Thursday, October 13, 2016

PBBM-Rose Hill v. Comm’r—Deduction for Golf Course Conservation Easement Donation Denied

1 PBBM copyIn, PBBM-Rose Hill v. Commissioner, Bench Op. (Oct. 7, 2016), the Tax Court sustained the IRS’s disallowance of a $15,160,000 deduction that a partnership claimed with regard to the donation of a conservation easement encumbering a golf course. The court determined that the easement had a value of only $100,000, the partnership failed to satisfy certain requirements in IRC § 170(h) and the accompanying Treasury Regulations, and the partnership was subject to a 40% gross valuation misstatement penalty. 

A Tax Court judge is authorized to issue a Bench Opinion in a regular or S case when the judge is “satisfied as to the factual conclusions to be reached in the case and that the law to be applied thereto is clear.” To issue a Bench Opinion, the judge orally states the findings of fact and opinion in court during the trial session and a transcript reflecting the findings of fact and opinion is sent to the parties. Bench Opinions cannot be relied upon as precedent in other cases. See U.S. Tax Court Rules of Practice and Procedure, Rule 152 and Taxpayer Information: After Trial.


In 2002, PBBM-Rose Hill, Ltd., a partnership (PBBM), purchased a 241-acre, 27-hole golf course located in Beaufort County, South Carolina, from Rose Hill Country Club, Inc., for $2.4 million. The golf course was largely interspersed among the houses of a gated community. 

PBBM ceased all business operations on the golf course in January 2006, and two months later filed a voluntary Chapter 11 bankruptcy petition. 

On December 28, 2007, PBBM contributed a conservation easement to the North American Land Trust (NALT) with respect to 234 acres of the golf-course property (7 acres were excluded from the easement for golf course maintenance and clubhouse areas). Three days later, on December 31, 2007, PBBM sold the golf course to a subsidiary of the Rose Hill Plantation Property Owners Association (a homeowners association) for $2.3 million. 

The IRS challenged the deduction claimed for the conservation easement donation on numerous grounds.


Voidable Gift

The IRS argued that that the donation failed to satisfy the “granted in perpetuity” and “protected in perpetuity” requirements of § 170(h)(2)(C) and § 170(h)(5)(A) because the gift was made without bankruptcy court approval and could have been voided by the bankruptcy trustee. The Tax Court determined that it was unclear whether the gift could have been voided given the facts. It also declined to reach the question of whether the possibility of avoidance caused the easement to fail to satisfy the perpetuity requirements because the easement failed to qualify for the deduction on other grounds.

Inconsistent Uses

The IRS argued that the donation failed to satisfy the “granted in perpetuity” and “protected in perpetuity” requirements because the rights reserved to the landowner in the easement allowed for inconsistent uses. Among other things, the easement reserved to the landowner the rights to alter the golf course, build twelve clay tennis courts, build a tennis pro shop, build two houses, create a driveway, create 6,000 square feet of parking areas, and build six-foot high fences.

The IRS presumably argued that the donation did not comply with Treasury Regulation § 1.170A-14(e) (the “no inconsistent use” regulation). This regulation provides, in part, that “a deduction will not be allowed if the contribution would accomplish one of the enumerated conservation purposes but would permit destruction of other significant conservation interests,” and “a use that is destructive of conservation interests will be permitted only if such use is necessary for the protection of the conservation interests that are the subject of the contribution.”

Rather than analyzing whether the retained rights caused the easement to violate the no inconsistent use regulation, the Tax Court stated that the easement permits the majority of the acreage to be used as a golf course; the reserved rights "do not impair the conservation purpose any more than the use of the property as a golf course, which is also permitted by the easement”; and, thus, the "reserved rights alone did not cause the easement to fall outside the definition of a qualified conservation contribution.” Unfortunately, this analysis does little to illuminate the parameters of the no inconsistent use regulation.

