Senate Finance Committee launches investigation, while anti-syndication bill is introduced in the House and Senate

Abusive syndicated easements are bad news, as described in more detail in my December 2017 article here. The Land Trust Alliance and the IRS have been fighting to shut down this tax shelter for years, and now Congress is jumping into the fray. On March 27, 2019, the Senate Finance Committee announced the beginning of an investigation into abusive syndicated conservation easement transactions. The Committee kicked off its investigation with fourteen individual letters to parties associated with investors known to have engaged in this type of syndicated easement.

Continue Reading Congress Increases Scrutiny of Syndicated Conservation Easements

New California Law Tracks Federal Financing Restrictions on Transfer Fees

Last session, California passed California Civil Code Section 1098.6 prohibiting the creation of new transfer fees effective as of January 1, 2019, unless the fee provides a “direct benefit” to the property, as defined under federal regulations.

A “transfer fee” means any fee requirement imposed by a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of real property (or an interest in real property), that requires a fee to be paid as a result of a transfer of the property.  Traditionally, a transfer fee would be instituted by a master community developer to underwrite the community homeowners association’s ongoing costs to manage the community. Unfortunately, some developers started treating transfer fees as a permanent source of income and began implementing them even where they would not be used to manage the community. This abuse gave rise to Civil Code Section 1098.6 last year and, earlier, certain federal regulations limiting federal financing of property encumbered by transfer fees that do not benefit the property.

Continue Reading Land Trusts Take Note: Transfer Fees in California Must Provide Direct Benefit to the Property

When the Tax Court issued its opinion in Pine Mountain Preserve, LLLP v. Commissioner of Internal Revenue, 151 T.C. 14 (December 27, 2018), the conservation community gave a collective sigh of relief because the court dismissed the IRS’s arguments challenging amendment clauses in conservation easements. But alas, the Tax Court giveth and the Tax Court taketh away. That sigh of relief came with some bitter medicine regarding floating homesites. More below. Continue Reading Tax Court Upholds Amendment Clauses but Continues Attack on Floating Homesites in Conservation Easements

DOJ sues Syndicated Easement Promoters

The Department of Justice has finally filed a civil complaint against certain promoters who have been spearheading syndicated easements to the tune of over $2 billion in claimed federal tax deductions using grossly inflated appraisals. Continue Reading Happy New Year’s Tidings for Land Trusts and Other Conservation Advocates

Service Focuses on Conservation Purpose Test and Division of Proceeds Clause in PBBM-Rose Hill, Belair Woods, and Champions Retreat Golf Founders

The IRS has been busy this year challenging conservation easement deductions, particularly conservation easements protecting golf courses and conservation easements providing overinflated syndicated tax deductions. Continue Reading Three Autumn Cases Deny Golf Course and Syndicated Conservation Easement Tax Deductions

Governor Brown signed S.B. 901 into law on September 7. The controversial and lengthy bill is simply entitled “Wildfires,” but has garnered a lot of media attention for what many are calling a utility bailout for the Northern California fires. What hasn’t received much attention is a small paragraph slipped into the bill to amend California’s conservation easement enabling statute, California Civil Code Sections 815–816. Continue Reading California Legislature Amends Venerable Conservation Easement Statute: New Civil Code 815.11

Last month, the IRS issued final regulations entitled “Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions,” codified as Treasury Regulation Sections 1.170A-15 (cash), -16 (noncash), -17 (qualified appraisals and appraisers), and -18 (clothing and household items).

Continue Reading IRS Publishes New Gift Substantiation Regulations

Earlier this month, the U.S. Tax Court handed down an oddly reasoned memo opinion rejecting a North Carolina developer’s conservation easement deduction in Wendell Falls Development, LLC v. Commissioner, T.C. Memo 2018-45 (April 4, 2018).

