Originally published on Passive Activities and Other Oxymorons on May 18th, 2011.
Private Letter Ruling 201110020
Sometimes I've contemplated go over to the dark side. I've made it this far with a chaotic good alignment so its probably not going to happen. In the event I do, though, I have two resolutions one of which I can only try for but the latter I guarantee. The first is that my villainy will be so subtly masterful that no one will ever realize it has happened. In the unlikely event that someone does get wind of it I will not gloatingly explain it all to them before I dispatch them thereby giving them a chance to turn the tables on me. The other resolution is that my villainy will not in anyway involve religion, charity or exempt organizations. It is very bad to manipulate people through their fear and greed but to use their higher aspirations is beyond despicable.
This disinclination to mix charitable endeavors with scamming caused me to miss some of the potential in conservation easements. I remember talking to one of my clients who deals in land and asking him what it really meant to own 10,000 acres of land somewhere. What is that you really have ? His answer was "a bundle of rights". Included in that bundle is the right to do some level of developing subject to local zoning. This might be a valuable right or it might not. If the property is already at its "highest and best use", which in appraiser speak is the use that gives you the greatest economic return then your development rights are of negligible value.
The "highest and best use" might be best for the owners bank balance but not for the rest of us. It's handy to have a CVS every mile or so as you are driving along in case you have to suddenly fill a prescription or desperately need a bottle of Mountain Dew, but its also nice to have some bucolic scenery and places for the birds to nest and there's all that global warming stuff people are worrying about, which is where conservation easements come in. A property owner gives up development rights and gets a charitable deduction. In addition the value of the property is reduced which could have a favorable effect on real estate, gift and estate taxes. For someone who really wants the property to remain unchanged, it's about as close to a free lunch as you can get.
Of course it is not entirely free. A fundamental law of taxation that I have discovered is that any reasonably complex tax matter involving significant dollars, regardless of whatever else it might be, is a white collar jobs program. Here is an estimate of the costs of doing a conservation easement. Palmer Land Trust comes up with $40,000 to $60,000 all in. That seems a little on the high side but I haven't shopped around. The interesting question is to whom is it that you give the conservation easement. Putting aside all the tax goodies, the goal is that the property not be developed after you have gone. It is up to the donee organization to enforce the restriction. So obviously it can't be just anybody. The regulations address the issue:
To be considered an eligible donee under this section, an organization must be a qualified organization, have a commitment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions.
Probably The Nature Conservancy would do the trick. ORG, the nameless organization in the PLR was trying to break into the field. Apparently the motives of ORG's Founder/President were not exclusively concerned with preserving nature.
When asked about resources to enforce easements the answer was:
Easements are monitored, but the ability to legally enforce easements is done by sending a copy of the deed is sent to the planning department. This in effect flags the property.
There is no special fund or account containing funds that are allocated to enforcement of easements.
Also ORG had other things going on besides conservation:
CO-1 website (i.e., website) and the limited liability company known as the CO-2 (hereinafter sometimes referred to as the "CO-2"). The CO-2, which advertises approximately 510 acres of land for sale on the website, uses potential conservation easement donations as a selling point and it lists the same contact information for the CO-2 (i.e., contact name, address, telephone number and email address) that ORG provided to the IRS for ORG.
ORG was able to provide its donors with a fairly convenient one-stop shopping type of service.
The normal procedure for accepting easements includes President's judgment call on whether or not to proceed and/or accept a conservation easement. The board of directors approves or disapproves recommendations that are made by President. President is compensated as an independent consultant to the donors. He is responsible for paying the appraiser. The donors are responsible for the consulting fees that are paid to President.
The Board was fine with this arrangement:
The institution has no paid employees. In addition to being the President of the Institute, President supports himself as a consultant on, among other subjects and endeavors, conservation easements. The Board grants to President the authority, acting in his capacity as an independent consultant, to perform work which he negotiates separately with grantors of conservation easements to the Institute. This work includes assisting in the valuation of the properties consistent with professional guidelines and as long as he does not act as the principle appraiser.
