Carroll V. Commissioner

U.S. Tax Court, 146 T.C. 13, April 27, 2016: Formula for sharing post-extinguishment proceeds must conform exactly to IRS Regs.

Despite the federal Tax Code and Treasury Regulations’ requirement that to be eligible for a tax deduction a donated conservation easement must be enforceable in forever and always (“in perpetuity”), the law recognizes the possibility that even a qualified conservation easement could be extinguished by a court in unusual circumstances. When a conservation or preservation easement is extinguished, that presumably increases the fair market value of the property because it could be sold without the burden of the easement. To assure that the property owner will never recoup the value of the gift that gave rise to a tax benefit (and reduced Treasury revenue) and that the value of that easement will always be used for conservation purposes, the Tax Code and Regulations require that to be eligible for the deduction, a donated conservation easement must spell out a certain formula for how the property owner and the conservation organization that holds the easement (various called the “grantee,” “donee” or “holder”) will divide the proceeds of the first sale of the property after extinguishment. The holder will then continue to have the cash value of the easement, to use for conservation purposes.

At issue in this case, which the Tax Court described as its first on this question, was how closely the formula for sharing post-extinguishment proceeds must conform to the text of the IRS regulations. The court’s answer was the formula must guarantee that the holder will get exactly what it would get using the precise words of the regulations; i.e., the court rejected the Carroll formula and therefore said the Carroll Easement did not qualify for a federal tax deduction.

Sec. 1.170A-14(g)(6)(ii) of the Income Tax Regs. says that the holder’s share of post-extinguishment proceeds must be “at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift [the numerator] bears to the value of the property as a whole at that time [the denominator].” These values are determined by an appraisal closely contemporaneous with the gift. Even as these dollar values might change over time, this fraction (the numerator divided by the denominator as determined by this formula at the time of the gift) never changes; it remains the same in perpetuity.

The conservation easement in this case (the Carroll Easement) used a different numerator.  Instead of the “value [of] the perpetual conservation restriction at the time of the gift,” the Carroll Easement used the amount allowable as a deduction for Federal income tax. In other words, regardless of what the donor’s appraisal might have said at the time of the gift, the Carroll Easement said that the value of the easement was what the IRS said the value was. This presumably reflects the fact that the IRS has often contested the donor’s appraised value and the Tax Court has sometimes agreed that the value of the easement at the time of the gift was some number lower than the donor’s appraised value, sometimes down to zero value.  The Carroll Easement also said that once there was a final determination of value by the IRS or a court of competent jurisdiction, the holder’s share of post-extinguishment proceeds would remain constant.

In disqualifying the Carroll Easement, the court relied on the federal Third Circuit Court of Appeals and district court decisions in the Kaufman cases. Kaufman v. Commissioner (Kaufman I), 134 T.C. 182 (2010), reconsideration denied by Kaufman v. Commissioner (Kaufman II), 136 T.C. 294 (2011), aff’d in part, vacated in part and remanded in part sub nom, Kaufman v. Shulman (Kaufman III), 687 F.3d 21 (1st Cir. 2012).  Although the facts in Kaufman were different, the principle cited by the court was that the nonprofit easement holder must be absolutely guaranteed its proportionate share of post-extinguishment proceeds. Kaufman I, 134 T.C. at 187.

The court understood this principle to mean that the holder’s proportionate share of post-extinguishment proceeds must be determinable exactly as the IRS Regulations state at the time of the gift (or perhaps when the deduction is claimed). The Carroll Easement left open the possibility that the holder’s proportionate share would appear to be one thing at the time of the gift and another thing by the time the IRS could no longer challenge the deduction claim or the IRS challenge was finally resolved.

(The court noted that if the Carroll case were appealed, the appeal would be heard by different Court of Appeals Circuit than the circuit which decided Kaufman, and so might reach a conclusion different from Kaufman’s, “the Court of Appeals for the First Circuit’s opinion in Kaufman III is instructive on several points.”)

Not surprisingly, Carroll objected that the court’s reasoning was circular:  was it logical to say that the Carroll Easement was disqualified for a charitable deduction because it might be disqualified for a charitable deduction for a reason other than the reason for which the court wanted to disqualify it? The Carroll Easement either would or would not be disqualified for a reason other than the post-extinguishment proceeds clause (indeed, the court rejected other IRS objections to the Easement; see below). If the Carroll Easement were disqualified for a reason other than the post-extinguishment proceeds clause, what possible difference could it make what the proceeds clause said? And if it were not disqualified on other grounds, then didn’t the Carroll Easement’s proceeds clause have the effect of guaranteeing the holder a certain share of proceeds that, once determined, would remain constant in perpetuity?

The court found this argument “unpersuasive. The regulatory requirements set forth in section 1.170A-14(g), Income Tax Regs., are designed to protect the conservation purpose of a conservation contribution and must be satisfied at the outset for a contribution to be deductible.”

The court also upheld the IRS decision to hold the taxpayer liable for accuracy-related penalties under I.R.C. sec. 6662. Although Tax Code Section 6664(c)(1) provides that the penalty under section 6662(a) do not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer’s position and that the taxpayer acted in good faith, the taxpayer in this case did not consult with an attorney or other adviser in the drafting of the easement, and therefore could not claim reasonable cause and good faith.

The IRS also challenged the deduction on the basis that easement the did not constitute a qualified real property interest under section 170(h)(1)(A), and was not contributed exclusively for conservation purposes under section 170(h)(1)(C) because it did not preserves open space pursuant to a clearly delineated Federal, State, or local government conservation policy and yield a significant public benefit. The court found the Carroll Easement met these requirements.

The opinion is available at

Wetlands America Trust, Inc. v. White Cloud Nine Ventures

Supreme Court of Virginia, Record No. 141577, February 12, 2016: Conservation easement ambiguity resolved in favor of allowing construction.

This controversy arose because of construction activities and proposed uses of land subject to a conservation easement. The legal questions were whether a Virginia conservation easement should be construed “strictly” (i.e., narrowly) against restrictions on land, whether certain provisions of the conservation easement itself were ambiguous, whether the lower court had a reasonable basis to find that no violation of the ambiguous terms of the easement had occurred, and whether the lower court had a reasonable basis to find that the construction activities would not violate the conservation purposes of the easement. Five of the seven member appeal court upheld the trial court, but two justices dissented.

Wetlands America Trust, Inc. (WAT) holds a conservation easement on Virginia property owned by White Cloud Nine Ventures, L.P. (White Cloud). White Cloud purchased the property to lease it to a related entity to use for a vineyard, grazing and milking cows, raising wheat, constructing a building to be used for a creamery, bakery, wine storage, and the tasting, sampling and sale of wine, cheese and bakery products. White Cloud began construction of the building, an adjoining parking lot, a new road and a new bridge. WAT sued, seeking a declaratory judgment that the construction and intended “commercial use” violated the conservation easement’s restrictive covenants. The trial court denied the declaratory judgment.

The first issue decided on appeal was whether the trial court was wrong to apply the common law principle that if the conservation easement, as a contract, was at all ambiguous, it must be strictly construed against WAT, the party seeking to enforce it. WAT argued that in Virginia a conservation easement should not be subject to that rule because the 1988 Virginia Conservation Easement Act (“VCEA”) (VA Code §§ 10.1-1009 through -1016), especially favors land conservation and sets conservation easements apart from other restrictions. The court said that under settled principles of statutory construction, “[s]tatutes in derogation of the common law are [themselves] to be strictly construed and not to be enlarged in their operation by construction beyond their express terms.” The court then said it found nowhere that the VCEA specifically addresses the principles of contract construction to be applied to conservation easements, and thus – construing VCEA narrowly — it does not directly exempt such easements from the common law principle favoring use of land free from restrictions.  That reasoning meant that if restrictive covenants in the conservation easement are determined to be ambiguous, they must be strictly construed against restriction and in favor of White Cloud.

