Originally published on Forbes.com.
So how is a Venus Flytrap like a golf course sand trap? You can find them both in a recent Tax Court decision about conservation easements. The owners of the Members Club and the Reserve Club negotiated with the North American Land Trust to grant conservation easements to land in and around two golf courses. All in they claimed over $7 million in charitable contributions The golf courses are part of St. James Plantation
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About St. James Plantation
St. James Plantation is a gated community in Southport NC. Or maybe you should say near Southport. Since 1999, there has been the Town of St James. There is something a little disturbing to me about having a gated community be recognized as a political subdivision. And then there is the connotation invoked by “plantation” as part of the name, but by all accounts, it is a magical place unless you look on TripAdvisor. At any rate, the founder of the community is Homer Wright who wanted to create the ideal place for his parents to retire to. He worked with developer John Atkinson to create the community.
Atkinson and members of Wright’s family own the entities that own the community’s golf courses.
About Conservation Easements
The charitable deduction for conservation easements is something of a free lunch since you can get a tax deduction for not doing something you did not want to do anyway. There can be a difficult valuation problem because there is not a lot of buying and selling of easements going on. What you have to do is a highest and best use valuation (and in this context highest and best use means what brings you the most money) and then subtract the value of the property as burdened by the easement. The problem is that the highest and best use is hypothetical. It is a vision of what could be there.
There is this wood lot, but I can envision the next Disney World there making the wood lot worth tens of thousands per acre. But I love the little critters and the plants and the trees, so I am going to renounce my future amusement park and leave it as a woodlot and take a multi-million dollar charitable contribution. Or maybe I will turn it into a golf course, but leave some Venus Flytraps scattered around and not cut down all the trees.
Typically these cases will turn on the plausibility of the highest and best use. There are a number of cases in New York City, where facade easements were valued at zero because of preexisting restrictions. I always compare easements like that to me renouncing my superpowers.
A Different Approach
Rather than attack valuation in this case the IRS argued that the donation did not actually address any of the “conservation purposes” that allow a deduction for contribution of less than an entire interest in real estate. Those purposes are – preservation of land areas for outdoor recreation by, or the education of, the general public – protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem – preservation of open space for the scenic enjoyment of the general public or pursuant to clearly delineated governmental conservation policy – preservation of a historically important land area or a certified historic structure.
Two Easements
The 2003 easement went with protecting a “relatively natural habitat” and “open space advancing clearly delineated government policy”. The owner maintains the right to alter the property in such manner as is appropriate as long as the best environmental practices prevailing in the golf industry are followed.
Specifically, the 2003 easement allows for digging (filling, excavating, dredging, or removing topsoil) as necessary for maintaining golf course sand traps or for the cultivation of sod for use on the golf course. Cart paths may be relocated as long as the relocation does not substantially increase the surface area taken up by cart paths. The deed permits the construction of rain shelters, rest stations, food concession stands, and other structures on the easement property as long as they do not exceed a total of 2,500 square feet. The owner may substantially increase the amount of surface area covered by the golf course if it secures prior consent from the easement holder and there is no material adverse effect on the conservation purposes.
The owner may also cut and remove trees that are on the golf course or within 30 feet of the golf course if the owner determines their removal is “appropriate for the proper maintenance of the golf course”. Additionally, the [*9] owner may cut trees to build a restroom, rain shelter, rest station, or food concession stand.
The decision gets into all the various plants and critters that call the golf course home or stop in from time to time. There have been sitings of an American alligator and
At trial NALT representatives testified that they had seen plants of particular concern such as Venus Flytraps on the 2003 easement area and located them with GPS coordinates. The baseline report includes an NC Natural Heritage Program map identifying where Venus Flytrap plants are located, but none of the locations are on the 2003 easement area
The 2005 easement is similar although it also includes some wetlands.
Venus Flytraps
The Venus Flytraps were the big deal for the 2003 easement.
Petitioners contend that, so long as the easement area provides habitat for one threatened or endangered species, the easement satisfies the conservation purpose test. Specifically, petitioners contend that the existence of the Venus Flytraps and Pitcher Plants on the 2003 easement property are sufficient for us to conclude that the area is a significant relatively natural habitat.
Not quite a big enough deal though.
Although the 2003 easement property is not ideal for the Venus Flytraps, petitioners provided photos of Venus Flytraps and Pitcher Plants actually found on the property. Nonetheless, if the plants are found only on the areas excluding the fairways, tee boxes, and greens, that area constitutes only 24% of the 2003 easement property.
The Two Million Dollar Gator
The elusive American Alligator was the high point of the 2005 easement, but that crafty old gator is tough to spot:
Petitioners presented evidence that an American Alligator, federally designated threatened, frequents two golf course holes. The NALT reports are unclear, however, about where the American Alligator has been seen. The reports cover several golf courses and specify only the holes by which the Alligator has been seen, not which golf course.
American alligator ‘Big Mumma’ guards her straw nest (R) at the Australian Reptile Park near Sydney on January 13, 2012. The park collects the clutch of eggs in order to artificially incubate them to determine the gender before distributing the hatchings to zoos around Australia. AFP PHOTO / Torsten BLACKWOOD (Photo credit should read TORSTEN BLACKWOOD/AFP/Getty Images)
Scenic For Whom?
When it came to scenic purposes, the three gatehouses where guards control access to the community were a problem. The fact that most of the population of the Town of St. James could drive by whenever they wanted did not help.
Petitioners contend that the general public does have visual access to the easement areas, regardless of the presence of guards, because the areas are visible from the roads within St. James Plantation, and most of the population of the Town of St. James lives within St. James Plantation. We are not persuaded. We do not impute access to St. James Plantation to the public at large simply because most of the town population lives within St. James Plantation.
No Penalties
One of the problems with conservation easements is who it is that you are supposed to give them to. Some of the outfits are more than a little sketchy, but not so North American Land Trust, which is reasonably substantial and responsible. Dealing with them spared the taxpayers from penalties.
We agree with petitioners that they acted with reasonable cause and in good faith. Petitioners worked with NALT to formulate a plan for creating the conservation easements. The NALT employees who inspected the easement areas and testified at trial hold degrees in biology and were qualified to make assessments about preserving the natural attributes of St. James Plantation.
Other Coverage
Nancy McLaughlin of Nonprofit Law Prof Blog had a pretty extensive piece on the decision. She notes that this makes three recent losses on NALT easements.
Atkinson is one of three recent cases in which the Tax Court has denied deductions for conservation easements conveyed to NALT. See Balsam Mountain v. Comm’r and Bosque Canyon Ranch v. Comm’r. NALT was also the donee of the conservation easement at issue in Kiva Dunes v. Comm’r, which inspired the Treasury to recommend eliminating the deduction with regard to golf course asements.
I covered the Balsam Mountain case.
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