Practitioners in this field know that the deductions claimed for conservation easements can be hotly contested by the IRS, whose litigation strategy relies on the kitchen sink method—a method that is frequently successful due to the complexity of the regulations and the difficulty donors have complying with them. Here, however, it seems as though the kitchen sink method could have been avoided because the easement in question clearly appears to have been either purchased for its full value or granted in exchange for development rights. But, instead of going the easy route, the Tax Court opinion focuses on whether the donor’s remaining property was enhanced by the easement, finding that it was—contrary to the opinions of two appraisers hired by the donor and one appraiser hired by the IRS.

Continue Reading Denial of Conservation Easement Deduction: Right Result, Puzzling Analysis

Green v. U.S., No. 16-6371 (10th Cir., Jan. 12, 2018)

Practitioners and donors often forget a pesky donation limitation that applies only to irrevocable trusts: the deduction for a real property donation is limited to the trust’s adjusted basis in the real property and is only permitted if the real property was acquired using the trust’s gross income. Internal Revenue Code section 642(c)(1) permits an irrevocable trust to claim a charitable deduction for “any amount of the gross income” of the trust which is donated to a qualified donee. Traditionally, most conservative tax practitioners have interpreted Section 642(c)(1) to mean that an irrevocable trust may donate an interest in real property, so long as (1) the interest was acquired with gross income and (2) the trust’s claimed deduction excludes unrealized appreciation. Unlike Internal Revenue Code section 170, which applies to individuals and corporations and clearly permits claiming unrealized appreciation as part of a charitable deduction, trusts and estates must rely on section 642 to claim charitable deductions and that section does not contain a similar provision.

Continue Reading Hobby Lobby Case Highlights Limitations on Charitable Deductions Claimed by Irrevocable Trusts

If my article on syndicated easement shelters and HR 4459 piqued your interest, please check out “The Billion Dollar Loophole,” an excellent piece of journalism written by Peter Elkind and published by both ProPublica and Fortune yesterday.

In his article, Peter digs into the genesis and current status of the thriving tax shelter industry that is tarnishing legitimate conservation practice and threatening the entire 170(h) conservation deduction. “The Billion Dollar Loophole” highlights the importance of passing remedial legislation like HR 4459.

Last week, Representative Mike Kelly (R) of Pennsylvania and Representative Mike Thompson (D) of California introduced the Charitable Conservation Easement Program Integrity Act of 2017 as H.R. 4459. The Act is simple; comprising only two pages, it addresses a certain type of abusive conservation easement transaction that has been proliferating over the past decade: the syndicated easement.

Continue Reading Bipartisan House Bill Addresses Syndicated Conservation Easement Tax Shelters

This month, the Tax Court revived a method to defeat conservation deductions with its October 10 opinion published as Palmolive Building Investors LLC et al. v. Commissioner, No. 23444-14; 149 T.C. No. 18 (Oct. 10, 2017), holding that if a taxpayer donates a conservation easement, the Treasury Regulations’ requirement that any mortgage must be subordinated to the conservation easement includes subordination of the mortgagee’s rights to insurance and condemnation proceeds.

Continue Reading Tax Court Declines to Follow First Circuit Ruling on Mortgage Subordinations & Conservation Easements

On September 27, 2017, California Governor Jerry Brown signed an extension of the Urban Agricultural Incentive Zones Act. Rather than sunsetting on January 1, 2019, the Act now extends until January 1, 2029.

The Act, originally authored by Assemblymember Phil Ting and enrolled in 2013 as Government Code Section 51042, permits certain local governments to voluntarily enter into contracts with property owners who commit to using their property for agricultural use in exchange for property tax breaks.

Continue Reading Urban Agricultural Incentive Zones Act Extended

Craft3 provides financing to innovative technology company, Enertechnix Process Sensors, Inc. (“EPSI”) to help the company survive and rebuild its sales function so that it can continue its work in preventing harmful industrial impacts on the environment. Click here to learn more.  Craft3 is a certified Community Development Financial Institution (“CDFI”) with a mission to strengthen economic, ecological, and family resilience in Pacific Northwest communities. The company provides loans and assistance to entrepreneurs, nonprofits, individuals and others that lack access to financing. Since inception, Craft3 reports it has invested more than $423 million in 5,000 individuals and businesses in Oregon and Washington.

