IV. Most Common Technical Arguments Used By Irs To Attack Easements
In order to preserve its manpower resources and to try to avoid the need to engage appraisers to value the property, which can be an expensive and time-consuming proposition, the IRS routinely seeks to attack syndicated conservation easements under the numerous statutory and technical rules that must be followed in order to be able to claim the deduction, including trying to find deficiencies in the underlying deeds granting the easements. Here are some of the most common technical arguments the IRS advances to attack such easements:A. Failure to be a Gift
The existence of some form of quid pro in exchange for the easement, results in a lack of charitable intent and thus the gift requirement is not met;30B. Not a Restriction Granted in Perpetuity
The easement fails the test of being “a restriction ‘granted in perpetuity’ on the use which may be made of the real property”, and hence is not a qualified real property interest under section 170(h)(2)(C), because of:1. Improper Amendment Clauses
2. Improper Extinguishment/Proceeds Clauses
- The easement deed contains an amendment clause permitting the easement to be extinguished by the mutual consent of the donor/taxpayer and the donee/land trust;31 or,
- the easement deed contains language allowing the land trust and the landowner to change the property subject to the easement by substituting other property owned by the taxpayer for the property originally subject to the easement;32 or,
- the easement allows any amendment or modification that could affect the perpetual duration of the deed restriction.33
3. Improper Mortgage Subordination Clauses
- The IRS will argue that the conservation purposes of the deed are not protected in perpetuity if it allows the parties to agree to extinguish the easement other than by a judicial proceeding, as required by Treas. Reg. section 1.170A-14(g)(6)(i).34
- The IRS will also attack an easement deed and argue that the conservation purposes of the deed are not protected in perpetuity, if the deed contains an extinguishment clause that does not precisely track the Treasury Regulation’s formula found in Treas. Reg. section 1.170A-14(g)(6)(ii)35 and
- the IRS will further argue that proceeds with respect to improvements added to the property after the grant of the easement are also subject to the same rule.36
C. Conservation Purposes Not Met
- The IRS will argue that failure of a mortgagee to comply with Treas. Reg. section 1.170A-14(g)(i)(2) and execute and properly file a subordination agreement subordinating its rights in the property to the land trust will result in the conservation purposes of the deed not being protected in perpetuity.37
The easement contributed in perpetuity was not made exclusively for one of the four conservation purposes outlined in the law.38 For example, the IRS challenged and won a case involving golf course easements that were supposedly designed to protect certain natural habitats yet the easements permitted the use of pesticides.391. Reserved Rights
Rights reserved by a landowner/donor in the easement deed run afoul of Treas. Reg. sections 1.170A-14(e)(2)40 and 1.170A-14(g)41 to the extent such reserved rights are inconsistent with the conservation purposes of the deed.42I. Deemed Consents
The IRS will argue that certain language in an easement deed in which the donor reserves certain rights with respect to the eased property and those reserved rights are conditioned either on obtaining the written “deemed consent” of the land trust to whom the easement is being granted or the land trust is otherwise deemed to have consented to granting those reserved rights upon failing to respond to a donor’s request for permission to exercise the conditional reserved right within some time frame will strip the land trust/donee of its ability to protect the conservation values of the eased property.43D. Improper Baseline Documentation
The required baseline documentation – a special report that donors of conservation easements must have prepared documenting the condition of the property at the time of donation (see Treas. Reg. section 1.170A-14(g)(5)) -- is insufficient or was not prepared prior to when the eased property was transferred.44E. Problems with the Appraisal 1. Failure to Attach a Qualified Appraisal to Return
2. The Appraisal is not a Qualified Appraisal
- Failing to attach a “Qualified Appraisal” to the return for any easement the value of which exceeds $500,000 will cause the deduction to be disallowed;45
3. The Appraisal is not Timely
- The appraisal is not a qualified appraisal because it fails to include all the information required by law.46
