The Tax Court held that a limited liability company (LLC) was not entitled to a charitable contribution deduction for granting a conservation easement to a national land trust. According to the court, the LLC expected to receive a substantial benefit from the easement donation, and the easement had no value when it was donated.
Facts: Wendell Falls Development, a North Carolina LLC treated as a partnership for tax purposes, was owned by two individual land developers and a corporation. The LLC owned 1,280 acres in Wake County, N.C., that it planned to subdivide into a planned community of residential and commercial spaces, an elementary school, and a park. In 2007, Wendell Falls sold 125 of the 1,280 acres to Wake County for $3,020,000, an amount determined by an appraisal firm hired by Wake County. The 125 acres were to be used as a county park, and the sale was accompanied by Wendell Falls's donation of a conservation easement on the tract to Smokey Mountain National Land Trust, a charitable organization. The easement restricted the type, size, and location of any structures that could be built on the 125 acres owned by the county. An appraiser valued the easement at $4,818,000.
On its 2007 Form 1065, U.S. Return of Partnership Income, Wendell Falls reported a $1,798,000 charitable contribution from the donation of the easement, determined as the difference between the easement's value of $4,818,000 and the $3,020,000 received from Wake County. In 2009, Wendell Falls amended its 2007 return and reported a charitable contribution of $4,818,000, the appraised value of the easement donated to Smokey Mountain. The IRS sent the tax matters partner a notice of final partnership administrative adjustment in 2013 that disallowed the deduction. The LLC petitioned the Tax Court for relief.
Issues: A taxpayer may deduct a charitable contribution for the donation of a conservation easement. No deduction is allowed for any charitable contribution, including a conservation easement, if the taxpayer expects a substantial benefit from the contribution. The IRS argued that Wendell Falls expected a substantial benefit from the donation of the easement by a park's increasing the value of the adjoining development and therefore was not entitled to a charitable contribution deduction.
Holding: The court agreed with the IRS, noting that all the residential lots of the planned community would have access to the 125 acres that could only be used as a park, with strict limitations on the types of buildings that the county could construct on it. Therefore, access to the park would increase the value of the lots, which would substantially benefit Wendell Falls as owner of the lots, according to the court.
The court further held that there could be no charitable contribution deduction because the donated easement had no value. Wake County had the 125 acres appraised at $3,020,000 before the easement, and then the county bought the land for the same amount from Wendell Falls with the easement. According to the court, this fact showed the easement did not diminish the value of the tract.
However, the court also held that Wendell Falls was not liable for a penalty related to its tax reporting of the easement donation because the LLC had reasonable cause for reporting the deduction, and the deduction was reported in good faith.
— By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.