IRS audit guide on conservation easements
IRS releases revised audit techniques guide on conservation
easements
IRS has revised its Conservation Easement audit technique
guide (ATG), which provides extensive insight into the statutory requirements
for qualified conservation contributions, valuation issues, IRS examination
procedures, penalties, and state tax credits associated with such
contributions.
Background. In general, Code Sec. 170(f)(3) bars a
charitable contribution deduction for a contribution of an interest in property
that is less than the taxpayer’s entire interest in the property, but an
exception is made for a qualified conservation contribution, i.e., the
contribution of a qualified real property interest to a qualified organization
exclusively for conservation purposes. The interest in property conveyed by a
facade easement must be protected in perpetuity for the contribution to be a
qualified conservation contribution. ( Code Sec. 170(h) , Reg. §
1.170A-14(b)(2) )
Any interest in the property retained by the donor must be
subject to legally enforceable restrictions that will prevent uses of the retained
interest inconsistent with the conservation purposes of the donation. ( Reg. §
1.170A-14(g)(1) )
Under Reg. § 1.170A-14(g)(2) , if the property has a
mortgage or other lien in effect at the time the easement is recorded, the
easement contribution is not deductible unless the mortgagee or lien holder
subordinates its rights in the property to the rights of the donee organization
to enforce the conservation purposes of the easement.
The value of a conservation easement is its fair market
value (FMV) at the time of contribution, as determined in a qualified appraisal
(see below). Under Reg. § 1.170A-13(c)(2) , which concerns any noncash
charitable contribution exceeding $5,000, the donor must: (1) obtain a
qualified appraisal for the contributed property; (2) attach a fully completed
appraisal summary (i.e., Form 8283) to the tax return on which the deduction is
claimed; and (3) maintain records relating to the claimed deduction, as
required by Reg. § 1.170A-13(b)(2)(ii) .
A qualified appraisal must include a detailed description of
the property and its physical condition, the valuation method used to determine
the FMV, and the specific basis for the valuation. ( Reg. § 1.170A-13(c)(3)(ii)
)
If the conservation organization requests a cash contribution
from the donor of the conservation easement, the payment is deductible as a
charitable contribution only if it is a voluntary transfer made with charitable
intent. ( Code Sec. 170 ) Charitable intent may exist if the transfer is made
without the receipt of, or the expectation of receiving, a quid pro quo for the
transfer. In general, if the benefits the transferor expects to receive are
substantial, the transfer does not satisfy the charitable intent requirement.
Tax issues. The ATG identified a number of issues frequently
associated with deficient conservation easement contribution claims, including
the following:
… failure to meet charitable contribution rules;…
noncompliance with substantiation requirements;… inadequate documentation or
lack of conservation purpose;… failure to provide the donee organization with
a right to proceeds in the event of termination;… use of improper appraisal
methodologies and overvalued conservation easements; and… failure to report
income from the sale of state tax credits.
Following is an overview of some of the key areas agents are
instructed to examine, and steps they should take, when reviewing a return
claiming a conservation easement deduction.
Planning the examination. Before contacting the taxpayer,
examiners should review the return, any attachments thereto, and internal and
external sources of information. Form 8283, Noncash Charitable Contributions,
is the “starting point” for examiners to gather information about the
deduction. Examiners are instructed to inspect the form for a number of red
flags, including:
… incomplete or missing information,… missing appraiser
or donee acknowledgments,… inconsistent dates when compared to other
documents,… a short time period between the acquisition of the property and
the donation date,… high valuation of the easement in relation to the basis
of the underlying property or the total acreage of the underlying land, and…
use of an appraiser who does not generally perform appraisals where the easement
is located.
In some cases, taxpayers will also attach baseline studies,
correspondence or other documents related to the easement donation. This
information should be reviewed for unusual items or inconsistencies and
ultimately compared to actual source documents.
Examiners should look for the following omissions, each of
which may be a basis for disallowing the charitable contribution: lack of
appraiser’s or donee’s signatures, failure to attach a qualified appraisal, and
failure to include the $500 façade filing fee for easements on buildings in
registered historic districts for which a deduction of more than $10,000 is
claimed. Examiners are also instructed to determine whether there were any
preexisting restrictions on the property such that granting the easement didn’t
impose any new restrictions causing any loss in value.
The ATG also addresses complications that can arise in
contexts where the donation originates from a flow-through entity.
Conducting the examination. Examiners are instructed to, if
possible, conduct a joint taxpayer interview with the IRS appraiser. If the
taxpayer or representative won’t consent to an interview, then the examiner
should either issue a summons or develop the case based on third-party
contacts, such as representative of the donee organization, the appraiser, the
baseline study author, or other conservation experts.
Examiners are also encouraged to inspect the property, if
possible, with the IRS appraiser. During the inspection, the examiner should
note factors including the location of the significant or protected habitat or
species, public access (both physical and visual) to the easement property, and
any inconsistent use of the property. The examiner should ask the taxpayer or
representative to point out the outdoor recreation areas, animals, plants,
scenic views, or historic land and structures that contribute to the
conservation purpose. If the examiner observes an absence of conservation
attributes, lack of access, de minimis public benefit, or use inconsistent with
the conservation purpose, the examiner should ask the taxpayer or
representative for clarification and additional documentation.
Document review. The examiner and IRS appraiser should
review documents such as the deed of conservation easement, subordination
agreements, baseline study, appraisals, information provided by the qualified
organization, and documents submitted to the National Park Service.
The deed of conservation easement should set out the
property that is being encumbered, the conservation purpose, protection of the
property in perpetuity, public access to the property, reserved rights, and
provisions for subordination and allocation of proceeds. In particular,
examiners should look for any language that negates or contradicts the
perpetuity requirement, whether the taxpayer reserved any property rights that
negate the conservation purpose, whether the taxpayer properly obtained a
subordination agreement from any lender(s) prior to granting the easement, and
whether the lender agreement provides for the donee organization to share in
the proceeds in the event that the easement is extinguished (e.g., by
condemnation or casualty).
The Tax Court has
ruled against taxpayers on this point in several recent cases, holding that a
mortgage on the underlying property defeats a façade easement deduction. Since
the bank would have preference to insurance proceeds in the event of a
casualty, the Court held that the façade easement wasn’t protected in
perpetuity. (See 1982 East, LLC, TC Memo 2011-84 , at Weekly Alert ¶ 1 04/21/2011 ; Kaufman I, (2010) 134 TC 182 ;
and Kaufman II, (2011) 136 TC 294 .)
Penalties. Throughout the examination, the examiner should
be developing relevant facts to determine what penalties may apply and whether
waiver of the penalty may be appropriate (based on reasonable cause). In
particular, examiners should be alert to any indication of fraud and should
consult the Fraud Technical Advisor program analyst if badges of fraud are
identified during the examination.
State tax credits. Most states with a conservation tax
credit program determine the amount of the credit based on a percentage of the
FMV of the donated easement. Some programs provide for a carryforward of unused
tax credits over a number of years, and some have transferable tax credits that
can be sold to third parties.
Although the issuance of the state tax credit, or use of
same to reduce state tax liability, doesn’t trigger federal gross income to a
taxpayer, sale of a transferable state tax credit is a taxable transaction that
results in gain equal to the excess of the amount realized over the adjusted
basis of the property (typically zero, since the taxpayer didn’t pay anything
to receive the credits). The Tax Court has also held that state tax credits are
capital assets. (See Tempel, 136 TC 341 , at Weekly Alert ¶ 45 04/07/2011 ) Although the charitable
contribution of a conservation easement is likely the most significant issue on
the return, examiners should nonetheless be alert to the related issue of
taxpayers’ failure to report income from the sale of state tax credits.
Conservation Easement Audit Techniques Guide
Revision Date – September 30, 2011
Note: This document is not an official pronouncement of the
law or position of the Service and cannot be used, cited, or relied upon as
such. This guide is current through the publication date.
Contents
Chapter 1: Introduction to Conservation Easements
……………………………………………………………. 8
Statement of Purpose
……………………………………………………………………………………………………
8
Overview
……………………………………………………………………………………………………………………
8
Getting Started
…………………………………………………………………………………………………………….
9
Definition of Conservation Easement ……………………………………………………………………………..
9
Tax
Issues…………………………………………………………………………………………………………………
10
Chapter 2: Charitable Contributions: Statutory Requirements
…………………………………………….. 10
Overview
………………………………………………………………………………………………………………….
10
Charitable Contribution Definition
……………………………………………………………………………….
10
Qualified
Organization…………………………………………………………………………………………….
11
Charitable
Intent……………………………………………………………………………………………………..
11
Real Estate Contributions
……………………………………………………………………………………………
11
Partial Interest
Rule…………………………………………………………………………………………………….
11
Conditional Gifts
………………………………………………………………………………………………………..
11
Earmarking
……………………………………………………………………………………………………………….
12
Year of
Donation………………………………………………………………………………………………………..
12
Substantiation
…………………………………………………………………………………………………………….
12
Amount of Deduction …………………………………………………………………………………………………
13
Chapter 3: Qualified Conservation Contribution
……………………………………………………………….. 13
Overview ………………………………………………………………………………………………………………….
13
Qualified Real Property Interest
…………………………………………………………………………………..
13
Qualified Organization………………………………………………………………………………………………..
14
Conservation Purpose
…………………………………………………………………………………………………
14
Perpetuity
…………………………………………………………………………………………………………………
14
Recording of Easements
………………………………………………………………………………………….
15
Amendments to Easements
………………………………………………………………………………………
15
Subordination of Mortgages in Lender Agreements
……………………………………………………. 15
Allocation of Proceeds in Deed & Lender
Agreements……………………………………………….. 16
Chapter 4: Qualified Organization
……………………………………………………………………………………
16
Overview ………………………………………………………………………………………………………………….
16
Qualified
Organization………………………………………………………………………………………………..
17
Commitment & Resources
…………………………………………………………………………………………..
17
Special Rules for Buildings in Registered Historic Districts
………………………………………… 17
Cash
Contributions…………………………………………………………………………………………………….
18
Quid Pro Quo Contribution
………………………………………………………………………………………
18
Chapter 5: Conservation
Purpose……………………………………………………………………………………..
19
Overview
………………………………………………………………………………………………………………….
19
Land for Outdoor Recreation or Education
……………………………………………………………………
20
Relatively Natural Habitat or Ecosystem
……………………………………………………………………….
20
Open Space
……………………………………………………………………………………………………………….
20
Scenic Enjoyment
…………………………………………………………………………………………………..
21
Governmental Conservation Policy
…………………………………………………………………………..
22
Significant Public Benefit
………………………………………………………………………………………..
22
Historically Important Land or Structure
……………………………………………………………………….
23
Historically Important Land
……………………………………………………………………………………..
23
Certified Historic Structure
………………………………………………………………………………………
23
Special Rules for Buildings in Registered Historic Districts
………………………………………… 24
Public Access
…………………………………………………………………………………………………………….
25
Inconsistent Uses
……………………………………………………………………………………………………….
25
Baseline Study
…………………………………………………………………………………………………………..
26
Chapter 6: Substantiation
………………………………………………………………………………………………..
26
Overview
………………………………………………………………………………………………………………….
26
Contemporaneous Written Acknowledgment
………………………………………………………………… 27
Form 8283, Noncash Charitable Contributions
……………………………………………………………… 28
Declaration of Appraiser
………………………………………………………………………………………….
29
Donee Acknowledgment
………………………………………………………………………………………….
29
Reasonable Cause Exception
……………………………………………………………………………………
29
Qualified Appraisal
…………………………………………………………………………………………………….
29
Façade Easement Filing Fee(Registered Historic District
Only) ………………………………………. 30
Baseline Study
…………………………………………………………………………………………………………..
30
Exhibit 6-1 – Substantiation Requirements
…………………………………………………………………….
30
Chapter 7: Qualified Appraisal Requirements
……………………………………………………………………
31
Overview
………………………………………………………………………………………………………………….
31
Qualified Appraisal …………………………………………………………………………………………………….
32
Reasonable Cause Exception
……………………………………………………………………………………
33
Qualified Appraiser …………………………………………………………………………………………………….
33
Generally Accepted Appraisal Standards
………………………………………………………………………
34
Uniform Standards of Professional Appraisal Practice
……………………………………………….. 34
Appraisal Fees
……………………………………………………………………………………………………………
35
Chapter 8: Amount of Deduction
……………………………………………………………………………………..
35
Overview
………………………………………………………………………………………………………………….
35
Percentage
Limitations………………………………………………………………………………………………..
36
Individuals…………………………………………………………………………………………………………….
36
Corporations
…………………………………………………………………………………………………………..
37
Special Rules for Farmers and Ranchers
……………………………………………………………………
37
Carryovers
……………………………………………………………………………………………………………..
37
Basis Limitations
……………………………………………………………………………………………………….
38
Contributions of Appreciated Property
………………………………………………………………………….
38
Ordinary Income and Short-Term Capital Gain Property
…………………………………………….. 38
Long-Term Capital Gain Property
…………………………………………………………………………….
39
Bargain Sale
………………………………………………………………………………………………………………
39
Taxable Gain
………………………………………………………………………………………………………….
40
Federal and State Easement Purchase Programs …………………………………………………………
40
Quid Pro Quo and Charitable Intent
……………………………………………………………………………..
40
Rehabilitation Tax Credit
…………………………………………………………………………………………….
41
Recapture of Rehabilitation Tax Credit
……………………………………………………………………..
41
Chapter 9: Valuation of Conservation Easements
……………………………………………………………… 42
Overview
………………………………………………………………………………………………………………….
42
Valuation Process……………………………………………………………………………………………………….
43
Valuation Date
…………………………………………………………………………………………………………..
43
Fair Market Value (FMV) ……………………………………………………………………………………………
43
Before and After Method
…………………………………………………………………………………………
44
Use of Flat Percentage Cannot Be Applied to Before Value
………………………………………… 44
Contiguous
Parcels………………………………………………………………………………………………….
45
Enhancement Rule ………………………………………………………………………………………………….
45
Market Analysis
…………………………………………………………………………………………………………
46
Highest and Best Use (HBU)
……………………………………………………………………………………….
47
Methodology
……………………………………………………………………………………………………………..
48
Sales Comparison Approach
…………………………………………………………………………………….
48
Cost Approach
……………………………………………………………………………………………………….
49
Income Capitalization Approach
………………………………………………………………………………
49
Transferable Development Rights (TDRs)
…………………………………………………………………….
51
Chapter 10: Preplanning the Examination
…………………………………………………………………………
52
Overview
………………………………………………………………………………………………………………….
52
Review of Return
……………………………………………………………………………………………………….
52
Form 8283
……………………………………………………………………………………………………………..
52
Return Attachments
………………………………………………………………………………………………..
54
Other Tax Issues
…………………………………………………………………………………………………….
54
TEFRA Considerations
……………………………………………………………………………………………
55
Internal Sources of Information
……………………………………………………………………………………
55
IRS Intranet
……………………………………………………………………………………………………………
55
Program Analysts ……………………………………………………………………………………………………
56
Integrated Data Retrieval System – IDRS
…………………………………………………………………..
56
Publication 78 ………………………………………………………………………………………………………..
56
Office of Professional Responsibility
………………………………………………………………………..
57
External Sources of Information …………………………………………………………………………………..
57
Internet Research
……………………………………………………………………………………………………
57
Public Records ……………………………………………………………………………………………………….
58
National Park Service
……………………………………………………………………………………………..
59
Interviews …………………………………………………………………………………………………………………
59
Information Document Requests
………………………………………………………………………………….
60
Valuation Expert Involvement
……………………………………………………………………………………..
60
Referral to LB & I Engineering
………………………………………………………………………………..
60
Referral Outcomes
………………………………………………………………………………………………….
61
LB & I Engineering Products
…………………………………………………………………………………..
61
Outside Experts
………………………………………………………………………………………………………
61
Consultation with Counsel
…………………………………………………………………………………………..
62
Coordination with TEGE
…………………………………………………………………………………………….
62
Chapter 11: Conducting the Examination
………………………………………………………………………….
63
Overview
………………………………………………………………………………………………………………….
63
Interviews
…………………………………………………………………………………………………………………
63
Property Inspection
…………………………………………………………………………………………………….
64
Review of Documents
…………………………………………………………………………………………………
65
Deed of Conservation Easement ……………………………………………………………………………….
65
Lender Agreements
…………………………………………………………………………………………………
67
Baseline Study ……………………………………………………………………………………………………….
68
Taxpayer’s Appraisal
………………………………………………………………………………………………
70
Donee Organization ………………………………………………………………………………………………..
70
National Park Service-Form 10-168
………………………………………………………………………….
72
Partnership Documents ……………………………………………………………………………………………
73
Third-Party Contacts
…………………………………………………………………………………………………..
74
Donee Organizations ……………………………………………………………………………………………….
74
Mortgage Lenders
…………………………………………………………………………………………………..
75
Appraiser ……………………………………………………………………………………………………………….
75
Federal, and State Conservation
Agencies………………………………………………………………….
76
Local Government Officials
…………………………………………………………………………………….
76
Real Estate Agents
………………………………………………………………………………………………….
76
Property Owners
…………………………………………………………………………………………………….
77
Chapter 12: Concluding the Examination
………………………………………………………………………….
77
Overview
………………………………………………………………………………………………………………….
77
Issue Identification
……………………………………………………………………………………………………..
77
Substantial Compliance
…………………………………………………………………………………………..
78
Report Writing
…………………………………………………………………………………………………………..
78
Job Aids
……………………………………………………………………………………………………………….
79
Valuation Expert Reports
…………………………………………………………………………………………
80
Penalties
……………………………………………………………………………………………………………….
80
Technical Assistance
……………………………………………………………………………………………….
81
Closing Conference
…………………………………………………………………………………………………….
81
Taxpayer Protests
……………………………………………………………………………………………………….
81
Rebuttals to Taxpayer Protest
…………………………………………………………………………………..
81
Exhibit 12-1 Conservation Easement Issue Identification
Worksheet ………………………………. 82
Chapter 13: Penalties
……………………………………………………………………………………………………..
85
Overview
………………………………………………………………………………………………………………….
85
Accuracy-Related Penalties
…………………………………………………………………………………………
85
IRC § 6662(c) Negligence or Disregard of Rules or
Regulations …………………………………. 86
IRC § 6662(d) Substantial Understatement of Income
Tax………………………………………….. 86
IRC § 6662(e) Valuation
Misstatements…………………………………………………………………….
87
IRC § 6663 Civil Fraud Penalties
……………………………………………………………………………..
88
IRC § 6664 Reasonable Cause Exception
…………………………………………………………………. 88
Return Preparers-IRC §
6694……………………………………………………………………………………….
89
Promoters-IRC §§ 6700 and 6701
………………………………………………………………………………..
90
Appraisers-IRC § 6695A Substantial and Gross Valuation
Misstatements Attributable to Incorrect Appraisals ……………………………………………………………………………………………………
90
Office of Professional Responsibility
Sanctions…………………………………………………………. 91
Chapter 14: State Tax Credits ………………………………………………………………………………………
91
Overview
………………………………………………………………………………………………………………….
91
State Tax Credit Programs
…………………………………………………………………………………………..
91
Sale of State Tax
Credits……………………………………………………………………………………………..
92
Chapter 1: Introduction to Conservation Chapter 1:
Introduction to Conservation Chapter 1: Introduction to Conservation Chapter 1:
Introduction to Conservation Chapter 1: Introduction to Conservation Chapter 1:
Introduction to Conservation Chapter 1: Introduction to Conservation Chapter 1:
Introduction to Conservation Chapter 1: Introduction to Conservation Chapter 1:
Introduction to Conservation Chapter 1: Introduction to Conservation Easements
EasementsEasements
Statement of Purpose
The purpose of this audit technique guide (ATG) is to
provide guidance for the examination of charitable contributions of
conservation easements. Users of this guide will learn about the general
requirements for charitable contributions and additional requirements for
contributions of conservation easements.
This ATG includes examination techniques and an overview of
the valuation of conservation easements. It also includes a discussion of
penalties, which may be applicable to taxpayers, and others involved in the
conservation easement transaction.
This guide is not designed to be all-inclusive. It is not a
comprehensive training manual on the valuation of conservation easements.
Overview
To be deductible, donated conservation easements must be
legally binding, permanent restrictions on the use, modification and
development of property such as parks, wetlands, farmland, forest land, scenic
areas, historic land or historic structures. Current and future owners of the
easement and the underlying property are bound by the terms of the conservation
easement.
Internal Revenue Code (IRC) § 170(h) states that a qualified
conservation contribution is a contribution of a qualified real property interest
(i.e., a restriction granted in perpetuity on the use which may be made of the
real property) to a qualified organization exclusively for conservation
purposes. The IRC and accompanying Treasury regulations outline the
requirements to be met before a contribution is deductible.
Qualified organizations that accept conservation easements
must have a commitment to protect the conservation purposes of the donation and
must have sufficient resources to enforce compliance with the terms of the
easement agreement.
IRC § 170(h)(4)(A) specifies the four deductible types of
conservation easements:
Preservation of land areas for outdoor recreation by, or
the education of, the general public.
Protection of a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem.
Preservation of open space (including farmland and forest
land).
Preservation of a historically important land area or a
certified historic structure.
The donation of a conservation easement that meets all
statutory and regulatory requirements, including specific substantiation
requirements, can be claimed as a charitable contribution deduction.
The value of a conservation easement is determined in a
qualified appraisal. The value of the contribution is the fair market value (FMV)
at the time of the contribution. To the extent there is a substantial record of
sales of easements comparable to the donated easement, the FMV is based on the
sales price of such comparables. If there is no substantial record of
market-place sales, the value is generally the difference between the FMV of
the underlying property before and after the easement is transferred. Various
statutory provisions may limit the amount of the deduction.
To conduct a quality examination, in-depth development of
facts is necessary. Examiners have primary responsibility for addressing the
taxpayer’s compliance with all statutory and regulatory requirements. Valuation
is also an important component of this tax issue. A multi-divisional approach,
working with LB&I Engineering, Counsel, and Tax Exempt and Government
Entities (TEGE), may be needed to properly develop tax issues in a conservation
easement examination.
Taxpayers, return preparers, appraisers, and others involved
with an improper or overvalued conservation easement may be subject to various
penalties.
While the charitable contribution of a conservation easement
may be the most significant issue on the tax return, Examiners should be alert
to other related tax issues such as a sale of state tax credits or a recapture
of rehabilitation tax credits.
Getting Started
Information about conservation easements including contacts,
job aids, and other reference materials are on the IRS Intranet at MySB/SE
under Examination, Issues and Procedures.
Definition of Conservation Easement
“Conservation easement”• is the generic term for easements
granted for outdoor recreation, natural habitat, open space, scenic and
historic preservation of land and buildings.
Conservation easements permanently restrict how land or
buildings are used. The “deed of conservation easement”• describes the
conservation purpose(s), the restrictions and the permissible uses of the
property. The deed must be recorded in the public record and must contain
legally binding restrictions enforceable by the donee organization under state
law.
The property owner gives up certain rights but retains
ownership of the underlying property. The extent and nature of the donee
organization’s control depends on the terms of the conservation easement. The
organization has an interest in the encumbered property that runs with the
land, which means that its restrictions are binding not only on the landowner
who grants the easement but also on all future owners of the property.
Tax Issues
Taxpayers must satisfy numerous statutory provisions in
order to claim a noncash charitable contribution deduction for the donation of
a conservation easement. Some deficiencies revealed in examinations of
conservation easements include:
Failure to meet charitable contributions rules.
Noncompliance with substantiation requirements.
Inadequate documentation or lack of conservation purpose.
Lack of perpetuity evidenced by deeds allowing for
abandonment or termination of easement.
Reserved property rights inconsistent with the claimed
conservation purpose.
Failure to comply with subordination rules.
Failure to provide the donee organization with a right to
proceeds in the event of termination.
Use of improper appraisal methodologies and overvalued
conservation easements.
Failure to report income from the sale of state tax
credits.
The IRS has also identified some promoters and appraisers
involved in conservation easement tax schemes.
