CONSERVATION EASEMENTS: TAX BENEFITS and CURRENT

Report
2011 Wyoming Conservation Easement
Conference
Income Tax Benefits and Requirements
Estate Taxes and Planning Opportunities
Using Conservation Easements
June 2, 2011
c. timothy lindstrom, esq.
p.o. box 7622, jackson, wy 83002
[email protected]
© C. Timothy Lindstrom 2011
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IRS Activity
• Currently 344 easement audits open; including 84 in CO
• 2005-2009 Closed audits on 1,115 easement cases;
including 418 in CO
• 3,500 to 4,000 easement contributions per year
• Chances of audit +/- 5% based on foregoing (outside of
CO)
• Fifteen judicial decisions regarding easement tax
compliance since 2005
Land Trust Alliance (2010)
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IRS Scorecard (twelve out of fifteen)
Glass v. C.I.R. 124 T.C. 258 (2005) Lost
Turner v. C.I.R. 126 T.C. 299 (2006) Won
Goldsby v. C.I.R. T.C. Memo. 2006-274 (2006) Won
Bruzewicz v. U.S. 604 F.Supp.2d 1197 (2009) Won
Hughes v. C.I.R. T.C. Memo. 2009-94 (2009) Won
Kiva Dunes v. C.I.R. T.C. Memo. 2009-145 (2009) Lost
Herman v. C.I.R. T.C. Memo. 2009-205 (2009) Won
Simmons v. C.I.R. T.C. Memo. 2009-208 (2009) Won
Lord v. C.I.R. T.C. Memo. 2010-196 (2010) Won
Klauer v. C.I.R. T.C. Memo 2010-65 (2010) Lost
Kaufman v. C.I.R. 134 T.C. 6 (2010) Won
Trout Ranch v. C.I.R. T.C. Memo 2010-283 (2010) Won
Schrimsher v. C.I.R. T.C. Memo 2011-71 (2011) Won
1982 East, LLC V. C.I.R. T.C. Memo 2011-84 (2011) Won
Boltar v. C.I.R. 136 T.C. No. 14 (2011) Won
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To be deductible conservation easements must
comply with:
• Internal Revenue Code section 170(h)
• Treasury Regulations section 1.170A-14
• Wyoming Uniform Conservation Easement Act:
W.S. Sections 34-1-201 through 34-1-207
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The “Partial Interest Rule”
A deduction under section 170 is generally not
allowed for a charitable contribution of any interest in
property that consists of less than the donor's entire
interest in the property. . .
Regulations section 1.170A-14(a); txt 15-16, 23-24, 77
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Exceptions to the Partial Interest Rule
Certain gifts in trust
Remainder interest in personal residence or farm
All of the donor’s undivided interest in property
A “Qualified conservation contribution”
“. . . a deduction may be allowed under section
170(f)(3)(B)(iii) for the value of a qualified conservation
contribution if the requirements of this section are met.”
Regulations section 1.170A-14(a); txt 15-16, 23-24, 77
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Qualified Conservation Contributions
• Contribution (includes “bargain sales”) of:
• A qualified real property interest
• To a qualified organization
• Exclusively for conservation purposes
• In perpetuity
Regulations section 1.170A-14(a); txt chapter 3
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Qualified Real Property Interests
-- The entire interest of the donor other than a “qualified
mineral interest”
A qualified mineral interest is the donor's interest in
subsurface oil, gas, or other minerals and the right of
access to such minerals.
Regulations section 1.170A-14(b)(1)
-- A remainder interest in a farm or personal residence
Code section 170(h)(2)(B) [not found in Regulations]
-- A “perpetual conservation restriction”
Regulations section 1.170A-14(b)(2); txt 25-28
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Perpetual Conservation Restriction
• A restriction, in perpetuity, on use of real property
including an easement or other interest in real property
that under state law has attributes similar to an
easement (e.g., a restrictive covenant or equitable
servitude)
Regulations section 1.170A-14(b)(2)
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Importance of State Law
• State real property law governs the creation, modification and
termination of conservation easements; therefore:
• Failure to create a perpetual restriction on the use of
real property under state law may disqualify
easement for federal tax benefits.
Conservation easements are “easements in gross” because they do
not benefit any specific property (i.e. they are not “appurtenant”)
Generally, under common law, easements in gross were
unenforceable. Enabling legislation has been enacted in 49 states
recognizing conservation easements and pre-empting common law.
• All states except North Dakota have enacted some form of authority
for the creation and enforcement of perpetual conservation
easements.
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Qualified Conservation Contributions
• Contribution (includes “bargain sales”) of:
• A qualified real property interest
• To a qualified organization
• Exclusively for conservation purposes
• In perpetuity
Regulations section 1.170A-14(a)
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Qualified Organizations
• Qualified Organizations include:
• Publicly supported tax-exempt organizations recognized
by the IRS under Code sections 501(c)(3) and
170(b)(1)(A)(vi) (“land trusts”)
• Public agencies
• Governmentally-affiliated organizations
Regulations section 1.170A-14(c)(1); txt 28-34
• Transfers must be limited to “qualified organizations”
agreeing to carry out the conservation purposes of the
easement.
Regulations section 1.170A-14(c)(2); txt 39
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Qualified Organizations (cont.)
