Land Trust and Taxpayer Win in IRS Easement Challenge

This is a summary of a US Tax Court in which the IRS challenged a conservation easement on 141 acres of Alabama coastal land, part of which included a golf course. After trial and briefing, the IRS dropped its challenge of the easement’s conservation values and focused on valuation.

In a lengthy opinion, the Tax Court ruled mostly in favor of the taxpayer (except for valuation) when analyzing inconsistent reserved rights and the conservation purposes on a golf course property.

In 1999, Steven Moses bought 398 acres of land in Calhoun County for $2.4 million. He and others formed an LLC to buy the 236 acres and then donate a conservation easement on it to Chattowah Open Land Trust in Dec. 2003. The IRS challenged both the easement deduction and the timber value deduction.

The IRS opening brief in the Tax Court case Kaufman is required reading to understand all the IRS issues with technical substantiation details.

A sample from the accredited Land Trust of North Alabama.

Part one of this two-part article examines how the Internal Revenue Service lures the land conservation community and the Tax Court into Wonderland distortions, and the precarious tower of cards upon which its legal theories rest.

The landowner donated historic preservation facade easements claiming a large deduction which the IRS challenged on valuation. Following Kaufman and Scheidelman, the Tax Court ruled that a generalized diminution in value approach was not an appropriate method of valuing a facade easement.

A sample easement monitoring report from the accredited Coastal Mountains Land Trust.

The Tax Court largely upheld the conservation easement donor’s valuation claim, despite flaws with the appraisal. The court also denied the taxpayer’s motion for litigation costs, finding that the IRS’s litigation position was “substantially justified” and the taxpayer was not a “prevailing party.”

The IRS challenged a façade easement deduction both on 170(f)(8) grounds and on valuation. The donee submitted an amended Form 990 return for the year in which the donation was made. The tax court held that a traditional contemporaneous written acknowledgment was necessary and denied the deduction.