Proceeds Clause 

The IRS argued that the donation failed to comply with Treasury Regulation § 1.170A-14(g)(6), which requires that a tax-deductible easement be extinguishable only in a judicial proceeding, upon a finding of impossibility or impracticality, and with a payment of a minimum proportionate share of post-extinguishment proceeds to the holder to be used by the holder in a manner consistent with the conservation purposes of the original contribution.

The Tax Court agreed with the IRS on this point. The court first explained that this regulation “elaborates on the protected-in-perpetuity requirement of section 170(h)(5)(A) by setting forth substantive rules to safeguard the conservation purpose of a contribution.” It then noted that the clause included in PBBM’s easement to comply with the “proceeds” component of the regulation was written such that, in some circumstances, the holder would not receive a minimum proportionate share of post-extinguishment proceeds as is required. Accordingly, the easement did not meet the requirements of the regulation and PBBM was not entitled to a deduction for the donation. For a similar holding, see Carroll v. Commissioner.

Conservation Purposes Test 

The IRS argued that the easement did not satisfy any of the conservation purposes tests set forth in § 170(h)(4)(A) and the Tax Court agreed.  

Outdoor Recreation by the General Public. One conservation purpose for which a tax-deductible easement may be donated is “the preservation of land areas for outdoor recreation by...the general public.” IRC § 170(h)(4)(A)(i). Treasury Regulation § 1.170A-14(d)(2)(ii) provides that this conservation purpose test will not be met “unless the for the substantial and regular use of the general public.”

The Tax Court found that the conservation easement failed to satisfy this test. The court noted that, although the easement required that the underlying property be open for substantial and regular use by the general public for outdoor recreation, and NALT could enforce this requirement in court (if it chose to do so), the easement also provided that it did not create any right of access by the public to the easement area. In addition, after the sale of the golf course to the homeowners association, (i) the association converted 9 holes of the golf course into a driving range and a park and operated the remaining 18 holes as a golf course, (ii) the entire area covered by the easement was accessible by car only by a single road and access was monitored by a guarded gatehouse owned and operated by the homeowners association, (iii) members of the public were allowed vehicular access to the property only if the occupants were in the area to play golf or tennis or eat at the clubhouse, and the restricted pass they received warned that any use of the pass for another purpose was not authorized and constituted trespassing, and (iv) a sign on the road to the park read: “Property owners, residents & guests only beyond this point.”

The Tax Court determined that “a significant portion of the property governed by the easement, the park, [was] relatively inaccessible to the public,” and the creation of a private park out of a substantial portion of the property demonstrated that the easement failed to preserve land for outdoor recreation by the general public.

Preservation of Open Space. A second conservation purpose for which a tax-deductible easement may be donated is the preservation of open space (including farmland and forest land) where such preservation is for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and, in either case, will yield a significant public benefit. IRC § 170(h)(4)(A)(iii).

The Tax Court held that the easement did not preserve the property for the scenic enjoyment of the public. Only a small part of property was visible from off the property, the non-golfing general public was not allowed vehicular access to the golf course, and the general public was not allowed to drive to the park. Accordingly, the easement preserved open space mainly for the benefit of the owners of the houses abutting the golf course and the benefit to the public was not significant.

The Tax Court also held that the easement did not preserve open space pursuant to a clearly delineated governmental conservation policy. Although there were several potentially applicable governmental conservation policies, the court determined that the easement did not promote any of those policies because the land’s ecological value was low and it appeared that the homeowners association could impede (block) public access to walking trails on the property, the use of which by the public might have been compatible with a local “greenway plan.”

Habitat Protection. A third conservation purpose for which a tax-deductible easement may be donated is “the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.” IRC § 170(h)(4)(A)(ii).

The Tax Court found that the easement also did not satisfy this conservation purpose test. The court noted that the IRS’s expert ecologist witness testified credibly that most of the bird species on the property are common backyard species; the wood stork, a threatened species, forages on the property but does not visit the area frequently compared to other areas of the county; most of the property is golf-course area; the diversity of species on the property is limited; the golf course is dominated by non-native grass species; the golf course requires continued application of fungicides and pesticides, resulting in pollution; the golf course is not conducive to wildlife; although alligators live on the protected property, this is a relatively unimportant species ecologically; the quality of the ponds on the property is similar to that of waterways in urban areas; and many of the trees on the property are in isolated patches or thin strips. The court also specifically rejected the proposition that the property was habitat for wood storks, noting that foraging activity did not convince the court that the property was habitat for the storks.

