On June 23, 2020, the Tax Court issued a Memorandum Opinion in the case of Plateau Holdings, LLC v. Commissioner (T.C. Memo. 2020-93). The primary issue before the court in Plateau Holdings, LLC was whether the IRS properly disallowed the charitable contribution deduction with respect to the donation of a conservation easement in full because the conservation purpose underlying the easements was not “protected in perpetuity” as required by IRC § 170(h)(5)(A), insofar as the charitable grantee was not absolutely entitled to a proportionate share of the proceeds in the event the property was sold following a judicial extinguishment of the easement.
The (Reasonable) Greed of the Donor
A donor grants a conservation easement to a qualified organization, reserving the right for limited development of the unencumbered land (not in the easement) – nothing extravagant, but it will certainly add value to the easement. In the easement deed, the developer provides that in the event of a judicial extinguishment the FMV of the easement will be calculated less the increase in the easement’s value after the date of the grant attributable to those improvements. Reasonable, right? If you’re Ebeneezer Scrooge on the 23rd of December beating Bob Cratchit with Tiny Tim’s own little crutch – according to the IRS. This is greed at its most vile – according to the IRS.
The Plateau Holdings, LLC case suffers from the same infirmity (and fate) as Hewitt v. Commissioner, T.C. Memo. 2020-89 (June 17, 2020) and Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54 (May 12, 2020), which in turn suffered from the same infirmities and fate as Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 127 (2019). You may notice a trend here. As the Tax Court in Oakbrook Land Holdings, LLC noted, the language contained in the easement deeds reducing the donor’s proportionate share by the value of the improvements is “standard industry language” likely used in “thousands” of conservation easement deeds. Likewise, the Tax Court noted in Oakbrook Land Holdings, LLC, the IRS is on the warpath, so do not expect to see an end to these cases anytime soon.
Conservation Easements Generally
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 in such property.” IRC § 170(f)(3)(A). A limited exception applies when the contribution is a “qualified conservation contribution” as defined in IRC § 170(f)(3)(B)(iii). For the exception to apply, the interest donated must be of “qualified real property,” the donee must be a “qualified organization,” and the contribution must be made “exclusively for conservation purposes.” IRC § 170(h)(1). If the contribution fails to meet all three tests, it fails. Irby v. Commissioner, 139 T.C. 371, 379 (2012). Critically, a contribution is “exclusively for conservation purposes” only if its conservation purposes are protected for-eh-ver. See IRC § 170(h)(5)(A).
The Judicial Extinguishment of a Conservation Easement
A conservation easement may be affected by a subsequent unexpected change in the conditions surrounding the property, which change would make the continued use of the property for conservation purposes “impossible or impractical.” Treas. Reg. § 1.170A-14(g)(6)(i). The regulations are not ignorant to this potentiality, so long as the easement is “extinguished by judicial proceeding” and the donee uses “all of the donee’s proceeds from a subsequent sale or exchange of the property” in a manner “consistent with the conservation purposes” of the original easement. Id. It is the “donee’s proceeds,” or share of the proceeds that the donee receives, that has tripped up all challengers so far in 2020.
Treas. Reg. § 1.170A-14(g)(6)(ii), states in part that at the time of the gift the donor must agree that the easement donation gives rise to a property right, immediately vested in the donee, “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.” At the time means when the easement was granted. There is no provision in the regulation that permits the consideration of any conditions subsequent, such as improvements to unencumbered surrounding land. The Tax Court has previously noted that in effect, the perpetuity requirement is deemed satisfied through judicial extinguishment because the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Coal Prop. Holdings, 153 T.C. at 136; IRC § 170(h)(5)(A).
As we have noted previously, the requirements of this regulation “are strictly construed.” Carroll v. Commissioner, 146 T.C. 196, 212 (2016). Because the conservancy in this case is not absolutely entitled to a proportionate share of the proceeds upon a post-extinguishment sale of the Property, the conservation purpose underlying the contribution is not “protected in perpetuity.” Coal Prop. Holdings, 153 T.C. at 127, 139.Add to favorites