Conservation Easement Audit Technique Guide

Publication 5464 (Rev. 1-2021) Catalog Number 75086E Department of the Treasury

Internal Revenue Service www.irs.gov

Conservation

Easement

Audit Technique Guide

This document is not an official pronouncement of the law or the position of the Service and cannot be

used, cited, or relied upon as such. This guide is current through the revision date. Since changes may

have occurred after the revision date that would affect the accuracy of this document, no guarantees are

made concerning the technical accuracy after the revision date.

The taxpayer names and addresses shown in this publication are hypothetical.

Audit Technique Guide Revision Date: 1/21/2021

Table of Contents

I. Overview .............................................................................................. 13

A. Statement of Purpose ................................................................... 13

B. Generally ........................................................................................ 13

C. Background / History .................................................................... 14

D. Relevant Terms ............................................................................. 15

D.1. Conservation Easement ..................................................... 15

D.2. Charitable Contribution ...................................................... 15

D.3. Qualified Conservation Contribution ................................ 15

D.4. Conservation Purpose ........................................................ 16

D.5. Fair Market Value ................................................................. 16

E. Law / Authority .............................................................................. 16

E.1. Exhibit 1-1 Conservation Easement Legal Authority ....... 16

E.2. Tax Issues ............................................................................ 17

E.3. Resources ............................................................................ 17

II. Statutory Requirements for All Charitable Contributions .............. 18

A. Overview ........................................................................................ 18

B. Charitable Contribution Definition .............................................. 18

B.1. Qualified Organization ........................................................ 18

B.2. Charitable Intent .................................................................. 18

C. Real Estate Contributions ............................................................ 18

D. Partial Interest Rule ...................................................................... 19

E. Conditional Gifts ........................................................................... 19

F. Earmarking .................................................................................... 19

G. Year of Donation ........................................................................... 19

H. Substantiation of Noncash Contributions .................................. 20

I. Amount of Deduction ................................................................... 21

III. Qualified Conservation Contribution ................................................ 22

A. Overview ........................................................................................ 22

B. Qualified Real Property Interest .................................................. 22

C. Qualified Organization .................................................................. 22

D. Conservation Purpose .................................................................. 23

E. Perpetuity ...................................................................................... 23

E.1. Reserved Rights .................................................................. 24

E.2. Recording Easements ......................................................... 25

E.3. Amendment Clauses in Easement Deeds ......................... 25

E.4. Subordination of Mortgages in Lender Agreements ........ 26

E.5. Extinguishment ................................................................... 26

E.6. Allocation of Proceeds in Deed and Lender Agreements 26

IV. Qualified Organization ....................................................................... 28

A. Overview ........................................................................................ 28

B. Qualified Organization .................................................................. 28

C. Commitment and Resources ....................................................... 28

D. Special Rules for Buildings in a Registered Historic District ... 29

E. Cash Contributions ....................................................................... 29

E.1. Quid Pro Quo Contribution ................................................ 30

V. Conservation Purpose ....................................................................... 30

A. Overview ........................................................................................ 30

B. Land for Outdoor Recreation or Education ................................ 31

C. Relatively Natural Habitat or Ecosystem .................................... 31

D. Open Space ................................................................................... 33

D.1. Scenic Enjoyment ............................................................... 33

D.2. Governmental Conservation Policy ................................... 34

D.3. Significant Public Benefit ................................................... 34

E. Historically Important Land or Structure .................................... 36

E.1. Historically Important Land ................................................ 36

E.2. Certified Historic Structure ................................................ 36

E.3. Special Rules for Buildings in Registered Historic

Districts .................................................................................... 37

F. Public Access ................................................................................ 38

G. Inconsistent Uses ......................................................................... 38

H. Baseline Study .............................................................................. 39

VI. Substantiation ..................................................................................... 39

A. Overview ........................................................................................ 40

B. Contemporaneous Written Acknowledgment ............................ 40

C. Form 8283, Noncash Charitable Contributions .......................... 42

C.1. Generally .............................................................................. 42

C.2. Declaration of Appraiser ..................................................... 43

C.3. Donee Acknowledgment ..................................................... 44

C.4. Failure to Attach Form 8283 ............................................... 44

D. Qualified Appraisal ....................................................................... 44

D.1. Qualified Appraisal Under Regulations ............................. 44

D.2. Generally Accepted Appraisal Standards ......................... 45

D.3. Reasonable Cause .............................................................. 45

E. Façade Easement Filing Fee (Registered Historic District Only)

F. Baseline Study .............................................................................. 45

G. Additional Donor Recordkeeping Requirements ....................... 46

H. Exhibit 6-1 - Substantiation Requirements ................................. 46

VII. Qualified Appraisal Requirements .................................................... 47

A. Overview ........................................................................................ 47

B. Qualified Appraisal ....................................................................... 47

B.1. Reasonable Cause Exception ............................................ 49

C. Qualified Appraiser ....................................................................... 50

D. Generally Accepted Appraisal Standards ................................... 51

D.1. Uniform Standards of Professional Appraisal Practice ... 51

E. Appraisal Fees .............................................................................. 53

VIII. Amount of Deduction ................................................................... 53

A. Overview ........................................................................................ 53

B. Percentage Limitations ................................................................ 53

B.1. Individuals ............................................................................ 53

B.2. Corporations ........................................................................ 54

B.3. Special Rules for Qualified Farmers and Ranchers ......... 54

B.4. Carryovers ........................................................................... 55

C. Contributions of Appreciated Property ....................................... 55

C.1. Ordinary Income and Short-Term Capital Gain Property 55

C.2. Long-Term Capital Gain Property ...................................... 56

D. Bargain Sale .................................................................................. 57

D.1. Taxable Gain ........................................................................ 57

D.2. Federal and State Easement Purchase Programs ........... 57

E. Quid Pro Quo or Substantial Benefit and Charitable Intent ...... 58

F. Rehabilitation Tax Credit .............................................................. 58

F.1. Recapture of Rehabilitation Tax Credit ............................. 59

IX. Valuation of Conservation Easements ............................................. 59

A. Overview ........................................................................................ 59

B. Valuation Process ......................................................................... 60

C. Valuation Date ............................................................................... 61

D. FMV ................................................................................................ 61

D.1. Before and After Method .................................................... 61

D.2. Use of Flat Percentage Cannot Be Applied to Before Value

D.3. Contiguous Parcels ............................................................. 62

D.4. Enhancement Rule .............................................................. 62

E. Market Analysis ............................................................................. 63

F. Highest and Best Use ................................................................... 64

G. Methodology .................................................................................. 65

G.1. Sales Comparison Approach ............................................. 66

G.2. Cost Approach ..................................................................... 67

G.3. Income Capitalization Approach ........................................ 67

G.4. Subdivision Development Method ..................................... 67

G.5. Aggregate Partnership Interest .......................................... 69

H. Transferable Development Rights ............................................... 69

X. Partnership Anti-Abuse Rules, Judicial Doctrines, and Codified

Economic Substance Doctrine .......................................................... 70

A. Partnership Anti-Abuse Rules ..................................................... 70

B. Judicial Doctrines ......................................................................... 72

B.1. Bona Fide Partner and Partnership ................................... 72

B.2. Substance Over Form ......................................................... 73

B.3. Step Transaction Doctrine .................................................. 74

C. Codified Economic Substance Doctrine ..................................... 76

XI. Preplanning the Examination ............................................................ 77

A. Overview ........................................................................................ 77

B. Review of Return ........................................................................... 77

B.1. Form 8283 – Appraisal Summary ....................................... 78

B.2. Signature Requirements ..................................................... 79

B.3. Return Attachments ............................................................ 79

B.4. Other Tax Issues ................................................................. 80

B.5. TEFRA Considerations ....................................................... 80

B.6. BBA Considerations (Taxable Years Beginning on or After

January 1, 2018) ...................................................................... 81

C. Internal Sources of Information ................................................... 81

C.1. IRS Intranet .......................................................................... 81

C.2. Program Analysts ................................................................ 81

C.3. Integrated Data Retrieval System – IDRS .......................... 81

C.4. Façade Filing Fee Verification ............................................ 82

C.5. Tax Exempt Organization Search ...................................... 82

C.6. Office of Professional Responsibility ................................ 82

D. External Sources of Information.................................................. 83

D.1. Internet Research ................................................................ 83

D.2. Taxpayer............................................................................... 83

D.3. Donee Organization ............................................................ 83

D.4. Appraiser .............................................................................. 84

D.5. Public Records .................................................................... 84

D.6. National Park Service .......................................................... 85

E. Interviews ...................................................................................... 86

F. Information Document Requests ................................................. 86

G. Valuation Expert Involvement ...................................................... 86

G.1. Referral to LB&I Engineering ............................................. 87

G.2. Referral Outcomes .............................................................. 87

G.3. LB&I Engineering Products ................................................ 88

G.4. Outside Experts ................................................................... 88

H. Consultation with Counsel ........................................................... 88

I. Coordination with TEGE ............................................................... 88

XII. Conducting the Examination ............................................................. 89

A. Overview ........................................................................................ 89

B. Interviews ...................................................................................... 90

C. Property Inspection ...................................................................... 91

D. Review of Documents ................................................................... 92

D.1. Deed of Conservation Easement ....................................... 92

D.2. Perpetuity ............................................................................. 93

D.3. Conservation Purpose ........................................................ 93

D.4. Reserved Rights .................................................................. 94

D.5. Lender Agreements ............................................................. 94

D.6. Subordination Agreements ................................................ 94

D.7. Allocation of Proceeds ....................................................... 95

D.8. Baseline Study ..................................................................... 95

D.9. Taxpayer’s Appraisal .......................................................... 97

D.10. Donee Organization ............................................................ 97

D.11. Commitment and Resources .............................................. 97

D.12. Cash Payments .................................................................... 98

D.13. Contemporaneous Written Acknowledgment................... 99

D.14. National Park Service – Form 10-168 ................................ 99

D.15. Partnership Documents .................................................... 101

E. Third-Party Contacts .................................................................. 101

E.1. Donee Organizations ........................................................ 102

E.2. Mortgage Lenders ............................................................. 102

E.3. Appraiser ............................................................................ 103

E.4. Federal and State Conservation Agencies ..................... 103

E.5. Local Government Officials .............................................. 103

E.6. Real Estate Agents ............................................................ 104

E.7. Property Owners ............................................................... 104

XIII. Concluding the Examination...................................................... 104

A. Overview ...................................................................................... 104

B. Issue Identification ..................................................................... 105

B.1. Substantial Compliance .................................................... 105

C. Report Writing ............................................................................. 106

C.1. Job Aids ............................................................................. 107

C.2. Valuation Expert Reports ................................................. 108

C.3. Penalties............................................................................. 108

C.4. Technical Assistance ........................................................ 109

D. Closing Conference .................................................................... 109

E. Taxpayer Protests ....................................................................... 109

E.1. Rebuttals to Taxpayer Protest ......................................... 109

F. Exhibit 13-1 Conservation Easement Issue Identification

Worksheet .................................................................................... 110

XIV. Penalties ...................................................................................... 114

A. Overview ...................................................................................... 114

B. Introduction to Penalty Approval .............................................. 115

C. Accuracy-Related Penalties ....................................................... 117

C.1. Section 6662(b)(1) and (c) Negligence or Disregard of

Rules or Regulations ............................................................. 117

C.2. Section 6662(b)(2) and (d) Substantial Understatement of

Income Tax ............................................................................. 118

C.3. Section 6662(b)(3) and (e) Substantial Valuation

Misstatement and Section 6662(h) Gross Valuation

Misstatement ......................................................................... 118

C.4. Section 6662(b)(6) and (i) Codified Economic Substance

Doctrine .................................................................................. 119

D. Section 6663 Civil Fraud Penalty ............................................... 120

E. Section 6664 Reasonable Cause Exception ............................. 120

E.1. Special Rule for Overvaluation of Charitable

Contributions ......................................................................... 120

E.2. Reliance on Professionals ................................................ 121

F. Section 6694 Understatement of Taxpayer’s Liability by Tax

Return Preparer ........................................................................... 122

G. Sections 6700 and 6701 Penalty for Promoting Abusive Tax

Shelters and Aiding and Abetting Understatements of Tax ... 122

H. Section 6695A Substantial and Gross Valuation Misstatements

Attributable to Incorrect Appraisals .......................................... 123

H.1. Office of Professional Responsibility Sanctions............ 124

I. Penalties Specifically Related to Reportable Transactions .... 124

I.1. Section 6662A Accuracy-Related Penalty on

Understatements with Respect to Reportable Transactions

125

I.2. Section 6707A Penalty for Failure to Include Reportable

Transaction Information with Return ................................... 126

I.3. Section 6707 Failure to Furnish Information Regarding

Reportable Transaction ........................................................ 126

I.4. Section 6708 Failure to Maintain Lists of Advisees with

Respect to Reportable Transactions ................................... 127

XV. State Tax Credits ......................................................................... 127

A. Overview ...................................................................................... 127

B. State Tax Credit Programs ......................................................... 127

C. Receipt of State Tax Credits ...................................................... 128

D. Sale of State Tax Credits ............................................................ 129

I. Overview

A. Statement of Purpose

(1) The purpose of this audit techniques guide (ATG) is to provide guidance for the

examination of charitable contributions of conservation easements. Users of

this guide will learn about the general requirements for charitable contributions

and additional requirements for contributions of conservation easements.

(2) This ATG includes examination techniques and an overview of the valuation of

conservation easements. It also includes a discussion of penalties, which may

be applicable to taxpayers and others involved in the conservation easement

transaction.

(3) This guide is not designed to be all-inclusive. It is not a comprehensive training

manual for conservation easements.

B. Generally

(1) To be deductible, donated conservation easements must be legally binding,

permanent restrictions on the use, modification and development of property

such as farmland, forest land, scenic areas, historic land or historic structures.

The restrictions on the property must be in perpetuity. Current and future

owners of the easement and the underlying property must all be bound by the

terms of the conservation easement deed.

(2) The general rule is that no charitable contribution deduction is allowed for a

transfer of property of less than the taxpayer’s entire interest in the property.

IRC § 170(f)(3). Section 170(f)(3)(B)(iii) provides an exception to the partial

interest rule for qualified conservation contributions.

(3) Section 170(h)(1) of the Internal Revenue Code (IRC) states that a qualified

conservation contribution is a contribution of a qualified real property interest

(i.e., a restriction granted in perpetuity on the use which may be made of the

real property) to a qualified organization exclusively for conservation purposes.

The IRC and accompanying Treasury Regulations outline the requirements that

must be met before a charitable contribution is deductible.

(4) Qualified organizations that accept conservation easements must have a

commitment to protect the conservation purposes of the donation in perpetuity

and must have sufficient resources to enforce compliance with the terms of the

easement deed.

(5) Section 170(h)(4)(A) specifies the four conservation purposes:

• Preservation of land areas for outdoor recreation by, or the education of,

the general public.

• Protection of a relatively natural habitat of fish, wildlife, or plants, or similar

ecosystem.

• Preservation of open space (including farmland and forest land), where

such preservation is for the scenic enjoyment of the general public or

pursuant to a clearly delineated federal, state, or local governmental

conservation policy and, for both purposes, will yield a significant public

benefit.

• Preservation of a historically important land area or a certified historic

structure.

(6) The donation of a conservation easement that meets all statutory and

regulatory requirements, including specific substantiation requirements, can be

claimed as a charitable contribution deduction.

(7) The value of a conservation easement must be determined in a qualified

appraisal prepared and signed by a qualified appraiser. The value of the

contribution is the fair market value (FMV) of the conservation easement at the

time of the contribution. To the extent there is a substantial record of sales of

conservation easements comparable to the donated easement, the FMV is

based on the sales price of such comparables. If there is no substantial record

of marketplace sales, the value is generally the difference between the FMV of

the underlying property before and after the easement is granted to the donee.

Because there is usually no substantial record of comparable sales, a before

and after valuation is used in most cases.

(8) To conduct a quality examination, in-depth development of facts is necessary.

Examiners have primary responsibility for addressing the taxpayer’s compliance

with all statutory and regulatory requirements.

(9) Valuation is also an important component of this tax issue. A multi-divisional

approach, working with LB&I Engineering, Counsel, and Tax Exempt and

Government Entities (TEGE), may be needed to properly develop tax issues in

a conservation easement examination.

(10) Taxpayers, return preparers, appraisers, and others involved with an improper

or overvalued conservation easement may be subject to various penalties.

(11) While the charitable contribution of a conservation easement may be the most

significant issue on the tax return, Examiners should be alert to other related tax

issues such as a sale of state tax credits, basis adjustments, or a recapture of

rehabilitation tax credits.

C. Background / History

(1) In recognition of our need to preserve our heritage, Congress allowed an

income tax deduction for owners of significant property who give up certain

rights of ownership to preserve their land or buildings for future generations.

(2) The IRS has seen abuses of this tax provision that compromise the policy

Congress intended to promote. We have seen taxpayers, often encouraged by

promoters and armed with questionable appraisals, take inappropriately large

deductions for easements. In some cases, taxpayers claim deductions when

they are not entitled to any deduction at all (for example, when taxpayers fail to

comply with the law and regulations governing deductions for contributions of

conservation easements). Also, taxpayers have sometimes used or developed

these properties in a manner inconsistent with section 501(c)(3). In other cases,

the charity has allowed property owners to modify the easement or develop the

land in a manner inconsistent with the easement’s restrictions.

(3) Another problem arises in connection with historic easements, particularly

façade easements. Here again, some taxpayers are taking improperly large

deductions. They agree not to modify the façade of their historic house and they

give an easement to this effect to a charity. However, if the façade was already

subject to restrictions under local zoning ordinances, the taxpayers may, in fact,

be giving up nothing, or very little. A taxpayer cannot give up a right that he or

she does not have.

D. Relevant Terms

D.1. Conservation Easement

(1) “Conservation easement” is the generic term for easements granted for

preservation of land areas for outdoor recreation, protection of a relatively

natural habitat for fish, wildlife, or plants, or a similar ecosystem, preservation of

open space for the scenic enjoyment of the public or pursuant to a federal,

state, or local governmental conservation policy, and preservation of a

historically important land area or historic building.

(2) Conservation easements permanently restrict how land or buildings are used.

The “deed of conservation easement” describes the conservation purpose, the

restrictions and the permissible uses of the property. The deed must be

recorded in the public record and must contain legally binding restrictions

enforceable by the donee organization.

(3) The donor gives up certain rights specified in the deed of conservation

easement, but retains ownership of the underlying property. The extent and

nature of the donee organization’s control depends on the terms of the

conservation easement deed. The organization has an interest in the

encumbered property that runs with the land, which means that its restrictions

are binding not only on the landowner who grants the easement but also on all

future owners of the property.

D.2. Charitable Contribution

(1) A charitable contribution is a contribution or gift to or for the use of a qualifying

organization. See Chapter 2.

D.3. Qualified Conservation Contribution

(1) Section 170(h)(1) defines a qualified conservation contribution as a contribution

of a qualified real property interest to a qualified organization to be used

exclusively for conservation purposes.

D.4. Conservation Purpose

(1) Section 170(h)(4)(A) defines “conservation purpose” as one of the following:

• Preservation of land for outdoor recreation by, or the education of, the

general public.

• Protection of a relatively natural habitat of fish, wildlife, or plants, or similar

ecosystem.

• Preservation of open space (including farmland and forest land) either for

the scenic enjoyment of the general public or pursuant to a clearly

delineated governmental conservation policy (both purposes must yield a

significant public benefit).

• Preservation of a historically important land area or a certified historic

structure.

(2) The easement must be created by deed and be exclusively for conservation

purposes. Donations of conservation easements may meet more than one

conservation purpose.

D.5. Fair Market Value

(1) The value of the donated easement must meet the definition of FMV as defined

by Treas. Reg. § 1.170A-1(c)(2): The FMV is the price at which the property

would change hands between a willing buyer and a willing seller, neither being

under any compulsion to buy or sell and both having reasonable knowledge of

relevant facts.

E. Law / Authority

E.1. Exhibit 1-1 Conservation Easement Legal Authority

(1) NOTE: This exhibit is not an all-inclusive list of potential issues for donations of

conservation easements. Users should review IRC § 170, DEFRA § 155, the

corresponding Treasury Regulations, Notice 2006-96 and case law.

Code/Regs/Other

Title

IRC § 170

Charitable, etc., contributions and gifts

DEFRA § 155

Deficit Reduction Act of 1984

Notice 2006-96

Guidance Regarding Appraisal

Requirements for Noncash Charitable

Contributions

Treas. Reg. § 1.170A-1

Charitable, etc., contributions and gifts;

allowance of deduction

Treas. Reg. § 1.170A-13

Recordkeeping and return requirements for

deductions for charitable contributions

Treas. Reg. § 1.170A-14

Qualified conservation contributions

Treas. Reg. § 1.170A-16

Substantiation and reporting requirements

for noncash charitable contributions

Treas. Reg. § 1.170A-17

Qualified appraisal and qualified appraiser

E.2. Tax Issues

(1) Taxpayers must satisfy numerous statutory provisions in order to claim a

noncash charitable contribution deduction for the donation of a conservation

easement. Some deficiencies revealed in examinations of conservation

easements include:

• Failure to meet charitable contributions rules, for example the easement

was granted in exchange for a change in zoning by the county (a quid pro

quo).

• Noncompliance with substantiation requirements.

• Inadequate documentation of or lack of conservation purpose.

• Lack of perpetuity evidenced by terms in the deeds.

• Reserved property rights inconsistent with conservation purpose.

• Failure to comply with subordination rules.

• Failure to provide the donee organization with the specified proportionate

share of the proceeds in the event of extinguishment.

• Use of improper appraisal methodologies.

• Failure to report income from the sale of state tax credits.

• Overvalued conservation easements.

(2) The IRS has identified some promoters and appraisers involved in conservation

easement tax schemes.

E.3. Resources

(1) Information about conservation easements, including contacts, job aids, and

other reference materials are on the IRS Virtual Library, Form 1040 Knowledge

Base.

II. Statutory Requirements for All Charitable Contributions

A. Overview

(1) In order to claim a charitable contribution deduction for a conservation

easement, taxpayers must meet the statutory requirements applicable to all

charitable contributions, as well as the specific requirements for conservation

easement donations.

(2) See Publication 526, Charitable Contributions (PDF), Publication 561,

Determining the Value of Donated Property (PDF), and Publication 1771,

Charitable Contributions - Substantiation and Disclosure Requirements (PDF).

B. Charitable Contribution Definition

(1) A charitable contribution is a contribution or gift to or for the use of a qualifying

organization. It is a transfer of money or property made with charitable intent

and without receipt of adequate consideration. IRC § 170(c); Treas. Reg. §

1.170A-1(h).

(2) Section 170 contains the rules that govern income tax deductions for charitable

contributions, including donations of conservation easements.

B.1. Qualified Organization

(1) A taxpayer can only deduct contributions made to organizations eligible to

accept tax-deductible contributions, which are organizations described in IRC §

170(c).

(2) An organization accepting tax-deductible contributions of conservation

easements must meet additional requirements to be a qualified organization.

See Chapter 4 for additional guidance on qualified organizations.

B.2. Charitable Intent

(1) A charitable contribution is a donation or gift to, or for the use of, a qualified

organization. It is voluntary and made without receipt, or the expectation of

receipt, of anything of economic value.

(2) A transfer of money or property is not voluntary if it is required or is made with

the expectation of a direct or indirect benefit. A benefit received or expected to

be received in connection with a payment or transfer by the taxpayer is called a

quid pro quo.

(3) See Chapter 8 for additional discussion of charitable intent and quid pro quo.

C. Real Estate Contributions

(1) For a contribution of real estate, including a contribution of a conservation

easement, there is no “transfer,” and therefore no deductible charitable

contribution, unless there is:

• A deed signed by the donor transferring the property and

• Acceptance by the qualified organization.

(2) Conservation easement deeds must be recorded in the public record.

D. Partial Interest Rule

(1) Generally, in order to have a deductible contribution, a taxpayer must contribute

the entire interest in the property. A partial interest is generally not deductible.

This is known as the "partial interest" rule. IRC § 170(f)(3)(A).

(2) A qualified conservation contribution is deductible even though it is a partial

interest. It is an exception to the partial interest rule. IRC §§ 170(f)(3)(B)(iii) and

(h).

E. Conditional Gifts

(1) If the contribution is a conditional gift, the donor cannot take a deduction.

• Example: If Justin transfers land in Maine to a city on the condition that

the land is used by the city for an unlikely use (e.g., alligator habitat), there

is no deductible charitable contribution before the time that the specified

use actually occurs.

(2) However, if there is only a negligible chance that the gift will be defeated, the

deduction is allowed. Treas. Reg. §§ 1.170A-1(e) and 1.170A-7(a)(3).

• Example: Susan transfers land to a city on the condition that the land is

used by the city for a public park. If, on the date of the gift, the city plans to

use the property as a park, and the possibility that it will not be used as a

park is so remote as to be negligible, the deduction is allowable at the time

of the transfer to the city.

F. Earmarking

(1) A taxpayer may not deduct earmarked contributions (e.g., for the benefit of a

particular individual or family). Earmarked amounts are treated as transfers to

the earmarked beneficiary and not as transfers to the IRC § 170(c)

organization.

• Example: Steven made payments to his church. He earmarked the

payments for John, a needy individual. Steven cannot deduct the amount

of the payments since he earmarked the funds for John. The church was

merely a conduit for Steven’s gift to John.

G. Year of Donation

(1) A taxpayer may deduct contributions paid within the taxable year. IRC §

170(a)(1) and Treas. Reg. § 1.170A-1(a) and (b).

(2) A promise to pay cash or transfer property in the future is not deductible. The

taxpayer may deduct payments made by check when the check is mailed or

delivered to the IRC § 170(c) organization. Treas. Reg. § 1.170A-1(b).

(3) For conservation easements, the year of the deduction is the year of

recordation. Treas. Reg. § 1.170A-14(g)(1).

• Example: A conservation easement was granted to a qualified

organization on December 20, 2007, as evidenced by the dated

signatures on the conservation easement deed. However, the easement

was not recorded in the public records until March 12, 2008. The year of

donation is 2008.

H. Substantiation of Noncash Contributions

(1) A charitable contribution is not deductible unless it is properly substantiated in

accordance with the IRC and the regulations. The documentation requirements

vary depending on the date of contribution, nature of the contribution (noncash

in the case of a conservation easement), type of property contributed, and

dollar amount claimed. For a conservation easement, the following documents

are required:

(2) Contemporaneous written acknowledgment from the donee organization. IRC §

170(f)(8). The contemporaneous written acknowledgment must meet the

acknowledgment requirement and the contemporaneous requirement.

• The acknowledgment must:

• Be in writing,

• Describe the property received by the donee,

• Contain a statement of whether the donee provided any goods or

services in consideration, in whole or in part, for the gift, and

• Provide a description of and a good faith estimate of the goods or

services, other than intangible religious benefits, provided to the

taxpayer.

• The contemporaneous requirement provides:

• The taxpayer must get the acknowledgment on or before the earlier

of:

• The date the taxpayer files a return for the year in which the

contribution was made, or

• The due date (including extensions) for filing such return.

(3) Form 8283, Section B, with supplemental statement.

(4) Deed (should be stamped with the recording date).

(5) Qualified Appraisal (for contributions of more than $5,000).

(6) Baseline study.

(7) The tax court has considered a number of cases in which taxpayers argued that

the deed of easement satisfied the contemporaneous written acknowledgment

requirement. In French v. Commissioner, T.C. Memo. 2016-53, and Schrimsher

v. Commissioner, T.C. Memo. 2011–71, the deed did not satisfy the

contemporaneous written acknowledgment requirement. In Big River

Development, LP v. Commissioner, T.C. Memo. 2017-166; 310 Retail, LLC v.

Commissioner, T.C. Memo. 2017-164; RP Golf, LLC v. Commissioner, T.C.

Memo. 2012-282; and Averyt v. Commissioner, T.C. Memo. 2012–198, the

deed did satisfy the contemporaneous written acknowledgment requirement.

(8) Examiners should contact Counsel for assistance if a taxpayer contends that

the deed of easement satisfies the contemporaneous written acknowledgment

requirement.

(9) In Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, a Form 8283

that omitted the cost basis of the subject property, with an attachment indicating

that it was not necessary to disclose it, neither strictly nor substantially complied

with the regulatory requirement to include such information on the form. See

also RERI Holdings v. Commissioner, 149 T.C. 1 (2017); Treas. Reg. § 1.170A-

13(c)(2)(i)(B) and (4)(ii)(E). Taxpayers are afforded the opportunity to

demonstrate reasonable cause for omitting the information. IRC §

170(f)(11)(A)(ii)(II).

(10) See Publication 526, Charitable Contributions (PDF), and Publication 1771,

Charitable Contributions - Substantiation and Disclosure Requirements (PDF)

and Chapter 6 for additional guidance on substantiation requirements.

(11) See IRC § 170(f)(8)(A)-(D), Treas. Reg. § 1.170A-13(f) (effective for

contributions made on or after December 16, 1996 and on or before July 30,

2018) and Treas. Reg. § 1.170A-16(a) (effective for contributions made after

July 30, 2018).

(12) See also Section 155 of the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-

369, 98 Stat. 691, Treas. Reg. § 1.170A-13(c)(2)(i)(B) (effective for contribution

made after December 31,1984, and on or before July 30, 2018) and Treas.

Reg. § 1.170A-16(c)-(e) (effective for contributions made after July 30, 2018).

I. Amount of Deduction

(1) Factors that may affect the amount a taxpayer may claim as a charitable

contribution deduction for a conservation easement include:

• FMV

• Quid pro quo and charitable intent

• Bargain sale

• Type of property (ordinary income, short-term capital gain, long-term

capital gain)

• Basis

• Percentage limitations

• Type of donee organization

(2) See Chapter 8 and Publication 526, Charitable Contributions (PDF) for

additional guidance on specific limitations on charitable contributions.

III. Qualified Conservation Contribution

A. Overview

(1) Section 170(h)(1) defines a qualified conservation contribution as a contribution

of a qualified real property interest to a qualified organization to be used

exclusively for conservation purposes.

B. Qualified Real Property Interest

(1) A qualified real property interest is any of the following interests in real property:

• The entire interest of the donor, other than a qualified mineral interest.

• A remainder interest.

• A restriction on the use of the real property granted in perpetuity (often

referred to as a conservation easement).

(2) See IRC § 170(h)(2).

C. Qualified Organization

(1) The recipient of a deductible conservation easement donation must be a

qualified organization and also an eligible donee. IRC §§ 170(h)(1)(B) and

170(h)(3); Treas. Reg. § 1.170A-14(c)(1).

(2) Qualified organizations include:

• The federal government, a United States (U.S.) possession, the District of

Columbia, a state government, or any political subdivision of a state or

U.S. possession.

• An organization described in IRC § 170(b)(1)(A)(vi).

• A charity described in IRC § 501(c)(3) that meets the public support test of

IRC § 509(a)(2).

• An IRC § 501(c)(3) organization that meets the requirements of IRC §

509(a)(3) and is controlled by one of the organizations described above.

(3) Note: See Treas. Reg. § 1.170A-14(c)(1) for the requirements to qualify as an

eligible donee.

(4) See IRC § 170(h)(3) and Chapter 4 for additional information on qualified

organizations.

D. Conservation Purpose

(1) Section 170(h)(4)(A) defines “conservation purpose” as one of the following:

• Preservation of land for outdoor recreation by, or the education of, the

general public.

• Protection of a relatively natural habitat of fish, wildlife, or plants, or similar

ecosystem.

• Preservation of open space (including farmland and forest land) either for

the scenic enjoyment of the general public or pursuant to a clearly

delineated governmental conservation policy (both purposes must yield a

significant public benefit).

