Readers know that Sirote & Permutt is frequently hired to defend IRS challenges to deductions claimed by taxpayers relating to qualified conservation contributions (otherwise called conservation easements). The basics under Code Section 170(h) provide that a “qualified conservation contribution” is a taxpayer’s contribution of a qualified real property interest, to a qualified organization, exclusively for conservation purposes.
As previously reported, most audits of conservation easements involve the IRS disputing the deduction on one or more of the following grounds: (1) whether the taxpayer claiming the deduction satisfies all of the reporting requirements applicable to conservation easements, (2) whether the value of the conservation easement claimed by the taxpayer is appropriate and properly documented by a qualified appraisal prepared by a qualified appraiser, and (3) whether the gift of the conservation easement protects certain conservation purposes described in Section 170(h) in perpetuity.
In connection with the third issue (whether the gift protects certain conservation purposes in perpetuity), we often work closely with land trusts who are intimately involved in the process of making sure that the grant of a conservation easement protects the conservation purposes that Congress wants protected and to make sure that the eased property is properly maintained and monitored following at the grant of the easement. The land trust is a key player and is essential to the process of protecting the conservation purposes in perpetuity. Such a land trust is normally considered a “qualified organization” under Section 170(h).
Not just any organization can serve as a “qualified organization”. One of the key requirements is that the organization be one of several different types of 501(c)(3) organizations that is operated exclusively for one or more exempt purposes. Additionally, the organization must have a commitment to protect the conservation purposes of a donation of a qualified conservation contribution and have the resources to enforce the restrictions imposed by the conservation easement deed.
Fortunately, in our conservation easement practice, we have had the opportunity to work with a great number of land trusts which work diligently to make sure that they continue to maintain their tax exempt status and their status as a qualified organization. When we are implementing or defending an easement, we concern ourselves with the requirements outlines above but have not yet had the misfortune of having to be concerned with a land trust’s status as a “qualified organization.” In fact, one of the benefits of the LTA and the land trust community’s efforts to “self-police” is that this normally is a non-issue.
But that is not always the case and a recently (on February 18, 2014) issued IRS Release, Release 20140518, tells a tale of woe in which an organization that considered itself a qualified organization, and that had previously received an advanced ruling from the IRS that the organization was exempt from tax under Section 501(a) of the Code as a 501(c)(3) organization, lost its status as an exempt organization under Section 501(c)(3) because it was not being operated for exempt purposes. Rather, in revoking the tax exempt status, the IRS concluded that the organization was simply a conduit for the entity’s president (who is described as having vast knowledge and experience in the field of public accounting as demonstrated by his being one of less than 250 non-lawyers nationwide admitted to practice before the United States Tax Court) to help his clients obtain sizable deductions. In its analysis, the IRS reviewed in detail 3 land transactions that the entity had entered into that were deemed to be connected to the president and showed that the president’s intent and goals were not concerned with environmental or conservation issues, but rather that the president used the organization as a vehicle for the enrichment of his clients. The Release is painful reading for the land trust community and serves as a warning that the IRS is serious about whether a land trust is properly operated under applicable law.
Of course, the entity and its president will have the opportunity to fight this revocation and, other than the IRS’s description of the facts in that case, we have no way of knowing what really happened. Things like this may not always be what they appear to be. Thankfully, taxpayer information like that cannot easily be disclosed and must normally be kept confidential.
Release 20145018 illustrates that the role of the land trust in conservation easement transactions is very important and that a key to successfully donating a conservation easement includes making sure that the donee of such a grant truly is a “qualified organization.” The Release puts all on notice to carefully review each potential donee of a conservation easement to be certain that it satisfies the Code’s requirement for being a “qualified organization.”