Conservation Easement's Valuation Held to Support Promotion, Unreasonable

Published date01 January 2021
Date01 January 2021
January 2021 3
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
(summarized in the April 2013 issue)). This decision was
upheld by the Fourth Circuit (opinion summarized in
the February 2015 issue). The Tax Court applied Belk in
a case where developed acres could be moved entirely
within the conservation area (Bosque Canyon Ranch, LP
v. Commissioner (summarized in the September 2015
issue)), but that approach was reversed by the Fifth Cir-
cuit (BC Ranch II v. Commissioner (opinion summarized
in the October 2017 issue)).
The Eleventh Circuit in this case followed the Fifth
Circuit’s approach, writing that the easements in the
case “only allow building areas to be moved around
within the fixed boundaries of the easement—they don’t
permit outside-territory swapping.”
A few months ago, the Eleventh Circuit reversed
the Tax Court, holding that a charitable deduction was
available for the contribution of a conservation ease-
ment over property that included a private operating
golf course (Champions Retreat Golf Founders, LLC v.
Commissioner (summarized in the August 2020 issue)).
A notice of appeal was filed by the donor on October
16 in one of the principal conservation easement cases:
the one in which the US Tax Court held that the applicable
tax regulations were promulgated in accordance with the
Administrative Procedure Act (Oakbrook Land Holdings,
LLC v. Commissioner (summarized in the August 2020
issue)). For reasons that are unclear at this point, the gov-
ernment filed a notice of appeal in the case on November
12. The procedural validity of these regulations, finalized
in 1986, will be reviewed by the US Court of Appeals for
the Sixth Circuit. It will be interesting to see if the Sixth
Circuit extends this burgeoning pattern of reversal of the
Tax Court’s conservation easement decisions. [9.7]
The US Tax Court, by decision dated November 2,
held that a contribution of a conservation easement on
undeveloped real estate did not give rise to the claimed
charitable deduction ($17.5 million) inasmuch as it failed
the in-perpetuity requirement because of a defective
judicial-extinguishment clause, and that the 20 percent
accuracy-related penalty for a substantial valuation mis-
statement was properly imposed (Glade Creek Partners,
LLC v. Commissioner).
The underlying property was originally obtained for
development as the site for vacation homes. Matters in
that regard failed to work out; the developers incurred
considerable debt. One of the principal developers
learned about conservation easements from the presi-
dent of the bank that held most of the loans. The con-
servation easement plan was designed in part to raise
sufficient funds to repay the debts. Appraisers were
hired, along with a tax lawyer for advice on the ease-
ment deduction.
The law as to the judicial extinguishment clause is
summarized in the August, September, and October
2020 issues. Suffice it to say that the deed in this case
subtracts from the extinguishment proceeds any increase
in the fair market value of the easement property attrib-
utable to post-easement improvements before determin-
ing the donee’s share. The court held that the language
in the deed fails to allocate extinguishment proceeds in
accordance with the tax regulation. Consequently, the
donor was denied the charitable deduction.
The Tax Court found the fair market value of the
easement to be $8.9 million. Thus, it did not sustain
the proposed penalty for gross valuation overstatement.
The donee, however, made a substantial valuation
misstatement; the court found that it lacked good
faith with respect to the valuation. A promotion of this
syndicated conservation easement plan promised that a
$250,000 investment would generate a $1.25 million
charitable contribution deduction. The court concluded
that the appraisers knowingly overvalued the easement
to “achieve the tax savings goals of the easement trans-
action and did not attempt to accurately ascertain the
easement’s fair market value.” The donee, having failed
to make a good-faith investigation of the easement’s
value, was held to not have acted with reasonable cause.
Overvaluation of this easement was said by the
court to be part of the easement transaction that was
“devised.” The appraised value was, the court wrote,
“determined on the basis of the need to attract inves-
tors by providing a sufficient tax benefit to raise enough
money to repay the … debt and to pay the fees of the
professionals involved.” It was not, the court stated,
a “good faith valuation of the easement property.”
A limited liability company contributed façade ease-
ments on three commercial buildings to a qualified
public charity. The buildings are located in a historic
preservation district in Buffalo, New York, where local
law restricted what building owners could do with their
property. The IRS disallowed the claimed charitable
deductions in their entirety on the grounds that the
easements had no effect on the value of the properties.
The US Tax Court, in its opinion in this case, traced
the economic decline of Buffalo around the time of the

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