In Defense Of Conservation Easement Charitable Deductions

I've written quite a few posts about conservation easements.  Those posts highlight the sampling problem that my blogging faces.  The transactions that end up in Tax Court are not necessarily representative.  Thus I may have given the impression that the whole field is full of scoundrels.  So I am really pleased to present this guest post from Rex Linville who is a Land Conservation Officer for the Piedmont Environmental Council.

Thanks for your coverage over the past few years of a variety of different Tax Court cases related to conservation easement donation.  There has certainly been a recent increase in these types of cases and since 2005, there have been more than 70 opinions related to the federal income tax deduction claimed for conservation easement donations under Section § 170(h) of the Internal Revenue Code.  These opinions have addressed a variety of issues ranging from the fundamental qualification of the donation as a “conservation easement”, to the valuation of the donation, and to other technical compliance issues.

Looking exclusively at these cases, an outside observer could conclude that conservation easements create the potential for a tax “scam” that is lining the pockets of landowners with unwarranted charitable gift deductions.  As a professional land conservation staff member working directly with landowners who have decided to preserve and protected the land they love I can confidently say that this body of case law does not represent the land conservation movement as a whole.  

The truth is that these 70 plus cases represent a very small minority of land conservation activities across the nation. There are more than 1,700 land trust working at the local level to preserve wildlife habitat area, ecosystems that produce clean water and air, scenic rural landscapes and recreation areas, historic sites such as civil war battlefields, and productive agricultural and forestry resources that supply our nation with food and timber. 

Working within their own community these groups have harnessed local enthusiasm and voluntary action to permanently preserve and protect as much as one million acres per year. Since the 1970's, there have been tens of thousands of conservation easements donated on tens of millions of acres to conservation groups across the nation.  The cases brought by the IRS and state tax departments represent far less than 1 percent of the donations that happen in even one year. 

 More importantly, the land trust community has been working hard to raise the bar and increase the quality and robust nature of the private voluntary land conservation work being done in America.  It is important to us that our conservation activities are done in a professional and sustainable manner. These cases have provided useful a road map for what not to do and have helped shed light on where land trusts should look for abuse.  The lessons learned from the case law are vital to the future success of land conservation.

Toward that same goal of increasing quality, at the national level, the land trust Alliance established an Accreditation Commission that graduated the first class of accredited land trusts in 2008.  Since then, the Commission has awarded accreditation to over 300 land trusts that meet national standards for excellence, uphold the public trust, and ensure that conservation efforts are permanent. Accreditation is not a one-time action; it fosters continuous improvement as land trusts maintain their accredited status by applying for renewal every five years.

At the local level, land trusts such as The Piedmont Environmental Council (PEC) are offering continuing legal education workshops for legal and tax practitioners who are advising landowners on conservation easement donations.  For example, on June 29^th PEC is hosting a workshop with presentations from IRS attorneys, legal scholars, and a US Tax Court Judge as a way or improving the quality and compliance of conservation easement donations in our service area.

If you want to learn more about what you can do to help preserve land in your own community you can find a local land trust through the “Find A Land Trust” web page of the land trust Alliance: http://findalandtrust.org/

W. Rex Linville, Land Conservation Officer
Piedmont Environmental Council
410 E. Water St, Suite 700
Charlottesville, VA 22902
Work: (434) 977-2033
Cell: (434) 466-8843
Web: www.pecva.org

Twitter: @RexLinville

Rex Linville has a B.S. in Finance from Virginia Tech and an M.S. in Forestry from Colorado State University.  He has worked as a land conservation officer with the Piedmont Environmental Council in Virginia for the past 10 years and prior to that worked for the Eastern Shore Land Conservancy in Maryland. During this time has worked with landowners and partner organizations on a wide range of conservation transactions and has been involved in conservation policy initiatives at the state and federal level.

Lu Gauthier Reports On Important Massachusetts Domicile Case

Lu Gauthier of the Boston Tax Institute  has given me permission to reproduce his email blasts.  BTI is a great value for live tax continuing professional education.  If you decided to contact BTI because you read about it here, be sure to mention it to Lu. It won't get you a discount or me a commission, but it will show him that this blogging thing is a thing.

