Charles F. and Susan G. Glass v. Commissioner

124 T.C. No. 16UNITED STATES TAX COURT
CHARLES F. AND SUSAN G. GLASS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17878-99. Filed May 25, 2005.
L is a longstanding nonprofit nature conservancy,
the tax-exempt purposes of which include the
preservation of wildlife, plants, and natural land on
or near the shoreline of Lake Michigan. Ps own
approximately 10 acres of land (property) that includes
a high undeveloped bluff on 460 feet of that shoreline.
Bald eagles commonly frequent the bluff. In addition,
dense vegetation grows naturally on the bluff. That
vegetation includes a species of plant, Lake Huron
tansy, that is considered to be threatened. The
natural values of the bluff also allow it to create or
promote a possible habitat for pitcher’s thistle,
another species of plant that is considered to be
threatened and that is found on the Lake Michigan
shoreline. Ps made contributions to L of two
conservation easements (conservation easements) in
perpetuity that generally preclude them or any
subsequent owner of the property from ever developing
or disturbing the natural state of much of the bluff.
Ps contributed the first easement in 1992 and the
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second in 1993. Ps claimed on their 1992 and 1993
Federal income tax returns that the contributions were
qualified conservation contributions under sec.
170(h)(1), I.R.C. R concedes that the contributions
meet two of the three requirements for such a
characterization; i.e., the portions of the bluff
covered by the conservation easements are each a
“qualified real property interest” and L is a
“qualified organization”. R asserts that the
contributions fail the third requirement, that they be
“exclusively for conservation purposes”.
Held: Each of the contributions is a qualified
conservation contribution under sec. 170(h)(1), I.R.C.,
in that (1) the conservation easements protect a
relatively natural habitat of plants or wildlife as
required by sec. 170(h)(4)(A)(ii), I.R.C., and (2) L
(or any subsequent holder of the conservation
easements) holds (or will hold) the conservation
easements exclusively for conservation purposes as
required by sec. 170(h)(5), I.R.C.
Charles F. Glass and Susan G. Glass, pro sese.1
Alexandra E. Nicholaides, for respondent.
LARO, Judge: Petitioners petitioned the Court to
redetermine deficiencies of $26,539, $40,175, $26,193, and
$22,771 in their Federal income taxes for 1992, 1993, 1994, and
1995, respectively. We decide whether petitioners’ respective
contributions in 1992 and 1993 of two conservation easements
(collectively, conservation easements; separately, conservation
1
William B. Acker petitioned the Court on behalf of
petitioners and continued to represent them until he withdrew on
Mar. 25, 2002.
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easement 1 and conservation easement 2) were qualified
conservation contributions under section 170(h)(1).2 We hold
they were. Petitioners claimed on their 1992 and 1993 Federal
income tax returns (1992 return and 1993 return, respectively)
that their contributions of the conservation easements were
qualified conservation contributions. As further support for his
disallowance of those claims, respondent in his posttrial brief
argues for the first time that petitioners have not proven that
they met the “contemporaneous written acknowledgment” requirement
of section 170(f)(8). We consider this position to have been
advanced untimely and do not decide it. See Leahy v.
Commissioner, 87 T.C. 56, 64-65 (1986).
FINDINGS OF FACT
I. Background
Some facts were stipulated. We incorporate herein by this
reference the parties’ stipulation of facts and the exhibits
submitted therewith. We find the stipulated facts accordingly.
Petitioners are husband and wife, and they filed a joint Federal
income tax return for each relevant year. They resided in Emmet
County, Michigan (Emmet County), when their petition was filed.
2
Unless otherwise indicated, section references are to the
Internal Revenue Code applicable to the relevant years, and Rule
references are to the Tax Court Rules of Practice and Procedure.
The relevant provisions of sec. 170(h) are set forth in an
appendix to this Opinion.
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Emmet County is on the northern lower peninsula of Michigan and
has 50 or more miles of shoreline on Lake Michigan.
II. Petitioners
A. Charles F. Glass (Mr. Glass)
Mr. Glass is a lawyer who has practiced law in Michigan
since 1969. His legal specialties are real estate, medical
malpractice defense, and employment and family and domestic
matters.
B. Susan G. Glass (Ms. Glass)
Ms. Glass has a bachelor of arts degree in English and a
master’s degree in art. She also has a real estate license. She
has worked as a copywriter and as an artist.
III. The Property
A. Petitioners’ Purchase of the Property
On August 17, 1988, petitioners purchased property
(property) at 3445 North Lakeshore Drive, Harbor Springs,
Michigan (Harbor Springs), for $283,000. The property is sited
along the shoreline of Lake Michigan in northern Emmet County and
includes three buildings and approximately 10 acres of land.
Although the property’s address is listed as in Harbor Springs,
the property is actually outside Harbor Springs in the Township
of Readmond, Michigan (Readmond), approximately 2-1/2 miles north
of Good Hart, Michigan, and 3-1/2 miles south of the Township of
Cross Village, Michigan (Cross Village).
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B. Petitioners’ Use of the Property
Petitioners used the property as a vacation home until 1994,
when they began using the property as their primary residence.
During 1992 and 1993, they resided in Grosse Point Farms,
Michigan. During part of 1994 and all of 1995, they used their
residence in Grosse Point Farms as a secondary residence to the
property. From 1995 through 1999, they lived part time at the
property and part time in Detroit, Michigan; they continued
during those years to use the property as their primary
residence. In 1999 or 2000, they began living entirely at the
property.
C. Buildings on the Property
The property has had the same three buildings on it since
1988. The first building is a single-story small handcrafted
cabin that is made of hand-hewn logs and elm bark shaving. This
cabin is approximately 1,278 square feet and is used by
petitioners as their home. The second building is a single-story
guest cottage that is approximately 512 square feet. The third
building is a single-story garage that is approximately 525
square feet.
D. Description of the Property
The property’s dimensions are generally 460 feet in width
from north to south and 1,055 feet in depth from east to west.
Its eastern edge is a straight line bordering Highway M-119
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(M-119).3 Its western edge is a crooked line abutting Lake
Michigan. Lake Michigan cannot be seen through the property from
M-119 because many large trees and dense foliage grow throughout
much of the property. Included among the trees on the property
is a plantation of large (approximately 100-foot) old growth
original white pine trees.
A portion of the property that generally includes the
property’s total width and extends approximately 900 feet from
M-119 is relatively flat and is generally open, grassy, and well
lawned around petitioners’ home and wooded and bushy in other
places, especially along M-119. The rest of the property
(approximately 155 feet in depth and 460 feet in width) slopes
down a steep bluff at an angle of about 100 degrees to the
shoreline of Lake Michigan or, more specifically, to Lake
Michigan’s ordinary high water mark.4 The bluff is approximately
100 feet high, and a stairway goes down it to the shoreline. The
shoreline is level and consists of rocks, sand, grass, and weeds.
3
M-119 is a blacktop highway from Harbor Springs to Cross
Village that is called the “tunnel of trees” because of its
narrowness and the degree of growth near its shoulderless edges.
The side of M-119 closest to Lake Michigan has primarily
residential dwellings ranging in style from basic summer cottages
to elaborate year-round homes. The opposite side of M-119 has
undeveloped land.
