Friday April 19, 2024
|
|
|
|
|
1.1.5 Gifts of Partial Interests in Property
|
|
|
Permanent Charitable Tax Extenders
In December of 2015, both the Senate and House passed the Protecting Americans From Tax Hikes Act of 2015 (H.R. 2029). The bill makes permanent four charitable tax extenders.
The four permanent charitable provisions include the following:
1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.
2. Food Inventory Gifts – An enhanced deduction for contributions of "apparently wholesome" food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.
3. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.
4. S Corporation Appreciated Gifts – A Subchapter S corporation may give appreciated stock or land to charity. Only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.
Partial Interests in Property
Property gifts are normally transfers of an entire asset. If a person gives the charity all rights and title, the gift is normally considered a long-term capital gain gift deductible up to 30% of adjusted gross income. However, if a person gives only part of the property rights, the gift may not be deductible. Sec. 170(f)(3).
As is true of many charitable deduction rules, the purpose of the partial-interest rule is to minimize abuse. If gifts of partial-interests were generally deductible, donors might tend to attempt to give portions of property and take deductions that exceeded the actual value transferred. Therefore, there are very specific requirements that affect charitable deductions for partial-interest gifts of property.
Gifts of Real Estate
Many partial-interest issues arise with respect to gifts of real estate. For example, a person may wish to give the land, but not the mineral rights. Alternatively, the person may be willing to allow use of the property for a period of time, but would like to retain ownership. Both of these are classic non-deductible partial-interests gifts. Reg. 1.170A-7(a).
Undivided Interests in Real Property
If a donor owns real property, he or she may make an undivided interest gift to a charity of each and every interest in the property. This gift will qualify for a deduction. Reg. 1.170A-7(b). However, if the gift is a minority interest in real property, the gift may be subject to a minority interest discount. Rev. Rul.87-37.
Normally, the undivided interest is a percentage of the entire asset. However, the undivided interest could be a fractional interest defined as a percentage of each year. PLR 9303007. A donor could give a home to a charity and retain the months of July and August. The gift of 10/12ths of the home would be deductible.
Example 1.1.5A Gift of Art
John Art Owner could give the right to own and display art to a charity for eight months each year, and retain the right to own and display the art for four months. Reg. 1.170A-7(d). So long as the charity has both the right and the access to possess the property, the charitable deduction will be permitted. Winokur v. Commissioner. If a calendar-divided gift of art is contemplated, it is very helpful if the charity actually takes possession and displays the collection during its designated period of time. In some circumstances, it may be possible to give the charity different time periods for different parts of an art collection. The collection thus could be rotated through the home of the donor and the gallery of the charity, with part of the collection on display in each location at all times.
Unitrusts, Annuity Trusts or Pooled Income Funds
A very specific authorization in the Code is given to create split interest trusts. The charitable remainder unitrust and annuity trust must pay a fixed percentage or annuity to one or more non-charitable beneficiaries, with the remainder to charity. Sec. 664. A pooled income fund allows collective investments and income paid to one or more persons, with a remainder to charity. Sec. 642(c).
Life Estates in Home or Farm
A life estate interest is the right to use property for a person's lifetime. If the life estate is retained in a home or a farm, then the value of the remainder interest produces a current deduction. Reg. 1.170A-7(b)(3). An undivided interest in the remainder may also be given. Rev. Rul. 87-37. The home must be a personal residence, but need not be the primary residence. Reasonable surrounding grounds, which is a question of fact determined by the customary lot size in a given area, may be included in the deed of the remainder interest to the charity. A farm is defined as land that is used for the production of agricultural products, including crops or timber. Reg. 1.170A-7(b)(4).
The remainder interest for home or farm is normally one or two lives, but may also be a remainder following a term of years. Reg. 1.170A-7(b).
Conservation Easements
A qualified conservation easement may be transferred to a charity and there will be a deduction for the reduction in value in property. Reg. 1.170A-14(a). Some owners choose to give the qualified easement, but to retain the mineral rights. The retention of mineral rights will not void the deduction, so long as the minerals cannot be extracted through a surface mining method. Sec. 170(h)(5)(B)(i).
