Estate of Robbins v. Chebeague & Cumberland Land Trust

Supreme Judicial Court ME, 2017 ME 17, January 26, 2017: Maine landowner doesn’t have standing to seek enforcement of conservation easement on land of another.

This case interprets a Maine statute to decide whether an owner of land subject to a conservation easement has standing to ask the courts to enforce the restriction as to another parcel of land subject to the same restriction. Both parcels of land were portions of the larger parcel which was the original subject of the easement. The majority of the court ruled that the Maine statute does not give the owner of one parcel standing to seek enforcement as to land of another owner, but it left open the question of whether the plaintiff landowner has a breach of contract claim against the holder of the easement. Two justices dissented.

In Maine, 33 M.R.S. § 476 et. seq. define and govern “conservation easements.”  The parties who may initiate or intervene in a court action affecting a Maine conservation easement are identified in 33 M.R.S. § 478(1). Section 478(1)(A) identifies one of those parties as: “An owner of an interest in the real property burdened by the easement” [emphasis added]. Subsection (D) identifies the Attorney General (subject to certain exceptions) as another party.

Payson, acting by and through her attorney-in-fact Robbins, granted the conservation easement to the predecessor in interest of the current holder, The Chebeague & Cumberland Land Trust (Trust), on roughly 100 acres of land on the Maine coast. Subsequent conveyances left the Estate of Robbins (Estate), successor to the original grantee, owning only a portion of that land and the Town of Cumberland (Town) owning another portion. The Trust agreed that the Town could use its land for a public beach and make various physical changes to it (build a parking lot, resurface the existing access road, relocate an existing bath house and add portable toilets). The Estate sued and on summary judgment the trial court found that the Estate lacked standing to bring any claim. The Estate appealed.

The appellate decision turned on the meaning of the phrase in the statute, “the real property burdened by the easement.” The court found this phrase to be ambiguous as to whether “the” real property means “all of the real property burdened by the easement” or only “the parcel on which enforcement is sought.”  To resolve the ambiguity, the court looked to the common law of servitudes before the advent of the statutory conservation easement, the history of the creation of statutory protections for conservation easements (including the seminal article by William H. Whyte, Jr., Securing Open Space for Urban America: Conservation Easements, Urban Land Inst.-Tech. Bulletin, no. 36, Dec. 1959, at 11-14), the Uniform Conservation Easement Act (UCEA) and the legislative history of the particular Maine statute in question. The court concluded that “had the Legislature intended, in enacting section 478(1), for a broader group of private citizens to have standing to enforce conservation easements upon land that they do not own, it would have said so much more clearly.”  Accordingly, the court held that 33 M.R.S. § 478(1) does not confer standing on the Estate to bring an action to enforce the conservation easement as to the Town land.

Two justices dissented, saying they found no ambiguity in the phrase “the real property burdened by the easement.” They wrote, “‘[T]he real property burdened by the easement’ is a specific reference, and it is a reference to the property described in a conservation easement that is being burdened by that conservation easement. To conclude that ‘the real property burdened by the easement’ refers only to the parcel being altered would require this Court to add to the language of 478(1)(A).”

Both the court majority and the dissent agreed that the case should be remanded to the trial court for further proceedings on the Estate’s claim of breach of contract. The court found itself unable, based on the record before it, “to identify with precision what agreement the Estate alleges has been breached.” If the agreement allegedly breached was the conservation easement, the court’s ruling on the Estate’s standing to bring an enforcement action would mean the Estate lacked standing to bring the breach of contract claim; if the allegedly breached agreement were some other agreement, the Estate might not lack standing.

It should be noted that Maine statutes differentiate among conservation easements (33 M.R.S. § 476 – 479-C), historic “preservation agreements” (33 M.R.S. §1551 – §1555), “trail easements” (33 M.R.S. §1581 – §1585), and “working waterfront covenants” (33 M.R.S. §131 – §136).

Decision available at and eventually at

15 West 17th Street LLC v. Commissioner

U.S. Tax Court, T.C. Memo. 2016-233, December 22, 2016: Preservation easement donee’s 990 cannot substitute for contemporaneous written acknowledgment letter.

The Internal Revenue Code requires that to qualify for a federal income tax deduction for contribution of a historic preservation easement or conservation easement valued at $250 or more, the taxpayer must substantiate the contribution by (among other things) giving the IRS a “contemporaneous written acknowledgment” or CWA from the donee organization. I.R.C. §170(f)(8). (The CWA requirements are summarized below.) A subsection also says, however, that a CWA isn’t necessary “if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe,” (emphasis added) that includes the information required to be included in the CWA. I.R.C. §170(f)(8)(D).

The question in this case was whether a description of the contribution in the donee’s tax return form 990 qualifies as a substitution of the CWA which would prevent the IRS from disqualifying the claimed deduction for failure to meet the substantiation requirement. The court majority ruled that the donee’s 990 cannot substitute for the CWA, but there were dissenting opinions.

Code §170(f)(8) requires a CWA as part of substantiation of the claimed contribution. The CWA is an acknowledgment from the donee to the taxpayer, dated on or before the earlier of the filing date of the tax return for the year in which the contribution was made or the due date (including extensions) for filing such return. The CWA must be written, state “[t]he amount of cash and a description (but not value) of any property other than cash contributed… Whether the donee organization provided any goods or services in consideration, in whole or in part” for the contribution, and if so, also give a “description and good faith estimate of the value of any [such] goods or services….”

In this case, in 2008 the donee (“Trust”) gave the taxpayer ( “LLC”) a letter acknowledging the 2007 contribution but did not state whether the Trust had provided any goods or services to the LLC, or whether the Trust had otherwise given the LLC anything of value, in exchange for the easement. The Trust’s 990 for 2007 summarized the easement donations it had received during 2007 but didn’t specifically describe a charitable contribution from the LLC or report any other information about the contribution that was supposed to be in a CWA. In 2014, after the deduction was already under review by the court, the Trust filed an amended 990 for 2007 which added, “One of the New York donations received during 2007 included the donation by [the LLC] of an Historic Preservation Deed of Easement * * *. The Trust provided no goods or services to [the LLC] in consideration for its donation of the Historic Preservation Deed of Easement.”

The court’s legal analysis focused on whether the language of Code §170(f)(8)(D) about the possible alternative to the CWA (“a return, on such form and in accordance with such regulations as the Secretary may prescribe”) created a “discretionary delegation of rulemaking authority” or created a provision that is “self-executing.” A “discretionary delegation of rulemaking authority” means that the Secretary of the Treasury has the discretion whether or not to make the provision operative by promulgating regulations. If the authority to issue regulations is discretionary, the absence of regulations has the effect of keeping in reserve, as it were, the possibility of allowing an alternative to the CWA but until the regulations are issued, there would be no substitute for the CWA. On the other hand, if the provision in §170(f)(8)(D) were “self-executing” that would mean that it went into effect even in the absence of the Secretary promulgating the regulations which the statute give the Secretary the authority to issue. If the court had held §170(f)(8)(D) was “self-executing,” then possibly the filing by the Trust of 990 which contained the information normally found in a CWA would save the LLC’s claimed deduction.

The court’s analysis reviewed precedents about discretionary delegation vs. self-executing provisions, the legislative history of this provision and the definition of the word “may” (as in “such regulations as the Secretary may prescribe”) and concluded this provision only created a discretionary delegation (no alternative exists to the CWA). The potential precedent that would be set by a ruling that a provision with this wording creates a self-executing statute of benefit to taxpayers (“taxpayer-friendly”) was significant to the court’s analysis.

The majority opinion was joined by nine judges and concurred in by two others. Six judges dissented in two dissenting opinions. Both dissenting opinions argued that the text of §170(f)(8)(D) should be read in two parts: the first part, self-executing, saying that a donee’s tax return would serve as a substitute for the CWA if it contains the information required of a CWA, and the second part, discretionary, saying that the Secretary may promulgate regulations about this. For the dissenters, the Secretary’s decision not to add to regulations around the filing of a 990 by issuing additional regulations on this subject does not mean that the self-executing part of §170(f)(8)(D) did not go into effect.

Decision available at

Ecotone Farm, LLC v. Ward (Ecotone IV)

U.S. Dist. Court, D. New Jersey, Civ. No. 2:11-5094(KM) (MAH), November 21, 2016: State law claims against conservation easement holder not dismissed.

The relevant cast of characters in this matter are Huff, managing member of Ecotone Farm LLC (Ecotone), the Plaintiffs; the Wards, neighbors to the farm property, Defendants; Fox, the Township Engineer, also a Defendant; and the New Jersey Conservation Foundation (NJCF), holder of a conservation easement on a portion of Huff’s property, also a Defendant.