• A “qualified organization” must have
• a commitment to protect the conservation purposes of
the donation, and
• the resources to enforce the restrictions.
Regulations section 1.170A-14(c)(1); txt 34-35; 37-38
• LTA Standards and Practices
• Accreditation
Txt 38
• Land Trust Alliance: www.lta.org
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Qualified Conservation Contribution
• Contribution (includes “bargain sales”) of:
• A qualified real property interest
• To a qualified organization
• Exclusively for conservation purposes
• In perpetuity
Regulations sections 1.170A-14(d)(1) – (5); txt 39-60
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Qualified Conservation Purposes:
1. Public Recreation/ Education
2. Protection of significant, relatively natural
habitat for plants or animals
3. Protection of historic structures or land areas
Regulations sections 1.170A-14(d)(1) – (5); txt 39-60
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Qualified Conservation Purposes (cont.):
4. Protection of open space
a.
For scenic purposes and/ or
b.
Pursuant to a clearly delineated
governmental conservation policy
c.
Resulting in a significant public
benefit
Regulations sections 1.170A-14(d)(1) – (5); txt 39-60
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Two types of inconsistent use prohibitions
• Inconsistent Use prohibition applicable to “open space”
easements:
• “A deduction will not be allowed for the preservation of
open space under section 170(h)(4)(A)(iii), if the terms
of the easement permit a degree of intrusion or
future development that would interfere with the
essential scenic quality of the land or with the
governmental conservation policy that is being furthered
by the donation.”
Regulations section 1.170A-14(d)(4)(v) (emphasis added); txt 74-76
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General inconsistent use prohibition
• Inconsistent use. Except as provided in paragraph
(e)(4) of this section, a deduction will not be allowed if
the contribution would accomplish one of the
enumerated conservation purposes but would permit
destruction of other significant conservation
interests. However, this requirement is not intended to
prohibit uses of the property, such as selective timber
harvesting or selective farming if, under the
circumstances, those uses do not impair significant
conservation interests.
Regulations sections 1.170A-14(e)(2) and (3)(emphasis added); txt 71-74
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Inconsistent Uses (cont.)
• Example, the preservation of farmland pursuant to a
State program for flood prevention and control would not
qualify under paragraph (d)(4) of this section if under the
terms of the contribution a significant naturally occurring
ecosystem could be injured or destroyed by the use of
pesticides in the operation of the farm.
Regulations sections 1.170A-14(e)(2)
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Sample inconsistent use provision
• The “Conservation Purposes” of this Easement are (i) to
preserve the Conservation Values, and other significant
conservation interests (to the extent that it is not
necessary to impair such other interests in order to
protect the Conservation Values), and (ii) to restrict the
use of the Property to those uses that are consistent with
such values and interests.
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Sample Inconsistent Use Provision 2
Reserved Uses:
The following uses, properly undertaken, are consistent
with the Conservation Purposes, and are reserved by the
Grantor, subject to the condition that such uses are
undertaken in a manner that is consistent with the
Conservation Purposes:
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Qualified Conservation Contribution
The Contribution (includes “bargain sales”) of:
• A qualified real property interest
• To a qualified organization
• Exclusively for conservation purposes
• In perpetuity
Regulations section 1.170A-14(a); txt 61-71
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Perpetuity
• Amendment and Termination (txt 64-70)
• Contract vs. Charitable Trust (txt 4, 64, 89-90)
Ҥ 2. Creation, Conveyance, Acceptance and
Duration.
(a) Except as otherwise provided in this Act, a
conservation easement may be created, conveyed,
recorded, assigned, released, modified, terminated, or
otherwise altered or affected in the same manner as
other easements.” [Emphasis added.]
Uniform Conservation Easement Act §2(a) (txt Appendix C)
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“because conservation easements are conveyed to
governmental bodies and charitable organizations to be
held and enforced for a specific public or charitable
purpose -- i.e., the protection of the land encumbered by
the easement for one or more conservation or
preservation purposes -- the existing case and statute
law of adopting states as it relates to the
enforcement of charitable trusts should apply to
conservation easements.”
Uniform Conservation Easement Act comment to §3 (emphasis added)
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Wyoming Uniform Conservation Easement Act
§ 34-1-202. Creation; conveyance; acceptance and duration
(a) Except as otherwise provided in this article, a conservation easement
may be created, conveyed, recorded, assigned, released, modified,
terminated or otherwise altered or affected in the same manner as other
easements. The provisions of W.S. 34-1-141 [governing description of
easement location] shall apply to this article. [Emphasis added.]
§ 34-1-203. Judicial action; modification; termination
(a) An action affecting a conservation easement may be brought by:
(i) An owner of an interest in the real property burdened by the
conservation easement;
(ii) A holder of the conservation easement;
(iii) A person having third-party rights of enforcement, as named in the
instrument creating the conservation easement.
(b) This article shall not affect the power of a court to modify or terminate a
conservation easement in accordance with the principles of law and equity.
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Wyoming Law Regarding Charitable Trusts
• In the absence of special provisions in the trust
instrument, the trustees have no power of their own
motion to decide that it has become impossible or
inexpedient to carry out the trust as originally
planned and then to substitute another scheme. If the
trustees feel that an emergency of this type has arisen,
they should bring the situation to the attention of the
court and ask for instructions. [Emphasis added].
