The news that Donald Trump takes advantage of conservation tax breaks should hardly be a surprise. He has said that he pays as little tax as possible, echoing Warren Buffett and many others in business. One reason he pays as little tax as possible is that he hates how Washington spends the money. And like many who may rail at the unfairness and complexity in the tax law, Mr. Trump also admits that he takes advantage of the tax laws and their Byzantine complexity.
In this light, it makes sense that Mr. Trump has his reduced taxes with conservation easements at golf clubs in Florida and New Jersey. Reports suggest that he granted easements in California and New York too. They were probably done as charitable donations of conservation easements. Although Mr. Trump has still not released his tax returns, he has granted a number of such easements, and he almost surely deducted their value. But value is a fluid concept, and perhaps particularly so with conversation easements. Unlike many easements, they are not rights of passage over land.
Instead, they are legal rights to enforce the preservation of the land. Conservation easements restrict property’s future development, which might sound odd for a developer. Of course, since you are giving away legal rights to charity, you can claim a tax deduction. One of the most controversial questions is what they are worth.
Conservation easements may preserve natural habitat or the historical façade of a building. In the latter case, you donate (usually to a historical preservation society) a permanent right preserving the outside of your historic office building or historic residence. Of course, local zoning and historic preservation laws may already prevent you from altering the historical character of the building.
In that sense, adding an easement may not add significant restrictions. Still, you can claim your deduction. Many technical requirements apply to donee charities, the type of property, and permitted purposes. For façade easements, the building must be certified as historic or be in a certified historic district. The rules are technical enough that you need professional help.
Appraisals before and after the easement are critical. One figure reveals the value of your property without it. The second reveals its value subject to the easement. The IRS targets inflated appraisals, claiming inflated values for building façades are a tax scam.
Some taxpayers have claimed excessive valuations for their donated easements. The IRS has taken some of them to court. These disputes often come down to dueling appraisers, and taxpayers can usually afford good ones. Still, court battles over the tax benefits are not uncommon. In one key case, Scheidelman v. Commissioner, the Second Circuit Court of Appeals reversed the Tax Court and handed the conservation easement community a big victory.
Ms. Huda Scheidelman claimed a modest façade easement donation which the IRS disallowed. There was no qualified appraisal, the IRS said, and not even the cash she contributed was deductible. That was harsh but the Tax Court agreed. Scheidelman had applied to a charity to donate a façade easement for her brownstone in Brooklyn. The easement would prohibit Scheidelman from altering its facade without permission and would require her to maintain the façade and the rest of the structure.
She hired an appraiser who valued it at $115,000 using the before-and-after method. The charity insisted that Ms. Scheidelman make a cash contribution toward operating costs of ten percent of the value of the easement ($9,275), which she did. She claimed her deduction, which the IRS denied, adding penalties. The Tax Court ruled that she couldn’t even deduct the cash since it was donated as a condition to the charity accepting her easement.
The Tax Court also concluded the appraiser did not make his before-and-after valuation approach clear. But the appellate court said he did. He explained how he arrived at his numbers and that was enough. There was also a glitch with the Form 8283 Ms. Scheidelman filed with her return. It failed to include the date and manner of acquisition of the property or its cost basis. The Tax Court thought that alone was enough to nix her deduction.
The appellate court disagreed. Any defect was just too technical to prevent a deduction, the court said. What about the cash donation? Contributions toward operating expenditures are commonplace, said the court, so it allowed them. Without some way of monitoring compliance, an easement is easily violated, withdrawn, or forgotten. A cash contribution (even a mandatory one) can help administer a charitable donation. That meant the cash was deductible too.
Conservation easements can provide attractive tax benefits to the donor and nice societal benefits too. There are details to be observed and overly rich appraisals can (and probably should) draw scrutiny. Still, with a properly planned and documented donation, and a deduction that isn’t greedy, everyone wins. Mr. Trump seems to know that.
For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.
via The Tax Lawyer http://ift.tt/1QMpM4T