This District Court decision denies a motion to dismiss state law claims against NJCF based on its involvement in a matter which began as a dispute between Huff and the Wards. The decision, issued as “not for publication,” does not address the substance of the claims but may be of interest to conservation and preservation easement holders. Readers should note that under the rules of federal court civil procedure, for the purposes of a motion to dismiss a claim the facts alleged in the complaint by the moving party — Huff, in this case — are accepted by the court as true.  These allegations are set out in a decision of the Court of Appeals, 3rd Circuit, in Ecotone Farm LLC v. Ward, No. 14-3625, 2016 WL 335837, January 28, 2016 (Ecotone III) (a non-precedential decision), and of the District Court in Ecotone Farm LLC v. Ward, Civ. No. 2:11-5094 (KM)(MAH), July 23, 2014 (Ecotone II), which the 3rd Circuit in part overruled in Ecotone III. The following report, therefore, states these alleged facts as presented by the court.  NJCF and the other Defendants undoubtedly have a different version of the events.

The dispute began between neighbors Huff and the Wards, about Huff’s efforts to renovate a house and two barns on the farm property, and a driveway shared by the Ecotone and Ward properties. The dispute escalated as the Wards involved the local Township and the Township engineer, Fox. During the dispute one of the Wards was elected to the Township Committee and thereby had some authority over Fox and allegedly enlisted Fox to interfere with Huff’s renovation. Ward made “baseless” reports to environmental authorities about Huff’s activities on the property “as a means of harassment and instructed … Fox, to do the same.”

The conservation easement held by NJCF permitted Huff to maintain and replace existing structures but prohibited “dumping or placing of soil or other substances or materials as landfill and … dumping or placing of trash, waste or unsightly or offensive materials … except for those materials generated from dredging the pond….” As the dispute continued, NJCF sent Huff a letter about a portion of the property near the barn where soil and materials involved in the renovation were temporarily stored, which NJCF claimed violated the conservation easement. Fox also received a copy of the NJCF’s letter and sent Huff a letter saying that the Township could not approve any improvements to the driveway area that would violate the conservation easement. Huff submitted a revised soil disturbance plan but then heard nothing from Fox for months. Meanwhile, Fox forwarded the revised plan to the NJCF to seek its position, and the NJCF wrote back to object to the plan. Fox continued to correspond with the NJCF and to seek its consent throughout the Township’s permitting process, which supposedly gave the NJCF potential leverage over Huff to renegotiate the terms of its conservation easement. Fox provided Ward and the NJCF with copies of documents relating to the renovation. Fox and Ward also forwarded documentation of the NJCF’s opposition to the renovation to other Township departments, including the Health Department, which would later deny Huff’s application to drill a new well on the property because of its location within the conservation easement. In summary, Huff seems to have alleged that NJCF was working in league with the Wards and Fox so NJCF could “maximize its influence over the property.” Huff alleged that the Wards, Fox, and NJCF “leveraged the easement to violate Huff’s property rights by impeding construction and allowing Fox and [Fox’s firm] to profit from baseless engineering charges.”

The current decision (Ecotone IV) is in response to the motion of NJCF and one of the Wards to dismiss the state law causes of action against them in Huff’s Complaint. The causes of action against NJCF were civil conspiracy; declaratory judgment as to the parties’ rights under the easement; and prima facie tort.

Huff’s Complaint alleged the existence of an understanding of which NJCF was a part having as its object the commitment of common law and constitutional torts. The Complaint alleged that NJCF “took baseless positions in relation to regulatory processing of Huff’s land use applications … [and] colluded with the [Fox] to further its own overbroad interpretation of the easement.” The court wrote that the idea that NJCF acted “in concert with Fox and Ward, to further their similar interest, is far from an inescapable inference, but it is sufficiently plausible at the pleading stage.” Thus, the civil conspiracy count against NJCF was allowed to proceed.

Huff’s motion for declaratory judgment could stand only if there was a genuine controversy about his rights under the conservation easement, and the court found that there was enough of a disagreement about interpreting the easement’s language that it was inappropriate to make a legal determination on that question at this stage, so that count also was allowed to proceed.

Lastly, NJCF (and Ward) argued that the count of prima facie tort should be dismissed because it really didn’t allege anything that wasn’t alleged by the rest of Huff’s complaint and therefore was superfluous. The court disagreed, saying that, “Because other counts are going forward, there is no pressing need to address the redundancy argument; there will be time enough [later in the proceedings] to narrow the theories.”

In summary, NJCF lost in its bid to have Huff’s Complaint against it dismissed, and the litigation will continue at the District Court.

Ecotone IV decision available at

Partita Partners LLC v. United States

U.S. District Court, S.D. New York, 15-cv-2561 (PKC), Oct. 25, 2016: Façade easement protection of entire exterior must be absolute.

At issue was whether a historic preservation easement on a building in a historic district could qualify for a federal charitable tax deduction even if the easement holder could grant an exception to the prohibition against alteration of the exterior. The court held such an easement would not qualify.

Partita donated a façade historic preservation easement to the Trust for Architectural Easements (“TAE”) and claimed an income tax deduction under §170(h)(4)(B) of the Internal Revenue Code. That section requires that in order to be a preservation easement in the façade of building located in a historic district must “preserve the entire exterior of the building …..” That Code section stipulate that such façade easement does not qualify as a conservation contribution “exclusively for conservation purposes,” unless it “(I) includes a restriction which preserves the entire exterior of the building (including the front, sides, rear, and height of the building), and (II) prohibits any change in the exterior of the building which is inconsistent with the historical character of such exterior …..”

The façade historic preservation easement which Partita donated to TAE provided that there would be no alteration, construction, remodeling or exterior extension without the express written consent of TAE, and that while 2,700 square feet of development rights associated with the property “shall be reserved for the future expansion of the Property in accordance with the terms of this Easement,” any exercise of development rights may not interfere with the preservation and conservation purposes of the easement, and must be approved by TAE. The IRS denied Partita’s claim for a deduction, asserting that these provisions failed to met the requirements of Code §170(h)(4)(B).

Partita offered two arguments: that §170(h)(4)(B) does not forbid alterations which do not exceed the highest point of the roof; and that the Code does not forbid alterations to the exterior if the alteration requires the consent of the easement holder. The court rejected both these arguments. It said that the provisions of the Code unambiguously require a restriction that (a) “preserves the entire exterior of the building…,” without exception as to the boundaries of the envelope of the exterior, and (b) is absolute, and not “a conditional restriction that delegates to the grantee future decisions on development of the exterior.”

Decision available at

Thanks to Jess Phelps for alerting PLD to this decision.

Boston Redevelopment Authority v. National Park Service (BRA II)

US Court of Appeals, First Circuit, No. 15-2270, September 23, 2016: Upholds NPS disapproval of Long Wharf restaurant use.

On appeal the court upheld the District Court decision in Boston Redevelopment Authority v. National Park Service (BRA I) 125 F.Supp.3d 325 (2015) in favor of the National Park Service (NPS), forbidding the Boston Redevelopment Authority (BRA) from using as a private restaurant certain land on the Boston Harbor waterfront designated for public recreational use under an NPS grant.

As reported here in connection with BRA I, the NPS is involved in the BRA’s attempt to place the restaurant on what is now a public open pavilion at the end of Long Wharf because the Commonwealth of Massachusetts received federal funds put toward the BRA’s redevelopment of the pier in the 1980s. The funds were a grant from the federal Land and Water Conservation Fund (LWCF) under the Land and Water Conservation Fund Act (LWCF Act), 54 U.S.C. §§ 200301-200310, for public outdoor recreation use. To get the LWCF grant the Commonwealth had to designate a project area (the “Section 6(f) Area”) which could not be converted to “other than public outdoor recreation use” without prior NPS approval. (In this sense, the acceptance of the LWCF grant acted like the grant by the BRA of a conservation easement on the Section 6(f) Area.)

When the BRA sought NPS approval for the restaurant use in 2009, the NPS approved because the pavilion area was outside the Section 6(f) Area as shown on the only plan of the Section 6(f) Area of which NPS was aware when making that decision. That was a 1983 map furnished to it by the Commonwealth, though the date of the map was after the date of the LWCF grant.  In 2014, however, NPS discovered a 1980 map clearly showing the Section 6(f) boundary area established at the time of the LWCF grant to include the pavilion. NPS reversed itself and denied approval for the restaurant.

