IRS targets conservation easements

by Cat Urbigkit

Conservation easements and tax deductions from the contribution of such easements are coming under close scrutiny by the federal government.

The Internal Revenue Service intends to review transactions involving improper charitable-contribution deductions of conservation easements and may challenge the tax-exempt status of participating organizations.

In some cases involving conservation easements, taxpayers have been improperly claiming an income tax charitable deduction, because the donor can reasonably expect to receive economic benefits greater than those received by the general public as a result of the donation, according to the IRS.

Last month the U.S. Treasury Department and the IRS issued a notice to advise taxpayers that the IRS intends to disallow improper charitable-contribution deductions for transfers of easements on real property to charitable organizations and for transfers of easements in connection with purchases of real property from charitable organizations. Taxpayers claiming improper charitable-contribution deductions for such transfers may be subject to accuracy-related penalties.

"We've uncovered numerous instances where the tax benefits of preserving open spaces and historic buildings have been twisted for inappropriate individual benefit," said IRS Commissioner Mark W. Everson. "Taxpayers who want to game the system and the charities that assist them will be called to account."

According to the taxpayer notice from the IRS: "One of the permitted conservation purposes ... is the protection of a relatively natural habitat of fish, wildlife or plants, or similar ecosystem. Another of the permitted conservation purposes is the preservation of open space ('open space easement'), including farmland and forest land, for the scenic enjoyment of the general public or pursuant to a clearly delineated government conservation policy. However, if the public benefit of an open-space easement is not significant, the charitable-contribution deduction will be disallowed."

The IRS is aware that some taxpayers are claiming inappropriate charitable-contribution deductions for easement transfers that do not qualify as qualified conservation contributions, or are claiming deductions for amounts that exceed the fair market value of the donated easement, according to a joint press release from the Treasury Department and IRS.

In addition, the IRS is aware that some taxpayers are claiming inappropriate charitable-contribution deductions for cash payments or easement transfers to charitable organizations in connection with the taxpayers' purchases of real property.

The IRS may impose penalties on promoters, appraisers and other persons involved in these transactions. In appropriate cases, the IRS may challenge the tax-exempt status of the charitable organization, based on the organization's operation for a substantial nonexempt purpose or impermissible private benefit.

One of the agency's four service-wide enforcement priorities is to discourage and deter non-compliance within tax-exempt and government entities and misuse of such entities by third parties for tax avoidance and other unintended purposes.