United States Tax Court, T.C. Memo. 2012-72, March 19, 2012: Where taxpayer presented credible evidence that reserved rights were not inconsistent with conservation purposes and IRS presented none to contrary, taxpayer satisfies burden of proof despite sparse record; state law determines whether unrecorded baseline documents may be incorporated by reference in conservation easement; appraisal revised by Court; no accuracy-related penalties.
The Butlers, taxpayers, granted conservations easements on large tracts of land in Georgia and claimed substantial tax deductions for qualified conservation contributions on their tax returns for two years. The conservation easements allowed many reserved rights to the Butlers, subject to various conditions and requirements, to be enforced by the easement grantees. The IRS denied their deductions, asserting that the conservation easements did not meet the standards for a qualified conservation contribution under section 170(h) of the Internal Revenue Code, and alternatively, contesting the proper value of the easement donations. The IRS did not question that the organizations that received the easements were qualified organizations under the Code.
The Tax Court first set out which party had the burden of proof of the issues. The Court concluded that the Butlers produced “credible evidence” on the facts as to whether their conservation easements satisfied the requirements of section 170(h), and so the IRS had the burden of proof to rebut them of that issue. As to the proper value of the donation, the Court held that the allocation of the burden of proof on those issues was immaterial because both sides presented extensive evidence and the Court decided those issues on the basis of a preponderance of the evidence.
The question as to whether the conservation easements were qualified conservation contributions turned on whether a valid conservation purpose was protected in perpetuity. The IRS argued that the extent of the reserved rights meant that although the easement may have protected the conservation purposes at the time the easement was granted, the extent to which development of the tracts is explicitly permitted by exercise of the reserved rights “would permit destruction of other significant conservation interests,” in the words of Section 1.170A-14(e)(2) of the Income Tax Regs.
The sites reserved for future development were located by unrecorded baseline documents that the easement attempted to incorporate by reference. The IRS argued that the reserved sites could not be adequately located because their location was not part of the recorded easement. The Court held that as a matter of law this question is determined by state conveyancing law, and in Georgia reference in a recorded conservation easement to a map showing the location of the lots effectively made that map part of the recorded easement.
The Court then turned to whether, if the properties were developed to the extent permitted by the rights reserved under the conservation deeds, they would still serve the conservation purpose, particularly the section 170(h)(4)(A)(ii) conservation purpose of protecting a relatively natural habitat. The Butlers presented evidence of environmental reports from the baseline documentation, subsequent supplemental reports and trial testimony, all of which the Court characterized as “sparse”. The environmental reports did not address how the conservation value of the properties would be affected by the reserved rights. The IRS offered no expert witness testimony to support their case on this point, but simply asserted that the conservation easements failed to address the subject.
Because the burden of proof was on the IRS, the Court held that the Service had not met that burden, and so agreed with the Butlers that the easements exclusively serve the conservation purpose of protecting a relatively natural habitat in perpetuity.
As to the proper value of the donation, the Court weighed the appraisals offered by the taxpayers and the IRS and made various adjustments to the taxpayers’ appraisal that lowered the value.
Decision available at http://www.ustaxcourt.gov/InOpHistoric/ButlerMemo.TCM.WPD.pdf.
Thanks to Leslie Rately-Beach for bringing this decision to my attention.