The Tax Court and Conservation Easements
Englewood Place, LLC v. Comm’r, T.C. Memo. 2020-105 | July 9, 2020 | Lauber, J. | Dkt. No. 1560-18
Short Summary: The case involved charitable contribution deductions for conservation easements.
In December 2008 Englewood acquired, by contribution from HRH Investments, LLC (HRH), a 135-acre tract of land in Effingham County, Georgia. On July 29, 2011, Englewood donated a conservation easement over 130 acres of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organization” for purposes of section 170(h)(3).
The easement deed recited the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to Englewood as grantor, including the rights to conduct commercial agricultural and timber-harvesting activities within the conserved area.
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 of the deed 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 grantee’s share of any future proceeds would be 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 Issues: Whether the taxpayer is entitled to a charitable deduction for its grant of a conservation easement.
Primary Holdings: The Taxpayer is not entitled to a charitable deduction for the gran of the conservation easement. The conservation purpose underlying the easement was not “protected in perpetuity” as required by section 170(h)(5)(A).
Englewood’s deed failed to satisfy the “protected in perpetuity” requirement for two reasons.
- The regulatory fraction used in the deed to determine the grantee’s proportionate share of post-extinguishment proceeds is applied, not to the full sale proceeds–an amount presumably equivalent to the FMV of the Property at the time of sale–but to the proceeds “minus any increase in value after the date of this Conservation Easement attributable to improvements.” Thus, the grantee’s share is improperly reduced on account of (1) appreciation in the value of improvements existing when the easement was granted plus (2) the FMV of any improvements that the donor or its successors subsequently make to the Property. By reducing the grantee’s share in this way, the deed violates the regulatory requirement that the donee receive, in the event the Property is sold following extinguishment of the easement, a share of proceeds that is “at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time.”
- Because the grantee’s share of the proceeds is improperly reduced by carve-outs both for donor improvements and for claims against the donor, the deed’s judicial extinguishment provisions do not satisfy the regulatory requirements.
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 set forth detailed rules for determining whether this “protected in perpetuity” requirement is met.
- The regulations recognize that “a subsequent unexpected change in the conditions surrounding the [donated] property * * * 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 because the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
- Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain a qualified appraisal of such property and attach to the return * * * such information regarding such property and such appraisal as the Secretary may require.” Sec. 170(f)(11)(C). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, sec. 155(a)(1)(B), 98 Stat. at 691; see sec. 1.170A-13(c)(2), Income Tax Regs. The IRS has pre-scribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450. Failure to comply with this requirement generally precludes a deduction.
Insight: The questions presented in this case are substantially identical to those previously decided adversely to the taxpayers 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); Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24; and Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159. The case illustrates the IRS’s continued focus on conservation easements. The opinion was issued along with several other conservation-easement opinions on the same date based on substantially the same facts, reasoning, and legal authorities.