T.C. Memo. 2012-1
UNITED STATES TAX COURT
KAYLN M. CARPENTER, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 15589-10, 15590-10, Filed January 3, 2012.
15591-10.
Larry D. Harvey, for petitioners.
Sara Jo Barkley and Luke D. Ortner, for respondent.
MEMORANDUM OPINION
HAINES, Judge: These cases are before the Court on
respondent’s motion for partial summary judgment. The cases are
consolidated for purposes of trial, briefing, and opinion.
1
Cases of the following petitioners are consolidated
herewith: Scott A. Van Wyhe, docket No. 15590-10; and John C.
and Sharon L. McSween, docket No. 15591-10.
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Kayln M. Carpenter, Scott A. Van Wyhe, and John C. and Sharon L.
McSween (the McSweens)2 separately petitioned the Court for
redetermination of the following deficiencies in Federal income
tax and additions to tax and penalties:3
Kayln M. Carpenter, docket No. 15589-10
Addition to Tax and Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
2004 $21,125 $496 $4,225
Scott A. Van Wyhe, docket No. 15590-10
Addition to Tax and Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
2004 $839 $42 $168
2006 15 15 3
John C. and Sharon L. McSween, docket No. 15591-10
Penalty
Year Deficiency Sec. 6662(a)
2003 $57,090 $11,418
2004 64,498 12,900
2005 14,574 2,915
The issue for determination after concessions is whether
petitioners are entitled to charitable contribution deductions
2
The McSweens are considered a single petitioner having
filed joint returns, having received a single notice of
deficiency, and having filed a single petition with this Court.
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended and in effect for the years
at issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. Amounts are rounded to the nearest
dollar.
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with respect to conservation easements petitioners granted to the
Greenlands Reserve (Greenlands).4
Background
The following facts are based upon the parties’ pleadings,
affidavits, and exhibits in support of and in opposition to the
motion for partial summary judgment. They are stated solely for
the purpose of deciding the motion and not as findings of fact in
this case. See Fed. R. Civ. P. 52(a). At the time petitioners
filed their petitions, they resided in Colorado.
The facts of all petitioners’ cases, though not identical,
are substantially similar. On or about December 23, 2003, each
petitioner acquired a parcel or parcels of land in Teller County,
Colorado, from Sixty Seven, LLC (Sixty Seven). Petitioners held
their parcels in fee simple. On or about December 24, 2003, each
petitioner conveyed a conservation easement to Greenlands, a
charitable nonprofit Colorado corporation which qualifies as a
tax-exempt nonprofit organization under sections 501(c)(3) and
170(b)(1)(A)(iv).5
4
Respondent did not address whether petitioners are liable
for the accuracy-related penalties under sec. 6662(a) and whether
petitioner Carpenter and the McSweens are liable for the addition
to tax under sec. 6651(a) in his motion for partial summary
judgment; therefore we do not address these issues in this
opinion.
5
The McSweens owned two parcels of land in Teller County.
They conveyed a conservation easement over the first parcel of
land on or about Dec. 24, 2003, and conveyed a conservation
easement over the second parcel on or about Jan. 29, 2004.
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Petitioner Carpenter claimed a $385,600 charitable
contribution deduction on her 2004 Federal income tax return.
Petitioner Van Wyhe claimed a $272,998 charitable contribution
deduction on his 2004 Federal income tax return, a $265,247
charitable contribution deduction carryover on his 2005 Federal
income tax return, and a $262,876 charitable contribution
deduction carryover on his 2006 Federal income tax return. The
McSweens claimed a $336,500 charitable contribution deduction on
their 2003 joint Federal income tax return, a $336,500 charitable
contribution deduction on their 2004 joint Federal income tax
return, a $311,776 charitable contribution deduction carryover on
their 2004 joint Federal income tax return, and a $612,844
charitable contribution deduction carryover on their 2005 joint
Federal income tax return. All of the Federal income tax returns
were timely filed.
All of the conservation easement deeds were virtually
identical and contained the following provision for
extinguishment of the easement:
Extinguishment – If circumstances arise in the future
such that render the purpose of this Conservation
Easement impossible to accomplish, this Conservation
Easement can be terminated or extinguished, whether in
whole or in part, by judicial proceedings, or by mutual
written agreement of both parties, provided no other
parties will be impacted and no laws or regulations are
violated by such termination. * * * [Emphasis added.]
A notice of deficiency was mailed to each petitioner disallowing
petitioners’ charitable contribution deductions. Respondent
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cited the emphasized language above in determining that
petitioners had not met the section 1.170A-14(g)(6)(i), Income
Tax Regs., requirement that their conservation easements be
granted in perpetuity. Each petitioner timely filed a petition
with this Court.
