The Eleventh Circuit reversed the Tax Court's denial of a deduction for a taxpayer's contribution of a conservation easement, remanding the case to the Tax Court to determine the proper amount of the deduction. The Tax Court had held that the easement did not satisfy the conservation-purpose requirement of Sec. 170(h); however, the appellate court found the easement property did satisfy that purpose because, despite including a golf course, it was a significant habitat for rare, endangered, or threatened species and it was an open space providing scenic enjoyment for the general public.
Facts: Champions Retreat was a limited liability company (LLC) based in Augusta, Ga., that had operated a golf course since 2005. The golf course was part of a 463-acre parcel that also included 66 homesites on 95 acres, and 57 acres of undeveloped bottomland forests and wetlands. Although the golf course was open only to members and their guests and not to the general public, parts of it and the undeveloped land bordered the Little and Savannah rivers and could be observed by members of the public who canoed or kayaked on those rivers, with Sumter National Forest on the other side of the Savannah River. The property is in an area that is home to various birds, animals, and plants.
In 2010, Champions Retreat donated a conservation easement consisting of restrictions on the golf course and the undeveloped land to the North American Land Trust. The company took a charitable contribution deduction of $10,427,435, which passed through to its owners. In 2014, the IRS disallowed the deduction in a notice of final partnership administrative adjustment. The LLC petitioned the Tax Court for relief. The Tax Court upheld the disallowance, holding that the easement did not satisfy a conservation purpose (Champions Retreat Golf Founders, LLC, T.C. Memo. 2018-146).
Issues: Sec. 170(f)(3)(B)(iii) excepts a qualified conservation contribution from the general disallowance of a charitable deduction for a contribution of a partial interest in property. A qualified conservation contribution is defined as the contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes (Sec. 170(h)(1)). One of four conservation purposes listed in Sec. 170(h)(4) must be satisfied, and portions of two of them relevant to this case are (1) "the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem" and (2) "the preservation of open space ... [that] is for the scenic enjoyment of the general public ... and [that] will yield a significant public benefit." A habitat for rare, endangered, or threatened species of plants, wildlife, or fish is considered a qualifying habitat and ecosystem (Regs. Sec. 1.170A-14(d)(3)(ii)).
Scenic enjoyment is evaluated based on all circumstances. It is not required that the general public have physical access to the property; visual access will suffice. The public does not have to have visual access to the entire property. However, visibility of a very small portion of the property might not meet the public-benefit requirement (Regs. Sec. 1.170A-14(d)(4)(ii)(B)).
The court had to determine whether the easement contributed to either (1) the protection of natural habitat or an ecosystem of plants, wildlife, or fish; or (2) the preservation of an open space that would provide a significant scenic benefit to the general public.
Holding: The court held that the easement contributed to a conservation purpose because the easement property was a significant habitat for (1) rare, threatened, and endangered species, including 26 bird species that are listed by one or more conservation organizations as a priority; (2) the southern fox squirrel, a species with declining numbers in the area; and (3) the denseflower knotweed, a rare plant species. The IRS had argued that the easement property did not contribute to a conservation purpose because it included unnatural land, fairways, and greens, and that the knotweed was present on only about 7% of the easement property. The court rejected these arguments, stating that the alteration of the land was not disqualifying as long as the species still existed there in a relatively natural state. Furthermore, according to the court, full coverage of knotweed was not required to contribute to a conservation purpose and could actually be harmful to the other species on the easement property.
The court also held that the easement satisfied the second conservation-purpose test, as it preserved open space for the scenic enjoyment of the general public who canoe or kayak on the Savannah and Little rivers. According to the court, despite the fact that many portions of the easement property bordered the golf course, the trees were the most visible feature of the golf course to the public, due to the high banks of the river. As a result, the golf course had little or no negative impact on the scenic view, especially when compared to portions of the river farther downstream that had substantial development.
The court remanded the case to the Tax Court for the determination of the proper amount of the deduction.
- Champions Retreat Golf Founders, LLC, No. 18-14817 (11th Cir. 5/13/20)
— By Charles J. Reichert, CPA.