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The Fifth Circuit encourages flexibility for conservation easement deductions in Bosque Mountain Ranch, while the Tax Court makes it difficult for farmers in Rutkoske. 

Two important conservation easement opinions were handed down last week.

Bosque Canyon Ranch [1] is noteworthy for the Fifth Circuit’s conservation-friendly language encouraging a flexible interpretation of the myriad statutory and regulatory requirements for easement deductions. This is a stark departure from a recent series of cases denying conservation easement deductions based on what some would call “foot faults.” More specifically, the appellate opinion in Bosque Canyon Ranch: (1) provides some certainty regarding what should be provided in a baseline documentation report, noting that the IRS should not pick apart each component of a report, and (2) holds that the right to relocate homesites that are carved out of an easement does not violate the perpetuity requirement for conservation easements, when the easement holder has approval rights over the final location and the maximum size of the homesites cannot change.

In a much less taxpayer-friendly opinion, the Tax Court in Rutkoske[2] provides the first judicial interpretation of the statutory rule that permits qualified farmers and ranchers to deduct the value of a conservation easement donation against up to 100% of their adjusted gross income. The Tax Court finds that income from the sale of farming property does not count toward qualifying the farmer and rancher for this benefit.

The cases are discussed in detail below.

Continue Reading New Cases Send Mixed Messages to Conservation Easement Donors

In many cases California’s property tax rules automatically penalize insufficiently counseled individuals who inherit interests in real estate-owning legal entities from a family member upon their death. To avoid this penalty, recipients of these interests need to ensure that Form BOE 100-B is filed within 90 days of their family member’s death, a task few are prepared to undertake at that time.

Individuals who acquire real estate often do so using legal entities they control, such as corporations, LLCs, or partnerships to protect themselves from any personal liability that could arise with respect to the real estate.

California’s property tax rules require that individuals who hold interests in real estate-owning legal entities notify the Board of Equalization (“BOE”) when they transfer interests in those legal entities in two situations:

Continue Reading The BOE Death Trap: Avoid Property Tax Penalties on the Death of a Family Member

Those familiar with conservation easements know that to qualify for a federal tax deduction, a conservation easement must meet several rigorous requirements found in Internal Revenue Code Section 170 and Section 1.170A-14 of the Treasury Regulations, not the least of which is the requirement that the easement be granted “in perpetuity.” In addition, the easement must be subject to “legally enforceable restrictions” (such as by recordation) that will prevent uses inconsistent with the conservation purposes of the donation.

Continue Reading Unsurprising Façade Easement Holding by Tax Court: Conservation Easement Must Be Recorded to Qualify for Deduction

While those working in social enterprise are still grappling with how to define it, Professor of Law Lloyd Hitoshi Mayer of Notre Dame Law School takes a look at social enterprise through the lens of domestic tax law, and explores whether it is necessary or desirable to modify existing law to better accommodate social enterprise. Read the paper here.

See Mayer, Lloyd Hitoshi, Creating a Tax Space for Social Enterprise (June 22, 2017). Notre Dame Law School Legal Studies Research Paper No. 1724. Available at SSRN: https://ssrn.com/abstract=2991120

Donating Fund InterestsDue to increased valuation of public and private equities, coupled with the upcoming end of the sunset provision that allows hedge fund managers to defer taxation on fees earned offshore,[1] there is an increased interest among hedge fund and private equity managers to donate a portion of their fund interests to charity.  The goal is to allow a manager to avoid ordinary income or capital gains tax and/or to obtain a tax deduction while accomplishing his or her philanthropic goals.  In order to make the most of any such charitable giving plan, managers need to appreciate that the amount of any charitable deduction will vary depending on the character of the donated property and the type of organization that receives the gift.

Continue Reading Donating Fund Interests: A “Why Now?” and “How To” Primer

photo-1454165804606-c3d57bc86b40The February 15, 2017 deadline for nonprofit organizations in California seeking to initially obtain or renew exemption from property taxes is quickly approaching, and there are changes to the reporting requirements if your organization allows third parties to use your property.

An increased concern amongst many tax-exempt organizations is how to report use of their property by private persons or non-exempt organizations.

Continue Reading Annual Filing for Welfare Exemption Due On or Before February 15th

san franciscoIt seems that San Francisco may have just partially removed its exception from transfer tax that applied to gifts, but the Office of the Assessor-Recorder may not be aware. As a bit of background, transfer tax applies to transfers of interests in real property and, in some cases, to transfers of interests in legal entities that own real property. Transfer tax applies to transfers of interests in a legal entity when enough of the interests in the entity are transferred so as to result in a deemed “change of ownership” of the real property that it owns. Continue Reading Did San Francisco Eliminate its Transfer Tax Exception for Certain Gifts?

On November 4, 2016, the IRS updated its Conservation Easement Audit Techniques Guide (CE Audit Guide) for the first time since March 15, 2012.

According to the IRS’s introduction on its Audit Techniques Guide website, Audit Techniques Guides (ATGs) are developed to help IRS examiners during audits by explaining issues and accounting methods within specific industries. ATGs are also meant to provide guidance to small business owners and tax professionals for tax planning purposes within those industries. However, each ATG contains a disclaimer that it is not “an official pronouncement of the law or position of the Service and cannot be used, cited, or relied upon as such.” This article will not explain the CE Audit Guide in depth, but rather discuss the specific updates made in November.

Continue Reading IRS Updates Conservation Easement Audit Techniques Guide

accountant-accounting-adviser-advisor-159804A new private ruling may be of great interest to clients with substantial real estate interests who wish to contribute one or more properties to a family foundation.  The ruling suggests that payment by the foundation to a property management entity controlled by the donor may be permissible under the personal services exception.

Continue Reading Private Ruling Exempts Property Management Services from Self-Dealing