Why You Need to Be Careful with a Deduction of Easement
Normally, you can’t deduct a contribution of property to charity without actually giving it away. However, if certain requirements are met, you may deduct the value of a conservation easement granted on property where you still retain ownership. Unfortunately, a donation by the owners of a golf course in a new case, Champions Retreat Golf Founders, LLC, TC Memo 2018-146, 9/10/18, failed to measure up to par.
Under IRS regulations, a deduction for an easement may be allowed in the following four instances:
1. Preservation of land for outdoor recreation or education of the general public. This includes property preserved for fishing and boating or land designated for nature or hiking trails. In this case, public use of the property must be “substantial and regular.”
2. Protection of a natural habitat of fish, wildlife or plants or a similar ecosystem. Access to the public may be limited for environmental reasons.
3. Preservation of a historically significant structure. To qualify for a deduction for this purpose, the public must have some access to the property.
4. Preservation of open space, either for the scenic enjoyment of the general public or pursuant to a government conservation policy. Visual access is sufficient. In other words, physical access to the property isn’t required.
Note that there’s a catch to the deal: The tax law says the donation must be made “in perpetuity.” Essentially, this means the property must stay the way it is. Even the slightest modification could jeopardize the deduction.
The taxpayer in the new case, a limited liability company (LLC), owned a golf course in Georgia that was struggling financially. The course is private and can be accessed only through a security gate, which is manned 24 hours a day.
To help make ends meet, the club arranged to donate an easement on the property. The easement document identified three conservation purposes:
- Preservation of the area as a relatively natural habitat of fish, wildlife or plants or a similar ecosystem
- Preservation of the area as an open space that provides scenic enjoyment to the general public and yields a significant public benefit
- Preservation of the area as open space which, if preserved, will advance a clearly delineated federal, state or local governmental conservation policy and will yield a significant public benefit
The easement document imposes several restrictions on the golf club. It restricts the ways the easement area can be used, including the types of structures that can be built, and requires the use of “the best environmental practices then prevailing in the golfing industry.”
In addition, the club cannot remove surface or ground water, live or dead trees or any other raw materials from the easement area. It can’t put up signs or outdoor advertising or construct new roads there.
Furthermore, it must protect the bodies of water on or near the easement area; creeks and ponds cannot be manipulated, no chemical discharge can be allowed to flow into a creek or pond, no vegetation within 100 feet of a creek or pond can be cleared and the club must be careful not to cause soil erosion and sedimentation.
While the golf club owners may have had good intentions, the donation didn’t meet the tax law requirements.
For one thing, the club is in a gated community and only accessible to members and their guests. Thus, it didn’t provide scenic enjoyment for the public. Also, expert testimony showed the easement generally didn’t provide a natural habitat for fish, wildlife or plants or a similar ecosystem. Result: Deduction denied.
There is usually a significant amount of money at stake, so make sure your clients meet the requirements for charitable donations of conservation easements. Have the proposed easement assessed by a reputable professional.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...