The Tax Court in RP Golf v. Commissioner disallowed a $16 million deduction for a conservation easement donation where the taxpayer failed to subordinate two mortgages prior to the donation of the conservation easement. Like the Carroll case, which we blogged about last week, this case is another example of how both the IRS and the Tax Court are harshly punishing taxpayers who fail to comply with highly technical rules and regulations associated with gifts of conservation easements.
The donation at issue in RP Golf covered 277 acres of property, which included a golf course. The original purchase of the property in 1997, which included the easement property, was financed by a bank, which received a security interest in the underlying property. The owner subsequently obtained a second loan, which was also secured by the property. On December 29, 2003, the taxpayer donated an easement to the local land trust. The banks did not sign the consent to subordinate their mortgage interest until April 14, 2004 – though the consents by their terms were effective as of December 30, 2003.
The IRS claimed that because the mortgages were not subordinated at the time of the easement donation, the conservation purposes were not protected in perpetuity, as required by Section 170(h)(5)(A). The taxpayer claimed that the banks had orally agreed to the subordination at the time of the easement, but didn't execute that subordination until later. The Tax Court followed a recent line of cases strictly construing the mortgage subordination requirement in the regulations, and requiring that the mortgage be subordinated at the time of the easement donation. The Tax Court also looked at Missouri law, as well as the mortgage agreements themselves, to determine whether the claimed oral agreement to subordinate was sufficient to protect the land trust's rights in the easement. The Court concluded that any oral agreement was not enforceable as between the parties, and certainly not enforceable against third parties.
The RP Golf case follows the Tax Court and Court of Appeals precedent strictly construing the requirement to subordinate mortgages before the easement is donated, despite the fact that all of these cases involve easements that had no adverse events occur between the date of donation and date of subordination. While these decisions appear to fly in the face of Congress's continued support of the conservation easement program, they have shaped the landscape of easement donations where taxpayers must ensure that every “i” is dotted and every “t” is crossed. Even a small misstep may have dire consequences.