An Alexandria attorney, specializing in real estate, was handed a $56,000 penalty by the U.S. Tax Court last month after it rejected his claim of a conservation easement tax deduction on land immediately adjacent to “The Grist Mill” once an integral part of George Washington’s Mount Vernon Plantation.
Chief Judge Joel Gerber denied a $342,000 deduction claimed by James D. Turner and his wife, Beverly, on what they described as a $3.1 million donation to Fairfax County in 1999. The land, previously a tree covered tract located on Route 235 near the intersection with Route 1, now contains 29 large homes.
What makes the case unusual is that it is the first significant victory for the Internal Revenue Service in their efforts to curb what they perceive as abuses to conservation easement tax deductions. According to tax specialists the case could have a national impact on how such easements are interpreted.
Pulled into the case was Mount Vernon District Supervisor Gerald Hyland who signed a letter for Turner, at the latter’s request, stating that Turner could build up to 62 homes on the site “by right.” During the tax litigation Hyland testified that Turner wrote the letter and he signed it.
“He asked for the letter from me since the plot is in my district. He sent it to the office and I signed it,” Hyland said. “However, the court obviously found that he was not entitled to the deduction.” The argument over the easement and the number of home which could be located on the site are not intertwined.
In arriving at his decision, Gerber determined that Turner’s donation to the county in agreeing “not to overdevelop” the tract had no value as a conservation easement tax deduction. “The requests by Hyland or any other influential groups to limit development simply indicate their desire for a development that would limit the quantity or amount of interference with the historic nature of the community,” Gerber wrote.
The site is visible from historic Woodlawn Plantation, constructed on land once owned by Washington. It once formed a scenic panorama visible from that plantation located at the intersection of routes 1 and 235.
AS NOTED in the court transcript, part of Turner’s practice is “the conduct of real estate closings through a title insurance company he owned.” He is also described by the court as “an investor in real property” and “at all relevant times ... a 60-percent member and general manager of FAC Co., L.C., a limited liability company formed for the purpose of acquiring, rezoning, and developing real property.”
The 29.5 acre site was conglomerated by FAC, according to the court. One parcel, owned by the Future Farmers of America, was acquired in 1997 and 1998 for $2 million, the transcript stated.
On Aug. 7 and 10, 1998, Turner purchased three additional lots “in the Woodland Heights historical overlay district for $550,000” and contributed them to FAC. Approximately one year later, FAC sold the 5.9 acre parcel, including the FFA building, for $1.6 million.
Prior to that sale, Hyland “assisted in the rezoning” of that site “to a C-2 classification that would permit continued use of the commercial building on that property.” The FFA building had existed there under a special use permit that would not necessarily convey to a new owner.
However, “Slightly more than half of the property (15.04 acres) is situated in a designated 100 year floodplain and not available for residential development,” the court noted. Plus, “Historical overlay districts are subjected to special requirements by the county.”
In the court’s assessment, the claim that 60 residences could be build on the 29.5 acre plot was erroneous. “In reality only approximately 30 could be built under the existing county zoning for the property.”
The claimed conservation easement and the underlying supporting appraisal, according to the opinion, “were based on the assumption that 60 dwelling units could be built and the potential for 30 was being given up by the easement.” But, the court claimed the site was always limited to 30 dwelling units. Therefore, nothing was being given up.
“At all relevant times, the Grist Mill property was zoned R-2 and was limited to a maximum development of 30 residences. Of the 29.5 acres, 15.4 acres were in a floodplain and could not be developed,” the court determined.
It was also noted during the trial that the “by right” conclusion in Hyland’s letter was incorrect. Rezoning would be required to raise the number of dwelling units to 62.
“I disagree that it was by-right. We would have had to go through rezoning. We introduced testimony that the site could go up to 62 dwelling units by rezoning which we feel we could have easily gotten through the regular process,” said J. Carlton Howard, Jr., Turner’s attorney, responding to calls placed to Turner’s office at 124 S. Royal St.
Gerber’s opinion noted that for real property to constitute a qualified conservation contribution all three of the following criteria must be met:
1. It must be a “qualified real property interest.”
2. The done must be a “qualified organization.”
3. The contribution is “exclusively for conservation purposes.”
The court also concluded there was no historic preservation easement because the site in question “did not preserve a historic structure or historically important land area.” Gerber stated, “Petitioner [Turner] has not shown how his proposed limitation in the conservation easement preserved an historical structure.”
Gerber’s ultimate conclusion was that Turner had not satisfied either the open space or historic preservation subdivision requirements to qualify for a deductible conservation easement.
He, therefore, denied the $342,000 deduction claimed by Turner and assessed the $56,000 in penalties.
“We’re very disappointed in the opinion. We think there are substantial facts missing from the court decision. We are assessing all our options including an appeal to the U.S. Circuit Court of Appeals for the Fourth District in Richmond,” Howard said.