Conservation Easements: Is it “In Perpetuity” or “Close Enough”?
Bethany Davenport, Staff Editor[1]
Since 1980, conservation easements have been allowed as a tax-deductible donation as long as they were granted “in perpetuity.”[2] 26 U.S.C. § 170(h) has “in perpetuity” as a provision to protect the purpose of the conservation easement.[3] The statute states, “[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.”[4] Although a seemingly straightforward phrase, the words “in perpetuity” have earned a new spotlight in interpreting tax code.On August 11, 2017, the Fifth Circuit, in BC Ranch II, L.P. v. Comm’r, decided that a conservation easement which allowed for the prospect of a future change in a conservation easement did not violate the term “in perpetuity,” and therefore was allowable for tax deduction purposes.[5] Specifically, the conservation easement at issue reserved a right to the grantors, Bosque Canyon Ranch II, L.P. and BC Ranch I, Inc., to change the location of designated home site parcels. The Fifth Circuit held that such a reserved right did not violate the purpose of the conservation easement since the grantee, North American Land Trust (NALT), would have to agree to the change, that the change would not violate the purpose of the conservation easement, and that the size of the conservation easement would not change.[6]The decision in BC Ranch II has caused a circuit split. In 2015, the Ninth Circuit, in Minnick v. Comm’r, considered the tax consequences of a conservation easement in which a mortgage lender’s interest in a piece of property was not subordinate to the interest of the recipient of a conservation easement.[7] The Ninth Circuit held that the conservation easement was not eligible for a tax deduction.[8] Minnick was pointed to in the dissent of BC Ranch II.[9] Even though there is a specific treasury regulation that mentions the disallowance of a tax deduction when a mortgage is not subordinate to the purpose of the conservation easement,[10] the logic of this decision should have been applied in BC Ranch II. If the conservation easement allows for a change in the future that could disrupt the conservation purpose, then it should not be allowed.The Fifth Circuit argued that since NALT must agree to a change in the location of a home site parcel and since the change cannot negatively affect the conservation purpose, these requirements should be sufficient to allow for the deduction.[11] This reasoning seems like it could easily lead to fraudulent gifts of conservation easements. In other words, a conservation easement could easily be given even though the grantor did not have the intent of the conservation easement existing on “in perpetuity.” Once conservation restrictions have been applied to a piece of real property, the value of the conservation easement is taken from the decrease in value on a piece of real property.[12] The appraised value of a deduction for a conservation easement is assessed when the piece of property is donated.[13] Changing a location of a restricted area on a piece of property could change the appraisal value of a tax deduction, even if it does not necessarily alter the conservation purpose. The current code on conservations easements does not allow for future changes in appraised value.[14]Since 2000, the acres of land held by conservation easements has grown from 24 million[15] to 56 million in 2015[16], a 125% increase. This fact lends support to the assertion that “in perpetuity” needs a firm interpretation either in the form of a regulation, or from a ruling by the Supreme Court. A firm interpretation of the phrase “in perpetuity” would halt further confusion on what the phrase really means, and thereby decrease the necessity of future cases.[1] J.D. Expected May 2019.[2] 26 U.S.C. § 170 (h)(5)(A) (Supp. IV 1980).[3] 26 U.S.C. § 170 (h)(5)(A) (2012).[4] Id.[5] BC Ranch II, L.P. v. Comm’r, 867 F.3d 547, 554 (5th Cir. 2017).[6] Id. at 552.[7] Minnick v. Comm’r, 796 F.3d 1156, 1160 (9th Cir. 2015).[8] Id.[9] BC Ranch, 867 F.3d at 561.[10] Minnick, 796 F.3d at 1160.[11] BC Ranch II, L.P. v. Comm’r, 867 F.3d 547, 554 (5th Cir. 2017).[12] 26 C.F.R. § 1.170A-1 (2017).[13] See id. [14] 26 U.S.C. § 170(h) (2012).[15] Zachary Bray, Reconciling Development and Natural Beauty: The Promise and Dilemma of Conservation Easements, 34 Harv. Envtl. L. Rev. 119, 124 (2010).[16] 2015 National Land Trust Census Report 3, Land Trust Alliance (2016), http://www.landtrustalliance.org/about/national-land-trust-census.*Featured image by , licensed under CC BY 2.0