The BRA went to federal court to try to get a ruling that NPS failed to comply with the federal Administrative Procedure Act (APA) on the grounds that NPS, in relying on the 1980 map and in reversing itself, was arbitrary and capricious. The lower court denied that request.

On appeal the court concluded that the record in the lower court supports the NPS’s view that the 1980 was the definitive map, and that NPS’s actions were reasonable and their determinations plausible, supported by substantial evidence and neither arbitrary nor capricious.

The court also dispatched with the BRA’s attempt to change its basis for attacking the NPS decision. The BRA tried to argue on appeal that NPS’s decision was not subject to APA review but, instead, an ultra vires “attempt to encumber land,” and also, according to the court, implied that the traditional APA standard of review does not apply to claims brought under either the LWCF Act or the Declaratory Judgment Act. The court said that these arguments were waived by the BRA because it did not make them in the lower court. “Having urged one standard of review in the district court,” the court wrote, “it [BRA] cannot now repudiate its earlier position and seek sanctuary in a different standard.” The court also noted, however, that in any event, these arguments by the BRA got the law wrong.

The BRA further argued that the LWCF grant was used only for planning purposes, while the Section 6(f) requirement are applicable only to land “acquired or developed” with LWCF grants and not to project “planning” undertaken with those grants. The court rejected the distinction between acquisition and development, on the one hand, and planning, on the other hand, as “artificial.”  Quoting from federal regulations, 36 C.F.R. § 59.3(a), that Section 6(f) is the “cornerstone of Federal compliance efforts to ensure that the Federal investments in [LWCF] assistance are being maintained in public outdoor recreation use,” the court said the BRA’s argument was an attempt to “chip away at this cornerstone. For example, grant recipients could skirt Section 6(f) entirely by allocating their LWCF stipends wholly for ‘planning’ rather than for acquisition or development. We refuse to read such a gaping loophole into the statute.” This argument was also rejected on procedural grounds.

Decision available at

Smith vs. Westfield

Massachusetts Appeals Court, 90 Mass. App. Ct. 80, August 25, 2016: Concurring opinion calls for change of test whether government designation gives land Mass. constitutional protection.

At issue here was the whether the City of Westfield had taken steps sufficient to make a playground subject to the protections of Massachusetts’ Constitution Article 97, which protects various conservation and historic preservation interests as rights of the public.

Article 97 (ratified in 1972) proclaims “The people shall have the right to … the natural, scenic, historic, and esthetic qualities of their environment; and the protection of the people in their right to the conservation, development and utilization of the agricultural, mineral, forest, water, air and other natural resources is hereby declared to be a public purpose.” As a brake on any effort to dispossess the people of this right, Article 97 goes on to require a two thirds majority roll call vote by each branch of the state legislature for “Lands and easements taken or acquired for such purposes … [to] be used for other purposes or otherwise disposed of …” (emphasis added).

In 1939 Westfield took title to certain land to satisfy a tax debt. In 1957, the city passed an ordinance recognizing the land as a playground. In 1979, a Federal grant was awarded the city that, in part, was used to upgrade the playground. A Statewide Comprehensive Outdoor Recreation Plan (SCORP) required for that grant was adopted by the Commonwealth and stated: “Land acquired or developed with [the grant] funds become protected under” Article 97.  In 2010, Westfield endorsed an open space and recreation plan of its own that designated the playground as “open space.” In August, 2011, however, the playground was determined to be surplus property, and the Westfield city council transferred control to the school department to construct an elementary school.

A group of residents took the city to court arguing among other things that, assuming a playground is within the environmental purposes protected by Article 97, the playground use was sufficiently dedicated to invoke the protection of Article 97 and the requisite vote of the legislature should be required to convert the property to non-playground use. The trial court found that no documents were ever recorded that dedicated the land for Article 97 purposes and therefore there was no designation in a manner sufficient to invoke the protection of Article 97. The residents appealed but the Appeals Court agreed with the lower court.

The court cited the 2013 Massachusetts Supreme Judicial Court decision in Mahajan vs. Department of Environmental Protection stating that Article 97 jurisdiction is not determined by “whether the use of the land incidentally serves purposes consistent with Article 97, or whether the land displays some attributes of Article 97 land, but whether the land was taken for those purposes, or subsequent to the taking was designated for those purposes in a manner sufficient to invoke the protection of Article 97.” The court also said the city’s action did not meet the test as set out in another Massachusetts decision that Article 97 protection also may arise where, following the taking for purposes other than Article 97, the land is specifically designated for Article 97 purposes by deed or other recorded restriction.

A concurring opinion called for a change to these tests when it comes to land used for an Article 97 purpose and somehow so designated but for which the restricted use has not been recorded at the registry of deeds either in the original deed to the government entity or through other means such as a conservation or historic preservation easement. “Nothing in the language or purpose of Article 97,” the Judge wrote, “suggests that its application should turn on whether the underlying deed provides record notice that the land has been committed to an Article 97 use.”

Decision available by search at

Lake Oswego Preservation Society v. City of Lake Oswego

Supreme Court of Oregon, 360 Or. 115, August 4, 2016: New owner can’t remove historic designation imposed during previous ownership under OR law.

The property in question, the Carman House, was built circa 1856. In 1992, when the property was owned by Richard Wilmot, the City of Lake Oswego placed a historic designation on the Carman House. Wilmot, who had previously challenged a designation as to the house and the land around it, did not challenge the city’s decision.

Subsequently, , in 1995, the State of Oregon adopted a statute saying that local governments must allow “a property owner” whose property is under consideration for local historic designation to refuse the designation. ORS 197.772(1). The statute also included a removal provision for properties already designated, which provided that “a property owner” may “remove from the property a historic property designation that was imposed on the property by the local government.” ORS 197.772(3). Wilmot still owned the property at that time and did not ask for the removal of the Carman House designation. In 2001, when the Carman House was still on Lake Oswego’s Landmark Designation List, the property was conveyed to a new owner, the trustee of the Mary Cadwell Wilmot Trust.

The issue presented in this case was whether the phrase “a property owner” in ORS 197.772(3) refers only to persons who owned a property at the time a local historic designation was imposed on that property, or could a successor owner remove a local historic designation put in place during a predecessor’s ownership. The court concluded that the statute applies only to the owner at the time of the local historic designation.

The court’s effort to figure out the legislative intent began with analysis of the wording of the statute. Using the ordinary dictionary definition and basic principles of grammar didn’t help – the court said that using these tools of analysis, “the text in this case is susceptible to at least two plausible interpretations.” The court was persuaded, however, that the legislature’s use of the same phrase in another subsection of the statute supports the interpretation that in the subsection in question, the legislature meant the owner at the time of the designation.

The court also looked at the legislative and regulatory context and concluded that this subsection most likely was intended to protect the investment-based expectations of the party who acquired the property without a historic designation, not a party who acquired a property with a designation in place at the time of acquisition.

Lastly, looking at legislative history, the court found no definitive answers but thought that, “Overall, that history weighs in favor of interpreting the phrase “a property owner” as referring only to owners at the time of designation.”

Decision available at

Thanks to Jess Phelps, Esq. for first bringing this decision to my attention.

Crain v. Hardin County Water District No. 2

Court of Appeals of Kentucky, No. 2015-CA-000499-MR, June 17, 2016: Ag conservation easement does not create public use protected from taking.

The issues in this case are (1) whether a taking of an easement on private land for a sewer line by the Water District is prohibited because of an agricultural conservation easement which the landowner previously conveyed to the Commonwealth of Kentucky, and (2) whether the District acted in good faith when negotiating a payment for the sewer easement. This PLD report focuses only on the agricultural conservation easement question.

The Crains conveyed an agricultural conservation easement to the Purchase of Agricultural Conservation Easement Corporation (PACE), which is administratively part of the Kentucky Department of Agriculture that was established to administer and hold title to the agricultural preservation easements. KRS 262.906. Hardin County Water District No. 2 (the District) is pursuing a wastewater project in connection with a large economic development project. The wastewater project requires the installation of sewer lines, one of which the District proposes to run through the Crains’ land. To do that, the District proposed to use eminent domain power to take an easement across the Crain property.

The Crains challenged the District’s right to take the sewer easement. In part, they argued that the agricultural conservation easement precluded the District from condemning any portion of the property for non-agricultural purposes. PACE, holder of the easement, did not object to the proposed easement. The trial court found for the District, saying the agricultural conservation easement did not preclude a taking by eminent domain, although the District’s easement would be secondary to the agricultural conservation easement.