The dissenting opinion disagreed, saying that the common law principle of strict construction in favor of free use of land does not apply to conservation easements.  The dissent took note that Virginia public policy, as embodied in the Constitution of Virginia, VCEA and statutes preceding VCEA strongly favors the conservation of land and open spaces.  The dissent wrote, “The oft-stated policy of the Commonwealth in favor of conservation easements such as the type at issue here could not be a clearer rejection of the common law strict construction principle.” The majority opinion, according to the dissent, ignores the common law principles of contract interpretation which provide that “where, as in this case, an easement is created by deed, the easement should be interpreted in accordance with Virginia’s rules of construction for deeds.” (The majority asserted in a footnote that the rules for interpretation of deeds are applicable “where there is a dispute, not over the meaning of restrictions placed on the use of certain land, but rather over the nature and extent of the estate the grantor intended to convey” [citation omitted].)

After having held that ambiguous provisions of the conservation easement should be interpreted in favor of White Cloud, the court then turned to the provisions of the easement which WAT claimed White Cloud violated.

The first provision at issue was whether the trial court was reasonable in finding that White Cloud’s building and uses are “farm buildings or structures” which are allowed by the easement. The court said that “farm building” is synonymous with “agricultural building,” and looked to the easement itself, Virginia’s Uniform Statewide Building Code and Webster’s Third New International Dictionary to interpret “farm buildings or structures.” The easement’s prohibition on new buildings which allows “farm buildings or structures” did not define “farm buildings” or “farm structures” but another section of the easement refers to various structures including farm buildings, as “agricultural buildings.” The court cited sections of the Building Code that define the term “[f]arm building or structure” to include storage, handling, production, display, sampling or sale of agricultural, horticultural, floricultural or silvicultural products produced in the farm, and handling, processing or sale of agricultural animals or agricultural animal products. The court cited the dictionary’s definition of “agriculture” as including “the science or art of the production of useful to man and in varying degrees the preparation of these [plant and animal] products for man’s use and their disposal (as by marketing).” The court concluded that production, preparation and marketing are components of agricultural activities included in the phrase “farm building” as used in the easement and that the permitted “farm/agricultural buildings” may be used for agricultural activities that are commercial and/or industrial in nature. On that basis, the court held that White Cloud’s intended use was allowed by the easement so long as the agricultural products involved were at least in part grown or derived from plants and livestock grown or grazing on the easement property.

The court turned to the conservation easement’s prohibition against constructing a building on “highly erodible areas as identified by the U.S. Department of Agriculture.” The court agreed with the trial court’s interpretation of the easement to mean the erodibility was to be tested after the construction site for the new building had been graded. This interpretation involved reconciling the construction prohibition cited above with another provision of the easement which allows grading, which says, “Grading… shall not materially alter the topography of the Protected Property except . . . as required in the construction of permitted buildings. . . .” Under this interpretation the court also found that it would be “completely incongruous and unreasonable to conclude” that White Cloud could grade the site for the new building but not for the parking area serving the building.

WAT also tried, unsuccessfully, to argue that in addition to the specific prohibitions analyzed above, White Cloud’s activities were prohibited as contrary to the conservation purpose of the easement.  The stated purpose was, “to assure that the Protected Property will be retained in perpetuity predominantly in its natural, scenic, and open condition, as evidenced by the [Baseline Document] Report [BDR], for conservation purposes as well as permitted agricultural pursuits, and to prevent any use of the Protected Property which will impair significantly or interfere with the conservation values of the Protected Property, its wildlife habitat, natural resources or associated ecosystem.”

While the court acknowledged what it called “inherent tension” between the conservation purposes (which, the court said, were undefined) and the expressly “permitted agricultural pursuits,” it also said that the easement calls for retention of the property for conservation purposes and permitted agricultural pursuits, and “therefore the character of the property is in no way frozen in perpetuity” (Emphasis added.) The court concluded that the trial court reasonably  ruled that, “under the Easement, White Cloud was not required to retain its property in the condition established by the [BDR] to the extent it has engaged in permitted uses.” The court also found the trial judge could make the determination that the expert witnesses for White Cloud were more persuasive that the expert for WAT in showing that White Cloud’s construction and use of its new facilities “did not significantly impair or interfere with the Easement’s conservation values and/or the property’s environment.”

Lastly, the court upheld the trial court on technical civil procedure grounds in refusing to consider another WAT claim (about constructing a bridge) which WAT had not alleged in its complaint.

The opinion is available at

In Re: Nealon

U.S. Bankruptcy Appellate Panel, 1st Circuit, BAP NO. MW 15-035, Bankruptcy Case No. 14-40719-HJB, January 20, 2016: Homestead protection in Massachusetts depends on actual use of property when homestead arises, not owner’s intentions or the property’s subdivision.

This case is about whether the Massachusetts Homestead Act provides protection in bankruptcy for a debtor’s land adjacent to, but as separate parcels subdivided from, the parcel on which the debtor’s house is located. In a very fact specific conclusion, the unpublished opinion of the Panel was that the adjacent land is entitled to homestead protection. This case is reported here because, although there was no conservation easement or historic preservation easement on the adjacent land, the decision in this case is cautionary regarding the need to determine homestead status of real estate proposed to be subject to a conservation easement or historic preservation easement even if the grantor’s principal residence building isn’t on easement land.

The debtors, the Nealons, were deed 13 acres of land and a 240-year old house (the “House”) identified in the deed by a street address (the “Street Address”) and as Lot 2 on a certain recorded plan.  Subsequently, as part of an intention to build a new house and sell off the existing House, the Nealons recorded a subdivision plan, approved by the municipality, showing two buildable lots (including the House lot) and two non-buildable lots. An agreement required as a condition of subdivision approval and signed by the Nealons required that the non-buildable lots be subject to a conservation easement or donated to a conservation organization. The Nealons did not grant a conservation easement or donate those lots (reportedly because their mortgage holder would not subordinate to a conservation easement and the Nealons would not pay for the release of those lots from his mortgage).  The Nealons did record a Declaration of Restrictive Covenants regarding wetlands on the non-buildable lots in order to qualify for water quality certification permits. According to the Nealons, they then discontinued efforts to develop the subdivision.

Two years later, the Nealons recorded a Declaration of Homestead on property identified only by the Street Address and the deed into them (which conveyed all 13 acres). The Nealons filed for chapter 7 bankruptcy protection less than five months later. They claimed a homestead exemption for all 13 acres. A creditor objected and asserted that no homestead protection applied to the three vacant lots, only the House lot.

The bankruptcy trial court considered whether the vacant lots were part of the Nealons’ principal residence for purposes of the Massachusetts homestead statute, MGL c. 188. It concluded as a finding of fact that the Nealons maintained an intention to subdivide the property, donate the non-buildable lots, and sell the other vacant lot, and therefore that court held that the three vacant lots were not entitled to homestead protection.

On appeal, the Panel reversed the lower court. They said that the subdivision of the property is irrelevant to the analysis of the homestead and the debtor’s past or future intention regarding the property is not controlling. The key factor, the Panel said, should be the debtor’s actual use of the Property at the time of the homestead declaration. The Panel found that the Nealons had met their burden of proof to show that they “actually used and occupied the vacant lots as part of and in connection with his principal residence at the time of the declaration.”

Decision available at


U.S. Dist. Court, SD New York, No. 11 Civ. 8157 (ER), February 1, 2016: Preservation easement recording date is contribution date in New York.

Mecox Partners LP (“Mecox”) donated a historic preservation easement and open space easement on property in New York State to a charitable organization. The deed of easement was fully executed in 2004, but was not recorded until November 2005.  Mecox claimed a qualified conservation contribution deduction on its 2004 tax return. They submitted an appraisal of the contribution dated June 13, 2005, which stated the value of the easement as of November 1, 2004.

The IRS denied the deduction, saying that the easement was not contributed in the tax year for which it was claimed. The IRS also said the substantiation requirements for a qualified conservation contribution deduction were not satisfied because the appraisal was not conducted within 60 days of the on November 17, 2005, contribution date, as required by treasury regulation 26 C.F.R. § 1.170A-13(c)(3)(i). Mecox took the case directly to the U.S. District Court.

