Pivotal Court Decision in Pine Mountain: What Does It All Mean?

In late October, the 11th Circuit Court of Appeals issued a landmark opinion in the Pine Mountain Preserve case. Although the decision establishes formal precedent only in Georgia, Florida, and Alabama, the court’s analysis is likely to be persuasive and impactful across the country.

Pine Mountain dealt with two major issues (actually three, if you include the valuation dispute, but we won’t be covering that angle). First, the 11th Circuit affirmed the United States Tax Court in holding that a typical conservation easement amendment provision, allowing amendments that are deemed by the holder to be consistent with the conservation purposes, complies with the protected-in-perpetuity requirement of § 170(h)(5)(A). As the Court reasoned, under the fundamental tenets of contract law, any document is amendable whether or not it contains an amendment provision. Thus, the amendment provisions in the conservation easements under scrutiny had the effect of limiting the scope of possible amendments, to those that were consistent with the easement’s conservation purposes. Moreover, the Court found that the possibility that atypical land trust holder would consent to a detrimental amendment is so remote as to be negligible, the standard under the applicable Treasury regulation that implements the statute.

On the second issue, the 11th Circuit vacated the Tax Court’s decision with respect to the degree of precision required for building areas. The two easements at issue both allowed a certain number of residential building areas. In one easement, the building areas were initially located in a clustered area around an artificial pond, but could be relocated upon the prior written consent of the land trust holder. In the other easement, the building areas were not initially fixed at all, and were to be located in the future with the prior written consent of the holder, based on consistency with the conservation purposes.

The Tax Court held in December 2018 that both of these easements violated the granted-in-perpetuity test of § 170(h)(2)(C), likening the easements to those previously struck down in the Belk line of cases. Now, in a significant check to the Tax Court’s and IRS’ overreach, the 11th Circuit has held that the easements did indeed satisfy the granted-in-perpetuity test because they constituted a broad restriction that applied to the entire protected property, even if the restrictions were lighter on the building areas.

The case remains active, as the 11th Circuit remanded to the Tax Court to determine whether the overall protection scheme, including the building area provisions, satisfy the § 170(h)(5)(A) protected-in-perpetuity requirement. But the IRS’ most aggressive arguments against building areas have now been rebuked by two different appellate courts (see the Fifth Circuit’s BC Ranch II opinion in 2017 for the other instance).

The11th Circuit’s opinion is a significant victory for the broader land conservation movement, and closely follows the analysis urged by the Land Trust Alliance’s amicus briefs in this case (of which I was honored to be the lead author). Moreover, the 11th Circuit’s analysis here sets up the taxpayers for another win in Carter, a similar case about building areas that is pending before the same court. What remains to be seen is whether the IRS will now back off its aggressive and unsupported arguments around building areas and amendment provisions.

So…what does it all mean for Maine land trusts? A few quick thoughts:

• We continue to be on relatively safe ground in using the current amendment provision in the Maine Land Conservation Attorneys Network Model Boilerplate (see Section15.F), and no changes to the template are recommended at this time. (Although stay tuned in the spring for a few unrelated changes coming to the template.)
• Land trusts should continue to be deliberate and discerning with respect to the size, number, and placement of building areas. For both programmatic and legal reasons, I strongly discourage fully floating building areas. However, many Maine land trusts continue to use a partially floating arrangement. In this formulation, a potential building zone (say, five acres)is identified in the easement, within which a smaller building area (say, one or two acres) may be established in the future. With proper documentation from the outset that siting the building area anywhere within those five acres is consistent with the conservation purposes, there is much lower risk of an IRS challenge.
• The IRS remains on the prowl against conservation easements, and has won several other cases on different technical and substantive grounds, as I have discussed in recent E-Bulletins. Donors who claim a federal income tax deduction must be careful to follow all of the rules around mortgage subordination, appraisals, the Form 8283, and contemporaneous written acknowledgments. Land trusts, as the primary drafters of easements, should ensure that their templates and practices around termination provisions, baseline documentation, etc., are in ship shape. I submit that the MLCAN Model Boilerplate (linked above) remains the best resource for staying current and avoiding IRS pitfalls.

