Tax Court reversed on conservation easement case


Authored by RSM US LLP

An appellate court recently reversed a Tax Court opinion that a donor’s reserved rights to build residential units on a donated property did not satisfy the granted in perpetuity requirement of the conservation easement deduction rules. The Eleventh Circuit also affirmed and remanded two other issues in Pine Mountain Preserve LLLP v. Commissioner, No. 19-11795 (11th Cir. 2020).


Pine Mountain Preserve LLLP (Pine Mountain) granted conservation easements to the North American Land Trust (NALT) covering large parcels of land in 2005, 2006 and 2007. Under the terms of the easements, Pine Mountain forfeits its right to develop the land and gives private contractual rights to NALT to police its use of the property. The easements grant NALT with a “‘perpetual easement in gross’ over a specified conservation area ‘for the purpose of preserving and protecting’ defined ‘conservation purposes.’” Each easement also contains a declaration of covenants and restrictions outlining Pine Mountain’s promises not to develop, subject to some agreed upon exceptions, the conservation areas for commercial or residential use. In each easement, Pine Mountain retains certain “reserved rights” allowing it to build certain specified structures on the land. On the 2005 and 2006 properties, Pine Mountain reserved the right to build single-family structures on certain lots designated as building areas. The 2005 easement clearly defined the building areas while the 2006 easement instead gives NALT the right to approve in advance where Pine Mountain places the building areas. The building areas can be modified so long as the building area’s total acreage remains unchanged and so long as NALT concludes that the modification does not cause adverse effect to the conservation purposes. Other reserved rights are all also subject to NALT’s approval. The 2007 easement does not allow for single-family residences but instead reserves the right for Pine Mountain to construct a water tower on a site subject to NALT’s approval. Finally, each easement also provides that the parties may bilaterally amend the easement’s terms, so long as the changes are not inconsistent with the easement’s conservation purposes.  

For each year at issue, Pine Mountain claimed tax deductions for the easements under section 170, which the IRS disallowed in their entirety. Pine Mountain filed a petition with the Tax Court challenging the disallowances of the deductions. The Tax Court held that the reserved rights to build residential and other units in the 2005 and 2006 grants disqualified the conservation easements from being granted in perpetuity within the meaning of section 170(h)(2)(C). However, the Tax Court held that the reserved right to build a water tower in the 2007 grant did not disqualify the conservation easement from being granted in perpetuity nor did the clause allowing the parties bilaterally amend the easement’s terms violate the protected in perpetuity requirement of section 170(h)(5)(A). Upon deciding that the 2007 grant constituted a valid conservation easement, the Tax Court determined the value of the grant by splitting the valuation of each party. At the appellate court, Pine Mountain appealed the decision that the 2005 and 2006 easements failed the granted in perpetuity requirement of section 170(h)(2)(C) and the IRS cross appealed the decision that the 2007 easement complied with the protected in perpetuity requirement of section 170(h)(5)(A) and with the court’s valuation of the 2007 easement. 

Court analysis

Section 170 allows a tax deduction for charitable contributions and gifts of interests in real property. Generally, conveyances of partial interests in property are not deductible, however section 170(f)(3)(B)(iii) permits a deduction for a qualified conservation contribution of less than an entire interest in a parcel. To qualify as a qualified conservation contribution, section 170(h)(1) requires that the grant must be 1) of a qualified real property interest, 2) to a qualified organization and 3) exclusively for conservation purposes. 

The Eleventh Circuit limited its finding to whether the grants were of qualified real property interests and were exclusively for conservation purposes as both parties agreed the NALT satisfied the qualified organization requirement. A qualified real property interest is defined under section 170(h)(2) to include a restriction, granted in perpetuity, on the use which may be made of the real property. Under section 170(h)(5)(A), in order for the grant to be exclusively for conservation purposes, the conservation purpose must be protected in perpetuity. Therefore, in order to meet the conservation easement rules the grant must be granted in perpetuity and protected in perpetuity.

Granted in perpetuity

The Tax Court determined that the easement’s reservation of rights to Pine Mountain to build a limited number of residential homes and other structures meant that the easements no longer qualified as restrictions, in perpetuity, on the use of the land. The appellate court disagreed, finding that “a broad limitation on the use of the property that applies to the parcel as a whole satisfies the statutory test, even if within that parcel there exist certain narrow exceptions to that limitation.” Further, the court distinguished Pine Mountain’s facts from that of Belk v. C.I.R., 774 F.3d 221 (4th Cir. 2014) (where a landowner reserved the right to substitute different areas of land for those in the conservation area) and likened them more to the facts in BC Ranch II v. C.I.R., 867 F.3d 547 (5th Cir. 2017). In BC Ranch, the landowners granted conservation easements to a land trust but reserved rights to build homesites on select five-acre plots, subject to the trust’s consent. The Fifth Circuit held that the easements satisfied the granted-in-perpetuity requirement because “[o]nly discrete five-acre residential parcels, entirely within the exterior boundaries of the easement property,” could be moved within the conservation area.” Id. at 553. The Eleventh Circuit agreed with this finding and determined that an easement granted in perpetuity over a defined conservation area satisfies the section 170(h)(2)(C) requirement, regardless of a reservation of rights to build homesites. 

Protected in perpetuity

The Eleventh Circuit affirmed the Tax Court’s decision that the 2007 easement was protected in perpetuity under section 170(h)(5)(A). In doing so, both courts dismissed the IRS’s argument that the provision allowing for the right to have mutual amendments made to the easement violates the protected in perpetuity requirement. The court concludes that parties to a bilateral contract can always agree to amend their agreement, whether or not expressly reserved and the reservation of such right does not violate the protected in perpetuity requirement. Although this issue needs to be decided for the 2005 and 2006 easements on remand to the Tax Court, the Eleventh Circuit assumes the same logic will be applied. 

WNT takeaways

The Eleventh Circuits reversal of the Tax Court’s “swiss cheese” approach to determining that certain zones cannot be carved out of a conservation zone and still satisfy the granted in perpetuity rules provides taxpayers with an avenue for conveying conservation easements with limited rights retained. The Pine Mountain decision is likely just the first of many to come as there is a barrage of litigation surrounding this area waiting to be heard. It is important to distinguish that this case does not relate to the syndicated conservation easement structures that the IRS considers listed transactions. Taxpayers who are making grants of conservation easements should consult with their tax advisors to ensure they are meeting the appropriate requirements to satisfy the charitable contribution rules.