The Tax Court delivered a blow to conservation easement donors in Wendell Falls Development, LLC v. Commissioner, T.C. Memo. 2018-45 [HERE]. Our previous blog, [HERE], provided a factual overview of Wendell Falls and the Tax Court's holding, which could be construed to invalidate the “Enhancement Regulation.” See Treas. Reg. § 1.170A-14(h)(3)(i)(fifth sentence).
In Wendell Falls, the taxpayer's representative emailed the donee of the conservation easement—Wake County North Carolina—that it “need[ed] to ensure that the County uses the [contributed] park for its intended use.” The parties' intended that the easement property would be maintained as a park. The Tax Court determined that the email “confirmed” that the donor had an “expectation of receiving a substantial benefit.”
The Tax Court then disallowed the taxpayer's $1,798,000 deduction finding that, “[n]o deduction for a charitable contribution is allowed if the taxpayer expects a substantial benefit from the contribution.” The Tax Court in Wendell Falls appears to also, by implication, invalidate the Substantial Benefit Regulation. See Treas. Reg. § 1.170A-14(h)(3)(i)(sixth and seventh sentences).
The Substantial Benefit Regulation does not provide that donor receipt of any substantial benefit automatically disallows the charitable deduction, as the opinion in Wendell Falls indicates. Rather, the Substantial Benefit Regulation directs that the value of financial or economic benefits received by a donor, even if substantial, reduces (rather than disallows) a donor's charitable deduction. If the value of the benefits received by the donor exceed the value of the contributed property, then the Substantial Benefit Regulation would render the contribution valueless.
The Tax Court cites to a United States Supreme Court case — United States v. American Bar Endowment, 477 U.S. 105, 116 (1986) — in support of its position that taxpayer receipt of a substantial benefit disallows a deduction under I.R.C. § 170. The Tax Court's citation appears to be misplaced because American Bar Endowment does not hold that receipt by the donor of a substantial benefit automatically disallows a charitable deduction. To the contrary, the Supreme Court was express that “[a] taxpayer may … claim a deduction for the difference between a payment to a charitable organization and the market value of the benefit received in return. . . .”
It is unclear if the Tax Court intended it's opinion to invalidate both the Substantial Benefit Regulation and the Enhancement Regulation (see our prior blog [HERE]). Nevertheless, the opinion in Wendell Falls can easily be construed as implicitly invalidating both regulations. Irrespective of the Tax Court's intent, unless the opinion in Wendall Falls gets appealed, vacated, or otherwise revised, donors of conservation easements (and other types of charitable property) should be wary of benefits that they may arguably receive in conjunction with making a charitable contribution.