[Posted December 16, 2014] What’s the biggest itemized deduction you’ve ever taken on your taxes? Ten thousand bucks? Thirty? A hundred? Many taxpayers are concerned about listing large deductions for fear that they’ll turn into audit magnets. But the taxpayers in Belk v. Commissioner felt no compunction about claiming a charitable deduction of ten million dollars on their 2004 through 2006 returns.

The donation was in-kind: a conservation easement prohibiting development of 184 acres near Charlotte, North Carolina. It would help you to know that the property was already improved, in one of the best ways possible – a golf course. The course was surrounded by homes, against which the easement didn’t apply.

The easement contained a provision that allowed the owners to swap out parcels of the covered area, as long as they substituted adjacent areas of equal or greater acreage and value. Thus, the easement would never cover less than 184 acres, though it might encompass more. Finally, a savings clause provided that if any land swap caused the transaction not to comply with the laws permitting tax deductions, that swap would be invalidated.

I’m neither a tax lawyer nor a transactional lawyer, but I recognize that one or more attorneys with those specialties must have put considerable effort into crafting the easement in this way, in an effort to fend off Uncle Sam. But as I hinted above, a deduction that large is likely to inspire scrutiny sooner or later. In the Belks’ case, it came in 2009 in the form of a deficiency notice from the IRS Commissioner.

I’ll do the math for you. Assuming – as I think is safe – that the taxpayers are in the 38% bracket, they now owe about $4 million in principal, plus penalty, plus several years in interest, all to a creditor who is not widely known for forgiving indebtedness.

The taxpayers sought relief in Tax Court, but got none. Today, in a published opinion, the Fourth Circuit affirms. The primary fault with the donation lies in the swap-out provision. Because land can be withdrawn from the easement pretty much at will, and other land substituted, this arrangement conflicts with the Tax Code’s definition of a “qualified conservation contribution.” That phrase, in turn, incorporates the following definition of a “qualified real property interest”: “a restriction (granted in perpetuity) on the use which may be made of the real property.”

Since I’m a grammar geek, I should point out the misuse of the word which in that definition; it should be that. But really, the operative word – the multi-million-dollar-decisive word – in this definition is the. Because the restriction has to cover “the real property,” a swap-out provision means that you can never pin down what, exactly, has been donated in perpetuity. Accordingly, this easement doesn’t qualify for the deduction.

But what about that savings clause? Doesn’t that reinstate the original boundaries of the easement? Alas for Mr. and Mrs. Taxpayer, no; this would be a condition subsequent that merely attempts to circumvent taxation. The court finds that this is in effect an attempt to rewrite the easement for tax-avoidance purposes, and concludes, “This we will not do.”

I’ve heard of cases where, as the saying goes, “a man’s life hangs on a comma.” Here, the use of a definite article – the – is the decisive factor in a multi-million-dollar appeal.