Transcript Conservation Easements and Appraisers

Conservation Easements and
Appraisers
October 31, 2012
Disclaimer
• The comments and views expressed by
the presenter do not reflect the policy or
position of the Internal Revenue Service.
Commentaries offered are the opinions of
the presenters.
Conservation Easement I.R.C.
§170
• Must be a voluntary gift to qualified
organization. IRC §170(c).
• Transfer of money or property without
receipt of adequate consideration.
• Made with charitable intent.
• No conditional gifts.
Conservation Easement cont.
• No earmarking
• Deductible in taxable year delivered to the
donee.
• Property substantiated-IRC & Regs.
Deduction Amount
• Quid pro quo and charitable intent
• Bargain sale
• Type of property (ordinary income, shortterm capital gain, long-term capital gain)
• Basis
• Percentage limitations
Qualified Conservation Contribution
IRC 170(h)
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Qualified real property interest
Granted in perpetuity
Qualified organization
Exclusively for conservation purposes
Qualified Real Property Interest
IRC 170(h)(2)
• Any of the following interests in real
property
– Transfer of an entire interest in property
except for qualifying mineral interest
– A remainder interest in real property
– A restriction on the use of the real property
granted in perpetuity (referred to as a
conservation easement)
Perpetuity IRC 170(h)(5)(A)
• Permanently restricting the use, modification, or
development of the property.
• Restriction remains on the property forever.
• Binding on current and future owners of the
property.
• Cannot be amended.
• Easement deed must be recorded-state law
controls.
Perpetuity – Other Requirements
• Subordination
– Pre-existing mortgagee or lien holders must
subordinate their interest. Treas. Reg.
1.170A-14(g)(2).
• Allocation of Proceeds on Extinguishment
– Donee has vested property interest.
– FMV equal to at least the proportionate value
of the easement restriction at the time of the
gift to the value of the property as a whole.
Treas. Reg. 1.170A-14(g)(6)(ii)
Qualified Organization
IRC 170(c)
• Governmental unit, publicly-supported charity, and some
non publicly supported charities.
• Not all 170(c) organizations are eligible to accept
deductible conservation easements. Treas. Reg.
1.170A-14(c)(1).
• Must be received by an eligible donee. IRC 170(h)
– Organized or operated for one of the conservation purposes in
IRC 170(h)(4)(A).
– Must have the resources to enforce the restrictions of the
conservation easement.
– Special Rules for Buildings in Registered Historic Districts-IRC
170(h)(4)(B)(ii).
• See Publication 78-Cumulative List of Organizations.
Conservation Purpose
IRC 170(h)(4)(A)
• Preservation of land for outdoor recreation by, or
for the education of, the general public.
• Protection of a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem.
• Preservation of open space for the scenic
enjoyment of the general public or pursuant to a
clearly delineated governmental conservation
policy. Needs significant public benefit.
• Preservation of historically important land or a
certified historic structure.
Inconsistent Use
• A donation must be exclusively for
conservation purposes. IRC §
170(h)(1)(C).
• With certain exceptions, a deduction will
not be allowed if the contribution would
accomplish one of the enumerated
conservation purposes but would permit
destruction of other significant
conservation interests.
Substantiation
• A charitable contribution is not deductible
unless it is substantiated in accordance
with the Internal Revenue Code and
applicable regulations.
Substantiation Requirements
• Contemporaneous Written
Acknowledgement
• Form 8283 (Appraisal Summary)
• Qualified Appraiser and Appraisal
• Façade Filing Fee
• Baseline study
Contemporaneous Written
Acknowledgement IRC 170(f)(8)
• Required content:
– Name of the qualified (donee) organization
– Amount of any cash contribution
– Description (but not the value) of the conservation
easement granted
– Goods or services statement (even if none received)
– Description and good faith estimate of the value of
goods or services provided by donee
• Form 8283 is not a substitute for CWA.
• Substantial compliance does not apply.
• No reasonable cause exception.
Form 8283 – Appraisal Summary
• An appraisal summary is required with
respect to noncash contributions in excess
of $5,000.
• Specific requirements set forth in Treas.
Reg. § 1.170A-13(c)(4).
• Must be signed and dated by the donee.
• Must be signed and dated by the qualified
appraiser who prepared the qualified
appraisal.
Other Substantiation Requirements
• Façade Filing Fee-IRC 170(h)(4)(B), 170(f)(13)
– Filing Fee ($500) for easements on buildings in
registered historic districts> $10,000 (contributions on
or after February 13, 2007).
• Baseline Study-Treas. Reg. 1.170A-14(g)(5)
– Must be made available to donee prior to the
donation.
– Identifies conservation attributes and the condition of
the property at the time of the donation.
– Specific information about the types of natural habitat
and ecosystems on the property, scenic or historic
aspects, historic structures, existing restrictions and
the impact of any reserved rights.
