Golf courses and their owners, like most people, do not like paying taxes. In fact, golf courses and their owners are pretty good at not paying taxes. How else is it that a 200+ acre, privately-owned golf course in an expensive and densely populated city, for example, can withstand what would otherwise be the crippling weight of its property taxes? Would it not be in the city’s (and public’s) best interest to develop that land into residential or commercial lots?
On his podcast, “Revisionist History,” Malcolm Gladwell explains that in California, at least, golf courses have historically found creative (or not-so-creative) solutions for keeping their tax bills low. In the world of tax law, there is a principle called “highest and best use.” One of the ways California, among other states, determines how much to tax a piece of property is to estimate what its highest and best use might be. When it comes to a golf course in the middle of an expensive neighborhood, for example, the highest and best use of that land is very likely not as a golf course.
In the 1960s, in order to avoid this “highest and best use” trap that would result in exorbitantly high property tax bills, country clubs in California, led by celebrities such as Bob Hope, joined together to propose an amendment to the California constitution. This amendment, which easily passed due to the support of golf-loving celebrities and congressmen, permanently exempted golf courses from the “highest and best use” standard and remains in place today. As a result, most privately owned golf courses in California benefit from paying very little in property taxes year after year, while the vast majority of Californians pay a comparatively high effective property tax rate.
In addition to the numerous ways golf courses have reduced their state tax bills, golf courses have also been successful at reducing their federal tax bills. One common strategy that golf courses have used to do this—and the strategy on which this Comment will focus—is through the donation of conservation easements.
Congress first authorized a charitable contribution tax deduction for the donation of a conservation easement in the Tax Reform Act of 1976. Over the last several decades, however, the Internal Revenue Service (“IRS”) has continuously expressed concern that taxpayers are grossly overvaluing conservation easements and then claiming excessive tax deductions upon donating them to qualified organizations. For example, in a 2017 bulletin, the IRS alleged that taxpayers were obtaining “greatly inflated” valuations and appraisals due to “unreasonable conclusions about the development potential of the real property.” Additional evidence of the IRS’s concern with conservation easement deductions lies in the fact that these deductions consistently rank among the top ten most litigated issues between taxpayers and the IRS.
In litigating issues related to conservation easement deductions, the IRS aims to police taxpayer abuse in the overvaluation of easements and subsequent claiming of excessive deductions. However, the IRS has historically had difficulty attacking deductions on valuation grounds due to the nature of the valuation methods permitted in the Internal Revenue Code (the “Code”). Instead, the IRS and U.S. Tax Court have had to look elsewhere, such as to deed technicalities, to invalidate inappropriately large deductions. When attacking a deduction based on a technicality like imprecise deed language rather than on valuation grounds, the IRS often disallows the entire deduction rather than simply limiting its size. This approach completely negates Congress’s intent to allow conservation easement deductions in the first place.
Donated conservation easements over golf courses are particularly illustrative of the valuation questions these deductions raise. Golf courses are not typically known for having conservation goals or being particularly environmentally friendly due to their excessive water and pesticide usage. However, courts have recently held that donated conservation easements over golf courses can be deducted under the Code so long as a valid conservation purpose exists. Since courts have established that golf courses are able to deduct the value of their donated conservation easements, the IRS has become hypercritical of the valuation of these easements. Golf courses, by necessity, take up a lot of acreage and are often located in high-income neighborhoods across the country. As a result, a donated conservation easement over a privately-held golf course has the potential to cover a lot of land (and expensive land, at that). A report on conservation easement deductions from 2017 stated that “[a]bout 10 percent of the acreage under easement claims about 69 percent of all tax benefits, largely because the valuation of the easements (per transaction or on a per-acre basis) is unusually high.” The report then explained that of the two dozen transactions related to conservation easements over golf courses examined by the IRS in 2017, the average value of the deduction claimed by the golf course owners was $19 million. The astronomical size of these deductions puts golf course owners in a unique position to drastically decrease their tax liability in a way that many lower-income taxpayers cannot. In addition to the IRS’s obvious concern with the potential to significantly overvalue these deductions and subsequently underpay taxes, the ability for wealthy taxpayers to uniquely benefit from inordinately large deductions also calls into question principles of equity and fairness.
One example of an attack on conservation easement valuations in the context of golf courses has recently received media attention due to the fame of the defendants and the properties at issue. In September 2022, the Attorney General of the State of New York filed a civil complaint against Donald Trump and various members of his family. The complaint alleges fraud in the valuation of numerous conservation easements donated over Trump’s golf course properties. Whether or not it intends to do so, the complaint perfectly illustrates the problematic imprecision of permissible methods for conservation easement valuation. Given the public nature of this complaint and the prominence of the defendants involved, critiques of conservation easement valuations will likely become more common and continue to gain traction with the media.
Overall, the inability of the IRS to attack inappropriately large conservation easement deductions on valuation grounds suggests that the valuation methods permitted by the Code allow for significant taxpayer abuse without the possibility of effective regulation. Instead, the Code should provide a more conservative and straightforward method for determining the value of these conservation easements, as it would allow the IRS to audit the deductions and assess them for reasonableness and accuracy without completely disallowing them.
This Comment begins by discussing the relevant laws and congressional intent behind the authorization of charitable contribution deductions. The Comment then walks through the requirements for a donated conservation easement to be deductible under the Code. Specifically, the Comment will focus on the requirements related to the valuation of conservation easements and illustrate how the IRS and courts generally have difficulty invalidating these deductions due to inappropriate valuations. These illustrations will include an analysis of the Tax Court’s recent opinion regarding valuation in Champions Retreat Golf Founders, LLC v. Commissioner, as well as an exploration of the allegations made in New York’s recent complaint against Donald Trump and his family. Ultimately, this Comment will argue that the current valuation methods authorized by the Code with respect to conservation easements provide far too much deference to taxpayers and open the door for significant abuse. This Comment will propose that a more conservative method of valuation, such as a method comparable to that used in eminent domain or takings valuations, should be adopted for the purpose of calculating these charitable contribution deductions. To support the argument for the adoption of a more conservative valuation method, this Comment will discuss the wealth distribution implications of the current tax law and various policy arguments supporting a less deferential valuation standard.