The easement must be exclusively for conservation purposes and must be made to a qualified governmental or other environmental organization. Reg. 1.170A-14(c). The gift of a perpetual easement results in a charitable deduction. The property will be appraised and the difference between the initial property value and the lower value for the property encumbered by the easement will be the charitable deduction. If the property is transferred through the estate, the easement deduction will be allowed as a charitable deduction for the estate. Sec. 2055(f).
As a note of caution in recent years, the is focusing on combating abusive syndicated conservation easement transactions, where the deduction for the conservation easement exceeds the investment in the property. The IRS has coordinated examinations of these transactions and designated them as listed transactions. If an abusive transaction is found, the IRS is imposing penalties, interest and fees for substantial or gross misstatements as to value. Taxpayers involved in syndicated conservation easement transactions are required to provide disclosure to the IRS under Notice 2017-10.
Conservation Easement Deductions
Conservation easements are deductible if a qualified real property interest is given to government or a qualified conservation charity. A qualified interest may be the entire property other than a qualified mineral interest, a remainder in real property or a restriction in perpetuity, such as a permanent conservation easement. The conservation easement must preserve land for outdoor recreation, protect natural habitat of wildlife, preserve open space or preserve historically important land or a certified historic structure.
Most gifts of appreciated property qualify for a charitable deduction with a 30% of adjusted gross income (AGI) limit and a five-year carry-forward. However, a qualified conservation contribution to an organization described in Sec. 170(b)(1)(A) is deductible to the extent of the excess of 50% of the contribution base over the amount of all other allowable charitable contributions. Therefore, other charitable contributions are first deducted under Sec. 170 provisions. Then, to the extent that other contributions do not exceed 50% of AGI, qualified public charity conservation gifts are deducted. If there is a carry forward for qualified conservation gifts, it may be used over the next 15 years. Sec. 170(b)(1)(E).
Example 1.1.5B Conservation Easement 50% Deduction
Joe Landowner has a contribution base of $100,000 and makes a qualified conservation contribution of $80,000 this year. He also gives cash of $70,000 to public charities. Joe may deduct 60% or $60,000 of the cash gift, and will carry forward $10,000 of the cash gift for up to five years. The $80,000 conservation gift does not qualify for a current deduction, but may be carried forward for up to 15 years.
Conservation Deductions For Farmers and Ranchers
For qualified farmers and ranchers, the deduction is increased to 100% of the excess of the taxpayer's contribution base over the amount of all other allowable charitable contributions. The excess may also be carried forward for 15 years. Sec. 170(b)(1)(E)(iv)(I). The qualified farmer or rancher must receive more than 50% of his or her gross income (as defined in Sec. 2032A(e)(5)) from ranching or farming activity and the land must remain available for agricultural or livestock production. Sec. 170(b)(1)(E)(iv)(I).
Example 1.1.5C Ranch 100% Deduction
Jane Rancher has a contribution base of $100,000 and makes a qualified ranch conservation easement gift of $80,000 this year. She also gives cash of $70,000 to public charities. Jane may deduct 60% or $60,000 of the cash gift, and will carry forward $10,000 of the cash gift for up to five years. The $80,000 conservation gift qualifies for a $40,000 gift this year (the difference between the 50% deducted and 100% of the contribution base) and the $40,000 balance of the conservation gift may be carried forward for up to 15 years.
In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher, for the taxable year in which the contribution is made, any qualified conservation contribution is allowable up to 100% of the excess of the corporation's taxable income (as computed under Sec. 170(b)(2)) over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100% limitation.
Estate Conservation Easement
It is also possible to create an estate conservation easement after the decedent passes away. Sec. 2031(c)(9). This conservation easement can result in an exclusion in the year of death and thereafter of up to $500,000 from the estate. In general, the reduction in value must be 30% or less of the value of the land before granting the conservation easement.
