CHAPTER 16
Conservation Organizations in Joint Ventures

  1. § 16.1 Overview
  2. § 16.2 Conservation and Environmental Protection as a Charitable or Educational Purpose: Public and Private Benefit
  3. § 16.3 Conservation Gifts and § 170(h) Contributions (Revised)
  4. § 16.7 Emerging Issues

§ 16.1 OVERVIEW

pp. 1200–1201. Insert the following to the end of footnote 1:

For the 2013 tax year, the Urban Institute website reports 8,834 organizations classified as “environmental” on the basis of NTEE code classifications, with aggregate gross receipts of $12.2 billion and aggregate total assets of $25.6 billion. The largest organization in the environmental category, in terms of both gross receipts and total assets, is the National Geographic Society, with gross receipts of $686 million and total assets of $1.3 billion for 2013 (http://nccsweb.urban.org/PubApps/showOrgsByCategory.php?close=1&ntee=C) (last visited March 29, 2016).

§ 16.2 CONSERVATION AND ENVIRONMENTAL PROTECTION AS A CHARITABLE OR EDUCATIONAL PURPOSE: PUBLIC AND PRIVATE BENEFIT

(a) IRS Ruling Position

p. 1201. Insert the following to the end of footnote 2:

PLR 201204020 (organization not exempt under § 501(c)(3) where its lake preservation activities were secondary to promoting the social and recreational activities of residents on the lake); PLR 201210044 (organization providing residential solar energy systems to low- and moderate-income families was not exempt because any environmental benefits to the public would be indirect and tangential); PLR 201221023 (organization denied exemption because its activities did not generate environmental benefits; rather, it acted as an intermediary that purchased carbon offsets from a commercial enterprise and resold them to businesses, which is an activity ordinarily conducted by commercial for-profit ventures); PLR 201405018 (IRS revoked charitable status of organization it determined to be primarily operated to benefit the founder's accounting practice clients by accepting donations of properties for which the clients claimed significant charitable contribution deductions); PLR 201451043 (IRS revoked charitable status of organization initially recognized as a private foundation, in part because grants it made to fund a botanical garden served the private interests of organizational managers; the public had limited access to the garden, which was enclosed by property owned by the organization's officers and was controlled by the officers); PLR 201514009 (IRS revoked charitable status of an organization it found to be primarily operating to facilitate grossly overstated façade easement contribution deductions for donors, citing New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), for the proposition that where an organization is actively participating in a scheme designed to facilitate tax avoidance it is not entitled to exempt status, because it is furthering a substantial nonexempt purpose); PLR 201531022 (activity of acquiring claims to clean up fuel spills from underground storage tank for a fee is a financing activity normally engaged in by for-profit entities such as banks and investment companies and not a charitable activity); PLR 201648020 (organization seeking exemption for restoring incorporator's residence, an historic landmark, denied exempt status based on multiple factors including inurement and impermissible private benefit).

(b) Judicial Holdings

p. 1207. Delete the language in footnote 13 in its entirety and replace with the following:

The special contribution percentage limitation and carryover rules were extended again by the Tax Increase Prevention Act of 2014 and made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (Pub. L. 114-113, Div. Q Title I, Sec. 111, Dec. 18, 2015). The PATH Act also enacted a special provision (new Code § 170(b)(2)(C)) for § 170(h) contributions made by Alaska Native Corporations of land conveyed under the Alaska Native Claims Settlement Act, effective for contributions made in taxable years beginning after December 31, 2015.

p. 1208. Delete the first paragraph following the Caveat.

§ 16.3 CONSERVATION GIFTS AND § 170(H) CONTRIBUTIONS (REVISED)

(a) Qualified Conservation Easements

p. 1208. Add the following to the end of footnote 15:

This has led the present administration to propose revisions to the § 170(h) deduction requirements, including (1) strengthening standards for organizations to qualify to receive deductible contributions of conservation easements by requiring such organizations to meet minimum requirements, specified in regulations, which would be based on the experiences and best practices developed in several states and by voluntary accreditation programs; (2) modifying the definition of eligible conservation purposes for which deductible contributions may be made, requiring that all contributed easements further a clearly delineated federal conservation policy (or an authorized state or tribal government policy) and yield significant public benefit; (3) requiring a donor to provide a detailed description of the conservation purpose or purposes furthered by the contribution, including a description of the significant public benefits it will yield, and the donee organization to attest that the conservation purpose, public benefits, and fair market value of the easement reported to the IRS are accurate; (4) requiring additional reporting of information about contributed conservation easements and their fair market values; (5) prohibiting a deduction for any contribution of a partial interest in property that is, or is intended to be, used as a golf course; (6) disallowing a deduction for any value of a historic preservation easement associated with forgone upward development above a historic building, and requiring all historic structure easements to comply with the 2006 Pension Protection Act provisions applicable to façade easements; and (7) piloting a nonrefundable conservation easement credit. General Explanations of the Administration's Fiscal Year 2017 Revenue Proposals, p. 213 (available at https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf).

p. 1209. Add the following to the end of the Caveat:

State law may require that the deed of easement be recorded before it is effective, meaning that an untimely recording of a conveyed deed of easement can mean a delayed or denied charitable deduction, depending on the facts and circumstances.15.1 Further, any attempt to rescind or remove the easement restrictions if the deduction is modified or disallowed by the IRS also raises conditional gift issues that jeopardize the deduction.15.2

p. 1209. Add the following to the end of footnote 16:

Various court decisions have explored the deductibility under § 170 of cash contributions made by donors of conservation easements to the donee organizations that were solicited, and in some cases required as a condition to acceptance of the easement donation, for the purpose of monitoring and enforcing the easement. The more recent decisions favor deductibility of the cash payments even if made as a condition of the conservation easement donation. See Scheidelman v. Commissioner, 682 F.3d 189 (2nd Cir. 2012) (“when a cash contribution (even mandatory in nature) serves to fund the administration of another charitable donation, it is an ‘unrequited gift’” and thus deductible as a charitable donation); Kaufman v. Commissioner, 136 T.C. 294 (2011) (cash contribution was deductible, as court saw no benefit to the donor other than facilitating the easement donation and an increased deduction by the amount of the cash contributed).