Chapter 2: Charitable Contributions: Chapter 2: Charitable
Contributions: Chapter 2: Charitable Contributions: Chapter 2: Charitable
Contributions: Chapter 2: Charitable Contributions: Chapter 2: Charitable
Contributions: Chapter 2: Charitable Contributions: Chapter 2: Charitable
Contributions: Chapter 2: Charitable Contributions: Statutory Requirements
Statutory Requirements Statutory RequirementsStatutory Requirements Statutory
Requirements Statutory Requirements Statutory Requirements
Overview
IRC § 170 contains the rules that govern income tax
deductions for charitable contributions, including donations of conservation
easements.
In order to claim a charitable contribution deduction for a
conservation easement, taxpayers must meet the statutory requirements for a
charitable contribution, as well as the specific requirements for conservation
easement donations.
See Publication 526, Charitable Contributions (PDF),
Publication 561, Determining the Value of Donated Property (PDF), and
Publication 1771, Charitable Contributions – Substantiation and Disclosure
Requirements (PDF).
Charitable Contribution Definition
A charitable contribution is a voluntary gift to or for the
use of a qualifying organization. It is a transfer of money or property without
receipt of adequate consideration made with charitable intent. IRC § 170(c).
Qualified Organization
A taxpayer can only deduct contributions made organizations
eligible to accept tax-deductible contributions, which are organizations
described in IRC § 170(c).
An organization accepting tax-deductible contributions of
conservation easements must meet additional requirements to be a qualified
organization.
See Chapter 4 for additional guidance on qualified
organizations.
Charitable Intent
A charitable contribution is a donation or gift to, or for
the use of, a qualified organization. It is voluntary and made without receipt,
or the expectation of receipt, of anything of equal value.
A transfer of money or property is not voluntary if it is
required or is made with the expectation of a direct or indirect benefit. A
benefit received or expected to be received in connection with a payment or
transfer by the taxpayer is called a quid pro quo.
See Chapter 8 for additional discussion of charitable intent
and quid pro quo.
Real Estate Contributions
For a contribution of real estate, including a contribution
of a conservation easement, there is no “transfer,”• and therefore no
deductible charitable contribution, unless there is:
A deed signed by the donor transferring the property,
Delivery to the qualified organization, and
Acceptance by the qualified organization.
Conservation easements must be recorded in the public
record.
Partial Interest Rule
Generally, in order to have a deductible contribution, a
taxpayer must contribute the entire interest in the property. This is known as
the “partial interest” rule. IRC § 170(f)(3)(A).
A qualified conservation contribution is an exception to the
partial interest rule. IRC § 170(f)(3)(B)(iii) and (h).
Conditional Gifts
If the contribution is a conditional gift, the taxpayer
cannot take a deduction.
Example: If Justin transfers land in Maine to a city
government on the condition that the land is used by the city for an unlikely
use (e.g., alligator habitat), there is no deductible charitable contribution
before the time that the specified use actually occurs.
However, if there is only a negligible chance that the gift
will be defeated, the deduction is allowed. Treas. Reg. §§ 1.170A-1(e) and
1.170A-7(a)(3).
Example: Susan transfers land to a city government on the
condition that the land is used by the city for a public park. If, on the date
of the gift, the city government plans to use the property as a park, and the
possibility that it will not be used as a park is so remote as to be
negligible, the deduction is allowable at the time of the transfer to the city
government.
Earmarking
A taxpayer may not deduct contributions earmarked. (i.e.,
for the benefit of a particular individual or family). Earmarked amounts are
treated as transfers to the earmarked beneficiary and not as transfers to the
qualified organization.
Example: Steven made payments to his church, but they were
earmarked for a named needy individual. Steven cannot deduct the amount of the
payments since the funds are specifically designated for a named individual.
Year of Donation
A taxpayer may deduct contributions paid within the taxable
year. IRC § 170(a)(1) and Treas. Reg. § 1.170A-1(b).
A promise to pay cash or transfer property in the future is
not deductible. The taxpayer may deduct payments made by check when the check
is mailed or delivered to the qualified organization. Treas. Reg. §
1.170A-1(b).
For contributions of real estate, the year of the deduction
is the year in which the real estate is transferred under the law of the state
where the real estate is located thus with respect to conservation easements,
the year of the deduction is the year of recordation.
Example: A conservation easement was granted to a qualified
organization on December 20, 2007, as evidenced by the dated signatures on the
conservation easement deed. However, the easement was not recorded in the
public records until March 12, 2008. The year of donation is 2008.
Substantiation
A charitable contribution is not deductible unless it is
properly substantiated in accordance with the Internal Revenue Code and the regulations.
The documentation requirements vary depending
on the date of contribution, nature of the contribution
(cash or noncash), type of property contributed, and dollar amount claimed.
Required documents may include proof of payment such as a
receipt or cancelled check, a contemporaneous written acknowledgment, a fully
completed Form 8283, Noncash Contributions (PDF) and a qualified appraisal. See
Publication 526, Charitable Contributions (PDF), and Publication 1771,
Charitable Contributions – Substantiation and Disclosure Requirements (PDF) and
Chapter 6 for additional guidance on substantiation requirements.
Amount of Deduction
Factors, which may affect the amount a taxpayer may claim as
a charitable contribution deduction for a conservation easement include:
Quid pro quo and charitable intent
Bargain sale
Type of property (ordinary income, short-term capital
gain, long-term capital gain)
Basis
Percentage limitations
Type of donee organization
See Chapter 8 and Publication 526, Charitable Contributions
(PDF) for additional guidance on specific limitations on charitable
contributions.
Chapter 3: Qualifi Chapter 3: Qualifi Chapter 3: Qualifi
Chapter 3: Qualifi Chapter 3: Qualified Conservation ed Conservation ed
Conservation ed Conservation Contribution Contribution Contribution
Contribution
Overview
IRC § 170(h)(1) defines a qualified conservation
contribution as a contribution of a qualified real property interest to a
qualified organization to be used exclusively for conservation purposes.
Qualified Real Property Interest
A qualified real property interest is any of the following
interests in real property:
The entire interest of the donor other than a qualified
mineral interest.
A remainder interest.
A restriction on the use of the real property granted in
perpetuity (often referred to as a conservation easement).
See IRC § 170(h)(2).
Qualified Organization
The recipient of a conservation easement donation must be a
qualified organization. IRC § 170(h)(1)(B).
Qualified organizations are organizations that include:
A governmental unit, including the Federal government, a
United States possession, the District of Columbia, a state government, or any
political subdivision of a state or United States possession.
A publicly charity described in section 501(c)(3) of the
Internal Revenue Code that meets the public support test in section
170(b)(1)(A)(vi) or section 509(a)(2).
A section 501(c)(3) that is classified as a supporting
organization described in section 509(a)(3) and that is operated, supervised,
or controlled by one of the organizations described above.
Note: A conservation easement must be received by an
eligible donee to be deductible. Treas. Reg. § 1.170A-14(c)(1). Not all
qualified organizations are eligible to accept deductible conservation
easements.
See IRC § 170(h)(3) and Chapter 4 for additional information
on qualified organizations.
Conservation Purpose
IRC § 170(h)(4)(A) defines “conservation purpose”• as one of
the following:
Preservation of land for outdoor recreation by, or the
education of, the general public.
Protection of a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem.
Preservation of open space (including farmland and forest
land) either for the scenic enjoyment of the general public or pursuant to a
clearly delineated governmental conservation policy (both purposes must yield a
significant public benefit).
Preservation of a historically important land area or a
certified historic structure.
The easement must be created by deed and be exclusively for
conservation purposes. Donations of conservation easements may meet more than
one conservation purpose.
See Chapter 5 for additional information on conservation
purpose.
Perpetuity
A deductible conservation easement must be made in
perpetuity, permanently restricting the use of the property. IRC § 170(h)(2)(C)
and (5)(A) and Treas. Reg. § 1.170A-14(b)(2).
This means that the deed of conservation easement must state
that:
The restriction remains on the property forever and,
Is binding on current and future owners of the property.
A deed of conservation easement that does not include these
requirements is not in perpetuity; therefore, the easement is not a deductible
charitable contribution.
Example: Some conservation easement deeds only impose
restrictions for a specific period such as 10 years. These easements are not
deductible since the easement is not in perpetuity.
Recording of Easements
The complete deed of conservation easement must be recorded
in the appropriate recordation office in the county where the property is
located. Under state law, an easement is not enforceable in perpetuity before
it is recorded.
All exhibits or attachments to the deed such as a
description of the easement restrictions, diagrams and lender agreements must
also be recorded.
The effective date of the gift is the recording date. Treas.
Reg. § 1.170(A)-14(g)(1).
In Herman v. Commissioner, T.C. Memo. 2009-205, the taxpayer
recorded a “Declaration of Restrictive Covenant”• for a donation of unused
development rights above a building. The covenant referred to an attached
architectural drawing, which described the easement restrictions but the
drawing was not recorded. The court ruled that because the attached drawing was
not recorded, it could not bind subsequent purchasers, did not protect the
conservation purpose of preserving the apartment building “in perpetuity“• and
failed to meet the requirements of IRC § 170(h)(5)(A).
Amendments to Easements
The restriction on the use of the real property must be
enforceable in perpetuity, meaning that it lasts forever and binds all future
owners. Conservation easements should not be amended except in limited
circumstances such as to correct a typographical error in the original easement
document.
An easement is not enforceable in perpetuity if it allows
amendments that change the nature of the restrictions imposed on the property.
An easement is not enforceable in perpetuity if it ends after a period of years
or if it can revert to the donor or another private party. However, if a remote
future event, like an earthquake, can extinguish the easement, the donation
would nevertheless be treated as in perpetuity. Treas. Reg. § 1.170A-14(g)(3).
Examiners should contact Counsel for assistance if the
conservation easement has been amended or terminated.
Subordination of Mortgages in Lender Agreements
If the property has a mortgage or other lien in effect at the
time the easement is recorded, the easement contribution is not deductible
unless the pre-existing mortgagee or lien holder subordinates its rights in the
property to the rights of the donee organization to enforce the conservation
purposes of the easement. Treas. Reg. § 1.170A-14(g)(2).
The subordination agreement must be recorded in the public
records.
Allocation of Proceeds in Deed & Lender Agreements
In order to claim a charitable contribution deduction for
the donation of a conservation easement, the donor, at the time of the gift,
must agree that the donation of the perpetual conservation restriction gives
rise to a property right, immediately vested in the donee organization, with a
fair market value that is at least equal to the proportionate value that the
perpetual conservation restriction at the time of the gift bears to the value
of the property as a whole. The proportionate value of the donee’s property
rights is a percentage of the value of the entire property that never changes.
Treas. Reg. § 1.170A-14(g)(6)(ii).
Lenders are generally reluctant to give up a priority right
to proceeds. Frequently, the lender agreement merely acknowledges the
conservation easement and agrees to the conservation purposes, but it does not
provide for an allocation of proceeds as required in the Treasury Regulation.
In Kaufman v. Commissioner, 134 T.C. No. 9 (2010), aff’d,
136 T.C. No. 13 (2011), the taxpayers transferred an easement on property that
was subject to a mortgage, and the bank retained a prior claim on any proceeds
on extinguishment (e.g., condemnation, casualty, hazard, or accident) of the
easement. The Tax Court held that the easement was not deductible since neither
the deed of conservation easement nor the lender agreement complied with Treas.
Reg. § 1.170A-14(g)(6)(ii). The Tax Court determined that the contribution was
not a qualified conservation contribution under IRC § 170(h), stating, “the
facade easement contribution thus fails as a matter of law to comply with the
enforceability in perpetuity requirements under section 1.170A-14(g).”•
Examiners should contact Counsel for assistance in review of
deeds and lender agreements to determine if the documents satisfy the
allocation of proceeds requirements of Treas. Reg. § 1.170A-14(g)(6)(ii).
Chapter 4: Qualified Organization Chapter 4: Qualified
Organization Chapter 4: Qualified Organization Chapter 4: Qualified
Organization Chapter 4: Qualified Organization Chapter 4: Qualified
Organization Chapter 4: Qualified OrganizationChapter 4: Qualified Organization
Overview
A taxpayer must transfer the conservation easement to an
eligible donee to qualify for a contribution deduction. An eligible donee:
Is a qualified organization,
Must have the commitment to protect the conservation
purpose of the donation, and
Must have the resources to enforce the conservation
restrictions.
See IRC § 170(h)(3) and Treas. Reg. § 1.170A-14(c).
Qualified Organization
A qualified organization is one of the following:
A governmental unit, including the Federal government, a
United States possession, the District of Columbia, a state government, or any
political subdivision of a state or United States possession.
A publicly charity described in section 501(c)(3) of the
Internal Revenue Code that meets the public support test of section
170(b)(1)(A)(vi) or section 509(a)(2).
A section 501(c)(3) organization that is classified as a
supporting organization 509(a)(3) and that is operated, supervised, or
controlled by one of the organizations described above.
Commitment & Resources
The organization must have the commitment to protect the
conservation purposes of the donation and resources to enforce the restrictions
of the conservation easement. Treas. Reg. § 1.170A-14(c)(1).
A conservation group organized or operated for one of the
conservation purposes in IRC § 170(h)(4)(A) is considered to have the
commitment required to protect the conservation purposes of the donation.
Treas. Reg. § 1.170A-14(c)(1).
Organizations that accept easement contributions and are
committed to conservation will generally have an established monitoring program
such as annual property inspections to ensure compliance with the conservation
easement terms and to protect the easement in perpetuity.
The organization must also have the resources to enforce the
restrictions of the conservation easement. Resources do not necessarily mean
cash. Resources may be in the form of volunteer services such as lawyers who
provide legal services or people who inspect and prepare monitoring reports.
If the organization at the time of contribution does not
have the commitment to protect the conservation purposes of the donation or
resources to enforce the easement restrictions, no deduction is allowed.
See Chapter 11 for suggestions on how to evaluate the
organization’s commitment and resources.
Special Rules for Buildings in Registered Historic Districts
For a contribution made after July 25, 2006 of a qualified
real property interest with respect to a building in a registered historic
district, an additional requirement must be met to satisfy the commitment and
resources test.
IRC § 170(h)(4)(B)(ii) requires the taxpayer and the donee
to certify, under penalty of perjury, in a written agreement, that the donee is
a qualified organization with a purpose of environmental protection, land
conservation, open space preservation, or historic preservation, and that the
donee has the resources to manage and enforce the restriction and a commitment
to do so. Note: This special rule does not apply to properties listed on the
National Register.
See Chapter 5 for a complete discussion of the special rules
for buildings in registered historic districts.
Cash Contributions
A common practice for conservation organizations is to
request a cash contribution (sometimes referred to as a “stewardship fee”•)
from donors of conservation easements. To be deductible as a charitable
contribution, the cash payment must be a voluntary transfer made with
charitable intent to a qualified organization. IRC § 170 (a) and (c).
Charitable intent may exist if the transfer is made without
the receipt of, or the expectation of receiving, a quid pro quo for the
transfer. As a general rule, if the benefits the transferor receives or expects
to receive are substantial, rather than incidental to the transfer,, the
transfer does not satisfy the charitable intent requirement under IRC § 170.
Hernandez v. Commissioner, 490 U.S. 680, 691 (1989); United States v. American
Bar Endowment, 477 U.S. 105, 117 (1986); Singer Co. v. U.S., 196 Ct. Cl. 90,
449 F.2d 413, 422-423 (1971).
If a direct or indirect economic benefit (other than a tax
deduction) is received as a result of making a contribution, the deduction is
limited or disallowed. See Publication 526, Charitable Contributions (PDF).
Quid Pro Quo Contribution
A quid pro quo contribution is a transfer of money or
property made to a qualified organization partly in exchange for goods or
services in return from the charity or a third party.
Many conservation organizations offer some level of services
to facilitate the easement such as conducting baseline studies, completion of
National Park Service applications, preparing legal documents, soliciting
subordination or lender agreements or arranging for appraisals. Depending on
the nature and extent of the services provided, a portion of the claimed
deduction may not be deductible.
A quid pro quo may also be in the form of an indirect
benefit from a third party.
Example: A land developer agrees to grant a conservation
easement to the county or other qualified organization in exchange for the
approval of a proposed subdivision.
If a taxpayer receives a quid pro quo, the cash payment may
be deductible as a charitable contribution, but only to the extent the amount
transferred exceeds the fair market value (FMV) of the quid pro quo, and only
if the excess amount was transferred with charitable intent.
The burden is on the taxpayer to show that all or part of a
payment is a charitable contribution or gift. Treas. Reg. § 1.170A-1(h)(1) and
(2); United States v. American Bar Endowment, 477 U.S. 105, 116-118 (1986); and
Rev. Rul. 67-246, 1967-2 CB 104.
In Scheidelman v. Commissioner, T.C. Memo 2010-151, the
taxpayers claimed a charitable contribution deduction for a cash payment paid
to the donee organization in conjunction with the granting of the conservation
easement. The donee organization had provided services to the taxpayers. The
Tax Court concluded that the taxpayers did not provide sufficient evidence that
they received nothing of substantial value or, if they had received something
of substantial value, what the value was of the benefits received.
Chapter 5: Conservation Purpose Chapter 5: Conservation
Purpose Chapter 5: Conservation Purpose Chapter 5: Conservation Purpose Chapter
5: Conservation Purpose Chapter 5: Conservation PurposeChapter 5: Conservation
Purpose Chapter 5: Conservation Purpose Chapter 5: Conservation Purpose
Overview
A charitable contribution made under the provisions of IRC §
170(h)(4)(A) (conservation easement) must be made exclusively for one of the
following conservation purposes:
Preservation of land for outdoor recreation by, or the
education of, the general public.
Protection of relatively natural habitat or ecosystem.
Preservation of open space, where there is significant
public benefit, and (1) the preservation is for the scenic enjoyment of the
general public, or (2) pursuant to a clearly delineated Federal, State or local
governmental conservation policy.
Preservation of historically important land area or a
certified historical structure.
The conservation easement must be transferred by deed (or
other legal instrument as appropriate under the law of the relevant state) and
recorded, be exclusively for conservation purposes in perpetuity and meet at
least one of the above conservation purposes.
Public access is generally required to claim a conservation
easement deduction; however, the type of access depends on the claimed
conservation purpose.
If the claimed conservation purpose is for the preservation
of open space under IRC § 170(h)(4)(A)(iii), the contribution must yield a
significant public benefit.
The deed of conservation easement must prohibit inconsistent
use of the property that could permit destruction of a significant conservation
interest, even if the deed accomplishes an enumerated conservation purpose.
A baseline study is used to identify the conservation
attributes and to establish the condition of the property at the time of the conservation
easement donation.
Land for Outdoor Recreation or Education
This category includes the donation of a qualified real
property interest to preserve land for outdoor recreation by, or for the
education of, the general public. IRC § 170(h)(4)(A)(i).
Substantial and regular physical access by the general
public to the preserved land is required. Treas. Reg. § 1.170A-14(d)(2)(ii).
Example: A donation to preserve a lake for use by the
general public for boating or fishing, or to preserve land for a nature
preserve or hiking trail.
See Treas. Reg. § 1.170A-14(d)(2) for additional guidance.
Relatively Natural Habitat or Ecosystem
This conservation purpose is satisfied if the conservation
easement protects a significant relatively natural habitat of fish, wildlife or
plants, or similar ecosystem. IRC § 170(h)(4)(A)(ii). An ordinary tract of land
where a common fish, wildlife or plant community, or similar ecosystem normally
lives does not satisfy this conservation purpose. The conservation easement
must protect a habitat that is significant. Treas. Reg. § 1.170A-14(d)(3).
Significant habitats and ecosystems include, but are not
limited to:
Habitats for rare, endangered or threatened species.
Natural areas that are relatively intact and are
considered high quality examples of land or aquatic communities.
Natural areas that are in or contribute to the ecological
viability of a park, preserve, wildlife refuge, wilderness area, or other
similar conservation area.
For this conservation purpose, limitations on public access
are allowable. For example, a restriction on all public access to the habitat
of a threatened native animal species would not defeat the claimed deduction.
Treas. Reg. § 1.170A-14(d)(3)(iii).
The determination of what specifically meets this
conservation purpose test is based on the facts and circumstances of the
specific case. In Glass v. Commissioner, 124 T.C. 258 (2005), the taxpayer
donated two easements that restricted the development of a fraction of a
10-acre parcel of residential property. The Tax Court held that the
conservation purpose of natural habitat was satisfied where the conservation
easements were placed on property that has possible places to create or promote
a relatively natural habitat of plants or wildlife, and the easements were held
exclusively for conservation purposes as required by section 170(h)(5) because
they were granted to a land trust in perpetuity.
Open Space
The donation of a qualified real property interest to
protect open space (including farmland and forest land) must be (1) for the
scenic enjoyment of the general public, or (2) pursuant to a clearly delineated
federal, state or local governmental conservation policy. This type of
conservation easement must preserve open space and must yield a significant public
benefit. IRC § 170(h)(4)(A)(iii).
Scenic Enjoyment
Preservation of open space may not be for the scenic
enjoyment of the general public if development of the property would impair the
scenic character of the local rural or urban landscape or interfere with a
scenic panorama that can be enjoyed by the public. See Treas. Reg. §
1.170A-14(d)(4)(ii) for additional guidance.
Whether the easement provides scenic enjoyment to the
general public is evaluated based on all the facts and circumstances. The burden
of proof is on the taxpayer to show the scenic characteristics of the property.
Treas. Reg. § 1.170A-14(d)(4)(ii)(A) lists factors to
consider:
The compatibility of the land use with other land in the
vicinity.
The degree of contrast and variety provided by the visual
scene.
The openness of the land (which would be a more
significant factor in an urban or densely populated setting or in a heavily
wooded area).
Relief from urban closeness.
The harmonious variety of shapes and textures.
The degree to which the land use maintains the scale and
character of the urban landscape to preserve open space, visual enjoyment and
sunlight for the surrounding area.
The consistency of the proposed scenic view with a
methodical state scenic identification program, such as a state landscape
inventory.
The consistency of the proposed scenic view with a
regional or local landscape inventory made pursuant to a sufficiently rigorous
review process, especially if the donation is endorsed by an appropriate state
or local governmental agency.
A conservation easement of open space preserved for the
scenic enjoyment of the general public does not require physical access. Visual
access to or across the property by the general public is sufficient. Although
the entire property need not be visible to the public in order to qualify for a
deduction, the public benefit from the donation may be insufficient to qualify
if only a small portion of the property is visible to the public. Treas. Reg. §
1.170A-14(d)(4)(ii)(B).
In Turner v. Commissioner, 126 T.C. 299 (2006), the
conservation purpose of open space was not met because the easement deed did
not restrict development and did not include specific provisions to protect the
views of the property. The taxpayer was not entitled to a deduction because the
conservation easement did not satisfy one of the required conservation purposes
in IRC § 170(h)(4)(A).
See Treas. Reg. § 1.170A-14(d)(4)(ii) for additional
guidance.
Governmental Conservation Policy
Conservation purpose includes the preservation of open space
where such preservation is pursuant to a clearly delineated federal, state or
local government conservation policy. IRC § 170(h)(4)(A)(iii)(II).
A broad declaration by a single official or legislative body
that the land should be conserved is not sufficient. The donation must further
a specific, identified conservation project. The fact that the donation was
accepted (or purchased) by a government agency alone is not sufficient to
satisfy this requirement. The more rigorous the review process by the
governmental agency, the more the acceptance of the easement tends to establish
the requisite clearly delineated governmental policy.
The government need not fund the conservation program but it
must involve a significant commitment by the government with respect to the
conservation project.
Public access is not required if the conservation purpose
would be undermined or frustrated by the public access. Treas. Reg. §
1.170A-14(d)(4)(iii)(C).
Example: For a donation pursuant to a local governmental
policy protecting a scenic bluff area, visual access would be required, as the
conservation purpose is to protect the scenic beauty of the bluff.
See Treas. Reg. § 1.170A-14(d)(4)(iii) for additional
guidance.
