Given the number of conservation easement Tax Court cases in the last two years, it’s obvious that this particular form of charitable donation continues to be popular with donors and to draw intense Internal Revenue Service scrutiny. Indeed, in December 2012, there were over 200 easement cases docketed in Tax Court.

Although the Internal Revenue Code uses the words “conservation easement” to describe both, there are two basic types of charitable easements.1 The first is an easement over mostly unimproved land, often to preserve wild spaces, a scenic view, a historic battlefield or a family farm. The second, found more often in urban areas, is a façade easement, designed to preserve at least the exterior of a historic building. In all cases, the easement is a recorded document in favor of a conservation charity that eliminates certain of the owner’s rights to alter the real estate. Once placed, the easement is permanent: Any subsequent purchasers take the property subject to the easement. 

To calculate the charitable deduction allowed, the appraiser values the property before the easement is placed and then again with the easement in place. The difference is allowed as a charitable income tax deduction. So, why are there so many court cases related to this type of donation? Two issues: validity and valuation.

To obtain a tax deduction, the easement must strictly conform to the regulations. For example, the regulations require that if there’s a mortgage on the property, the mortgage holders subordinate their mortgage to the interest held by the conservation charity.2 Failure to obtain that subordination, including with respect to insurance proceeds if the property should be destroyed, will cause the deduction to be completely disallowed.3


Valuation Disputes

More frequent are disputes over valuation. Sometimes, the dispute is over the valuation before the easement is placed. This is most common in easements over undeveloped land, farms or open spaces. If the appraiser is valuing the land before the easement based on the possibility of subdivision for home sites or mineral development, the IRS may challenge the development plan as being economically infeasible.4

For developed property, including single-family, multi-family and commercial real estate, the valuation disputes are rarely over the “before easement” value. For these properties, the disputes tend to be about the reduction in value caused by the restrictions in the easement.5 The IRS may assert that the restrictions in the easement are only marginally more restrictive than those in the pre-existing zoning or historic district restrictions, and therefore, the incremental reduction in value is very small or non-existent.6

Failure to obtain a timely, qualified appraisal will also preclude any deduction.7 A number of recent cases resulted in the taxpayer’s complete loss of the deduction, even though the easement was properly recorded and legally binding, due to the failure of the appraiser to use acceptable valuation techniques.8 

Assuming the dispute is limited only to valuation, the Tax Court considers the factors raised by the taxpayer’s appraiser and the IRS’ appraiser and determines a value for the easement.


Bottom Line

So, where does this leave donors (and their advisors) who are contemplating preserving their family farm as such for future generations? Or, an urban owner of a historic property contemplating preserving the façade? The advisors and their appraisers should review the relevant court cases. Strict conformity to the regulatory requirements for the easement and a quality appraisal are necessities for a successful easement donation.


—This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this publication.



1. Internal Revenue Code Section 170(h).

2. Treasury Regulations Section 1.170A-14(g)(2); see also Minnick et ux. v. Commissioner, T.C. Memo. 2012-345 and Mitchell v. Comm’r, 138 T.C. No. 16.

3. Treas. Regs. Section 1.170A-14(g)(6); see also Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012).

4. Esgar Corporation v. Comm’r, T.C. Memo. 2012-35.

5. Whitehouse Hotel Ltd. Partnership, et al. v. Comm’r, 139 T.C. No. 13 and Butler v. Comm’r, T.C. Memo. 2012-72.

6. Loren Dunlap, et ux., et al., T.C. Memo. 2012-126.

7. Treas. Regs. Section 1.170A-13(c)(3) and Scheidelman v. Comm’r, 682 F.3d 189 (2d Cir. 2012).

8. Freidberg v. Comm’r, T.C. Memo. 2011-238; Rothman v. Comm’r, T.C. Memo. 2012-218.