The court found for the IRS. The court looked to New York State law to determine the taxpayer’s interest in the property before turning to federal law to determine the tax consequences of that interest. The court found that under the applicable New York law, New York Environmental Conservation Law (“ECL”) Article 49, Title 3, for an instrument to be a “conservation easement” as defined in that statute the instrument must be recorded to be effective. ECL § 49-0305(4).  Accordingly, the court held that federal law requires that a deduction for charitable contribution of a conservation easement in New York cannot be claimed until the easement is recorded. Because Mecox claimed the deduction for a tax year prior to the recording, the claimed deduction was denied.

The court cited support in two recent U.S. Tax Court decisions: Zarlengo v. Commissioner, 108 T.C.M. 155, (2014), and Rothman v. Commissioner, 103 T.C.M. 1864 (2012), vacated in part on unrelated grounds, 104 T.C.M. 126 (2012). (Tax Court decisions are not binding precedent on the US District Court.)

But the argument didn’t end there. Mecox made two alternative arguments to still try to hold onto the deduction. First, Mecox asserted that the ECL does not apply in this case because, according to them, the easement is not a “conservation easement” under ECL but “a common-law restrictive covenant, which does not require recordation to be effective.”  The court rejected this reasoning, saying that the instrument makes clear the parties’ intent (which the court said governs how it should be construed under New York property law) for the instrument to be a conservation easement under the ECL, even if it does not precisely so state. Alternatively, Mecox argued that even if the ECL does apply to this easement, recordation is required only for a conveyance to be effective against subsequent purchasers, not as between the parties to the instrument. The court rejected this interpretation, saying it is in direct contradiction of the text of the ECL.

The court also addressed the substantiation problem about the date the appraisal was prepared. Having decided that the contribution date was the recording date of November 17, 2005, the court found the appraisal, conducted on June 13, 2005, was not prepared within 60 days before the contribution date of the appraised property, or before the extended due date of the tax return claiming the deduction. 26 C.F.R. § 1.170A-13(c)(3)(i).

The court did not address the IRS imposition of an accuracy-related penalty under 26 U.S.C. § 6662.

Decision available at or by Google search.

Gemperle v. Commissioner

U.S. Tax Court, T.C. Memo. 2016-1, January 4, 2016: No preservation easement tax deduction unless appraisal filed with tax return.

Gemperle, the taxpayer (petitioner), claimed a federal income tax deduction for 2007 and 2008 for the contribution of a historic preservation easement on the façade of a Chicago home. Contrary to the requirements of the Internal Revenue Code and Treasury Regulations, they did not submit an appraisal (qualified or otherwise) with their tax return even though they claimed a deduction in excess of $5,000. The IRS denied their deduction based on several grounds including the failure to file a qualified appraisal.

At the tax court, the taxpayers represented themselves. They and IRS agreed that no qualified appraisal was filed with the return. Accordingly, the court agreed that the IRS was right to deny the claimed deductions. The court therefore did not discuss the alternative denial grounds asserted by the IRS.

The court also agreed with the IRS that a 40% substantial valuation misstatement penalty should be imposed. The court first found that a 20% accuracy related penalty under Code section 6662(a) on the whole of the underpayments was appropriate because the failure to file a qualified appraisal was at least a careless, if not reckless, disregard of the Code and Regulations. The court said the Gemperles did not present evidence on which they might have based a Good Faith Defense of adequate disclosure of their position or reasonable cause for the resulting underpayments acting in good faith. The court went on to find that the taxpayers’ claimed valuation of the easement was more than 200% of the amount determined to be the correct valuation (based on admissible evidence), and thus the claimed deduction triggered the 40% gross valuation misstatement penalties under Code section 6662(e)(1)(A) and (h). The court therefore agreed with the IRS and imposed the 40% penalty.

The decision is available at

Thanks to Jess Phelps for bringing this to my attention.

Atkinson v Commissioner

U.S. Tax Court, T.C. Memo 2015-236, December 9, 2015: Golf course conservation easement doesn’t qualify for deduction.

The Tax Court held that contribution of certain conservation easements on land at the subject golf course do not qualify for a Federal income tax charitable deduction because they do not meet the conservation purposes requirement of the tax Code, Sec. 170(h)(1). The court’s memo is interesting reading about baseline reports and interpretations of some categories of the “conservation purposes” requirements of the code and Treasury Regulations.

The members of two limited liability companies which own a golf course in North Carolina sought Federal income tax deductions for contribution of conservation easements on land of the golf course (the “2003 Easement,” consisting of six noncontiguous tracts, and the “2005 Easement,” consisting of three noncontiguous tracts). To be a “qualified conservation contribution” eligible for an income tax deduction, a conservation easement must be “exclusively for conservation purposes,” among other requirements. The taxpayer-members contended that the easements were exclusively for two of the conservation purposes listed in Code section 170(h)(4)(A): “protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,” and “preservation of open space (including farmland and forest land) where such preservation is … for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit.”

In a lengthy analysis the court reviewed the provisions of the easements and evidence about the land and its plant- and wildlife.

The court noted that the “natural habitat” purpose requires:

  • A “habitat,” meaning an “area or environment where an organism or ecological community normally lives or occurs” or the “place where a person or thing is most likely to be found.”
  • “Significant” habitats and ecosystems, which include, but are not limited to, habitats for rare, endangered, or threatened species of animal, fish, or plants; and natural areas which are included in, or which contribute to, the ecological viability of a local, state, or national park, nature preserve, wildlife refuge, wilderness area, or other similar conservation area.

The key evidentiary facts about the subject land and ecosystem were:

  • Although the easements include longleaf pines at the margins of the fairways, the terms of the 2003 easement do not protect the longleaf pine from removal; the longleaf pine currently on the 2003 easement property are not maintained in a relatively natural state; and there is no management plan for the pines.
  • Although there are manmade ponds on the 2003 easement, the ponds lack sufficient significant transition areas to mimic nature so that plants and animals would be able to use them or allow rare, endangered, or threatened native species of wildlife or plants to exist in a relatively natural state.
  • The 2003 easement does not actually limit the use of pesticides and chemicals which could injure or destroy the ecosystem and therefore may destroy the conservation purpose.
  • The 2003 easement property does not qualify as a “relatively natural habitat” or as a “natural” habitat, and accordingly is not a “natural area” that “contributes to” the ecological viability of a local conservation area known as the Middle Swamp or surrounding undeveloped area.
  • The 2003 easement property does not act as a “wildlife corridor” or “sink” for any species.
  • On the basis of the foregoing, rare, endangered, or threatened wildlife and plants are not “most likely” to be found or do not “normally live” on the 2003 easement property.
  • The 2005 easement suffers from the same problems as the 2003 easement.

The court also addressed the conservation purpose of preserving open space, although neither party presented expert testimony to establish whether the easement areas serve that purpose. First the court concluded that the taxpayers did not establish any clearly delineated governmental policies that apply to either easement area. Then the court concluded that the easement areas did not meet the public benefit test, because there was no evidentiary basis to conclude either that the general public has physical or visual access.

The court accordingly found that the easements did not meet the conservation purpose requirement of a qualified conservation contribution.

The court declined to impose an accuracy related penalty, finding that the taxpayers qualify for the reasonable cause defense of section 6664(c)(1) because, in relying on various experts as to the qualification of the easements, they had reasonable cause and acted in good faith in claiming the deduction.

Decision available at

Legg v. Commissioner

U.S. Tax Court, 145 T.C. No. 13, December 7, 2015: Upholds IRS procedure for imposition of 40% accuracy related penalty on conservation easement overvaluation.

The issue in this case was about the internal procedure of the IRS when imposing an accuracy related penalty under Internal Revenue Code section 6662 for the misstatement of valuation of conservation easement charitable deduction. The court upheld the IRS’ assertion that it had properly complied with the procedure to impose a 40% accuracy-related penalty for a gross valuation misstatement under section 6662(h), and was not limited to imposing a 20% accuracy-related penalty under section 6662(a).

Legg, the taxpayer, had claimed a Federal income tax charitable deduction based on the alleged value of a donated conservation easement at $1,418,500. The IRS said the contribution didn’t satisfy the requirements for a deduction or alternatively that the value of the conservation easement was zero.  Legg and the IRS ultimately reached agreement that there was a qualified contribution but that the value was $80,000. The difference between the deduction claimed by Legg and the settlement value meant that Legg has misstated the value by enough to be subject to the 40% gross valuation misstatement penalty.

