Originally published on Forbes.com.
If there is one thing I love to see the IRS win it is a golf course conservation case. The only thing better is some poor shmoe going pro se and beating the IRS on a dependency deduction. The Eighth Circuit decision in RP Golf v Com is a confirmation of an IRS win in Tax Court that I covered last year. The easements in question granted to the Platte County Land Trust involved The National Golf Course of Kansas City and The Deuce at The National.
You know somehow “The Deuce” just doesn’t sound like the right name for a golf course. An HBO porn drama, on the other hand …. That fits But you will have to check out fellow contributor, Susannah Breslin to learn about that. Not the sort of thing for the Investment Channel. Anyway, the easement was valued at $16.4 million. The Tax Court never got to valuation, though. As in several other cases, the deduction was spiked on a gotcha basis. The holder of a mortgage on the property did not subordinate to the easement making it impermanent.
Why Golf Course Conservation Easement Deduction Are Pernicious
It occurs to me that there might be some circumstances in which preserving a golf course would have conservation value. If the golf course has been around for a long time, a really long time, like maybe fifty years or so and the area around it has become very built up, that last bit of open space might have some value. That does not appear to be the scenario with some of the big-dollar easement donations the IRS has been litigating. Over a few years, you start with land in its natural state. Build a golf course and a bunch of houses which increases the value of the property. Then claim an easement deduction for not building even more houses or designing the golf course so that a couple of the displaced critters will still have a home. A tax subsidy for that type of activity is counterproductive to conservation.
The fact is that we all have to live somewhere so housing in and of itself is not counter conservation. Golf on the other hand is. I can’t think of a hobby that takes up more acreage. Take up hiking instead. It has all the health benefits of golf, is a lot cheaper and hiking trails are a lot less disruptive to the environment. Maybe I’m on a crusade because my covivant and I have become volunteer trail maintainers. We live next door to a golf course which I walk by almost daily. It really does not stand up to the trail when it comes to preserving the natural environment.
The Ruling
The taxpayer argued that it was fine if the subordination happened after the donation, but both the Ninth and Tenth Circuits have ruled otherwise in Minnick v Comm and Mitchell v Comm respectively. RP Golf argued that it had an oral agreement. It would be beyond tedious for me to here cite Goldwyn’s Law of Contracts. It was worse than that:
The tax court made a finding of fact about oral agreements. It found insufficient testimony or documentation of the alleged oral agreements. It assessed the credibility of RP Golf’s representative, noting that he “did not remember who he talked to at the banks” despite his own testimony that he was “sure” he spoke with bank representatives. Viewing the tax court’s finding in its “true light, regardless of the label,” it made a finding of fact that “he evidence does not establish the oral consent agreements that RP Golf claims.”
So that was it. The Tax Court ruling was affirmed.
Reaction
Professor Nancy McLaughlin of the University of Utah wrote me:
I think the holding is unsurprising given the Mitchell (10th Circuit) and Minnick (9th Circuit) holdings. Perhaps the taxpayer in RP Golf appealed the case to establish grounds for a malpractice suit. I know that Minnick (former member of House of Reps) sued his lawyers in ID for malpractice (not sure what the ultimate result was in that case – it may still be pending).
Professor McLaughlin is actually cited in the Mitchell decision. How cool is that?
Attorney Stephen Small commented.
Not a surprise at all RP Golf is making arguments that have already been losers (see Mitchell and Minnick, cited therein). Also, Satullo, back in 1993, said the same thing.
Malpractice?
Walter Minnick who served a single term in Congress (2009-2011) was burned by the same rule. He filed a lawsuit against Hawley Troxell Ennis and Hawley, alleging they committed malpractice by not advising him to get bank subordination before donating a conservation easement. The Idaho Supreme Court ruled that the action was not barred by the statute of limitations in 2015, but I have not been able to trace it any further. So many projects, so little time.
The Moral
In the area of gifts of appreciated property, particularly conservation easements, you need to always remember Reilly’s Fourth Law of Tax Planning –Execution isn’t everything but it’s a lot.
Other Coverage
Ed Zollars of Current Federal Tax Developments had a summary of the RP Golf decision. A KPMG TaxNews Flash included a timeline.
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