4
Lake Michigan’s high water mark is 582.35 feet above sea
level. The U.S. Army Corps of Engineers set Lake Michigan’s
ordinary high water mark at approximately 581 feet above sea
level.
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The side of the bluff contains many trees (e.g., white pine,
cedar, spruce, oak, maple, balsam fir) and dense vegetation
(e.g., juniper bushes and other shrubs).
Petitioners’ home on the property is sited on relatively
flat land on the top of the bluff approximately 45 to 50 feet
from the edge at the top of the bluff. On a clear day, a
beautiful panoramic view of Lake Michigan may be seen from the
home and from a further distance of at least 50 more feet towards
M-119. Petitioners have chairs at the top of the bluff to enjoy
that view and to socialize.
Species of plants that grow on the Lake Michigan shoreline
in northern Emmet County include Lake Huron tansy and pitcher’s
thistle. These plants are considered to be threatened and
require undisturbed habitats to survive. Birds on that shoreline
include bald eagles, piping plovers, and kingfishers. Other
wildlife in the area includes deer, bears, and raccoons.
In the early 1990s, bald eagles were returning to the Lake
Michigan shoreline on and near the property, and the presence of
bald eagles along that shoreline is more common today than in
earlier years, when it was unusual to see an eagle on that
shoreline. An exceptionally old and high tree on the top of the
bluff of the property covered by conservation easement 1 (the
highest tree on the bluff for some miles) is an occasional
roosting site for at least one bald eagle. The property also has
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attracted kingfishers and has Lake Huron tansy growing on it,
especially on the bluff. The property is not an ideal habitat
for Lake Huron tansy or pitcher’s thistle, another threatened
species of plant, but the property, in its natural state, allows
for the creation or promotion of the habitat of those species as
well as the habitat of bald eagles and piping plovers.
E. Surroundings of the Property
The Lake Michigan shoreline from north of Harbor Springs to
Cross Village is generally developed only for residential and
related purposes. Most of that shoreline is privately owned with
single family vacation homes. Approximately one home is sited on
that shoreline every 250 feet in the half mile north of the
property and in the half mile south of the property; i.e.,
approximately 21 homes are in the immediate 1-mile vicinity of
the property.
The typical use of the land in the immediate vicinity of the
property is for single-family dwellings. Petitioners’ neighbors
to the north, for example, built a large home on two parcels of
land that cover approximately 400 feet of lakefront. A number of
high density developments with either lakefront or back lots are
also found on the land in the immediate vicinity of the property.
For example, the Sequoia Yacht Club, which is approximately 1 to
2 miles south of the property, is a platted subdivision which was
developed on 300 feet of lake frontage and 1,000 feet of depth
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and includes 3 lakefront lots and 19 or 20 back lots. Mr. Glass
assisted in the development of the Sequoia Yacht Club on the
underlying real estate which, unlike the property, has a large
area between the bluff and the water upon which to build. Other
nearby densely platted developments, e.g., Blisswood and Old
Trial Inn, both of which are approximately one-half mile from the
property, also consist of lakefront lots and back lots. Such
developments are not the norm in the area of the property; single
family homes and cottages are.
The nearest public access to the shoreline on the property
is approximately 1.5 miles to the south at Readmond Township Park
in Readmond.5 Readmond is approximately 40 square miles, is
approximately 10 miles north of Harbor Springs (the nearest
incorporated city), and is in Emmet County. Readmond abuts Lake
Michigan and is a popular tourist area in the summer when its
population increases substantially. The year-round, permanent
residents of Readmond totaled approximately 370 and 500 in 1990
and 2000, respectively.
The Readmond Township Park is a small park that is publicly
owned by Readmond. It has in it a picnic table, a sandy beach
with approximately 200 feet of frontage, and limited parking for
5
Although M-119 is a closer public point, Mr. Glass does
not allow people to cross his property to get to the shoreline
from M-119. Mr. Glass would consider such people to be
trespassers.
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approximately 15 cars. On both sides of the park are private
homes which extend down to the water. No incorporated cities are
found to the north of Readmond.
The nearest public access to the shoreline to the north of
the property is approximately 4 miles away in Cross Village.
Cross Village is in Emmet County and is also the nearest public
access for boats to enter Lake Michigan. The public area in
Cross Village includes 200 to 300 feet of lakefront property.
F. Zoning Rules as to the Property
During 1992 and 1993, part of the property was zoned
“scenic resource 2” (SR-2), and the rest of the property was
zoned “recreation residential 2” (RR-2). The SR-2 class applied
to the 400 feet of the property that started at the M-119 road
right of way.6 The zoning restrictions overlapped any other
restriction placed on the property as to construction, building,
or development.
1. SR-2 Class
The SR-2 class is essentially a single-family, low-density,
residential classification that allows any residential-related
use. The SR-2 class requires that a building lot have a minimum
size of 30,000 square feet, with at least one side measuring at
least 150 feet. The portion of the property zoned SR-2 also
6
The road is the traveled part and the road right of way is
the easement in which the road exists.
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included from the M-119 road right of way a 40-foot scenic
greenbelt setback (which may be included within the 30,000-
square-foot minimum lot size) in which tree removal, clearing, or
construction was restricted. With the exception of these zoning
rules, the Federal, State, and local governments generally
allowed petitioners to do whatever they desired as to the portion
of the property zoned SR-2. The portion of the property zoned
SR-2 was large enough that it could probably be divided into four
building lots of 30,000 square feet each.
2. RR-2 Class
The RR-2 class is designed to accommodate cottage and
seasonal home development. The RR-2 class requires that each
building lot have a minimum size of 22,000 square feet with at
least one side measuring at least 100 feet. The portion of the
property zoned RR-2 also included from the high water mark a
60-foot waterfront setback in which building or development was
not allowed. The conservation easements included space that was
within this 60-foot limitation.
3. Exceptions to the General Zoning Rules
The required minimum lot sizes under SR-2 and RR-2 could be
smaller if the lots had central (e.g., from the municipality)
sewer and water. In the case of RR-2, the required lot size
would then be 12,000 square feet with at least one side measuring
at least 100 feet. The portion of the property subject to the
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60-foot limitation may be included in ascertaining the building
site of 12,000 square feet, as may be the portions of the
property covered by the conservation easements.
G. Building on the Side of the Bluff
Some homes in Emmet County were built on the bluff along
Lake Michigan. The construction of a home on a bluff on or near
the property interferes with the bluff’s natural scenic beauty.
It also interferes with and destroys the natural habitat of
wildlife or plants that live or grow naturally on or near the
bluff. There also are risks of a landslide in building on or
near a bluff.
H. Enjoyment of the Property
The primary enjoyment of the Lake Michigan shoreline in
Emmet County is derived in the summer, particularly during July
and August. During the summer months (especially July and
August), people travel to that shoreline primarily to swim in
Lake Michigan and to relax on the beach there. With the
exception of people staying on the shoreline in Emmet County,
people generally do not travel to Emmet County to go boating.
