The Conservation Easement Deduction – No Mulligans Allowed

Granting a conservation land easement to a charitable organization or city can be a pretty good deal for taxpayers. Frequently in residential and mixed-use development, the developer will opt to conserve land as “open space” in order to enhance the esthetic appeal of the residential community. Open space might take the form of a park or greenbelt, for example. City council and local governments are known to bar development unless the developer’s specific plan includes some amount of open space acreage. This is a common requirement, particularly in places like Los Angeles and surrounding areas where one can drive for hours without seeing anything green.

If a developer is forbidden from building on some portion of their land, why not donate it and obtain a tax deduction? Of course many do. For example, a taxpayer might purchase 25 acres of land for the purpose of turning it into a public golf course. Unless the taxpayer is a frustrated artist or someone with entirely too much discretionary income, we can safely assume that 99% of the land will remain free of buildings and other structures post-development. In this case, the taxpayer might be able to donate 99% of the land as a conservation easement and receive a substantial income tax deduction as a result.

That is unless of course, they don’t follow-through with the paperwork.

Take RP Golf LLC (“RP”), a company that developed two golf courses in Missouri.[1] RP obtained bank loans to purchase the land. The loans were secured by deeds of trust on the land. A common but (so far) uninteresting finance-paradigm.

In 2003, RP granted a conservation easement to the local county, which would protect the land from any future development. Naturally, RP obtained an appraisal, which determined the value of the land decreased from $17.4 million to $1 million as a result of the donated conservation easement. On its 2003 income tax return, RP claimed a charitable deduction of $16.4 million.

The IRS disallowed the deduction in 2008. RP and the IRS then fought it out in tax court. Last Thursday, the Court issued its final ruling, siding with the IRS in disallowing the deduction.

Simply put, the IRS successfully argued that RP did not qualify for a charitable donation because the banks held interests in the land at the time of the donation by virtue of their security interest, i.e., the deeds of trust, which prohibited transfer without the banks’ consent. The banks provided verbal, but not written permission to grant the easement at the time of the donation. RP found out the hard way that written permission was required.

Even though the banks later agreed in writing to subordinate their interest, the Court held no donation was possible since RP violated the deeds of trust by transferring the easement interest. This violation immediately provided the banks with the power to foreclose on the land, which would have wiped out the easement.

Note the actual interest in land transferred at the time of the attempted donation. That is, RP had the power, but not the contractual right, to grant the easement.

What would have apparently fixed the problem (read: permitted the taxpayer to lawfully take the deduction)? A letter from the lender, signed prior to the donation, agreeing to subordinate its interest and consenting to the easement grant.

Bye-bye $16.4 million donation. No possibility of a mulligan here.


By Michael S. Cooper, Esq., Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] See RP Golf LLC et al., v. Commissioner, case number 27873-08, United States Tax Court