The Tax Court recently ruled on a series of three conservation contribution cases, with mixed results for the IRS and taxpayer. A common thread running through all of them is the necessity of taxpayers to adhere closely to the strict rules that are required to win such charitable deductions. Also apparent, however, is the win-win result – for the taxpayer and for the community that benefits from a conservation contribution—that these donations can promote.
Comment. The IRS has had improper deductions for conservation easements on its radar for a number of years, dating back at least since 2004. Congress has also expressed concern; under the Pension Protection Act of 2006 (PPA), it especially tightened the rules for façade easements on personal residences.
In Kaufman, 136 T.C. No. 13, the Tax Court confirmed that the transfer of a façade easement to a preservation trust did not qualify for a charitable deduction because the property contributed was subject to a bank mortgage. The court upheld this denial of a charitable deduction despite the fact that foreclo sure was only a very remote possibility, with the taxpayer’s personal finances in strong financial shape.
Next, in Boltar, L.L.C., 136 T.C. No. 14, the Tax Court held that an expert’s valuation of a charitable conservation easement may be subject to a high level of scrutiny. Hiring an expert and relying on the expert’s valuation did not automatically make the contribution impervious to IRS attack. The Tax Court, in taking its own look, found that the expert’s report was not the product of reliable methods, and it assumed scenarios that were unrealistic in view of the facts of the case. As a result, the size of the taxpayer’s charitable deduction was substantially decreased.
Finally, in Tempel, 136 T.C. No. 15, the Tax Court handed the donor a partial victory by finding that the sale of transferable state conservation easement income tax credits received as a result of an easement donation gave rise to short-term capital gain as opposed to ordinary income. The court found over IRS’s protests that the state tax credits sold did not represent a right to income and therefore the “substitute for ordinary income doctrine” did not apply. However, the court agreed with the IRS that taxpayer did not have any basis in the credits or a long-term holding period, which began when the credits were granted and ended when the taxpayer sold them.
Bottom line: A conservation or historic preservation easement can allow you to continue to enjoy property you own while receiving a tax deduction in return for helping preserve the unique value of your property for future generations. The rules for qualifying an easement as a charitable donation, however, are strict and must be planned for carefully. Please consult our offices for further details.