IRS scrutiny of charitable conservation easements.

• Author: McCollum, Victoria L.

Until recently, conservation easements had received very little IRS attention. However, Notice 2004-41 and Rev. Rul. 2003-123, taken together with recent statements by IRS Commissioner Mark W. Everson (see IR News Release 2004-86), indicate that the Service has apparently noticed the abundance of taxpayers claiming substantial tax benefits from charitable conservation deductions and is concerned about abuse.

Notice 2004-41

The IRS announced in Notice 2004-41 that taxpayers might be claiming improper charitable deductions under Sec. 170 for the following types of contributions:

1. Transfers of real property easements to a charitable organization; and

2. Payments to a charitable organization for a purchase of real property from said organization.

   Besides the type of contribution, the Service may also challenge the exempt status of certain charitable organizations participating in these transactions. Further, it may also penalize certain promoters and appraisers of transactions with improper deductions.

   Rev. Rul. 2003-123

   Another example of IRS scrutiny of deductions for conservation easements appeared in Rev. Rul. 2003-123, which disallowed a trust's deduction for a 20-acre parcel that otherwise met the Sec. 170(h) requirements for a qualified conservation contribution. The contribution was deemed to be made from trust principal and, thus, disallowed; for a charitable deduction to be available to a trust or an estate, the contribution's source must be gross income, not corpus; see Sec. 642(c). While Rev. Rul. 68-667 had concluded that amounts paid to a charity out of trust corpus did not qualify for a charitable deduction, Rev. Rul. 2003-123 further clarified that this ruling also extends to qualified conservation contributions.

   IR News Release 2004-81

   Further evidence of recent IRS attention to conservation easement abuse is Commissioner Everson's written statement (IR 2004-81) before the Committee on Finance, U.S. Senate: Hearing on Charitable Giving Problems and Best Practices. In his statement, the Commissioner noted that although conservation easements represent a valued part of philanthropy, there were several abuses in this area, including (1) overvaluation of easements, (2) the failure by charities to monitor easement requirements and (3) the potential for inconsistent use by the landowner of the property on which the original deduction was based. He stated that the Administration's FY 2005 Budget includes several proposals to address these problems.

   The IRS also enacted a program to begin matching Form 8283, Noncash Charitable Contributions (which is completed by a donor making a noncash charitable contribution...