Introduction: Conservation Easements
In general, a landowner can make a tax deductible charitable contribution by creating a conservation easement on its land and transferring that easement to a conservation trust. To qualify as a conservation trust, the trust generally must restrict development of the land. The land remains the property of the landowner, subject to those development restrictions. The landowner is allowed a tax deduction equal to the value of the easement contribution, subject to applicable limitations.
Lord v. Commissioner: Failure to Strictly Comply with the Law Results in Denial of Deduction
In Lord v. Commissioner, the IRS determined that the taxpayer, Henry Lord, was not entitled to a charitable contribution for his conservation easement because of relatively minor issues with the appraisal he used to value the easement contribution.
In typical situations, taxpayers who claim a deduction for a non-cash charitable contribution of more than $5,000 must have an appraisal done in order to validate the value of the contribution. Tax Regulations specify the elements that are required to be included in a "qualified" appraisal, including the date of the contribution, the date on which the property was appraised, and the value of the contribution on the date of contribution.
In Lord, the taxpayer failed to obtain an appraisal that met these strict requirements. Instead of indicating the date of the contribution and the date of the appraisal, the Lord appraisal referenced an "effective date" and a "report date." The Tax Court Memorandum opinion indicated that the Tax Court was unable to determine the meaning of these labels and, as a result, it was unable to substantiate the easement contribution. Because the taxpayer failed to satisfy the requirements of a qualified appraisal, it was not entitled to a charitable contribution deduction.
As the Lord decision reaffirms, failure to comply with tax regulations in their entirety can result in a total loss of tax benefits. This case serves as a reminder that, in the context of a charitable deduction for a conservation easement, as with other tax matters, attention to detail is critical.