Conservation Easements

BY EDWARD J. SCHNEE

Do you have a client who’s interested in protecting the environment as well as getting a tax break? Recently, the Tax Court considered the deductibility of a conservation easement to a charity.

In 1988 Mr. and Mrs. Charles Glass purchased property on the shore of Lake Michigan. In the 1990s bald eagles returned to this area, and one roosted on their land. The property also was a suitable habitat for a couple of endangered plants.

In 1990 the couple gave a conservation easement on part of the property to a qualified charity. In 1992 and 1993 they gave two additional easements to LTV, a Michigan nonprofit organization, for the purpose of ensuring the scenic and natural resource value of the property would be retained forever by preventing development of the listed parts of the property. The easements did not restrict development of other parts of the property, which the Glasses used as a vacation home until 1994, when they converted it to their principal residence. They claimed a charitable contribution for both easements. The IRS objected to the deduction.

Result. For the taxpayers. IRC section 170(f)(3) normally denies a charitable contribution for donations of less than a taxpayer’s entire interest in a property, but there is an exception for a “qualified conservation contribution.” To be eligible, the property must be a qualified real property interest, the contributee must be a qualified organization and the contribution must be exclusively for conservation purposes. The IRS said the contributions met the first two requirements but not the third.

Under section 170(h)(4) and (5), a contribution is made exclusively for conservation purposes if it is made in perpetuity and designed to

Preserve land for the general public’s outdoor recreation or education.
Protect the relatively natural habitats of fish, wildlife or plants.
Preserve open space for the public’s scenic enjoyment.
Preserve a historically important land area or structure.

The regulations expand the requirement to ensure the charity is able to enforce the restriction.

The legislative history makes clear that widespread use of this special contribution provision was not intended. The contribution should apply only to “the preservation of unique or otherwise significant land areas or structures.” The taxpayers’ case was aided by testimony from the director of the charity that the property was indeed a roosting spot for bald eagles and a proper place for threatened plants to grow. The Tax Court concluded the contribution met all the requirements.

Taxpayers desiring a charitable contribution for a conservation easement should carefully review the requirements, guarantee the documents contain the necessary provisions and restrictions and provide a qualified appraisal for the amount of the deduction.

Charles F. Glass v. Commissioner, 124 TC no. 16.

Prepared by Edward J. Schnee, CPA, PhD, Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.

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