RP Golf v. Commissioner[1] is an important case for golf course developers. While it illustrates the wrong way to try to get a deduction for the cost of the underlying land, planning tips help show the right way to do so. Here, the taxpayer sought a charitable contribution deduction for transferring a permanent conservation easement to a land trust. Unfortunately, the taxpayer did not protect the easement into perpetuity as required under Internal Revenue Code (IRC) § 170(b)(1)(E). Namely, bank mortgages securing the land were not subordinated prior to the conveyance.

The relevant authorities, facts, and decision appear. Then, planning tips and the future are discussed.

Relevant Authorities

To secure a qualified conservation charitable contribution, a real property interest must be conveyed to a qualified organization exclusively for conservation reasons.[2] This conservation purpose must be assured into perpetuity.[3] The mortgagee must subordinate its rights to the qualified organization so that the conservation purpose must be assured into perpetuity.[4] The mortgage must be subordinated at the time of the donation.[5]

A saving provision does exist: A deduction is still allowed even though an interest could be defeated on a condition but only to the extent, on the date of the transfer, the possibility of this condition occurring is “so remote as to be negligible.”[6] Nevertheless, the Internal Revenue Service (IRS), by providing the previous authorities, showed that it did not consider mortgage foreclosure to be remote or negligible.

Facts

RP Golf sought a $16.4 million charitable deduction for giving a conservation easement to Platte County Land Trust (PCLT). The IRS disallowed it as not fulfilling the qualified charitable contribution easement provisions under § 170(b)(1)(E). The lower court ruled for the IRS.

RP Golf bought land for two private golf clubs, obtaining mortgage loans from two financial institutions, the first for land acquisition and the second for land development. Both loans were secured through trust deeds.

RP Golf subsequently granted a permanent conservation easement as to PCLT, a non-profit. The easement stated that it was to “further the policies of the State of Missouri designed to foster the preservation of open space and open areas, conservation of the state’s forest, soil, water, plant, and wildlife habitats, and other natural and scenic resources.”[7]

Unfortunately, only after the transfer did the two financial institutions sign mortgage subordinations to permit PCLT to enforce its easement. The only issue for the Eighth Circuit was whether the land was donated “exclusively for a conservation purpose.”[8] More specifically, the Eighth Circuit had to address whether the purpose was “protected [into] perpetuity.”[9]

RP Golf argued that it met this perpetuity requirement despite subordination occurring after conveyance. Two other circuits, though, found meeting the perpetuity requirement to be impossible if the subordination occurred after the conveyance.[10]

As the financial institutions’ mortgages were not subordinated in advance of the charitable contribution, RP Golf could not obtain a charitable contribution deduction for the qualified conservation charitable contribution.

Planning Tips

1. If possible, acquire land for golf courses without mortgages. Then, there is no issue about mortgage subordination to get a conservation easement charitable contribution deduction.
2. If mortgage financing is obtained, the developer should assure the subordinations before conveying the property to a charitable contribution easement.
3. If it is done correctly, donations of conservation easements can at times obtain deductions close to the full purchase price of the land (given the rate at which land appreciates and donations occurring some years after acquisitions in knowing how much land is necessary for the course).
4. Especially in matters of deductibility as opposed to income, taxpayers should error on the side of being exacting because deductibility is a matter of legislative grace.

The Future

The IRS is unlikely to change its relevant regulations at any time soon. Thus, these tips should be followed for successful conservation easement charitable contribution deductions.

[1] No. 16-3277, 860 F.3d 1096 (8th Cir. 2017).

[2] Treas. Reg. § 1.170A-14(a).

[3] IRC § 170(h)(5)(A). All references hereafter are to 26 U.S.C., the IRC, so both 26 U.S.C. and IRC are omitted.

[4] Treas. Reg. § 1.170A-14(g)(2).

[5] Id.

[6] Treas. Reg. § 1.170A-14(g)(3).

[7] 860 F.3d at 1096.

[8] Treas. Reg. § 1.170A-14(a).

[9] § 170(h)(5)(A).

[10] Minnick v. Commissioner, 796 F.3d 1156, 1159 (9th Cir. 2015); Mitchell v. Commissioner, 775 F.3d 1243, 1248 (10th Cir. 2015).