The U.S. Tax Court today found the IRS had properly disallowed the full amount of a charitable contribution deduction of $155.5 million related to a conservation easement granted by the taxpayer to a qualified organization.
The court found that the conservation easement did not satisfy the requirements of section 170(h)(5)(A) because the easement was not “protected in perpetuity” and given that under the easement deed, the charitable organization was not entitled to a proportionate share of the proceeds in the event the property was sold following a judicial extinguishment of the easement.
The case is: Coal Property Holdings, LLC v. Commissioner, 153 T.C. No. 7 (October 28, 2019). Read the Tax Court’s opinion [PDF 125 KB]
The Tax Court summarized the facts in this case as follows:
Under the easement deed, the charitable organization was not entitled to a proportionate share of the proceeds in the event the property was sold following a judicial extinguishment of the easement, and the IRS thus asserted that the easement deed failed to comply with the regulations governing judicial extinguishments—that is, Reg. section 1.170A-14(g)(6)(i) and (ii) providing that in the event the easement is extinguished and the property is sold, the chartable grantee must be entitled to a proportionate share of the proceeds, as defined by formula.
The Tax Court found that the easement did not satisfy Reg. section 1.170A-14(g)(6) because the portion of the proceeds to which the qualified organization would be entitled on judicial extinguishment of the easement would be reduced by amounts paid in satisfaction of prior claims against the taxpayer and by amounts inuring to the taxpayer and attributable to appreciation in the value of improvements existing when the easement was granted plus the fair market value of any improvements subsequently made by the taxpayer to the property.
The Tax Court, thus, concluded that the IRS had properly disallowed the charitable contribution deduction in its entirety because the conservation purpose of the easement was not “protected in perpetuity” as required by statute.
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