In two recent court cases, the Tax Court has sustained the Service's denial of charitable deductions stemming from the donation of a conservation easement on real property. In Douglas G. Carroll, et ux. v. Commissioner, the court held that a couple's donation of a conservation easement does not qualify for a charitable donation deduction because the conservation purpose is not protected in perpetuity, as required under Section 170(h)(5)(A). In RP Golf LLC, et al. v. Commissioner, the court held that a partnership's donation of a conservation easement on real property currently operated as a golf course was incomplete because the property was mortgaged and therefore the donation did not qualify for the deduction under Section 170.

Facts

Douglas G. Carroll, et ux. v. Commissioner

On December 15, 2005, Carroll executed a deed of conservation easement on two parcels of land to the Maryland Environmental Trust (MET) and the Land Preservation Trust, Inc. (LPT). The parcels were zoned agricultural and amounted to 24 acres in Baltimore County, Maryland. The agreement stated that the easement was perpetual and any construction or work contemplated by Carroll must be approved in advance by MET and LPT. An independent appraisal determined the value of the easement to be $ 1.2 million. Carroll claimed a $ 495,356 noncash charitable contribution deduction on Schedule A, Itemized Deductions, on his 2005 return and carried forward the remaining deduction.

The IRS concurred that the conservation easement was granted to qualified organizations, but was not a qualified real property interest under Section 170(h)(1)(A) and was not contributed exclusively for conservation purposes under Section 170(h)(1)(C). The Tax Court disagreed and held that the contribution of the conservation easement is a qualified real property interest pursuant to Section 170(h)(2)(C) because the express terms of the easement included legally enforceable restrictions that will prevent uses of the retained interest in the subject property that are inconsistent with the conservation purposes of the contribution. The court further held that the easement meets the conservation purposes fulfilling the policy goals of a "qualified conservation contribution." This is evidenced by the MET's rigorous easement-review process, combined with the requisite approval from Maryland's highest officials, as testified to by MET's conservation easement planner. Further, the court determined that the contribution yields a significant public benefit due to development pressures of the surrounding area.

The main area of contention is whether the easement is protected in perpetuity or changes in the conditions surrounding the donated property could make it impossible or impractical to continue using the property for the intended conservation purpose. Section 170 requires that in the event of an extinguishment of a taxpayer's conservation easement, the easement recipient is guaranteed a proportionate share of extinguishment proceeds as valued by the fair-market value of the easement on the date of the gift. However, Carroll's agreement states the value of MET's and LPT's proportionate interest is determined by the ratio of "the deduction for federal income tax purposes allowable by reason of this grant, pursuant to Section 170(h) of the Code" over the value of the subject property as a whole on the date of the gift. If the easement were invalidated and the deductions were disallowed, Carroll could argue that no tax deduction was ever received and, therefore, MET and LPT would not be entitled to any extinguishment proceeds. Following the logic of that possibility, the court held that the easement is not protected in perpetuity and, thus, is not a qualified conservation contribution and, therefore, Carroll is not entitled to a carryforward charitable contribution deduction for the years in issue.

The court also sustained the Service's determination that Carroll was liable for accuracy-related penalties under Section 6662.

RP Golf LLC, et al. v. Commissioner

In 1997, RP Golf obtained a loan from Hillcrest Bank to acquire land on which to build two golf courses. RP obtained additional financing from Hillcrest and Great Southern Bank to build the courses, which were place in service in 2000, 2002 and 2003. Each loan was subsequently modified, changing the terms and loan principal. The modifications were in writing as specifically required by the agreements and state law regarding real estate agreements.

On December 29, 2003, RP granted a conservation easement to the Platte County Land Trust (PLT), a Missouri not-for-profit corporation, expressly reserving the right for itself, and its successors or assigns, to use the property as a golf course, and it continues to operate two private golf clubs on the property. The expressed intent of the easement was to further state policies to protect, preserve and maintain open areas and spaces in the light of encroaching urban and metropolitan development.

At the time of the easement contribution, the property was subject to senior deeds of trust held by Hillcrest Bank and Great Southern Bank which, according to RP, they had orally agreed to subordinate before the contribution was made. Written consents subordinating the interests of the two banks were executed by bank officers on April 14, 2004, approximately 100 days after the PLT agreement, however each consent states that the subordination was effective December 31, 2003.

The IRS argued that no charitable contribution occurred because the easement is not protected in perpetuity because at the time of the contribution there was no written subordination by the banks, as required by agreements and property deeds. The court cited Mitchell v. Commissioner, 138 T.C. 324 (2012), supplemented by T.C. Memo. 2013-204, aff'd, 775 F.3d 1243 (10th Cir. 2015), where a 2003 conveyance failed as a qualified conservation easement when a subordination agreement was not signed until almost two years after the grant of the conservation easement and the court held that the regulation requires that a subordination agreement must be in place at the time of the gift. In order for RP Golf to be eligible for a charitable contribution deduction for 2003, it had to meet all the requirements of Section 170(h), which are not satisfied by a mere oral agreement. Without meeting the requirement for protection in perpetuity, the contribution was not a qualified conservation contribution and the taxpayer is not entitled to a charitable contribution.

As a further technical failure of the transaction, RP's subsidiary, National Golf, actually effectuated the transaction but never had legal title to the property and, thus, could not convey the easement to PLT. Accordingly, PLT did not have the power or authority to enforce the conservation requirements of the easement and, thus, no charitable contribution occurred.

Implications

These two cases follow a trend by the IRS of aggressively challenging conservation easement transactions on many different grounds, including technical qualification and valuation of the deduction. In both cases, the taxpayer failed on what could arguably be considered a minor technicality and the charitable deduction was denied. Further, in Carroll, the taxpayers were assessed accuracy-related penalties.

When undertaking a conservation easement, it is incumbent on the taxpayer to be extremely diligent in adherence to the rules (avoiding any foot faults) and properly documenting such adherence.

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