Mitchell v. Commissioner

RAMONA L. MITCHELL, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 10891–10. Filed April 3, 2012.

In 2003 P contributed a conservation easement over 180
acres of unimproved land to a qualified organization. The pur-
chase of the unimproved land was seller financed. After a
downpayment, P executed a promissory note for the
remaining payments secured by a deed of trust on the unim-
proved land. P failed to have the mortgagee subordinate the
deed of trust to the conservation easement deed until two
years later, in 2005. P claimed a charitable contribution
deduction on her 2003 Federal income tax return. I.R.C. sec.
170 allows a deduction for a ‘‘qualified conservation contribu-
tion’’. A qualified conservation contribution must be made
exclusively for conservation purposes. I.R.C. sec. 170(h). A
contribution shall not be treated as exclusively for conserva-
tion purposes unless the conservation purpose is protected in
perpetuity. I.R.C. sec. 170(h)(5)(A). Pursuant to sec. 1.170A–
14(g)(2), Income Tax Regs., no deduction is permitted for an

324

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00001 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 325

interest in property which is subject to a mortgage unless the
mortgagee subordinates its rights in the property to the right
of the qualified organization to enforce the conservation pur-
poses of the gift in perpetuity. P argues she has met the
requirements of sec. 1.170A–14(g)(2), Income Tax Regs., and
is eligible for a charitable contribution deduction under I.R.C.
sec. 170. R argues that P failed to have the mortgagee
subordinate his deed of trust to the conservation easement
deed and therefore failed to meet the requirements of sec.
1.170A–14(g)(2), Income Tax Regs., and I.R.C. sec. 170. As
part of P’s argument that she has met the requirements of
sec. 1.170A–14(g)(2), Income Tax Regs., P raises an issue of
first impression: whether we must consider the so-remote-as-
to-be-negligible standard of sec. 1.170A–14(g)(3), Income Tax
Regs., in determining whether P satisfied the requirements of
sec. 1.170A–14(g)(2), Income Tax Regs. Held: The so-remote-
as-to-be-negligible standard of sec. 1.170A–14(g)(3), Income
Tax Regs., does not apply to determine whether P satisfied
the requirements of sec. 1.170A–14(g)(2), Income Tax Regs.
Held, further, P has not met the requirements of sec. 1.170A–
14(g)(2), Income Tax Regs., and is not eligible for the chari-
table contribution deduction under I.R.C. sec. 170 for 2003.
Held, further, P is not liable for the accuracy-related penalty
under I.R.C. sec. 6662.

Larry D. Harvey, for petitioner.
Miles B. Fuller, Steven I. Josephy, and Joseph A. Peters, for
respondent.
HAINES, Judge: Respondent determined a deficiency of
$142,600 in petitioner’s Federal income tax and an accuracy-
related penalty under section 6662(a) 1 and (d) of $28,520 for
2003. 2 The issues for decision after concessions are: (1)
whether petitioner is entitled to a charitable contribution
deduction with respect to the conservation easement she
granted to Montezuma Land Conservancy (Conservancy); (2)
if petitioner is entitled to a charitable contribution deduction,
the amount of the deduction; and (3) whether petitioner is
liable for the accuracy-related penalty under section 6662(a)
and (d) or alternatively, if we determine petitioner is entitled
to a charitable contribution deduction, whether she is liable
1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as

amended and in effect for the year at issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure. Amounts are rounded to the nearest dollar.
2 Respondent first asserted that petitioner is liable for the accuracy-related penalty in his an-

swer. Should we find in favor of petitioner on the first issue below, respondent claims she is
liable for a gross valuation misstatement penalty under sec. 6662(h) of $50,973 for 2003.

