Rally 2009 IRS Panel Highlights
At Rally 2009, the Land Trust Alliance again invited three senior Internal Revenue Service officials answer questions on IRS scrutiny of conservation easements. The following is a quick summary of some of the points made by Karin Gross (IRS Office of the Chief Counsel, DC), Alex Nicholaides (IRS Senior Counsel SBSE, Michigan), and Ron Cerudi (IRS Field Specialist, Engineer). Attorney Steve Small and Director of Public Policy Russ Shay facilitated the discussion.
- The IRS downplayed the precedential value of the land trust and taxpayer win in Kiva Dunes calling it fact specific. (Alex) “No one should interpret the Kiva Dunes case as a green light for golf courses.” (Karin)
- Using knowledgeable appraisers with local expertise (usually this means having a local appraiser) is critical as shown in Whitehouse Hotels. (Alex)
- The IRS won the Bruzewicz case because the contemporaneous written acknowledgement letter simply didn’t exist. This may seem draconian, but the law says taxpayers must substantiate their deductions. (Alex)
- The Hughes case demonstrates that all statements in appraisals must be backed up by appropriate, accurate research done by the appraiser. Land trusts should take a hard look at the appraisal before signing off on Form 8283. (Alex)
- The Herman case shows that easements must provide more protection than is already provided by law to qualify under Section 170. (Alex)
- In Simmons, the court ruled with the taxpayer on substantial compliance with substantiation requirements, but the case may be appealed. Substantiation must be provided in writing, but it could be written into the easement or provided in some other form so long as it includes the necessary “goods and services” language. E-mail also is okay. But it’s best to provide substantiation as a separate document so the taxpayer can attach it to their return for an agent to see since that is what the agents look for. (Alex)
- The Colorado audits are an anomaly not likely to be repeated. (Ron, see full transcript below)
- Conservation easement deductions average $400,000 compared to $10,000 for donations of art and $50,000 for donations of stock; thus the IRS sees our sector as having a huge effect on revenue and equally huge opportunity for abuse (observation by Russ Shay to which the IRS panel nodded in agreement).
- The IRS needs to be more selective in transactions they review by concentrating on abusive cases. (Ron)
- Form 8283 must have a complete description of property and the higher the deduction the more complete the description should be. (Karin) Steve Small suggested attaching the baseline survey.
- Taxpayers may avoid unnecessary review by attaching the gift letter and the conservation easement to Form 8283 because the better the substantiation the more likely the reviewer is to move on. (Karin)
- Disclose any related person that has a financial interest in the transaction. (Karin)
- Baseline documentation provided by land trusts is not considered “goods or services” because it doesn’t reduce value and is part of necessary documentation. (Karin & Alex).
- The land trust paying for the appraisal is considered a goods or service because the regulations require the taxpayer to obtain the appraisal. (Russ)
- Renewable energy development and carbon sequestration do not qualify as conservation purposes as the statute is currently worded. (Karin)
- If a land trust feels the value on an 8283 is overstated, they should consider a review appraisal, document concerns about valuation to the donor, and if necessary, walk away. (Ron & Alex)
- Q Can a revenue agent start an examination and assert anything about the value of an easement before talking to a specialist? A. Oh, they can assert it, but history shows that assertion won’t carry a lot of weight down the road. If a taxpayer feels a revenue agent is off base on valuation, he or she can request in writing to a manager and the agent that a specialist look at valuation. (Ron)
- If the taxpayer feels an agent is wrong on a point of law, document the concern in writing and ask for a meeting with a manager. Send the documentation to the agent and the manager. (Ron)
- If necessary the Issue Management Team could get involved in disputes over points of law. They have no plans to disband the Issue Management Team. The agents can contact the attorneys assigned to assist in this area. No one wants to work on cases without issues. But don’t circumvent the revenue agent. (Karin)
- The IRS will not ignore amendments, especially if an amendment happens shortly after a donation. Amendments will cause the IRS to question if the easement is perpetual, especially if language in easement allows amendment at the discretion of grantor and grantee without reference to upholding the purposes of the easement. (Karin)
- Q. Would you challenge a deduction due to the requirement of a stewardship endowment? A. In one case, a historic trust required a down payment to even consider an easement and then demanded a percentage of the deduction or would not take the easement. Where there’s a requested contribution roughly equivalent to stewardship costs, I’m fine with that, but when it becomes a mandatory payment and it really looks like a commercial transaction it can be a problem. (Karin, see full transcript below)
Full Transcript of Karin Gross Comments on Stewardship Endowments
Q. Would you challenge a deduction due to the requirement of a stewardship endowment? A. Excellent question. If the land trust says to the donor we would like an amount of money equivalent to what we need to do our due diligence and make sure that you’re not violating the terms of the easement, I don’t have a problem with that, I think that’s just fine. But cash payments can be structured in all sorts of different ways. In the most extreme example that I’ve ever seen the historic trust required payment upfront—a down payment before they even began to talk to the taxpayer. And then at the time of granting the easement, the trust told the taxpayer what the amount of the deduction would be and said they must pay a percentage of the deduction or would not take the easement. That’s an extreme example we’re now challenging in court. So we have two ends of the spectrum—one where there’s a requested contribution that’s roughly equivalent to stewardship costs and I don’t have a problem with that, everyone understands that when non-cash contributions are made to charities, whether it be to land trusts or whatever kind of charity, there are some costs associated with taking care of that property. But when it becomes a mandatory payment and it really looks like a commercial transaction, and in this particular case there was even a discount for early payment. In the appropriate cases we will challenge that. As an interesting aside, in the Bruzewicz case we decided to abandon the cash payment issue, but the judge in a footnote questioned the cash payment and whether it was an appropriate deduction. (Karin)
Full Transcript of Ron Cerudi Comments on Colorado Audits
Colorado is an anomaly, the state asked us to come in and help out. What I learned from Colorado is that states can’t rely on the IRS to come in and police their conservation easement legislation. States are going to have to do that themselves. Sometimes they have great intentions and great programs, but they don’t figure out the enforcement details. I think Colorado has done a fantastic job with their recent legislation and hopefully our involvement in this stuff is going to be minimal. I’ll still be involved if we see something highly questionable, but if the legislation is implemented and staffed effectively I think it’s great progress. It would be really nice if we had closer communication with the state. In Colorado we have an information sharing agreement with Department of Revenue, but not Department of Real Estate. It’s very problematic that we can’t share with Department of Real Estate. In Colorado I think there has been a lot of misinformation; a lot of it is the result of our own internal requirements to protect taxpayer information, so there were a lot of misinterpretations of what we were doing and we couldn’t legally talk about it. A lot of what was in the papers just made me want to cringe. I should also mention that in the normal course of business we don’t tend to look at large concentrations of conservation easements in one area—we tend to be more selective. With our limited resources we prefer to focus on the most potentially abusive transactions. The first several transactions we looked at in Colorado weren’t just run of the mill easements, they were highly questionable and those are the kinds of transactions we need to be looking at rather than just normal conservation easements. (Ron)
We'd like to thank Steve Small and all three IRS representatives for making this session possible.
For more on IRS audits of conservation easements click here.