•
Town of Cody v. Buffalo Bill Memorial Association, 196 P.2d 369 (Wyo. 1948) [quoting 2
Bogert, Trusts and Trustees § 435]
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Charitable Trust Doctrine -- Conservation
Easements
A conservation easement may only be amended or
terminated if:
1. Such a power is expressly reserved in the easement
itself;
2. a court applies the doctrine of “administrative deviation”
to alter a provision that would defeat or substantially
impair the conservation purposes of the easement; or
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Charitable Trust Doctrine -- Conservation
Easements (cont.)
3. the charitable purpose of the easement is impossible to
accomplish due to changed circumstances and a court,
through the doctrine of cy pres authorizes a revision or
termination.
Paraphrasing Nancy A. McLaughlin, Rethinking the Perpetual Nature of Conservation
Easements, 29 Harv. Int’l L.J. 421, 435–436 (2005)
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Federal Requirements Pertaining to
Amendment and Termination
None of the assets of a land trust may “inure” to the
benefit of any “disqualified person” (“excess benefit
transactions”).
Internal Revenue Code section 501(c)(3); txt 65-66
-- A disqualified person is anyone in a period beginning
five years before a transaction in a position to exert
“substantial influence.”
-- Board members, staff, “substantial contributors” more
than 2% of the land trust’s annual receipts, or $5,000,
whichever is greater (may include easement value).
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Federal Requirements Pertaining to
Amendment and Termination (cont.)
Consequences:
-- Excise tax of 25% plus repayment of benefit
-- Up to $10,000 penalty on land trust managers
-- Loss of exempt status
Regulations section 53.4958-7; txt 65-66
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Federal Requirements Pertaining to
Amendment and Termination (cont.)
• A land trust’s assets must be used “exclusively” for
charitable purposes
Internal Revenue Code section 501(c)(3); txt 66-67
• A land trust must have a “commitment to protect the
conservation purposes of the contribution.
Internal Revenue Code section 170(h)(3); txt 67-68
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Other Regulatory Requirements:
• Documentation (available prior to grant) (txt 83-85)
• Donee's right to inspection (txt 86)
• Donee’s right “to enforce the conservation restrictions by
appropriate legal proceedings, including but not limited
to, the right to require the restoration of the property to
its condition at the time of the donation.” (txt 86-88)
• Landowner must give notice before exercising any
reserved rights that may impair the conservation
interests protected by the easement. (txt 85)
Regulations sections 1.170A-14(g)(5)(i) and (ii)
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Other Regulatory Requirements (con’t.)
• Mortgages must be subordinated
Regulations section 1.170A-14(g)(2); txt 70-71
• Payment of proceeds in event of of extinguishment
“. . .when a change in conditions give rise to the
extinguishment of a perpetual conservation restriction
under paragraph (g)(6)(i) of this section, the donee
organization, on a subsequent sale, exchange, or
involuntary conversion of the subject property, must be
entitled to a portion of the proceeds at least equal to that
proportionate value of the perpetual conservation
restriction. . .”
Regulations section 1.170A-14(g)(6)(ii); txt 91-99
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Mortgage Subordination Requirement
Kaufman v. Commissioner, 134 T.C. 6 (4/26/10); 1982
East, LLC v. Commissioner, T.C. Memo 2011-84
(4/12/11) rule that conditional subordinations are not
acceptable.
Lender “shall have a prior claim to all insurance
proceeds as a result of any casualty, hazard or accident
occurring to or about the Property and all proceeds of
condemnation, and shall be entitled to same in
preference to Grantee until the Mortgage is paid off and
discharged, notwithstanding that the Mortgage is
subordinate in priority to the Agreement.”
What about other matters of title that could pre-empt a
conservation easement, e.g. covenants with reversionary
provisions?
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Acceptable Subordination Forms
• [Name and address of financial institution] (“Mortgagee”), present
holder of a mortgage from, [donors] (“Mortgagor”), recorded on
[date] in the [County] Registry of Deeds in Deed Book [ ] Page [ ], for
consideration paid, hereby recognizes and assents to the terms and
provisions of a Conservation Restriction running to the Conservation
Trust, to be recorded herewith, and agrees to subordinate and hold
its mortgage subject to the terms and provisions of said
Conservation Restriction to the same extent as if said mortgage had
been recorded subsequent to the recording of the Conservation
Restriction, and the undersigned shall, in the exercise of its rights
pursuant to said instrument, recognize the terms and provisions of
the aforesaid Conservation Restriction. Compact of Cape Cod
Conservation Trusts Form
• The Lender hereby consents to the terms and intent of this
Easement, and agrees that the lien represented by said Deed of
Trust shall be held subject-to this Easement and joins in this Deed to
reflect its direction to the Trustee to execute this Easement to giveeffect to the subordination of such Deed of Trust to this Easement.
Virginia Outdoors Foundation Form
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Minerals
• Deductible easements must prohibit strip mining
• Other forms of mining and mineral extraction must be
“limited” “localized” and “not irremediably destructive of
significant conservation values”
Regulations section 1.170A-14(g)(4); txt 25, 77–83
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Mineral Issues:
• Gravel pits
• Subsurface minerals
• Severed minerals and easement deductions
• Federal plans for BLM and other federal lands
• “Carve-out” provisions
• “Remoteness letter”
Txt 76-85
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Donative Intent
Conservation buyer transactions (txt 123-128)
Quid pro quo transactions (txt 118-119)
Cluster developments (txt 119-120)
Grants requiring easements
Reciprocal contributions (txt 121-122)
Qualified bargain sales (txt 6, 116-117)
Sham (“collapsible”) transactions (txt 18-19)
See U.S. v. American Bar Endowment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986); txt 1617, 115-116
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Income Tax Benefits
Easement Valuation
• Value of land before c.e.
