On May 12, 2020, the Tax Court issued its opinion in Oakbrook Land Holdings v. Commissioner, 154 T.C. No. 10 (Oakbrook I) and concurrently issued a Memorandum Opinion in Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54 (Oakbrook II). The issue presented in Oakbrook I was whether, for purposes of a conservation easement, the “protected in perpetuity” requirement of IRC § 170(h)(5), as interpreted in Treas. Reg. § 1.170A-14(g)(6), which was found to have been violated because the donee’s share of the extinguishment proceeds (1) is based on a fixed historical value rather than a proportionate share, and (2) is reduced by the value of any improvements made by the donor was valid under the Administrative Procedure Act (APA), 5 U.S.C. § 553 (2018) and under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). In Oakbrook II, the issue presented was whether a conservation easement deed violated the “protected in perpetuity” requirement of IRC § 170(h)(5), as interpreted in Treas. Reg. § 1.170A-14(g)(6). In both cases, the Tax Court found for the IRS.
Statutory and Regulatory Framework for Conservation Easements
If a taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV of the property at the time the gift is made. See Treas. Reg. § 1.170A-1(c)(1). However, the Code restricts a taxpayer’s charitable contribution deduction for the donation of an interest in property that consists of less than the taxpayer’s entire interest in such property. IRC § 170(f)(3)(A). There is an exception to this entire interest rule for a “qualified conservation contribution.” See IRC § 170(f)(3)(B)(iii).
This exception applies where: (1) the taxpayer contributes a qualified real property interest, (2) the donee is a qualified organization, and (3) the contribution is exclusively for conservation purposes. See IRC § 170(h)(1). IRC § 170(h)(5)(A) provides that a contribution will not be treated as being made exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. Despite the perpetuity requirement, 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. Treas. Reg. § 1.170A-14(g)(6)(i).
If there is an unexpected change, 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. Id. Thus, the perpetuity requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee exclusively for conservation purposes. See IRC § 170(h)(5)(A).
For deduction to be allowed IRC § 170(h)(5), at the time of the gift, the donor must agree that the donation of the perpetual conservation restriction gives rise to an immediately vested property right in the donee organization, with a fair market value 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. Treasury Regulation § 1.170A-14(g)(6)(ii).
The proportionate value of the donee’s property rights must remain constant. Id. As such, when a change in conditions gives rise to the extinguishment of a perpetual conservation restriction under Treasury Regulation § 1.170A-14(g)(6)(i), the donee organization, on a subsequent transfer of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction. Treasury Regulation § 1.170A-14(g)(6)(ii).
The proportionate value is equal to the value of the conservation easement at the time of the gift, divided by the value of the property as a whole at that time. PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 207 (5th Cir. 2018); see also Carroll v. Commissioner, 146 T.C. 196, 219 (2016). No amount, including that attributable to improvements, may be subtracted out” of the proceeds against which the proportionate value is applied. PBBM-Rose Hill, 900 F.3d at 208; Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 136-37 (2019).
Bright Line Rule – Valuation of Conservation Easement Must be Based on Proportionate Value of Proceeds not Fixed Historical Value
A grant of a conservation easement will not satisfy the protected in perpetuity requirement of IRC § 170(h)(5)(A) and Treas. Reg. § 1.170A-14(g)(6) if the donee organization’s share of the proceeds, in the event the property were sold following a judicial extinguishment of the easement, would be (1) determined according to a fixed historical value rather than a proportionate share of the proceeds and (2) reduced by the value of any improvements made by the donor. See Oakbrook II, T.C. Memo. 2020-54, *36-*37.
Bright Line Rule – Perpetuity Requirement Valid under Administrative Procedure Act (APA) and Chevron
On January 14, 1986, Treasury adopted the proposed amendments to the conservation easement regulations, including the judicial extinguishment portion, with numerous revisions based on voluminous comments. See T.D. 8069, 1986-1 C.B. 89. The preamble to the final regulations provides a summary of the law and states that, after consideration of all comments regarding the proposed amendments those amendments are adopted as revised by this Treasury decision. Id. at 90.
When reviewing agency actions the scope of a court’s review is narrow, because a court is not empowered to substitute its judgment for that of the agency. Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 285 (1974). The regulations und IRC § 170(h)(5) were promulgated to provide necessary guidance to the public for compliance with the law relating to contributions of partial interests in property for conservation purposes. This was a rational, valid reason, and the administrative record demonstrates that the regulations should be upheld under the APA and Chevron. Accord Wing v. Commissioner, 81 T.C. 17, 31-32 (1983).Add to favorites