Discussion
I. Introduction
We may grant summary judgment “if the pleadings, answers to
interrogatories, depositions, admissions, and any other
acceptable materials, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that a
decision may be rendered as a matter of law.” Rule 121(b). In
pertinent part, Rule 121(d) provides: “When a motion for summary
judgment is made and supported * * *, an adverse party may not
rest upon the mere allegations or denials of such party’s
pleading, but such party’s response * * * must set forth specific
facts showing that there is a genuine issue for trial.”
Respondent has moved for partial summary judgment and bears the
burden of proving there is no genuine issue of material fact as
to whether petitioners’ contributions of the conservation
easements were exclusively for conservation purposes, and so we
infer facts in the manner most favorable to petitioners. See,
e.g., Anonymous v. Commissioner, 134 T.C. 13, 15 (2010) (citing
Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985)).
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II. Qualified Conservation Contribution
A taxpayer is generally allowed a deduction for any
charitable contribution made during the taxable year. Sec.
170(a)(1). A charitable contribution is a gift of property to a
charitable organization, made with charitable intent and without
the receipt or expectation of receipt of adequate consideration.
See Hernandez v. Commissioner, 490 U.S. 680, 690 (1989); United
States v. Am. Bar Endowment, 477 U.S. 105, 116-118 (1986); see
also sec. 1.170A-1(h)(1) and (2), Income Tax Regs. While a
taxpayer is generally not allowed a charitable contribution
deduction for a gift of property consisting of less than an
entire interest in that property, an exception is made for a
“qualified conservation contribution.” See sec. 170(f)(3)(A),
(B)(iii).
A “qualified conservation contribution” is a contribution
(1) of a “qualified real property interest”, (2) to a “qualified
organization”, (3) which is made “exclusively for conservation
purposes”. Sec. 170(h)(1); see also sec. 1.170A-14(a), Income
Tax Regs. Respondent concedes that there was a contribution of a
qualified real property interest and that at the time of the
contributions Greenlands was a qualified organization under
section 170(h)(3). Therefore, we focus on the third requirement;
i.e., whether petitioners’ contributions of the donated property
were exclusively for conservation purposes.
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A contribution is made exclusively for conservation purposes
only if it meets the requirements of section 170(h)(5). Glass v.
Commissioner, 124 T.C. 258, 277 (2005), affd. 471 F.3d 698 (6th
Cir. 2006). Section 170(h)(5)(A) provides that “A contribution
shall not be treated as exclusively for conservation purposes
unless the conservation purpose is protected in perpetuity.” In
order for a conservation easement to be enforceable in
perpetuity, the “interest in the property retained by the donor *
* * must be subject to legally enforceable restrictions * * *
that will prevent uses of the retained interest inconsistent with
the conservation purposes of the donation.” Sec. 1.170A-
14(g)(1), Income Tax Regs. Section 1.170A-14(g)(6)(i), Income
Tax Regs. (extinguishment regulation), states in pertinent part:
If a subsequent unexpected change in the conditions
surrounding the property that is the subject of a
donation under this paragraph can make impossible or
impractical the continued use of the property for
conservation purposes, the conservation purpose can
nonetheless be treated as protected in perpetuity if
the restrictions are extinguished by judicial
proceeding and all of the donee’s proceeds * * * from a
subsequent sale or exchange of the property are used by
the donee organization in a manner consistent with the
conservation purposes of the original contribution.
Respondent has filed a motion for partial summary judgment,
arguing that petitioners’ conservation easements are not
protected in perpetuity because the conservation easement deeds
allow the parties to extinguish the conservation easements by
mutual agreement. Petitioners in response make two arguments.
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First, petitioners argue that summary judgment on this issue is
inappropriate because there is a genuine issue of material fact.
Second, petitioners argue that the donations created charitable
trusts or restricted gifts which implicate the doctrine of cy
pres. Under cy pres termination of the conservation easements
would require a judicial proceeding which would prevent the
parties from extinguishing the easements by mutual agreement. We
take each of petitioners’ arguments in turn.
A. Whether Summary Judgment Is Inappropriate Because There
Is a Genuine Issue of Material Fact
Section 1.170A-14(g)(6), Income Tax Regs., allows for
extinguishment of a conservation easement if subsequent
unexpected changes in the conditions surrounding the property can
make “impossible or impracticable” (emphasis added) the continued
use of the property for conservation purposes. On the other hand
the conservation easement deeds allow for extinguishment of the
conservation easement only if circumstances arise in the future
that render the purpose of the conservation easements “impossible
to accomplish”. (Emphasis added.) Petitioners argue that the
conservation easement deeds have more stringent provisions on
extinguishment than those in the regulations and that we must
determine whether conditions existed at the time of grant of the
conservation easements that would make it impossible to
accomplish the purposes of the easements. Petitioners are asking
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us to read the extinguishment regulation in tandem with section
1.170A-14(g)(3), Income Tax Regs.
