The Tax Court disallowed a taxpayer’s deduction for a conservation easement because the taxpayer’s donated golf course was not a qualified real property interest. The court found that the golf course was not subject to a use restriction in perpetuity since the easement agreement permitted the taxpayer, with the approval of the charitable organization, to substitute other property in the future.
Taxpayers can deduct the value of a charitable contribution of a partial interest if the donated partial interest is a qualified conservation contribution. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. Qualified real property interests are an entire interest in real property (other than some mineral interests), a remainder interest in real property, or a perpetual restriction on the use of the donated real property. In addition, a contribution will not be exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.
In 1996, B.V. Belk Jr. and his wife, Harriet, transferred approximately 410 acres near Charlotte, N.C., to Olde Sycamore, their wholly owned LLC. Olde Sycamore built single-family homes and a 185-acre golf course on the property. In December 2004, Olde Sycamore entered into a conservation easement agreement with SMNLT, a nonprofit Sec. 501(c)(3) organization, covering the golf course; however, the agreement allowed Sycamore, after obtaining SMNLT’s approval, the right to future substitution of land adjacent to the golf course for golf course land. Any new land was required to have an area and value greater than or equal to the substituted land. Olde Sycamore claimed a charitable contribution of $10,524,000 on its 2004 federal income tax return, which passed through to the Belks’ individual return. The IRS disallowed the 2004 charitable contribution and related carryovers, which prompted the taxpayers to petition the Tax Court for relief.
Since the Belks did not transfer an entire interest or a remainder interest, the golf course could be a qualified real property interest only if it was subject to a use restriction granted in perpetuity. The court held that this was not the case because the easement agreement allowed parts of the golf course to potentially be substituted with property not covered by the easement.
The taxpayers argued that the substitution provision was irrelevant because it did not impair the conservation purpose of the easement. The court rejected this argument, stating the perpetual protection of the property’s conservation purpose is a separate and distinct requirement from the requirement that the property’s use must be perpetually restricted. The court further held that even if a property’s conservation purpose is perpetually protected, that does not imply that there is no need to perpetually restrict the use of the real property.
The court acknowledged that Regs. Sec. 1.170A-14(c)(2) allows property substitutions when the continued use of the property is impractical or impossible; however, those regulations do not allow substitution for other reasons and not for any reason, as in this case. Furthermore, the court stated that the property’s use must be restricted perpetually regardless of any agreement between the parties, and, therefore, SMNLT’s approval of any future substitutions was irrelevant.
Belk, 140 T.C. No. 1
By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.