Constructive denial clause does not violate conservation-easement perpetuity rules

Plain-English summary

Chief Counsel considered a conservation-easement provision requiring the easement holder's express approval for certain land uses. Under the provision, the holder's failure to answer a sufficiently detailed written request within 60 days counted as a denial, but the owner could submit the request again. Chief Counsel advised that this constructive-denial mechanism was not inconsistent with section 170(h)'s requirement that the conservation restriction and purpose be protected in perpetuity. The advice did not authorize any use that would destroy a significant conservation interest or otherwise violate section 170(h).

Ruling snapshot

• Question: Does a clause treating an easement holder's failure to respond to a proposed-use request as a nonfinal denial violate section 170(h)'s perpetuity requirements?
• Outcome: advice given, the clause is not inconsistent with the perpetuity requirements
• Key authorities: IRC § 170(h)(1), § 170(h)(2)(C), and § 170(h)(5)(A)

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           memorandum
           Number: 202002011
           Release Date: 1/10/2020
           CC:ITA:B01:JGRILL
           PRENO-120084-19

 UILC:     170.00-00, 170.14-00

  date:    November 26, 2019

     to:   Anita Gill
           (Small Business/Self-Employed)

  from:    Norma C. Rotunno
           (Income Tax & Accounting)


subject:   Conservation Easement Deed with Constructive Denial Clause

           This Chief Counsel Advice responds to your request for assistance. This advice may
           not be used or cited as precedent.

           ISSUE

           Is a constructive denial clause inconsistent with the perpetuity requirements of section
           170(h) of the Internal Revenue Code?

           BACKGROUND AND LAW

           Conservation easement deeds sometimes include a clause governing uses of the land
           that are permitted only with the express approval of the easement holder. The clause
           specifies that if the easement holder does not respond within a specified period of time
           to a request by the property owner regarding a proposed use, then the request is
           considered denied (“constructive denial clause”). Such a clause may include the
           following language:

           Constructive Denial. For activities or uses that are expressly permitted by the terms of
           the easement only with the easement holder’s approval, the property owner’s request
           for approval shall be in writing and shall describe the nature, scope, design, location,
           timetable, and any other material aspect of the proposed activity or use in sufficient
           detail to permit the easement holder to make an informed determination regarding
           approval or denial of the request. Such a request shall be delivered to the easement
           holder at least sixty (60) days prior to the anticipated start date of such activity or use.
PRENO-120084-19                              2

The easement holder agrees to use reasonable diligence to respond to such a request
within the sixty (60) days of delivery. The easement holder’s failure to respond to such
a request within the sixty (60) day period shall be deemed a constructive denial.
Because a constructive denial is not a decision by the easement holder based on the
merits of the property owner’s request, it is not final or binding on the easement holder,
and the property owner can resubmit the same or a similar request for approval.

Section 170(h)(1) allows a deduction for a contribution of a qualified real property
interest to a qualified organization exclusively for conservation purposes. Section
170(h)(2)(C) states that a qualified real property interest is a restriction (granted in
perpetuity) on the use of the real property. Section 170(h)(5)(A) further provides that in
order for a contribution to be treated as exclusively for conservation purposes, the
conservation purpose must be protected in perpetuity.

CONCLUSION

No, a constructive denial clause is not inconsistent with the perpetuity requirements of
section 170(h).

Nothing in this memorandum allows for a use that would permit destruction of a
significant conservation interest or would be otherwise inconsistent with the
requirements of section 170(h).

Please call (202) 317-7003 if you have any further questions.