In Notice 2007-50; the IRS released guidance on the implementation of the "qualified conservation contribution" changes. The guidelines outline the general rules for deductions and include multiple question and answer cases to explain the application of conservation deduction rules.
Contribution Deduction Order
Conservation deductions are considered after other charitable deductions. For a donor with AGI of $100 who makes a gift of $70 of cash and creates a conservation easement valued at $80, the charitable deduction is limited to $60 for the year. There is a $10 cash carryforward that may be used for up to five years, and an $80 conservation gift carryforward. The conservation carryforward is a 50%-type gift with a carryforward for up to 15 years.
If the donor is a farmer or rancher with over 50% of income from farming or ranching, then in the same situation the donor first deducts the cash contribution to 60% of AGI and then may deduct the conservation contribution up to 100% of AGI, producing a total deduction of $100. The farmer carries forward a $10 cash deduction for up to 5 years and the remaining $40 of the conservation contribution may be carried forward up to 15 years.
Contributions by Partnerships or Sub Chapter S Corporations
The determination as to whether a partner or shareholder is a qualified farmer or rancher is made at the individual level, not at the partnership level.
Bargain sale Conservation Easement
Income from the sale portion of the land in a bargain sale is not used to determine whether the farmer or rancher qualifies under the 50 percent farm income requirement.
Sale of Timber
Timber planting and cultivation is a permissible farming activity under Sec. 2032A(e)(5). It may be used to determine whether a tree farmer has reached the required 50% income level.
Hunting and Fishing Fees
Income from hunting and fishing fees is not farm income.
Restricted to Agriculture or Ranching
The typical agricultural or ranching restrictions could include a prohibition against construction of buildings other than normal farmstead and farm buildings, a restriction against removing minerals in a way that would adversely affect agricultural or livestock production and prohibitions on land use detrimental to agricultural or livestock production.
Gifts of Fractional Interests in Art
Gifts of fractional interests in art and other tangible personal property are generally deductible at fair market value. Reg. 1.170A-5(a)(2). If a fractional gift of tangible personal property is made and subsequent fractional gifts are made, then the future deductions will be based on the lesser of the initial asset value or the value at the time of the future fractional gift. Sec. 170(o)(2)(A). This valuation method applies to income, gift and estate taxes.
If the art has increased in value and the donor passes away prior to completing the gift, the balance of the fractional art gift will be testamentary. Initially, some tax advisors were concerned that the art might appreciate in value and a donor would pass away, leaving the remaining fraction to the charity as a bequest in his or her will. If the art were included on Form 706 at fair market value but the charitable estate deduction was limited, there could be estate tax on phantom value. However, the issue was resolved in the Tax Technical Corrections Act of 2007. If a donor passes away and bequeaths the balance of a fractional gift to a qualified exempt charity, the estate will receive a full estate tax charitable deduction.
Initially, property subject to the fractional gift rules must be fully owned by the donor, or donor and donee charity. All fractional gifts must be completed within ten years or the donor's death, whichever is earlier. Sec. 170(o)(3)(A)(i). The charity must take substantial physical possession or make use of the property for an exempt purpose. If these tests are not met, charitable income and gift tax deductions for all previous contributions of interests in the item will be recaptured (plus interest). Recapture also includes an added penalty tax of 10% of the recapture amount.
For example, an art museum described in Sec. 501(c)(3) is the recipient of a fractional interest in a painting. The art museum includes the painting in an art exhibit and therefore satisfies the related-use requirement.
If there are two or more owners of tangible personal property, then gifts of fractional interests are permitted if all owners give the same fractional percentages. Sec. 170(o)(1)(B). For example, if a painting is owned 60% by A and 40% by B, then both could make fractional gifts of 50% of each respective interest. They would need to coordinate future gifts to continue to give the same percentages, and presumably must die together to qualify for an estate tax deduction. Given the restrictions, there may be a limited number of fractional gifts by multiple owners.
|
Case Studies on Gifts of Partial Interests in Property
Preserving the Razorback Sucker, Bonytail and the Inheritance:
Marty Campbell, 71, owned more than 2,000 acres along the upper Sampson River. As a nature advocate, Marty strongly opposed the non-natural developments along the Sampson River. In particular, dam installations and the introduction of non-native fish changed the river environment and put many fish at risk. For example, the razorback sucker, humpback chub and bonytail all once thrived in the Sampson River system but now face potential extinction. Marty wanted to do something positive to help the situation.