$1,000,000
• Value of land after c.e.
(700,000)
• Difference = c.e. value
$ 300,000
Regulations § 1.1170A-14(h)(3)
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Calculating the Federal Income Tax Benefit
2011
Maximum benefit:
Before c.e. value of land
$1,000,000
After c.e. value of land
C.e. value
(700,000)
$
Maximum federal income tax rate
Maximum federal income tax savings
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300,000
x 0.35
$
105,000
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Limitation on deductions:
2011
50% of “contribution base” (AGI) if donor’s farm income is less than 50% of
all income
Internal Revenue Code §§ 170(b)(1)(E)(i) and 170(b)(1)(E)(vi).
100% of contribution base if donor’s farm income is 50% or more of all
income
Internal Revenue Code §§ 170(b)(1)(E)(iv)(I) and 170(b)(1)(E)(vi).
[Note that proceeds from the sale of a conservation easement are
not “income from the business of farming”]
2012
30% of contribution base after 12/31/11
Internal Revenue Code §§ 170(b)(1)(C) and 170(b)(1)(E)(vi).
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Carrying deductions forward:
2011
Unused portions of deduction may be carried forward for
fifteen years
Internal Revenue Code §§ 170(b)(1)(E)(ii) and 170(b)(1)(E)(vi).
2012
Unused portions of deduction may be carried forward for
five years
Internal Revenue Code §§ 170(b)(1)(D)(ii) and 170(b)(1)(E)(vi).
“Phasing” contributions
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Calculating the Federal Income Tax Benefit - 2011
Assume:
Married filing jointly
Donor income $250,000
Other contributions $50,000
Other deductions $50,000
Conservation easement deduction $500,000
Maximum charitable deduction allowed $125,000 ($500,000 x 50%)
Deduction available $75,000 ($125,000 - $50,000)
Taxable income prior to easement deduction $150,000 ($250,000 – $100,000)
Rate on income between $75,000 and $150,000 ($64,500 @ 25%; $10,500 @ 28%)
Tax savings in first year due to easement: $19,065 (25.42%)
Cumulative savings over 7 years $127,101 (25.42%)
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Example of Operation of Current Limitations (2011)
•
•
•
•
•
•
C.e. value
Donor’s annual income
Annual limitation
Annual cap on c.e. deduction
Sixteen-year deduction period
Total deduction cap
•
•
Amount of deduction unusable $0.00 (50% level)
Amount of deduction unusable $0.00 (100% level)
$
$
300,000
54,000
x 50%
$
27,000
x
16
$ 432,000
Example of Operation of Future Limitations (2012)
•
•
•
•
•
•
C.e. value
Donor’s annual income
Annual limitation
Annual cap on c.e. deduction
Six-year deduction period
Total deduction cap
•
Amount of deduction unusable $ 202,800
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$ 300,000
$ 54,000
x 30%
$ 16,200
x
6
$ 97,200
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Application of enhanced write-off to fee contributions
Contributions of qualified conservation contributions (i) In general Any
qualified conservation contribution (as defined in subsection (h)(1)) shall be
allowed to the extent the aggregate of such contributions does not exceed
the excess of 50 percent of the taxpayer's contribution base over the
amount of all other charitable contributions allowable under this paragraph.
(ii) Carryover If the aggregate amount of contributions described in clause
(i) exceeds the limitation of clause (i), such excess shall be treated (in a
manner consistent with the rules of subsection (d)(1)) as a charitable
contribution to which clause (i) applies in each of the 15 succeeding years in
order of time.
Internal Revenue Code §170(b)(1)(E)
(h) Qualified conservation contribution (1) In general For purposes of
subsection (f)(3)(B)(iii), the term "qualified conservation contribution" means
a contribution- (A) of a qualified real property interest, (B) to a qualified
organization, (C) exclusively for conservation purposes.
Internal Revenue Code §170(h)(1)
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Basis Issues
• Calculating the basis in a conservation easement
• Adjusting the basis of easement land for the grant of an
easement
• Enhancement vs. larger parcel affect on basis
• Allocation of adjusted basis in 1031 exchanges
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Basis Issues (cont.)
Calculating Basis in Conservation Easements
• Needed for completing form 8283
• Needed to determine limitation on first year contributions
• Needed for other basis determinations
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Calculating Basis in Conservation Easements
(cont.)
• Example:
Appraised highest and best use before easement:
$750,000
Appraised highest and best use after easement:
$250,000
Easement value:
$500,000
Percentage reduction due to easement ($500k/$750k):
67%
Original basis in easement property:
$100,000
Basis in easement (67% x $100k):
$ 67,000
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Basis Issues (cont.)
