This post was originally published on Forbes Jun 1, 2015
There have been a lot of cases on conservation easements of late. My impression is that planners may well have gotten just a little carried away with the concept. You get a tax deduction for giving away a “might have been”, a fable in a way and the more fantastic the fable the greater the tax deduction. The way it works is that you have a piece of property that, hypothetically, could be developed, but there is a bunch of do-gooders or city or regional planners who would like to see it stay the way it is because it looks nice to drive by or is a refuge for birds or, in the big city, preserves the historic character of the neighborhood. So you give up the right to change the property, which is worth something, probably. For that, you get a charitable deduction.
Petitioners thereafter investigated selling their development rights to private parties. On October 12, 2005, petitioners executed a contract to sell 15 of their 17 development rights to Kennard Warfield, a developer, for $2.4 million. This contract was later amended to extend the closing date and require Mr. Warfield to make a $1.2 million downpayment toward the purchase price. Petitioners subsequently agreed to sell another development right to Mr. Warfield, which increased the total purchase price to $2.56 million.
On October 17, 2006, Howard County gave final approval to the density sending and receiving plats. On October 20, 2006, the deed of easement and the [*8] plats transferring the development rights were recorded in Howard County land records. These documents state that they were being filed simultaneously to describe the conservation easement, convey it in perpetuity to Howard County, and sever the development rights from Rose Hill. Petitioners in due course received from Mr. Warfield the $1.36 million balance of the purchase price. Upon recordation of the deed of easement, all future development was prohibited for Rose Hill with the exception of farming.
when it is impractical or impossible to determine the cost orother basis of the portion of the property sold, the amount realized on such sale should be applied to reduce the basis of the entire property and only the excess over the basis of the entire property is recognized as gain.
Respondent contends that petitioners’ claimed charitable contribution deductions were properly disallowed for three distinct and independent reasons: (1) Mr. Dumler’s appraisal issued July 1, 2007, was not a “qualified appraisal”; (2) the Form 8283 accompanying petitioners’ original return was not a valid “appraisal summary”; and (3) petitioners lacked donative intent because the easement they granted Howard County was part of a quid pro quo exchange.
These omissions were not trivial, formal, or mechanical. Because of them, the appraisal failed to inform the IRS of the essence of the transaction in which petitioners engaged. Because the July 1, 2007, appraisal did not provide an accurate description of the property contributed, did not specify the date of the contribu tion, and did not inform the IRS of the salient terms of the agreements among petitioners, Howard County, and Mr. Warfield, we find that it was not a “qualified appraisal” within the meaning of ection 1.170A-13(c)(3)(i), Income Tax Regs.
Petitioners received “consideration” from Howard County in return for the easement, namely, the county’s permission to sell 16 development rights to Mr. [*22] Warfield, which petitioners otherwise could not have done. The Form 8283 accompanying their original return disclosed neither the quid pro quo they received from the county nor the $2.56 million they received from Mr. Warfield. Because the Form 8283 failed to include the donee’s signature and failed to disclose the consideration petitioners received from the donee, their appraisal summary did not comply with the regulations.
The external features of the transaction show that petitioners granted an easement to Howard County in exchange for the county’s granting them permission to sell their development rights. Under the ALPP, petitioners could not transfer their development rights to Mr. Warfield until the density sending and receiving plats were approved by Howard County and an easement was placed on Rose Hill to restrict future development. Petitioners would not have conveyed the easement unless they received permission to sell their development rights; and they could not legally sell their development rights unless they executed the deed of easement. Petitioners’ transaction thus bears the classic features of a quid pro quo exchange as defined in Hernandez and its progeny.
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