Deny It Like It’s TOT Conservation Easement Denial Upheld

It is no secret. Everyone likes reading and writing about syndicated conservation easements. In December 2019, the Tax Court ruled in the case of TOT Property Holdings LLC v. Comm’r.[1] The result was an unfavorable one for the taxpayer. The transaction in question was more-or-less a run of the mill syndicated conservation easement, albeit ending in disaster based on another technical foot fault. The Eleventh Circuit heard the appeal and upheld the ruling of the Tax Court. In doing so, the Court dropped some relatively concerning dicta, upheld application of the extinguishment regulations, and likely soured other cases in the pipeline for many.


In 2005, a gentleman by the name of George R. Dixson purchased 2,602 acres of rural land in Van Buren County, Tennessee for about $1.9 million. In 2008, Dixson contributed 652 acres to two difference limited liability companies, namely Evergreen Pines Plantation, LLC and Harper Branch Forest, LLC. The LLCs were owned by TOT Property Holdings, LLC (“TOT”). A 98.99% interest in TOT was eventually sold, holding the two single-member LLCs and about $100 to PES Fund VI, LLC (“PES”), the investment fund pursuant to a syndication of interests.[2] The price was $1,039,200. Shortly thereafter, TOT executed a deed, donating a conservation easement to Foothills Land Conservancy (“Foothills”) encumbering nearly all of the 652 acres. Unfortunately, the deed contained the dreaded language which has been the downfall of numerous similar easements (from a tax perspective at least). This language was the favorable offset of any extinguishment proceeds to the taxpayer with respect to improvement costs post-easement. The result, per the IRS and the 11th Circuit, is failure to comply with the extinguishment regulations. TOT lost at a bench trial in Tax Court. While there were three issues at Tax Court, the issue involving the language contained in the deed effectively disposed of the merits.

The Fall

The language at issue relates to the “in perpetuity” requirement under Treas. Reg. § 1.170A-14(g)(6)(ii).[3] In the world of real property, nothing is technically in perpetuity. However, Congress saw fit to require that conservation easements be protected in perpetuity in order to qualify for the deduction under IRC § 170(h). The Regulations require that:

In case of a donation made after February 13, 1986, for a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time. See § 1.170A-14(h)(3)(iii) relating to the allocation of basis. For purposes of this paragraph (g)(6)(ii), that proportionate value of the donee’s property rights shall remain constant. Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction.

However, the TOT deed provided that the extinguishment proceeds payable to the grantee be computed as follows:

. . . multiplying (a) the fair market value of the Property unencumbered by this Easement (minus any increase in value after the date of this grant attributable to improvements) by (b) a fraction, the numerator of which is the value of this Easement at the time of the grant and the denominator of which is the value of the Property without deduction of the value of this Easement at the time of this grant.

(emphasis added)

In the 11th Circuit at least, going forward, there are likely going to be a lot of easement deductions falling on summary judgment, as the extinguishment regulations appear to hold water in that circuit.

Other Interesting Factors

There are a few other items that tend to raise questions on this high-dollar value development opportunity, being a low density, destination mountain resort residential development. Think about that considering, with respect to the 652 acre subject property:

  • there were no mountains, large bodies of water, or any consistent flows of water;
  • while telephone and electricity were available, there was no public water;
  • the surrounding area was rural and undeveloped; and
  • A nearby development was not successful and another was a purported Ponzi scheme.

So, while the appraiser arrived at a value, assuming a mountain resort community, the facts surrounding the appraisal were not too supportive. The 11th Circuit and the IRS noticed.

Footnote 23

Interestingly, the Court found it proper to add Footnote 23. Footnote 23 read as follows:

Unlike Mr. Barber, Mr. Wingard had been aware of this arm’s-length transaction when he valued the property but did not take it into account for his valuation.  He reasoned that he did not consider owning a partial interest in an entity that owns property the same as owning the property itself.  We reject Mr. Wingard’s reason; it makes no common sense.  When the partial interest is a 99% ownership interest and complete control, as here, and when the property is the only asset of the entity (besides $100 cash), it is clear that the parties considered the price paid to be the fair market value of the property.

This footnote effectively acts to ignore the fact that entity interests were purchased, not a fee interest in property. However, the Court is not ignorant of the fact that the entity merely held the real property and nominal cash. The last part of the last sentence reading “… it is clear that the parties considered the price paid to be the fair market value of the property.” is disturbingly conclusive. However, this being another bad facts/bad law scenario, the facts are indeed tough to ignore.

The Valuation Issue – Comparable Sales vs. Highest and Best Use

Considering Footnote 23 and the battles of the appraisers, valuation came into play and was hotly disputed as the valuation, as determined by the Tax Court, would dictate with respect to penalties, even though the Tax Court denied the deduction in full. While conservation easements are usually supported with before and after valuations (value before the easement, then after the easement) to value the easement itself, the sale of the 99% interest was, to the Court, highly indicative of the value of the underlying property since the entity owned effectively nothing but the property. Therefore, be it comparable sale or highest and best use, the taxpayer would effectively be at a loss. With respect to comparable sale, the entirety of the property, if looking at the price of the interest sold, was significantly less than the claimed value. The sale of the entity interests would in effect be a proxy for the value of the property. Applying this logic to the highest and best use scenario, assuming comparable sales would not apply, the before value could be determined based upon this proxy. Therefore with a direct comparable proxy or a proxy for the before value, the taxpayer is pinched based on the price paid for the interests acquired.


The IRS is relentlessly pursuing syndicated conservation easements and is having much success in its enforcement measures. While, from a policy perspective, it is questionable that the IRS regularly desires to avoid the valuation fight (except in the penalty arena) while constantly taking taxpayers to task on technical foot faults just because the IRS plainly does not like the transactions. However, when complex transactions have poor facts, the IRS’ job is an easy one.

[1] TOT Property Holdings LLC v. Comm’r, No.5600-17 (Dec. 13, 2019).

[2] See Footnote 4, TOT Property Holdings LLC v. Comm’r, 27 AFTR 2d 2021-2420 (11th. Cir. 2021).

[3] See also PBBM-Rose Hill, Ltd., v. Comm’r, 900 F.3d 193 (5th Cir. 2018).


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