Tax Court Denies Conservation Easement Deduction as a Quid Pro Quo Exchange

In Pollard v. Commissioner TC Memo 2013-38, the U.S. Tax Court recently denied a taxpayers' deduction for the donation of a conservation easement where the taxpayer granted the easement pursuant to negotiations with a local zoning authority for approval of a subdivision exemption.

Generally, charitable contributions must be freely given, i.e., a gift, to qualify for the deduction. If the contribution is made in exchange for a specific benefit, i.e., a quid pro quo, then it does not qualify for the deduction. Under Treasury Regulation §1.170A-1(h) a taxpayer is not allowed a deduction for a charitable contribution unless the taxpayer intends to make a payment in an amount that exceeds the value of any goods or services the taxpayer obtains and actually makes a payment that exceeds the fair value of what is received. Thus the law does not allow a deduction for a quid pro quo contribution in which the "donor" ends up receiving something of value absent a showing of those two conditions.

In Pollard v. Commissioner, the taxpayer was seeking to obtain an exemption from land use rules that would allow him to subdivide his property and would allow for an increase in building density. Approval for such an exemption was possible under the local law, but was wholly at the discretion of the County Board of Commissioners. The Land Use department staff recommended against granting the exemption. The department staff, however, did note that if the Board decided to grant the exemption, they should condition the exemption on the granting of a conservation easement on the property.

Accordingly, the taxpayer made a gift agreement to transfer one easement in December 2001 and a second just after the beginning of 2002. This gift agreement was recorded at the same time as the Board's resolution granting the exemption.

Under IRC §170(f)(3)(B)(iii), the taxpayer claimed a charitable contribution deduction of a "qualified conservation contribution." After an IRS audit, the service found that, in fact, the taxpayer made the contribution in exchange for the granting of the exemption. The taxpayer objected, arguing that the Board had removed the requirement for a conservation easement from the agreement and he had a letter from a Board member written prior to trial that he "did not recall" having required a grant of the easement prior to approving the change in Land Use.

The Tax Court noted that the taxpayer had introduced the possibility of a conservation easement only after being informed his request would not be approved, and used it as a bargaining chip, adjusting it as necessary until approval was granted. The public record of the meetings clearly indicate that, despite the Board member's inability to recall a requirement, the Board had unanimously indicated that the exemption request would be denied without a conservation easement being granted. Moreover, the Board did not record the approval of the exemption until the gift agreement was ready to be recorded, suggesting that recording of the exemption was conditioned on the execution of the gift agreement:

The external features of the transaction herein demonstrate that petitioner's granting of both the first and second conservation easements to Boulder County was part of a quid pro quo exchange for Boulder County's approving his subdivision exemption request. It is also clear that Boulder County's approval of his subdivision exemption request was a substantial benefit to petitioner.

So despite the fact that the exemption itself did not state that it was conditioned on the easement being granted, the Court found that the exemption was directly predicated on the granting of the easements and that the easements would not have been granted except for the fact that it was the only way for the taxpayer to obtain the desired tax benefit.

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