Academic journal article Journal of Accountancy

Conservation Easements Are Deductible despite Reimbursement Provision

Academic journal article Journal of Accountancy

Conservation Easements Are Deductible despite Reimbursement Provision

Article excerpt

The Tax Court upheld charitable donations of conservation easements in a bargain sale, despite a requirement that, in the event of a later disposal of the property and extinguishment of the easements, the donee organization use the proceeds to reimburse the government agencies that funded the purchase. The court determined that the reimbursement provision did not violate the perpetuity requirement of Regs. Sec. 1.170A-14(g) because the donee organization was entitled to an amount at least equal to its proportionate share of the proceeds from any disposition of the properties.

Irby Ranches LLC operated a family-owned cattle ranch in Colorado. In 2003 and 2004, Irby Ranches conveyed conservation easements encumbering two parcels of land to Colorado Open Lands (COL), a qualified charitable organization, m bargain sale transactions. The purchase portion of the transactions was funded with grants from three government agencies. The appraiser hired by COL and the Irbys determined that the easements were worth 60% of one tract's unencumbered value and 63% of the other's. Under the terms of the conveyance, COL was entitled to that share of any proceeds should the properties ever be disposed. A reimbursement provision, however, obligated COL to remit most of the proceeds from a disposition to the government agencies as repayment for their funding, leaving COL with 25% of the proceeds.

The IRS disallowed the charitable contribution deduction, arguing that because of the reimbursement provision, the conservation purpose of the easements was not protected in perpetuity. It further contended that the appraisal report was not qualified because it did not state that it had been prepared for income tax purposes. Last, it asserted that Irby Ranches had not obtained contemporaneous written acknowledgment from COL of the contribution, as required by statute.

Generally, a charitable contribution deduction is not permitted for a contribution of less than a donor's entire interest in property. Sec. 170(f)(3)(B)(iii) provides an exception for a qualified conservation contribution, which must be a qualified real property interest given to a qualified donee organization exclusively for conservation purposes. Regs. Sec. 1.170A-14(g) further requires that the donee organization's interest must be protected in perpetuity from use inconsistent with the conservation purposes of the donation. …

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