In Champions Retreat Golf Founders, LLC v. Commissioner, T.C. Memo. 2018-146, the Tax Court has held that a company operating a golf club is not entitled to a $10.4 million charitable contribution deduction related to the donation of a qualified conservation contribution because the easement contribution failed to satisfy the conservation purpose requirement of Section 170(h).

Facts

Champions Retreat is a limited liability company that operates a private golf club along the Savannah River outside of Augusta, Georgia. Champions Retreat decided to donate a conservation easement with respect to part of the property that it owned that included the golf course.

A conservation biologist for the North American Land Trust (NALT) performed a survey of the property, documenting its natural features and species, and determined that it met the requirements for a conservation easement. In 2010, Champions Retreat conveyed an easement to NALT that covered 348 acres (the easement area). The easement area included 25 of the golf course's 27 holes in their entirety, most of the two remaining holes, and the driving range. It did not include the parking lot, the pro shop, restaurant, locker room and certain other facilities.

Champions Retreat claimed a $10.4 million charitable contribution deduction related to the easement on its 2010 Form 1065, U.S. Return of Partnership Income. The IRS denied the deduction on two alternative grounds: (1) the conservation easement did not meet the requirements of Section 170 and (2) the easement did not have a value greater than zero.

Easement area purposes and uses

Claimed conservation purposes. The easement document between Champions Retreat and NALT identified three conservation purposes: (1) preservation of the area as a relatively natural habitat of fish, wildlife or plants, or similar ecosystem; (2) preservation of an open space that provides scenic enjoyment to the general public and yields a significant public benefit; and (3) preservation of an open space that advances a clearly delineated federal, state or local governmental conservation policy and will yield a significant public benefit.

Restrictions on use. The easement imposed several restrictions on Champions Retreat. It restricted the use of the land and the types of structures that could be built on it. The easement also required the golf club to use "the best environmental practices then prevailing in the golfing industry." The easement included specific restrictions to protect existing trees and bodies of water on the property, but it also included several exceptions to allow some additional construction, clearing of land around greens and fairways, and maintaining the manicured condition of the golf course.

Natural wildlife on easement area. The easement area provided a habitat for various plants and wildlife. In addition to a number of birds spotted on the property, other notable species of conservation concern observed in the easement area include the southern fox squirrel (a game species in Georgia with a six-month hunting season) and the denseflower knotweed (a plant that grows in the easement area's bottomland forest and swamp habitats).

Golf course maintenance of easement area. Champions Retreat installed nonnative grasses on its fairways and greens and several man-made water features. The greens are meticulously maintained, watered and mowed regularly. The club also uses a number of chemicals in maintaining the course, including herbicides, fungicides and pesticides. Some of these chemicals are associated with environmental hazard when introduced to aquatic habitats, either directly or through runoff.

Public use of easement area. Local residents frequently use the Savannah River for various recreational purposes. They also use Little River (an offshoot of the Savannah River that runs through the golf course) — although there was some dispute whether Litter River was public or privately owned by Champions Retreat. The easement area, along with other golf courses in the region, was designated as an open space by a county planning commission for purposes of its "Vision 2035" plan.

Opinion

The Court noted that charitable deductions are allowed for "qualified conservation contributions," which Section 170(h)(1) defines as a contribution of a qualified real property interest to a qualified organization, made exclusively for conservation purposes. There was no dispute that the easement area represented a qualified real property interest and the NALT was a qualified organization. Rather, the case hinged on whether on whether Champions Retreat's contribution was exclusively for conservation purposes.

For a contribution to be treated as made exclusively for conservation purposes, the court explained, it must satisfy one of the conservation purposes listed in Section 170(h)(4). Champions Retreat contended that the contribution satisfied two such purposes: (1) the protection of a relatively natural habitat of fish, wildlife or plants, or a similar ecosystem, and (2) the preservation of open space for the scenic enjoyment of the general public or under a clearly delineated federal, state or local governmental conservation policy. Both Champions Retreat and the government presented expert testimony as to whether the easement area satisfied these conservation purpose requirements.

Relatively natural habitat

Under Reg. Section 1.170A-14(d)(3)(ii), a "relatively natural habitat" — for purposes of establishing conservation purposes — includes habitats for rare, endangered or threatened species and also natural areas that are included in, or contribute to, national, state or local parks or preserves. For these purposes, some human alteration will not result in the denial of a deduction so long as the plants and wildlife continue to exist in a relatively natural state.

With respect to rare, endangered and threatened species, Champions Retreat argued that the land provided a habitat for several such species, including various birds, the southern fox squirrel and the denseflower knotweed. Of these, the Court found that Champions Retreat presented evidence of rare, endangered or threatened status for only one: the denseflower knotweed. However, the Court determined that denseflower knotweed inhabits too small a fraction of the easement area (less than 17%) to establish conservation purposes.

Champions Retreat further argued that the easement area is a relatively natural habitat because it is a natural area that contributes to the ecological viability of Sumter National Forest, located across the Savannah River. The Court acknowledged that Sumter National Forest was a national park under the relevant regulations, but stated that it could not conclude that the easement area is a natural area that contributes to the ecological viability of the park. In this respect, the Court noted that the golf course is planted with heavily-managed non-native grasses, the easement allows removal of trees around the fairway and greens, and the golf club uses various chemicals in its maintenance that may be harmful to the surrounding natural environment. Champions Retreat argued that the use of chemicals should not be counted against it, so long as it follows "the best environmental practices then prevailing in the golf industry" in accordance with the easement. However, the Court concluded that Champions Retreat failed to establish that such practices are consistent with the environmental practices that would be expected if the purpose of the easement was conservation.

Because the Court found that the easement area neither provides a habitat for rare, threatened or endangered species, nor is a natural area that contributes to the ecological viability of Sumter National Forest, it concluded that Champions Retreat's contribution was not made for the conservation purpose of protecting a relatively natural habitat.

Preservation of open space

The Court explained that, for a contribution to satisfy the conservation purpose requirement in Section 170(h) as the preservation of an open space, such preservation must be either for the scenic enjoyment of the general public or under a clearly delineated federal, state or local governmental conservation policy. In addition, the preservation of open space must yield a significant public benefit.

As to scenic enjoyment, the Court noted that the easement area is located in a private area only accessible to members and their guests. As a result, in general, the only public view of the grounds is from the Savannah and Little Rivers, but such view is limited by the 3- to 10-feet river banks. Accordingly, the Court concluded that the easement area was not contributed for the scenic enjoyment of the general public.

With respect to a governmental conservation policy, Champions Retreat cited a Georgia statute directing a state agency to establish minimum standards for protection of natural resources. But the Court found such statute insufficient to establish an "identified conservation project" to which the easement area contributed. Moreover, it determined the county's Vision 2035 plan — which was focused on land development and not conservation — similarly did not establish an identified conservation project to which the easement contributed.

Having determined that the easement contribution was neither for the enjoyment of the general public nor under a clearly delineated governmental conservation policy, the Court did not consider whether the contribution met the further statutory requirement of yielding a significant public benefit.

Implications

The fact pattern of this case is similar to a fairly common fact pattern in which developers look to get a conservation easement deduction for land surrounding their development that they plan to leave undeveloped as part of a plan to limit residential density. While using reasoning similar to prior conservation easement cases, the Court's decision shows that the IRS continues to challenge not just syndicated easements but regular easements, searching for the presence of any "foot faults" with which it can deny the deduction. Taxpayers that are considering making a conservation easement should make sure that the easement meets at least one of the requirements of Section 170(h)(4) and that sufficient documentation is maintained.

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