Eleventh Circuit: Partnership's Conservation Easement Deduction Was Limited to Basis

(Parker Tax Publishing June 2025)

The Eleventh Circuit affirmed the Tax Court and held that the amount of the charitable deduction a partnership could claim for its donation of a conservation easement was limited to its adjusted basis in the easement under Code Sec. 170(e) and Code Sec. 724(b) because the easement property was an inventory item in the hands of the partner that contributed the property. The Eleventh Circuit rejected the taxpayer's argument that the Tax Court erred in categorizing the easement property as an inventory item based on the seven-factor test established in U.S. v. Winthrop, 417 F.2d 905 (5th Cir. 1969). Glade Creek Partners, LLC v. Comm'r, 2025 PTC 208 (11th Cir. 2025).

Background

In 2006, International Land Consultants, Inc. (ILC) purchased nearly 2,000 acres of undeveloped land in Tennessee, which it planned to develop and market as a residential vacation community. In part because of the 2008 economic recession, however, ILC's plans went awry, and it faced serious financial problems. One of ILC's three owners walked away from the project. Facing pressure from the bank that had funded ILC's infrastructure loans, the company's remaining two owners, as well as its real-estate advisor, organized Hawks Bluff Investment Group, Inc. (Hawks Bluff), an S corporation, to assume ILC's debt in exchange for some of ILC's land. But even after Hawks Bluff assumed ILC's debt, financial pressures persisted, so Hawks Bluff pursued a conservation-easement transaction to pay off part of its debt. To execute this transaction, in 2012, the owners of Hawks Bluff organized Glade Creek Partners, LLC (Glade), to which Hawks Bluff contributed about 1,313 acres of land. Two months later, Glade donated a conservation easement on this land (the Easement Property) to Atlantic Coast Conservancy.

At the end of 2012, Hawks Bluff stated on its tax return that it was a real-estate dealer and reported the Easement Property on the line for "inventory" items. It reported a decrease in inventory to account for the transfer of the Easement Property to Glade. Meanwhile, Glade claimed a charitable-contribution deduction for the entire fair market value of the easement. The IRS disallowed Glade's easement deduction, and Glade petitioned the Tax Court.

After a trial, the Tax Court likewise disallowed the easement deduction, reasoning that the easement's conservation purposes were not protected "in perpetuity" under Code Sec. 170(h)(5)(A) and Reg. Sec. 1.170A-14(g)(6)(ii). Glade appealed the Tax Court's decision to the Eleventh Circuit. In 2021, the Eleventh Circuit held Reg. Sec. 1.170A-14(g)(6)(ii) invalid in Hewitt v. Comm'r, 2021 PTC 410 (11th Cir. 2021). Accordingly, the Eleventh Circuit remanded Glade's case so that the Tax Court could address the IRS's alternative arguments for disallowing Glade's easement deduction.

On remand, the IRS conceded that Glade was entitled to an easement deduction. So the sole issue before the Tax Court was whether Glade could deduct the entire fair market value of the easement or whether, instead, the amount of the deduction was limited to Glade's adjusted basis in the easement. That issue turned on whether the Easement Property was an inventory item or a capital asset in the hands of Hawks Bluff, the partner that contributed the Easement Property to Glade. The Tax Court held that the Easement Property was an inventory item and that the deduction was therefore limited to Glade's adjusted basis. Glade again appealed to the Eleventh Circuit.

Code Sec. 170(e) generally provides that when a taxpayer seeks to deduct a charitable contribution of property, he must reduce the deduction by "the amount of gain which would not have been long-term capital gain . . . if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution." In other words, the taxpayer must reduce the deduction by any short-term capital gains or ordinary income that would have resulted from a hypothetical sale of the property. Code Sec. 724 governs the characterization - i.e., as ordinary income or as a capital gain - of gains that result from property contributed to a partnership by one of its partners. Code Sec. 724(b) provides that, in the case of property that was an inventory item in the hands of the partner who contributed it, any gain is considered ordinary income for a five-year period starting on the date of contribution.

The Easement Property was contributed to Glade, a partnership, by Hawks Bluff, one of its partners. Accordingly, to determine the character of the Easement Property, the Tax Court turned to Code Sec. 724(b). The Tax Court found that the Easement Property was inventory in the hands of Hawks Bluff when it contributed the property to Glade in September 2012. Accordingly, the Tax Court concluded that, if Glade had sold the Easement Property in December 2012, it would have yielded ordinary income under Code Sec. 724(b). And because the Easement Property would have yielded ordinary income had Glade sold it in December 2012, so too would the easement itself have yielded ordinary income. Therefore, the Tax Court held that, under Code Sec. 170(e), the amount of Glade's easement deduction was limited by the amount that Glade would have gained if it had sold the easement in December 2012.