• Preservation of a historically important land area or a certified historic

structure.

(2) The easement must be created by deed and be exclusively for conservation

purposes. Donations of conservation easements may meet more than one

conservation purpose.

(3) See Chapter 5 for additional information on conservation purpose.

E. Perpetuity

(1) A deductible conservation easement must be made in perpetuity, permanently

restricting the use of the property. Section 170(h)(2)(C) requires that the interest

in real property be subject to a use restriction granted in perpetuity, and IRC §

170(h)(5)(A) requires that the conservation purpose be protected in perpetuity.

See also Treas. Reg. §§ 1.170A-14(b)(2) and 1.170A-14(g)(1).

(2) This means that the deed of conservation easement must indicate that the

restriction remains on the property forever and is binding on current and future

owners of the property.

(3) If a deed of conservation easement does not meet the perpetuity requirements,

the contribution of a conservation easement is not deductible.

(4) If the conservation easement deed imposes restrictions for a specific period

such as ten years, it is not in perpetuity and is not deductible. An easement is

not enforceable in perpetuity if it ends after a period of years or if it can revert to

the donor or to another private party. However, if a remote future event, like an

earthquake, can extinguish the easement, the donation could nevertheless be

treated as enforceable in perpetuity. Treas. Reg. § 1.170A-14(g)(3).

(5) In Carpenter v. Commissioner, T.C. Memo. 2012-1, a conservation easement

was not enforceable in perpetuity because it allowed for the extinguishment of

the easement by mutual consent of the parties if circumstances arose in the

future that would render the purpose of the conservation easement impossible

to accomplish.

(6) In Belk v. Commissioner, 140 T.C. 1 (2013), motion for reconsideration denied,

T.C. Memo. 2013-154, aff’d 774 F.3d 1243 (4th Cir. 2014), the deed of

easement allowed the taxpayers and donee to change the property subject to

the easement by substituting other property owned by the taxpayers for the

property originally subject to the easement. The tax court ruled that the

provision caused the easement to fail the requirements of IRC § 170(h)(2)(C),

as the donated property interest was not subject to a use restriction granted in

perpetuity.

(7) In Pine Mountain Preserve, LLLP v. Commissioner, 151 T.C. 247 (2018), and

Pine Mountain Preserve, LLLP v. Commissioner, 116 T.C. Memo. 214, rev’d in

part, aff’d in part, vacated and remanded, 2020 WL 6193897 (11th Cir. Oct. 22,

2020), the 2005 deed of easement set out boundaries for ten building areas, but

allowed the boundaries to be modified by mutual agreement of the donor and

NALT, the donee. The 2006 deed of easement allowed the designation of six

building areas within the conservation area, but with no other restriction on

location except that the locations must be approved in advance by NALT. The

tax court, following Belk, ruled that these provisions caused the easement to fail

the grant in perpetuity requirements of IRC § 170(h)(2)(C). In so doing, the

court explicitly rejected the holding in BC Ranch II, L.P. v. Commissioner, 867

F.3d 547 (5th Cir. 2017), where the Fifth Circuit ruled that the so-called floating

homesites did not defeat perpetuity. The Eleventh Circuit, in Pine Mountain,

ruled that the moveable building areas do not violate the “granted in perpetuity”

requirement under § 170(h)(2)(C), but remanded the issue of whether they

violate the “protected in perpetuity” requirement under § 170(h)(5)(A). The

Eleventh Circuit agreed with the tax court that the amendment clause did not

violate the protected in perpetuity requirement of IRC § 170(h)(5)(A). Lastly, the

Eleventh Circuit held that when determining the fair market value of the

easement, the tax court should value the easement using the standards set

forth in the governing regulations.

(8) Agents should note that under Golsen v. Commissioner, 54 T.C. 742, 756-57,

aff’d, 445 F.2d 985 (10th Cir. 1971), the tax court is bound by an appellate

court’s opinions in cases appealable to that appellate court’s circuit. We

recommend that all floating homesite/moveable building area clause cases and

amendment clause cases be referred to the assigned LB&I and SB/SE

Counsel.

E.1. Reserved Rights

(1) In Hoffman Props. II, LP v. Commissioner, 956 F.3d 832 (6th Cir. 2020), a

façade easement case, the Sixth Circuit Court of Appeals affirmed the tax

court’s holding that the automatic approval clause in the deed rendered the

easement nondeductible because the clause was inconsistent with the

easement being enforceable in perpetuity under IRC § 170(h)(5)(A). The clause

reserved to the donor rights to modify the building façade if the donor obtained

the prior approval of the easement holder, but if the holder failed to respond to a

request for approval within 45 days, the request was automatically considered

approved. The court of appeals explained that a failure of the donee to act

within 45 days would foreclose its ability to prevent the proposed modification.

For a CCA containing an acceptable “constructive denial” clause, see CCA

202002011 (released Jan. 10, 2020).

E.2. Recording Easements

(1) The deed of conservation easement must be recorded in the appropriate

recordation office. See generally Treas. Reg. § 1.170A-14(g)(1).

(2) In a federal tax controversy, state law controls the determination of a taxpayer’s

interest in property while the tax consequences are determined under federal

law. United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722 (1985);

Woods v. Commissioner, 137 T.C. 159, 162 (2011). An easement is not

enforceable in perpetuity before it is recorded.

(3) In addition to the deed, all exhibits or attachments to the deed, such as a

description of the easement restrictions, maps, and lender agreements, may

need to be recorded. In Herman v. Commissioner, T.C. Memo. 2009-205, the

taxpayer recorded a “Declaration of Restrictive Covenant” for a donation of

unused development rights above a building in New York City. The covenant

referred to an attached architectural drawing, which described the easement

restrictions, but the drawing was not recorded. The court ruled that because the

attached drawing was not recorded, it could not bind subsequent purchasers,

did not protect the conservation purpose of preserving the building “in

perpetuity,” and failed to meet the requirements of IRC § 170(h)(5)(A). But see

Butler v. Commissioner, T.C. Memo. 2012-72, holding that documents

incorporated into the deed by reference do not have to be recorded with the

deed under Georgia law.

E.3. Amendment Clauses in Easement Deeds

(1) The restriction on the use of the real property must be enforceable in perpetuity,

meaning that it lasts forever and binds all future owners. An easement deed

may fail the perpetuity requirements of IRC § 170(h)(2)(C) and (h)(5)(A) if it

allows any amendment or modification that could adversely affect the perpetual

duration of the deed restriction.

(2) In Pine Mountain Preserve, LLLP v. Commissioner, 151 T.C. 247 (2018), rev’d

in part, aff’d in part, vacated and remanded, 2020 WL 6193897 (11th Cir. Oct.

22, 2020), the deed of easement allowed the donor and the donee to amend

the deed by agreement so long as the amendment was not inconsistent with the

conservation purposes. The tax court ruled that such an amendment clause

does not violate the enforceable in perpetuity requirements of IRC §

170(h)(5)(A). See discussion of amendment clauses and the Pine Mountain

case above under the heading “Perpetuity.”

(3) The issue of Amendment Clauses is different than the issue of Reserved

Rights. See Chapter 12 for information on Reserved Rights in an easement

deed.

E.4. Subordination of Mortgages in Lender Agreements

(1) If the property has a mortgage or lien in effect at the time the easement is

recorded, the easement contribution is not deductible unless the mortgagee or

lien holder subordinates its rights in the property to the rights of the donee

organization to enforce the conservation purposes of the easement in

perpetuity. Treas. Reg. § 1.170A-14(g)(2).

(2) The subordination agreement must be recorded in a timely manner.

(3) In Minnick v. Commissioner, T.C. Memo. 2012‐345, aff’d, 796 F.3d 1156 (9th

Cir. 2015), the tax court held that petitioners were not entitled to a charitable

contribution deduction because they failed to meet the subordination

requirements (i.e., the mortgagor and petitioners had not entered into a

subordination agreement at the time the easement was donated, rather, it was

entered into after the donation). See also Mitchell v. Commissioner, 138 T.C.

324 (2012), supplemented by T.C. Memo. 2013-204, aff’d, 775 F.3d 1243 (10th

Cir. 2015); RP Golf, LLC v. Commissioner, T.C. Memo. 2016‐80, aff’d 860

F.3d1096 (8th Cir. 2018); Palmolive Building Investors v. Commissioner, 149

T.C. 380 (2017).

E.5. Extinguishment

(1) Treas. Reg. § 1.170A-14(g)(6)(i) generally provides that if a subsequent

unexpected change in the conditions surrounding the property that is the

subject of a donation can make impossible or impractical the continued use of

the property for conservation purposes, the conservation purpose can

nonetheless be treated as protected in perpetuity if the restrictions are

extinguished by judicial proceeding and all of the donee’s proceeds (determined

under Treas. Reg. § 1.170A-14(g)(6)(ii)) from a subsequent sale or exchange of

the property are used by the donee organization in a manner consistent with the

conservation purposes of the original contribution.

E.6. Allocation of Proceeds in Deed and Lender Agreements

(1) In order to claim a charitable contribution deduction for the donation of a

conservation easement, the donor, at the time of the gift, must agree that the

donation of the perpetual conservation restriction gives rise to a property right,

immediately vested in the donee organization, with a FMV that is at least equal

to the proportionate value that the perpetual conservation restriction at the time

of the gift bears to the value of the property as a whole. The proportionate value

of the donee’s property rights must remain constant. The donee organization

must be entitled to a portion of the proceeds at least equal to that proportionate

value of the perpetual conservation restriction. The requirements of Treas. Reg.

§ 1.170A-14(g)(6)(i) and (ii) are strictly construed. If a grantee is not absolutely

entitled to the proportionate share of extinguishment proceeds, then the

conservation purpose of the contribution is not protected in perpetuity. The only

exception is if state law provides that the donor is entitled to the full proceeds

from the conversion without regard to the terms of the prior perpetual

conservation restriction. Treas. Reg. § 1.170A-14(g)(6)(ii) (last clause).

(2) Treas. Reg. § 1.170A-14(g)(6)(ii) requires the donee’s proportionate interest

upon extinguishment of a conservation easement to be a percentage

determined by (1) the FMV of the conservation easement on the date of the gift

(numerator), over (2) the FMV of the property as a whole on the date of the gift

(denominator).

(3) In Carroll v. Commissioner, 146 T.C. 196 (2016), petitioners’ deed of

conservation easement instead used a ratio of the charitable contribution

deduction allowable over the value of the property as a whole on the date of the

gift. Thus, the deed failed to satisfy Treas. Reg. § 1.170A- 14(g)(6)(ii) because it

did not guarantee the donee a proportionate share of the extinguishment

proceeds based on the FMV of the conservation easement at the time of the

gift.

(4) In PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018), the

deed of easement provided that in case of extinguishment, the donee would

receive the proportionate value required by the regulation less the expenses of

the sale and the amount attributable to improvements constructed after the

easement. The court disallowed the deduction because any reduction to the

proportionate value required by the regulation failed to satisfy its requirements.

(5) In Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126 (2019), the

deed of easement provided that in case of extinguishment, the donee would

receive the proportionate value required by the regulation “after the satisfaction

of prior claims” and less any increase in value attributable to improvements.

The court, following PBBM-Rose Hill, disallowed the deduction because any

reduction to the proportionate value required by the regulation failed to satisfy

its requirements.

(6) See also Plateau Holdings, LLC v. Commissioner, T.C. Memo. 2020-93; Belair

Woods, LLC v. Commissioner, T.C. Memo. 2020-112; Village at Effingham, LLC

v. Commissioner, T.C. Memo. 2020-102; Riverside Place, LLC v.

Commissioner, T.C. Memo. 2020-103; Maple Landing, LLC v. Commissioner,

T.C. Memo. 2020-104; Englewood Place, LLC v. Commissioner, T.C. Memo.

2020-105; Hewitt v. Commissioner, T.C. Memo. 2020-89; Woodland Property

Holdings, LLC v. Commissioner, T.C. Memo. 2020-55; Oakbrook Land

Holdings, LLC v. Commissioner, T.C. Memo. 2020-54; Cottonwood Place, LLC

v. Commissioner, T.C. Memo. 2020-115; Red Oak Estates, LLC v.

Commissioner, T.C. Memo. 2020-116; Smith Lake, LLC v. Commissioner, T.C.

Memo. 2020-107; Lumpkin One Five Six, LLC v. Commissioner, T.C. Memo.

2020-94.

(7) Examiners should contact Counsel for assistance in review of deeds and lender

agreements to determine if the documents satisfy the allocation of proceeds

requirements of Treas. Reg. § 1.170A-14(g)(6)(ii).

IV. Qualified Organization

A. Overview

(1) A taxpayer must transfer the conservation easement to an eligible donee to

qualify for a contribution deduction. An eligible donee:

• Is a qualified organization,

• Must have the commitment to protect the conservation purpose(s) of the

donation, and

• Must have the resources to enforce the conservation restrictions.

(2) See IRC § 170(h)(3); Treas. Reg. § 1.170A-14(c)(1).

B. Qualified Organization

(1) A qualified organization is one of the following:

• A governmental unit, including the U.S. government, a U.S. possession,

the District of Columbia, a state government, or any political subdivision of

a state or U.S. possession so long as the contribution is made for

exclusively public purposes.

• A public charity described in IRC § 501(c)(3) that meets the public support

test of IRC § 509(a)(2) or a public charity described in 170(b)(1)(A)(vi).

• A public charity described in IRC § 501(c)(3) that meets the requirements

of IRC § 509(a)(3) and is controlled by one of the organizations described

above. Treas. Reg. § 1.170A-14(c)(1).

C. Commitment and Resources

(1) The qualified organization must have the commitment to protect the

conservation purpose(s) of the donation Treas. Reg. § 1.170A- 14(c)(1). An

entity organized or operated for one of the conservation purposes in IRC §

170(h)(4)(A) is considered to have the commitment required to protect the

conservation purposes of the donation. Treas. Reg. § 1.170A-14(c)(1).

(2) Qualified organizations that accept easement contributions and are committed

to conservation will generally have an established monitoring program, such as

annual property inspections to ensure compliance with the conservation

easement terms and to protect the easement in perpetuity. The terms of the

easement contribution must permit the qualified organization access to the

property for inspection. Treas. Reg. § 1.170A-14(g)(5)(ii).

(3) The qualified organization must also have the resources to enforce the

restrictions of the conservation easement. Resources do not necessarily mean

cash. Treas. Reg. § 1.170A-14(c)(1). Resources may be in the form of the

volunteer services of lawyers who provide legal services or conservationists

who inspect the property and prepare monitoring reports.

(4) See Chapter 12 for suggestions on how to evaluate the organization’s

commitment and resources.

D. Special Rules for Buildings in a Registered Historic District

(1) For a contribution made after July 25, 2006, of a qualified real property interest

with respect to a building in a registered historic district, an additional

requirement must be met to satisfy the commitment and resources test. Section

170(h)(4)(B)(ii) requires the taxpayer and the donee organization to execute a

written agreement certifying, under penalty of perjury, that the donee is a

qualified organization with a purpose of environmental protection, land

conservation, open space preservation, or historic preservation, and that the

donee has the resources to manage and enforce the restriction and a

commitment to do so. The taxpayer is also required to attach to its return a

copy of the qualified appraisal for the qualified property interest, photos of the

entire exterior of the building and a description of all restrictions on the

development of the building. IRC § 170(h)(4)(B)(iii)(I-III).

(2) Note: This special rule does not apply to properties listed on the National

(3) See Chapter 5 for a complete discussion of the special rules for buildings in

registered historic districts.

E. Cash Contributions

(1) A common practice for qualified organizations is to request a cash contribution

(sometimes referred to as a “stewardship fee”) from donors of conservation

easements. To be deductible as a charitable contribution, the cash payment

must be a voluntary transfer made with charitable intent to a qualified

organization. IRC § 170 (a) and (c). All cash contributions, regardless of

amount, must be substantiated with a bank record or a receipt from the donee.

The record or receipt must show the name of the donee, the date of the

contribution, and the amount of the contribution. IRC § 170(f)(17); Treas. Reg.

§ 1.170A-15.

(2) Charitable intent exists if the transfer is made without the receipt of, or the

expectation of receiving, a quid pro quo for the transfer. Generally, if the

benefits the transferor receives or expects to receive are substantial, rather

than incidental to the transfer, the transfer does not satisfy the charitable intent

requirement under IRC § 170. Hernandez v. Commissioner, 490 U.S. 680, 691

(1989); United States v. American Bar Endowment, 477 U.S. 105, 117-118

(1986); Wendell Falls Development, LLC v. Commissioner, T.C. Memo. 2018-

45, at *10-13; Singer Co. v. United States, 196 Ct. Cl. 90, 106 449 F.2d 413,

422-423 (1971).

(3) If a direct or indirect economic benefit (other than a tax deduction) is received or

is expected to be received as a result of making a contribution, the deduction

may be limited or disallowed. See generally § 1.170A-1(h)(3), which was

published on June 13, 2019. A state or local tax credit is a direct or indirect

economic benefit that reduced the amount of a taxpayer’s charitable

contribution deduction.

E.1. Quid Pro Quo Contribution

(1) A quid pro quo contribution is a transfer of money or property made to a

qualified organization partly in exchange for goods or services in return from the

charity or a third party. A quid pro quo may also be in the form of an indirect

benefit from a third party.

• Example: A land developer agrees to grant a conservation easement to

the county or other qualified organization in exchange for the approval of a

proposed subdivision. See Triumph Mixed Use Investments III, LLC v.

Commissioner, T.C. Memo. 2018-65. *31-42.

(2) If a taxpayer receives a quid pro quo, the transfer to the charity may be

deductible as a charitable contribution, but only to the extent the amount

transferred exceeds the FMV of the quid pro quo, and only if the excess amount

was transferred with charitable intent. United States v. American Bar

Endowment, 477 U.S. 105, 117 (1986).

(3) The burden is on the taxpayer to show that all or part of a payment is a

charitable contribution or gift. Treas. Reg. § 1.170A-1(h)(1) and (2); United

States v. American Bar Endowment, 477 U.S. 105, 116-118 (1986); and Rev.

Rul. 67-246, 1967-2 C.B. 104.

V. Conservation Purpose

A. Overview

(1) A contribution of a conservation easement to a qualified organization must be

made for one of the following conservation purposes:

• Preservation of land areas for outdoor recreation by, or the education of,

the general public.

• Protection of a relatively natural habitat for fish, wildlife, or plants, or a

similar ecosystem.

• Preservation of open space for the scenic enjoyment of the general public,

or pursuant to a federal, state, or local governmental conservation policy,

both yielding a significant public benefit.

• Preservation of historically important land area or certified historic building.

(2) IRC § 170(h)(4)(A).

(3) The conservation easement must be transferred by deed (or other legal

instrument as appropriate under the law of the relevant State) and recorded

where the property is located, be exclusively for conservation purposes,

protected in perpetuity, and meet at least one of the above conservation

purposes.

(4) Any required access to the land by the general public depends on the

conservation purpose of the conservation easement. If the claimed

conservation purpose is for the preservation of open space under IRC §

170(h)(4)(A)(iii), the contribution must yield a significant public benefit which is

usually by visual access from a public highway. Treas. Reg. § 1.170A-

14(d)(4)(ii)(B).

(5) The deed of conservation easement must prohibit inconsistent use of the

property that could permit destruction of a significant conservation interest,

even if the easement accomplishes an enumerated conservation purpose.

Treas. Reg. § 1.170A-14(e)(2).

(6) A baseline study is used to identify the conservation attributes and to establish

the condition of the property at the time of the conservation easement donation.

Treas. Reg. § 1.170A-14(g)(5).

B. Land for Outdoor Recreation or Education

(1) This category includes the donation of a qualified real property interest to

preserve land for outdoor recreation by, or for the education of, the general

public. IRC § 170(h)(4)(A)(i).

(2) Substantial and regular physical access by the general public to the preserved

land is required. Treas. Reg. § 1.170A-14(d)(2)(ii).

• Examples: A donation to preserve a lake for use by the general public for

boating or fishing, or to preserve land for a hiking trail.

(3) See Treas. Reg. § 1.170A-14(d)(2) for additional guidance.

(4) See also PPBM-Rose Hill, Limited v. Commissioner, 900 F.3d 193 (5th Cir.

2018). In denying the charitable contribution deduction because the taxpayer

failed to comply with the extinguishment clause requirements in Treas. Reg. §

1.170A-14(g)(6)(ii), the Fifth Circuit Court of Appeals reversed the tax court on

the issue of whether the conservation easement met the outdoor recreation

conservation purpose. The court determined that the easement met the outdoor

recreation conservation purpose because the terms of the deed stated that the

property was being protected for outdoor recreation “for use by the general

public.”

C. Relatively Natural Habitat or Ecosystem

(1) This conservation purpose is satisfied if the conservation easement protects a

significant relatively natural habitat of fish, wildlife or plants, or similar

ecosystem. IRC § 170(h)(4)(A)(ii). An ordinary tract of land where a common

fish, wildlife or plant community, or similar ecosystem normally lives does not

satisfy this conservation purpose. Treas. Reg. § 1.170A- 14(d)(3)(ii).

(2) Significant habitats and ecosystems include, but are not limited to:

• Habitats for rare, endangered, or threatened species.

• Natural areas that are relatively intact and are considered high quality

examples of land or aquatic communities.

• Natural areas that are in or contribute to the ecological viability of a park,

preserve, wildlife refuge, wilderness area, or other similar conservation

area.

(3) For this conservation purpose, limitations on public access are allowable. For

example, a restriction on all public access to the habitat of a threatened native

animal species would not defeat the claimed deduction. Treas. Reg. § 1.170A-

14(d)(3)(iii). The taxpayer’s documentation, called a baseline report, as required

by Treas. Reg. § 1.170A-14(g)(5)(i), should clearly describe and identify the

relative natural habitat or ecosystem being protected on the property.

(4) The determination of what specifically meets this conservation purpose test is

based on the facts and circumstances of the specific case. In Glass v.

Commissioner, 124 T.C. 258 (2005), aff’d, 471 F.3d 698 (6th Cir. 2006), the

taxpayer donated two easements that restricted the development of a fraction of

a 10-acre parcel of residential property. The tax court held that the conservation

purpose of natural habitat was satisfied because the conservation easements

were placed on property that had possible places to create or promote a

relatively natural habitat of plants or wildlife.

(5) In Atkinson v. Commissioner, T.C. Memo. 2015-236, taxpayer claimed

deductions for conservation easements encumbering non-contiguous tracts of

land on and adjacent to golf courses located in a gated and guarded residential

community. The tax court distinguished the Glass case and held that the

easements did not protect a relatively natural habitat. In so holding, the tax

court reasoned, among other things, that the golf courses’ use of pesticides

could destroy the ecosystem of the encumbered property. The tax court’s

reliance on the Service’s expert reports and testimony in Atkinson demonstrates

the importance of expert evidence in “protecting natural habitat” cases.

(6) In Champions Retreat Golf Founders, LLC. v. Commissioner, T.C. Memo. 2018-

146, taxpayer claimed a deduction for an easement on approximately 350 acres

that encumbered most of a golf course scattered among houses in a gated

residential community. Taxpayer argued the easement satisfied conservation

purposes by preserving habitat for "species of conservation concern," and

providing open space for scenic enjoyment of the general public and pursuant

to a clearly delineated governmental policy. The court sustained the

disallowance, finding that that the easement failed to satisfy either the habitat

purpose or the open space purpose. The court held there was an insufficient

presence of rare, endangered, or threatened species, and the encumbered land

was in a non-natural state. Finally, the court held that open space conservation

purpose was not met because there was insufficient physical and visual access

for the public to enjoy the encumbered land in the gated community. Moreover,

the court held that the easement did not satisfy a clearly delineated

governmental policy since the state statute cited by the taxpayer did not support

a determination that the encumbered property was a part of an “identified

conservation project.” As in the Atkinson case, the tax court relied on expert

reports and testimony to determine that the taxpayer failed to satisfy the

conservation purposes of IRC § 170(h). On appeal, the Eleventh Circuit Court

of Appeals disagreed with the tax court and vacated and remanded the tax

court opinion. Champion’s Retreat Golf Founders, LLC v. Commissioner, 959

F.3d 1033 (11th Cir. 2020). A Motion to Amend the Opinion, filed in the 11th

Circuit Court of Appeals on behalf of the Commissioner, is currently pending.

D. Open Space

(1) The donation of a qualified real property interest to protect open space

(including farmland and forest land) must be (1) for the scenic enjoyment of the

general public, or (2) pursuant to a clearly delineated federal, state, or local

governmental conservation policy. This type of conservation easement must

preserve open space and must yield a significant public benefit. IRC §

170(h)(4)(A)(iii).

D.1. Scenic Enjoyment

(1) Preservation of open space may be for the scenic enjoyment of the general

public if development of the property would impair the scenic character of the

local rural or urban landscape or interfere with a scenic panorama that can be

enjoyed by the public. Treas. Reg. § 1.170A- 14(d)(4)(ii)(A).

(2) Whether the easement provides scenic enjoyment to the general public is

evaluated based on all the facts and circumstances. The burden of proof is on

the taxpayer to show the scenic characteristics of the property.

(3) Treas. Reg. § 1.170A-14(d)(4)(ii)(A) lists factors to consider:

• The compatibility of the land use with other land in the vicinity.

• The degree of contrast and variety provided by the visual scene.

• The openness of the land (which would be a more significant factor in an

urban or densely populated setting or in a heavily wooded area).

• Relief from urban closeness.

• The harmonious variety of shapes and textures.

• The degree to which the land use maintains the scale and character of the

urban landscape to preserve open space, visual enjoyment and sunlight

for the surrounding area.

• The consistency of the proposed scenic view with a methodical state

scenic identification program, such as a state landscape inventory.

• The consistency of the proposed scenic view with a regional or local

landscape inventory made pursuant to a sufficiently rigorous review

process, especially if the donation is endorsed by an appropriate state or

local governmental agency.

(4) A conservation easement preserving open space for the scenic enjoyment of

the general public does not require physical access by the public. Visual access

to or across the property by the general public is sufficient. Although the entire

property need not be visible to the public in order to qualify for a deduction, the

public benefit from the donation may be insufficient to qualify if only a small

portion of the property is visible to the public. Treas. Reg. § 1.170A-

14(d)(4)(ii)(B).

(5) In Turner v. Commissioner, 126 T.C. 299 (2006), the conservation purpose of

open space was not met because the easement deed did not protect the views

of the property. The taxpayer was not entitled to a deduction because the

conservation easement did not satisfy one of the required conservation

purposes in IRC § 170(h)(4)(A).

(6) See Treas. Reg. § 1.170A-14(d)(4)(ii) for additional guidance.

D.2. Governmental Conservation Policy

(1) Conservation purpose includes the preservation of open space where such

preservation is pursuant to a clearly delineated federal, state, or local

government conservation policy. IRC § 170(h)(4)(A)(iii)(II).

(2) A broad declaration by a single official or legislative body that the land should

be conserved is not sufficient. The donation must further a specific, identified

conservation project. The fact that the donation was accepted by a government

agency is not sufficient to satisfy this requirement. The more rigorous the review

process by the governmental agency, the more the acceptance of the easement

tends to establish the requisite clearly delineated governmental policy. Treas.

Reg. § 1.170A-14(d)(4)(iii)(B).

(3) The government need not fund the conservation program, but it must involve a

significant commitment by the government with respect to the conservation

project.

(4) Public access is not required if the conservation purpose would be undermined

or frustrated by the public access. Treas. Reg. § 1.170A-14(d)(4)(iii)(C).

D.3. Significant Public Benefit

(1) A conservation purpose based on the preservation of open space, whether for

scenic enjoyment or pursuant to a governmental conservation policy, must yield

a significant public benefit. IRC § 170(h)(4)(A)(iii).

(2) A determination of whether a conservation easement provides a significant

public benefit must be based on all facts and circumstances. Treas. Reg. §

1.170A-14(d)(4)(iv) lists a number of factors that may be considered:

• Uniqueness of the property to the area.

• Intensity of land development in the area.

• Consistency of the proposed open space use with public programs for

conservation in the region.

• Consistency of proposed open space use with existing private

conservation programs in the area, evidenced by other protected land held

by a qualified organization in close proximity to the property.

• Likelihood the property would be developed in the absence of the

easement.

• Opportunity of the public to appreciate the property's scenic values.

• Importance of the property to preserve a landscape or resource that

attracts tourism or commerce.

• Likelihood of the donee acquiring substitute property or property rights.

• Cost of enforcing the terms of the conservation restrictions.

• Population density in the area.

• Consistency of open space use with a legislatively mandated program

identifying particular parcels of land for future protection.

(3) The preservation of an ordinary tract of land would not, in and of itself, yield a

significant public benefit. Treas. Reg. § 1.170A-14(d)(4)(iv)(B). A charitable

contribution will not be allowed if an easement does not impose new or

expanded restrictions on the property. A conservation easement that merely

limits the number of lots that the acreage is divided into does not necessarily

satisfy the open space requirement of IRC § 170(h). Turner v. Commissioner,

126 T.C. 299 (2006).

(4) The legislative history underlying IRC § 170(h) shows that Congress did not

intend for every easement to qualify for a deduction. A deduction is not allowed

unless there is an assurance that the public benefit furthered by the contribution

would be substantial enough to justify the allowance of a deduction. S. Rep. 96-

1007, at 9-10 (1980), reprinted in 1980 U.S.C.C.A.N. 6736, 6744-45.

• Example: Significant public benefit includes the preservation of a unique

natural land formation for the enjoyment of the general public or the

preservation of woodland along a well-traveled public highway to preserve

the appearance of the area so as to maintain the scenic view from the

highway.

E. Historically Important Land or Structure

(1) This category includes the donation of a qualified real property interest to

preserve a historically important land area or a certified historic structure. IRC §

170(h)(4)(A)(iv).

E.1. Historically Important Land

(1) Historically important land includes:

• An independently significant land area that meets the National Register

Criteria for Evaluation.

• Land within a registered historic district and buildings on the land area that

is reasonably considered as contributing to the significance of the district.

• Land where the physical or environmental features contribute to the

historic or cultural importance and continuing integrity of certified historic

structures.

(2) See Treas. Reg. § 1.170A-14(d)(5)(ii) for additional guidance.

(3) Under the Pension Protection Act (IRC § 170(h)(4)(C)), a “certified historic

structure” includes a land area listed in the National Register of Historic Places.

The National Register is part of a national program administered by the National

Park Service (NPS) to identify, evaluate and protect historic and archeological

resources worthy of preservation. A list of properties in the National Register

can be found on the NPS Web page.

E.2. Certified Historic Structure

(1) A certified historic structure is:

• Any building, structure, or land area listed on the National Register, or

• Any building located in a registered historic district and certified by the

Secretary of the Interior as being of historic significance to the district.

(2) A certified historic structure may be a commercial property or a personal

residence.

(3) The NPS Technical Preservation Services administers the certification program

for the Department of the Interior. This certification application is submitted

through the taxpayer’s State Historic Preservation Office, which makes a

recommendation to the NPS regarding the application. The certification must be

done at the time the easement is donated or by the due date (including

extensions) of the return for the year of the donation. Treas. Reg. § 1.170A-

14(d)(5)(iii).

(4) The term “registered historic district” includes a district described in IRC §

47(c)(3)(B) and includes:

• Any district listed in the National Register, and

• Any district:

• designated under a statute of the appropriate state or local

government, if such statute is certified by the Secretary of the

Interior as containing criteria which will substantially achieve the

purpose of preserving and rehabilitating buildings of historic

significance to the district, and

• that is certified by the Secretary of the Interior as meeting

substantially all of the requirements for the listing of districts in the

National Register.

