Sunday, March 4, 2012

Conservation Easements, Perpetuity, and Form 990

The IRS has been more focused in recent years on the perpetuity requirements of IRC § 170(h). In the recent case, Carpenter v. Comm’r, T.C. Memo. 2012-1, the Tax Court sustained the IRS’s disallowance of deductions for the donation of conservation easements that are extinguishable “by mutual written agreement of both parties” if circumstances arise in the future that render the purpose of the easement “impossible to accomplish.” The court held that conservation easements that are extinguishable by mutual agreement of the parties, even if subject to a standard, fail as a matter of law to comply with the requirement that the conservation purpose of a tax-deductible conservation easement be "protected in perpetuity" under IRC § 170(h)(5)(A).

The IRS made important revisions to the 2011 Form 990 instructions relating to conservation easements, some of which relate to the perpetuity requirements.

Modifications, Transfers, Releases, Terminations, or Extinguishments

Although organizations accepting conservation easement donations have been required to report on their conservation easement modification, transfer, release, termination, or extinguishment activities since 2006, the revised 2011 Form 990 Schedule D Instructions contain more detailed information regarding this reporting obligation. The revised instructions provide, in part, that “[u]se of a synonym for any of these terms does not avoid the application of the reporting requirement. For example, calling an action a ‘swap’ or a ‘boundary line adjustment’ does not mean the action is not also a modification, transfer, or extinguishment.” The revised instructions also provide that “[t]ax exemption may be undermined by the modification, transfer, release, extinguishment, or termination of an easement.”

Statement of Revenue

The 2011 Form 990 Instructions (on page 33) and the 2011 Form 990 Schedule D Instructions (on page 3) provide that an organization must report contributions of conservation easements in Part VIII of Form 990, Statement of Revenue, consistently with how it reports revenue from such contributions in its books, records, and financial statements. The IRS is not telling filers how they need to report on conservation easements. Rather, it is telling them only that they must be consistent in their reporting in their books and records and across the 990.

According to the Land Trust Alliance’s Guide to the Form 990, most land trusts value their easements at zero or assign a nominal value, such as $1, because a typical conservation easement provides the land trust with no affirmative rights except to monitor and enforce the easement and, thus, constitutes a liability. Some land trusts, however, record their easements at their appraised (“before and after”) value and book them as both income and expenses in the same year.


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