The fact that the taxpayer didn’t retain the right to substitute entirely different property, but rather was limited to changing the boundaries of the conservation easement by no more than 5% did not get the taxpayer in the case of Balsam Mountain Investments, LLC, et al v. Commissioner, TC Memo-2015-43 a positive result.

Rather the taxpayer ended up with the same bad result (the contribution was found not to be a “qualified real property interest” and thus no deduction at all was allowed) as the taxpayer in Belk v. Commissioner, 140 TC No. 1, supplemented by TC Memo 2013-154 affd 774 F.3d 221 (4th Circuit 2014).

In Belk the taxpayer reserved the right to substitute for the land covered by the conservation easement another equivalent parcel upon the approval of the recipient organization. In this case, the taxpayer noted, the taxpayer could only substitute 5% of the land among other specific instructions. The taxpayer argued that the ability to make such a minor change should not cause it to fail to have given a “qualified real property interest” under IRC §170(h)(2)(C).

IRC §170(h)(2) provides that, to be a qualified real property interest in the case of a conservation easement is “a restriction (granted in perpetuity) on the use which may be made of the real property.”

The Tax Court did not agree with the taxpayer that the above language allowed for a substitution of a minor interest. As the Court noted when comparing this case to Belk’s facts:

This makes the easement different from the one in Belk, but the difference does not matter. The easement granted by Balsam Investments in 2003 was not an interest in an identifiable, specific piece of real property. For five years after 2003 Balsam Investments could change the boundaries of the “Conservation Area” burdened by the easement. As of 2003 the easement did not constitute a “qualified real property interest” of the type described in section 170(h)(2)(C).

The Court also declined to take up the taxpayer’s request that it revisit and overrule the Belk decision.

The Court specifically noted that a strict definition is to be applied, in its view, to property meeting the qualifications. It held:

This is because an interest in real property is a “qualified real property interest” of the type described in section 170(h)(2)(C) only if it is an interest in an identifiable, specific piece of real property.2 See Belk v. Commissioner, 140 T.C. at 10. The easement granted by Balsam Investments permitted it to change the boundaries of the “Conservation Area”. Therefore, the easement is not an interest in an identifiable, specific piece of real property. Under Belk, the easement is not a “qualified real property interest” of the type described in section 170(h)(2)(C).