Limitation of Conservation Easement Charitable Deductions by Inventory Basis Under IRC §§ 170(e) and 724(b)

Introduction

Glade Creek Partners, LLC v. Commissioner of Internal Revenue (11th Cir. June 6, 2025) addresses whether a partnership’s donation of a conservation easement may be deducted in full or must be reduced by the donor-partner’s basis when the underlying property is treated as inventory. The petitioners—Glade Creek Partners, LLC and its tax matters partner Sequatchie Holdings, LLC—donated a perpetual conservation easement on 1,313 acres to Atlantic Coast Conservancy in 2012 and claimed a charitable deduction equal to the easement’s full fair market value. The Internal Revenue Service challenged the claimed deduction under I.R.C. § 170(e) (which requires a reduction for the amount of gain that would not be long-term capital gain) and I.R.C. § 724(b) (which treats contributed inventory items as ordinary income for five years). Key issues include (1) whether §§ 170(e) and 724(b) apply to conservation easements at all, and (2) if so, whether the deductible amount must be limited by the partner’s adjusted basis in the easement property.

Summary of the Judgment

The Eleventh Circuit affirmed the Tax Court’s decision limiting Glade’s deduction. The Court held:

Applicability of §§ 170(e) and 724(b): Although Glade argued that conservation easements are governed solely by § 170(h), the Court found that § 170(e) applies to all charitable contributions of property and § 724(b) appropriately characterizes a partner-contributed inventory item as ordinary income.
Character of the Easement Property: Hawks Bluff Investment Group, Inc. (the contributing partner) treated the land as inventory on its 2012 tax return, and the Tax Court’s finding that the property was inventory was not clearly erroneous.
Deduction Limit: Under § 170(e)(1)(A), the easement deduction must be reduced by the amount of gain that would have been ordinary income had the easement been sold at fair market value. Because § 724(b) classifies gain on contributed inventory as ordinary income, Glade’s deduction was limited to its adjusted basis.

Analysis

1. Precedents Cited

Hewitt v. Commissioner (11th Cir. 2021): Invalidated Treasury Regulation § 1.170A-14(g)(6)(ii), which had imposed “perpetuity” restrictions on conservation easements. This Court remanded to allow the Tax Court to consider alternative statutory grounds.
Winthrop Test (United States v. Winthrop, 5th Cir. 1969): Established a seven-factor inquiry for distinguishing “capital assets” from “inventory”—including purpose held, frequency of sales, and taxpayer’s business practices.
Boree v. Commissioner (11th Cir. 2016): Confirmed that the Tax Court need not consider every Winthrop factor in isolation and may rely on additional facts when characterizing property.
Access Now, Inc. v. Southwest Airlines Co. (11th Cir. 2004) & Finnegan v. Commissioner (11th Cir. 2019): Articulated the standard for refusing to consider issues raised for the first time on appeal, balancing miscarriage of justice and prejudice.

2. Legal Reasoning

The Court’s reasoning proceeds in three steps:

Application of § 170(e): The plain text of § 170(e)(1)(A) requires donors of property to reduce deductions by “the amount of gain” that would not be long-term capital gain if sold at fair market value. This general rule captures contributions of conservation easements unless a specific carve-out exists. No such exception appears in § 170(h).
Operation of § 724(b): When a partner contributes inventory property to a partnership, § 724(b)(1) treats gain on subsequent partnership sales as ordinary income for five years. The Court held that this statutory rule determines the character of the hypothetical gain on sale of the easement.
Characterization as Inventory: The Tax Court’s factual finding—that Hawks Bluff held the underlying land as inventory—was not clearly erroneous. The partnership tax return, ownership context, and continuous business of real estate development supported this classification.

3. Impact

This decision clarifies that donors of conservation easements must consider the character of the underlying property in their hands (or the contributing partner’s hands) before claiming maximum deductions. Partnerships and their advisors will need to:

Review entity returns to determine inventory treatment before contribution.
Anticipate deduction limitations under § 170(e) when property is not a capital asset.
Structure contributions through entities that hold property as capital assets if full fair market value deductions are desired.

Complex Concepts Simplified

Adjusted Basis: The amount a taxpayer has invested in property for tax purposes—original cost plus improvements, minus depreciation.
Fair Market Value: The price at which property would change hands between a willing buyer and seller, each having reasonable knowledge and neither under compulsion.
Capital Asset vs. Inventory: Capital Asset: Held for investment or use; gains are long-term capital gains if held > 1 year. Inventory: Held for sale in the ordinary course of business; gains are treated as ordinary income.
Hypothetical Gain Reduction (§ 170(e)): Donors must reduce their charitable deduction by the amount of gain that would be ordinary income or short-term gain if they sold the property at the time of donation.

Conclusion

Glade Creek Partners reinforces that charitable deductions for conservation easements cannot be claimed in full when underlying property is treated as inventory. Under I.R.C. § 170(e), the deduction must be reduced by the amount of hypothetical ordinary income—a rule shaped by § 724(b) when a partnership receives contributed inventory. Taxpayers and practitioners must closely examine the status of land contributions and apply the governing statutes to avoid overstatement of deductions. This decision underscores the interplay between partnership tax rules and charitable contribution limitations, ensuring that conservation easement donors align their planning with the character of property on contribution.