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Florida Tax Review

Abstract

This Article examines Carpenter against the backdrop of the legislative history of section170(h), state law, and public policy. It clarifies the manner in which the state law cy pres doctrine and its general charitable intent requirement should be analyzed with regard to tax-deductible conservation easements. It offers suggestions as to how best to comply with the extinguishment regulation given the Tax Court’s rulings in Carpenter and other relevant cases. It discusses the court’s holding that the tax-deductible conservation easements at issue in Carpenter constitute restricted charitable gifts under state law and the importance of this status in ensuring that easements are administered in accordance with their terms and purposes over the long term. It also explains that Congress enacted section 170(h) to subsidize the acquisition of perpetual conservation easements, or those that are extinguishable by a court only upon frustration of their purposes, and Congress specifically did not defer to states, localities, or easement holders regarding transfer, release, or other extinguishment of tax-deductible easements. Also examined are the reasons underlying the restriction on transfer, extinguishment, and proceeds regulations, as well as the policy reasons supporting the application of uniform rules in this context.

Two recent Circuit Court decisions, Simmons v. Commissioner and Kaufman v. Commissioner, are also discussed. Although those decisions do not directly address the extinguishment regulation, this Article explains that they undermine the IRS’s efforts to enforce the perpetuity requirements in section 170(h) and the regulations, and open the door to loss of the federal investment in conservation easements and significant abuse.

This Article concludes that the IRS’s strategy of relying on litigation to establish clear rules consistent with Congressional intent in this context appears unlikely to be successful, and another approach is needed. The Article recommends that the Treasury Department and the IRS clarify the regulations and issue other forward-looking guidance regarding the manner in which taxpayers must satisfy the critically important protected-in-perpetuity requirements if they wish to continue to benefit from generous (generally six-figure) deductions. Without clear uniform rules addressing the transfer, amendment, and extinguishment of tax-deductible conservation easements, the purportedly perpetual protections provided by such easements will erode over time, and the enormous public investment in these instruments will be lost.

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