US Tax Court, 142 TC 7, March 11, 2014: No federal tax deduction for conservation easement when state law limits easement to 99 years.
Wachter, in a bargain sale transaction, donated to a land trust a portion of the value of a conservation easement on North Dakota land. Wachter claimed a tax deduction for donation of a qualified conservation contribution. The IRS denied the deduction, saying that the conservation easement did not satisfy the requirements of the Tax Code and Treasury Regulations that the easement must be enforceable in perpetuity. The IRS argued that North Dakota law limits the term of most easements to 99 years, and therefore this conservation easement would not exist in perpetuity. Wachter argued that the 99-year limitation qualifies as a “remote future event” under Treas. Reg. section 1.170A-14(g)(3), thereby coming within an exception or defense to the perpetuity requirement.
The court sided with the IRS. It noted that North Dakota is the only State that has a law that provides for a maximum duration that may not be overcome by agreement. It wrote that logically, the event termination of the North Dakota conservation easement is not remote, but on the contrary, “On the dates of the donations it [termination] was not only possible, it was inevitable.” The court cited prior tax court and other federal court decisions defining “so remote as to be negligible” as “`a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction’”, and “`a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance’.”
Because other questions of fact remained unresolved between Wachter and the IRS, the court declined to issue a summary judgment ruling on another issue, whether Wachter provided to the IRS with a “contemporaneous written acknowledgment” that met the requirements of Tax Code section 170(f)(8) and Treasury Regs. section 1.170A-13(f)(15).
The decision is available at http://www.ustaxcourt.gov/InOpHistoric/WachterDiv.Buch.TC.WPD.pdf.