Attorneys David Wooldridge and Ronald Levitt are lead counsel for taxpayers who appealed their case to the 4th Circuit Court of Appeal in a landmark case that may have a significant impact on charitable deduction law. They have worked on this case since 2008, including a trial in U.S. Tax Court in 2011. Sirote attorney Gregory Rhodes and I are assisting with the appeal.

Yesterday’s issue of BNA Daily Tax Report summarizes the case, pasted below with a link to the opening brief.

Bloomberg BNA Daily Tax Report, May 15, 2014

Golf Community Developers File Brief in Appeal of Conservation Easement Deduction

Developers of a golf community filed their opening brief appealing a U.S. Tax Court decision that they couldn’t claim a $2.1 million charitable contribution deduction for a conservation easement they granted encumbering a portion of the development, because the easement agreement included a provision allowing for substitution of portions of the restricted property (Belk v. Commissioner, 4th Cir., No. 13–02161, brief filed, 5/14/14).

The taxpayers, B.V. and Harriet Belk, through Olde Sycamore LLC, held and developed a 410-acre parcel near Charlotte, N.C., as a residential community that included a golf course. In 2004, Olde Sycamore executed a conservation easement agreement with Smoky Mountain National Land Trust for the land where the golf course was located. The conservation easement agreement provided that the Belks and the land trust could change the property that is subject to the easement.

Judge Juan F. Vasquez ruled in January 2013 that the use of the subject property was not restricted in perpetuity as required by tax code Section 170(h) because the easement agreement between the taxpayer’s entity, Olde Sycamore LLC, and the Smoky Mountain National Land Trust allowed for substitution of the property subject to the restriction (19 DTR K-2, 1/29/13). In June 2013, Vasquez denied the Belks’ motion for rehearing (119 DTR K-4, 6/20/13).

Substitution provision

In their brief, filed April 23, the Belks argued that the Tax Court erred in interpreting Section 170(h) as prohibiting a deduction for any easement agreement that allowed for a substitution of encumbered property, because such an easement wouldn’t be in perpetuity as required by the statute.

The brief argued that Section 170(h) doesn’t “concern or relate to the specific location, fixed-nature or other attributes of the real property protected. In contrast, Section 170(h)(5) makes clear that the ‘conservation purposes’ accomplished through the easement agreement must be protected in perpetuity.” An easement that allows for substitution while still protecting the conservation purposes doesn’t violate Section 170(h), the brief said.

Savings clause

The brief further argued that the easement’s “savings clause,” which prohibits the land trust from agreeing to any amendment that would result in the easement failing to qualify as a “qualified conservation contribution” under the statute, would prevent the land trust from later agreeing to any substitution that would violate Section 170(h).

The brief said that the Tax Court erred in determining that the substitution provision and savings clause were irreconcilable and that the substitution provision trumped the savings clause.

“Nothing contained in the Substitution Provision nor the Savings Clause suggests that Olde Sycamore and SMNLT intended that the Substitution Provision should override the general requirement that substitutions and other amendments were impermissible if they would cause the Conservation Easement to fail to qualify as a ‘qualified conservation contribution’ under Code § 170(h),” the brief said.

Sirote & Permutt PC in Birmingham, Ala. represents the Belks.

Read the Belk opening brief.