The Tax Court recently struck down another conservation easement under Internal Revenue Code (“IRC”) IRC § 170(h). 1 This case follows several other high-profile conservation easements that have been struck down recently. 2 IRC § 170(h) and the related Treasury Regulations contain a myriad of technical requirements in order for an easement to qualify for the deduction, and the failure to fully comply with each such requirement makes the deduction even more susceptible to a challenge from the Internal Revenue Service (“IRS”).
In the case at hand, the IRS asserted that the easement did not meet the requirements of IRC § 170, or in the alternative, that the easement did not have a value greater than zero. Whether the contribution was of qualified real property and to a qualified organization was not at issue leaving the Court to determine whether the contribution was used exclusively for conservation purposes.
Background
The Court devoted a fair amount of time to the background of Champions Retreat, the development of the golf course there, the management of the golf course, the topography and adjacent properties, the flora and fauna present on the easement granted, and the donation of the easement itself.
Champions Retreat golf club was developed on a 463.3-acre tract and completed in 2005. It was located just outside of Augusta, Georgia. The golf club is located in a private section of Riverwood Plantation that can only be accessed through private gates that have 24-hour security. The club consists of 3 9-hole golf courses, each designed by a “Champion” of the game, Arnold Palmer, Jack Nicklaus, and Gary Player. The groundskeeper frequently used chemicals, herbicides, insecticides and fungicides on the course, some of which require the use of protective gear while applying. Plant regulators were also used to keep plants short and stubby. The course also was primarily covered in two non-native grasses, bermuda for the fairways and bent for the greens.
As far as topography, the course was located on two rivers, the Savannah River and the Little River, as well other creeks and low-lying wetland areas. The course also contained numerous man-made water features. The Sumter National Forest was located across the Savannah River from the course. There were numerous plants, animals, and aquatic life located on the easement, and the Court heard testimony from several experts in this area.
The idea for the easement itself came about when the accountant for Champions Retreat came across the Tax Court’s opinion in Kiva Dunes Conservation, LLC v. Comm’r, T.C. Memo 2009-145. In that case, the Tax Court allowed the deduction for a golf course easement valued at over $28 Million. Initially, the IRS sought to deny the deduction entirely, but conceded that Kiva Dunes was entitled to the deduction prior to trial. The Tax Court was left to decide the value of the easement and whether accuracy related penalties applied.
At the time of the easement at issue, Champions Retreat was not profitable. In 2010, a Georgia Partnership named Kiokee Creek contributed $2,700,000 to Champions Retreat in exchange for a 15% interest. The easement was conveyed and recorded on December 29, 2010. Champions Retreat took a deduction for the easement of $10,427,435, 98.8% of which was allocated to Kiokee Creek. The easement claimed three conservation purposes:
- Preservation of the area as a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem;
- Preservation of the area as open space which provides scenic enjoyment to the general public and yields a significant public benefit; and
- Preservation of the area as open space which, if preserved, will advance a clearly delineated Federal, State, or local governmental conservation policy and will yield a significant public benefit.
Each of these three purposes is listed in IRC § 170(h)(4) which defines what a contribution purpose is for purposes of the IRC § 170 deduction.
Analysis by the Tax Court of “Exclusively for Conservation Purposes”
Preservation of the area as a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.
In a fairly lengthy analysis of this claimed purpose, the Court discussed expert testimony on both sides regarding the fish, wildlife, and plants presence and whether there were threatened species present. The Court noted that, pursuant to Treas. Reg. § 1.170A-14(d)(3)(ii), the presence of human alteration alone did not disqualify the contribution from being eligible for the deduction as long as “the fish, wildlife, or plants continue to exist there in a relatively natural state.” While the presence of certain plants and animals which were or could be threatened was noted, the Court was unconvinced that it was sufficient to qualify for the deduction. Citing a 2015 Tax Court case with an very similar fact pattern in which the deduction under IRC § 170 was denied for an easement covering a golf course due to lack of a conservation purpose or open space preservation as required under IRC § 170(h), the Court stated that species present in the easement area that are not of regional concern does not satisfy the conservation purpose requirement. 3 The Court pointed out that the primary species of plant which was threatened only existed in a small portion of the area contributed, and further, due to application and runoff of chemicals and fungicides used to manage the golf course, much of the property did not exist in a natural state. Again citing Atkinson, the Court noted that while Champions Retreat may aim to sue such chemicals responsibly, they did not establish that the best environmental practices in the golf industry was equal to or better than “the best environmental practices then prevailing for conservation, as might be expected if conservation was the purpose of the easement.” 4 The Court concluded that the contribution did not meet the requirements of the deduction for the preservation of the area as a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem.
Preservation of the area as open space which provides scenic enjoyment to the general public and yields a significant public benefit.
The Court made quick work of this argument. While the golf course could be accessed by the public from the Savannah River (and possibly the Little River though this was disputed), the 3 to 10-foot river banks largely prevented any scenic enjoyment. The remainder of the Golf Course could only be accessed through a private gate into Riverwood Plantation and was only open to members and their guests, not the general public. The Court concluded the area was not available for the scenic enjoyment of the public.
Preservation of the area as open space which, if preserved, will advance a clearly delineated Federal, State, or local governmental conservation policy and will yield a significant public benefit.
Champions Retreat’s next argument centered around governmental conservation policy. They contended that the easement was made pursuant to Georgia law directing its Department of Natural Resources to promulgate minimum standards to protect natural resources and river corridors. They also argued that it was made pursuant to the county’s implementation of the Georgia Greenspace Program. The Court found this unconvincing. The Court noted that, pursuant to Treas. Reg. §1.170A-14(d)(iii)(A), the governmental conservation policy did not need to identify specific land for certification, but it did need to be more than a general declaration of conservation goals and there must be a significant commitment from the government to the conservation project. The Court concluded there was no support that either project was an identified conservation project nor any evidence that the Georgia Greenspace Program designated the easement as worthy of protection.
Conclusion of the Tax Court
In the end, the Tax Court seemed wholly unconvinced that there were any conservation purposes to the easement granted by Champions Retreat. The Court denied the deduction in full. The IRS does not seem to be a fan of these transactions and has shown they will attack them in a variety of ways including whether the requirements are met for the deduction, and if so, what is the value of the deduction claimed. Here the IRS asserted issues with both, but with Court concluding the contribution did not qualify for the deduction, the Court never reached the valuation issue. Taxpayers contemplating a conservation easement should ensure they are in strict compliance with all the technical requirements of IRC § 170(h) and the related regulations.
Per this article by Peter Reilly, it seems the case will be appealed.
Key Takeaways
In reviewing this case in light of a few other recent cases, the IRS seems to be increasing its attacks on easements on more than just valuation issues. The recent stretch of cases seems to rely heavily on application of Treas. Reg. §1.170A-14. While still incentivized by Congress, and without any outward showing by Congress of an intent to do away with conservation easements, the enforcement tactics and legal arguments of the IRS over recent stretch of cases illustrate that the IRS is increasing its attacks outside of the realm of valuation and is actively trying to assert more technical non-compliance issues with easement gifts by taxpayers.
Footnotes
- See Champions Retreat Golf Founders, LLC, et al. v. Comm’r, TC Memo 2018-46.
- See discussions of those cases here (Rose Hill) and here (Harbor Lofts).
- See Atkinson v. Comm’r, T.C. Memo 2015-36
- See Id., at 38.