A scenic view of the property is seen from watercraft on
Lake Michigan and from the property’s shoreline. As to the
former, the waters of Lake Michigan near the property at a
distance of at least one-half mile to 1 mile into the water are
some of the most heavily traveled parts of Lake Michigan. With
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the exception of recreational watercraft used by people staying
on the shoreline on or near the property, recreational watercraft
generally do not use those waters because a public harbor is not
relatively close to the property. The recreational watercraft
that do use those waters do so mainly in July and August and,
with the exception of recreational watercraft used by people
staying on the shoreline on or near the property, seldom come
close to the shoreline of the property. In the winter, only
freighters use the waters near the property, and they do so at a
distance that is approximately 1 mile into the water.
Few people walk the Lake Michigan shoreline in Emmet County
at times other than in the summer. In the summer (primarily July
and August), many people walk that shoreline, and many people
believe that the public is allowed to walk along any part of a
Great Lake shoreline up to the ordinary high water mark.7 Some
people do not walk on private beaches on Lake Michigan because
they view those beaches as the private property of another. The
people who walk the shoreline on or near the property are
7
In Glass v. Goeckel, 683 N.W.2d 719 (Mich. Ct. App. 2004),
the court ruled contrary to this belief that people who own land
on Lake Huron have the exclusive right to use and enjoy that land
up to the water’s edge. The trial court had ruled that the
public had a right to walk on the portion of that land that was
between the ordinary highwater mark and the water’s edge. In
reversing the trial court, the court of appeals held that the
general public may pass that land only by walking in the water.
The Supreme Court of Michigan agreed to hear an appeal of that
case and is currently considering this issue.
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generally neighboring landowners (or the renters of homes on that
land), family, or friends. The landowners on Lake Michigan
generally have an informal understanding that they (or their
guests, including renters of their land) may walk along Lake
Michigan on each other’s land.
IV. Easement on the Property Contributed by Petitioners in 1990
On December 31, 1990, petitioners recorded a document
(previous deed) entitled “Deed of Conservation Easement”. The
previous deed reflected an easement (previous easement) that
petitioners contributed to the Lake Traverse Conservancy (LTC)
Trust (trust). The previous easement covers the approximately
2.64 acres of the property consisting of the width of the
property at M-119 and 250 feet inland towards Lake Michigan.8
The previous deed generally restricts the building, construction,
development, or removal of trees on the portion of the property
encumbered by the previous easement (encumbered woodland), but
allows for the building of (and removal of trees for) a
3,200-square-foot garage/work space/studio and related access
road. When petitioners contributed the previous easement to the
trust, petitioners did not consider whether or how the
development of the unencumbered portion of the property would
affect the encumbered woodland.
8
The previous deed notes that an access road runs through
the previous easement to the garage, which is on a portion of the
property not covered by the previous easement.
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On their 1990 Federal income tax return (1990 return),
petitioners claimed as a deduction a $94,000 noncash charitable
contribution of the previous easement. Petitioners attached to
their 1990 return a letter from Robert W. Frame (Frame), C.A.E.,
M.A.I., stating that he had appraised the previous easement at
a fair market value of $94,000. Frame stated in the letter that
he had estimated that the fair market value of the encumbered
woodland was $114,000 before the previous easement was imposed,
that the fair market value of the encumbered woodland was $10,000
after the previous easement was imposed, and that the previous
easement enhanced by $10,000 the fair market value of the portion
of the property that was not encumbered by the previous easement.
Frame concluded in the letter that these numbers resulted in the
claimed $94,000 fair market value for the previous easement
($114,000 - ($10,000 + $10,000) = $94,000).
V. Easement on the Property Contributed by Petitioners in 1992
On December 28, 1992, petitioners signed a document (deed 1)
entitled “Conservation Easement”. Deed 1 was recorded at the
Register of Deeds for Emmet County on December 29, 1992. LTC
prepared deed 1 contemporaneously with petitioners’ contribution
to the trust of conservation easement 1 in perpetuity. At the
time of that contribution, petitioners also contributed $2,000 to
the trust.
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Conservation easement 1 covers the part of the property
consisting of the northernmost 150 feet of shoreline and all
portions landward for 120 feet from the ordinary high water mark
(encumbered shoreline 1). Deed 1 states that encumbered
shoreline 1 “contains a relatively intact forested ecosystem,
providing wildlife habitat, as well as habitat for old growth
white pine trees”, that “lake front property in and around the
area of the Property is under intense development pressure,
thereby causing or at least exacerbating the impact on rare and
protected flora and fauna of the area such as the piping plover
* * * and Huron Tansy”,9 and that petitioners and LTC
recognize the scenic and natural resource values of the
Property and share the common intention to conserve
these values in perpetuity by the conveyance of a
Conservation Easement to protect the use or development
of the Property for any purpose or in any manner which
would conflict with the maintenance of these scenic and
natural resource values.
Deed 1 states further that
The purpose of this Conservation Easement is to ensure
that the scenic and natural resource values of the
Property will be retained forever. This Conservation
Easement is intended to prevent the use or development
of the Property for any purpose or in any manner which
conflicts with the perpetual maintenance of these
scenic and natural resource values. By executing this
Conservation Easement, the Grantors acknowledge that
they are giving up development rights associated with
9
The reference in deed 1 to “wildlife”, “flora and fauna”,
and the specific species of those items was a general reference
to wildlife, flora and fauna, and the specific species found
along the Lake Michigan shoreline in Emmet County and not
necessarily on encumbered shoreline 1.
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the Property. In addition, this Conservation Easement
includes covenants on the part of the Grantors to
refrain from doing certain acts, as set forth below, so
that all uses of the Property will be consistent with
this Conservation Easement. Grantee accepts this
Conservation Easement to conserve the natural resources
and scenic values of the Property for the present and
future generations. The parties acknowledge that this
Conservation Easement constitutes a servitude upon the
land and runs with the land.
Deed 1 goes on to list activities that are restricted on
encumbered shoreline 1 (e.g., mining activities and, except as
otherwise provided in deed 1, development, construction,
improvement, or similar acts that would destroy any part of
encumbered shoreline 1), and activities that are permitted on
encumbered shoreline 1 (e.g., alteration of trees to provide
views of Lake Michigan, construction of foot paths to the Lake
Michigan shoreline, and certain construction of overlook decks,
patios, or boat houses). Deed 1 generally states that
petitioners are liable for any cost incurred by LTC to enforce
conservation easement 1 and allows conservation easement 1 to be
terminated “If subsequent, unexpected changes in the Property, or
nearby property, render the Purpose of this Conservation Easement
impossible to achieve”. Deed 1 states that LTC
may transfer or otherwise assign this Conservation
Easement only to a qualified conservation organization
which agrees to enforce this Conservation Easement in
accordance with the regulations established by the
Internal Revenue Service governing such transfers and
the laws of the State of Michigan. If Grantee ceases
to exist, Grantee’s rights and obligations under this
Conservation Easement shall immediately vest in the
following entities in the following order to the extent
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they evince an intent to accept this Conservation
Easement: (a) The Nature Conservancy, (b) the Michigan
department of Natural Resources, or (c) any other
appropriate organization which qualifies under Section
170(h)(3) of the Code, has conservation purposes, and
is qualified to accept and hold this Conservation
Easement either voluntarily or through an award of such
right by a court of competent jurisdiction under the
doctrine of cy pres.
