Philanthropy Tax E-Letter
Conservation Easements, General Patton and the IRS

Conservation Easements, General Patton and the IRS


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“Rommel you magnificent bastard, I read your book,” General George Patton shouted after outmaneuvering German Field Marshall Rommel’s troops on a World War II battlefield. The book is Infanterie Grelft (Infantry Attacks).


We don’t have proof that Patton actually shouted those words on the battlefield. But, that was what George C. Scott yelled, while playing the General, in the movie “Patton.” And George C. Scott wouldn’t lie.


Be patient, dear readers — you’ll soon see my Patton tie-in with the Internal Revenue Service.


Conservation easements aren’t everyday gifts, but they are, nevertheless, important. They benefit the public at large and offer tax and non-tax advantages to donors. 


Many requirements must be met to obtain charitable deductions. An increasing number of court cases involve the IRS’s denial or reduction of tax benefits. After first determining whether an easement is a qualified one, quid pro quo, valuation and substantiation are among the other issues that arise. 


Here’s a quick overview of conservation easements, followed by the IRS’s lengthy audit checklist for its agents. The checklist is from the IRS’s “Conservation Easement Audit Techniques Guide.” So you see, you’ll have read the IRS’s book.


Conservation easements in brief. To be deductible, conservation easements must be legally binding and have permanent restrictions on the use, modification and development of property, such as parks, wetlands, farmland, forest land, scenic areas, historic land and historic structures. Current and future owners of the easement and the underlying property must be bound by the terms of the conservation easement.


A qualified conservation contribution under IRC Section 170(h) is a contribution of a qualified real property interest (for example, a restriction granted in perpetuity on the use which may be made of the real property) to a qualified organization exclusively for conservation purposes. TheIRC and accompanying Treasury regulations outline the requirements for a contribution to be deductible.


Qualified organizations that accept conservation easements must have a commitment to protect the conservation purposes of the donation and must have sufficient resources to enforce compliance with the easement agreement’s terms.


Four deductible types of conservation easements:

Preservation of land areas for outdoor recreation by, or the education of, the general public. 

Protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem. 

Preservation of open space (including farmland and forest land). 

Preservation of a historically important land area or a certified historic structure. 


The donation of a conservation easement that meets all the statutory and regulatory requirements, including specific valuation and substantiation requirements, can be claimed as a charitable deduction.


A conservation easement’s value is determined by a qualified appraisal. The easement’s value is the fair market value (FMV) at the time of the contribution. To the extent there is a substantial record of sales of easements comparable to the one donated, the FMV is based on the sales price of those comparable easements. 


If there is no substantial record of market-place sales, the value is, generally, the difference between the FMV of the underlying property before and after the easement is transferred. 


Head’s up. Various statutory provisions may limit the amount of the deduction — for example, adjusted gross income ceilings, allowable carryovers or donor’s holding period.


Caveat. Taxpayers, return preparers, appraisers and others involved with an improper or overvalued conservation easement may be subject to various penalties. 


The IRS’s alert to its examiners: “While the charitable contribution of a conservation easement may be the most significant issue on the tax return,” IRS examiners are alerted to examine related tax issues “such as a sale of state tax credits or a recapture of rehabilitation tax credit.”


The IRS tells its agents that the following worksheet (checklist) is an “all- inclusive list of potential issues for donations of conservation easements.” It instructs them to review Section 170, The Deficit Reduction Act of 1984 (DEFRA Section 155), the corresponding Treasury Regulations, Notice 2006-96 and case law. 



View the Conservation Easement Issue Identification Worksheet for IRS Agents

© Conrad Teitell 2012. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.



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