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00002 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 326 138 UNITED STATES TAX COURT REPORTS (324)

for the gross valuation misstatement penalty under section
6662(a) and (h).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.
At the time petitioner filed her petition, she lived in Colo-
rado.
Charles Mitchell, his wife Ramona L. Mitchell, and their
son, Blake Mitchell (Mitchells), resided in Mancos, Colorado,
a ranching community established in 1876. Mancos is
between Cortez, Colorado, 17 miles to the west, and
Durango, Colorado, 30 miles to the east. Highway 160, at the
base of the San Juan Mountains and known as the San Juan
Skyway, connects the three towns. The towns are in the
southwest corner of Colorado in the ‘‘Four Corners’’ area,
where the boundaries of Colorado, New Mexico, Arizona, and
Utah meet.
The town of Mancos is in the northern part of Mancos
Valley. Charles had owned a business in the town which
began as a manufacturer of matches but eventually evolved
into a manufacturer of erosion and flood control products.
Charles had tried to buy 456 acres of ranchland in the
southern part of the Mancos Valley from Clyde Sheek for
over 20 years. The ranchland was approximately eight miles
by road south of the town of Mancos.
In 1998 Sheek finally agreed to sell the northerly 105-acre
parcel to the Mitchells for $180,000. 3 The parcel was unim-
proved; i.e., it had no buildings, only partial fencing, no utili-
ties, and no domestic water. Access was from a two-lane
gravel road maintained by the county. The land had been
used by Sheek to graze cattle and was not in good condition
when the Mitchells purchased it. The property also was used
by wildlife for habitat.
The Mitchells installed a two-inch water line from the
northern boundary of the 105-acre parcel in 2000 with elec-
trical lines added in 2001–02. The Mancos River channel
running through the property was protected from further
erosion, and fields were improved. Blake and his wife,
Melody, built a home on the 105-acre parcel in 2000. Subse-
3 Montezuma County assessors records describe the parcel as 95 acres. The land records de-

scribe it as 105 acres. We will use 105 acres for purposes of the Opinion.

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00003 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 327

quently a 50- by 100-foot shop and a 900-square-foot guest-
house were built on the parcel.
In 2000 Charles sold his business. He again approached
Sheek to buy the remaining 351 acres bordering the south
boundary of the 105-acre parcel bought in 1998. Sheek
agreed to sell the 351-acre parcel in 2001 for $683,000. He
did not want all cash. He wanted retirement income. Con-
sequently, after a downpayment of $83,000, the balance of
$600,000 was to be paid in installments of $60,000 per year
plus interest. A promissory note was signed and secured by
a deed of trust recorded in the records of Montezuma County,
Colorado, in January 2001.
As a result of the two purchases, the Mitchells owned 456
acres of ranchland in the southern portion of the Mancos
Valley (Lone Canyon Ranch). The south and west sides of the
Lone Canyon Ranch are bordered by the Mesa Verde
National Park (park) where the Anasazi people, the
cliffdwellers, had their communities. A portion of the ranch
is actually within the park. To the south also is Ute Indian
land and to the east is Bureau of Land Management land
and a privately owned ranch. Charles and petitioner built
their own home at Lone Canyon Ranch in 2001 and 2002.
Charles began having health problems. In December 2002
the Mitchells formed C. L. Mitchell Properties, L.L.L.P., a
family limited partnership (partnership). 4 Lone Canyon
Ranch was transferred to the partnership, subject to the deed
of trust, as were other investments, including a rental prop-
erty and cash and securities. Although Charles was named
the general partner, it soon became evident that he could not
carry out his management duties. Consequently, Blake took
over the management duties. Charles eventually died of his
illness in 2006.
On December 31, 2003, the partnership granted a con-
servation easement on the south 180 acres of unimproved
land to Conservancy. The parties executed a deed of con-
servation easement in gross. At the time the easement was
granted, the deed of trust securing the debt to Sheek was not
subordinated to the conservation easement held by Conser-
vancy. From 2003 to 2005 the partnership had the money to
4 The name of the limited partnership was changed at a later date to Lone Canyon Ranch

Limited Liability Limited Partnership.

