Conservation easements can be an important tool for ranchers owning Montana ranch properties to obtain income tax charitable deductions and to lessen future taxable estates for estate tax purposes. However, the taxpayer and tax practitioner must carefully follow all rules in order to properly substantiate and claim the conservation easement tax deduction.
The importance of careful compliance with conservation easement requirements was demonstrated in the United States Tax Court in Gemperle v. C.I.R., T.C. Memo 2016-1, which upheld the IRS’s denial of a charitable deduction for a conservation easement.
The basis of denial was that the taxpayers, despite obtaining an appraisal of the conservation easement, failed to include a copy of the appraisal with their tax return. In order to be eligible for the conservation easement deduction, Internal Revenue Code § 170(f)(11)(C) requires that the taxpayer obtain a “qualified appraisal” and include it with his or her income tax return.
At trial on the matter before the Tax Court, the taxpayer attempted to introduce the appraisal as an exhibit to show evidence of the value of the easement (in this case a historical façade easement). However, the taxpayer did not list the appraiser as a witness to testify at trial. Accordingly, the Tax Court denied introduction of the appraisal since the appraiser was not available to testify and to be subject to cross-examination as to the contents of the appraisal. The Tax Court held that the qualified appraisal must be included with the tax return. Because the return did not include the qualified appraisal and the appraiser was not present to testify to establish value, the charitable deduction was disallowed in its entirety. Taxpayers did not produce any other expert witness testimony to substantiate the value of the charitable deduction.
Harsh Result for Technical Violation?
One wonders why the appraiser was not available to testify at a Tax Court trial. The reported case does not state why. This seemingly harsh, hyper-technical result, perhaps proves the old legal maxim: bad facts make bad law. Perhaps the expert appraiser no longer stood by his appraisal or acknowledged it was deficient in other aspects and would not have been upheld upon close court scrutiny. Otherwise, might the IRS have allowed a late-filed qualified appraisal or permitted an amended return to include the appraisal and thus allow the deduction to meet statutory requirements? In a similar situation, IRS Regulations permit the taxpayer to provide a qualified appraisal within 90 days of the IRS request what the taxpayer fails to attach an appraisal summary. See Reg. 1.170A-13(c)(4).
The taxpayer and tax practitioner must be careful to comply with statutory requirements for claiming a conservation easement charitable deduction. The IRS and Tax Court may strictly hold the taxpayer to documentation criteria.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP.
Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah.