With no fanfare, an Alexandria real estate company in 1999 gave Fairfax County what the company would later describe as a tax-deductible $3.1 million donation: a promise not to overdevelop scenic land once owned by George Washington. The wooded tract, down the road from the first president's home at Mount Vernon, was the largest undeveloped plot in the southern part of the county.
But developers then clear-cut acres of trees on the property and erected 29 sprawling homes that preservationists today deride as "McMansions." The towering houses, though not in violation of the terms of the easement, border Washington Grist Mill state park and are visible from the Woodlawn Plantation historic site.
The U.S. Tax Court ruled last month that the company's donation had no value as a tax deduction because it "did not protect open space or a historically important land area." Chief Judge Joel Gerber rejected $342,000 in initial deductions claimed by company manager and local lawyer James D. Turner and his wife. The judge also assessed the couple $56,000 in penalties.
Tax specialists said it appeared to be the first time a court had thrown out such a write-off, known as a conservation easement deduction. The action has broad national implications for both the conservation movement and for wealthy investors, who are increasingly pursuing such deductions.
Boston lawyer Stephen J. Small, author of a leading book on easement law, described the May 16 ruling as "the first big win" for the IRS in its recently declared war against abuses of the easements.
"It's an important case," Small said. "I think the IRS and the courts saw an opportunity to make a statement."
In court filings, the IRS charged that the development, known as the Grist Mill Woods subdivision, created a "massive visual intrusion" on area historic sites and "permanently destroyed" the view.
National and local preservationists applauded the ruling.
"The easement did not protect anything that was not already protected," said Rand Wentworth, president of the national Land Trust Alliance. "It's a joke all around."
Turner, an Old Town real estate lawyer, declined to comment. His attorney, J. Carlton Howard Jr., said that he was disappointed with the ruling and that Turner's company gave up valuable development rights.
"This is not someone playing fraudulent games and trying to make something out of nothing," Howard said. "We agreed to limit ourselves, and we believed that might have been a benefit to Mount Vernon."
Conservation easements are credited with making preservation the fastest-growing arm of the environmental movement. When used as envisioned by Congress, the easements are permanent deed restrictions that limit intrusive development to preserve open space or historical ambience.
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.
"The easement did not preserve open space," IRS lawyer John Altman testified. "The entire property [was] scraped of all the trees. It was filled with houses, pools, out-buildings, decks and et cetera."
In any case, Altman added, "there is no scenic enjoyment for the public to be had, whether it was 30 homes or 60 homes. It didn't protect the view."
To support his argument that more homes could have been built on the property, Turner introduced a letter signed by Fairfax County Supervisor Gerald W. Hyland (D-Mount Vernon) saying that Turner had the "right" to build 62 houses. But Hyland testified that Turner wrote the letter and that Hyland signed it without checking whether it was accurate.
Turner's attorney said in court filings that Turner had been caught in an "IRS dragnet" because he claimed the easement reduced the tract's value by $3.1 million -- more than the $2.5 million he had paid for the land roughly a year earlier.
"The IRS incorrectly reacted in a knee-jerk fashion to the level of the deductions claimed," Howard wrote. He argued that the write-offs were valid, however, because land values were rising quickly.
Still pending for Turner is a similar tax court case involving a nearby subdivision and an easement he valued at $2.4 million.
In the Grist Mill area, tourists visiting Woodlawn Plantation once could stand on the mansion's portico, turn toward Washington's estate and see only trees and the Potomac River. Now they see the subdivision, said plantation director Ross Randall.
"The fabric and the character of what originally was Mount Vernon certainly was changed," Randall said. "We have spent the last 20 years allowing visitors to step back and away from the modern world, and now it's harder to do."