The IRS Chief Counsel has signaled with CCA 202130014 that the Service will likely be persevering with its exhausting line on conservation easements. The engine of each abusive syndicated conservation easement is a vastly inflated appraisal. Moderately than concentrate on the appraisal difficulty, IRS has as a substitute gone after technical flaws within the easement paperwork. What’s disturbing about that method is that it could be relevant to official easement transactions.
About Easement Deductions
There’s a normal rule that partial pursuits in property will not be deductible as charitable contributions. Certified easements are an exception to that rule. Since there may be not lots of shopping for and promoting of easements, they’re often valued on a earlier than and after foundation. The earlier than worth is the place all of the shenanigans are, however that isn’t what the CCA is about. The CCA is about “perpetuity”.
Eternally Is A Lengthy Lengthy Time
One of many necessities of a professional easement is that or not it’s perpetual, which is a very very long time and as a sensible matter nothing on earth might be actually perpetual. To be able to make issues as perpetual as potential, the rules present that within the occasion of a judicial termination of the easement, say from a taking by eminent area, the proceeds must be break up in accordance with the share of worth established on the time of the easement. And the certified group that maintain the easement has to make use of its share for conservation functions.
However what about enhancements which can be made subsequent to the easement? You will have a bit of land on which you possibly can conceivably have constructed 100 homes. It’s price $10 million or so that you say. You give an easement to a land belief which lets you construct one home. Now the land is price $100,000. Or so that you say for functions of your charitable contribution of $9.9 million. You utilize half or so of your tax financial savings to construct a $2 million home.
Years go by and issues change. The property is taken by eminent area. The state is much less sanguine in regards to the prospects of the property and offers $4 million for it. You desire a deal that offers you $2 million off the highest for the home and a 99% break up to the land belief on the stability. In response to the ruling and the IRS place in court docket the place they’ve typically been successful, you flunk the perpetuity requirement. No deduction for you.
One thing that the advocates of official conservation easements may admire is that the CCA contains recommended language to fulfill the perpetuity requirement.
Donor agrees that the donation of the perpetual conservation restriction described on this deed offers rise to a property proper, instantly vested within the donee group, with a good market worth that’s at the very least equal to the proportionate worth that the perpetual conservation restriction, on the time of the present, bears to the truthful market worth of the property as a complete at the moment. For functions of this paragraph, the proportionate worth of the donee group’s property rights shall stay fixed.
On a subsequent sale, change, or involuntary conversion of the topic property, the donee group will likely be entitled to a portion of the proceeds at the very least equal to that proportionate worth of the perpetual conservation restriction.
All the donee group’s proceeds from a subsequent sale or change of the property have to be utilized by the donee group in a way in keeping with the conservation functions of the unique contribution’
What can be actually equitable can be for the IRS to permit donors and land trusts to retroactively repair paperwork that fail the requirement. The abusive syndicated conservations easements need to be crushed, nevertheless it shouldn’t be on the expense of official offers.
For a decade’s price of protection of tax facets of easements take a look at my Conservation Easement Tax Deduction Protection Spherical Up.