Tax Court (Again) Finds Defective Easement Deed Extinguishment Clause

Date01 August 2020
Published date01 August 2020
August 2020 5
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
The US Court of Appeals for the Eleventh Circuit,
by decision dated May 13, reversed the US Tax Court,
holding that a charitable deduction is available for the
contribution of a conservation easement over property
that includes a private operating golf course (Champions
Retreat Golf Founders, LLC v. Commissioner). The deci-
sion of the Tax Court in this case is summarized in the
November 2018 issue.
This easement, contributed to a qualified charitable
organization, covers 348 acres consisting of undeveloped
land and the golf course, including the driving range.
The easement property is home to abundant species of
birds (some rare), the regionally declining southern fox
squirrel, and a rare plant species (the denseflower knot-
weed). Although the property is not accessible to the
public, it is readily observable to members of the public
who kayak or canoe on neighboring rivers.
The court of appeals stated, citing the tax regulations,
that the donor is entitled to a deduction if its easement
includes a habitat for rare, endangered, or threatened
species of animal, fish, or plants, or if the easement con-
tributes to the ecological viability of the adjacent national
forest. The court wrote that these are the “standards that
apply despite the presence of a golf course on part of the
property.” It added that the law requires only a “relatively
natural habitat … or similar ecosystem,” not that the
“land itself be relatively natural.”
The appellate court found fault with the Tax Court’s
fact-finding, stating that some of it is “clearly errone-
ous” or inexplicable. Some of the court’s conclusions
were found to be wrong as a matter of law. The court
of appeals’ view of this case came down to this: “Were
it not for the presence of a golf course on part of this
property, the assertion that contributing an easement
over property with this array of species does not qualify
as a conservation purpose would be a nonstarter.”
The case was remanded to the Tax Court for deter-
mination of the proper amount of the charitable deduc-
tion. [9.7]
The US Tax Court, by decision dated May 12, held that
an easement deed violates the “protected in perpetuity”
requirement in the law (IRC § 170(h)(5)(A), as interpreted
by Reg. § 1.170A-14(g)(6)), because the donee’s share of
the extinguishment proceeds (1) is based on a fixed his-
torical value rather than a proportionate share and (2) is
reduced by the value of any improvements made by the
donor (Oakbrook Land Holdings, LLC v. Commissioner).
A limited liability company contributed a conservation
easement over a portion of a tract of land to a qualified
charitable organization, claiming a $9.5 million charitable
deduction. At issue, following an IRS examination, was
the extinguishment provision in the easement deed.
The court concluded that in the event of a sale of the
property following judicial extinguishment of the ease-
ment, the charity’s share of the proceeds would be limited
to the “initial fixed value” of the easement — that is, its
fair market value on the date the easement was granted.
Then, the donee’s proceeds would be further reduced by
the value of any improvements made to the property by
the donor. Thus, if property values rose after that date,
the charity’s share would not be “protected from inflation
either in local land prices or the economy more generally.”
Conversely, if property values fell, the charity might not
receive even the initial fixed value of the easement.
Having lost on this issue, the donor challenged the
validity of the tax regulation involved in this case. The
court’s separate opinion in that regard (same date) is
summarized next. [9.7]
Note: Likewise, Woodland Property Holdings, LLC v.
Commissioner (May 13). Other similar Tax Court opinions
are summarized in the January and March 2020 issues.
As noted earlier, a contribution will not be treated as
made exclusively for conservation purposes “unless the
conservation purpose is protected in perpetuity” (IRC
§ 170(h)(5)(A)). The tax regulations recognize circum-
stances where restrictions on property can be judicially
extinguished because they have become “impossible or
impractical” and provide for provision of adequate sales
proceeds to the charity involved (Reg. § 1.170A-14(g)(6)).
The Tax Court reviewed the proposed conservation
easement regulations issued in 1983, the more than 700
pages of comments received, and the final regulations
issued in 1986. This was undertaken because the donor of
the easement contended that the judicial extinguishment
regulation is procedurally defective, on the theory it was
not properly promulgated in accordance with the Admin-
istrative Procedure Act. After reviewing that material and
the preamble to the final regulations, the court found that
Treasury’s rationale for the judicial extinguishment rule can
“reasonably be discerned and coincides with the agency ’s
authority and obligations under the relevant statute.”
This donor also asserted that the regulation is sub-
stantively invalid. The court analyzed the regulation
under the Chevron tests, considering whether it is based
“on a permissible construction of the statute.” The court

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