Global Tax Insights
Case Update: Conservation Easement Deductions under IRS AttackOctober 01, 2019
Attention, property owners: You may qualify for tax benefits associated with conservation easements. Here are three recent tax cases to help illustrate how you can qualify.
Conservation easements provide a seemingly easy way for property owners to both satisfy their charitable inclinations and secure a valuable federal income tax deduction. But you must comply with a complex web of rules to qualify for the tax deduction. Three recent U.S. Tax Court cases illustrate how a taxpayer can slip up and forfeit the deduction.
1. Pine Mountain Preserve, LLLP v. Commissioner
A developer bought a tract of land in Alabama and granted easements to a qualified land trust in 2005, 2006 and 2007. Each easement defined a conservation area to be restricted in perpetuity from development, with a carveout for 16 reserved “building areas” where the taxpayer could build single-family residences.
The taxpayer claimed charitable contribution deductions for the easements in each of those years. However, the IRS contended the easements weren’t “qualified property interests,” as required by the tax code.
The Tax Court agreed with the IRS about the 2005 and 2006 easements. It found they didn’t restrict a specific, identifiable piece of real property. Why? The carveouts allowed supposedly conserved land to be taken back and used for residential development. As a result, neither easement constituted a qualified real property interest that could give rise to a charitable contribution deduction.
The court upheld the contribution for the 2007 easement, however. As the Tax Court noted, it covered a specific, identifiable piece of real property, was granted in perpetuity and was made exclusively for conservation purposes — all requirements of the tax rules for easement deductions.
Pine Mountain Preserve, LLLP v. Comm’r, 151 T.C. No. 14 (Dec. 27, 2018)
2. Wendell Falls Development, LLC v. Commissioner
A developer purchased 1,280 acres of land in North Carolina for a master-planned community. Then it granted a conservation easement on 125 of the acres. The easement restricted the land to uses related to establishing a park.
On its 2007 tax return, the developer claimed a deduction of almost $1.8 million for the easement. But the IRS determined the allowable deduction was zero, because the taxpayer expected to receive a substantial benefit from the easement contribution.
Siding with the IRS, the Tax Court pointed out that the master-planned community was designed so that all the clusters of residential areas would have access to the park through a system of “greenways.” And, as the prospective seller of the residential lots in those clusters, the developer would benefit from the increased value to the lots from the park as an amenity.
Wendell Falls Development, LLC v. Comm’r, T.C. Memo. 2018-45 (April 4, 2018)
3. Belair Woods, LLC v. Commissioner
This taxpayer claimed a charitable contribution deduction of nearly $4.8 million for donating a conservation easement. The IRS argued that it should be denied because the taxpayer didn’t attach to its tax return a fully completed “appraisal summary” on Form 8283, “Noncash Charitable Contributions.”
In particular, the taxpayer didn’t disclose the donated property’s cost or adjusted basis, as required by the form. Instead, it attached a letter stating that it didn’t include the basis information because basis isn’t considered when computing the deduction amount.
The Tax Court held that this wasn’t a case of inadvertent omission, in which case the taxpayer would have had some time to remedy the mistake. Rather, it was a conscious election not to supply the required information. So, the taxpayer didn’t comply with the regulatory reporting requirements. However, the court found that material issues remained as to whether the taxpayer could establish a “reasonable cause” defense for its failure to submit the basis.
Belair Woods, LLC v. Comm’r, T.C. Memo. 2018-159 (Sept. 20, 2018)
Dot i’s and Cross t’s
Deductions for charitable conservation easements can save you a bundle in taxes. But you must fulfill a range of obligations regarding everything from charitable intent and mortgage subordination to appraisals and substantiation. Contact our tax pros to help you cover the necessary bases.