Qualified Appraisal IRS
170(f)(11)(C)
• Required for noncash donations > $5,000
(other than publicly traded stock).
• Special substantiation requirements.
Treas. Reg. 1.170A-13(c)(3).
• Codified definitions of qualified appraisal
and qualified appraiser (appraisals
prepared for returns or submissions filed
after August 17, 2006). IRC 170(f)(11)(E).
• Proposed Regulations-Notice 2006-96.
Qualified Appraisal
IRC 170(f)(11)(E) & Treas. Reg.
1.170A-13(c)
• Must meet all of the requirements of Treas. Reg.
• Prepared, signed, and dated by a qualified appraiser.
• In accordance with generally accepted appraisal
standards.
• No earlier than 60 days before and not later than return
due date (including extensions).
• No prohibited appraisal fee.
• Must attach to return for donations > $500,000. Special
rule for post Pension Protection Act (PPA) easements on
buildings in registered historic districts.
Qualified Appraisal Regulations
Treas. Reg. 1.170A-13(c)(3)(ii)
• Description of the
property
• Physical condition
• Date/expected date of
contribution
• Agreement terms related
to the property’s use, sale
or other disposition
• Appraiser’s name,
address and identification
number
• Appraiser qualifications
• Statement that appraisal
was prepared for tax
purposes
• Appraisal date
• FMV of the contribution
• Valuation method
• Specific basis for
valuation
Qualified Appraiser 170(f)(11)(E)(ii)
• Appraisal designation from a recognized
professional appraiser organization OR met
minimum education & experience requirements.
• Regularly performs appraisals for compensation.
• Meets such other requirements as prescribed by
the Secretary in regulations or other guidance.
• Verifiable education and experience in valuing
the type of property subject to the appraisal.
• Not been prohibited from practicing before the
IRS any time in the 3-year period ending on the
date of the appraisal. IRC 170(f)(11)(E)(iii).
Qualified Appraiser Notice 2006-96
Pension Protection Act (PPA)
• Appraisal designation awarded on
demonstrated competency in valuing type
of property being appraised.
• Appraiser self-qualification declaration in
the appraisal.
• Minimum education and experience
requirements.
Minimum Education & Experience
Real Property
• For returns filed on or before October 19,
2006
– Treas. Regs. 1.170A-13(c)(5)
• For returns filed after October 19, 2006
– Licensed or certified
– For type of property appraised
– In the state property is located
Minimum Education & Experience
Other than Real Property
• For returns filed on or before February 16,
2007
– Treas. Regs. 1.170A-13(c)(5)
• For returns filed after February 16, 2007
– College or relevant coursework
– 2 years experience
– Fully describe qualification in appraisal
Guidance Resources
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Internal Revenue Code Section 170
Sections 267 and 707
Treasury Regulation Sections 1.170A-13 and 1.170A-14
Notice 2006-96, Guidance Regarding Appraisal
Requirements for Noncash Charitable Contributions
• Publication 526, Chartable Contributions
• Publication 561, Determining the Value of Donated
Property
• Publication 1771, Charitable ContributionsSubstantiation and Disclosure Requirements
Recent Cases
•
Trout Ranch v. Commissioner
T.C. Memo. 2010-283
•
Boltar v. Commissioner
136 T.C. No. 14, April 5, 2011
•
Sheidelman v. Commissioner
T.C. Memo. 2010-151
•
1982 East, LLC v. Commissioner
T.C. Memo. 2011-84
•
Herman v. Commissioner
T.C. Memo. 2009-205
•
Schrimsher v. Commissioner
T.C. Memo. 2011-71
•
Dunlap v. Commissioner
T.C. Memo. 2012-126
•
Rothman v. Commissioner
T.C. Memo. 2012-163
Recurring Errors
• Encumbered parcel isolated and valued
independently without consideration of
contiguous property.
• Market analysis and support is nonexistent
in the report.
Recurring Errors
• Highest and best use is not developed or
supported. No Market Analysis provided
to drive the HBU conclusions. Missing the
tests of investment return for alternative
uses.
• Qualitative grids without explanation or
support for the conclusion. Reviewer
should be able to duplicate the process.
Recurring Errors
• Use of another appraiser’s sales data
without independent reconfirmation.
• Reliance on bargain sales.
• Easement sales or easement encumbered
land sales used without adequate
assessment of comparability.
• Enhancement not thoroughly addressed or
conclusions adequately supported.
Taxpayer/Appraiser
Misconceptions
• IRS will not go to court.
• IRS will not pursue appraiser penalties.
• Easements automatically impose a
significant loss in value.
• Subdivision Development/Discounted
Cash flow never accepted by IRS.
Taxpayer/Appraiser
Misconceptions
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Percent diminution is a method.
Direct Sales Comparison is required.
IRS will not consider sales of easements.
IRS will not consider easement
encumbered sales.
