'Kiva Dunes' And Golf Course Conservation Easements: Important Implications For Tax Deductibility Of Conservation Easement Contributions

Article by Charles M. Ruchelman and Matthew C. Hicks1

Several months ago, the Tax Court decided Kiva Dunes Conservation, LLC v. Commissioner,2 a case concerning valuation of a golf course conservation easement for purposes of a charitable contribution deduction. The case is likely to influence future conservation easement controversies.

Conservation Easements Generally In general, to receive a deduction for a charitable contribution under Section 170 of the Internal Revenue Code (the "Code"), a donor must give up his entire interest in the property.3 An exception exists, however, for conservation easements. 4 Conservation easements are restrictions on the development or use of real property that promote open space, historic preservation or protection of natural resources. The donee of a conservation easement has the right to enforce the restrictions, while the donor retains all other ownership interests.

To qualify for a charitable deduction under Section 170, a contribution of a conservation easement must meet three statutory requirements. First, the easement must be granted in perpetuity.5 Second, the easement must be donated to a "qualified organization."6 A qualified organization is typically a government agency or public charity that is dedicated to conservation and has the means to enforce the easement. Third, the easement must satisfy a "conservation purpose" as defined by the Code.7 If such requirements are met, the donor may deduct up to the fair market value of the easement.8

Since 2004, the IRS has increasingly targeted conservation easements. The IRS is primarily concerned that some easements may lack a conservation purpose and/or have inflated values. Both of those concerns were raised in Kiva Dunes.

Significance Of Kiva Dunes In Kiva Dunes, the petitioner, Kiva Dunes Conservation, LLC, placed a conservation easement on an up-scale Alabama golf course prohibiting uses other than that of a golf course, park, or agricultural enterprise. It donated the easement to the North American Land Trust and claimed a charitable contribution deduction in the amount of $30,588,235. The IRS disallowed the deduction and petitioner brought suit in the Tax Court.

After trial, the IRS conceded that the petitioner was entitled to a deduction. The only issue remaining for decision was the valuation of the conservation easement. Ultimately, the court relied heavily on the taxpayer's valuation expert and decided the easement was worth $28,656,004.

The Tax Court case is significant in two respects. First, in conceding the deductibility of the contribution, the IRS recognized that golf course conservation easements may satisfy a conservation purpose. Second, the court promoted greater consistency in valuation standards by prohibiting the use of post-donation information to determine a property's value.

Golf Course Conservation Easements In Kiva Dunes, the IRS initially argued the easement did not satisfy a conservation purpose. Four conservation purposes are recognized under the Code: (1) outdoor recreation by, or for the education of, the general public; (2) protection of relatively natural habitat; (3) preservation of open space; and (4) historic preservation.9 The petitioner...