Deed 1 does not restrict petitioners’ right to develop any part
of the property not covered by conservation easement 1.
Petitioners obtained from Frame an appraisal of conservation
easement 1 and attached to their 1992 return a letter from Frame
stating that he had appraised conservation easement 1 at a fair
market value of $99,000. Frame stated in the letter that he had
estimated that the fair market value of encumbered shoreline 1
was $249,000 before conservation easement 1 was imposed, that the
fair market value of encumbered shoreline 1 was $99,500 after
conservation easement 1 was imposed, and that conservation
easement 1 enhanced by $50,500 the fair market value of the
portion of the property not covered by conservation easement 1.
Frame concluded in the letter that these numbers resulted in the
claimed $99,000 fair market value for conservation easement 1
($249,000 - ($99,500 + $50,500) = $99,000).
Petitioners claimed on their 1992 return that they had made
total charitable contributions of $108,957, consisting of a
$99,000 noncash contribution of conservation easement 1 and cash
contributions of $9,957. Petitioners deducted on their 1992
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return $95,569 of the total claimed charitable contributions and
carried over the $13,388 balance to 1993.
VI. Easement on the Property Contributed by Petitioners in 1993
On December 28, 1993, petitioners signed a document (deed 2)
entitled “Lakefront Conservation Easement #2”. Deed 2 was
recorded in the Emmet County Register of Deeds on December 30,
1993, and re-recorded there on November 24, 1994. LTC prepared
deed 2 contemporaneously with petitioners’ contribution to the
trust of conservation easement 2 in perpetuity. At the time of
that contribution, petitioners also contributed $2,000 to the
trust. On December 30, 1993, a mortgagee of the property agreed
to subordinate its mortgage on the property to the extent
necessary to permit LTC to enforce the purpose of conservation
easement 2 in perpetuity.
Conservation easement 2 covers the part of the property
consisting of the southernmost 260 feet of shoreline and all
portions landward for 120 feet from the ordinary high water mark
(encumbered shoreline 2). Deed 2 states verbatim with deed 1
that encumbered shoreline 2 “contains a relatively intact
forested ecosystem, providing wildlife habitat, as well as
habitat for old growth white pine trees”, that “the lake front
property in and around the area of the Property is under intense
development pressure, thereby causing or at least exacerbating
the impact on rare and protected flora and fauna of the area such
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as the piping plover * * * and Huron Tansy”,10 and that
petitioners and LTC
recognize the scenic and natural resource values of the
Property and share the common intention to conserve
these values in perpetuity by the conveyance of a
Conservation Easement to protect the use or development
of the Property for any purpose or in any manner which
would conflict with the maintenance of these scenic and
natural resource values.
Deed 2 also states verbatim with deed 1 that
The purpose of this Conservation Easement is to ensure
that the scenic and natural resource values of the
Property will be retained forever. This Conservation
Easement is intended to prevent the use or development
of the Property for any purpose or in any manner which
conflicts with the perpetual maintenance of these
scenic and natural resource values. By executing this
Conservation Easement, the Grantors acknowledge that
they are giving up development rights associated with
the Property. In addition, this Conservation Easement
includes covenants on the part of the Grantors to
refrain from doing certain acts, as set forth below, so
that all uses of the Property will be consistent with
this Conservation Easement. Grantee accepts this
Conservation Easement to conserve the natural resources
and scenic values of the Property for the present and
future generations. The parties acknowledge that this
Conservation Easement constitutes a servitude upon the
land and runs with the land.
Deed 2 goes on to list activities that are restricted on
encumbered shoreline 2 (e.g., mining activities and, except as
otherwise provided in deed 2, development, construction,
improvement, or similar acts that would destroy any part of
10
The reference in deed 2 to “wildlife”, “flora and fauna”,
and the specific species of those items was a general reference
to wildlife, flora and fauna, and the specific species found
along the Lake Michigan shoreline in Emmet County and not
necessarily on encumbered shoreline 2.
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encumbered shoreline 2), and activities that are permitted on
encumbered shoreline 2 (e.g., alteration of trees to provide
views of Lake Michigan, construction of foot paths to the Lake
Michigan shoreline, and certain construction of overlook decks,
patios, or boat houses). Deed 2 generally states that
petitioners are liable for any cost incurred by LTC to enforce
conservation easement 2 and allows conservation easement 2 to be
terminated “If subsequent, unexpected changes in the Property, or
nearby property, render the Purpose of this Conservation Easement
impossible to achieve”. Deed 2 states that LTC
may transfer or otherwise assign this Conservation
Easement only to a qualified conservation organization
which agrees to enforce this Conservation Easement in
accordance with the regulations established by the
Internal Revenue Service governing such transfers and
the laws of the State of Michigan. If Grantee ceases
to exist, Grantee’s rights and obligations under this
Conservation Easement shall immediately vest in the
following entities in the following order to the extent
they evince an intent to accept this Conservation
Easement: (a) The Nature Conservancy, (b) the Michigan
department of Natural Resources, or (c) any other
appropriate organization which qualifies under Section
170(h)(3) of the Code, has conservation purposes, and
is qualified to accept and hold this Conservation
Easement either voluntarily or through an award of such
right by a court of competent jurisdiction under the
doctrine of cy pres.
Deed 2 does not restrict petitioners’ right to develop any part
of the property not covered by conservation easement 2.
Petitioners obtained from Frame an appraisal of conservation
easement 2 and attached to their 1993 return a letter from Frame
stating that he had appraised conservation easement 2 at a fair
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market value of $241,800. Frame stated in the letter that he had
estimated that the fair market value of encumbered shoreline 2
was $483,600 before conservation easement 2 was imposed, that the
fair market value of encumbered shoreline 2 was $193,400 after
conservation easement 2 was imposed, and that conservation
easement 2 enhanced by $48,400 the fair market value of the
portion of the property that was not covered by conservation
easement 2. Frame concluded in the letter that these numbers
resulted in the claimed $241,800 fair market value for
conservation easement 2 ($483,600 - ($193,400 + $48,400) =
$241,800).
Petitioners claimed on their 1993 return that they had made
total charitable contributions of $266,602, consisting of a
$241,800 noncash contribution of conservation easement 2, cash
contributions of $11,414, and the $13,388 carryover from 1992.
Petitioners deducted on their 1993 return $128,473 of the total
claimed contributions and carried over the $138,129 balance to
1994. Petitioners later deducted $86,939 of the carryover for
1994 and the remainder for 1995.
VII. The Conservation Easements
Development of the lakefront immediately to the north and
south of the property is not limited by any restrictive easement
similar to the conservation easements. When petitioners
contributed the conservation easements to the trust, petitioners
- 23 -
and LTC understood that restrictions were not placed on
petitioners’ use of the unencumbered portions of the property.
Petitioners also understood at those times that they (or a
subsequent owner of the property) could develop the unencumbered
portions of the property in any desired way (subject to zoning
limitations). Petitioners did not consider at those times
whether or how development of the unencumbered portions of the
property would affect the ecosystem of the portions of the
property covered by the conservation easements. Petitioners did
not grant any restrictive easement on the middle of the property
because they wanted to be able to develop it if they desired.