p. 1209. Add the following paragraph at the end of this page:

The IRS will also challenge the deductibility of a contribution of an easement that does not appear to place restrictions on the property that go beyond those of local ordinances and law. For example, in 1982 East, LLC,17.1 the Tax Court held the easement failed to satisfy § 170(h)(4) because it was local law and the rules of the landmarks preservation commission, not the easement, that preserved the subject property.

pp. 1209–1210. Add the following to the end of footnote 17:

In Bosque Canyon Ranch, the Fifth Circuit found that the ordinary standard of statutory construction, rather than the usual strict construction standard for “intentionally adopted tax loopholes,” applies to analyze tax deductions for conservation easement donations. BC Ranch II, L.P., also known as Bosque Canyon Ranch II, L.P. v Commissioner, Docket Numbers 16-60068 and 16-60069, United States Court of Appeals, Fifth Circuit (Aug. 11, 2017) (vacating and remanding to the Tax Court; the appellate court allowed flexibility in satisfying the perpetuity requirement and the requirements of a baseline report). The taxpayer's receipt of a substantial benefit may result in a disallowance of the entire contribution deduction. In Wendell Falls Development, the IRS and the court disallowed the entire $1.798 million claimed deduction because a preponderance of the evidence demonstrated that the taxpayer expected a substantial benefit from the contribution of the easement, which required the property to be used as a park, that being an increase in the value of adjacent lots owned by the taxpayer that resulted from the adjacent property's access to the park within the planned community. Wendell Falls Development, LLC v. Commissioner, T.C. Memo 2018-45. In Triumph Mixed Use Investments III, LLC et al v. Commissioner, T.C. Memo 2018-65, the court held the taxpayer was not entitled to a charitable contribution deduction for a transfer of real property and development credits because it transferred the property in exchange for approval of a concept plan and expected approval of an area development plan as a quid pro quo. The court found the transfer of real property and development credits was integral to the city's approval of both plans and that the benefit had substantial value and was not reported or valued by the taxpayer in determining the deduction.

(b) Exclusively for Conservation Purposes: Enforceable in Perpetuity

p. 1211. Add the following to the end of the second paragraph of this subsection:

Courts have held that a conservation easement that permits modification of the boundaries or substitution of properties is not a qualified real property interest because it is not an interest in an identifiable, specific piece of property, as required by the statute.22.1

p. 1212. Delete the language in footnote 23 in its entirety and replace with the following:

Turner v. Commissioner, 126 T.C. 299 (2006).

p. 1212. Insert this paragraph following the first full paragraph on this page:

In Turner v. Commissioner, the court examined the open space and historic preservation requirements and concluded that the donor did not satisfy either requirement and thus was not entitled to a charitable contribution deduction for a gift of a conservation easement. In that case, an individual bought parcels of unimproved land located within a historical overlay district, with approximately half the land located in a floodplain where development was prohibited.

p. 1212. Add the following at the end of this page:

The conservation purpose requirement was recently addressed in Atkinson,24.1 a golf course easement case. In that case the court considered both the “natural habitat” and “open space” alternative means to satisfy the requirement. The court held that the placement of conservation restrictions on two separate golf courses within a single development did not satisfy the “natural habitat” prong, in part because the use of pesticides and other chemicals to maintain the golf course actually injured or destroyed native natural habitat rather than protecting it. The court also observed that the restrictions did not protect a particular species of tree that was native to the property, and that the developers planted certain grasses to maintain the course that were not native to the property. The court found that the easements did not preserve an open space because the golf courses were located in a private gated community that was not easily accessible or open to view by the general public. The court stopped short of opining as to whether a golf course easement was inherently inconsistent with the conservation purpose requirement.

The special “conservation purpose” requirement provisions for contributions of façade easements has also been addressed in litigation. In 61 York Acquisition v. Commissioner,24.3 the court found that the façade easement deed failed to satisfy the conservation purpose requirement because it did not protect and preserve two walls and various other portions of the outside structure and thus did not preserve the “entire exterior” of the building as required by § 170(h)(4)(B).

p. 1213. Add the following to the end of footnote 25:

Reconsideration denied, T.C. Memo 2013-172.

p. 1214. Add the following to the end of footnote 30:

However, the subordination requirement was not violated in a case where the donee organization was required to reimburse to government agencies, in the event of a condemnation of the property and extinguishment of the easements, funds they had provided to the donee organization to acquire the restricted property in a bargain purchase, because in such case the donor had no claims to the proceeds. Irby v. Commissioner, 139 T.C. 371 (2012). Issues regarding how extinguishment proceeds were determined were also addressed in more recent cases. In PBBM-Rose Hill, Ltd., PBBM Corporation, Tax Matters Partner v. Commissioner, Tax Court Docket No. 26096-14 (Bench Opinion Sept. 9, 2016), the easement failed the extinguishment requirement because it did not assure that the donee organization would receive the minimum amount required under the regulations in the event the easement is extinguished by a judicial proceeding. In Carroll v. Commissioner, 146 T.C. 196 (2016), the court denied a charitable deduction carryover because the easement terms failed to guarantee that the donee would receive a proportionate share of proceeds upon an extinguishment of the easement by a judicial proceeding. In Palmolive the court denied a § 170 deduction for a contribution of a façade easement because the easement deed provided that the mortgage holders had prior claims to that of the donee organization with respect to proceeds received from condemnation or insurance. The court rejected the donor's argument that the subordination requirement merely requires that the mortgage holder subordinate its rights to foreclosure, and refused to find that the defect was cured by a so-called savings clause that purported to retroactively amend the easement, because it required the mortgage holders' consent and thus was not satisfied at the time the contribution was made. Palmolive Building Investors, LLC v. Commissioner, 149 T.C. No. 18 (October 10, 2017).

p. 1214. Add the following after the first paragraph on this page (and before Note):