Significant Public Benefit
A conservation purpose based on the preservation of open
space, whether for scenic enjoyment or pursuant to a governmental conservation
policy, must yield a significant public benefit. IRC § 170(h)(4)(A)(iii).
A determination of whether a conservation easement provides
a significant public benefit must be made based on all facts and circumstances.
Treas. Reg. § 1.170A-14(d)(4)(iv) lists a number of factors that may be
considered:
Uniqueness of the property to the area.
Intensity of land development in the area.
Consistency of the proposed open space use with public and
private conservation programs.
Likelihood the property would be developed in the absence
of the easement.
Opportunity of the public to appreciate the property’s
scenic values.
Importance of the property to preservation, tourism or
commerce.
Likelihood of the donee acquiring substitute property.
Cost of enforcing the terms of the conservation
restrictions.
Population density in the area.
Consistency of open space use with a legislatively
mandated program identifying particular parcels of land for future protection.
The preservation of an ordinary tract of land would not, in
and of itself, yield a significant public benefit. Treas. Reg. § 1.170A
14(d)(4)(iv)(B). A conservation easement that merely limits the number of lots
that the acreage is divided into does not satisfy the open space requirement of
section 170(h). Turner v. Commissioner, 126 T.C. 299 (2006).
The legislative history underlying section 170(h) shows that
Congress did not intend for every easement to qualify for a deduction. A
deduction is not allowed unless there is an assurance that the public benefit
furthered by the contribution would be substantial enough to justify the
allowance of a deduction. S. Rep. 96-1007, at 9-10 (1980), reprinted in 1980
U.S.C.C.A.N. 6736, 6744-45.
Example: Significant public benefit includes the
preservation of a unique natural land formation for the enjoyment of the
general public or the preservation of woodland along a well-traveled public
highway to preserve the appearance of the area so as to maintain the scenic
view from the highway.
Historically Important Land or Structure
This category includes the donation of a qualified real
property interest to preserve a historically important land area or a certified
historic structure. IRC § 170(h)(4)(A)(iv).
Historically Important Land
Historically important land includes:
An independently significant land area that meets the
National Register Criteria for Evaluation
Land where the physical or environmental features
contribute to the historic or cultural importance and continuing integrity of
certified historic structures.
See Treas. Reg. § 1.170A-14(d)(5)(ii) for additional
guidance.
Under the Pension Protection Act (IRC § 170(h)(4)(C)), a
“certified historic structure”• includes a land area listed in the National
Register. The National Register of Historic Places is part of a national
program administered by the National Park Service (NPS) to identify, evaluate
and protect historic and archeological resources worthy of preservation. A list
of properties listed in the National Register can be found on the NPS web page.
Certified Historic Structure
A certified historic structure is:
Any building, structure, or land area listed on the
National Register, or
Any building located in a registered historic district and
certified by the Secretary of the Interior as being of historic significance to
the district.
The National Park Service Technical Preservation Services
administers the certification program for the Department of the Interior. This
certification must be done at the time the property is donated or by the due
date (including extensions) of the return for the year of the donation.
A certified historic structure may be a commercial property
or a personal residence. The term “registered historic district”• includes a
district described in IRC § 47(c)(3)(B).
The term “registered historic district”• means:
Any district listed in the National Register, and
Any district
o designated under a statute of the appropriate State or
local government, if such statute is certified by the Secretary of the Interior
to the Secretary as containing criteria which will substantially achieve the
purpose of preserving and rehabilitating buildings of historic significance to
the district, and
o which is certified by the Secretary of the Interior to the
Secretary as meeting substantially all of the requirements for the listing of
districts in the National Register.
A building is in a local historic district will meet not the
definition of a certified historic structure unless both the statute and the
district have been certified in accordance with IRC § 47.
Some visual access by the public to the building, structure
or land area is required.
See Treas. Reg. § 1.170A-14(d)(5)(iv) for additional
guidance.
Special Rules for Buildings in Registered Historic Districts
IRC §170(h)(4)(B) imposes additional requirements for
contributions of conservation easements on buildings in registered historic
districts. Note: These special rules do not apply to properties listed in the
National Register.
To qualify, all of the following additional requirements
must be met:
Effective for contributions made after July 25, 2006:
1. the entire exterior of the building, including the front,
sides, rear, and height, must be restricted, and no changes can be made to the
exterior that are inconsistent with the historical character of the exterior;
2. the donor must enter into a written agreement with the
donee certifying, under penalty of perjury, that the donee is a qualified
organization with a purpose of environmental protection, land conservation,
open space preservation, or historic preservation, and that the donee has the
resources to manage and enforce the restrictions and the commitment to do so.
Effective for contributions made in tax years beginning
after August 17, 2006, the taxpayer must attach to their return a qualified
appraisal as defined in IRC § 170(f)(11)(E), photographs of the entire exterior
of the building, and a description of all restrictions on the development of
the building.
For contributions of facade easements on buildings in
registered historic districts, on or after February 13, 2007, donors must pay a
$500 filing fee to the U.S. Treasury if a deduction of more than $10,000 is
claimed. IRC § 170(f)(13). The fee is to be used to enforce the provisions of
IRC§ 170(h).
Public Access
Public access (either physical or visual) to the property is
generally required for the conservation easement to be deductible except with
respect to protection of a relatively natural habitat or ecosystem or pursuant
to specified governmental policies. The type of access depends on the claimed
conservation purpose.
If physical access is required, access must be substantial
and on a regular basis.
If only visual access is required, the entire property need
not be visible to the public for a donation to qualify, although the public
benefit from the donation may be insufficient to qualify for a deduction if
only a small portion of the property is visible to the public.
See Treas. Reg. § 1.170A-14(d) and discussion below for
specific access requirements.
Inconsistent Uses
A donation must be exclusively for conservation purposes,
and the deed of conservation easement must prohibit all inconsistent uses. An
inconsistent use allows for the destruction or potential destruction of
significant conservation interests in conflict with a conservation purpose.
Some inconsistent uses are permitted if necessary to protect
the conservation interests that are the subject of the easement.
Most conservation easement donors reserve some rights to the
property. Depending on the nature and extent of these reserved rights, the
claimed conservation purpose may be eroded or impaired to such a degree that
the contribution may not be allowable. A determination of whether the reserved
rights defeat the conservation purpose must be determined based on all facts
and circumstances.
Example: The conservation purpose of the easement as
described in the conservation easement deed was to protect the relatively
natural habitat for scrub jay, a threatened bird. The deed of easement allows
the taxpayer to use pesticides that would destroy the natural food source for
the scrub jay. The taxpayer is not entitled to a deduction because the allowed
activity is an inconsistent use.
See Treas. Reg. § 1.170A 14(e)(2) and (e)(3) for additional
guidance.
Baseline Study
If the donor reserves rights that may impair the
conservation interests associated with the property, the donor must provide
baseline documentation (sometimes referred to as the baseline study) to the
donee prior to the time the donation is made. Treas. Reg. § 1.170A-14(g)(5).
This documentation should provide specific information about the conservation
values of the property.
The baseline documentation is generally prepared by a person
with specific training or skills in the assessment of conservation values such
as a biologist, botanist or historian. The baseline study may be prepared by a
person affiliated with the donee.
This documentation may include:
Survey maps from the United States Geological Survey,
showing the property line and other contiguous or nearby protected areas.
A map of the area drawn to scale showing all existing
man-made improvements or incursions (such as roads, buildings, fences, or
gravel pits), vegetation and identification of flora and fauna (including, for
example, rare species locations, animal breeding and roosting areas, and
migration routes), land use history (including present uses and recent past
disturbances), and distinct natural features (such as large trees and aquatic
areas).
An aerial photograph of the property at an appropriate
scale taken as close as possible to the date the donation is made.
On-site photographs taken at appropriate locations on the
property.
The documentation must be accompanied by a statement signed
by the donor and a representative of the donee organization affirming that the
documentation of the natural resources is an accurate representation of the
protected property at the time of the transfer. Treas. Reg. §
1.170A-14(g)(5)(i).
Chapter 6: Substantiation Chapter 6: Substantiation Chapter
6: Substantiation Chapter 6: SubstantiationChapter 6: Substantiation Chapter 6:
Substantiation Chapter 6: Substantiation
Overview
A charitable contribution for a conservation easement is not
deductible unless properly substantiated in accordance with the Internal
Revenue Code and applicable regulations, including:
IRC § 170(a)(1)
IRC § 170(f)(8)
IRC § 170(f)(11)
IRC § 170(f)(13)
Treas. Reg. § 1.170A-13
Treas. Reg. § 1.170A-14
These code sections and corresponding regulations describe
the specific recordkeeping and substantiation requirements for donors of
charitable contributions. See also Notice 2006-96.
A donor cannot claim a charitable contribution deduction
unless the donor maintains a record of the contribution. The kind of records
required to substantiate a charitable contribution vary depending on the
amount, date of contribution, type of property contributed and whether the
donation was a cash or noncash contribution. There are also special rules with
respect to buildings in registered historic districts.
The burden is on the taxpayer to demonstrate that the cash
or property transferred to the qualified organization is a deductible
contribution. See Treas. Reg. § 1.170A-1(h)(1) and (2); United States v.
American Bar Endowment, 477 U.S. 105, 116-118 (1986); and Revenue Ruling
67-246, 1967-2 CB 104.
See Publication 1771, Charitable
Contributions-Substantiation and Disclosure Requirements (PDF), and Publication
526, Noncash Contributions (PDF), for additional information.
See Exhibit 6-1 for summary of substantiation requirements.
Contemporaneous Written Acknowledgment
A contemporaneous written acknowledgment (CWA) by the
qualified donee organization is required for all contribution deductions of
$250 or more (in cash or property).
“Contemporaneous”• means that the taxpayer must obtain the
acknowledgment by the earlier of the date on which the taxpayer files his or
her tax return claiming the charitable contribution deduction, or the due date
(including extensions) for the return. IRC § 170(f)(8) and Treas. Reg. §
1.170A-13(f)(3).
This acknowledgment by the qualified donee organization must
contain:
Amount of any cash contribution,
Description (but not the value) of the conservation
easement granted,
Statement that no goods or services were provided by the
organization in return for the contribution (if this was the case),
Description and good faith estimate of the value of goods
or services, if any, that an organization provided in return for the
contribution, and
A statement that goods or services (if any) that an
organization provided in return for the contribution consisted entirely of
intangible religious benefits (if this was the case).
Section 170(f)(8) requirements must be complied with for a
deduction to be allowed. See Addis v. Commissioner, 374 F.3d 881 (9th Cir.
2004), affg. 118 TC 528 (2004) (“the deterrence value of section 170(f)(8)’s
total denial of a deduction comports with the effective administration of a
self-assessment and self-reporting system”•), cited in
Viralam v. Commissioner, 136 T.C. No. 8 (Feb. 14, 2011); Schrimsher v.
Commissioner, T.C. Memo 2011-71 (March 28, 2011).
The following CWA does not meet the statutory requirement of
IRC § 170(f)(8) since it does not make an affirmative statement that no goods
or services were provided (or describe if good or services were actually
provided) in exchange for the contribution.
Example: “Thank you for your contribution by deed of a
conservation easement on XYZ property and $10,000 cash contribution for
maintenance of the easement that ABC Conservation received on May 5, 2008.”•
In Schrimsher v. Commissioner, the Court held that where the
donee provided no goods or services, the CWA must say that in order to satisfy
the statutory requirements. The Court noted that a deed stating that the donee
provided consideration of $10 plus “other good and valuable
consideration” does not satisfy the statutory requirement.
Note: Taxpayers and return preparers frequently confuse the
CWA requirement with the filing of Form 8283, Noncash Charitable Contributions
(PDF). This form is not a substitute for the contemporaneous written
acknowledgment; both are required. Failure to meet either requirement may
result in disallowance of the charitable contribution deduction.
Form 8283, Noncash Charitable Contributions
Section B of Form 8283, Noncash Charitable Contributions
(PDF), referred to in the Deficit Reduction Act of 1984 and the Treasury
Regulations as an “appraisal summary,”• must be fully completed and attached to
the return for all noncash donations greater than $5,000.
Note: If the donation originates from a flow-through entity
(such as S-corporation or partnership), the partner or shareholder who receives
an allocation of the charitable contribution must attach a copy of the
flow-through entity’s appraisal summary (Form 8283) to the tax return on which
the deduction for the contribution is first claimed. Treas. Reg. §
1.170A-13(c)(4)(iv)(G).
Section B of Form 8283 is often incomplete or improperly
completed by taxpayers and return preparers. Common errors include:
Inadequate description of the property
Missing information
Lack of signatures
Inconsistent dates
A description of the property must have sufficient detail
for a person unfamiliar with the type of property to ascertain that the
property being appraised is the property that was contributed. Treas. Reg. §
1.170A-13(c)(4)(ii)(B).
The remainder of Section B, Part I, requests additional
required information regarding:
Acquisition date of the property
How the property was acquired by the donor
Donor’s cost or adjusted basis
Bargain sale
Appraised fair market value of the easement donation
The instructions to Form 8283 require a statement that
identifies the conservation purpose, shows fair market value before and after,
states whether the donation was made in order to get an approval or was
required by contract, and whether the taxpayer or related person has any
interest in nearby property. This statement must be attached to the Form 8283.
See Instructions for Form 8283, Noncash Charitable
Contributions (PDF), and Treas. Reg. § 1.170A-13(c)(4) for detailed discussion
of the appraisal summary (Form 8283) requirements.
Declaration of Appraiser
Section B, Part III, Declaration of Appraiser, must be
completed by the qualified appraiser for donations in excess of $5,000. Treas.
Reg. § 1.170A-13(c)(4)(ii)(K) and (L).
Donee Acknowledgment
Section B, Part IV, Donee Acknowledgment, must be signed by
an official authorized to sign the tax or information returns of the donee
organization or a person specifically designated to sign Form 8283. Treas. Reg.
§ 1.170A-13(c)(4)(iii).
Reasonable Cause Exception
Examiners should solicit from the taxpayer a fully completed
Form 8283 if not attached to the return. The failure to file Form 8283 or the
filing of an incomplete Form 8283 should result in disallowance of the
charitable contribution deduction for the conservation easement unless:
Such failure was due to reasonable cause and not willful
neglect or was due to a good-faith omission,
The taxpayer otherwise complies with Treas. Reg. §
1.170A-13(c)(3) and (c)(4), and
The taxpayer submits a fully completed form within 90 days
of an IRS request.
In rare and unusual circumstances in which it is impossible
for the taxpayer to obtain the signature of the donee, the taxpayer’s deduction
will not be disallowed for that reason provided that the taxpayer attaches a
statement to the Form 8283 explaining, in detail, why it was not possible to
obtain the donee’s signature. Treas. Reg. § 1.170A-13(c)(4)(iv)(C)(2).
Qualified Appraisal
Qualified appraisals are required for all noncash
contribution deductions of conservation easements greater than $5,000. IRC §
170(f)(11)(C).
If a charitable contribution deduction of more than $500,000
is claimed for a noncash contribution made after June 3, 2004, the taxpayer
must attach a copy of a qualified appraisal of the property to the return in
the year of donation. IRC § 170(f)(11)(D).
Special rule: For contributions of façade easements in
registered historic districts made in tax years beginning after August 17,
2006, a qualified appraisal must be attached to the return regardless of the
dollar amount claimed for the conservation easement. IRC §
170(h)(4)(B)(iii)(I). Note: This special rule does not apply to properties
listed on the National Register.
See Chapter 7 for additional information on qualified
appraisals.
Façade Easement Filing Fee(Registered Historic District
Only)
For contributions of façade easements made on or after
February 13, 2007, donors must pay a $500 filing fee with their return in the
taxable year of the contribution to the U.S. Treasury for donation of easements
on buildings in registered historic districts if a deduction of more than
$10,000 is claimed. IRC § 170(f)(13). The fee is to be used to enforce the
provisions of IRC § 170(h).
Payment is transmitted to the IRS using Form 8283V, Payment
Voucher for Filing Fee under Section 170(f)(13) (PDF).
Baseline Study
A donor of a conservation easement where rights are retained
must give the qualified organization documentation (baseline study) that
establishes the condition of the property at the time of the gift, the types of
natural habitat on the property (if the conservation purpose is for natural
habitat), and the existing restrictions on the property. Treas. Reg. §
1.170A-14(g)(5)(i). The documentation generally includes maps, surveys and
photographs of the property and must be provided prior to the time the donation
is made.
See Chapter 5 for additional information on baseline
documentation.
Exhibit 6-1 – Substantiation Requirements
Form
Criteria
Due Date
Attach to Return
Contemporaneous Written Acknowledgment
All $250 or more
Earlier of Return filing date or Due Date (with extensions)
No
F8283 (Appraisal
All >$500 Part A
Return filing date
Yes
Form
Criteria
Due Date
Attach to Return
Summary)
All >$5,000 Part B
Also attach statement per Form 8283 Instructions
Qualified Appraisal
All >$5,000
No earlier than 60 days prior to date of contribution but no
later than original/amended return filing date
Yes If over $500,000 or an easement on a building in a
registered historic district
Façade Filing Fee
All easements on buildings in registered historic districts
>$10,000
Return filing date
No Mail in with Form 8283V
Baseline Study
Required to be given to donee organization to establish
condition of property
Prior to donation
No
Chapter 7: Qualified Appraisal Chapter 7: Qualified
Appraisal Chapter 7: Qualified Appraisal Chapter 7: Qualified Appraisal Chapter
7: Qualified Appraisal Chapter 7: Qualified Appraisal Chapter 7: Qualified
Appraisal Chapter 7: Qualified Appraisal Chapter 7: Qualified Appraisal
Requirements Requirements RequirementsRequirementsRequirements
Overview
Generally, noncash charitable contributions for which a
deduction of more than $5,000 is claimed must be substantiated with a qualified
appraisal prepared by a qualified appraiser in accordance with generally
accepted appraisal standards. IRC § 170(f)(11)(C) and (E)(i)(II).
The Pension Protection Act of 2006 (PPA) amended IRC §
170(f)(11)(E), which provides definitions of qualified appraisal and qualified
appraiser, effective for appraisals prepared for returns or submissions filed
after August 17, 2006. See Notice 2006-96, 2006-2 C.B. 902 for transitional
rules.
IRC § 170(f)(11)(E) and corresponding Treas. Reg. §
1.170A-13(c)(3) set forth substantiation requirements that must be met for the
appraisal to be considered a qualified appraisal.
This chapter discusses the requirements for a qualified
appraisal, a qualified appraiser and generally accepted appraisal standards.
See Publication 561, Determining the Value of Donated
Property (PDF) and Treas. Reg. § 1.170A-13 for additional guidance on qualified
appraisals requirements.
Qualified Appraisal
IRC § 170(f)(11), effective for contributions made after
June 3, 2004, requires a qualified appraisal for property donations of more
than $5,000.
IRC § 170(f)(11)(D) requires the attachment of a qualified
appraisal to the return if the deduction claimed exceeds $500,000. For
contributions of façade easements in registered historic districts made in tax
years after August 17, 2006, a qualified appraisal must be attached regardless
of the dollar amount claimed as a deduction. IRC § 170(h)(4)(B) (iii)(I). Note:
This special rule does not apply to properties listed on the National Register.
IRC § 170(f)(11)(E) was amended in 2006 to include
definitions of the terms “qualified appraisal”• and “qualified appraiser .”•
Notice 2006-96 provides transitional guidance and safe harbors to be used until
proposed regulations are finalized.
An appraisal is treated as a qualified appraisal within the
meaning of IRC § 170(f)(11)(E) if the appraisal complies with all of the
requirements of Treas. Reg. § 1.170A-13(c) (except to the extent the
regulations are inconsistent with IRC § 170(f)(11)). See also Notice 2006-96.
A qualified appraisal must:
Be prepared no earlier than 60 days before the date of
contribution nor later than the due date (including extensions) of the tax
return on which the charitable contribution deduction is first claimed. Treas.
Reg. § 1.170A-13(c)(3)(i)(A).
Be prepared, signed and dated by a qualified appraiser.
Treas. Reg. § 1.170A-13(c)(3)(i)(B).
Not involve a prohibited appraisal fee. Treas. Reg. §
1.170A-13(c)(6).
Include information required by Treas. Reg. §
1.170A-13(c)(3)(ii).
Treas. Reg. § 1.170A-13(c)(3)(ii) outlines specific items
required to be included in an appraisal report:
A detailed description of the property.
The property’s physical condition (for a contribution of
tangible property).
The date or expected date of the contribution.
The terms of any agreement relating to the property’s use,
sale or other disposition.
The appraiser’s name, address, and taxpayer identification
number, and that of the appraiser’s employer or partnership.
The qualifications of the appraiser, including the appraiser’s
background experience, education and membership in professional appraisal
associations.
A statement that the appraisal was prepared for income tax
purposes.
The date the property was appraised.
The appraised fair market value of the property on the
date or expected date of the contribution.
The method of valuation used to determine the fair market
value.
The specific basis for the valuation (such as specific
comparable sales transactions or statistical sampling, including a
justification for using sampling and an explanation of the sampling procedure
used).
Reasonable Cause Exception
The charitable deduction will not be denied if the
taxpayer’s failure to comply with the requirements of IRC § 170(f)(11) was due
to reasonable cause and not willful neglect. IRC § 170(f)(11)(A)(ii)(II).
Qualified Appraiser
The term “qualified appraiser”• as defined in IRC §
170(f)(11)(E)(ii) means an individual who:
Has earned an appraisal designation from a recognized
professional appraiser organization or met minimum education and experience
requirements as set forth in the regulations,
Regularly performs appraisals for which the individual
receives compensation, and
Meets such other requirements as prescribed by the
Secretary in regulations or other guidance.
An individual is not a qualified appraiser unless the
individual demonstrates verifiable education and experience in valuing the type
of property subject to the appraisal and the individual has not been prohibited
from practicing before the IRS any time in the 3-year period ending on the date
of the appraisal. IRC § 170(f)(11)(E)(iii).
Notice 2006-96 offers transitional guidance on the qualified
appraiser requirements. The Notice provides that:
The appraisal designation from a recognized appraiser
organization must be based on demonstrated competency in valuing the type of
property for which the appraisal is performed.
The appraiser is treated as having demonstrated verifiable
education and experience in valuing the type of property if the appraiser makes
a declaration in the appraisal that, because of the appraiser’s background,
experience, education and membership in professional associations, the
appraiser is qualified to make appraisals of the type of property being valued.
The appraiser will be treated as having met minimum
education and experience requirements if, for real property:
For returns filed on or before October 19, 2006, the
appraiser is a “qualified appraiser”• under IRC § 1.170A-13(c)(5) to appraise
the type of property valued.
For returns filed after Oct. 19, 2006, the appraiser is
licensed or certified for the type of property being appraised in the state in
which the appraised real property is located.
For returns filed on or before August 17, 2006, the term
“qualified appraiser”• is defined in Treas. Reg. § 1.170A-13(c)(5) as an
individual who declares that he or she:
Holds himself or herself out to the public as an appraiser
or performs appraisals on a regular basis;
Is qualified to make appraisals of the type of property
being valued;
Is not a person specifically prohibited from being a
qualified appraiser of particular property (such as the donor, the donee, or
others with a connection to the donor or donee); and
Understands that he or she can be subject to civil
penalties for aiding and abetting a tax understatement due to an intentionally
false or fraudulent value overstatement.
An individual is not a qualified appraiser with respect to a
particular donation if the donor had knowledge of facts that would cause a
reasonable person to expect the appraiser to falsely overstate the value of the
donated property. Treas. Reg. § 1.170A-13(c)(5)(ii).
The appraiser’s certification, which is typically included
in the appraisal, provides a good starting point to assess whether the
appraiser is a qualified appraiser. The resume provides information on their
experience and professional designations. It will also typically indicate in
which jurisdictions the appraiser holds a license or certification.
