Tax Court Shifts Conservation Easement Landscape With Reversal

The recent US Tax Court decision in Valley Park Ranch v. Commissioner marks another shift in the landscape of conservation easements with significant implications for taxpayers whose conservation easement deductions were denied in the past, and for those considering claiming them in the future.

The IRS denied Valley Park Ranch’s $14.8 million deduction due to the easement deed’s non-compliance with Treas. Reg. § 1.170A-14(g)(6)(ii). This regulation is frequently used by the IRS to deny deductions and enforce the “protected-in-perpetuity” requirement under Section 170(h)(5) of the tax code.

It mandated a specific formula for distributing proceeds if a conservation easement were ever extinguished, with a proportional distribution between the landowner (donor) and the land trust (donee) based on the easement’s initial value compared with the property’s total value.

However, the Tax Court ruled in favor of Valley Park Ranch, finding the regulation invalid because the IRS failed to adequately consider public comments made during the rulemaking process, violating the Administrative Procedure Act.

The decision has significant ramifications.

Reopening Past Denials. Taxpayers who were previously denied deductions based on the now-invalid regulation may be able to challenge those decisions. Because the specific formula for proceeds distribution is no longer enforceable, according to the Tax Court, these cases could be evaluated with a more flexible approach.

Potential for Looser Standards. The invalidation of this regulation could usher in an era of less stringent approval standards for future conservation easement deductions. This could benefit qualified claims that had been denied under the stricter interpretation enforced by the contested regulation.

Navigating Uncertainty. While the decision creates opportunities for challenges and potentially taxpayer-favorable interpretations, it also breeds uncertainty. The IRS may issue new guidance or revise existing regulations in response to the Tax Court’s ruling. Taxpayers considering conservation easements, whether new or existing, should tread cautiously and seek professional guidance to navigate this evolving landscape.

Beyond Conservation Easements. The decision has broader implications. It sets a precedent for stricter adherence to legal procedures when creating tax regulations and could lead to greater scrutiny of existing regulations for APA compliance. Future tax disputes might place greater emphasis on whether regulations were created following proper procedures, in addition to their substantive content.

Strategic Next Steps. The Valley Park Ranch ruling could trigger a rise in appeals from taxpayers seeking to challenge previous denials and refiling of applications rejected under the stricter regulation. It also may pave the way for a more taxpayer-friendly approach toward conservation easement deductions in the future.

However, those considering revisiting previously denied deductions due to the invalidated regulation or pursuing new easements should consult with a tax professional. Strong appraisals and comprehensive documentation demonstrating the legitimacy of the conservation easement and its perpetual restrictions are essential for success.

With the possibility of new IRS guidance in response to the decision, staying informed about developments in this evolving legal landscape is critical to strategically take advantage of any potential opportunities.

Valley Park Ranch is a game-changer for conservation easement deductions. While it opens doors for both possible challenges and a more taxpayer-friendly landscape, it also necessitates caution and expert guidance in navigating this uncertain terrain.

The case is Valley Park Ranch LLC v. Commissioner, T.C., 12384-20, 3/28/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sonya Jindal Tork is partner at Taft Law with focus on real estate, tax controversies and litigation, partnership tax, and charitable, estate, and asset protection planning.

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