(5) A building in a local historic district will not meet the definition of a certified

historic structure unless both the structure and the district have been certified in

accordance with IRC § 47.

E.3. Special Rules for Buildings in Registered Historic Districts

(1) Section 170(h)(4)(B) imposes additional requirements for contributions of

conservation easements on the exterior of a building in a registered historic

district. Note: These requirements do not apply to properties listed in the

National Register.

(2) To qualify, all of the following additional requirements must be met:

• The entire exterior of the building, including the front, sides, rear, and

height, must be restricted, and no changes can be made to the exterior

that are inconsistent with the historical character of the exterior.

• The donor must enter into a written agreement with the donee certifying,

under penalty of perjury, that the donee is a qualified organization with a

purpose of environmental protection, land conservation, open space

preservation, or historic preservation, and that the donee has the

resources to manage and enforce the restrictions and the commitment to

do so.

• Donors must attach to the return a qualified appraisal as defined in IRC §

170(f)(11)(E), photographs of the entire exterior of the building, and a

description of all restrictions on the development of the building.

• Donors must pay a $500 filing fee to the U.S. Treasury if a deduction of

more than $10,000 is claimed. IRC § 170(f)(13).

(3) Some visual access by the public to the building, structure or land area is

required. The terms of the easement must be such that the general public is

given the opportunity on a regular basis to view the characteristics and features

of the property. Factors to be considered in determining the type of access for

historic properties include:

• Historical significance of the property;

• The nature and features that are the subject of the easement;

• The remoteness or accessibility of the site of the donated property;

• The possibility of physical hazards to the public visiting the property;

• The extent to which public access would be an unreasonable intrusion on

any privacy interests of individuals living on the property;

• The degree to which public access would impair the preservation interests

which are the subject of the donation; and

• The availability and opportunities for the public to view the property by

means other than visits to the site.

(4) See Treas. Reg. § 1.170A-14(d)(5)(iv) for additional guidance.

F. Public Access

(1) Public access (either physical or visual) to the property is generally required for

the conservation easement to be deductible except with respect to protection of

a relatively natural habitat or ecosystem or pursuant to specified governmental

policies. The type of access depends on the claimed conservation purpose.

(2) If physical access is required, access must be substantial and on a regular

basis.

(3) If only visual access is required, the entire property need not be visible to the

public for a donation to qualify. However, the public benefit from the donation is

insufficient to qualify for a deduction if only a small portion of the property is

visible to the public.

(4) See Treas. Reg. § 1.170A-14(d) for specific access requirements.

G. Inconsistent Uses

(1) A donation must be exclusively for conservation purposes, and generally the

deed of conservation easement must prohibit inconsistent uses. An inconsistent

use allows for the destruction or potential destruction of significant conservation

interests in conflict with a conservation purpose.

(2) However, some inconsistent uses are permitted if necessary to protect the

conservation interests that are the subject of the easement.

(3) All conservation easements reserve some rights for the owner of the

encumbered property. Depending on the nature and extent of these reserved

rights, the claimed conservation purpose may be impaired to such a degree that

the contribution may not be allowable. A determination of whether the reserved

rights defeat the conservation purpose must be determined based on all facts

and circumstances.

• Example: The conservation purpose of the easement as described in the

conservation easement deed was to protect the relatively natural habitat

for scrub jay, a threatened bird. The deed of easement allows the taxpayer

to use pesticides that would destroy the natural food source for the scrub

jay. The taxpayer is not entitled to a deduction because the allowed

activity is an inconsistent use.

(4) See Treas. Reg. § 1.170A -14(e)(2) and (e)(3) for additional guidance.

H. Baseline Study

(1) When a donor reserves a Taxright, the exercise of which may impair

conservation interests associated with the encumbered property, the donor

must provide the donee organization with documentation sufficient to establish

the condition of the property at the time of the donation. The donor must provide

baseline documentation to the donee prior to the time the donation is made.

Treas. Reg. § 1.170A-14(g)(5)(i). This documentation should provide specific

information about the conservation values of the property.

(2) The baseline documentation is generally prepared by a person with specific

training in the assessment of conservation values such as a biologist, botanist,

or historian. The baseline study may be prepared by a person affiliated with the

donee organization.

(3) This documentation may include:

• Survey maps from the U.S. Geological Survey, showing the property line

and other contiguous or nearby protected areas.

• A map of the area drawn to scale showing all existing man-made

improvements or incursions (such as roads, buildings, fences, or gravel

pits) and vegetation, and identification of flora and fauna (including, for

example, rare species locations, animal breeding and roosting areas, and

migration routes), land use history (including present uses and recent past

disturbances), and distinct natural features (such as large trees and

aquatic areas).

• An aerial photograph of the property.

• On-site photographs taken at appropriate locations on the property.

(4) The documentation must be accompanied by a statement signed by the donor

and a representative of the donee organization affirming that the documentation

is an accurate representation of the protected property at the time of the

transfer.

(5) See Treas. Reg. § 1.170A-14(g)(5)(i) for additional guidance.

VI. Substantiation

A. Overview

(1) A charitable contribution is not deductible unless properly substantiated in

accordance with the Internal Revenue Code and applicable regulations,

including:

• IRC § 170(a)(1)

• IRC § 170(f)(8)

• IRC § 170(f)(11)

• IRC § 170(f)(13)

• Treas. Reg. § 1.170A-13

• Treas. Reg. § 1.170A-14

• Treas. Reg. § 1.170A-16

• Treas. Reg. § 1.170A-17

(2) These IRC sections and corresponding regulations describe the specific

substantiation and recordkeeping requirements for donors of noncash

contributions. Note that substantiation requirements for noncash contributions

made on or before July 30, 2018, are generally governed by Treas. Reg. §

1.170A-13, while substantiation requirements for noncash contributions made

after July 30, 2018, are generally governed by Treas. Reg. § 1.170A-16. Treas.

Reg. § 1.170A-16(g). Where appropriate, both regulations are cited below.

Treas. Reg. § 1.170A-17 is applicable to contributions made on or after January

1, 2019.

(3) The kind of documents required to substantiate a charitable contribution vary

depending on the amount, date of contribution, and type of property contributed.

(4) The burden is on the taxpayer to demonstrate that the property transferred to

the qualified organization is a deductible contribution. See Treas. Reg. §

1.170A-1(h)(1) and (2); United States v. American Bar Endowment, 477 U.S.

105, 116-118 (1986); and Revenue Ruling 67-246, 1967-2 C.B. 104.

(5) See Publication 1771, Charitable Contributions-Substantiation and Disclosure

Requirements (PDF), Publication 526, Noncash Contributions (PDF), and

Publication 561, Determining the Value of Donated Property (PDF), for

additional information.

(6) See Exhibit 6-1 for a summary of substantiation requirements.

B. Contemporaneous Written Acknowledgment

(1) A contemporaneous written acknowledgment (CWA) by the qualified donee

organization is required for all contribution deductions of $250 or more, whether

in cash or property.

(2) “Contemporaneous” means that the taxpayer must obtain the acknowledgment

by the earlier of the date on which the taxpayer files his or her tax return

claiming the charitable contribution deduction, or the due date (including

extensions) for the return. IRC § 170(f)(8); Treas. Reg. § 1.170A-13(f)(3); and

Publication 1771, Charitable Contributions-Substantiation and Disclosure

Requirements (PDF).

(3) This acknowledgment by the qualified donee organization must contain:

• Amount of any cash contribution,

• Description (but not the value) of the property contributed,

• Statement that no goods or services were provided by the organization in

return for the contribution (if this was the case),

• Description and good faith estimate of the value of goods or services, if

any, that an organization provided in return for the contribution, and

• A statement that goods or services (if any) that an organization provided in

return for the contribution consisted entirely of intangible religious benefits

(if this was the case).

(4) See Treas. Reg. § 1.170A-13(f)(2).

(5) Section 170(f)(8) requirements must be complied with for a deduction to be

allowed. See Addis v. Commissioner, 374 F.3d 881, 887 (9th Cir. 2004), aff’g,

118 T.C. 528 (2002) (“the deterrence value of section 170(f)(8)’s total denial of

a deduction comports with the effective administration of a self-assessment and

self-reporting system”), cited in Viralam v. Commissioner, 136 T.C. 151;

Schrimsher v. Commissioner, T.C. Memo. 2011-71.

(6) The following CWA does not meet the statutory requirement of IRC § 170(f)(8)

because it does not make an affirmative statement that no goods or services

were provided (or describe if goods or services were actually provided) in

exchange for the contribution.

• Example: “Thank you for your contribution by deed of a conservation

easement on XYZ property and $10,000 cash contribution for

maintenance of the easement that ABC Land Trust received on May 5,

2018.”

(7) A CWA is not required to take any particular form, and an easement deed may

qualify as a CWA under certain circumstances. Unless the deed expressly

states the total value of the goods or services received by the donor in

exchange for the contribution, the deed taken as a whole must provide that no

goods or services were received in exchange. Schrimsher v. Commissioner,

T.C. Memo. 2011-71. The tax court has held that a deed qualified as a CWA

when no valuable consideration was mentioned in the deed and the deed

contained a merger clause. Averyt v. Commissioner, T.C. Memo. 2012-198; RP

Golf, LLC v. Commissioner, T.C. Memo. 2012-282. A merger clause provides

that the particular deed sets forth the entire agreement of the parties regarding

the contribution of the conservation easement and supersedes all prior

discussions, negotiations, or agreements relating to the easement. French v.

Commissioner, T.C. Memo. 2016- 53, held that in the case of a deed without an

indication that there were no goods or services provided, unless there is a

merger clause, the deed cannot be taken as a whole to qualify as a CWA. In

such a case, the absence of a merger clause means that a donor could have

received consideration in exchange for the contribution even if the deed does

not mention that there was any valuable consideration transferred.

(8) Some deeds recite the amount of consideration as "$1.00 and other good and

valuable consideration." Numerous state courts have held that phrase is

inherently and intrinsically ambiguous. The phrase may mean that no real

consideration was given, that the consideration was nominal, or that the

consideration was substantial but was not disclosed. Nevertheless, in the

absence of any other evidence concerning the amount of consideration, the tax

court has held that a deed can satisfy the CWA requirements even if it

describes the consideration as “$1.00 and other good and valuable

consideration” as long as the deed contains a merger clause. 310 Retail, LLC v.

Commissioner, T.C. Memo. 2017-164, and Big River Dev., L.P. v.

Commissioner, T.C. Memo. 2017-166.

(9) If you have any questions about whether the deed language satisfies the

requirements for a CWA under IRC § 170(f)(8), consult with Counsel.

(10) In IRC § 170(f)(8)(D), Congress provided an exception to the CWA requirement.

Section 170(f)(8)(D) states that a CWA is not required if the donee organization

files a return on such form and in accordance with such regulations as the

Treasury Department may prescribe (donee reporting). In the Tax Cuts and

Jobs Act, Congress deleted subparagraph (D) and redesignated what had been

subparagraph (E) as subparagraph (D), effective for contributions made in tax

years beginning after December 31, 2016. Even before that effective date, the

IRC § 170(f)(8)(D) exception was not effective. 15 West 17th St. v.

Commissioner, 147 T.C. No. 19 (2016).

(11) Note: Taxpayers and return preparers frequently confuse the CWA requirement

with the filing of Form 8283, Noncash Charitable Contributions (PDF). This form

is not a substitute for the CWA; both are required. Failure to meet either

requirement may result in disallowance of the charitable contribution deduction.

C. Form 8283, Noncash Charitable Contributions

C.1. Generally

(1) Section B of Form 8283, Noncash Charitable Contributions (PDF), referred to in

the Deficit Reduction Act of 1984 and in Treas. Reg. § 1.170A-13(c)(4) as an

“appraisal summary,” must be fully completed and attached to the return for

noncash donations greater than $5,000.

(2) Note: If the donation originates from a flow-through entity (such as S

corporation or partnership), the partner or shareholder who receives an

allocation of the charitable contribution must attach a copy of the flow-through

entity’s appraisal summary (Form 8283) to the tax return on which the

deduction for the contribution is first claimed. Treas. Reg. § 1.170A-

13(c)(4)(iv)(G); Treas. Reg. § 1.170A-16(f)(4)(ii).

(3) Form 8283, Section B is often improperly completed. Common errors include:

• Inadequate description of the property

• Missing information

• Missing signatures

• Inconsistent dates

(4) The description of the property must have sufficient detail for a person

unfamiliar with the type of property to ascertain that the property being

appraised is the property that was contributed. Treas. Reg. § 1.170A-

13(c)(4)(ii)(B). A similar rule applies under Treas. Reg. § 1.170A-16(d)(3)(iv)(B).

(5) Form 8283, Section B, Part I, requests information regarding:

• Acquisition date of the property

• How the property was acquired by the donor

• Donor’s cost or adjusted basis

• Bargain sale amount received

• Appraised FMV of the easement

(6) For conservation easements, the instructions to Form 8283 also require a

statement that identifies the conservation purpose, shows FMV before and

after, states whether the donation was made in order to get an approval or was

required by contract, and whether the taxpayer or related person has any

interest in nearby property. This statement, described in the Instructions to the

Form 8283, must be attached to the Form 8283.

(7) See Instructions for Form 8283, Noncash Charitable Contributions (PDF), and

Treas. Reg. § 1.170A-13(c)(4); Treas. Reg. § 1.170A-16(d)(3) for detailed

discussion of the appraisal summary (Form 8283) requirements.

(8) In Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159, the tax court

held that the taxpayer’s Form 8283 appraisal summary did not comply with

Treas. Reg. § 1.170A-13(c)(4) when the taxpayer failed to include its cost basis

in the property on Form 8283 and the taxpayer’s explanation in the statement

attached to Form 8283 did not show that it was unable to provide such

information. The deduction was therefore disallowed.

C.2. Declaration of Appraiser

(1) Form 8283, Section B, Part III, Declaration of Appraiser, must be completed by

the qualified appraiser for donations in excess of $5,000. Treas. Reg. § 1.170A-

13(c)(4)(ii)(K) and (L); Treas. Reg. § 1.170A-16(d)(3)(iii) and (d)(4).

C.3. Donee Acknowledgment

(1) Form 8283, Section B, Part IV, Donee Acknowledgment, must be signed by an

official authorized to sign the tax or information returns of the donee

organization or a person specifically authorized by such official to sign Form

8283. Treas. Reg. § 1.170A-13(c)(4)(iii); Treas. Reg. § 1.170A-16(d)(5)(i).

C.4. Failure to Attach Form 8283

(1) For contributions made on or before July 30, 2018, the failure to file Form 8283

results in disallowance of the charitable contribution deduction for the

conservation easement unless:

• Such failure was due to a “good-faith omission,”

• The donor otherwise complied with Treas. Reg. § 1.170A-13(c)(3) and

(c)(4) (including completion of a timely qualified appraisal), and

• The IRS requests that the donor submit a fully completed form within 90

days of the request, and the donor complies. Treas. Reg. § 1.170A-

13(c)(4)(iv)(H).

(2) In rare and unusual circumstances in which it is impossible for the taxpayer to

obtain the signature of the donee, the taxpayer’s deduction will not be

disallowed for that reason provided that the taxpayer attaches a statement to

the Form 8283 explaining, in detail, why it was not possible to obtain the

donee’s signature. Treas. Reg. § 1.170A-13(c)(4)(iv)(C)(2).

D. Qualified Appraisal

(1) Qualified appraisals are required for all contribution deductions for conservation

easements valued at more than $5,000. IRC § 170(f)(11)(C).

(2) To be a qualified appraisal under IRC § 170(f)(11)(E), an appraisal of property

(1) must be treated as a qualified appraisal under regulations or other guidance

prescribed by the Secretary and (2) must be conducted by a qualified appraiser

in accordance with generally accepted appraisal standards and any regulations

or other guidance prescribed by the Secretary. See also Notice 2006-96, 2006-

2 C.B. 902, for rules applicable to contributions made before January 1, 2019,

the effective date of Treas. Reg. § 1.170A-17.

D.1. Qualified Appraisal Under Regulations

(1) Treas. Reg. § 1.170A-13(c)(3) and Treas. Reg. § 1.170A-17(a)(3) define a

qualified appraisal as a document that, among other things: (1) relates to an

appraisal that is made not earlier than 60 days before the date of contribution of

the appraised property and no later than the due date (including extensions) of

the return on which a deduction is first claimed under IRC § 170; (2) is

prepared, signed, and dated by a qualified appraiser; (3) includes, among other

requirements, (a) a description of the property appraised; (b) the FMV of such

property and the specific basis for the valuation, (c) a statement that such

appraisal was prepared for income tax purposes; (d) the qualifications of the

qualified appraiser; and (e) the signature and taxpayer identification number of

such appraiser; and (4) does not involve an appraisal fee that violates certain

prescribed rules.

D.2. Generally Accepted Appraisal Standards

(1) Section 170(f)(11)(E) specifies that the qualified appraisal must be conducted

by a qualified appraiser in accordance with generally accepted appraisal

standards.

(2) If a charitable contribution deduction of more than $500,000 is claimed for a

noncash contribution, the taxpayer must attach a copy of a qualified appraisal of

the property to the return for the year of donation. IRC § 170(f)(11)(D).

(3) Special rule: For contributions of façade easements in registered historic

districts, a qualified appraisal must be attached to the return regardless of the

dollar amount claimed for the conservation easement. IRC § 170(h)(4)(B)(iii)(I).

Note: This special rule does not apply to properties listed on the National

D.3. Reasonable Cause

(1) If the taxpayer fails to obtain a qualified appraisal or fails to otherwise meet the

requirements of IRC § 170(f)(11)(B),(C), or (D), the deduction is not disallowed

if the failure was due to reasonable cause and not to willful neglect. IRC §

170(f)(11)(A)(ii)(II). A determination of whether or not the taxpayer acted

reasonably and not with willful neglect, requires an analysis of the relevant facts

and circumstances. If you have any questions or concerns, consult Counsel.

(2) See Chapter 7 for additional information on qualified appraisals.

E. Façade Easement Filing Fee (Registered Historic District Only)

(1) For deductions of more than $10,000, for a donation of an easement on a

building in a registered historic district, a donor must pay a $500 filing fee with

its return in the taxable year of the contribution. IRC § 170(f)(13). The fee is to

be used to enforce the provisions of IRC § 170(h).

(2) Payment is transmitted to the IRS using Form 8283-V, Payment Voucher for

Filing Fee under Section 170(f)(13) (PDF).

F. Baseline Study

(1) A donor that retains rights in property subject to a donated conservation

easement (nearly all donors) must make available to the qualified organization

documentation that establishes the condition of the property at the time of the

gift (baseline study). Treas. Reg. § 1.170A-14(g)(5)(i). The baseline study must

be signed by the donor and donee. The baseline study generally includes

maps, surveys, and photographs of the property and must be given to the

qualified organization prior to the time the donation is made.

(2) See Chapter 5 for additional information on baseline documentation.

G. Additional Donor Recordkeeping Requirements

(1) In addition to the substantiation requirements described above, Treas. Reg. §

1.170A-14(i) requires the donor of a qualified conservation easement who

claims a deduction to maintain written records of the FMV of the property before

and after the donation and the conservation easement purpose furthered by the

donation.

H. Exhibit 6-1 - Substantiation Requirements

Required Item

Criteria

Due Date

Attach to Retur

Contemporaneous

Written

Acknowledgment

≥ $250 or more

Earlier of return filing date

or due date (with

extensions)

Form 8283

(Appraisal

Summary)

> $500, ≤ $5,000

Part A

> $5,000 Part B

Return filing date

Yes

Also attach

conservation

easement

statement per Form

8283 Instructions

Qualified Appraisal

>$5,000

Must be made no earlier

than 60 days prior to date

of contribution, but no later

than original/amended

return filing date

Yes, but only if >

$500,000 or an

easement on a

building in a

registered historic

district

Façade Filing Fee of

$500

All easements on

buildings in

registered historic

districts >$10,000

Return filing date

Mail in with Form

8283

-V

Baseline Study

Required to be

made

available to

donee and signed

by donor

and donee

establish

condition of

property

Before time of donation

VII. Qualified Appraisal Requirements

A. Overview

(1) Generally, noncash charitable contributions for which a deduction of more than

$5,000 is claimed must be substantiated with a qualified appraisal prepared by

a qualified appraiser in accordance with generally accepted appraisal

standards. IRC §§ 170(f)(11)(C) and (f)(11)(E)(i)(II).

(2) The Pension Protection Act of 2006 (PPA) amended IRC § 170(f)(11)(E) to

provide definitions of qualified appraisal and qualified appraiser. See Notice

2006-96, 2006-2 C.B. 902, for transitional rules. See Treas. Reg. § 1.170A-17

for contributions on or after January 1, 2019.

(3) Treas. Reg. § 1.170A-13(c)(3), which predates IRC § 170(f)(11)(E), sets forth

substantiation requirements that must be met for the appraisal to be considered

a qualified appraisal. Portions of Treas. Reg. § 1.170A-13(c)(3) are superseded

by IRC § 170(f)(11)(E).

(4) This chapter discusses the requirements for a qualified appraisal, a qualified

appraiser and generally accepted appraisal standards.

(5) See Publication 561, Determining the Value of Donated Property (PDF), Treas.

Reg. § 1.170A-13 and Treas. Reg. § 1.170A-17 for additional guidance on

qualified appraisal requirements.

B. Qualified Appraisal

(1) Section 170(f)(11) states that no deduction is allowed for any contribution of

property for which a deduction of more than $500 is claimed unless the

requirements of IRC § 170(f)(11)(B), (C), and (D) are met.

(2) Section 170(f)(11)(C) requires a qualified appraisal for property donations of

more than $5,000.

(3) Section 170(f)(11)(D) additionally requires the attachment of the qualified

appraisal to the return if the deduction claimed exceeds $500,000.

(4) For contributions of façade easements in registered historic districts, a qualified

appraisal must be attached regardless of the dollar amount claimed as a

deduction. IRC § 170(h)(4)(B)(iii)(I).

(5) Note: This special rule does not apply to properties listed on the National

(6) Section 170(f)(11)(E) was amended in 2006 to include new definitions of the

terms “qualified appraisal” and “qualified appraiser.” Treas. Reg. § 1.170A-17

provides guidance relating to these definitions. For contributions prior to

January 1, 2019, taxpayers may rely on the transitional guidance and safe

harbors in Notice 2006-96.

(7) An appraisal is treated as a qualified appraisal within the meaning of IRC §

170(f)(11)(E) if the appraisal complies with all of the requirements of Treas.

Reg. § 1.170A-17. For contributions prior to January 1, 2019, an appraisal that

complies with all the requirements of Treas. Reg. § 1.170A-13(c) (except to the

extent the regulations are inconsistent with IRC § 170(f)(11)) is also treated as

a qualified appraisal. See Notice 2006-96.

(8) A qualified appraisal must:

• Be prepared, signed and dated by a qualified appraiser in accordance with

generally accepted appraisal standards.

• Meet the relevant requirements of Treas. Reg. § 1.170A-17(a).

• Be dated no earlier than 60 days before the date of contribution nor later

than:

• The due date (including extensions) of the tax return on which the

charitable contribution deduction is first claimed.

• In the case of a partnership or S corporation, the due date

(including extensions) of the return on which the deduction is first

reported; or

• In the case of a deduction first claimed on an amended return, the

date on which the amended return is filed.

• Not involve a prohibited appraisal fee, which, in general, means that the

appraisal fee may not be based on the appraised value of the property.

(9) Treas. Reg. § 1.170A-17(a)(3) outlines specific items that must be included in a

qualified report:

• A detailed description of the property.

• The property’s physical condition (for a contribution of real property or

tangible personal property).

• The date or expected date of the contribution.

• The valuation effective date, defined in Treas. Reg. § 1.170A-17(a)(5).

• The terms of any agreement relating to the property’s use, sale or other

disposition.

• The appraiser’s name, address, and taxpayer identification number, and

that of the appraiser’s employer or partnership.

• The qualifications of the appraiser, including the appraiser’s background

experience, education and membership in professional appraisal

associations.

• A statement that the appraisal was prepared for income tax purposes.

• The signature of the appraiser and the date signed by the appraiser.

• The declaration by the appraiser set forth in Treas. Reg. § 1.170A-

17(a)(3)(vi).

• The appraised FMV of the property on the valuation effective date.

• The method of valuation used to determine the FMV.

• The specific basis for the valuation (such as specific comparable sales

transactions or statistical sampling, including a justification for using

sampling and an explanation of the sampling procedure used).

(10) An appraisal is not a qualified appraisal for a particular contribution if the donor

either failed to disclose or misrepresented facts, and a reasonable person

would expect that this failure or misrepresentation would cause the appraiser to

misstate the value of the donated property. Treas. Reg. § 1.170A-17(a)(6).

(11) Note that for contributions made before January 1, 2019, Treas. Reg. § 1.170A-

13(c)(5)(ii) states that an individual is not a qualified appraiser with respect to a

particular donation if the donor had knowledge of facts that would cause a

reasonable person to expect the appraiser falsely to overstate the value of the

donated property.

(12) See also Notice 2006-96, which provides guidance and safe harbors that

taxpayers can rely on for contributions prior to January 1, 2019.

(13) Audit Tip: Examiners must ensure that the appraisal describes exactly what is

being donated, an easement, and not a going concern and/or mineral or

property rights. In Costello v. Commissioner, T.C. Memo. 2015-87, the

appraisal did not describe or purport to value an easement. Rather, it stated

that “the property rights appraised comprise the fee simple interest in the

subject property.” For that and other reasons, the tax court concluded that the

appraisal was not a qualified appraisal under sec. 1.170A-13(c)(3)(i), the

predecessor of the currently applicable -17 regs.

(14) Audit Tip: Examiners should also consider whether the appraiser failed to

consider and analyze prior transfers of the properties. Generally, the appraisals

should mention prior transfers and try and reconcile any discrepancy in value.

B.1. Reasonable Cause Exception

(1) The charitable contribution deduction will not be denied for the donor’s failure to

comply with the requirements of IRC § 170(f)(11) if the failure was due to

reasonable cause and not willful neglect. IRC § 170(f)(11)(A)(ii)(II). Reasonable

cause requires that the taxpayer exercise ordinary business care and prudence

as to the challenged item, and thus the inquiry is inherently a fact-intensive one.

(2) A taxpayer’s reliance on the advice of a professional constitutes reasonable

cause and not willful neglect if the taxpayer can prove by a preponderance of

the evidence that: (1) the taxpayer reasonably believed the professional was a

competent tax adviser with sufficient expertise to justify reliance; (2) the

taxpayer provided necessary and accurate information to the advising

professional; (3) the taxpayer actually relied in good faith on the professional’s

advice. These determinations are very fact-specific. Compare Crimi v.

Commissioner, T.C. Memo. 2013-51 (donor met the reasonable cause

requirements) with Alli v. Commissioner, T.C. Memo. 2014-15 (donor did not

meet the reasonable cause requirements).

C. Qualified Appraiser

(1) The term “qualified appraiser” as defined in IRC § 170(f)(11)(E)(ii) means an

individual who:

• Has earned an appraisal designation from a recognized professional

appraiser organization or met minimum education and experience

requirements as set forth in the regulations,

• Regularly performs appraisals for which the individual receives

compensation, and

• Meets such other requirements as prescribed by the Secretary in

regulations or other guidance.

(2) An individual is not a qualified appraiser unless the individual:

• Demonstrates verifiable education and experience in valuing the type of

property subject to the appraisal, and

• Has 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).

(3) Treas. Reg. § 1.170A-17 provides guidance on the qualified appraiser

requirements.

• If the appraiser is relying on an appraisal designation to meet the

education and experience requirements in Treas. Reg. § 1.170A-17(b)(2),

the designation from a recognized appraiser organization must be based

on the appraiser’s demonstrated competency.

• The appraiser is treated as having demonstrated education and

experience in valuing the type of property that is “verifiable” within the

meaning of IRC § 170(f)(11)(E)(iii) and Treas. Reg. § 1.170A-17(b)(4) if

the appraiser specifies, in the appraisal, the appraiser’s education and

experience in valuing the type of property and the appraiser makes a

declaration in the appraisal that, because of the appraiser’s experience

and education the appraiser is qualified to make appraisals of the type of

property being valued.

(4) Under Treas. Reg. § 1.170A-17(b)(5)(v)(C), an independent contractor who is

regularly used as an appraiser by any of the individuals described in Treas.

Reg. § 1.170A-17(b)(5) (ii), (iii), or (iv) and who does not perform a majority of

his or her appraisals for others during the taxable year is not a qualified

appraiser. In the syndicated conservation easement context, it may come to the

attention of the Tax Matters Partner or others that the appraiser may have

violated this provision because of his/her repetitive dealings with the facilitators

of the transaction. Examiners should contact Counsel to discuss whether an

appraiser’s conduct is contrary to Treas. Reg. § 1.170A-17(b).

(5) Also, an individual who is prohibited from practicing before the Internal Revenue

Service under 31 U.S.C. 330(c) (now 31 U.S.C. 330(d)) at any time during the

three-year period ending on the date the appraisal is signed by the individual is

not a qualified appraiser. Treas. Reg. § 1.170A-17(b)((5)(vi).

(6) A qualified appraisal must include the appraiser’s qualifications to value the

type of property being valued. Treas. Reg. § 1.170A-17(a)(3)(iii)(B). The

appraiser’s resume, which is typically included in the appraisal, may be included

to satisfy this requirement and provides a good starting point to assess whether

the appraiser is a qualified appraiser. The resume provides information on his

or her education and experience and professional designations. It will also

typically indicate in which jurisdictions the appraiser holds a license or

certification.

(7) License information regarding jurisdictions, history, and disciplinary actions can

be found on The Appraisal Foundation Web page at

http://www.appraisalfoundation.org. Some states also provide appraisal

licensing information online. Examiners or IRS appraisers can contact the

various state boards by telephone to determine if there are any past or pending

disciplinary actions against the appraiser. The Office of Professional

Responsibility (OPR) publishes a list of practitioners, including appraisers, who

have been subject to disciplinary actions by the IRS.

D. Generally Accepted Appraisal Standards

(1) Section 170(f)(11)(E)(i)(II) and Treas. Reg. § 1.170A-17 state that a qualified

appraisal is an appraisal conducted by a qualified appraiser in accordance with

generally accepted appraisal standards and any regulations or other guidance

prescribed by the Secretary.

(2) Treas. Reg. § 1.170A-17(a)(2) provides that “generally accepted appraisal

standards” means the substance and principles of the Uniform Standards of

Professional Appraisal Practice (USPAP), as developed by the Appraisal

Standards Board of The Appraisal Foundation.

D.1. Uniform Standards of Professional Appraisal Practice

(1) In 1989, The Appraisal Foundation, a nonprofit organization, adopted licensing

and appraisal standards for the appraisal industry. USPAP sets forth the

minimum acceptable appraisal standards for federally regulated transactions.

USPAP is recognized throughout the U.S. as the generally accepted standards

of professional appraisal practice.

(2) Although USPAP was intended for appraisals prepared for federally regulated

transactions, all states have adopted USPAP for real estate appraisals

completed by licensed or certified appraisers.

(3) In addition, various appraisal organizations such as the Appraisal Institute (AI),

National Association of Independent Fee Appraisers (NIAFA), American Society

of Appraisers (ASA), and American Society of Farm Managers and Rural

Appraisers (ASFMRA) have additional standards and ethics that their

membership (both designated and undesignated) is required to follow. For the

most part these organizations require adherence to USPAP.