License information regarding jurisdictions, history and
disciplinary actions can be found on The Appraisal Foundation Web page. You can
search for information on a specific appraiser by selecting the “find an
appraiser”• button or utilize this link: Find an Appraiser. Some states also
provide appraisal licensing information online. Examiners or IRS appraisers can
contact the various state boards via telephone to determine if there are any
past or pending disciplinary actions against the appraiser. The Office of
Professional Responsibility (OPR) publishes a list of practitioners, including
appraisers, who have been subject to disciplinary actions by the IRS.
Generally Accepted Appraisal Standards
IRC § 170(f)(11)(E)(i)(II) states that a qualified appraisal
is an appraisal conducted by a qualified appraiser in accordance with generally
accepted appraisal standards and any regulations or other guidance prescribed
by the Secretary.
Section 3.02(2) of Notice 2006-96 states that an appraisal
will be treated as having been conducted in accordance with generally accepted
appraisal standards if, for example, the appraisal is consistent with the
substance and principles of the Uniform Standards of Professional Appraisal
Practice (USPAP), as developed by the Appraisal Standards Board of The
Appraisal Foundation.
Uniform Standards of Professional Appraisal Practice
In 1989, The Appraisal Foundation, a nonprofit organization,
adopted licensing and appraisal standards for the appraisal industry. The
Uniform Standards of Professional Appraisal Practice (USPAP) are the minimum
acceptable appraisal standards for federally regulated transactions.
USPAP is recognized throughout the United States as the
generally accepted standards of professional appraisal practice.
Although USPAP was intended for appraisals prepared for
federally regulated transactions, all states have adopted USPAP for appraisals
completed by licensed or certified appraisers. USPAP is applicable to an
appraisal assignment in three ways:
By law or regulation,
By client request or requirement, or
By choice.
In addition, various appraisal organizations such as The
Appraisal Institute (AI), National Association of Independent Fee Appraisers
(NIAFA), American Society of Appraisers (ASA), and American Society of Farm
Managers and Rural Appraisers (ASFMRA) have additional standards and ethics
that their membership (both designated and undesignated) is required to follow.
For the most part these organizations require adherence to USPAP as part of
their standards and ethics requirements.
IRC § 170(f)(11)(E)(i)(II) does not specifically mandate
compliance with USPAP but does require the appraisal to be prepared in
accordance with generally accepted appraisal standards. Qualified appraisers
holding themselves out to the public as appraisers generally would be required
to comply with USPAP by virtue of their appraisal licenses and professional
designations.
In assessing whether an appraisal is a qualified appraisal
for returns filed after August 17, 2006, Examiners and IRS appraisers must
consider whether the appraisal is consistent with the substance and principles of
USPAP and, if not, whether the appraisal satisfies the generally accepted
appraisal standard requirement. For returns filed before this date, compliance
with appraisal valuation standards including USPAP is considered in assessing
the reliability, credibility and overall accuracy of the appraisal.
Appraisal Fees
Appraisal fees that a taxpayer pays to determine the fair
market value (FMV) of donated property are not deductible as charitable
contributions. However, taxpayers can claim appraisal fees, subject to the two
percent of adjusted gross income (AGI) limit, as a miscellaneous itemized
deduction on Schedule A, Itemized Deductions (PDF), of Form 1040, U.S.
Individual Income Tax Return (PDF).
Chapter 8: Amount of Deduction Chapter 8: Amount of
Deduction Chapter 8: Amount of Deduction Chapter 8: Amount of DeductionChapter
8: Amount of DeductionChapter 8: Amount of Deduction Chapter 8: Amount of
DeductionChapter 8: Amount of Deduction Chapter 8: Amount of Deduction Chapter
8: Amount of Deduction
Overview
Several factors may affect the amount a taxpayer may claim
as a charitable contribution deduction for a conservation easement:
Percentage limitations
Basis limitations
Type of property (ordinary income, short-term capital
gain, long-term capital gain)
Bargain sale
Quid pro quo and charitable intent
Rehabilitation tax credits
Any charitable contribution amount that cannot be utilized
by the taxpayer in the year of donation of the conservation easement can be
carried over and claimed on subsequent year tax returns, generally for five
years. Depending on the year and type of the donation and the identity of the
donor (i.e., a qualified farmer or rancher), an extended carryover period may
exist.
Percentage Limitations
For charitable contributions by individuals of property
other than cash, the amount of the deduction a taxpayer may claim is subject to
percentage limitations based on:
The type of property donated,
The type of qualified organization, and
The use of the property by the qualified organization.
See Publication 526, Charitable Contributions (PDF), for
additional guidance on percentage limitations.
Individuals
In general, deductible contributions may not exceed 50% of
the individual’s contribution base, but lower percentages apply in the case of
appreciated property and contributions to certain private foundations.
A 30% limit applies to contributions of long-term capital
gain property donated to 50% limit organizations (those described in IRC §
170(b)(1)(A)), and a 20% limit applies for similar gifts to 30% organizations
(those described in IRC § 170(b)(1)(B)).
Contribution base for individuals is defined in IRC §
170(b)(1)(G) as adjusted gross income (computed without regard to any net
operating loss carryback to the taxable year under IRC § 172).
Qualified organizations accepting conservation easements are
generally 50% organizations. A conservation easement is considered long-term
capital gain property if the underlying property is a capital asset held for
more than a year. Accordingly, the 30% limit would generally apply to the
donation of conservation easements where the holding period is greater than one
year.
Note: For tax years beginning after December 31, 2005, and
on or before December 31, 2011, an individual may deduct a qualified
conservation easement contribution up to 50% of the individual’s contribution base
(after reducing the contribution base by other contributions). IRC §
170(b)(1)(E)(i).
The maximum percentage limitation for contributions of cash
is 50%.
Corporations
For corporations, in general, the maximum amount allowable
as a charitable contribution deduction for any taxable year is 10% of the
corporation’s taxable income for that year, computed with certain adjustments
described in IRC § 170(b)(2)(C).
Special Rules for Farmers and Ranchers
An individual who is a qualified farmer or rancher may deduct
up to 100% of the individual’s contribution base (after reduction by other
contributions) for the donation of a qualified conservation contribution.
A qualified farmer or rancher is an individual whose gross
income from the trade or business of farming within the meaning of IRC §
2032A(e)(5) is greater than 50% of the individual’s gross income for the
taxable year.
For any contribution after August 17, 2006, of property that
is used in agriculture or livestock production, the 100% limitation applies only
if the contribution is subject to a restriction that provides the donated land
remains available for agriculture or livestock production. IRC §
170(b)(1)(E)(iv)(II). If the contribution is not subject to such a restriction,
the 50% limitation applies.
A corporation that is a qualified farmer or rancher may make
a qualified conservation contribution of property used in agriculture or
livestock production (or available for such production) and deduct up to 100%
of the corporation’s taxable income provided the donated land remains available
for such production. IRC § 170(b)(2)(B).
Note: This provision was only applicable for certain
contributions of conservation easements beginning after 2005 and before 2012.
Carryovers
In general, taxpayers (both individuals and corporations)
can carry over unused charitable contributions for up to five years.
For contributions made in tax years beginning after December
31, 2005, and on or before December 31, 2011, the following rules apply:
An individual with a qualified conservation contribution
or a qualified farmer or rancher may carry over deductions for 15 years. IRC §
170(b)(1)(E)(ii).
A corporate qualified farmer or rancher may carry over a
deduction for a qualified conservation easement for 15 years. IRC § 170(b)(2)(B)(ii)
Basis Limitations
The deduction for a charitable contribution of property
generally is equal to the fair market value (FMV) of the property, but in some
cases may be limited to the lesser of FMV or basis.
In the case of tangible property, the deduction is limited
to the lesser of FMV or basis if the use of the property transferred is
unrelated to the charitable purpose of the qualified organization, for example,
donation of a piece of art work to a conservation land trust. IRC §
170(e)(1)(B)(i)(I).
Contributions of Appreciated Property
If a taxpayer contributes property with a FMV that is more
than the taxpayer’s basis, the taxpayer may have to reduce the FMV by the
amount of appreciation when determining the amount of the deduction. IRC §
170(e)(1). Different rules apply to determining the deduction, depending on
whether the property is:
Ordinary income property
Short-term capital gain property
Long-term capital gain property
See Publication 544, Sales and Other Dispositions of Assets
(PDF), for additional guidance.
Ordinary Income and Short-Term Capital Gain Property
If the property is ordinary income property or short-term
capital gain property, the deduction generally is limited to basis. IRC §
170(e)(1)(A).
Property is ordinary income or short-term capital gain
property if its sale at FMV on the date of contribution would result in
ordinary income or short-term capital gain.
An example of ordinary income property is real property
(land and anything built on it) held by a real estate dealer/developer, if the
donated real property is primarily held for sale to customers in the ordinary
course of trade or business. If the property is ordinary income property in the
hands of the donor, then the deduction would be limited to basis.
Gain on the disposition of depreciable real property is
treated as ordinary income to the extent of additional depreciation allowed or
allowable on the property. Additional depreciation is the amount of the actual
depreciation over the depreciation figured using the straight line method. See
Publication 544, Sales and Other Disposition of Assets (PDF) and Form 4797
(PDF) and the related instructions.
Another example is capital gain property (such as real
estate held for investment) held for a year or less.
Example: Jefferson contributes a conservation easement on a
parcel that he held for 11 months. The conservation easement is short-term
capital gain property, and Jefferson’s deduction is limited to the lesser of
his basis in the easement or its fair market value.
The amount of basis allocable to the conservation easement
bears the same ratio to the total basis of the property as the FMV of the
conservation easement bears to the FMV of the entire parcel.
Example: Mary paid $80,000 for a parcel held for investment,
which has a FMV of $100,000. She decides to donate a conservation easement with
a FMV of $5,000.
If Mary’s parcel is held for less than one year, her
deduction for the easement is $4,000 ($5000/$100,000 x $80,000 = $4,000).
If Mary held the property for more than a year, her
deduction is the easement’s FMV or $5,000.
Long-Term Capital Gain Property
If property is long-term capital gain property, the
deduction generally is not limited to basis and may be as much as FMV. IRC §
170(e)(1).
Property is long-term capital gain property if its sale at
FMV on the date of the contribution would result in long-term capital gain.
Long-term capital gain property is property held for more
than a year.
An example is real estate held for more than a year for
investment or a personal residence held for more than a year.
Bargain Sale
A bargain sale of property to a qualified organization is a
sale or exchange for less than the property’s fair market value (FMV). In a
bargain sale, the taxpayer has charitable intent and, therefore, purposely
accepts less than FMV for the property. IRC § 1011(b).
If a taxpayer contributes property subject to a debt (such
as a mortgage), and the debt is assumed by the qualified organization, the
taxpayer must reduce the FMV of the property by the amount of the debt.
A bargain sale is treated as partly a charitable
contribution and partly a sale or exchange. To determine the FMV of the
contributed part, subtract the amount paid by the qualified organization from
the property’s FMV at the time of the gift.
FMV of property transferred less mortgage assumed (if
applicable) Less: Amount paid by the qualified organization Equals FMV of
charitable contribution
Taxable Gain
The part of the bargain sale that is a sale or exchange may
result in a taxable gain. The amount of taxable gain is determined by
allocating basis (under IRC § 1011(b)) between the portion of the property sold
and the portion of property contributed.
For more information on determining the amount of any
taxable gain, see “Bargain Sales to Charity” in Publication 544,
Sales and Other Dispositions of Assets (PDF), and IRC § 1011(b).
Example: Betty sells a conservation easement (on property
held for investment for more than one year) to a conservation organization for
$10,000. The FMV of the easement is $12,500. Her charitable contribution
deduction from the bargain sale is $2,500 ($12,500 – $10,000) provided that all
requirements to claim a conservation easement deduction have been met.
See Treas. Reg. § 1.170A-14(h)(3)(iii) for additional
guidance on allocating basis.
Federal and State Easement Purchase Programs
Many states and some other federal agencies have land or
conservation easement purchase programs. The purchase price may be at fair
market value (FMV) or at a discounted price depending on the specific program.
If the conservation easement was purchased at FMV, then there would be no
charitable contribution for the conservation easement.
The Farm and Ranch Land Protection Program (FRPP) is one
example of an easement purchase program. This program is a financial
assistance-matching program administered through the U.S. Department of
Agriculture (USDA). The Federal Government provides up to 50% of the appraised
fair market value to an eligible entity for the acquisition of an easement. The
entity must provide a minimum of 25% of the purchase price. The property owner
may contribute up to the remaining 25% of the appraised FMV of the conservation
easement.
The donation must meet all of the statutory and regulatory requirements
for a qualified conservation easement contribution in order for the taxpayer to
claim a noncash charitable contribution for the donation portion of a bargain
sale.
Quid Pro Quo and Charitable Intent
Charitable intent exists if the transfer was made without
the receipt of, or the expectation of receiving, a quid pro quo for the
transfer. As a general rule, if the benefits received or expected to be
received are greater than those that inure to the general public, the transfer
does not satisfy the charitable intent requirement under IRC § 170. Hernandez
v. Commissioner, 490 U.S. 691 (1989); United States v. American Bar Endowment,
477 U.S. 105, 118 (1986); Singer Co. v. U.S., 196 Ct. Cl. 90, 449 F.2d 413,
422-423 (1971).
If the donor or a related person receives, or can reasonably
expect to receive, a substantial financial or economic benefit, but it is
clearly shown that the benefit is less than the amount of the transfer, then a
deduction is allowable for the excess of the amount transferred over the amount
of the financial or economic benefit received or reasonably expected to be
received by the donor or related person.
Example 1: Steven is a real estate developer. He contributes
a conservation easement with the expectation that it will result in his
receiving preferential zoning treatment from the city zoning board. Steven is
not allowed a charitable contribution deduction.
Example 2: Jeanie lives along a scenic highway. In order to
secure a variance on her property, the zoning board requires an easement on 10
percent of her property. Jeanie decides to place an easement on 25 percent of
her property. Jeanie may deduct as a charitable contribution the value of the
easement she placed on 15 percent of her property.
The burden is on the taxpayer to show that all or part of a
payment is a charitable contribution or gift. Treas. Reg. § 1.170A-1(h)(1) and
(2); United States v. American Bar Endowment, 477 U.S. 105, 116-118 (1986); and
Revenue Ruling 67-246, 1967-2 CB 104.
In Scheidelman v. Commissioner, T.C. Memo 2010-151, the
taxpayer claimed a charitable contribution deduction for a cash payment to the
donee organization in conjunction with the granting of the conservation
easement. The Tax Court concluded that the taxpayer did not provide sufficient
evidence that she received nothing of substantial value or, if they had
received something of substantial value, the value of the benefits received.
Rehabilitation Tax Credit
IRC § 47 is an investment tax credit intended to encourage
rehabilitation of historic buildings for urban and rural revitalization. The
rehabilitation tax credit is a two-tier credit with a 20% credit available for
certified historic structures and a 10% credit for any qualified rehabilitated building
other than a certified historic structure, first placed in service before 1936.
The National Park Service and the IRS in partnership with
State Historic Preservation Offices jointly administer the Historic
Preservation Tax Incentives Program. See the Rehabilitation Tax Credit Market
Segment Specialization Program Guide (PDF) for additional information.
Recapture of Rehabilitation Tax Credit
IRC § 50(a)(1) provides for recapture of the investment tax
credit upon disposition.
When a façade easement is conveyed during the same year that
a qualified rehabilitated building is placed in service, the taxpayer will not
be entitled to claim the portion of the rehabilitation tax credit attributable
to the façade easement. See Rev. Rul. 89-90, 1989-2 C.B. 3, and Rome I, Ltd. v.
Comm., 96 T.C. 697 (1991).
Under IRC § 50, if a taxpayer claims a rehabilitation tax
credit with respect to property and subsequently makes a qualified conservation
contribution (i.e., contributes a façade easement) with respect to the property,
the charitable contribution is a partial disposition of the property. This
event will trigger recapture of all or part of the credit if the contribution
is made within the recapture period (5 years from the placed in service date).
Under § 170(f)(14), if, during the 5 years preceding the
date of a façade easement contribution, a rehabilitation tax credit under IRC §
47 was claimed for the building, the amount of the charitable contribution
deduction must be reduced by the ratio of the sum of the credits allowed for
those 5 years over the fair market value of the building on the date of
contribution.
See the Rehabilitation Tax Credit Market Segment
Specialization Program Guide (PDF) for additional information.
Chapter 9: Valuation of Conservation Chapter 9: Valuation of
Conservation Chapter 9: Valuation of Conservation Chapter 9: Valuation of
Conservation Chapter 9: Valuation of Conservation Chapter 9: Valuation of
Conservation Chapter 9: Valuation of Conservation Chapter 9: Valuation of
Conservation Chapter 9: Valuation of Conservation Chapter 9: Valuation of
Conservation Chapter 9: Valuation of Conservation Easements EasementsEasements
Overview
To determine the fair market value (FMV) of a conservation
easement, appraisers must have a clear understanding of IRC § 170 and the
accompanying Treasury regulations. The appraiser also must meet the definition
of a “qualified appraiser.”•
The value of a conservation easement is the FMV at the time
of contribution and depends on the particular facts and circumstances of the
property. Treas. Reg. § 1.170A-14(h)(3)(i).
IRC § 170(f)(11)(E) and Treas. Reg. § 1.170A-13(c)(3) impose
special substantiation requirements that must be met for the appraisal to be
considered a qualified appraisal.
Treas. Reg. § 1.170A-14(h)(3)(i) requires that, if there is
a substantial record of sales of comparable easements, those sales are used to
value conservation easements. Since easements are not typically sold, there
usually are insufficient sales to use a comparable easement sales approach. In
that case, the “before and after” method of valuing a conservation
easement generally is used.
The scope of this chapter is to provide a general overview
on the valuation of conservation easements and generally accepted appraisal
standards. A comprehensive discussion of valuation is beyond the scope of this
ATG.
See Treas. Reg. §§ 1.170A-13 and 1.170A-14 of the Income Tax
Regulations, Notice 2006-96, 2006-2 C.B. 902, Publication 526, Charitable
Contributions, Publication 561, Determining the Value of Donated Property
(PDF), Form 8283, Noncash Charitable Contributions (PDF), and the Instructions
for Form 8283 (PDF) for more information about valuation, qualified appraisers,
qualified appraisals, and other requirements.
Valuation Process
Valuation, as defined by the Dictionary of Real Estate,
Fifth Edition, is the process of estimating the FMV of an identified interest
in a specific parcel or parcels of real estate as of a specified date. It is a
term used interchangeably with appraisal. The valuation process is a systematic
procedure and entails:
Defining the problem/scope of work,
Data collection and property description,
Data analysis,
Application of the approaches to value,
Reconciliation of value indications and final opinion of
value, and
Reporting the defined value.
Critical to the completion of any valuation assignment,
especially the valuation of a conservation easement, is clearly defining the
problem and determining the scope of work. A detailed scope of work should be
presented in the appraisal to allow a reader to understand exactly what steps
and procedures were utilized by valuation experts in their analyses and FMV
determinations.
Appraisers must have a thorough understanding of which
rights were “given up”• or relinquished and which rights were retained by the
donor in order to properly value the conservation easement.
Valuation Date
The value of a conservation easement contribution is the
fair market value of the easement at the time of the contribution. Treas. Reg.
§ 1.170A-14(h)(3)(i). The qualified appraisal must state, among other things,
the date or expected date of the contribution. Treas. Reg. §
1.170A-13(c)(3)(ii)(C).
Fair Market Value (FMV)
The value of the donated easement must meet the definition
of FMV as defined by Treas. Reg. § 1.170A-1(c)(2):
The fair market value is the price at which the property
would change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or sell and both having reasonable knowledge of
relevant facts.
A common error found in appraisals submitted for federal tax
purposes is that the FMV definition utilized in the appraisals is not correct.
Definitions from other sources, such as The Appraisal Foundation, Financial
Institutions Reform, Recovery and Enforcement Act or 1989 (FIRREA), or from an
appraisal organization, frequently are used. Those definitions, while similar,
differ from the definition in the Treasury Regulation because, for example, the
value
conclusion is tied to an exposure time. An appraisal
prepared based on an alternative FMV definition could affect the value of the
conservation easement and should not be used.
The FMV of the property must decrease as a result of the granting
of the conservation easement in order for a taxpayer to claim a charitable
contribution deduction. In some instances, the grant of a conservation easement
may not have a material effect on the value of the property. Treas. Reg. §
1.170A-14(h)(3)(ii).
Before and After Method
The best evidence of FMV of a conservation easement is the
sale price of easements comparable to the donated easement. An appraiser should
research the market to determine if there are any sales of comparable
easements; however, in most instances, there are no comparable easement sales.
If there are no comparable easement sales, the “before
and after” method of valuing a conservation easement is used.
FMV of the property before the easement Less: FMV of the
property after the easement Equals FMV of the easement
In essence, an appraiser must determine the highest and best
use (HBU) and the corresponding FMV of the subject property twice: first,
without regard to the conservation easement (“before”• value), and then again
after considering the specific restrictions imposed on the property by the
easement document (“after”• value).
In determining the “before”• value of the property, an
appraiser must consider the current use of the property but also objectively
assess the likelihood that the property would be developed absent the
conservation easement restriction. Existing zoning, conservation, historic
preservation, or other laws and restrictions may limit the property’s potential
HBU. Treas. Reg. § 1.170A-14(h)(3)(ii).
In determining the “after”• value of the property, an
appraiser must consider both the specific restrictions imposed by the
conservation easement being valued and the specific restrictions imposed by
easements on any “comparable”• properties.
Use of Flat Percentage Cannot Be Applied to Before Value
There is no standard value or percentage impact on the
“before”• value of the property due to the granting of a conservation easement.
Each conservation easement must be valued before and after the granting of the
easement, based on the particular facts and circumstances of that property, and
the value must be substantiated with a qualified appraisal.
The Internal Revenue Service will not accept an appraisal to
substantiate the FMV of a conservation easement if the appraisal merely values
the property before the donation and then
applies a set percentage thereto without explanation and
without reference to the specific attributes of the property and the easement
(I.R.S. CCA 200738013 (August 9, 2007)).
Contiguous Parcels
The amount of the charitable contribution deduction due to
the granting of a conservation easement covering a portion of a contiguous
property owned by the donor and the donor’s family (as defined in IRC
267(c)(4)) is the difference between the FMV of the entire contiguous parcel of
the property before and after the granting of the restriction. Treas. Reg. §
1.170A-14(h)(3)(i).
Section 267(c)(4) defines the term “family”• as including
only an individual’s “brothers and sisters (whether by the whole or half
blood), spouse, ancestors and lineal descendants.”• Parents, children,
grandparents, grand children, half-brothers and half-sisters are included in
the definition of family but cousins, nieces, nephews, in-laws, and step
relations are not included.
Example: John Smith owns a 1,000-acre farm. Mr. Smith
decides to put a conservation easement on the southern 500 acres. The entire
1,000 acres would need to be valued before and after the easement is imposed
because the same donor owns the property and the unencumbered parcel is
contiguous to the encumbered parcel.
In order to properly determine what properties should be
valued, an appraiser must identify and determine the ownership of any
contiguous parcels at the outset of the appraisal assignment. Next, the
appraiser must assess whether the owners of any contiguous parcels are the
donor or donor’s family as defined in IRC § 267(c)(4).
Application of the contiguous parcel rules can be complex.
IRS appraisers should contact a program analyst or Counsel for guidance.
Enhancement Rule
An appraiser must also consider any enhancement to the value
of any other property owned by the donor or a related person resulting from the
conservation easement. The amount of the conservation contribution deduction is
reduced by the amount of the increase in the value of the other property,
whether or not that other property is contiguous. Treas. Reg. §
1.170A-14(h)(3)(i).
A related person, for purposes of applying the enhancement
rule, is defined in IRC §§ 267(b) or 707(b). Application of the related party
rules can be complex. IRS appraisers should contact a program analyst or
Counsel for guidance.
