Golf Courses and Conservation Easements
By Steven Miller, alliantgroup National Director of Tax and former IRS Acting Commissioner
The government has won the most recent skirmish in the ongoing battle between the IRS and taxpayers relating to the parameters of what can be claimed as a charitable deduction for a contribution of a conservation easement. The U.S. Tax Court ruled for the IRS in disallowing a charitable contribution deduction associated with a conservation easement on a golf course. In the case, Atkinson, et al., v. Commissioner, T.C. Memo. 2015-236, the taxpayers claimed deductions totaling almost $8 million, plus expenses, for its 2003 and 2005 tax years. The deductions were associated with two separate conveyances of conservation easements on two North Carolina golf courses within a single development. In its decision, the court addressed the “conservation purpose” of the conveyances. While valuation was also challenged by the IRS, the court’s decision to disallow rested on the ineligibility of the deduction, making the arguments about valuation unnecessary.
Relevant Laws and Regulations
The Internal Revenue Code allows a charitable deduction for an easement conveyed on property in certain circumstances that serve a conservation purpose, including the preservation of land areas for outdoor recreation by, or for the education of, the general public; the protection of a relatively natural habitat of fish, wildlife or plants, or similar ecosystem; the preservation of open space; or the preservation of an historically important land area or a certified historic structure. The easement deeds for the 2003 and 2005 donations were very similar, stating that the conservation purpose is to preserve the area as a “relatively natural habitat of fish, wildlife or plants” and to preserve “open space.”
2003 Easement
The 2003 easement involved 79 acres conveyed to the North American Land Trust (NALT), consisting of the area in and around a golf course. The property is made up of fairways, greens, teeing grounds, driving ranges, rough, ponds and wetland areas. Tees, bunkers, fairways and greens make up more than 19 percent of the property; wetlands make up only 5 percent. The region where the golf course is located was identified as a biodiversity hotspot by The Nature Conservancy. During a NALT inspection, the biologist identified fish crows, great blue herons, American kestrel, southern leopard frogs and Venus flytraps on the property. The golf superintendent also mentioned that an American alligator was occasionally spotted on the course, but it was not confirmed by the NALT biologist. In addition to these species, the most significant ecological feature of the easement property is the longleaf pine.
2005 Easement
The 2005 easement involved 91 acres conveyed to NALT and also consists of the areas in and around a golf course. In the 2005 easement, wetlands made up 37 percent of the property, while tees, bunkers, fairways and greens made up around 17 percent. The area in which this easement is located was also once dominated by longleaf pine forests. Species that were found on the property include the Venus flytrap, the American alligator, the eastern fox squirrel, shortleaf yellow-eyed grass, yellow pitcher plants and purple pitcher plants. The NALT report also stated that there were no sites where animals build their dens on the property.
Other Relevant Facts
In both instances, the deeds allow the land owners to operate a golf course, make alterations and engage in certain construction activities. Owners could make alterations “in such manner as owner determines to be appropriate” as long as it meets the best environmental practices in the golf industry. The deeds specifically allow for construction of rain shelters, rest stations, food concession stands, and other structures and for maintenance of turf grass and other vegetation as the owner determines to be appropriate. The deeds also allow for the cutting and removal of trees that are on the golf course or within 30 feet of the golf course.
The Ruling
The IRS disagreed with the taxpayers on the propriety of the charitable deductions and the case ended up in Tax Court. In addressing whether the easements preserve a “relatively natural habitat of fish, wildlife or plants” the court also disagreed with the taxpayers. In getting to its conclusion for each of the easements, the court decided that the property is not a relatively natural habitat, preventing the easements from satisfying the conservation purpose requirement. The court referenced all the changes made to the natural state of the land to create the golf courses in explaining the reasoning for the decision. The court stated that “fairways, tee boxes and greens … are sodded or planted with 419 Bermuda and Tidwarf, which are nonnative grasses and consequently do not provide a relatively natural habitat for the pitcher plants and Venus flytraps.”
Additionally, the deeds’ lack of protection for the longleaf pine trees appears to have been a big factor. This was significant to the court because a large portion of the longleaf pines that actually remain on each of the easement properties could be removed under the provisions of the deeds. This means that the court found that the easements didn’t provide protection for the most significant ecological feature of the properties. Additionally, the court found that the use of pesticides, insecticides, fungicides, herbicides and fertilizers not only does not preserve the natural habitat, but actually “injures or destroys” the habitat.
For the two easements, the court also addressed whether the easements preserve open space or whether they played a contributory role to a significant habitat. In regards to open space, the court stated that the taxpayers did not produce any credible evidence to show that the conservation purpose for either easement was met. Additionally, both of the easement properties are part of a gated community that is not open to the general public and there are not sufficient amounts of the easement property visible to the public. When discussing the contributory role of the properties, in addition to the nonnative conditions of the properties, the court focused on “barriers to animal migration such as the surrounding homes, human activity and nightly watering.”
Further Judicial Ramifications
Even though the deduction was lost to the taxpayers, they did succeed in abating the penalties imposed by the IRS. The IRS had assessed a 20 percent accuracy-related penalty under Internal Revenue Code section 6662, but the taxpayers successfully asserted the reasonable cause defense. The taxpayers showed that the claimed value of the properties was based on a “qualified appraisal” by a “qualified appraiser” and “that the taxpayer made a good-faith investigation of the value of the property.”
While these particular golf course easements did not qualify for the deduction, the court refused to opine on whether operating a golf course was inherently inconsistent with any conservation purpose. This is not the first time the court has seen a similar issue. In Kiva Dunes Conservation, LLC v. Commissioner, T.C. Memo. 2009-145, the court did not decide whether operating a golf course was inconsistent with the conservation purpose because the commissioner had already conceded the issue, and only addressed the valuation issue in that case. Thus, the door remains open for land owners and developers of golf courses with appropriate facts and circumstances to claim a charitable contribution deduction for conveyance of a conservation easement.
Conservation and façade easements have been in the crosshairs with respect to the IRS since I led the Service’s efforts in this area in 2005, and they remain a contentious and highly litigated issue. Since the beginning of 2014, there have been 19 cases heard in United State Tax or federal district court.
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