Basis Adjustment for Contribution
Assume:
25% (Percentage of appraised “before” value represented by
easement)
$100,000 (Unadjusted basis in easement land)
Basis adjustment: $100,000 – (25% x $100,000) = $75,000
Additional amount subject to gain on sale of easement land: $25,000
($100,000 - $75,000)
Additional tax if easement land sold: = $3,750 (15% x $25,000)
Regulations §1.170A-14(h)(3)(iii)
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Basis Issues (cont.)
Like-kind exchange example
•
Taxpayer bargain sells conservation easement for $200,000.
•
Easement value is $500,000.
•
Deduction = $300,000 ($500,000 – $200,000)
•
Percentage of easement value = to purchase price 40%
($200,000/$500,000)
•
Basis in easement property $50,000.
•
Appraised f.m.v. of easement property before easement = $900,000
•
% of f.m.v. equal to easement 56% ($500,000/$900,000)
•
Basis in easement $28,000 (56% x $50,000)
•
Basis carried over to exchange property $11,200 ($28,000 x 40%)
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Appraisal Issues
Attorney Client Privilege and Appraisals
Conservation easement appraisal work done by
appraiser as consultant to an attorney representing
easement donor is not entitled to the attorney client
privilege or the work product privilege because (1) the
consultant was not communicating about legal matters
and (2) the work product was not prepared because of
anticipated litigation but rather to satisfy federal
requirements for substantiation of the easement
donation.
U.S. v. Richey, No. 09-35462, 9th Circuit Court of Appeals, (2011)
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Appraisal Issues (cont.)
Contiguous (“Larger”) Parcel Rule
“The amount of the deduction in the case of a charitable
contribution of a perpetual conservation restriction
covering a portion of the contiguous property owned by a
donor and the donor's family (as defined in section
267(c)(4)) is the difference between the fair market value
of the entire contiguous parcel of property before and
after the granting of the restriction.”
Regulations § 1.1170A-14(h)(3)(i)
“The family of an individual shall include only his
brothers and sisters (whether by the whole or half blood),
spouse, ancestors, and lineal descendants . . .”
Internal Revenue Code §267(c)(4)
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Appraisal Issues (cont.)
Enhancement Rule
“If the granting of a perpetual conservation restriction
after January 14, 1986, has the effect of increasing the
value of any other property owned by the donor or a
related person, the amount of the deduction for the
conservation contribution shall be reduced by the
amount of the increase in the value of the other property,
whether or not such property is contiguous.”
Internal Revenue Code §267(c)(4)
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Appraisal Issues (cont.)
Effect of Contiguous Parcel Rule on Basis
Contiguous Parcel (200 acres under easement, 50 acres
unrestricted):
Property basis: $200,000
Appraised “before value” including all contiguous property: $750,000
Appraised “after value” including all contiguous property: $200,000
Easement value: $550,000
Deduction: $550,000
Reduction in property basis required: 73.3% ($550,000/ $750,000)
Adjusted basis to reflect contribution: $53,340 [$200,000 – (73.3% x
$200,000]
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Appraisal Issues (cont.)
Effect of Enhancement Rule on Basis
Easement Parcel (200 acres)
Enhanced Parcel (50 acres)
Easement Parcel basis: $200,000
Appraised “before value” of Easement Parcel: $750,000
Appraised “after value” of Easement Parcel: $100,000
Easement value: $650,000
Value of Enhanced Parcel before easement: $100,000
Value of Enhanced Parcel after easement: $200,000
Deduction: $550,000
Reduction in property basis required: 86.7% ($650,000/ $750,000)
Adjusted basis to reflect contribution: $26,600 [$200,000 – (86.7% x $200,000]
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Appraisal Issues (cont.)
Comparison
Contiguous Parcel:
Easement value is $550,00
Deduction is $550,000
Basis adjustment required ($146,600)
Enhancement:
Easement value is $650,00
Subtraction for enhancement: $100,000
Deduction is $550,000
Basis adjustment required ($173,400)
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Example:
Appraisal Issues (cont.)
Use of Percentages
Before value of easement property determined by
comparable analysis: $800,000
Average reduction in value of properties subject to
comparable easements: 70%
Diminution factor: 70%
After value of easement property: $240,000 [$800,000 –
($800,000 x 70%)]
Easement value: $560,000
© C. Timothy Lindstrom 2011
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Appraisal Issues (cont.)
Use of Percentages
Johnston v. C.I.R. T.C. Memo. 1997-475 (allowed)
Strasburg v. C.I.R., T.C. Memo 2000-94 (2000) (rejected)
Nick R. Hughes v. Commissioner, T.C. Memo. 2009-94 (2009)
(rejected)
Bruzewicz v. C.I.R. 604 F.Supp.2d 1197 (N.D. Illinois, 2009) (criticized)
Simmons v. C.I.R. T.C. Memo. 2009-208 (2009) (allowed)
Scheidelman v. C.I.R. TC Memo 2010-151 (2010) (criticized)
IRS Chief Counsel Advisory, IRS CCA 2007 38013 (rejected)
Instructions to Form 8283 (rejected)
© C. Timothy Lindstrom 2011
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Issues for Corporations and Other Entities
C corporations
Charitable deductions limited to 10% of “taxable” income
Five-year carry-forward period
No capital gains rate
© C. Timothy Lindstrom 2011
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Issues for Corporations and Other Entities
(cont.)
