Rally 2010 IRS Panel Highlights
At Rally 2010, the Land Trust Alliance again invited three 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), Marc Caine, IRS Attorney (NY) and Ron Cerruti, IRS Engineering and Valuation Territory Manager (CA). Attorney Steve Small and Land Trust Alliance Director of Public Policy Russ Shay facilitated the discussion.
At the session, the IRS panelists circulated an unofficial “Issue Identification Worksheet” that revenue agents have been using to evaluate easement compliance with the applicable law and regulations. The version presented here corrects an error identified by the audience at Rally.
The following highlights are distilled from our notes. If you were there and believe we are omitting or mischaracterizing an important point, please let us know by emailing email@example.com.
- Given three recent IRS wins on “technical” issues (the Kaufman, Scheidelman and Lord tax court cases), the IRS will likely continue to press these issues. (Steve) This year’s cases on 170(h), contemporaneous acknowledgement, and valuation are not new issues – you need to follow these longstanding rules. (Marc) We’ve been talking about these issues at Rally for years, but we’re just getting the decisions now. The courts are saying we don’t need to get into complicated valuation issues because basic documentation is lacking. Agents are trained to resolve cases on the simplest basis possible (Karin).
- There are about 100 conservation easement cases currently docketed (Marc). There are many Colorado and historic preservation cases coming up next year. Remember there are bad deals out there: over valuation, bad documentation, criminal scams, and historic preservation easements with deficient appraisals (Russ).
- Sheidleman v. Commissioner concerned a façade easement in Brooklyn. Appraiser said donation was 11% of building value (about $115,000) with little rationale. The appraisal was thrown out on summary judgment. (Ron)
- Regarding the stewardship donation in Scheidelman, Judge Halpern suggested the mandatory nature of the payment may not be a problem by itself, but the IRS also looks for things akin to a “used car” transaction (issue discussed in Supreme Court’s Hernandez case), such as a discount for early payment -- factors unrelated to actual stewardship costs. (Ron) We understand that land trusts need cash to monitor conservation easements – this is required of a “qualified organization” and is not something we would challenge. But the transaction in Scheidelman looked very commercial: a required payment for signing of 8283, tied to percentage of appraisal rather than stewardship costs. A commercial transaction lacks the charitable intent required of a charitable gift. (Karin)
- The IRS won the Kaufman case on summary judgment based on a deficiency in the lender agreement (subordination). It’s an important condition for perpetuity that even if the conservation easement is extinguished, the land trust won’t end up with nothing. Under 1.170A-14(g)(2) the lender must subordinate interest to the conservation easement, and in case of condemnation or extinguishment, proceeds must go to the land trust, not just landowner and bank (Karin). The lender must actually subordinate the mortgage, not just “consent” to the easement (Steve).
- There are 90 pages of regulations that deal with charitable donations and conservation easements. The revenue agent may never have seen a conservation easement before. Make their job and your experience easier by providing more information up front: 8283 in detail – properly filled out and detailed baseline report (consider attaching to return). (Ron) Also attach the (f)8 contemporaneous written acknowledgment letter (Marc). Attach a copy of the CE deed to 8283; it should be referenced as . “Easement at [address]” is not an adequate “description of donated property” for a Form 8283. (Karin) Steve noted his “ ” tend to run 3 to 9 pages. Landowners have years to get to know their property; a detailed statement can help a revenue agent understand its value too.
- Valuation is a secondary issue to documentation. If an agent gets a well documented package and lacks the resources to look at valuation, the process is over. If documentation is incomplete, they’ll keep digging and may also get to valuation. (Ron) Prompt responses, open communication and binders of documentation will help them meet internal deadlines and resolve an audit before it goes to court. (Marc) The IRS has been emboldened by recent Tax Court decisions. Good documentation will help get them to move on to someone else who didn’t properly document (Steve).