To learn more about what a CDFI does, click here. Interested in learning about other CDFIs across the country? Click here.

The Fifth Circuit encourages flexibility for conservation easement deductions in Bosque Mountain Ranch, while the Tax Court makes it difficult for farmers in Rutkoske. 

Two important conservation easement opinions were handed down last week.

Bosque Canyon Ranch [1] is noteworthy for the Fifth Circuit’s conservation-friendly language encouraging a flexible interpretation of the myriad statutory and regulatory requirements for easement deductions. This is a stark departure from a recent series of cases denying conservation easement deductions based on what some would call “foot faults.” More specifically, the appellate opinion in Bosque Canyon Ranch: (1) provides some certainty regarding what should be provided in a baseline documentation report, noting that the IRS should not pick apart each component of a report, and (2) holds that the right to relocate homesites that are carved out of an easement does not violate the perpetuity requirement for conservation easements, when the easement holder has approval rights over the final location and the maximum size of the homesites cannot change.

In a much less taxpayer-friendly opinion, the Tax Court in Rutkoske[2] provides the first judicial interpretation of the statutory rule that permits qualified farmers and ranchers to deduct the value of a conservation easement donation against up to 100% of their adjusted gross income. The Tax Court finds that income from the sale of farming property does not count toward qualifying the farmer and rancher for this benefit.

The cases are discussed in detail below.

Continue Reading New Cases Send Mixed Messages to Conservation Easement Donors

In many cases California’s property tax rules automatically penalize insufficiently counseled individuals who inherit interests in real estate-owning legal entities from a family member upon their death. To avoid this penalty, recipients of these interests need to ensure that Form BOE 100-B is filed within 90 days of their family member’s death, a task few are prepared to undertake at that time.

Individuals who acquire real estate often do so using legal entities they control, such as corporations, LLCs, or partnerships to protect themselves from any personal liability that could arise with respect to the real estate.

California’s property tax rules require that individuals who hold interests in real estate-owning legal entities notify the Board of Equalization (“BOE”) when they transfer interests in those legal entities in two situations:

Continue Reading The BOE Death Trap: Avoid Property Tax Penalties on the Death of a Family Member

Those familiar with conservation easements know that to qualify for a federal tax deduction, a conservation easement must meet several rigorous requirements found in Internal Revenue Code Section 170 and Section 1.170A-14 of the Treasury Regulations, not the least of which is the requirement that the easement be granted “in perpetuity.” In addition, the easement must be subject to “legally enforceable restrictions” (such as by recordation) that will prevent uses inconsistent with the conservation purposes of the donation.

Continue Reading Unsurprising Façade Easement Holding by Tax Court: Conservation Easement Must Be Recorded to Qualify for Deduction

While those working in social enterprise are still grappling with how to define it, Professor of Law Lloyd Hitoshi Mayer of Notre Dame Law School takes a look at social enterprise through the lens of domestic tax law, and explores whether it is necessary or desirable to modify existing law to better accommodate social enterprise. Read the paper here.

See Mayer, Lloyd Hitoshi, Creating a Tax Space for Social Enterprise (June 22, 2017). Notre Dame Law School Legal Studies Research Paper No. 1724. Available at SSRN: https://ssrn.com/abstract=2991120

Donating Fund InterestsDue to increased valuation of public and private equities, coupled with the upcoming end of the sunset provision that allows hedge fund managers to defer taxation on fees earned offshore,[1] there is an increased interest among hedge fund and private equity managers to donate a portion of their fund interests to charity.  The goal is to allow a manager to avoid ordinary income or capital gains tax and/or to obtain a tax deduction while accomplishing his or her philanthropic goals.  In order to make the most of any such charitable giving plan, managers need to appreciate that the amount of any charitable deduction will vary depending on the character of the donated property and the type of organization that receives the gift.

