Friday, February 8, 2013
As regular readers already know, I am pretty skeptical of tax deductions for golf course conservation easements. The bold landowners in Belk v. CIR, 140 T.C. No. 1 (Jan. 28, 2013) asserted that the conservation easement burdening a golf course should be valued at over $10 million. The golf course was part of a residential suburban development. I am sure many of you have seen these places where the golf course is part of the attraction for people to buy the homes in the development both because of the attraction of being able to play golf but because of the open space the golf course provides. The valuation of such golf courses is complicated because it often fails to account for the fact that the presence of the golf course increases the value of the surrounding homes. In this case, the Belk conservation easement also had an unusual provision. It stated that the landowners could change the boundaries of the conservation easement with agreement of the conservation easement holder. Here is the exact language from the conservation easement:
3. Owner may substitute an area of land owned by Owner which is contiguous to the Conservation Area for an equal or lesser area of land comprising a portion of the Conservation Area, provided that:
a. In the opinion of Trust:
(1) the substitute property is of the same or better ecological stability as that found in the portion of the Conservation Area to be substituted;
(2) the substitution shall have no adverse affect on the conservation purposes of the Conservation Easement or on any of the significant environmental features of the Conservation Area described in the Baseline documentation;
(3) the portion of the Conservation Area to be substituted is selected, constructed and managed so as to have no adverse impact on the Conservation Area as a whole;
(4) the fair market value of Trust's conservation easement interest in the substituted property, when subject to this Conservation Easement, is at least equal to or greater than the fair market value of the Conservation Easement portion of the Conservation Area to be substituted; and
(5) Owner has submitted to Trust sufficient documentation describing the proposed substitution and how such substitution meets the criteria set forth in subsections (1)-(4) above of this Section B.3.a. of this Article III.
The IRS disallowed the deduction because a moveable conservation easement is not perpetual as required by the statute allowing charitable deductions for conservation easements. The Tax Court agreed. This view of conservation easements places a primacy on the location preserved over the features preserved (or conservation value of the restriction). In some ways, I am happy to see scrutiny of these highly appraised golf course conservation easements, but regret that the IRS does not recognize the potential value of a movable conservation easement. With climate change and shifting land use patterns, there are multiple reasons for wanting more flexible arrangements that the typical permanent conservation easement. This law doesn’t prohibit it of course (although it might signal some trouble for arrangements of that type in states like California that require conservation easements to be perpetual), but does indicate movable conservation easements won’t be able to garner tax deductions that have induced many landowners and developers to create the restrictions. For two other summaries of this case, see Nancy McLaughlin’s take and Jonathan Bockian’s. For more thoughts on movable conservation easements, check out this article by Bill Weeks.