Imposition of the 40% penalty depended on whether the IRS had complied with the procedural requirement of Code section 6751(b)(1), which requires that no penalty be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination” (with certain exceptions). The IRS examiner’s report had calculated both a 40% penalty and — because of uncertainty as to whether the 40% penalty could be imposed where an underpayment was the consequence of an adjustment not based on valuation — a 20% in the alternative. The report determined that Legg was liable for the 40% gross penalty and was approved in writing by the examiner’s immediate supervisor.  The court concluded that the IRS examiner made an “initial determination” regarding the section 6662(h) 40% penalties in compliance with section 6751(b)(1).

Decision available at

Scott v. Metcalf Charitable Trust

Supreme Court of Montana, 2015 MT 265, No. DA 14-0798, September 8, 2015: Conservation restrictions created outside Montana conservation easement statute enforceable.

The basic issue in this case was whether in Montana an easement in gross (here, a restriction for the benefit of a person, rather than benefitting a piece of land (a “dominant estate”) that binds another particular person but “running with the land”) remained enforceable even after the affected land (the “servient estate”) changed hands and the benefit of the easement was transferred to a new entity. The answer was yes, based on specifics of Montana law.

Donna Metcalf (Metcalf) — the predecessor in title to the Lee and Donna Metcalf Charitable Trust (Trust) — transferred a 40-acre parcel of land to Richard Thieltges (Thieltges) by warranty deed. The deed, granted in consideration of $1 “and other valuable consideration” included imposition of a set of “covenants, restrictions, conditions and charges” (the Metcalf Restrictions). The deed also stated, “These restrictions and covenants are to run with the land and shall be binding upon [Thieltges], his successors, heirs or assigns.” Thieltges later conveyed the land to the Scotts by warranty deed. It was undisputed that the Scotts had actual knowledge of the Metcalf Restrictions.

The Scotts then asked a court to invalidate the Metcalf Restrictions and allow them to subdivide the property.  The trial court concluded that the Metcalf Restrictions were enforceable by the Trust against the Scotts and any other of Thieltges’s successors with actual notice of them. It refused to invalidate the restrictions. The Scotts appealed. The Montana Supreme Court answered four questions.

1. Were the Metcalf Restrictions enforceable against the Scotts by the Trust?

The court first concluded that as a matter of law under § 70-17-102, Montana Code Annotated (MCA) the Metcalf Restrictions are an easement in gross, “a nonpossessory interest in land that benefits the holder of the easement personally,” without a “dominant estate,” i.e., specific land that benefits from the easement.

The court noted that generally, and not exclusively in Montana, “for an easement to be enforceable against parties that were not the original parties to the easement, the burden of the easement must pass to the original easement grantor’s successors in interest and the benefit of the easement must pass to the original easement grantee’s successors in interest,” citing Restatement (Third) of Property: Servitudes §§ 4.4, 4.7 (2000); 4 Richard R. Powell, Powell on Real Property § 34.17, at 34-167 to -176, (Michael Allan Wolf ed., 2015); 7 Thompson on Real Property, §§ 60.02(a), 60.07(a), at 460-61, 548-49 (David A. Thomas ed., 2d ed. 2006).  The court held that both the benefit and burden in this case passed to the original parties’ successors in interest.

As to the burden, the court said that under § 70-20-308, MCA, “transfer of real property passes all easements attached thereto,” so an easement remains attached to a servient estate despite transfer of that estate (with exceptions regarding intent of original parties and knowledge of the successor to the servient estate, which the court said did not apply here).

As to the benefit of the restrictions, since no one contested that the Trust is Metcalf’s successor in interest, the court concluded that the benefit also passed when it was transferred from Metcalf to the Trust. Citing Montana precedent that when there was “no language in the warranty deed limiting the grant[ee]‘s right to freely alienate and apportion the easement” (emphasis added by PLD), the court held that because there was no language in the Metcalf deed limiting the grantee’s or grantor’s right to alienate the easement, “the easement in gross comprising the Metcalf Restrictions was freely transferrable. It was, therefore devisable to the Trust. The easement in gross was not rendered unenforceable by its transfer or by Metcalf’s death.” The court took note that this holding “is at odds with the laws of many other jurisdictions. Most jurisdictions in the United States strictly limit the transfer of easements in gross. See Powell on Real Property §§ 34.02[2][d], 34.16, at 34-19 to -20, 34-163 to -167; Thompson on Real Property, § 60.07(c), 552-55.”

Since both the burden and benefit of the restrictions passed in this case the court concludes that the Metcalf Restrictions were enforceable by the Trust against the Scotts.

2. Were the Metcalf Restrictions enforceable as anything other than a conservation easement?

If the Metcalf Restrictions were deemed to be a conservation easement under Title 76, Chapter 6, MCA, they might not be enforceable if the statutory requirements for creating a conservation easement were not complied with. The court held that creating a servitude for a conservation purpose is expressly allowed under § 70-17-102, MCA (i.e., the statute allowing creation of an easement in gross) and that § 76-6-105(2), MCA (the conservation easement enabling statute) states that Title 76, Chapter 6, MCA, governing conservation easements, “may not be construed to imply that any easement, covenant, condition, or restriction that does not have the benefit of this chapter is not enforceable based on any provisions of this chapter.” Accordingly, the Metcalf Restrictions were enforceable as something other than a conservation easement.

3. Were the Metcalf Restrictions a nonvested property interest that was void as violations of § 72-2-1002, MCA, Montana’s version of the rule against perpetuities?

The court noted that the rule against perpetuities in the statute does not apply to a “nonvested property interest . . . arising out of a nondonative transfer.” The consideration recited in the easement deed meant that the Metcalf conveyance was “nondonative.”

4.  Were the Metcalf Restrictions void for vagueness?

The court said the meaning of the Metcalf Restrictions was not at issue here, and to decide the question would require a ruling “without the benefit of actual facts or a concrete controversy.”  Accordingly, the court would not invalidate the Restrictions on the grounds of vagueness.

The court therefore affirmed the trial court’s decision to grant summary judgment in favor of the Trust’s enforcement of the Metcalf Restrictions.

Decision available at{F0F9AE4F-0000-C610-A352-48A19493B105}&impersonate=true&objectType=document&objectStoreName=PROD%20OBJECT%20STORE, or go to and search by case name or docket number DA 14-0798.

US v. 1.57 Acres of Land

US District Court, S.D. California, No. 12cv3055-LAB (MDD), September 8, 2015: Non-economic value of conservation easement excluded in valuation of taking.

This decision is about excluding evidence in a trial to determine how much the United States must compensate the County of San Diego for taking a small parcel of land subject to a conservation easement. The taking was part of a project to secure the US/Mexico border.  The relevant deed recites that the conservation easement “possesses wildlife and habitat values . . . of great importance to [the County]. . . .” The County argued that the intended US use of this roughly 0.43 acre area for a vehicle turnaround renders that portion unsuitable for habitat conservation purposes and destroys burrowing owl habitat. The County said this deprives it of its interest in the property and affects it’s compliance with a “Multiple Species Conservation Program” agreement (“MSCP”) between it, the US Fish and Wildlife Service, and the California Department of Fish and Game.

The United States argued that just compensation is determined by private market value, so the Court should preclude evidence relating to the value of habitat conservation, public interest, or other non-economic considerations.

The County didn’t contest that market value is generally the relevant measure for just compensation. Instead, it argued that its conservation easement does have a private market value.  The court quoted from the County’s argument:

“[C]onservation easement property interests, which protect certain wildlife, habitats, and biological species, are freely traded in private, as well as public markets. These easements are valued based on their demand by willing buyers. . . . So while habitat properties do have a government demand that results in a public value, they also have a private demand that results in an economic value. . . . It is the County’s position that the highest and best use of the property being condemned is its use as a conservation easement and that value is based on the habitat contained on it. This particular property contains burrowing owl habitat, a rare commodity, and serves the last viable population of burrowing owls in San Diego County.”

The court agreed with the US that it is appropriate to limit the County’s evidence to matters relating to market value, and therefore granted that portion of the US motion to exclude evidence of non-economic value.