(4) For contributions prior to January 1, 2019, IRC § 170(f)(11)(E)(i)(II) does not

specifically mandate compliance with USPAP but does require the appraisal to

be prepared in accordance with generally accepted appraisal standards. Notice

2006-96, section 3.02(2). Qualified real estate appraisers holding themselves

out to the public as appraisers generally would be required to comply with

USPAP by virtue of their appraisal licenses and professional designations. For

contributions on or after January 1, 2019, Treas. Reg. § 1.170A-17(a)(1) and (2)

require that appraisals be prepared in accordance with the substance and

principles of USPAP.

(5) In assessing whether an appraisal is a qualified appraisal, Examiners and IRS

Appraisers must consider whether the appraisal is prepared in accordance with

the substance and principles of USPAP. If not, it is not a qualified appraisal

under Treas. Reg. § 1.170A-17(a), which is applicable to contributions made on

and after January 1, 2019. For rules applicable to contributions made before

January 1, 2019, see IRC § 170(f)(11)(E) and Notice 2006-96.

(6) The USPAP rules of ethics provide that “[a]n appraiser must perform

assignments with impartiality, objectivity, and independence, and without

accommodation of personal interests. Further, it provides that, among other

things, an appraiser “must not perform an assignment with bias; must not

advocate the cause or interest of any party or issue; must not accept an

assignment that includes the reporting of predetermined opinions and

conclusions;… must not communicate assignment results with the intent to

mislead or to defraud;…[and] must not use or communicate a report or

assignment results known by the appraiser to be misleading or fraudulent…”

There may be grounds to challenge whether the appraisal is a qualified

appraisal if any of the above (or other improper conduct) is present. Examiners

should consult Counsel regarding these issues.

(7) Audit Tip: Examiners should work with the IRS Appraisers to consider whether

the appraiser complied with USPAP in substance. For example, Examiners

should consider whether the appraiser used “extraordinary assumptions” and/or

improper “hypothetical conditions” as the basis for the appraisal.

(8) Audit Tip: Examiners may consider, in assessing whether the appraiser

satisfies the USPAP rules, the pattern of conduct between the appraiser and

the promoter/managing member of a partnership. For example, an appraiser’s

pattern of providing inflated appraisals to a promoter in other transactions may

suggest that the appraiser did not act independently in the transaction under

audit. If pattern evidence will form the basis for a position in any written

document to the taxpayer, it should be coordinated with Counsel.

E. Appraisal Fees

(1) Appraisal fees that a taxpayer pays to determine the FMV of donated property

are not deductible as charitable contributions. However, for taxable years prior

to 2018, taxpayers can claim appraisal fees, subject to the two percent of

adjusted gross income (AGI) limit, as a miscellaneous itemized deduction on

Schedule A, Itemized Deductions (PDF), of Form 1040, U.S. Individual Income

Tax Return (PDF). Beginning in taxable year 2018, appraisal fees paid to

determine the FMV of donated property are not deductible as miscellaneous

itemized deductions on Schedule A.

VIII. Amount of Deduction

A. Overview

(1) There are several considerations that may influence the amount a taxpayer may

claim as a charitable contribution deduction for a conservation easement.

These considerations may be categorized as follows:

• FMV (See Chapter 9)

• Percentage limitations

• Carryovers

• Contributions of appreciated property (ordinary income, short-term capital

gain, long-term capital gain)

• Bargain sale

• Quid pro quo or substantial benefit and charitable intent

B. Percentage Limitations

B.1. Individuals

(1) For charitable contributions by individuals, the amount of the deduction a

taxpayer may claim is subject to a limitation based on a percentage of that

taxpayer’s “contribution base.” IRC § 170(b)(1)(H). This limitation is referred to

as a percentage limitation. Percentage limitations may vary, depending on:

• The type of property donated,

• The type of qualified donee organization that received the donation, and

• The use of the property by the qualified donee organization.

(2) Contribution base for individuals is defined in IRC § 170(b)(1)(H) as the

individual’s adjusted gross income (computed without regard to any net

operating loss carryback to the taxable year under IRC § 172).

(3) See Publication 526, Charitable Contributions (PDF) for additional guidance on

percentage limitations.

(4) In general, when an individual contributes to an organization described in IRC §

170(b)(1)(A) (IRC § 170(b)(1)(A) organization), that individual’s deduction may

not exceed 50% of the individual’s “contribution base.” IRC § 170(b)(1)(A).

(5) When the individual contributes long-term capital gain property to an IRC §

170(b)(1)(A) organization, however, the applicable percentage limitation may be

limited to 30% of the individual’s contribution base. IRC § 170(b)(1)(C).

(6) A deduction arising from an individual’s contribution to a qualified, but otherwise

non-IRC§ 170(b)(1)(A) organization may not exceed 30% of the individual’s

contribution base. IRC § 170(b)(1)(B). When that contribution is of long-term

capital gain property, a percentage limitation of 20% may apply instead. IRC §

170(b)(1)(D).

(7) A conservation easement is considered long-term capital gain property if the

underlying property is a capital asset held for more than a year. Generally,

when an individual contributes a qualified conservation contribution, the

individual’s deduction for that contribution may not exceed 50% of his or her

“contribution base.” IRC § 170(b)(1)(E)(i).

(8) If the individual is a qualified farmer or rancher, however, a 100% limitation may

apply. IRC § 170(b)(1)(E)(iv).

(9) The maximum percentage limitation for contributions of cash by individuals is

50% for contributions made in tax years beginning before January 1, 2018, and

is increased to 60% for contributions of cash made in tax years beginning after

December 31, 2017, and 100% for contributions of cash in 2020.

B.2. Corporations

(1) For C-corporation donors, in general, the maximum amount allowable as a

charitable contribution deduction for any taxable year is 10% of that

corporation's taxable income for that year (25% for 2020), computed with

certain adjustments described in IRC § 170(b)(2)(D).

B.3. Special Rules for Qualified Farmers and Ranchers

(1) In general, if an individual is a “qualified farmer or rancher” and makes a

qualified conservation contribution of “property used in agriculture or livestock

production,” the qualified farmer or rancher may claim a charitable contribution

deduction up to 100% of the contribution base. IRC § 170(b)(1)(E)(iv). See and

IRC § 170 (b)(2)(B) for corporate farms and ranchers.

(2) A “qualified farmer or rancher” is generally an individual or corporate taxpayer

whose gross income from the trade or business of farming is greater than 50%

of that taxpayer’s gross income for the taxable year. IRC § 170(b)(1)(E)(v).

Gross income from the trade or business of farming does not include income

from the sale of property. Rutkoske v. Commissioner, 149 T.C. 133 (2017).

(3) A qualified conservation contribution is of “property used in agriculture or

livestock production” only when the contribution subjects the underlying

property to a restriction that requires the property to remain available for

agriculture or livestock production. IRC § 170(b)(1)(E)(iv)(II). If the contribution

fails to do so, the ordinary limitations for qualified conservation contributions will

apply.

B.4. Carryovers

(1) In general, taxpayers (both individuals and corporations) can carry over unused

charitable contributions for up to five years. For conservation easement

contributions, however, the carryover period is 15 years. IRC § 170(b)(2)(E) and

(2)(B)(ii).

C. Contributions of Appreciated Property

(1) Generally, a taxpayer’s deduction for a charitable contribution of property

equals the FMV of the property, but in some cases it may be limited to the

lesser of FMV or basis.

(2) If a taxpayer contributes appreciated property (i.e., property with a FMV that

exceeds the taxpayer's basis), the amount of the taxpayer’s charitable

contribution deduction may be reduced. As relevant here, the extent to which a

taxpayer’s deduction may be reduced will depend on the nature of the

contributed property. IRC § 170(e)(1). To determine whether to reduce the

amount of allowable deduction, find out whether the property is:

• Ordinary income property

• Short-term capital gain property

• Long-term capital gain property

(3) See Publication 544, Sales and Other Dispositions of Assets (PDF) for

additional guidance.

C.1. Ordinary Income and Short-Term Capital Gain Property

(1) Generally, if the property is ordinary income property or short-term capital gain

property, the taxpayer’s deduction is limited to basis. IRC § 170(e)(1)(A).

(2) This rule applies to contributions of appreciated property only to the extent that,

if the taxpayer had hypothetically sold the property for FMV rather than donate

the property, the resulting gain would have been ordinary income or short-term

capital gain to the taxpayer.

(3) This means that, generally, if the property is ordinary income property in the

hands of the donor-taxpayer, the taxpayer’s deduction is limited to basis.

(4) An example of ordinary income property is inventory. In a real property context,

inventory will include real property (land and anything built on it) held by a real

estate dealer, when that real property is primarily held for sale to the dealer’s

customers in the ordinary course of his/her trade or business.

(5) Gain on the disposition of depreciable real property is treated as ordinary

income to the extent of additional depreciation allowed or allowable on the

property. Additional depreciation is the amount of the actual depreciation over

the depreciation figured using the straight line method. See Publication 544,

Sales and Other Disposition of Assets (PDF) and Form 4797 (PDF) and the

related instructions.

(6) Contributions of short-term capital gain property (such as real estate held for

investment for a year or less) is treated the same as ordinary income property

in that the taxpayer’s deduction is generally limited to basis.

• Example: Jefferson contributes a conservation easement on a parcel that

he held for 11 months. The conservation easement is short-term capital

gain property, and Jefferson's deduction is limited to the lesser of his basis

in the easement or its FMV.

(7) The amount of basis allocable to the conservation easement bears the same

ratio to the total basis of the property as the FMV of the conservation easement

bears to the FMV of the entire parcel before the granting of the conservation

easement. IRC § 170(e)(2); Treas. Reg. § 1.170A-4(c).

• Example: Mary paid $80,000 for a parcel held for investment, which has a

FMV of $100,000. She decides to donate a conservation easement with a

FMV of $5,000. If Mary's parcel is held for less than one year, her

deduction for the easement is $4,000 ($5,000/$100,000 x $80,000 =

$4,000). If Mary held the property for more than a year, her deduction is

the easement's FMV ($5,000).

C.2. Long-Term Capital Gain Property

(1) If the taxpayer contributes appreciated long-term capital gain property, the

taxpayer’s deduction generally is not limited to basis and may equal FMV. IRC

§ 170(e)(1).

(2) Property is long-term capital gain property when, if the taxpayer had

hypothetically sold the property or FMV rather than donated the property, its

sale on the date of the contribution would have resulted in long-term capital

gain to the taxpayer.

(3) Long-term capital gain property is a capital asset held for more than a year. IRC

§ 1222(3).

(4) Examples of long-term capital gain property are (1) real estate held for more

than a year for investment, or (2) a personal residence held for more than a

year.

D. Bargain Sale

(1) A bargain sale is a taxpayer’s sale or transfer of property to a qualified

organization for less than the property's FMV. Treas. Reg. § 1.170A-4(c)(2)(ii).

(2) A bargain sale is treated partly as a charitable contribution and partly as a sale

or exchange of the property. As such, to qualify for bargain sale treatment, the

taxpayer must establish that charitable intent motivated the taxpayer to sell the

property to the qualified organization for less than FMV.

(3) As relevant here, the amount of the charitable contribution deduction arising

from the bargain sale equals the excess of the FMV of the property less the

consideration paid by the qualified organization to acquire the property.

• Example: Betty sells a conservation easement (on property held for

investment for more than one year) to a conservation organization for

$10,000. The FMV of the easement is $12,500. Her charitable contribution

deduction from the bargain sale is $2,500 ($12,500 - $10,000) provided

that all requirements to claim a conservation easement deduction have

been met and she knew, at the time of the sale, that the easement was

worth $12,500. If a taxpayer contributes property subject to a debt (such

as a mortgage), and the debt is assumed by the qualified organization, the

taxpayer must reduce the FMV of the property by the amount of the debt.

D.1. Taxable Gain

(1) The part of the bargain sale that is a sale or exchange may result in a taxable

gain. The amount of taxable gain is determined by allocating basis (under IRC §

1011(b)) between the portion of the property deemed sold and the portion of

property deemed contributed.

(2) For more information on determining the amount of any taxable gain, see

"Bargain Sales to Charity" in Publication 544, Sales and Other Dispositions of

Assets (PDF), and IRC § 1011(b). There are examples in Pub. 544 and Pub.

526.

(3) See Treas. Reg. §§ 1.170A-4(c)(2) and 1.170A-14(h)(3)(iii) for additional

guidance on allocating basis.

D.2. Federal and State Easement Purchase Programs

(1) Many states and some federal agencies have conservation easement purchase

programs. The purchase price may be at FMV or at a discounted price,

depending on the specific program. If the conservation easement was

purchased by the state or federal agency at FMV, then there would be no

charitable contribution for the conservation easement.

(2) The donation must meet all of the statutory and regulatory requirements for a

qualified conservation easement contribution in order for the taxpayer to claim a

noncash charitable contribution for the donation portion of a bargain sale.

E. Quid Pro Quo or Substantial Benefit and Charitable Intent

(1) Charitable intent generally exists if the transfer was made without the receipt of,

or the expectation of receiving, a quid pro quo or substantial benefit for the

transfer. As a general rule, if the benefits received or expected to be received

are greater than those that inure to the general public, the transfer does not

satisfy the charitable intent requirement under IRC § 170. Hernandez v.

Commissioner, 490 U.S. 691 (1989); United States v. American Bar

Endowment, 477 U.S. 105, 118 (1986); Singer Co. v. U.S., 196 Ct. Cl. 90, 449

F.2d 413, 422-423 (1971).

(2) If the donor receives, or can reasonably expect to receive, a substantial

financial or economic benefit, but it is clearly shown that the benefit is less than

the amount of the donor’s transfer, then a deduction is allowable for the excess

of the amount the donor transferred over the amount of the financial or

economic benefit received or reasonably expected to be received by the donor.

In considering whether the taxpayer had any expectation of receiving a quid pro

quo, we may look to external features of the transaction. Triumph Mixed Use

Investments III, LLC v. Commissioner, T.C. Memo. 2018-065. The benefits that

the taxpayer expects to receive may flow from property that is not the subject of

the easement. Wendell Falls v. Commissioner, T.C. Memo. 2018-45.

(3) If a taxpayer transfers a conservation easement with the expectation of

receiving a state or local tax credit in return, that credit is a quid pro quo. See

Treas. Reg. § 1.170A-1(h)(3), which applies to property transferred by

taxpayers after August 27, 2018.

• Example 1: Steven is a real estate developer. He contributes a

conservation easement with the expectation that it will result in his

receiving preferential zoning treatment from the city zoning board. Steven

is not allowed a charitable contribution deduction.

• Example 2: Jeanie lives along a scenic highway. In order for her to secure

a variance on her property, the zoning board requires an easement on 10

percent of her property. Jeanie decides to place an easement on 25

percent of her property. Jeanie may deduct as a charitable contribution the

value of the easement she placed on 15 percent of her property.

F. Rehabilitation Tax Credit

(1) Section 47 is an investment tax credit intended to encourage rehabilitation of

historic buildings for urban and rural revitalization. The rehabilitation tax credit is

a 20% credit available to taxpayers who make qualified rehabilitation

expenditures with respect to certified historic structures.

(2) NPS and the IRS in partnership with State Historic Preservation Offices jointly

administer the Historic Preservation Tax Incentives Program. See the

Rehabilitation Tax Credit Market Segment Specialization Program Guide (PDF)

for additional information.

F.1. Recapture of Rehabilitation Tax Credit

(1) Section 50(a)(1) provides for recapture of the investment tax credit upon

disposition.

(2) When a façade easement is contributed during the same year that a qualified

rehabilitated building is placed in service, the taxpayer will not be entitled to

claim the portion of the rehabilitation tax credit attributable to the façade

easement. Rome I, Ltd. v. Commissioner, 96 T.C. 697 (1991); Rev. Rul. 89-90,

1989-2 C.B. 3.

(3) Under IRC § 50, if a taxpayer claims a rehabilitation tax credit with respect to

property and subsequently makes a qualified conservation contribution (i.e.,

contributes a façade easement) with respect to the property, the charitable

contribution is a partial disposition of the property. This event will trigger

recapture of all or part of the credit if the contribution is made within the

recapture period (5 years from the placed in service date). See Rev. Rul. 89-90.

(4) Pursuant to IRC § 170(f)(14), the amount of a taxpayer’s charitable contribution

deduction for a qualified conservation contribution may be reduced if the

taxpayer was allowed IRC § 47 credits for prior years with respect to the

building underlying the present conservation contribution. In such cases, the

amount of the taxpayer’s deduction will be reduced by an amount bearing the

same ratio to the FMV of the contribution as the sum of the total IRC § 47

credits allowed to the taxpayer for the 5 preceding years over the FMV of the

building on the date of contribution.

(5) See the Rehabilitation Tax Credit Market Segment Specialization Program

Guide (PDF) for additional information.

IX. Valuation of Conservation Easements

A. Overview

(1) To determine the FMV of a conservation easement, appraisers must have a

clear understanding of IRC § 170 and the accompanying Treasury regulations.

The appraiser also must meet the definition in IRC § 170(f)(11)(E) of a “qualified

appraiser.”

(2) The value of a conservation easement is the FMV at the time of contribution

and depends on the particular facts and circumstances of the property. Treas.

Reg. § 1.170A-14(h)(3)(i).

(3) Section 170(f)(11)(E) and Treas. Reg. § 1.170A-13(c)(3) impose substantiation

requirements that must be met for the appraisal to be considered a qualified

appraisal.

(4) Treas. Reg. § 1.170A-14(h)(3)(i) requires that, if there is a substantial record of

sales of comparable easements, those sales are used to value conservation

easements. Since easements are not typically sold, there usually are

insufficient sales to use a comparable easement sales approach. In most

cases, the "before and after" method of valuing a conservation easement is

used.

(5) The purpose of this chapter is to provide a general overview on the valuation of

conservation easements and generally accepted appraisal standards. A

comprehensive discussion of valuation is beyond the scope of this ATG.

(6) See Treas. Reg. §§ 1.170A-13 and 1.170A-14, and, for contributions on or after

January 1, 2019, Treas. Reg. 1.170A-17. See also Notice 2006-96, Publication

526, Charitable Contributions (PDF), Publication 561, Determining the Value of

Donated Property (PDF), Form 8283, Noncash Charitable Contributions (PDF),

and the Instructions for Form 8283 (PDF) for more information about valuation,

qualified appraisers, qualified appraisals, and other requirements.

B. Valuation Process

(1) Valuation, as defined by the Dictionary of Real Estate Appraisal, Sixth Edition,

The Appraisal Institute, Chicago, Ill., 2015, is the process of estimating the FMV

of an identified interest in a specific parcel or parcels of real estate as of a

specified date. It is a term used interchangeably with appraisal. The valuation

process includes:

• Defining the problem/scope of work,

• Data collection and property description,

• Data analysis,

• Application of the approaches to value,

• Reconciliation of value indications and final opinion of value, and

• Reporting the defined value.

(2) Critical to the completion of any valuation assignment, especially the valuation

of a conservation easement, is clearly defining the problem and determining the

scope of work. A detailed scope of work should be presented in the appraisal to

allow a reader to understand exactly what steps and procedures were utilized

by valuation experts in their analyses and FMV determinations.

(3) Appraisers must have a thorough understanding of which rights were “given up”

or relinquished and which rights were retained by the donor in order to properly

value the conservation easement. They must refer to the deed to determine

what rights were relinquished.

C. Valuation Date

(1) The value of a conservation easement contribution is the FMV of the easement

at the time of the contribution. Treas. Reg. § 1.170A-14(h)(3)(i). For federal

income tax purposes, the date of contribution is the date the deed of easement

is recorded pursuant to state law. The qualified appraisal must state, among

other things, the date or expected date of the contribution. Treas. Reg. §

1.170A-13(c)(3)(ii)(C); Treas. Reg. § 1.170A-17(a)(3)(iii).

D. FMV

(1) The value of the donated easement must meet the definition of FMV as defined

by Treas. Reg. § 1.170A-1(c)(2):

• The FMV is the price at which the property would change hands between

a willing buyer and a willing seller, neither being under any compulsion to

buy or sell and both having reasonable knowledge of relevant facts.

(2) A common error found in appraisals submitted for federal income tax purposes

is that the FMV definition utilized in the appraisals is not correct. Also, the FMV

of the property must decrease as a result of the granting of the conservation

easement in order for a taxpayer to claim a charitable contribution deduction. In

some instances, the grant of a conservation easement may have no material

effect on the value of the property or may in fact serve to enhance the value of

property. Treas. Reg. § 1.170A-14(h)(3)(ii).

D.1. Before and After Method

(1) In theory, the best evidence of FMV of a conservation easement is the sale

price of easements comparable to the donated easement. An appraiser should

research the market to determine if there is a substantial record of sales of

comparable easements; however, in most instances, there is no substantial

record of comparable sales.

(2) If there is no substantial record of comparable easement sales, the "before and

after" approach to valuing a conservation easement is used.

• FMV of the property before the easement – FMV of the property after the

easement = FMV of the easement

(3) In essence, an appraiser must determine the highest and best use (HBU) and

the corresponding FMV of the subject property twice: first, without regard to the

conservation easement (“before” value), and then again after considering the

specific restrictions imposed on the property by the deed (“after” value).

(4) In determining the “before” value of the property, an appraiser must consider

the current use of the property but also objectively assess the likelihood that the

property would be developed absent the conservation easement restriction.

Existing zoning, conservation, historic preservation, or other laws and

restrictions may limit the property’s potential HBU. Treas. Reg. § 1.170A-

14(h)(3)(ii).

(5) In determining the “after” value of the property, an appraiser must consider both

the specific restrictions imposed by the conservation easement being valued

and the specific restrictions imposed by easements on any “comparable”

properties.

D.2. Use of Flat Percentage Cannot Be Applied to Before Value

(1) There is no standard value or percentage impact on the “before” value of the

property due to the granting of a conservation easement. Each conservation

easement must be valued before and after the granting of the easement, based

on the particular facts and circumstances of that property, and the value must

be substantiated with a qualified appraisal.

D.3. Contiguous Parcels

(1) The amount of the charitable contribution deduction due to the granting of a

conservation easement covering a portion of a contiguous property owned by

the donor and the “donor’s family” (as defined in IRC § 267(c)(4)) is the

difference between the FMV of the entire contiguous parcel of the property

before and after the granting of the easement. Treas. Reg. § 1.170A-

14(h)(3)(i).

(2) Section 267(c)(4) defines the term “family” as including only an individual’s

“brothers and sisters (whether by the whole or half-blood), spouse, ancestors

and lineal descendants.” Parents, children, grandparents, grandchildren, half-

brothers and half-sisters are included in the definition of family, but cousins,

nieces, nephews, in-laws, and step relations are not included.

• Example: John Smith owns a 1,000-acre farm. Mr. Smith decides to put a

conservation easement on the southern 500 acres. The entire 1,000 acres

would need to be valued before and after the easement is imposed

because the donor owns the entire 1,000 acres, and the unencumbered

parcel is contiguous to the encumbered parcel.

(3) In order to properly determine what properties should be valued, an appraiser

must identify and determine the ownership of any contiguous parcels at the

outset of the appraisal assignment. Next, the appraiser must assess whether

the owners of any contiguous parcels are the donor or donor’s family as defined

in IRC § 267(c)(4).

(4) Application of the contiguous parcel rules can be complex. IRS appraisers

should contact a program analyst or Counsel for guidance. For information

about contiguous parcels, see CCA 201334039 (8/23/2013).

D.4. Enhancement Rule

(1) A taxpayer must also consider any enhancement to the value of other property

owned by the donor or a “related person” resulting from the taxpayer’s

contribution of a conservation easement. The amount of the conservation

contribution deduction is reduced by the amount of the increase in the value of

the other property, whether or not that other property is contiguous. Treas. Reg.

§ 1.170A- 14(h)(3)(i).

(2) A related person, for purposes of applying the enhancement rule, is defined in

IRC §§ 267(b) or 707(b). Application of the related party rules can be complex.

IRS appraisers should contact a program analyst or Counsel for guidance.

(3) There are two important distinctions between the contiguous parcel and the

enhancement rules. First, the contiguous parcel rule applies only to contiguous

property, but the enhancement rule can apply to both contiguous and

noncontiguous property. Second, the contiguous parcel rule only applies to

contiguous property owned by the donor or the donor’s family (as defined in

IRC § 267(c)(4)), but the enhancement rule applies to contiguous or

noncontiguous property owned by a related party under §§ 267(b) or 707(b).

The definition of “related person” includes the donor’s family members and also

“related” non-family members.

• Example: John Smith owns a 1,000-acre farm. Mr. Smith decides to put a

conservation easement on the southern 500 acres. The entire 1,000-acre

parcel would need to be valued based on the application of the contiguous

parcel rule. John Smith also owns a noncontiguous 50-acre parcel located

within a quarter mile of the subject property. Because of the conservation

easement, the 50-acre parcel will have superior views of the river that lies

beyond the 500-acre parcel. As a result, the 50-acre parcel would need to

be valued and the conservation easement contribution would be reduced

by the amount of the increase in value (if any) to the 50-acre parcel.

(4) Application of the enhancement rules can be complex. IRS appraisers should

contact a program analyst or Counsel for guidance. See CCA 201334039

(8/23/2013).

E. Market Analysis

(1) Market analysis is defined as a process for examining the demand for and

supply of a property type and the geographic market area for that property type.

This is a critical step in the highest and best use analysis. The six-step market

analysis process described below provides data required for the four test

criteria (physically possible, legally permissible, financially feasible and

maximally productive). See The Appraisal of Real Estate, 14th Edition, The

Appraisal Institute, Chicago, Ill., 2013, page 299.

(2) An appraiser can use current and historical market conditions to infer future

supply and demand. In addition, to forecast subject-specific supply, demand,

absorption and capture rate (capture rate is the percentage of total market

demand a specific property or group of properties is expected to capture) over a

property’s projected holding period, the appraiser should augment the analysis

of current and historical market conditions with fundamental analysis. Given the

fact that, in the majority of conservation easement cases, development of the

property has not taken place, then there should be more emphasis on a

fundamental analysis. A fundamental analysis would require an analysis of

historic and projected: population, income, zoning, demand, absorption, supply,

ideal improvement, existing space, proposed space, occupied space, market

demographics, market income and expense information, capitalization rates,

etc. to forecast future market conditions and is a much more detailed analysis

than an inferred analysis.

(3) Most market analysis can be performed using a six-step process:

• Property Productivity Analysis: Physical, Legal and Location Attributes

• Market Delineation: Competitive Market Area

• Demand Analysis: Demand Segmentation, Historical Growth & Demand

Drivers

• Supply Analysis: Existing, Under Construction and Proposed Competition

• Interaction of Supply and Demand: Competitive and Residual Demand

• Forecast Subject Capture: Reconciliation of Inferred and Fundamental

Forecasts

(4) Layman’s terms: The appraiser analyzes how competitive the subject property

is or will be in its market area. The current and future demand for similar

properties is estimated and compared to the estimated current and future

supply within the market area.

(5) Appraisers using a residential subdivision method may not always adequately

quantify the market demand and supply for the proposed lots and/or houses.

The Appraisal of Real Estate, 14th Edition, The Appraisal Institute, Chicago, Ill,

2013, pages 299 – 330 (Chapter 15) provides a detailed discussion on

completing a market analysis for a variety of property types and serves as a

good reference tool.

(6) When appraisers fail to follow the six-step process, and do not support demand,

supply and a capture rate for the subject property, it can lead to erroneous

conclusions in the highest and best use analysis.

F. Highest and Best Use

(1) The determination of the property’s HBU is vital to the valuation of any real

estate, including conservation easements.

(2) All professional appraisal organizations recognize that the HBU of the property

is a key element to a proper valuation. To qualify as the HBU, a use must

satisfy four criteria:

• Physically Possible - The land must be able to accommodate the size

and shape of the ideal improvement: What uses of the subject site are

physically possible?

• Legally Permissible - A property use that is either currently allowed or

most probably allowable under applicable laws and regulations. What

uses of the subject site are permitted by zoning, deed restrictions, and

government restrictions?

• Financial Feasibility - The ability of a property to generate sufficient

income to support the use for which it was designed. Among those uses

that are physically possible and legally permissible, which uses will

produce a net return to the owner?

• Maximally Productive - The selected use must yield the highest value

among the possible uses. Among the feasible uses, which use will

produce the highest net return or the highest present worth?

(3) An appraiser’s HBU analysis and conclusion should be documented in the

appraisal report with a comprehensive discussion supported by relevant market

data or other information sources to adequately support the conclusions.

(4) At times, an appraiser may rely in part on the analysis by another professional

such as a land planner or geologist. However, an appraiser is required by

generally accepted appraisal standards to exercise due diligence with respect

to the assumptions put forth by the other professional. An appraiser must have

a reasonable basis to believe that the other professional’s work product is

credible and should disclose such reliance.

G. Methodology

(1) Treas. Reg. § 1.170A-14(h)(3)(i) and (ii) allows for two different types of

valuation: direct comparison or indirect analysis.

(2) Direct comparison is to analyze sales of comparable properties to arrive at a

conclusion as to value. A direct comparison is based on direct sales of

easements, meaning the price paid by purchases of easements having the

same or similar restrictions.

(3) Conservation easements are sold infrequently and even if the appraiser is able

to identify sales of easements, they might not be appropriate comparables, and

the number of sales might not be substantial. Accordingly, most conservation

easements are valued by indirect analysis (before and after approach).

(4) There are three recognized valuation methodologies within the appraisal

industry:

• Sales Comparison Approach (SCA)

• Cost Approach (CA)

• Income Capitalization Approach (ICA)

(5) All three approaches should be considered in every appraisal assignment. This

does not mean that all three approaches need to be applied.

• Example: If the appraiser is valuing the impact of granting a conservation

façade easement on a single-family home in an area in which single-family

homes are typically not rental income properties, then it is not necessary

to complete the income capitalization approach. Generally, a statement

that due to the lack of market information the income capitalization

approach was not completed would be sufficient.

(6) The following brief descriptions of the three approaches (i.e., Sales, Cost and

Income Capitalization Approaches) were taken from The Dictionary of Real

Estate Appraisal, Sixth Edition, which was published by The Appraisal Institute,

Chicago, Ill., 2015.

G.1. Sales Comparison Approach

(1) In the Sales Comparison Approach, a value indication is derived by comparing

the property being appraised to similar properties that have been sold recently,

applying appropriate units of comparison, and making adjustments to the sale

prices of the comparables based on the elements of comparison. The sales

comparison approach is the most common and preferred method of land

valuation when an adequate supply of comparable sales is available.

(2) Elements of comparison are defined by The Appraisal of Real Estate, 14th

Edition, The Appraisal Institute, Chicago, Ill. 2013, page 404 as “the

characteristics or attributes of properties and transactions that help explain the

variances in the prices paid for real property.” The elements of comparison are

divided into two categories: transactional adjustments and property

adjustments.

(3) Transactional adjustments are:

• Real property rights conveyed

• Financing terms

• Conditions of sale

• Expenditures made immediately after purchase

• Market conditions

(4) These adjustments are “generally applied in the order listed” and are

successive.

(5) Property adjustments are:

• Location

• Physical characteristics

• Economic characteristics

• Legal characteristics

• Non-realty components of value.

(6) Property adjustments are usually applied after the transactional adjustments,

but in no particular order and are not successive.

(7) Layman’s terms: The appraiser compares the subject property to recently sold

properties. Adjustments are made to the sales to account for differences

between the properties to estimate the FMV of the subject property. If there is a

sufficient number of sales, this is the preferred valuation methodology for land.

G.2. Cost Approach

(1) In the cost approach, a value indication is derived for the fee simple interest in a

property by estimating the current cost to construct a reproduction of (or

replacement for) the existing structure, including entrepreneurial incentive or

profit; deducting the depreciation from the total cost; and adding the estimated

land value. Improvement cost estimates can be done with national cost

manuals (e.g., Marshall Valuation Service Manual), builder cost estimates or

market extraction. National cost manuals only provide a cost for new

improvements. In utilizing these manuals, the valuation must include indirect

costs and an analysis for all forms of depreciation.