WILLIAM D. & CHRISTINE J. EVANS v. COMMISSIONER OF REVENUE Docket Nos. C298827 & C310439

         

In a very important Domicile case, the ATB held that Mr. and Mrs. Evans were not domiciled in Massachusetts. The ATB relied heavily on their testimony and other evidence that their decision to move to Florida was because of their desire to live in a setting optimal for Mrs. Evans' medical condition.     

This ruling was made based on all of the evidence. The Board found and ruled that the appellants were physically present in Massachusetts for 150 days in 2001; 166 days in 2002; 165 days in 2003; and 169 days in 2005 and were nonresidents.  While generally I do not recommend that a client spend that many days in Massachusetts, the burden of proving domicile will rest with the individual and clearly the Evans carried the day.   

Domicile is something I focus on a lot, so there is a good chance I will write something on this case for forbes.com.

Estate Tax And Goodwill From Boston Tax Institute

Lucien Gauthier has given me permission to reproduce his email blasts.  Here is the latest.


In Estate of Franklin Z. Adell v. Comm., TCM 2014-155 (08/04/14), in light of the fact that the goodwill of a C corporation was attributable to the son of the decedent with whom the corporation did not have a covenant not to compete and or other agreement, the Tax Court determined that the stock of the decedent was worth only 9.3M and not 26M as the government argued.  As far as I know, this is the first case involving personal goodwill in an estate tax context and the concept of personal goodwill appears to have saved the estate between 10M and 15M of estate taxes.  If you would like to learn more about how to use personal goodwill to save both income taxes and estate taxes, consider attending our 1/2 day seminar on 06/11 from 1:30pm-5:00pm in Waltham.  If you also would like to learn something about complete liquidations of S corporations and C corporations, consider attending our 1/2 day seminar entitled Complete Liquidations from 9:00am-12:30pm on 06/11 in Waltham.  Please remember that two 1/2 day seminars on the same day are only $225 and not $150 for each seminar!

I have not looked at the Adell case yet, but I think you may see something on it on forbes.com next week.  I sometimes leave out the notices about seminars from the BTI when I get behind in posting the blasts, but this one is timely.  Personal goodwill is a powerful technique that many people are unaware of, but it has stood up well in decisions.

News From The Boston Tax Institute

Lu Gauthier of the Boston Tax Institute  has given me permission to reproduce his email blasts.  BTI is a great value for live tax continuing professional education.  If you decided to contact BTI because you read about it here, be sure to mention it to Lu. It won't get you a discount or me a commission, but it will show him that this blogging thing is a thing.

I've gotten a little behind.  So this one represents a few installments.

Our thanks to Moore McLaughlin, CPA, Esq and Cory Bilodeau, Esq. for another update.  

In an opinion issued on May 19, 2015, the Tax Court in Redisch, TC Memo 2015-95, held that a couple did not convert their Florida vacation home to property held for the production of income. The rental effort was not serious and the property was never rented. As a result, they could not deduct Schedule E deductions related to the home or claim a loss under Code Sec. 165 when the property was sold for less than what they paid for it.  In general, no deduction is allowed for the expenses incurred in maintaining a personal residence.  Similarly, a loss incurred on the sale of a personal residence generally is considered personal in nature and can not be deducted.  However, taxpayers may deduct all the ordinary and necessary expenses paid or incurred during the tax year for the management, conservation, or maintenance of property held for the production of income.  Whether an individual has converted his personal property to one held for the production of income is a question of fact.  In the case of a converted residence, the Tax Court often looks to five factors to determine the taxpayer's intent: (1) the length of time the house was occupied by the individual as his residence before placing it on the market for sale; (2) whether the individual permanently abandoned all further personal use of the house; (3) the character of the property (recreational or otherwise); (4) offers to rent; and (5) offers to sell. No one factor is determinative, and all of the facts and circumstances are considered.  Similarly, in order for a taxpayer to deduct a loss, it must be incurred in a trade or business, be incurred in any transaction entered into for profit, though not connected with a trade or business, or arise from some sort of casualty or theft.  A taxpayer can claim a loss on property purchased or constructed  as a primary residence if, before its sale, it is rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale.

