Court Upholds Third‐Party Summons in Conservation Easement Examination

• DOI: http://doi.org/10.1002/npc.30809
• Published date: 01 January 2021
• Date: 01 January 2021

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 January 2021 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

gifts and the weak enforcement of the local historic

district preservation law. The public charity, by con-

trast, annually inspected the properties and monitored

changes to them. The parties stipulated that the ease-

ments qualified under the federal tax law rules. With

their value being the only issue, the court applied the

before-and-after valuation method.

In this valuation process, the court must take into

account any effects from historic preservation laws

that already restrict the property’s potential highest

and best use (Reg. § 1.170A-14(h)(3)(ii)). The govern-

ment’s expert witness testified that the easements did

not restrict the fair market value of the properties. The

donors claimed there are “numerous requirements”

imposed by the easements that are not imposed by

Buffalo law. The IRS attacked these alleged differ-

ences, labeling them “untrue or of no consequence”;

the court wrote that the IRS “has the better of [this]

argument.”

Nonetheless, the donor won this case with the

argument that although Buffalo had preservation stand-

ards, “its economic problems made its monitoring and

enforcement of those standards ineffectual” and that

the easements “created a system of enforcement where

none in fact had existed” (great lawyering!) (Kissling v.

Commissioner (November 12)). The court thus upheld

the charitable deductions in an amount somewhat less

than the claimed amount (and ruled that no penalties

are applicable). [9.7] ◆

COURT UPHOLDS THIRD-PARTY

SUMMONS IN CONSERVATION

EASEMENT EXAMINATION

The IRS is examining a charitable deduction claimed

for a gift of a conservation easement. As part of that

inquiry, the IRS issued a summons to a bank seeking

information about the value of the property involved.

The IRS, of course, has the authority to issue a third-party

summons (IRC § 7602(a)(2)). The US Supreme Court

articulated the analytical framework that governs these

types of enforcement efforts (United States v. Powell

(1964)). Applying the Powell factors, a federal district

court, by decision dated November 3, granted the IRS’s

motion to dismiss the donor’s petition to quash the sum-

mons (Gretsch Stone, LLC v. United States (M.D. Ga.)).

The court found that the IRS’s investigation is for a

proper tax law purpose, the information summoned is

relevant to the investigation’s purpose, the documents

sought are not already in the IRS’s possession, and the

IRS followed the requisite procedural requirements. The

court noted that the IRS first attempted to obtain the

information from the donor, which did not or could not

provide it. ◆

GAO CRITICAL OF IRS’S

ADMINISTRATION OF

COMMUNITY BENEFIT

STANDARD

The US Government Accountability Office issued a

report, made public on October 20, titled “Tax Admin-

istration: Opportunities Exist to Improve Oversight of

Hospitals’ Tax-Exempt Status” (GAO-20-679). The GAO

concluded that the law is unclear as to what community

benefit activities exempt hospitals should be engaged in

and the Form 990, Schedule H, inadequately presents

community benefit information. It also made recommen-

dations to Congress and the IRS for change.

Community Benefits

The GAO complained that the IRS does not define

specific types of community benefit services and activities

that nonprofit hospitals must undertake to qualify for tax

exemption. Instead, the GAO stated, the IRS only pro-

vides guidance in the form of examples. The GAO found

“[s]ome health care industry stakeholders” who told the

agency that the “IRS’s community benefit standard does

not ensure that the community benefits that tax-exempt

hospitals provide justify their tax exemptions.”

Issues that were identified are the ability of hospitals

to address some of the standard’s factors in ways that

do not benefit surrounding communities, the loss of

relevance of some of the factors, and the failure of the

standard to identify some factors that can demonstrate

substantial community benefit.

Other stakeholders, however, such as representatives

of tax-exempt hospitals, told the GAO that “current

law and the community benefit standard offer hospitals

needed flexibility in demonstrating community bene-

fits.” These individuals advised the GAO that “commu-

nity health needs vary substantially across the country,”

so that “community benefits can vary substantially from

place to place.”

The IRS stated to the GAO that it “reviews hospitals’

services and activities to ensure that they are providing

community benefits that justify their tax exemptions.”

The GAO, however, observed that the IRS could not

“identify” whether any exempt hospitals were referred

to its audit division during fiscal years 2015–19 for

potentially providing insufficient community benefits,

lamenting that the IRS does not track this information.

Schedule H

The GAO reported that Schedule H “solicits infor-

mation inconsistently, resulting in a lack of clarity about

the community benefits hospitals provide.” It criticized

the location of the questions and the nature of the

instructions. The Schedule H “reporting structure,” it is