G.3. Income Capitalization Approach

(1) In the Income Capitalization Approach, an appraiser derives a value indication

for an income- producing property (i.e., rental property) by converting its

anticipated benefits (cash flows and reversion) into property value. This

conversion can be accomplished in two ways. One year’s net income

expectancy or an annual average of several years’ income expectancies can be

capitalized at a market-derived capitalization rate. Alternatively, the annual cash

flows for the holding period and the reversion can be discounted at a specified

yield rate.

(2) The FMV of the subject property is estimated based on the anticipated net

income from the property. The appraiser estimates the potential gross income

and subtracts vacancy and collection loss as well as operating expenses to

estimate the net income. If one year’s net income is estimated, then that income

is capitalized via a market-derived capitalization rate to provide an indication of

the FMV of the subject property. If multiple years’ net income is estimated, then

the cash flows and reversion are discounted at a specified yield rate to provide

a FMV indication.

G.4. Subdivision Development Method

(1) In the valuation of land conservation easements, many appraisals include a

land residual analysis using a Subdivision Development Method. Although

appraisers have referred to this approach as a different valuation methodology,

the Subdivision Development Method is an adaptation (or subset) of the income

capitalization method. The reason appraisers refer to it as “another” method is

because the analysis utilizes a combination of both the sales comparison and

cost approaches described above.

(2) This method estimates land value assuming that subdivision and development

of the property is the HBU of the parcel of land being appraised. When all direct

and indirect costs, and entrepreneurial incentive (expected rate of return on

investment) are deducted from the anticipated gross sales price of the finished

lots, the resultant net sales proceeds are then discounted to present value at a

market-derived rate over the development and absorption period to indicate the

value of the raw land (The Dictionary of Real Estate Appraisal, Sixth Edition,

The Appraisal Institute Chicago, Ill., 2015, page 223).

(3) Layman’s terms: The FMV of the subject property is estimated by first

estimating what the “finished” lots would sell for in the marketplace. Costs,

including anticipated profit, are then deducted to estimate the net income

projected to be generated by the property. The projected net income (i.e., cash

flow) is discounted (for the time necessary to get approvals, finish the lots and

sell the lots) at a specified discount rate (a/k/a yield rate) to provide a FMV

indication.

• Example: Parcel C is a 100-acre parcel that is zoned residential, and the

appraiser has concluded that the HBU of the property is for a 50 lot

residential subdivision. An appraiser may use the sales comparison

approach to determine the market value of the “finished” lots. The

appraisal would provide information on similar projects in order to estimate

the absorption period to sell the lots. Next, the appraiser deducts the costs

to improve the property (development costs) necessary for the subject

property to attain the finished lot status. Finally, the cash flow over the

absorption period is discounted back to the valuation date (this accounts

for the time get the approvals, take the lots to the finished lot stage, and to

sell all of the lots) to provide an estimate of the present value of the

subject property as raw land.

(4) The Subdivision Development Method requires a significant amount of data

such as development costs, profit margins, sales projections and the pricing of

developed lots. It is typically completed using a Discounted Cash Flow (DCF)

analysis.

(5) Although the tax court has not specifically addressed the merits of utilizing the

Subdivision Development Method, there are several decisions in the federal

courts that provide some insight. The Supreme Court stated in Olson v. United

States, 292 U.S. 246, 257 (1934) that “Elements affecting value that depend

upon events or combinations of occurrences which, while within the realm of

possibility, are not fairly shown to be reasonably probable, should be excluded

from consideration.”

(6) Since there are many variables involved in the Subdivision Development

Method, there is a greater chance of errors, which could result in an incorrect

valuation. Some common errors include:

• Failure to account for time to obtain necessary project approval.

• Failure to account for time to put infrastructure in place.

• Failure to include the cost of the infrastructure.

• Failure to account for time necessary to sell the units (absorption) or lack

of support for the absorption estimate.

• Failure to include developer’s profit.

• Failure to account for existing competing properties as well as properties

that are still in the planning stage.

• Inadequate assessment of the risk associated with the development.

G.5. Aggregate Partnership Interest

(1) The examiner should look at the aggregate investment by partners in the

partnership as a factor in determining the FMV of the contributed property

when, as is true in most syndicated conservation easement cases, that

partnership’s only significant asset is the land. In other words, the amounts

invested by partners in acquiring their partnership interests, less any portion of

that investment used to pay fees and costs, may be a reasonable indicator of

the before value of the property held by the partnership, especially when the

partners acquire their partnership interests shortly before the donation of the

easement. Contemporaneous sales and transactions have been approved by

the courts to support a determination of value. Plateau Holdings, LLC v.

Commissioner, T.C. Memo. 2020-93; TOT Property Holdings, LLC v.

Commissioner, TC Docket No. 5600-17 (unpublished bench op., Nov. 22,

2019).

H. Transferable Development Rights

(1) A transferable development right (TDR) is a development right held by the

landowner that can be transferred by the landowner for use in another location.

A number of states, counties and cities have established TDR programs. These

programs are used to manage land development through the exchange of

zoning privileges allowing property owners to separate development rights from

the underlying property and sell them to purchasers who want to increase the

density of development in higher density areas.

(2) For example, in New York City, an owner of a building with TDRs may be able

to transfer (sell) unused development rights for use in other building sites

subject to the program restrictions.

(3) A transfer of development rights by the landowner is not a transfer of the

landowner’s entire interest in the property and may not qualify for a charitable

contribution per IRC § 170(f)(3). Examiners and IRS appraisers should consult

with Counsel if the conservation easement case involves TDRs.

X. Partnership Anti-Abuse Rules, Judicial Doctrines, and Codified

Economic Substance Doctrine

(1) The following information generally relates to syndicated conservation

easement transactions. Examiners should contact a partnership program

analyst or Counsel for guidance.

(2) Judicial Doctrines and their statutory and regulatory analogs, discussed below,

require extensive factual development and should not be asserted unless there

is a sufficient basis to raise them. At the inception, when considering whether to

assert these doctrines, the agent should consult with Counsel to consider

whether they are viable doctrines to be asserted. Counsel can provide support

in developing the factual and legal arguments to be included in the RAR.

A. Partnership Anti-Abuse Rules

(1) If a partnership is formed or availed of in connection with a transaction a

principal purpose of which is to reduce substantially the partners’ aggregate

federal tax liability in a manner that is inconsistent with the intent of subchapter

K, the Commissioner can recast the transaction for federal tax purposes, as

appropriate to achieve tax results that are consistent with the intent of

subchapter K, in light of the applicable statutory and regulatory provisions and

the pertinent facts and circumstances. See § 1.701-2(b). Whether a partnership

was formed or availed of with a principal purpose to reduce substantially the

present value of the partner’s aggregate federal tax liability in a manner

inconsistent with the intent of subchapter K is determined based on all the facts

and circumstances. See § 1.701-2(c) for a list of some factors.

(2) Implicit in the intent of subchapter K are the following requirements: (1) the

partnership must be bona fide and each partnership transaction or series of

related transactions (individually or collectively, the transaction) must be

entered into for a substantial business purpose; (2) the form of each partnership

transaction must be respected under substance over form principles; and (3)

the tax consequences to each partner and the partnership must accurately

reflect the partners’ economic agreement and clearly reflect the partner’s

income, except to the extent that the results of a particular provision which

would otherwise not meet this requirement are clearly contemplated by that

provision. See § 1.701-2(a).

(3) Section 1.701-2(b) provides that, even though the transaction may fall within the

literal words of a particular statutory or regulatory provision, the Commissioner

can determine, based on the particular facts and circumstances, that to achieve

results that are consistent with the intent of subchapter K:

• The purported partnership should be disregarded in whole or in part, and

the partnership’s assets and activities should be considered, in whole or in

part, to be owned and conducted, respectively, by one or more of its

purported partners;

• One or more of the purported partners of the partnership should not be

treated as a partner;

• The methods of accounting used by the partnership or a partner should be

adjusted to reflect clearly the partnership’s or the partner’s income;

• The partnership’s items of income, gain, loss, deduction, or credit should

be reallocated; or

• The claimed tax treatment should otherwise be adjusted or modified.

(4) Audit Tip: Examiners should consult with Counsel if Treas. Reg. § 1.701-2

appears applicable to the facts of the case. CCDM 31.1.1-1 requires review by

Associate Chief Counsel, Pass-throughs and Special Industries (P&SI). Field

Counsel should consult with P&SI early if this argument is potentially applicable.

(5) Audit Tip: Examiners should look at the factors contained in Treas. Reg. §

1.701-2(c) in determining whether partnership anti-abuse could apply to their

case. Some of the factors contained in the discussion of Judicial Doctrines

below might also be informative. The factors contained in § 1.701-2(c) include:

• The present value of the partner’s aggregate federal tax liability is

substantially less than had the partners owned the partnership’s assets

and conducted the partnership’s activities directly;

• The present value of the partners’ aggregate federal tax liability is

substantially less than would be the case if purportedly separate

transactions that are designed to achieve a particular end result are

integrated and treated as steps in a single transaction. For example, this

analysis may indicate that it was contemplated that a partner who was

necessary to achieve the intended tax results and whose interests in the

partnership was liquidated or disposed of (in whole or part) would be a

partner only temporarily in order to provide the claimed tax benefits to the

remaining partners;

• One or more partners who are necessary to achieve the claimed tax

results either have a nominal interest in the partnership, are substantially

protected from any risk of loss from the partnership’s activities (through

distribution preferences, indemnity or loss guaranty agreements, or other

arrangements), or have little or no participation in the profits from the

partnership’s activities other than a preferred return that is in the nature of

a payment for the use of capital;

• Substantially all the partners (measured by number or interests in the

partnership) are related (directly or indirectly) to on another;

• Partnership items are allocated in compliance with the literal language of

Treas. Reg. §§ 1.704-1 and 1.704-2, but with results that are inconsistent

with the purpose of section 704(b) and § 1.701-2. In this regard, particular

scrutiny will be paid to partnerships in which income or gain is specially

allocated to one or more partners that may be legally or effectively exempt

from federal income tax (because actually tax exempt or because the

taxpayer has unused net operating losses, capital losses, or foreign tax

credits);

• The benefits and burdens of ownership of property nominally contributed

to the partnership are in substantial part retained (directly or indirectly) by

the contributing partner (or a related party);

• The benefits and burdens of ownership of partnership property are in

substantial part shifted (directly or indirectly) to the distributee partner

before or after the property is actually distributed to the distributee partner

(or related party).

B. Judicial Doctrines

B.1. Bona Fide Partner and Partnership

(1) Whether an entity or contractual arrangement is a partnership for federal

income tax purposes requires a facts-and-circumstances analysis. The

Supreme Court in Commissioner v. Culbertson, 337 U.S. 733, 742 (1949),

stated that there is a partnership for federal tax purposes when:

(2) Considering all the facts – the agreement, the conduct of the parties in

execution of its provisions, their statements, the testimony of disinterested

persons, the relationship of the parties, their respective abilities and capital

contributions, the actual control of income and the purposes for which it is used,

and any other facts throwing light on their true intent – the parties in good faith

and acting with a business purpose intended to join together in the present

conduct of the enterprise.

(3) The critical inquiry is the parties’ intent to join together in conducting business

activity and sharing profits. See, e.g., Commissioner v. Tower, 327 U.S. 280,

287 (1946). See also Estate of Kahn v. Commissioner, 499 F.2d 1186, 1189

(2d Cir. 1974) (identifying factors a court might consider); Luna v.

Commissioner, 42 T.C. 1067, 1077-78 (1964) (same).

(4) In Historic Boardwalk Hall, LLC v. Commissioner, 694 F.3d 425 (3d Cir. 2012),

the Third Circuit applied Culbertson to determine if a partner was a bona fide

partner. The facts in the case revealed the purported partner had neither a

meaningful downside risk nor a meaningful upside potential; therefore, the court

found that investor was not a bona fide partner.

(5) Audit Tip: In determining whether there is a bona fide partner or partnership,

Examiners should consider whether:

• The property partner (i.e., the partner contributing land to the partnership)

sought to sell the land, but instead contributed the land to the partnership

and only remained a partner for a short period of time after the

contribution.

• The property partnership conducted little to no business.

• There is a partner who contributed cash to the property partnership for a

nominal interest and who did not participate in the partnership or report

gain or income from the partnership (see e.g., Andantech LLC v.

Commissioner, 331 F.3d 972, 980 (D.C. Cir. 2003) The court found that a

participants participation in a partnership “was so minimal…that his

presence was required only to make possible the formation of a

partnership, itself formed only to create a benefit from the method of

taxing that entity. In addition, there was almost no evidence that any of the

partners had any intention of taking advantage of the potential business…

except their existence.”).

• Investors ability to transfer interests in the investment partnership are

limited.

• Investment partnership has a right to buy back the investors interests on a

specified date based on a fair market value that is largely determined by

the Manager. The fair market value may or may not be subject to a cap.

Alternatively, does the promoter have the ability to purchase back the

interests due to options, etc., that would result in the investors leaving the

partnership.

• Investors were to receive a fixed, preferred, rate of return that was

protected by a tax loss recapture insurance policy. The partnership

agreement may provide that this purported rate of return be calculated

based on the tax benefits received from the charitable contribution

deduction in the partnership agreement.

• If there were pre-existing income streams related to the property (e.g.,

lease of hunting rights) and neither the investors nor the property

partnership reported the income properly.

• Whether the partnership’s contribution of the easement was pre-arranged

(i.e., the purported option to develop the property was unlikely to occur,

unable to occur, economically or physically improbable, etc.).

(6) Audit Tip: If a transaction contains tiers of partnerships, consideration must be

given as to whether exams into the partnerships into which the investors made

contributions or purchased interests should also be opened in addition to the

partnership that holds land and makes a charitable contribution. Examiners

should consider whether some of these factors are present at both the lower-

tier and upper-tier partnership levels.

B.2. Substance Over Form

(1) Transactions that literally comply with the language of the IRC but produce

results other than what the IRC and regulations intend are not given effect. In

Gregory v. Helvering, 293 U.S. 465, 470 (1935), the Supreme Court found that

even though the transaction complied with the Code, “the transaction upon its

face lies outside the plain intent of the statute.” Therefore, the Court found that

to give the transaction effect would be to “exalt artifice above reality and to

deprive the statutory provision in question of all serious purpose.” Id. In

Knetsch v. United States, 364 U.S. 361 (1960), the Supreme Court again found

a transaction abusive, even though the transaction met every literal requirement

of the Code. The Court stated that “there was nothing of substance to be

realized by Knetsch from this transaction beyond a tax deduction.” Id. at 366.

See also Allen v. Commissioner, 92 T.C. 1, 8, 11 (1989) (explaining that “the

transaction in its entirety must be examined in a realistic economic sense to

determine the tax consequences” and that transactions where tax savings are

more than twice the cash investment are subject to scrutiny).

(2) Audit Tip: In determining whether the substance over form doctrine applies,

Examiners should consider whether:

• The property partner (i.e., the partner contributing land to the partnership)

sought to sell the land.

• The property partner, shortly after the contribution of the land to the

property partnership, sold its entire interest (or substantial portion of its

interest) to investment partnership (see e.g., Margolis v. Commissioner,

337 F.2d 1001 (9th Cir. 1964) (Taxpayer transferred land into a dormant

corporation and twenty days later sold all the stock in the corporation and

reported his gain on the transaction as long-term capital gain from the sale

of stock. The Ninth Circuit ruled that it was in fact a sale of land with

taxpayer’s interest held for sale in the ordinary course of his business.). If

the property partner retains an interest in the partnership, additional facts

must be considered (e.g., whether the partner held him/herself out to be a

partner, whether the partner reported any income from the land, whether

the partner received a Schedule K-1, etc.). Examiners should consult with

Counsel in these types of cases.

• The investment partnership’s intent was really to purchase the land (e.g.,

promotion materials predate the purchase of the interest in the property

partnership interest and/or the investment partnership was already in

discussion with a charitable organization at or before the purchase of the

property partnership interest).

• Whether the partnership’s contribution of the easement was pre-arranged

(i.e., the purported option to develop the property was unlikely to occur,

unable to occur, economically or physically improbable, etc.).

B.3. Step Transaction Doctrine

(1) Under the step transaction doctrine, a series of formally separate steps may be

collapsed and treated as a single transaction if the steps are in substance

interrelated and focused toward a particular result. Courts have applied three

alternative tests in deciding whether the step transaction doctrine should be

invoked in a particular situation: the binding commitment test, the end result

test, and the interdependence test.

(2) The binding commitment test is the most limited and rigorous of the three tests.

It looks to whether, at the time the first step was entered into, there was a

binding commitment to undertake the later transactions. Commissioner v.

Gordon, 391 U.S. 83, 96 (1968).

(3) The end result test analyzes whether the formally separate steps merely

constitute prearranged parts of a single transaction intended from the outset to

reach a specific end result. This test relies on the parties’ intent at the time the

transaction is structured. The intent the courts focus on is not whether the

taxpayers intended to avoid taxes, but whether the parties intended from the

outset “to reach a particular result by structuring a series of transactions in a

certain way.” True v. United States, 190 F.3d 1165, 1175 (10th Cir. 1999).

(4) Finally, the interdependence test looks to whether the steps are so

interdependent that the legal relations created by one step would have been

fruitless without a completion of the later series of steps. See Penrod v.

Commissioner, 88 T.C. 1415, 1430 (1987). Steps are generally accorded

independent significance if, standing alone, they were undertaken for valid and

independent economic or business reasons. Security Indus. Ins. Co. v. United

States, 702 F.2d 1234, 1246 -1247 (5th Cir. 1983). See also Greene v. United

States, 13 F.3d 577, 584 (2d Cir. 1994).

(5) The existence of economic substance or a valid non-tax business purpose in a

given transaction does not preclude the application of the step transaction

doctrine. Events such as the actual payment of money, legal transfer of

property, adjustment of company books, and execution of a contract all produce

economic effects and accompany almost any business dealing. Thus, the

courts do not rely on the occurrence of these events alone to determine

whether the step transaction doctrine applies. “Likewise, a taxpayer may

proffer some non-tax business purpose for engaging in a series of transactional

steps to accomplish a result he could have achieved by more direct means, but

that business purpose by itself does not preclude application of the step

transaction doctrine.” True v. United States, 190 F.3d at 1177. See also

Associated Wholesale Grocers v. United States, 927 F.2d 1517, 1527 (10th Cir.

1991); Long Term Capital Holdings, et al. v. United States, 330 F. Supp. 2d

122, 193 (D. Conn. 2004), aff’d without published opinion 150 Fed. Appx. 40

(2d Cir. 2005).

(6) Audit Tip: In determining whether the step transaction doctrine applies,

Examiners should consider whether:

• The property partner (i.e., the partner contributing land to the partnership)

had no business purpose for contributing the land to a partnership.

• The property partner sought to sell the land.

• The property partner, shortly after the contribution of the land to the

property partnership, sold its entire interest (or substantial portion of its

interest) to investment partnership. If the property partner retains an

interest in the partnership, additional facts must be considered (e.g.,

whether the partner held him/herself out to be a partner, whether the

partner reported any income from the land, whether the partner received a

Schedule K-1, etc.) Examiners should consult with Counsel in these types

of cases.

• The investment partnership was already in discussion with a charitable

organization at or before the purchase of the property partnership interest.

• Whether the partnership’s contribution of the easement was pre-arranged

(i.e., the purported option to develop the property was unlikely to occur,

unable to occur, economically or physically improbable, etc.).

C. Codified Economic Substance Doctrine

(1) Section 7701(o)(1) provides that, in the case of any transaction to which the

economic substance doctrine is relevant, such transaction shall be treated as

having economic substance only if (A) the transaction changes in a meaningful

way (apart from federal income tax effects) the taxpayer’s economic position,

and (B) the taxpayer has a substantial purpose (apart from federal income tax

effects) for entering into such transaction.

(2) In cases where a taxpayer relies on profit potential, the potential for profit of a

transaction shall be taken into account in determining whether the requirements

of IRC § 7701(o)(1)(A) and (B) are met with respect to the transaction only if the

present value of the reasonably expected pre-tax profit from the transaction is

substantial in relation to the present value of the expected net tax benefits that

would be allowed if the transaction were respected. Fees and other transaction

expenses shall be taken into account as expenses in determining pre-tax profit.

IRC § 7701(o)(2)(A) and (B).

(3) For additional information about the codified economic substance doctrine, see

Notice 2010-62; Notice 2014-58. Examiners considering application of the

codified economic substance doctrine are encouraged to coordinate with

Counsel.

(4) Audit Tip: Examiners should consult with local Counsel if the codified

economic substance doctrine appears applicable to the facts of the case.

CCDM 31.1.1-1 requires review by an Associate Chief Counsel in novel cases

(i.e., when the doctrine has not previously been applied to that type of

transaction). See Chief Counsel Notice 2012-008 and Chief Counsel Notice

2016-009. See also IRM 4.8.9.9.2.1(1)(p). LB&I Examiners must also secure

approvals required in IRM Exhibit 4.46.4-4.

(5) Audit Tip: Examiners should also be alert to other appropriate arguments and

consult with Counsel as necessary.

(6) Audit Tip: In determining whether a transaction has economic substance,

Examiners should consider:

• Whether the transaction is promoted, pre-packaged (e.g., a promoter

provides potential clients with promotional materials, regularly markets the

product, and facilitates the transaction year to year). This could also

include the use of almost identical, template documents used to effectuate

the transaction.

• Whether the transaction includes unnecessary steps (e.g., contribution of

the land to the property partnership by the property partner when the facts

demonstrate that the property partner’s goal was to sell the land).

• Transaction has no meaningful potential for profit apart from tax benefits

(e.g., property partnership did not engage in any business).

• Investment partnership has a right to buy back the investors interests on a

specified date based on a fair market value that is largely determined by

the Manager. The fair market value may or may not be subject to a cap.

Alternatively, does the promoter have the ability to purchase back the

interests due to options, etc., that would result in the investors leaving the

partnership.

• Transaction has no significant risk of loss (e.g., presence of certain audit

insurance that also covers original contribution).

• Transaction is outside the investor’s ordinary business operations.

• Whether the partnership’s contribution of the easement was pre-arranged

(i.e., the purported option to develop the property was unlikely to occur,

unable to occur, economically or physically improbable, etc.).

XI. Preplanning the Examination

A. Overview

(1) IRM 4.10.2, Pre-contact Responsibilities, requires Examiners to perform a pre-

contact analysis, including a review of the income tax return, any attachments

to the return, and internal and external sources of information.

B. Review of Return

(1) Only itemizers may claim a charitable contribution deduction. A conservation

easement deduction is reported on Schedule A, Itemized Deductions (PDF),

Line 12, “Other than by cash or check.” Any carryover of charitable

contributions originating from earlier tax years appears on the “Carryover from

Prior Year,” Line 13.

(2) Audit Tip: Examiners should determine, at the beginning of the examination,

the tax year of the contribution. If the amount claimed on the return is a

carryover from an earlier tax year, the original return, including all attachments,

must be secured. This is important 1) to verify compliance with substantiation

requirements, and 2) to ensure that all open tax years are included in the

examination.

B.1. Form 8283 – Appraisal Summary

(1) Form 8283, Noncash Charitable Contributions (PDF), referred to in DEFRA §

155 and Treas. Reg. § 1.170A-13(c)(4) as the “appraisal summary,” is the

starting point to gather information about the conservation easement deduction.

(2) Form 8283 must be completed and attached to the return for all noncash

charitable contribution deductions greater than $500. IRC § 170(f)(11)(B). For

noncash charitable contribution deductions in excess of $5,000, the taxpayer

must complete Section B of the Form 8283. Treas. Reg. § 1.170A-13(c)(2);

Treas. Reg. § 1.170A-16(d)(1)(iii). For contributions after July 30, 2018, these

rules also apply to carryover years. Treas. Reg. § 1.170A-16(f)(3).

(3) If the donation originates from a flow-through entity (such as S corporation or

partnership), the partner or shareholder must include a copy of the entity’s Form

8283 with the return on which the deduction is first claimed. Treas. Reg. §

1.170A-13(c)(4)(iv)(G); Treas. Reg. § 1.170A-16(f)(4).

(4) Close inspection of Form 8283 may indicate an improper deduction or

overvalued conservation easement. Look for:

• Incomplete or missing information, such as an inadequate description of

the property or missing acquisition date or basis in the property.

• Missing appraiser or donee signatures.

• Inconsistent dates when compared to the appraisal or other documents.

• A short time period between the acquisition of the property and the

donation date.

• High valuation of the easement as compared to the basis of the underlying

property, in light of holding period and the market conditions for the

relevant market.

• High valuation of the easement in light of the total value of the land.

• Use of an appraiser who does not generally perform appraisals where the

easement is located.

(5) Audit Tip: Completion of the appraisal summary (Form 8283) does not satisfy

the CWA requirement in IRC § 170(f)(8) and Treas. Reg. § 1.170A-13(f). A

CWA is required for any contribution of $250 or more. Failure to comply with the

CWA requirement will result in disallowance of the charitable contribution

deduction. See Chapter 2 for a discussion of what information must be included

in the CWA and when it must be obtained by the taxpayer.

B.2. Signature Requirements

(1) Form 8283, Section B, Part II, Taxpayer (Donor) Statement, is not relevant

unless the appraised value for an item is $500 or less. It is typically left blank for

conservation easement donations.

(2) Form 8283, Section B, Part III, Declaration of Appraiser, must be signed and

dated by the qualified appraiser for donations in excess of $5,000. Treas. Reg.

§ 1.170A-13(c)(4)(i)(C); Treas. Reg. § 170A-16(d)(1)(iii).

(3) Form 8283, Section B, Part IV, Donee Acknowledgment, must be signed by an

official authorized to sign the tax returns of the donee organization or a person

specifically designated to sign Form 8283. Treas. Reg. § 1.170A-13(c)(4)(i)(B);

Treas. Reg. § 170A-16(d)(5). Examiners should look for incomplete or

improperly completed donee acknowledgments and determine if there are any

discrepancies with other available information.

B.3. Return Attachments

(1) A qualified appraisal, prepared and signed by a qualified appraiser, is required

to be attached to the return if the deduction claimed (1) exceeds $500,000, or

(2) regardless of the dollar amount claimed, if the deduction relates to a

contribution of a façade easement on a building or structure in a registered

historic district. IRC §§ 170(f)(11)(D) and 170(h)(4)(B)(iii)(I).

(2) Note: The special rule for façade easements does not apply to properties listed

on the National Register.

(3) See Chapter 7 for guidance on qualified appraisals.

(4) If a qualified appraisal was required to be attached, but was not attached to the

original return claiming the conservation easement, the charitable contribution

deduction will be disallowed for failing to meet the IRC § 170(f)(11)

requirements. Section 170(f)(11)(A)(ii)(II), however, provides for a limited

exception to this rule. The charitable contribution deduction may still be allowed

if it is shown that the failure to meet such requirements is due to reasonable

cause and not willful neglect.

(5) If the Examiner does not have the original return or has been assigned a

carryover tax year, the original return must be ordered from the Service Center

using SC 45 to verify compliance with the requirement to attach a qualified

appraisal.

(6) If a return is filed electronically, any attachments, including the appraisal, must

be filed with the return. The attachments can be scanned and attached

electronically to the e-file return as a PDF file. If documents are not submitted

electronically, they must be mailed with the Form 8453, U.S. Individual Income

Tax Transmittal (PDF) for an IRS e-file Return. The Examiner will need to

request the original Form 8453 with attachments to determine if the taxpayer

has met the substantiation requirements.

(7) IDRS command code TRDBV will show whether the Form 8453 was filed and

the related Document Locator Number (DLN). The Form 8453 and any

attachments can be secured using command code ESTAB with the identified

DLN. If the TRDBV does not show the filing of a Form 8453, the IDRS print

should be included in the examiner’s work papers to demonstrate that there is

no record of filing the required return attachments.

(8) In some cases, taxpayers attach baseline studies, correspondence or other

documents related to the easement donation. This information should be

reviewed for unusual items or inconsistencies and ultimately compared to actual

source documents.

B.4. Other Tax Issues

(1) The Examiner is responsible for determining the scope of the audit and should

be alert to other potential tax issues on the tax return, which may or may not be

related to the conservation easement deduction.

(2) Some examples of potential issues related to the conservation easement

donation are cash donations to the easement donee, income generated from

the sale of state tax credits and recapture of rehabilitation tax credits.

(3) IRM 4.10.4.3, Minimum Requirements for Examination of Income, requires

Examiners to consider gross income during the examination of all income tax

returns regardless of the type of return filed by the taxpayer. All deviations from

minimum probes need to be documented and approved by the group manager.

B.5. TEFRA Considerations

(1) An individual’s income tax return may be selected for examination based on a

large noncash contribution or carryover. Examiners must determine as quickly

as possible whether the donation originated from a partnership or limited liability

company (LLC) treated as a partnership for federal income tax purposes. This

information may not be readily available by inspection of the return particularly

for carryovers.

(2) The determination of the tax treatment of partnership items is made at the

partnership level. If the easement donation was made by a partnership or LLC

treated as a partnership, which is subject to TEFRA, the charitable contribution

is a partnership item. An adjustment to the charitable contribution deduction

cannot be proposed without conducting an examination of the originating donor

entity (i.e., Form 1065 entity). If the entity is a TEFRA entity, the unified audit

procedures for partnership proceedings must be followed. These procedures

may present additional administrative complexities due to statute concerns,

involvement of multiple tiers of ownership, and the location of the key case

entity and partnership investors.

(3) It is possible that the minimum assessment period for partnership items per IRC

§ 6229 may have expired. While the government can best protect its interest by

extending the IRC § 6229 period of assessment before it expires and

conducting a partnership proceeding that includes all the partners, the

government is not precluded from conducting a partnership proceeding if the

IRC § 6501 assessment period for any of the partners is still open.

(4) Examiners should consult with their local Technical Services Passthrough

Coordinator for guidance on TEFRA examinations. A list of current coordinators

can be found on the IRS Virtual Library.

(5) TEFRA was repealed for tax years beginning on or after January 1, 2018.

B.6. BBA Considerations (Taxable Years Beginning on or After

January 1, 2018)

(1) The Bipartisan Budget Act replaced the auditing procedures for partnerships

under TEFRA with the centralized partnership audit regime, referred to as BBA.

Partnerships that file returns for tax years starting January 2018 must follow

rules under the BBA. Refer to the BBA resources on the IRS Virtual Library and

consult with the Technical Services Passthrough Coordinator.

C. Internal Sources of Information

(1) Information available from internal sources may be useful in preplanning for the

examination, including the Conservation Easement issue Web page on the IRS

Virtual Library, IDRS and contacts with program analysts and the Office of

Professional Responsibility.

C.1. IRS Intranet

(1) Training materials, job aids, recent court decisions and other reference

materials on conservation easements can be found on IRS Virtual Library, Form

1040 Knowledge Base. Examiners should refer to the Virtual Library page for

updated information.

C.2. Program Analysts

(1) Examiners are encouraged to contact program analysts (PAs) assigned to this

issue to discuss case development as early as possible in the examination.

Contact information can be found on the Virtual Library page. PAs can explain

the statutory requirements, help the examiner analyze the documents, and write

reports.

C.3. Integrated Data Retrieval System – IDRS

(1) Examiners should review all available IDRS information to identify any

additional donations and carryovers. A review of the taxpayer's filing history

over several years can provide insight.