On appeal the court held, first, that the Kentucky statute on agricultural conservation easements “clearly permitted” use of such easement areas for a sewer line, citing language saying the Commonwealth is permitted to grant rights of way through restricted land “for the installation of, transportation of, or use of, lines for water, sewage, electric, telephone, gas, oil or oil products….” KRS 262.910(4)(e). The court’s opinion does not discuss the text of the easement, as the Crains evidently did not assert that the text itself prohibited granting a sewer line easement, other than by application of the statute.

The Crains had argued in the alternative that the condemnation is prohibited by the “prior public use doctrine.” As explained by the court, “the doctrine provides that land devoted to a public use may not be taken for another public use under the power of eminent domain.” The court said that the applicability of the doctrine in this case depended on the distinction between public use and public purpose, and held that while the easement had a public purpose, it did not create a public use.

The Crains’ position was that the agricultural conservation easement created a real property interest held by the Commonwealth for a public use. The Court disagreed, quoting Kipling v. City of White Plains, 80 S.W.3d 776 (Ky. App. 2001): “for purposes of condemnation and eminent domain, the fact that the public receives some sort of benefit from a certain use of land does not mean that the land is being used for a public purpose.” (Comment: although this quote says public benefit does not necessarily create a “public purpose,” it seems the court cited it for the principle that public benefit does not equate to public purpose or public use.) The Crains tried to say that an easement is different because it is “a privilege or an interest in land upon the dominant tenement to enjoy a right to enter the servient tenement,” and this interest constitutes a dedication to a prior public use. The court again disagreed, saying that the agricultural conservation easement simply grated the right to PACE to “restrict certain future development of the property” but did not grant either the Commonwealth or the public a right to come onto the Crains’ property. This right, while “clearly a public purpose … does not constitute a prior public use.”

The decision on appeal does not discuss whether the Crains, as grantors of the easement rather than holders, had standing to try to protect the agricultural purpose of the conservation easement.

The court also found against the Crains as to the good faith negotiations issue.

The decision is available at and should eventually be available at and/or

Mountanos v. Commissioner (Mountanos II)

U.S. Court of Appeals, 9th Circuit, No. 14-71580, June 1, 2016: Upholds Tax Court decision about highest and best use.

In the Tax Court decision Mountanos v. Commissioner, T.C. Memo. 2013-138, June 3, 2013 (Mountanos I), the tax court agreed with the IRS that a federal tax deduction should not be allowed for a conservation easement Mountanos donated, finding that Mountanos failed to prove that the property’s highest and best use before the grant of the easement was higher that after the grant of the easement.

In a very brief opinion, the appeals court agreed with the tax court about the valuation, and also upheld the tax court’s decision to impose an accuracy-related penalty.

Decision available at as a “not for publication” document.

Telzrow v. US

U.S. Court of Federal Claims, No. 15-1359C, May 26, 2016: Trial may proceed on US liability for failure to remove mechanic’s lien.

This decision is about procedural matters but is reported here as an illustration of a problem that may not be addressed by the provisions commonly found in most historic preservation and conservation easements: mechanics liens.

The United States Department of Agriculture, acting through the Natural Resources Conservation Service (“Conservation Service” or “government”), purchased a conservation easement on Telzrows’ land under the Wetlands Reserve Program for the purpose of restoring and protecting wetlands. Food Security Act of 1985, Pub. L. No. 99-198, Title XII, § 1237, 99 Stat. 1354 (1985), as added by Pub. L. No. 101-624, Tit. XIV, § 1438 (formerly codified at 16 U.S.C. § 3837), repealed by Agricultural Act of 2014, Pub. L. No. 113-79, § 2703(a), 128 Stat. 767 (2014).

The easements generally allow federal officers and their contractors to enter the land and perform wetlands restoration work. This particular deed of easement granted the United States, “the right to enter unto the easement area to undertake, at its own expense or on a cost share basis with the [l]andowner or other entity, any activities to restore, protect, manage, locate and mark the boundaries, maintain, enhance, and monitor the wetland and other natural values of the easement area.”

The US awarded a contract for restoration work on the Telzrows’ land to a contractor who did the work using materials purchased on credit from a subcontractor. The government paid the contractor but he then filed for bankruptcy and never paid his subcontractor. The subcontractor then obtained a mechanic’s lien on the Telzrows’ farm pursuant to Illinois law. The Telzrows asked the Conservation Service to pay the subcontractor’s claim but it refused. Ultimately the Telzrows sued the government in federal court for breach of contract (the conservation easement), demanding damages.

The procedural argument arose because the government failed to answer the Telzrows’  complaint by the deadline imposed by the Rules of the Court of Federal Claims (“RCFC”). The Telzrows filed a motion for the government to lose by default, and the government opposed the entry of default and asked for additional time to respond to the complaint. The government also asked the court to dismiss the Telzrows’ claim for a couple of reasons, including failure to state a claim under applicable procedural federal rules.

The court allowed the government additional time to respond but to rule on the government’s motion to dismiss, the court had to decide if the Telzrows had plausibly alleged a breach of contract, assuming the facts were as alleged by the Telzrows.

The court then had to interpret the contractual language of the conservation easement. It found that the easement language contemplates that restoration work is “undertake[n]” by the United States at its sole option and does not give the landowner any rights or responsibilities in the restoration work, citing a Ninth Circuit decision holding that this form of Conservation Service deed “nowhere grants [a landowner] the power to veto a conservation plan of which it disapproves.” Big Meadows Grazing Ass’n v. United States ex rel. Veneman, 344 F.3d 940, 943 n.4 (9th Cir. 2003). The court interpreted Big Meadows to mean that the United States “can and does assume sole responsibility to perform and pay for restoration.” The court said that is follows from that that landowners “are or should be shielded from the burdens of restoration absent a separate and further agreement.”

Based on the facts alleged by the Telzrows, the court found that in this instance part of the cost of restoration ultimately was imposed on the Telzrows, despite the United States’ obligation to pay for such costs. The court held that is sufficient to state a plausible claim for breach of contract, either in terms of breach of warranty or failure to perform an affirmative obligation. Accordingly the court denied the government’s motion to dismiss for failure to state a claim, which means that a trial on the merits may proceed.

Decision available at

Carroll V. Commissioner

U.S. Tax Court, 146 T.C. 13, April 27, 2016: Formula for sharing post-extinguishment proceeds must conform exactly to IRS Regs.

Despite the federal Tax Code and Treasury Regulations’ requirement that to be eligible for a tax deduction a donated conservation easement must be enforceable in forever and always (“in perpetuity”), the law recognizes the possibility that even a qualified conservation easement could be extinguished by a court in unusual circumstances. When a conservation or preservation easement is extinguished, that presumably increases the fair market value of the property because it could be sold without the burden of the easement. To assure that the property owner will never recoup the value of the gift that gave rise to a tax benefit (and reduced Treasury revenue) and that the value of that easement will always be used for conservation purposes, the Tax Code and Regulations require that to be eligible for the deduction, a donated conservation easement must spell out a certain formula for how the property owner and the conservation organization that holds the easement (various called the “grantee,” “donee” or “holder”) will divide the proceeds of the first sale of the property after extinguishment. The holder will then continue to have the cash value of the easement, to use for conservation purposes.

At issue in this case, which the Tax Court described as its first on this question, was how closely the formula for sharing post-extinguishment proceeds must conform to the text of the IRS regulations. The court’s answer was the formula must guarantee that the holder will get exactly what it would get using the precise words of the regulations; i.e., the court rejected the Carroll formula and therefore said the Carroll Easement did not qualify for a federal tax deduction.

Sec. 1.170A-14(g)(6)(ii) of the Income Tax Regs. says that the holder’s share of post-extinguishment proceeds must be “at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift [the numerator] bears to the value of the property as a whole at that time [the denominator].” These values are determined by an appraisal closely contemporaneous with the gift. Even as these dollar values might change over time, this fraction (the numerator divided by the denominator as determined by this formula at the time of the gift) never changes; it remains the same in perpetuity.

The conservation easement in this case (the Carroll Easement) used a different numerator.  Instead of the “value [of] the perpetual conservation restriction at the time of the gift,” the Carroll Easement used the amount allowable as a deduction for Federal income tax. In other words, regardless of what the donor’s appraisal might have said at the time of the gift, the Carroll Easement said that the value of the easement was what the IRS said the value was. This presumably reflects the fact that the IRS has often contested the donor’s appraised value and the Tax Court has sometimes agreed that the value of the easement at the time of the gift was some number lower than the donor’s appraised value, sometimes down to zero value.  The Carroll Easement also said that once there was a final determination of value by the IRS or a court of competent jurisdiction, the holder’s share of post-extinguishment proceeds would remain constant.

