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If you sincerely want to have property that you own preserved in its current use, there is nothing closer to a free lunch than donating a conservation easement. You get a charitable contribution for the value of the easement and your property taxesmight be lower in the future. Of course, if, in the future, you decided that you would rather have the money from selling the property to Wal-mart rather than a perpetual cow pasture, the lunch will turn out to have been expensive. So it would be nice to have an out.
Of course, that would defeat the purpose of allowing the deduction. That is what the case of Kayln M. Carpenter, et al. v. Commissioner, TC Memo 2012-1 is seemingly about. As with some Tax Court decisions, though, this decision is the latest in a story that has been going on for several years. This paragraph made me think there was something sketchy about this case:
On or about December 23, 2003, each petitioner acquired a parcel or parcels of land in Teller County, Colorado, from Sixty Seven, LLC (Sixty Seven). Petitioners held their parcels in fee simple. On or about December 24, 2003, each petitioner conveyed a conservation easement to Greenlands, a charitable nonprofit Colorado corporation which qualifies as a tax-exempt nonprofit organization under sections 501(c)(3) and 170(b)(1)(A)(iv).
So they acquired the property, held it for a year and a day and then did the easement. Hmmm. For what is is worth there is a defunct LLC called Sixty Seven, which had as its registered agent Cary L. Carpenter. I would pursue that item further, except as I often tell myself “Dammit Riles, you are a tax blogger, not an investigative reporter.”
The Story Behind the Story
Greenlands on the other hand is a little easier to research. It has an extensive website and as a not-for-profit its Form 990s are available onguidestar.org. The 990s raise a question about Greenlands. As I discussed in my piece “Conservations Easements a New Field for Villainy” , which concerned an anonymous organization that had its exempt status revoked, a qualified donee has to have the resources to enforce the easements. As an example, L’enfant Trust, which I discussed here had $4,000,000 in marketable securities last time I looked and about $200,000 in payroll to supervise 1,000 easements of Washington historical facades. Greenlands on the other hand has only one employee its president Howard Hallman, who receives $12,000 per year for his 40 hour week. It has cash and receivables of about $300,000. It holds conservation easements valued at over 150 million dollars.
Greenlands and Mr. Hallman have been in the middle of the controversy about Colorado conservation easements. It is not just the federal deduction that is at stake. Colorado has an extremely generous credit for conservation easement donations. At the time of the donations covered by this case, it could be as much as $260,000. The credit is transferable. The dollar limit accounts for the need to divide the property up before making the easement donation. In his testimony on legislation to verify conservation easements, Mr. Hallman defended the practice of dividing properties. He also pointed out that owners are often giving up valuable gravel mining rights in addition to development rights.
Apparently state and federal scrutiny of the easements created significant problems beginning in 2006. According to its 990s, Greenlands received no easements in 2008 or 2009.
This editorial expressed support for heightened scrutiny:
In Colorado Springs, the News reports, the Greenlands Reserve land trust has participated in dozens of small parcel easements — some of which allow the seller to go forth with oil and gas drilling. What a deal. The state pays a high price to set aside land for bunnies and birds, yet the “seller” still gets to drill for oil or gas.
In one Greenlands transaction, a development company — belonging to a Greenlands board member — sold a 16.5-acre easement behind two homes near the intersection of Centennial Boulevard and Centennial Glen Drive. It’s probably a boon to the people who own those two homes, but it’s hardly the kind of property that benefits a statewide conservation and open space objective. In 25 of the easements, Greenlands allows the property owner to charge for commercial hunting — so long as 25 percent of the proceeds go to the trust.
On the other hand, this commentary considered the IRS project which is estimated at 300 audits as being a “range war”. Landowners who had made easement donations found that they could not sell their credits and some owners feared losing their property. There is now greater state scrutiny of easements for which credits are claimed and there seems to be some desire at the state level to just close the curtain on the possibly abusive transactions that took place prior to the reform. It will be interesting to see whether this case is the end of the story.
The Case
Rather than challenging the valuation of the easements, the IRS attacked their validity because of a clause in the contract:
Extinguishment – If circumstances arise in the future such that render the purpose of this Conservation Easement impossible to accomplish, this Conservation Easement can be terminated or extinguished, whether in whole or in part, by judicial proceedings, or by mutual written agreement of both parties, provided no other parties will be impacted and no laws or regulations are violated by such termination.
The Tax Court ruled that a handshake between the owner and Greenlands should not be enough to terminate a valid easement:
Petitioners’ conservation easement deeds allow for extinguishment of the conservation easements through mutual consent of the parties.
Extinguishment by mutual consent of the parties does not guarantee that the conservation purpose of the donated property will continue to be protected in perpetuity. As at least one commentator has noted, the “restrictions are supposed to be perpetual in the first place, and the decision to terminate them should not be solely by interested parties.
The Lesson
If you are considering a conservation easement donation, be sure to use an organization with a long-established track record and significant resources. Don’t do it unless you have a sincere desire for the property to be preserved. And when it comes to the valuation, there is being aggressive and there is being crazy. As we used to say at Joseph B. Cohan and Associates, “Pigs get fed. Hogs get slaughtered.”
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