There are two important distinctions between the contiguous
parcel and the enhancement rules. First, the contiguous rule applies only to
contiguous property, but the enhancement rule can apply to both contiguous and
noncontiguous property. Second, the contiguous rule only applies to contiguous
property owned by the donor or the donor’s family (as defined in IRC §
267(c)(4), but the enhancement rule applies to contiguous or noncontiguous
property owned by a related
party under §§ 267(b) or 707(b), which are broader.
Therefore, the appraiser must consider the impact the easement has on both
contiguous and noncontiguous parcels.
Appraisers must inquire about contiguous or nearby
properties owned by the donor, the donor’s family, and other related parties or
entities and consider any possible enhancement.
Example: John Smith owns a 1,000-acre farm. Mr. Smith
decides to put a conservation easement on the southern 500 acres. The entire
1,000-acre parcel would need to be valued based on the application of the
contiguous parcel rule. John Smith also owns a noncontiguous 50-acre parcel
located within a quarter mile of the subject property. Because of the conservation
easement, the 50-acre parcel will have superior views of the river that lies
beyond the 500-acre parcel. As a result, the 50-acre parcel would need to be
valued and the conservation easement contribution would be reduced by the
amount of the increase in value (if any) to the 50-acre parcel.
Application of the enhancement rules can be complex. IRS
appraisers should contact a program analyst or Counsel for guidance.
Market Analysis
Market analysis is defined as a process for examining the
demand for and supply of a property type and the geographic market area for
that property type. This is a critical step in the highest and best use
analysis. The six-step market analysis process described below is data required
for the four test criteria (physically possible, legally permissible,
financially feasible and maximally productive). See The Appraisal of Real
Estate, 13th Edition, The Appraisal Institute, Chicago, Ill., 2008, page 279.
An appraiser can use current and historical market
conditions to infer future supply and demand conditions. In addition, to
forecast subject-specific supply, demand, absorption and capture over a
property’s projected holding period, the appraiser can augment the analysis of
current and historical market conditions with fundamental analysis. Given the
fact, that, in the majority of conservation easement cases, development of the
property has not taken place, then there should be more emphasis on a
fundamental analysis.
Most market analysis can be performed using a six-step process:
Step 1-Property Productivity Analysis: Physical, Legal and
Location Attributes Step 2-Market Delineation: Competitive Market Area Step
3-Demand Analysis: Demand Segmentation, Historical Growth & Demand Drivers
Step 4-Supply Analysis: Existing, Under Construction and Proposed Competition
Step 5-Interaction of Supply and Demand: Competitive and Residual Demand Step
6-Forecast Subject Capture: Reconciliation of Inferred and Fundamental
Forecasts
Layman’s terms: The appraiser analyses how competitive the
subject is or will be in its market area. The current and future demand for
similar properties is estimated and compared to the estimated current and
future supply within the market area.
Appraisers using a residential subdivision method may not
always adequately quantify the market demand and supply for the proposed lots
and/or houses. The lack of market analysis for demand and supply may be an
issue in some conversion of warehouse properties to residential condominiums
appraisals. The Appraisal of Real Estate, 13th Edition, The Appraisal
Institute, Chicago, Ill, 2008, pages 173 – 203 (Chapter 9) provides a detailed
discussion on completing a market analysis for a variety of property types and
serves as a good reference tool.
When appraisers fail to follow the six-step process, and do
not support demand, supply and a capture rate for the subject property, it can
lead to erroneous conclusions in the highest and best use analysis.
Highest and Best Use (HBU)
The determination of the property’s highest and best use
(HBU) is vital to the valuation of any real estate including conservation
easements.
All professional appraisal organizations recognize the HBU
of the property is a key element to a proper valuation. To qualify as the HBU,
a use must satisfy four criteria:
Physically Possible – The land must be able to accommodate
the size and shape of the ideal improvement or in terms that are more common:
What uses of the subject site are physically possible?
Legally Permissible – A property use that is either currently
allowed or most probably allowable under applicable laws and regulations. What
uses of the subject site are permitted by zoning, deed restrictions,
environment restrictions, and government restrictions?
Financial Feasibility – The ability of a property to
generate sufficient income to support the use for which it was designed. Among
those uses that are physically possible and legally permissible, which uses
will produce a net return to the owner?
Maximally Productive – The selected use must yield the
highest value of the possible uses. Among the feasible uses, which use will
produce the highest net return or the highest present worth?
An appraiser’s HBU analysis and conclusion should be
documented in the appraisal report with a comprehensive discussion supported by
relevant market data or other information sources to adequately support their
conclusions.
At times, an appraiser may rely in part on the analysis by
another professional such as a land planner or geologist , however, an
appraiser is required by generally accepted appraisal standards to exercise due
diligence with respect to the assumptions put forth by the other professional.
An appraiser must have a reasonable basis to believe that the other
professional’s work product is credible and should disclose such reliance.
Methodology
Treas. Reg. § 1.170A-14(h)(3)(i) and (ii) allow for two
different types of valuation: direct comparison or indirect analysis.
Direct comparison is to analyze sales of comparable
properties to arrive at a conclusion as to value. A direct comparison is based
on direct sales of easements meaning the price paid by purchases of easements
having the same or similar restrictions.
Conservation easements are sold infrequently and even if the
appraiser is able to identify sales of easements they may not be appropriate
comparables, accordingly, most conservation easements are valued by indirect
analysis.
There are three recognized valuation methodologies within
the appraisal industry:
Sales Comparison Approach (SCA)
Cost Approach (CA)
Income Capitalization Approach (ICA)
All three approaches should be considered in every appraisal
assignment. This does not mean that all three approaches need to be applied.
Example: If the appraiser is valuing the impact of granting
a conservation façade easement on a single-family home in an area in which
single-family homes are typically not rental income properties, then it is not
necessary to complete the income capitalization approach. Generally, a
statement that due to the lack of market information the income capitalization
approach was not completed would be sufficient. Given the age of the property’s
improvements (must be at least 50 years old to qualify), it is also acceptable
if the cost approach is not completed on the subject property due to the
subjective nature of the depreciation estimate (if a similar statement is made
in the appraisal).
The following brief descriptions of the three approaches
(i.e., Sales, Cost and Income Capitalization Approaches) were taken from The
Dictionary of Real Estate Appraisal, Fifth Edition, which was published by The
Appraisal Institute of Chicago, Illinois copyright 2010.
Sales Comparison Approach
A set of procedures in which a value indication is derived
by comparing the property being appraised to similar properties that have been
sold recently, then applying appropriate units of comparison and making
adjustments to the sale prices of the comparables based on the elements of
comparison. The sales comparison approach is the most common and preferred
method of land valuation when an adequate supply of comparable sales are
available.
Elements of comparison are defined by The Appraisal of Real
Estate, 13th Edition, The Appraisal Institute, Chicago, Ill, 2008, page 309 as
“the characteristics or attributes of properties
and transactions that help explain the variances in the
prices paid for real property.”• They are divided into two categories:
transactional adjustments and property adjustments.
Transactional adjustments are:
Real property rights conveyed
Financing terms
Conditions of sale
Expenditures made immediately after purchase
Market conditions
These adjustments are “generally applied in the order
listed”• and are successive.
Property adjustments are:
Location
Physical characteristics
Economic characteristics
Use
Non-realty components of value.
Property adjustments are usually applied after the
transactional adjustments, but in no particular order and are not successive.
Layman’s terms: The appraiser compares the subject property
to recent sales of sold properties. Adjustments are made to the sales to
account for differences between the properties to estimate the FMV of the
subject property. If there are sufficient sales, this is the preferred
valuation methodology for land.
Cost Approach
A set of procedures through which a value indication is
derived for the fee simple interest in a property by estimating the current
cost to construct a reproduction of (or replacement for) the existing
structure, including an entrepreneurial incentive, deducting the depreciation
from the total cost, and adding the estimated land value. Improvement cost
estimates can be done with national cost manuals (e.g., Marshall Valuation
Service Manual), builder cost estimates or market extraction. National cost
manuals provide a cost new for the improvements and therefore in utilizing
these manuals, the valuation must include an analysis for all forms of
depreciation present in the improvements.
Layman’s terms: The appraiser estimates the FMV of the subject
property’s improvements “as is”• and adds the depreciated improvement value to
the land value to estimate the FMV for the entire property. This approach is
typically not utilized for vacant land because there are no improvements to
value.
Income Capitalization Approach
A set of procedures through which an appraiser derives a
value indication for an income-producing property (i.e., rental property) by
converting its anticipated benefits (cash flows and reversion) into property
value. This conversion can be accomplished in two ways. One year’s net income
expectancy can be capitalized at a market-derived capitalization rate.
Alternatively, the annual cash flows for the holding period and the reversion
can be discounted at a specified yield rate.
Layman’s terms: The FMV of the subject property is estimated
based on the anticipated net income to the property. The appraiser estimates
the potential gross income and subtracts vacancy and collection loss as well as
operating expenses to estimate the net income to the property. If one year’s
net income is estimated then that income is capitalized via a market-derived
capitalization rate to provide an indication of the FMV of the subject
property. If multiple years’ net income is estimated, then the cash flows and
reversion are discounted at a specified yield rate to provide a FMV indication.
Subdivision Development Method
In the valuation of land conservation easements, many
appraisals include a land residual analysis using a Subdivision Development
Method. Although appraisers have referred to this approach as a different
valuation methodology, this approach is an adaptation (or subset) of the income
capitalization approach. The reason appraisers refer to it as “another”•
approach is because the analysis utilizes a combination of both the sales
comparison and cost approaches described above.
This method estimates land value assuming that subdivision
and development of the property is the HBU of the parcel of land being
appraised. When all direct, indirect costs, and entrepreneurial incentive
(expected rate of return on investment) are deducted from the anticipated gross
sales price of the finished lots, the resultant net sales proceeds are then
discounted to present value at a market-derived rate over the development and
absorption period to indicate the value of the raw land (The Dictionary of Real
Estate Appraisal, Fifth Edition, The Appraisal Institute of Chicago, Illinois
copyright 2010, pages 188).
Layman’s terms: The FMV of the subject property is estimated
by first estimating what the “finished”• lots would sell for in the market
place. Costs, including anticipated profit, are then deducted to estimate the
anticipated net income to the property. The projected net income (i.e., cash
flow) is discounted (for the time necessary to get approvals, finish the lots
and sell the lots) at a specified discount rate (a/k/a yield rate) to provide a
FMV indication.
Example: Parcel C is a 100-acre parcel that is zoned
residential and the appraiser has concluded that the HBU of the property is for
a 50 lot residential subdivision. Typically, the appraiser will use the sales
comparison approach to determine the market value of the “finished”• lots. The
appraisal would provide information on similar projects in order to estimate
the absorption period to sell the lots. Next, the appraiser deducts the costs
to improve the property (development costs) necessary for the subject property
to attain the finished lot status that was valued. Finally, the cash flows over
the absorption period are discounted back to the valuation date (this accounts
for the time get the approvals, take the lots to the
finished lot stage, and to sell all of the lots) to provide an estimate of the
present value of the subject property as raw land.
The Subdivision Development Method is a complex procedure
and requires a significant amount of data such as development costs, profit
margins, sales projections and the pricing of developed lots. It is typically
completed using a Discounted Cash Flow (DCF) analysis. The Appraisal of Real
Estate, 13th Edition, The Appraisal Institute, Chicago, Ill, 2008, page 375
states: “The application of the DCF analysis is useful as a method for checking
the reasonableness of value indications derived from other methods applied to
the estimate the value of vacant land with development potential.”•
The Uniform Appraisal Standards for Federal Land
Acquisitions (UASFLA) (which is commonly referred to as Yellow Book), was
developed by Interagency Land Acquisition Conference as a guide for appraisers
performing appraisals for federal land acquisition. The use of the subdivision
development method is discussed on page 45 of the Yellow Book stating, “When
comparable sales are available with which to accurately estimate the property’s
market value, the development approach should not be relied upon as the primary
indicator of value, as it is considerably more prone to error.”• UASFLA goes on
to state the approach can be used as a test of both the HBU conclusion and to
support a value indicated by the sales comparison approach. Thus if this
approach appears in an appraisal, one should carefully research all of the
assumptions that were put forth within the analysis for reasonableness.
Although the Tax Courts have not specifically addressed the
issue of utilizing the Subdivision Development Method, there are several
decisions in the Federal Courts, which provide some insight. The Supreme Court
stated in Olson v. United States, 292 U.S. 246, 257 (1934) that “Elements
affecting value that depend upon events or combinations of occurrences which,
while within the realm of possibility, are not fairly shown to be reasonably
probable, should be excluded from consideration.”• This position was also
brought forth in United States v. 320.0 Acres of Land, 605 F.2d 762, 814-820
(5th Cir. 1979). In United States v. 47.3096 Acres of Land, 583 F.2d 270, 272
(6th Cir. 1978) the court stated “that the property was “˜needed or likely to
needed in the reasonably near future’ for residential subdivision.”•
Since there are many variables involved in this type of
analysis, there is a greater chance of errors, which could result in an
incorrect valuation. Some common errors include:
Failure to account for time to obtain necessary project
approval.
Failure to recognize time to put infrastructure in place.
Failure to include the cost of the infrastructure.
Lack of recognition of the time necessary to sell the
units (absorption) or lack of support for the absorption estimate.
Failure to include developer’s profit.
Lack of recognition of existing competing properties as
well as properties that are still in the planning stage.
Inadequate assessment of the risk associated with the
development.
Transferable Development Rights (TDRs)
A transferable development right (TDR) is a development
right held by the landowner that can be transferred by the landowner to another
location. A number of states, counties and cities have established TDR
programs. These programs are used to manage land development through the exchange
of zoning privileges allowing property owners to separate development rights
from the underlying property and sell them to purchasers who want to increase
the density of development in higher density areas.
For example, in New York City, an owner of a building with
TDRs may be able to transfer or sell unused development rights to other
building sites subject to the program restrictions.
A transfer of development rights by the owner of the
property is not a transfer of the owner’s entire interest in the property and
may not qualify for a charitable contribution per IRC § 170(f)(3). Examiners
and IRS appraisers should consult with Counsel if the conservation easement
case involves TDRs.
Chapter 10: Preplanning the Examination Chapter 10:
Preplanning the Examination Chapter 10: Preplanning the Examination Chapter 10:
Preplanning the Examination Chapter 10: Preplanning the Examination Chapter 10:
Preplanning the Examination Chapter 10: Preplanning the Examination Chapter 10:
Preplanning the Examination Chapter 10: Preplanning the Examination Chapter 10:
Preplanning the Examination
Overview
IRM 4.10, Pre-contact Responsibilities, requires Examiners
to perform a pre-contact analysis, including a review of the income tax return,
any attachments to the return, and internal and external sources of
information.
Review of Return
A taxpayer must itemize to claim a deduction for a
conservation easement. A conservation easement deduction is reported on
Schedule A, Itemized Deductions (PDF), Line 17, “Other than by cash or check.”•
Any carryover of charitable contributions originating from earlier tax years
appears on the “Carryover from Prior Year,”• Line 18.
Audit Tip: Examiners should determine at the beginning of
the examination the tax year of the contribution. If the amount claimed on the
return is a carryover from an earlier tax year, the original return including
all attachments must be secured. This is important 1) to verify compliance with
substantiation requirements, and 2) to ensure that all tax years are included
in the examination to the extent the statute of limitations is open.
Form 8283
Form 8283, Noncash Charitable Contributions (PDF), referred to
in the Deficit Reduction Act and Treas. Reg. 1.170A-13(c)(4) as the “appraisal
summary,”• is the starting point to gather information about the conservation
easement deduction.
This form must be completed and attached to the return for
all noncash charitable contribution deductions greater than $500. IRC §
170(f)(11)(A) and Treas. Reg. § 1.170A-13(b)(3). For
noncash charitable contribution deductions in excess of
$5,000, the taxpayer must complete Section B, of the Form 8283. IRC §
170(f)(11)(B) and Treas. Reg. § 1.170A-13(c).
If the donation originates from a flow-through entity (such
as S-corporation or partnership), the partner or shareholder must include a
copy of the entity’s Form 8283 with the return. Treas. Reg. §
1.170A-13(c)(4)(iv)(G).
Close inspection of Form 8283 may reveal preliminary
indications of an improper deduction or overvalued conservation easement such
as:
Incomplete or missing information such as an inadequate
description of the property, lack of acquisition date, or basis in the property.
Missing appraiser or donee acknowledgments.
Inconsistent dates when compared to the appraisal or other
attached documents.
A short time period between the acquisition of the
property and the donation date.
High valuation of the easement as compared to the basis of
the underlying property, in light of holding period and the market conditions
for the relevant market.
High valuation of the easement in light of the total
acreage of the underlying land.
Use of an appraiser who does not generally perform
appraisals where the easement is located.
Audit Tip: Completion of the appraisal summary (Form 8283)
does not satisfy the contemporaneous written acknowledgment requirement
outlined in IRC § 170(f)(8). Failure to comply with the contemporaneous written
acknowledgment requirement will result in disallowance of the charitable
contribution deduction.
Signature Requirements
Part II, of Section B, Taxpayer (Donor) Statement is not
relevant unless the appraised value is $500 or less.
Part III of Section B, Declaration of Appraiser, must be
signed and dated by the qualified appraiser for donations in excess of $5,000.
The signature date does not need to be the same date as the date of the
contribution.
Part IV of Section B, Donee Acknowledgment, must be signed
by an official authorized to sign the tax returns of the donee organization or
a person specifically designated to sign Form 8283. Examiners should look for
incomplete or improperly completed donee acknowledgments and determine if there
are any date discrepancies with other available information.
Audit Tip: If either the appraiser or donee signature is
missing, Examiners should solicit the signature on a copy of the Form 8283 (to
be submitted within 90 days of the IRS request) and determine whether such
failure was due to reasonable cause under IRC § 170(f)(11)(A)(ii)(II) or a good
faith omission under Treas. Reg. § 1.170A-13(c)(4)(iv)(H). If not due to
reasonable cause or good faith omission, the lack of signatures on the original
Form 8283 is a basis for disallowance of the charitable contribution.
Return Attachments
A qualified appraisal is required to be attached to the
return if the deduction claimed (1) exceeds $500,000, or (2) regardless of the
dollar amount claimed, if the deduction relates to a contribution of a façade
easement in tax years after August 17, 2006, on a building or structure in a
registered historic district.
Note: The special rule for façade easements in tax years
after August 17, 2006 does not apply to properties listed on the National
Register.
See Chapter 7 for guidance on qualified appraisals.
If a qualified appraisal was not attached to the original
return claiming the conservation easement, the charitable contribution may be
disallowed for failing to meet the IRC 170(f)(11) requirements. See IRC §
170(f)(11)(A)(ii)(II) and Treas. Reg. § 1.170A-13(c)(4)(iv)(H) for limited
exceptions to this rule.
If the Examiner does not have the original return or has
been assigned a carryover tax year, the original return must be ordered from
the Service Center using SC 45 to verify compliance with the requirement to
attach the appraisal.
If a return is filed electronically, any attachments
including the appraisal must be filed with the Form 8453, U.S. Individual
Income Tax Transmittal (PDF) for an IRS e-file Return. The Examiner will need
to request the original Form 8453 with attachments to determine if the taxpayer
has met the substantiation requirements.
IDRS command code TRDBV will show whether the Form 8453 was
filed and the related Document Locator Number (DLN). The Form 8283 can be
secured using command code ESTAB with the identified DLN. If the TRDBV does not
show the filing of a Form 8453, the IDRS print should be included in the
examiner’s work papers to demonstrate that there is no record of filing the
required return attachments.
In some cases, taxpayers attach baseline studies,
correspondence or other documents related to the easement donation. This
information should be reviewed for unusual items or inconsistencies and
ultimately compared to actual source documents.
Other Tax Issues
The Examiner is responsible for determining the scope of the
audit and should be alert to other potential tax issues on the tax return,
which may or may not be related to the conservation easement deduction.
Some examples of potential issues related to the
conservation easement donation are income generated from the sale of state tax
credits and recapture of rehabilitation tax credits.
IRM 4.10.4.3, Minimum Requirements for Examination of
Income, requires Examiners to consider gross income during the examination of
all income tax returns regardless of the type of return filed by the taxpayer.
All deviations from minimum probes need to be documented and approved by the
group manager.
TEFRA Considerations
An individual’s income tax return may be selected for examination
based on a large noncash contribution or carryover. Examiners must determine as
quickly as possible whether the donation originated from a partnership or
limited liability company (LLC) electing tax treatment as a partnership. This
information may not be readily available by inspection of the return
particularly for carryovers into subsequent tax years.
The determination of the tax treatment of partnership items
is made at the partnership level. If the easement donation was made by a
partnership or LLC treated as a partnership, the charitable contribution is a
partnership item. An adjustment to the conservation charitable contribution
cannot be proposed without conducting an examination of the originating donor
entity (i.e., Form 1065 entity). If the entity is a TEFRA entity, the unified
audit procedures for partnership proceedings must be followed. These procedures
may present additional administrative complexities due to statute concerns,
involvement of multiple tiers of ownership, and the location of the key case
entity and other partnership investors.
In some instances, the originating partnership or LLC return
may have a statute that is less than the 12-month minimum that is required to
initiate an examination without securing SB/SE Area Director or the LB & I
Director of Field Operations (DFO) approval (IRM 4.31.2.2.1).
It is also possible that the minimum assessment period for
partnership items per IRC § 6229 may have expired. While the government can
best protect its interest by extending the IRC § 6229 period of assessment
before it expires and conducting the partnership proceeding that includes all
the partners, the government is not precluded from conducting a partnership
proceeding if the IRC § 6501 assessment period for any of the partners is still
open.
Examiners should consult with their local TEFRA Coordinator
for guidance on TEFRA examinations. A list of current coordinators can be found
on MySB/SE, Issues and Procedures, TEFRA.
Internal Sources of Information
Information available from internal sources may be useful in
preplanning for the examination, including the Conservation Easement issue Web
page on MySB/SE, IDRS and contacts with program analysts and the Office of
Professional Responsibility.
IRS Intranet
Training materials, job aids, recent court decisions and
other reference materials on conservation easements can be found on MySB/SE,
Issues and Procedures, under “Conservation Easements.”• Examiners should refer
to the Web page for updated information.
Program Analysts
Examiners are encouraged to contact program analysts (PAs)
assigned to this issue to discuss case development as early as possible in the
examination. A list of PAs assigned to conservation easements is available on
the conservation easement web page on MySB/SE under “Contacts.”• PAs can help
with understanding of the statutory requirements, analysis of the documents,
review of legal documents, and report writing.
Integrated Data Retrieval System – IDRS
Examiners should review all available IDRS information to
identify any additional donations and carryovers. A review of the taxpayer’s
filing history over several years can provide insight into the taxpayer’s
contribution history.
Reviewing the taxpayer’s Information Returns Processing
(IRP) documents and securing a link analysis (Yk1) may reveal related
flow-through entities associated with the easement transaction.
Façade Filing Fee Verification
For certain contributions of façade easements on or after
February 13, 2007, donors must pay a $500 filing fee to the U.S. Treasury. This
fee is required for donations of easements on buildings in registered historic
districts if a deduction of more than $10,000 is claimed. IRC § 170(f)(13). The
fee is to be used to enforce the provisions of IRC § 170(h).
No deduction is allowed unless the taxpayer includes the fee
with the return. IRC § 170(f)(13)(A). Payment is transmitted to the IRS using
Form 8283V, Payment Voucher for Filing Fee under Section 170(f)(13) (PDF).
IDRS reports IMFOLT (individual returns) and BMFOLT
(corporate/partnership returns) will show a TC (Transaction Code) 971 with AC
(Action Code) 670 to identify the payment of the filing fee. Examiners can also
contact a program analyst for confirmation of fee payment.
Publication 78
Publication 78, Cumulative List of Organizations described
in Section 170(c) of the Internal Revenue Code of 1986, should be consulted to
verify whether the organization has tax-exempt status. An online searchable
version can be found IRS.gov. Click on “Charities and Nonprofits,”• then “Search
for Charities”• to search for qualified organizations by name and city.
Examiners should also be aware that a listing in Publication 78 is not
definitive of an organization’s qualification for exempt status.
