Rally 2013 IRS Panel Highlights
At Rally 2013, the Land Trust Alliance again invited senior Internal Revenue Service officials to answer questions on IRS scrutiny of conservation easements. The following is a summary of some of the points made by Karin Gross, Supervisory Attorney, IRS Office of the Chief Counsel (DC), and Marc Caine, IRS Attorney (NY). The Alliance had invited another senior official to attend but, due to the sequester, he was unable to attend. Attorney Steve Small and Land Trust Alliance Director of Public Policy Russ Shay facilitated the discussion.
The following highlights are distilled from Alliance staff notes. If you attended the IRS session and believe we are omitting or mischaracterizing an important point, please let us know via email.
- The provision in the Internal Revenue Code about carryovers and percentages is due to expire this year. Unless it’s extended, that will be the end of 15-year carryovers (Karin). Do not assume the enhanced conservation deduction incentives will be extended. Plan now if you want to benefit from them (Steve). If you haven’t yet called your member of congress on this, you should. (Russ)
- Valuation is important – even if the deduction is disallowed for other reasons (no gift letter, etc.) valuation is used to determine the percentage of the overvaluation when calculating penalties. (Karin)
- There are two parts to valuation, the “13 regs” (under 1.170A-13) which go to the qualified appraisal checklist and the “14 regs” (under 1.170A-14) which go to the credibility of the actual valuation. (Karin)
- The 13 regs describe record-keeping and substantiation. Under the 13 regs, the taxpayer must obtain a qualified appraisal or else the deduction is completely disallowed. (Karin)
- The 14 regs describe conservation purposes and explain the “before and after” approach to conservation easement valuation. Under the 14 regs, the taxpayer must show that the easement actually does have value or else the deduction is completely disallowed. (Karin)
- According to IRS Memo ILM 201334039 (which addresses the contiguous property rule) the “before and after” method must be based on all contiguous property owned by the same person. Even a disregarded entity (i.e. LLC that is owned by same person) that owns the property must be included. (Karin)
- Whitehouse Hotel v. Commissioner (a series of cases on the deduction for a property in New Orleans) involved valuation of contiguous property that was affected by the conservation easement. (Karin)
- The question of contiguity is a big question. Are properties separated by a road considered contiguous? In one case, the owner gave the state an easement for a road – thus the answer was different, in that state, than if the state used eminent domain to claim the property for the road. There are other local rules about divisions by rivers, roads, or county lines. Check with local counsel as to contiguity which is a matter of state law. (Steve)
- The enhancement rule states that if a donor owns related property that will be enhanced by the donation, the deduction will be reduced by the value of that enhancement. (Karin)
- If three neighboring landowners want to donate at the same time, they can’t technically donate simultaneously. (Karin) Rather their conservation easements will appear in a certain recording order even if they all signed their easements at the same time. You should talk to an appraiser about enhancement deductions and find out if the order of recordation filing would change the enhancement attributions. (Steve) This area of law is highly technical and rule bound.
- When reporting an easement worth $1 million that results in $100,000 enhancement on contiguous property, what do you report as the fair market value of the easement on Part I of the 8283 form? $1 million? $900,000? I suggest that you report either number on Part I, then claim the correct deduction in Part II and include how you got there in an attachment. (Steve)
- You can get a deduction for an amendment to increase acreage or increase restrictions but be sure to value all of the contiguous property in the appraisal and take into account enhancements to contiguous property. (Karin)
- The taxpayer may not know about other history on the property (LLCs, probate, etc.) so the taxpayer may want to do an investigation. Start the inquiry well before it goes to the IRS. Make sure that the landowner has the authority to convey the property. For example, an irrevocable trust does not have the authority to donate an easement. (Steve)
- Bear in mind, the 40% penalty on overvaluation is strict liability – taxpayers have to pay it even if they weren’t willful or negligent in overvaluation of the deduction. (Marc)
- There are also penalties for appraisers. If the “pattern of overstatement is habitual”, then that “appraiser should really be shut down.” (Marc)
- Do your donor a service by explaining the penalties without giving specific legal advice. (Karin)
- There are penalties for aiding and abetting people who file bad appraisals. There are fines and non-profits could lose their tax exempt status. (Marc)
- Appraisals that are based on a subdivision analysis tend to have a much higher valuation. Those tend to have the highest potential for abuse from the IRS perspective. To help with that, appraisals should have an explanation of how you got there (include local laws, zoning, etc.). (Marc)
- For subdivision analysis, we want to see an absorption rate. Typically the appraiser will list “12 – 15 months” but that’s just boilerplate and may not be realistic. (Marc)
- The appraisal should show the value of the property such that an outside party can understand it. (Marc)
- Even if the appraiser is great in your area, you need to be sure that they understand IRS tax rules because our requirements differ. (Karin)
- The IRS will look to see if the appraisal follows substantive USPAP requirements. (Marc)
- A land trust that sees an appraisal that “shocks the conscience” can refuse to sign the 8283. If you have similar easements with much lower appraisal values, you can contact the donor and explain that this is a risk and they could get audited. (Steve)
- With respect to gift letter requirements, you don’t need to include a date, however you should avoid language such as “you are now eligible for a tax deduction.” (Karin)
- On Form 8283, you should include a date and the date should be the date of recordation. (Karin)
- The IRS is not a roadblock for tax deduction. We’re just looking for the facts. I don’t have a checklist but we have an engineering department and they’ll do a test to see if the absorption rate is reasonable [in any subdivision analysis]. (Marc)
- There continues to be a perception that there is a disconnect between what IRS senior leadership says here and what revenue agents in the field are doing. IRS panelists want to hear from you personally if you or a landowner has been treated unfairly by field personnel. (Steve) Here are their phone numbers:
- Karin Gross: 202-622-8407
- Marc Caine: 516-688-1715
If you believe we are omitting or mischaracterizing an important point, please let us know via email.