Thursday, January 12, 2012

The ‘I’m from the Govt and I’m here to help’ Case

TP conveyed an easement to 501(c)3 conservation fund. Generally the difference between the value of the property with the easement vs. without the easement constitutes a charitable deduction for the conveyor. TP is permanently sacrificing that value even though they still own the property. (Note that this is an exception to the general rule that only the contribution of an enitre interest will qualify as a charitable contribution.) It is normal for the contribution deductions resulting from conservation easements to be in the hundreds of thousands of dollars and so one should expect increased IRS scrutiny. In this instance the transaction failed as a matter of law because the contract contained the following wording:

Extinguishment – If circumstances arise in the future such that render the purpose of this Conservation Easement impossible to accomplish, this Conservation Easement can be terminated or extinguished, whether in whole or in part, by judicial proceedings, or by mutual written agreement of both parties, provided no other parties will be impacted and no laws or regulations are violated by such termination.

This ran afoul of the following parts of the code which provide for the ability to obtain a charitable contribution:

“A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.” And “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 conservation purposes of the donation.”

This case is a bit scary because one would assume the conservation 501(c)3 attorneys would have drafted an appropriate contract. You know the contributors were not the ones to write the contract.

Take aways:

• The court ruled that the remoteness of the likelihood of this clause ever being exercised was neither here nor there as far as the outcome of this case was concerned.

• TP argued that the gift constituted the creation of a charitable trust. The court noted that State law determines the nature of the property rights, and Federal law determines the appropriate tax treatment of those rights. There was no evidence to indicate that their State considered contributions to conservation easements to be de facto trusts. Nor was there any language in the conservation easement deeds to evidence either the creation of a trust or the intention to create a trust.

• Pay a CPA and a tax attorney dummy! I had a call once from a farmer seeking an appointment to discuss the tax treatment of conservation easements. He refused to come in unless the consult would be free. Really? Trust me when I tell you, screwing this up may be life changing. It is worth the money to get professional advice.

• In the future I will require that clients in this situation retain a tax attorney to review the contract and issue an opinion letter re: the legitimacy of the charitable contribution prior to preparing the return – or even better before they sign the contract so the recipient can be made to change the wording. (My opinion is that CPAs should not be interpreting contracts. That is a legal service.)

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