Houston Tax Attorney Blog
Houston Tax Attorney
Tax benefits can cause investors to put money were they otherwise would not. The conservation easement is one example. Conservation easements reward investors with charitable deductions for putting money into projects that conserve real property. The charitable deductions can be very large in relation to the amount invested. The recent Champions Retreat Golf Founders, LLC v. Commissioner, T.C. Memo. 2018-146 case provides an example involving a conservation easement for a private golf course.
The Facts & Procedural History
The golf course acreage was initially owned by a real estate developer. It was transferred to the taxpayer, which was to develop the land into a golf club. The taxpayer raised an initial $13.2 million for construction of the golf club by selling 66 residential lots in a development on the acres, which afforded the new homeowners a lifetime membership to the golf club. The taxpayer also took on debt to build the golf club. The club was completed in three years.
The golf club was not profitable. Thus, the taxpayer’s accountant proposed a charitable easement be used to attract new investors and thereby allow the taxpayer to pay down its construction debt.
After an initial inspection by the North American Land Trust to determine if the acreage qualified, several of the accountant’s other clients invested $2.7 million via a LLC formed to make the investment.
After another inspection by the North American Land Trust, the easement was filed for the property. The easement imposed certain restrictions on the use of the acreage. The North American Land Trust acknowledged the donation.
The taxpayer then reported a $10.4 millon charitable contribution deduction on its partnership tax return and allocated 98.8% of the deduction to the clients who invested the $2.7 million.
The IRS disallowed the full $10.4 million deduction. Litigation ensued.
The Conservation Easement Rules
Conservation easements are a legitimate vehicle for obtaining a charitable deduction. To qualify for the deduction, the charitable deduction rules have to be satisfied.
This includes that the taxpayer make a “qualified conservation contribution.” A qualified conservation contribution is a contribution of:
- a qualified real property interest,
- to a qualified organization,
- that is made exclusively for conservation purposes.
In this case, only the last element was in dispute. The IRS asserted that the taxpayer’s contribution was not exclusively for conservation purposes.
Exclusively for Conservation Purposes
Can the contribution of a private golf course be exclusively for conservation purposes? Given the facts here, the court said that it could not.
While the easement was for land and protected plants and animals, many of which were somewhat high on the endangered watch lists, the court found that none of the plants or animals were significant enough to qualify. This was based on the expert testimony presented to the court and the fact that the plants and animals that may have qualified, would have been limited due to the golf course grass (which was not native to the area) and the impact of the maintenance (including the chemicals used to maintain the golf course) on the plants and animals.
Also, the court noted that the golf course was not accessible to the public, as it was behind a locked and guarded gate only accessible by members, such that it was not “for the scenic enjoyment of the general public.”
Review Existing Conservation Easement Structures
Given the size of the deductions in comparison to the investments, these deductions can easily be the largest items on the individual investor’s tax returns. The holding may call into question similar conservation easements. Taxpayers who reported the benefits of charitable contributions via conservation easements should revisit the viability of their deductions in light of this court case.