Land Trust and Taxpayer Win in Landmark IRS Easement Challenge
The US Tax Court recently decided a case in which the IRS challenged a North American Land Trust conservation easement on 141 acres of Alabama coastal land, part of which included a golf course. After trial and briefing, the IRS dropped its challenge of the easement’s conservation values and focused on valuation. The easement includes significant habitat for endangered species, is a critical migratory bird flyway and buffers a federal wildlife refuge. The Tax Court upheld the easement, upheld the deduction for a stewardship endowment, and only slightly reduced the value of the donation from what the taxpayer had claimed.
In 2002, Kiva Dunes Conservation, LLC (Kiva) acquired a 140.9-acre property consisting of the Kiva Dunes Golf Course and several natural areas. The taxpayer donated the easement to North American Land Trust, a Pennsylvania nonprofit corporation (NALT) in 2002, and the IRS audited the taxpayer in 2005, issuing a deficiency notice in early 2006. Kiva claimed a deduction for the 2002 tax year of $30,888,000 for the easement donation representing a 96.7% reduction from the unencumbered value of the Gulf Coast property. The IRS engineer’s report originally suggested a value instead of $1,200,000. However, IRS proposed to disallow the deduction entirely, finding no conservation purpose. At trial, IRS still maintained lack of conservation purpose and a zero deduction, but alternatively argued for an easement value of about $1.2 million using an outside appraiser (who was not local). IRS engineers are not appraisers and tend to advocate for values of zero to nominal amounts apparently based on their perception that conservation easements do not reduce the value of the underlying land.
The Tax Court found that the value was only slightly less than the claimed $30 million dollar deduction and allowed a deduction of $28 million dollars. The costs of trial and preparation were significant. David Wooldridge, lead counsel for the taxpayer, indicates that the total legal expenses, including experts and a week-long trial, for the taxpayer alone were very substantial, several times the cost of initially implementing the easement. Fortunately, the taxpayer could afford to pay for the extensive preparation and had the resolve to see this three-year case through to the end.
The conservation easement purposes cite relatively natural habitat, open space, scenic enjoyment and clearly delineated government policy. The introductory clauses of the easement also list the protection of five specific species or habitat types and state that the golf course is not an inconsistent use. The restrictions are comprehensive, clear and typical of the majority of conservation easements.
The easement requires the use of the best environmental practices in the management and operation of the golf course and references particular management publications for guidance. The conservation easement also clearly states that the easement property cannot be used to qualify other non-easement property for government subdivision approval or any other permit approval. Subdivision and fragmentation of the property is not prohibited, but requires allocation of the reserved rights with the consent of NALT to the resulting parcels. The reserved rights provide for golf course operations and for nature education and recreation. The conservation easement has extensive detail about the exercise of reserved rights and NALT approval functions.
The golf course included constructed lakes and wetlands as well as landing sites for Neotropical migratory birds of conservation concern. While the golf course is open to the public for a relatively modest greens fee, public recreation was not listed as a conservation purpose in the easement. In addition to the relatively natural habitat, the golf course easement preserved extensive scenic vistas to the public from two major public roads. The validity of the easement was the subject of extensive expert testimony, two days of trial and extensive briefing, before the IRS dropped that portion of the challenge. In regard to habitat, the IRS appears to be recycling some arguments that were unsuccessful in Glass v. Commissioner, namely that the easement did not adequately protect whatever habitat might exist.
The property lies between two parcels of the Bon Secour National Wildlife Refuge and sits in a very scenic location on Alabama’s Fort Morgan Peninsula, a spit of land that helps form Mobile Bay. The natural habitat area of easement property consists of 49 acres of the 140.9 conserved acres. The other 92 acres includes the golf course, with 73 acres mowed for fairways and the remainder consisting of lakes, wetlands and scrub oak hammocks. The entire area is in an important Neotropical migratory bird flyway, used frequently by birds to rest and refuel. The IRS challenged the easement both on its qualification under section 170(h) and on valuation grounds.
The Court noted in the second footnote in its opinion that “Baldwin County has 32 miles of gulf coastline that is consistently ranked as one of the most beautiful beach destinations in the United States.” Because the IRS conceded the conservation values after trial, the court did not opine as to the issue of a qualified conservation easement. This tactic appears to be a strategic retreat by the IRS to avoid establishing case law on this point in a case where a golf course protected notable scenic views, significant wildlife habitat, and buffered a national wildlife refuge.
“Interestingly, the IRS and some lawyers across the nation have stated publicly that it may be inappropriate for a charitable deduction to be allowed for a conservation easement on golf course property,” said lead taxpayer attorney David Wooldridge (of Sirote & Permutt). “This case of first impression makes clear that the opposite is true.” The cautious analyst would also add to this statement that while true in this case where the conservation values inherent in the relatively natural habitat adjacent to the golf course are well documented and substantial, it could be much less true in other cases, and land trusts should still use great caution in considering conservation easements on golf courses.
Taxpayer Attorney Analysis
The trial ran for a week at the end of January 2008, and the parties submitted post-trial briefs through 2008. The Court issued its opinion in June 2009. “It seemed like the longest week of my life,” said Ronald A Levitt, the transactional attorney on the case for the taxpayer. “It was an intense experience and I appreciate what tax litigation attorneys like my partner David Wooldridge do now more than ever. It was rewarding because of the good that these conservation easements do. Conservation easements make the world a better place and defending them is more fun than the usual tax court case that is often only about money.”
Wooldridge and Levitt say that the case is notable for several reasons:
(1) Following the trial, the IRS conceded that an easement over property used as a golf course can constitute a permissible “conservation purpose,” protecting wildlife habitat and preserving open space vistas available to the public
(2) The valuation method (known as the “subdivision method”) used by the taxpayer’s appraiser is a permissible method of determining the value of the conservation easement, contrary to IRS pronouncements
(3) The fair market value of the easement contributed by the taxpayer was almost $28.7 million. This constitutes 94 percent of the value claimed by the taxpayer, an unusually high percentage in litigated tax cases.
Tax Court proceedings differ from more familiar court procedures in that oral arguments occur first in front of the Judge and then the parties take up to a year after that to exchange briefs, reply briefs, post-trial briefs and a variety of other pleadings.
“The Tax Court decision is important because it settled several issues of critical importance to taxpayers making contributions of similar conservation easements,” added Levitt. “The decision will prove crucial to other taxpayers, including several other cases on which our firm is working on behalf of clients.”
Conservation Defense Clearinghouse
It includes briefs; the trial transcript; a detailed analysis Memorandum with appraisal comparison, trial strategy and forecasts of IRS actions and perspectives; and more.
The Conservation Defense Clearinghouse is a new resource for Alliance member land trusts and partners. Login is easy, with the same password as The Learning Center.