Posted by: Patricia Salkin | August 21, 2007

Pair of Conservation Easement Cases Reach Opposite Conclusions as to Tax Deductions

In a Sixth Circuit case, taxpayers granted two conservation easements over property they owned on the shore of Lake Michigan.  The IRS claimed that the easements did not qualify as “qualified conservation contributions” under IRC §§ 170(h), (h)(4)(A) and (h)(1)(C) because they were too small, allowed too many retained rights, failed to restrict adjacent properties and did not protect “significant” habitat.  The Sixth Circuit approved the easements and upheld the deductions because the property contained potential habitat for specific rare, endangered or threatened species.  Although existing structures were allowed to remain and additional structures could be built, the reserved rights could only be exercised in a manner that minimized interference with the scenic and natural values of the property, as determined by the land conservancy holding the easement.  Although the property was small, there is no minimum size for a conservation easement so long as the identified species can exist in an area the size of the encumbered property.  The fact that adjacent land was not protected does not affect the habitat value of the easements, which were in perpetuity. Glass v. Commissioner of Internal Revenue, 471 F.3d 698 (6th Cir. 2006).


Reaching an opposite conclusion, the Tax Court found that where taxpayers granted a conservation easement to the County limiting construction of the historically significant property to 30 lots, the deduction was disallowed because the evidence showed that half the property was in a flood plain and no more than 30 lots would be allowed without a zone change.  The conservation easement failed to protect open space, views or historic character because it did not limit the location or size of future development.  Taxpayers were liable for 20-percent accuracy-related penalty due to their reliance on an appraisal based on statements about the potential development of the property they knew or should have known were false. Turner v. Commissioner of Internal Revenue, 126 T.C. 299 (2006).


As a reminder, the tax law that encourages conservation easement donation is due to expire at the end of the year. Federal law allows donors of qualified conservation easements to deduct up to 30 percent of their adjusted gross income from their taxes for six years.  The Pension Protection Act of 2006 allows donors to deduct up to 50 percent of their adjusted gross income for 16 years, and qualifying ranchers can deduct up to 100 percent.  Unless extended, the special provisions are due to expire on December 31, 2007.  If passed, the Rural Heritage Conservation Extension Act of 2007 will make the law permanent.   

Thanks to Deborah Rosenthal, Esq., AICP of Bingham McCutchen for discussing these conservation easement updates at the August 2007 ALI-ABA Land Use Institute.


  1. In the Turner case, it may have been preferable for the Tax Court to recognize that the proposed conservation easement had some value, albeit less than what the donor asserted. After all, the plaintiff, FAC Co., was in the business of acquiring property for the purpose of rezoning it, and subsequently redeveloping it. Although the Court cited a number of impediments to rezoning this property, it was not impossible that it could eventually be achieved. If there was any chance that the historic value of this property (which was once owned George Washington and used to operate a grist mill) could subsequently be lost to development, then surely there would be some value to eliminating this uncertainty.

    One of the impediments cited by the Court was the high cost of pursuing rezoning. Over time, the value of undeveloped land has risen, and it is likely to continue to do the same. Eventually, there will be an economic incentive strong enough to overcome the cost of pursuing the rezoning. At that time, the developer may no longer be interested in granting the easement, or its value will have appreciated and cost taxpayers more to acquire. Obtaining the easement at the present time may turn out have been the more prudent choice.

  2. Good points RJ

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