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Woodland Property Holdings, LLC v. Commissioner (T.C. Memo. 2020-55)

On May 13, 2020, the Tax Court issued a Memorandum Opinion in the case of Woodland Property Holdings, LLC v. Commissioner (T.C. Memo. 2020-55). The basic issue before the court in Woodland Property Holdings, LLC was whether the conservation purpose underlying the easement is not “protected in perpetuity,” as required by IRC § 170(h)(5)(A) and Treas. Reg. § 1.170A-14(g)(6). The same question was presented and resolved in Railroad Holdings, LLC v. Commissioner, T.C. Memo. 2020-22 and Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54.

The Doomed Deeds – Conservation Easements Failing for Lack of Perpetuity

To petitioner’s credit, it acknowledges that its position is identical to the question presented in Railroad Holdings, LLC v. Commissioner, T.C. Memo. 2020-22 and Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54. When the petitioner admitted that, however, these two cases had not yet been decided by the Tax Court. Unfortunately, both Railroad Holdings and Oakbrook I. were decided adversely to the taxpayer.

In fairness, the holdings in these cases should not have come as too much of a surprise to the petitioner, as a substantially similar (read: practically identical) to that decided adversely to the taxpayer in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018) and Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019). Still, hope sprung eternal, and victories have been snatched from the jaws of defeat before. Nevertheless, following the reasoning of these cases, the Tax Court held that the conservation purpose underlying the easement in this case was not “protected in perpetuity” as required by § 170(h)(5)(A).

A Note on Brevity

(The opinion in Woodland Property Holdings is only 10 pages long, as opposed to the 44 in Oakbrook I and the even longer one in the companion case of Oakbrook Land Holdings, LLC v. Commissioner (Oakbrook II), 154 T.C. No. 10 (May 12, 2020), which weighs in at 128 pithy pages. Thus, the summary of the issue in the present opinion, and the summary herein, are proportionally smaller, as well.)

A Brief Recap of the Issue

For an easement of the sort involved here, a charitable contribution deduction is allowable only if the underlying conservation purpose is “protected in perpetuity.” IRC § 170(h)(5)(A); see Coal Prop. Holdings, 153 T.C. at 135. The Treasury Regulations set forth detailed rules for determining whether this “protected in perpetuity” requirement is met. See Treas. Reg. § 1.170A-14(g).

The rules governing “judicial extinguishment” appear in Treas. Reg. § 1.170A-14(g)(6). It provides that the donor must agree that the easement gives rise to a property right in the donee having a FMV that is at least equal to the proportionate value that the easement at the time of the gift, bears to the value of the property as whole at that time. Id.

In the event of a sale following judicial extinguishment of the easement, the donee must be entitled to a portion of the proceeds at least equal to that proportionate value. Id. In effect, then, the “perpetuity” requirement is deemed satisfied 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 (quoting IRC § 170(h)(5)(A)). The regulation requires, in short, that the donee receive a proportionate share of the sale proceeds, as determined by the fraction set forth in the regulation (see Oakbrook I for an excellent plain language version of this fraction). The easement deed in this case does not satisfy this requirement.

Original opinion: (T.C. Memo. 2020-55) Woodland Property Holdings, LLC v. Commissioner

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