Conservation Easements: Recent Case Law Highlights Issues for Effective Planning

Conservation Easements: Recent Case Law Highlights Issues for Effective Planning

September 01, 2013

The tax incentives associated with conservation easements have become a hot topic in recent years among tax advisors and the Internal Revenue Service (IRS). As highlighted by recent tax court cases, the Internal Revenue Service challenges of deduction requests from taxpayers have been on the rise given the potential opportunities that exist for taxpayers and the apparent confusion over the interpretation of the regulations under Section 170(h) of the Internal Revenue Code (IRC). However, with proper planning and administration, conservation easements can provide significant benefits from a tax planning perspective.


A conservation easement is a voluntary agreement that restricts the ability to develop a portion of land for some type of conservation benefit, such as maintaining open space preservation, historic preservation, wildlife habitat, or a specific characteristic of the land that the owner is attempting to protect. It is a legally binding agreement that excludes a termination date. If the underlying property is sold, the conservation easement restrictions remain in effect. As a result, land is protected indefinitely for future generations.

When a conservation easement is created, fee ownership in the underlying land remains with the original property owner. However, through the easement agreement, the owner forfeits specified rights to all or a portion of his or her land holdings. From a planning perspective, the conservation easement rights are typically donated to a qualified private charitable organization, which holds and enforces the restrictions pursuant to the agreement. IRC Section 1.170A-14(d) provides for the requirements of a conservation contribution to qualify as a deductible charitable gift. In general, a conservation easement must be permanent and provide a public benefit by protecting an identifiable resource.

From a valuation perspective in general, pursuant to IRC Section 170A-14(h)(3)(i), the Fair Market Value of a contribution of a perpetual conservation easement may be determined based on comparable sales of easements, such as pursuant to a governmental program, or the difference between the value of the land before the easement is put in place and the value afterward.

When properly administered, a conservation easement can provide significant tax benefits to landowners, such as state and federal income tax deductions, as well as reduced estate, capital gains, and property taxes because a valued portion of the property rights is separated and transferred to a non-taxable entity.

With the passing of the American Taxpayer Relief Act of 2012 (ATRA), IRC Section 170 was amended to allow an individual a deduction for the grant of a conservation easement up to 50% of the individual’s adjusted gross income (AGI). Any unused portion of the deduction may be carried forward for up to 15 years. In contrast, in 2012 there was a 30% AGI limitation and a 5-year carryover period. This change should result in the continued growth in the use of conservation easements as a tax and estate planning tool.

Recent Case Law

The IRS has challenged the validly of donations in several recent cases over issues including compliance with requirements for conservation easement enforcement into perpetuity, qualified appraisals, and substantiation. Three recent cases highlight issues that have arisen from confusion over the interpretation of regulations under IRC Section 170(h).

No Deduction for Mandatory Easements

In Pollard v. Commissioner; T.C. Memo. 2013-38 (February 6, 2013), the Tax Court denied a charitable deduction for an easement that was required in order to obtain a land-use exemption. In 1998, the taxpayer purchased 68 acres of farmland in Boulder Country, Colorado, for $1.1 million. In order to build a personal residence on a portion of the property, a subdivision exemption from Boulder County was required. The Boulder County Commissioners determined that no exemption would be allowed to build the residence unless the taxpayer granted a conservation easement. In 2001, the taxpayer signed a conservation easement and later signed a second, more comprehensive, easement in 2003. The easement placed a variety of limitations on the use of petitioner’s property that, according to the language of the easement, served to protect the land’s natural beauty and rural character.

The taxpayer’s appraiser determined that the “before-easement value” was $1.62 million and the “after-easement value” was $568,000, resulting in a charitable deduction of $1.05 million. The taxpayer reported that deduction on tax returns between 2003 and 2007. The IRS determined that the contribution failed to satisfy the requirements of IRC Section 170 and initially asserted that the easement had no value as of the grant date. Subsequently, the IRS conceded that the easement had value, but asserted that the easement value was not more than $128,000.

The Tax Court observed that Boulder County had made it clear that no land-use exemption would be granted without the conservation easement. Because the easement was mandated in order to obtain the exemption, there was no charitable gift and therefore no charitable deduction.

No Deduction for Conservation Easement Donation which Permits Substitution

In Belk v. Commissioner, 140 T.C. No. 1 (January 28, 2013) (Belk I), the Tax Court held the land owner was not entitled to a $10.5 million charitable contribution deduction for the donation of a conservation easement on a 185-acre golf course to a qualified organization. Soon after, in Belk v. Commissioner, T.C. Memo 2013-154 (June 19, 2013) (Belk II), the Tax Court denied the taxpayers’ motion for reconsideration, rejecting all three of the taxpayers’ arguments and expanded on its prior holding in Belk I.