I noticed this case also and may be covering it on forbes.com [PJR]

Our thanks to Moore McLaughlin, CPA, Esq. and Cory Bilodeau, Esq. for the following update.

In an opinion published on May 26, 2015, the Tax Court held in Fargo, T.C. Memo 2015-96, that the taxpayer's sale of real estate in an unsolicited one-time bulk sale produced ordinary income and not capital gain, notwithstanding the absence of physical improvements over a ten year period. The Court found that the taxpayer's original development intent continued throughout the entire holding period.  The court analyzed 8 factors and found that 4 favored the Taxpayer and 4 favored the IRS.  However, the Court noted that the taxpayer's actions indicated a continued desire to develop the property until the time of the sale.

If the Taxpayer engaged in proper tax planning, it may have been possible to structure the transaction in a manner that locked in capital gains.  This type of tax planning will be discussed at the update on Federal Income Taxation of Real Estate on June 3 in Waltham by tax attorneys Moore McLaughlin, CPA, Esq. and Cory Bilodeau, Esq., both from the tax law firm McLaughlin & Quinn, LLC.

I was pretty excited about this case, but ulitmately decided to pass on it.  One thing that threw me was that the partnership had owned the property in 1997 giving the impression that it had been held in the partnership a really long time.  On rereading I noted that the case has kicked around a long time with the sale being around 2001. It is pretty messy and complicated.

Our thanks to Paul Ferreira for the following email!

The IC-DISC:  Are you still missing the boat on adding value to many of your clients?

The Interest Charge-Domestic International Sales Corporation (IC-DISC) is the last surviving export incentive available for privately-held companies whose products are delivered outside of the United States.  Originally enacted by Congress in 1971, the IC-DISC is a tremendous federal income tax savings vehicle as well as a lucrative addition to the services for you and your firm to deliver to current and target clients.  Many clients in a variety of industries qualify for the IC-DISC.  Clients that manufacture products within the US as well as those that distribute US made products outside of the US will qualify for the IC-DISC.  Likewise, seafood caught within the US and scrap metal processed within the US will qualify.  Our 1/2 day seminar on IC-DISC will be presented from 9:00am-12:30pm on 6/8 in Waltham  followed by a 1/2 day seminar entitled Federal & State R & D Credits from 1:30pm-5:00pm.  Please remember that two 1/2 day seminars on the same day are only $225 instead of $150 each!  

Now that seems like something worth looking into.

The nexus and apportionment provisions have been changing requiring both taxpayers and tax practitioners to reexamine whether or not their activities or client activities have subjected them to income taxation in states where no such requirement existed previously.  No longer is a physical presence required within a state before its taxing jurisdiction is permitted.  Taxpayers and their advisors need to re-evaluate their compliance positions in many states.  Coupled with the change in nexus requirement in some 40 states, a growing number of states have adopted market-based sourcing requirements for purposes of sourcing receipts with 3 of the 6 New England States adopting the change.  The new sourcing requirements can create either multiple inclusion or non-inclusion of particular sales receipts for purposes of income tax apportionment.  These changes, coupled with the unique provisions of New Hampshire's combined reporting, provide some potential tax benefits for businesses conducting activity in the State.

  

We will discuss the nexus changes and the market-based sourcing requirements that are developing across the country and where the New England States currently position themselves during the morning session.  During the afternoon session, we will discuss the New Hampshire reporting requirements for combined groups.  Join us at our June 5th seminar entitled Economic Nexus & Combined Reporting in Peabody, MA and determine whether your clients now have (1) filing responsibilities in one or more states where there was no such requirement in the past (2) the receipts apportionment methods changed requiring different documentation and possible double inclusion of income and (3) can benefit from filing combined returns in New Hampshire. Evaluate your clients' exposure and risk before the Departments of Revenue knock on their door.