The Tax Court concluded that the donation did not satisfy any of the conservation purposes tests in § 170(h) and, thus, no deduction was allowable.

Form 8283 (Appraisal Summary) 

The IRS argued that PBBM failed to attach a completed Form 8283 to its tax return as required by Treasury Regulation § 1.170A-13(c)(2)(i)(B). The court noted that the following items were missing from Section B, Part I of PBBM's Form 8283: a summary of the physical condition of the property, the date the property was acquired, how the property was acquired, the donor's cost, and the amount claimed as a deduction. However, the court agreed with PBBM that “it is unclear whether a taxpayer donating an intangible right should fill out Section B, Part I, and if so, how these blanks should be filled out for such a contribution.” The court also found that the missing information could be found in other parts of PBBM’s tax return and its attachments. Accordingly, the court held that PBBM substantially complied with the appraisal summary requirement.

Qualified Appraisal

The IRS argued that PBBM fail to obtain a qualified appraisal as required by IRC § 170(f)(11)(C) because the appraisal it submitted with its tax return was missing some of the required information. The Tax Court summarily disagreed, noting that it found that the appraisal contained all of the required information.


The appraisal that PBBM submitted with its tax return valued the easement at $15,610,000. PBBM hired the same appraiser to serve as its expert valuation witness at trial, and the appraiser testified at trial that the easement had a value of $13,380,000. In coming up with this figure, the appraiser assumed that the highest and best use of the property before the easement was for commercial and residential (multifamily and single family) use.

The IRS’s expert witness concluded that the easement had a value of only $100,000. He maintained that the highest and best use of the property before the easement was a golf course. He assumed that current zoning restrictions allowed the property to be used only for open space or recreational use, that it was highly unlikely the property could be rezoned for development, and that the owners of adjoining houses would likely oppose development. 

The Tax Court agreed with the IRS’s expert. It found that it was uncertain that the owner of the property could have developed the property without permission of the county; it was uncertain that the county would have given its permission had such permission been required; the adjoining homeowners were opposed to development of the property; the opposition would have reduced the chance that the county would have permitted development had its permission been required; and the opposition would also have put economic pressure on the property owner to leave the property undeveloped. The court found that the uncertainties about the possibility of developing the property were so great that an owner would have been discouraged from pursuing development.

The Tax Court concluded that if PBBM had thought the property was worth roughly $15.6 million because of its development potential, it would not have sold the property to the homeowners association for $2.3 million. Although PBBM suggested that environmental concerns motivated it to give up over $13 million of value, the court was unconvinced. It concluded that PBBM donated the easement because it did not think that developing the property was feasible. This conclusion was further supported by the fact that PBBM had assured the bankruptcy court that selling the property for $2.3 million was in the best interests of the bankruptcy estate and the creditors. 


The court held that PBBM was liable for the 40% strict liability gross valuation misstatement penalty because the value it reported on its tax return for the easement ($15,160,000) was more than 15 times (or 15,160%) of the court-determined correct value ($100,000). This penalty was applied to the underpayment of taxes resulting from PBBM’s reporting of a $15,610,000 deduction instead of a $100,000 deduction.

PBBM was found not liable for a 20% negligence penalty with regard to the underpayments resulting from the difference between a deduction of $100,000 and a deduction of $0 because PBBM qualified for the reasonable cause and good faith exception. The court explained that the possibility that the gift could have been voided by the bankruptcy trustee did not demonstrate that PBBM acted in bad faith; the proceeds clause was an imperfect, but good faith, attempt to satisfy the extinguishment regulation; and, although the easement did not satisfy any of the conservation purposes tests, BPPM appeared to have made a good faith attempt to meet the requirements of § 170(h). 

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

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