ISSUE

The Senate Finance Committee has been holding hearings on Conservation Easements.  The not-for-profit press tends to rail about abusive uses of these tax-planning vehicles.  What are they?

 

SITUATION

Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

DCC’s Chief Financial Officer calls to ask about Conservation Easements.  “We’ve got a potential donor who wants to give us some land that she says is a “conservation easement.”  What do I need to know?”

“Well, let’s start with the basics.  Conservation Easements have been around for a while.  They can be great tax-advantaged vehicles to help preserve the natural beauty provided by our Creator.  In a nutshell, a donor (generally) puts a permanent restriction on real property so that it may be used only for conservation purposes – which generally includes protection and preservation.  Promoters and syndicators came on the scene several years ago and some “expanded” the use of these provisions.  The 2006 “Pension Protection Act” enacted several provisions to encourage conservation contributions while attempting to limit perceived abuses.  IRS Notice 2007-50, “Guidance on percentage limitations imposed by Code section 170(b)(1)(E) on qualified conservation contributions made by individuals” can be a good “geeky” reference.  Also note that if you “received or held” any conservation easement at any time during the year (Form 990, Part IV, Line 7) you will need to complete Schedule D (Form 990), Part II for those tax years.”

“Okay,” says the CFO, “it sounds like I’ve got some homework to do.”

“Yep. At the end of the day, you should seek guidance from knowledgeable advisors in your area who understand the nuances of these tax tools. Be very diligent in understanding the restrictions placed on your real property so that you do not violate any of those imposed rules – for purposes of maintaining its tax-exempt status, a recipient tax-exempt organization generally must protect the conservation easements it holds in perpetuity.”

 

RULES

From Form 990, Glossary:

Conservation easement.  A restriction (granted in perpetuity) on the use that may be made of real property granted exclusively for conservation purposes. Conservation purposes include preserving land areas for outdoor recreation by, or for the education of, the general public; protecting a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem; preserving open space, including farmland and forest land, where such preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly defined federal, state, or local governmental conservation policy; and preserving a historically important land area or a certified historic structure. For more information, see section 170(h) and Notice 2004-41, 2004-2 C.B. 31.

From IRS webpage, “Conservation Easements”:

Background – Abusive Transactions Involving Charitable Contributions of Easements

In recognition of our need to preserve our heritage, Congress allowed an income tax deduction for owners of significant property who give up certain rights of ownership to preserve their land or buildings for future generations.

The IRS has seen abuses of this tax provision that compromise the policy Congress intended to promote. We have seen taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductions for easements. In some cases, taxpayers claim deductions when they are not entitled to any deduction at all (for example, when taxpayers fail to comply with the law and regulations governing deductions for contributions of conservation easements). Also, taxpayers have sometimes used or developed these properties in a manner inconsistent with section 501(c)(3). In other cases, the charity has allowed property owners to modify the easement or develop the land in a manner inconsistent with the easement’s restrictions.

Another problem arises in connection with historic easements, particularly façade easements. Here again, some taxpayers are taking improperly large deductions. They agree not to modify the façade of their historic house and they give an easement to this effect to a charity. However, if the façade was already subject to restrictions under local zoning ordinances, the taxpayers may, in fact, be giving up nothing, or very little. A taxpayer cannot give up a right that he or she does not have.

 

BOTTOM LINE

  • Congress and the IRS are sensitive to potential abuses involving contributions to “conservation easement” property.
  • Do some research on the web – including the IRS’ website – if you are looking at (or already have) conservation easement property.
  • Review Schedule D (Form 990), Part II and the instructions thereto to ensure that you understand the reporting requirement for conservation easements – including historic easements and façade easements.
  • Be very diligent in understanding the restrictions placed on your real property so that you do not violate any of those imposed rules.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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