Originally published on Forbes.com.
These easement cases keep coming. Section 170(h) of the Code has created a mini-tax shelter industry based on bogus conservation easements. Section 170(h) needs to be repealed and a better way found to promote conservation. Paul Streckfus EO Tax Journal 2018-181
One easement case follows another. Soon after hitting publish on a piece on a facade easement in Lynn Massachusetts, Paul Strekfus’s EO Tax Journal alerted me to Champions Retreat Golf Founders LLC, which was decided by Tax Court Judge Cary Douglas Pugh. The opinion was issued on September 10. No disrespect to Lynn, but the golf case is a much bigger deal.
An easement deduction can be attacked from a couple of angles. One is technical defects – Reilly’s Fourth Law of Tax Planning – Execution isn’t everything but it’s a lot. Another is valuation. A conservation easement valuation is subtracting the value of what the property is from what the property could be. The latter often includes elements of fantasy.
There is a third possibility. That would be that there is actually not much in the way of conservation going on. And that is the position IRS took with Champions Retreat. As taxpayers’s attorney Vivian D. Hoard wrote in her brief:
It is no secret that the Treasury Department has sought to eliminate the charitable contribution deductions for contributions of easements on golf courses since the Kiva Dunes case. The Treasury Department argues that these easements only benefit the affluent.
Here is some of the background.
Champions Retreat
For somebody like me, who spends more time on computer role playing games than on the golf course, Champions Retreat makes me think of a safe place where you can bring your level 50 warrior to regain his health, repair his armor and maybe buy a new sword. Of course, it is none of that.
You start with Riverwood Plantation which is a “Master Planned Community on 3,000 acres of stately pines and hardwood”. Maybe it is just me, but if you are in Georgia and want to have a planned community, I find the notion of calling it a plantation just a little disturbing. Within Riverwood Plantation there is a gated area called the Reserve. The Tax Court describes it this way:
Along with the golf club and Founders Village, the Reserve includes Bishops Court, the Cottages at Riverwood Plantation (Cottages), and the Bungalows at Champions Retreat (Bungalows). Bishops Court is a residential development separate from the golf club. The Cottages and the Bungalows provide guest accommodations. The Cottages adjoin the golf course.
Champions Retreat is the golf club.
The champions part comes from it being three nine-hole courses each designed by a different golf great – Gary Player, Jack Nicklaus, and Arnold Palmer. The video was prepared by new owners after a rebrand, but I think it gives a fell for the concept.
So I guess the idea is that you can go on a golf retreat at a place designed by champions – Champions Retreat. But it’s not just about golf. It is also about conservation. Or not, depending on what you think of the Tax Court decisions. Here is the story on that.
A Syndicated Easement Deduction
There is part of the case that is a little difficult to follow. After the Kiva Dunes decision, Douglas Cates, accountant for Champions Retreat Golf Founders LLC (Champions Retreat), which owned and operated the golf club, suggested that the donation of a conservation easement, in addition to the good it would do for the world, could attract additional investment to pay down debt and outstanding construction costs. I have a little difficulty following the structure.
Kiokee Creek, a Georgia partnership, was formed on September 24, 2010, as a vehicle for investing in Champions Retreat. Its 15 original members, most of whom were Mr. Cates’ clients, contributed a total of $2,705,000 for their interests. In November 2010 Kiokee Creek contributed $2,700,000 to Champions Retreat in exchange for a 15% interest.
Champions Retreat claimed a $10,427,435 charitable contribution deduction on its Form 1065, U.S. Return of Partnership Income, for the 2010 taxable year for its donation of the easement to NALT. Champions Retreat allocated approximately 98.8% of the deduction to Kiokee Creek, the remaining 1.2% of the deduction to Riverwood Land, and none to the other 37 members.
So the Kiokee Creek partners contributed $2.7 million and got a deduction of $10.4 million. I’m not sure how that worked. Apparently the IRS also had issues with it, but that was resolved before the matter went to the Tax Court.
