Saturday, February 18, 2012
Several years ago the IRS suffered a major defeat when the Tax Court blessed a $28.6 million charitable income tax deduction for the donation of a conservation easement encumbering the Kiva Dunes golf course, which is located on the gulf coast in Baldwin County, Alabama. Kiva Dunes Conservation, LLC v. Comm’r, T.C. Memo. 2009-145. After trial in the Tax Court, the IRS conceded that the donation of the easement constituted a qualified conservation contribution eligible for a charitable deduction under IRC § 170(h). Accordingly, the Tax Court’s opinion focused solely on the question of the value of the easement and, thus, the amount of the deduction.
The case involved a classic “battle of the experts” and the Tax Court found the easement donor’s valuation expert to be more credible and persuasive than the IRS’s expert. The court ultimately accepted the before and after values asserted by the donor’s expert, with modest adjustments, and concluded that the conservation easement had a value of $28.6 million, which was very close to the donor’s claimed value of $30.5 million.
Following the Tax Court’s decision in Kiva Dunes, IRS representatives indicated informally that no one should look to the case as a green light for golf course easements and the agency intended to continue to litigate such cases. Another way to deal with the problem, of course, is to seek legislative change. Accordingly, it perhaps should come as no surprise to see elimination of the charitable deduction for contributions of conservation easements on golf courses included in the Obama administration’s fiscal 2013 revenue proposals. In its “green book” explanation of those proposals, which was released on February 13, 2012, the Treasury Department explains:
A deduction is generally available for charitable contributions of cash and property. This deduction is limited -- or disallowed entirely -- for certain types of hard-to-value property. In general, no charitable deduction is allowed for a contribution of a partial interest in property. An exception to this rule provides that a donor may deduct the value of a conservation easement (a partial interest) that is donated to a qualified charitable organization exclusively for conservation purposes. The value of the deduction for any contribution that produces a return benefit to the donor must be reduced by the value of the benefit received.
Reasons for Change
Recent court decisions have upheld large deductions taken for contributions of easements preserving recreational amenities, including golf courses, surrounded by upscale, private home sites. These contributions have raised concerns both that the deduction amounts claimed for such easements (often by the developers of the private home sites) are excessive, and also that the conservation easement deduction is not narrowly tailored to promote only bona fide conservation activities, as opposed to the private interests of donors. These concerns are particularly strong in the case of the deduction for contributions of easements on golf courses. The benefit of an easement on a private golf course, especially one that is part of a luxury housing development, may accrue to a limited number of users such as members of the course club or the owners of the surrounding homes, not the general public, and the construction and operation of the course may even result in environmental degradation. Easements on golf courses are particularly susceptible to overvaluation, as private interests often profit from the contribution of the easement. Because of the difficulty determining both the value of the easement and the value of the return benefits provided to the donor -- including indirect benefits, such as the increase in the value of home sites surrounding the golf course -- it is difficult and costly for the IRS to challenge inflated golf course easement deductions. Thus, to promote the kinds of public benefits intended by the charitable deduction provision and to prevent abuses, no charitable deduction should be allowed for contributions of easements on golf courses.
The proposal would amend the charitable contribution deduction provision to prohibit a deduction for any contribution of property that is, or is intended to be, used as a golf course.
The proposal would be effective as of the date of enactment.