RP Golf, LLC v. Commissioner (RP Golf II)

U.S. Tax Court, 2016 T.C. Memo 80, April 28, 2016: Mortgage subordination after recording of easement fails perpetuity test.

RP Golf, LLC (LLC) developed two private golf clubs. The purchase and development of the property was financed by loans secured by deeds of trust (mortgages) to Hillcrest and Great Southern banks. In December 2003, LLC (through its wholly owned subsidiary, National Golf, to which it conveyed a portion of the property) granted a permanent conservation easement to Platte County Land Trust (PLT). Subsequently, on April 14, 2004, Great Southern and Hillcrest signed subordinations of their mortgages to PLT’s right to enforce the easement.  Both subordinations state an effective date of December 31, 2003. Also on April 14, LLC filed its 2003 partnership tax return claiming a tax deduction for the easement.

The IRS disallowed the charitable deduction, claiming it did not meet the requirements for a “qualified conservation contribution” under 26 U.S.C. § 170(b)(1)(E).  The key issue before the court was whether the easement met the perpetuity requirements of section 170(h) of the Tax Code for a qualified conservation easement in light of the recording of the mortgage subordinations after the grant and recording of the easement. The court found that it did not.

The court cited Mitchell v. Commissioner (Mitchell I), 138 T.C. 324 (2012), supplemented by T.C. Memo. 2013-204 (Mitchell II), aff’d, 775 F.3d 1243 (10th Cir. 2015), where a 2003 conveyance failed as a qualified conservation easement when a subordination agreement was not signed until almost two years after the grant of the conservation easement. In Mitchell the courts held that Treasury Regulation 1.170A-14(g) requires that a subordination agreement must be in place at the time of the gift and that an oral agreement failed to meet the perpetuity requirements.

The court found that LLC failed to establish that RP Golf and Great Southern Bank and Hillcrest Bank entered into any agreements, oral or written, binding under Missouri law, regarding subordination to the easement on or before December 29, 2003, the date of the PLT agreement.  Accordingly, the court held LLC was not entitled to a deduction on its 2003 tax return for a qualified conservation contribution.

Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10754.

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