The Fifth Circuit encourages flexibility for conservation easement deductions in Bosque Mountain Ranch, while the Tax Court makes it difficult for farmers in Rutkoske. 

Two important conservation easement were handed down last week.

Bosque Canyon Ranch [1] is noteworthy for the Fifth Circuit’s conservation-friendly language encouraging a flexible interpretation of the myriad statutory and regulatory requirements for easement deductions. This is a stark departure from a recent series of cases denying conservation easement deductions based on what some would call “foot faults.” More specifically, the appellate opinion in Bosque Canyon Ranch: (1) provides some certainty regarding what should be provided in a baseline documentation report, noting that the IRS should not pick apart each component of a report, and (2) holds that the right to relocate homesites that are carved out of an easement does not violate the perpetuity requirement for conservation easements, when the easement holder has approval rights over the final location and the maximum size of the homesites cannot change.

In a much less taxpayer-friendly opinion, the Tax Court in Rutkoske[2] provides the first judicial interpretation of the statutory rule that permits qualified farmers and ranchers to deduct the value of a conservation easement donation against up to 100% of their adjusted gross income. The Tax Court finds that income from the sale of farming property does not count toward qualifying the farmer and rancher for this benefit.

The cases are discussed in detail below.

Continue Reading New Cases Send Mixed Messages to Conservation Easement Donors

Those familiar with conservation easements know that to qualify for a federal tax deduction, a conservation easement must meet several rigorous requirements found in Internal Revenue Code Section 170 and Section 1.170A-14 of the Treasury Regulations, not the least of which is the requirement that the easement be granted “in perpetuity.” In addition, the easement must be subject to “legally enforceable restrictions” (such as by recordation) that will prevent uses inconsistent with the conservation purposes of the donation.

Continue Reading Unsurprising Façade Easement Holding by Tax Court: Conservation Easement Must Be Recorded to Qualify for Deduction

On November 4, 2016, the IRS updated its Conservation Easement Audit Techniques Guide (CE Audit Guide) for the first time since March 15, 2012.

According to the IRS’s introduction on its Audit Techniques Guide website, Audit Techniques Guides (ATGs) are developed to help IRS examiners during audits by explaining issues and accounting methods within specific industries. ATGs are also meant to provide guidance to small business owners and tax professionals for tax planning purposes within those industries. However, each ATG contains a disclaimer that it is not “an official pronouncement of the law or position of the Service and cannot be used, cited, or relied upon as such.” This article will not explain the CE Audit Guide in depth, but rather discuss the specific updates made in November.

Continue Reading IRS Updates Conservation Easement Audit Techniques Guide

photo-1445297983845-454043d4eef4The Tax Court, in a case of first impression, has recently ventured into the perpetuity minefield.  One Dr. Douglas Carroll and spouse Deirdre Smith, of Baltimore, Maryland, conveyed a conservation easement in 2005 over approximately 26 acres of open land in Maryland, mostly pastureland zoned for agricultural uses, to the Maryland Environmental Trust (MET) and the Land Preservation Trust (LPT).  The former organization is a quasi-governmental agency, the latter a private, nongovernmental exempt organization.  The protected property consisted of two parcels of unequal size; upon the smaller parcel sat the taxpayers’ two-story primary residence, and, on the larger, a small (1,000-square-foot) house where a farmhand tenant  resided.

Continue Reading Lurching Towards Perpetuity

photo-1446482972539-0ed52b3e9520We have all been told at one point or another that we simply “can’t have it all.”  But for owners of recreational or agricultural land who desire to preserve the land, pass it down to their descendants as a legacy property, and achieve substantial tax savings, “(almost) having it all” is a possibility.  Enter, the conservation easement – a valuable tool that can bridge the divide between these often competing interests. Continue Reading Conserve Your Land, Preserve Your Estate: The Conservation Easement as a Land Use, Tax & Estate Planning Tool