IRS For The Win: No Tax Deduction If Conservation Easement Boundaries Change
On March 12, 2015, the U.S. Tax Court sided with the Internal Revenue Service (“IRS”) to disallow a charitable-contribution deduction claimed by North Carolina Company, Balsam Mountain Investments, LLC. (“Balsam Mountain”) The Company had previously dedicated a perpetual conservation easement to the North American Land Trust, a nonprofit entity in 2003. Similar to many individuals, farming interests, and corporations, after dedicating the conservation easement, Balsam Mountain took a tax deduction for the value of the easement. The IRS subsequently decided that the Balsam Mountain easement was not a “qualified real property interest” as described by the tax code, because the easement agreement allowed Balsam Mountain to make boundary changes.
To quote the Decision: “We hold that the easement is not a ‘qualified real property interest’ of the type described in [the tax code]…This is because an interest in real property is a ‘qualified real property interest’ of the type described…only if it is an interest in an identifiable, specific piece of real property. The easement granted by Balsam Investments permitted it to change the boundaries of the ‘conservation area.’ Therefore, the easement is not an interest in an identifiable, specific piece of real property.”
The problem, according to the Court, was that the easement agreement reserved Balsam Mountain the right to change the easement boundary under some circumstances so long as the changes would not exceed 5 percent of the land covered by the easement. By allowing one or both of the parties to subsequently change the easement boundary, the easement was not (at least according to the Court) placed on a fixed “identifiable piece of land,” and therefore no deduction was allowed.
Bottom line: In California, as in most jurisdictions, conservation easements must be specifically described and are granted in perpetuity. If taking a tax deduction, make sure there’s no wiggle room in the easement boundaries or legal description after recording the conservation easement.
The cited case is Balsam Mountain Investments LLC, Balsam Mountain Management Co. LLC, f.k.a. Balsam Mountain Co. LLC, Tax Matters Partners v. Commissioner of Internal Revenue, case number 20545-11 (U.S. Tax Court).
For questions about conservation easements, contact Braiden Chadwick.