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Sixth Circuit Rejects IRS Attempt to Limit Conservation Easement Deduction
Posted in Tax and Finance

A conservation easement can be a significant estate planning tool for those individuals who have some conservation interests. Essentially, a conservation easement is a legal restriction placed on your land that limits the types of activities allowed. This easement is permanent, and will bind all future owners. A landowner will still have use of the land, so long as the landowner complies with the restrictions set forth in the easement.

There are several potential tax advantages of donating a conservation easement:

  • a taxpayer can claim a federal income tax deduction for the value of the easement; 
  • the value of the easement can then be subtracted from a decedent’s estate for federal estate tax purposes; 
  • heirs of a landowner who donate a conservation easement can receive an additional estate tax exclusion of up to 40% of the remaining taxable value of the land; and
  • in some localities, local real estate taxes may be reduced.

In addition to the favorable tax treatment, a conservation easement will preserve the natural state of your land for all future owners, by eliminating development on your land.

The IRS has realized the significant advantages of the conservation easement, and has occasionally challenged

conservation easement deductions. For instance, in Glass v. Commissioner, the taxpayer granted two conservation easements on land totaling 10 acres on the shore of Lake Michigan. The taxpayers claimed a total charitable deduction of $340,800. The property in question was a habitat for several types of birds and plants such as bald eagles, kingfishers, Lake Huron tansy and pitcher’s thistle. The conservation easement provided that the purpose “is to ensure that the scenic and natural resource values of the property will be retained forever.” The easement precluded any use of the property inconsistent with the easement’s purpose.

In order for a taxpayer to deduct an easement, the easement must be a contribution of a qualified real property interest, to a qualified organization and used exclusively for conservation purposes. In general, the IRS claimed that the portion of the property covered by the conservation easement was too small, and was not exclusively used for conservation purposes. Over stringent objections by the IRS, the Tax Court concluded that the conservation easements were qualified conservation contributions because they protected a relatively natural habitat of plants or wildlife, and the land owner or any subsequent easement holder was required to hold the land exclusively for easement purposes. The Sixth Circuit Court of Appeals affirmed the Tax Court’s decision holding that the terms of the easement “do not allow [t]axpayers to use their retained rights in the encumbered property in a way that undermines the Easement’s conservation purpose of protecting a threatened natural habitat of wildlife and plants in perpetuity.”

Many estate planning professionals are wondering why the IRS pursued this case so aggressively since the facts of the case plainly show that the easement was a qualified conservation easement under the Internal Revenue (Code). Furthermore, the IRS made several illogical arguments in its attempt to preclude the easement deduction. For instance, the IRS argued that the easement “failed to restrict the building rights of neighboring property owners.” Clearly, a taxpayer cannot limit the building on property that he or she does not own. Adoption of this type of restriction would preclude any conservation easement donations. The IRS also argued that the conservation easement was too small, although the Code and its regulations do not require a minimum size for a conservation easement. Further, the IRS could not introduce any evidence to show that the plants and/or wildlife could not exist on the 10 acre easement. Lastly, the IRS argued that the taxpayer had to prove that the species were living on the property at the time of the donation. The court held otherwise, and stated that there the taxpayer must only show favorable habitat or community.

Although the Sixth Circuit ultimately ruled in favor of the taxpayer, this case is evidence that the IRS is pursuing some conservation easement deductions. However, do not let the IRS scare you out of donating a conservation easement on your land. With the right strategy, a conservation easement can preserve the beauty of your land for many future generations and, as an added bonus, save you or your family a significant amount of tax liability.

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...



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