Mitchell A. Kane: The Dispute Over Perpetual Conservation Easements Just Got Worse (December 13, 2022)

Mitchell A. Kane, editor in chief of the Tax Law Review at New York University School of Law, has made available for download his article “The Dispute Over Perpetual Conservation Easements Just Got Worse”, published on the TaxNotes blog. The article begins as follows:

With the recent filing of a petition for certiorari in Oakbrook Land Holdings LLC v. Commissioner,1 the long-running saga over the charitable contribution deduction for conservation easements has entered a new, and potentially damaging, chapter. At the core of the controversy is the so-called proceeds regulation.2 Generally, no charitable contribution deduction is available under IRC section 170 for gifts of partial interests in property. One important exception to this general prohibition covers gifts of “qualified conservation contributions” — a category that includes restrictions on the use of real property commonly referred to as “conservation easements.”3 There are requirements to qualify a conservation easement gift for the deduction. For example, the easement must be granted exclusively for a “conservation purpose,” and it must be held by a qualified organization, typically a land trust or a governmental organization.4 A further requirement — of central import in Oakbrook — is that the conservation easement be perpetual.5

The proceeds regulation indicates how a conservation easement can satisfy the statutory perpetuity requirement notwithstanding that the easement may be subject to extinguishment in state court proceedings when the associated conservation purpose becomes impossible or impractical. To preserve deductibility, the donor of a conservation easement to a qualified organization must agree at the time of the easement grant that following any extinguishment of the easement, a requisite amount of proceeds from a sale, exchange, or involuntary conversion of the once-burdened real property must flow to the donee organization, which then must devote those proceeds in a manner consistent with the easement’s original conservation purpose.6 The determination of the donee’s share of proceeds under the proceeds regulation, and the question whether the proceeds regulation itself is valid, has generated extensive litigation.7 The IRS has taken the position that failure to agree to a correct calculation of the donee’s portion of proceeds causes the donation to fail the requirements of section 170, in which case any claimed deduction will be disallowed in its entirety.

A simple numerical example will assist here. Suppose a landowner places a conservation easement on a parcel of real property and everybody agrees that the value of the easement is $100,000 and the value of the fee simple interest without restrictions is $1 million. The regulation indicates that the donee organization must be entitled to proceeds from a monetization event following judicial extinguishment in an amount that reflects a constant “proportionate value,” using the time of donation as a baseline.8 This requirement has generated two types of interpretive questions and associated litigation disputes.

Click here to read the full article: “The Dispute Over Perpetual Conservation Easements Just Got Worse”

Posted by Marin Larkin, Associate Editor, Wealth Strategies Journal.

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