For landowners, donating a conservation easement is a way to protect places they love. It’s also a major financial decision. Done right the tax incentives may offset some of that loss in property value, making conservation a viable option for more landowners. However, done wrong, the IRS may reign down on the transaction to deny the deduction as an abusive tax transaction.
In a recent case, the United States Tax Court ruled a limited liability company (LLC) was not entitled to charitable contribution deduction because the conservation purpose of the easement was not "protected in perpetuity" as required by Code Sec. 170(h)(5)(A). The taxpayer had donated a conservation easement to a qualified charitable organization. The easement deed provided that, if the property were sold following judicial extinguishment of the easement, the donee organization would receive a share of the proceeds, "after the satisfaction of prior claims," determined by a formula.
The easement did not satisfy the requirements of Reg. §1.170A-14(g)(6) because the portion of the proceeds to which the donee was entitled was improperly reduced by amounts paid in satisfaction of prior claims against the taxpayer. Further, the amounts inuring to the taxpayer were attributable to (i) appreciation in the value of improvements existing when the easement was granted; and (ii) the fair market value of any improvements the taxpayer subsequently made to the property, followed.
The taxpayer’s attempted use of a saving clause to reform the deed to comply with the regulation was not valid because the savings clause provided for a future event that altered the tax consequences of a conveyance and was therefore, declined to be enforced by the court. In addition, the taxpayer argued that Reg. §1.170A-14(g)(6) was ambiguous and that the text on which it relied did not constitute an impermissible saving clause but rather set forth a permitted interpretation provision. However, this argument was rejected because the regulation was unambiguous on its face as it plainly required that the charitable grantee be guaranteed to receive its full proportionate share of the sale proceeds, upon a sale following judicial extinguishment of the easement. Therefore, the IRS's motion for partial summary judgment was granted.
While the conservation easement transaction can sometimes be more difficult to attack, highly technically rules exist giving the IRS more ammo to find a reason to disregard and deny the perceived tax benefits.
Anyone considering a conservation easement donation or already involved in one should have the transaction reviewed by an independent tax attorney with experience in this area of law. Contact Joseph P. Wilson at 949-397-2292 or wilson@wilsontaxlaw.com. Mr. Wilson represents clients throughout California and the Globe, involving local, state, federal and international civil tax disputes and tax litigation and criminal tax defense. Mr. Wilson is the Managing Shareholder at Wilson Tax Law Group, APLC, former Member of the Executive Committee of the Taxation Section, California Lawyers’ Association, a former IRS Attorney, a former Assistant United States Attorney, and a former Tax Attorney, California Franchise Tax Board.
Wilson Tax Law Group, APLC is an Orange County law firm specializing in Federal and State tax audits, internal compliance, FBAR, offshore bank account disclosures, and criminal tax, including appeals, trials, and collections. The Los Angeles and San Francisco Daily Journals have named Wilson Tax Law Group, APLC as one of the “Top 20 Boutique Firms in California”.
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