No, a Lessee Cannot Grant a Conservation Easement

In the recent Harbor Lofts case, the Tax Court clarified that a long-term lessee of real property is not entitled to take a deduction with respect to a grant of a conservation easement on that same property.1With this case, we are reminded again that easements can be completely denied, even when a substantial interest in property is given away, if the technical and basic requirements under the statute and applicable regulations are not properly followed.

The primary issue in this case was whether a long-term lessee, as an (arguable) equitable owner of the property, could grant an easement and satisfy the perpetuity requirements of Section 170. The taxpayer argued that fee ownership was not expressly required, which the Court agreed with, and analogized the easement with an easement granted by tenants in common. Alternatively, the taxpayer argued that due to the lengthy term of the lease, it was the equitable owner of the building for tax purposes and thus entitled to the deductions relating to the building.

The IRS argued that since the taxpayer merely held a leasehold interest, it was unable to satisfy the perpetuity requirements under Code Section 170(h)(2)(C) and Code Section 170(h)(5)(A) and Treas. Reg. Section 1.170A-14 (the extinguishment regulations).

As discussed in a previous article on the Rose Hill opinion from the 5th Circuit, the statute requires that the contribution must be “exclusively for conservation purposes.”2 This also requires the contribution to be in perpetuity. Accordingly, the Tax Court found that the taxpayer, as a tenant, holding interests under a lease, and that the interest granted by the taxpayer was not a “qualified real property interest” as required by statute. While agreeing that the statute did not require a fee ownership, the Tax Court made clear that one is unable to give up the requisite rights and satisfy the requirements of the statute and regulations with interests held by a lessee. Therefore, the taxpayer was not entitled to a deduction. At most, the taxpayer could create a restriction that ran through the lease term, and this was insufficient to satisfy the requirements to receive a deduction.

So once again, a charitable conservation easement deduction is denied due to divergence from the statute and applicable regulations. Taxpayers are reminded that these gifts from Congress require compliance with the applicable rules as a strict condition to the receipt of the tax benefit. As a further note, not only are taxpayers who fail to follow the rules punished in the form of denial of the easement, but, just like in the Harbor Lofts case, steep penalties can apply as well due to the size of the tax benefit that is usually disallowed. In many cases, this can be a penalty of up to 40%. The easement in the Harbor Lofts case was granted at the end of 2009. It is now 2018 and much time has passed and likely much interest has accrued. While the tax due as a result of the denial of the deduction merely places the taxpayer in the same position as it would have been in had the easement not been done (minus the restriction on the property), the penalties and interest on penalties, if such penalties are upheld, can serve to severely punish the taxpayer.


  1. Harbor Lofts Associated, et al. v. Comm’r, 151 T.C. No. 3 (Aug. 27., 2018).
  2. See and PBBM-Rose Hill, Limited v. Comm’r, 122 AFTR 2d 2018-5471 (5th Cir. 2018).


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