Churches and Federal, State, and local governments generally
are eligible to receive tax-deductible contributions even though they are not
listed in Publication 78. In addition, a local organization that is exempt
under a group ruling may not be listed, as it may be a local arm or subsidiary
of a national conservation organization.
Inclusion in Publication 78 alone is not conclusive that the
organization is an organization eligible to receive a conservation easement
contribution. The donee organization must have the commitment to protect the
conservation purpose and have the resources to enforce the conservation
restrictions.
See Chapter 4 for detailed discussion on qualified
organization requirements.
Office of Professional Responsibility
Examiners can search the Office of Professional
Responsibility intranet Web page for any previous disciplinary actions against
the appraiser or the return preparer. The presence of prior sanctions suggests
a need for extra scrutiny by the examiner.
External Sources of Information
Examination of a charitable contribution deduction for a
conservation easement is fact intensive requiring examiners to gather and
analyze information to determine whether the charitable contribution deduction
is allowable. Review of documents from external sources such as the Internet,
public records, and the National Park Service in advance of taxpayer contact
can help streamline the examination process.
Internet Research
The Internet (using Google or other similar search engine) can
be an excellent source of background information relevant to the taxpayer,
donee organization and appraiser.
Taxpayer
Examiners should search the Internet for information on the
taxpayer’s business, personal history, reputation in the community, and involvement
with conservation issues and organizations.
A particular easement donation may have received local
newspaper coverage at the time of the donation. News articles may provide
evidence to support charitable intent, quid pro quo, transactions between
related parties, or the donor’s basis (e.g., if the property constitutes
inventory in the hands of the taxpayer).
Donee Organization
Guidestar.org provides tax returns of charitable
organizations and other important information relating to the organizations.
Examiners will need to register online to access the information.
Returns provided on Guidestar, however, generally do not
include schedules of contributors. The Economic Research Institute also can be
used to research charitable organizations.
An Internet search of the donee organization may provide
relevant information on the organization. Most organizations have their own Web
sites, which provide a wealth of information, especially regarding their
charitable purpose and goals.
This research may reveal relationships between the donor and
donee organization. Transactions between related parties by either position or
business activity must be scrutinized closely.
Audit Tip: Taxpayers have been known to create a
“self-serving” donee organization solely for the purpose of accepting
their own easement. These organizations may lack charitable purpose or be
engaged in self-dealing. If there is a question or concern as to the operations
of the organization, examiners should submit a referral to Tax Exempt and Governmental
Entities (TEGE).
Appraiser
Examiners can obtain information about the appraiser and
appraisal firm such as their professional credentials, expertise with respect
to conservation easements, and past business dealings with the donor or donee
organization. This information is helpful in determining if the appraiser is a
“qualified appraiser” and may provide some insight into any business
history with the taxpayer or donee organization.
License information regarding jurisdictions, history and
disciplinary actions can be found on The Appraisal Foundation Web page. You can
search for information on a specific appraiser by selecting the “find an
appraiser”• button or utilize this link: Find an Appraiser Web page. Some
states also provide appraisal licensing information online. Examiners or IRS
appraisers can contact the various state boards by telephone to determine if
there are any past or pending disciplinary actions against the appraiser.
Audit Tip: If the appraisal is attached to the return, the
appraiser’s professional qualifications should be included as part of the
appraisal. Information found on the Internet should be compared to the
information provided with the return.
Public Records
Examiners must secure directly from the appropriate
recordation office the conservation easement deed, any subordination
agreements, and other pertinent documents that are recorded under State law. If
online research is not available, the Examiner or the IRS appraiser will need
to travel to the recorder’s office to obtain this information. Use of research
services such as Accurint alone will not be sufficient in these examinations.
Audit Tip: Until the easement is recorded, the easement is
not enforceable in perpetuity. Treas. Reg. § 1.170A-14(g)(1). In some cases, taxpayers
claim the donation in the wrong tax year.
Examiners should determine if there were any preexisting
restrictions on the property imposed by local or state ordinances, zoning or
the rules of the historic districts. There may be no loss in value as a result
of the granting of the easement if the easement does not impose new or expanded
restrictions on the property. IRS appraisers have significant experience with
this type of research and will generally address this aspect as part of their
fieldwork.
In addition to obtaining copies of the recorded instruments,
examiners should research the property’s ownership, sales and mortgage history.
Be alert to recent sales or mortgages on the property that may provide insight
into the easement value.
How title is held to the property may affect the amount that
can be claimed as a charitable contribution by a taxpayer. In addition, the IRS
appraiser will need to know the property owner of the eased property, any
contiguous properties and any other properties owned by the taxpayer in order
to properly apply the contiguous/enhancement rules in valuing the property.
Examiners should verify through interviews and review of public records in the
county the property is located to verify ownership on the date of the contribution.
Many conservation easements originate from flow-through
entities (i.e., S-corporations and partnerships). The allocation of the
contributions to the shareholders or partners is reported on Form K-1.
Examiners should verify the percentage of ownership and determine if the
contribution amount was properly allocated.
National Park Service
For donations of easements on certified historic structures,
examiners must verify that the property is a certified historic structure and
that the status was obtained by the due date of the return including
extensions. IRC § 170(h)(4)(C) and Treas. Reg. § 1.170A-14(d)(5)(iii). The
taxpayer will generally provide this information in response to the initial
information document request (IDR).
If a building is individually listed on The National
Register of Historic Places, no certification is required from the National
Park Service Historic Preservation Division.
Audit Tip: To obtain certification from the National Park
Service, the taxpayer would have submitted Form 10-168 (PDF) to the Historic
Preservation Division for certification that the building contributes to the
district. Examiners should obtain a copy of the certification and any related
documents from the taxpayer or the National Park Service.
Interviews
As in all income tax examinations, the interview is an
important component of a quality examination. The interview is the first step
in securing the necessary background information to evaluate the claimed
deduction.
The best time for interviewing the taxpayer is usually after
reviewing the easement documents and assignment of an IRS appraiser to the
case. If possible, the Examiner and IRS appraiser should jointly interview the
taxpayer.
Unless the representative has first-hand knowledge of the
conservation easement transaction, Examiners will need to interview the
taxpayer. Do not provide written questions to the representative to ask the
taxpayer. In some instances, it may be necessary to summons the taxpayer.
Information Document Requests
A sample Information Document Request (IDR can be found on
the conservation easement MySB/SE web page under the “Job Aids”• tab and on
RGS. The IDR should be modified to meet the specific needs of the examination
requesting only relevant information. Documents from the taxpayer are necessary
not only to verify the easement donation, but also to collect initial
documentation of the fair market value (FMV) of the easement.
Securing documents is only the beginning of the examination
of a conservation easement deduction. A final determination cannot be made
without careful review of the documents and background information,
coordination with LB & I Engineering on the valuation, and in many cases
third party contacts.
Valuation Expert Involvement
Valuation of the conservation easement is an important part
of a conservation easement deduction examination. A referral to LB & I
Engineering for an IRS appraiser or an outside expert will generally be
required. Examiners and the IRS appraiser need to work together to avoid duplication
of effort, share information, and rely on each person’s specific job skills to
fully develop the case.
Note: The Examiner has primary responsibility for the
non-valuation aspects of the issue and must not suspend or delay work on the
income tax case pending receipt of a valuation report.
Referral to LB & I Engineering
A referral is made through the Specialist Referral System
(SRS). Referrals to LB & I Engineering should be considered in all
conservation easement cases, even if the case falls outside of the mandatory
referral specifications. See the SRS web page for current referral criteria.
The referral must be made early in the examination process
to allow sufficient time for LB & I Engineering input. The Examiner should
inform the taxpayer and their Representative of an IRS appraiser’s
participation and expected examination timeframes.
Examiners should promptly provide the IRS appraiser with:
A copy of the return or pertinent part of the return
Form 8283, including attachments
Copy of the appraisal (if attached or once received)
Other pertinent information attached to the return
A recorded copy of easement deed including any attachments
and correspondence
Baseline study of the property (if attached or once
received)
Referral Outcomes
LB & I Engineering may accept or decline in response to
the referral depending on the dollar amount of the easement, available staffing
resources and other factors. Another option is a consultation, where the IRS
appraiser will provide informal feedback to the Examiner as to the
reasonableness and adequacy of the taxpayer’s appraisal.
If the referral is accepted, a meeting should be scheduled
with the assigned IRS appraiser to discuss duties and timeframes for
completion. This meeting should be documented in memo form. An action plan
template is available on the conservation easement web page on MySB/SE under
“Job Aids, Engineering Coordination”• to help with allocation of
responsibilities. The IRS appraiser and Examiner should coordinate their
actions throughout the examination.
Generally, the scope of the IRS appraiser’s work should be
limited to valuation and qualified appraisal issues, and the Examiner will
handle the legal issues under IRC § 170. However, there is some overlap of
responsibilities. For example, the inspection of the property and interview of
the taxpayer are important for both the IRS appraiser and the Examiner and
should (to the extent possible) be conducted jointly.
If funds are available, LB & I Engineering may hire an
outside fee appraiser.
Examiners can seek assistance from program analysts to
discuss alternatives and assistance in resolution of any issues with LB & I
Engineering.
LB & I Engineering Products
The IRS appraiser will generally prepare an “appraisal
review with an opinion of value, which is a detailed review of the taxpayer’s
appraisal and includes an estimation of the fair market value of the
conservation easement.
In some cases, the IRS appraiser may provide only an
“appraisal review,”• which is simply a critique of completeness and reliability
of the taxpayer’s appraisal without determining the fair market value of the
conservation easement. In other cases, the IRS appraiser may elect to complete
an appraisal in lieu of completing a review with an opinion of value report.
Outside Experts
The IRS utilizes outside valuation experts if funds are
available. Requests for use of an outside expert are made using the SRS
referral process.
An outside fee appraiser must be approved through the IRS
procurement process. LB & I Engineering is responsible for working with the
Contracting Officer Technical Representative (COTR) to identify experts,
solicit bids, arranging for background investigations and execute the contract.
The outside expert reports are limited to valuation of the
conservation easement so Examiners will need to address the legal issues under
IRC § 170.
Consultation with Counsel
Because examination of a conservation easement deduction
involves review of a number of legal documents, Examiners will need to consult
with Counsel. A list of Counsel assigned to conservation easements is available
on MySB/SE under “Contacts.”•
Counsel should be engaged early in the examination to assist
with review of the legal documents for areas of noncompliance, particularly for
issues such as conservation purpose, inconsistent use of the property,
perpetuity, subordination and allocation of proceeds.
Examiners will need to be alert to court decisions that
could affect their examination. Recently decided cases relevant to the
conservation easement issue can be found on MySB/SE.
Coordination with TEGE
The Examiner should determine whether the donee organization
is or has been under examination by TEGE. If so, the Examiner should contact
the Exempt Organization (EO) Examiner assigned to the case to obtain pertinent
information and to coordinate examination activities, as appropriate.
The EO Examiner can assist in securing records from the
donee organization and provide detailed information on the organization.
Coordination with TEGE avoids duplication of effort and unnecessary contacts
with the donee organization.
During the examination, the Examiner may need to consider a
referral to TEGE for examination of the donee organization. Some factors that
may warrant a referral include:
False or misleading statements by the donee organization
regarding the tax requirements or valuation of contributions of conservation
easements.
Evidence of undue influence on the taxpayer’s appraiser by
the donee organization.
Presence of related party transactions between donor and
the donee organization.
Lack of any charitable activity by the donee organization,
or activities contrary to its stated charitable purpose.
Use of a related “for-profit” business to
process easement donations.
Information indicating that the donor’s conservation
contribution lacked a “conservation purpose”• for purposes of section 170(h)
could also have a bearing on the donee
organization’s exempt status, particularly if it is accepted
other similar conservation contributions that lack a conservation purpose.
Examiners can make referrals to TEGE using the SRS referral
process.
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Overview
Conservation easement examinations are very challenging
cases requiring substantial factual development and review of legal documents.
A team approach (working with LB & I Engineering, Counsel and program
analysts) is the most effective way to conduct these examinations.
Examiners will need to look beyond information provided on
the tax return and analyze the substance of the transaction rather than the
mere form. Examiners must employ investigative skills to identify any omissions
or discrepancies of material facts.
During an examination, the examiner will obtain
documentation, conduct interviews of the taxpayer and third parties and inspect
the property encumbered by the easement. The examiner must evaluate all of this
information to determine if the taxpayer meets the:
General statutory requirements for charitable
contributions per IRC § 170(a).
Specific statutory requirements for qualified conservation
contributions per IRC § 170(h) and Treas. Reg. § 1.170A-14, including
compliance with one or more of the conservation purposes listed in IRC §
170(h)(4)(A).
Contemporaneous written acknowledgment requirement under
IRC § 170(f)(8).
Substantiation requirements and, specifically, the
qualified appraisal and appraiser requirements in IRC § 170(f)(11), Notice
2006-96, and Treas. Reg. § 1.170A-13.
Interviews
As with all examinations, interviewing the taxpayer who
donated the conservation easement is an important first step in the development
of facts. The interview provides important information regarding the
taxpayer’s:
Intent in making the easement donation
Understanding of the transaction
Efforts to comply with the statutory requirements
Due diligence in obtaining a correct appraisal
If possible, the examiner and IRS appraiser should conduct a
joint interview. Review of the conservation easement deed, baseline study and
the taxpayer’s appraisal, prior to the interview,
will help the Examiner and IRS appraiser carry out a focused
interview. In some cases, more than one interview may be required to gather all
relevant facts.
Sample interview questions are found on the “Job Aids”• tab
on the conservation easement MySB/SE Web page. The list of questions is not
all-inclusive and should be modified to address the specific facts of the case.
These questions are not intended to be utilized as a check sheet but rather as
a basis to assemble a case-specific interview.
Audit Tip: Some representatives may request that questions
be submitted in writing prior to the interview or in lieu of an interview.
Written questions and answers are not an appropriate substitute for an
in-person interview of the taxpayer. If the taxpayer or representative will not
consent to an interview, then the examiner should either issue a summons for
interview or develop the case based on third party contacts.
Depending on the case, interviews of third parties such as
representatives of the donee organization, the appraiser, the baseline study
author or other conservation experts may be needed. See discussion below on
third party contacts.
Property Inspection
The examiner’s inspection of the property provides valuable
information to assist in determining whether the conservation easement meets
one of the IRC 170(h)(4) conservation purposes.
If possible, the examiner should inspect the entire
property. Site visitation should be coordinated with the IRS appraiser,
whenever possible. If the examiner does not inspect the property, they should
contact the IRS appraiser to discuss their observations and review pictures
obtained during their site inspection. Examiners can also research property on
Google Maps or Zillow.
If it is not practical to inspect the entire property, the
examiner should view areas that are relevant to the taxpayer’s claimed
conservation purpose and document their observations.
Both the interior and exterior of historic properties should
be inspected. The IRS appraiser generally will need to inspect the interior for
purposes of valuing the property.
Audit Tip: Depending on the location of the property and
time of year, casual attire and boots may be necessary.
During the inspection, the examiner should take note:
The location of the significant or protected habitat or
species
Physical and visual access by the public to the easement
property
The nature of the surrounding properties and intensity of
development in the area
The location of buildings and other structures
Any post-easement building or land improvements impacting
the stated conservation purposes
Any inconsistent use of the property
The IRS appraiser will be interested in factors affecting
the highest and best use of the property before and after the granting of the
conservation easement, such as zoning or other restrictions on the property,
topography or floodplains.
Ask the taxpayer or representative to point out the outdoor
recreation areas, animals, plants, scenic views, or historic land and
structures that contribute to the conservation purpose. If the examiner
observes an absence of conservation attributes, lack of access, de minimus
public benefit or use inconsistent with the conservation purpose, the examiner
should discuss with the taxpayer or representative to clarify and solicit
additional documentation as warranted.
Example: A Wisconsin taxpayer donates a conservation
easement with a claimed conservation purpose of protecting habitat for
pheasants, a federally protected species. Pheasants thrive in a habitat of hay
fields, cropland and grassland. The examiner observes none of this habitat on
the property during the site inspection.
Audit Tip: “A picture speaks a thousand words.”• Consider
taking photographs or video of the property, the surrounding areas, and the
protected habitat or species, from various public access points. The IRS
appraiser will generally take pictures of the property.
Review of Documents
The examiner and IRS appraiser will be required to review
documents such as the deed of conservation easement, subordination agreements,
baseline study, appraisals, information provided by the qualified organization
and documents submitted to the National Park Service. The documents lay the
foundation for determining the deductibility of the charitable contribution.
Deed of Conservation Easement
Conservation easement deeds vary considerably in complexity
and length. It is imperative that the examiner read the deed carefully and have
a clear understanding of each of the deed’s provisions in order to properly
assess the taxpayer’s compliance with the statute and regulations. Program
analysts and Counsel should be consulted for help.
Be sure to review a complete and executed copy of the
recorded deed including attachments. Taxpayers and representatives sometimes
provide drafts or unexecuted copies. If there are multiple versions, inquire as
to the changes made and reasons for the revisions.
Audit Tip: A copy of the easement deed is generally included
as part of the appraisal report, which may not be the final easement document.
Compare it to the recorded deed to see if they are the same. If not, discuss
with the IRS appraiser since the valuation of the conservation easement could
be impacted.
In reading the conservation easement deed, the examiner
should ascertain:
What property is being encumbered?
What is the stated conservation purpose?
Does the deed protect the property in perpetuity?
What type of public access is allowed to the property?
What are the reserved rights?
What are the provisions for subordination and allocation
of proceeds?
Perpetuity
Most conservation easement deeds will state that the
easement is in perpetuity, but be alert to any provisions contradicting or
negating that statement. Conservation easements are not in perpetuity if they
can be abandoned or terminated.
Examiners need to pay close attention to any language in the
document regarding reserved rights that are inconsistent with the perpetuity
requirement.
See Chapter 3 for guidance on the perpetuity requirements.
Conservation Purpose
The conservation easement deed should include a specific
description of the conservation purpose of the particular easement, including,
for example, the species, scenic views or building being protected. The deed
alone is not evidence of conservation purpose and must be substantiated by
other available information.
Audit Tip: In some cases, the conservation purpose as
described in the deed merely repeats the conservation purpose definition in IRC
§ 170(h)(4)(A). The taxpayer must clearly describe and provide documentation to
show how the easement meets the conservation purpose.
Except for protection of a relatively natural habitat or
ecosystem, conservation easements generally must offer either physical or
visual access by the public. Physical access is only required if the
conservation purpose is for recreation by or education of the general public
under IRC § 170(h)(4)(A)(i). When evaluating access the examiner needs to
determine:
What access is allowed, by whom, and with what frequency?
What portion of the conservation easement can be seen from
the highway or other public space (if an open space easement for scenic
enjoyment)?
What impact any reserved rights have on public access?
Effective for donations of conservation easements on
buildings in registered historic districts after July 25, 2006 that are not
listed in the National Register, the entire exterior (including the front,
sides, rear, and height of the building) must be restricted. If the
conservation easement deed does not clearly protect all sides of the property,
the charitable contribution is not deductible.
Audit Tip: The term “height”• was specifically used in the
statute to encompass the donation of space above the historic building. A deed,
which describes the restriction as the “roof,”• would
not satisfy the statute absent any additional narrative
limiting the “height”• of the building. A roof can be raised and additional
floors added if the easement merely uses the term “roof.”•
See Chapter 5 for guidance on conservation purpose
requirements.
Reserved Rights
Taxpayers sometimes reserve property rights that can destroy
a conservation purpose.
Example: The easement calls for the protection of the
Virginia running buffalo clover, an endangered plant. However, the deed allows
use of all terrain vehicles over the protected land in the area of the clover,
which would destroy the natural habitat. This is an inconsistent use of the
property, which would result in disallowance of the deduction.
Taxpayers are permitted to reserve some development rights
on a portion of the property, such as construction of additional homes or
structures, installation of utilities, and building of fences or roads,
provided the conservation purposes are protected. However, the examiner must
determine whether such construction would destroy the claimed conservation
purpose. Depending on the facts and circumstances, retention of these reserved
rights may result in disallowance.
Example: A taxpayer claims a charitable contribution
deduction for an open space easement but reserves the right to build three
additional residences on the property. The deed does not state the specific
location or limit the size of the residences. The deed allows the taxpayer to
construct residences that, whereby as a result of size or placement on the
property, would block the public’s scenic view, thus undermining the stated
conservation purpose.
See Chapter 3 and Chapter 5 for guidance on perpetuity and
conservation purpose requirements.
Lender Agreements
If the property was encumbered by a mortgage or other lien
at the time of the easement recordation, the taxpayer must obtain a
subordination agreement from the lender(s) prior to the granting of the
conservation easement in order for the conservation easement to be deductible.
The lender must also agree that the donee organization has a claim on any
proceeds in the event of the easement’s extinguishment.
See Chapter 3 for additional guidance on lender agreements.
Subordination Agreements
If there is a preexisting mortgage or other lien on the
property (including home equity loans or other lines of credit) prior to the
granting of the conservation easement, the taxpayer must obtain a subordination
agreement from the lender. Subordination agreements must be recorded in the
public record.
The best way to determine if there are existing mortgages
including home equity loans or lines of credit by researching public records
and interviewing the taxpayer. The subordination agreement is generally part of
the lender agreement attached to the conservation easement deed.
Audit Tip: Examiners must confirm that timely subordination
agreements for all liens were recorded in the public record prior to the
easement donation. If the taxpayer did not obtain a subordination agreement
before the time of the contribution, the charitable contribution should be
disallowed for lack of perpetuity.
Substantial compliance does not apply to failure to properly
subordinate.
Allocation of Proceeds
In order for a charitable contribution deduction to be
allowed, the taxpayer, at the time of the gift, the donation of the perpetual
conservation restriction gives rise to a property right vested in the donee
organization. This means that the donee organization must share in the proceeds
in the event of extinguishment (e.g., condemnation, casualty, hazard or
accident) of the easement. If the lender retains a prior claim on any proceeds
on extinguishment, the charitable contribution is not deductible.
Most lenders are willing to execute a subordination
agreement but some will not agree to the allocation of proceeds in the event of
extinguishment. Language in the lender agreement that requires payment to the
mortgage or other lien holder before the donee organization receives proceeds
violates the allocation of proceeds requirement.
Audit Tip: Counsel should always be consulted to determine
whether the lender agreement meets the allocation of proceeds requirement since
variances in the language of the subordination agreement or deed could affect
the ultimate legal conclusion.
Baseline Study
A baseline study is required if the taxpayer has reserved
any right which may impair the conservation purpose. If there are no reserved
rights, a baseline study is not required. Nevertheless, the taxpayer must still
be able to provide sufficient documentation to establish that the donation
meets one of the conservation purposes defined in IRC § 170(h)(4)(A).
The baseline study is a record of a property’s condition at
the time of the donation and is required to substantiate the conservation
purpose if the donor retains certain rights in the property. It serves two
purposes: 1) to satisfy the Treasury Regulations and 2) to assist the donee
organization and others in monitoring and enforcing the easement.
The baseline study does not have to be attached to the
return or the deed of conservation easement but the donor must provide the
study to the donee prior to the time the donation is made. In most cases, a
copy must be obtained from the taxpayer or donee organization.
The statement required by the Form 8283 is not the baseline
study.
The quality of a baseline study can vary a great deal. Some
are detailed expert reports, describing the property condition, conservation
value, impact of reserved rights, and environmental hazards. Some are the
taxpayer’s self-assessment of the property or the work of a volunteer with
little or no professional credentials.
A properly documented baseline study is invaluable in
helping the examiner determine if the donation satisfies one of the
conservation purposes. A comprehensive baseline study would generally include:
A description of the encumbrance
A description and map of the conservation characteristics
and areas (i.e., listing of identified plants or wildlife)
A map or series of maps depicting roads, fences, existing
structures, trails, water bodies, wetlands, and any other property features
Identification of any reserved building sites
Surveys or plat maps
Description of any management plans, such as a timber plan
On-site photographs including aerial photographs
The study author’s name and professional credentials
The first step in reviewing the baseline report is
determining whether the taxpayer was required to secure one.