Respondent conceded that Champions Retreat did not make a disguised sale to Kiokee Creek Preservation Partners, LLC (Kiokee Creek). Respondent also conceded that Champions Retreat’s allocation of the charitable contribution deduction at issue had substantial economic effect. Finally, respondent conceded that Champions Retreat complied with sec. 704 in decreasing the capital accounts of the members receiving allocations of the charitable contribution deduction and in properly allocating interest income and ordinary business loss to its members.
That would have been a really important concession if there had turned out to be a deduction. Instead it is just a matter of curiosity for partnership tax geeks like me.
No Deduction
The reason that the deduction is denied is that there is not enough in the way of conservation going on. Here are some of the high points. There were three conservation purposes mentioned in the easement
Preservation of the area as a relatively natural habitat of fish, wildlife, or plants or similar ecosystem; and
Preservation of the area as open space which provides scenic enjoyment to the general public and yields a significant public benefit; and
Preservation of the area as open space which, if preserved, will advance a clearly delineated Federal, State, or local governmental conservation policy and will yield a significant public benefit
On the first point:
Champions Retreat has presented evidence of only one rare, endangered, or threatened species with a habitat on the easement area — denseflower knotweed — and it inhabits just a small fraction of the easement area. ….
Even were we to find that the areas resembling open pine woodlands were natural areas, there is no guaranty that they will be protected. The easement allows the removal of any tree — whether standing or fallen — that is within 30 feet of a playable area. From the photographs in both Mr. Echols’ and Mr. Wilson’s expert reports, it appears that several of the trees in these areas would be eligible for removal under the Easement.
Mr. Ager testified that the ponds he surveyed in the easement area were high-quality aquatic environments. However, the chemicals that Champions Retreat uses in the easement area could injure those environments. ….
Because we find that the easement area neither provides a habitat for rare, threatened, or endangered species nor is a natural area that contributes to the ecological viability of Sumter National Forest, we find that Champions Retreat’s contribution was not made for the conservation purpose of protecting a relatively natural habitat.
On the open space for the scenic enjoyment of the public, I can really get into that. I live very close to a golf course and it does look very nice when I am walking by it. I’ll often stop and chat with a foursome to avoid the prospect of getting hit in the back of the head with a ball aimed at the hole right near the road. When it comes to Champions Retreat, though, there is a problem. That darn gate.
The easement area is located in the private section of Riverwood Plantation and is accessible only to members and their guests, through a gate manned 24 hours a day. Even taking into account the annual charity events held at the golf club, we conclude that the public does not have sufficient physical access to enjoy the easement area.
And, because of the limited physical access, the public could view the easement area only from the Savannah and Little Rivers, so visual access is limited to the areas adjacent to the those rivers. The extent to which the general public can see the easement area from the rivers is limited further by the 3- to 10-foot river banks. Finally, uncertainty persists regarding public access to the Little River. Thus, we conclude that the contribution of the easement area was not for the scenic enjoyment of the general public.
No luck on the “clearly delineated Federal, State, or local governmental conservation policy” either.
Champions Retreat argued at trial that the designation of the golf club as open space under the Columbia County Planning Commission’s Vision 2035 plan showed that its contribution was pursuant to a local governmental conservation policy. While the Planning Commission did produce Vision 2035 pursuant to State law, it was not a law focused on conservation but rather on land development. We thus conclude that the preservation of open space was not pursuant to a clearly delineated governmental conservation policy.
We need not consider whether Champions Retreat’s preservation of open space yields significant public benefit — as required by section 170(h)(4)(iii)(A) — because we find that it was neither for the enjoyment of the general public nor pursuant to a clearly delineated governmental conservation policy.
The Squirrels
One of the most fascinating side trips in this case was the fox squirrels. The taxpayers were frustrated in their inability to get testimony from Dr. Patrick Jodice who had written about fox squirrels living on golf courses. His name comes up in articles defending golf courses as important conservation centers. It took me a while to find something that he had written, but here it is Assessing the Conservation Value of Golf Courses for Fox Squirrels in Coastal South Carolina. You will note that there is a co-author, Kristin Meehan. Ms. Meehan ended up with a masters thesis out of the whole effort – Landscape Scale Correlates of Fox Squirrel (Sciurus niger) Presence with Professor Jodice as the Committee Chair. So it was actually Ms. Meehan riding in a golf cart along the cart paths counting squirrels.
