Claiming Deductions for a Conservation Easement

From: Conservation Easements: The Federal Tax Rules and Special Considerations Applicable to Syndicated Transactions

By: Bryan Mick, JD, MBA and Bradford Updike, JD, LLM
Mick Law P.C.

A taxpayer must itemize to claim a deduction for a conservation easement. A conservation easement deduction is reported on Schedule A, Itemized Deductions, Line 17 (“other than by cash or check”), and any carryover of charitable contributions originating from earlier tax years appears on Schedule A, Line 18 (“carryover from prior years”). Taxpayers must also satisfy numerous statutory provisions to claim a noncash charitable contribution deduction for the donation of a conservation easement. Some examples of deficiencies revealed in the government’s examinations of conservation easements include (which have been extrapolated from the IRS’ Conservation Easement Audit Techniques Guide last revised January 1, 2012):

• A failure to include supporting information with the tax return (e.g., a failure to include a form 8283 and required accompanying statements, appraisal summary, or full qualified appraisal if required);¹
• A failure to procure a contemporaneous written acknowledgement from the done in a timely manner (i.e., by the earlier of the tax return due date including allowed extensions or the filing date) or that complies with the requirements of the Treasury Regulations;
• Inadequate conservation value documentation being provided by the donor to the done prior to the time of the donation or lack of sufficient conservation purpose (e.g., baseline report explaining a property’s conservation values contains outdated property information.² or is provided to the done after the donation date, or the property in question is an ordinary tract of land that lacks significant habitats or fails to otherwise support a significant public conservation-related purpose);³
• Lack of easement conveyance into perpetuity as evidenced by deeds allowing for a termination of the easement (with the ability to move the boundaries of retained building zones relative to protected areas being prohibited by the perpetuity rule);⁴
• Reserved property rights are inconsistent with the claimed conservation purposes of the property (e.g., the easement allows the property to be used in a way that comprises the conservation values stated in the appraisal and baseline report);
• A failure to comply with the Treasury Regulation subordination rules in cases where the property has a mortgage;
• Uses of improper appraisal methodologies and overvalued conservation easements; and
• A failure within the appraisal to consider any increase of value within property held by the donor or a party related to the donor.

Bryan S. Mick is the President of Mick Law P.C. in Omaha, Nebraska, and a provider of independent due diligence legal services for various broker-dealers and registered investment advisors throughout the country.

Brad Updike joined Mick Law in August 15, 2006, and his areas of practice include securities law, oil and gas, private equity, conservation real estate, DPP due diligence, taxation analysis relating to securitized financing, and securities advertising practices. On a local level, Mr. Updike has also served the legal needs of Omaha-based clients on matters relating to estate planning, private placements, trademark law, and 501(c)(3) non-profit taxation matters.

 

Bryan Mick, Bradford Updike, Mick Law P.C., SANDLAPPER Securities, LLC, Sandlapper Wealth Management, LLC, and TRIPS are unaffiliated.

¹  Conservation Easement Audit Techniques, International Revenue Service (Jan. 3,2012), https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Conservation-Easement-Audit-Techniques-Guide (explaining that a full appraisal must accompany the federal income tax return in cases where the charitable deduction is more than $500,000).
² A Baseline report is a document that includes maps, pictures, site visit inspection notes and other information that describes the overall conservation value of the property that will be subject to an easement. This information is required to be finalized and certified by the donor property owner prior tot he time of the easement.
³ See Bosque Canyon Rach, L.P. v. C.I.R., T.C.M. (RIA) 2015 -130, No. 1067-09, 2015 WL 4237654, at *5-6 (T.C. July 14,2015) (noting significant problems with the baseline report, including outdated maps and a site visit and inspection of the subject property undertaken several months after the easement was granted).
⁴ Id. at 4. In addition to the problems with the baseline report, the donor was able to move boundaries of building zones with approval of the land trust done. Id.