In disqualifying the Carroll Easement, the court relied on the federal Third Circuit Court of Appeals and district court decisions in the Kaufman cases. Kaufman v. Commissioner (Kaufman I), 134 T.C. 182 (2010), reconsideration denied by Kaufman v. Commissioner (Kaufman II), 136 T.C. 294 (2011), aff’d in part, vacated in part and remanded in part sub nom, Kaufman v. Shulman (Kaufman III), 687 F.3d 21 (1st Cir. 2012).  Although the facts in Kaufman were different, the principle cited by the court was that the nonprofit easement holder must be absolutely guaranteed its proportionate share of post-extinguishment proceeds. Kaufman I, 134 T.C. at 187.

The court understood this principle to mean that the holder’s proportionate share of post-extinguishment proceeds must be determinable exactly as the IRS Regulations state at the time of the gift (or perhaps when the deduction is claimed). The Carroll Easement left open the possibility that the holder’s proportionate share would appear to be one thing at the time of the gift and another thing by the time the IRS could no longer challenge the deduction claim or the IRS challenge was finally resolved.

(The court noted that if the Carroll case were appealed, the appeal would be heard by different Court of Appeals Circuit than the circuit which decided Kaufman, and so might reach a conclusion different from Kaufman’s, “the Court of Appeals for the First Circuit’s opinion in Kaufman III is instructive on several points.”)

Not surprisingly, Carroll objected that the court’s reasoning was circular:  was it logical to say that the Carroll Easement was disqualified for a charitable deduction because it might be disqualified for a charitable deduction for a reason other than the reason for which the court wanted to disqualify it? The Carroll Easement either would or would not be disqualified for a reason other than the post-extinguishment proceeds clause (indeed, the court rejected other IRS objections to the Easement; see below). If the Carroll Easement were disqualified for a reason other than the post-extinguishment proceeds clause, what possible difference could it make what the proceeds clause said? And if it were not disqualified on other grounds, then didn’t the Carroll Easement’s proceeds clause have the effect of guaranteeing the holder a certain share of proceeds that, once determined, would remain constant in perpetuity?

The court found this argument “unpersuasive. The regulatory requirements set forth in section 1.170A-14(g), Income Tax Regs., are designed to protect the conservation purpose of a conservation contribution and must be satisfied at the outset for a contribution to be deductible.”

The court also upheld the IRS decision to hold the taxpayer liable for accuracy-related penalties under I.R.C. sec. 6662. Although Tax Code Section 6664(c)(1) provides that the penalty under section 6662(a) do not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer’s position and that the taxpayer acted in good faith, the taxpayer in this case did not consult with an attorney or other adviser in the drafting of the easement, and therefore could not claim reasonable cause and good faith.

The IRS also challenged the deduction on the basis that easement the did not constitute a qualified real property interest under section 170(h)(1)(A), and was not contributed exclusively for conservation purposes under section 170(h)(1)(C) because it did not preserves open space pursuant to a clearly delineated Federal, State, or local government conservation policy and yield a significant public benefit. The court found the Carroll Easement met these requirements.

The opinion is available at

Wetlands America Trust, Inc. v. White Cloud Nine Ventures

Supreme Court of Virginia, Record No. 141577, February 12, 2016: Conservation easement ambiguity resolved in favor of allowing construction.

This controversy arose because of construction activities and proposed uses of land subject to a conservation easement. The legal questions were whether a Virginia conservation easement should be construed “strictly” (i.e., narrowly) against restrictions on land, whether certain provisions of the conservation easement itself were ambiguous, whether the lower court had a reasonable basis to find that no violation of the ambiguous terms of the easement had occurred, and whether the lower court had a reasonable basis to find that the construction activities would not violate the conservation purposes of the easement. Five of the seven member appeal court upheld the trial court, but two justices dissented.

Wetlands America Trust, Inc. (WAT) holds a conservation easement on Virginia property owned by White Cloud Nine Ventures, L.P. (White Cloud). White Cloud purchased the property to lease it to a related entity to use for a vineyard, grazing and milking cows, raising wheat, constructing a building to be used for a creamery, bakery, wine storage, and the tasting, sampling and sale of wine, cheese and bakery products. White Cloud began construction of the building, an adjoining parking lot, a new road and a new bridge. WAT sued, seeking a declaratory judgment that the construction and intended “commercial use” violated the conservation easement’s restrictive covenants. The trial court denied the declaratory judgment.

The first issue decided on appeal was whether the trial court was wrong to apply the common law principle that if the conservation easement, as a contract, was at all ambiguous, it must be strictly construed against WAT, the party seeking to enforce it. WAT argued that in Virginia a conservation easement should not be subject to that rule because the 1988 Virginia Conservation Easement Act (“VCEA”) (VA Code §§ 10.1-1009 through -1016), especially favors land conservation and sets conservation easements apart from other restrictions. The court said that under settled principles of statutory construction, “[s]tatutes in derogation of the common law are [themselves] to be strictly construed and not to be enlarged in their operation by construction beyond their express terms.” The court then said it found nowhere that the VCEA specifically addresses the principles of contract construction to be applied to conservation easements, and thus – construing VCEA narrowly — it does not directly exempt such easements from the common law principle favoring use of land free from restrictions.  That reasoning meant that if restrictive covenants in the conservation easement are determined to be ambiguous, they must be strictly construed against restriction and in favor of White Cloud.

The dissenting opinion disagreed, saying that the common law principle of strict construction in favor of free use of land does not apply to conservation easements.  The dissent took note that Virginia public policy, as embodied in the Constitution of Virginia, VCEA and statutes preceding VCEA strongly favors the conservation of land and open spaces.  The dissent wrote, “The oft-stated policy of the Commonwealth in favor of conservation easements such as the type at issue here could not be a clearer rejection of the common law strict construction principle.” The majority opinion, according to the dissent, ignores the common law principles of contract interpretation which provide that “where, as in this case, an easement is created by deed, the easement should be interpreted in accordance with Virginia’s rules of construction for deeds.” (The majority asserted in a footnote that the rules for interpretation of deeds are applicable “where there is a dispute, not over the meaning of restrictions placed on the use of certain land, but rather over the nature and extent of the estate the grantor intended to convey” [citation omitted].)

After having held that ambiguous provisions of the conservation easement should be interpreted in favor of White Cloud, the court then turned to the provisions of the easement which WAT claimed White Cloud violated.

The first provision at issue was whether the trial court was reasonable in finding that White Cloud’s building and uses are “farm buildings or structures” which are allowed by the easement. The court said that “farm building” is synonymous with “agricultural building,” and looked to the easement itself, Virginia’s Uniform Statewide Building Code and Webster’s Third New International Dictionary to interpret “farm buildings or structures.” The easement’s prohibition on new buildings which allows “farm buildings or structures” did not define “farm buildings” or “farm structures” but another section of the easement refers to various structures including farm buildings, as “agricultural buildings.” The court cited sections of the Building Code that define the term “[f]arm building or structure” to include storage, handling, production, display, sampling or sale of agricultural, horticultural, floricultural or silvicultural products produced in the farm, and handling, processing or sale of agricultural animals or agricultural animal products. The court cited the dictionary’s definition of “agriculture” as including “the science or art of the production of useful to man and in varying degrees the preparation of these [plant and animal] products for man’s use and their disposal (as by marketing).” The court concluded that production, preparation and marketing are components of agricultural activities included in the phrase “farm building” as used in the easement and that the permitted “farm/agricultural buildings” may be used for agricultural activities that are commercial and/or industrial in nature. On that basis, the court held that White Cloud’s intended use was allowed by the easement so long as the agricultural products involved were at least in part grown or derived from plants and livestock grown or grazing on the easement property.

The court turned to the conservation easement’s prohibition against constructing a building on “highly erodible areas as identified by the U.S. Department of Agriculture.” The court agreed with the trial court’s interpretation of the easement to mean the erodibility was to be tested after the construction site for the new building had been graded. This interpretation involved reconciling the construction prohibition cited above with another provision of the easement which allows grading, which says, “Grading… shall not materially alter the topography of the Protected Property except . . . as required in the construction of permitted buildings. . . .” Under this interpretation the court also found that it would be “completely incongruous and unreasonable to conclude” that White Cloud could grade the site for the new building but not for the parking area serving the building.

WAT also tried, unsuccessfully, to argue that in addition to the specific prohibitions analyzed above, White Cloud’s activities were prohibited as contrary to the conservation purpose of the easement.  The stated purpose was, “to assure that the Protected Property will be retained in perpetuity predominantly in its natural, scenic, and open condition, as evidenced by the [Baseline Document] Report [BDR], for conservation purposes as well as permitted agricultural pursuits, and to prevent any use of the Protected Property which will impair significantly or interfere with the conservation values of the Protected Property, its wildlife habitat, natural resources or associated ecosystem.”

