Another Attack on Conservation Easements
Lumpkin HC, LLC v. Comm’r, T.C. Memo. 2020-95 | June 23, 2020 | Kerrigan, J. | Dkt. No. 192-18
Lumpkin HC, LLC (Lumpkin HC) conveyed a deed of easement on most of the property to the Atlantic Coast Conservancy, Inc. (ACC), a Georgia nonprofit corporation. ACC was a “qualified organization” for purposes of section 170(h)(3). Lumpkin HC claimed an $8,242,000 charitable contribution deduction for its contribution of the conservation easement to ACC on its 2012 Form 1065, U.S. Return of Partnership Income. Lumpkin HC attached Form 8283, Noncash Charitable Contributions, to its partnership return and stated that its adjusted tax basis in the property at the time of donation was $458,502.
The IRS issued a notice of final partnership administrative adjustment (FPAA) for tax year 2012 to Hurricane Creek Partners, LLC, as tax matters partner for Lumpkin HC. In the FPAA, respondent disallowed a $8,242,000 deduction for a noncash charitable contribution and asserted a gross valuation misstatement penalty pursuant to section 6662(h), or in the alternative, a penalty pursuant to section 6662(h).
- Does the extinguishment clause in Lumpkin HC’s deed of conservation easement violates the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs.
- Does the deed’s inclusion of a right to designate an acceptable development-area homesite violates section 170(h)(2)(C) and section 1.170A-14(g)(1), Income Tax Regs.
- Is the Treasury’s proceeds regulation based on a permissible construction of the statute?
- The deed granting the conservation easement reduces the donee’s share of the proceeds in the event of extinguishment by the value of improvements (if any) made by the donor. Accordingly, petitioner has not satisfied the perpetuity requirement of section 170(h)(5)(A).
- Since the deed reduces the donee’s share of the proceeds by reducing the FMV of the unencumbered property at the time of sale by any increase in value attributable to post-easement improvements before applying the proportionate distribution percentages, the conservation purpose is not protected in perpetuity.
- The construction of section 170(h)(5) as set forth in section 1.170A-14(g)(6), Income Tax Regs., is valid under Chevron. The proceeds regulation’s “proportionate value” approach is not “arbitrary, capricious, or manifestly contrary to the statute” as examined under the two-part inquiry.
Key Points of Law:
- Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property at the time the gift is made. See sec. 1.170A-1(c)(1), Income Tax Regs.
- The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property”. Sec. 170(f)(3)(A). However, there is an exception to this rule for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii). This exception applies to a “qualified conservation contribution”, which is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. Sec. 170(h)(1).
- To meet the requirements of section 1.170A-14(g)(6)(ii), Income Tax Regs. (the “proceeds regulation”), the deed must guarantee that the donee will receive “a proportionate share of extinguishment proceeds.”
- When considering whether a regulation is arbitrary and capricious, the Tax Court generally employs the two-part inquiry established by Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). The first part is to inquire “whether Congress has directly spoken to the precise question at issue.” Id. at 842. If the intent of Congress is clear, there is no further inquiry.
- Where the statute is silent, the court must give deference to the interpretation embodied in the agency’s regulation unless it is “arbitrary, capricious, or manifestly contrary to the statute.”
Insight: Lumpkin serves as yet another Tax Court case holding taxpayers to the letter of the law in the context of charitable deductions for conservation easement contributions. The case also illustrates the so-called Chevron doctrine—the two-step process through which courts analyze the validity of administrative regulations. That doctrine tends to be deferential to the federal agency.