LTC wanted to obtain the conservation easements, and sought
and continues to seek to obtain similar conservation easements in
northern Michigan, because LTC believes that northern Michigan is
relatively undeveloped as compared with other parts of the State.
Significant and abundant natural resources are present in
northern Michigan, particularly around M-119 and the nearby
shoreline, and LTC believes that these resources may be
threatened by overdevelopment. LTC attempts to balance a
development of northern Michigan with a development of new nature
preserves and the protection of areas for wildlife and scenic
views.
LTC made a special effort in the 1990s to attempt to
conserve land in the area of the property. Bald eagles were
- 24 -
returning to that area, and LTC believed that bald eagles are
very sensitive to human activity. Much development also had
occurred near the property, including the subdividing of land in
a manner that LTC believed threatened to hurt the scenic quality
and drive out the wildlife. LTC wanted to minimize any
development of the shoreline on or near the property so as not to
drive out the bald eagles, to protect the natural scenic beauty
of the bluff, and to protect the habitat for local wildlife and
plants including Lake Huron tansy and pitcher’s thistle.
LTC acknowledged and accepted the conservation easements on
the basis of the legal descriptions set forth in deed 1 and deed
2. LTC accepted the conservation easements in part to protect
the Lake Michigan shoreline of the property going up to and over
the top of the bluff so as to preserve intact the present or
potential habitat there for wildlife and plants. LTC also
accepted the conservation easements in part to protect the
structure of the bluff itself; e.g., by controlling any erosion
of that bluff. The bluff is sandy, delicate, and subject to
erosion. Building on the bluff would erode the bluff and
displace the vegetation growing on it.
The conservation easements have not restricted petitioners’
use or enjoyment of the property but have limited the development
of encumbered shoreline 1 and encumbered shoreline 2
(collectively, encumbered shoreline). Petitioners contributed
- 25 -
the conservation easements to the trust to protect the encumbered
shoreline from development and to deduct a resulting charitable
contribution. As to the former, petitioners hoped that their
neighbors would also restrict a similar portion of their real
estate in order to conserve it.
The conservation easements preclude petitioners from
building on the lakefront lots of the property and, as granted,
cover some but not all of the bluff on the property; neither of
the conservation easements reaches the top of the bluff, and the
conservation easements cover only 410 of the 460 feet of the
shoreline of the property.11 When they granted the conservation
easements, petitioners believed that the conservation easements
extended over the top of the bluff. They learned they were
mistaken when the property was later surveyed (the property was
not surveyed when they bought it). In July 2004, petitioners
filed a lawsuit (lawsuit) in Emmet County Circuit Court against
LTC. The lawsuit, which is currently pending, seeks a
reformation of the deeds underlying the conservation easements to
enlarge the encumbered shoreline.
11
When they contributed conservation easement 2 to the
trust, petitioners knew that 50 feet of shoreline was
unencumbered. Petitioners may develop that unencumbered
shoreline in any way consistent with the zoning requirements.
- 26 -
VIII. LTC
LTC is a Michigan nonprofit organization described in
section 170(c) and exempt from Federal income tax under section
501(c)(3). LTC has more than 4,200 members and is the largest
membership-supported nonprofit organization in northern Michigan.
LTC’s current endowment fund is $4 million. LTC’s endowment fund
from 1992 through 1995 was between $1.25 and $2.5 million.
LTC has operated for more than three decades to preserve
land and wilderness in trust for conservation and for the
recreation and education of the people of Michigan. LTC’s
purpose is to protect the natural integrity and scenic beauty of
northern Michigan for the enjoyment of future generations.12 LTC
supports its purpose by: (1) Acquiring property by contribution
or purchase, (2) obtaining easements such as the conservation
easements by gift or through purchase, and (3) educating the
public about the purposes of LTC. LTC currently owns
approximately 75 miles of shoreline on rivers, lakes, and streams
in northern Michigan.
When a landowner contributes an easement to LTC, LTC
typically also asks for and receives a cash contribution from
that landowner. The cash contribution is meant to help LTC
monitor and, if necessary, enforce the terms of the easement.
12
In this context, the “natural integrity” of the land
includes its ecosystem concept which refers to the protection of
the ecosystem of wildlife, fish, plants, and animals.
- 27 -
LTC also helps the landowner find an appraiser to value the
contributed property by furnishing the landowner with a list of
appraisers, all of whom attended a seminar on the subject
sponsored by LTC. LTC also usually gives the landowner some
brochures explaining the mechanics of a conservation easement and
a guide detailing the tax ramifications of a conservation
easement and the contribution thereof. LTC does not value any
easement that it receives from a landowner, and LTC does not
acknowledge or accept any valuation of the easement. LTC usually
verifies its receipt of a contributed easement by signing Form
8283, Noncash Charitable Contributions.
LTC does not on an annual basis formally monitor each
conservation easement that it receives to ensure compliance but
occasionally monitors them informally. LTC maintains a file for
each of these easements.
OPINION
We decide whether petitioners’ contributions of the
conservation easements are qualified conservation contributions
under section 170(h)(1). Petitioners argue they are.13
According to petitioners, the conservation easements prohibit any
construction, development, or disturbance of the natural state of
13
While petitioners filed the lawsuit to reform the deeds
underlying the conservation easements, we decide this case on the
basis of the specific property that petitioners actually
contributed to the trust in 1992 and 1993.
- 28 -
the bluff on the encumbered shoreline. Petitioners conclude that
the conservation easements: (1) Protect a relatively natural
habitat for wildlife and plants, (2) preserve open space for the
scenic enjoyment of the general public, which will yield a
significant public benefit, and (3) preserve open space pursuant
to clearly delineated public policies set forth in the Emmet
County zoning ordinances and in the Endangered Species Act of
1973, Pub. L. 93-205, sec. 2(b), 87 Stat. 884, current version at
16 U.S.C. sec. 1531(b) (2000), which will yield a significant
public benefit. Respondent argues that petitioners have not
proven that the conservation easements did any of those things.
Respondent concludes, argues, and determined that the
conservation easements are not qualified conservation
contributions under section 170(h)(1).
Respondent’s deficiency determination is presumed correct,
and petitioners must prove it wrong in order to prevail.14
Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioners must prove their entitlement to deduct their claimed
14
In certain cases, if an individual introduces credible
evidence with respect to a factual issue relevant to ascertaining
his or her proper tax liability, sec. 7491 places the burden of
proof on the Commissioner as to that issue. See sec. 7491(a);
Rule 142(a)(2). Sec. 7491 applies to court cases arising in
connection with examinations commencing after July 22, 1998. See
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(c)(2), 112 Stat. 726. Because the
examination underlying this case commenced before July 23, 1998,
sec. 7491(a) does not apply to shift the burden of proof to
respondent.
- 29 -
charitable contributions; deductions are strictly a matter of
legislative grace, and petitioners must satisfy the specific
statutory requirements for their claimed deductions. Deputy v.
DuPont, 308 U.S. 488, 493 (1940).
Section 170(a)(1) generally allows a deduction for any
charitable contribution made during the taxable year. In this
context, a charitable contribution includes a gift of property to
a charitable organization, made with charitable intent and
without the receipt or expectation of receipt of adequate
consideration. See Hernandez v. Commissioner, 490 U.S. 680, 690
(1989); United States v. Am. Bar Endowment, 477 U.S. 105, 116-118
(1986); see also sec. 1.170A-1(h)(1) and (2), Income Tax Regs.
