Balsam Mountain v. Commissioner—Conservation Easement Authorizing Limited Swaps Not Deductible Under § 170(h)

In Balsam Mountain v. Commissioner, T.C. Memo. 2015-43, that Tax Court held that a conservation easement that authorized the parties, for a period of up to 5 years, to remove up to 5% of the land from the easement in exchange for protecting a similar amount of contiguous land was not eligible for a deduction under IRC § 170(h). Citing to the 4th Circuit’s recent decision in Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014), the Tax Court explained that the easement did not qualify as a “restriction (granted in perpetuity) on the real property” as required by 170(h)(2)(C).

Background

In 2003, Balsam Mountain Investments, LLC (BMI), granted a conservation easement on 22-acres in North Carolina to the North American Land Trust (NALT). BMI reserved the right in the easement to, for five years following the donation, make alterations to the boundaries of the area protected by the easement, subject to the following conditions:

• the total amount of land protected by the easement could not be reduced,
• land added to the easement had to be contiguous to the originally protected land,
• land added to the easement had to, in NALT’s reasonable judgment, make an equal or greater contribution to the easement’s conservation purpose,
• the “location and reconfiguration of a boundary” could not, in NALT’s judgment, result in any material adverse effect on the easement’s conservation purposes, and
• no more than 5% of the originally protected land could be removed from the easement as a result of such alterations.

Analysis

In Belk, the 4th Circuit affirmed the Tax Court’s holding that a conservation easement was not “a restriction (granted in perpetuity) on the use which may be made of the real property” as required by § 170(h)(2)(C) because the easement permitted the grantor and grantee to swap land in and out of the easement, subject to the approval of the grantee and certain other conditions. The 4th Circuit explained that, to be eligible for a deduction, an easement must protect, in perpetuity, a “defined and static” (or in the Tax Court’s words, “identifiable, specific”) parcel of real property. Based on Belk, the Tax Court held that the Balsam easement, which authorized the grantor to change the property subject to the easement, was not a “a restriction (granted in perpetuity) on the use which may be made of the real property” and, thus, was not eligible for a deduction.

BMI argued that Belk was distinguishable because the Belk easement allowed for the substitution of all of the land originally protected by the easement, while the Balsam easement allowed for the substitution of only 5% of the originally protected land. The Tax Court was not persuaded. While the court agreed that the Belk and Balsam easements were different, it said “the difference does not matter.” For five years following the donation, BMI, with the approval of NALT, could change the boundaries of the area protected by the easement. Accordingly, the easement was not an interest in an identifiable, specific piece of real property and, thus, was not deductible. Finding no genuine dispute as to any material fact, the court granted the IRS’s motion for summary judgment on the issue.

Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law