the ‘‘agreement 

makes no attempt to nullify * * * [the Court’s] determination’’ (citing Surface Combustion Corp. v. Commissioner, 9 

T.C. 631, and O’Brien v. Commissioner, 46 T.C. 583)); Estate 

of Petter v. Commissioner, T.C. Memo. 2009–280 (‘‘a judgment adjusting the value of each unit will actually trigger a 

reallocation of the number of units between the trusts and 

the foundation under the formula clause. So we are not 

issuing a merely declaratory judgment’’), aff ’d, 653 F.3d 1012 

(9th Cir. 2011). 

4. Voluntary removal of the easement 

The event that might defeat the contribution to NAT is the 

‘‘removal’’ of the easement and the return of the cash pursuant to NAT’s side letter. Even if, as a matter of law, the side 

letter was not enforceable for any of the reasons the Graevs 

advance, the question would remain whether, as a matter of 

fact, in December 2004 there was a non-negligible possibility 

that the IRS would disallow the Graevs’ contribution deduction and NAT would voluntarily remove the easement. We 

have found that there was. Mr. Graev evidently concluded 

that NAT’s promise should be believed; he took deliberate 

steps to obtain its promise; and his conclusion is evidence of 

what was likely. NAT made such promises to Mr. Graev and 

others precisely because it was soliciting contributions from 

(377) GRAEV v. COMMISSIONER 409

within a community of potential donors, and the ability of 

such an organization to obtain solicitations might well be 

undermined if it got a reputation for failing to keep its promises. To decide that there was no non-negligible possibility 

that NAT would voluntarily extinguish the easement and 

return the cash would require us to find that, in order to 

induce Mr. Graev to make his contribution, NAT made cynical promises that it fully intended to break. Our record will 

not support such a finding; the stipulated evidence simply 

shows a non-profit organization going about accomplishing 

its purpose. If we speculate (without evidence) that NAT 

might have reneged on its promise, or even if we assume that 

NAT probably would have reneged on its promise, that still 

leaves us with at least a non-negligible possibility that NAT 

would have done what it said it would do. That possibility is 

fatal to the Graevs’ contribution deductions. 

III. Conclusion 

Thus, on the evidence before us, we find that there was a 

substantial possibility that the IRS would challenge the 

Graevs’ easement contribution deductions. We hold that neither State nor Federal law would prevent enforcement of the 

side letter. And we find that apart from any legal enforceability of the side letter, it reflected what NAT was likely to 

do in the event of IRS disallowance. 

For these reasons, we conclude that at the time of Mr. 

Graev’s contributions to NAT, the possibility that the IRS 

would disallow the Graevs’ deductions for the contributions 

and, as a result, that NAT would ‘‘promptly refund * * * 

[Mr. Graev’s] entire cash endowment contribution and join 

with * * * [Mr. Graev] to immediately remove the facade 

conservation easement from the property’s title’’ (as it promised) was not ‘‘so remote as to be negligible’’. Accordingly, 

under 26 C.F.R. sections 1.170A–1(e) and 1.170A–7(a)(3) the 

deduction relating to the cash contributions is disallowed. 

Likewise, under 26 C.F.R. sections 1.170A–1(e), 1.170A– 

7(a)(3), and 1.170A–14(g)(3), the easement contribution 

deductions are disallowed. 

410 140 UNITED STATES TAX COURT REPORTS (377) 

To reflect the foregoing, 

f 

An appropriate order will be issued.