Façade Easement Deductions Saved Due to Ineffectual Local Law Enforcement

• Date: 01 January 2021
• DOI: http://doi.org/10.1002/npc.30808
• Published date: 01 January 2021

Bruce R. Hopkins’ NONPROFIT COUNSEL

January 2021 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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] ◆

CONSERVATION EASEMENT’S

VALUATION HELD TO SUPPORT

PROMOTION, UNREASONABLE

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.”

[9.7] ◆

FAÇADE EASEMENT

DEDUCTIONS SAVED DUE TO

INEFFECTUAL LOCAL LAW

ENFORCEMENT

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