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- Challenging Environment
- IRS Challenges to Easement Donation Deductions and Taxpayer Reponse
- Report of IRS Advisory Council
- Courts to IRS: Ease Up on Conservation Easement Valuations
- Congressional Members Urge IRS to Institute a Moratorium on Easement Donation Enforcement Actions
Challenging Environment
- This "News & Issues" Section includes a review of the IRS challenges of the tax incentive for historic preservation easements below at "IRS Challenges To Easement Donations and Cuommunity Reponse". However, this review 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.
- Several tax practitioners have commented on the Tax Court decisions. See "Courts to IRS: Ease Up on Conservation Easement Valuations Challenges" below. The Advisory Council of the IRS itself also reacted critically to the IRS challenges. See "Report of IRS Advisory Council" below.
IRS Challenges to Easement Donation Deductions and Taxpayer Reponse
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
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.
The IRS initially claimed that 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. Taxpayers from Chicago, Washington, DC, New York to Boston, New Orleans, Ohio and Alabama have challenged the IRS for disallowing their easement deduction, and these taxpayer challenges are working their way through the courts. Some are awaiting decision; others are docketed for the coming months; in in others, decisions have been reached. For the text of the decisions to date, click here for "Tax Court Cases."
Report of IRS Advisory Council
IRSAC Reproaches IRS for "overreaching"
In its 2009 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.”
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."
IRS Fails to Repond to IRSAC Recommendations
The 2009 IRSAC Report contains six recommendations to the IRS concerning historic preservation easements. The IRS is required to respond to those recommendations, but, two years after the publication of the IRSAC Report, has yet to do so, at least publically. During a March 30, 2001 appearance before Congress, the IRS Commissioner, Douglas Shulman, was rebuked on this point, where the following exchange took place:
Ms. Black. […] But I want to turn the attention to a program called the Historic Preservation Facade Easement Program. And I know that Chairman Jo Ann Emerson was concerned about this, and brought this situation up in Appropriations.[…] And then, also the IRS advisory council in the 2009 general report took issue with what is going on with the audits. And I wondered if you might, in my one-minute time that I have left, speak a little bit about the program and the fact that even the advisory committee recommends that there may be a safe harbor on the audit policy, because of it appearing to be so onerous. […]
Mr. Shulman. […] On easements, historic easements is an issue. You get a big tax credit. We need to have some coverage, make sure people don’t abuse it, but also make sure that there is historic preservation, and people use those easements. We take very seriously the IRSAC recommendations. Those people spent a lot of time. And we are looking right now at those recommendations. I cannot speak specifically to the program here, but would be happy to follow up with you on it.
Ms. Black. Well, I appreciate that, because there was a recommendation, and I would like to know what you think about the recommendation, if you all will follow through on that. Thank you.
To view the testimony of Douglas Shulman in its entirety, click here.
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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("News and Issues" Section revised May 2011)
Congressional Members Urge IRS to Institute a Moratorium on Easement Donation Enforcement Actions
In April 2011, Congressmen Michael Turner (R-OH) and Russ Carnahan (D-MO) sent a correspondence to the IRS to express their concern that "the Internal Revenue Service is engaging in policies and practices that undermine existing law related to the charitable tax deduction for the donation of preservation easements on certified historic structures." They call the disregard by the IRS of the IRSAC recommendations unfortunate, and asked for an immediate and temporary moratorium on enforcement actions related to easement donations until reforms of enforcement are put into place.
Steven Miller, IRS Deputy Commissioner for Services and Enforcement, responded to Rep. Turner in May 2011.