The IRS position in the latter case (Mitchell) was upheld on appeal, with the court concluding that the Commissioner is entitled to demand strict compliance with the mortgage subordination provision, irrespective of the likelihood of foreclosure in any particular case. The court also rejected the taxpayer's contention that subordinating the mortgage subsequent to the contribution of the easement satisfied the in perpetuity requirement, because a conservation easement subject to a prior mortgage obligation is at risk of extinguishment upon foreclosure, and thus requiring subordination at the time of the donation is consistent with the Code's requirement that the conservation purpose be protected in perpetuity.31.1

The conservation easement deed will not satisfy the in perpetuity requirement if it permits the substitution of other properties or modifies the boundaries of the restricted property.31.2 Further, the grant of a conservation easement by a long-term lessee did not satisfy the in perpetuity requirement because a lessee does not possess perpetual property rights and thus could not grant a perpetual conservation restriction.31.3

p. 1214. Add the following to the end of the Note:

Consideration must also be given to any local law provisions that limit the duration of the easement.31.4

(c) Qualified Farmers and Ranchers

p. 1214. Add the following footnote at the end of the third sentence:

31.5In Rutkoske v. Commissioner, 149 T.C. No. 6 (August 7, 2017), the Tax Court held that income from the sale of farming property, including development rights, was not gross income from the trade or business of farming. The court concluded that disposition of the property and development rights was not an activity described in § 2032AE(5), the standard applicable to determining the meaning of a qualified farmer or rancher.

p. 1214. Add this paragraph following the first paragraph of this subsection:

Individuals who made qualified conservation contributions under § 170(h) between January 1, 2006, and December 31, 2009, were eligible for an enhanced deduction for the contribution, which was enacted by the Pension Protection Act of 2006 (PPA of 2006). See Pub. L. No. 109-280, § 1206(a)(1), 120 Stat. 780 (2006). Section 170(b)(1)(E), which was added to the Internal Revenue Code by the PPA of 2006, permits individuals to use a higher, 50 percent contribution base for purposes of deducting qualified conservation contributions (as opposed to the 30 percent limitation generally applicable to contributions of capital gain property under § 170(b)(1)(C)), as well as a 15-year carry forward period (rather than the usual five years permitted by § 170(d)(1)) for deducting amounts that exceed the 50 percent limitation. Individuals who are “qualified farmers and ranchers,” as defined in new § 170(b)(1)(E)(v), are entitled to an enhanced, 100 percent contribution base for certain qualified conservation contributions made after December 31, 2005, and before January 1, 2010. § 15302(b), PL 110-246, June 18, 2008; § 4(b), PL 110-246, June 18, 2008. These provisions were extended by the American Taxpayer Relief Act of 2012 and the Tax Increase Prevention Act of 2014 and made permanent by the Protecting Americans from Tax Hikes Act of 2015.

(d) Valuation Issues

p. 1214. Add the following to the end of footnote 32:

In Wendell Falls Development, the court determined the value of the donated conservation easement to be zero on the basis that the highest and best use of the property did not differ from its required use under the easement (i.e., as a park within a planned community), which was supported by the fact that the purchaser of the property did not reduce the purchase price of the encumbered property below the appraised value of the property unencumbered by the easement. Wendell Falls Development, LLC v. Commissioner, T.C. Memo 2018-45.

(i) Valuation, Substantiation, and Appraisals.   p. 1216. Add the following to the end of footnote 34:

Ultimately, the gross undervaluation penalty in Whitehouse was vacated on the basis that the taxpayer demonstrated good-faith investigation as to value. 755 F.3d 236 (5th Cir. 2014).

p. 1216. Add the following to the end of footnote 35:

For a comprehensive article on conservation easement valuation difficulties, see Conservation Easements and the Valuation Conundrum, Nancy A. McLaughlin, 19 Florida Tax Review 225 (2016).

p. 1217. Add the following to the end of footnote 36:

For cases generally upholding the taxpayer's appraisal and valuation, see Palmer Ranch Holdings, Ltd. v. Commissioner, T.C. Memo 2014-79 (court valued easement at $19.955 million; IRS had asserted value of $6.978 million, and taxpayer had claimed value of $23.943 million) (pending appeal); and SWF Realty v. Commissioner, T.C. Memo 2015-63 (court determined easement value to be $7,350,000; IRS claimed value was $4,040,000, and taxpayer's two separate appraisals valued easement at $7,350,000 and $7,398,333, respectively).

For cases generally upholding the IRS's appraisal and valuation, see Mountanos v. Commissioner, T.C. Memo 2013-138, reconsideration denied, T.C. Memo 2014-38 (court valued easement at zero because taxpayer failed to show that the before and after highest and best uses differed; taxpayer claimed easement value of $4,691,500, asserting highest and best use changed from vineyard or development to recreation following the placement of the easement); Mountanos v. Commissioner, 651 Fed. Appx. 592 (9th Cir. 2016) affirmed the Tax Court decision's denial of the conservation easement deduction and upheld the accuracy-related overvaluation penalty; Chandler v. Commissioner, 142 T.C. 279 (2014) (court valued easement at zero, as IRS asserted; taxpayer had claimed values of $191,400 and $371,250, respectively, for two separate easements); Scheidelman v. Commissioner, 755 F.3d 148 (2nd Cir. 2014) (court valued easement at zero, agreeing with IRS and Tax Court; taxpayer claimed easement value of $115,000); Seventeen Seventy Sherman Street L.L.C., T.C. Memo 2014-124 (court upheld IRS determination of contribution value to be zero in quid pro quo exchange because taxpayer failed to prove that the easement had any value beyond the value of development rights it received in the arrangement; taxpayer had claimed easement value of $5,125,000).