While the court acknowledged what it called “inherent tension” between the conservation purposes (which, the court said, were undefined) and the expressly “permitted agricultural pursuits,” it also said that the easement calls for retention of the property for conservation purposes and permitted agricultural pursuits, and “therefore the character of the property is in no way frozen in perpetuity” (Emphasis added.) The court concluded that the trial court reasonably  ruled that, “under the Easement, White Cloud was not required to retain its property in the condition established by the [BDR] to the extent it has engaged in permitted uses.” The court also found the trial judge could make the determination that the expert witnesses for White Cloud were more persuasive that the expert for WAT in showing that White Cloud’s construction and use of its new facilities “did not significantly impair or interfere with the Easement’s conservation values and/or the property’s environment.”

Lastly, the court upheld the trial court on technical civil procedure grounds in refusing to consider another WAT claim (about constructing a bridge) which WAT had not alleged in its complaint.

The opinion is available at

In Re: Nealon

U.S. Bankruptcy Appellate Panel, 1st Circuit, BAP NO. MW 15-035, Bankruptcy Case No. 14-40719-HJB, January 20, 2016: Homestead protection in Massachusetts depends on actual use of property when homestead arises, not owner’s intentions or the property’s subdivision.

This case is about whether the Massachusetts Homestead Act provides protection in bankruptcy for a debtor’s land adjacent to, but as separate parcels subdivided from, the parcel on which the debtor’s house is located. In a very fact specific conclusion, the unpublished opinion of the Panel was that the adjacent land is entitled to homestead protection. This case is reported here because, although there was no conservation easement or historic preservation easement on the adjacent land, the decision in this case is cautionary regarding the need to determine homestead status of real estate proposed to be subject to a conservation easement or historic preservation easement even if the grantor’s principal residence building isn’t on easement land.

The debtors, the Nealons, were deed 13 acres of land and a 240-year old house (the “House”) identified in the deed by a street address (the “Street Address”) and as Lot 2 on a certain recorded plan.  Subsequently, as part of an intention to build a new house and sell off the existing House, the Nealons recorded a subdivision plan, approved by the municipality, showing two buildable lots (including the House lot) and two non-buildable lots. An agreement required as a condition of subdivision approval and signed by the Nealons required that the non-buildable lots be subject to a conservation easement or donated to a conservation organization. The Nealons did not grant a conservation easement or donate those lots (reportedly because their mortgage holder would not subordinate to a conservation easement and the Nealons would not pay for the release of those lots from his mortgage).  The Nealons did record a Declaration of Restrictive Covenants regarding wetlands on the non-buildable lots in order to qualify for water quality certification permits. According to the Nealons, they then discontinued efforts to develop the subdivision.

Two years later, the Nealons recorded a Declaration of Homestead on property identified only by the Street Address and the deed into them (which conveyed all 13 acres). The Nealons filed for chapter 7 bankruptcy protection less than five months later. They claimed a homestead exemption for all 13 acres. A creditor objected and asserted that no homestead protection applied to the three vacant lots, only the House lot.

The bankruptcy trial court considered whether the vacant lots were part of the Nealons’ principal residence for purposes of the Massachusetts homestead statute, MGL c. 188. It concluded as a finding of fact that the Nealons maintained an intention to subdivide the property, donate the non-buildable lots, and sell the other vacant lot, and therefore that court held that the three vacant lots were not entitled to homestead protection.

On appeal, the Panel reversed the lower court. They said that the subdivision of the property is irrelevant to the analysis of the homestead and the debtor’s past or future intention regarding the property is not controlling. The key factor, the Panel said, should be the debtor’s actual use of the Property at the time of the homestead declaration. The Panel found that the Nealons had met their burden of proof to show that they “actually used and occupied the vacant lots as part of and in connection with his principal residence at the time of the declaration.”

Decision available at


U.S. Dist. Court, SD New York, No. 11 Civ. 8157 (ER), February 1, 2016: Preservation easement recording date is contribution date in New York.

Mecox Partners LP (“Mecox”) donated a historic preservation easement and open space easement on property in New York State to a charitable organization. The deed of easement was fully executed in 2004, but was not recorded until November 2005.  Mecox claimed a qualified conservation contribution deduction on its 2004 tax return. They submitted an appraisal of the contribution dated June 13, 2005, which stated the value of the easement as of November 1, 2004.

The IRS denied the deduction, saying that the easement was not contributed in the tax year for which it was claimed. The IRS also said the substantiation requirements for a qualified conservation contribution deduction were not satisfied because the appraisal was not conducted within 60 days of the on November 17, 2005, contribution date, as required by treasury regulation 26 C.F.R. § 1.170A-13(c)(3)(i). Mecox took the case directly to the U.S. District Court.

The court found for the IRS. The court looked to New York State law to determine the taxpayer’s interest in the property before turning to federal law to determine the tax consequences of that interest. The court found that under the applicable New York law, New York Environmental Conservation Law (“ECL”) Article 49, Title 3, for an instrument to be a “conservation easement” as defined in that statute the instrument must be recorded to be effective. ECL § 49-0305(4).  Accordingly, the court held that federal law requires that a deduction for charitable contribution of a conservation easement in New York cannot be claimed until the easement is recorded. Because Mecox claimed the deduction for a tax year prior to the recording, the claimed deduction was denied.

The court cited support in two recent U.S. Tax Court decisions: Zarlengo v. Commissioner, 108 T.C.M. 155, (2014), and Rothman v. Commissioner, 103 T.C.M. 1864 (2012), vacated in part on unrelated grounds, 104 T.C.M. 126 (2012). (Tax Court decisions are not binding precedent on the US District Court.)

But the argument didn’t end there. Mecox made two alternative arguments to still try to hold onto the deduction. First, Mecox asserted that the ECL does not apply in this case because, according to them, the easement is not a “conservation easement” under ECL but “a common-law restrictive covenant, which does not require recordation to be effective.”  The court rejected this reasoning, saying that the instrument makes clear the parties’ intent (which the court said governs how it should be construed under New York property law) for the instrument to be a conservation easement under the ECL, even if it does not precisely so state. Alternatively, Mecox argued that even if the ECL does apply to this easement, recordation is required only for a conveyance to be effective against subsequent purchasers, not as between the parties to the instrument. The court rejected this interpretation, saying it is in direct contradiction of the text of the ECL.

The court also addressed the substantiation problem about the date the appraisal was prepared. Having decided that the contribution date was the recording date of November 17, 2005, the court found the appraisal, conducted on June 13, 2005, was not prepared within 60 days before the contribution date of the appraised property, or before the extended due date of the tax return claiming the deduction. 26 C.F.R. § 1.170A-13(c)(3)(i).

The court did not address the IRS imposition of an accuracy-related penalty under 26 U.S.C. § 6662.

Decision available at or by Google search.

Gemperle v. Commissioner

U.S. Tax Court, T.C. Memo. 2016-1, January 4, 2016: No preservation easement tax deduction unless appraisal filed with tax return.

Gemperle, the taxpayer (petitioner), claimed a federal income tax deduction for 2007 and 2008 for the contribution of a historic preservation easement on the façade of a Chicago home. Contrary to the requirements of the Internal Revenue Code and Treasury Regulations, they did not submit an appraisal (qualified or otherwise) with their tax return even though they claimed a deduction in excess of $5,000. The IRS denied their deduction based on several grounds including the failure to file a qualified appraisal.

At the tax court, the taxpayers represented themselves. They and IRS agreed that no qualified appraisal was filed with the return. Accordingly, the court agreed that the IRS was right to deny the claimed deductions. The court therefore did not discuss the alternative denial grounds asserted by the IRS.

The court also agreed with the IRS that a 40% substantial valuation misstatement penalty should be imposed. The court first found that a 20% accuracy related penalty under Code section 6662(a) on the whole of the underpayments was appropriate because the failure to file a qualified appraisal was at least a careless, if not reckless, disregard of the Code and Regulations. The court said the Gemperles did not present evidence on which they might have based a Good Faith Defense of adequate disclosure of their position or reasonable cause for the resulting underpayments acting in good faith. The court went on to find that the taxpayers’ claimed valuation of the easement was more than 200% of the amount determined to be the correct valuation (based on admissible evidence), and thus the claimed deduction triggered the 40% gross valuation misstatement penalties under Code section 6662(e)(1)(A) and (h). The court therefore agreed with the IRS and imposed the 40% penalty.