The US also sought to exclude evidence relating to replacement cost of a substitute facility because the MSCP force majeure clause says the County isn’t obligated to replace the condemned property. The MSCP says that when “the County is wholly or partially prevented from performing obligations … because of unforeseeable causes beyond the reasonable control of and without the fault or negligence of the County . . . including but not limited to . . . actions of federal or state agencies …, the County shall be excused from whatever performance is affected … to the extent so affected….”  The court agreed with and granted that portion of the US motion to exclude evidence of the cost of a substitute facility.

Decision available at

La Mirada v. Los Angeles

Court of Appeals of California, Second District, Division Eight, No. B259672, September 9, 2015: Building and occupancy permits void after demolition in excess of permit.

In this mandamus action, demolition, building and occupancy permits issued by the City of Los Angeles were declared void because the entire structure was demolished, contrary to previously issued permits which required preservation of the façade. The city was ordered to re-do the permit process, going back to consideration of revised demolition plans.

The building which was demolished, the so-called 1924 Old Spaghetti Factory (OSF) building, was not designated a historic landmark at the national, state, or local levels but the original project plans recognized that the building had historical value. The plans which the original developer submitted for project permits and variances would preserve the façade of the OSF building and incorporate it into the project. Although the project permits and variances were issued before the recession hit in 2008, the project halted before demolition. It was revived by a new developer in 2011. That developer obtained a City demolition permit to demolish the entire building, including the façade, as recommended or justified by advice from the new developer’s engineer and architect. Thereafter, the whole building was demolished, the City issued a building permit, the developer completed the project, and the City issued occupancy permits.

La Mirada Avenue Neighborhood Association of Hollywood (La Mirada), a group of residents and residential property owners in the City of Los Angeles who advocate for residential quality of life issues in Hollywood, had unsuccessfully challenged the project permits and variances. They now challenged the issuance of the demolition, building and occupancy permits.  After exhausting administrative remedies, La Mirada sought a court order to void all those permits. The trial court largely granted La Mirada’s petition, and this appellate court affirmed the trial court.

One of the pre-demolition project permits was the City’s adopting a zone change ordinance which included a condition (“Q Condition 7″) that, “The use and development of the property shall be in substantial conformance with the plot plan submitted with the application.” That plot plan included demolition preserving the façade. Four or more years later, after the city approved the total demolition permit, when the City approved the building and occupancy permits, the City determined that its issuance of the total demolition permit was in error but despite the total demolition the project substantially conformed to the plot plan.

As a threshold matter, the City and the Developer argued that La Mirada’s claims were moot because the project was complete and the City had already required the developer to seek revisions of the relevant project approvals. The court rejected that, saying a ruling on the petition “has an important practical impact. … The voiding of these certificates and a stay on further ones pending reapproval is not a meaningless act with no practical impact. The residential building and park cannot be occupied without valid certificates of occupancy.”

The central issue was then whether the City abused its discretion in determining that the demolition permit was void but the building permits were validly issued. The court said the appropriate standard is California Code of Civil Procedure section 1094.5, subdivision (b), which “defines ‘abuse of discretion’ to include instances in which the administrative agency ‘has not proceeded in the manner required by law, the order or decision is not supported by the findings, or the findings are not supported by the evidence.’” Under that standard, the court found the City had abused its discretion because after the city zoning administrator ruled the full demolition permit did not comply with Q Condition 7, the zoning administrator determined that the later-issued building permits did substantially conform to Q Condition 7. This, the court said, is where the City’s action “does not proceed in the manner required by law” and so constitutes an abuse of discretion: the City had no discretion to issue permits that violated Q Condition 7 and the zone change ordinance.

Accordingly, the court affirmed the trial court judgment (1) directing the City to void all permits previously granted, including but not limited to demolition and building permits and certificates of occupancy, and (2) directing the City to prepare and process subsequent environmental review before permitting any more changes to the project. The court also awarded costs on appeal to La Mirada.

(Editorial note: while it seems likely the City will accept revised plans to demolish the façade, and therefore re-approve the building and occupancy permits, that may not be the end of the litigation if the rationale for the project permits and variances relied on the preservation of the façade as the basis for allowing those permits.)

Decision available at until Nov. 9, 2015, then at the California appellate courts’ Case Information Search.

The opinion in this case has not been certified for publication or ordered published for purposes of California Rules of Court rule 8.1115, which prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b).

Boston Redevelopment Authority v. National Park Service

US District Court, D. Massachusetts, Civil Action No. 14-12990-PBS, August 26, 2015: Long Wharf Pavilion in Land and Water Conservation Fund restricted area can’t become restaurant.

The dispute underlying this case is whether the Plaintiff Boston Redevelopment Authority (BRA) may convert Long Wharf Pavilion, an open-air structure built in 1988 on Long Wharf in Boston Harbor, into a restaurant. The particular issue in this summary judgment case is whether the National Park Service (NPS) may rely on a certain map (the “1980 map”) in denying the BRA permission under the Land and Water Conservation Fund (LWCF) Act to convert the Pavilion into a restaurant.

The BRA was awarded a federal LWCF grant in 1981 to plan, purchase, and develop public outdoor recreation spaces on Long Wharf. Under the LWCF Act, 54 U.S.C. § 200305(f)(3), no property acquired or developed with LWCF assistance and shown on a “project boundary map” (a “6(f) map”) as within a so-called “6(f) restricted area” may, without the approval of the Secretary of the Interior, be converted to other than public outdoor recreation use.

When asked to approve the Long Wharf conversion, NPS initially did not take notice of the 1980 Map but did consider a 1983 6(f) map and approved the project. Later, with the existence of the 1980 Map in the NPS records brought to its attention, the NPS reversed itself and denied approval of the project.

The BRA appealed the denial and sought summary judgment that NPS could not rely on the 1980 Map. The basis of the BRA motion was (1) that the NPS action violated the federal Administrative Procedure Act (APA) because relying on the 1980 Map was arbitrary and  capricious; and (2) NPS should be judicially estopped from relying on the 1980 map after initially taking the position that the Long Wharf Pavilion did not fall into the 6(f) restricted area. NPS also moved for summary judgment to uphold its decision.

The court’s analysis was necessarily heavily fact specific but within the context that, “Because the APA standard affords great deference to agency decisionmaking and because the Secretary’s action is presumed valid, judicial review, even at the summary judgment stage, is narrow.” The court concluded that the NPS could reasonably decide that the 1980 Map was the 6(f) map which established the 6(f) restricted area, and that the Long wharf Pavilion area was within that 6(f) restricted area. Despite the BRA’s assertion to the contrary, the court found there was also no evidence in the record that the 6(f) boundary was ever formally amended.

The court also rejected the BRA argument that NPS acted arbitrary and capriciously when it changed its mind, allowing the restaurant project to proceed before rejecting it. The court held it “is not the law” that NPS cannot reconsider its decisions even after discovering a mistake, writing, “It is well-established that ‘an agency, may, on its own initiative, reconsider its interim or even its final decisions, regardless of whether the applicable statute and agency regulations expressly provide for such review’ ” [citation omitted].

Lastly, the court rejected the BRA’s assertion that the doctrine of judicial estoppel should prevent NPS from saying the Long Wharf Pavilion is in the 6(f) restricted area after previously representing to the Massachusetts Department of Environmental Protection (DEP) that it was not part of a 6(f) restricted area, which representation became part of the record before the Massachusetts Office of Appeals and Dispute Resolution and the Massachusetts Superior Court in the Mahajan v. DEP litigation (which was ultimately decided on appeal in Mahajan v. DEP, 984 N.E.2d 821 (Mass. 2013)).

Noting that “judicial estoppel is an equitable doctrine invoked by a court at its discretion” and that ” the Government may not be estopped on the same terms as any other litigant,” the court weighed the equities and found in favor of NPS. The court found NPS changed its position in good faith after realizing a mistake, and did not take “one calculated position early on in the litigation and then adroitly flip-flops to another when expedient.”  The court also said that, “judicial estoppel would not merely affect BRA and NPS. Rather, NPS is responsible for enforcing LWCF restrictions that preserve outdoor recreational spaces for the benefit of the public at large.”

The court accordingly denied the BRA’s Motion for Summary Judgment and allowed the NPS Motion.

