Conservation Easement Deduction Fails Due to Donor's Retained Development Rights
In Carter v. Commissioner, 1the Tax Court found that taxpayers were not entitled to charitable contribution deductions for their donation of an easement to a land trust and also found that taxpayers were not subject to gross valuation misstatement penalties because the IRS failed to meet its burden of timely written approval of assessment.
In coastal Glynn County, Georgia, sits a picturesque tract of land known as Dover Hall that is reported to have been a favorite hunting and vacation oasis for Babe Ruth. In 2005, Dover Hall Plantation, LLC purchased Dover Hall. In 2011, Dover Hall Plantation, LLC conveyed a 500-acre easement on Dover Hall to the North American Land Trust (NALT), a "qualified organization" within I.R.C. Sec. 170(h)(3), for the purpose of preserving the natural habitat of the land and providing the general public with scenic enjoyment. The easement contained a general restriction on the construction and development of the property. However, Dover Hall Plantation, LLC retained the right to build single-family dwellings in numerous to-be-determined locations on the property, subject to NALT's approval. Notably, the deed of easement did not limit the permitted building of residences to those of Dover Hall Plantation, LLC or their family members, as taxpayers attempted to argue in litigation.
Dover Hall Plantation, LLC claimed a charitable contribution deduction on its 2011 tax return for the donation of the easement to NALT. Individual partners of Dover Hall Plantation, LLC also claimed charitable contribution deductions on their individual returns for the donation.
The IRS disallowed the taxpayers claimed deductions and imposed accuracy-related gross valuation misstatement penalties under I.R.C. Sec. 6662(a), (b)(3), (e) and (h). However, the court did not sustain the penalties. The court found that the IRS did not meet its burden of production on the penalties' applicability because the Revenue Agent failed to timely comply with Code Sec. 6751(b)'s written supervisory approval requirement, but rather obtained the requisite approval of the penalties only after notifying the taxpayers of his initial determination of the penalties.
Section 170(f)(3) generally precludes taxpayers from taking a deduction for contribution of part of their interest in property. However, this general rule does not apply to a "qualified conservation contribution," which is defined in Section 170(h)(1) as, "a contribution-(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes." Section 170(h)(4)(A) defines "conservation purpose" as the preservation of:
- Land for recreational or educational uses by the general public,
- A relatively natural habitat of wildlife, plants, or similar ecosystem,
- Open space that will yield a significant public benefit, or
- An historically important land area or a certified historic structure.
Furthermore, a contribution is not treated as exclusively for conservation purposes unless it is protected in perpetuity.2Thus, Section 170(h) requires that: (1) the use of the property in question be restricted in perpetuity, and (2) the conservation purposes be protected in perpetuity. Under Section 170(h)(2)(C), the term "qualified real property interest" includes "a restriction (granted in perpetuity) on the use which may be made of real property."
Here, the court found that the taxpayer's easement did not meet Section 170(h)(2)(C)'s perpetual restriction requirement because the permitted building areas were antithetical to the easement's conservation purposes. Specifically, the designated areas where the single-family homes could be developed would not actually be preserved as open spaces and any natural ecosystems within them would not be protected. Because of this, the Court found that the easement in issue was not a "qualified real property interest" within Section 170(h)(2)(C) and the conveyance of the easement was not a qualified conservation contribution within the meaning of Section 170(h)(1). Thus, the court agreed with the Commissioner's finding that the taxpayers were not entitled to charitable contribution deductions under Section 170 for the conveyance of a partial interest in Dover Hall to NALT.
In its decision, the court relied upon its analysis in a substantially similar case, Pine Mountain Pres., LLLP v. Commissioner, 3wherein an easement was found to not be a qualified real property interest. In Pine Mountain, the court emphasized an implicit framing issue that the building of family homes within designated building areas destroys the preservation of the sites themselves as open and protected space, and thus it does not matter whether it impairs the conservation purpose of the easement as a whole.
In the instant case, the court did not agree with the taxpayer's argument that their case was distinguished from Pine Mountain because their easement was located in a different state and it only permitted taxpayers to build homes for themselves and family members, rather than for commercial development. However, the deed of easement does not contain any such restriction, and the validity of the preservation does not turn on whether the builder occupies the home or sells it to someone else.
The court's decision that the easement Dover Hall Plantation, LLC conveyed to NALT fails Section 170(h)(2)'s perpetual restriction requirement is based upon prior case law establishing that designated building areas on the conservation easement where open space is not protected destroys the preservation of the building areas and is thus antithetical to the easement's conservation purposes.
- TC Memo. 2020-21
- See Section 170(h)(5)(A).
- 151 T.C. 274.
Frank S. Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or email@example.com.
This article originally appeared in the July 2020 edition of Estate Planning Journal, a monthly periodical directed to estate planning professionals that offers readers the newest and most innovative strategies for saving taxes, building wealth, and managing assets. Robert E. Madden, of the District of Columbia, Virginia, and New York Bars, is the author of Tax Planning for Highly Compensated Individuals (Thomson Reuters/ WG&L). Scott A. Bowman is a partner in the law firm of McDermott Will & Emery LLP in Washington, D.C. He is a member of the Florida, New York, California, and Connecticut Bars and co-authored this article.