If the taxpayer is required to have a baseline study, the
next step is to ascertain whether the baseline study is sufficient to satisfy
the baseline requirements as outlined in Treas. Reg. § 1.170A-14(g)(5),
including the signed statement by the donor and representative of the donee
organization. This statement is an affirmation that the baseline study is an
accurate representation of the protected property at the time of transfer. The
statement may be incorporated in the baseline study or be a separate document.
The examiner will also need to assess the credibility of the
baseline study. A baseline study prepared by an independent qualified expert
such as a conservationist, biologist, forester or botanist would generally be
given greater evidentiary weight than one prepared by a less qualified person
or the taxpayer’s self-assessment.
Examiners will need to confirm that the baseline study is
based on accurate information. In some cases, outside experts may be hired
depending on availability of funds. Generally, Examiners will need to conduct
their own research contacting federal, state or local conservation agencies or
historic preservation groups as appropriate. Internet research will reveal many
useful internet Web sites such as natureserve.org that can help the Examiner in
determining whether the baseline study supports the claimed conservation
purpose(s).
Audit Tip: Some baseline studies are not property-specific
but rather, they include narrative about the general area or State without any
specific reference to the donated property. These baseline studies do not meet
the requirements of Treas. Reg. § 1.170A-14(g)(5).
See Chapter 5 for guidance on the baseline study
requirements.
Taxpayer’s Appraisal
The IRS appraiser has primary responsibility for review of
the taxpayer’s appraisal to determine if it is a qualified appraisal prepared
by a qualified appraiser and that the conservation easement was properly
valued.
The examiner should read the appraisal to obtain background
information on the property and have a general understanding of the appraisal
content and methodology. In consultation with the IRS appraiser, the examiner
should determine if the appraisal was timely filed and if it meets the
requirements of IRC § 170(f)(11), Notice 2006-96, and Treas. Reg. §
1.170A-13(c).
See Chapter 7 for guidance on qualified appraisal
requirements.
Donee Organization
During the preplanning of the examination, the examiner will
generally be able to determine whether the donee is an organization eligible to
receive tax-deductible contributions. The examiner must also consider whether
the donor made any cash payments to the donee, and review the contemporaneous written
acknowledgment.
Examiner may need assistance from TEGE to determine whether
the donee has the commitment to protect the conservation purposes of the
donation and has resources to enforce the restrictions of the conservation
easement.
Indication of failure by the donee organization in these
areas may suggest the need for a referral to TEGE.
See Chapter 4 for guidance on qualified organizations.
Commitment and Resources
The taxpayer must transfer the conservation easement to an
eligible donee to qualify for a contribution deduction. In order to be an
eligible donee, the organization must be a qualified organization, must have a
commitment to protect the conservation purpose of the donation and must have
the resources to enforce the restrictions in the conservation easements.
Some of the information used to evaluate this factor
includes:
The donee organization’s Web site
The donee organization’s tax returns (Forms 990), obtained
from Guidestar.org or the Economic Research Institute
Interviews of the taxpayer and representatives of the
donee organization
Observations during the property inspection
Property monitoring reports
Written agreements between the organization and the
taxpayer (required for contributions of easements of registered historic
districts made after July 25, 2006)
If the organization did not meet the commitment and
resources tests at the time of contribution, no deduction is allowed. A
conservation group organized or operated primarily or substantially for one of
the conservation purposes specified in IRC § 170(h) is considered to have the
requisite commitment. Treas. Reg. § 1.170A-14(c)(1).
Audit Tip: Monitoring reports are a good source to verify
whether the taxpayer is in compliance with, and the donee organization is
enforcing, the terms of the easement. In some cases, donee organizations have
allowed changes after the donations that were in violation of the terms of the
easement. Examiners should consult Counsel for assistance if the easement was
terminated or not being enforced. In addition, a referral to TEGE should be
considered.
Cash Payments
A voluntary transfer of money or property to a qualified
organization is generally deductible as a charitable contribution.
If a taxpayer received goods or services from the
organization in exchange for making the cash contribution, the deduction is
limited to the excess of the cash over the FMV of the goods and services. Goods
and services include cash, property, services, benefits or privileges.
Any cash payment made in conjunction with the conservation
easement must be addressed as part of the examination. Examination steps should
include an interview of the taxpayer and a review of documents provided by the
taxpayer and the donee organization.
Factors that may indicate that the cash payment was in
exchange for goods or services include:
Negotiations between the donor and donee as to the amount
of the payment and timing of the payment, and discounts generally found only in
commercial transactions.
Offering of substantial services to facilitate the
donation process.
Refusal of the donee organization to sign the Form 8283
until full payment of the cash.
Use of cash payment amounts tied to the value of the
conservation easement.
Conditional or refundable donations dependent on some
event such as an IRS examination.
Each case must be decided on the facts and circumstances.
Audit Tip: The Examiner may need to issue a summons to the
donee organization for relevant documents (including the application,
correspondence, donation agreements, processing documents, and other documents
relevant to the cash and easement donations).
Contemporaneous Written Acknowledgment
IRC § 170(f)(8) requires that all cash and noncash
contributions of $250 or more must be substantiated with a contemporaneous
written acknowledgment (CWA) and lists the requirements for a CWA. It must be
secured by the earlier of the date the taxpayer filed their return or the due
date (including extensions) for the return. The Form 8283, Noncash Charitable
Contributions (PDF), is not a substitute for a CWA.
A CWA is required for both the cash payment and the
conservation easement. Examiners must verify that it was a timely
acknowledgment and fully complies with the statutory requirements. Failure to
secure a timely or proper CWA is a basis for disallowance of the contribution.
Note: A CWA is not sufficient if it does not include either
a statement that no goods or services were provided (if this was the case) or
if it does not state the value of any goods or services provided.
Audit Tip: Some taxpayers may argue all that is required is
substantial compliance with the CWA requirement. However, the CWA is a
statutorily mandated provision and substantial compliance does not apply.
See Chapter 6 for guidance on CWA requirements.
National Park Service-Form 10-168
Congress provided two incentives for historic preservation:
(1) the charitable contribution deduction for historic preservation of a
historically important land area or a certified historic structure under IRC §
170(h) and (2) the rehabilitation credit under § 47.
The taxpayer would have submitted Form 10-168 (PDF) to the
National Park Service (NPS) for certification that the building contributes to
the district. Examiners should obtain a copy of the certification and any
related documents from the taxpayer or the NPS.
Even if the property is certified by the Secretary of
Interior, it does not mean the charitable contribution deduction is allowable.
36 CFR 67.1 provides that the IRS is responsible for all legal determinations
concerning the tax consequences.
Part I of the Form 10-168 is used for certification of the
building for historic status details the condition of the building at the time
of the application. Part II is a notice of proposed work and generally includes
information such as:
Date of application
Description of the condition of the building and any
proposed work.
The expected start and completion dates
Estimated costs
Architectural drawings
Part II is required for any rehabilitation project whether
the property is individually listed on the National Register of Historic Places
or in a registered historic district.
Audit Tip: While the owner is under no legal obligation to
complete the proposed rehabilitation of the building, prior to submitting the
application, the owner has to undertake preliminary steps such as obtaining
market studies, architectural drawings, cost estimates, financing applications,
investment prospectus, legal opinions, lease agreements, partnership
agreements, and other documents that may be legally binding.
In some cases, taxpayers have improperly claimed a
charitable contribution deduction for the contribution of development rights
that were retained.
Section 48(g) permits the rehabilitation tax credit to be
claimed only by owners and, in some instances, lessees. If the taxpayer does
not own all of the interests in real property to which the rehabilitation
relates (and is not a lessee), the taxpayer is not entitled to the entire
rehabilitation tax credit. Generally, no tax credit is permitted for property
that the taxpayer does not own. See Villa v. Commissioner, T.C.M. 1980-305;
Davenport v. Commissioner, T.C.M. 1977-34); Schaevitz v. Commissioner, T.C.M.1971-197
and Bailey v. Commissioner, 88 T.C. 1293 (1987).
Audit Tip: If the easement is contributed prior to the start
of rehabilitation, the deed of easement will generally reserve the right to
rehabilitate the property. Accordingly, a portion of the rehabilitation
benefits is attributable to a real property interest that the taxpayer no
longer owns. In that case, a ratable portion of the dollars spent on the
rehabilitation would not be eligible for the rehabilitation tax credit.
If it is determined that a deduction for the easement is
allowable, the examiner or IRS appraiser must take into account the reserved
rehabilitation rights in determining the fair market value of the conservation
contribution under Treas. Reg. 1.170A-14(h)(3)(ii). Consideration must also be
given to the impact of local zoning, conservation and historic preservation
laws.
Being listed on the National Register of Historic Places or
located in a registered district imposes no restrictions on the property. Only
local law can impose restrictions. A local historic district may not have the
same boundaries as the National Register District by the same name. Thus, a
building may be certified for purposes of a charitable contribution deduction
by the NPS but the only restrictions prior to the easement might be local
zoning.
Audit Tip: Be sure to determine whether there are
restrictions under local preservation law. A building added to the National
Register of Historic Places may or may not be subject to local restrictions.
Partnership Documents
In some instances, partnerships are formed to transfer the
charitable contribution deduction. Some partnerships offer guarantees that if
the IRS disallows the deductions, the investor will be paid the amount of the
deduction disallowed times the highest tax rate.
A similar partnership arrangement was used to transfer state
rehabilitation tax credits in the Virginia Historic Tax Credit Fund 2001LP v.
Commissioner, 693 F.3d 129(4th Cir. 2011) case.
The Fourth Circuit Court of Appeals held in this case that
the transfer of the state tax credit was a disguised sale.
Audit Tip: Examiners should review partnership agreements
and other documents specifically inquiring about any guarantees. Counsel
guidance should be solicited in evaluating these transactions.
Third-Party Contacts
Development of a conservation easement case frequently
requires third-party contacts for additional facts or confirmation of
information obtained during the course of the examination. Examples of possible
third party contacts include:
Donee organization(s)
Mortgage lenders
Appraisers
Local government officials
Real estate agents
State and Federal conservation agencies
Prior or subsequent property owners
Examiners must adhere to procedures for making third-party
contacts as outlined in IRM, Section 4.11.57, Third Party Contacts. Advance
notification of potential third party contacts during an examination is
accomplished by the providing the taxpayer with a Publication 1, Your Rights as
a Taxpayer (PDF), at the onset of the examination, generally with the initial
appointment letter.
Not all contacts are third party contacts. See IRM Section
4.11.57.3 for additional guidance.
Form 12180, Third Party Contact Authorization Form, or
Letter 1995, Third Party Contact Letter to Request Information, is used to
solicit records. Some cases may require use of an administrative summons (Form
2039).
Audit Tip: While advance notification (using Publication 1,
Your Rights as a Taxpayer (PDF)) and reporting of any third party contacts to
the third-party coordinator is required, there is no requirement to obtain the
taxpayer’s permission prior to making a third party contact.
Donee Organizations
Third-party contacts may be warranted with key
representatives of the donee organization. Individuals involved in drafting of
the easement deed or who were points of contact may have important information
on the transactions. Consider separate interviews of all third parties.
Typically, these interviews can be done by telephone.
Audit Tip: Examiners should request the organization’s
entire file for this donation and any other donation by the taxpayer.
Donee organizations may want a summons before consenting to
release of records. A standard document request, approved by Counsel, which can
be attached to the summons, is found on the conservation easement Web page on
MySB/SE under “Job Aids.”•
Mortgage Lenders
Mortgage lender files are a valuable source of information
about the subordination, allocation of proceeds, and valuation of the
conservation easement.
If the bank agreed to the subordination, the lender’s file
may include correspondence or other information from the taxpayer or the donee
organization describing the impact of the conservation easement on the value
and or use of the property. Examiners should obtain explanations for any
inconsistent statements made to third parties.
Example: Correspondence from the donee organization to the
lender soliciting a subordination agreement included statements that the
conservation easement has no impact on the value of the property.
If the taxpayer secured a mortgage or refinanced around the
time of the easement donation, an appraisal may have been obtained by the
lender. The appraisal coupled with information on the loan application may be
helpful in evaluating the reasonableness of the claimed value of the easement.
Example: The taxpayer granted a conservation easement on
December 29, 2010, claiming a loss in value on the property of $23 million. The
before value of the property was determined to be $25 million with an after
value of $2 million. The taxpayer obtained a mortgage loan on January 27, 2011.
The bank’s appraisal reports a value of $20 million after considering the
impact of the conservation easement on the property value. This suggests that
the easement may have been overvalued.
The loan application and related appraisals can also be
useful in determining whether the taxpayer made a good faith investigation of
the value of the easement. This is relevant to imposition of penalties.
Example: Using the example above, suppose the taxpayer
showed the value of the property on his loan application as $24 million. If the
taxpayer believed his property lost $23 million in value due to the donation of
the easement, why was the “alleged”• $2 million after value not reported on the
loan application?
A summons will generally be required to obtain the loan file
information. A standard document request, approved by Counsel, which can be
attached to the summons, is found on the conservation easement web page on
MySB/SE under “Job Aids.”•
Appraiser
In some instances, it may be necessary to interview the
taxpayer’s appraiser. The IRS appraiser would generally conduct this interview;
however, the Examiner may also participate.
It may also be necessary to obtain the appraiser’s work
file. Most licensed appraisers are required to maintain a work file in
accordance with State licensing requirements. The appraiser’s work file may
include communications between the taxpayer or donee organization or may reveal
the existence of multiple versions of the appraisal.
The examiner or the IRS appraiser should inquire to
determine the changes made and the reasons for the revisions.
A standard document request, approved by Counsel, which can
be attached to the summons, is found on the conservation easement web page on
MySB/SE under “Job Aids.”•
Federal, and State Conservation Agencies
To help ascertain the physical characteristics of the
subject property as well as evaluate the conservation purposes, examiners may
want to contact various federal and state conservation agencies, including but
not limited to:
National Park Service
U.S. Fish and Wildlife Service
U.S. Environmental Protection Agency
U.S. Department of Agriculture
U.S. Army Corps of Engineers
State Departments of Natural Resources
These agencies may have information on the specific property
or on the area in general.
Local Government Officials
Local officials responsible for zoning and building permits
and preservation boards are good sources of information. If possible, secure
copies of pertinent records and speak directly to the knowledgeable officials.
Evidence of quid pro quo may be found by talking to local officials and
reviewing records including minutes of meetings.
Audit Tip: If the conservation easement is part of
subdivision development, request assistance from the IRS appraiser in reviewing
documents such as plats, maps, etc.
Real Estate Agents
Local real estate agents can be valuable third party
contacts, having knowledge of property values, sales and local market
conditions, including properties encumbered by easements.
Audit Tip: If the property was purchased or sold shortly
before or after the date of the contribution, the real estate agent may be able
to provide useful information as to the value of the property or impact of the
conservation easement.
Property Owners
Prior or subsequent owners of the subject property can
provide information useful in determining the value of the property such as
physical condition, preexisting restrictions or encumbrances and other specific
attributes.
Audit Tip: If the property was sold subsequent to the
granting of the easement, consider contacting the buyer to determine the impact
(if any) on the purchase price paid. Buyers are sometimes not aware of the
easement or may indicate the easement had no impact on the purchase price.
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Overview
The examiner must determine whether the taxpayer meets all
of the requirements to claim a charitable contribution for the conservation
easement. While the process of issue identification begins in the preplanning
stages of the examination, a conclusion as to the deductibility of the
conservation easement can only be made after considering all of the information
obtained during the examination.
In addition to legal issues, examiners, generally with the
assistance of a valuation expert, will determine if the conservation easement
has been properly valued.
Preparation of a quality examination report is a critical
component of the examination process. The examiner will need to include a
comprehensive explanation of the facts, law and conclusions incorporating the
IRS appraiser’s work product and attaching relevant exhibits. If the
examination results in a proposed adjustment, the examiner must consider
whether penalties are applicable and who is liable for the penalties.
During the closing conference, the examiner should explain
the bases for any proposed adjustments to the charitable contribution deduction
and proposed penalties. In unagreed cases, the examiner will need to verify
that the taxpayer’s protest complies with the requirements as outlined in
Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t
Agree (PDF) and prepare a rebuttal to the protest as warranted.
Issue Identification
The examiner and IRS appraiser must have a comprehensive
understanding of all of the legal requirements and evaluate the value of the
conservation easement in order to make a decision on the deductibility of the
easement.
The Internal Revenue Code, Treasury Regulations,
publications and this ATG are tools to help in the identification of potential
issues. Program analysts and Counsel can also be consulted for assistance.
An Issue Identification Worksheet has been developed as a
job aid to help examiners with issue analysis. The worksheet is not
all-inclusive but is a summary of key issues. See Exhibit 12-1.
Besides assessing all aspects of the issue, examiners must
also examine whether other costs associated with the conservation easement
contribution were properly reported.
Audit Tip: Appraisal fees are deductible only as
miscellaneous deductions subject to adjusted gross income limitation. Taxpayers
will sometimes improperly claim the appraisal fees and other costs as cash contributions.
Substantial Compliance
The burden is on taxpayers to establish they have complied
with all statutory requirements to substantiate the charitable contribution
claimed under IRC § 170. Moreover, a charitable contribution is allowed as a
deduction only if verified under the Treasury Regulations. IRC § 170(a)(1);
Smith v. Commissioner, T.C. Memo 2007-368; Hewitt v. Commissioner, 109 T.C.
258, 261 (1997), aff’d without published opinion, 166 F.3d 332 (4th Cir. 1998).
In cases where the disallowance is based in whole or in part
on noncompliance with the substantiation rules, taxpayers and their
representatives may argue that they have substantially complied, based on a
judicial doctrine called “substantial compliance.”•
Under prior law, some courts have allowed a deduction for a
taxpayer who has substantially, but not strictly, complied with “directory”•
regulations governing tax elections and deductions. See Bond v. Commissioner,
100 T.C. 32, 41 (1993). However, see Scheidelman v. Commissioner, T.C. Memo.
2010-151 (July 14, 2010), stating that “the lack of a methodology or specific
basis for the calculated after-donation value is too significant for us to
ignore under the guise of substantial compliance”• and “[w]hen a qualified
appraisal has not been submitted, we have not applied the doctrine of
substantial compliance to excuse a taxpayer’s failure to meet the qualified
appraisal requirement.”•
It is important to note that Bond and Simmons v.
Commissioner, T.C. Memo. 2009-208 (Sept. 15, 2009), were based on law in effect
prior to the enactment of the American Jobs Creation Act (2004) and the Pension
Protection Act (2006), both of which imposed new mandatory statutory
requirements for qualified appraisals.
Report Writing
The examiner’s report is the principal means of
communicating to the taxpayer, Appeals, and Counsel the reasons for proposed
adjustments to the conservation easements. Typically, conservation easement
issue reports take a significant amount of time to prepare. Unagreed reports
should be prepared in accordance with IRM section 4.10.8.11, Unagreed Case
Procedures: Preliminary (30-Day) Letters.
The explanation of items, whether presented in a lead sheet
format or on Form 886A, Explanation of Items, will be fact intensive,
describing all details of the transaction, the tax law and the bases for any
proposed adjustment. There may be a number of exhibits including an appraisal,
an appraisal review, the conservation easement deed, lender agreement, the
contemporaneous written acknowledgment and other pertinent documents.
If the lead sheet work papers are used for the unagreed
report, extraneous information (e.g., work paper cross-referencing, audit
steps, etc.) that would be of no use to the taxpayer or Representative should
be removed prior to the issuance of the report.
In many cases in which an adjustment is proposed, there will
be more than one legal reason for the proposed adjustment (in addition to
valuation). The legal issues are generally the primary position, and valuation
serves as an alternative position.
Audit Tip: It is very important that the report clearly
articulate and address all issues and include relevant exhibits. Appeals will
generally not consider other bases for the adjustment if not specifically
mentioned in the unagreed report.
Job Aids
Report writing job aids are available on the conservation
easement Web page on MySB/SE under “Job Aids.”• These aids, while intended to
help streamline the report writing process, must be customized to address the
facts and circumstances of each case.
The job aids provide a sample presentation format including
facts, applicable tax law, analysis and conclusions. The content in the
analysis and conclusions section is organized to match the content of the Issue
Identification Worksheet discussed above. The examiner will need to check the
most current edition of the IRC to be sure that there have not been any
statutory changes since the date of the job aid.
The Facts section of the job aid serves as an example of the
extent and type of information, which should be included in the report.
The Law section contains a summary of conservation easement
tax law. It was prepared in consultation with Counsel and generally is used
verbatim in all reports but examiners should update for any statutory changes
subsequent to the date of this report writing job aid.
The Analysis and Conclusion section will also be case
specific, but this material may be used to assist with drafting of the
examiner’s conclusions. A discussion of substantial compliance included in this
section should be incorporated into all unagreed reports.
Valuation Expert Reports
The IRS appraiser or outside appraiser’s report or review
must be attached as an addendum to the examiner’s unagreed report.
In some cases, the IRS appraiser will also provide a Form
886A, Explanation of Items, in addition to an appraisal or appraisal review.
While this information will be very useful in drafting the unagreed report,
these documents generally should not be used as a substitute for the examiner’s
report narrative.
IRS appraisers sometimes include legal positions in their
Form 886A write-ups. The Examiner must review this information for factual and
technical accuracy particularly for tax law interpretations to 1) identify any
inconsistent facts or conclusions, 2) verify correct application of tax law,
and 3) ensure that correct positions are incorporated into the examiner’s
report as a basis for any proposed adjustment.
Audit Tip: Notate on the Examiner Case Activity Record (Form
9984) and in the Report Transmittal (Form 4665) that a complete copy of IRS
appraiser report was provided to the taxpayer so there will be no question that
the taxpayer received a copy. It is also a good idea to mention in the report
narrative.
Penalties
The application of penalties is based on the facts and
circumstances of each case. There is no statutory authority to waive penalties
unless the taxpayer can establish that the reasonable cause exception applies.
A separate lead sheet or Form 886A will be needed for
proposed penalties (if any). Throughout the examination, the examiner should be
developing relevant facts to determine what penalties may apply and whether
waiver of the penalty may be appropriate (based on reasonable cause).
Audit Tip: Do not wait until the end of the audit to think
about penalties. Consideration of penalties and gathering of information should
be done throughout the examination, beginning with the preplan. Interviews of
the taxpayer and third parties may be required to obtain all necessary facts.
The penalty report for a conservation easement case would
generally include a tiering of proposed penalties with multiple alternative
positions, starting with valuation misstatements, then substantial
understatement, and finally negligence.
A discussion of reasonable cause must be incorporated into
the penalty write-up. There are special rules with respect to overvaluation of
charitable contributions. Note: For gross valuation overstatements for
donations after August 17, 2006, there is no reasonable cause exception for
gross overvaluation. Reasonable cause may apply for substantial overvaluation
or negligence.
Audit Tip: Examiners should be alert to any indication of
fraud and should consult the Fraud Technical Advisor program analyst if badges
of fraud are identified during the examination.
See Chapter 13 for detailed discussion of penalties and
reasonable cause.
Technical Assistance
Program analysts and Counsel assigned to this issue are
available to provide assistance and feedback with respect to unagreed reports.
A list of contacts is found on the conservation easement web page on MySB/SE
under “Contacts.”•
Closing Conference
A closing conference is normally held with the taxpayer or
representative. The purpose of the conference is to explain the bases for any
proposed adjustments to the charitable contribution deduction and proposed
penalties, confirm the accuracy of the facts, gather new information, and
obtain a preliminary response from (or on behalf of ) the taxpayer.
The examiner may want to provide a draft report in advance
of the meeting or at the conference. Since valuation is a significant issue in
most conservation easement cases, it is recommended that the IRS appraiser
participate in the conference.
Taxpayer Protests
Taxpayers will generally need to file a formal written
protest in order to exercise appeal rights. If the total amount of tax for any
tax period is less than $25,000, a small case request can be submitted instead
of a formal written protest.