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00004 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 328 138 UNITED STATES TAX COURT REPORTS (324)

pay off the promissory note, which the deed of trust secured,
at any time. There were no lawsuits, potential or otherwise;
all bills were paid; payments on the promissory note to
Sheek were current, and casualty insurance was in place.
Two years after the conservation easement was granted,
Sheek agreed to subordinate his deed of trust to the con-
servation easement but received no consideration for the
subordination. On December 22, 2005, Sheek signed the
Subordination to Deed of Conservation Easement in Gross
(subordination agreement).
In 2004 the Mitchells hired William B. Love Appraisals,
Inc. (Love), to appraise the conservation easement granted to
Conservancy as of December 31, 2003. Love determined that
the conservation easement had a market value of $504,000.
Love issued an appraisal report for the partnership on Feb-
ruary 17, 2004 (Love appraisal). The partnership claimed a
$504,000 charitable contribution deduction, which flowed
through to its two partners, Charles and petitioner, equally.
Charles and petitioner claimed a $504,000 5 charitable con-
tribution deduction on their 2003 joint Federal income tax
return dated April 13, 2004 (2003 return). Charles and peti-
tioner attached Form 8283, Noncash Charitable Contribu-
tions, to their 2003 return along with a copy of the Love
appraisal.
A notice of deficiency was mailed to petitioner on February
23, 2010, disallowing her 2003 charitable contribution deduc-
tion. Respondent determined that petitioner had not met the
requirements of section 170. Alternatively, respondent deter-
mined that if petitioner had met the requirements of section
170, the amount of the charitable contribution deduction was
$100,100. 6 Petitioner timely filed a petition with this Court
on May 12, 2010.
OPINION

The issues before this Court are whether petitioner made
a qualified conservation contribution to Conservancy and if
so, whether she substantiated the reported charitable con-
tribution deduction in the manner required by section
5 Because of limitations on itemized deductions claimed on Schedule A, Itemized Deductions,

only $447,236 of the charitable contribution deduction could be claimed on the 2003 return.
6 Respondent in his pretrial memorandum concedes that, if a charitable contribution deduction

is allowed, the amount of the deduction is $122,000.

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00005 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 329

170(f)(8). If we find that petitioner made a qualified con-
servation contribution and that she substantiated it, we then
must determine its value. Finally, we must determine
whether petitioner is liable for certain penalties under sec-
tion 6662.
I. Qualified Conservation Contribution
A taxpayer is generally allowed a deduction for any chari-
table 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 con-
sisting 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 contribution the Conservancy was a qualified organiza-
tion under section 170(h)(3). Therefore, we focus on the third
requirement; i.e., whether petitioner’s contribution of the
conservation easement to Conservancy was exclusively for
conservation purposes.
A contribution is made exclusively for conservation pur-
poses only if it meets the requirements of section 170(h)(5).
Glass v. Commissioner, 124 T.C. 258, 277 (2005), aff ’d, 471
F.3d 698 (6th Cir. 2006). Section 170(h)(5)(A) provides that
‘‘A contribution shall not be treated as exclusively for con-
servation purposes unless the conservation purpose is pro-
tected in perpetuity.’’ Section 1.170A–14(g), Income Tax
Regs., elaborates on the enforceability-in-perpetuity require-
ment. Paragraph (g)(1) provides generally that in order for a
conservation easement to be enforceable in perpetuity, the

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00006 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 330 138 UNITED STATES TAX COURT REPORTS (324)

‘‘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.’’ The various subpara-
graphs of paragraph (g) set forth many of these legally
enforceable restrictions.
Paragraph (g)(2) addresses mortgages and in pertinent
part provides that ‘‘no deduction will be permitted * * * for
an interest in property which is subject to a mortgage unless
the mortgagee subordinates its rights in the property to the
right of the * * * [donee] organization to enforce the con-
servation purposes of the gift in perpetuity.’’
Paragraph (g)(3) is entitled ‘‘Remote future event’’ and
addresses events that may defeat the property interest that
has passed to the donee organization. It provides that a
deduction will not be disallowed merely because on the date
of the gift there is the possibility that the interest will be
defeated so long as on that date the possibility of defeat is
so remote as to be negligible.
Paragraph (g)(6) is entitled ‘‘Extinguishment’’ and recog-
nizes that after the donee organization’s receipt of an
interest in property, an unexpected change in the conditions
surrounding the property can make impossible or impractical
the continued use of the property for conservation purposes.
Subdivision (i) of paragraph (g)(6) provides that those pur-
poses will nonetheless be treated as protected in perpetuity
if the restrictions limiting use of the property for conserva-
tion purposes ‘‘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.’’
Subdivision (ii) of paragraph (g)(6) is entitled ‘‘Proceeds’’
and, in pertinent part, provides:
for a deduction to be allowed under this section, at the time of the gift the
donor must agree that the donation of the perpetual conservation restric-
tion gives rise to a property right, immediately vested in the donee
organization, with a fair market value that is at least equal to the propor-
tionate value that the perpetual conservation restriction at the time of the
gift bears to the value of the property as a whole at that time. * * * For
purposes of this paragraph (g)(6)(ii), that proportionate value of the donee’s
property rights shall remain constant. Accordingly, when a change in