The decision is available at The 1980 Map may be seen in an article by Matt Conti dated February 12, 2014, in the online newsletter North End

Minnick v. Commissioner of Internal Revenue (Minnick II)

US Court of Appeals Ninth Circuit, No. 13-73234, August 12, 2015: Mortgage subordination at the time of easement gift, not later, required for deduction.

The US Tax Court held in Minnick v. Commissioner (Minnick I), 2012 T.C. Memo 345, December 17, 2012,  that Treasury Regulations §1.170A-14(g)(2) requires that, for a taxpayer to take a deduction for the donation of a conservation easement, any mortgage on the property must be subordinated to the easement at the time of the donation, not afterward. Minnick appealed, but in this decision the 9th Circuit Court of Appeals affirmed the decision of the Tax Court.

In 2006, Minnick granted a conservation easement to a land trust. The land was subject to a mortgage that was not subordinated to the conservation easement until five years later.  Minnick claimed a deduction and the IRS disallowed it.  The Tax Court decided that the deduction was not allowed because the mortgage was not subordinated at the time of the grant of the conservation easement, citing its own then recent decision in Mitchell v. Commissioner, 138 T.C. 324, 332 (2012) (Mitchell I). Mitchell I was subsequently upheld by the 10th Circuit Court of appeals in Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015) (Mitchell II).

Treas. Reg. § 1.170A-14(g)(2) says that when a conservation or preservation easement property is subject to a mortgage, “no deduction will be permitted . . . unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.” The Regulation does not expressly say when the subordination must occur.  In the current case, the court first held that the “plain meaning” of §1.170A-14(g)(2), “strictly construed,” is that “subordination is a prerequisite to allowing a deduction,” as stated in Mitchell II.  The court went on to say that even if §1.170A-14(g)(2) were deemed ambiguous regarding when subordination is required, precedents require that courts defer to the IRS’s reasonable interpretation of its own regulations when the IRS’s interpretation is reasonable and is not “plainly erroneous or inconsistent with the regulation.” The court found that the IRS’ interpretation at issue here met this standard.

Decision available at

Bosque Canyon Ranch LP v. Commissioner

US Tax Court, T.C. Memo. 2015-130, July 14, 2015: Conservation easement deduction denied; inadequate baseline documentation; Belk violation.

Citing the precedent of the Belk II tax court memo, as affirmed by the Fourth Circuit decision in Belk III, the court denied any tax deduction for twin conservation easements that allowed for the alteration of boundaries between unrestricted house parcels and the property subject to the easements. The tax deductions were also denied because of shortcomings of the baseline reports substantiating conditions at the easement properties. Gross valuation misstatement penalties were imposed. In addition, the court ruled on the tax ramifications of the transfer of the house parcels from the limited partnership to the limited partners, but this Digest report does not discuss that aspect of the case.

Two limited partnerships, Bosque Canyon Resort LP I and Bosque Canyon Resort LP II, granted conservation easements to the North American Land Trust (NALT) on land each entity owned (the 2005 easement and the 2007 easement) and subsequently distributed to each limited partner the fee simple interest in an undeveloped five-acre parcel of property (Homesite parcels). It appears from the court’s opinion that the designated Homesite parcels were not subject to the easements but bordered on the easement land.

The easements provided that the Homesite parcel owners and the NALT could agree, without any further process, to change the boundaries between the Homesite parcels and the property subject to the easements, provided that any modification could not “in the Trust’s reasonable judgment, directly or indirectly result in any material adverse effect on any of the Conservation Purposes” and provided “[t]he area of each Homesite parcel … [could] not be increased.” Thus, land that was subject to the easements could be released from the easements and become Homesite parcels if the parties agreed.

The court said the possibility that the parties could change those boundaries violated the principle set out in Belk II and Belk III, that for an easement to be a qualified conservation contribution entitling the donor to a tax deduction, not only must the easement be enforceable in perpetuity, but also the use of the land originally subject to the easement must be restricted in perpetuity.  In other words, land swaps and other boundary changes after the grant of the easement are impermissible (i.e., impermissible without a judicial proceeding extinguishing the easement on land going out of the easement and grant of a qualified easement or amendment to existing qualified easement for land going into the easement). Accordingly, on that basis the claimed deduction was denied.

The court also agreed with the IRS that the deduction should be denied because of improprieties in the baseline documentation prepared by NALT. Treasury Regulations sec. 1.170A-14(g)(5)(i) require that “when the [easement] donor reserves rights the exercise of which may impair the conservation interests associated with the property … the donor must make available to the donee, prior to the time the donation is made, documentation sufficient to establish the condition of the property at the time of the gift.” Under the easements, the BRC easement grantors retained various rights.

For the 2005 easement, the baseline documentation included: maps, a recorded copy of the 2005 deed, photographs taken in 2004, existing conditions reports including a “Site Survey Report” dated March 2007 (15 months after the date of the easement transfer), and a signed owner acknowledgement. The 2007 Site Survey Report was completed using notes taken during an April 2004 site visit, approximately 20 months before the date of transfer. The court noted that construction and development had taken place on the property during that period.

For the 2007 easement, the 2007 baseline documentation included: maps, a recorded copy of the 2007 deed, photographs taken in November 2008 (14 months after the date of transfer of this easement), existing conditions reports including the same  2007 Site Survey Report (based on the 2004 site visit), and a “partially executed” owner acknowledgement which was signed after the date of transfer.

The court characterized these baseline reports as “unreliable, incomplete, and insufficient to establish the condition of the relevant property on the date the respective easements were granted,” and denied a deduction for the easements on this grounds as well.

The court imposed gross valuation misstatement penalties under Internal Revenue Code section 6662(h). Because the court determined the donation did not meet the requirements for a qualified conservation contribution, the actual value of each donation was zero, and any claimed deduction, regardless of how small, would trigger the gross misstatement penalty.  Under the law applicable to the 2005 easement, the grantor could assert the defense that it acted reasonably and in good faith. The court rejected that defense because of the extent of flaws in the baseline document. The court said the grantor had not made a reasonable attempt to comply with the substantiation requirement, and therefore they could not make use of this defense.  By the time of the 2007 easement, the law had changed and the reasonable cause defense was no longer available for misstatements relating to charitable contribution deductions.

Decision available at

Schaecher v. Bouffault

Supreme Court of Virginia, Record No. 141480,June 4, 2015: Accusation of conservation easement violation is not defamation in Virginia.

At issue was whether public accusations that a party violated a conservation easement is defamation in Virginia. The Plaintiffs, 3 Dog Farm, LC, and Happy Tails sought a special use permit to operate a boarding kennel of more than five canine animals. The defendant, Bouffault (a member of the County Planning Commission), sent emails and made public statements claiming that the kennel as proposed would violate conservation easements (among other allegations). Happy Tails and 3 Dog brought suit, claiming that these statements characterize them or their principal as “a lawbreaker, one without integrity, or one with disregard for the law,” or imply that Happy Tails was in violation of the law, and that defendant made these statements with the intent to defame. The trial court ruled that the statements were not defamatory and the Plaintiffs appealed.

The court reviewed Virginia law about defamation, saying that a statement is actionable under state law if it is both false and defamatory. Defamatory words are those “tend[ing] so to harm the reputation of another as to lower him in the estimation of the community or to deter third persons from associating or dealing with him.” Citing Restatement (Second) of Torts § 559 and Chapin v. Knight-Ridder, Inc., 993 F.2d 1087, 1092 (4th Cir. 1993) (applying Virginia law). An actionable false statement must have a “requisite defamatory ‘sting’ to one’s reputation, citing Air Wis. Airlines Corp. v. Hoeper, ___ U.S. ___, ___, 134 S.Ct. 852, 866 (2014). The court also cited its own decision holding that the level of harm to one’s reputation required for defamatory “sting,” is that defamatory language “tends to injure one’s reputation in the common estimation of mankind, to throw contumely, shame, or disgrace upon him, or which tends to hold him up to scorn, ridicule, or contempt, or which is calculated to render him infamous, odious, or ridiculous.” Moss v. Harwood, 102 Va. 386, 392, 46 S.E. 385 (1904).

