Open space conservation easements on golf courses have been a source of considerable debate for some time. Earlier this week, a lawyer friend sent me the recently announced 11th U.S. Circuit Court of Appeals decision in the case of Champions Retreat Golf Founders, LLC, Riverwood Land, LLC, Tax Matters Partner (CHAMPIONS) v. Commissioner of IRS (IRS). I’m no lawyer, but this decision seems significant for golf facilities seeking to benefit from the conservation easement process.
In short, a conservation easement, if placed on a property that could be otherwise developed and donated to an appropriately qualified third party trust can provide income tax benefits to the donor in return for the amount of value lost by relinquishing those development rights. In this case, “The appellant taxpayer claimed a charitable deduction for donating a conservation easement over property that included a private golf course and undeveloped land. The Commissioner of Internal Revenue disallowed the deduction, and the Tax Court upheld the decision. The deduction was proper if the donation was made for “the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,” or was made for “the preservation of open space . . . for the scenic enjoyment of the general public.” I.R.C.”
What is particularly significant in this case is that the Appeals Court clearly viewed golf courses in a more favorable light (as compared to the IRS and Tax Court) with respect to the definition of a “natural habitat”, a key component of conservation easements. Reportedly, this is the first time that an Appellate Court has reversed the Tax Court on what constitutes the preservation of a “Natural Habitat,” a key element of conservation easement purposes and attributes. The Tax Court had rejected CHAMPIONS’ biologist expert testimony regarding threatened or endangered species of birds despite documenting over 60 different species because:
- The names were not found on all the lists published for such species and they were located outside the boundaries of the golf course which comprised about 70% of the conservation easement property, and;
- The birds had to be seen by both the taxpayer’s experts even if the birds were also seen by the Commissioner’s expert in order to qualify.
The appeals court found otherwise. Preservation of significant vegetation is a key component for qualifying as a conservation easement and the CHAMPIONS property is home to the denseflower knotweed. The Tax Court had rejected the expert testimony regarding the importance of preserving this plant, opting instead to conclude that commonly used chemicals for golf course maintenance would destroy it. The 11th Circuit Opinion observes that not only would development of the property destroy this species, but also that the recipient of the easement (the trust) had the right, under the easement to restrict or stop chemical use that would damage or destroy the plant.
Scenic enjoyment of a property for the public is also a legitimate element in assessing the bona rides of a conservation easement. The property is situated on the Savannah River, and on the opposite bank is a national forest. Someone kayaking on the Savannah River and the Little River which runs though the easement could see the site and that would be one of the attractions of kayaking on those waterways. The Tax Court, as did in many cases before was so focused on the site’s use as a golf course making it seriously doubt whether the land was donated for “the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,” or for “the preservation of open space . . . for the scenic enjoyment of the general public [that] will yield a significant public benefit.” The Appeals Court clearly cut through that prejudice noting that without the golf course, the deduction would have been allowed by the tax court. The Appeals Court approved the tax deduction despite less than 30% of the property containing the “Natural Habitat,” and the Scenic open space area covering a small portion of the 436 acre site.
Of particular interest to golf courses is that; “What matters under the Code and regulation is not so much whether all the land is natural, but whether the habitat is natural. Indeed, the regulation says it is not disqualifying that the land has been altered, so long as “the fish, wildlife, or plants continue to exist there in a relatively natural state.” 26 C.F.R. § 1.170A- 14(d)(3)(i). The commissioner’s expert noted nothing unnatural about these birds’ existence; they apparently find the habitat quite suitable.”
This case should make it easier for golf course owners to donate conservation easements involving golf courses. Will it help stem the tide of golf course closures? There will continue to be the requirement that the highest and best use of the property be both legitimate and supported for an alternative use, but with golf courses and clubs continuing to experience distress nationwide, the potential impact of economic fluctuations and the potential spread in market values, conservation easements and their attendant tax benefits could become a much more viable options for those owners who seek to continue golf operations and preserve open space.