How to proceed with proceeds?

On Dec. 29, the U.S Court of Appeals for the Eleventh Circuit published its opinion in Hewitt v. Commissioner, reversing and remanding the U.S. Tax Court’s decision. Why is this important? The IRS — for years now — has challenged hundreds of donations of conservation easements on the basis that these easements included language allegedly violating federal tax regulations and law. The allegedly faulty language was a termination proceeds provision which allowed the subtraction of the increase in value of post-easement improvements. It’s all rather technical and complicated, but the IRS used it to trip up many a donation. And the Tax Court, for the most part, has supported the IRS position.

But now, the Eleventh Circuit, which covers Alabama, Florida and Georgia, has called into question this section of the regulation, the Tax Court’s ruling and the IRS’s interpretation. With this December decision, the case was sent back to Tax Court for a do-over.

Many questions remain about this decision — and there’s very little consensus today as to the decision’s ramifications. The Land Trust Alliance expects the courts to apply this case rather narrowly, at least for the time being. What happens next will depend in no small part on a different circuit court’s decision in Oakbrook Land Holdings v. Commissioner, which tackles arguments similar to the Hewitt case. The Oakbrook case should give land conservationists more guidance soon on how to proceed.

In the meantime, the Alliance’s recommendation to land trusts is to sit tight, avoid quick reactions such as altering any easement template or agreeing to any donor request to eliminate or alter the proceeds clause language. Let this matter evolve in the courts.

As this situation evolves, my colleagues and I will have more guidance for you. Stay tuned.