Publication 5, Your Appeal Rights and How to Prepare a
Protest If You Don’t Agree (PDF), outlines the specific information that must
be included in a formal protest. The taxpayer or representative must provide a
list of changes they do not agree with, the facts supporting their position,
and the authority they are relying upon.
A protest is not adequate if it does not comply with the
requirements as described in Publication 5. A taxpayer’s general statements
without a clear explanation and without citing any legal basis for disagreement
is generally not sufficient.
Letter 3615, Letter Advising of Incomplete Protest, is
mailed to the taxpayer if the protest is determined to be inadequate. Unless
the group manager agrees to an extension, if the taxpayer fails to provide a
complete protest within 10 days, the case would be closed for Statutory Notice of
Deficiency.
Rebuttals to Taxpayer Protest
If there is new or contradictory information in the protest,
the examiner may need to request additional information from the taxpayer or
prepare a rebuttal to supplement the unagreed report.
The examiner should provide a copy of the protest to the IRS
appraiser so they can provide a written rebuttal for issues within the scope of
their responsibilities (such as qualified appraisal or appraiser and
valuation). The IRS appraiser’s rebuttal may be incorporated into a single
rebuttal or as an addendum to the examiner’s rebuttal.
A copy of the rebuttal, including the IRS appraiser’s
rebuttal, should be provided to the taxpayer.
Exhibit 12-1 Conservation Easement Issue Identification
Worksheet
NOTE: This worksheet is an all-inclusive list of potential
issues for donations of conservation easements. Users should review IRC section
170, DEFRA section 155, the corresponding Treasury Regulations, Notice 2006-96
and case law.
General Rule Issues
Code/Regs
Lack of charitable intent (including quid pro quo)
170(a); 1.170A-1(h)
Conditional gift
1.170A-1(e); 1.170A-7(a)(3)
Contemporaneous written acknowledgment (CWA)
170(f)(8); 1.170A-13(f)
Qualified Appraisal Issues
Code/Regs
(Note: The Deficit Reduction Act of 1984 (DEFRA) and section
170(f)(11) outline the statutory appraisal requirements.)
170(f)(11) (donations after 6/3/04) DEFRA
155(a)(1)(A),(a)(4) 1.170A-13(c)(3)(i) Notice 2006-96 §3.02(1)
Appraisal not attached to return (FMV >$500K)
170(f)(11)(D) (donations after 6/3/04)
Appraisal not prepared in accordance with generally accepted
appraisal standards
170(f)(11)(E)(i)(II) (returns filed after 8/17/06); Notice
2006-96 §3.02(2)
Appraisal not timely
1.170A-13(c)(3)(i)(A)
Not a qualified appraiser
170(f)(11)(E)(ii) (returns filed after 8/17/06) DEFRA
155(a)(5) 1.170A-13(c)(3)(i)(B); Notice 2006-96, §3.03
Doesn’t meet IRC, DEFRA, or Treas. Reg.
170(f)(11)(E)(i)(I) (returns filed after 8/17/06)
Qualified Appraisal Issues
Code/Regs
requirements
DEFRA 155(a)(1) through (6) 1.170A-13(c)((3)(ii)
1.170A-13(c)(3)(i)(C); Notice 2006-96
Appraisal fee based on percentage of value
1.170A-13(c)(3)(i)(B); 1.170A-13(c)(6)
Form 8283 (appraisal summary) missing or incomplete
1.170A-13(c)(4) DEFRA 155(a)(1)(B); DEFRA 155(a)(3)
Qualified Real Property Interest Issues
Code/Regs
Qualified real property interest
170(h)(2); 1.170A-14(a), (b)
Lack of perpetuity
170(h)(2)(C); 170(h)(5)
Lack of perpetuity – Failure to properly subordinate
1.170A-14(g)(2)
Lack of perpetuity – Extinguishment-allocation of proceeds
1.170A-14(g)(6)(ii)
Not a qualified organization or eligible donee
170(h)(3); 1.170A-14(c)(1)
Conservation Purpose Issues
Code/Regs
Conservation purpose
170(h)(4)(A); 1.170A-14(d)(1)
Outdoor recreation or education of public
170(h)(4)(A)(i); 1.170A-14(d)(2)
Outdoor recreation or education of public – Lack of access
1.170A-14(d)(2)(ii)
Protection of environmental system (natural habitat)
170(h)(4)(A)(ii); 1.170A-14(d)(3)
Protection of environmental system -Significant habitat or
ecosystem
1.170A-14(d)(3)(ii)
Preservation of open space
170(h)(4)(A)(iii); 1.170A-14(d)(4)
Preservation of open space -Scenic enjoyment
170(h)(4)(A)(iii)(I); 1.170A-14(d)(4)(ii)
Preservation of open space -Scenic enjoyment-Lack of visual
access
1.170A-14(d)(4)(ii)(B)
Preservation of open space -Governmental conservation policy
170(h)(4)(A)(iii)(II): 1.170A-14(d)(4)(iii)
Preservation of open space -Governmental conservation policy
Physical or visual access
1.170A-14(d)(4)(iii)((C)
Conservation Purpose Issues
Code/Regs
required if conservation purpose is frustrated without
access
Preservation of historic land or certified historic
structure
170((h)(4)(A)(iv)
Preservation of historic land or certified historic
structure – Historic land
1.170A-14(d)(5)
Preservation of historic land or certified historic
structure – Certified historic structure
1.170A-14(d)(5)(ii)
Preservation of historic land or certified historic
structure – Certified historic structure (1) Individually listed or (2) in
historic district and NPS certifies
170(h)(4)(C) (donations made after 8/17/06);
1.170A-14((d)(5)(iii)
Preservation of historic land or certified historic
structure – Lack of visual access
1.170A-14(d)(5)(iv)(A)
Failure to comply w/ PPA for buildings not individually
listed. (façade only)
170(h)(4)(B) (donations after 7/25/06)
Failure to comply w/ PPA for buildings not individually
listed – No restriction for entire exterior.
170(h)(4)(B)(i) (donations after 7/25/06)
Failure to comply w/ PPA for buildings not individually
listed – Lack of written agreement between donor/donee.
170(h)(4)(B)(ii) (donations after 7/25/06)
Failure to comply w/ PPA for buildings not individually
listed – Failure to attach appraisal, with photos and description of
restrictions.
170(h)(4)(B)(iii) (tax years beg. after 8/17/06)
Failure to comply w/ PPA for buildings not individually
listed – Failure to pay $500 filing fee (façade only)
170(f)(13) (contributions on or after 2/13/07
Not exclusively for conservation purpose
170(h)(5); 1.170A-14(e)
Not exclusively for conservation purpose – Inconsistent Use
1.170A-14(e)((2) and (3)
Insufficient or lack of documentation for conservation
purpose (baseline study)
1.170A-14(g)(5)(i); 1.170A-13(c)(4)(ii)(M)
Valuation Issues
Code/Regs
Valuation Issues
Code/Regs
Overvaluation
170(a); 1.170A-14(h)(3)
Deduction not based on FMV
170(a); 1.170A-1(c); 1.170A-14(h)(3)
Deduction limited to basis
170(e)(1)(A)
Contiguous parcel/noncontiguous parcel
1.170A-14(h)(3)(i)
Miscellaneous Issues
Code/Regs
Percentage limitations not computed properly
170(b)
Rehabilitation credit-reduction of deduction (façade only)
170(f)(14)
Rehabilitation credit-recapture (façade only)
50(a); Rev. Rul. 89-90
Penalty Issues
Code/Regs
Taxpayer penalties
6662(a), (e), (h); 6664(c)(1) – (3)
Appraiser penalty (Returns filed after 7/25/06 if facade
easement on a building in a registered historic district; returns filed after
8/17/06 for all other easements.)
6695A
Chapter 13: Penalties Chapter 13: Penalties Chapter 13:
Penalties Chapter 13: Penalties Chapter 13: Penalties
Overview
Penalties exist to encourage voluntary compliance by
supporting the standards of behavior required by the IRC. Examiners are
required to consider penalties and document their determination in all taxpayer
examinations.
All facts and circumstances must be developed during the
examination to determine what penalties, (if any) are appropriate. Penalties
may be warranted on the taxpayer, return preparer, appraisers and/or other tax
advisors.
See the IRM 20.1, Penalty Handbook, for additional guidance
on penalties.
Accuracy-Related Penalties
IRC § 6662 imposes accuracy-related penalties on
underpayments. The maximum accuracy-related penalty imposed on any portion of
an underpayment is 20% (40% in the case of a gross
valuation misstatement), even if that portion of the
underpayment is attributable to more than one type of misconduct.
Penalties must be determined on a case-by-case basis taking
into account all the pertinent facts and circumstances. In order to determine
what penalties, if any, should be applied examiners must ascertain the
taxpayer’s experience, knowledge, education, the extent of their review or
inquiry in assessing the correctness of the conservation easement donation, and
whether they relied on any appraisers, return preparers or other professionals.
IRC § 6662(c) Negligence or Disregard of Rules or
Regulations
A 20% accuracy-related penalty can be asserted pursuant to
IRC § 6662(c) if the underpayment of tax is attributable to negligence or a
careless, reckless, or intentional disregard of rules or regulations.
Negligence includes any failure to make a reasonable attempt
to comply with the provisions of the Internal Revenue Code or to exercise ordinary
and reasonable care in the preparation of a tax return. IRC § 6662(c) and
Treas. Reg. § 1.6662-3(b).
In Turner v. Commissioner (126 T.C. 299 (2006)), the tax
court held the taxpayer was liable for a 20% negligence penalty under IRC §
6662. The appraiser’s report was not considered sufficient for the reasonable
cause exception (IRC § 6664(c)) to apply because the report was based on
erroneous assumptions.
The term “disregard”• includes any careless, reckless, or
intentional disregard of rules or regulations. A disregard is careless if the
taxpayer does not exercise reasonable diligence to determine the correctness of
a return position that is contrary to a rule or regulation. A disregard is
reckless where the taxpayer makes little or no effort to determine whether a
rule or regulation exists, under circumstances which are a substantial
deviation from the standard of conduct observed by a reasonable person.
Additionally, a disregard is intentional where the taxpayer has knowledge of
the rule or regulation that the taxpayer disregards. Treas. Reg. §
1.6662-3(b)(2).
“Rules or regulations”• under this section includes the
provisions of the Internal Revenue Code, temporary or final Treasury
regulations, and revenue rulings or notices (other than notices of proposed
rulemaking) issued by the Internal Revenue Service and published in the
Internal Revenue Bulletin. IRC § 1.6662-3(b)(2). Therefore, if the facts
indicate that a taxpayer took a return position contrary to any published
notice or revenue ruling, the taxpayer may be subject to the accuracy-related
penalty for an underpayment attributable to disregard or rules or regulations,
if the return position was taken subsequent to the issuance of the notice or
revenue ruling.
See IRM 20.1.5.7, Negligence or Disregard of Rules or
Regulations for additional guidance.
IRC § 6662(d) Substantial Understatement of Income Tax
A 20% accuracy-related penalty can be asserted pursuant to
IRC § 6662(d) if the underpayment of tax is attributable to a substantial
understatement of income tax.
A substantial understatement of income tax exists for a
taxable year of an individual if the amount of understatement exceeds the
greater of 10% of the tax required to be shown on the return or $5,000. IRC §
6662(d)(1).
For taxable years beginning on or after October 23, 2004,
the substantial understatement of a corporation must exceed the lesser of (i)
10% of the tax required to be shown on the return (or, if greater, $10,000), or
(ii) $10,000,000.
The amount of the understatement generally is reduced by the
portion of the understatement attributable to any item if:
The treatment is, or was, supported by substantial
authority, or
Facts relevant to the tax treatment were adequately
disclosed on the return or on a statement attached to the return and there is a
reasonable basis for the tax treatment.
There is no reduction, however, if any item is attributable
to a tax shelter, which means a partnership or other entity, any investment
plan or arrangement, or any other plan or arrangement with a significant
purposes of avoidance or evasion of Federal income tax. IRC § 6662(d)(2)(C).
See IRM 20.1.5.8, Substantial Understatement, for additional
guidance.
IRC § 6662(e) Valuation Misstatements
A 20% accuracy-related penalty can be asserted pursuant to
IRC § 6662(e) if the underpayment of tax is attributable to a substantial
valuation misstatement. IRC § 6662(e)(1).
A 40% accuracy-related penalty can be asserted pursuant to
IRC § 6662(h) if the underpayment of income tax is attributable to a gross
valuation misstatement.
For returns filed after August 17, 2006, a substantial
valuation misstatement exists when the claimed value of any property is 150% or
more of the amount determined to be the correct value. A gross valuation
misstatement occurs when the claimed value of any property is 200% or more of
the amount determined to be the correct value. Note: In the case of an
appraisal with respect to a donation under IRC §170(h)(4)(C)(ii) (a facade easement
on a building which is located in a registered historic district), these rules
apply to returns filed after July 25, 2006.
Note: For returns filed prior to August 17, 2006, a
substantial valuation misstatement penalty applies if a value claimed on the
return is at least twice (200% or more) the amount determined to be the correct
value. A gross valuation misstatement penalty applies if a value claimed on the
return is at least four times (400% or more) the amount determined to be the
correct value. The reasonable cause exception (IRC § 6664(c)) applied to both
substantial and gross valuation misstatements.
No penalty is imposed unless the portion of the underpayment
attributable to the valuation misstatement exceeds $5,000 ($10,000 in the case
of a corporation other than an S corporation or a personal holding company).
See IRM 20.1.5.9, Substantial Valuation Misstatement, for
additional guidance.
IRC § 6663 Civil Fraud Penalties
IRC § 6663 states that if any portion of the underpayment of
tax is due to fraud, a penalty of 75% may be asserted on the portion of
underpayment attributable to fraud.
Examiners should be alert to any indications of fraud, such
as altered or backdated documents, false testimony or evidence of collusion
between the taxpayer, the donee organization, return preparer, and the
appraiser.
If badges of fraud are noted the examiner is required to
discuss with their group manager and involve the local fraud technical advisors
as early as possible.
See IRM 20.1.5.12, Civil Fraud Penalty, for additional
guidance.
IRC § 6664 Reasonable Cause Exception
In general, no penalty will be proposed under IRC §§ 6662 or
6663 if the taxpayer establishes there was reasonable cause for the
underpayment and they acted in good faith. IRC § 6664(c)(1). See IRM 20.1.5.6,
Reasonable Cause, for additional guidance.
Special Rule for Overvaluation of Charitable Contributions
For substantial valuation misstatements of charitable
contribution property, reasonable cause only applies if:
The claimed value of the property was based on a qualified
appraisal made by a qualified appraiser, and
The taxpayer made a good faith investigation of the value
of the contributed property.
Improper valuation of conservation easements and a lack of
qualified appraisal are common bases for full or partial disallowance of the
charitable contribution. Accordingly, if the claimed value is substantially
overvalued (150% or more), the substantial valuation misstatement penalty must
be applied unless the appraisal was a qualified appraisal by a qualified
appraiser and the taxpayer made a good faith investigation of the value.
The reasonable cause exception is not available for gross
valuation misstatements on returns filed after August 17, 2006. IRC §
6664(c)(3). In the case of an appraisal of a facade easement on a building
located in a registered historic district), the reasonable cause exception is
not available for gross valuation misstatements on returns filed after July 25,
2006.
Reliance on Professionals
Reliance on a return preparer or other professional such as
an attorney or appraiser does not automatically constitute reasonable cause and
good faith under Treas. Reg. § 1.6664-4(b).
Reliance constitutes reasonable cause and good faith if,
under all the circumstances, such reliance was reasonable and the taxpayer
acted in good faith.
The taxpayer must prove:
They did not know, nor should have known, that the advisor
suffered from a conflict of interest or a lack of expertise,
Complete, accurate and all necessary information was provided
to the advisor by the taxpayer, and
The taxpayer actually relied in good faith on the
advisor’s judgment.
In Scheidelman vs. Commissioner, T.C. Memo. 2010-151, the
court concluded that the taxpayer had reasonable cause and acted in good faith.
A tax deficiency was proposed for the disallowance of a charitable contribution
of a façade easement and for an accuracy-related penalty for substantial
understatement of income tax or in the alternative negligence. The taxpayer had
no tax experience or real estate training and had relied on her long-time
return preparer, a competent tax professional and the appraiser.
If the taxpayer claims reliance on professionals, the
Examiner must identify specifically who advised the taxpayer, when and what
services or advice was provided and determine whether the taxpayer fully
disclosed the necessary information for the advisor to make a proper
determination.
This will generally require an interview of the taxpayer and
of the professional(s) to confirm the taxpayer’s information and evaluate
whether nonassertion of the penalty is appropriate due to reasonable cause.
Copies of any professional opinion letters, correspondence, analysis, billing
records or other documentation should be solicited from the taxpayer or
professional to substantiate reliance on professionals.
Examiners should review IRM 20.1.5.6.4, Reliance on Advice,
for additional guidance.
Return Preparers-IRC § 6694
Examiners are responsible for determining whether IRC §
6694, Understatement of Taxpayer’s Liability by Tax Return Preparer, penalties
should be asserted on the return preparer for improper tax return preparation.
Preparer penalties should be asserted only after deliberation of all facts and
circumstances and not based solely on the determination of deficiencies in
related tax return examinations.
Examiners may consider asserting penalties under IRC § 6694
on appraisers for inflated or incorrect appraisals in lieu of IRC § 6695A if
the appraiser meets the definition of a nonsigning return preparer (Treas. Reg.
§ 301.7701-15(b)(2)).
IRM 20.1.6.3, Preparer Conduct Penalties, provides
additional guidance on the return preparer penalties. Examiners also may
contact their local Return Preparer Coordinator for help with preparer penalty
cases.
Promoters-IRC §§ 6700 and 6701
Appraisers may be subject to IRC § 6700 for direct or
indirect participation in the sale of a tax plan or arrangement that results in
a material gross overvaluation misstatement. IRC § 6701 may also be applicable
for the preparation of the appraisal if the appraiser knows or had reason to
believe that the appraisal was to be used in connection with a material tax
matter and knows that use of the document would result in an understatement of
tax.
The examiner should consider a referral to the SB/SE Lead
Development Center (LDC) for return preparers, appraisers, promoters, authors
of legal opinions, donee organizations, or anyone else who was directly or
indirectly involved with a scheme or promotion advocating improper or
overvalued conservation easement donations.
While examiners may secure information on the role and level
of involvement of each person in conjunction with the determination of the
appropriateness of taxpayer penalties, examiners cannot commence an IRC § 6700,
Promoting Abusive Tax Shelters, Etc., or IRC § 6701, Aiding and Abetting
Understatement of Tax Liability, penalty investigation without specific
authorization from the SB/SE LDC. A referral form can be found on the LDC Web
page.
Contact a SB/SE LDC program analyst for assistance on the
application of IRC § 6700 or 6701 penalties, determination of whether a
referral is warranted, or coordination of participant examinations.
See IRM 20.1.6.1, Overview of the Return Preparer, Promoter,
and Material Advisor Penalties, and IRM 4.32 for additional guidance.
Appraisers-IRC § 6695A Substantial and Gross Valuation
Misstatements Attributable to Incorrect Appraisals
IRC § 6695A was added by the Pension Protection Act of 2006.
It provides a civil penalty on any person who prepares an appraisal that the
appraiser knows (or reasonably should have known) is to be used to support a
tax position, and such appraisal results in a substantial or gross valuation
misstatement (as defined in IRC § 6662(e) and (h) respectively).
The amount of the IRC § 6695A penalty is the lesser of:
The greater of 10% of the amount of the underpayment
attributable to the misstatement or $1,000, or
125% of the gross income received from the preparation of
the appraisal
Under the provision, the penalty does not apply if the
appraiser establishes that it was “more likely than not” that the
value established in the appraisal was correct.
This penalty applies to returns filed after August 17, 2006,
with respect to easements based on one of the first three conservation purposes
outlined in IRC § 170(h)(4)(A). However, if the
appraisal relates to a façade easement donation in a
registered historic district, the penalty applies to returns filed after July
25, 2006.
There are no preassessment appeal rights extended to the
appraiser at the time of the penalty case closure by the examiner. The
appraiser may request an appeals conference upon notice of the service’s intent
to assess the penalty.
CAUTION: The statute of limitations for the appraiser
penalty case is three years from the later of the due date of the related
return or the date the return was filed. Securing an extension on the return
being examined does not extend the appraiser penalty statute. Form 872-AP,
Consent to Extend the Time on Assessment of IRC Section 6695A Penalty, is used
to extend the appraiser penalty case statute.
See IRM 20.1.12, Penalties Applicable to Incorrect
Appraisals, and the Servicewide Penalty Web page for additional guidance on the
assessment of this penalty.
Office of Professional Responsibility Sanctions
Prior to the changes instituted by the Pension Protection
Act of 2006 (PPA), an IRC § 6701 penalty for aiding and abetting was required
to be assessed before the Office of Professional Responsibility (OPR) could
seek disciplinary action against an appraiser.
The PPA eliminated the penalty assessment requirement.
Disciplinary action may include, but is not limited to, suspending or barring
an appraiser from:
Preparing or presenting appraisals on the value of
property or other assets to the Treasury Department or the IRS.
Appearing before the Treasury Department or the IRS for
the purpose of offering opinion evidence on the value of property or assets.
Chapter 14: State Tax Credits
Overview
An increasing number of states offer tax incentives in the
form of income tax deductions or credits for the donation of conservation
easements. Some programs allow for the transfer and sale of unused state tax
credits. Qualifying for a state tax benefit does not automatically qualify a
taxpayer for a federal tax benefit.
State Tax Credit Programs
Generally, state conservation credit programs are designed
to encourage landowners to voluntarily preserve their land. State tax
incentives have become increasingly popular.
In 1983, North Carolina was the first state to enact a
conservation tax credit program with eleven more states (California, Colorado,
Connecticut, Delaware, Georgia, Maryland, Mississippi, New Mexico, New York,
South Carolina, and Virginia) passing similar tax credit legislation.
Most state tax credit programs closely follow the federal
requirements for conservation easements. There is no uniform model but nearly
all state programs determine the amount of the credit based on a percentage of
the fair market value of the donated easement. Generally, the programs provide
for carry forward of unused tax credits over a number of years. Some states,
including Colorado, South Carolina, Virginia and New Mexico, have transferable
tax credits.
Transferability allows taxpayers to sell tax credits to
third parties. Credit brokers or facilitators assist taxpayers in negotiating
the sales price and are generally reimbursed for their services from the
proceeds of the sale. The third party purchaser then uses the credits to reduce
their own state tax liabilities.
In 2007, The Conservation Resource Center, a nonprofit
conservation organization, published a report analyzing the impact of state
conservation tax credits. According to the report, taxpayers receive as much as
70 to 82 percent of the face value of their state tax credits, depending on
market rates at the time of the sale.
Sale of State Tax Credits
The issuance of the state tax credit or its use to reduce
state tax liability, does not result in federal gross income to a taxpayer who
qualifies for the credit or reduce the amount of the taxpayer’s federal
charitable contribution deduction, but a sale of a transferable state tax
credit is a taxable transaction.
Section 1001(a) provides that the gain from the sale or
other disposition of property is the excess of the amount realized over the
adjusted basis of the property.
The amount realized from the sale of the credit is the sum
of any money received plus the fair market value of any property received (IRC
§ 1001(b)). The taxpayer to whom the state issued tax credits does not have any
basis in the credits because nothing was paid to receive the credits and the
issuance of the tax credits was not a taxable event requiring inclusion in
gross income. Thus, the gain from the sale of tax credits by a taxpayer who
obtained them from the state would usually be equal to the entire amount
realized.
The Tax Court in Tempel v. Commissioner, 136 T.C. 15 (2011)
and McNeil v Commissioner T.C. Memo 2011-109, reached a conclusion stating that
the state tax credits are capital assets. The Court did affirm that the
taxpayer did not have any basis in the state tax credits and the holding period
begins when the credits are granted