Big Changes in the Area of Conservation Easements Following Recent Tax Court Opinion

December 31, 2018 - Tyler K. Gilliam

In Pine Mountain Preserve the Tax Court determined in a full-court opinion that the section 170 “perpetuity” requirement was not satisfied where an easement permits landowners to move the location of future structures within the conservation area. Pine Mountain Preserve, LLLP v. Commissioner of Internal Revenue, 151 T.C. 14 (2018).

Conservation easements often reserve to landowners future rights to construct, within the conserved area, structures (like single-family residences) and facilities appurtenant to those structures (like barns, gazebos, fences and roads). Easements generally do not specify the exact location of these future build zones within the conserved areas. Last week, in Pine Mountain Preserve, the Tax Court held that this common practice (reserving the right to build anywhere within a conserved area) will invalidate an otherwise legitimate conservation easement.

Writing for the majority, Judge Lauber instructed, “[w]hat matters is whether there is a perpetual use restriction on ‘the real property’ covered by the easement at the time the easement is granted.” The Court determined that where “[building] lots could literally be placed anywhere within [the conserved area],” the statutory “perpetual use restriction did not attach at the outset to a defined parcel of real property or to a single, immutable parcel of land.” The Court reasoned that “[b]y permitting the [building envelopes] to be relocated to other sections of the conservation area, the deed allows the developer to subject to . . . development land that was supposed to be protected in perpetuity from any form of development.”

Put differently, the Court decided that to grant a perpetual use restriction on the “real property” subject to the easement, the precise real property to be protected within the conserved area must be defined at the time the easement is granted. In the Court’s opinion, because a right to build anywhere within a conserved area means that any portion of the area might later be developed, none of the area is in fact protected in perpetuity.

Practitioners, on the other hand, commonly interpret the “real property” clause in section 170(h)(2)(C) to refer only to the conserved area, generally—not particularized portions of property within the conserved area. Their thought is that so long as the same amount of land is preserved within the boundaries of the conserved area, it should not matter which portion of the land within the conserved area is developed.

Without weighing-in on the arguments, it is almost certain that Pine Mountain Preserve will be appealed. In the meantime, Pine Mountain Preserve assuredly will have an important practical effect on future conservation easements. Specifically, when drafting conservation easements, practitioners and taxpayers should work together to specify which portions of a conserved area they wish to designate for future development. This designation should include buildings and other structures, like roads, utility apparatus and fences.

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