Tax Court Deals Another Blow to Conservation Easements

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On June 24, 2013, the U.S. Tax Court disallowed a couple’s deduction for the donation of a conservation easement on the façade of a building to the National Architectural Trust, a qualified charitable organization. The court found that the donation was not deductible because it was a conditional gift. The central fact in the case was that the couple and the Trust had executed a side agreement that provided that the Trust would remove the easement from the property if the IRS disallowed the deduction. Finding that the risk of disallowance was not “remote” under the Regulations in light of the IRS’s increased scrutiny of conservation easement deductions, the court held the donation to be conditional and thus ineligible for a tax deduction.

“This ruling is not a surprise in light of similar outcomes in the estate and gift arena,” said Jim Mastracchio, Co-Chair of BakerHostetler’s Tax Controversy Practice. Jeff Erney, Co-Chair of BakerHostetler’s Tax Controversy Practice, added, “People who are considering donating a conservation easement need to seek counsel with substantial experience in this area. This is doubly true for people who have received a notice of disallowance of their conservation easement deductions.”