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00007 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 331

conditions gives rise to the extinguishment of a perpetual conservation
restriction under paragraph (g)(6)(i) of this section, the donee organization,
on a subsequent sale, exchange, or involuntary conversion of the subject
property, must be entitled to a portion of the proceeds at least equal to
that proportionate value of the perpetual conservation restriction * * *.

Respondent argues that petitioner’s conservation easement
was not protected in perpetuity and thus it is not a qualified
conservation contribution. Specifically, respondent argues
that petitioner failed to satisfy the requirements of section
1.170A–14(g)(2), Income Tax Regs. (subordination regula-
tion), and section 1.170A–14(g)(6)(ii), Income Tax Regs. (pro-
ceeds regulation). We will address each of these arguments
in turn.
A. Whether Petitioner Satisfied the Requirements of the
Subordination Regulation
Respondent argues that the conservation purpose of the
donated property is not protected in perpetuity because peti-
tioner failed to meet the requirements of the subordination
regulation, which required Sheek to subordinate his deed of
trust to the deed of conservation easement. Petitioner argues
that Sheek entered into a subordination agreement in 2005
which complies with the requirements of the subordination
regulation. Petitioner also argues that in determining
whether the requirements of the subordination regulation
are met this Court must consider the so-remote-as-to-be-neg-
ligible standard in section 1.170A–14(g)(3), Income Tax Regs.
Finally, petitioner argues that she entered into an oral agree-
ment with Sheek with respect to the use of Lone Canyon
Ranch and that the oral agreement provides the necessary
protection required by section 170(h)(1)(c).
1. Whether Petitioner’s Obtaining a Subordination Agree-
ment in 2005 Satisfies the Requirements of the Sub-
ordination Regulation
Petitioner claims her grant of a conservation easement to
Conservancy satisfies the requirements of the subordination
regulation because Sheek subordinated his deed of trust to
Conservancy’s deed of conservation easement in 2005. Peti-
tioner argues that it is irrelevant that the subordination
agreement was signed almost two years after the grant of the

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00008 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 332 138 UNITED STATES TAX COURT REPORTS (324)

conservation easement because the subordination regulation
has no requirement as to when the mortgagee must subordi-
nate its claim to that of the donee organization. Respondent
argues that in order to comply with the requirements of the
subordination regulation, the mortgagee’s rights in the prop-
erty must be subordinate to the conservation easement on
the date the conservation easement is granted. We agree
with respondent.
Though the subordination regulation is silent as to when
a taxpayer must subordinate a preexisting mortgage on
donated property, we find that the regulation requires that
a subordination agreement be in place at the time of the gift.
In order to be eligible for the charitable contribution deduc-
tion for 2003, petitioner had to meet all the requirements of
section 170(h) and the underlying regulations, including the
requirement that the Sheek deed of trust be subordinate to
the conservation easement deed of trust. See sec. 1.170A–
14(g)(2), Income Tax Regs. Sheek did not subordinate his
deed of trust to the conservation easement deed of trust until
December 22, 2005. Had petitioner defaulted on the promis-
sory note before that date, Sheek could have instituted fore-
closure proceedings and eliminated the conservation ease-
ment. The conservation easement was therefore not protected
in perpetuity at the time of the gift. As a result, petitioner
failed to meet the requirements of section 170(h) and the
underlying regulations for 2003.
Petitioner argues that notwithstanding the fact that
Sheek’s deed of trust took priority over the conservation
easement until December 22, 2005, the conservation ease-
ment was still protected in perpetuity because the probability
of petitioner’s defaulting on her promissory note was so
remote as to be negligible.
2. Whether This Court Must Consider the So-Remote-as-To-
Be-Negligible Standard When Determining Whether
Petitioner Satisfied the Requirements of the Subordi-
nation Regulation
Petitioner argues that we must read the subordination
regulation in tandem with the so-remote-as-to-be-negligible
standard of section 1.170A–14(g)(3), Income Tax Regs. She
argues that the probability of her defaulting on the Sheek

