Originally published on Forbes.com.
Ever watch those TV infomercials about becoming a real estate millionaire with no money down?
Frankly, some of the principles they discuss can work. As a matter of fact, real estate is probably one of the best endeavors for someone of modest means who has an entrepreneurial flair, but the promoters tend to downplay the work and risk aspects of the enterprise.
I’ll tell you what was really lucrative, at least for a while – giving lectures to crowded rooms about how to do the no-money down trick. Many years ago a client of mine was doing that and he invited me to one of the events, where he introduced me as his accountant. Hate to break it to you, but that night did not make my career. At any rate, many of the techniques he discussed were these neat little maneuvers to convince property sellers to take the promise of cash rather than actual cash for their properties.
One technique that really struck me was the “mortgage with wheels on it”. The idea is that you offer the seller a security interest on a property that you already own. Why this makes the seller feel better was not entirely clear to me, but most of these techniques seemed to be derived from Barnum’s Law. You included a provision that you could substitute a property of equivalent value – that provision being the wheels. Then what you did after the deal closed was substitute the property that you just bought for that other property. Alternatively the property you just bought could be the “other property” for your next deal.
The Wheels On The Easement
At any rate, I thought of the “mortgage with wheels”when I read the Fourth Circuit decision in the appeal of B.V. and Harriet Belk of the Tax Court decision denying them a $10,254,000 conservation easement charitable deduction. What they were trying to do was have an easement with wheels on it. There must have been a concern that the wheels could create a problem. There was a savings clause in the the easement – so maybe the wheels could fall off without the deduction crashing and burning. Things did not go well for the Belks.
The Tax Court concluded that the Belks were not entitled to claim a deduction for the donation of the easement because Olde Sycamore had not donated “a qualified real property interest.” 26 U.S.C. § 170(h)(1). The Tax Court reasoned that “because the conservation easement agreement permits to change what property is subject to the conservation easement, the use restriction was not granted in perpetuity,” as required by § 170(h)(2)(C)
The Belks maintained that since any property removed from the Easement must be replaced by a property of equivalent value that there really was a permanent restriction.
A Grammar Lesson
Whenever you see the term “ plain language of the Code” in a decision, you can be pretty sure, things are going badly for one side or the other, probably the taxpayer. “Plain language of the Code” relates to Reilly’s First Law of Tax Planning – “It is what it is. Deal with it.”.
…..the Code expressly provides that a “qualified property interest” includes “a restriction (granted in perpetuity) on the use which may be made of the real property.” 26 U.S.C. § 170(h)(2)(C) (emphasis added). The placement of the article “the” before “real property” makes clear that a perpetual use restriction must attach to a defined parcel of real property rather than simply some or any (or interchangeable parcels of) real property. For “the” is a definite article, which lends to the noun that follows it a specific rather than general identity. (Emphasis added)
The Savings Clause
The Belks also argued that they could save the deduction by taking the wheels off the easement.
Finally, the Belks argue that even if we find the substitution provision in the Easement prevents it from satisfying the requirements of § 170(h)(2)(C), the savings clause nonetheless renders the Easement eligible for a deduction. The savings clause provides in pertinent part that the Trust:
shall have no right or power to agree to any amendments … that would result in this Conservation Easement failing to qualify … as a qualified conservation contribution under Section 170(h) of the Internal Revenue Code and applicable regulations.
The Belks contend that if we should “determine that Section 170(h)(2)(C) precludes substitutions of property,” as we have, this savings clause “operates to “save” deduction by precluding the parties from executing an amendment allowing such a substitution of property.” Reply Br. 20. In other words, the Belks argue that the savings clause negates a right clearly articulated in the Easement — their right to substitute property — but only if triggered by an adverse determination by this court.
The Court was not buying that either.
In contrast to those situations, the Belks’ intent to retain “a disqualifying power” is clear from the face of the Easement. There is no open interpretive question for the savings clause to “help” clarify. If the Belks’ “overriding intent[]” had been, as they suggest, merely for the Easement to qualify for a tax deduction under § 170(h), they would not have included a provision so clearly at odds with the language of § 170(h)(2)(C). In fact, the Easement reflects the Belks’ “overriding intent[]” to create an easement that permitted substitution of the parcel — in violation of § 170(h)(2)(C) — and to jettison the substitution provision only if it subsequently caused the donation to “fail[] to qualify … as a qualified conservation contribution under Section 170(h).” Thus, the Belks ask us to employ their savings clause not to “aid in determining intent,” Rev. Rul. 75-440, but to rewrite their Easement in response to our holding. This we will not do.
Are Conservation Easements Bad Tax Policy?
Conservation easements seem to have generated quite a bit of tax litigation. The problem with them from a tax administration viewpoint is that there is a lot of opportunity for collusion of the two sides to the contract. The big tax savings that the donor is getting are not coming out of the hide of the receiving entity. On top of that, an easement donor mainly motivated by the deduction will not be very, if at all, concerned about whether any real conservation goals are being met.
I was surprised to find that conservation easements do not appear to be among the items mention in Senator Tom Coburn’s Tax Decoder. I guess he couldn’t cover everything.
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