In Wendell Falls Development, LLC v. Commissioner, T.C. Memo. 2018-45 [Here], the Tax Court seemed to determine that there is no deduction allowable for a conservation easement that “enhances” the value of other property owned by a donor taxpayer. The case involved a developer, Wendell Falls, that placed a conservation easement over certain property located within one of its ongoing development projects. Wendell Falls, then sold the easement-encumbered property (which was restricted to use as a park) to Wake County at what it claimed was a “bargain price.”
At trial, none of the expert reports provided by the IRS nor the taxpayer determined that the contribution of the conservation easement “enhanced” the value of any other property owned by the taxpayer. However, disregarding the experts' opinions, the Tax Court concluded that the conservation easement enhanced the value of other property owned by the taxpayer – becausethe court inferred that the presence of a park benefited the yet-to-be-sold, adjacent lots. The Tax Court then took the unprecedented step of determining the presence of such enhancement caused the entire conservation easement donation to be nondeductible, citing U.S. v. American Bar Endowment, 477 U.S. 105, 116 (1986).
The Tax Court's decision marks a radical departure from prior conservation easement jurisprudence, as well as the Treasury regulations pertaining to the valuation of conservation easement donations. The regulations specifically dictate how any increase in the value of other property owned by a taxpayeror related person is to be handled in the context of a “before and after” conservation easement valuation. The regulations account for this possibility by requiring any appraisal to account for the value of any such “enhancement,” by reducing the amount ofthe charitable deduction by such enhancement value. Indeed, the “substantial benefits” the court determined enhance the value of the eased property should have merely reduced the value of the taxpayer's claimed charitable deduction.
The Tax Court focuses on the taxpayer's apparent “expectation” of substantial-enhancement benefits when donating the conservation easement. The expectation being that the property would continue to be utilized as a park once encumbered by the conservation easement and owned by Wake County. The court's opinion seems to blur the line between expectation of a post-contribution use that may result in enhancement value to other property owned by the taxpayer (which reduces the value of a charitable deduction) and quid pro quo (which disallows a charitable deduction altogether). Indeed, the Tax Court reasons that the taxpayer's deduction “is not allowable because of this expectation.” It is likely that many other donors could have the same or a similar expectation with respect to their properties once eased.
In Wendell Falls Development, LLC, the experts for the taxpayer and the IRS all agreed that the conservation easement did not enhance the value of the taxpayer's other property. The Tax Court, however, disagreed with both experts, finding that the donation of the conservation easement createdan (unspecified amount of) enhancement to the value of other property owned by the taxpayer. Although this disregard of the unanimous conclusion of the experts was itself notable, the Tax Court's ruling that the presence of such enhancement caused the entire contribution to be nondeductible is significantly more consequential.
It is difficult to ascertain thefull implications of the court's decision. Taken to its logical conclusion, it could mean the presence of any “enhancement” in value to a taxpayer's property causes a conservation easement donation to be nondeductible–Treasury regulations notwithstanding. We expect the IRS will now take this position during audit.
Given the frequency with which a conservation easement donation will impact the value of adjacent or proximately located property owned by a taxpayer, his relatives or “related parties,” the decision could impact an extremely large number of past and future conservation easement donations. The potential breadth of the court's holding remains to be seen, but donors (and their appraisers) should take note.