IRS Doubles Down on Stance in Conservation Easement Safe Harbor

The IRS doubled down on its litigation stance in safe harbor deed language for conservation easements released this month, following conflicting appeals courts’ decisions, tax practitioners say.

The agency on April 10 released Notice 2023-30, which laid out specific language to include in new or existing deeds that would protect landowners’ deductions, should the easement be extinguished or impacted by boundary line adjustments. But the language mirrors a controversial Treasury regulation regarding easement extinguishments that’s been the subject of several legal challenges.

A decision split between the 6th and 11th circuit courts of appeals over the Treasury regulation has left tax practitioners unsure how to advise clients to implement the safe harbor language, especially if their conservation easement is in the 11th Circuit—which invalidated the regulation. Professionals say the validity of the regulation could be determined by the Supreme Court but noted the high court may not want to take up such a technical issue.

“We’ve got this conflict of the circuits, and if you have a conservation easement in the 11th Circuit, it’s going to be treated differently than if you have a conservation easement in the 6th Circuit or really anyplace else,” said Nancy Ortmeyer Kuhn, a shareholder at Shulman Rogers.

A Tale of Two Rulings

Taxpayers who satisfy the requirements of tax code Section 170(h) may claim a deduction for donating away rights to develop their land in order to promote conservation.

The safe harbor language used in the IRS’s notice tracks “almost identically” with Treasury regulation 1.170A-14(g)(6)(ii), which interprets the requirements under Section 170, Kuhn said.

The regulation holds that a tax deduction from a conservation easement would be blocked if the easement deed reserves for the donor the value of post-donation property improvements in its specification of how proceeds from selling the property should be divided between the donor and recipient if a judge later extinguishes the easement.

The regulation spurred legal challenges from taxpayers, which made their way past US Tax Court and through to the appellate courts.

The 6th Circuit Court of Appeals upheld the regulation last year in Oakbrook Land Holdings LLC v. Commissioner under the Administrative Procedure Act. The act requires the federal government to give notice and respond to significant comment on its regulations.

The IRS denied Oakbrook Land Holdings LLC a $9.55 million tax deduction on its conservation easement donation.

In late 2021, the 11th Circuit Court of Appeals invalidated Treasury’s regulation in Hewitt v. Commissioner. The court held that the IRS violated the Administrative Procedure Act because it failed to respond to a comment from the New York Landmarks Conservancy.

Elizabeth Blickley, counsel at Fox Rothschild LLP, said the IRS’s new guidance doubles down on its litigation position.

“The IRS came out with these two safe harbor provisions, which are strikingly similar to their failed arguments in both cases,” Blickley said. “And in my mind, that is not following Congress’s instruction to basically correct a mutual mistake between the donor and the donee organization who are attempting to comply with Section 170 using a model deed, that’s bolstering IRS’s litigation position.”

Florida, Georgia, and Alabama

Conflict between the 11th Circuit’s ruling on the regulation and the IRS’s new safe harbor language impacts taxpayers with easements located in Florida, Georgia, and Alabama.

Practitioners said landowners who qualify to benefit from the IRS guidance have the dilemma of what to do in their deeds with the safe harbor language if it’s been invalidated by the appellate court.

Landowners in the 11th Circuit might endanger their deduction if they omit the safe harbor language and an extinguishment occurs.

Kristy Caron, counsel at Fox Rothschild LLP, said it’s unclear whether to advise clients that they can rely on the precedent set by the 11th Circuit if they donated an easement in those three states.

“Until the 11th Circuit has the opportunity to review current precedent, existing case law remains good precedent,” Caron said. “There are many factors for donors and their counsel to consider in deciding whether to amend, including trying to figure out the potential unintended consequences of amending the deed.” Caron added, “Two similarly situated donors could easily reach different conclusions on the issue of whether to amend.”

The IRS and the Treasury Department didn’t respond to requests for comment.

Outside of the 11th Circuit, Treasury’s regulation is still valid, having been initially upheld by the Tax Court, which has only been overturned in the 11th Circuit.

But Caron and Blickley said even for taxpayers who do use the safe harbor language, the IRS’s notice may not shield a donor’s deduction.

“Even assuming every eligible taxpayer amends their deed to conform with these two safe harbor provisions, this does not guarantee IRS won’t identify some other problem,” Blickley said.

Blickley added, “Without a complete model deed the IRS will honor, these safe harbor provisions only guarantee the IRS will honor those two provisions.”

The agency has made a concerted effort to crack down on conservation easement deductions, an area of the code it said has been abused. In 2016, the IRS began requiring reporting of syndicated conservation easement transactions, in which a group of investors is solicited to buy property and donate development rights over the property for a tax break.

The service has relied on alleged technical defects, such as language in extinguishment clauses, to deny both syndicated and non-syndicated conservation easement deductions.

Both Blickley and Caron explained there are several issues, such as valuation, qualified appraisal, and qualified appraisers, that are not addressed in the safe harbor guidance and could make an easement deduction vulnerable to denial by the IRS.

And, if a taxpayer amends their deed, it’s unclear if it will clash with state law or impact some states’ tax credits.

“If a donor received a charitable donation deduction under federal law and state tax credits for the same donation, does the recordation of the amended deed affect the state tax credits received?” Caron said.

Uniformity Sought

Robert Wall, tax partner at Akerman LLP, said what would be helpful to clear up at least some of the confusion is a uniform ruling across the court system.

“I mean, ultimately, I think that what everybody’s looking for is, there’s going to need to be some sort of resolution uniformly across the circuits,” Wall said.

That would likely mean, however, that the Supreme Court would have to get involved.

The high court declined to review the validity of the IRS’ regulation in the Oakbrook case in January.

Wall said it was unlikely the Supreme Court would take up a tax law-related case, “particularly these hyper-technical ones” if they don’t have to.

Kuhn noted other appellate courts may take up similar cases and weigh in on the issue.

“Other conservation easement cases could arise in other circuits, and it could be extended to other circuits one way or another,” Kuhn said.

Wall concluded the IRS could use the language from this notice to “beef up” its arguments against additional challenges.

“This notice is part of an ongoing chess match,” he said.

—With assistance from Aysha Bagchi.