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Two taxpayers successfully defended their conservation easement deduction in a recent Tax Court decision, T.C. Memo. 2020-159.

The taxpayers, former NFL defensive lineman Warren Sapp and Dr. Kumar Rajagopalan were members of an LLC that purchased property in western North Carolina for development as a residential subdivision. Rather than develop all 37 lots, it was decided to develop 12 lots with open space on the remainder of the property. As the paperwork on the conservation easement was being worked on lots were being sold. Four of the lots were entered escrow during August 2006, one to Dr. Kumar and the others to unrelated third parties. The LLC obtained financing from a bank with the 12 lots as security for more than it cost to assemble the entire property.

On Nov. 28, 2006, a contribution easement was donated to a qualified charitable organization. The parties to the easement could agree to amendments but only if they were not inconsistent with the conservation purposes. The closing on the properties was delayed to complete access roads and electric service. During this time the real estate market began to crumble. The LLC filed its 2006 tax return reporting a noncash charitable contribution of $4,879,000 for the conservation easement. Attached to the return was a qualified appraisal of the easement. Both taxpayers filed their individual income tax returns reporting the flow-through contribution and attached the qualified appraisals to their returns. The IRS disallowed the deductions and assessed tax and penalties for 2006.

The IRS stipulated that the easement was “exclusively for a conservation purpose.” After the court dismissed the IRS’s contention that the amendment clause violated the required perpetuity provision, the court focused on the valuation of the easement. In a detailed discussion of the valuation rules for conservation easements, the court determined that the best evidence for the valuation would be the actual sales of the lots in the subdivision.

The court determined that based on the evidence presented that the value of the conservation easement is at least the amount claimed on the LLC return and passed through to the taxpayers. After dismissing the valuations by the “experts,” the court noted the unique circumstances surrounding the case and that the taxpayers benefited by granting the easement at the top of the real estate market.




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