Conservation Easements: Tax Shelters or Lifesavers

by Taylor English Duma LLP

In the Fifth Edition of “Simple Wealth, Inevitable Wealth” by Nick Murray, the author advises against making investment decisions based primarily on taxes. That is probably good advice when considering conservation easements.

Conservation easements, done properly, are wonderful and legal. They protect land, water, air, and nature. Many times, they provide the open space scientists say is needed to maintain our mental health. Many scientists even believe that golf courses in urban areas serve an important conservation purpose. However, certain types of conservation easements are under attack as inappropriate tax shelters. So, although conservation easements can be beneficial to the environment and the donor’s tax bill, they can be risky.

A conservation easement is a restriction on property that lasts for infinity. Generally that restriction prohibits the owner from developing the entire parcel or at least a portion of it, and the donor gets a charitable deduction for the decline in value as a result. Moreover, the restriction must be for a charitable purpose such as protecting a relatively natural habitat, or providing open space for the benefit of the public, or providing land for public recreation.

While the administrative requirements for compliance with 26 U.S.C. §170 are numerous, the two most frequent reasons disqualifying an easement are lack of conservation purpose and overstatement of value. In selecting a conservation easement, the taxpayer should be comfortable with the qualifications and reputation of both the environmentalist assessing the conservation purpose of the easement as well as the appraiser valuing the easement for purposes of the charitable contribution deduction. The investor should always make an independent investigation; interview the biologist and appraisers involved; review their reports; kick the tires. In other words, invest wisely.

Natural Habitats

The IRS routinely attacks conservation easements that are based on the “relatively natural habitat” prong of the regulations. The “donation of a qualified real property interest to protect a significant relatively natural habitat in which fish, wildlife, or plant community, or similar ecosystem normally lives” meets the conservation purposes test. [i]A significant habitat is defined as including, “habitats for rare, endangered, or threatened species of animals, fish, or plants.” [ii] Thus habitats for rare, endangered, or threatened animals, fish, or plants are deemed significant under the regulations. [iii] “The fact that the habitat or environment has been altered to some extent by human activity will not result in a deduction being denied . . . if the fish, wildlife, or plants continue to exist there in a relatively natural state.” [iv]

“Rare, endangered, or threatened,” species are not defined under 26 U.S.C. §170. The IRS seeks to limit the phrase to just those species listed as threatened or endangered under the Endangered Species Act of 1973 (the “Act”).[v] But being listed under the Act is a long, cumbersome, and political process, and many species needing protection are not listed or protected by the Act. The Act confirms in §5 that the federal government intends to protect more species than just listed species. Under that section, the federal government is authorized to purchase lands, “to conserve fish, wildlife, and plants, including those which are listed as endangered species or threatened species pursuant to the Act.” [vi]

Since the Act envisions federal protection for more than just listed species, so should IRC §170, particularly since Congress chose not to limit the definition of rare, endangered or threatened species to listed species under the Act. Because the federal government does not have the resources to purchase enough land to protect species of concern, Congress incentivized private citizens in IRC §170 to donate land to help conserve relatively natural habitats for species that conservation biologists and conservation groups recognize as rare, threatened or endangered whether or not they have been listed under the Act.

Endangered and Threatened Species

The U.S. Fish and Wildlife Service (“USFWS”) maintains the endangered and threatened species list under the Act, as well as the proposed species list and the candidate species list. The Natural Heritage Program that operates under the umbrella organization called “NatureServe,” also tracks species of conservation concern and high priority habitats. NatureServe has developed a global ranking system classifying species from G-1 through G-5. A rank of G-1 means the species is critically imperiled. A rank of G-2 means the species is imperiled, i.e. only 20 known occurrences in the world. A rank of G-3 means the species is vulnerable, i.e. only 80 known occurrences in the world.

Conservationists are particularly concerned about G-1 through G-3 species. However, conservation biologists might also be concerned about a G-4 or G-5 species if the species is experiencing a decline across its range. More problematic is that the rankings are sometimes outdated or inaccurate. For instance, even though Botanists know the Venus Flytrap is well on its way to extinction, it is still listed as a G-3 species.[vii]

The Conundrum

To have conservation value for tax purposes, the property must be desirable for development. The issue is once the property is desirable for development, because development is closing in, the naysayers such as the IRS say it is not worthy of conserving because it is too small an area to conserve.

Consider conservation easements on golf courses. A Brookings Institute study from May 2017 opined, “When private charities and federal and state elected officials allocate spending to purchase or conserve land, they do not spend the vast majority of their resources to preserve golf courses, suburban subdivisions, real estate developments, or vacation homes. The disparity in where the money goes suggest that the tax expenditure is not flowing to preserve properties with high conservation value.” [viii]

Interestingly, the Brookings Institute article did not cite any conservation biologists. So what do scientists say? Many scientists have written about the value of golf courses to conservation. For example, Dr. Patrick Jodice, an employee of the U.S. Geological Survey, has studied fox squirrels and their urban habitats. According to Dr. Jodice, the fox squirrel population is declining throughout much of the southeast but they are often observed on golf courses. In one article dealing with the Fox Squirrel in South Carolina, Dr. Jodice confirmed, “The role of golf courses in wildlife conservation has become increasingly important in areas where development is prevalent, where native habitats are declining and becoming fragmented and where golf courses represent some of the largest track of remaining open space.” Other scientists are studying the incidents of the declining red-headed woodpecker on golf courses in Ohio.[ix] Yet others are studying the incidents of wood storks, cormorants, herons, and egrets on golf courses in Southwest Florida.[x]

Tax Court Realities

Sometimes, the courts may not be apprised of relevant studies related to the conservation benefits of golf courses. This can result in a ruling that does more harm than good. For example, in Atkinson v. Commissioner, TC Memo 2015-236, the Court held that the Venus Flytrap was not “designated threatened or endangered;” therefore, the habitat did not meet the definition of a relatively natural habitat under the regulations. The Court can only render a decision based on the facts and evidence before it.

A second golf course case is now pending before the Tax Court. The conservation purposes at issue in this case are “relatively natural habitat” for the fox squirrel and open space. In this case, the Court was made aware of the scientific research supporting the notion that golf courses can enhance conservation. This supports the argument that while the government spends its money on large swaths of open space for conservation, Congress has incentivized developers to handle the smaller projects to provide urban oases to species with scant alternative habitat options. Time will tell whether the Tax Court agrees.

[i] Treas. Reg. 1.170A-14(d)(3)(i).
[ii] Treas. Reg. 1.170A-14(d)(3)(ii).
[iii] Glass v. Commissioner, 98 AFTR 2d 2006-8309.
[iv] Treas. Reg. §1.170A-14(d)(3)(i).
[v] 16 U.S.C. §§ 1531-1544 (1973).
[vi] 16 U.S.C. § 1534(a)(emphasis added).
[vii] See testimony of Respondent’s expert witness in United States Tax Court docket number 004868-15, Champions Retreat Golf Founders, LLC v. Commissioner. Respondent’s expert is petitioning to have the Venus Flytrap, a G-3 species placed on the Threatened and Endangered Species list.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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