Taxpayer/Appraiser
Misconceptions
• IRS will only consider sales comparison of
easement encumbered sales.
• Bargain sales reflect market value.
• Highest and best use is the owner’s
decision.
Taxpayer / Appraiser
Misconceptions
• A simple statement of highest and best use is
adequate support for the conclusion.
• Existing development or owner plans are by
default the highest and best use.
• Easement value cannot be zero.
• IRS position is easements have zero value.
• “Contiguous owned parcel” analysis is not
required.
Omission and Commission
• Generally Accepted Standards (USPAP)
• Conduct Section of Ethics Rule: An appraiser
must perform assignments with impartiality,
objectively, and independence, and without
accommodation of personal interests.
– Must not communicate assignment results with the
intent to mislead or to defraud;
– Must not use or communicate a report that is known
by the appraiser to be misleading or fraudulent.
Omission and Commission
• Generally Accepted Standards (USPAP)
– Standards Rule 1-1(b): not commit a
substantial error of omission or commission
that significantly affects an appraisal.
• Comment: An appraiser must use sufficient care to
avoid errors that would significantly affect his or
her opinions and conclusions.
Omission and Commission
• By omission; leaving out information or
data that would be viewed as pertinent to
a given assignment, that would change the
results if considered.
• By commission; including erroneous or
inappropriate information or data within a
given assignment that would change
results if not included.
6695A Appraiser Penalty
• Prior to PPA penalties subject to IRC 6700 or
IRC 6701
• IRC 6695A Originated with the Pension
Protection Act of 2006
• Not intended for minor differences of opinion
• Treated as a separate case from originating tax
case
• Practitioner has opportunity to support their work
6695A Appraiser Penalty
• 6695A. Substantial and gross valuation
misstatements attributable to incorrect
appraisals.
• 6695A(a) Imposition of penalty. –if• 6695A(a)(1) a person prepares an appraisal of
the value of property and such person knows, or
reasonablely should have known, that the
appraisal would be used in connection with a
return or claim for refund, and
6695A Appraiser Penalty
• 6695A(a)(2) the claimed value of the
property on a return or a claim for refund
which is based on such appraisal results in
a substantial valuation misstatement under
chapter 1, a substantial estate or gift tax
valuation understatement, or a gross
valuation misstatement, with respect to
such property, then such person shall pay
a penalty in the amount determined under
section (b).
6695A Appraiser Penalty
• 6695A(b) Amount of Penalty – The amount of
the penalty imposed under subsection (a) on
any person with respect to an appraisal shall be
equal to the LESSER of –
• 6695A(b)(1) the greater of –
• 6695A(b)(1)(A) 10 percent of the amount of the
underpayment attributable to the misstatement
described in subsection (a)(2), or
6695A Appraiser Penalty
• 6695A(b)(1)(B) $1,000, or
• 6695A(b)(2) 125 percent of the gross income
received by the person described in subsection
(a)(1) from the preparation of the appraisal.
• 6695A(c) Exception – No penalty shall be
imposed under subsection (a) if the person
establishes to the satisfaction of the Secretary
that the value established in the appraisal was
more likely than not the proper value.
Market Analysis and Highest and
Best Use
• Most critical elements in conservation
easement appraisals
• Market Analysis MUST be done before
Highest and Best Use Analysis
• Must be a reflection of market
performance and expectations, supported
with FACTS!
Methodology Used to value
Conservation Easements
• Direct Approaches:
– Sales of Easements: By Regulation – If there is a
substantial record of sales of easements comparable
to the donated easement (such as purchases
pursuant to a governmental program), the fair market
value of the donated easement is based on the sales
process of such comparable easements. (Treas.
Reg. 1.170A-14(h)(3))
– If none or not enough comparable easement sales
then:
Before and After Approach
•
Before Value
• (less) After Value
•
Conservation Easement Value
Before Value
– Standard Appraisal
• Highest and Best use (may already have a portion
under easement)
• Three approaches to value
• Typically nothing unusual
After Value
• Direct Sales Comparison Approach
– Easement Encumbered sales
• Must be arm’s length
• Must be similar to the subject – Size, Location,
Sale Date, Restrictions, etc.
• Property must have similar Highest and best use
as the subject in both Before and After condition
• Typically concludes $/acre
• Value of Easement = Before Value – After Value
• Rare but may be used more often as more and
more Easement encumbered sales occur
After Value
• Indirect Sales Comparison Approach
• In some cases with limited or no data in the
subject market the appraiser must use sales
from out of the area, but the decision must be
supported and full analysis shown.
– Ideally, sales of encumbered property are compared
to sales of un-encumbered property
• Comparables must be similar
• Sales can be from other market areas
• Encumbered sales must have similar restrictions and similar
H&B use conclusions
• Typically conclude percent diminution in value as opposed to
$/acre
The End