When the Tax Court issued its opinion in Pine Mountain Preserve, LLLP v. Commissioner of Internal Revenue, 151 T.C. 14 (December 27, 2018), the conservation community gave a collective sigh of relief because the court dismissed the IRS’s arguments challenging amendment clauses in conservation easements. But alas, the Tax Court giveth and the Tax Court taketh away. That sigh of relief came with some bitter medicine regarding floating homesites. More below. Continue Reading Tax Court Upholds Amendment Clauses but Continues Attack on Floating Homesites in Conservation Easements
DOJ sues Syndicated Easement Promoters
The Department of Justice has finally filed a civil complaint against certain promoters who have been spearheading syndicated easements to the tune of over $2 billion in claimed federal tax deductions using grossly inflated appraisals. Continue Reading Happy New Year’s Tidings for Land Trusts and Other Conservation Advocates
Service Focuses on Conservation Purpose Test and Division of Proceeds Clause in PBBM-Rose Hill, Belair Woods, and Champions Retreat Golf Founders
The IRS has been busy this year challenging conservation easement deductions, particularly conservation easements protecting golf courses and conservation easements providing overinflated syndicated tax deductions. Continue Reading Three Autumn Cases Deny Golf Course and Syndicated Conservation Easement Tax Deductions
Governor Brown signed S.B. 901 into law on September 7. The controversial and lengthy bill is simply entitled “Wildfires,” but has garnered a lot of media attention for what many are calling a utility bailout for the Northern California fires. What hasn’t received much attention is a small paragraph slipped into the bill to amend California’s conservation easement enabling statute, California Civil Code Sections 815–816. Continue Reading California Legislature Amends Venerable Conservation Easement Statute: New Civil Code 815.11
Last month, the IRS issued final regulations entitled “Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions,” codified as Treasury Regulation Sections 1.170A-15 (cash), -16 (noncash), -17 (qualified appraisals and appraisers), and -18 (clothing and household items).
If my article on syndicated easement shelters and HR 4459 piqued your interest, please check out “The Billion Dollar Loophole,” an excellent piece of journalism written by Peter Elkind and published by both ProPublica and Fortune yesterday.
In his article, Peter digs into the genesis and current status of the thriving tax shelter industry that is tarnishing legitimate conservation practice and threatening the entire 170(h) conservation deduction. “The Billion Dollar Loophole” highlights the importance of passing remedial legislation like HR 4459.
Last week, Representative Mike Kelly (R) of Pennsylvania and Representative Mike Thompson (D) of California introduced the Charitable Conservation Easement Program Integrity Act of 2017 as H.R. 4459. The Act is simple; comprising only two pages, it addresses a certain type of abusive conservation easement transaction that has been proliferating over the past decade: the syndicated easement.
This month, the Tax Court revived a method to defeat conservation deductions with its October 10 opinion published as Palmolive Building Investors LLC et al. v. Commissioner, No. 23444-14; 149 T.C. No. 18 (Oct. 10, 2017), holding that if a taxpayer donates a conservation easement, the Treasury Regulations’ requirement that any mortgage must be subordinated to the conservation easement includes subordination of the mortgagee’s rights to insurance and condemnation proceeds.
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 opinions were handed down last week.
Bosque Canyon Ranch  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 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.
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.