The court then found that the potential violation of an easement “does not as a general principle carry the ‘sting’ of a reprehensible crime. The mere implication that one might be in violation of an easement, absent more — such as inflammatory language or context to suggest that the statement causes particular harm to one’s reputation — does not rise to the level of defamation. It does not so ‘harm the reputation of another as to lower him in the estimation of the community or to deter third persons from associating or dealing with him,’ … such as by making [Bouffault] appear odious, infamous, or ridiculous, or subjecting her to contempt, scorn, shame, or disgrace.”

The court also found that whatever innuendo might be contained in Bouffault’s statements, it does not characterize the defendant as a “law breaker” or “a person of disregard for the legal obligations pertaining to the Property.”

The court upheld the decision of the trial court. There were other issues in this matter unrelated to conservation or historic preservation easements.

Decision available at

In re: The Application of Living Word Bible Camp

Court of Appeals of Minnesota, Nos. A14-0464, 14-0481, A14-1224, A14-1225, April 6, 2015: Bible camp’s development not prohibited by conservation easement.

Two groups of realtors oppose Living Word Bible Camp’s (LWBC) plan to build a youth bible camp on a property of 283 acres, of which 84 acres is subject to a conservation easement owned by the Minnesota Land Trust. The plan calls for a cluster development on fewer than 6 acres of the property, the ability to accommodate up to 150 overnight guests, while approximately 240 acres are to remain “in a natural state.”

The conservation easement generally prohibits development and commercial use but specifically permits construction of trails for “firebreaks, walking, horseback riding, [and] cross-country skiing.”  Among various challenges, the camp’s opponents argued that a conditional-use permit (CUP) for the camp allows a commercial use by allowing the portion of the property subject to the conservation easement to be used for “trails for hiking, nature trails, cross country skiing, and other low impact non-motorized activities.” The court rejected this argument for two reasons, finding that those uses are not commercial as defined in the relevant local ordinance, and they are specifically permitted by the conservation easement. The ordinance defines “[c]ommercial use” as “the principal use of land or buildings for the sale, lease, rental, or trade of products, goods and services.” Although the conservation easement prohibits commercial development “of any kind” on easement property, it specifically allows recreational uses of the property, including establishment of trails for “firebreaks, walking, horseback riding, [and] cross-country skiing.” Accordingly, the court found, the planned uses are consistent with the conservation-easement mandates.

The decision is unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2014). It is available at

Kaufman v. Commissioner (Kaufman V)

Court of Appeals, 1st Circuit, No. 14-1863, April 24, 2015: Penalty upheld for gross valuation misstatement.

The Kaufmans’ claim of a federal income tax deduction for donating a historic preservation easement (“preservation restriction” in Massachusetts) was denied after multiple court proceedings culminating in the Tax Court finding that the value of the easement was zero and that the Kaufmans were liable for a 40% accuracy-related penalty for making a gross valuation misstatement. Kaufman v. Commissioner, 107 T.C.M. 1262, T.C. Memo 2014-52 (2014) (“Kaufman IV”). The Kaufmans appealed that decision, and now the Appeals Court affirmed the Tax Court, ruling that the Tax Court did not “clearly err” when it found the Kaufmans must pay the penalties.

The 40% accuracy-related penalty in question comes under Section 6662 of the Internal Revenue Code, imposed for a 400% or more overstatement of the value of any property claimed on a tax return (§ 6662(h)).  The Kaufmans argued that they should be excused from the penalty under the “reasonable cause exception” (§ 6664(c)). That exception requires that the taxpayer had reasonable cause, acted in good faith, based the claimed value on a qualified appraisal made by a qualified appraiser, and a good faith investigation by the taxpayer of the value of the contributed property.

Good Faith: the Tax Court found that the Kaufmans did not have reasonable cause or act in good faith in claiming the deduction and failed to make a good faith investigation; the appeals court held that these finding were not clearly erroneous.  The findings at the Tax Court included facts showing that after the Kaufmans got the appraisal, Mr. Kaufman was unequivocally assured by a representative of the grantee Trust that he did not expect the donation to decrease the value of the Kaufman residence at all. The court said this “would have put a reasonable person on notice that further investigation was required to verify the purported value of the donated easement” and, “This should have immediately raised red flags as to whether the value of the easement was zero.” Also arguing against good faith was the fact the Kaufmans had signed a letter stating that the restrictions were the same as those already in place by virtue of local zoning restrictions.

Among the court’s rejections of various arguments made by the Kaufmans, the court said that obtaining a qualified appraisal made by a qualified appraiser does not automatically constitute a good-faith investigation.

Decision available at

SWF Real Estate LLC v. Commissioner

Tax Court, T.C. Memo. 2015-63, April 2, 2015: Tax due on partnership’s easement tax credit allocation as disguised sale.

The prime issue in this case was how the IRS should treat a limited partnership transaction involving Virginia tax credits for the donation of a conservation easement, and the valuation for federal tax purposes of that donation. Also at issue was the valuation of the conservation easement for federal income tax deduction purposes.

Virginia allows a landowner tax credits for a portion of the value of a charitable contribution of a conservation easement to a qualified donee. An owner may choose to sell some or all of the credits, particularly if the credit exceeds their tax obligation. Under federal tax law, income from the sale of credits may be treated as income on which a tax may be due. In this case, the landowner sought to avoid that federal tax by creating a somewhat complicated deal structure under which, the landowner hoped, the transfer of the credits would not be a taxable event. The tax court decided that the deal structure didn’t work to avoid the federal tax because in substance it was a sale, even if it was made to appear something else in form.

The deal structure developed as follows: In the first stage of the transaction, a tract of land that was owned by an individual, John Lewis, was conveyed to a limited liability company, SWF, which was created and wholly owned by Lewis. With the intention to contribute a conservation easement on the land to a qualified entity, Lewis engaged Conservation Solutions LLC (CS) to advise him. CS advised Lewis that the contribution would generate $3.2 million in Virginia tax credits for the LLC. As CS further advised, SWF (the company that now owned the land and would donate the easement) agreed to transfer most of the credits to an unaffiliated limited partnership called Virginia Conservation Tax Credit Fund LLLP (Virginia Conservation). Virginia Conservation, rather than buy the credits outright, became a 1% limited partner in SWF.

Typically in a limited partnership the burdens and benefits of ownership are divided among the partners, although the allocation is not always in the same proportion as the partners’ ownership percentages, and the allocation of the burdens may be different from the allocation of the benefits. In this case, although the allocation of the SWF partnership’s profits and losses were in proportion to their respective percentage interests of 1% (Virginia Conservation) and 99% (Lewis, through his corporation), the tax credits were allocated in reverse proportions, about 99% for Virginia conservation and 1% for Lewis. Under the partnership operating agreement Virginia Conservation paid $1.6 million for its 1% stake in SWF and would be entitled it to about $3 million in tax credits. Other provisions of the transaction documents effectively eliminated any transaction risk to Virginia Conservation.

After the conservation easement was contributed, SWF claimed on its tax returns that the $1.6 million received from Virginia Conservation was a “capital contribution,” i.e., not income.  The IRS disagreed and the matter went to tax court.

The tax court held that the transaction was a disguised sale pursuant to section 707(a)(2)(B) of the Internal Revenue Code. Section 707 “prevents use of the partnership provisions to render nontaxable what would in substance have been a taxable exchange if it had not been `run through’ the partnership.” Accordingly, SWF owed additional federal income tax.

On the valuation question, the IRS’s argument that the appraisal submitted by SWF with its tax return was too high was primarily presented in terms of an attack on the credibility of SWF’s appraiser. The court didn’t find that attack itself credible. At trial, competing appraisals were offered in evidence by SWF and the IRS. The appraisal SWF put into evidence was slightly lower than the appraisal it had submitted with its tax return. The court found SWF’s appraisal evidence more credible than the IRS’s, and so held that SWF was entitled to only a slightly smaller deduction than it claimed.

The decision is available at

Ranch O, LLC v. Colorado Cattlemen’s Agricultural Land Trust

Court of Appeals of Colorado, Div. 1, No. 13CA2204, February 26, 2015: Land Trust keeps conservation easement despite error naming grantor.