Section 1.170A-14(g)(3), Income Tax Regs. (so-remote-as-to-
be-negligible standard), provides that
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.
Petitioners argue that the conditions necessary for
extinguishment of the conservation easements are not possible or
the possibility is so remote as to be negligible and that in
either event the likelihood of such conditions’ occurring and
thus the likelihood of extinguishment is a material question of
fact precluding summary judgment. Respondent argues that the so-
remote-as-to-be-negligible standard is irrelevant to our inquiry.
We agree with respondent.
This Court has previously found that the so-remote-as-to-be-
negligible standard does not modify the extinguishment
regulation. In other words, the Commissioner is not required to
make a showing with respect to the likelihood or possibility of
extinguishment in determining whether an easement complies with
the requirements of the extinguishment regulation. See Kaufman
v. Commissioner, 136 T.C. 294, 311-313 (2011). The risk
addressed by the extinguishment regulation, an “unexpected”
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change in conditions surrounding the property, likely describes a
class of events the range of whose probabilities includes, if it
is not coincident with, the range of probabilities of events that
are so remote as to be negligible. See id. at 313. However, the
issue before us is not whether there is a possibility that events
could occur which would trigger the conservation easements’
extinguishment provision, but whether upon the happening of such
events the ability to extinguish the conservation easements
through mutual agreement of the parties violates the requirements
of the extinguishment regulation.
Section 1.170-14(g)(6), Income Tax Regs., suggests that any
extinguishment of a conservation easement be done through
judicial proceedings. It is petitioners’ inclusion of the right
of the parties to extinguish or terminate the conservation
easements “by mutual written agreement of both parties” that
causes the issues before us. It is not a question as to the
degree of probability of the changed conditions that would
justify extinguishment of the restrictions.
Although there is a genuine issue of material fact as to
whether circumstances could arise which would make it impossible
to accomplish the purposes of the conservation easement, that
issue is irrelevant to our inquiry. Disputes over facts that are
not outcome determinative do not preclude the entry of summary
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judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986).
B. Whether the Donation Created a Charitable Trust or a
Restricted Gift Which Implicates the Cy Pres Doctrine,
Requiring a Judicial Proceeding To Extinguish the
Easement
Petitioners alternatively argue that the donations of the
property created a charitable trust or a restricted gift which
implicates the cy pres doctrine, requiring a judicial proceeding
to extinguish the easement. To determine whether the
conservation easement deeds comply with requirements for the
conservation easement deduction under Federal tax law, we must
look to State law to determine the effect of the deeds. State
law determines the nature of the property rights, and Federal law
determines the appropriate tax treatment of those rights. Estate
of Lay v. Commissioner, T.C. Memo. 2011-208. Specifically, we
must look to State law to determine how conservation easements
may be extinguished. Pursuant to Col. Rev. Stat. sec. 38-30.5-
107 (2010), “Conservation easements in gross may, in whole or in
part, be released, terminated, extinguished, or abandoned by
merger with the underlying fee interest in the servient land or
water rights or in any other manner in which easements may be
lawfully terminated, released, extinguished or abandoned.”
Petitioners recognize that conservation easements may be
extinguished through many means under Colorado State law,
including by mutual consent of the parties; however, they argue
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that their contributions to Greenlands each constitute a
restricted gift or a charitable trust. As a result, the cy pres
doctrine applies to those contributions and thus these
conservation easement contributions made to Greenlands may be
extinguished only by a judicial proceeding and may not be
extinguished by mutual consent of the parties.
Petitioners argue that the gifts to Greenlands each
constitute a charitable trust. We agree with respondent and find
that the transfers of property to Greenlands did not create
charitable trusts. No court in the State of Colorado has decided
whether a donation of a conservation easement to a charitable
organization constitutes a charitable trust. If the highest
court of the State has not spoken on the issue, then this Court
must apply what it finds to be the State law after giving proper
regard to relevant rulings of other courts of the State.
Commissioner v. Estate of Bosch, 387 U.S. 456 (1967). In
determining whether a donation to a hospital constituted a
charitable trust under Colorado law, the Court in George W.
