Fairfax Case Draws Line on Easements

The IRS argued that development near Washington Grist Mill Park and other Mount Vernon area historic sites created a "massive visual intrusion." (By Joe Stephens -- The Washington Post)

Landowners "donate" the easements to a nonprofit land trust or a government agency that, in effect, certifies that the restrictions are meaningful and provide some public benefit. That allows the donor to seek federal income tax deductions for the reduction in the land's market value.

Those tax benefits have fueled an explosion in easements, particularly in Virginia, which offers additional state tax credits. In 1995, Virginia landowners placed easements on fewer than 6,000 acres; last year, the figure exceeded 35,000.

Across the country, donors to conservation groups and other nonprofit organizations have collected millions in tax write-offs from easements. In recent years, however, the IRS has sought to crack down on easement donation abuses, placing them on the agency's annual "Dirty Dozen" list of tax scams.

In a recent speech to conservationists, Steven T. Miller, the IRS's commissioner for tax-exempt organizations, said a team of auditors is ferreting out "hyper-inflated deductions." The agency is looking at contributors, land appraisers and the nonprofit organizations that accept the donations and are supposed to enforce the restrictions.

"We have looked at more than 25 promoters and so far have referred nine for further investigation," Miller said. "We are examining more than 15 recipient charities for involvement in particular abuses, and several charity officials for unduly profiting from their positions with the charity. We are examining over 500 easement donors."

He added that "the level of our activity in this area is unprecedented. As we proceed, we are prepared to use every civil and criminal tool at our disposal."

In Turner's case, the controversy centered on 29 acres along Mount Vernon Memorial Highway.

Turner and FAC Co. acquired the land in 1997 and 1998 for about $2.5 million, court filings show. A year later, Turner created the conservation easement, which he said reduced the number of homes that FAC or a future owner could build from 62 to 30. The easement did not limit the size of the houses or require a buffer zone between the houses and Grist Mill Park. Turner and FAC later sold the property, and another company built the Grist Mill Woods subdivision.

An appraiser, hired by Turner and relying on information he supplied, concluded that the easement reduced the property's market value by $3.1 million.

But in his court ruling, Gerber wrote that half the acreage was on a flood plain, where building was prohibited. The remainder was covered by strict zoning and historic district restrictions limiting construction to 30 residential lots, he said.

Gerber concluded that Turner had claimed the tax deduction "based on assumptions known to be false or erroneous" and that Turner "knew that the floodplain could not be developed."

At trial, the IRS argued it would have been physically impossible to put more than 30 homes on the site.