They took all the trees
Put em in a tree museum
And they charged the people
A dollar and a half just to see emDont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
Joni Mitchell, Big Yellow Taxi
In his swan song opinion for the Tax Court, Chief Judge Joel Gerber sided with the IRS, sending a strong message to those seeking a little green from conservation easements: The green in question must add to the quality of the environment rather than just to the bulge in your wallet....
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The case--James D. Turner, 126 T.C. No. 16 (May 16, 2006), involved property adjacent to George Washington’s home at Mount Vernon, Virginia. No doubt the case will serve as grist to the rumor mill that the IRS is cracking down on taxpayers who claim inappropriate deductions for donations of conservation easements. Interestingly, Judge Gerber decided the case on definitional grounds rather than on whether the valuation was correct. Unfortunately for Mr. Turner, that turned the decision into an “all or nothing” decision. Even worse for Mr. Turner, the transaction carried with it a net tax cost because Judge Gerber also assessed an accuracy-related penalty under Section 6664 of the Internal Revenue Code. That may be the real message in the case. In our view, Judge Gerber was sending a message to taxpayers that he did not like the games that the taxpayer had played.
The land in question consisted of 29.3 acres which the taxpayer had assembled through several transactions. It had special zoning that permitted one commercial building, but by and large the land was zoned for residential use (R-2). Under the R-2 classification, the owner is permitted to develop two single-family houses per acre, which would mean that the taxpayer could have developed somewhere around 60 houses (62 is the number that appears in the case). The taxpayer could have developed more houses per acre, but that would have required an application to rezone the property PDH.
Unfortunately for Mr. Turner, the property carried with it some significant burdens. First, over half the property (15.04) acres was located in a 100-year flood zone and not available for residential development. The property was once owned by President George Washington and is located in the Woodlawn historic overlay district, meaning that it is subject to additional restrictions and limitations on its use.
Against this background, the taxpayer granted a conservation easement to Fairfax County that limited the number of building lots to 30. The easement and its valuation were based on the assumption that 60 dwelling units could be built on the 29.3 acres. However, the Judge Gerber points out that at the time the easement was granted, there was “only the possibility” that the number of buildings or dwellings could have been increased from 30 to a larger number of units. Judge Gerber noted that the zoning process can be time consuming and costly. Moreover, the zoning process provides local residents certain rights. Finally, he noted that the zoning board takes into account the environmental sensitivity of the property, whether the variation would be consistent with the current use of the neighborhood, and whether storm water runoff can be effectively managed. To obtain the change, Mr. Turner would have had to engage in negotiations with “adverse interests.” Any zoning change would have likely required involvement by the County Board of Supervisors, the Planning and Zoning Committee, the Mount Vernon Council, the Architectural Review Board, the Fairfax County Office of Public Works, and the Mount Vernon Ladies’ Association (Mount Vernon’s owner and maintainer).
As described in a Washington Post story, the housing development would significantly alter the view from George Washington’s porch, changing it from a panoramic view of green space and trees to what we suspect from the picture in the Post article are McMansions. See J. Stephens, Fairfax Case Draws Line on Easements: IRS Gets ‘First Big Win’ in Push to Stem Abuse of Conservation Tool, Washington Post, June 4, 2006.
The taxpayer tried to support his claim that 62 homes could be built on the property despite all the zoning limitations and interests of other parties. He pointed to a letter from Fairfax County Supervisor Gerald Hyland that asked the taxpayer to consider granting a conservation easement that would reduce the number of houses that could be built from 62 to 30. Unfortunately for the taxpayer, the IRS and Judge Gerber determined that the taxpayer and his advisors had prepared the letter and requested Hyland to sign it. At the time the letter was signed, Supervisor Hyland was unaware that the taxpayer already had plans to limit development to 30 homes—in all likelihood because of all the zoning issues, including the flood plain.
In reaching his decision to deny Mr. Turner the deduction for the contribution of the easement, Judge Gerber focused on the definitions in Section 170(f)(3). He determined that the contribution was not for a “contribution purpose” because it did not (1) preserve the open space either for the scenic enjoyment of the general public or in furtherance of a governmental conservation policy that yields a significant public benefit, or (2) preserve a historically important land area or a certified historic structure. See Sections 170(h)(4) and (5) of the Internal Revenue Code.