In 2011
100% write-off available for
C corporations if more than 50% of income is from
the “business of farming”
and
Stock not listed on any recognized market
Internal Revenue Code §170(b)(2)(i)
© C. Timothy Lindstrom 2011
60
Issues for Corporations and Other Entities
(cont.)
S corporations
Charitable deductions pass-through to shareholders prorata
Shareholders may deduct no more than their basis in
their shares
Shareholders’ unused deductions carry-forward for
fifteen years and may be used against 50% of
shareholders’ AGI
Internal Revenue Code §1366(d)
© C. Timothy Lindstrom 2011
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Issues for Corporations and Other Entities
(cont.)
In 2011:
Unlimited pass-through for gain portion of easement
contribution.
Basis portion of contribution limited to shareholder basis
in shares.
Internal Revenue Code §1367(a)(2)
© C. Timothy Lindstrom 2011
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Example of S-corp Pass-through Rules
S-corp contributes conservation easement worth $500,000
Two equal shareholders. John holds 25% of the shares with a
$10,000 basis; Jane holds 75% of the shares with a $50,000 basis.
S-corp basis in land subject to easement $200,000.
Appraised fair market value of land before easement $1,000,000
Basis in conservation easement $100,000 [($500,000/$1,000,000) x
$200,000]
Portion of conservation easement constituting gain $400,000
($500,000 - $100,000) or 80%
John’s share of easement deduction $125,000 (25% x $500,000)
Jane’s share of easement deduction $375,000 (75% x $500,000)
© C. Timothy Lindstrom 2011
63
Example of S-corp Pass-through Rules (cont.)
Portion of John’s share constituting basis $25,000 ($125,000 x 20%)
Portion of John’s share constituting gain $100,000 ($125,000 - $25,000)
Portion of Jane’s share constituting basis $75,000 ($375,000 x 20%)
Portion of Jane’s share constituting gain $300,000 ($375,000 - $75,000)
John’s pass-through in first year $110,000 ($100,000 + $10,000)
Jane’s pass-through in first year $350,000 ($300,000 + $50,000)
© C. Timothy Lindstrom 2011
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Example of S-corp Pass-through Rules (cont.)
•
In 2012
– Amount of deduction passing to John is $10,000.
– Amount of deduction passing to Jane is $50,000.
– Balance may be passed through over the next five years provided that
John and Jane establish a new basis in their shares.
© C. Timothy Lindstrom 2011
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Issues for Corporations and Other Entities (cont.)
Trusts
Grantor trusts – ignored for purposes of taxation; i.e. the owner of the trust is
treated as the recipient of all income and deductions (including charitable deductions)
of the trust.
Internal Revenue Code §671
To ensure that contribution or bargain sale of a conservation easement by a
grantor trust is effective the trust instrument should expressly authorize the trustee to
make charitable contributions in general, or contributions of conservation easements
in specific.
QPRT Trusts – QPRT trusts are grantor trusts. However, regulations prohibit
the distribution of any income or corpus of the trust to or for the benefit of anyone
other than the transferor prior to the termination of the trust.
Regulations §25.2702-5(c)(4)
Irrevocable Trusts – Contributions of conservation easements by irrevocable
trusts are not deductible by the trust because they are not payments from income, but
from corpus and they do not pass through to beneficiaries because they are not
owners.
See Goldsby v. C.I.R., T.C. Memo. 2006-274 (2006)
© C. Timothy Lindstrom 2011
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Substantiation Requirements – Acknowledgment Letter
•
“General rule No deduction shall be allowed under subsection (a) for any
contribution of $250 or more unless the taxpayer substantiates the contribution by a
contemporaneous written acknowledgment of the contribution by the donee
organization that meets the requirements of subparagraph (B).”
Internal Revenue Code §170(f)(8)(A)
•
“Content of acknowledgement: An acknowledgement meets the requirements of
this subparagraph if it includes the following information:
“(i) The amount of cash and a description (but not value) of any property other than
cash contributed.
“(ii) Whether the donee organization provided any goods or services in consideration,
in whole or in part, for any property described in clause (i).
“(iii) A description and good faith estimate of the value of any goods or services
referred to in clause (ii) or, if such goods or services consist solely of intangible
religious benefits, a statement to that effect. For purposes of this subparagraph, the
term "intangible religious benefit" means any intangible religious benefit which is
provided by an organization organized exclusively for religious purposes and which
generally is not sold in a commercial transaction outside the donative context.”
Internal Revenue Code §170(f)(8)(B)
© C. Timothy Lindstrom 2011
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Substantiation Requirements – Acknowledgment Letter
(cont.)
“Contemporaneous: For purposes of subparagraph (A), an
acknowledgment shall be considered to be contemporaneous if the
taxpayer obtains the acknowledgment on or before the earlier of“(i) the date on which the taxpayer files a return for the taxable year
in which the contribution was made, or
“(ii) the due date (including extensions) for filing such return.
Internal Revenue Code §170(f)(8)(c)
© C. Timothy Lindstrom 2011
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Substantiation Requirements -- Appraisal
•
Donor must obtain a qualified appraisal of the easement
(A) A description of the property in sufficient detail for a person who is not
generally familiar with the type of property to ascertain that the property that
was appraised is the property that was (or will be) contributed;
***
(C) The date (or expected date) of contribution to the donee;
(D) The terms of any agreement or understanding entered into (or expected
to be entered into) by or on behalf of the donor or donee that relates to the
use, sale, or other disposition of the property contributed . . .