For cases generally disregarding the appraisals of both the taxpayer and the IRS, see Gorra v. Commissioner, T.C. Memo 2013-254 (court valued easement at $104,000; IRS had asserted zero value, and taxpayer claimed value of $605,000); Schmidt v. Commissioner, T.C. Memo 2014-159 (court determined easement value to be $1.152 million; IRS and taxpayer had asserted values of $195,000 and $1.6 million, respectively); and Zarlengo v. Commissioner, T.C. Memo 2014-161 (court determined easement value to be $157,500; IRS had claimed zero value, and the taxpayer had claimed $660,000).

p. 1218. Add the following to the end of footnote 38:

On motion for reconsideration, based on the appellate court's decision in Scheidelman II, 682 F.3d 189 (2nd Cir. 2012) (finding that the regulation requires only that the appraiser identify the valuation method used, not that the method be reliable), the Tax Court determined that the appraisal in Friedberg was a qualified appraisal, but stated that the reliability and accuracy of the appraisal were left to be decided at trial. Friedberg v. Commissioner, T.C. Memo 2013-224 (intervening change in controlling law warranted reconsideration; although on reconsideration the appraisal constituted a qualified appraisal, the reliability of the appraisal was still an issue). Failure to provide sufficient specified information regarding a description of the property can cause the appraisal to fail the qualified appraisal requirements. See, for example, Belk v. Commissioner, 140 T.C. 1 (2013), aff'd, 774 F.3d 221 (4th Cir. 2014); Costello v. Commissioner, T.C. Memo 2015-87.

p. 1220. Add the following to the end of footnote 41:

The doctrine of substantial compliance continues to be asserted by taxpayers in many cases. In Costello v. Commissioner, T.C. Memo 2015-87 (appraisal failed to substantially comply because it valued the fee simple interest rather than the easement and therefore did not contain an accurate description of the property), the Tax Court reiterated that the doctrine is not a substitute for missing entire categories of content in an appraisal, but rather is at most a means of accepting a nearly complete effort that has simply fallen short in regard to minor procedural errors or relatively unimportant clerical oversights. The court in Costello further stated that it has declined to apply the substantial compliance doctrine where the taxpayer's reporting fails to meet substantive requirements set forth in the regulations or omits entire categories of required information. These cases often involve defects in the appraisal or appraisal summary. (Bosque Canyon Ranch, L.P., BC Ranch, Inc., Tax Matters Partner v. Commissioner, T.C. Memo 2015-130 (court rejected and found meritless the taxpayer's substantial compliance contention when the baseline documentation failed to establish the condition of the property, contrary to the requirements of Treasury Regulation § 1.170A-14(g)(5) in instances where the donor reserves right to the property); Rothman v. Commissioner, T.C. Memo 2012-218, slip op. at 10 (the taxpayer did not “substantially comply” where the appraisal valued “a property right different from the one petitioners contributed”); Lord v. Commissioner, T.C. Memo 2010-96 (taxpayer did not substantially comply where the appraisal omitted the contribution date, the appraisal performance date, and the fair market value as of the contribution date); Friedman v. Commissioner, T.C. Memo 2010-45 (the taxpayer did not “substantially comply” where the appraisal omitted, inter alia, an adequate description of the donated property); Zarlengo v. Commissioner, T.C. Memo 2014-161 (finding that taxpayers substantially complied by disclosing contribution date on appraisal summary).) Importantly, in Averyt (Averyt v. Commissioner, T.C. Memo 2012-198), the court held that the doctrine of substantial compliance does not apply to excuse compliance with the strict substantiation requirements of § 170(f)(8)(B). In PBBM-Rose Hill, Ltd., PBBM Corporation, Tax Matters Partner v. Commissioner, Tax Court Docket No. 26096-14 (Bench Opinion Sept. 9, 2016), the court addressed a Form 8283 reporting issue and determined the taxpayer substantially complied with the reporting requirements even though its Form 8283 failed to include a summary of the physical condition of the property, the date the property was acquired, how the property was acquired, the donor's cost, and the amount claimed as a deduction. In that case, the court concluded the taxpayer substantially complied with the Form 8283 reporting requirement because the information was contained elsewhere on the taxpayer's Form 1065 return and attachments. In RERI Holdings I, LLC v. Commissioner, 149 T.C. No. 1 (July 3, 2017), a case involving the contribution of a remainder interest, the court disallowed a $33 million claimed deduction because the donor failed to report its $2.95 million cost or other basis on IRS Form 8283, and determined the omission could not be excused on the grounds of substantial compliance because disclosure would have alerted the IRS to potential overvaluation of the property due to the large disparity between cost and the contribution value over a 17-month period.

p. 1220. Add the following after the first paragraph on this page (before Note):

Zarlengo v. Commissioner, T.C. Memo 2014-161.

p. 1220. Add the following after the first paragraph on this page (before Note):

The Second Circuit's decision in Scheidelman II42.1 was found by the Tax Court to constitute an intervening change in law that resulted in reconsideration of numerous qualified appraisal cases involving conservation easement donations that had been litigated in the Tax Court. In Scheidelman I, the Tax Court had held that the mechanical application of a percentage diminution in the market value before donation of a façade easement does not constitute a method of valuation as contemplated under the qualified appraisal regulations. In Scheidelman II, the appellate court stated that the regulation requires only that the appraiser identify the valuation method used and not that the method adopted be reliable. Based on Scheidelman II, the Tax Court subsequently reconsidered numerous prior decisions that had addressed the qualified appraisal issue. One example is Friedberg v. Commissioner, where the court determined on reconsideration that the appraisal constituted a qualified appraisal, but that the reliability of the appraisal was still an issue to be determined at trial.42.2

In addition, the separate “contemporaneous written acknowledgment” requirement of § 170(f)(8)(B) has been the subject of recent litigation. In Schrimscher,42.3 the court stated that the acknowledgment need not take any particular form, but found the requirement was not satisfied where the only statement in the agreement considering consideration was the statement that the donee provided consideration of $10 plus other good and valuable consideration. The court found this did not clearly state that no consideration was provided or, in the alternative, the amount of any consideration provided, so the acknowledgment was defective. A similar result was obtained in Bruce, where the court found the requirements were not satisfied because there was no statement regarding whether any goods or services were provided in consideration for the contribution, and the acknowledgment was not received by the time the taxpayer filed his tax return.42.4 On the other hand, in Irby42.5 the court found the contemporaneous written acknowledgment requirements were satisfied even though there was no statement in the acknowledgment that no goods or services were provided, on the basis that in this case involving a bargain sale, the overall documentation clearly demonstrated that consideration in the form of cash was provided to the donor for the sale component of the transaction.

