Eleventh Circuit Deals IRS Defeat In Conservation Easement Struggle

The Eleventh Circuit has thrown a monkey wrench into the IRS machinery grinding away at abusive conservation easement deductions. Judge Barbara Lagoa, a Trump appointee, wrote the opinion in David and Tammy Hewitt v Commissioner of IRS issued on December 29, 2021. 

The Hewitts were appealing a 2020 Tax Court decision by Judge Goeke. The Hewitts had claimed a $2.8 million deduction on their 2012 return. Somehow the 2012 return got by, but the IRS was disallowing carryovers in 2013 and 2014. Judge Goeke agreed with the disallowance resulting in deficiencies of $336,894 and $347,878 for 2013 and 2014 respectively, but passed on valuation and accuracy penalties.

The Perpetuity Problem

Judge Goeke based total disallowance of the deduction on the failure of the easement document to meet the perpetuity requirement (Section 170(h)(5)(A)). The problem was with the clause in the agreement as to what would happen in the event that the easement was extinguished by judicial action (such as a taking of the property by eminent domain).

Regulation 1.170A-14(g)(6)(ii) requires that the percentage split of proceeds be set at that the time of the donation and remain fixed. The donee's share has to be at least the proportionate value the gift bears to the whole at that time. The Hewiitt easement had a clause allowing five one acre homesites on the 257 acre property and provided that in the event of judicial extinguishment that the value of any post easement improvements would come off the top and go to the donors.