Originally published on Forbes.com.
The Eleventh Circuit has given one of President Trump’s favorite tax deductions a boost with its decision in Champion Retreat Golf Founders LLC. When a list of Trump Charitable contributions was released, “Various Conservation Easements” topped the list at $63,825,000 and according to this story in the Wall Street Journal, golf courses number among his many easements.
I was expecting a congratulatory tweet to the judges, but none so far. Given how hard the IRS has been on conservation easements, they may account for the surfeit of audits that prevent the President from releasing his returns. Or maybe it is because he is such a strong Christian.
Regardless, the Eleventh Circuit decision in Champion can be seen as a vindication for golf courses being worthy of easement deductions.
The Attack On Conservation Easements
The IRS attacks conservation easement deductions from a variety of angles. They have had a great deal of success with technical foot faults. Reilly’s Fourth Law of Tax Planning – Execution isn’t everything but it it’s a lot.
Valuation is another avenue that until recently has not been a focus, but it promises to be emphasized in the future.
Champion Retreat was a different story. The argument was that there was just not enough in the way of conservation going on.
Conservation Purposes
The regulations (Reg 1.170A-14) mention four possible conservation purposes, two of which are relevant in the Champion case – protection of a relatively natural habitat and the preservation of certain open space.
There are a variety of good things about the open space, one of which is providing the general public with scenic enjoyment.
The IRS argued and the Tax Court agreed that the golf course was not all that natural what with the non-indigenous grass they plant and all those chemicals. The birds and squirrels were not all that endangered. The state of Georgia allows hunters to shoot up to 12 squirrels a day during hunting season.
As far as the scenic part goes, the area protected from the easement cannot be seen by the general public from the road.
Appeal Judges See It Differently
So there are a lot of different sorts of birds that visit the golf course and the squirrels. Maybe those second amendment enthusiasts in the Georgia legislature think it is OK to shoot them, but Congress wants them protected.
“Were it not for the presence of a golf course on part of this property, the assertion that contributing an easement over property with this array of species does not qualify as a conservation purpose would be a nonstarter.”
“The Commissioner discounts the importance of the species, noting that Georgia has a six-month season in which hunters may take up to 12 squirrels per day. But that is not dispositive of the question whether providing the squirrels a habitat is a conservation purpose. That Georgia chooses not to protect the species hardly seems a reason to deny whatever protection is available under federal law.”
You can’t see the protected area from the road, but if you are courageous enough to get into a canoe or kayak you can see it from the river. I’m not much inclined toward canoes and when it comes to kayaks, don’t get me started. So I have to wonder if those folks can be considered the general public, but that was enough for the judges.
Partial Dissent
Britt Grant, who was appointed by President Trump in 2018, went along with the overall judgement, but dissented on the reasoning. She thought that since the scenic enjoyment of the boaters was a sufficient purpose, they did not need to get involved with the birds and the squirrels.
“But the presence of animals cannot hide that a lot of the easement is highly developed and at least somewhat hazardous to certain species. And no matter how many animals live on the Champions easement, the reality remains the same: with the chemicals, imported grasses, large fans, artificial drainage, and water pumping, it is not at all clear that the easement amounts to a “relatively natural habitat.” I do not mean to say that a golf course could never qualify; it’s simply not clear that this one does.
As thorny as this “natural habitat” question is, we could spare ourselves the trouble of solving it. After all, we could limit our decision to holding that the easement qualifies for a deduction as an open, scenic space.”
Judge Grant grew up in Georgia, was Georgia’s Solicitor General and on Georgia’s Supreme Court, so I have to wonder if the disrespect for Georgia squirrel hunters shown by the majority was a factor. Regardless, she does cast a little bit of a cloud on the notion that golf courses are great for critters.
Comment
Vivian Hoard, who represented Champion spoke with me and gave me some more sympathetic views on the case indicating that this is not the sort of abusive easement deal that they IRS should be pursuing.
This was a syndication of sorts, but it was not a recent acquisition. Instead tax motivated investors were found to take advantage of a legitimate deduction. The land had been acquired in 2002 and the 27 hole golf course was opened in 2005. The golf course was losing money and it was really a nice spot for development.
I have tried a number of back of the envelope computations and concluded the amount of the deduction is not of the crazy sort that you are seeing in current deals.
Ms. Hoard remarked:
“We are thrilled with this decision because it accomplishes the original goal of the conservation easement deduction. The law was designed to encourage property owners to resist the temptation to develop.”
It Is Not Over
The case goes back to the Tax Court.
“The bottom line is this: the record establishes that Champions is entitle to a deduction in the proper amount. Because it upheld the Commissioner’s disallowance of the deduction, the Tax Court did not address the proper amount, and we express no opinion on it. That will be an issue for the Tax Court on remand.”
Ms. Hoard is optimistic on the valuation issue.
Other Coverage
Lew Taishoff has A Great Golf Fixed, where he graciously thanked me for alerting him to this decision. Mr. Taishoff watches the Tax Court with incredible focus which leaves him little time to scan the rest of tax litigation. He wins my heart with a Tolkien reference as he refers to the court as the Elevenses (That is the third of a hobbit’s six daily meals)
“Reversed and remanded, to try the valuation issue.
In consequence whereof, I shorten the odds on Judge Mark V Holmes’ “try the valuation and forget perpetuity games” dissent in Oakwood winning on appeal to 6 Cir from 3 to 1 to 6 to 5. Get your money on before Las Vegas and the parimutuels take it off the boards altogether.”
Law360 has Golf Course Can Claim $10M Easement Deduction, 11th Circ. Says behind its paywall. Strictly speaking the headline is wrong since it kicked it back to the Tax Court for valuation.
Damon Clime has a detailed story Champion Retreat wins federal tax case in the Augusta Chronicle including comment from Attorney Hoard and the accountant who structured the deal, Doug Cates.
Larry Hirsh has something on Golf Property Analysts.
“What is particularly significant in this case is that the Appeals Court clearly viewed golf courses in a more favorable light (as compared to the IRS and Tax Court) with respect to the definition of a “natural habitat”, a key component of conservation easements. Reportedly, this is the first time that an Appellate Court has reversed the Tax Court on what constitutes the preservation of a “Natural Habitat,” a key element of conservation easement purposes and attributes.”
Phil Ogea has something on 11thCircuitBusinessBlog.com.
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