In some cases the conservation deed may serve as the contemporaneous written acknowledgment, but if it does not contain an express statement regarding whether any goods or services were provided in consideration for the contribution, then the deed taken as a whole must prove compliance with the requirement.42.6 However, in French42.7 the court held that the conservation deed did not satisfy the acknowledgment requirements where it failed to state that no goods or services were provided in consideration for the contribution, and the deed did not contain a provision stating it was the only agreement of the parties such that the IRS could conclude no other consideration was provided in exchange. Importantly, in Averyt42.8 the court held that the doctrine of substantial compliance does not apply to excuse compliance with the strict substantiation requirements of § 170(f)(8)(B).

(ii) Penalties and Burden of Proof.   p. 1222. Add the following to the end of this subsection:

Numerous cases have addressed the revisions to § 6662 made by the Pension Protection Act of 2006, including their application to carryovers of charitable deductions relating to conservation easement contributions made before the revisions were enacted. Sections 6662(a) and (b) generally impose a 20 percent accuracy-related penalty with regard to negligence, substantial understatement of income tax, and a substantial valuation misstatement. Section 6662(h) provides that the penalty is increased to 40 percent on the portion of an underpayment of tax that is attributable to a gross valuation misstatement. For returns filed on or before August 17, 2006, a gross valuation misstatement is a misstatement of the value of property by 400 percent or more of the property's value. For returns filed after August 17, 2006, the penalty applies to misstatements of the value of property by 200 percent. Treasury Regulation § 1.6662-5(g) provides that when the actual value of the property is zero and the value claimed is greater than zero, the gross valuation misstatement penalty applies. Effective for returns filed after August 17, 2006, § 6664(c)(3) provides that taxpayers may not claim a reasonable cause defense for gross valuation misstatements relating to charitable contribution deductions. Treasury Regulation § 1.6662-2(c) provides that the maximum accuracy-related penalty that may be imposed on any portion of an underpayment that is attributable both to negligence and a gross valuation misstatement is 40 percent of such portion.49.1

p. 1223. Add the following new subsections (f) and (g) following subsection (e):

(f) IRS Conservation Easement Audit Guidelines (Rev. Nov. 4, 2016)

On November 4, 2016, the IRS revised its “Conservation Easement Audit Techniques Guide.”52.1 The purpose of the 89-page guide is to provide guidance for the IRS examination of charitable contributions of conservation easements. The guide includes examination techniques, an overview of the valuation of conservation easements, and a discussion of penalties that may be applicable to taxpayers and others involved in a conservation easement transaction. Topics covered by the guide include an overview of conservation easements, §170 statutory requirements, substantiation, qualified appraisals, valuation considerations, state tax credits, and penalties. The guide also contains sections regarding preplanning, conducting, and concluding the examination.

(g) IRS Notice 2017-10 Regarding Syndicated Conservation Easements (Revised)

In IRS Notice 2017-10,52.2 the IRS expressed concern that promoters are syndicating conservation easements that purport to give investors charitable deductions significantly greater than amounts invested. The notice identifies certain syndicated conservation easement arrangements as tax-avoidance transactions and further designates them as listed transactions for purposes of Treasury Regulations §§ 1.6011-4(b)(2), 6111, and 6112. The notice imposes disclosure obligations on participants in such transactions, as well as on promoters of such transactions. The notice indicates that the IRS is particularly concerned with the use of appraisals that overstate the value of the easement based on unreasonable conclusions about the development potential of the property.

The notice treats as a listed transaction a conservation easement arrangement involving the following: (1) a partnership or other pass-through entity is used as an investment vehicle to own or acquire real property that will be subject to a conservation easement; (2) a promoter syndicates ownership interests in the pass-through entity, using promotional materials suggesting an investor may be entitled to a share of a charitable deduction that equals or exceeds 2.5 times the investor's investment; (3) the investor purchases, directly or indirectly, an interest in the pass-through entity that holds real property; (4) the pass-through entity donates a conservation easement on the property to a §501(c)(3) organization that is then allocated to the investors; and (5) following the contribution of the easement, an investor claims a § 170 charitable deduction with respect to the conservation easement.

Participants in transactions that are described within the notice are subject to IRS Form 8886 reportable transaction reporting requirements and “failure to disclose” penalties under IRC § 6707A. They also may be subject to increased accuracy-related penalties applicable to listed transactions under IRC § 6662A.

Material advisors involved in a listed transaction described in Notice 2017-10 must file IRS Form 8918 detailing the specifics of the conservation easement syndication. In addition, the material advisor must maintain an information list similar to that set forth in IRS Form 13976, which must be made available to the IRS and Treasury Department upon written request. Failure to satisfy these requirements may result in “failure to disclose” penalties under IRC § 6707 and failing to provide the requested information list under IRC § 6708.

The notice generally applies to conservation easement transactions that are the same as, or substantially similar to, transactions described in the notice that are entered into after January 1, 2010. Participants and material advisors must consider statute of limitations provisions to determine the reporting obligations with respect to a particular tax year.

