McLaughlin on Kaufman: Protecting Public Investment in Conservation Easements

The conservation purpose of a conservation easement will be "protected in perpetuity" only if the holder has an absolute right to a share of post-extinguishment proceeds. The donor's lender cannot be given priority rights to such proceeds. So the Tax Court held in Kaufman v. Comm'r. In this Analysis, Nancy A. McLaughlin discusses the import of this decision, including the court's approach to penalties and the deductibility of cash payments made to the donee. She writes:

I. Introduction

      In two related decisions, Kaufman v. Comm'r, 134 T.C. No. 9 (2010) (Kaufman I) [enhanced version available to lexis.com subscribers] and Kaufman v. Comm'r, 136 T.C. No. 13 (2011) (Kaufman II) [enhanced version], the Tax Court provided guidance regarding the meaning of the "perpetuity" requirements in § 170(h) of the Internal Revenue Code (IRC § 170(h)). In particular, the court found that the mortgage subordination agreement obtained in connection with a facade easement donation, which granted the lender priority rights to insurance and condemnation proceeds, caused the donation to fail as a matter of law to comply with the "enforceable-in-perpetuity" requirements of the Treasury Regulations interpreting IRC § 170(h) (the Treasury Regulations).

     The court also provided guidance regarding the deductibility of cash payments that are sometimes made in connection with the donation of a conservation easement, as well as a donor's liability for accuracy-related penalties.

     ....

VI. Kaufman in Perspective

     Congress made the conservation easement deduction provision a permanent part of the Internal Revenue Code in 1980 with the enactment of IRC § 170(h). However, because of the significant potential for abuse, Congress imposed substantial new limitations on the deduction. Of particular relevance to the Kaufman decisions is the requirement in IRC § 170(h)(5)(A) that the conservation purpose of a qualified conservation contribution be "protected in perpetuity."

     Congress provided significant guidance regarding the meaning of the new protected in perpetuity requirement in the legislative history of IRC § 170(h). In 1986, after a public notice and comment process, the Treasury Department issued final regulations interpreting IRC § 170(h). Those regulations, which include the eligible donee, restriction on transfer, no inconsistent use, baseline documentation, extinguishment, division of proceeds, and other specific requirements, were carefully crafted to ensure that tax-deductible conservation easements will be enforceable in perpetuity and their conservation purposes will be protected in perpetuity as Congress intended.

     IRC § 170(h) then remained a relatively obscure provision of the Code until the last decade or so, when the number of conservation and facade easement donations began to increase dramatically. With the growth in the number of easement donations came increased interest and scrutiny. In 2003, the Washington Post published a series of articles questioning some of the practices of The Nature Conservancy, the nation's largest and most well-funded land trust. In December of the same year, the Washington Post published a follow-up article describing allegedly abusive conservation easement donation transactions involving "wildly exaggerated" easement appraisals and developers who received "shocking" tax deductions for donating conservation easements encumbering golf course fairways or otherwise undevelopable land.

(footnotes omitted)

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