Wendell Falls Development, LLC v. Commissioner

Tax Court, 2018 T.C. Memo 45, April 4, 2018: Easement increases value of taxpayer’s land; no deduction allowed.

The court decided that donation of a conservation easement restricting 125 acres within a proposed 1,280 acre residential development created a substantial benefit to the taxpayer in the value or utility of the taxpayer’s remaining land, and such benefit was not merely incidental to a charitable purpose. Accordingly, the court denied any federal tax deduction to the donor. The court also decided that even if the donation had not created a substantial benefit to the taxpayer, the conservation easement should have been appraised at zero value and therefore no deduction would be allowed anyway. The court decided against imposing any penalty for a tax underpayment.

The taxpayer, Wendell Falls Development, LLC (Wendell), bought the unimproved 1,280 acres and planned to subdivide them into a master-planned community (PUD) with residential areas, commercial spaces, an elementary school, and a park. The park would be on the 125 acres. The PUD was approved by the town, which also agreed to buy the 125 acres subject to a conservation easement. The PUD as approved did not affect the 125 acres because it was outside the boundaries of the town and therefore not subject to the town’s zoning ordinances. Wendell Falls then granted a conservation easement to a land trust on the 125 acres before conveying the restricted land to the town.

Wendell obtained an appraisal of the 125 acres at $3,020,000.

Although the Internal Revenue Code, Section 170(a), provides for a tax deduction for a charitable contribution of a “qualified conservation contribution,” including contribution of a conservation easement that meets various tests, the U.S. Supreme Court has ruled that no deduction is allowed for a charitable contribution if the taxpayer expects a substantial benefit from the contribution. United States v. Am. Bar Endowment, 477 U.S. 105 (1986). The Tax Court has ruled that a substantial benefit may exist when the contribution creates a direct or indirect benefit to the taxpayer “in the form of enhancement in the value or utility of the taxpayer’s remaining land or otherwise to benefit the taxpayer” (Elrod v. Commissioner, 87 T.C. 1046, 1075 (1986); Sutton v. Commissioner, 57 T.C. 239, 243 (1971)) that is not merely incidental to a charitable purpose (McGrady v. Commissioner, T.C. Memo. 2016-233; McLennan v. United States, 24 Cl. Ct. 102, 107 (1991), aff’d, 994 F.2d 839 (Fed. Cir. 1993)).

The court in this case agreed with IRS that Wendell Falls got a substantial benefit from the conservation easement because creating the amenity of a public park on the 125 acres increased the value of the rest of the adjoining 1,280 acres owned by Wendell Falls. This substantial benefited negated the charitable purpose of the contribution, so the court ruled no deduction was allowable.

The court also ruled that even without the disallowance due to substantial benefit, no deduction was available because the conservation easement had zero monetary value. The value of a qualified conservation easement is equal to the value of the restricted real estate before grant of the easement minus the value of the real estate subject to the easement, valued at the real estate’s highest and best. Income Tax Regs., sec. 1.170A-14(h)(3)(i) and (ii).  The court, citing the plan developed by the taxpayer, found the best use of the 125 acres was as parkland within a master-planned community. Accordingly, the conservation easement “did not diminish the value of the 125 acres because it did not prevent it [sic] from being put to its best use.”

The court declined to impose any penalty on Wendell. The IRS sought a 20% penalty under code section 6662(a) for either negligence or a substantial understatement of income tax. Noting that the 20% penalty is not applicable when there was reasonable cause for the reporting of a deduction and the deduction was reported in good faith (Code sec. 6664(c)(1)), the court reasoned that the substantial benefit determination is something for which the court has broad discretion, therefore the taxpayer’s “failure to anticipate the adverse resolution” of that determination does not show that the taxpayer “did not make sufficient effort to assess the proper tax treatment of the easement,” and therefore no penalty should be imposed.

Decision available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11607.

Leave a Reply




You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>