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Tax Court Denies Conservation Easement Deduction

Although the number of your clients who might give “conservation easements” to government units is probably limited, the tax stakes are extremely high for those who do. In the latest example, Carter, TC Memo 2020-21, the taxpayer lost in Tax Court because the conservation easement donation didn’t include the proper specifications.

Mar 17th 2020
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conservation easement
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Although the number of your clients who might give “conservation easements” to government units is probably limited, the tax stakes are extremely high for those who do. Not surprisingly, taxpayers and the IRS often clash over the deductible amounts for donations, so the court dockets are jammed with these types of cases.

In the latest example, Carter, TC Memo 2020-21, the taxpayer lost in Tax Court because the conservation easement donation didn’t include the proper specifications.

Notably, a taxpayer can deduct the full fair market value (FMV) of donated property he or she has owned for longer than one year if the charitable organization  uses the property to further its tax-exempt purpose. Such gifts are subject to an annual limit of 30% of adjusted gross income (AGI), but any excess may be carried forward for up to five years.

These rules apply to donations of an interest in property for certain specific conservation purposes. Unlike most other charitable gifts, you can still retain ownership of the property, although you must grant certain rights for using or viewing the property. Contributions must be made to a government unit or public charity or organization.

For instance, a taxpayer may be able to write off the value of the conservation easement for any one of these reasons.

  • Preservation of land for outdoor recreation or education of the general public.
  • Protection of a natural habitat of fish, wildlife or plants or a similar ecosystem.
  • Preservation of a historically significant historic structure.
  • Preservation of open space either for the scenic enjoyment of the general public or pursuant to a government conservation policy.

In the new case, a partnership in Georgia conveyed to the Noprth American Land Trust (NALT), a qualified charitable organization, a conservation easement covering  500 acres on the edge of its farm. The deed of easement restricts the use of the covered property and, among other things, generally prohibits the construction or occupancy of any dwellings.

However, as part of a “carve-out,” the partnership retained the right to build 11 single-family dwellings in specified "building areas." The locations of these building areas remained to be determined, subject to NALT's approval. The partnership claimed a deduction equal to the easement’s purported interest and the partners reported six-figure write-offs on their respective tax returns,

Not so fast, said the IRS. It disallowed the deductions and assessed deficiencies, interest and penalties.

Now the Tax Court has sided with the IRS. It noted that that the easement terms included the carve-out allowing the partnership to build 11 unspecified homes on the property. The locations of those were not fixed at the outset, so the donation doesn’t qualify under the technical requirements for conservation easements.

What really hurts in this case is that the partnership could easily have resolved the problem by designating the building areas in its conveyance or omitting some of the land from the conservation grant.

With so many tax dollars at stake, your clients can’t afford to make a similar mistake. Ensure that all the legal and tax requirements are met before a transaction is completed.

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