Exemption Revoked for Conservation Easement Shams

In Private Letter Ruling 201109030 (Dec. 8, 2010), released on March 4 and recently reported in Tax Notes Today, the Internal Revenue Service (“IRS”) revoked the federal income tax exemption of an organization claiming to qualify under section 501(c)(3) of the Internal Revenue Code (“Code”).  The organization received donations of five conservation easements, three of which are most notable.  The first was a tract of non-environmentally-sensitive land located on the grounds of a private, gated condominium/tennis resort and used as a storm water retention area and a miniature golf course.  The second, a 30-acre tract on a small bayou, was originally part of a larger real estate development.  A state EPA department required the developer to set aside wetlands before he could obtain necessary permits.  An IRS agent who examined the tract observed that it had been used as a dumping ground and four-wheeling playground.  A third easement consisted of interior easement lots in a residential subdivision containing large water front residential lots and wooded interior lots.  The easement lots added wooded space between houses.  Moreover, two ponds, and a boat/RV storage facility, had been constructed on the easement property.

The IRS determined that the transfers of the easements failed the test of “qualified conservation contribution” under Code section 170(h)(1).

Contributions … that are not for the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystems, that restrict the entrance of the general public from their benefit and education, that benefit only a private residential community of home owners, that restrict entrance to only the easement contributors, that are not donated in perpetuity, that are not monitored by the exempt organization on are regular basis do not qualify as charitable conservation easement contributions.

Further, the organization that received the transfers failed the test of Code section 501(c)(3) on grounds of advancing a non-exempt purpose:

ORG is not operating exclusively for an exempt conservation easement purpose as defined in IRC Section 501(c)(3) and IRC Section 170(h), because more than an insubstantial part of ORG activities are in furtherance of a non-exempt purpose. The non-exempt purpose of accepting non-qualifying conservation easement contributions by ORG serves the private interest of donors rather than an IRC 501(c)(3) purpose.

A word to the wise charitable conservation organizations: If a real estate developer approaches you as a potential donee of a conservation easement, make certain the transaction is not merely a device for seeking a tax benefit for a private community’s exclusive, collective recreational benefit.  Do not let a habitat for woodsy wildlife become a habitat for Hyatt humanity.

JRB