The Philandering Philanthropist, Part 2 of 4 - $2.5 Million Ranch to Charity:
John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.
Historic Home Conservation Easement Deduction:
Jack Green was a real estate investor who purchased an historic residence in Charleston, South Carolina. He and his spouse Harper used the home as a second residence and spent most of the winter months in Charleston.br>
Rodeo Rider Tax-Free Lifestyle or "No Tax Will I Ever Pay":
Mac Swenson loved the great outdoors. He grew up in the Big Sky country of Montana. As soon as he could walk, Mac was on a pony. By his teen years, Mac was riding horses every day.
A Gift of an Undivided Partial Interest:
Louise Logan, age 62, has been active in her church ever since she can remember. She now serves on the Board. Each summer, the Board members attend a weeklong retreat in the mountains to rejuvenate themselves and discuss the church's short-term and long-term goals. Louise has been kind enough to allow the Board to use her vacation home for the retreat instead of renting hotel facilities for a week. The home is located in the mountains about a 2½-hour drive from the church. It is a beautiful home, has five bedrooms and plenty of space for at least 20 people and is built on a lake surrounded by pine trees. The home was built by her husband and they anticipated that they would retire there. However, her husband died suddenly three years ago of a heart attack and now the home remains vacant a good portion of the year. Her children and grandchildren use the home for vacations periodically and the church staff sometimes uses the home for retreats as well.
|
Private Letter Rulings
PLR
200738013 Appraisal's for Façade Easement Gifts:
In ILM 200738013, issued Aug. 9, 2007, the IRS set forth guidelines for charitable deduction appraisals of gifts of façade easements.
PLR
200741016 IRA Loan To Charity Permitted:
IRA owner desires to make a 20 year term loan with annual 5% interest payments to church B. The self-directed IRA custodian is willing to transfer funds to church B in exchange for both the 20 year/5% note and a collateral assignment on an insurance policy.
PLR
200836014 Grant of Conservation Easement is Tax Deductible:
Business made a grant of a conservation easement on real property consisting of forest, marsh and saltwater habitats for endangered species to a charitable organization in perpetuity. The charity is organized as a public charity within the meaning of Sec. 170(b)(1)(A)(vi) created to preserve natural and rural land along the coast of State X.
PLR
200840018 Conservation Easement Exception for Sec. 2032A Farm Denied:
Father passed away on Date 1 and left his farm to Taxpayer. The executor for Father's estate filed Form 706. On schedule A-1, the executor elected to value the real property based on its use as a farm rather than its assumed highest and best use.
PLR
201302043 Sale of Conservation Easement Will Not Jeopardize Club's Exemption:
Club is classified as an exempt organization under Sec. 501(c)(7) of the Code. Club has operated continuously as a social club for over a decade. Club's purpose is to own and operate a private club for golf and other leisure activities for the recreation of its members.
|
|
|
|
Related Topics on Gifts of Partial Interests in Property
3.1.10
Income, Gift, Estate and GSTT:
The donor to a charitable remainder annuity trust will receive an income tax deduction equal to the present value of the remainder interest. It is calculated using the applicable federal rate for the current month or one of the prior two months, as permitted under Sec. 7520.
3.10.9
Income, Gift, Estate and Generation-Skipping Transfer Taxes:
The donor to a charitable remainder unitrust will receive an income tax deduction equal to the present value of the remainder interest. It is calculated using the applicable federal rate for the current month or one of the prior two months, as permitted under Sec. 7520.