Syndicated conservation easements remain in the crosshairs of federal enforcement action. On September 10, 2018, the Large Business and International Division (LB&I) of the Internal Revenue Service announced a new compliance campaign involving syndicated conservation easements that it has identified as an area having a high risk of compliance issues. The campaign is designed to enhance IRS enforcement of the listed transaction disclosure requirements implemented by Notice 2017-10 and the structuring and valuation requirements of the purported donations. On December 18, 2018, the U.S. Department of Justice filed a complaint seeking an order stopping certain persons from organizing, promoting, or selling an allegedly abusive conservation easement syndication tax scheme. The Department of Justice complaint alleged that the transactions in question are shams that lacked economic substance, did not qualify as qualified conservation contributions, and involved grossly overvalued charitable deduction amounts.52.352.3 On March 27, 2019, the Senate Finance Committee opened an investigation into the abuse of syndicated conservation easement transactions and sent 14 letters to persons appearing to be involved in the promotion of such transactions. The letters request extensive information and documentation pertaining to specific transactions and the persons' role in structuring and selling the arrangements.52.4

In June 2019, Senators Charles Grassley, Chairman of the Senate Finance Committee, and its ranking member, Ron Wyden, released copies of three letters to attorneys representing sponsors of controversial land conservation transactions. The substance of the letters follows 14 earlier ones sent by the senators to individuals in late March 2019. Lawmakers have requested detailed information, including names of investors and promotional materials that have been given to the investors. On a separate note, the IRS has announced that it is preparing to bring several cases involving syndicated conservation easements to trial. In December 2018, the Department of Justice sued promotors of a Georgia land conservation transaction that involved more than $2 billion in alleged inflated tax deductions.

§ 16.7 EMERGING ISSUES

(d) Developments at the State Level

p. 1233. Add the following to the end of footnote 69:

Aff'd, 744 F.3d 648 (10th Cir. 2014).

p. 1233. Add the following new subsection (e):

(e) Partnership and Disguised Sale Issues

The increase in structured conservation easement transactions involving the use of limited liability companies and other entities treated as partnerships for federal tax purposes has resulted in litigation involving both substantive § 170(h) requirements as well as tax abuse concerns. In some of these cases, the IRS has challenged the partnership status of the involved entity, or asserted that the structured arrangement was a disguised sale of the underlying property, to attack the transactions. In SWF Real Estate LLC and Route 231 LLC, the courts found that the arrangements constituted disguised sales of Virginia conservation tax credits requiring the partnerships to recognize income on the amounts received on the sale.69.1 In Bosque Canyon Ranch, the court held that the arrangement constituted a disguised sale of real estate parcels requiring the partnership to recognize income on the amounts received on the sale.69.2

