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.
On September 27, 2017, California Governor Jerry Brown signed an extension of the Urban Agricultural Incentive Zones Act. Rather than sunsetting on January 1, 2019, the Act now extends until January 1, 2029.
The Act, originally authored by Assemblymember Phil Ting and enrolled in 2013 as Government Code Section 51042, permits certain local governments to voluntarily enter into contracts with property owners who commit to using their property for agricultural use in exchange for property tax breaks.
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  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 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.
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.
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
The 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.
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.
A 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.
The case of Salus Mundi Foundation et al v. Commissioner
On August 15, 2016, the Tax Court decided in Salus Mundi Foundation et al v. Commissioner, T.C. Memo. 2016-154, that two foundations were liable as transferees for a corporation’s unpaid federal tax liability after another foundation distributed to the foundations the proceeds of the sale of the corporation’s stock.
The history in this case involves a marital trust that initially owned all of the stock in a C corporation called Double-D Ranch. Later, a portion of the stock was transferred to the Diebold Foundation in New York. Subsequent to that, the Diebold Foundation in New York sold the stock and distributed the proceeds from the sale of Double-D Ranch stock to three foundations formed by the Diebold children, pursuant to a New York state-approved plan of dissolution.