Vallery Meml. Fund, Inc. v. Saint Luke’s Cmty. Found., Inc. (In
re Estate of Vallery), 883 P.2d 24, 27 (Colo. App. 1993) opined:
Colorado recognizes that the intent to create a trust
can be inferred from the nature of property
transactions, the circumstances surrounding the holding
and transfer of property, the particular documents or
language used, and the conduct of the parties. See
Matter of Estate of Daniels, 665 P.2d 594 (Colo. 1983).
However, while no particular language must be used to
create a trust or to manifest the necessary intention
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to create a trust, this inference should not come
easily. Bishop & Diocese of Colorado v. Mote, 716 P.2d
85 (Colo.), cert. denied, 479 U.S. 826, 107 S.Ct. 102,
93 L.Ed.2d 52 (1986). Clear, explicit, definite,
unequivocal, and unambiguous language or conduct
establishing the intent to create a trust is required.
Bishop & Diocese of Colorado v. Mote, supra; Goemmer v.
Hartman, 791 P.2d 1238 (Colo. App. 1990).
Thus, even though formal or technical words are not
necessary, see Marshall v. Grauberger, 796 P.2d 34
(Colo. App. 1990), the fact that the document makes no
mention of a “trust” is significant in determining
whether a trust was intended. See Denver Chapter No.
145, Order of Ahepa v. Mile Hi City Chapter No. 360,
171 Colo. 541, 469 P.2d 740 (1970).
Moreover, 1 Restatement, Trusts 3d, sec. 2 (2003), defines a
charitable trust in pertinent part as a “fiduciary relationship
with respect to property, arising from a manifestation of
intention to create that relationship”. We do not find any
clear, explicit, definite, unequivocal, and unambiguous language
in the conservation easement deeds to create a trust. We also do
not find any intention to create a trust. As a result, we do not
find that petitioners created charitable trusts under Colorado
law with their conservation easement deeds.
Next, petitioners ask us to determine whether each of their
donations to Greenlands constitutes a restricted gift under
Colorado law. This is another novel issue of Colorado law, as no
court in the State of Colorado has decided whether a donation of
a conservation easement to a charitable organization constitutes
a restricted gift. Consequently, we apply what we find to be the
State law after giving proper regard to relevant rulings of other
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courts of the State of Colorado. See Commissioner v. Estate of
Bosch, supra at 465. We find that petitioners’ transfers to
Greenlands did constitute restricted gifts. Restricted gifts are
“contributions conditioned on the use of a gift in accordance
with the donor’s precise directions and limitations.” Schmidt,
“Modern Tomb Raiders: Nonprofit Organizations’ Impermissible Use
of Restricted Funds”, 31 Colo. Law. 57, 58 (2002).
Petitioners made outright gifts to Greenlands with a
restriction on the use of the gifts. The conservation easement
deeds restricted Greenlands’ use of the gift to “preserve and
protect in perpetuity the Conservation Values of the Property for
the benefit of this generation and generations to come.”
Moreover, at least one commentator has argued that conservation
easements eligible for Federal charitable contribution income tax
deductions are also, by definition, charitable gifts for a
specific purpose, i.e., a restricted gift. See McLaughlin,
“Internal Revenue Code Section 170(h): National Perpetuity
Standards For Federally Subsidized Conservation Easements Part 2:
Comparison to State Law”, 46 Real Prop. Tr. & Est. L.J. 1, 23
(2011). Thus we find that each petitioners’ donation of a
conservation easement to Greenlands is a restricted gift under
Colorado law.
Having found that petitioners each made a restricted gift,
we turn to the issue of whether the doctrine of cy pres is
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applicable to these restricted gifts. Although the doctrine of
cy pres ordinarily applies to charitable trusts, at least one
Colorado court has found no sound reason to require the existence
of a formal trust to apply the doctrine. See George W. Vallery
Meml. Fund, Inc. v. Saint Luke’s Found., Inc. (In re Estate of
Vallery), supra. The court in Estate of Vallery held that “even
in the absence of a formal trust, the doctrine of cy pres is
available when there is an absolute bequest to a charitable
organization.” Id. at 28.
Under the cy pres doctrine, equity allows deviation from the
terms of a charitable bequest when the particular purpose of the
gift becomes impossible or impracticable to accomplish and the
donor manifested a more general intention to devote the property
to charitable purposes. Id.; see also Dunbar v. Board of Trs. of
George W. Clayton College, 461 P.2d 28 (Colo. 1969).6
Petitioners argue that the doctrine of cy pres applies to
their restricted gifts. Petitioners further argue that cy pres
6
“If property is given in trust to be applied to a
particular charitable purpose, and it is or becomes
impossible or impracticable or illegal to carry out the
particular purpose, and if the settlor manifested a
more general intention to devote the property to
charitable purposes, the trust will not fail but the
Court will direct the application of the property to
some charitable purpose which falls within the general
charitable intention of the settlor.”