NOTES

  1. 15.1 For recent cases interpreting New York State's conservation easement statute, see Mecox Partners v. Commissioner, 2016 WL 398216 (S.D. N.Y.) (delay in recording deed until subsequent tax year also caused appraisal to fail to satisfy the “more than 60 days prior” timing requirement of qualified appraisal rules); Zarlengo v. Commissioner, T.C. Memo 2014-161, and Rothman v. Commissioner, T.C. Memo 2012-163, each of which held that state law determines the nature of the property rights transferred, and because New York's easement law requires recording to be effective, the recording date governs the date of the contribution for federal tax purposes.
  2. 15.2 Graev v. Commissioner, 140 T.C. 377 (2012) (holding that side letter agreement to remove the easement in the event the IRS disallowed the deduction was not a remote contingency, and thus there was a conditional, rather than a completed, gift under Treasury Regulation § 1.170A-1(e)).
  3. 17.1 T.C. Memo 2011-84. The IRS will also assert that in such cases, the value of the easement is zero or minimal. For a discussion comparing the restrictions under the easement versus local ordinances and laws, see Gorra v. Commissioner, T.C. Memo 2013-254 (holding that the façade easement did impose restrictions not imposed under local law and citing prior cases addressing the issue in various fact patterns).
  4. 22.1 Balsam Mountain Investments, LLC v. Commissioner, T.C. Memo 2015-43 (substitution of 5 percent of the land initially subject to the easement violated the requirement); Belk v. Commissioner, 140 T.C. 1 (2013), aff'd, 774 F.3d 221 (4th Cir. 2014) (substitution of contiguous land for all or a portion of the initially restricted land violated the requirement). The ability to make such modifications or substitutions may also be violations of the “in perpetuity” requirement and the qualified appraisal requirement, each of which is discussed below. The Fifth Circuit Court of Appeals appeared to take a more liberal view of certain permitted easement modifications in its review of Bosque Canyon Ranch, in which it found that the perpetuity requirement was not violated where the easement permitted, with the consent of the easement holder, a relocation of home sites, because the external boundaries of the easement and the maximum sizes of the home sites could not be changed. BC Ranch II, L.P., also known as Bosque Canyon Ranch II, L.P. v Commissioner, Docket Numbers 16-60068 and 16-60069, United States Court of Appeals, Fifth Circuit (Aug. 11, 2017) (vacating and remanding to the Tax Court). In Salt Point Timber, the Tax Court found that a qualified conservation contribution was not made because the easement deed provided that if certain conditions were met, the easement could be replaced by an easement encumbering an adjacent property, which was not required to be held by a qualified organization. The easement deed contained no express condition that the holder of a replacement easement was required to be a qualified organization, and the taxpayer failed to provide persuasive evidence that the conditions for replacing the easement were so highly improbable or remote that they would be ignored. Salt Point Timber, LLC v. Commissioner, T.C. Memo 2017-145.
  5. 24.1 Atkinson v. Commissioner, T.C. Memo 2015-236. Golf course easements have been the source of controversy over the past decade. In Kiva Dunes Conservation, LLC v. Commissioner, T.C. Memo 2009-145, the court did not address the conservation purpose requirement but addressed the valuation of the easement and upheld 90 percent of the claimed deduction. More recently, the Tax Court addressed a variety of issues involving golf course easements. In PBBM-Rose Hill, Ltd., PBBM Corporation, Tax Matters Partner v. Commissioner, Tax Court Docket No. 26096-14 (Bench Opinion Sept. 9, 2016), the court denied a $15.16 million golf course conservation easement deduction, holding that the value of the easement was $100,000 but denying the entire deduction on the basis it failed the extinguishment requirement, the “in perpetuity” requirement, and the conservation purpose requirement. With respect to the failed conservation purpose, the court stated that although the reservation of rights by the owner of the property to make certain improvements to the property did not impair the conservation purpose any more than the use of the property as a golf course, and thus those rights alone did not cause the easement to fail, the easement did not create any right of access by the public to the easement area, access was available only by a single road and past a guarded gatehouse after the guard ascertained the car occupant intended to use the facilities, only a small part of the property was visible off the property and the general public was not allowed access, and the easement on the golf course did not protect uncommon habitat or species. In RP Golf LLC v. Commissioner, T.C. Memo 2016-80, the court held that the easement was not granted in perpetuity because the property was subject to preexisting unsubordinated mortgages at the time of the grant, and the consents to subordinate were not executed until after the contribution. In that case the court declined to address whether a golf course conservation easement could meet the conservation purpose requirement or whether the value of the easement was appropriate. In Champions Retreat Golf Founders LLC v. Commissioner, TC Memo 2018-146, the court found that the grant of a conservation easement on a private golf course did not satisfy the conservation purpose requirement and thus did not qualify for a charitable deduction. In that case, the court addressed the taxpayer's arguments pertaining to a relatively natural habitat, open space, and a clearly delineated governmental conservation policy and concluded that the grant did not further any of these conservation purposes.
  6. 24.2 General Explanations of the Administration's Fiscal Year 2017 Revenue Proposals, p. 213 (available at https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf).
  7. 24.3 61 York Acquisition, LLC, SIB Partnership, Ltd., Tax Matters Partner v. Commissioner, T.C. Memo 2013-266. Section 170(h)(4)(B) provides that a contribution that consists of a restriction with respect to the exterior of a certified historic structure shall not be considered to be exclusively for conservation purposes unless the interest (1) includes a restriction that preserves the entire exterior of the building (including the front, sides, rear, and height of the building) and (2) prohibits any change in the exterior of the building that is inconsistent with the historical character of the exterior (italics added).
  8. 31.1 Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015). The same result obtained in Minnick v. Commissioner, T.C. Memo 2012-345, aff'd, 796 F.3d 1156 (9th Cir. 2015), holding that, in order for the donation of a conservation easement to be protected “in perpetuity,” any prior mortgage on the land must be subordinated at the time of the gift. See also RP Golf LLC v. Commissioner, T.C. Memo 2016-80 (the easement was not granted in perpetuity because the property was subject to preexisting unsubordinated mortgages at the time of the grant; consents to subordinate were not executed until after the contribution).
  9. 31.2 Bosque Canyon Ranch, L.P., BC Ranch, Inc., Tax Matters Partner v. Commissioner, T.C. Memo 2015-130 (deeds permitting modification to boundaries between home sites and restricted property violated “in perpetuity” requirement); see also Balsam Mountain Investments, LLC v. Commissioner, T.C. Memo 2015-43 (substitution of 5 percent of the land initially subject to the easement violated the requirement); Belk v. Commissioner, 140 T.C. 1 (2013), aff'd, 774 F.3d 221 (4th Cir. 2014) (substitution of contiguous land for all or a portion of the initially restricted land violated the requirement).
  10. 31.3 Harbor Lofts Assoc. v. Commissioner, 151 T.C. No. 3 (2018). The Harbor Lofts court also held that the long-term lease was not a qualified real property interest, as required by section 170(h), because under Massachusetts law a commercial lease is a contract rather than a conveyance of real property and thus the lessee held contractual rather than real property rights.
  11. 31.4 For example, North Dakota law limits the duration of a conservation easement to 99 years. In Wachter, the court found the 99-year limit violated the “in perpetuity” requirement, thus precluding the possibility of satisfying the § 170(h) requirements for conservation easement donations made in that state. Wachter v. Commissioner, 142 T.C. 140 (2014).
  12. 42.1 Scheidelman v. Commissioner, 682 F.3d 189 (2nd Cir. 2012).