For a deeper analysis, see the Alliance’s updated Pointers for Balancing Risk When Permitting Structures on Deductible Conservation Easements After the Tax Court Decisions in Pine Mountain Preserve and Carter (behind paywall for Alliance members).

Still hungry for more? I will be discussing these and other cases at an Alliance webinar on March 4 (see below).

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Form 8283 Changes

 In December 2020, the IRS released a new version of its Form 8283, replacing an earlier version dated November 2019. The new form and instructions can be found here on the IRS website. Although it is up to landowners and their advisors to follow the rules for claiming charitable deductions, land trusts can be helpful in pointing out the existence of the new version of the form.

There are no major changes for the typical land or conservation easement donation. That said, there are a couple new details worth mentioning:

• Section B, Part I of the Form, for gifts valued at over $5,000, has moved from page two to page one. This is the substantive section typically required to be completed for a land or easement gift, while Section A and Section B, Part II are left blank. (In the rare event of a claimed conservation easement deduction of $5,000 or less, the donor would fill out Section A and also attach the separate statement as set forth in the instructions.)
• In Line 5(g) of Section B, Part I, some sort of “separate statement” is now required to be attached for bargain sales, although the instructions do not shed any light on what this statement might include. I have an inquiry into the IRS on this point, and will report back on the MLTN list serve if I hear anything useful. Anyone who has any insight, please email me.

In addition, here are some general tips on completing the Form 8283, in light of changes over recent years and the IRS’ scrutinizing these forms for errors in the hopes of denying deductions:

• There is often confusion over which box to check in Section B, Part I. The “Qualified Conservation Contribution” box should be checked only for conservation easements. For outright land donations, the “Other Real Estate” box should be checked.
• The donor must be sure to fill out every applicable part of Section B, Part I, Lines 3(a)-(i). The IRS has been very persnickety about missing items and has denied deductions in their entirety for minor foot faults on the form.
• Donors and their advisors also must remember to attach to the Form 8283 a separate statement for any conservation easement donation. Details of what is required on this statement are included in the Instructions. A template for this statement can be found here on the MLTN website.
• For any claimed deduction over $500,000, the entire appraisal must be included with the tax return. This rule has been in place for many years now, but is still occasionally overlooked by donors and accountants.
• A representative of the land trust signs the “Donee Acknowledgment” section at the bottom of page 2 of the Form, but should do so only if the substantive part of the form has been completed and after conducting a basic accuracy review of the appraisal to ensure there is no error in the property description or that no gift has been made (e.g., because the easement was granted in connection with some sort of governmental approval). All of these practices should be spelled out in a detailed disclosure letter sent to the donor early in the project discussions, to avoid any surprises See Land Trust Standards and Practices 10.A and 10.B for details.
• The land trust’s signatory must be either the person authorized to sign the organization’s tax returns (typically any Board officer, but not the Executive Director, unless the E.D. is also an officer under the Bylaws) or else someone who has been “specifically designated” to sign the Form 8283. To meet this latter qualification, I would suggest that the Board’s authorizing resolution expressly empower whoever is executing the closing documents to also sign the Form 8283.

‍Upcoming Event: Land Trust Alliance Webinar on Federal Tax Law

Date: Thursday, March 4, 2:00 - 3:30 pm

Location: Webinar

Sponsor:  Land Trust Alliance

Register and more information here

As usual, there’s a lot going on at the Tax Court and at the IRS that land trusts need to know about. Attorneys Rob Levin and Jessica Jay will bring everyone up to speed on the latest developments in case law and actions to curtail conservation easement syndicated deals.

How will you benefit from this webinar?

• Hear the latest decisions/actions from the courts and IRS concerning conservation easements/fee land donations

• Learn prudent strategies to address those actions/decisions

• Learn that latest on conservation easement syndications

E-Bulletin Information

 I send E-Bulletins 3 or 4 times per year to provide updates and analyses on legal and policy matters respecting Maine land conservation.  I do my best to keep my messages brief, timely, and useful to conservation-minded landowners, as well as land trust professionals and volunteers.  At the same time, no one should rely on these E-Bulletins as legal advice, and I encourage you to consult a qualified attorney for advice on any particular situation.  

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