Glass v. Commissioner, 471 F.3d 698 (6th Cir. 2006).

Terra Bowling, J.D.

The Sixth Circuit has concluded that a couple properly claimed a tax deduction for a conservation easement, despite claims from the Internal Revenue Service (IRS) that the conservation easements were not qualified deductions.

Background
In 1988, Charles and Susan Glass purchased a ten-acre parcel of land on the shores of Lake Michigan, which included a home and a guest cottage on a bluff. The heavily forested property was home to several threatened species, such as bald eagles, piping plovers, Lake Huron tansy, and pitcher’s thistle.

In an effort to preserve the natural features of the property, the couple granted three conservation easements to the Lake Traverse Conservancy (LTC), a Michigan nonprofit agency that facilitates the creation of conservation easements. As part of one of the easements, the couple retained a limited right to conduct certain activities within the easement, such as maintaining foot paths to the shore and the right to add to or replace an existing cottage. In another easement, the couple retained the right to replace or add to an existing guest cottage, so long as the cottage did not exceed a certain size.

When the couple claimed charitable deductions on their federal taxes for the conservation easements, the Commissioner of the Internal Revenue Service (IRS) issued a notice of deficiency for two of the easements. The couple challenged the decision in the United States Tax Court, which concluded that the conservation easements were qualified deductions. The IRS appealed the decision.

Qualified Contributions?
The United States Court of Appeals for the Sixth Circuit first examined whether the conservation easements were qualified conservation contributions under I.R.C. § 170(h)(1). Section 170 requires the taxpayer to show that three requirements have been met: “1) the real property interest is a ‘real property interest;’ 2) the donee is a ‘qualified organization;’ and 3) the contribution is exclusively for ‘conservation purposes.’” The IRS claimed that the couple’s conservation easement did not meet the third requirement.

In order to show that a contribution is exclusively for conservation purposes, the conservation must provide “… protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystems.”1 The treasury regulation implementing this definition required that the easement protect a significant habitat.

The Sixth Circuit agreed with the tax court’s determination that the easements were a significant habitat for threatened species such as bald eagles, Lake Huron tansy, and pitcher’s thistle. The IRS attempted to argue that even if there were protected species on the property, the terms of the conservation easements “undermine their state purpose because the encumbered property is too small, [t]axpayers’ reserved rights are too great, and there is no limit on building on neighboring properties.”2 The court rejected these assertions.

The court held that the IRS did not prove that the preserved property was too small for the protected species to exist. Furthermore, the easements had been carefully drawn to prohibit any activity or use of the encumbered property that would undermine their stated conservation purposes. For instance, the couple could prune vegetation to preserve the scenic view or for safety purposes, but clear cutting was clearly prohibited. The court found that LTC appeared to be willing to monitor and enforce compliance and there was no evidence to the contrary. The Sixth Circuit noted that the couple, in granting the easements, was not required to consider the neighbors’ building rights. The appellate court found that the couple met all of the statutory requirements for contributing a conservation easement and affirmed the Tax Court’s decision.

Endnotes
1. I.R.C. § 170 (H)(4)(A)(ii).
2. Glass v. Commissioner, 471 F.3d 698, 709 (6th Cir. 2006).

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