- The appraisal attached to the returns fails to be a Qualified Appraisal because it does not comply with the regulations or the generally accepted appraisals standards set forth under the Uniform Standards of Professional Appraisal Practice (USPAP) as developed by the Appraisal Standards Board of the Appraisal Foundation.47
4. Appraisal Fee is Based on Value of Property
- Failure to timely submit the “Qualified Appraisal” will result in the deduction being disallowed48
F. Problems With the Appraiser
- The appraisal is invalid because the fee charged is based on the appraised value of the property.49
- For example, the IRS will challenge an appraisal if the fee charged by the appraiser is based on a percentage of the value of the appraised easement;50
The appraiser who prepared the appraisal is not a “qualified appraiser” as that term is defined under the Treasury Regulations.51G. Problems with the Form 8283
The Appraisal Summary (i.e., the Form 8283, “Noncash Charitable Contributions”) that needs to be submitted with the taxpayer’s filed return for the easement transaction is incomplete and otherwise does not accurately describe the eased property is missing signature or has inconsistent dates.52
H. Lack of Contemporaneous Written Acknowledgement (CWA)
- For example, in one case, the IRS argued, and both the United States Tax Court and the D.C. Circuit agreed, that the Form 8283 was fatally deficient because it did not state the cost basis of the donated property.53
The donee (land trust) has failed to provide to the donor (landowner) the required CWA or the contents of said letter do not meet the requirements of the law.54
- See Hernandez v. Commissioner, 490 U.S. 691 (1989) (if the benefits received or expected to be received are greater than those that inure to the general public, then the transfer fails the section 170 charitable intent requirement); Pollard v. Commissioner, T.”C. Memo. 2013-38 (charitable deduction with respect to a conservation easement was disallowed because the conveyance was part of a quid pro quo exchange).
- Carpenter v. Commissioner, T.C. Memo. 2012-1 motion for reconsideration denied, T.C. Memo. 2013-172 (since the restrictions in a deed were supposed to be perpetual, the decision to terminate them could not be done solely by the interested parties).
- Belk v. Commissioner, 140 T.C. 1 (2013), motion for reconsideration denied, T.C. Memo. 2013-154, aff’d 774 F.3d 1243 (4th Cir. 2014).
- Wachter v. Commissioner, 142 T.C. 140 (2014) (conservation easement in North Dakota was disqualified for a charitable contribution deduction because North Dakota law limited easements to a maximum duration of 99 years).
- See Carpenter v. Commissioner, T.C. Memo. 2012-1, motion for reconsideration denied, T.C. Memo. 2013-172.
- The formula states that in the event of a judicial condemnation or a sale, in order for the conservation purposes to be protected in perpetuity, the donee must be entitled to a portion of the proceeds in an amount that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as whole. Treas. Reg. 170A-14(g)(6)(ii). The proportionate value of the donee’s property rights is a percentage of the value of the entire property that never changes. Id. See, e.g., Caroll v. Commissioner, 146 T.C. 196 (2016) (easement deduction disallowed because the extinguishment language in the deed did not precisely track the language of the regulation).
- See, e.g., PBBM-Rose Hill Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126 (2019) (granting the government's motion for partial summary judgment holding that the "judicial extinguishment" provisions of the easement deed did not satisfy the requirements of Treas. Reg. § 1.170A-14(g)(6)); TOT Property Holdings LLC v. Commissioner, Docket No. 5600-17 (Order dated December 13, 2019) and Glade Creek Partners LLC v. Commissioner., T.C. Memo. 2020-148 (applying the analysis in Coal Property Holdings LLC v. Commissioner, 153 T.C. 126 (2019), the Court agreed with the IRS that the proceeds clause in Glade Creek’s easement deed didn’t comply with the protected in perpetuity requirements of § 170 because it failed to guarantee that the donee would receive the full proportionate share of the proceeds if the easement was judicially extinguished and the property sold because the extinguishment clause allowed for the value of future improvements made subsequent to the easement being granted being taken into account in the computation); Hewitt v. Commissioner, T.C. Memo. 2020-89 (easement deed’s judicial extinguishment provisions did not satisfy the perpetuity requirements of Treas. Reg. § 1.170A-14(g)(6) because the deed would subtract the value of post-easement improvements made by the donor when determining the donee’s share of the proceeds if the easement was judicially extinguished and the property).