Those "Live Free Or Die" license plates and income tax exemption for wages give New Hampshire an undeserved reputation as a tax haven of sorts. If you ever contemplate doing business there, you might be surprised.

Our thanks to Kenneth J. Vacovec, Esq. for the following email!

Reminder to all:

The FBAR filings now must all be done electronically only, on Form 114. Third party filers are  authorized to file on behalf of clients on Form 114 a,  which must be signed by the client and provided to the third party filer for their records prior to the electronic filing. All the paperwork must be prepared and received in time to file by June 30, 2015 for the 2014 filings. There are no filing date extensions at all allowed. We fear that with all the FBAR publicity and focus by the IRS on these filings, that the IRS will begin a program of imposing penalties for filings after the June 30 date. Also, there are very specific requirements for the information needed in the filing which requires strict attention to the form instructions. Certain entries such as: AKA, DBA, SAME and UNKNOWN cannot be used. You must  push your clients for complete information in time for the June 30 filing date!!!

I lose a lot of sleep over foreign reporting issues.

In a rather lengthy decision (Coastal Heart Medical Group, Inc., et al., v. Comm., TCM 2015-84 (5/4/15)), the Tax Court concluded that a medical doctor who failed to group his various business activities and failed to aggregate his various rental real estate activities failed to prove that he was a real estate professional and also failed to prove that he materially participated in each of his separate business activities so that losses from these passive activities were disallowed and the 20% taxpayer accuracy-related penalty applied.  If you have a client with multiple business and/or rental real estate activities which have net losses, it may behoove you to take a fresh look at these activities to see if they have been grouped or aggregated in the most advantageous manner.  If you would like to come up to speed on passive activity losses, grouping, real estate professionals and aggregation, material participation, the 3.8% tax on net investment income, and the treatment of rental real estate for purposes of the 3.8% tax, we are offering a number of seminars in various locations to help you.  Please consult our 2015 Spring Brochure at the icon shown above for seminars, dates, and locations beginning with Passive Activity Losses on 5/27 in Waltham and The Treatment of Rental Real Estate for Purposes of the 3.8% Tax on 5/28 in W. Springfield.   

Coastal Heart is one that I covered on forbes.com.  There is a really wild back story  to it which includes a doctor being framed with planted drugs and a gun

Our thanks to Robert E. Clark for the following email!   

Can I collect Social Security as a spouse and wait until I am older to collect a higher amount on my own work record?  Many married couples ask this question as they plan for their retirement.

For the answer to be yes, one member of a couple must have filed for benefits to open their record.  Workers open their record by starting to collect their own Social Security.  Or, if they have reached Social Security's full retirement age, by filing and suspending benefits.  A worker under full retirement age cannot file and suspend benefits.

Once your significant other's record is open, you must be full retirement age to file only for benefits as a spouse and delay filing for your own retirement benefit.  If you are under full retirement age, you must file for your own retirement benefit first before filing as a spouse.

I keep telling my covivant that marriage is not something that old people should do, but this social security thing has me thinking.  The idea is that you collect on your spouse's record until your 72 or something like that so your benefit is maxed.

Our thanks to Phillip R. Dardeno, CPA, MST for the following email!

Commissioner Mark Nunnelly, Massachusetts Department of Revenue

Mark Nunnelly has been appointed as the new Commissioner of the Department of Revenue.   He is responsible for overseeing nearly 2,000 DOR employees in offices across the state who work in tax administration, child support enforcement and local services for cities and towns. He was appointed on March 30, 2015.

Commissioner Nunnelly formerly worked for Bain Capital.  Commissioner Nunnelly joined Bain Capital, one of the world's foremost private investment firms, in1989 as a Managing Director. He held a number of leadership roles as part of the firm's growth and global expansion and worked extensively in the business services and technology industries.  Prior to joining Bain Capital, the Commissioner was a Partner at the consulting firm Bain & Company, working in the US, Asian and European strategy practices.  Previously, he worked at Procter & Gamble in product management.  Additionally, Commissioner Nunnelly founded, and had operating responsibility for, several entrepreneurial ventures. He has been deeply involved in a number of Massachusetts and national philanthropic efforts, with a particular focus on children and national service. 

