Many farmers will sell or grant a conservation easement to various organizations. These easements are designed to permanently keep certain farm land out of production due to their sensitive topsoils or other features.
If the granting of the easement is structured properly, the difference between the fair market value of the land before the easement and the value after granting it will result in a charitable deduction. However, in order for the deduction to be allowed, the easement must be permanent. The definition of permanent is usually determined by state law.
The Tax Court yesterday released the Wachter v. Commissioner case that determined under North Dakota Law, an easement can only last for 99 years. Since 99 years is not "permanent", the Court ruled in favor of the IRS and disallowed the charitable deduction for the three year period covered by the case.
The Wachter's held varying interests in WW Ranch, a partnership and Wind River Properties, LLC. WW Ranch entered into an arrangement with North Dakota Natural Resource Trust (NDNRT) regarding a conservation easement. These easements were donated over a three year period (2004-2006). For each year, two appraisals were done, one to determine the value before the easement and the second to determine the value after the easement. Since the property was sold to the trust, the net contribution deduction was equal to the value before the easement less the value after the easement less the amount of sale proceeds. For 2004, the Wachter's took a deduction of $349,000, $247,550 in 2005 and $162,500 in 2006.
North Dakota law regarding easements is unique. It appears to be the only state in the country that limits easements to 99 years by law. Since the Tax Code requires that the conservation easement be of a permanent nature, the Tax Court ruled in favor of the IRS and disallowed all of the easement charitable donations.
The Tax Court case also dealt with certain issues pertaining to cash donations made by the Wachter's to NDNRT during these same years. The dispute revolved around lack of documentation and whether goods and services were provided to the taxpayers by NDNRT. The Tax Court did not give a final ruling on this issue.
The bottom line is that when the Tax Code says permanent, it means permanent.