In the conservation easement agreement, the landowners agreed to restrict their use of the golf course and not to develop the site. However, the agreement permitted the landowners to change what real property is covered by the conservation easement, which led to the primary argument in this case.

Specifically, the conservation easement authorized the landowner to remove land from the protection of the easement in exchange for adding an equal or greater amount of contiguous land to the easement, provided that in the opinion of the grantee: (i) the substitute land “is of the same or better ecological stability” as the land removed, (ii) the Fair Market Value of the “easement interest” on the substitute land will be at least equal to or greater than the Fair Market Value of the “easement interest” that encumbers the land to be removed (and that will be extinguished as a result of the substitution), and (iii) the substitution will have no adverse effect on the conservation purposes of the easement. Further, the agreement contained an amendment clause that authorizes the landowner and grantee to agree to amendments that are not inconsistent with the conservation purposes of the easement and will not result in the easement failing to qualify for a deduction under Section 170(h).

The landowners argued that the amendment provision included in the deed provides that the holder cannot agree to amendments that would result in the easement failing to qualify for a deduction under IRC Section 170(h)(5). The Tax Court held that satisfying the requirements of this section does not necessarily affect whether there is a qualified real property interest as part of IRC Section 170(h)(2)(C).

In Belk I, the Tax Court dismissed this argument and held that the landowners did not donate their entire interest in real property or a remainder interest in real property and did not satisfy IRC Section 170(h)(2)(C) due to the conservation easement permitting substitution.

In Belk II, the Tax Court also noted that the treasury regulations permit substitutions under limited circumstances and the easement at issue did not limit substitutions to those circumstances. Moreover, the Tax Court found that the parties’ intent controlled when interpreting a contract, and the Tax Court viewed the intent to be for the conservation agreement to permit substitutions.

The petitioner also argued that as long as the taxpayer agreed not to develop 185 acres of land, neither the court nor the IRS should be concerned with what land actually comprises the 185 acres. The Tax Court disagreed, holding, as it had in Belk I, that a “floating” easement is not eligible for a deduction under Section 170(h), and that Section 170(h)(2)(C) requires that taxpayers donate an interest in an “identifiable, specific piece of real property.”

Under IRC Section 170(h)(2)(C), a qualified real property interest includes a restriction granted in perpetuity on the use which may be made of the real property. The Tax Court found that this requirement was not met.

IRS Questions Perpetuity, Qualified Appraisal, and Acknowledgements for Contributions

In Irby v. Commissioner, 139 T.C. No. 14 (October 25, 2012), the Tax Court ruled in favor of the taxpayer, holding that the IRS claims were unfounded. The IRS claimed the petitioners were not in compliance with several areas of IRC Section 170(h), questioning three items of the petitioner’s deduction request, arguing that: (i) the grant of the conservation easement was not protected in perpetuity, (ii) the appraisal report did not meet the requirements of a qualified appraisal, and (iii) the acknowledgement for contributions was not contemporaneous.

In this case, the taxpayers were members of an LLC, which conveyed conservation easements encumbering two parcels of land to Colorado Open Lands (COL), a qualified organization, in a bargain transaction. The IRS claims the grant was not protected in perpetuity because COL was required to reimburse the funding government agencies in the event it received proceeds should the land to which the easements relate be condemned and the easements extinguished. The Tax Court found that the contribution by the LLC, including the petitioners, was made exclusively for conservation purposes and met the requirements of Section 170(h)(5).

The IRS then questioned the claimed deduction under Section 170, which requires that the taxpayer must obtain and include a “qualified appraisal” for any property contributed. The IRS challenged one specific category indicating that the appraisal submitted did not contain “a statement that the appraisal was prepared for income tax purposes.” The Tax Court ruled that the appraisal report included all the required information either in the appraisal or in the appraisal summaries attached to the respective tax returns.

Finally, the IRS questioned if proper contemporaneous written acknowledgements from the donee organization for the contributions was obtained. They asserted that none of the submitted documents individually contain sufficient information. The Tax Court ruled that contemporaneous written acknowledgements can be made up of a series of documents and that, collectively, the documents the LLC provided constitute a contemporaneous written acknowledgment.


These two recent rulings highlight some of the basic issues surrounding the use of conservation easements and the willingness of the IRS to challenge claimed deductions. With recent legislation creating a more favorable tax environment for conservation easements, taxpayers and their advisors have an opportunity for effective planning when conducted properly.