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00009 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 333

promissory note on December 31, 2003, was so remote as to
be negligible. Thus, petitioner argues that possibility should
be disregarded under the so-remote-as-to-be-negligible
standard in determining whether the conservation easement
is enforceable in perpetuity. Respondent argues that the so-
remote-as-to-be-negligible standard is irrelevant to our
inquiry. We agree with respondent.
a. Prior Caselaw
This Court has previously considered on a number of occa-
sions taxpayer arguments about the applicability of section
1.170A–14(g)(3), Income Tax Regs., to the rest of para-
graph (g). Kaufman v. Commissioner, 136 T.C. 294 (2011)
(Kaufman II); Kaufman v. Commissioner, 134 T.C. 182
(2010) (Kaufman I); Carpenter v. Commissioner, T.C. Memo.
2012–1; Simmons v. Commissioner, T.C. Memo. 2009–208,
aff ’d, 646 F.3d 6 (D.C. Cir. 2011).
In Kaufman II, the taxpayers contributed to a donee
organization a facade easement on a single-family rowhouse
which they owned in a historic preservation district in
Boston. At the time of contribution, the property was subject
to a mortgage which entitled the mortgagee to a ‘‘prior claim’’
to all proceeds of condemnation and to all insurance proceeds
resulting from any casualty of the property. The taxpayers
claimed a charitable contribution deduction equal to the
value they assigned to the facade easement. The Commis-
sioner disallowed the deduction, because the taxpayers had
failed to meet the requirement of section 1.170A–14(g)(6)(ii),
Income Tax Regs., that the charity receive a proportionate
share of proceeds following judicial extinguishment of the
facade easement and a subsequent sale of the property.
The taxpayers argued that section 1.170A–14(g)(6), Income
Tax Regs., should be read in tandem with section 1.170A–
14(g)(3), Income Tax Regs. The taxpayers hypothesized a
very low probability of occurrence of a set of events that
would deprive the charity of its proportional share of pro-
ceeds following judicial extinguishment of the facade ease-
ment and subsequent sale of the property. They concluded
that the possibility of such deprivation was ‘‘so remote as to
be negligible’’ and, thus, had to be disregarded under the so-

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00010 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 334 138 UNITED STATES TAX COURT REPORTS (324)

remote-as-to-be-negligible standard in determining whether
the facade easement was enforceable in perpetuity.
This Court found that the so-remote-as-to-be-negligible
standard does not modify section 1.170A–14(g)(6)(ii), Income
Tax Regs. Specifically, we held that
[i]t is not a question as to the degree of improbability of the changed condi-
tions that would justify judicial extinguishment of the restrictions. Nor is
it a question of the probability that, in the case of judicial extinguishment
following an unexpected change in conditions, the proceeds of a condemna-
tion or other sale would be adequate to pay both the bank and * * * [ the
charity]. As we said in * * * [Kaufman I], 134 T.C. at 186, the require-
ment in section 1.170A–14(g)(6)(ii), Income Tax Regs., that * * * [the
charity] be entitled to its proportionate share of the proceeds is not condi-
tional: ‘‘Petitioners cannot avoid the strict requirement in section 1.170A–
14(g)(6)(ii), Income Tax Regs., simply by showing that they would most
likely be able to satisfy both their mortgage and their obligation to * * *
[the charity].’’ [Kaufman II, 136 T.C. at 313.]

