If you sincerely wish to have property that you own forever shielded from development, the donation of a conservation easement is as close as you can come to free lunch . Besides getting another party involved to see that your conservation goal is followed through on and your kids don't turn your beloved wood lot into the site of a Walmart Supercenter, you get an immediate income tax deduction and possibly a break on your property tax, while continuing to own and use the property. You are getting goodies for refraining from doing something you didn't want to do anyway.
As it turns out the goodies are so good, that some people have been going after them without wholeheartedly embracing conservation goals. This has led to a significant amount of litigation. The most recent conservation easement case, I have noted, is the Tax Court decision in the case of Balsam Mountain Investments LLC. I'm not convinced that the IRS was actually attacking an abuse here, but I can't say I am wholeheartedly rooting for the taxpayer either. Here is the story and maybe some of you can tell me what you think.
An Easement With A Bit Of Wiggle Room
BMI donated a conservation easement to North American Land Trust, The easement protected a 22 acre parcel. There was a wrinkle though. The taxpayer reserved the right to kind of redraw the map, but only just a little bit. BMI could carve as much as 5% out of the protected property within five years of the easement grant. The carved out property had to be replaced with property that was of equal value and contiguous to the original parcel. I'm trying to visualize this and being a little geeky I'm imagining a chess board. The conservation easement covers the whole board except for the last two rows where all the black pieces are. BMI decides that they would like to do something with the squares where the white king and queen are. So they change the conservation easement to free up those two squares and have it extend over all the black pawns.
Anyway the Tax Court ruled that the tweaking right blew the whole deduction. They cited last year's decision int the case of BV Belk. The Belk easement had much more flexibility in it, but even the tiny bit of wiggle room allowed by the BMI easement was enough to eliminate the certainty required in a qualified easement.
We hold that the easement is not a “qualified real property interest” of the type described in section 170(h)(2)(C). Belk v. Commissioner held that a conservation easement is not a “qualified real property interest” of the type described in section 170(h)(2)(C) if the easement agreement permits the grantor to change what property is subject to the easement. This is because an interest in real property is a “qualified real property interest” of the type described in section 170(h)(2)(C) only if it is an interest in an identifiable, specific piece of real property. The easement granted by Balsam Investments permitted it to change the boundaries of the “Conservation Area”. Therefore, the easement is not an interest in an identifiable, specific piece of real property. Under Belk, the easement is not a “qualified real property interest” of the type described in section 170(h)(2)(C). (References omitted)
According to the narrative in the case, the notice of final partnership administrative adjustment had gone out in 2011 on this 2003 deduction. The partnership had dissolved in 2006, which must have made litigating this interesting. I had a sense that the story behind the story might be even more interesting.
Andie MacDowell Has A Place There
The underlying property in this case is part of Balsam Mountain Preserve. Here is Andie MacDowell enthusing about her place there.
Balsam Mountain Preserve counts itself the lowest density private club community in western North Carolina. Of the 4,400 acres in the community, 3,400 are in permanent conservation easement with North American Land Trust holding the easement. There is also The Balsam Mountain Trust that is dedicated to the stewardship of the preserved land. The architecturally distinctive homes in the preserve currently for sale range from $850,000 to $2,800,000. Available homesites range from $150,000 to $460,000.
Real Estate Woes
BMI is no longer involved in the preserve. There was some real estate drama that caused the project to change hands. Becky Johnson of the Smoky Mountain News wrote about some of those developments.
In order to connect the dots between the 2003 transaction and the current Balsam Mountain Preserve, I contacted North American Land Trust. I heard back from NALT's lawyer George Asimos of Saul Ewing LLP. The 22 acres easement was part of a 28 acre parcel that BMI acquired after it already owned the bulk of the land that became Balsam Mountain Preserve. The 5% play was meant to allow additional flexibility in the placement of the homesite that would be going there.
The IRS also challenged the valuation of the overall conservation easement. A different entity, BMP Development LP, with the same tax matters partner settled with the IRS in 2012. $8,000,000 was allowed of a claimed deduction of $55,495,000 with neither the 40% or 20% penalties being assessed.
Conservation Easements Are Good For Everybody?
Mr. Asimos had me really charged up about what a good thing this whole deal is. Remember even though it is a private deal there in North Carolina, the very low density provides habitat for the birds and the other critters. Who knows? Maybe some of the little birds on my deck who peck at the sunflower seeds when the squirrels are done eating at the squirrel proof bird feeder stopped in on Andie MacDowell on their way to Massachusetts.
Issues
Still there are a couple of things that bother me. One is the notion of developers buying property and then getting an easement deduction not that long afterwards. In principle,capitalism would seem to indicate that you should not be able to make that work very often. A few weeks ago, though, some financial planners called me up to ask for my thoughts on a group that was essentially syndicating easement deductions. They would buy property, hold it for a year and then take a big conservation easement deduction. In order for that to work, they would have to be buying property from people for substantially less than it's fair market value or kind of fibbing about the value of the easement. A business plan based on fooling all of the people all of the time probably is not that great an idea.
In its explanation of the advantage of conservation easements, North American Land Trust makes this observation.
Instead of doing five hundred lots over a fifteen-year period, the developer is able to sell large parcels designed as conservation plans with tax incentives, to future homestead buyers by explaining the benefits and the unique nature of the community. Such conservation plans are often approved quickly with less infrastructure costs. The time value of money and the reduction of risk capital are important considerations to such professionals.
There is a general principle that density increase value, but if a developer can get in and get out more quickly with less risk, then there might be an argument in some cases that a deal like Balsam Mountain Preserve is the highest and best use. In which case, there should not be a charitable deduction for the easements, which actually enhance the value of the retained land.
I really hate to tinker with the Code, but it seems like a charitable contribution for a conservation easement should require a much longer holding period than a year.
Who Monitors Easements?
Then there is the issue of how the continued monitoring of conservation easements will be funded. North American Land Trust, according to its most recent (2013) Form 990 has 406 conservation easements covering nearly 90,000 acres. NALT spent $182,870 monitoring, inspecting and enforcing easements in 2013. It has just over $450,000 in investments on its balance sheet. If revenue associated with the receipt of new easements were to slow down, are the resources there to continue monitoring the existing ones? I think you could ask this question about any of the organizations that are the recipients of these easements. Quis custodiet ipsos custodes?
If This Goes On
Finally, there is this reaction from perhaps reading too much post apocalyptic dystopian science fiction. If we view tax incentives as public resources do we really want to encourage conservation by creating eco-paradises for the pretty rich and kind of famous? Wouldn't it be better to have some really dense housing and total wilderness? Do developments like Balsam Mountain Preserve really need tax incentives to make them viable?
Will There Be An Appeal?
Back to the tax issues, Mr. Asimos does not know whether the case will be appealed. I suspect the fact that the entity that took the deduction is dissolved must complicate things. Mr. Asimos seems to think that there could have been more briefs filed. The decision may be important for the movement, since the amount of flexibility in the easement was not that great. I asked him if organizations like NALT might file amicus briefs if there is an appeal and he indicated that it was possible. One thing that crossed my mind is that possibly the taxpayers should be allowed a deduction in 2008 when by the terms of the easement the boundaries became fixed.
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