Conservation Easement Update: Pine Mountain Preserve Case Brings Big Impact to the Land Conservation Community
Contributors
On October 22, 2020, the 11th Circuit Court of Appeals issued their decision in Pine Mountain Preserve, LLP v. Commissioner, and the decision rendered potentially positives results for the land conservation community. The case has been closely watched by the tax and legal community, as many of the technical issues being raised by the Internal Revenue Service (IRS) in more recent audits are based on the prior Tax Court rulings in Pine Mountain Preserve.
The following is a summary of the relevant issues, including the position of the Tax Court and Court of Appeals.
Issue #1:
Does the presence of “reserved rights” by the landowner prevent the donation from being a “Qualified Real Property Interest” as required by Internal Revenue Code §170(h)(1)(a)?
Tax Court:
The presence of reserved rights, in the form of “building areas” in the deed of easement, prevents the easement from meeting the Qualified Real Property Interest requirement. As a result, the entire charitable contributions were disallowed for the 2005 and 2006 donations.
Court of Appeals:
The legal precedent used by the Tax Court to deny the deduction was inapplicable based on a substantial difference in facts. The IRS and Tax Court relied heavily on Belk v. Commissioner, where the deed of easement allowed for the landowner to substitute conserved land with unrestricted land at a later date. In the Pine Mountain case, the landowner was only allowed to move “building areas” within the same conserved property, without changing the easement boundaries and with the full consent of the land trust.
The Court of Appeals also referenced in footnote 3 that the regulations allow for movable building sites without making the conservation easement donation non-deductible.
Issue #2:
Does the presence of an “amendment clause” in the deed of easement result in the property not being “protected-in-perpetuity?”
Tax Court:
The presence of an amendment clause does not violate the “protection in perpetuity” requirement. (Note: This was cross-appealed by the Commissioner.)
Court of Appeals:
Agreed with the Tax Court finding the amendment clause did not violate the protected-in-perpetuity requirement. The Court of Appeals further rejected the Commissioner’s position that “perpetuity” meant “inalienability, unreleasability, or unamendability.” In fact, the term “perpetuity” only means the granted property will not automatically revert to the grantor or his heirs in the future.
The Court of Appeals also indicated that, as a matter of contract law, parties to a bilateral contract (e.g., a conservation easement) are free to amend their agreement after the fact, even if the right to amend is not expressly included in the deed of easement.
Issue #3:
What is the proper method for valuing a conservation easement donation?
Tax Court:
The original decision by the Tax Court only considered the value of the 2007 easement because it was the only year that did not include “building areas”, and the IRS still substantially reduced the value of the easement as compared to the taxpayer’s valuation expert. In its ruling, the Tax Court held that neither the partnership’s expert nor the IRS’s expert used an acceptable method for valuing the easement. As a result, the Tax Court decided to give equal weight to both valuations and assigned a value equal to 50% of each side’s value.
Court of Appeals:
The method used by the Tax Court was not acceptable since it did not meet any of the requirements detailed in the applicable tax regulations. The issue of value was remanded back to the Tax Court to determine the correct value of the easement.
Where are we headed from here?
Although the Court of Appeals resolved multiple issues, the following items have been remanded for the Tax Court to examine further:
- 1) The Court of Appeals only determined the 2005 and 2006 donations met the “granted in perpetuity” requirements. The Tax Court must now determine if they are “protected in perpetuity.”
- 2) If the donations are determined to be protected in perpetuity, the Tax Court must then determine the value of the 2005, 2006 and 2007 deductions using the methods prescribed in the IRS regulations.
The decision handed down by the Court of Appeals clearly shows it is willing to hold the IRS and Tax Court accountable when their arguments do not follow the applicable law. This is a positive sign not only for Pine Mountain but for all of those involved in the land conservation community.
We will continue to monitor the progress of Pine Mountain and provide updates as they become available. Be sure to subscribe here to receive news and alerts from Moore Colson’s Tax Practice.
Adam Bateman, CPA, is a Partner with Moore Colson’s Tax Services practice. Adam specializes in providing tax compliance and planning services for closely-held businesses and their owners in the construction, real estate and financial services industries.
Andy Starnes, CPA, is a Partner and Tax Services Practice Leader Moore Colson. Andy’s specialties include corporate tax compliance and planning, business consulting and multi-generational planning with a focus on the construction, professional services and staffing industries.
