Conservation Donation Audits
The mass audit of conservation easement donations that took place in Colorado is not being repeated in other states, but it still appears a significant number of easement audits are underway, with a number of those cases headed to trial soon. In addition, there are many more ongoing audits of historic preservation easements, whose outcome could affect the law of conservation easements. We’re closely monitoring these audits and working with the IRS to ensure their enforcement efforts ensnare fewer legitimate easement donors.
For a land trust that has never experienced a donor audit, the process can be a shocking one, as it often starts with an assertion by the IRS that the donor has not met the requirements of the law, or that their donation is worth far less than its appraised value. While the Land Trust Alliance is not in a position to provide legal advice, we may be able to help in various ways. If you or a donor to your land trust is audited, please contact Russ Shay at 202-800-2230 or firstname.lastname@example.org.
Wonder what the IRS is thinking? Read their playbook!
Most IRS revenue agents are accountants without any prior experience in dealing with conservation easements. As such, they rely heavily on their internal guidance materials to interpret easements and spot documentation problems. Reading their new audit guide may help you see easements through their eyes and avoid or mitigate potential problems.
While this page focuses on handling audits once they happen, we strongly suggest you also review our Conservation Donation Rules page for guidance to help you avoid audits in the first place. Land trusts may also be interested in our Practical Pointers Series which touches upon many of the issues that come up in audits.
Conservation Easements Removed from "Dirty Dozen" List
We are delighted to report that the IRS has removed conservation easements from its “Dirty Dozen” list of abusive transactions. That doesn’t mean they will stop auditing easements, but, for the first time in years, conservation easements are not specifically mentioned (the list still includes a category called "abusive donations to charities"). We believe this is a direct result of the dialogue the Alliance has had with the IRS and the progress land trusts have made with improved practices, accreditation, and appraisal reform.
IRS Advisory Council Criticizes Hard Line on Historic Preservation Easements (posted 12/10/09)
The IRS Advisory Council (IRSAC) recently issued a council-wide recommendation criticizing IRS' hard-line stance against historic preservation easements -- touching on many of the same issues that conservation easement donors have faced. The purpose of IRSAC is to provide a public forum for IRS officials and tax professionals to discuss tax administration issues and recommend improvements to IRS operations, policies, programs and procedures. Their report is not binding on the IRS. Nonetheless, it may cause some re-evaluation within the IRS about its approach, and we will be working to see that it does.the report.
IRS Panelists at Rally 2009 Provide Advice to Land Trusts (posted 10/15/09)
Courts to IRS: Ease Up on Conservation Easement Valuations (posted 8/10/09)
In audits of conservation easements, IRS personnel frequently assert that easement donations have no value. Thus, landowners should be encouraged by a new article indicating that the IRS assertion of zero valuation has no judicial support. In fact, the Tax Court has found that conservation easements have a significant effect on value. Land trusts with unhappy donors under audit may find it helpful to share the article by Scott D. McClure, Steven E. Hollingworth and Nicole D. Brown of Hogan & Hartson LLP.
With roughly 300 audits now underway, Colorado has become a laboratory for IRS audits of conservation easements. While the State is working to constructively address abuses of it's lucrative state income tax credit, IRS audits remain largely indiscriminate. The Alliance is working with land trusts, attorneys and appraisers in Colorado to encourage a more strategic approach.
Colorado Senators Express Concerns to IRS (posted 11/17/09)
In a new letter, Senators Mark Udall and Michael Bennet urge the IRS to promptly conclude its many audits in the state and re-focus on cooperating with state officials to eliminate fraud. More
Advice to Landowners and Land Trusts Based on Lessons Learned in Colorado (updated 8/20/09)
At Rally 2009 in Portland, OR, attorneys and appraisers familiar with Colorado audits will present Workshop D16: "Lessons Learned in IRS Audits of Colorado Conservation Easement Donors" on Wednesday, October 14, 10:30am-Noon. For a preview of that session that's still very much relevant today, please read Attorney Bill Silberstein's article in the Summer 2007 issue of Exchange: "Easement Audits in Colorado: What Can We Learn From Them."
