On July 9, 2020, the U.S. Tax Court granted partial summary judgment in favor of the Internal Revenue Service (IRS) in four separate cases brought against taxpayers for charitable contributions of conservation easements. The basis for the judgments against the taxpayers were (i) violation of the proceeds clause under Treas. Reg. § 1.170A-14(g)(6)(ii) which results in a violation of the perpetuity requirement under I.R.C. § 170(h)(5)(a); and (ii) failure to provide the cost basis in IRS Form 8283 which was not substantial compliance with IRS requirements.
In each of the four cases, Village at Effingham, Riverside Place, Maple Landing and Englewood Place, the Tax Court considered whether charitable deductions for conservation easement donations made between 2009 and 2011 should be denied for a failure to protect the respective properties in perpetuity pursuant to I.R.C. § 170(h)(5)(a) and Treas. Reg. § 1.170A-14(g)(6)(ii) because of the language used in the proceeds clause in each conservation easement. In order for a conservation easement donation to be allowed as a charitable deduction, Treas. Reg. § 1.170A-14(g)(6)(ii) requires that each conservation easement provide for the proceeds received by the landowner from any condemnation of the property or extinguishment of the easement to be shared with the grantee of the easement according to the formula expressly provided by the regulations. In all four cases the language used in the proceeds clause included deductions from the percentage that the grantee of the easement would otherwise receive for (i) appreciation in the value of existing improvements, and (ii) the value of improvements added to the property after the donation of the conservation easement. The proceeds clause also provided for payment to the grantee “after the satisfaction of any and all prior claims” which could include claims owed by grantor to third parties. The Tax Court in each case found this language to violate the perpetuity requirement of I.R.C. § 170(h)(5)(a).
In each case, the taxpayers also failed to report the cost basis of the property on the IRS Form 8283, instead providing a statement that the information was not provided “because of the fact that the basis of the property is not taken into consideration when computing the amount of the deduction.” The Tax Court determined that the failure to report was a conscious election not to supply the information and that failure to comply was not substantial compliance with the requirements of Form 8283. Language similar to that used in these cases was also rejected by the Tax Court earlier this year in Oakhill Woods and Belair Woods.