3.3.9
Income, Gift and Estate Taxes:
The major benefits of a charitable gift annuity are an income tax charitable deduction and partly tax-free payments. Reg. 1.1011-2(a). In addition, if the donor/annuitant passes away prior to his or her life expectancy, the unrecovered basis may be deducted on the final income tax return as a miscellaneous itemized deduction not subject to the 2% limit. Sec. 72(b)(3) and Sec.67(b)(10).
3.7.4
Income, Gift and Estate Tax:
An income tax deduction is permitted for the present value of the remainder interest. It is calculated using the Applicable Federal Rate (AFR) under Sec. 7520 and factors from IRS Pub. 1457. The remainder must be reduced by straight-line depreciation for the income tax deduction. Sec. 170(f)(4).
Goldsby:
In Thomas B. Goldsby, Jr. et ux. v. Commissioner; T.C. Memo. 2006-274; No. 8232-05 (27 Dec 2006), the Tax Court denied a conservation easement deduction.
Kaufman:
In Gordon Kaufman et ux. v. Commissioner; 136 T.C. No. 13; No. 15997-09 (3 Apr 2011), the Tax Court affirmed a partial summary judgment that denied a charitable deduction for a façade easement.
Carpenter:
In Kayln M. Carpenter et al. v. Commissioner; T.C. Memo. 2012-1; Nos. 15589-10, 15590-10, 15591-10, (3 Jan. 2012), the Tax Court denied charitable deductions for gifts of conservation easements.
Mitchell:
In Ramona L. Mitchell v. Commissioner; 138 T.C. No. 16; No. 10891-10 (3 Apr 2012), the Tax Court denied a conservation easement charitable deduction due to a mortgage on the property with no subordination agreement.
Dunlap:
In Loren Dunlap et al. v. Commissioner; T.C. Memo. 2012-126; Nos. 28849-08 10393-09, 12168-09, 14860-09, 14865-09, 14866-09, 20138-09, (1 May 2012), the Tax Court determined that seven taxpayers did not qualify for charitable contribution deductions for gifts of conservation easements.
Wall:
In Frederick M. Wall v. Commissioner; T.C. Memo. 2012-169; No. 17209-09 (18 Jun 2012), the Tax Court determined that a façade easement on a mortgaged home would not qualify for a charitable deduction.
Scheidelman:
In Huda T. Scheidelman v. Commissioner; No. 10-358 (15 Jun 2012), the 2nd Circuit reversed a Tax Court decision denying a charitable deduction for a façade easement with an appraisal based upon a percentage of value method.
Kaufman:
In Gordon Kaufman et ux. v. Commissioner; Nos. 11-2017 (18 Jul 2012), the First Circuit determined that a façade easement deduction was not explicitly precluded by the existence of a mortgage, but they remanded the case to the Tax Court and noted that the local zoning requirements of the historic district may eliminate most of the charitable deduction.
Rothman:
In Steven Rothman et ux v. Commissioner; T.C. Memo. 2012-163; No. 17547-10 (Jun 2012) the Tax Court denied a $290,000 façade easement charitable deduction because the appraiser had used a percentage method.
RP Golf LLC:
In RP Golf, LLC et al. v. Commissioner; T.C. Memo. 2012-282 (2 Oct 2012), the Tax Court ruled on motions for summary judgment with respect to a conservation easement.
Irby:
In Charles R. Irby et ux. et al. v. Commissioner; 139 T.C. No. 14; Nos. 7559-10, 7561-10, 7562-10, (24 Oct 2012), the Tax Court approved a conservation easement deduction as part of a bargain sale.
Minnick:
In Walter C. Minnick et ux. v. Commissioner; T.C. Memo. 2012-345; No. 29632-09 (16 Dec 2012), the Tax Court denied a charitable deduction for a transfer of a conservation easement.
Scheidelman:
In Huda T. Scheidelman et al. v. Commissioner; T.C. Memo. 2013-18; No. 15171-08 (15 Jan 2103), the Tax Court determined the valuation of a conservation easement. In the initial Tax Court case, the judge held that a percentage method valuation was improper and denied the deduction. In Scheidelman v. Commissioner, 682 F.3d 189 (2 D Cir. 2012), the Court of Appeals determined that the appraisal did meet the minimum requirements and remanded the case to Tax Court.
