Conservation Easement Litigation

• Date: 01 April 2020
• Published date: 01 April 2020
• DOI: http://doi.org/10.1002/npc.30712

Bruce R. Hopkins’ NONPROFIT COUNSEL

April 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

received by an independent contractor for performance

of services constitutes self-employment income; (4) vir-

tual currency paid by an employer as remuneration for

services constitutes wages for employment tax purposes;

(5) payments made using virtual currency are subject to

backup withholding; and (6) taxpayers can be subject to

penalties for failure to comply with the tax laws.

For US tax purposes, transactions using virtual cur-

rency must be reported in US dollars. Therefore, taxpay-

ers are required to determine the fair market value of

virtual currency in US dollars as of the date of payment

or receipt. If a virtual currency is “listed on an exchange

and the exchange rate is established by market supply

and demand, the fair market value of the virtual currency

is determined by converting the virtual currency into U.S.

dollars (or into another real currency which in turn can

be converted into U.S. dollars) at the exchange rate, in a

reasonable manner that is consistently applied.”

Charitable Deduction Law

One of these two answers (35) states that charitable

organizations can assist their donors of virtual currency

by providing, when required, a contemporaneous written

acknowledgment of the gift (IRC § 170(f)(8)). This answer

also references the Form 8283 filing requirement and the

more-than-$5,000-in-value rule concerning appraisals

(IRC § 170(f)(11)(C)). The answer does not state outright

that the appraisal rules apply to contributions of virtual

currency, but that is the obvious implication.

The other answer (36) states that charities that

receive gifts of virtual currency must report them on

Schedule M of the annual information return and refer-

ences the Form 8282 filing requirement. ◆

CONSERVATION EASEMENT

LITIGATION

• A partnership conveyed to a qualified charitable

organization an easement that restricts use of the

covered property and generally prohibits construc-

tion or occupancy of any dwellings. The donor, how-

ever, retained the right to build single-family units in

specified areas, subject to the donee’s approval. The

US Tax Court held that the uses permitted within

the building areas prevented achievement of the

conservation purposes in the easement in its entirety,

thus causing the easement to fail one of the tax reg-

ulation’s perpetual protection requirements (Carter

v. Commissioner (February 3)). The court rested its

conclusion on the Pine Mountain Preserve case (sum-

marized in the March 2019 issue), in which the court

rebuffed the Fifth Circuit’s entreaty to not interpret

the conservation easement rules too narrowly (BC

Ranch II, LP v. Commissioner (summarized in the

October 2017 issue)).

• An organization executed a conservation easement

deed in favor of a qualified charitable organization.

This deed provided that if the easement was extin-

guished and proceeds were allocated between the

donor and donee, the charity “shall be entitled to

a portion of the proceeds at least equal to the fair

market value of the conservation easement . . . as

of the date of this conservation easement,” rather

than be entitled to a proportionate share of the pro-

ceeds.” The US Tax Court agreed with the IRS that

the claimed deduction for this gift must be denied

in its entirety, because the deed does not create a

proportion that represents the donee’s share of the

property right and “hence a corresponding frac-

tion of proceeds to which the donee is perpetually

entitled” (Railroad Holdings, LLC v. Commissioner

(February 5)). The court analogized to its finding in

Coal Property Holdings (summarized in the January

2020 issue), where the deed there “achieved an

impermissible diminution in the donee’s entitlement

by expressly subtracting the increase in value that

was attributable to subsequent improvements.”

The court added: “The deed here achieves such a

diminution by applying its formula to a date-of-gift

value that would exclude subsequent appreciation.

Neither of these approaches complies with the

regulation.”

• A limited liability company made a charitable gift

of a conservation easement, claiming an $8 million

charitable deduction. The IRS denied the deduction

in its entirety, because the donor did not attach a fully

completed appraisal summary to its tax return. Specif-

ically, the donor did not disclose the basis amount of

the contributed property. The US Tax Court held that

the donor did not strictly comply with the requisite

requirements (Oakhill Woods, LLC v. Commissioner

(Feb. 13)). The donor supplied the requisite informa-

tion three years after its return was filed and only after

learning that the IRS examination, in the court’s words,

“might have an unhappy ending.” The court observed

that the tax regulations create a “prophylactic rule

designed to provide the IRS with information to help

it decide whether to commence an examination”

and that the regulations “would be meaningless if

a taxpayer could cure noncompliance ex post facto,

after learning that an examination had begun and

was headed toward an adverse outcome.” The court

was skeptical of the donor’s position, which was that

the underlying land appreciated in value “by more

than 800 percent over three and a half years amid

the worst real estate crisis since the Great Depres-

sion.” Nonetheless, the court declined to grant com-

plete summary judgment to the government, noting

that disputes of material fact exist as to whether the

donor had reasonable cause for its failure to supply a

fully completed appraisal summary. [9.7] ◆