In Carpenter, the taxpayers contributed to a donee
organization a conservation easement on open land in Colo-
rado. The conservation easement deed allowed the parties to
extinguish the conservation easement by mutual written
agreement if circumstances arose in the future that would
render the purpose of the conservation easement impossible
to accomplish. The taxpayers claimed a charitable contribu-
tion deduction equal to the value they assigned to the con-
servation easement. The Commissioner disallowed the deduc-
tion, because the taxpayers had failed to meet the require-
ment of section 1.170A–14(g)(6)(i), Income Tax Regs., that
the conservation easement be extinguished by a judicial pro-
ceeding.
The taxpayers argued that section 1.170A–14(g)(6)(i),
Income Tax Regs., should be read in tandem with section
1.170A–14(g)(3), Income Tax Regs. They claimed that the
conditions necessary for extinguishment of the conservation
easement were not possible or the possibility was so remote
as to be negligible. Thus, the taxpayers argued that the
possibility of extinguishment by mutual agreement of the
parties had to be disregarded under the so-remote-as-to-be-
negligible standard in determining whether the conservation
easement was enforceable in perpetuity. This Court, relying
on its previous holding in Kaufman II, found that the so-

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00011 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 335

remote-as-to-be-negligible standard does not modify section
1.170A–14(g)(6)(i), Income Tax Regs.
At least one court has applied the so-remote-as-to-be-neg-
ligible standard to find that a gift of a facade easement was
protected in perpetuity. In Simmons, the taxpayer contrib-
uted to a donee organization a facade easement on two
rowhouses which the taxpayer owned in Washington, D.C. At
the time of contribution, the properties were subject to a
mortgage. The conservation easement deed provided that the
mortgagees subordinate their rights in the properties to the
right of the donee and its successors or assigns to enforce the
conservation purposes of the easements in perpetuity. The
deed also provided that nothing contained in the deed should
be construed to limit the donee’s right to give its consent to
changes in the facade or to abandon some or all of its rights
under the deed. The taxpayers claimed a charitable contribu-
tion deduction equal to the value they assigned to the facade
easements, and the Commissioner disallowed that deduction.
First, the Commissioner argued that the taxpayer had
failed to meet the conservation purpose described in section
170(h)(4) because the donee organization had the right not to
exercise its obligations under the easement. Second, the
Commissioner argued that the requirements of section
1.170A–14(g), Income Tax Regs., had not been met because
the restrictions on the easement allowed the donee organiza-
tion to consent to changes in the facades. Finally, the
Commissioner argued that the taxpayer was not entitled to
the charitable contribution deduction because she failed to
subordinate the mortgage on the property as required by the
subordination regulation.
We held that the easements granted to the donee organiza-
tion were valid conservation easements. The donee’s right to
consent to changes in the facades was subject to local, State,
and Federal law. Section 1.170A–14(d)(5), Income Tax Regs.,
specifically allows a donation to satisfy the conservation pur-
pose test even if future development is allowed, as long as
that future development is subject to local, State, and Fed-
eral laws and regulations. Further we held that the taxpayer
had satisfied the requirements of the subordination regula-
tion because the mortgagees had agreed to subordinate their
interest in the property within the conservation easement
deed. We, however, did not address the Commissioner’s argu-

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00012 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 336 138 UNITED STATES TAX COURT REPORTS (324)

ment that the taxpayer failed to meet the conservation pur-
pose because the donee organization had the right to not
exercise its obligations under the easements.
The Commissioner appealed, arguing once again that the
conservation easement was not protected in perpetuity
because the donee organization was free to abandon its right
to enforce the restrictions set out in the deed. Commissioner
v. Simmons, 646 F.3d 6. The Court of Appeals for the District
of Columbia Circuit found that the Commissioner had not
shown the possibility that the donee would actually abandon
its rights. The Court of Appeals noted that the donee had
been monitoring easements since 1978, yet the Commissioner
had failed to point to a single instance where the donee had
abandoned its right to enforce those easements. Relying on
the so-remote-as-to-be-negligible standard, the Court of
Appeals rejected the Commissioner’s argument that the con-
tribution failed the perpetuity requirement because it had
concluded that the possibility the donee would abandon the
conservation easement was so remote as to be negligible. Id.
at 10–11.
b. Our Case
As discussed above, this Court has previously decided that
the so-remote-as-to-be-negligible standard should not be
applied when determining whether a taxpayer has met the
requirement of section 1.170A–14(g)(6)(i) and (ii), Income Tax
Regs. See Kaufman II, 136 T.C. 294; Carpenter v. Commis-
sioner, T.C. Memo. 2012–1. However, the so-remote-as-to-be-
negligible standard has been used to determine whether a
conservation deed which allows a donee organization to
abandon its rights under the deed is a gift in perpetuity. See
Commissioner v. Simmons, 646 F.3d 6. We are now pre-
sented with an issue of first impression: whether we must
consider the so-remote-as-to-be-negligible standard in deter-
mining whether petitioner satisfied the subordination regula-
tion.
We briefly discussed the promulgation of section 1.170A–
14, Income Tax Regs., in Kaufman II. We found that
[t]he drafters of section 1.170A–14, Income Tax Regs., undoubtedly
understood the difficulties (if not impossibility) under State common or
statutory law of making a conservation restriction perpetual. They

