When the Tax Court issued its opinion in Pine Mountain Preserve, LLLP v. Commissioner of Internal Revenue, 151 T.C. 14 (December 27, 2018), the conservation community gave a collective sigh of relief because the court dismissed the IRS’s arguments challenging amendment clauses in conservation easements. But alas, the Tax Court giveth and the Tax Court taketh away. That sigh of relief came with some bitter medicine regarding floating homesites. More below. Continue Reading Tax Court Upholds Amendment Clauses but Continues Attack on Floating Homesites in Conservation Easements
DOJ sues Syndicated Easement Promoters
The Department of Justice has finally filed a civil complaint against certain promoters who have been spearheading syndicated easements to the tune of over $2 billion in claimed federal tax deductions using grossly inflated appraisals. Continue Reading Happy New Year’s Tidings for Land Trusts and Other Conservation Advocates
Service Focuses on Conservation Purpose Test and Division of Proceeds Clause in PBBM-Rose Hill, Belair Woods, and Champions Retreat Golf Founders
The IRS has been busy this year challenging conservation easement deductions, particularly conservation easements protecting golf courses and conservation easements providing overinflated syndicated tax deductions. Continue Reading Three Autumn Cases Deny Golf Course and Syndicated Conservation Easement Tax Deductions
Governor Brown signed S.B. 901 into law on September 7. The controversial and lengthy bill is simply entitled “Wildfires,” but has garnered a lot of media attention for what many are calling a utility bailout for the Northern California fires. What hasn’t received much attention is a small paragraph slipped into the bill to amend California’s conservation easement enabling statute, California Civil Code Sections 815–816. Continue Reading California Legislature Amends Venerable Conservation Easement Statute: New Civil Code 815.11
Last month, the IRS issued final regulations entitled “Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions,” codified as Treasury Regulation Sections 1.170A-15 (cash), -16 (noncash), -17 (qualified appraisals and appraisers), and -18 (clothing and household items).
Earlier this month, the U.S. Tax Court handed down an oddly reasoned memo opinion rejecting a North Carolina developer’s conservation easement deduction in Wendell Falls Development, LLC v. Commissioner, T.C. Memo 2018-45 (April 4, 2018).
Practitioners in this field know that the deductions claimed for conservation easements can be hotly contested by the IRS, whose litigation strategy relies on the kitchen sink method—a method that is frequently successful due to the complexity of the regulations and the difficulty donors have complying with them. Here, however, it seems as though the kitchen sink method could have been avoided because the easement in question clearly appears to have been either purchased for its full value or granted in exchange for development rights. But, instead of going the easy route, the Tax Court opinion focuses on whether the donor’s remaining property was enhanced by the easement, finding that it was—contrary to the opinions of two appraisers hired by the donor and one appraiser hired by the IRS.
Green v. U.S., No. 16-6371 (10th Cir., Jan. 12, 2018)
Practitioners and donors often forget a pesky donation limitation that applies only to irrevocable trusts: the deduction for a real property donation is limited to the trust’s adjusted basis in the real property and is only permitted if the real property was acquired using the trust’s gross income. Internal Revenue Code section 642(c)(1) permits an irrevocable trust to claim a charitable deduction for “any amount of the gross income” of the trust which is donated to a qualified donee. Traditionally, most conservative tax practitioners have interpreted Section 642(c)(1) to mean that an irrevocable trust may donate an interest in real property, so long as (1) the interest was acquired with gross income and (2) the trust’s claimed deduction excludes unrealized appreciation. Unlike Internal Revenue Code section 170, which applies to individuals and corporations and clearly permits claiming unrealized appreciation as part of a charitable deduction, trusts and estates must rely on section 642 to claim charitable deductions and that section does not contain a similar provision.
If my article on syndicated easement shelters and HR 4459 piqued your interest, please check out “The Billion Dollar Loophole,” an excellent piece of journalism written by Peter Elkind and published by both ProPublica and Fortune yesterday.
In his article, Peter digs into the genesis and current status of the thriving tax shelter industry that is tarnishing legitimate conservation practice and threatening the entire 170(h) conservation deduction. “The Billion Dollar Loophole” highlights the importance of passing remedial legislation like HR 4459.
Last week, Representative Mike Kelly (R) of Pennsylvania and Representative Mike Thompson (D) of California introduced the Charitable Conservation Easement Program Integrity Act of 2017 as H.R. 4459. The Act is simple; comprising only two pages, it addresses a certain type of abusive conservation easement transaction that has been proliferating over the past decade: the syndicated easement.
This month, the Tax Court revived a method to defeat conservation deductions with its October 10 opinion published as Palmolive Building Investors LLC et al. v. Commissioner, No. 23444-14; 149 T.C. No. 18 (Oct. 10, 2017), holding that if a taxpayer donates a conservation easement, the Treasury Regulations’ requirement that any mortgage must be subordinated to the conservation easement includes subordination of the mortgagee’s rights to insurance and condemnation proceeds.