Originally published on Forbes.com.
Whenever there is a case about taxpayers taking a huge charitable contribution for promising to leave their golf course a golf course, the first thing that always pops into my head is Sarah Norcliffe Cleghorn’s poem: “The golf links lie so near the mill/That almost every day/The laboring children can look out/And see the men at play.” I usually root for the taxpayers, but not in golf course conservation easement cases. The latest is RP Golf, LLC. They ended up losing because of “i” dotting/ “t” crossing sorts or issues. If it was almost anything besides a golf course conservation easement, I might feel a little sorry for them.
There were two courses involved – The National Golf Course of Kansas City and The Deuce at The National. The courses were designed by Tom Watson. The easement was donated to the Platte County Land Trust. The actual donor was National Golf Club of Kansas LLC, whose sole member was RP. The project had been financed by Hillcrest Bank and Great Southern Bank. The donation was in 2003. The appraised fair market value of the easement was $16,400,000.
There was some question as to whether a valid conservation purpose was being served by the donation.
At issue was whether RP Golf had satisfied the substantiation requirements of section 170 with respect to the conservation easement contribution. Respondent also claimed that the [*15] conservation easement did not: (1) protect a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem under section 170(h)(4)(A)(ii) or (2) preserve open space pursuant to a clearly delineated Federal, State, or local governmental conservation policy under section 170(h)(4)(A)(iii)(II).
The PLT agreement relied upon the Missouri statutory conservation policy, limited to open spaces and areas within counties having a population of more than 200,000 residents or in any county adjoining, or city not within but adjoining such county.
And then there was the little problem that some of the land in the easement deed was not, you know, owned by National Golf. Apparently that discrepancy was not noted in the appraisal.
A complete appraisal in a summary report was dated April 13, 2004. The appraisal was addressed to the chief executive office of National Golf in regard to a conservation easement on the National I and the National II 10 with an effective date of December 15, 2003. The appraisal commitment letter stated that the sole intended users of the appraisal were the principals of National Golf and the Internal Revenue Service in regard to a permanent conservation easement.
The property description was for 277.86 acres, and the appraisal reflected ownership by National Golf and the “National II, LLC”. The appraisal of the National I and the National II reflected a before valuation of $17,400,000, an after valuation of $1 million, and an easement valuation of $16,400,000.
The appraisal included several assumptions and limitations. One was that the title to the property interest appraised as good and marketable.
It is a little unclear but it seems that the balance of the land was owned by RP, which may have intended to have the easement cover it, but the deed from National Golf did not accomplish that.
And The Mortgage
One of the requirements of a deductible easement donation is that it be in perpetuity. An implication of that is that the easement has to be superior to any mortgages. So you have to get the entities holding mortgages to subordinate. Hillcrest did subordinate, but the subordination was not filed until several months after the easement deed. Taxpayers argued that there was an oral agreement in place to get the subordination, but that did not cut it. So no deduction
The property described in the PLT agreement purporting to grant a conservation easement was subject to preexisting, unsubordinated mortgages on the date of the grant. Because the easement granted by National Golf could have been extinguished by foreclosure between December 29, 2003, and April 15, 2004, it was not protected in perpetuity and, therefore, was not a qualified conservation contribution.
Other Coverage
The Wall Street Journal mentioned this case as being outstanding in a more general article in January.
Among others, the National Golf Club of Kansas City is waiting for a ruling from the tax court. The club’s environmental expert cited the importance of fishless ponds for amphibian reproduction and noted the presence of marsh milkweed and red-eared sliders.
Amphibian reproduction – Who knew?
Professor Nancy McLaughlin wrote me “It’s a longish case but the conclusion is simple.” She has something on it in the Nonprofit Law Prof Blog. Professor McLaughlin indicated that there is something of a push to allow developers to fix mistakes after the fact. I do have to admit that little as I like these deductions, the result, in this case, is kind of harsh.
In a previous round of this litigation, RP Golf did catch a break on not having a separate contemporaneous acknowledgement.
Possibly relief might be on the way. There are reports that Donald Trump is quite a fan of conservation deductions.
The self-described “ardent philanthropist” donated development rights for some of his most valuable properties to conservation groups and local governments, protecting songbirds and big brown bats, and giving himself the ability to claim federal tax deductions, according to land records in four states.
Last year, the front-runner for the Republican presidential nomination pledged not to build on 74% of his Westchester County, N.Y., estate, and in 2014, he promised not to construct houses on a driving range in California, according to the records. He previously donated so-called conservation easements on his Mar-a-Lago Club in Palm Beach, Fla., and his Bedminster, N.J., golf course. The land restrictions are legally binding and permanent.
Of course, ]Trump probably has a terrific team working on his easements and these other developers who have their deductions disallowed are probably losers.
Lew Taishoff, the Quick Draw McGraw of the tax blogosphere had something Thursday – “Forever, And Ever, We Never Will Part“.
And of course your lenders have to subordinate at Day One, in such a manner as binds BFPs and everybody else. Judge Paris cites all the cases on that point, most of which I’ve blogged and I’ll spare you the cross-references; you can easily find them in my archive.
The golfers double-bogeyed that one.
Other tax bloggers do not seem to have picked up on this yet. Maybe they are playing golf this weekend.
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