***
E) The name, address and (if a taxpayer identification number is otherwise
required by section 6109 and the regulations thereunder) the identifying
number of the qualified appraiser; and, if the qualified appraiser is acting in
his or her capacity as a partner in a partnership, an employee of any person
(whether an individual, corporation, or partnerships), or and independent
contractor engaged by a person other than the donor, the name, address,
and taxpayer identification number (if a number is otherwise required by
section 6109 and the regulations thereunder) of the partnership or the
person who employs or engages the qualified appraiser;
© C. Timothy Lindstrom 2011
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Substantiation Requirements – Appraisal (cont.)
•
(F) The qualifications of the qualified appraiser who signs the appraisal, including the
appraiser's background, experience, education, and membership, if any, in
professional appraisal associations;
•
•
(G) A statement that the appraisal was prepared for income tax purposes;
(H) The date (or dates) on which the property was appraised:
•
(1) The appraised fair market value (within the meaning of §1.170A-1(c)(2) of the
property on the date (or expected date) of contribution;
•
(J) The method of valuation used to determine the fair market value, such as the
income approach, the market-data approach, and the replacement-cost-lessdepreciation approach; and
•
(K) The specific basis for the valuation, such as specific comparable sales
transactions or statistical sampling, including a justification for using sampling and an
explanation of the sampling procedure employed.
•
Regulations §1.170A-13(c)(2)(ii)
© C. Timothy Lindstrom 2011
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Substantiation Requirements – Appraisal
(cont.)
• The appraisal cannot be done earlier than 60 days prior
to the contribution or later than the date on which the
return claiming the deduction is filed, or the due date for
such return (plus extensions).
Regulations §1.170A-13(c)(3)(i)(A)
• If the value of the contribution exceeds $500,000 the full
appraisal must be filed with the return.
Internal Revenue Code §170(f)(11)(d)
© C. Timothy Lindstrom 2011
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Recent Compliance Cases
Ney v. C.I.R. T.C. Summary Opinion 2006-154 (2006) [Failure to comply with statutory requirements for
appraisal.]
Gomez v. C.I.R. T.C. Summ.Op. 2008-93 (2008) [Lack of timely acknowledgment.]
Bruzewicz v. C.I.R. 604 F.Supp.2d 1197 (N.D. Illinois, 2009) [Lack of adequate acknowledgment; failure to
comply with statutory requirements for qualified appraisal.]
Simmons v. C.I.R. T.C. Memo. 2009-208 (2009) [Signature of land trust on easement sufficient
acknowledgment.]
Consolidated Investors v. C.I.R., T.C. Memo. 2009-290 (2009) [Fact that appraisal was done more than 60 days
prior to contribution; failure to state the appraisal was for tax purposes; failure to provide the date of the
contribution; failure to provide the value of the contribution on the contribution date, were found to be
“insubstantial.”]
Scheidelman v. C.I.R. TC Memo 2010-151 (2010) [Failure to provide evidence of the value, if any, of benefits
received from the land trust.]
Lord v. C.I.R. T.C. Memo. 2010-196 (2010) [Failure of appraisal to included contribution date, the date the
appraisal was performed, or the appraised fair market value of the easement contribution on the contribution
date.]
Hendrix v. United States, 106 AFTR 2d 2010-5373 (S.D. Ohio, Eastern Division, 2010). [Failure to state the expected
date of contribution; failure to include appraiser’s qualifications; failure to state that the appraisal was
prepared for income tax purposes.]
Schrimsher v. C.I.R. T.C. Memo. 2011-71 (2011) [Failure of acknowledgement to describe goods and services
given in exchange for contribution]
© C. Timothy Lindstrom 2011
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Substantial Compliance
“At the outset, it is apparent that the essence of section
170 is to allow certain taxpayers a charitable deduction
for contributions made to certain organizations. It is
equally apparent that the reporting requirements of
section 1.170A-13, Income Tax Regs., are helpful to
respondent in the processing and auditing of returns on
which charitable deductions are claimed. However, the
reporting requirements do not relate to the substance or
essence of whether or not a charitable contribution was
actually made. We conclude, therefore, that the reporting
requirements are directory and not mandatory. * * *”
[Failure to provide any appraisal at all was excused.]
Bond v. Commissioner 100 T.C. 32, 41 (1993)
© C. Timothy Lindstrom 2011
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Substantial Compliance (cont.)
“Reading the Tax Court's decisions on the subject of substantial
compliance is enough to make one's head swim. Tax lawyers can
have no confidence concerning the circumstances in which
noncompliance with regulations governing the election of favorable
tax treatment will or will not work a forfeiture. *** We think the
doctrine should be interpreted narrowly, and point out that the courts
of appeals owe no special deference to the Tax Court's legal views .
. . The common law doctrine of substantial compliance should not be
allowed to spread beyond cases in which the taxpayer had a good
excuse (though not a legal justification) for failing to comply with
either an unimportant requirement or one unclearly or
confusingly stated in the regulations or the statute.”
•
Prussner v. U.S., 896 F.2d 218, 224 (7th Cir. 1990)
© C. Timothy Lindstrom 2011
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Substantial Compliance (cont.)
Did the taxpayer provide sufficient information to allow the
government to evaluate its charitable contribution?