Belk Jr:
In B.V. Belk Jr. et ux. v. Commissioner; 140 T.C. No. 1; No. 5437-10 (27 Jan 2013), theTax Court held that a conservation easement charitable deduction was denied because the deed was not "in perpetuity."
Pollard:
In James M. Pollard v. Commissioner; T.C. Memo. 2013-38; No. 22950-09 (6 Feb 2013), the Tax Court denied a charitable deduction for an easement that was required in order to obtain a land-use exemption.
Carpenter:
In Kayln M. Carpenter et al. v. Commissioner; T.C. Memo. 2013-172; No. 15589-10, 15590-10, 15591-10 (25 Jul 2013), the Tax Court refused to reconsider its opinion that a conservation easement that could be terminated by mutual agreement was not perpetual.
61 York Acquisition:
In 61 York Acquisition LLC et al. v. Commissioner; T.C. Memo. 2013-266; No. 22910-12 (19 Nov 2013), the Tax Court denied a façade easement conservation deduction to a partnership that owned a partial interest in a 20 story building.
Woods:
At a press conference on December 4, House Ways and Means Chair Dave Camp (R-MI) stated that there will be no tax reform bill in 2013.
Esgar Corp:
In Esgar Corp. et al. v. Commissioner; No. 12-9009 (7 Mar 2014), the Tenth Circuit affirmed a conservation easement value decision by the Tax Court.
Palmer Ranch Holdings:
In Palmer Ranch Holdings Ltd. et. al. v. Commissioner; T.C. Memo. 2014-79; No. 17017-11 (6 May 2014), the Tax Court reduced a claimed $23,942,500 charitable deduction to $19,955,014. It also determined that there was reasonable cause to not assess an accuracy-related penalty.
Chandler:
In Logan M. Chandler et ux. v. Commissioner; 142 T.C. No. 16; No. 16534-08 (14 May 2014), the Tax Court determined that two Boston home façade easements had no value. The Court also held that the basis on one of the homes was overstated when it was sold.
Scheidelman:
In Huda T. Scheidelman v. Commissioner; No. 13-2650 (18 Jun 2014), the Second Circuit affirmed a “zero value” determination by the Tax Court for a charitable façade conservation easement.
Seventeen Seventy Sherman Street:
In Seventeen Seventy Sherman Street LLC et al. v. Commissioner; T.C. Memo. 2014-124; No. 19686-11 (19 Jun 2014), the Tax Court determined that a Denver partnership failed to value consideration received and therefore qualified for zero charitable deduction from the gift of a conservation easement.
El Jebel Shrine is a historic building recognized by both the city of Denver and the National Register of Historic Places. In 2000, Continental Oil purchased the property. In 2002, it was transferred to Seventeen Seventy Sherman Street LLC.
The partnership planned to develop the building into residential condominiums. It approached the Denver Community Planning and Development Agency (CPDA). The negotiations with CPDA had three parts. The partnership needed a planned unit development (PUD) approval. It would also be necessary to grant interior and exterior conservation easements to the city or another selected conservation nonprofit. Finally, there would need to be a view plane variance. Denver requires specific approval to build any structure that may obstruct the view of the Rocky Mountains from the city. The Denver Planning Board controls the view plane variance.
In 2003, the City Council approved PUD 545, and the Planning Board granted the view plane variance. On December 31, 2003, the partnership transferred interior and exterior conservation easements to Historic Denver, a conservation nonprofit.
Partnership appraiser Bonnie Roerig completed an appraisal report and determined the fair market value of the conservation easements to be $7,150,000. Partnership attorney Carl Leppman opined that the conservation easement deduction would be permitted, but any substantial benefit transferred by the city must reduce the claimed deduction amount. The partnership did not report any benefit received from the city and claimed the full $7,150,000 charitable deduction.