(2) Reviewing the taxpayer's Information Returns Processing (IRP) documents and

securing a yK1 link analysis may reveal related flow-through entities associated

with the easement contribution.

C.4. Façade Filing Fee Verification

(1) Donors must pay a $500 filing fee to the U.S. Treasury for donations of

easements on buildings in registered historic districts if they claim a deduction

of more than $10,000. IRC § 170(f)(13)(A)-(B). The fee is to be used to enforce

the provisions of IRC § 170(h). IRC § 170(f)(13)(C).

(2) No deduction is allowed for façade easement deductions over $10,000 unless

the taxpayer includes the fee with the return. IRC § 170(f)(13)(A). Payment is

transmitted to the IRS using Form 8283-V, Payment Voucher for Filing Fee

under Section 170(f)(13) (PDF).

(3) IDRS reports IMFOLT (individual returns) and BMFOLT (corporate/partnership

returns) will show a TC (Transaction Code) 971 with AC (Action Code) 670 to

identify the payment of the filing fee. Examiners can also contact a program

analyst for confirmation of fee payment.

C.5. Tax Exempt Organization Search

(1) Tax Exempt Organization Search (previously Publication 78) should be

consulted to verify whether the organization has tax-exempt status. The online

searchable version can be found IRS.gov. Click on “Charities and Nonprofits,”

then “Search for Charities” to search for qualified organizations by name and

city.

(2) Examiners should be aware that a listing on the Tax Exempt Organization

Search is not always necessary in order to qualify to receive tax deductible

contributions.

(3) Some entities eligible to receive tax-deductible charitable contributions may not

be listed in Tax Exempt Organization Search, such as churches and certain

affiliated organizations, group exemption subordinate organizations, and

governmental units (including Indian tribal governments).

(4) Only qualified organizations that meet the requirements of IRC § 170(h)(3) and

Treas. Reg. § 1.170A-14(c)(1) are eligible to receive a deductible conservation

easement contribution. The donee organization must have the commitment to

protect the conservation purpose and have the resources to enforce the

conservation restrictions.

(5) See Chapter 4 for detailed discussion on qualified organization requirements.

C.6. Office of Professional Responsibility

(1) Examiners can search the Office of Professional Responsibility intranet Web

page for any previous disciplinary actions against the appraiser or the return

preparer. The presence of prior sanctions suggests a need for extra scrutiny by

the examiner.

D. External Sources of Information

(1) Examination of a charitable contribution deduction for a conservation easement

is fact intensive, requiring examiners to gather and analyze information to

determine whether the charitable contribution deduction is allowable. Review of

documents from external sources such as the Internet, public records, and the

National Park Service in advance of taxpayer contact can help streamline the

examination process.

D.1. Internet Research

(1) The Internet (using Google or other similar search engine) can be an excellent

source of background information relevant to the taxpayer, donee organization,

and appraiser.

D.2. Taxpayer

(1) Examiners should search the Internet for information on the taxpayer's

business, personal history, reputation in the community, and involvement with

conservation issues and organizations.

(2) A particular easement donation may have received local newspaper coverage

at the time of the donation. News articles may provide evidence regarding

charitable intent, quid pro quo, transactions between related parties, the donor's

basis, or whether the property constitutes inventory in the hands of the

taxpayer.

D.3. Donee Organization

(1) The Tax Exempt Organization Search on IRS.gov and Guidestar.org provide

tax returns of charitable organizations and other important information relating

to the organizations. Examiners will need to register online to access the

Guidestar information. Returns provided on Guidestar, however, generally do

not include schedules of contributors. The Economic Research Institute also

can be used to research charitable organizations.

(2) An Internet search of the donee organization may provide relevant information

on the organization. Most organizations have their own websites, which provide

a wealth of information, especially regarding their charitable purpose and goals.

This research may reveal relationships between the donor and donee

organization. Transactions between related parties by either position or

business activity must be scrutinized closely.

(3) Audit Tip: A "self-serving" donee organization organized solely for the purpose

of accepting one easement may lack charitable purpose or be engaged in self-

dealing. If there is a question or concern as to the operations of the

organization, examiners should submit a referral to Tax Exempt and

Governmental Entities (TEGE) through the Specialist Referral System (SRS).

D.4. Appraiser

(1) Examiners can obtain information about the appraiser and appraisal firm, such

as their professional credentials, expertise with respect to conservation

easements, and past business dealings with the donor or donee organization.

This information is helpful in determining if the appraiser is a "qualified

appraiser" and may provide some insight into any business history with the

taxpayer or donee organization.

(2) License information regarding jurisdictions, history and disciplinary actions can

be found on The Appraisal Subcommittee of the Federal Financial Institutions

Examination Council webpage. You can search for information on a specific

appraiser by selecting the “find an appraiser” button or utilize this link: Find an

Appraiser. Some states also provide appraisal licensing information online.

Examiners or IRS appraisers can contact the various state boards by telephone

to determine if there are any past or pending disciplinary actions against the

appraiser. The contact information for each state’s appraiser regulatory

program can be found on the Appraisal Subcommittee Web page at this link:

State Appraisal Regulatory Information Web page.

(3) Audit Tip: An appraisal summary or a qualified appraisal must include the

name, address, and identifying number of the qualified appraiser that signs the

appraisal summary or qualified appraisal. Treas. Reg. §§ 1.170A-13(c)(4)(ii)(I);

1.170A-13(c)(3)(ii)(E); 1.170A-16(d)(3)(iii) and 1.170A-17(a)(3)(iv)(A). For a

qualified appraisal, the appraiser's professional qualifications must be included.

Information found on the Internet should be used to verify the accuracy of the

information provided with the return.

D.5. Public Records

(1) Examiners must secure, directly from the appropriate recordation office, the

conservation easement deed, any subordination agreements, and other

pertinent documents that are recorded with the deed. If online research is not

available, the Examiner or the IRS appraiser may need to travel to the

recordation office to obtain this information. Use of research services such as

Accurint alone is not sufficient.

(2) Audit Tip: Until the easement is recorded, the easement is not enforceable in

perpetuity. Treas. Reg. § 1.170A-14(g)(1). In some cases, taxpayers claim the

donation in the wrong tax year. See Chapter 2 for a detailed discussion on

statutory requirements.

(3) Examiners should determine if there were any preexisting restrictions on the

property imposed by local or state ordinances, zoning, or the rules of the

historic districts. There will be no loss in value as a result of the granting of the

easement if the easement does not impose new restrictions on the property.

IRS appraisers have significant experience with this type of research and will

generally address this as part of their fieldwork.

(4) In addition to obtaining copies of the recorded instruments, examiners should

research the property's ownership, sales, and mortgage history. Be alert to

recent sales or mortgages on the property that may provide insight into the

easement value. Insurance records may also be informative.

(5) The IRS appraiser will need to identify the property owner of the encumbered

property. Identify any contiguous properties, and any other properties owned by

the taxpayer or a related party, in order to properly apply the

contiguous/enhancement rules in valuing the property and determining the

proper amount of the deduction. Examiners should verify ownership on the date

of the contribution through interviews and review of public records (in the county

where the property is located).

(6) Many conservation easements originate from flow-through entities (i.e., S

corporations and partnerships). The allocation of contributions to the

shareholders or partners is reported on Schedule K-1, Partners Share of

Income, Deductions, Credits, etc. Examiners should verify the percentage of

ownership and determine if the contribution amount was properly allocated.

D.6. National Park Service

(1) For donations of easements on certified historic structures, examiners must

verify that the property is a certified historic structure and that the status was

obtained either at the time the transfer was made or at the due date (including

extensions) for filing the donor’s return for the taxable year in which the

contribution was made. IRC § 170(h)(4)(C) and Treas. Reg. § 1.170A-

14(d)(5)(iii). The taxpayer will generally provide this information in response to

the initial information document request (IDR).

(2) If a building is individually listed on The National Register of Historic Places, no

certification is required from the NPS Historic Preservation Division. If a building

is located in a registered historic district, it must be certified by the Secretary of

the Interior to the Secretary of Treasury as being of historic significance to the

district. Treas. Reg. § 1.170A-14(d)(5)(iii)(B).

(3) Review the returns for the relevant period to see if the Rehabilitation Tax Credit

was claimed. If the credit was claimed, consult the program analysts, Counsel,

and the IRS Virtual Library.

(4) Audit Tip: To obtain certification from NPS, the taxpayer would have submitted

Form 10-168 (PDF) to the Historic Preservation Division for certification that the

building contributes to the district. Examiners should obtain a copy of the

certification and any related documents from the taxpayer or NPS.

E. Interviews

(1) As in all income tax examinations, the interview is an important component of a

quality examination. The interview is a crucial step in securing the necessary

background information to evaluate the claimed deduction. See IRM 4.10.3.3,

Interviews: Authority and Purpose.

(2) The best time for interviewing the taxpayer is usually after conducting the

research discussed above, reviewing the easement documents and assignment

of an IRS appraiser to the case (if applicable). If possible, the Examiner and

IRS appraiser should jointly interview the taxpayer.

(3) Examiners will usually need to interview the taxpayer. The representative

cannot substitute for the taxpayer. Do not provide written questions to the

representative to ask the taxpayer. In some instances, it may be necessary to

summons the taxpayer.

(4) Audit Tip: Develop a timeline of events surrounding the donation and a

diagram depicting the transaction.

F. Information Document Requests

(1) A sample Information Document Request (IDR) can be found on the IRS Virtual

Library. The IDR should be modified to meet the specific needs of the

examination, requesting only relevant information. Documents from the

taxpayer are necessary not only to verify the easement donation, but also to

collect initial documentation of the FMV of the easement. See Chapter 2 for a

detailed discussion of what documents are required to substantiate a

conservation easement contribution.

(2) Securing documents is only the beginning of the examination of a conservation

easement deduction. A final determination cannot be made without careful

review of the documents and background information, coordination with LB&I

Engineering on the valuation (as appropriate), and in many cases, third party

contacts.

G. Valuation Expert Involvement

(1) Valuation of the conservation easement is an important part of a conservation

easement deduction examination. A referral to LB&I Engineering for an IRS

appraiser or an outside expert will generally be required. Examiners and the

IRS appraiser need to work together to avoid duplication of effort, share

information, and rely on each person's specific job skills to fully develop the

case.

(2) Note: The Examiner has primary responsibility for the non-valuation aspects of

the issue and must not suspend or delay work on the income tax case pending

receipt of LB&I Engineering’s valuation report.

G.1. Referral to LB&I Engineering

(1) A referral is made through the Specialist Referral System (SRS). Referrals to

LB&I Engineering should be considered in all conservation easement cases.

The referral must be made early in the examination process to allow sufficient

time for LB&I Engineering input. The Examiner should inform the taxpayers and

their Representative of an IRS appraiser’s participation and expected

examination timeframes.

(2) Examiners should promptly provide the IRS appraiser with:

• A copy of the return or pertinent part of the return

• Form 8283, including attachments

• A copy of the appraisal (if attached or once received)

• Other pertinent information attached to the return

• A recorded copy of easement deed including any attachments and

correspondence

• Baseline study of the property (if attached or once received)

• Contemporaneous Written Acknowledgment (IRC § 170(f)(8))

G.2. Referral Outcomes

(1) LB&I Engineering may accept or decline the referral, depending on the

deduction amount, available staffing resources, and other factors. In lieu of an

“appraisal review,” the IRS appraiser may provide informal feedback to the

Examiner as to the reasonableness and adequacy of the taxpayer’s appraisal.

(2) If the formal referral is accepted, a meeting should be scheduled with the

assigned IRS appraiser to discuss duties and timeframes for completion. This

meeting should be documented in memo form. The IRS appraiser and

Examiner should coordinate their actions throughout the examination.

(3) Generally, the scope of the IRS appraiser’s work is limited to valuation and

qualified appraisal issues, and the Examiner will handle the legal issues under

IRC § 170. However, there is some overlap of responsibilities. For example, the

inspection of the property and interview of the taxpayer are important for both

the IRS appraiser and the Examiner and should (to the extent possible) be

conducted jointly.

(4) If funds are available, LB&I Engineering may hire an outside fee appraiser.

(5) Examiners can seek assistance from program analysts to discuss alternatives

and assistance in resolution of any issues with LB&I Engineering.

G.3. LB&I Engineering Products

(1) The IRS appraiser will generally prepare an “appraisal review with an opinion of

value,” which is a detailed review of the taxpayer’s appraisal and includes an

estimate of the FMV of the conservation easement. In other cases, the IRS

appraiser will prepare an appraisal.

(2) In some cases, the IRS appraiser may provide an “appraisal review,” which is

simply a critique of completeness and reliability of the taxpayer’s appraisal

without determining the FMV of the conservation easement. Another option is

an informal consultation, where the IRS appraiser gives informal feedback on

the taxpayer’s appraisal.

G.4. Outside Experts

(1) The IRS hires outside valuation experts (“outside fee appraisers”) if funds are

available. Requests for use of an outside fee appraiser are made using the SRS

referral process.

(2) An outside fee appraiser must be approved through the IRS procurement

process. LB&I Engineering is responsible for working with the Contracting

Officer’s Representative (COR) to identify experts, solicit bids, arrange for

background investigations, and execute the contract.

(3) The outside fee appraiser reports only address valuation of the conservation

easement. Examiners will need to address the legal issues under IRC § 170.

H. Consultation with Counsel

(1) Because examination of a conservation easement deduction involves review of

a number of legal documents, Examiners will need to consult with Counsel.

(2) Counsel should be engaged early in the examination to assist with review of the

legal documents for areas of IRC § 170 noncompliance, such as conservation

purpose, inconsistent use of the property, perpetuity, subordination and

allocation of proceeds. It is imperative that examiners consult with Counsel in

the case of raising any of the following: bona fide partner or partnership,

partnership anti-abuse rules under Treas. Reg. § 1.701-2, judicial doctrines

(e.g., substance over form or step transaction doctrine) or the codified

economic substance doctrine under IRC § 7701(o). See Chapter 10 for

additional information. Examiners will need to be alert to court decisions that

could affect their examination. Recently decided cases relevant to the

conservation easement issue can be found on the IRS Virtual Library.

(3) Audit Tip: Certain arguments, including those made under Treas. Reg. §

1.701-2 and the codified economic substance doctrine, require Associate Office

review. CCDM 31.1.1-1.

I. Coordination with TEGE

(1) The Examiner should determine whether the donee organization is or has been

under examination by TEGE. If so, the Examiner should contact the Exempt

Organization (EO) Examiner assigned to the case to obtain pertinent

information and to coordinate examination activities, as appropriate.

(2) The EO Examiner can assist in securing records from the donee organization

and provide detailed information on the organization. Coordination with TEGE

avoids duplication of effort and unnecessary contacts with the donee

organization.

(3) During the examination, the Examiner may need to consider a referral to TEGE

for examination of the donee organization. Some factors that may warrant a

referral include:

• False or misleading statements by the donee organization regarding the

tax requirements or valuation of contributions of conservation easements.

• Evidence of undue influence on the taxpayer’s appraiser by the donee

organization.

• Presence of related party transactions between the donor and the donee

organization.

• Lack of any charitable activity by the donee organization, or activities

contrary to its stated charitable purpose.

• Use of a related "for-profit" business to process easement donations.

• Information indicating that the donor’s conservation contribution lacked a

“conservation purpose” for purposes of IRC § 170(h) could also have a

bearing on the donee organization’s exempt status, particularly if it has

accepted other conservation contributions that lack a conservation

purpose.

(4) Examiners can make referrals to TEGE using the SRS referral process or

submit a request for consultation.

XII. Conducting the Examination

A. Overview

(1) Conservation easement examinations are very challenging cases requiring

substantial factual development and review of legal documents. A team

approach (examiner working with LB&I Engineering, Counsel, and program

analysts) is the most effective way to conduct these examinations.

(2) Examiners will need to look beyond information provided on the tax return and

analyze the substance of the transaction rather than the mere form of the

transaction. Examiners must employ investigative skills to identify any

omissions or discrepancies of material facts.

(3) During an examination, the examiner will obtain documentation, conduct

interviews of the taxpayer and third parties, and perhaps visit the property

encumbered by the easement. The examiner must evaluate all of this

information to determine if the taxpayer meets the:

• General statutory requirements for all charitable contributions per IRC §

170.

• Specific statutory requirements for qualified conservation contributions per

IRC § 170(h) and Treas. Reg. § 1.170A-14, including compliance with one

or more of the conservation purposes listed in IRC § 170(h)(4)(A).

• Contemporaneous written acknowledgment requirement under IRC §

170(f)(8).

• Substantiation requirements and, specifically, the qualified appraisal and

appraiser requirements in IRC § 170(f)(11), Notice 2006-96, and Treas.

Reg. § 1.170A-13. The substantiation requirements of Treas. Reg. §

1.170A-16 are applicable to contributions made after July 30, 2018.

• Statutory (DEFRA) and regulatory requirements for Form 8283. Treas.

Reg. § 1.170A- 13(c)(4).

• Baseline requirements. Treas. Reg. § 1.170A-14(g)(5).

B. Interviews

(1) As with all examinations, interviewing the taxpayer who donated the

conservation easement is an important step in the development of facts. The

interview provides important information regarding the history of the property

and the taxpayer’s:

• Intent in making the easement donation.

• Understanding of the transaction.

• Efforts to comply with the statutory and regulatory requirements.

• Due diligence in obtaining a correct appraisal.

(2) If possible, the examiner and IRS appraiser should conduct a joint interview.

Review of the conservation easement deed, baseline study and the taxpayer’s

appraisal, prior to the interview, will help the Examiner and IRS appraiser carry

out a focused interview. In some cases, more than one interview may be

required to gather all relevant facts.

(3) Audit Tip: Some representatives may request that questions be submitted in

writing prior to the interview or in lieu of an interview. Written questions and

answers are not an appropriate substitute for an in-person interview of the

taxpayer. If the taxpayer or representative will not consent to an interview, then

the examiner should either issue a summons for interview or develop the case

based on third party contacts.

(4) Depending on the case, interviews of third parties such as representatives of

the donee organization, the appraiser, the baseline study author, or other

conservation experts may be needed. See discussion below on third party

contacts.

C. Property Inspection

(1) The examiner’s inspection of the property provides valuable information to

assist in determining whether the conservation easement meets one of the four

IRC § 170(h)(4) conservation purposes.

(2) If possible, the examiner should inspect the entire property. Site visitation

should be coordinated with the IRS appraiser, whenever possible. If the

examiner does not inspect the property, the examiner should contact the IRS

appraiser to discuss the appraiser’s observations and review pictures obtained

during site inspection. Examiners can also research property on Google Maps,

Zillow, or Real Quest.

(3) If it is not practical to inspect the entire property, the examiner should view

areas that are relevant to the taxpayer’s claimed conservation purpose and

document the observations.

(4) Both the interior and exterior of historic properties should be inspected. The IRS

appraiser generally will need to inspect the interior for purposes of valuing the

property.

(5) Audit Tip: Depending on the location of the property and time of year, casual

attire and boots may be necessary. The Examiner may want to consider

bringing a copy of a map of the property from the baseline report or the

appraisal as a reference guide during the visit.

(6) During the inspection, the examiner should note:

• The location of the significant or protected habitat or species

• Physical and visual access by the public to the easement property

• The nature of the surrounding properties and intensity of development in

the area

• The location of buildings and other structures

• Any post-easement building or land improvements impacting the stated

conservation purposes

• Any inconsistent use of the property

(7) The IRS appraiser will be interested in factors affecting the highest and best

use of the property before and after the granting of the conservation easement,

such as zoning or other restrictions on the property, topography or floodplains.

(8) Ask the taxpayer or representative to point out the outdoor recreation areas,

animals, plants, scenic views, or historic land and structures that contribute to

the conservation purpose. If the examiner observes an absence of conservation

attributes, lack of access, de minimis public benefit, or use inconsistent with a

conservation purpose, the examiner should discuss with the taxpayer or

representative to clarify and solicit additional documentation as warranted.

• Example: A Wisconsin taxpayer donates a conservation easement with a

claimed conservation purpose of protecting the habitat for pheasants, a

federally protected species. Pheasants thrive in a habitat of hay fields,

cropland, and grassland. The examiner observes none of this habitat on

the property during the site inspection.

(9) Audit Tip: “A picture speaks a thousand words.” Consider taking photographs

and video of the property, the surrounding areas, and the protected habitat or

species, from various public access points with an IRS approved device. The

IRS appraiser will generally take pictures of the property.

D. Review of Documents

(1) The examiner and IRS appraiser will be required to review documents, such as

the deed of conservation easement, subordination agreements, baseline study,

appraisals, contemporaneous written acknowledgment , and information

provided by the qualified organization and, in appropriate cases, documents

submitted to the National Park Service. The documents lay the foundation for

determining deductibility.

D.1. Deed of Conservation Easement

(1) Conservation easement deeds vary considerably in complexity and length. It is

imperative that the examiner and appraiser read the deed carefully and have a

clear understanding of each of the deed’s provisions in order to properly assess

the taxpayer’s compliance with the statute and regulations. Program analysts

and Counsel should be consulted for help.

(2) Be sure to review a complete and executed copy of the recorded deed including

attachments. Taxpayers and representatives sometimes provide drafts or

unexecuted copies. If there are multiple versions, ask for them. Inquire as to the

changes made and reasons for the revisions.

(3) Audit Tip: A copy of an easement deed should be included as part of the

appraisal report. Compare it to the recorded deed to see if they are the same. If

not, discuss with the IRS appraiser as the value of the conservation easement

could be impacted.

(4) In reading the conservation easement deed, the examiner should determine:

• What property is being encumbered?

• What is the stated conservation purpose?

• Does the deed protect the property in perpetuity?

• What type of public access is allowed to the property?

• What rights are reserved by the taxpayer?

• What are the provisions for mortgagee subordination and allocation of

proceeds upon extinguishment?

D.2. Perpetuity

(1) Most conservation easement deeds will state that the easement is granted and

enforceable in perpetuity, but be alert to any provisions contradicting that

statement.

(2) See Chapter 3 for guidance on the perpetuity requirements.

D.3. Conservation Purpose

(1) The conservation easement deed should include a specific description of the

conservation purpose of the particular easement, including, for example, the

species, scenic views, or building being protected. The deed alone is not

evidence of conservation purpose and must be substantiated by other available

information.

(2) Audit Tip: In some cases, the conservation purpose as described in the deed

merely repeats the conservation purpose definition in IRC § 170(h)(4)(A). The

taxpayer must clearly describe and provide documentation to show how the

easement meets the conservation purpose.

(3) Except for protection of a relatively natural habitat or ecosystem, conservation

easements generally must offer either physical access or visual access by the

public from a public space such as a highway. Physical access is only required

if the conservation purpose is for recreation by or education of the general

public under IRC § 170(h)(4)(A)(i). When evaluating access, the examiner

needs to determine:

• What access is allowed, by whom, and with what frequency?

• What portion of the conservation easement can be seen from the highway

or other public space (if an open space easement for scenic enjoyment)?

• What impact do reserved rights have on public access?

(4) For donations of conservation easements on buildings in registered historic

districts, the entire exterior (including the front, sides, rear, and height of the

building) must be preserved. IRC § 170(h)(4)(B). If the conservation easement

deed does not clearly protect the entire exterior, the charitable contribution is

not deductible.

(5) Audit Tip: The term “height” was specifically used in the statute to encompass

the donation of space above the historic building. A deed that describes the

restriction as the “roof,” would not satisfy the statute absent any additional

narrative limiting the “height” of the building. A roof can be raised, and

additional floors can be added if the easement merely uses the term “roof.”

(6) See Chapter 5 for guidance on conservation purpose requirements.

D.4. Reserved Rights

(1) Taxpayers sometimes reserve rights that can destroy a conservation purpose.

• Example: The easement calls for the protection of the Virginia running

buffalo clover, an endangered plant. However, the deed allows use of all-

terrain vehicles over the protected land in the area of the clover, which

would destroy the clover. This is an inconsistent use, which would result in

disallowance of the deduction. Treas. Reg. § 1.170A-14(e).

(2) Taxpayers are permitted to reserve some development rights on a portion of the

property, such as construction of additional homes or structures, installation of

utilities, and building of fences or roads, provided that conservation purposes

are protected. Depending on the facts and circumstances, retention of these

reserved rights may result in disallowance and need to be reflected in the

appraisal report and valuation conclusions.

• Example: A taxpayer claims a charitable contribution deduction for an

open space easement but reserves the right to build three residences on

the property. The deed does not state the specific location or limit the size

of the residences. This may raise multiple issues:

• It may allow for construction of homes that block the public’s scenic

view, thus permitting destruction of a conservation interest (Treas.

Reg. § 1.170A-14(f) Ex. 3).

• It may not restrict the use of the property in perpetuity.

(3) See Chapter 3 and Chapter 5 for guidance on perpetuity and conservation

purpose requirements.

D.5. Lender Agreements

(1) If the property was encumbered by a mortgage or other lien at the time of the

easement recordation, the taxpayer must obtain a subordination agreement

from the lender prior to the donation of the conservation easement. Palmolive

Building Investors, LLC v. Commissioner, 149 T.C. 380, 394 (2017).

(2) See Chapter 3 for additional guidance on lender agreements.

D.6. Subordination Agreements

(1) A subordination agreement is an agreement by the lender to subordinate its

rights to the rights of the easement holder to enforce the conservation purposes

of the donation in perpetuity. Subordination agreements must be recorded in

the public record.

(2) The best way to determine if there are existing mortgages, including home

equity loans or lines of credit, is by researching public records and interviewing

the taxpayer. The subordination agreement is generally part of the lender

agreement attached to the conservation easement deed.

(3) Audit Tip: Examiners must confirm that timely subordination agreements for all

liens were recorded in the public record no later than the time the easement is

recorded. If the taxpayer did not obtain a subordination agreement before the

time of the contribution, the charitable contribution should be disallowed for lack

of perpetuity.

(4) Substantial compliance does not apply to failure to properly subordinate.

Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. 2015).

D.7. Allocation of Proceeds

(1) For a charitable contribution deduction to be allowed, at the time of the gift, the

donation of the perpetual conservation restriction must give rise to a property

right immediately vested in the donee organization, which a FMV that is at least

equal to the proportion that the value of the perpetual conservation restriction at

the time of the fit bears to the value of the property as a whole at that time, and

that proportion remains constant. If a subsequent unexpected change in the

conditions surrounding the property that is the subject of a perpetual

conservation restriction make the continuation of the easement impossible or

impractical (e.g., condemnation, casualty, hazard, or accident) the easement

may only be extinguished by judicial proceeding. In the event of such an

extinguishment, at a minimum, the donee must receive its proportion (as

determined when the easement was originally valued) of the extinguishment

proceeds.

(2) Audit Tip: Counsel should always be consulted to determine whether the deed

meets the allocation of proceeds requirement; improper language in the deed

could result in disallowance. See Carroll v. Commissioner, 146 T.C. No. 13

(2016), Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126 (2019).

D.8. Baseline Study

(1) Under Treas. Reg. § 1.170A-14(g)(5)(i), a baseline study is required if the

taxpayer has reserved any right that may impair the conservation purpose.

Taxpayers almost always reserve these kinds of rights.

(2) The baseline study is a record of a property’s condition at the time of the

donation and is required to substantiate the conservation purpose. It serves two

significant purposes: 1) to satisfy the Treasury Regulations and 2) to assist the

donee organization and others in monitoring and enforcing the easement in

perpetuity.

(3) The baseline study does not have to be attached to the return or the deed of

conservation easement, but the donor must provide the study to the donee prior

to the time the donation is made. If the terms of the donation contain restrictions

with regard to a particular natural resource to be protected, the condition of the

resource at or near the time of the gift must be established. A statement saying

that the natural resource inventory is an accurate representation of the

protected property at the time of the transfer must be signed by the donor and

donee. Examiners should obtain a copy of the baseline study (natural resource

inventory and signed statement) from the taxpayer or donee organization.

(4) The quality of a baseline study can vary a great deal. Some are detailed, expert

reports, describing the property’s condition, conservation value, impact of

reserved rights, and environmental hazards. Some are the taxpayer’s self-

assessment of the property or the work of a volunteer with little or no

professional credentials.

(5) A properly documented baseline study is invaluable in helping the examiner

determine if the donation satisfies one of the conservation purposes. A

comprehensive baseline study would generally include:

• A description of the encumbrance

• A description and map of the conservation characteristics and areas (i.e.,

listing of identified plants or wildlife)

• A map or series of maps, drawn to scale, depicting roads, fences, existing

structures, trails, water bodies, wetlands, land use history and any other

property features

• Identification of any reserved building sites

• Surveys or plat maps

• Description of any management plans, such as a timber plan

• On-site photographs possibly including aerial photographs

• The study author’s name and professional credentials

(6) The first step in reviewing the baseline study is determining whether the

taxpayer was required to secure one. Nearly all easement deeds reserve

significant rights, so nearly all must have a baseline study.

(7) If the taxpayer is required to have a baseline study, the next step is to ascertain

whether the baseline study is sufficient to satisfy the baseline requirements as

outlined in Treas. Reg. § 1.170A-14(g)(5), including the signed statement by the

donor and representative of the donee organization. This statement is an

affirmation that the baseline study is an accurate representation of the protected

property at the time of transfer. The statement may be incorporated in the

baseline study or be a separate document, and it may be included in the deed

of easement.

(8) The examiner will also need to assess the credibility of the baseline study. A

baseline study prepared by an independent qualified expert such as a

conservationist, biologist, forester or botanist would generally be given greater

evidentiary weight than one prepared by a less qualified person or the

taxpayer’s self-assessment. Also, a baseline study with a lot of documentary

support is more credible than one with little support.

(9) Examiners will need to confirm that the baseline study is based on accurate

information. In some cases, the IRS will hire outside experts to evaluate the

baseline study. Generally, examiners will need to conduct their own research

contacting federal, state or local conservation agencies or historic preservation

groups as appropriate. Internet research will reveal many useful Internet

websites such as natureserve.org that can help the examiner in evaluating the

baseline study.

(10) Audit Tip: Sometimes taxpayers only have a narrative about the general area

or state without any specific reference to the donated property. These generic

narratives do not meet the requirements of Treas. Reg. § 1.170A-14(g)(5).

(11) See Chapter 5 for guidance on the baseline study requirements.

D.9. Taxpayer’s Appraisal

(1) The IRS appraiser has primary responsibility for review of the taxpayer’s

appraisal to determine if the claimed conservation easement value is correct.

(2) The examiner should read the appraisal to obtain background information on

the property and have a general understanding of the appraisal content and

methodology. In consultation with the IRS appraiser, the examiner should

determine if the appraisal was timely and if it meets the requirements of IRC §

170(f)(11), Notice 2006-96, and Treas. Reg. § 1.170A-13(c).

(3) See Chapter 7 for guidance on qualified appraisal requirements.

D.10. Donee Organization

(1) During the preplanning of the examination, the examiner will generally be able

to determine whether the donee is an organization eligible to receive tax-

deductible contributions. The examiner must also consider whether the donor

made any cash payments to the donee, and review the contemporaneous

written acknowledgment.

(2) The examiner may need assistance from TEGE to determine whether the

donee has the commitment to protect the conservation purposes of the

donation and has resources to enforce the restrictions of the conservation

easement. Indication of failure by the donee organization in these areas may

suggest the need for a referral to TEGE.

(3) See Chapter 4 for guidance on qualified organizations.

D.11. Commitment and Resources

(1) The taxpayer must transfer the conservation easement to an eligible donee to

qualify for a contribution deduction. In order to be an eligible donee, the

organization must be a qualified organization, must have a commitment to

protect the conservation purpose of the donation and must have the resources

to enforce the restrictions in the conservation easements.

