The Internal Revenue Code provision allowing deductions for charitable easements benefits all of society. For example, on that piece of beautiful land overlooking Lake Erie, currently wooded and devoid of houses, we could either visually enjoy that vista in perpetuity (a type of public conservation easement), or a developer could build a behemoth there, blocking all scenic enjoyment. “Monte Hall, I choose Door #1, the scenic enjoyment associated with an easement.” 

To encourage conservation easements, the IRC provides an income tax deduction under Section 170(h). As society would like, the IRC requires that the easement be protected in perpetuity. 

In the squirreliest of ways, taxpayers have tried, on occasion, to develop a conservation easement, take a deduction and then eventually eliminate the easement. I refer to this as “The Perpetual Easement Until the Income Tax Statute of Limitations Has Expired.” This subterfuge has led to substantial litigation in this area. As author Nancy A. McLaughlin notes in her masterpiece article on charitable easements, 32 cases challenging the tax deductions for easements have been decided since 2005, and 200 more are in the pipeline. 

The author undertakes a thorough and thoughtful examination of the case law and legislative history in this area and how to further protect easements in perpetuity. Though she’s happy with the recent decision in Carpenter, 103 T.C.M. (CCH) 1001 (2012) and much of the reasoning in the opinion, she would like to limit a local government’s ability to influence abandonment; this would be accomplished through the Treasury Department updating regulations to further tighten the “protected in perpetuity” requirements, specifically, to have uniform standards as to the transfer, amendment and extinguishment of easements. These standards would provide a protocol for transparency of when these changes occur (for instance, reporting these changes on a Form 990), as well as other safeguards. For example, the author advocates adherence to uniform rules for the standard of “impossibility or impracticality,” one that would provide set rules as to when easements could be modified, in an attempt to prevent state governments from whimsically changing easements. 

Though Professor McLaughlin discusses Carpenter as a positive development in the area, she notes that it doesn’t do enough. She maintains that the Carpenter court goes a long way to protecting the long-term nature of conservation easements by providing significant guidance regarding compliance with the regulations (ensuring perpetuity) and defining the role of the state in enforcing easements, but feels that even this may leave too much discretion to local governments. 

 

Carpenter

In Carpenter, the taxpayers inserted the following disingenuous provision into their “perpetual” easement:

 

If circumstances arise in the future such that render the purposes of this Conservation Easement
impossible to accomplish, this Conservation Easement can be terminated … by mutual written agreement of both parties…

 

The court focused on the “mutual agreement” provision. It emphasized that the ability to extinguish a conservation easement by mutual agreement violates Treasury Regulations Section 1.170A-14(g)(6)(i), which requires a judicial proceeding to extinguish an easement.

The Tax Court ignored all of the taxpayer’s arguments in holding that the easement wasn’t perpetual. Specifically, the court refused to accept the taxpayer’s argument that the circumstance is so “remote as to be negligible.” (The author encourages the Treasury to update its regulations to ensure that “remote” argument can never be successful.)

 

Clarity Needed

Prof. McLaughlin discusses the court’s interpretation of the cy pres doctrine as applied to charitable easements and suggests that a different standard be applied, one that prohibits agreement among the parties to terminate an easement.

Most importantly, the author emphasizes the need for further uniformity and clarity in an area, via updated Treasury regulations, so that these cases aren’t continually litigated in the future. This excellent piece of literature should be added to the library of all who practice in the charitable easement area.