We have received several emails regarding our recent blog post concerning comments by IRS officials at the Land Trust Alliance (LTA) meeting held in October of this year. Specifically, we noted that IRS officials acknowledged during the meeting that they are challenging “amendment clauses” in conservation easement deeds. We further described how we have tried two separate Tax Court cases in which the IRS has challenged amendment provisions.
The email responses have ranged from disbelief, to criticism of mischaracterizing IRS positions, to plain anxiety. Although IRS comments are informing as to the Service's position, we determined the best way to describe the official IRS position is to describe, in their own words, the position they have taken in the two Tax Court cases. Both cases involve the following “amendment” provision:
- Amendment. Owner and Holder recognize that circumstances could arise which would justify the modification of certain of the restrictions contained in this Conservation Easement. To this end, Holder and the legal owner or owners of the Conservation Area or, if the Conservation Area has been legally subpided, the Owner of that portion of the Conservation Area affected by such amendment at the time of amendment shall mutually have the right, in their sole discretion, to agree to amendments to this Conservation Easement which are not inconsistent with the Conservation Purposes; provided, however, that Holder shall have no right or power to agree to any amendments hereto that would result in this Conservation Easement failing to qualify as a valid conservation agreement under the “State Conservation Easement Law,” as the same may be hereafter amended, or as a qualified conservation contribution under Section 170(h) of the Internal Revenue Code and applicable regulations.
This language is very similar to the language found in a sample deed contained on the LTA website, which states as follows:
- Amendment. If the circumstances arise under which an amendment to or modification of this Easement would be appropriate, Grantor and Grantee are free to jointly amend this Easement; provided that no amendment shall be allowed that will affect the qualifications of this Easement under any applicable laws. Any amendment must not be inconsistent with the preservation and protection of the Conservation Values of the Property and shall not affect the perpetual duration of the Easement. Any amendment must be in writing, signed by both parties, and recorded in the official records of _____ County, Colorado.
In its brief filed November 2, 2015 in the first case (Kumar Rajagopalan, et al., Doc. No. 21394-11), the IRS argued:
- The amendment clause permits the parties to agree to modify certain restrictions in the deed of easement. These modifications can include removing restrictions on development or other protections intended to preserve the property in perpetuiy.
- Outside of [the two limited situations, in the] regulations, there is no statute or regulation that contemplates or allows modification of the terms of an easement. Indeed, those two regulations will only be implicated if there is a sudden and unexpected change in the circumstances surrounding the conservation easement.
- Petitioners cite to state law and model deeds which permit modification or amendment of easements. Parties are free to allow for amendment of their easements as long as they are not seeking a federal income tax deduction as well.
In its brief filed August 11, 2015 in the second case (Pine Mountain Preserve, LLLP, et al., Doc. No. 8956-13), the IRS argued:
- In this case, [the donor] fails to meet the perpetuity requirement. Section 6.7 of each [deed] allows amendments to the conservation easements in the sole discretion of [the donor and the donee]. Aside from the savings clause," which clearly has no effect, the only limitation on amending the easements is that the amendments not be inconsistent with the "Conservation Purposes." This limitation is ambiguous, as it does not delineate any clear parameters as to which provisions of the easements may, or may not, be modified, and it has little meaning.
- The ability of [the land trust / donee] to reject or accept a proposed modification is irrelevant; "restrictions [in a deed] are supposed to be perpetual in the first place, and the decision to terminate them should not be solely by interested parties."
The IRS reiterated this argument in its answering brief filed October 13, 2015.
Accordingly, it is clearly IRS position that the ability to amend a conservation easement causes the easement to be nondeductible. The LTA language which is used by many land trusts throughout the country contains substantially identical language to that being challenged in at least two ongoing cases. We have informed the court in both cases that the IRS's position would have a draconian effect on the land trust community.
We do not provide and make public this information to criticize the IRS or its representatives, nor do we provide it for the purpose of unduly alarming the land trust community. However, we think positions formally taken by the IRS that have drastic consequences on ongoing practices in the land trust community are of vital importance to the community.