In a case of first impression arising from the grant of a Colorado conservation easement, the U.S. Tax Court ruled on April 3, 2012, that the failure of the taxpayer to subordinate an underlying mortgage to the conservation easement until two years after the grant barred a charitable contribution deduction because at the time of the grant the conservation easement was not protected in perpetuity. Mitchell v. Commissioner, 138 T.C. No. 16 (U.S. Tax Court April 3, 2012).

The taxpayer and her husband owned 456 acres of ranch land in Montezuma County, Colorado, portions of which are bordered by the Mesa Verde National Park, which was once populated in circa 12th Century B.C. by ancient Native American ‘Anasazi' people who lived in cliff palaces. A portion of the ranch is within the park, and it is bordered to the south by Ute Indian land and to the east by BLM land.

Originally acquired subject to seller financing, title was transferred to a family limited partnership, and the southern portion of the ranch was subjected to a conservation easement in gross for the Montezuma Land Conservancy, an organization qualified to receive grants of conservation easements. At the time of the grant, the seller financing deed of trust was not subordinated to the conservation easement.

The family limited partnership had sufficient funds to pay off the deed of trust at any time, there were no lawsuits or threats of lawsuits, all bills were kept current, the seller financing was kept current, and casualty insurance was maintained in effect. The subordination was signed by the seller and recorded two years after the conservation easement was established.

The conservation easement appraisal determined that the conservation easement had a fair market value of $504,000, which the family limited partnership claimed as a charitable contribution deduction, a portion of which flowed through to the taxpayer and was claimed on the taxpayer's 2003 return filed April 13, 2004. On February 23, 2010, almost six years after the return was filed, the IRS disallowed the charitable contribution deduction.

In its analysis of the requirements for a qualified conservation contribution, the Tax Court focused on the requirement that a conservation easement must be protected in perpetuity. Treas. Reg. §1.170A-14(g). The concern regarding whether the requirement had been fulfilled was due to the existence of the seller financing secured by the deed of trust, which had priority over the conservation easement for a period of two years before the subordination was recorded in 2005.

The taxpayer argued that the requirement was met under the so-called "so-remote-as-to-be-negligible" standard of the Treasury Regulation cited above, and more specifically, that although the deed of trust was not subordinated until 2005, the requirement was nonetheless met because the possibility of foreclosure on the deed of trust was so remote as to be negligible. Consequently, the issue, one of first impression, was whether the "so-remote-as-to-be-negligible" standard applies in determining whether the subordination requirements of the Treasury Regulations are satisfied.

Unfortunately for the taxpayer, the Tax Court held that the subordination requirements should not be read in tandem with the "so-remote-as-to-be-negligible" standard, and that the taxpayer could not avoid the strict requirements of subordination by trying to show the possibility of foreclosure on the deed of trust is so remote as to be negligible.