(2) Some of the information used to evaluate commitment and resources include:

• The donee organization’s website

• The donee organization’s tax returns (Forms 990), obtained from either

the Tax Exempt Organization Search on IRS.gov, Guidestar.org, or the

Economic Research Institute

• Interviews of the taxpayer and representatives of the donee organization

• Observations during the property inspection

• Property monitoring reports

• Written agreements between the organization and the taxpayer certifying

that the done is qualified and has commitment and resources (required for

contributions of easements in registered historic districts)

(3) If the organization did not meet the commitment and resources tests at the time

of contribution, no deduction is allowed. A conservation group organized or

operated primarily or substantially for one of the conservation purposes

specified in IRC § 170(h)(4)(A) is considered to have the requisite commitment.

Treas. Reg. § 1.170A-14(c)(1).

(4) Audit Tip: Ask for the organization’s monitoring reports to verify whether the

taxpayer is in compliance with, and the donee organization is enforcing, the

terms of the easement. In some cases, donee organizations have allowed

changes that were in violation of the terms of the easement.

(5) Examiners should consult Counsel for assistance if the easement was

terminated or not being enforced. In addition, a referral to TEGE should be

considered.

D.12. Cash Payments

(1) A voluntary transfer of money to a qualified organization is generally deductible

as a charitable contribution.

(2) If a taxpayer received goods or services from the organization in exchange for

making the cash contribution, the deduction is limited to the excess of the cash

over the FMV of the goods and services. Goods and services include cash,

property, services, benefits, or privileges.

(3) Any cash payment made in conjunction with the conservation easement must

be addressed as part of the examination. Examination steps should include an

interview of the taxpayer and a review of documents provided by the taxpayer

and the donee organization. A properly substantiated stewardship fee may be

deductible if it meets the requirements of IRC § 170.

(4) Each case must be decided on the facts and circumstances.

(5) Audit Tip: The Examiner may need to issue a summons to the donee

organization for relevant documents (including the application, correspondence,

donation agreements, processing documents, and other documents relevant to

the cash and easement donations).

(6) Audit Tip: Particularly in syndicated conservation easement transactions, the

donation of both the easement and the accompanying cash payment may be

reported on a short-year return. Just as the Examiner needs to confirm that the

easement donation was completed during that short year (by checking the date

the easement was recorded), the Examiner also needs to confirm that the cash

donation was completed during the short year.

D.13. Contemporaneous Written Acknowledgment

(1) Section 170(f)(8) states that all cash and noncash contributions of $250 or more

must be substantiated with a CWA and lists the requirements for a CWA. It

must be obtained by the taxpayer by the earlier of the date the taxpayer filed

the return or the due date (including extensions) for the return. The Form 8283,

Noncash Charitable Contributions (PDF), is not a substitute for a CWA.

(2) A CWA is required for both the cash payment and the conservation easement.

Examiners must verify that it was a timely acknowledgment and fully complies

with the statutory requirements. Failure to secure a timely or proper CWA

results in disallowance of the contribution.

(3) Note: A CWA must include either a statement that no goods or services were

provided (if this was the case) or the value of any goods or services provided.

(4) Audit Tip: Some taxpayers may argue all that is required is substantial

compliance with the CWA requirement. However, because the CWA is

specifically required by statute, substantial compliance does not apply.

(5) Audit Tip: In some cases, the deed itself may satisfy the CWA requirement. In

Big River Development, LP v. Commissioner, T.C. Memo. 2017-166; 310 Retail,

LLC v. Commissioner, T.C. Memo. 2017-164; RP Golf, LLC v. Commissioner,

T.C. Memo. 2012-282; and Averyt v. Commissioner, T.C. Memo. 2012–198, the

deed did satisfy the contemporaneous written acknowledgment requirement.

(6) If the taxpayer makes this argument, this issue should be discussed with

Counsel.

(7) See Chapter 6 for guidance on CWA requirements.

D.14. National Park Service – Form 10-168

(1) Congress provided two incentives for historic preservation: (1) the charitable

contribution deduction for historic preservation of a historically important land

area or a certified historic structure under IRC § 170(h) and (2) the rehabilitation

credit under IRC § 47.

100

(2) The Form 10-168 (PDF) must be submitted to the NPS for certification that a

building in a registered historic district contributes to the district for purposes of

either tax incentive. Examiners should obtain a copy of the certification and any

related documents from the taxpayer or the NPS.

(3) Even if the property is certified by the Secretary of Interior, it does not mean the

charitable contribution deduction is allowable. The IRS is responsible for all

legal determinations concerning the tax consequences. 36 CFR § 67.1.

(4) Part I of the Form 10-168, used for certification of the building for historic status,

details the condition of the building at the time of the application. Part II is a

notice of proposed work and generally includes information such as:

• Date of application

• Description of the condition of the building and any proposed work

• The expected start and completion dates

• Estimated costs

• Architectural drawings

(5) Part II is required for any rehabilitation project whether the property is

individually listed on the National Register of Historic Places or in a registered

historic district.

(6) In some cases, taxpayers have improperly claimed a charitable contribution

deduction for the contribution of development rights that they retained.

(7) Section 47 permits the rehabilitation tax credit to be claimed only by owners

and, in some instances, lessees if certain statutory requirements are met. If the

taxpayer does not own all of the interests in real property to which the

rehabilitation relates (and is not a lessee), the taxpayer is not entitled to the

entire rehabilitation tax credit. Generally, no tax credit is permitted for property

that the taxpayer does not own. See Villa v. Commissioner, T.C.M. 1980-305;

Davenport v. Commissioner, T.C.M. 1977-34); Schaevitz v. Commissioner,

T.C.M.1971-197 and Bailey v. Commissioner, 88 T.C. 1293 (1987).

(8) Audit Tip: Contact Counsel in rehabilitation project cases. Resources and

contacts for the Rehabilitation Credit are available on the IRS Virtual Library.

(9) Being listed on the National Register of Historic Places or located in a

registered district imposes no restrictions on the property. Only local law can

impose restrictions. A local historic district may not have the same boundaries

as the National Register District by the same name. Thus, a building may be

certified for purposes of a charitable contribution deduction by the NPS but the

only restrictions prior to the easement might be local zoning.

(10) Audit Tip: Be sure to determine whether there are restrictions under local

preservation law. A building added to the National Register of Historic Places

may or may not be subject to local restrictions.

101

D.15. Partnership Documents

(1) Examiners should carefully review partnership agreements and other

documents when present in any easement case. A partnership arrangement

was used to transfer state rehabilitation tax credits in Virginia Historic Tax

Credit Fund 2001 LP v. Commissioner, 693 F.3d 129 (4th Cir. 2011). The

Fourth Circuit Court of Appeals held that the transfer of the state tax credit was

a disguised sale. The partnership structure and partnership agreement are of

particular importance in a syndicated conservation easement case because the

partnership relies on the contributing partner’s holding period to generate the

deduction. Some cases involve multiple layers of partnerships. In addition to

the partnership agreement, the partnership may use other materials including a

Private Placement Memorandum, operating agreement, and articles of

organization. All partnership materials should be reviewed thoroughly.

Examiners should determine the relationship between the various entities and

consider whether the transaction is respected for tax purposes as well as

whether the partners are bona fide, meaning that they each share meaningfully

in the economic returns of the activity.

E. Third-Party Contacts

(1) Development of a conservation easement case frequently requires contact with

third-parties for additional facts or confirmation of information obtained during

the course of the examination. Examples of possible third-party contacts

include:

• Donee organization

• Mortgage lenders

• Appraisers

• Local government officials

• Real estate agents

• State and federal conservation agencies

• Prior and subsequent owners of the encumbered property

(2) Examiners must adhere to procedures for making third-party contacts as

outlined in IRM, Section 4.11.57, Third Party Contacts; IRM 25.27.1, Third-Party

Contact Program. Advance notification of potential third-party contacts during

an examination is required. The examiner must provide Letter 3164 to the

taxpayer and must wait 45 days from the issuance of the letter before

contacting the third party. There are multiple letters in the 3164 series.

Typically, Letters 3164-E, F and G are used in a conservation easement audit.

(3) IRC 7602(c) Notice of Contact of Third Parties, does not apply to any contact

with any office of any local, state, federal or foreign entity unless the contact is

102

concerning the taxpayer’s business with the government office contacted, such

as the taxpayer’s contracts with, or employment by the office. See IRM Section

4.11.57.4.2.5 for additional guidance.

(4) Form 12180, Third-Party Contact Authorization Form, or Letter 1995, Third

Party Contact Letter to Request Information, is used to solicit records. Some

cases may require use of an administrative summons (Form 2039).

(5) Audit Tip: While the examiner is required to notify the taxpayer of the intent to

make a third-party contact and wait 45 days, there is no requirement to obtain

the taxpayer’s permission prior to making a third-party contact.

E.1. Donee Organizations

(1) Third-party contacts may be warranted with key representatives of the donee

organization. Individuals involved in drafting the easement deed or who were

points of contact may have important information on the transactions. Consider

separate interviews of all third parties. Typically, these interviews can be done

by telephone.

(2) Audit Tip: Examiners should request the organization's entire file including all

correspondence for this donation and any other donation by the taxpayer.

(3) Donee organizations may want a summons before consenting to release of

records.

E.2. Mortgage Lenders

(1) Mortgage lender files are a valuable source of information about the

subordination, allocation of proceeds, and valuation of the conservation

easement.

(2) If the bank agreed to the subordination, the lender’s file may include

correspondence or other information from the taxpayer or the donee

organization describing the impact of the conservation easement on the value

or use of the property. Examiners should obtain explanations for any

inconsistent statements made to third parties.

• Example: Correspondence from the donee organization to the lender

soliciting a subordination agreement includes statements that the

conservation easement has no impact on the value of the property.

(3) If the taxpayer secured a mortgage or refinancing around the time of the

easement donation, an appraisal may have been obtained by the lender. The

appraisal coupled, with information on the loan application, may be helpful in

evaluating the reasonableness of the claimed value of the easement.

• Example: The taxpayer granted a conservation easement on December

27, 2019, claiming a loss in value on the property of $23 million. The

taxpayer’s appraised before value of the property was determined to be

$25 million with an after value of $2 million. The taxpayer obtained a

103

mortgage loan on January 27, 2020. The bank’s appraisal reports a value

of $20 million after considering the impact of the conservation easement

on the property. This suggests that the taxpayer overvalued the easement.

(4) The taxpayer’s loan application and related appraisals can also be useful in

determining whether the taxpayer made a good faith investigation of the value

of the easement. This is relevant to imposition of penalties.

• Example: Using the example above, suppose the taxpayer showed the

value of the property on his loan application as $24 million. If the taxpayer

believed his property lost $23 million in value due to the donation of the

easement, why was the “alleged” $2 million after value not reported on the

loan application?

(5) A summons will generally be required to obtain the loan file information.

E.3. Appraiser

(1) An interview of the taxpayer’s appraiser should generally be conducted by the

IRS appraiser. The examiner should also participate.

(2) It may also be necessary to obtain the taxpayer’s appraiser’s work file. Most

licensed appraisers are required to maintain a work file in accordance with state

licensing requirements. The appraiser’s work file may include communications

between the taxpayer and donee organization or may reveal the existence of

multiple versions of the appraisal.

(3) The examiner or the IRS appraiser should determine if there were multiple

versions of the appraisal and if so, secure copies and the reasons for them.

E.4. Federal and State Conservation Agencies

(1) To find out about the physical characteristics of the subject property and the

easement’s conservation purposes, examiners may want to contact various

federal and state conservation agencies, including but not limited to:

• NPS

• U.S. Fish and Wildlife Service

• U.S. Environmental Protection Agency

• U.S. Department of Agriculture

• U.S. Army Corps of Engineers

• State Departments of Natural Resources

(2) These agencies may have information on the specific property or on the area in

general.

E.5. Local Government Officials

104

(1) Local preservation boards and officials responsible for zoning and building

permits are good sources of information. If possible, secure copies of pertinent

records and speak directly to the officials. Evidence of quid pro quo may be

found by talking to local officials and reviewing records including minutes of

meetings.

(2) Audit Tip: If the conservation easement is part of subdivision development,

request assistance from the IRS appraiser in reviewing documents such as

plats, maps, etc.

E.6. Real Estate Agents

(1) Local real estate agents can be valuable third-party contacts, having knowledge

of property values, sales, and local market conditions, including sales of

properties encumbered by easements.

(2) Audit Tip: If the property was purchased or sold shortly before or after the date

of the contribution, the real estate agent may be able to provide useful

information as to the value of the property or impact of the conservation

easement.

E.7. Property Owners

(1) Prior or subsequent owners of the subject property can provide information

useful in determining the value of the property such as physical condition,

preexisting restrictions or encumbrances and other specific attributes.

(2) Audit Tip: If the property was sold subsequent to the granting of the easement,

consider contacting the buyer to determine the impact (if any) on the purchase

price paid. Buyers are sometimes unaware of the easement or may indicate the

easement had no impact on the purchase price.

XIII. Concluding the Examination

A. Overview

(1) The examiner must determine whether the taxpayer meets all of the

requirements to claim a charitable contribution deduction for the conservation

easement. While the process of issue identification begins in the preplanning

stages of the examination, a conclusion as to the deductibility of the

conservation easement can only be made after considering all of the

information obtained during the examination.

(2) In addition to identifying legal issues, examiners, generally with the assistance

of a valuation expert, will determine if the conservation easement has been

properly valued.

(3) Preparation of a quality examination report is a critical component of the

examination process. The examiner will need to include a comprehensive

explanation of the facts, law, and conclusions, incorporating the IRS appraiser’s

work product and attaching relevant exhibits. If the examination results in a

105

proposed adjustment, the examiner must consider whether penalties are

applicable and who is liable for the penalties.

(4) During the closing conference, the examiner should explain the bases for any

proposed adjustments to the charitable contribution deduction and proposed

penalties. In unagreed cases, the examiner will need to verify that the

taxpayer’s protest complies with the requirements as outlined in Publication 5,

Your Appeal Rights and How to Prepare a Protest If You Don’t Agree (PDF)

and to prepare a rebuttal to the protest as warranted.

B. Issue Identification

(1) The examiner and IRS appraiser must have a comprehensive understanding of

all of the legal requirements and the value of the conservation easement in

order to make a decision on deductibility of the contribution.

(2) The Internal Revenue Code, Treasury Regulations, publications, and this ATG

are tools to help in the identification of potential issues. Program analysts and

Counsel can also be consulted for assistance.

(3) An Issue Identification Worksheet has been developed as a job aid to help

examiners with issue analysis. The worksheet is not all-inclusive but is a

summary of key issues. See Exhibit 13-1.

(4) Besides examining all aspects of the conservation easement deduction issue,

examiners must also examine whether other costs associated with the

conservation easement contribution were properly reported.

(5) Audit Tip: Taxpayers will sometimes improperly claim the appraisal fees and

other costs as cash contributions. Appraisal fees are deductible only as

miscellaneous deductions subject to a 2% adjusted gross income limitation

under IRC § 67, and, even then, are not deductible for any taxable year

beginning after December 31, 2017, and before January 1, 2026.

B.1. Substantial Compliance

(1) The burden is on taxpayers to establish they have complied with all statutory

requirements to substantiate the charitable contribution claimed under IRC §

170. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Moreover, a

charitable contribution is allowed as a deduction only if verified under the

Treasury Regulations. IRC § 170(a)(1).

(2) In cases where the disallowance is based in whole or in part on noncompliance

with the substantiation rules, taxpayers and their representatives may argue

that they have substantially complied, based on a judicial doctrine called

“substantial compliance.” Bond v. Commissioner, 100 T.C. 32, 40–41 (1993).

(3) Under prior law, some courts have allowed a deduction for a taxpayer who has

substantially, but not strictly, complied with “directory” regulations governing tax

elections and deductions. See Bond v. Commissioner, 100 T.C. 32, 40-41

(1993). The tax court has ruled that a taxpayer substantially complies with the

106

regulations when the taxpayer had “provided most of the information required,

and the single defect in furnishing everything required was not significant.”

Hewitt v. Commissioner, 109 T.C. 258, 265 (1997).

(4) It is important to note that Bond, Hewitt, and Simmons v. Commissioner, T.C.

Memo. 2009-208, were based on law in effect prior to the enactment of the

Pension Protection Act (2006), which imposes new mandatory statutory

requirements for qualified appraisals.

(5) In Costello v. Commissioner, T.C. Memo. 2015-87, the tax court declined to

apply the substantial compliance doctrine where the taxpayer’s appraisal valued

a fee simple interest “before and after a hypothetical sale of development rights”

instead of a conservation easement. The tax court stated that an appraisal of

the wrong asset cannot substantially comply with the regulations because the

appraisal in that case prevents the Commissioner from properly understanding

and calculating the claimed deduction.

(6) The tax court has stated that the substantial compliance doctrine should not be

liberally applied. Alli v. Commissioner, T.C. Memo 2014-15. Compliance is not

substantial if an appraisal fails to meet the essential requirements of the

governing statute. Cave Buttes, LLC v. Commissioner, 147 T.C. 338, 350

(2016). The substantial compliance doctrine should only be used to forgive

“minor discrepancies in the taxpayer’s reporting.” Kaufman v. Shulman, 687

F.3d 21, 22 (1st Cir. 2012).

(7) A failure to comply with the contemporaneous written acknowledgment

requirement of IRC § 170(f)(8) cannot be excused by the substantial

compliance doctrine. Izen v. Commissioner, 148 T.C. 71, 77 (2017); Boone

Operations Co. LLC. v. Commissioner, T.C. Memo. 2013-101. However, the tax

court determined that a deed of easement may constitute a contemporaneous

written acknowledgment in 310 Retail, LLC, v. Commissioner, T.C. Memo.

2017-164 and in Big River Development v. Commissioner, T.C. Memo 2017-

166 as long as the deed satisfies the requirements of § 170(f)(8).

(8) A refusal to report the cost basis and date of acquisition on the donated

property on Form 8283 does not substantially comply with the regulatory

requirement. Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159.

Where a taxpayer’s Form 8283 has “simply too many omissions to overlook or

to categorize as inadvertent” it cannot be said to have substantially complied.

Brannan Sand & Gravel Co., LLC v. Commissioner, T.C. Memo. 2020-76.

C. Report Writing

(1) The examiner’s report is the principal means of informing to the taxpayer, IRS

Independent Office of Appeals (Appeals), and Counsel of the reasons for

proposed adjustments to the conservation easement deduction. Typically,

conservation easement issue reports take a significant amount of time to

prepare. Unagreed reports should be prepared in accordance with IRM section

107

4.10.8.12, Unagreed Case Procedures (SB/SE Field and Office Examiners

Only).

(2) See Chapter 14 and IGM SBSE-20-0520-0029,Timing of Supervisory Approval

with Respect to IRC 6751(b)(1), for more information about timing of

supervisory approval for penalties.

(3) The explanation of items, whether presented in a lead sheet format or on Form

886-A, Explanation of Items, will be fact intensive, describing all details of the

transaction, the tax law, and the bases for any proposed adjustment. There may

be a number of exhibits including the appraisal, an appraisal review, the

conservation easement deed (with recording date), lender agreement, the

contemporaneous written acknowledgment, baseline, and other pertinent

documents.

(4) If the lead sheet work papers are used for the unagreed report, extraneous

information (e.g., work paper cross-referencing, audit steps, etc.) that would be

of no use to the taxpayer or representative should be removed prior to the

issuance of the report.

(5) In many cases in which an adjustment is proposed, there will be more than one

legal theory for the proposed adjustment (in addition to valuation). The legal

issues are generally the primary position, and valuation serves as an alternative

position.

(6) Audit Tip: It is very important that the report clearly articulate and address all

issues and include relevant exhibits. Appeals will generally not consider bases

for the adjustment if not addressed in the unagreed report.

C.1. Job Aids

(1) Report writing job aids are available on the IRS Virtual Library page. These

aids, while intended to help streamline the report writing process, must be

customized to address the facts and circumstances of each case.

(2) The job aids provide a sample presentation format including facts, applicable

tax law, analysis, and conclusions. The examiner will need to check the most

current edition of the IRC, Treasury Regulations, case law, and published

guidance to be sure that there have not been any changes since the date of the

job aid.

(3) The Facts section of the job aid serves as an example of the extent and type of

information that should be included in the report.

(4) The Law section contains a summary of conservation easement tax law. It was

prepared in consultation with Counsel and generally is used verbatim in all

reports, but examiners should update for any new case law decisions and

statutory changes.

(5) The Analysis and Conclusion section will also be case specific, but this material

may be used to assist with drafting of the examiner’s conclusions. A discussion

108

of substantial compliance included in this section should be incorporated into all

unagreed reports.

C.2. Valuation Expert Reports

(1) The IRS appraiser’s or outside fee appraiser’s report or review must be

attached as an addendum to the examiner’s unagreed report.

(2) Audit Tip: Notate on the Examiner Case Activity Record (Form 9984) and in

the Report Transmittal (Form 4665) that a complete copy of the IRS appraiser

report was provided to the taxpayer so there will be no question that the

taxpayer received a copy. It is also a good idea to mention this in the report

narrative.

C.3. Penalties

(1) The application of penalties is based on the facts and circumstances of each

case. There is no statutory authority to waive applicable penalties unless the

taxpayer can establish that the reasonable cause exception, to the extent

applicable to accuracy-related and other penalties, applies. The reasonable

cause exception is not available for gross valuation misstatements. IRC §

6664(c)(3).

(2) A separate lead sheet or Form 886-A will be needed if there are any proposed

penalties.

(3) Throughout the examination, the examiner should be developing relevant facts

to determine which penalties may apply and whether there is reasonable cause

for any of the otherwise applicable penalties. Examiners are required to

consider penalties, document their determination, and obtain written approval

by their immediate supervisor of any determination to seek a penalty in all

taxpayer examinations. See IRC § 6751(b)(1).

(4) See Chapter 14 and IGM SBSE-20-0520-0029, Timing of Supervisory Approval

with Respect to IRC 6751(b)(1), for more information about timing of

supervisory approval for penalties.

(5) Audit Tip: Do not wait until the end of the audit to think about penalties.

Consideration of penalties and gathering of information should be done

throughout the examination, beginning with the preplan. Interviews of the

taxpayer and third parties may be required to obtain all necessary facts.

(6) The penalty report for a conservation easement case will generally include a

tiering of proposed penalties with multiple alternative positions, starting with

valuation misstatements, then substantial understatement, and finally

negligence.

(7) A discussion of reasonable cause must be incorporated into the penalty write-

up.

109

(8) Audit Tip: Examiners should be alert to any indication of fraud and should

consult the Fraud Enforcement Advisor if badges of fraud are identified during

the examination.

(9) See Chapter 14 for detailed discussion of penalties and reasonable cause.

C.4. Technical Assistance

(1) Program analysts and Counsel attorneys assigned to this issue are available to

provide assistance and feedback with respect to unagreed reports. Contacts

can be found on the IRS Virtual Library page.

D. Closing Conference

(1) A closing conference is normally held with the taxpayer or representative. The

purpose of the conference is to explain the bases for any proposed adjustments

to the charitable contribution deduction and proposed penalties, confirm the

accuracy of the facts, gather new information, and obtain a preliminary

response from (or on behalf of) the taxpayer.

(2) The examiner may want to provide a draft report to the taxpayer or

representative in advance of the meeting or at the conference. Since valuation

is a significant issue in most conservation easement cases, it is recommended

that the IRS appraiser participate in the conference.

E. Taxpayer Protests

(1) Taxpayers will generally need to file a formal written protest in order to exercise

appeal rights. If the total amount of tax for any tax period is less than $25,000, a

small case request can be submitted instead of a formal written protest.

(2) Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t

Agree (PDF), outlines the specific information that must be included in a formal

protest. The taxpayer or representative must provide a list of changes they do

not agree with, the facts supporting their position, and the authority they are

relying upon.

(3) A protest is not adequate if it does not comply with the requirements as

described in Publication 5. A taxpayer’s general statements without a clear

explanation and without citing any legal basis for disagreement is generally not

sufficient.

(4) Letter 1025, Letter of Protest, is mailed to the taxpayer if the protest is

determined to be inadequate. Unless the group manager agrees to an

extension, if the taxpayer fails to provide a complete protest within 10 days, the

case should be closed for Statutory Notice of Deficiency, Final Partnership

Administrative Adjustment, or Notice of Final Partnership Adjustment.

E.1. Rebuttals to Taxpayer Protest

110

(1) If there is new or contradictory information in the protest, the examiner may

need to request additional information from the taxpayer or prepare a rebuttal to

supplement the unagreed report.

(2) The examiner should provide a copy of the protest to the IRS appraiser so the

appraiser can provide a written rebuttal for issues within the scope of his or her

responsibilities (such as qualified appraisal, qualified appraiser, or valuation).

The IRS appraiser’s rebuttal may be incorporated into a single rebuttal or as an

addendum to the examiner’s rebuttal.

(3) A copy of the rebuttal, including the IRS appraiser’s rebuttal, should be provided

to the taxpayer.

F. Exhibit 13-1 Conservation Easement Issue Identification

Worksheet

(1) NOTE: This worksheet is not an all-inclusive list of potential issues for

donations of conservation easements. Users should review IRC § 170, DEFRA

§ 155, the corresponding Treasury Regulations, Notice 2006-96 and case law.

General Contribution Deduction Issues

Code/Regs/Other

Lack of charitable intent (including receipt

of quid pro quo)

IRC § 170(a)

Treas. Reg. § 1.170A

-1(h)

Conditional gift

Treas. Reg. § 1.170A-1(e)

Treas. Reg. § 1.170A-7(a)(3)

Contemporaneous written

acknowledgment

IRC § 170(f)(8)

Treas. Reg. § 1.170A

-13(f)

Treas. Reg. § 1.170A-16(b)

Substantiation and reporting requirements

IRC § 170(f)(11)

Treas. Reg. § 1.170A

-13(c)

Treas. Reg. § 1.170A

-16(d)-(f)

Qualified Appraisal Issues

Code/Regs/Other

(Note: The Deficit Reduction Act of 1984

(DEFRA) and §

170(f)(11)

outline the statutory appraisal

requirements.)

IRC § 170(f)(11)

DEFRA §§ 155(a)(1)(A) and (a)(4)

Treas. Reg. § 1.170A

-13(c)(3)

Treas. Reg. §

1.170A-16(e)(1)(iv)

Notice 2006-96, Section 3

111

Appraisal not attached to return (FMV

>$500K)

IRC § 170(f)(11)(D)

Appraisal not prepared in accordance with

generally accepted appraisal standards

IRC § 170(f)(11)(E)(i)(II);

Treas. Reg. § 1.170A

-17(a)

Notice 2006-96, Section 3.02(2)

Appraisal not timely

Treas. Reg. § 1.170A-13(c)(3)(i)(A)

Treas. Reg. § 1.170A-17(a)(4)

Not a qualified appraiser

IRC § 170(f)(11)(E)(ii)

Treas. Reg. 1.170A

-13(c)(3)(i)(B)

Treas. Reg. 1.170A

-13(c)(5)

Treas. Reg. 1.170A

-17(b)(1)

Notice 2006-96, Section 3.03

Doesn’t meet IRC, DEFRA, or Treas

Reg. requirements

DEFRA § 155; § 170(f)(11)(E)(i)(I)

Treas. Reg. § 1.170A

-13(c)(3)

Notice 2006-96

Appraisal fee based on percentage of

value

Treas. Reg. § 1.170A-13(c)(3)(i)(D)

Treas. Reg. § 1.170A

-13(c)(6)

Treas. Reg. § 1.170A-17(a)(9)

Form 8283

(appraisal summary) missing

or incomplete

DEFRA § 155(a)(1)(B)

DEFRA § 155(a)(3)

Treas. Reg. § 1.170A

-13(c)(4)

Treas. Reg. § 1.170A

-16(d)(iii)

Treas. Reg. § 1.170A-16(f)

Qualified Real Property Interest Issues

Code/Regs/Other

Qualified real

property interest

IRC § 170(h)(2)

Treas. Reg. § 1.170A-14(a) and (b)

Lack of perpetuity

IRC § 170(h)(2)(C)

IRC § 170(h)(5)

Lack of perpetuity

- Failure to properly

subordinate

Treas. Reg. § 1.170A-14(g)(2)

Lack of perpetuity

- Extinguishment-

allocation of proceeds

Treas. Reg. § 1.170A-14(g)(6)(ii)

Not a qualified organization or eligible

donee

IRC § 170(h)(3)

Treas. Reg. § 1.170A-14(c)(1)

Conservation Purpose Issues

Code/Regs/Other

Conservation purpose

IRC § 170(h)(4)

Treas. Reg. § 1.170A-14(d)

Outdoor recreation or education of public

IRC § 170(h)(4)(A)(i)

Treas. Reg. § 1.170A-14(d)(2)

Outdoor recreation or education of public

- Lack of access

Treas. Reg. § 1.170A-14(d)(2)(ii)

112

Protection of

environmental system

(natural habitat)

IRC § 170(h)(4)(A)(ii)

Treas. Reg. § 1.170A

-14(d)(3)

Protection of environmental system -

Significant habitat or ecosystem

Treas. Reg. § 1.170A-14(d)(3)(ii)

Preservation of open space

IRC § 170(h)(4)(A)(iii)

Treas. Reg. § 1.170A-14(d)(4)

Preservation of open space

-Scenic

enjoyment

IRC § 170(h)(4)(A)(iii)(I)

Treas. Reg. § 1.170A

-14(d)(4)(ii)

Preservation of open space

Governmental conservation policy

IRC § 170(h)(4)(A)(iii)(II)

Treas. Reg. § 1.170A

-14(d)(4)(iii)

Preservation of open space

Governmental conservation policy

Physical or visual access required if

conservation purpose is frustrated without

access

Treas. Reg. §

1.170A-14(d)(4)(iii)(C)

Preservation of historic land or certified

historic structure

IRC § 170(h)(4)(A)(iv)

Treas. Reg. § 1.170A

-14(d)(5)

Preservation of historic land or certified

historic structure - Historic land

Treas. Reg. § 1.170A-14(d)(5)(ii)

reservation of historic land or certified

historic structure

- Certified historic

structure

Treas. Reg. § 1.170A-14(d)(5)(iii)

Preservation of historic land or certified

historic structure

- Certified historic

structure

(1) Individually listed or (2) in h

istoric

district and NPS certifies

IRC § 170(h)(4)(C) (donations made after

8/17/06)

Treas. Reg. §

1.170A-14(d)(5)(iii)

Preservation of historic land or certified

historic structure - Lack of visual access

Treas. Reg. § 1.170A-14(d)(5)(iv)(A)

Failure to comply w/ PPA for buildings not

individually listed. (façade only)

IRC § 170(h)(4)(B)

Failure to comply w/ PPA for buildings not

individually listed

No restriction for entire

exterior.

IRC

§ 170(h)(4)(B)(i)

Failure to comply w/ PPA for buildings not

individually listed

- Lack of donor/donee

written agreement: re donee’s

qualifications.

IRC

§ 170(h)(4)(B)(ii)

113

Failure to comply w/ PPA for buildings not

individually listed

- Failure to attach

appraisal, with photos and

description of

restrictions.

IRC

§ 170(h)(4)(B)(iii)

Failure to comply w/ PPA for buildings not

individually listed

- Failure to pay

$500 filing fee (façade only)

IRC

§ 170(f)(13)

Not exclusively for conservation purpose

IRC § 170(h)(5)

Treas.

