Turner v. Commissioner (Opening Brief of Respondent)

• Turner v. Commissioner, 126 T.C. No. 16 (U.S.T.C. 2006)
• State: Virginia
• Procedural Status: Case concluded.
• Date: 2006
• Keywords: Appraisal; appraisal penalty; charitable deduction; Internal Revenue Code; historic preservation easement; open space; public conservation easement; section 170(f); section 170(h); unsigned document; valuation.
• Summary of Facts and Issues: In 1997 and 1998, James Turner (Turner) purchased several contiguous parcels comprising 42 acres in Fairfax County, Virginia.  These parcels were located in a county historic district, as they were in proximity to Mount Vernon (George Washington’s former estate), adjacent to a grist mill property once owned by Washington and now open to the public, and within the viewshed of another historic plantation.  The parcels also abutted the George Washington Memorial Parkway, a well-traveled scenic byway.  Upon completing the purchase, Turner began considering several different ways to develop a 29-acre portion (the “subject property”) for commercial and/or residential uses.  Under the local zoning ordinances, approximately 15 acres of the subject property were in a floodplain and were therefore not developable at all.  By right, Turner could subdivide and develop the remaining 14 acres into 30 separate residential lots.  After floating concept plans for a 62-lot subdivision before local agencies and community groups, Turner eventually applied for a 30-lot subdivision in November 1998, which was preliminarily approved by the county in March 1999 and finally approved in 2000.  Meanwhile, Turner drafted a conservation easement, but the only substantive restriction in the easement was to limit development to no more than 30 single-family lots.  The easement was signed and recorded in December 1999 in connection with Turner’s sale of 29 of the 30 lots to a builder/developer, but the county never accepted the easement, as required by Virginia law.  Eventually, 29 homes were built on the subject property, and these homes were visible from the surrounding historic properties that were open to the public.  (Turner donated the remaining lot to the Mount Vernon Ladies Association, which owned the abutting Grist Mill.)  In the course of his dealings, Turner ghost-wrote letters from both a County Supervisor and the Mount Vernon Ladies Association, asking him to limit his building on the subject property to no more than 30 lots, even while acknowledging that he could by-right develop 62 lots.  In fact these letters were inaccurate, because Turner could only develop 30 lots by right.  Turner filed his 1999 federal income tax return and claimed a charitable deduction of $343,000.  (The easement was appraised at $3,120,000 based on the difference in value between a 62-lot subdivision and a 30-lot subdivision, but Turner’s claimed deduction was lower due to the adjusted gross income limitations.)  In part due to faulty information passed on by Turner, the conservation easement appraisal was based on the mistaken assumptions that the property enjoyed a 62-lot by-right development and that the floodplain portion of the property was developable.  In addition, the Form 8283 appraisal summary that was submitted with the return was not signed by the county.  The IRS challenged the deduction on a number of different counts, and sought accuracy-related penalties for negligence and substantial understatement.  At issue in the case was whether the easement satisfied either the open space conservation purpose test of Code section 170(h)(A)(4)(iii) or the historic preservation conservation purposes test of Code section 170(h)(4)(A)(iv). 
• Holding: The Tax Court first held that the easement did not meet the open space conservation purpose test because it did not preserve any land in its natural state.  Similarly, the Court held that the easement also failed the historic preservation test because it did not protect any of the property’s natural condition, and it was this natural condition that contributed to the historical nature of the surrounding properties.  Finally, the Court assessed a 20% accuracy-related penalty on Turner due to his negligence in allowing the flawed appraisal to be the basis of his claimed deduction. 
• Analysis and Notes:  Judging from the briefs and the opinion, this appears to have been an abusive conservation easement donation.  The opinion is the first time any court has found that a conservation easement does not meet any of the conservation purposes of Code section 170(h)(4)(A).  And rightly so, for the easement appears to have had zero conservation value, as not a single square foot of land was preserved.  Turner essentially argued that a “tasteful” and “high-end” 30-lot subdivision, when compared to a 62-lot subdivision, is tantamount to open space or historic preservation.  One of the most important cases in years, Turner will no doubt be much discussed throughout the land conservation community and will hopefully serve as a lesson to those few opportunists who might abuse conservation easement federal tax benefits.