On November 2, 2020, the Tax Court issued a Memorandum Opinion in the case of Glade Creek Partners LLC v. Commissioner (T.C. Memo. 2020-148). The primary issue before the court in Glade Creek Partners LLC v. Commissioner was whether Glade Creek is entitled to the easement deduction under the technical requirements of IRC § 170.
History of Easement in Glade Creek Partners LLC v. Commissioner
In December 2012, Glade Creek granted a conservation easement to the Atlantic Coast Conservancy, Inc. (Conservancy), on 1,313 acres of land in the North Georgia mountains. The deed of easement states that the easement is intended to preserve open space for wildlife habitats threatened by development and provide significant public benefit, scenic views of the Cumberland Plateau, and agricultural land. It states that the easement property will be retained forever predominantly in its natural condition, and the easement will prevent any use that will materially impair or interfere with the conservation values. The deed grants enforcement rights to the Conservancy so that it can protect the easement property and prevent uses inconsistent with the conservation values.
The deed contains nonexclusive lists of prohibited and permitted uses. Glade Creek reserved the right to engage in all uses not expressly prohibited by the deed that are consistent with the easement’s conservation purposes. Permitted uses include agriculture and the construction of a single-family dwelling, accessory buildings, access roads, fences, a subsistence garden, hunting stands and platforms, and trails. Construction of the dwelling and accessory buildings is expressly conditioned on 30 days’ written notice to the Conservancy and before commencing construction.
The Conservancy has 30 days to grant or withhold its approval on the basis of its informed judgment about the construction’s impact on the easement property, and if it does not timely respond, approval is deemed given (default provision). The deed expressly states that Glade Creek may engage in the other enumerated permitted uses without prior written notice or approval.
The Involuntary Extinguishment Clause
The easement shall have at the time of extinguishment a fair market value determined by multiplying the then fair market value of the easement area unencumbered by the easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the easement at the time of this grant to the value of the easement area, without deduction for the value of the easement, at the time of this grant. The conservation values at the time of this grant shall be those conservation values used to calculate the deduction for federal income tax purposes allowable by reason of this grant, and the ratio shall remain constant.
Critically, the deed subtracts from the extinguishment proceeds any increase in the fair market value of the easement property attributable to post-easement improvements before determining the conservancy’s share.
Conservation Easements, Generally
IRC § 170(a)(1) allows taxpayers to deduct charitable contributions made within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the deduction is generally equal to the donated property’s fair market value at the time of the donation. Treas. Reg. § 1.170A-1(c)(1). Generally, a taxpayer is not entitled to deduct the donation of an interest in property which consists of less than the taxpayer’s entire interest. IRC § 170(f)(3)(A).
An exception is made for a contribution of a partial interest in property that constitutes a qualified conservation contribution. IRC § 170(f)(3)(B)(iii). The exception applies where: (1) the taxpayer donates a qualified real property interest, (2) the donee is a qualified organization, and (3) the contribution is exclusively for conservation purposes. IRC § 170(h)(1). The donation must satisfy all three requirements. Irby v. Commissioner, 139 T.C. 371, 379 (2012).
The Perpetuity Requirement
A contribution is exclusively for conservation purposes if its conservation purpose is protected in perpetuity. IRC § 170(h)(5)(A). The regulations interpreting IRC § 170(h)(5) recognize that a subsequent unexpected change in the conditions surrounding the property can make impossible or impractical the continued use of the property for conservation purposes. Treas. Reg. § 1.170A-14(g)(6)(i).
In such an event the easement would not be protected in perpetuity. However, the regulation provides a way for the perpetuity requirement to be deemed satisfied. The conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and the donee uses its share of the proceeds from a subsequent sale or exchange of the property in a manner consistent with the conservation purposes of the original contribution. Id.
The plain text of Treas. Reg. § 1.170A-14(g)(6)(ii) requires the donee to receive a proportionate share of the extinguishment proceeds and does not permit the value of any post-easement improvements to be subtracted out before determining the donee’s share. Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 139 (2019) (holding that an easement deed with a nearly identical proceeds computation failed the perpetuity requirement); Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, at *40-*41; see PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 208 (5th Cir. 2018).
Because the deed improperly subtracts any value attributable to post-easement improvements from the extinguishment proceeds before determining the Conservancy’s share, the Tax Court found that it did not properly allocate extinguishment proceeds to the Conservancy in accordance with the proceeds regulation. The proceeds regulation is not satisfied, and the easement’s conservation purposes are not protected in perpetuity. Glade Creek, therefore, was not entitled to the easement deduction.
(T.C. Memo. 2020-148) Glade Creek Partners, LLC v. Commissioner
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