Glade challenged the Tax Court's holding on two grounds. First, it contended - for the first time on appeal - that Code Sec. 170(e) and Code Sec. 724(b) did not apply to its easement deduction at all. According to Glade, Code Sec. 170(e) does not apply to conservation easements, which are governed solely by Code Sec. 170(h). Glade further argued that Code Sec. 724(b) was inapplicable because Glade still owned the Easement Property. Second, Glade argued that, even if Code Sec. 170(e) and Code Sec. 724(b) did apply, the Tax Court erred in finding that they limit the amount of its deduction because, it contended, the Easement Property was a capital asset. Glade contended that the Tax Court misapplied the seven-factor test established in U.S. v. Winthrop, 417 F.2d 905 (5th Cir. 1969), for determining whether a taxpayer's property is a capital asset or an investment item. In particular, Glade faulted the Tax Court for both failing to consider several Winthrop factors and weighing facts not contemplated by the Winthrop factors.

Analysis

The Eleventh Circuit affirmed the Tax Court's judgment. Regarding Glade's broad-based challenges to the applicable statutory framework, the court noted that issues not raised for the first time on appeal are generally not considered by the Eleventh Circuit. However, this rule is not jurisdictional, and the Eleventh Circuit may choose to hear the argument if (1) the issue involves a pure question of law and refusal to consider it would result in a miscarriage of justice or (2) the issue presents significant questions of general impact or great public concern.

The Eleventh Circuit determined that refusing to consider Glade's challenges to the statutory framework would not result in a miscarriage of justice. The court reasoned that Glade would not be prejudiced by such a refusal; Glade knew since the beginning of the litigation that Code Sec. 170(e) and Code Sec. 724(b) were implicated. The court noted that the IRS laid out this statutory framework in its pretrial memorandum, post-trial opening and answering briefs, and supplemental brief on remand. Glade could have raised its challenges to the statutory framework at any of these points, the court reasoned, but Glade failed to do so. In the court's view, allowing Glade to challenge the statutory framework now would, if anything, prejudice the IRS. The court was also not persuaded that this issue presented a significant legal question of broad impact and great public concern. The significance of the legal question was, in the court's view, outweighed by the prejudice the IRS would suffer if the court allowed Glade to present a new claim.

Regarding the Tax Court's categorization of the Easement Property as an inventory item in the hands of Hawks Bluff, the Eleventh Circuit found that Glade's argument was foreclosed by Boree v. Comm'r, 2016 PTC 341 (11th Cir. 2016), where the Eleventh Circuit held that the Winthrop factors are not controlling and that the Tax Court may consider other facts. The Eleventh Circuit also rejected Glade's argument that the Tax Court should not have relied on Hawks Bluff's 2012 tax return in determining the Easement Property was inventory since that return did not reflect Glade's intent. The court noted that under Code Sec. 724(b)(2), Glade's intent was irrelevant. Rather, the character of the Easement Property depended on the intent of Hawks Bluff, the partner that contributed the property to Glade.

The Eleventh Circuit also was not persuaded by Glade's argument that the Tax Court improperly considered the purpose of Hawks Bluff's predecessor, ILC, when ILC held the Easement Property. The court noted that Code Sec. 724(b) applies to property that was inventory in the hands of the contributing partner "immediately before such contribution." Glade argued that, because ILC did not hold the Easement Property "immediately before" Hawks Bluff contributed it to Glade, the Tax Court erred in considering ILC's purpose in holding it. The Eleventh Circuit found that Glade's point might stand if Hawks Bluff and ILC were wholly distinct entities without any relationship to each other. But the Tax Court found that Hawks Bluff was organized to take over ILC's failing real estate business and that of Hawks Bluff's three owners, two were the owners of ILC and the third was ILC's real-estate advisor. Accordingly, the Eleventh Circuit concluded that the Tax Court had reason to view ILC's purpose as probative - if only weakly probative, given the Tax Court's primary reliance on Hawks Bluff's 2012 return - of Hawks Bluff's purpose in holding the Easement Property.

For a discussion of charitable contributions of ordinary income property, see Parker Tax ¶84,140. For a discussion of the character of gain or loss on contributed inventory items by a partnership, see Parker Tax ¶22,750.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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