Judge Gerber rejected the taxpayer’s claim that the easement met the “open space" requirement, looking to the legislative history underlying Section 170(h). It provides:
the preservation of * * * [land] as a public garden * * * (1) the preservation of farmland pursuant to a State program for flood prevention and control; (2) the preservation of a unique natural land formation for the enjoyment of the general public; (3) the preservation of woodland along a Federal highway pursuant to a government program to preserve the appearance of the area so as to maintain the scenic view from the
highway; and (4) the preservation of a stretch of undeveloped oceanfront property located between a public highway and the ocean so as to maintain the scenic ocean view from the highway. [S. Rept. 96-1007, at 12 (1980), 1980-2 C.B. 599, 605.]
From these examples, Judge Gerber concluded that Congress wanted the natural state of the land preserved. Judge Gerber, in effect said to the taxpayer, that it doesn’t make any difference that you only built 30 houses instead of 60, the “open space” is no longer open space. The taxpayer countered that nothing had been built on the flood plain, to which Judge Gerber said that as zoned, you couldn’t build there so you gave nothing away of value. Finally, Judge Gerber notes that the deed contained no restrictions that protected the view. He concludes by pointing out that “[t]he natural state was not protected by the development of 30 rather than 62 units.”
Judge Gerber then addressed whether the grant of the easement met the “historic preservation” requirement. Once again, Judge Gerber turned to the legislative history, which provides:
The term “historically important land area” is intended to include independently significant land areas (for example, a civil war battlefield) and historic sites
and related land areas, the physical or environmental features of which contribute to the historic or cultural importance and continuing integrity of certified historic structures such as Mount Vernon, or historic districts, such as Waterford, Virginia, or
Harper’s Ferry, West Virginia. * * * [S. Rept. 96-1007, supra at 12, 1980-2 C.B. at 605; emphasis added.]
Judge Gerber agreed with the IRS that there was no historic structure on the taxpayer’s property. Consequently, the taxpayer had to demonstrate that the easement protected a historically important land area. It is at this point that the IRS raised the loss of trees that were cut down for the development on the Grist Mill land. Judge Gerber, in one of his last statements as a judge, bluntly characterizes the “tree removal” argument as irrelevant. He then throws the IRS the big bone, pointing out that as empty space, Grist Mill would be important to preserving Mount Vernon and the experience of visitors, who would continue to be removed from the modern world if the Grist Mill were still vacant land. And with that, he concludes that the “historic preservation” route to Mr. Turner’s nirvana was closed.
There are several important lessons in this case. First, efforts to create self-supporting evidence are likely to prove unsuccessful. Second, taxpayers must dot their i's and cross their t's. Although it wasn’t ultimately the deciding issue, Judge Gerber did note that the easement had never been acknowledged or signed by the grantee. Third, and most importantly, this was an unusual case because it did not turn on valuation, as do many of these cases. However, ascertaining whether the easement qualified under one of the categories of permissible easements, Judge Gerber developed an analysis that could have just as easily been used in addressing the question of value. In essence, Judge Gerber said, “Congress required you to give something meaningful away to qualify for the easement, but what you gave away is not meaningful in terms of what Congress had in mind.” That sort of analysis can quickly be converted into an argument that the taxpayer gave nothing of value away.
It is necessary to read Judge Gerber’s opinion to fully understand the metaphysics behind the assessment ($56,537) of the accuracy-related penalty under Section 6662. However, Judge Gerber’s decision centered on the taxpayer’s reliance on an appraisal that was based on the erroneous assumption that the land could be developed as 62 lots rather than just 30 lots made by the appraiser. Judge Gerber was troubled by the fact that the taxpayer intended to develop it as 30 lots at the time the appraisal was obtained yet apparently let the appraiser base his valuation on an assumed 62-lot development.
And there you have it. Judge Gerber rides off into the sunset with a full car and an empty caseload. According to the Washington Post article, the IRS is actively investigating claimed deductions on over 500 conservation easements.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
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