Continue Reading Donating Fund Interests: A “Why Now?” and “How To” Primer

photo-1454165804606-c3d57bc86b40The February 15, 2017 deadline for nonprofit organizations in California seeking to initially obtain or renew exemption from property taxes is quickly approaching, and there are changes to the reporting requirements if your organization allows third parties to use your property.

An increased concern amongst many tax-exempt organizations is how to report use of their property by private persons or non-exempt organizations.

Continue Reading Annual Filing for Welfare Exemption Due On or Before February 15th

san franciscoIt seems that San Francisco may have just partially removed its exception from transfer tax that applied to gifts, but the Office of the Assessor-Recorder may not be aware. As a bit of background, transfer tax applies to transfers of interests in real property and, in some cases, to transfers of interests in legal entities that own real property. Transfer tax applies to transfers of interests in a legal entity when enough of the interests in the entity are transferred so as to result in a deemed “change of ownership” of the real property that it owns. Continue Reading Did San Francisco Eliminate its Transfer Tax Exception for Certain Gifts?

On November 4, 2016, the IRS updated its Conservation Easement Audit Techniques Guide (CE Audit Guide) for the first time since March 15, 2012.

According to the IRS’s introduction on its Audit Techniques Guide website, Audit Techniques Guides (ATGs) are developed to help IRS examiners during audits by explaining issues and accounting methods within specific industries. ATGs are also meant to provide guidance to small business owners and tax professionals for tax planning purposes within those industries. However, each ATG contains a disclaimer that it is not “an official pronouncement of the law or position of the Service and cannot be used, cited, or relied upon as such.” This article will not explain the CE Audit Guide in depth, but rather discuss the specific updates made in November.

Continue Reading IRS Updates Conservation Easement Audit Techniques Guide

accountant-accounting-adviser-advisor-159804A new private ruling may be of great interest to clients with substantial real estate interests who wish to contribute one or more properties to a family foundation.  The ruling suggests that payment by the foundation to a property management entity controlled by the donor may be permissible under the personal services exception.

Continue Reading Private Ruling Exempts Property Management Services from Self-Dealing

voteA Brief Case Study:  Your nonprofit’s founder sends out an email in their official capacity to all of its members urging the them to vote for or against a political candidate or for or against a local proposition.

It may be a well-intended gesture, but a mistake that could result in excise taxes or the potential loss of your organization’s tax-exempt status.

Continue Reading What Your Nonprofit Needs to Know Before Advocating a Political Agenda

The case of Salus Mundi Foundation et al v. Commissioner

Transferee LiabilityOn August 15, 2016, the Tax Court decided in Salus Mundi Foundation et al v. Commissioner, T.C. Memo. 2016-154, that two foundations were liable as transferees for a corporation’s unpaid federal tax liability after another foundation distributed to the foundations the proceeds of the sale of the corporation’s stock.

The history in this case involves a marital trust that initially owned all of the stock in a C corporation called Double-D Ranch.  Later, a portion of the stock was transferred to the Diebold Foundation in New York.  Subsequent to that, the Diebold Foundation in New York sold the stock and distributed the proceeds from the sale of Double-D Ranch stock to three foundations formed by the Diebold children, pursuant to a New York state-approved plan of dissolution.

Continue Reading Transferee Liability: The [Unlikely] Situation that your Nonprofit Receives a Charitable Gift with Expensive Tax Strings Attached

SOCAP_logoThis month more than 2,500 people gathered at the ninth Social Capital Markets (SOCAP) conference, billed as the intersection of money and meaning.  The conference is designed to be the place where businesses built to solve the biggest problems meet investors, peers, partners and those who make it happen.  Launched in 2008 in the midst of the economic crises, the conference has grown is size and scope. Coblentz was thrilled to have had the opportunity to sponsor, attend and speak at this event and we came away with the following takeaways:

Continue Reading Takeaways From SOCAP16: The Social Capital Markets Conference

photo-1454165804606-c3d57bc86b40Those responsible for managing a private foundation’s investment assets may not always understand the unique fiduciary and tax constraints imposed on private foundations and their managers by both state and federal law.

