Over the last few weeks, we posted two of a four part series of blog articles regarding the Tax Court's recent opinion in Bosque Canyon Ranch, TC Memo 2015-130. The first blog post, which is found here, discusses the facts of the case and foreshadows subsequent discussions on the various issues addressed by the Court. The second post, which is found here, analyzes issues regarding “floating homesites,” i.e., reserved rights to build homes on property subject to the easement. This post analyzes the Court's holding that the easements in the case were not deductible because the taxpayer failed to satisfy the “baseline documentation” requirements of Treas. Reg. § 1.170A-14(g)(5)(i). Adequacy of baseline documentation has rarely been an issue in prior reported cases or in audits with which we are familiar.
The taxpayer in Bosque granted a conservation easement in December 2005 (the “2005 Easement”) and another conservation easement in September 2007 (the “2007 Easement”). With respect to the baseline documentation for the 2005 Easement, the Court found it problematic that the property was described as of April 2004 (20 months before the 2005 Easement was granted) and that other portions of the documentation were not completed until March 2007 (15 months after the easement). With respect to the 2007 Easement, the Court was critical that the baseline documentation contained photographs taken in November 2008 (13 months after the date of the 2007 easement), a Site Survey Report describing the property as of April 2004 (41 months prior to the date of the 2007 easement), and an owner acknowledgement that was described as “partially executed” and signed after the date that the easement was contributed.
While seeming to acknowledge that the taxpayer's documentation fell within the general categories of documentation that the regulations say “may” be provided to satisfy the baseline documentation requirement, the Court concluded that the requirement was not met because the untimely documentation was “insufficient to establish the condition of the property prior to the dates of the transfers,” as required under Treas. Reg. § 1.170A-14(g)(5)(i).
The Tax Court's ruling in Bosque marks the first time a court has determined baseline documentation to be insufficient to satisfy Treas. Reg. § 1.170A-14(g)(5)(i). Many land trusts have viewed the baseline documentation as an ongoing process, and they have not been focused on contemporaneous collection of all of the data. Updating the baseline documentation with pictures, maps and other information over the life of an easement is not an uncommon practice. The Bosque ruling will cause land trusts and taxpayers to rethink this process and pay more attention to obtaining maps, descriptions, photographs, analyses, and signatures contemporaneously with the grant of an easement. Because of the Bosque Court's focus on timelines, there is still little guidance available on the nature and detail of documentation sufficient to satisfy the baseline documentation requirement.
It is worth noting that Bosque was a topic of discussion at a panel presentation that took place at the Land Trust Alliance Rally held last week in Sacramento California. The Panel included representatives from the IRS. The major take away of the discussion confirmed the importance of having a completed baseline report at the time of the grant of an easement and that the baseline report should not be later updated or amended. The IRS emphasized that a baseline report must be complete and accurate as of the date of the conservation easement grant. The speakers noted that while many land trusts may do additional work on the property, such additional work should be considered something other than an amendment to the final report. One such option would be to include such subsequent information in a “monitoring report.”