Colorado Easements in the News (posted 12/14/07)
Colorado's newspapers continue to cover investigations by the state and by the IRS of conservation easement donations in Colorado. The Alliance has been working closely with the Colorado Coalition of Land Trusts to help shape how the media handles this story. On Monday the Denver Post ran an excellent editorial, with a message we support: that the state is right to crack down on abusers, while supporting Colorado’s conservation easement program as one that has very successfully protected important conservation lands. Read the editorial.
IRS sends letter to Senator Salazar (updated 9/10/07)
The Land Trust Alliance and representatives of the Colorado's conservation community met with IRS officials in late July to discuss the conservation easement audits in Colorado. to Senator Salazar about the meeting. (pdf 688 KB)
For more information, please visit the Colorado Coalition of Land Trusts.
There has been increasing IRS attention to donations of conservation easements, resulting in several recent tax court cases. The Land Trust Alliance continues to support ethical, legal, and technically sound conservation easements but also recognizes that there are "bad easements" out there. We support the new reforms for appraisals and appraisers that passed as part of H.R. 4 in August of 2006.Learn more about those reforms
Those associated with Land Trust Alliance member land trusts can find more comprehensive case law information in the Conservation Defense Clearinghouse. Rob Levin's Case Law Summaries are particularly helpful (login first, then return here for a direct link).
Glass vs. Commissioner
The Land Trust Alliance and the Little Traverse Conservancy submitted a "friend of the court" brief in response to the IRS's appeal of a Tax Court verdict. The IRS argues for new and very narrow interpretations of what wildlife habitat is "significant" enough that its protection with a conservation easement would merit a tax deduction. The Alliance argues for a more inclusive interpretation.
On December 21, 2006, the 6th Circuit Court of Appeals ruled on the Glass case rejecting the IRS's arguments for a greatly narrower reading of what qualifies for protection with a tax-deductible donation of a conservation easement. The IRS's very narrow view of how stringent the protection the easement provides must be was also rejected. The IRS had argued that the easement cannot allow virtually any activity that could conceivably harm conservation values, under any circumstances. See the Circuit Court's decision below.
Ney vs. Commissioner
In this case, the IRS questioned the validity of the easement donation on two parcels of farmland owned by Bruce and Marina Ney. The IRS claimed that the petitioners did not comply with written substantiation requirements and they denied the charitable deduction. The Ney's appealed the IRS decision in court. Ultimately, the tax court agreed with the IRS, citing the lack of a qualified appraisal at the time of donation and the failure to obtain the appraiser's signature on Form 8283.
Turner vs. Commissioner
In May of 2006, the U.S. Tax Court disqualified a donated conservation easement for a tax deduction for failing to meet the specific standards of the tax law. The easement was donated by a real estate company to the county government. No land trust was involved. Land Trust Alliance agrees with the IRS in this case, and supports the decision that the easement did not meet the standards of the law. We applaud the court and the IRS for showing that enforcement of the existing law can work.
Simmons v. Commissioner
In recent months, we’ve shared news of several cases in which courts have sided with the IRS’ strict interpretation of the requirement that conservation donors obtain a letter describing their donation and declaring that no goods or services were provided in return. Land trusts should continue to send gift substantiation letters, but charities that have not sent these letters in the past might find encouragement by a recent case. In Simmons v. Commissioner, the court found that substantial compliance with the gift substantiation rules was sufficient, sharply contrasting with the strict compliance standard applied in the Bruzewicz and Gomez decisions.
United States v. Richey
In this the Court denied the IRS demand to see the appraiser’s work because of attorney-client privileges. As such, it appears easement donors may be able to strengthen their hand in case of an audit by having their attorney retain the appraiser to be used in valuing an easement donation. In this case, the IRS challenged the valuation of an easement donated to The Nature Conservancy and demanded that the appraiser turn over his entire work file. Instead the appraiser turned over his work file to the taxpayers’ attorney, and did not respond to the demand. The Court sided with the taxpayers saying that because the attorney hired the appraiser, that the appraiser’s private work file was protected by attorney-client privilege.
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Land Trust 990's and audits of land trusts are handled by an entirely different division of the IRS. Read more information.