Commissioner Nunnelly received an MBA with Distinction from Harvard Business School and an AB from Centre College.

A new Commissioner has always brought about change in the organization. New ideas, different priorities, and new focuses will certainly be seen over the next few months.

Putting somebody from Bain Capital in charge of the Revenue Department seems kind of odd.  Can't help but wonder whether it will be the fox watching the hen house or it takes a - well you know how that one goes.

In Jose A. Lamas v. Comm., TCM 2015-59 (03/25/15) the Tax Court concluded that  two real estate development businesses (Shoma and Greens) could be GROUPED together because they met all five nonexclusive factors in Reg. 1.469-4(c) and were an appropriate economic unit in which T materially participated. The investor exception did not apply, and the work not customarily done by owners exception did not apply. Assuming arguendo that T worked < 500 hours in Shoma and Greens, T met the signification participation activity test #4 because he significantly participated in Bella Vista and in Shoma and Greens and materially participated for > 500 hours in all of his significant participant activities.  Grouping as well as several other topics will be discussed in our full day seminar entitled Passive Activity Losses on 5/27 in Waltham.  Grouping as well as all of the decided cases and administrative pronouncements on Grouping also will be discussed in detail in our new 1/2 day seminar entitled Grouping for Purposes of Sections 469 and 1411 on 6/12 in Waltham.  Grouping can be used to deduct losses that otherwise would be passive and not deductible and also can be used to avoid reporting income as passive income subject to the 3.8% tax on net investment income.  If you want to learn about Passive Activity Losses, Section 1411, and Grouping, come to a BTI seminar!!!  Don't waste your time and money elsewhere.

Lamas is another case I covered on forbes.com. There was another fascinating back story involving deforestation and political intrigue that the rest of the tax blogosphere let pass.

On 4/13/15, the Tax Court (in Richard Leyh v. Comm., TC Summary Opinion 2015-27 dated 04/13/15) concluded that taxpayers who elected to aggregate their rental real estate activities and who kept a detailed contemporaneous log of the time spent operating their 12 rental properties were real estate professionals (REPs)who could deduct $69,531 of losses against their non-passive income such as wages.  The court allowed the taxpayer wife to include the travel time in driving from their principal residence to the rental properties to perform services.  Although a Tax Court Summary Opinion cannot be cited as precedent, it is comforting to see pro sese taxpayers (taxpayers who represent themselves) beat the IRS with a detailed contemporaneous log and travel time.  The election to aggregate the properties also was critical to the taxpayers' victory.  If you represent taxpayers who purport to be real estate professionals, you may want to advise them to make an election to aggregate (if they have not already done so), keep a detailed contemporaneous log of the time spent servicing the rental properties, and remember to include travel time in their original log.  If you want to learn more about REPs, please join us at our full day seminar entitled Passive Activity Losses on 5/27 or at a special 1/2 day seminar entitled Real Estate Professionals on 6/12 in Waltham.  Section 469 continues to be one of the most important, misunderstood, and heavily litigated areas of tax practice today!       

I don't know why I let this one pass.  Probably too worried about Kent Hovind.

Our thanks to Todd Weaver of Strategies for College for the following email!  


Think that your role as business advisor, family confidant, and tax savings guru is all that you need to be concerned with?  Think about this:  You can offer a client a choice of $18,000 in tax savings OR a $38,450 college grant.  That's a $20,450 difference.  Attend our seminar and find out what actually happened.  If you're not paying attention to clients with college bound kids, you could be saving tax dollars and losing college funding dollars.  The ramifications of not being well informed could be very costly. 

Come to our seminar entitled Strategies For College on June 24th at the Hyatt house in Waltham in order to learn how to deal with opportunities like this.

I always worry that when tax planning concepts appropriate for the very well heeled get pushed down a level or two that things like college financial aid get lost in the shuffle.

I'll try not to get so far behind on Lu's updates again, but I can't make that a firm promise.