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Lack of Subordination Prevents Valid Conservation Easement for Purposes of a Deduction

By Steven Miller, alliantgroup National Director of Tax and former IRS Acting Commissioner

The United States Tax Court, on April 28, 2016, held that a conservation easement on a golf course in Missouri was not granted in perpetuity and, therefore, disallowed in full the charitable contribution deduction. In addition to the lack of perpetuity, there was a question of whether the LLC that made the contribution owned all of the property the easement was located on. Without ownership, the taxpayer cannot donate an easement.

The Facts 

In 1997, RP Golf, LLC (RP Golf) acquired the land on which the golf course referred to in this case was developed. RP Golf then conveyed a portion of the golf course to its subsidiary, the National Golf Club of Kansas City LLC (National Golf). A portion of the property described as “the northwest quarter of section 26” was not included in the conveyance from RP Golf to National Golf. The original purchase of the land was financed by Hillcrest Bank, and additionally, the bank made development loans secured by a deed of trust that was recorded in the County Recorder’s Office. Another bank, Great Southern Bank, also had deeds of trust on the property from development loans made earlier. Both of the banks held their interest in the property before the easement was donated. 

On December 29, 2003, National Golf granted a conservation easement to Platte County Land Trust. It was recorded on December 30, 2003 and the easement included the northwest quarter of section 26, which had not been conveyed to National Golf. Based on this donation, RP Golf, as a partner of National Golf, claimed a conservation easement contribution deduction of $16,400,000 on its 2003 tax return.  The return was filed on April 14, 2004. The banks also executed a “consent to subordinate” on April 14, 2004. The consent was made effective on December 31, 2003 and recorded on April 15, 2004. 

The Ruling

In making its decision, the court discussed two issues: (1) whether the donation of the easement on the northwest quarter of section 26 was executed; and (2) whether the consent to subordinate their interest executed by the banks was sufficient to meet to the perpetuity requirement of Internal Revenue Code section 170(h)(5). 

In answering the first question, the court stated that, while the tax deduction is a federal question, it “depends in part upon state law, which creates and governs the nature of the interest in property.”  Missouri law requires a written contract on any transfer of real property and also requires that deeds transferring property be written and signed by the grantor—in this case RP Golf. Since RP Golf did not sign the deed granting the conservation easement, the easement on the northwest quarter of section 26 was never donated and, therefore, no deduction can be taken for this portion of the conservation easement. 

Regarding the subordination issue, the court made it clear that timing is very important. The court cited Mitchell v. Commissioner, 138 T.C. 324, 332 (2012), stating that “though the subordination regulation is silent as to when a taxpayer must subordinate a preexisting mortgage on donated property, we find that the regulation requires that a subordination agreement must be in place at the time of the gift.” In this case, the easement was granted on December 29 and was recorded on December 30, 2003. The subordination agreement was not executed until April 14, 2004 and was not “effective” until December 31, 2003. Both of these dates are after the date the easement was granted and recorded. Additionally, the court thought it was important that one of the loans was coming due in February 2004, which made it a very real possibility that the easement could have been lost because of default. The taxpayer argued that there was an oral agreement with the banks prior to executing the donation of the easement, but the court did not give this argument any weight because the Missouri statute of frauds requires a writing for this type of transaction. Additionally, the loan documents executed by the banks had a notice requiring any changes to be made in writing.   

Based on the above reasoning, the court disallowed the entire deduction for the charitable contribution of a conservation easement. The court was also asked to determine whether the conservation easement on a property operating as a golf course could meet the conservation purpose requirement and whether the value of the easement was appropriate. The court declined to address these issues because the entire deduction was disallowed when the taxpayer did not get the loans subordinated. This is the second time since December 2015 that the court has declined to address the conservation purpose question with regards to a golf course. 

Steven Miller is alliantgroup’s National Director of Tax and the co-leader of alliantNational, alliantgroup’s national practice. alliantNational provides subject matter expertise on complex and emerging federal, state and international tax issues as well as legislative and regulatory affairs to help taxpayers receive timely and precise guidance on all their tax matters. Contact us today for more information on this and other topics.


Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.


Contact our team today with any tax controversy concern you’re facing. We fight every day to protect the interests of the taxpayer, and we look forward to putting you in the best tax situation possible.

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