Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
A Critical Analysis of Glass v. Commissioner: Why Size Should
Matter for Conservation Easements
Jonathan M. Burke*
In Glass v. Commissioner, the Sixth Circuit Court of Appeals upheld the Tax Court’s determination that the Glasses were entitled to a deduction for two conservation easements contributed to a conservation organization under section 170(h) of the Code. The total combined size of both of the taxpayer’s conservation easements was 49,200 square feet, a significant but not huge area. For purposes of comparison, a football field has an area of 57,600 square feet. The Sixth Circuit’s decision was a major setback for the Service, which had hoped to establish on appeal a “uniform and workable definition of ‘natural habitat’ in the context of conservation easements.” The Sixth Circuit rejected the Commissioner’s argument that the small size of the encumbered property should preclude the allowance of a deduction, holding that “[i]t is not the size of the [c]onservation [e]asement that matters; rather, it is whether any retained use undermines its stated conservation purpose.”
The danger of ignoring size when evaluating the terms of a contributed conservation easement for tax purposes is that it could encourage abuses by developers and homeowners alike. For example, developers have placed conservation easements on golf courses and claimed deductions for such easements, despite the fact that such easements likely serve no conservation purpose. Individual homeowners have claimed deductions for conservation easements in their backyards, even when development would not be permitted otherwise under local zoning laws. Conservation easements have been used as a means of excluding others from property when the landowner would have otherwise been unable to do so. Furthermore, sometimes conservation easements placed on private land have actually increased the value of the encumbered land, despite the prohibition on deductions for quid pro quo transactions.
Because the Sixth Circuit in Glass refused to allow size to serve as a limiting principle for conservation easements, solutions to this problem of abusive deductions must come from elsewhere. This Note proposes that, although technically correct in its reasoning, the Sixth Circuit in Glass missed an opportunity to help stem the abuse of section 170(h) by disingenuous taxpayers. Therefore, to prevent questionable deductions, either the implementing regulation or the Code itself must be amended to distinguish between conservation easements that yield a significant public benefit and those that do not.Part I provides a brief overview of conservation easements and purported abuses by taxpayers. Part II discusses in more detail the facts and decision of the Glass case. Part III analyzes the Sixth Circuit’s reasoning and evaluates the potential unforeseen consequences of the Sixth Circuit’s decision. Part IV recommends some potential changes to either the implementing regulation or the Code itself that may be necessary in light of Glass.