May 19, 2022 - Douglas Myser

Tax Court case on proceeds formula. The Eleventh Circuit found the IRS's interpretation of the judicial extinguishment proceeds formula for conservation easements to be procedurally invalid under the Administrative Procedure Act. In 2012, David Hewitt made a conservation easement contribution to the Pelican Coast Conservancy Inc. The recorded deed of conservation easement reserved Hewitt's and his wife's right to build certain improvements on their property subject to the deed. The deed also provided that, in the event of a judicial extinguishment of the easement, any increase in value after the date of the grant due to property improvements would be subtracted from the fair market value when determining the portion of proceeds due the conservancy. Tax Court case on proceeds formula.

The Hewitts reported charitable contribution deductions for tax years 2017, 2013, and 2014, related to the easement. In 2017, the IRS sent a notice of deficiency to the Hewitt's disallowing the charitable contribution carryover deductions claimed in 2013 and 2014 from the easement. The Tax Court sided with the IRS due to the deed's wording regarding judicial extinguishment. Subtracting the value of post-easement property improvements before determining the donee's share of proceeds is not permitted under Regs. Sec. 1.170A-14(g)(6), the Tax Court held.

Sec. 170 permits a charitable contribution deduction for contributions of qualified conservation easements. The contribution must be exclusively for conservation purposes, which must be protected in perpetuity. Regs. Sec. 1.170-14(g) provides rules for establishing that conservation purposes are protected by enforceable restrictions in perpetuity. Among them is a special rule for when a subsequent, unexpected change in conditions surrounding the property makes its continued use for conservation purposes impractical or impossible.

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