Simmons v. C.I.R. T.C. Memo. 2009-208, 16.
“The substantial compliance doctrine is not a substitute for missing
entire categories of content; rather, it is at most a means of
accepting a nearly complete effort that has simply fallen short in
regard to minor procedural errors or relatively unimportant clerical
oversights.”
Hendrix v. U.S. 106 AFTR 2d 2010-5373, 5377 (S.D. Ohio, Eastern Division, 2010).
“When a qualified appraisal has not been submitted, we have not
applied the doctrine of substantial compliance to excuse a
taxpayer's failure to meet the qualified appraisal requirement.”
Scheidelman v. C.I.R. T.C. Memo. 2010-151, 12.
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© C. Timothy Lindstrom 2011
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© C. Timothy Lindstrom 2011
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Form 8283 Instructions:
Attach a statement that:
• Identifies the conservation purposes furthered by your donation,
• Shows, if before and after valuation is used, the FMV of the
underlying property before and after the gift
• States whether you made the donation in order to get a permit or
other approval from a local or other governing authority and whether
the donation was required a contract, and
• If you or any related person has any interest in other property
nearby, describes that interest.
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Recommended Substantiation Documentation
Return should be accompanied by:
Qualified appraisal (contributions of $500k or more)
Copy of recorded easement
Fully completed Form 8283 – use attachment if necessary
Completed attachment required by instructions
Copy of mortgage subordination, if any
Copy of baseline document
If a bargain sale, copy of original executed contract
If enhancement exists, map showing location of enhanced parcels in relation to
easement parcel
© C. Timothy Lindstrom 2011
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Estate Taxes and Planning Opportunities
Using Conservation Easements
Estate Tax Rates and Exclusion Amounts
2011: Exclusion Amount $5,000,000
2011: Top Rate 35%
2013: Exclusion Amount $1,000,000
2013: Top rate: 55%
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Basic concepts
•
1.
Unified Credit
•
2.
Rate
•
3.
Gift tax
•
4.
Marital deduction
•
5.
Maximizing use of the unified credit (beware of “I
Love You” wills)
•
•
•
•
•
6.
Estate planning goal: reduction of taxable estate
a.
By-pass trusts
b.
Annual gifting
c.
Discounting
d.
Special use value
© C. Timothy Lindstrom 2011
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Effect of conservation easements on estate tax
•
“Reduction in value”
•
40% exclusion
–
Extensive Criteria
–
$500,000 cap on exclusion
–
30% threshold for reduction in value
–
Retained development rights not subject to
exclusion
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Calculation of ESTATE TAX SAVINGS (2011)
• Before c.e. value of land
• After c.e. value of land
• C.e. value
$1,000,000
(700,000)
$ 300,000
• Reduction in estate due to c.e.
• Maximum federal estate tax rate
• Maximum savings due to reduction
$
•
•
•
•
•
$
After c.e. value in estate
40% exclusion
Exclusion allowed
Maximum federal estate tax rate
Maximum savings due to exclusion
• Maximum savings due to reduction in estate
• Maximum savings due to exclusion
• Total Maximum Estate Tax Savings
© C. Timothy Lindstrom 2011
$
$
$
300,000
x 0.35
105,000
700,000
x 0.40
280,000
x 0.35
98,000
$ 105,000
98,000
$ 261,000
83
Post mortem election
• All heirs must authorize
• Within time for filing return, including extensions
Internal Revenue Code §§ 2031(c)(8)(A)(iii); 2031(c)(8)(C); and 2031(c)(9)
© C. Timothy Lindstrom 2011
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Doubling the $5 million Exclusion:
• Avoid joint tenancy w/ right of survivorship
• Avoid “I love you” wills
• Use by-pass trusts
© C. Timothy Lindstrom 2011
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Conservation Easements and Other Estate
Planning tools
Conservation easements enhance other estate planning
tools:
Exemption
Annual gift exclusion
Special use valuation
© C. Timothy Lindstrom 2011
86
Easements and Annual Gifts
Without easement
$13,000 annual exclusion per donor
$5,000,000 lifetime exemption per donor
Value of land to transfer
$7,500,000
Assume 6 children and joint gifts (6 x $26,000)
$156,000/ year
Time for 100% transfer ($7,500,000/ $156,000)
49 years
Time for 51% transfer ($3,250,000/ $156,000) =
21 years
(annual appreciation not included)
© C. Timothy Lindstrom 2011
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Easements and Annual Gifts (cont.)
With easement
Value of land to transfer
$7,500,000
Conservation easement value
($3,250,000)
Remaining value to transfer
Assume 6 children and joint gifts (6 x $26,000)
$3,250,000
$156,000/ year
Time for 100% transfer ($3,250,000/ $156,000) =
21 years
Time for 51% transfer ($1,657,500/ $156,000) =
11 years
(annual appreciation not included)
© C. Timothy Lindstrom 2011
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Value Replacement
• Donors’ ages: 51 (h) 43 (w)
• Easement value
$ 1,942,000
• Tax savings
$
• $680K buys a second to die policy worth
•
• Net policy pay-out (less premium)
680,000
$12.5M
$ 11.8M
• Estimated forgone development value
•
(assuming appreciation)
($ 5M)
• Net increase due to value replacement
$6.8M
© C. Timothy Lindstrom 2011
89

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