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failed conservation easement donation, gift tax

Technical topics regarding tax preparation.
#1
JAD  
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The IRS has had quite a good year or two on the conservation easement issue. It won cases where the legal document specified that if the easement is extinguished in the future and the property sold, then the proceeds are to be allocated according to a percentage that does not include the FMV of improvements made after the date of the donation. This causes the easement to fail the perpetuity requirement. I believe that that same failure causes the donation to be a taxable gift.

IRC Sec. 2522(c)(2) disallows the charitable deduction if the donation is of a partial interest, unless the interest meets the requirements of IRC Sec. 170(f)(3)(B).

To meet the requirements of Sec. 170(f)(3)(B), the donation must be a qualified conservation contribution.

A qualified conservation contribution is defined in IRC Sec. 170(h) and includes the requirement that the restriction on the property be granted in perpetuity. Reg. 1.170A-14(g)(6)(ii) further discusses the meaning of "enforceable in perpetuity" and the importance of the extinguishment clause ensuring that the charity's interest is protected.

Therefore, the gift does not qualify for the charitable deduction on the gift tax return (Form 709, Part 4, line 7), and the value of the donation less $15,000 is a taxable gift.

Agree, disagree? The reason I am second guessing myself is that the IRS has won some very significant cases, and I haven't heard anyone discuss the related gift tax return issues.
 

#2
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Good point, agreed, suspect its just extremely rare for an income tax person to make the connection. Most non-E&G folks probably don't even know charitable is listed on the 709. Seen many many charitable donations disallowed for various reasons, but never seen the associated gift tax issues raised. In exam, would require a referral to E&G, which they don't want to do, and E&G doesn't have the capacity for.

Would be curious to look if the gift tax provisions also defer to IRC 170's substantiation requirements. if so, then the missed gifts would be everywhere.
 

#3
JAD  
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Thanks for the response! Honestly I didn't think anyone would be willing to read through that on this deadline date. Also thanks for the confirmation. I have to prepare 3 gift tax returns to report this failed transaction.
 

#4
Nilodop  
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This article https://news.bloombergtax.com/daily-tax ... -them-down is not authority for anything. In fact, it's more an advocacy piece for the notion that IRS is wrong. But it certainly is surprising that the result of the income tax disallowance is likely a gift tax obligation.

And that it's not mentioned.
Last edited by Nilodop on 16-Oct-2021 10:05am, edited 1 time in total.
 

#5
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I wonder if a mistake analysis would help.
Steve
 

#6
JAD  
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Interesting article, thanks for posting. I disagree with the premise

he IRS and U.S. Tax Court seem determined to shut down charitable conservation easements despite the congressional intent to support them

She complains about deductions being denied due to "small deviations" from "hyper-technical requirements". Welcome to the IRC. If you miss your identification deadline by one day in 1031, you are out of luck. If you claim an $18M donation for art and don't attach an appraisal, the deduction remains an economic reality, but you lose the deduction.

For the most part, she discusses the failure of the extinguishment clause. This is what caused the donation that came to me to fail as a tax deduction. This clause has economic reality. If the conservation easement is extinguished, then the charitable organization is supposed to receive a fixed % of the sales proceeds based upon the value of the easement at the time of the donation to the total value of the property. If the legal document changes that percentage because of subsequent improvements, then the charitable organization's interest is not protected with certainty. She refers to a "very technical (and fixable) problem with document drafting." The concept is not that technical.

Anyway, I agree that it seems that the IRS and people discussing this issue haven't focused on the gift tax issue. I also had not. I had alerted my client to the problem with claiming the deduction, but I am a year behind on the gift tax issue.

It is terrible to think of what would happen in these many cases if the IRS went back to the various donors and forced gift tax treatment. Some of these #s are quite large. I believe that the statute of limitations never runs on gifts that are not disclosed, and if true, the IRS has all the time in the world.
 

#7
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The IRS and U.S. Tax Court seem determined to shut down charitable conservation easements despite the congressional intent to support them



NAEA Conservation Easement seminar by tax attorney also supports this premise.
 

#8
sjrcpa  
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I believe they are trying to shut down the syndicated conservation easements; not when Mom and Dad have one for the family farm.
 

#9
JAD  
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This CCA clearly discusses the law (and would have saved me a fair amount of research time had it been issued in 2020). It even provides suggested language so that people know how to do this transaction without running afoul of the rules.

https://www.irs.gov/pub/irs-wd/202130014.pdf

As for the syndicated conservation easements mentioned by sjrcpa, they seem pretty abusive, although I didn't do a deep dive on the issue.
 


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