  13. 42.2 Friedberg v. Commissioner, T.C. Memo 2013-224 (intervening change in controlling law warranted reconsideration; although on reconsideration the appraisal constituted a qualified appraisal, the reliability of the appraisal was still an issue to be determined at trial).
  14. 42.3 Schrimscher v. Commissioner, T.C. Memo 2011-71.
  15. 42.4 Bruce v. Commissioner, T.C. Memo 2011-153. In 15 West 17th Street LLC v. Commissioner, 147 T.C. 19 (2016), a $64.5 million conservation easement deduction was disallowed for failing to satisfy the § 170(f)(8(a) contemporaneous written acknowledgment requirement; the court held that the donor could not cure the defect by the donee organization filing an amended Form 990 return that included a statement by the donee that no goods or services were provided in consideration for the contribution.
  16. 42.5 Irby v. Commissioner, 139 T.C. 71 (2012).
  17. 42.6 For this purpose, factors to be taken into account that support compliance include that the deed recites no consideration other than the preservation of the property and that the deed contains a provision stating that the deed is the entire agreement of the parties. See, for example, Averyt v. Commissioner, T.C. Memo 2012-198 and RP Golf LLC v. Commissioner, T.C. Memo 2012-282. In Big River Development the court concluded that the easement deed constituted a contemporaneous written acknowledgment because it contained no reference to valuable goods or services being furnished to the donor, recited no receipt by the donee of any consideration for providing goods or services, and contained a term providing that the deed reflected the entire agreement of the parties and that any previous agreements were null and void. Although the court rejected the taxpayer's argument that the donee organization's amended Forms 990 stating no goods or services were provided were a contemporaneous written acknowledgement and acknowledged that the donee's contribution letter to the donor was untimely, it found that the deed of easement satisfied the requirements of § 170(f)(8). Big River Development LP et al v. Commissioner, T.C. Memo 2017-166.
  18. 42.7 French v. Commissioner, T.C. Memo 2016-53.
  19. 42.8 Averyt v. Commissioner, T.C. Memo 2012-198, slip op. at 10.
  20. 49.1 Cases addressing the generally applicable 20 percent accuracy-related penalty include Scheidelman v. Commissioner, T.C. Memo 2010-151 (court found reasonable cause even though it determined that the easement had zero value; no § 6662(a) accuracy-related penalties for 2004 and 2005 claimed deductions; taxpayer reasonably relied on tax return preparer and qualified appraiser); Seventeen Seventy Sherman Street L.L.C., T.C. Memo 2014-124 (court upheld negligence penalty for underpayment relating to 2003 contribution); and Schmidt v. Commissioner, T.C. Memo 2014-159 (taxpayer found to have reasonable cause for understatement of income relating to 2003 contribution). Cases addressing the gross valuation misstatement penalty include Gorra v. Commissioner, T.C. Memo 2013-254 (penalty applied to 2006 and 2007 claimed deductions); Chandler v. Commissioner, 142 T.C. 279 (2014) (found reasonable cause for 2004 and 2005, but held no reasonable cause defense was available for a 2006 underpayment attributable to a carryover of a 2004 claimed charitable deduction); Seventeen Seventy Sherman Street L.L.C., T.C. Memo 2014-124 (court did not impose gross valuation misstatement penalty for underpayment relating to 2003 contribution); Reisner v. Commissioner, T.C. Memo 2014-230 (holding that taxpayer was precluded from using reasonable cause defense for its 2006 tax return involving the carryover of a charitable contribution deduction claimed for a contribution made in 2004; court distinguished Pollard v. Commissioner, T.C. Memo 2013-38, because in that case the IRS stated in its brief that it would concede the gross valuation misstatement penalties for 2006 and 2007 if the taxpayer established reasonable cause for earlier years); Bosque Canyon Ranch v. Commissioner, T.C. Memo 2015-130 (reasonable cause defense not available for 2007 return); Kaufman v. Commissioner, 784 F.3d 56 (1st Cir. 2015) (taxpayers did not rely on appraisal in good faith, so reasonable cause defense did not apply, when separately from the appraisal the taxpayers obtained information that value of restricted property would not decrease as a result of the easement, but they failed to undertake further investigation as to the easement's impact on value; court upheld gross valuation misstatement penalty for 2003 and 2004 tax years); and Gemperle v. Commissioner, T.C. Memo 2016-1 (taxpayers liable for penalty for 2007 and 2008 tax year underpayments relating to 2007 charitable contribution). In PBBM-Rose Hill, Ltd., PBBM Corporation, Tax Matters Partner v. Commissioner, Tax Court Docket No. 26096-14 (Bench Opinion Sept. 9, 2016), the taxpayer was found liable for the 40 percent penalty on the amount that the claimed $15.16 million deduction exceeded the court-determined value of $100,000, but was not liable for a penalty on the $100,000 court-determined value amount. In Carroll v. Commissioner, 146 T.C. 196 (2016), the court upheld the accuracy-related penalties under § 6662(a) because the taxpayers failed to demonstrate they acted with reasonable cause and good faith in not seeking competent tax advice regarding the easement. The court in that case failed to consider gross valuation misstatement penalties because the IRS did not assert them in the statutory notice of deficiency or in initial pleadings, but only attempted to assert them later in the proceedings. In Wendell Falls Development the court found the value of the conservation easement contribution to be zero, but failed to uphold the 20% penalty for negligence or substantial understatement because the taxpayer's failure to anticipate the substantial benefit it received as a result of the contribution did not show it did not make sufficient effort to assure proper tax treatment, and both the taxpayer and government appraisers failed to properly account for the enhancement conferred on the donor in their appraised values of the property. Wendell Falls Development, LLC v. Commissioner, T.C. Memo 2018-45. In Triumph Mixed Use Investments III, LLC et al v. Commissioner, T.C. Memo 2018-65, the court upheld the §§ 6662(a) and (b) negligence penalty where the taxpayer failed to report or establish the value of the benefit received in exchange for the property donation as part of a quid pro quo, finding that the taxpayer did not make a reasonable attempt to ascertain the correctness of the charitable deduction because it did not adjust the deduction for the consideration received.
  21. 52.1 https://www.irs.gov/pub/irs-utl/conservation_easement.pdf
  22. 52.2 IRS Notice 2017-10, I.R.B. 2017-4 (Jan. 23, 2017) (https://www.irs.gov/irb/2017-04_IRB/ar12.html).
  23. 52.3 United States v. Nancy Zak, Claud Clark III, Ecovest Capital, Inc,, Alan N. Solon, Robert M. McCullough, Ralph R. Teal Jr filed In the United States District Court for the Northern District of Georgia Atlanta Division (Case 1:18-cv-05774-AT). The Department of Justice press release announcing the action is available at https://www.justice.gov/opa/pr/justice-department-sues-shut-down-promoters-conservation-easement-tax-scheme-operating-out (last searched June 1, 2019).
  24. 52.4 Copies of the letters and the Committee's press release are available at https://www.finance.senate.gov/chairmans-news/grassley-wyden-launch-probe-of-conservation-tax-benefit-abuse (last searched June 1, 2019).
  25. 69.1 SWF Real Estate LLC v. Commissioner, T.C. Memo 2015-63; Route 231, LLC v. Commissioner, T.C. Memo 2014-30. See § 3.9(d)(ii) regarding disguised sales partnership rules under § 707(a)(2).
  26. 69.2 Bosque Canyon Ranch, L.P., BC Ranch, Inc., Tax Matters Partner, T.C. Memo 2015-130. These cases follow the principles analyzed in earlier tax credit cases, including Virginia Historic Tax Credit Fund 2001 LP, 639 F.3d 129 (4th Cir. 2011) (court found disguised sale of Virginia historic rehabilitation tax credits) and Historic Boardwalk Hall LLC, 694 F.3d 425 (3rd Cir. 2012) (court found the participants were not bona fide partners because they did not have meaningful risk or upside). On appeal, the Fifth Circuit Court of Appeals vacated and remanded the Tax Court's decision in Bosque Canyon Ranch on various grounds, including the Tax Court's determination that the entirety of the limited partners' contributions were disguised sales; with respect to this issue, the court remanded for the Tax Court to determine the correct amount of any taxable income that results from the disguised sales.” BC Ranch II, L.P., also known as Bosque Canyon Ranch II, L.P. v Commissioner, Docket Numbers 16-60068 and 16-60069, United States Court of Appeals, Fifth Circuit (Aug. 11, 2017) (vacating and remanding to the Tax Court).
..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
52.14.224.197