I'm a pretty easy going guy but there are three things that outrage me besides chiseling with not for profits- thinking that "imply" and "infer" can be used interchangeably, not distinguishing between "i.e." and "e.g." and confusing "principle" with "principal".
There were some other things. President donated his car to ORG, but ORG had been paying the car expenses before the donation. ORG paid President consulting fees but did not issue 1099 until audit commenced. The extent of the one-stop shopping benefits really takes the cake, though:
ORG has demonstrated that it lacks commitment to protect the conservation easements. For example, during the years under examination, ORG accommodated a property owner whose land was subject to a conservation easement and casement restrictions. ORG worked with the property owner to modify the easement restrictions which allowed the property to be further developed in violation of its exempt purposes. Also, President, the President of ORG, benefited financially from this transaction by receiving a consulting fee for assisting with the amendment transaction. This consulting fee was not reported by ORG as income until the IRS initiated its examination.
You pay President to get ORG to accept your conservation easement so that you can get the tax benefits. It turns out that you went a little overboard with the easements and you want to do something that violates them. Pay President and ORG and they will modify them for you. Is this a great country or what ?
That should be enough but the IRS continues to pile it on:
ORG has stated in writing that it monitors the easements it holds on an annual basis. ORG has also stated that President is the sole official who performs the monitoring duties. ORO relies on city and county entities to provide advance warning on easement infringements. The government contends that it is virtually impossible for one person to annually monitor (in one month's time) a total of 35 easements with an average affected area of % acres each. ORG was asked to provide documentation and substantiation of the monitoring activities that were performed by President and it was asked to provide
President's qualifications to perform such monitoring activities. To date, ORG has failed to provide the requested information and documentation. The government contends that ORG is not monitoring the conservation easements on a regular basis, if at all. Additionally, ORG lacks the resources and the staff to monitor the conservation easements and to defend the restrictions if called upon to do so.
Moreover, as a consequence of ORG's failure to determine whether each easement serves a conservation purpose, ORG's subsequent monitoring activities (such as they arc) also fail to serve any conservation purpose.
ORG made a campaign contribution in the amount of $$ to a mayoral race in City of during 20XX. During an interview with the President, President, he confirmed that ORG had made previous political campaign contributions.
The contribution that ORG made to the mayoral race is strictly prohibited by I.R.C. § 501(cX3) which prohibits participation in, or intervention in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for office.
ORG is not giving up the ship.
The following are specific areas of disagreement with the taxpayer as stated in the response received by the IRS on April 1, 20XX: * ORG disagrees with the government contention that the organization was liable for filing Forms 990 for the years of 20XX and 20XX because the organization's monetary receipts were below SS. * ORG contends that it provided organization documents shortly after the initial interview via mail. * ORG provided several corrections pertaining to the responses to questions during the initial interview. The corrections can be read in the correspondence dated April 1, 2030C. * ORG provided clarification to responses provided to the IRS on July 1, 20XX. * ORG contends that it provided the examining agent records which illustrate that the organization monitored its easements for infringements. * ORG provides in its response that many of the casement donations accepted concern wetlands and therefore meets the Code § 170(h) requirements of a conservation purpose. * ORG disagrees with the IRS position that it's Founder (President) has not been able to demonstrate that he has sufficient experience and expertise in dealing with conservation related issues.
ORG provides in its response several examples of President's experience in this field. * ORG disagrees with the IRS position that it acted for private benefit when it amended a conservation easement deed at the request of the owner. * ORG disagrees with the IRS position that it acted for private benefit of it its founder by allowing the founder to be compensated as a "private consultant" to many of its conservation easement donors. * ORG disagrees with the IRS position that it allowed inurement to President in form of payments and compensation. * ORG disagrees with the IRS position that it made a political campaign contribution. * ORG disagrees with the IRS conclusion that its exempt status should be revoked due to a failure to operate for an exempt purpose
I don't know if we will be reading about this in a Tax Court decision in a couple of years. We can only hope.