The focus on special charitable-incentive tax laws that expire on Dec. 31, 2013 has been on tax-free distributions to charities from individual retirement accounts. Back reference. Tax-Free IRA Distributions to Charity.
The enhanced tax benefits for gifts of conservation easements also expire at year end. Although these gifts are much less common than charitable/IRA rollovers (maximum $100,000 per year), claimed easement deductions are often millions of dollars.
Qualified conservation contributions—background. These gifts aren’t subject to the rules that generally bar deductions for gifts of partial interests in property.
Definitions
Qualified conservation contribution: A gift of a qualified real property interest to a qualified organization exclusively for conservation purposes.
Qualified real property interest: (1) The entire interest of the donor, other than a qualified mineral interest; (2) a remainder interest; or (3) a restriction, granted in perpetuity, on the use that may be made of the real property.
Qualified organizations: Public charities, governmental units and certain supporting organizations (an organization organized and operated exclusively for the benefit of, to perform the functions of or carry out the purposes of a charity).
Conservation purposes include: (1) the preservation of land areas for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, plants or similar ecosystems; (3) the preservation of open space (including farmland and forest land), where that preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or under a clearly delineated federal, state or local governmental conservation policy; and (4) the preservation of a historically important land area or a certified historic structure.
Ceilings on deductibility—before 2006. Qualified conservation contributions of capital gain property were subject to the same percentage of adjusted gross income (AGI) ceilings and carryover rules that apply to other charitable gifts of capital gain property. (Capital gain property is long-term appreciated property deductible at full fair market value.)
Increased adjusted gross income ceiling—rules through 2013. The ceiling on deductibility for individuals is 50 percent of AGI (instead of 30 percent).
Another increased benefit—15-year carryover. Individuals are allowed to carry over any qualified conservation contributions that exceed the 50 percent AGI limit for up to 15 years (instead of five years).
Farmers and ranchers additional increased benefits. For an individual who is a qualified farmer or rancher for the taxable year in which the contribution is made, a deduction for a qualified conservation contribution is allowable for up to 100 percent of AGI.
Corporate farmers and ranchers: For a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher for the taxable year in which the contribution is made, any qualified conservation contribution is allowable up to 100 percent of the excess of the corporation’s taxable income (as computed under Internal Revenue Code Section 170(b)(2)) over the amount of all other allowable charitable contributions. A corporation’s ceiling on deductibility is normally 10 percent of its taxable income. Corporate farmers and ranchers have a 15-year carryover for these contributions.
Stella—preserve the hotel façade! Litigation between a taxpayer and the Internal Revenue Service can go on for years. The poster boy for conservation easement litigation between the IRS and a taxpayer is the Ritz Carlton Hotel in New Orleans (this explains the headline of this article). The hotel limited its ability to alter the building’s façade, claiming a $7.4 million charitable gift. The IRS’s appraisers found that figure a tad high—valuing the easement at $1.15 million. The legal battle started in the Tax Court, then continued in the Fifth Circuit Court of Appeals, and it’s back in that court again. Whitehouse Hotel Limited Partnership, 615 F.3d 321 (CA-5 2010).
Many conservation easements benefit the public. The key issue is the value of the benefit (generally measured by the decrease in value of the property on which the easement is placed).
The IRS tries to avoid he-said-she-said duels of valuation experts in prolonged trials by attacking appraisals on grounds other than valuation—for example, the appraiser isn’t qualified, the appraisal summary (Form 8283) wasn’t signed by the required party, the substantiation requirements weren’t met or the correct valuation method wasn’t used.
Senate Finance Committee chairman Max Baucus (D-MT) says that there will be no extenders bill this year or next year, rather, each expiring (or expired) provision will be examined separately as part of overall tax reform.
But wait, there’s an exception. Mr. Baucus, together with ranking Republican Senate Finance Committee member Oren Hatch (R-UT), on March 12, introduced S. 526 that would make the conservation easement benefits “permanent” (not just extend those benefits for one year, as is the usual case). The permanent law would continue the 50 percent AGI ceiling for most individuals, the 100 percent AGI ceiling for ranchers and farmers, and the carryover would be 15 years. The bill excludes golf courses from the term “qualified conservation easement.”
House Ways and Means members Mike Thompson (D-CA) and Jim Gerlach (R-PA) introduced a substantially identical bill (H.R. 2807) in the House, with 144 co-sponsors. This bill, however, doesn’t have the golf course exclusion.
No one—not Congress, not the president, not even pundits—knows the fate of the expiring tax laws.
We do know that if a conservation easement is granted before year-end, the current enhanced benefits—the increased AGI deductibility ceilings and extended carryovers—will be available.
Presumably, extended carryovers for contributions made before 2014 would continue to apply after 2013. Otherwise, taxpayers who relied on the law would be unfairly treated. But, as a former U.S. Attorney for the Southern District of New York said at every meeting of the assistant U.S. attorneys: “Never assume a Goddamn thing.”
© Conrad Teitell 2013. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.