While section 170(f)(3) generally does not allow an individual to
deduct a charitable contribution for a gift of property
consisting of less than his or her entire interest in that
property, an exception applies in the case of a “qualified
conservation contribution.” See sec. 170(f)(3)(B)(iii). A
contribution of real property is a qualified conservation
contribution if (1) the real property is a “qualified real
property interest”, (2) the contributee is a “qualified
organization”, and (3) the contribution is “exclusively for
conservation purposes” (collectively, three requirements). Sec.
170(h)(1); see also sec. 1.170A-14(a), Income Tax Regs.
- 30 -
As to the first of the three requirements, an interest in
real property is a qualified real property interest if the
interest is the donor’s entire interest in that real property
(other than a qualified mineral interest), a remainder interest,
or a restriction granted in perpetuity on the use which may be
made of the real property. Sec. 170(h)(2). In the case of the
latter, i.e., a restriction granted in perpetuity on the use
which may be made of the real property, the regulations
interpreting that provision clarify that such a restriction must
be legally enforceable to limit any use of the real property that
is inconsistent with the conservation purpose of the
contribution. See sec. 1.170A-14(g)(1), Income Tax Regs. These
regulations note that this requirement may be met by recording
the restriction in the land records of the jurisdiction in which
the real property is located. Id.As to the second of the three requirements, a contributee is
a qualified organization if it is described in section 170(h)(3).
The regulations interpreting this provision mandate that the
organization be committed to protecting the conservation purposes
of the contribution and have the resources necessary to enforce
the restrictions granted in perpetuity. Sec. 1.170A-14(c)(1),
Income Tax Regs.
As to the third of the three requirements, a contribution is
made exclusively for conservation purposes if it meets the tests
- 31 -
of section 170(h)(4) and (5). Section 170(h)(4)(A) generally
provides that a contribution is for a conservation purpose if it:
(1) Preserves land for outdoor recreation by, or the education
of, the general public, (2) protects a relatively natural habitat
of fish, wildlife, or plants, or similar ecosystem, (3) preserves
open space for the scenic enjoyment of the general public or
pursuant to a Federal, State, or local governmental conservation
policy, and this preservation will yield a significant public
benefit, or (4) preserves a historically important land area or a
certified historic structure. See also sec. 1.170A-14(d)(1),
Income Tax Regs. Under the statute, each of these four prongs is
a conservation purpose in and of itself, and a taxpayer’s
satisfaction of one of these prongs suffices to establish the
requisite conservation purpose. See also S. Rept. 96-1007, at 10
(1980), 1980-2 C.B. 599, 604. Section 170(h)(5)(A) generally
provides that a contribution of a qualified real property
interest may be exclusively for conservation purposes only if it
is protected in perpetuity. The statute contains no further
specific guidance as to when a contribution of a qualified real
property interest that is protected in perpetuity will be
exclusively for conservation purposes.
The requirement in section 170(h)(1)(C) that a qualified
contribution of a conservation easement be “exclusively for
charitable purposes” may be traced to the Tax Reform Act of 1969
- 32 -
(TRA 1969), Pub. L. 91-172, sec. 201(a), 83 Stat. 549. Congress
generally provided in section 170(f)(3)(A), as then enacted, that
an individual may not deduct a charitable contribution for
contributed property in which he or she retained an interest.
See TRA 1969 sec. 201(a)(1). However, Congress provided in
section 170(f)(3)(B)(ii), as then enacted, that this general rule
of nondeductibility would not apply if the contribution was of an
undivided portion of the taxpayer’s entire interest in the
property. See TRA 1969 sec. 201(a). The conferees stated in
their report on section 170(f)(3)(B)(ii) that they intended that
such an undivided interest include an open space easement in
gross where the easement was in perpetuity.15 H. Conf. Rept.
91-782, at 294 (1969), 1969-3 C.B. 644, 654. In light of this
statement, the regulations interpreting section 170(f)(3)(B)(ii),
as enacted in 1969, allowed a charitable deduction for the fair
market value of an easement contributed to a charitable
organization in perpetuity where the easement restricts the use
of the taxpayer’s property; e.g., by limiting the type and height
of buildings that may be erected, the removal of trees, the
15
Sec. 1.170A-7(b)(1)(ii), Income Tax Regs., defines an
“easement in gross” as “a mere personal interest in, or right to
use, the land of another; it is not supported by a dominant
estate but is attached to, and vested in, the person to whom it
is granted.” See also Black’s Law Dictionary 527 (7th ed. 1999)
(the term “easement in gross” denotes “An easement benefitting a
particular person and not a particular piece of land”).
- 33 -
erection of utility lines, the dumping of trash, and the use of
signs. See sec. 1.170A-7(b)(1)(ii), Income Tax Regs.
In the Tax Reduction and Simplification Act of 1977 (TRSA),
Pub. L. 95-30, sec. 309(a), 91 Stat. 154, Congress enacted the
initial version of section 170(f)(3)(B)(iii), creating an
exception from the general rule of section 170(f)(3)(A) for an
“easement with respect to real property granted in perpetuity to
an organization described in subsection (b)(1)(A) exclusively for
conservation purposes”.16 The conference report on TRSA
explained that
While it is intended that the term “conservation
purposes” be liberally construed with regard to the
types of property with respect to which deductible
conservation easements * * * may be granted, it is also
intended that contributions of perpetual easements * *
* qualify for the deduction only in situations where
the conservation purposes of protecting or preserving
the property will in practice be carried out. Thus, it
is intended that a contribution of a conservation
easement * * * qualify for a deduction only if the
holding of the easement * * * is related to the purpose
16
Congress coined the terms “conservation purposes” and
“exclusively for conservation purposes” in the Tax Reform Act of
1976 (TRA 1976), Pub. L. 94-455, sec. 2124(e)(1)(C) and (D),
90 Stat. 1919. Congress provided further in the TRA 1976 that
the term “conservation purposes” in this context means (1) “the
preservation of land areas for public outdoor recreation or
education, or scenic enjoyment”, (2) “the preservation of
historically important land areas or structures”, or (3) “the
protection of natural environmental systems”. TRA 1976 sec.
2124(e)(1)(D); see also sec. 170(f)(3)(C), as enacted by TRA
1976. Congress did not in the TRA 1976 define (or indicate the
meaning of) either the word “exclusively” or the term
“exclusively for conservation purposes”. Nor does the
legislative history of the TRA 1976 shed any light on the meaning
of that word or that term.
- 34 -
or function constituting the donee’s purpose for
exemption (organizations such as nature conservancies,
environmental, and historic trusts, State and local
governments, etc.) and the donee is able to enforce its
rights as holder of the easement * * * and protect the
conservation purposes which the contribution is
intended to advance. The requirement that the
contribution be exclusively for conservation purposes
is also intended to limit deductible contributions to
those transfers which require that the donee hold the
easement * * * exclusively for conservation purposes
(i.e., that they not be transferable by the donee in
exchange for money, other property, or services). [H.
Conf. Rept. 95-263, at 30-31 (1977), 1977-1 C.B. 519,
523.]
