Irby v. Commissioner

US Tax Court, 139 T.C. 14, October 25, 2012: Allows deduction for conservation easement despite technical anomalies of easement, appraisal and gift acknowledgment.

The issues in this tax case were: (1) Were the conservation purposes of a conservation easement protected in perpetuity even though the easement required that in the event of judicial extinguishment, most of the proceeds from a future property sale paid to the donee land trust had to be paid to certain government entities? (2) Was petitioners’ appraisal “qualified”  even though it did not explicitly contain a statement that it was “prepared for income tax purposes”? and (3) Did multiple documents signed by the donee land trust, taken together, constitute a “contemporaneous written acknowledgment” of the donation, even though there was not one document that by itself met all the requirements for such acknowledgment?

Irby Ranches, LLC (Irby or Petitioner) conveyed to Colorado Open Lands (COL), the donee land trust, two conservation easements on two parcels, as part of a bargain sale transaction.  The cost of the transaction to COL was supported by grants from three governmental agencies to COL: (1) the Farm and Ranchland Protection Program (FRPP) of the National Resources Conservation Service (NRCS), an agency of the U.S. Department of Agriculture (USDA); (2) Great Outdoors Colorado (GOCO), a voter-created trust fund organization of the State of Colorado; and (3) the Gunnison County Land Preservation Board.

Perpetuity:  One of the easements said that, of the portion paid to COL of proceeds of a post-extinguishment sale or condemnation, the various government agencies that funded the transaction were entitled to receive 75%, a figure determined by their portion of the funding.

The Internal Revenue Code requires that an easement must be granted “in perpetuity” for the contribution to be tax deductible. The IRS argued that the division of the post-extinguishment proceeds between COL and the government funders failed the perpetuity test. The IRS said it didn’t comply with Treasury Regulations sections 1.170A-14(g)(6) (i) and (ii) that  require that for an easement to be considered as perpetual, the donee of the easement “must be entitled to a portion of the proceeds [of a post-extinguishment sale or exchange of the property] at least equal to that proportionate value of the perpetual conservation restriction,” and the payment to the donee must be “used by the donee organization in a manner consistent with the conservation purposes of the original contribution.”  The IRS argued that the payment of proceeds to COL was merely “superficial” because of COL’s obligation to repay grant money to the government funders, and therefor the easement didn’t meet the requirement as to payment of proceeds or use of proceeds.

The Court held for Irby on both points. First, the Court said that COL would indeed receive its proportionate share of the extinguishment proceeds. The Court distinguished several other cases (Wall v. Commissioner, T.C. Memo. 2012-169, Mitchell v. Commissioner, 138 T.C. 16 (Apr. 3, 2012); 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84., Kaufman v. Shulman, 687 F.3d 21, 26 (1st Cir. 2012), aff’g in part, vacating in part, and remanding in part Kaufman v. Commissioner, 136 T.C. 294 (2011), and 134 T.C. 182 (2010)). While in those cases, the Court wrote, “the funds diverted by the deeds were used to further the donor taxpayer’s interests,” in this matter COL “holds an absolute right to the condemnation proceeds vis-à-vis” the taxpayer, who could never “reap a windfall should the east Irby and/or west Irby parcels be condemned.” Second, the Court found that all of the extinguishment proceeds would be used by COL “in a manner consistent with the conservation purposes of the original contribution.” It noted that all of the entities to which COL must pay a share of the proceeds are governmental entities, qualified to be the donee of deductible charitable contributions, and “established to assist in the conservation of open land, and … legally obligated to fulfill their conservation purpose.” It was not significant that these entities are not required to use the proceeds for the conservation purposes of the Irby easement parcels.

(The Court noted that there was evidence that the grant makers required non-negotiable, “take it or leave it” reimbursement provisions as conditions of making their grants, but the relevance of that to the deductibility of the donation of the easement by the taxpayer was not clear to this reader.)

Appraisal prepared for income tax purposes: The Petitioners’ appraisal did not contain the explicit statement that it was prepared for use for income tax purposes. Treasury Regs. section 1.170A-13(c)(3)(ii)(G) says that such statement is required. The Court held this was not a fatal flaw. It wrote that the circumstances in this case were like those in Simmons v. Commissioner, T.C. Memo. 2009-208, aff’d, 646 F.3d 6 (D.C. Cir. 2011), in which the appraisal likewise did not include the explicit statement but did say that the property owner was contemplating donating the easements to a charitable entity, discussed relevant IRS practice and Tax Court cases, and “included all of the required information either in the appraisal or in the appraisal summaries attached to petitioners’ respective returns”.

Contemporaneous written acknowledgment: The Code requires that to qualify for a charitable deduction for any contribution of $250 or more, a taxpayer must obtain a contemporaneous written acknowledgment from the donee organization. The IRS argued that there was no single writing from COL to Irby that met the requirements for a contemporaneous written acknowledgment. The Court, however, agreed with the Petitioner that there is nothing that says the contemporaneous written acknowledgment can’t be made up of a series of documents. The Court said the requirements were met by the contents of several documents signed by COL: Option Agreements, the Forms 8283, letters from COL to Irby, the settlement statements prepared by the title company in the bargain sale transaction, and deeds.

The Court noted that even though COL did not state in any of these documents that no goods or services were provided by the donee organization in exchange for the gift, such statement from the donee is required only “[i]f the donee organization provided no goods or services to the taxpayer in consideration of the taxpayer’s contribution”.  In this bargain sale transaction, goods were provided “in the form of cash”, which was disclosed on the option agreement and the settlement statements.

Decision available at http://www.ustaxcourt.gov/InOpHistoric/IrbyDiv.TC.WPD.pdf.

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