The IRS Chief Counsel has signaled with CCA 202130014 that the Service will be continuing its hard line on conservation easements. The engine of every abusive syndicated conservation easement is a vastly inflated appraisal. Rather than focus on the appraisal issue, IRS has instead gone after technical flaws in the easement documents. What is disturbing about that approach is that it might be applicable to legitimate easement transactions.
About Easement Deductions
There is a general rule that partial interests in property are not deductible as charitable contributions. Qualified easements are an exception to that rule. Since there is not a lot of buying and selling of easements, they are usually valued on a before and after basis. The before value is where all the shenanigans are, but that is not what the CCA is about. The CCA is about “perpetuity”.
Forever Is A Long Long Time
One of the requirements of a qualified easement is that it be perpetual, which is a really long time and as a practical matter nothing on earth can be truly perpetual. In order to make things as perpetual as possible, the regulations provide that in the event of a judicial termination of the easement, say from a taking by eminent domain, the proceeds have to be split in accordance with the percentage of value established at the time of the easement. And the qualified organization that hold the easement has to use its share for conservation purposes.
But what about improvements that are made subsequent to the easement? You have a piece of land on which you could conceivably have built 100 houses. It is worth $10 million or so you say. You give an easement to a land trust which allows you to build one house. Now the land is worth $100,000. Or so you say for purposes of your charitable contribution of $9.9 million. You use half or so of your tax savings to build a $2 million house.
Years go by and things change. The property is taken by eminent domain. The state is less sanguine about the prospects of the property and gives $4 million for it. You want a deal that gives you $2 million off the top for the house and a 99% split to the land trust on the balance. According to the ruling and the IRS position in court where they have generally been winning, you flunk the perpetuity requirement. No deduction for you.
Suggested Language
Something that the advocates of legitimate conservation easements might appreciate is that the CCA includes suggested language to satisfy the perpetuity requirement.
Donor agrees that the donation of the perpetual conservation restriction described in this deed 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 fair market value of the property as a whole at that time. For purposes of this paragraph, the proportionate value of the donee organization’s property rights shall remain constant.
On a subsequent sale, exchange, or involuntary conversion of the subject property, the donee organization will be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction.
All of the donee organization’s proceeds from a subsequent sale or exchange of the property must be used by the donee organization in a manner consistent with the conservation purposes of the original contribution’
What would be really equitable would be for the IRS to allow donors and land trusts to retroactively fix documents that fail the requirement. The abusive syndicated conservations easements deserve to be crushed, but it should not be at the expense of legitimate deals.
Other Coverage
Ed Zollars had IRS Memorandum Indicates Limits on the Terms of Conservation Easements.
For a decade’s worth of coverage of tax aspects of easements check out my Conservation Easement Tax Deduction Coverage Round Up.