But cf. St. Andrews Plantation, LLC v. Commissioner, Docket No. 20849-17 (Order dated November 16, 2020) (Court denies respondent’s summary judgment motion finding that a deed which failed to guarantee the donee its proportionate share of proceeds if the conservation easement was judicially extinguished did not violate the perpetuity requirement because the future improvements reserved in the deed (permitting maintenance of existing modest improvements, which consisted entirely of a forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate) could not increase the fair market value of the subject property (or any increase would be de minimis) thus not necessarily resulting in the donee organization receiving less than its proportionate share of proceeds in the event the property was sold following judicial extinguishment of the easement).
- See Mitchell v. Commissioner, 138 T.C. 324, 332 (2012), motion for reconsideration denied, T.C. Memo. 2013-2014 aff’d by the U.S. Court of Appeals, Tenth Circuit, No. 13-9003 (January 6, 2015) (a mortgage subordination agreement must be in place at the time the conservation easement is granted to satisfy the regulation’s protected in perpetuity requirement; see also Minnick v. Commissioner, T.C. Memo. 2012-345 aff’d 796 F.3d 1156 (9th Cir. 2015) (a mortgage subordination agreement executed 5 years after the grant of the easement did not satisfy the mortgage subordination requirement in Treas. Reg. 1.170-14(g)(2) and thus the easement failed the “protected in perpetuity” requirement).
- The four conservation purposes are: (1) to preserve land areas for outdoor recreational or educational use by the general public; (2) to protect the natural habitat of fish, wildlife or plants; (3) to preserve open space for the scenic enjoyment of the general public or pursuant to a Federal, State or Local conservation policy for the benefit of the general public; and (4) the preservation of important historical land areas or structures. See I.R.C. §§ 170(h)(1)(C) and § 170(h)(4).
- See Champions Retreat Golf Founders, LLC v. Commissioner, T.C. Memo. 2018-146, slip opinion at 30.
- Treas. Reg. § 1.170A-14(E)(2) provides that “a deduction will not be allowed if the contribution would accomplish one of the conservation purposes but would permit destruction of other significant conservation purposes.”
- Treas. Reg. § 1.170A-14(g) provides in relevant part that “[i]n the case of any donation under this section, any interest in the property retained by the donor . . . must be subject to legally enforceable restrictions . . . that will prevent uses of the retained interest inconsistent with the conservations purposes of the donation.”
- See, e.g., Glass v. Comm’r, 471 F.3d 698 (6th Cir. 2006) aff’g 124 T.C. 258 (2005) (even though the donors had retained certain rights over the property enabling them to build a boathouse, storage shed, day shelter and a scenic viewing platform, as well as for cutting vegetation for safety and view purpose and for walking paths, the Court still held that the conservation easements were granted for conservation purposes within the meaning of I.R.C. § 170(h)(4) since the overall easement purpose and effect was to protect bald eagles and endangered plant habits); Butler v. Commissioner, T.C. Memo. 2012-72 (Court found that certain rights retained by donors over the property conserved were not inconsistent with the conservation purposes of the donation which was to protect significant natural habitats and ecosystems found on the property).
- See Hoffman Properties II, LP v. Commissioner, Docket No. TL-14130-15 (Tax Court Order dated July 12, 2017) (taxpayer denied an easement deduction because a “deemed consent provision “ placed in the easement deed -- which provided that the donee land trust would be deemed to consent to any written request by the donor to exercise certain rights it had reserved in the deed if the land trust failed to respond within 45 days -- curtailed the donee land trust’s rights to approve or deny changes and therefore the easement could permit the taxpayer to use the eased property in a manner inconsistent with the conservation purposes protected by the easement).
- Bosque Canyon Ranch II, L.P. v. Commissioner, 867 F.3d 547 (5th Cir. 2017) vacating and remanding T.C. Memo. 2015-130 (donors failed to make appropriate baseline documentation available to the land trust at the time of the grant of the easements).
- The current “qualified appraisal” requirements are found in I.R.C. § 170(f)(11) and Treasury Regulation § 1.170A-17. This regulation applies to contributions made on, or after, January 1, 2019, although taxpayers may rely on the rules of this regulation for appraisals prepared for returns or submissions filed after August 17, 2006. Treas. Reg. § 1.170A-17(c).