The IRS audited, issued a final partnership administrative adjustment (FPAA) and denied the deduction. The IRS claimed first that the deduction did not comply with Section 170 and therefore should be valued at zero. Second, if the deduction were determined to be in compliance, the IRS claimed the actual value of the deduction was $2,050,000. Subsequently, the IRS reduced its claimed deduction valuation to $400,000.
The Second Circuit noted that at trial the partnership claimed the actual value of the deduction was $5,125,000. However, a taxpayer involved with a conservation easement that is in a “quid pro quo transaction” must identify or value the consideration received or lose the entire deduction. In this case, the partnership benefitted both from the approval of PUD 545 and the Denver Planning Commission view plane variance. Because the partnership failed to provide “credible evidence” with respect to consideration provided, it failed the Sec. 170 test and there is no deduction.
The IRS also assessed a gross valuation overstatement penalty under Sec. 6662(h)(2). Because there clearly was substantial value, this claim was not applicable.
However, the IRS also claimed a negligence or disregard of rules or regulations penalty under Sec. 6662(a). Because the partnership was warned by tax attorney Leppman that the consideration received must be valued and used to reduce the deduction and it disregarded that advice, it is guilty of negligence. Therefore, the negligence penalty is applicable.
Editor’s Note: This is a harsh decision. The conservation easement clearly had substantial value. While it was very poor judgment for the partnership to attempt to claim the full deduction with no offset, the loss of the entire deduction is a very severe penalty.
Mann:
In Lawrence P. Mann et ux. v. United States; No. 8:17-cv-00200 (30 Jan 2019), the U.S. District Court for the District of Maryland denied a deduction for a charitable gift of a home. The home was transferred to a nonprofit. The nonprofit planned to "deconstruct" it and sell the salvaged items.
Palmolive Building Investors:
In Palmolive Building Investors LLC et al. v. Commissioner; No. 23444-14; 152 T.C. No. 4 (28 Feb 2019), the Tax Court upheld penalties assessed against a partnership that failed to qualify for a $33.41 million charitable deduction on a gift of a façade conservation easement.
TOT Property Holdings LLC:
In TOT Property Holdings LLC et al. v. Commissioner; No. 5600-17 (13 Dec 2019), the Tax Court denied a conservation easement deduction and held a syndicated partnership liable for gross misstatement of value and negligence penalties.
Rock Creek Property Holdings LLC:
In Rock Creek Property Holdings, LLC et al. v. Commissioner; No. 5599-17 (2020), the Tax Court denied a conservation easement charitable deduction because the property value was not protected in perpetuity. If the conservation easement were extinguished by eminent domain or other judicial action, the nonprofit would not receive a proportionate value in the proceeds.
Georgia resident, Robert B. Akin inherited property in 2008. In 2013, there were multiple transfers that resulted in property being transferred to Fund XVIII, LLC. The LLC owned Rock Creek Property Holdings, LLC (Rock Creek Holdings). On December 23, 2013, Rock Creek Holdings transferred a conservation easement deed on 719 acres to Southeast Regional Land Conservancy, Inc. ("SERLC”).
The judicial extinguishment provision of the conservation deed stated, “For purposes of this conservation easement, the fair market value of SERLC’s right and interest (which value shall remain constant) shall be equal to the difference between (a) the fair market value of the conservation area as if not burdened by this conservation easement and (b) the fair market value of the conservation in the area burdened by this conservation easement, and such values are determined as of the date of this conservation easement."
The conservation easement also included a savings clause. The savings clause stated, “If any provision of this conservation easement is determined by final judgment of a court having competent jurisdiction to be invalid, such determination shall not have the effect of rendering the remaining provisions of this conservation easement invalid."
The IRS Form 1065 filed for 2013 claimed a charitable conservation easement deduction of $7,875,000. The property sold for $1.2 million in September of 2013 and Taxpayer claimed it was worth over $7.9 million three months later.
The Court noted that under Section 170(h)(2)(C) a conservation easement property interest must be protected in perpetuity. The question in this case was whether the property interest of the nonprofit would be protected in perpetuity under the judicial extinguishment clause. In order for the easement to be protected, the nonprofit must receive a proportionate value of the extinguishment proceeds.