The Land Trust accepted and recorded a deed of conservation easement (“Conservation Deed”) from one Craig J. Walker, an individual who, as it turned out, had overlooked that he had previously granted and recorded a deed of the Conservation Deed property to an LLC of which he, Walker, was the sole manager and ninety-nine percent membership owner (the “Walker LLC”).  Neither Walker nor the Land Trust was aware of the error. Subsequently Walker, on the Walker LLC’s behalf, conveyed the land to Ranch O LLC (Rancho). Walker had told Ranch O’s principal of the Conservation Deed and the deed to Rancho gave notice of the easement in bold type and all block capital letters.

Rancho then asked a trial court for a declaratory judgment that the Conservation Deed was invalid and had no force and effect because of the error in naming Walker individually as  grantor, not Walker LLC. The trial court refused and ordered reformation of the Conservation Deed to reflect the true grantor, Walker LLC. The trial court also held that the reformation was not contrary to intent of section 38-35-109, C.R.S. 2014, the “race notice” portion of Colorado’s conveyancing law. That statute requires that unrecorded instruments about real estate are generally not valid against persons with rights in that real estate who first record an instrument creating their rights (those who win the “race” to the land records office). Walker had no problem with the trial court summary judgment, but Rancho appealed. The court of appeals upheld the trial court, ordering reformation of the Conservation Deed so the Land Trust ends up with good title to it.

Reformation of the Conservation Deed was ordered based on the finding that there had been a mutual mistake between grantor and grantee.  The court cited a Colorado Supreme Court decision stating that a mutual mistake requires that both parties must “labor under the same erroneous conception in respect to the terms and conditions of the instrument.” The court found that standard was met here. The court rejected Ranch O’s argument that reformation would prejudice it, finding that Ranch O had actual notice of the Conservation Deed and bought the property subject to it.

The court also upheld the trial court’s decision that reformation of the Conservation Deed was not contrary to the intent of the race-notice statute. The court noted that the race-notice statute makes an exception to the effect that unrecorded instruments are valid against a party if that party, like Ranch O, had notice of the unrecorded instrument prior to the acquisition of its rights.

Decision available at

Minnick v. Ennis

Idaho Supreme Court, No. 41663, 2015 Opinion No. 1, January 9, 2015: Statute of limitations on malpractice claim for lawyer’s failure to seek mortgage subordination before recording conservation easement runs from when IRS raised issue.

The Minnicks engaged the law firm Hawley Troxell as counsel for a real estate project. As part of the project the Minnicks granted a conservation easement to the Land Trust of Treasure Valley, Inc.  The Minnicks’ mortgage on the property was not subordinated to the easement at the time of record the easement (a subordination that was, in the court’s words, “expressly required by the plain language of the easement agreement as well as the applicable federal regulations”).  The Minnicks claimed large charitable deductions and tax refunds on their jointly filed tax returns for the years 2006, 2007, and 2008. The Minnicks allege Hawley Troxell knew the Minnicks wanted the easement grant to qualify as a charitable contribution for federal tax purposes. Hawley Troxell denied knowing this and said it reviewed the easement only to ensure it met local land use standards.

The IRS denied the Minnicks’ deduction claim and the matter went to Tax Court. The Minnicks say they only then discovered for the first time that Hawley Troxell failed to take the actions necessary to subordinate the mortgage to the easement. (In 2011, with Hawley Troxell’s input and assistance, the bank subordinated.)

On April 3, 2012, while the Minnicks’ case was pending before the Tax Court, it decided Mitchell v. Commissioner (Mitchell I), 138 T.C. 324 (T.C. 2012). Mitchell I held that a mortgage must be subordinated prior to the grant of a conservation easement, the “the so-remote-as-to-be-negligible” exception did not apply to that requirement, and therefore (as a decision on an issue of first impression) the failure to obtain a subordination could not be cured after recording the easement.  On December 17, 2012, the Tax Court issued its decision in Minnick v. Commissioner, 2012 T.C. Memo 345, denying the Minnicks any deduction because of the untimely subordination (citing Mitchell I), and upholding penalties.

On June 7, 2012, after the Mitchell I decision but before the Minnick decision, the Minnicks, seeing they might lose in Tax Court, filed suit against Hawley Troxell for professional negligence. The Minnicks didn’t serve Hawley Troxell with the complaint until December 5, 2012.  Hawley Troxell answered the complaint with affirmative defenses including the two-year statute of limitations in Idaho Code section 5-219(4).  The trial court agreed with Hawley Troxell and dismissed the suit. On Hawley Troxell’s motion, the lower court awarded Hawley Troxell $66.00 in costs and $50,000 in fees. The Minnicks appealed.

On the appeal, the Idaho Supreme Court reversed the lower court, saying the Minnicks’ legal malpractice action against Hawley Troxell was not time-barred under Idaho Code section 5-219.

The court explained that while the Idaho statute indeed required a malpractice action to commence within two years “after the cause of action has accrued,” the cause of action in malpractice cannot accrue in Idaho until “some damage” has occurred.  The court found that “some damage” related to untimely subordination could not have been incurred and could not have begun accruing — and therefore the Minnicks’ claim against Hawley Troxell could not been brought — until the subordination issue was formally raised. It was not until June 2011 that the IRS first requested information specifically concerning subordination and it was not until October 2011 that the IRS introduced the subordinate issue in the Tax Court. The Minnick action against Hawley Troxell was filed within two years after the subordination was first raised by the IRS and therefore was not time barred.

The court reasoned that if the IRS had never raised the subordination issue, and had the Minnicks prevailed on the other issues raised, Hawley Troxell’s failure to obtain subordination could not have harmed the Minnicks and they would not have an actionable claim for legal malpractice.

The court remanded the matter to the trial court for further proceedings. Given the holding on the statute of limitations, the court also vacated the lower court’s fee award to Hawley Troxell. The court found it premature to award attorney fees on the appeal, but awarded the Minnicks appeal costs.

Decision available at

Mitchell v. Commissioner

US Court of Appeals, 10th Circuit, No. 13-9003, January 6, 2015: No deduction for conservation easement without mortgage subordination at time of grant.

This decision affirms the US Tax Court decision in Mitchell v. Commissioner, 138 T.C. 324 (2012) (Mitchell I) (of which the Tax Court rejected reconsideration in Mitchell II, T.C. Memo. 2013-204, August 29, 2013), denying a charitable contribution deduction for a conservation easement on real estate subject to a mortgage that was not subordinated to the easement at the time of the donation. Obtained a mortgage subordination after donating the conservation easement did not cure the failure to comply with Internal Revenue Code and implementing Treasury Regulations.

In 2003 Mitchell granted a conservation easement to the Montezuma Land Conservancy (the Conservancy) a conservation easement over her land that was subject to a mortgage and then claimed a federal tax deduction. In 2005, the mortgage holder agreed to subordinate the mortgage to the easement. The IRS denied Mitchell’s deduction claim, she appealed and the matter went to the Tax Court. The Tax Court agreed with the IRS. Mitchell appeal to the higher Appeals Court.

The Appeals Court found no ambiguity in the Regulation’s requirement (Treas. Regs. § 1.170A-14(g)(2)) that subordination is a prerequisite to allowing a deduction, and that even if there were some ambiguity, the IRS’s interpretation of the Regulations is reasonable, not plainly erroneous or inconsistent with the mortgage subordination provision’s plain language.

Mitchell unsuccessfully tried to assert that the “so remote as to be negligible” exception applies to the subordination requirement.  That exception (Treas. Regs. § 1.170A-14(g)(3)) is that strict compliance should not be required when the risk that the event to be avoided by noncompliance (in this case, foreclosure) is so remote as to be a negligible risk. The Court said there must be strict compliance with the subordination requirement, and the risk of foreclosure is unexceptional.

The Court distinguished its “so remote as to be negligible” holding here from other holdings including: Wachter v. Comm’r, 142 T.C. 7, Mar. 11, 2014 (improbability of event), Kaufman v. Shulman, 687 F.3d 21, 27 (1st Cir. 2012) (improbability of event), Commissioner v. Simmons, 646 F.3d 6 (D.C. Cir. 2011) (remoteness based on easement holder’s record of enforcement of easement).


Decision available at