Why is this important? 

Running afoul of the rules can result in costly excise taxes that can be imposed on both the foundation and its managers, and in the most extreme cases, can lead to revocation of tax-exempt status.

Continue Reading Investing Private Foundation Assets: What Every Foundation Manager Should Know

photo-1445297983845-454043d4eef4The Tax Court, in a case of first impression, has recently ventured into the perpetuity minefield.  One Dr. Douglas Carroll and spouse Deirdre Smith, of Baltimore, Maryland, conveyed a conservation easement in 2005 over approximately 26 acres of open land in Maryland, mostly pastureland zoned for agricultural uses, to the Maryland Environmental Trust (MET) and the Land Preservation Trust (LPT).  The former organization is a quasi-governmental agency, the latter a private, nongovernmental exempt organization.  The protected property consisted of two parcels of unequal size; upon the smaller parcel sat the taxpayers’ two-story primary residence, and, on the larger, a small (1,000-square-foot) house where a farmhand tenant  resided.

Continue Reading Lurching Towards Perpetuity

taxThe IRS Office of Chief Counsel recently released Information Letter 2016-0036 in response to questions regarding the taxation of crowdfunding revenue. In it the IRS concluded that crowdfunding revenue is taxable to the extent it is received in exchange for services or property.

Continue Reading Thinking of Crowdfunding Your Project? Beware – the Taxman Cometh

photo-1446482972539-0ed52b3e9520We have all been told at one point or another that we simply “can’t have it all.”  But for owners of recreational or agricultural land who desire to preserve the land, pass it down to their descendants as a legacy property, and achieve substantial tax savings, “(almost) having it all” is a possibility.  Enter, the conservation easement – a valuable tool that can bridge the divide between these often competing interests. Continue Reading Conserve Your Land, Preserve Your Estate: The Conservation Easement as a Land Use, Tax & Estate Planning Tool

photo-1460925895917-afdab827c52fIn recent years, private foundations increasingly have sought to incorporate socially responsible investing (“SRI”) mandates.  Some SRI mandates take the form of negative screens—e.g., screening out tobacco stocks.  Other SRI approaches are more proactive—e.g., a foundation focusing on disease eradication might invest in companies that develop vaccines.  However, there has been a view—accurate or not—that some socially responsible investments yield lower risk-adjusted financial returns than traditional investments (such investments are sometimes referred to as “concessionary”).

Accordingly, when a foundation engages in an SRI program, several legal issues arise.

Continue Reading IRS Notice Provides Support for Socially Responsible Investing by Private Foundations

A promise to give is not a guaranteed charitable gift.

smartphone-586903_1920In an open letter to their newborn daughter last December, Facebook CEO Mark Zuckerberg and wife Priscilla Chan announced they will eventually give 99 percent of their Facebook shares during their lives to a variety of important social causes.  Over the past several months, commentators have expressed both enthusiasm and concern with the manner in which the couple chose to commit their wealth to advancing these causes.  Continue Reading What Does the Chan Zuckerberg Initiative Mean for Modern Philanthropy?

tax-468440_1920In July of 2014, the Internal Revenue Service (IRS) introduced a shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.  At that time, the Form 1023-EZ required a $400 user fee to be submitted with the application.

Effective July 1, 2016, the cost will drop to $275 for Form 1023-EZ filers, pursuant to recently issued Revenue Procedure 2016-32.

Continue Reading Form 1023-EZ Filers Benefit From Reduced Fee

On April 25, 2016, Joan and Sandy Weill announced their donation of $185 million to establish the UCSF Weill Institute for Neurosciences in an ambitious effort to accelerate the development of new therapies for diseases affecting the brain and nervous system, including psychiatric disorders. This is the largest single donation in UCSF History. Learn more in the video below, or read about the donation here.