Tax Court Denies Deductions for Contributions of Conservation Easements

May 4, 2012

In several recent cases the United States Tax Court has denied or reduced charitable contribution deductions for contributions of conservation easements.

Lack of Recitation that “No Goods of Services” Were Provided

In order for a donor to claim a charitable contribution deduction for a contribution of $250 or more, the donee organization must provide a contemporaneous written acknowledgment of the contribution.  The acknowledgment must include:  (1) the amount of cash and a description (but not the value) of any property other than cash contributed; (2) whether the donee organization provided any goods or services in consideration of the contribution; and (3) a description and a good faith estimate of the value of any goods or services provided by the donee organization in consideration of the contribution.  The contemporaneous written acknowledgment need not take any particular form.

In Schrimsher v. Commissioner, T.C. Memo. 2011-71, the Tax Court upheld the IRS’s denial of a deduction the taxpayers claimed for the charitable contribution of a façade easement.  Pursuant to an agreement the taxpayers granted a façade easement in a Huntsville, Alabama building to the Alabama Historical Commission.  The agreement recited that the easement was given “for and in consideration of the sum of TEN DOLLARS, plus other good and valuable consideration ….”  The IRS did not dispute that the agreement constituted an “acknowledgment” or that it was contemporaneous.

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Extinguishable by Mutual Consent

In general, no charitable deduction is available unless the taxpayer donates his or her entire interest in property.  One of the exceptions to this rule is the exception for a “qualified consideration contribution.”  A “qualified conservation contribution” is a contribution (1) of a “qualified real property interest,” (2) to a “qualified organization,” (3) which is made “exclusively for conservation purposes.”  In Carpenter v. Commissioner, T.C. Memo. 2012-1, the issue was whether the taxpayer’s donation of a conservation easement failed the “exclusively for conservation purposes” requirement because the easement was terminable by mutual written agreement of the taxpayers and the donee organization if future circumstances rendered the purposes of the easement impossible to accomplish.

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Subject to a Mortgage

Whether the conservation purpose was “protected in perpetuity” was also at issue in Mitchell v. Commissioner, 138 T.C. No. 16 (2012).  The Mitchells had acquired real property from a seller who insisted on being paid in yearly installments, so the Mitchells signed a promissory note secured by a deed of trust.  When Mr. Mitchell became ill, the Mitchells put the real property and other assets into a family limited partnership.  A year later in 2003 the partnership granted a conservation easement on 180 acres of the property to a conservancy, and the partnership claimed a charitable contribution deduction that flowed through to the Mitchells.  In 2005, the seller agreed to subordinate his deed of trust to the conservation easement.

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Highest and Best Use

In Esgar Corp., et al. v. Commissioner, T.C. Memo 2012-35, the issue was the value of conservation easements.  The court held that the highest and best use of the property prior to the contribution of the easements was agricultural, not mining as claimed by the taxpayers.  Therefore, the amount of the deduction was reduced.