As originally enacted, the provisions of former section
170(f)(3)(B)(iii) did not apply to contributions made after
June 13, 1981. TRSA sec. 309(b)(1), 91 Stat. 154. In the Tax
Treatment Extension Act of 1980 (TTEA), Pub. L. 96-541,
sec. 6(a), 94 Stat. 3206, Congress effectively extended those
provisions permanently. The Senate report behind this extension
noted the committee’s belief that the preservation of our
country’s natural resources and cultural heritage was important
and that conservation easements play an important role in this
preservation. S. Rept. 96-1007, supra at 9, 1980-2 C.B. at 603.
The report also noted that
The committee also recognizes that it is not in the
country’s best interest to restrict or prohibit the
development of all land areas and existing structures.
Therefore, the committee believes that provisions
allowing deductions for conservation easements should
be directed at the preservation of unique or otherwise
significant land areas or structures. Accordingly, the
committee has agreed to extend the expiring provisions
of present law on a permanent basis and modify those
provisions in several respects.
- 35 -
In particular, the committee found it appropriate
to expand the types of transfers which will qualify as
deductible contributions in certain cases where the
contributions are likely to further significant
conservation goals without presenting significant
potential for abuse. In addition, the committee bill
would restrict the qualifying contributions where there
is no assurance that the public benefit, if any,
furthered by the contribution would be substantial
enough to justify the allowance of a deduction. In
addition, the committee decided that the treatment of
open space easements should be clarified. [Id. at
9-10, 1980-2 C.B. at 603.]
With our understanding of the statute and its relevant
legislative history in mind, we now turn back to the three
requirements for a qualified conservation contribution.
Respondent concedes that the first and second requirements have
been met; i.e., the conservation easements are qualified real
property interests and the contributee is a qualified
organization under section 170(h)(3). As to the third
requirement, respondent challenges petitioners’ assertion that
the conservation easements protect a relatively natural habitat
of wildlife or plants for purposes of section 170(h)(4)(A)(ii).
Respondent also challenges petitioners’ assertion that the
conservation easements preserve open space in the manner required
by section 170(h)(4)(A)(iii). Petitioners will prevail as to
this issue if (1) they establish either of those conservation
purposes as to the contributions and (2) they meet the
requirement in section 170(h)(5) that the contributions be
exclusively for at least one of those conservation purposes.
- 36 -
As to the first assertion, section 1.170A-14(d)(3)(i),
Income Tax Regs., interprets section 170(h)(4)(A)(ii) to provide
that a qualified real property interest will meet the
conservation purposes test, and thus satisfy the third
requirement before us, if that interest is contributed “to
protect a significant relatively natural habitat in which a fish,
wildlife, or plant community, or similar ecosystem, normally
lives”. For this purpose, section 1.170A-14(d)(3)(ii), Income
Tax Regs., lists as examples of significant habitats and
ecosystems: (1) Habitats for rare, endangered, or threatened
species of animals, fish, or plants, (2) natural areas that
represent high quality examples of a terrestrial or aquatic
community, such as islands that are undeveloped or not intensely
developed where the coastal ecosystem is relatively intact, and
(3) natural areas which are included in, or which contribute to,
the ecological viability of a local, State, or National park,
nature preserve, wildlife refuge, wilderness area, or other
similar conservation area. Section 1.170A-14(d)(3)(iii), Income
Tax Regs., explains that a contribution of a qualified real
property interest that meets this significant habitat or
ecosystem test is deductible even if, as here, the public’s right
to access that property is restricted. The legislative history
of the TTEA states that a contribution is “considered to be made
for conservation purposes if it will operate to protect or
- 37 -
enhance the viability of an area or environment in which a fish,
wildlife, or plant community normally lives or occurs.” S. Rept.
96-1007, supra at 10, 1980-2 C.B. at 604. That legislative
history emphasizes that “The committee intends that contributions
for this purpose will protect and preserve significant natural
habitats and ecosystems”. Id. at 11, 1980-2 C.B. at 604.
Respondent argues that petitioners have not satisfied any of
the examples set forth in the regulations. We disagree. LTC’s
executive director, Thomas Bailey (Bailey), testified credibly
that the property is a “famous” roosting spot for bald eagles and
that the conservation easements establish a proper place for the
growth and existence of Lake Huron tansy and pitcher’s thistle.
Bailey also testified credibly that he has toured the property on
various occasions, that the habitat on the encumbered shoreline
is a proper and normal environment for Lake Huron tansy,
pitcher’s thistle, and bald eagles, among other species, and that
the staff of LTC has seen Lake Huron tansy growing on the
property. Ms. Glass testified credibly that she also has seen
Lake Huron tansy growing on the property and that she has
regularly seen bald eagles there as well. She also testified
credibly that at least one of those eagles roosts on a tree
growing on encumbered shoreline 1. We also find in the record
probative evidence that both Lake Huron tansy and pitcher’s
thistle are considered threatened species which are worthy of
- 38 -
special attention towards the goal of preservation and that LTC,
the largest membership-supported nonprofit organization in
northern Michigan, has agreed through the conservation easements
to attempt to preserve those species by giving them that special
attention.
We apply the plain meaning of the words “habitat” and
“community” to interpret them for purposes of the statute and the
regulations. Cf. Venture Funding, Ltd. v. Commissioner, 110 T.C.
236, 241-242 (1998), affd. without published opinion 198 F.3d 248(6th Cir. 1999); Trans City Life Ins. Co. v. Commissioner, 106
T.C. 274, 299 (1996). A habitat denotes “The area or environment
where an organism or ecological community normally lives or
occurs” or “The place where a person or thing is most likely to
be found.” American Heritage Dictionary of the English Language
786 (4th ed. 2000); see also 7 C.F.R. sec. 636.3 (2002)
(“Wildlife habitat means the aquatic and terrestrial environments
required for wildlife to complete their life cycles, including
air, food, cover, water, and spatial requirements.”). A
community may be defined in this context as “A group of plants
and animals living and interacting with one another in a specific
region under relatively similar environmental conditions.”
American Heritage Dictionary of the English Language 374.
The encumbered shoreline fits those definitions of “habitat”
and “community”. In its natural undeveloped state, it is a
- 39 -
“relatively natural habitat” for a community of Lake Huron tansy,
of pitcher’s thistle, and of bald eagles, among other species of
plants and wildlife. Each of the conservation easements will
therefore protect and preserve significant natural habitats by
limiting the development or use of the encumbered shoreline.17
By the same token, petitioners’ contributions of the conservation
easements operate to protect or enhance the viability of an area
or environment in which a wildlife community and a plant
community normally live or occur. Both portions of encumbered
shoreline also have natural values that make them possible places
to create or promote the habitat of Lake Huron tansy as well as
the habitat of bald eagles. We hold that petitioners have proven
that their contributions of the conservation easements were for a
conservation purpose under section 170(h)(4), specifically,
section 170(h)(4)(A)(ii).18
We turn to the question of whether petitioners’
contributions also meet the “exclusively for conservation
purposes” requirement of section 170(h)(5). We read that term to
place a focus on the contributee’s holding of a qualified real
17
We read sec. 170(h)(4)(A)(ii) to mean that the protection
of a relatively natural habitat of wildlife or plants, in and of
itself, is a significant conservation purpose within the intent
of the statute.