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00013 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 337

required legally enforceable restrictions preventing inconsistent use by the
donor and his successors in interest. See sec. 1.170A–14(g)(1), Income Tax
Regs. They defused the risk presented by potentially defeasing events of
remote and negligible possibility. See sec. 1.170A–14(g)(3), Income Tax
Regs. * * * They did not, however, consider the risk of mortgage fore-
closure per se to be remote and negligible and required subordination to
protect from defeasance. See sec. 1.170A–14(g)(2), Income Tax Regs. * * *
[Kaufman II, 136 T.C. at 306–307; emphasis added.]

The drafters of section 1.170A–14(g), Income Tax Regs., saw
taxpayers defaulting on their mortgages as more than a
remote possibility. Therefore they drafted a specific provision
which would absolutely prevent a default from destroying a
conservation easement’s grant in perpetuity.
Similarly the drafters included section 1.170A–14(g)(6)(i)
and (ii), Income Tax Regs., to address similar albeit different
concerns. We refused to apply the so-remote-as-to-be-neg-
ligible standard in both Carpenter and Kaufman II. Both
were cases where the taxpayer attempted to use the so-
remote-as-to-be-negligible standard to avoid a specific
requirement of the regulations (i.e., the judicial proceeding
requirement of section 1.170A–14(g)(6)(i), Income Tax Regs.,
and the proceeds requirement of section 1.170A–14(g)(6)(ii),
Income Tax Regs).
Though the Court of Appeals for the District of Columbia
Circuit applied the so-remote-as-to-be-negligible standard in
Simmons, that case is distinguishable from our case. The
Court of Appeals applied the so-remote-as-to-be-negligible
standard to defeat a general argument made by the Commis-
sioner as to the conservation easement’s grant in perpetuity.
The standard was not used to defeat a specific subparagraph
of section 1.170A–14(g), Income Tax Regs., as petitioner
argues in our case.
Given our prior rulings in this area, we find that the
subordination regulation should not be read in tandem with
the so-remote-as-to-be-negligible standard. In other words,
petitioner cannot avoid meeting the strict requirement of the
subordination regulation with respect to the Sheek deed of
trust by making a showing that the possibility of foreclosure
on that deed of trust is so remote as to be negligible. The
requirements of the subordination regulation are strict
requirements that may not be avoided by use of the so-
remote-as-to-be-negligible standard.

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00014 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 338 138 UNITED STATES TAX COURT REPORTS (324)

