Tax Issues for Land Trusts
Mitigation Banks & Unrelated Business Taxable Income
Mitigation banks can be related to charitable activities
A land conservation and nature education organization’s stream mitigation activities are substantially related to its exempt purpose and do not constitute an unrelated trade or business. The income the organization will receive from the sale of mitigation credits is not unrelated business taxable income ruled the IRS.
This does not make it a foregone conclusion that every stream mitigation activities fulfills an organization’s exempt purpose and so is not subject to UBIT. The IRS conducted an elaborate evaluation of the specific facts and circumstances of the transaction and the organization to reach that conclusion.
Citing Section 1.501(c) of the Treasury Regulations the IRS scrutinized if the activity was “regularly carried on” and if it had “a causal relationship to the achievement of exempt purposes” that is “substantive” and that “contributes importantly to the accomplishment of those purposes.” The IRS also examined the “frequency and continuity of activities and the manner in which they are conducted” to determine what constitutes “regularly carried on” in this context. A further exhaustive analysis of what constitutes “lessening the burdens of government” by the exempt organization ensued with the IRS finally agreeing that the organization did so by virtue of seven distinct obligations or activities.
Read IRS Revenue Ruling 2014-08031 (November 27, 2013).
Seven forms of guidance
For anyone not familiar with the inner workings of tax administration, the array of IRS guidance may puzzle you even after second and third glances. There are seven common forms of guidance. In administering the tax laws enacted by the Congress, the IRS must take the specifics of these laws and translate them into detailed regulations, rules and procedures. The Office of Chief Counsel fills this role by producing several different kinds of documents and publications that provide guidance to taxpayers, firms and charitable groups.
Review the seven forms of guidance.
In 2008, the IRS introduced a new Form 990 with many new questions and definitions, including Schedule D, which contains additional reporting requirements for conservation easements. All land trusts filing a full 900 should read the current instructions to the form very carefully and consult with a knowledgeable attorney or financial advisor.
Advice from the Land Trust Alliance
- Detailed Guide to the Form 990
- Guidance on How to Account for Conservation Easements
- Highlights of Schedule D Conservation Easement Questions
- Looking for advice on how to document conservation easement donations? Please visit the Conservation Donation Rules web page »
Forms and Highlights from the IRS
All nonprofit organizations are now required to file some version of the Form 990 each year. Starting with tax year 2009 (returns filed in 2010), an organization that has not filed for three consecutive years will automatically lose its tax-exempt status. The automatic revocation of exemption is effective as of the due date of the third required annual filing or notice. Unlike personal income tax returns, returns are due by the 15th day of the fifth month after the close of an organization’s tax year. For example, if a land trust’s tax year closes on December 31, its 990 is due by the following May 15.
For tax years 2010 and later (filed in 2011 and later), the filing requirements are:
- Organizations with annual gross receipts greater than or equal to $200,000 or total assets greater than or equal to $500,000 must file the Form 990.
- Organizations with gross receipts of less than $200,000 and total assets less than $500,000 may file Form 990-EZ.
- Organizations with annual gross receipts normally less than or equal to $50,000 must file the e-Postcard (also called the Form 990-N). Read more about the e-Postcard here. Learn more about filing requirements.
In addition to being required by the IRS, some state agencies that regulate charitable solicitations also require charities to file the full Form 990 as part of their annual report.
The purpose of Form 990 is to assess compliance with nonprofit law. Those rules are discussed at great length in Nonprofit Law and Recordkeeping for Land Trusts, Volume I: Complying with Federal, State and Local Law, part of the Standards and Practices Curriculum. This page is no substitute for those volumes or professional tax advice, but here are some guidelines and helpful refreshers from the IRS:
- IRS Nonprofit Governance Guidelines: In 2008, the IRS published a list of recommended governance policies and practices for tax-exempt organizations. These guidelines are consistent with Land Trust Standards and Practices and reflect themes stressed in the Form 990 and recent audits, including transparency, financial oversight and accountability.
- Compliance Guide for 501(c)(3) Public Charities: A concise pamphlet that summarizes the rules for maintaining your tax-exempt status.
- Stay Exempt: An IRS "micro-site" with virtual workshops and mini-courses to help nonprofit leaders maintain their organization’s tax exemption.
- Publication 557, Tax-Exempt Status for Your Organization: This is the IRS' detailed guide to securing and protecting your organization's tax-exempt status.
If your organization is audited, please email us so we can highlight resources available to you.