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- IRS Challenges to Easements and Community Response
- Report of IRS Advisory Council
- Courts to IRS: Ease Up on Conservation Easement Valuations
- US Tax Court Cases 2008-present
- Background of IRS Challenges
IRS Challenges to Easements and Community Response
This "News & Issues" Section includes a review of the IRS challenges of the tax incentive for historic preservation easements and community responses.
- Historic preservation easement donors and easement holding organizations came under increased scrutiny by the IRS, the news media, and Congress starting at the end of 2004. In response, Congress reformed the tax incentive for preservation easements in 2006, but the IRS challenges continued, and even intensified. See "Background of IRS Challenges" below.
- As taxpayers disagreed with the IRS challenges, a number of cases have been heard in the US Tax Court and others are in process. See "2008-2009 US Tax Court Cases" below.
- Several tax practitioners have commented on the Tax Court decisions. See "Courts to IRS: Ease Up on Conservation Easement Valuations Challenges" below.
- Most recently (November 2009), the Advisory Council of the IRS itself reacted to the IRS challenges. See "Report of IRS Advisory Council" below.
This "News & Issues" Section does not purport to contain a complete review of all legislative, IRS and judicial developments regarding IRS challenges, which developments are continually evolving, but rather a summary of the recent highlights. Capitol Historic Trust strongly encourages you to discuss the information contained in this "News and Issues" Section with your professional legal and tax advisors if you are considering donating an historic preservation easement.
("News and Issues" Section revised November 2009)
Report of IRS Advisory Council
In its recent Report dated November 18, 2009, the Internal Revenue Service Advisory Council (IRSAC) tackled the recent spate of IRS challenges to historic preservation easement donations. IRSAC is an organized public forum, authorized by Congress, in which IRS officials and tax professionals discuss relevant tax administration issues. IRSAC offers suggestions for improvements to the IRS, and IRS executives also bring issues to the IRSAC to solicit input.
In the Report, IRSAC, as its first agenda item, addressed the IRS challenges to historic preservation easements—in very explicit terms. IRSAC stated that the current IRS audit effort strains the IRS resources and “may fail to distinguish between a legitimate deduction authorized by statute and an abusive tax shelter.†The IRSAC Report added that there is a perception that "the IRS is overreaching on this issue.â€
IRSAC had six recommendations on how to resolve the current controversy. Those recommendations include the adoption of a safe-harbor audit policy. Under this policy, qualified appraisals would be accepted when the appraised value of the donated easement is equal to or less than 10 percent of the value of the underlying property, absent "clear and convincing evidence to the contrary."
The complete 2009 IRSAC Report can be found at the IRS website. The link is: http://www.irs.gov/taxpros/article/0,,id=215345,00.html. It can also be found on this website by clicking here at "2009 IRSAC Report."
Courts to IRS: Ease Up on Conservation Easement Valuations
In article entitled "Courts to IRS: Ease Up on Conservation Easement Valuations," published in August 2009 by Tax Analysts in its "Tax Notes," tax practioners review the reaction of the Tax Court to IRS challenges. The article concludes that courts largely reject the IRS’s zero or negligible valuation position and find significant value in conservation easements. The authors also feel that "Taxpayers should be encouraged that the courts have respected donations of conservation easements as having significant value." For a copy of the article, click below.
Courts to IRS: Ease Up on Conservation Easement Valuations
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US Tax Court Cases 2008-present
Taxpayers in New Orleans, Chicago, Washington, DC, New York and Boston have challenged the IRS for disallowing their easement deduction, and these taxpayer challenges are working their way through the courts. Some are awaiting decision and others are docketed for the coming months. In two cases, a decision has been reached on the merits, in both cases favorable to the taxpayer.
Whitehouse v. Commissioner, a tax court case decided in October 2008, upheld an easement donation on a hotel in a New Orleans historic district that already had strong local preservation laws. The only issue in dispute was valuation. The taxpayer argued the easement value was almost 15% of the value of the property, and the IRS appraiser argued that the easement had no value. The tax court allowed a deduction for the easement of 14.82% of the court-determined value of the underlying property.
In September 2009, the tax court in Simmons v. Commissioner upheld easement donations on two Washington, DC properties. The IRS had raised technical objections to the easement donations and also claimed that the value of the easements was zero. The tax court rejected both the technical claims (ruling that the easement was valid and the donor‘s appraisals were "qualified appraisals") and the “zero valuation“ claims (ruling that the easement had value). Regarding the claim of the IRS that the easements had no value, the court stated "We do not find [the IRS‘] expert reports credible insofar as they maintain that an easement would have absolutely no effect on the fair market value of valuable real estate." The court held that the value of each easement was equal to 5% of the value of the underlying property.
Three rulings not on the merits (summary judgment) have also been made. Two were in March 2009, one in federal district court in Chicago and one in tax court. In the district court case, Bruzewicz v. United States, the judge ruled for the IRS, holding that, under district court precedent, the taxpayers‘ appraisal did not meet technical requirements. Later that week, in the second case, the tax court made opposite ruling in Schiedelman v. Commissioner, rejecting the IRS‘s virtually identical arguments about the taxpayers‘ appraisal and denying the motion of the IRS. The case went on to trial on the merits and is awaiting ruling. Finally, in Kaufman v. Commissioner, the Tax Court held in May 2010 that the easement donation of a Boston couple was not perpetual because the lender retained first priority to condemnation and insurance proceeds. The taxpayers have requested reconsideration of the ruling, and a number of amicus briefs have been submitted in support of that motion, including one by the Trust. The case proceeded to trial on other issues and awaits ruling on the motion for reconsideration as well as the issues raised at trial.
For more on the cases, and the text of the decisions, click here for "Tax Court Cases."
Background of IRS Challenges
In 2004, the IRS announced that taxpayers may be improperly claiming deductions for easement contributions (IRS Notice 2004-41) and placed all easement deductions (for both land and historic preservation) on the IRS list of "tax scams" (IRS Notice 2006-25), announcing a large scale audit initiative (Letter of IRS Commissioner Mark Everson to Senate Finance Committee). The IRS and media attention led Congress to hold hearings in 2005 about the easement donation tax deduction.
Congress passed legislation in August 2006 that revised some technical requirements of the deduction but otherwise retained it intact (and even relaxed some deduction limitations)(August 2006 Legislation). The historic preservation community felt that, with the August 2006 legislation, Congress had reaffirmed its support for the federal historic preservation tax incentive program. However, the IRS stepped up its audit review of easement donors (including of donors to the Trust) and began uniformly disallowing deductions for easement donations in their entirety, initially claiming easements had no value, and later adding technical challenges, claiming, for example, that the donor’s appraisals were not "qualified" or that certain easement terms were not compliant under the regulations. See "2008-2009 US Tax Court Cases" above.
After the passage of the August 2006 Legislation, the IRS issued several documents that relate to preservation easements. In November 2006, the IRS issued Notice 2006-96 providing appraisal standards for historic preservation easement donations (IRS Notice 2006-96, Appraisal Standards). In December 2006, the IRS revised the instructions for Form 8283 (Form 8283 Instructions) and in April 2007 issued an updated version of Publication 561 (Publication 561), each containing sections specifically focused on qualified conservation contributions. In September 2007, the IRS released a memorandum (Chief Counsel Memorandum 200738013), concerning the IRS’s requirements for the valuation of historic preservation easements. In March 2008, the IRS assured preservation community representatives that it did not believe that all conservation easements were intrinsically of little or no value, and that its goal was to faithfully carry out Congressional intent to encourage historic preservation (Correspondence with IRS), but these assurances did not seem to affect the IRS challenge initiatives.