For the “qualified appraisal” regulations in effect before Treasury Regulation § 1.170A-17 one needs to look at Treasury Regulation § 1.170A-13. See also IRS Notice 2006-96 for transitional guidance regarding I.R.C. § 170(f)(11)(E)’s definitions of “qualified appraisal” and “qualified appraiser.” Taxpayer can rely upon IRS Notice 2006-96 prior to the effective date of Treasury Regulation § 1.170A-17.
- See Treas. Reg. § 1.170A-17(a)(3) which outlines the specific items that must be included in the report for it to be a qualified appraisal. These items include:
See, e.g., Cave Buttes v. Commissioner, 147 T.C. No. 10 (2016) (over the IRS objections that the appraisal was not prepared by a qualified appraiser, did not include the qualifications of the appraiser who prepared the report, did not include a sufficiently detailed or accurate description of the property, failed to include a statement that appraisal had been prepared for income tax purposes, the date of value was not the date of the purported contribution, and that the appraisal otherwise used a definition of fair market value that was different than the definition provided by the treasury regulations, the Court held that the appraisal was a qualified appraisal because it substantially complied with the appraisal summary requirements under the regulations).
- A detailed description of the property.
- The property’s physical condition.
- The valuation effective date.
- The fair market value of the contributed property on the valuation effective date.
- The terms of any agreement relating to the property’s use, sale or other disposition.
- The date or the expected date of the contribution.
- The appraiser’s name, address, and taxpayer identification number, and that of the appraiser’s employer or partnership.
- The qualifications of the appraiser, including the appraiser’s background experience, education and membership in professional appraisal associations.
- A declaration made by the appraiser that the appraisal was made for income tax purposes.
- The date the property was appraised.
- The appraised fair market value of the property on the date or expected date of the contributions.
- The method of valuation used to determine the fair market value.
- The specific basis for valuation (such as a specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure used.
- Treas. Regs. § 1.170A-17(a)(1) & (2).
- For appraisals of contributions made on, or after, January 1, 2019, there are two timing requirements effectively limiting the valuation effective date to a 60-day period ending on the contribution date: the appraisal report date (the date the appraiser signs and dates the appraisal) and the valuation effective date (the date the value opinion applies). First, a qualified appraisal's appraisal report date must be no earlier than 60 days before the contribution date, and no later than (i) the return due date (including extensions) on which the deduction is first claimed; or (ii) if the donor is a partnership or S corporation, then the return's due date (including extensions) on which the deduction is first reported; or (iii) if the deduction is first claimed on an amended return, the date the amended return is filed. Treas. Reg. § 1.170A-17(a)(4). Second, if the appraisal report date is before the contribution date, the valuation effective date must be no earlier than 60 days before the contribution date, and no later than the contribution date. Treas. Reg. § 1.170A-17(a)(5)(iii). Prior to the enactment of these regulations the timing requirement for a Qualified Appraisal was set forth in Treas. Reg. § 1.170A-13(c)(3)(i)(A).
- Treas. Reg. § 1.170A-17(a)(9).
- See Treas. Reg. § 1.170A-13(c)(6)(i), the former regulation that governed appraisal fees prior to enactment of Treas. Reg. § 1.170A-17(a)(9).
- Treas. Regs. § 1.170A-17(b).
- Treasury Regulation § 1.170A-16(d)(1). This regulation applies to all noncash charitable contributions made after July 30, 2018, although taxpayer may rely on the rules of this regulation for contributions made after June 3, 2004, or appraisals prepared for returns or submission filed after August 17, 2006. Treas. Reg. § 1.170A-16(g). Prior to the enactment of this regulation the requirements for Form 8283 were set forth in I.R.C. § 170(f)(11)(D); see also, the IRS Conservation Audit Techniques Guide published in 2012 and last revised in January 2018 found at IRS Website at page 27.
- See Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019), aff’d RERI Holdings I LLC v. Commissioner, 149 T.C. 1 (2017). Note this case was decided under former Treas. Reg. § 1,170A-13.
- I.R.C. § 170(f)(8); Addis v. Commissioner, 374 F.3d 881, 887 (9th Cir. 20014), aff’g 118 T.C. 528 (2002) (“the deterrence value of section 170(f)(8)’s total denial of a deduction comports with the effective administration of a self-assessment and self-reporting system); see also the IRS Conservation Audit Techniques Guide, supra note 36, at page 25.