The Rock Creek Holdings deed was insufficient. While the partnership claimed that the donee must be entitled to “at least” the initial value, the Court determined that the “at least” language did not save the deduction. The nonprofit must have an absolute right to a proportionate share of the extinguishment proceeds. The Court stated, “The share to which the donee is entitled shall include the donee's proportionate share of any appreciation in value of the property occurring after the date of the donation.” Because the deed fixed the amount and did not allow the nonprofit to receive potential appreciation during a judicial extinguishment, the deduction was denied.
Editor's Note: The Court denied the deduction because of a technical defect in the deed. However, it seems probable that the claimed increase from $1.2 million to over $8 million in value over a period of three months was an unstated factor in the decision. This was a very aggressive appraisal.
Champions Retreat Golf Founders LLC:
In Champions Retreat Golf Founders LLC et al. v. Commissioner; No. 18-14817 (11th Cir. 2020), the Eleventh Circuit vacated a Tax Court decision denying a $10.4 million charitable deduction for donation of a conservation easement. The case was remanded to the Tax Court to determine the value of the charitable deduction.
Champions Retreat Golf Founders, LLC (Champions) built a 27-hole golf course designed by Gary Player, Arnold Palmer and Jack Nicklaus. The private golf course, opened in 2005, included the clubhouse, 27 holes and 66 homes on 463 acres. About 57 acres was used as an undeveloped habitat for many types of birds, the southern fox squirrel and the rare denseflower knotweed.
In 2009, the Champions course was in a difficult financial situation. In exchange for capital contributions, it conveyed a conservation easement of 348 acres to the National American Land Trust (NALT).
The $2.7 million capital contribution was made by the 15 partners of Kiokee Creek, a Georgia partnership. The partnership received a 15% capital interest in Champions and 99.8% of the charitable deduction for the conservation easement gift. The value of the charitable deduction was determined by a qualified appraiser to be $10.4 million.
The Tax Court noted a conservation easement must be "(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes." Sec. 170(f)(3)(iii).
Because the purpose of the conservation easement was obviously to obtain a capital contribution, the Tax Court determined that the grant of an easement was not "exclusively for conservation purposes." Therefore, the Tax Court denied the $10.4 million deduction.
However, the Eleventh Circuit noted, "The Code allows a deduction for an easement contributed for the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem. Under this provision, and the implementing regulation, Champions is entitled to a deduction if its easement includes habitat for rare, endangered, or threatened species of animal, fish, or plants, or if the easement contributes to the ecological viability of the adjacent national forest."
The Eleventh Circuit rejected the Tax Court determination. The Eleventh Circuit stated, "The Tax Court's implicit finding that the only birds on the property were those seen by both Champions experts is clearly erroneous. More importantly, the Tax Court's conclusion that Champions did not contribute this easement for the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem — a conclusion based in part on the clearly erroneous finding of fact — is wrong as a matter of law."
The Eleventh Circuit concluded, "What matters under the Code and Regulations is not so much whether all the land is natural, but whether the habitat is natural. Indeed, the regulation says it is not disqualifying that the land has been altered, so long as the fish, wildlife, or plants continue to exist there in a relatively natural state." Reg. 1.170A–14(d)(3)(i).
Therefore, the Tax Court decision was vacated and the case remanded to determine the value of the conservation easement.
Editor's Note: The IRS prefers to win conservation easement cases on technical grounds. It now must contest the valuation in the Tax Court. The dissenting (in part) judge for the Eleventh Circuit noted that there was extensive chemical use by the golf course. She stated this chemical use may violate the "natural habitat" requirement, but that the scenic enjoyment standard for a conservation easement was met.
James Turner:
In James B. Turner et ux. v. Commissioner; 126 T.C. No. 16; No. 5165-04 (16 May 2006), the taxpayer had given an easement to Fairfax County and claimed a charitable deduction of $1,248,000.
|
|
|
|
|
|
© Copyright 1999-2024 Crescendo Interactive, Inc.
|
|
