On December 27, 2018, the Tax Court issued a 116-page opinion in Pine Mountain Preserve, LLP v. Commissioner (“Pine Mountain”) determining the deductibility of three conservation easements donated by the partnership during the 2005, 2006 and 2007 tax years. Sirote represented the partnership in the litigation. The majority opinion, written by Judge Lauber, denied the deductions claimed in 2005 and 2006 because the partnership had retained the right to locate 10 homesites on the 550-acre parcel underlying the 2005 easement and 6 homesites on the 499 acre parcel underlying the 2006 easement. Because the location of the homesites might move (though only with the land trust's approval), Judge Lauber said that the easement was not protected in perpetuity as required by the Internal Revenue Code §170(h)(2)(C) (easement must protect a specific parcel of property in perpetuity). 

The majority opinion relied heavily on the Fifth Circuit dissent in BC Ranch. The dissent opined that a floating outparcel that is not subject to the restrictions of the easement alters the boundaries of the easement-protected property. However, the majority opinion in BC Ranch rejected the dissent's position and allowed the easement deduction. Our blog on the Fifth Circuit's decision in BC Ranch can be found here. (BC Ranch was decided in the Tax Court under the style Bosque Canyon Ranch v. Comm'r).

Pine Mountain Preserve, LLP v. Commissioner (“Pine Mountain”) determining the deductibility of three conservation easements donated by the partnership during the 2005, 2006 and 2007 tax years. Sirote represented the partnership in the litigation. The majority opinion, written by Judge Lauber, denied the deductions claimed in 2005 and 2006 because the partnership had retained the right to locate 10 homesites on the 550-acre parcel underlying the 2005 easement and 6 homesites on the 499 acre parcel underlying the 2006 easement. Because the location of the homesites might move (though only with the land trust's approval), Judge Lauber said that the easement was not protected in perpetuity as required by the Internal Revenue Code §170(h)(2)(C) (easement must protect a specific parcel of property in perpetuity).

The majority opinion relied heavily on the Fifth Circuit dissent in BC Ranch. The dissent opined that a floating outparcel that is not subject to the restrictions of the easement alters the boundaries of the easement-protected property. However, the majority opinion in BC Ranch rejected the dissent's position and allowed the easement deduction. Our blog on the Fifth Circuit's decision in BC Ranch can be found here. (BC Ranch was decided in the Tax Court under the style Bosque Canyon Ranch v. Comm'r).

In Pine Mountain, the Tax Court's majority allowed the deduction for the 2007 easement. It allowed a floating water tower, but no homesites. And the Court allowed a deduction for 2007 of $4,700,000, significantly more than originally deducted.

The Pine Mountain majority also addressed the IRS's argument that a general right to amend an easement deed should result in loss of a deduction because the parties could subsequently amend the deed to alter the property subject to the easement. Lauber and the concurring judges rejected this IRS argument. The Tax Court concluded that a land trust charged with stewardship of an easement could not properly consent to such an amendment.

Judge Morrison, the trial judge who heard the evidence in the Pine Mountain case, issued a dissenting opinion stating he would have allowed a deduction for 2005 for an amount that was more than twice what was originally claimed. He rejected the majority's conclusion that a reserved right to relocate a homesite alters the property protected by the easement. Judge Morrison observed that the IRS has on numerous occasions allowed easement donors to reserve homesites even if the location of the homesite is not fixed at the time of donation. Judge Morrison also distinguished the Tax Court opinion reversed by BC Ranch (the Bosque Canyon opinion), which involved homesite outparcels that are not subject to the restrictions of the conservation easement. The homesites in Pine Mountain remained subject to the restrictions of the easement even if relocated.

Judge Morrison's dissent concluded that, in addition to allowing a deduction for the 2007 easement, the 2005 conservation easement should qualify for deduction in the amount of $27,000,000. However, Judge Morrison would have denied the deduction for the 2006 easement, as the majority did, but for a different reason. In his opinion, the floating homesites on the 2006 easement compromised the conservation purposes of the easement.

This case is expected to be appealed. The Tax Court's final decision was entered on February 7, 2019, and the parties have until May 8, 2019 to file a notice of appeal.