The decision is available at

Thanks to Jess Phelps for bringing this to my attention.

Atkinson v Commissioner

U.S. Tax Court, T.C. Memo 2015-236, December 9, 2015: Golf course conservation easement doesn’t qualify for deduction.

The Tax Court held that contribution of certain conservation easements on land at the subject golf course do not qualify for a Federal income tax charitable deduction because they do not meet the conservation purposes requirement of the tax Code, Sec. 170(h)(1). The court’s memo is interesting reading about baseline reports and interpretations of some categories of the “conservation purposes” requirements of the code and Treasury Regulations.

The members of two limited liability companies which own a golf course in North Carolina sought Federal income tax deductions for contribution of conservation easements on land of the golf course (the “2003 Easement,” consisting of six noncontiguous tracts, and the “2005 Easement,” consisting of three noncontiguous tracts). To be a “qualified conservation contribution” eligible for an income tax deduction, a conservation easement must be “exclusively for conservation purposes,” among other requirements. The taxpayer-members contended that the easements were exclusively for two of the conservation purposes listed in Code section 170(h)(4)(A): “protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,” and “preservation of open space (including farmland and forest land) where such preservation is … for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit.”

In a lengthy analysis the court reviewed the provisions of the easements and evidence about the land and its plant- and wildlife.

The court noted that the “natural habitat” purpose requires:

  • A “habitat,” meaning an “area or environment where an organism or ecological community normally lives or occurs” or the “place where a person or thing is most likely to be found.”
  • “Significant” habitats and ecosystems, which include, but are not limited to, habitats for rare, endangered, or threatened species of animal, fish, or plants; and natural areas which are included in, or which contribute to, the ecological viability of a local, state, or national park, nature preserve, wildlife refuge, wilderness area, or other similar conservation area.

The key evidentiary facts about the subject land and ecosystem were:

  • Although the easements include longleaf pines at the margins of the fairways, the terms of the 2003 easement do not protect the longleaf pine from removal; the longleaf pine currently on the 2003 easement property are not maintained in a relatively natural state; and there is no management plan for the pines.
  • Although there are manmade ponds on the 2003 easement, the ponds lack sufficient significant transition areas to mimic nature so that plants and animals would be able to use them or allow rare, endangered, or threatened native species of wildlife or plants to exist in a relatively natural state.
  • The 2003 easement does not actually limit the use of pesticides and chemicals which could injure or destroy the ecosystem and therefore may destroy the conservation purpose.
  • The 2003 easement property does not qualify as a “relatively natural habitat” or as a “natural” habitat, and accordingly is not a “natural area” that “contributes to” the ecological viability of a local conservation area known as the Middle Swamp or surrounding undeveloped area.
  • The 2003 easement property does not act as a “wildlife corridor” or “sink” for any species.
  • On the basis of the foregoing, rare, endangered, or threatened wildlife and plants are not “most likely” to be found or do not “normally live” on the 2003 easement property.
  • The 2005 easement suffers from the same problems as the 2003 easement.

The court also addressed the conservation purpose of preserving open space, although neither party presented expert testimony to establish whether the easement areas serve that purpose. First the court concluded that the taxpayers did not establish any clearly delineated governmental policies that apply to either easement area. Then the court concluded that the easement areas did not meet the public benefit test, because there was no evidentiary basis to conclude either that the general public has physical or visual access.

The court accordingly found that the easements did not meet the conservation purpose requirement of a qualified conservation contribution.

The court declined to impose an accuracy related penalty, finding that the taxpayers qualify for the reasonable cause defense of section 6664(c)(1) because, in relying on various experts as to the qualification of the easements, they had reasonable cause and acted in good faith in claiming the deduction.

Decision available at

Legg v. Commissioner

U.S. Tax Court, 145 T.C. No. 13, December 7, 2015: Upholds IRS procedure for imposition of 40% accuracy related penalty on conservation easement overvaluation.

The issue in this case was about the internal procedure of the IRS when imposing an accuracy related penalty under Internal Revenue Code section 6662 for the misstatement of valuation of conservation easement charitable deduction. The court upheld the IRS’ assertion that it had properly complied with the procedure to impose a 40% accuracy-related penalty for a gross valuation misstatement under section 6662(h), and was not limited to imposing a 20% accuracy-related penalty under section 6662(a).

Legg, the taxpayer, had claimed a Federal income tax charitable deduction based on the alleged value of a donated conservation easement at $1,418,500. The IRS said the contribution didn’t satisfy the requirements for a deduction or alternatively that the value of the conservation easement was zero.  Legg and the IRS ultimately reached agreement that there was a qualified contribution but that the value was $80,000. The difference between the deduction claimed by Legg and the settlement value meant that Legg has misstated the value by enough to be subject to the 40% gross valuation misstatement penalty.

Imposition of the 40% penalty depended on whether the IRS had complied with the procedural requirement of Code section 6751(b)(1), which requires that no penalty be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination” (with certain exceptions). The IRS examiner’s report had calculated both a 40% penalty and — because of uncertainty as to whether the 40% penalty could be imposed where an underpayment was the consequence of an adjustment not based on valuation — a 20% in the alternative. The report determined that Legg was liable for the 40% gross penalty and was approved in writing by the examiner’s immediate supervisor.  The court concluded that the IRS examiner made an “initial determination” regarding the section 6662(h) 40% penalties in compliance with section 6751(b)(1).

Decision available at

Scott v. Metcalf Charitable Trust

Supreme Court of Montana, 2015 MT 265, No. DA 14-0798, September 8, 2015: Conservation restrictions created outside Montana conservation easement statute enforceable.

The basic issue in this case was whether in Montana an easement in gross (here, a restriction for the benefit of a person, rather than benefitting a piece of land (a “dominant estate”) that binds another particular person but “running with the land”) remained enforceable even after the affected land (the “servient estate”) changed hands and the benefit of the easement was transferred to a new entity. The answer was yes, based on specifics of Montana law.

Donna Metcalf (Metcalf) — the predecessor in title to the Lee and Donna Metcalf Charitable Trust (Trust) — transferred a 40-acre parcel of land to Richard Thieltges (Thieltges) by warranty deed. The deed, granted in consideration of $1 “and other valuable consideration” included imposition of a set of “covenants, restrictions, conditions and charges” (the Metcalf Restrictions). The deed also stated, “These restrictions and covenants are to run with the land and shall be binding upon [Thieltges], his successors, heirs or assigns.” Thieltges later conveyed the land to the Scotts by warranty deed. It was undisputed that the Scotts had actual knowledge of the Metcalf Restrictions.

The Scotts then asked a court to invalidate the Metcalf Restrictions and allow them to subdivide the property.  The trial court concluded that the Metcalf Restrictions were enforceable by the Trust against the Scotts and any other of Thieltges’s successors with actual notice of them. It refused to invalidate the restrictions. The Scotts appealed. The Montana Supreme Court answered four questions.

1. Were the Metcalf Restrictions enforceable against the Scotts by the Trust?

The court first concluded that as a matter of law under § 70-17-102, Montana Code Annotated (MCA) the Metcalf Restrictions are an easement in gross, “a nonpossessory interest in land that benefits the holder of the easement personally,” without a “dominant estate,” i.e., specific land that benefits from the easement.

The court noted that generally, and not exclusively in Montana, “for an easement to be enforceable against parties that were not the original parties to the easement, the burden of the easement must pass to the original easement grantor’s successors in interest and the benefit of the easement must pass to the original easement grantee’s successors in interest,” citing Restatement (Third) of Property: Servitudes §§ 4.4, 4.7 (2000); 4 Richard R. Powell, Powell on Real Property § 34.17, at 34-167 to -176, (Michael Allan Wolf ed., 2015); 7 Thompson on Real Property, §§ 60.02(a), 60.07(a), at 460-61, 548-49 (David A. Thomas ed., 2d ed. 2006).  The court held that both the benefit and burden in this case passed to the original parties’ successors in interest.

As to the burden, the court said that under § 70-20-308, MCA, “transfer of real property passes all easements attached thereto,” so an easement remains attached to a servient estate despite transfer of that estate (with exceptions regarding intent of original parties and knowledge of the successor to the servient estate, which the court said did not apply here).