Dunbar v. Board of Trs. of George W. Clayton College, 461 P.2d
28, 30 (Colo. 1969) (quoting 11 Restatement, Trusts 2d, sec. 399
(1959)).
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prevents the parties from agreeing to extinguish the conservation
easements in the event it becomes impossible to carry out the
purposes of the conservation easements. Rather, it is
petitioners’ contention that the cy pres doctrine will require a
judicial proceeding in the event the purposes of the conservation
easements become impossible to carry out. Respondent argues that
cy pres is inapplicable to the restricted gifts because
petitioners did not manifest a more general intention to devote
the property to charitable purposes. We agree with respondent.
We are called upon to determine petitioners’ intention in
granting the conservation easements. Specifically, we are called
upon to determine whether petitioners manifested a more general
intent to devote the property to a general charitable purpose
beyond the restrictions placed in the conservation easement
deeds. Neither party has asserted that any provision in the
conservation easement deeds besides the extinguishment clauses is
ambiguous and, absent ambiguity, interpretation of the deeds is a
question of law. See Penning v. Ferguson (In re Ferguson
Trusts), 929 P.2d 33, 35 (Colo. App. 1996). Our objective in
construing the deeds, as with any other contract, is to determine
the intent of the drafters. See id.
The purpose of the conservation easements as stated in the
conservation easement deeds is to:
assure that the Property will be returned to and
retained forever predominantly in a natural, scenic,
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and open space condition, to preserve and protect in
perpetuity the wildlife, aesthetic, ecological and
environmental values, and water quality characteristics
of the Property, and to prevent any use of the Property
that will impair or interfere with the Conservation
Values of the Property and to extinguish any and all
development rights and allocations and density rights
and allocations, whether presently existing or arising
in the future. * * *
The conservation easement deeds also reserve certain rights to
petitioners:
Grantor reserves to itself, and to its successors and
assigns, all rights accruing from their ownership of
the Property, including the right to engage in and
permit or invite others to engage in all uses of the
Property that are not expressly prohibited herein and
are not inconsistent with the purpose of the
Conservation Easement. * * *
We do not find that petitioners intended to donate their property
to Greenlands with a general charitable purpose. The deeds make
clear that petitioners wanted to retain all rights over the
donated property not specifically granted to Greenlands in the
conservation easement deeds. Should the purpose of the deeds
become impossible to fulfill, petitioners demonstrated no
intention to have the donated property put to some other general
charitable use. As a result, we hold that the cy pres doctrine
is inapplicable to petitioners’ restricted gifts.
Having found that the cy pres doctrine is inapplicable to
petitioners’ restricted gifts, we find that petitioners’
conservation easements may be terminated by a mutual agreement of
the parties. We must now determine whether the ability to
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extinguish the easements by mutual agreement of the parties
violates the requirements of the extinguishment regulation.
C. Whether the Parties’ Ability To Extinguish the
Conservation Easements Through Mutual Consent Violates
the Requirements of the Extinguishment Regulation
We have previously discussed the restrictions required by
the extinguishment regulation. In Kaufman v. Commissioner, 136
T.C. 294 (2011), we declined to rule that a conservation deed
must require a judicial proceeding to extinguish an easement for
the easement to be perpetual. Id. at 307 n. 7. We once again
decline to create an absolute rule. Rather, we find that the
extinguishment regulation provides taxpayers with a guide, a safe
harbor, by which to create the necessary restrictions to
guarantee protection of the conservation purpose in perpetuity.
Petitioners’ conservation easement deeds allow for
extinguishment of the conservation easements through mutual
consent of the parties. Extinguishment by mutual consent of the
parties does not guarantee that the conservation purpose of the
donated property will continue to be protected in perpetuity. As
at least one commentator has noted, the “restrictions [in a deed]
are supposed to be perpetual in the first place, and the decision
to terminate them should not be solely by interested parties.
With the decision-making process pushed into a court of law, the
legal tension created by such judicial review will generally tend
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to create a fair result.” Small, Federal Tax Law of Conservation
Easements 16-4 (1986).
Because petitioners’ easements may be extinguished by mutual
consent of the parties, the easements fail as a matter of law to
comply with the enforceability in perpetuity requirements under
section 1.170A-14(g), Income Tax Regs. For that reason, we find
that the easements were not protected in perpetuity and thus were
not qualified conservation contributions under section 170(h)(1).
We shall grant the motion with respect to the easements and deny
petitioners’ charitable contribution deductions.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will
be issued.