Conservation Easements and the Tax Court
Belair Woods, LLC v. Comm’r, T.C. Memo. 2020-112 | July 22, 2020 | Lauber, J. | Dkt. No. 19493-17
Short Summary: The case involved charitable contribution deductions for conservation easements. It arose on the IRS’s motion for partial summary judgments, contending that the charitable contribution deduction claimed by Belair Woods, LLC (Belair), was properly disallowed because the conservation purpose underlying the easement was not “protected in perpetuity” as required by section 170(h)(5)(A).
In December 2008 Belair acquired, by contribution from HRH Investments, LLC (HRH), a 145-acre tract of land in Effingham County, Georgia. On December 30, 2009, Belair donated a conservation easement over 141 acres of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organization” for purposes of section 170(h)(3).
The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the property were sold following judicial extinguishment of the easement, paragraph 17 provided that “[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of any and all prior claims, shall be determined, unless otherwise provided by Georgia law at the time, in accordance with the Proceeds paragraph.” Paragraph 19, captioned “Proceeds,” specified that the deed granted the Conservancy “a real property interest, immediately vested in Grantee,” and that this vested property interest entitled the Conservancy to receive, in the event of an extinguishment, a share of any future proceeds determined by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement.
Key Issue: Whether the charitable contribution deductions related to conservation easements should be recognized. Ultimately, the issue turned on whether the underlying deed granting the easement satisfied the Treasury Regulation’s “protected in perpetuity” requirement.
Primary Holdings: The Court granted the IRS’s Motion for Summary Judgment, holding, that Belair’s deed fails to satisfy the “protected in perpetuity” requirement.
Key Points of Law:
- 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). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1). For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.” Sec. 170(h)(5)(A).
- The regulations recognize that “a subsequent unexpected change in the conditions surrounding the property that is the subject of a donation * * * can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied be- cause the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
- Judicial estoppel applies in the Tax Court. See Huddleston v. Commission- er, 100 T.C. 17, 28 (1993). Generally, three non-exhaustive factors guide our analysis when asked to invoke this doctrine. We consider whether: (1) “a party’s later position * * * [is] ‘clearly inconsistent’ with its earlier position,” (2) “the party has succeeded in persuading a court to accept that party’s earlier position,” and (3) “the party seeking to assert an inconsistent position would derive an unfair advantage.”
- The donation of a conservation easement gives rise to a deduction only if it imposes “a restriction (granted in perpetuity) on the use which may be made of the real property.” Sec. 170(h)(2)(C). The “donation under this paragraph” thus consists of the use restrictions that are imposed in perpetuity by the easement deed. See sec. 1.170A-14(g)(6)(i), Income Tax Regs. The restrictions imposed by the easement deed necessarily apply, not only to the land, but also to any improvements made by the grantor pursuant to its reserved rights.
- Deductions are a matter of legislative grace, and a taxpayer must prove its entitlement to the deductions it claims. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). To be entitled to a deduction for the donation of a conservation easement, the donor must ensure that the donation “gives rise to a property right, immediately vested in the donee organization,” to receive a proportionate share of the proceeds of any post-extinguishment sale. Sec. 1.170A- 14(g)(6)(ii), Income Tax Regs.
Insight: This case raises substantially the same issues raised in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12, 2020); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); and Carroll v. Commissioner, 146 T.C. 196 (2016). It is yet another example of the IRS’s continued focus on syndicated conservation easements and its substantial devotion of enforcement resources towards attacking their validity. The case, as many prior cases, has ultimately turned on technical issues related to the underlying deed and its legal descriptions, rather than valuation or other issues.