18
On the basis of this holding, we need not and do not
consider petitioners’ other arguments that the conservation
easements also meet the requirements of sec. 170(h)(4)(A)(iii).
- 40 -
property interest and, more specifically, to require that the
contributee hold such an interest in perpetuity exclusively for
one or more of the conservation purposes listed in section
170(h)(4). While the term was included in the TRA 1976 without
any specific indication as to its meaning, see discussion supra
note 16, the legislative history of the TRSA briefly discusses
the meaning of that term. Although the view of a subsequent
Congress is not a controlling basis from which to infer the
intent of an earlier Congress, Haynes v. United States, 390 U.S.
85, 87 n.4 (1968); United States v. Philadelphia Natl. Bank,
374 U.S. 321, 348-349 (1963), we note that the TRSA modified
former section 170(f)(3)(B) by adding a provision (former section
170(h)(3)(B)(iii)) containing the phrase “exclusively for
conservation purposes” and that the legislative history to this
modification is consistent with our reading. The legislative
history states:
it is intended that a contribution of a conservation
easement * * * qualify for a deduction only if the
holding of the easement * * * is related to the purpose
or function constituting the donee’s purpose for
exemption * * * and the donee is able to enforce its
rights as holder of the easement * * * and protect the
conservation purposes which the contribution is
intended to advance. The requirement that the
contribution be exclusively for conservation purposes
is also intended to limit deductible contributions to
those transfers which require that the donee hold the
easement * * * exclusively for conservation purposes
(i.e., that they not be transferable by the donee in
exchange for money, other property, or services). [H.
Conf. Rept. 95-263, supra at 30-31, 1977-1 C.B. at
523.]
- 41 -
We conclude that petitioners’ contributions meet the
“exclusively for conservation purposes” requirement of section
170(h)(5). The contributee, LTC, is a legitimate, longstanding
nature conservancy dealing at arm’s length with petitioners, and
LTC has agreed (and has the commitment and financial resources)
to enforce the preservation-related restrictions included in deed
1 and deed 2 in perpetuity. LTC’s holding of the conservation
easements also is directly related to its tax-exempt purposes.
We also note that petitioners through the restrictions in deed 1
and deed 2 have gratuitously surrendered valuable property rights
in the encumbered shoreline, that those restrictions are legally
enforceable to limit in perpetuity any inconsistent use of the
encumbered shoreline, and that any subsequent holder of the
conservation easements must be an entity fully committed to
carrying out the contributions’ charitable purposes. Congress
through the enactment of section 170(h) intended in relevant part
to encourage preservation of our country’s natural resources
through the contribution of easements such as the conservation
easements, see S. Rept. 96-1007, supra at 9, 1980-2 C.B. at 603,
and petitioners’ contributions of the conservation easements,
which serve to preserve this Nation’s natural resources of bald
eagles, Lake Huron tansy, and the bluff, among other things, are
consistent with the statute’s objective.
- 42 -
We hold that petitioners’ respective contributions in 1992
and 1993 of the conservation easements are qualified conservation
contributions under section 170(h)(1) because, in relevant part,
they protect a relatively natural habitat of wildlife and plants
and are exclusively for conservation purposes.19 In so holding,
we have considered all arguments made as to the issues decided
herein, and we have rejected as meritless those arguments not
discussed herein.20
19
The encumbered shoreline is a portion of real property
used by petitioners as their personal residence, and sec.
170(h)(4)(A)(ii) does not require that the protection of the
natural habitats referenced therein be pursuant to a clearly
delineated governmental conservation policy. The staff of the
Joint Committee on Taxation has recently prepared a report
stating that sec. 170(h) is “so broad that the IRS effectively
has no basis to challenge contributions claimed to have been made
for such [conservation] purposes” and “the status quo in essence
permits the donor and the donee, the two parties with the
greatest incentive to reach such a conclusion, to determine that
a conservation purpose is served.” Staff of the Joint Committee
on Taxation, Options to Improve Tax Compliance and Reform Tax
Expenditure 286 (Jan. 27, 2005). The report proposes changes to
sec. 170(h). Id. at 1, 277. The proposal, if adopted, would
provide that the protection of the natural habitats referenced in
sec. 170(h)(4)(A)(ii) is exclusively for conservation purposes
only if it is pursuant to a clearly delineated governmental
policy; i.e., it furthers a specific, identified conservation
project. Id. at 282. The proposal, if adopted, would provide
that a qualified real property interest is not considered as
contributed exclusively for a conservation purpose if the donor
(or a family member of the donor) has a right to use all or a
portion of the real property as a personal residence at any time
after the contribution. Id. at 283.
20
At trial, the Court severed from the matter at hand the
issue concerning the fair market value of petitioners’
contributions. Respondent asserts as to the matter at hand that
petitioners contributed a small portion of the property and
(continued...)
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Accordingly,
An appropriate order
will be issued.
20
(...continued)
retained the right to build on the property’s unencumbered
portions. We view this assertion as relating not to the
characterization of the conservation easements as qualified
conservation contributions but as most directly related to a
determination of those contributions’ fair market value.
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APPENDIX
SEC. 170(h). Qualified Conservation Contribution.--
(1) In general.--* * * the term “qualified
conservation contribution” means a contribution--
(A) of a qualified real property
interest,
(B) to a qualified organization,
(C) exclusively for conservation
purposes.
(2) Qualified real property interest.--For
purposes of this subsection, the term “qualified real
property interest” means any of the following interests
in real property:
(A) the entire interest of the donor
other than a qualified mineral interest,
(B) a remainder interest, and
(C) a restriction (granted in
perpetuity) on the use which may be made of
the real property.
* * * * * * *
(4) Conservation purpose defined.--
(A) In general.--For purposes of this
subsection, the term “conservation purpose”
means--
(i) the preservation of land
areas for outdoor recreation by, or
the education of, the general
public,
(ii) the protection of a
relatively natural habitat of fish,
wildlife, or plants, or similar
ecosystem,
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(iii) the preservation of open
space (including farmland and
forest land) where such
preservation is --
(I) for the scenic
enjoyment of the general
public, or
(II) pursuant to a
clearly delineated
Federal, State, or local
governmental conservation
policy,
and will yield a
significant public
benefit, or
(iv) the preservation of an
historically important land area or
a certified historic structure.
(B) Certified historic structure.--For
purposes of subparagraph (A)(iv), the term
“certified historic structure” means any
building, structure, or land area which --
(i) is listed in the National
Register, or
(ii) is located in a
registered historic district (as
defined in section 47(c)(3)(B)) and
is certified by the Secretary of
the Interior to the Secretary as
being of historic significance to
the district.
A building, structure, or land area satisfies the
preceding sentence if it satisfies such sentence either
at the time of the transfer or on the due date
(including extensions) for filing the transferor’s
return under this chapter for the taxable year in which
the transfer is made.
(5) Exclusively for conservation purposes.--For
purposes of this subsection--
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(A) Conservation purpose must be
protected.--A contribution shall not be
treated as exclusively for conservation
purposes unless the conservation purpose is
protected in perpetuity.