Tax Court Holds Easement Regulation Valid

• Date: 01 August 2020
• DOI: http://doi.org/10.1002/npc.30752
• Published date: 01 August 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

August 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

GOLF COURSE EASEMENT

DECISION REVERSED

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] ◆

TAX COURT (AGAIN) FINDS

DEFECTIVE EASEMENT DEED

EXTINGUISHMENT CLAUSE

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. ◆

TAX COURT HOLDS EASEMENT

REGULATION VALID

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