In a recent case, the 11th Circuit discussed conservation easements and their statutory requirements. The full case addressed three issues: (1) the granted-in-perpetuity requirement, (2) the effect of an amendment clause (and the protected-in-perpetuity requirement), and (3) valuation methods.
This post focuses on only the first issue—the operation of § 170(h)(2)(C)’s granted-in-perpetuity requirement.
For some quick (and simplified) background, § 170 allows the charitable contribution deduction. Generally, charitable contribution deductions are not allowed for contributions of partial interests in property (that is, if you own the property and you give away something other than that full ownership). An exception exists, however, for qualified conservation contributions, which allows a charitable deduction for a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes.
Autumn sunrise. Mountain landscape. Fall morning with vivid sky over beautiful valley. Tranquil … [+]
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At dispute in this case (on the first issue) were the definitions and requirements of a “qualified real property interest” and “exclusively for conservation purposes”. As relevant here, the definition of a qualified real property interest requires that there be “a restriction (granted in perpetuity) on the use which may be made of the real property.” § 170(h)(2)(C). The 11th Circuit referred to this as the “granted-in-perpetuity requirement.”
Although the court focused on the other statutory elements, too—namely the “protected-in-perpetuity” requirement to be exclusively for conservation purposes—this post focuses mainly on the granted-in-perpetuity requirement.
For its part, the Tax Court held that some easements at issue in this case violated the granted-in-perpetuity requirement of § 170(h)(2)(C) because the easements reserved in the donor the right to build a limited number of residential homes and structures. In its decision, the Tax Court used a “Swiss Cheese” metaphor, in which the easement-related area is a slice of cheese, and the § 170(h)(2)(C) requirement means that the developer must be barred “from putting new holes in the cheese.” 151 T.C. 247, 273 (2018).
The 11th Circuit, however, disagreed with the Tax Court.
The 11th Circuit noted that, “[o]n its face, § 170(b)(2)(C) doesn’t require much—only that a grant embody ‘a restriction (granted in perpetuity) on the uses which may be made of the real property.’” Moreover, according to the court, a conservation easement—like the type in the case—does that because it “constitutes ‘a restriction’ on ‘the use . . . of the real property’ because it burdens what would otherwise be the landowner’s fee-simple enjoyment of—and absolute discretion over—the use of its property.” Furthermore, the 11th Circuit noted that, “[a]nd it does so ‘in perpetuity’ because nothing in the grant envisions a reversion of the easement interest to the landowner, its heirs, or assigns.”
In other words, according to the 11th Circuit, “[a] broad limitation on the use of the property that applies to the parcel as a whole satisfies the statutory test, even if within that parcel there exist certain narrow exceptions to that limitation.”
The Commissioner, on the other hand, disagreed; he argued that every inch of the land much be subject to the restriction in perpetuity. Thus, according to this view, a limited reservation of development rights violates the granted-in-perpetuity rule. In short, the purpose of the requirement, according to the Commissioner, was to ensure that the restriction can’t be later “removed, weakened, or diminished.”
The 11th Circuit disagreed based on the plain language of the statute and the common-law meaning of perpetuity. First, with respect to the language, the court emphasized that the article “a” precedes the word “restriction”. Thus, the court noted that the easements did, in fact, impose “a restriction” on the uses of the underlying land because they “broadly restrict [ ] preexisting development rights.”
Second, with respect to the in-perpetuity requirement, the court noted that the restriction was in perpetuity, as understood in the common law, because the donor and “its heirs, or assigns remain indefinitely subject to the restriction and because nothing in the grants will cause the easements, either automatically or upon the happening of some event, to revert back to the [donor] or its successors.”
In short, on this issue, the court held that, “[a]n easement granted in perpetuity over a defined conservation area clears § 170(h)(2)(C)’s relatively low threshold, even if it reserves targeted development rights for homesite construction.”
The 11th Circuit continued to discuss, in more detail, the delineation of the protected-in-perpetuity requirement and § 170(h)(5)(A)—and how it differs from the separate granted-in-perpetuity requirement of § 170(h)(2)(C), but that is not the subject of this post. This post is only a brief summary of one aspect of the case (and not a complete analysis of the case or the issues presented).
The case is Pine Mountain Preserve LLLP v. Commissioner, No. 19-11795 (Oct. 22, 2020); you can find it here.
This is only a summary of the case and some portions—including facts, issues, or analysis—have been omitted or edited; these issues are highly technical and detailed — if you need advice in this area, please review the case in its entirety and consult a tax attorney.