Charitable Contributions of Conservation Easements: Potential for Abuse Prompts Heightened Scrutiny

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EXECUTIVE SUMMARY

* Taxpayers can benefit from a deduction for a charitable conservation contribution while the public benefits from a resulting preservation of real property including farmland, natural fish and wildlife habitats, and historic sites.

* Congress' rationale for tax deduction includes, besides the public benefit of protecting valuable resources, recognition of the additional costs and loss of value that an easement or similar restriction can pose for the property owner. Nonetheless, the IRS has considered such easements to have a high potential for abuse and has scrutinized them, especially those that are promoted for their tax benefits.

* For historic sites, easements commonly require owners to preserve and maintain the historic character of a historic building's facade or other external features. Other easements for which a qualified conservation contribution can be available protect farmland, forests and other open-space or buffer land for scenic enjoyment or recreation or to serve a governmental policy that significantly benefits the public.

* For a donated easement to be qualified as a conservation contribution, it must be made to a qualified organization that serves the purpose of the donation and is able to enforce the easement's restrictions. If any mortgage attaches to the property, the lender must subordinate its interest to the qualified organization. Special rules apply to historic easements, including certification of historic structures by the National Register of Historic Places.

* Under a special allowance extended through 2011, a deduction is limited for most individuals by 50% of the contribution base over the amount of all other allowable charitable contributions for the tax year, with a maximum carryforward of 15 years. For years after 2011, the deduction is scheduled to be limited to 30% of the contribution base, under rules applicable to capital gain property, with a five-year carryforward. Deductions by C corporations are limited to 10% of taxable income without regard to net operating loss and capital loss carrybacks, and carryforward is for five years.

* Tax controversies have frequently arisen over the valuation method and its application by taxpayers. Taxpayers also must be able to defend appraisals and appraiser qualifications under requirements heightened by the Pension Protection Act of 2006.

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Charitable contributions of conservation easements allow taxpayers to obtain a federal tax benefit while helping to conserve land for public use or enjoyment or to preserve a historic structure. Through the use of these easements, ownership of land or a historic building is kept in private hands but with restrictions on its use. The easement creates a discounted value for the property that provides a charitable contribution tax deduction and tax savings for the owner of these properties, while the public benefits from the conservation objectives.

Taxpayers can take a charitable deduction for qualified conservation contributions, which are contributions of a qualified real property interest to a qualified organization exclusively for conservation purposes (IRC [section] 170(h)(1)). A qualified real property interest for this purpose can be the taxpayer's entire interest in the property, a remainder interest or an easement that restricts the use of the property in perpetuity. Conservation purposes under IRC [section] 170(h)(4)(A) are (1) preserving land for outdoor recreational use by, or education of, the general public; (2) protecting relatively natural habitats of fish, wildlife or plants; (3) preserving open space (including farmland or forest space) for scenic enjoyment of the general public or under a governmental conservation policy yielding significant public benefit; and (4) preserving a historically important land area or a certified historic structure.

From 2003 through 2007 approximately 3,000 tax returns per year contained a charitable deduction for donation of a qualified conservation contribution. …