As to the benefit of the restrictions, since no one contested that the Trust is Metcalf’s successor in interest, the court concluded that the benefit also passed when it was transferred from Metcalf to the Trust. Citing Montana precedent that when there was “no language in the warranty deed limiting the grant[ee]‘s right to freely alienate and apportion the easement” (emphasis added by PLD), the court held that because there was no language in the Metcalf deed limiting the grantee’s or grantor’s right to alienate the easement, “the easement in gross comprising the Metcalf Restrictions was freely transferrable. It was, therefore devisable to the Trust. The easement in gross was not rendered unenforceable by its transfer or by Metcalf’s death.” The court took note that this holding “is at odds with the laws of many other jurisdictions. Most jurisdictions in the United States strictly limit the transfer of easements in gross. See Powell on Real Property §§ 34.02[2][d], 34.16, at 34-19 to -20, 34-163 to -167; Thompson on Real Property, § 60.07(c), 552-55.”

Since both the burden and benefit of the restrictions passed in this case the court concludes that the Metcalf Restrictions were enforceable by the Trust against the Scotts.

2. Were the Metcalf Restrictions enforceable as anything other than a conservation easement?

If the Metcalf Restrictions were deemed to be a conservation easement under Title 76, Chapter 6, MCA, they might not be enforceable if the statutory requirements for creating a conservation easement were not complied with. The court held that creating a servitude for a conservation purpose is expressly allowed under § 70-17-102, MCA (i.e., the statute allowing creation of an easement in gross) and that § 76-6-105(2), MCA (the conservation easement enabling statute) states that Title 76, Chapter 6, MCA, governing conservation easements, “may not be construed to imply that any easement, covenant, condition, or restriction that does not have the benefit of this chapter is not enforceable based on any provisions of this chapter.” Accordingly, the Metcalf Restrictions were enforceable as something other than a conservation easement.

3. Were the Metcalf Restrictions a nonvested property interest that was void as violations of § 72-2-1002, MCA, Montana’s version of the rule against perpetuities?

The court noted that the rule against perpetuities in the statute does not apply to a “nonvested property interest . . . arising out of a nondonative transfer.” The consideration recited in the easement deed meant that the Metcalf conveyance was “nondonative.”

4.  Were the Metcalf Restrictions void for vagueness?

The court said the meaning of the Metcalf Restrictions was not at issue here, and to decide the question would require a ruling “without the benefit of actual facts or a concrete controversy.”  Accordingly, the court would not invalidate the Restrictions on the grounds of vagueness.

The court therefore affirmed the trial court’s decision to grant summary judgment in favor of the Trust’s enforcement of the Metcalf Restrictions.

Decision available at{F0F9AE4F-0000-C610-A352-48A19493B105}&impersonate=true&objectType=document&objectStoreName=PROD%20OBJECT%20STORE, or go to and search by case name or docket number DA 14-0798.

US v. 1.57 Acres of Land

US District Court, S.D. California, No. 12cv3055-LAB (MDD), September 8, 2015: Non-economic value of conservation easement excluded in valuation of taking.

This decision is about excluding evidence in a trial to determine how much the United States must compensate the County of San Diego for taking a small parcel of land subject to a conservation easement. The taking was part of a project to secure the US/Mexico border.  The relevant deed recites that the conservation easement “possesses wildlife and habitat values . . . of great importance to [the County]. . . .” The County argued that the intended US use of this roughly 0.43 acre area for a vehicle turnaround renders that portion unsuitable for habitat conservation purposes and destroys burrowing owl habitat. The County said this deprives it of its interest in the property and affects it’s compliance with a “Multiple Species Conservation Program” agreement (“MSCP”) between it, the US Fish and Wildlife Service, and the California Department of Fish and Game.

The United States argued that just compensation is determined by private market value, so the Court should preclude evidence relating to the value of habitat conservation, public interest, or other non-economic considerations.

The County didn’t contest that market value is generally the relevant measure for just compensation. Instead, it argued that its conservation easement does have a private market value.  The court quoted from the County’s argument:

“[C]onservation easement property interests, which protect certain wildlife, habitats, and biological species, are freely traded in private, as well as public markets. These easements are valued based on their demand by willing buyers. . . . So while habitat properties do have a government demand that results in a public value, they also have a private demand that results in an economic value. . . . It is the County’s position that the highest and best use of the property being condemned is its use as a conservation easement and that value is based on the habitat contained on it. This particular property contains burrowing owl habitat, a rare commodity, and serves the last viable population of burrowing owls in San Diego County.”

The court agreed with the US that it is appropriate to limit the County’s evidence to matters relating to market value, and therefore granted that portion of the US motion to exclude evidence of non-economic value.

The US also sought to exclude evidence relating to replacement cost of a substitute facility because the MSCP force majeure clause says the County isn’t obligated to replace the condemned property. The MSCP says that when “the County is wholly or partially prevented from performing obligations … because of unforeseeable causes beyond the reasonable control of and without the fault or negligence of the County . . . including but not limited to . . . actions of federal or state agencies …, the County shall be excused from whatever performance is affected … to the extent so affected….”  The court agreed with and granted that portion of the US motion to exclude evidence of the cost of a substitute facility.

Decision available at

La Mirada v. Los Angeles

Court of Appeals of California, Second District, Division Eight, No. B259672, September 9, 2015: Building and occupancy permits void after demolition in excess of permit.

In this mandamus action, demolition, building and occupancy permits issued by the City of Los Angeles were declared void because the entire structure was demolished, contrary to previously issued permits which required preservation of the façade. The city was ordered to re-do the permit process, going back to consideration of revised demolition plans.

The building which was demolished, the so-called 1924 Old Spaghetti Factory (OSF) building, was not designated a historic landmark at the national, state, or local levels but the original project plans recognized that the building had historical value. The plans which the original developer submitted for project permits and variances would preserve the façade of the OSF building and incorporate it into the project. Although the project permits and variances were issued before the recession hit in 2008, the project halted before demolition. It was revived by a new developer in 2011. That developer obtained a City demolition permit to demolish the entire building, including the façade, as recommended or justified by advice from the new developer’s engineer and architect. Thereafter, the whole building was demolished, the City issued a building permit, the developer completed the project, and the City issued occupancy permits.

La Mirada Avenue Neighborhood Association of Hollywood (La Mirada), a group of residents and residential property owners in the City of Los Angeles who advocate for residential quality of life issues in Hollywood, had unsuccessfully challenged the project permits and variances. They now challenged the issuance of the demolition, building and occupancy permits.  After exhausting administrative remedies, La Mirada sought a court order to void all those permits. The trial court largely granted La Mirada’s petition, and this appellate court affirmed the trial court.

One of the pre-demolition project permits was the City’s adopting a zone change ordinance which included a condition (“Q Condition 7″) that, “The use and development of the property shall be in substantial conformance with the plot plan submitted with the application.” That plot plan included demolition preserving the façade. Four or more years later, after the city approved the total demolition permit, when the City approved the building and occupancy permits, the City determined that its issuance of the total demolition permit was in error but despite the total demolition the project substantially conformed to the plot plan.

As a threshold matter, the City and the Developer argued that La Mirada’s claims were moot because the project was complete and the City had already required the developer to seek revisions of the relevant project approvals. The court rejected that, saying a ruling on the petition “has an important practical impact. … The voiding of these certificates and a stay on further ones pending reapproval is not a meaningless act with no practical impact. The residential building and park cannot be occupied without valid certificates of occupancy.”

The central issue was then whether the City abused its discretion in determining that the demolition permit was void but the building permits were validly issued. The court said the appropriate standard is California Code of Civil Procedure section 1094.5, subdivision (b), which “defines ‘abuse of discretion’ to include instances in which the administrative agency ‘has not proceeded in the manner required by law, the order or decision is not supported by the findings, or the findings are not supported by the evidence.’” Under that standard, the court found the City had abused its discretion because after the city zoning administrator ruled the full demolition permit did not comply with Q Condition 7, the zoning administrator determined that the later-issued building permits did substantially conform to Q Condition 7. This, the court said, is where the City’s action “does not proceed in the manner required by law” and so constitutes an abuse of discretion: the City had no discretion to issue permits that violated Q Condition 7 and the zone change ordinance.

Accordingly, the court affirmed the trial court judgment (1) directing the City to void all permits previously granted, including but not limited to demolition and building permits and certificates of occupancy, and (2) directing the City to prepare and process subsequent environmental review before permitting any more changes to the project. The court also awarded costs on appeal to La Mirada.

(Editorial note: while it seems likely the City will accept revised plans to demolish the façade, and therefore re-approve the building and occupancy permits, that may not be the end of the litigation if the rationale for the project permits and variances relied on the preservation of the façade as the basis for allowing those permits.)

Decision available at until Nov. 9, 2015, then at the California appellate courts’ Case Information Search.

The opinion in this case has not been certified for publication or ordered published for purposes of California Rules of Court rule 8.1115, which prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b).