Cottonwood Place, LLC case highlights strict adherence to IRS perpetuity regulations for conservation easements.

In a pivotal case, the Tax Court has denied Cottonwood Place, LLC’s charitable deduction for a conservation easement donation. The court found that the conservation purpose was not protected “in perpetuity” as required under Code Sec. 170(h). So, the ruling underscores the rigid application of perpetuity and proportionate value requirements for conservation easements.

Background

Taxpayers donating conservation easements can claim charitable deductions under strict conditions:

1. The donation must meet the “qualified conservation contribution” standards outlined in Code Sec. 170(f)(3)(B)(iii).
2. The conservation purposes must be protected in perpetuity. Which means ensuring ongoing benefit and preservation.

Under the perpetuity requirement, if a conservation easement is extinguished, the charitable donee must receive a share of the proceeds proportional to the easement’s value at the time of donation. This is regulated by Reg. §1.170A-14(g)(6)(ii), often referred to as the proceeds regulation.

Case Details

Cottonwood Place, LLC, donated a conservation easement on land in Georgia. The deed stated that, in the event of extinguishment, the donee’s proceeds would be calculated after deducting the value of posteasement improvements made by the donor or its successors.

The IRS disallowed the deduction, arguing that this provision violated the proportionate value requirement because the donee was not guaranteed its full proportional share of proceeds.

Court’s Decision

The Tax Court upheld the IRS’s position, ruling that:

1. Proportionate Value Requirement Not Met: By subtracting posteasement improvements from extinguishment proceeds, the deed reduced the donee’s entitlement below the required proportionate share.
2. Perpetuity Requirement Violated: The conservation purpose was not protected in perpetuity, invalidating the deduction under Code Sec. 170(h).
3. Proceeds Regulation Validity Confirmed: Consistent with Oakbrook Land Holdings, LLC (2020), the court reaffirmed the regulation as a valid interpretation of the perpetuity requirement.

Legal Precedents Cited

The court’s decision aligns with prior rulings emphasizing strict adherence to the perpetuity and proportionate value standards:

1. Carroll (2016): Deeds failing to guarantee a donee’s proportional share of extinguishment proceeds violate the perpetuity requirement.
2. Coal Property Holdings, LLC (2019): Subtracting posteasement improvements invalidates a deed under perpetuity rules.
3. Oakbrook Land Holdings, LLC (2020): Upheld the validity of the proceeds regulation.

Implications for Taxpayers

This case reaffirms the importance of precise deed drafting for conservation easements. Consequently, any deviation from the proportionate value requirement, including posteasement improvements deductions, can jeopardize charitable deductions.

Taxpayer Takeaway:
To ensure compliance with perpetuity and proportionate value requirements:

1. Draft easement deeds with clear language guaranteeing the donee’s full proportional share of proceeds.
2. Avoid provisions that reduce extinguishment proceeds for posteasement improvements.
3. Consult tax professionals experienced in conservation easements.

Looking Ahead

The Cottonwood decision reinforces the IRS’s authority to strictly enforce perpetuity requirements. Taxpayers should anticipate heightened scrutiny of conservation easement deductions and also ensure their deeds meet all statutory and regulatory standards.

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