- Form 8283 is NOT a contemporaneous written acknowledgement ((f)8 statement) – don’t tell us that it is – substantial compliance is not good enough. This has been the law since 1993. Must be contemporaneous, have “goods and services language,” and while not required, it’s prudent to file it with the tax return (Karin). And the land trust should keep a copy in their easement files in case landowner loses theirs (Russ). Filing with the return can help avoid a fishing expedition (Steve).
- Changing form 8283 to serve as “contemporaneous written acknowledgement” or to clarify that donations of land aren’t “qualified conservation contributions” would add a page and be a major, multiyear task for the IRS, so we need to educate CPAs instead (Russ).
- The IRS does not expect land trusts to be appraisal experts but they do have a duty to look over the 8283 to see that the landowner did it right and to point out deficiencies to the landowner. (Karin). IRS has new “issue identification worksheet” that identifies potential issues from the 90 pages of regulations – this can be a helpful tool for you (Ron).
- Taxpayers have 60 days to amend returns to correct errors such as failing to file the 8283 (Marc). BUT, proposed regs may do away with 60 days to file amended return. The 8283 has been required since 1984 and failure to file could be reason for denial of the deduction. The taxpayer should at least attempt to make good by filing amended return. (Karin)
- In the hypothetical case of a landowner failing to get a subordination agreement before the conservation easement is recorded, the donation does not qualify as a qualified conservation contribution, even if the subordination is obtained and filed later – it must be contemporaneous to be enforceable in perpetuity (Karin). Land trusts should help donors by not accepting easements that don’t meet the perpetuity requirements for deductibility, including all due diligence supplemental material. (Steve).
- If there is a full mortgage discharge, but bank won’t record for several weeks, then get date stamped copies of discharge delivery to recorder, even if not yet “recorded.” Exact rules and the helpfulness of things like title insurance may depend on state law (Steve).
- The Turner case was a successful prosecution of a deduction on the basis of conservation purposes– the court said it didn’t protect anything. The Glass case also related to natural habitat, but IRS lost (Karin).
- A landowner may claim a deduction for public recreation or educational purposes even if they charge access fee. The IRS was concerned about things like private golf clubs, not nominal access fees. (Karin)
- Extinguishment of a conservation easement would be lawful if its conservation purposes are impossible or impractical to continue. If not within that context, consequences would be a taxable windfall for the donor. (Karin)
- Tax returns are selected for audit and sent to a local office based on an automated score of “risky” issues (and this process can’t tell if it’s a CE). CEs are not automatically sent to Marc or Karin, but a revenue agent may choose to call in such experts if needed. (Ron) Most revenue agents are CPAs who don’t know conservation and have to make a fast decision. By the time a return gets to somebody who knows about CEs, the landowner is in big trouble. Land trust’s job to make it clear that the easement provides significant public benefits and tax laws are complied with in plain language. (Russ) An audit starts with a legal issue such as compliance with 170(h), then an engineer may be brought in to look at valuation. Sometimes it may seem like agents don’t know the issues, but they can turn to teams of technical advisors, and losing faith in the revenue agent is a fast track to litigation. (Marc)
- “Emerging issues case” is a term for something we don’t have a lot of experience with, something for us at the IRS to pay more attention to, which may be contrary to the regs, such as giving CEs a standard percentage diminution in value. It may become a “coordinated issue” formally addressed in a paper that goes out to the field (Ron). It’s a term of art among Appeals staff suggesting the need to seek technical guidance from a national coordinator (Marc).
- When facing an audit you have right to sit down with agent and appraiser to talk through these complicated issues. If you perceive you’re not being treated well, you have a right to talk to an agent’s supervisor. (Ron) If an agent is making a serious mistake, ask them to ask for help from specialists, and if no response, ask a supervisor directly. (Karin) You can also turn to the IRS tax payer advocate or your local congressperson. There’s no sense going to court when an audit can be resolved with a phone call. (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
- Ronald M.Cerruti: 415-522-6132
If you believe we are omitting or mischaracterizing an important point, please let us know by emailing firstname.lastname@example.org. Thanks.