Petitioner argues that Kaufman II is distinguishable from
this case and instead we should follow this Court’s ruling in
Simmons. Petitioner argues that Simmons stands for the
proposition that the subordination regulation must be read in
tandem with the so-remote-as-to-be negligible standard. As
we have explained above, Simmons stands for no such thing.
The Court of Appeals never addressed the subordination
regulation arguments raised in this Court because this Court
in Simmons held that the mortgage holder had subordinated
its mortgage to the conservation easement deed.
3. Whether Petitioner’s Oral Agreement With Sheek Pro-
vided the Necessary Protection Required by Section
170(h)(1)(c)
Petitioner finally argues that in an oral agreement with
Sheek the Mitchells agreed that they would not subdivide or
develop Lone Canyon Ranch. Petitioner argues that these
were the same rights relinquished under the conservation
easement deed of trust and thus the oral agreement protects
the conservation easement purpose in perpetuity as required
by section 170(h)(1)(c) and (5). We disagree. The oral agree-
ment had no effect on Sheek’s ability to foreclose on the prop-
erty and extinguish the conservation agreement had peti-
tioner defaulted on her promissory note. Thus, the oral
agreement fails to comply with the requirements of section
1.170A–14(g)(2), Income Tax Regs.
B. Whether Petitioner Satisfied the Requirements of the
Proceeds Regulation
Having found that petitioner failed to meet the require-
ments of the subordination regulation, we need not further
determine whether petitioner satisfied the requirements of
the proceeds regulation to make our decision. Having found
that petitioner failed to comply with the requirements of the
subordination regulation, we find that petitioner did not
make a qualified conservation contribution and thus is not
eligible for a charitable contribution deduction for 2003.

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00015 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 (324) MITCHELL v. COMMISSIONER 339

II. Substantiation Requirement and Value of Charitable Con-
tribution Deduction
Having found that petitioner failed to comply with the
requirements of the subordination regulation and thus is not
eligible for a charitable contribution deduction under section
170, we need not address respondent’s argument that peti-
tioner failed to meet the substantiation requirements of sec-
tion 170(f)(8) or inquire into the value of petitioner’s claimed
charitable contribution.
III. Accuracy-Related Penalty
Respondent determined that petitioner is liable for the
accuracy-related penalty under section 6662(a) for 2003. Sec-
tion 6662(a) and (b)(2) imposes a 20% accuracy-related pen-
alty upon any underpayment of tax resulting from a substan-
tial understatement of income tax. An understatement is
substantial if it exceeds the greater of 10% of the tax
required to be shown on the return or $5,000. Sec.
6662(d)(1)(A).
Generally, a taxpayer bears the burden of proving the
Commissioner’s determinations incorrect. Rule 142(a)(1);
Welch v. Helvering, 290 U.S. 111, 115 (1933). However, the
Commissioner bears the burden of proof with respect to any
new matter raised in the answer. Rule 142(a). Because he
first raised the issue in his answer, respondent bears the
burden of proof with respect to petitioner’s liability for the
accuracy-related penalty and must therefore prove that it is
appropriate to impose that penalty. Respondent calculated
that petitioner understated her income tax by $142,600. Peti-
tioner had reported tax of $351,076 on her 2003 return. The
amount of the understatement was substantial because it
exceeded the greater of (1) 10% of the tax required to be
shown on the return for the taxable year, or (2) $5,000.
The accuracy-related penalty is not imposed, however, with
respect to any portion of the underpayment if the taxpayer
can establish that she acted with reasonable cause and in
good faith. Sec. 6664(c)(1). The decision as to whether the
taxpayer acted with reasonable cause and in good faith
depends upon all the pertinent facts and circumstances. Sec.
1.6664–4(b)(1), Income Tax Regs. Circumstances indicating
that a taxpayer acted with reasonable cause and in good

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00016 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA
 340 138 UNITED STATES TAX COURT REPORTS (324)

faith include ‘‘an honest misunderstanding of fact or law that
is reasonable in light of all of the facts and circumstances,
including the experience, knowledge, and education of the
taxpayer.’’ Id.
We found all of petitioner’s witnesses to be credible and
truthful. Petitioner attempted to comply with the require-
ments for making a charitable contribution of a conservation
easement. Petitioner hired an accountant and an appraiser;
however, she inadvertently failed to obtain a subordination
agreement from Sheek. That said, upon being made aware of
the need for a subordination agreement she promptly
obtained one. Given the circumstances, we find that peti-
tioner acted with reasonable cause and in good faith. There-
fore we hold that petitioner is not liable for the accuracy-
related penalty under section 6662(a) for 2003.
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,
Decision will be entered under Rule 155.

f

VerDate 0ct 09 2002 10:50 Jun 06, 2013 Jkt 372897 PO 20009 Frm 00017 Fmt 2847 Sfmt 2847 V:\FILES\MITCHELL.138 SHEILA