Professor Jodice talked to me and told me quite a bit about squirrels, but as a federal employee, he was not in a position to comment on the case.
Appeal
Attorney Vivian Hoard wrote me that her clients intend to appeal. Ms. Hoard graciously provided me with copies of the briefs.
More On This In The Future?
The interesting thing about Tax Court decisions is that you are seeing what the IRS was focusing on several years ago. I asked Paul Streckfus if he thought they would be continuing efforts in this are likely. He wrote me:
It’s hard to tell. Will the IRS have the resources to continue enough audits to deter? Is the money involved worth the gamble to proceed with one of these deals? Will the new Commissioner support this audit effort? How much pressure will come down from Congress, White House and Treasury to curtail these audits?
President Trump does seem fond of conservation easements. So there is that.
Other Coverage
There are a couple of brief summaries here and there, but the only extended treatment I found was from Lew Taishoff – Not Endangered, Except The Benderdinker.
Champions Retreat Golf Founders, LLC., Riverwood Land, LLC., Tax Matters Partner, filed 9/10/18, is more like a rout than a retreat, as Judge Pugh finds there weren’t enough “rare, endangered, or threatened species in the easement area to satisfy the conservation purpose requirement.” …
Takeaway- Having only a nuthatch, a knotweed, a fox squirrel, and a busted Benderdinker, when you’ve got a $10 million deduction on the line, is the nearest thing to a Michael Corleone gambit I can think of.
About The Plantation Thing – It Is Not Just Me
This is the second easement case where the development is designated a “plantation”. You can read about St. James Plantation, here. I thought my discomfort might just be a Yankee thing as the ghost of my immigrant great grandfather, Private Patrick Lyons of the 22nd New Jersey, veteran of the Mud March and possibly within the sound of the guns during Chancelorsville, haunted me. So I spoke to some people I know with Virginia roots. Michael Schaffner wrote me:
“Plantation” has such a bucolic ring in certain ears. I don’t suppose developers would get quite as positive a response to a “Master Planned Community” called “Riverwood Slave Labor Camp”.
To be fair though Michael is even more of a neo-abolitionist than I am.
I spoke to a friend of mine who is deep in the real estate business, whose great great grandfather was also at Chancellorsville. only with a Virginia regiment. He didn’t see why it would be any problem at all and pointed out to me that it is extremely common to use that name and he is certain that it is meant to elicit more of a moonlight, magnolia, mint julep sort of feeling, not some sort of neo-Confederate endorsement of slavery. And he is right you will find a lot of developments called “__________Plantation”.
So maybe not so much a thing.
Then I heard from Rodney Thomas, managing partner of Resources Building Tomorrow . Rodney and I are high school classmates (Xavier High School in NYC) and he lives in Richmond now. Rodney is African American. He wrote:
Only a fool or insensitive clown would name a community development anything plantation.
Can’t really put the rest of his comments here. That influenced me to consider what the NAACP thinks about the matter. NAACP spokesperson Malik Russell wrote me:
In the American South, plantations were places which dehumanized enslaved Africans into property and hid all types of heinous crimes including rape, torture and death . There is nothing idyllic about the term plantation, it like confederate statues and confederate flags, represent symbols of oppression, slavery, segregation and holocaust, regardless of any attempts to congenialize them.
People involved in marketing Riverwood Plantation had no comment on the name issue. The concern about using “plantation” in development names does seem to be becoming a thing as you can read here and here. Maybe this will be the final frontier of neo-abolitionism, but there will probably be something else. I have no reason to doubt my friend’s belief that the naming convention is quite innocent, but the NAACP is a venerable institution and its opinions need to be taken seriously.
Update
The golf course was sold in 2014 and the new owners asked me to make clear that the litigation applies to the previous ownership group Champions Retreat Golf Founders LLC.
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