Reg. § 1.170A-14(e)

Not exclusively for conservation purpose

Treas. Reg. § 1.170A-14(e)(2) and (3)

Conservation Purpose Issues

Code/Regs/Other

Inconsistent Use

Treas. Reg. 1.170A-14(e)(2) and (3)

Insufficient or lack of documentation for

conservation purpose (baseline study)

Treas. Reg. § 1.170A-14(g)(5)(i)

Treas. Reg. §

; 1.170A-13(c)(4)(ii)(M)

Valuation Issues

Code/Regs/Other

Overvaluation

IRC § 170(a)

Treas. Reg. § 1.170A-14(h)(3)

Deduction not based on FMV

IRC § 170(a)

Treas.

Reg. § 1.170A-1(c)

Treas. Reg. § 1.170A-14(h)(3)

Deduction limited to basis

IRC § 170(e)(1)(A) Contiguous

Parcel/noncontiguous parcel

Treas. Reg. § 1.170A-14(h)(3)(i)

Aggregate partnership investment in an

almost contemporaneous transaction

indicates the before value of the

conservation easement

Plateau Holdings, LLC v. Commissioner,

T.C. Memo. 2020

-93.

TOT Property Holdings, LLC v.

Commissioner

, TC Docket No. 5600-

17 (unpublished bench op., Nov. 22, 2019).

Miscellaneous Issues

Code/Regs/Other

Percentage limitations not computed

properly

IRC § 170(b)

Rehabilitation credit

-reduction of

deduction

(façade only)

IRC § 170(f)(14)

Rehabilitation credit

-recapture (façade

only)

IRC § 50(a)

Rev. Rul. 89-90

114

Partnership anti

-abuse rule

Treas. Reg. § 1.701-2

Codified Economic Substance Doctrine

IRC § 7701(o)

Judicial Doctrines

Code/Regs/Other

Step Transaction

See Chapter 10

Substance over Form Doctrine

See Chapter 10

Lack of bona fide partner and partnership

See Chapter 10

Penalties and Penalty Issues

Code/Regs/Other

Taxpayer Penalties

Accuracy

-Related

IRC § 6662(b)(1), (b)(2), (b)(3), (b)(6), (h),

(i)

Accuracy

-related – reportable transaction

understatement

IRC § 6662A(a), (c)

Failure to disclose participation in

reportable transaction

IRC § 6707A

Treas. Reg. §

301.6707A-1

Fraud Penalty

IRC § 6663

Reasonable Cause

IRC § 6664(c)

Other Penalties

Appraiser penalty

IRC § 6695A

Tax Return Preparers

IRC § 6694

Promoting Abusive Tax Shelters

IRC § 6700

Aiding and Abetting Understatement of

Tax

IRC § 6701

Failure to disclosure- material advisor

IRC § 6707

Failure to maintain list of advisees with

respect to reportable transaction

IRC § 6708

XIV. Penalties

A. Overview

(1) Penalties exist to encourage voluntary compliance by supporting the standards

of behavior required by the IRC. Examiners are required to consider penalties

and document their determination (and obtain written approval by their

immediate supervisor of an initial determination to seek a penalty in all taxpayer

examinations. See IRC § 6751(b)(1) and Interim Guidance Memorandum

SBSE-20-0520-0029 directing examiners when to secure penalty, approval.

115

(2) All facts and circumstances must be developed during the examination to

determine what penalties (if any) are appropriate. Penalties may be imposed on

the taxpayer, return preparer, appraisers and other tax advisors.

(3) See the IRM 20.1, Penalty Handbook, for additional guidance on penalties.

B. Introduction to Penalty Approval

(1) Nearly every penalty worked in a field audit requires proper, writing supervisory

approval prior to asserting that penalty. IRC § 6751(b)(1). The only penalties

determined in the field that do not require supervisory approval under IRC §

6751(b)(1) are the additions to tax under IRC §§ 6651, 6654, and 6655.

(2) Each penalty determined in an examination must be properly approved, unless

specifically excepted under IRC § 6751(b)(2). Palmolive Building Investors, LLC

v. Commissioner, 152 T.C. 75, 82-87 (2019). Therefore, if an examiner

determines the gross valuation misstatement penalty applies, but alternatively

asserts the negligence penalty, substantial understatement of income tax

penalty, and substantial valuation misstatement penalty, the examiner must

secure written supervisory approval for each of these four penalties. Multiple

penalties may be approved on the same form. Belair Woods, LLC v.

Commissioner, 154 T.C. No. 1(2020). Even assessable penalties, such as IRC

§ 6707A penalties for failures to include reportable transaction information with

a return, must be approved. Laidlaw’s Harley Davidson Sales, Inc. v.

Commissioner, 154 T.C. No. 4, slip op. at 19 (Jan. 16, 2020).

(3) Supervisory approval under section 6751(b)(1) should take the proper form and

evidence approval by the proper person at the proper time.

• Penalty approval must be in writing. IRC § 6751(b)(1). All examinations

in which a penalty is asserted should include a completed and signed Civil

Penalty Approval Form under the 300 tab. Legally, a penalty may be

approved in writing through other means. For example, a penalty may be

approved by signing the cover letter to a summary report, if the subject

penalty is included in that summary report. PBBM-Rose Hill, LTD. v.

Commissioner, 900 F.3d 193, 213 (5th Cir. 2018).

• Penalty approval must also be secured from the proper individual. To

be acceptable approval, the immediate supervisor of the individual who

initially determined the penalty must provide the written approval. IRC §

6751(b)(1); Palmolive Building Investors, LLC v. Commissioner, 152 T.C.

75, 82-87 (2019).

• Note: Different employees can determine different penalties within the

same examination. However, if separate employees determine

different penalties in the same examination, then each individual must

have their immediate supervisor approve the penalties they

determined. Palmolive Building Investors, LLC v. Commissioner, 152

T.C. 75, 84-85 (2019). For example, if Revenue Agent A determines

116

that the negligence penalty applies to the taxpayer’s 2015 Form 1120,

and Revenue Agent B determines that the substantial understatement

of income tax penalty applies to the Taxpayer’s 2015 Form 1120, then

Revenue Agent A’s immediate supervisor must approve the

negligence penalty and Revenue Agent B’s immediate supervisor

must approve the substantial understatement of income tax penalty.

An acting supervisor may approve a penalty. Blackburn v.

Commissioner, 150 T.C. 218, 220, 224 (2018).

• Note: A penalty may be determined by an examiner, an Appeals

Officer, or Counsel. Roth v. Commissioner, T.C. Memo. 2017-248, at

*8-*12. Therefore, if you are working with Counsel on a case and they

recommend a penalty, make sure that the Counsel employee secures

their immediate supervisor’s written approval. If an examiner’s

manager mentions that the examiner should assert a specific penalty

not previously determined by that examiner, that manager needs to

secure the written approval of their immediate supervisor. IRC §

6751(b)(1).

• Penalty approvals must be timely. See Interim Guidance Memorandum

SBSE-20-0520-0029 directing examiners when to secure penalty approval

for all penalties other than those set forth in IRC §§ 6651, 6654, and 6655

and those automatically calculated through electronic means. That

memorandum provides: For all penalties subject to section 6751(b)(1),

written supervisory approval required under section 6751(b)(1) must be

obtained prior to issuing any written communication of penalties to a

taxpayer that offers the taxpayer an opportunity to sign an agreement or

consent to assessment or proposal of the penalty.

(4) As a best practice, Examiners should keep detailed notes about supervisory

approval. The notes should include the following information:

• who made the initial determination to assert each penalty;

• when those determinations were made;

• when those penalties were first approved in writing;

• who approved those penalties;

• what the approver’s relationship is to the person who initially determined

the penalty (it should always be the determiner’s immediate supervisor);

and

• when those penalties were first communicated to the taxpayer.

(5) Noting this information will help Counsel defend penalties and may limit the

times examiners have to testify about the matter.

(6) Retain all penalty approvals in your file. If you later determine a penalty does

not apply or the amount of the penalty changes, do not destroy the previous

117

approval. You should note the change in determination or amount while making

sure to retain the previous approval.

(7) Examiners should consult Counsel with any IRC § 6751(b) questions.

C. Accuracy-Related Penalties

(1) Section 6662 imposes accuracy-related penalties on underpayments.

Generally, the accuracy- related penalty imposed on any portion of an

underpayment is 20% (40% in the case of a gross valuation misstatement

under IRC6662(h) and nondisclosed noneconomic substance transaction under

IRC § 6662(i)), even if that portion of the underpayment is attributable to more

than one type of misconduct. In every case, Examiners should consider all the

facts and circumstances to determine if a penalty, an any alternative bases for

the penalty, apply.

(2) The most common accuracy-related penalties in conservation easement cases

will be for IRC § 6662(h) gross valuation misstatements, IRC § 6662(b)(1)

negligence or disregard of rules or regulations, IRC § 6662(b)(2) substantial

understatements of income tax, and IRC § 6662(b)(3) substantial valuation

misstatements. Often, an examiner will find it appropriate to assert the IRC §

6662(h) gross valuation misstatement as a primary theory and to assert the

three penalties listed in IRC §§ 6662(b)(1)-(3) in the alternative. In syndicated

conservation easement cases, Examiners may also assert IRC § 6662A.

C.1. Section 6662(b)(1) and (c) Negligence or Disregard of Rules or

Regulations

(1) A 20% accuracy-related penalty should be asserted pursuant to IRC §

6662(b)(1) and (c) if the underpayment of tax is attributable to negligence or to

a careless, reckless, or intentional disregard of rules or regulations.

(2) Negligence includes any failure to make a reasonable attempt to comply with

the provisions of the Internal Revenue Code or to exercise ordinary and

reasonable care in the preparation of a tax return. IRC § 6662(c); Treas. Reg. §

1.6662-3(b).

(3) In Turner v. Commissioner, 126 T.C. 299 (2006), the tax court held that the

taxpayer was liable for a 20% negligence penalty under IRC § 6662(c). In that

case, the appraiser's report was not considered sufficient for the IRC § 6664(c)

reasonable cause exception to apply because the report was based on

erroneous assumptions.

(4) The term “disregard” includes any careless, reckless, or intentional disregard of

rules or regulations. A disregard is careless if the taxpayer does not exercise

reasonable diligence to determine the correctness of a return position that is

contrary to a rule or regulation. A disregard is reckless where the taxpayer

makes little or no effort to determine whether a rule or regulation exists, under

circumstances which demonstrate a substantial deviation from the standard of

118

conduct that a reasonable person would observe. Disregard is intentional where

the taxpayer has knowledge of the rule or regulation that the taxpayer

disregards. Treas. Reg. § 1.6662-3(b)(2).

(5) The terms “rules or regulations” under this section includes the provisions of the

IRC, temporary or final Treasury regulations, and revenue rulings or notices

(other than notices of proposed rulemaking) issued by the Internal Revenue

Service and published in the Internal Revenue Bulletin. Treas. Reg. § 1.6662-

3(b)(2). Therefore, if the facts indicate that a taxpayer took a return position

contrary to any published notice or revenue ruling, the taxpayer may be subject

to the accuracy-related penalty for an underpayment attributable to disregard of

rules or regulations.

(6) See IRM 20.1.5.7, Negligence or Disregard of Rules or Regulations for

additional guidance.

C.2. Section 6662(b)(2) and (d) Substantial Understatement of Income

Tax

(1) A 20% accuracy-related penalty should be asserted pursuant to IRC §

6662(b)(2) and (d) if the underpayment of tax is attributable to a substantial

understatement of income tax.

(2) A substantial understatement of income tax exists for a taxable year of an

individual if the amount of understatement exceeds the greater of 10% of the

tax required to be shown on the return or $5,000. IRC § 6662(d)(1)(A).

(3) An understatement of income tax of a corporation (other than an S Corporation

or a personal holding company) is substantial if it exceeds the lesser of 10% of

the tax required to be shown on the return (or, if greater, $10,000), or

$10,000,000. IRC § 6662(d)(1)(B).

(4) The amount of the understatement generally is reduced by the portion of the

understatement attributable to any item if:

• The treatment is, or was, supported by substantial authority, or

• Facts relevant to the tax treatment were adequately disclosed on the

return or on a statement attached to the return and there is a reasonable

basis for the tax treatment.

(5) IRC § 6662(d)(2)(B).

(6) There is no reduction, however, for any item attributable to a tax shelter, which

means either: (1) a partnership or other entity, (2) any investment plan or

arrangement, or (3) any other plan or arrangement, if a significant purpose of

such partnership, entity, plan, or arrangement is the avoidance or evasion of

federal income tax. IRC § 6662(d)(2)(C).

(7) See IRM 20.1.5.9, Substantial Understatement, for additional guidance.

C.3. Section 6662(b)(3) and (e) Substantial Valuation Misstatement

119

and Section 6662(h) Gross Valuation Misstatement

(1) A 20% accuracy-related penalty can be asserted pursuant to IRC § 6662(b)(3)

and (e) if the underpayment of tax is attributable to a substantial valuation

misstatement. IRC § 6662(e)(1).

(2) A 40% accuracy-related penalty can be asserted pursuant to IRC § 6662(h) if

the underpayment of income tax is attributable to a gross valuation

misstatement.

(3) A substantial valuation misstatement exists when the claimed value of any

property is 150% or more of the amount determined to be the correct value. A

gross valuation misstatement occurs when the claimed value of any property is

200% or more of the amount determined to be the correct value.

(4) Note: The Pension Protection Act of 2006 (PPA), Pub. L. No. 109–280, sec.

1219(a)(2)(B), 120 Stat. at 1083, amended the rules for the 40% gross

valuation misstatement penalty. Before the PPA, the penalty applied when

taxpayers misstated the value of their property by 400% or more, and taxpayers

could avoid the penalty under certain circumstances if they made the

misstatement in good faith and with reasonable cause. The IRC § 6664(c)

reasonable cause exception applied to both substantial and gross valuation

misstatements. The PPA lowered the threshold for gross valuation

misstatements to 200% and eliminated the reasonable cause exception for

gross valuation misstatements of charitable contribution property. See secs.

6662(h), 6664(c).

(5) No penalty is imposed unless the portion of the underpayment attributable to

the valuation misstatement exceeds $5,000 ($10,000 in the case of a

corporation other than an S corporation or a personal holding company). IRC §

6662(e)(2).

(6) See IRM 20.1.5.10, Substantial Valuation Misstatement and IRM 20.1.5.10.3,

IRC 6662(h) Gross Valuation Misstatement, for additional guidance.

C.4. Section 6662(b)(6) and (i) Codified Economic Substance

Doctrine

(1) Section 6662(b)(6) provides for a 20% penalty in the case of an underpayment

attributable to any disallowance of claimed tax benefits by reason of a

transaction lacking economic substance (within the meaning of IRC § 7701(o))

or failing to meet the requirements of any similar rule of law. See Chapter 10 for

more information relating to IRC § 7701(o).

(2) Section 6662(i)(1) provides that the penalty shall be imposed at the rate of 40%

in the case of a nondisclosed noneconomic substance transaction as defined in

IRC § 6662(i)(2). The term “nondisclosed noneconomic substance transaction”

means any portion of a transaction described in IRC § 6662(b)(6) with respect

120

to which the relevant facts affecting the tax treatment are not adequately

disclosed in the return nor in a statement attached to the return.

D. Section 6663 Civil Fraud Penalty

(1) Section 6663 imposes a penalty of 75% on any portion of the underpayment of

tax is due to fraud.

(2) In a TEFRA partnership matter, the IRS must prove, by clear and convincing

evidence, the partnership-level elements of the fraud penalty based on the

conduct and intent of the managing partner(s). If the IRS proves fraud, the

fraud penalty is applicable to all the partners in the partnership on any

underpayments of tax resulting from the adjustments to partnership items that

are attributable to fraud. Those partners may then raise any partner-level

defenses in refund actions under section 6230(c).

(3) Examiners should be alert to any indications of fraud, which can be

demonstrated through a pattern of conduct. See CC Notice 2020-008, Question

and Answer 2. The Office of Fraud Enforcement and Counsel can assist

Examiners as necessary. If badges of fraud are noted, Examiners are required

to discuss this with their group manager and involve the local fraud technical

advisors as early as possible.

(4) See IRM 20.1.5.16, Civil Fraud Penalty, for additional guidance.

E. Section 6664 Reasonable Cause Exception

(1) In general, no penalty will be asserted under IRC §§ 6662 or 6663 if the

taxpayer establishes there was reasonable cause for the underpayment and the

taxpayer acted in good faith. IRC § 6664(c)(1). See IRM 20.1.5.7.1 &

20.1.5.10.7.1, Reasonable Cause, for additional guidance.

(2) Reasonable cause must be determined on a case-by-case basis, taking into

account all the pertinent facts and circumstances. To determine whether

reasonable cause exists, examiners must ascertain the taxpayer’s experience,

knowledge, education, the extent of the taxpayer’s review or inquiry in

assessing the correctness of the conservation easement donation, and whether

the taxpayer relied on any appraisers, return preparers, or other professionals.

E.1. Special Rule for Overvaluation of Charitable Contributions

(1) For substantial valuation misstatements of charitable contribution property,

reasonable cause may apply only if:

• The claimed value of the property was based on a qualified appraisal

made by a qualified appraiser, and

• In addition to obtaining the appraisal, the taxpayer made a good faith

investigation of the value of the contributed property.

(2) IRC § 6664(c)(3).

121

(3) Improper valuation of conservation easements and a lack of a qualified

appraisal are common bases for full or partial disallowance of the charitable

contribution deduction. Accordingly, if the easement is substantially overvalued

(150% or more), the reasonable cause exception cannot apply unless the

appraisal was a qualified appraisal by a qualified appraiser and the taxpayer

made a good faith investigation of the value of the easement in addition to

securing the appraisal.

(4) For returns filed after July 25, 2006, the reasonable cause exception is not

available for gross valuation misstatements. IRC § 6664(c)(3).

E.2. Reliance on Professionals

(1) Reliance on a return preparer or other professional such as an attorney or

appraiser does not automatically constitute reasonable cause and good faith

under Treas. Reg. § 1.6664-4(b). Curtis Investment Company, LLC v.

Commissioner, T.C. Memo. 2017-150, at *7-*9, *40-*46 (holding no reasonable

cause even through the taxpayers claimed they relied on three tax

professionals who reviewed the underlying transaction because the tax

professionals relied solely on the opinion letter obtained by the promoter and

did not provide their own opinion letters).

(2) Reliance constitutes reasonable cause and good faith if, under all the

circumstances, such reliance was reasonable and the taxpayer acted in good

faith. However, reasonable cause relief is not appropriate if the professional

relief upon was the promoter of the transaction. CNT Investors, LLC v.

Commissioner, 144 T.C. 161, 226 (2015).

(3) Reasonable cause and good faith may exist if the taxpayers can demonstrate

that:

• They did not know, nor should have known, that the advisor suffered from

a conflict of interest or a lack of expertise,

• Complete, accurate and all necessary information was provided to the

advisor by the taxpayers, and

• The taxpayers actually relied in good faith on the advisor’s judgment.

(4) CNT Investors, LLC v. Commissioner, 144 T.C. 161, 223 (2015).

(5) If the taxpayer claims reliance on professionals, the examiner must identify

specifically who advised the taxpayer and when and what services or advice

were provided and determine whether the taxpayer fully disclosed the

necessary information for the advisor to make a proper determination.

(6) This will generally require an interview of the taxpayer and of the professional to

confirm the taxpayer's information and evaluate whether non-assertion of the

penalty is appropriate due to reasonable cause. Copies of any professional

opinion letters, correspondence, analysis, billing records or other

122

documentation should be solicited from the taxpayer or professional to

substantiate reliance on professionals.

(7) Examiners should review IRM 20.1.5.7.4, Reliance on Advice, for additional

guidance.

F. Section 6694 Understatement of Taxpayer’s Liability by Tax Return

Preparer

(1) Examiners are responsible for determining whether IRC § 6694 penalties

should be asserted on the return preparer. Preparer penalties should be

asserted only after consideration of all facts and circumstances and not based

solely on the determination of deficiencies in related tax return examinations.

(2) Examiners may consider asserting penalties under IRC § 6694 on appraisers

for inflated or incorrect appraisals in lieu of IRC § 6695A if the appraiser meets

the definition of a nonsigning return preparer. Treas. Reg. § 301.7701-15(b)(2).

(3) CAUTION: The statute of limitations on assessing the IRC § 6694(a) penalty is

three years from the date the return or claim for refund (from which the penalty

stems) was filed. IRC § 6696(d). Securing an extension on the return being

examined does not extend the IRC § 6694(a) penalty statute. Form 872-D,

Consent to Extend the Time on Assessment of Tax Return Preparer Penalty is

used to extend the IRC § 6694(a) case statute.

(4) There is no statute of limitations on assessment of the IRC § 6694(b) penalty.

IRC § 6696(d). However, in the interest of efficiency and preserving evidence,

these examinations should not be delayed.

(5) IRM 20.1.6, Preparer, Promoter, Material Advisor Penalties, provides additional

guidance on the return preparer penalties. Examiners also may contact their

local Return Preparer Coordinator for help with preparer penalty cases.

G. Sections 6700 and 6701 Penalty for Promoting Abusive Tax

Shelters and Aiding and Abetting Understatements of Tax

(1) Various individuals (or entities) may be subject to penalty under IRC §§ 6700 or

6701 for their role in the transaction. For example, appraisers may be subject to

IRC § 6700 for direct or indirect participation in the sale of a tax plan or

arrangement that results in a material gross overvaluation misstatement.

Section 6701 penalties may also be applicable for the preparation of the

appraisal if the appraiser knows or had reason to believe that the appraisal was

to be used in connection with a material tax matter and knows that use of the

document would result in an understatement of tax.

(2) The examiner should consider a referral to the SB/SE Lead Development

Center (LDC) for return preparers, appraisers, promoters, authors of legal

opinions, donee organizations, or anyone else who was directly or indirectly

123

involved with a scheme or promotion advocating improper or overvalued

conservation easement donations.

(3) While examiners may secure information on the role and level of involvement of

each person in conjunction with the determination of the appropriateness of

taxpayer penalties, examiners cannot commence an IRC § 6700, Promoting

Abusive Tax Shelters, Etc., or IRC § 6701, Aiding and Abetting Understatement

of Tax Liability, penalty investigation without specific authorization from the

SB/SE LDC. A referral form can be found on the LDC Web page.

(4) Contact a SB/SE LDC program analyst for assistance on the application of IRC

§ 6700 or 6701 penalties, determination of whether a referral is warranted, or

coordination of participant examinations.

(5) There is no statute of limitations on asserting the IRC §§ 6700 and 6701

penalties. However, in the interest of efficiency and preserving evidence, these

examinations should not be delayed.

(6) See IRM 20.1.6, Overview of the Return Preparer, Promoter, and Material

Advisor Penalties, and IRM 4.32 for additional guidance.

H. Section 6695A Substantial and Gross Valuation Misstatements

Attributable to Incorrect Appraisals

(1) Section 6695A was added by the Pension Protection Act of 2006. It provides a

civil penalty on any person who prepares an appraisal of the value of property

that the appraiser knows (or reasonably should have known) is to be used in

connection with a return or a claim for refund, and such appraisal results in a

substantial or gross valuation misstatement (as defined in IRC § 6662(e) and

(h) respectively).

(2) The amount of the IRC § 6695A penalty is the lesser of:

• The greater of 10% of the amount of the underpayment attributable to the

misstatement or $1,000, or

• 125% of the gross income received from the preparation of the appraisal

(3) Under IRC § 6695A(c), the penalty does not apply if the appraiser establishes

that it was "more likely than not" that the value established in the appraisal was

correct.

(4) There are no preassessment appeal rights extended to the appraiser at the time

of the penalty case closure by the examiner. The appraiser may request an

appeals conference upon notice of the Service’s intent to assess the penalty.

(5) CAUTION: The statute of limitations for the appraiser penalty case is three

years from the later of the due date of the related return or the date the return

was filed. Securing an extension on the return being examined does not extend

the appraiser penalty statute. Form 872-AP, Consent to Extend the Time on

124

Assessment of IRC Section 6695A Penalty, is used to extend the appraiser

penalty case statute.

(6) Interim guidance on how to open and pursue an IRC § 6695A case was issued

on January 22, 2020 at LB&I-20-0120-001. Please review that document when

you believe an IRC § 6695A penalty case should be opened.

(7) See IRM 20.1.12, Penalties Applicable to Incorrect Appraisals, and the

Servicewide Penalty Web page for additional guidance on the assessment of

this penalty.

H.1. Office of Professional Responsibility Sanctions

(1) Prior to the changes instituted by the Pension Protection Act of 2006 (PPA), an

IRC § 6701 penalty for aiding and abetting was required to be assessed before

the Office of Professional Responsibility (OPR) could seek disciplinary action

against an appraiser.

(2) The PPA eliminated the penalty assessment requirement. Disciplinary action

may include, but is not limited to, suspending or barring an appraiser from:

• Preparing or presenting appraisals on the value of property or other assets

to the Treasury Department or the IRS.

• Appearing before the Treasury Department or the IRS for the purpose of

offering opinion evidence on the value of property or assets.

I. Penalties Specifically Related to Reportable Transactions

(1) Certain penalties are applicable only to reportable transactions as defined in

Treas. Reg. § 1.6011-4(b). In Notice 2017-10, the IRS identified certain

syndicated conservation easement transactions as listed transactions. A

syndicated conservation easement transaction is a listed transaction if:

• An investor receives promotional materials that offer prospective investors

in a pass-through entity the possibility of a charitable contribution

deduction that equals or exceeds an amount that is two and one-half times

the amount of the investor’s investment.

• The promotional materials may be oral or written.

• For purposes of this notice, promotional materials include, but are

not limited to, documents described in § 301.6112-1(b)(3)(iii)(B) of

the Regulations.

• The investor purchases an interest, directly or indirectly (through one or

more tiers of pass-through entities), in the pass-through entity that holds

real property.

• The pass-through entity that holds the real property contributes a

conservation easement encumbering the property to a tax-exempt entity

125

and allocates, directly or through one or more tiers of pass-through

entities, a charitable contribution deduction to the investor.

• Following that contribution, the investor reports on his or her federal

income tax return a charitable contribution deduction with respect to the

conservation easement.

(2) Transactions that are the same or similar to the transaction described above

are considered listed transactions.

(3) If a syndicated conservation easement transaction was entered into by a

taxpayer on or after January 1, 2010, the taxpayer must have reported their

participation. Similarly, material advisors have similar obligations to disclose

their participation in listed transactions. IRC § 6111. A material advisor is any

person:

• who provides any material aid, assistance, or advice with respect to

organizing, managing, promoting, selling, implementing, insuring, or

carrying out any reportable or listed transaction, and

• who directly or indirectly derives gross income in excess of $250,000

($50,000 for a reportable or listed transaction if substantially all of the tax

benefits of the transactions are provided to natural persons).

(4) IRC § 6111(b)(1)(B).

I.1. Section 6662A Accuracy-Related Penalty on Understatements with

Respect to Reportable Transactions

(1) Section 6662A sets forth a special accuracy-related penalty for

understatements resulting from reportable transactions. A reportable

transaction understatement is not calculated in the same manner as the

accuracy-related penalty under IRC § 6662. An example of how to calculate this

amount can be found at IRM 20.1.5.17.2.

(2) The IRC § 6662A accuracy-related penalty is 20% of the reportable transaction

understatement if the transaction is property disclosed and 30% if the

transaction is not property disclosed. IRC § 6662A(c).

(3) In determining whether reasonable cause should excuse the IRC § 6662A

penalty, an examiner should look to the special definition of reasonable cause

specifically set out for that penalty which is described in IRC § 6664(d). To

receive reasonable cause relief, the taxpayer must have shown not only

reasonable cause (as discussed for the accuracy-related penalties), but also

that the taxpayer:

• Adequately disclosed the relevant facts about the transaction;

• Had substantial authority for claiming the tax treatment of the transaction,

and

• Believed the treatment was more likely than not correct. IRC § 6664(d)(3).

126

I.2. Section 6707A Penalty for Failure to Include Reportable

Transaction Information with Return

(1) Section 6707A(a) provides that any person who fails to file a timely, complete

Form 8886, Reportable Transaction Disclosure Statement, is subject to a

penalty. The IRC § 6707A penalty is imposed in addition to any other penalty.

There is no reasonable cause exception to the § 6707A penalty. Generally, the

Commissioner may rescind the penalty if doing so would promote compliance

with the IRC and effective tax administration. Treas. Reg. § 301.6707A-

1(e)(1)(i). This rule does not apply to listed transactions and so is unavailable

in the case of a transaction described in Notice 2017-10, Section 2, and

substantially similar transactions.

(2) For listed SCE transactions described in Notice 2017-10, “participants” include

(but are not limited to) investors, the pass-through entity (any tier, if multiple

tiers are involved), or any other person whose tax return reflects the tax

consequences of such SCE transaction. The Notice specifically provides that a

donee described in § 170(c) shall not be treated as a participant in the SCE

transaction under § 1.6011-4.

(3) Under § 6707A(b)(1), the amount of the penalty is 75% of the decrease in tax

shown on the return as a result of the listed transaction, or the decrease that

would have resulted from the transaction if it were respected for federal tax

purposes. The penalty amount is subject to the maximum and minimum

amounts. The maximum penalty under § 6707A(b)(2)(A) for listed transactions

is $200,000 ($100,000 in the case of a natural person), and the minimum

penalty under § 6707A(b)(3) is $10,000 ($5,000 in the case of a natural

person).

(4) A penalty imposed under § 6707A is in addition to any other penalty imposed

under the Internal Revenue Code. § 6707A(f); Treas. Reg. § 301.6707A-1(a);

IRM 4.32.4.1.1(3).

I.3. Section 6707 Failure to Furnish Information Regarding Reportable

Transaction

(1) Section 6707(a) provides that any material advisor who fails to file a timely,

complete Form 8918, Material Advisor Disclosure Statement, is subject to a

penalty. There is no reasonable cause exception to the § 6707 penalty.

Generally, the Commissioner may rescind the penalty if doing so would

promote compliance with the IRC and effective tax administration. IRC §

6707(c). This rule does not apply to listed transactions and so is unavailable in

the case of a transaction described in Notice 2017-10, Section 2, and

substantially similar transactions.

(2) The penalty amount equals $50,000 for any failure. In the case of listed

transactions, including transactions described in Notice 2017-10, Section 2, and

substantially similar transactions, the penalty is the greater of $200,000 or 50 %

127

of the gross income derived by such person with respect to aid, assistance, or

advice which is provided with respect to the listed transaction before the date

the return is filed under section 6111. In the case of an intentional failure the

penalty is the greater of $200,000 or 75% of the gross income derived by such

person with respect to aid, assistance, or advice which is provided with respect

to the listed transaction before the date the return is filed under section 6111.

I.4. Section 6708 Failure to Maintain Lists of Advisees with Respect to

Reportable Transactions

(1) Section 6708 provides a penalty applicable to a material advisor who does not

make a list required to be maintain under IRC 6112 available to the Service

within 20 business days of a request. For more information about making such

a request, see IRM 4.32.2.8.2.2.2, Issuance of IRC 6112 Letter. The penalty

can be imposed in addition to any other penalty. The penalty is subject to a

reasonable cause exception.

(2) The amount of the penalty is $10,000 per day.

XV. State Tax Credits

A. Overview

(1) An increasing number of states offer incentives in the form of income tax credits

for the donation of conservation easements. Some state conservation

easement tax credit programs allow for the transfer and sale of the tax credits.

A taxpayer may qualify for a state tax credit, but still not qualify for a federal tax

deduction.

B. State Tax Credit Programs

(1) The following states and territories have or had some form of tax credit

programs for conservation easements:

• Arkansas (a “wetland and riparian zone conservation tax credit”)

• California

• Colorado

• Connecticut

• Delaware

• Florida (exemption from real property tax)

• Georgia

• Iowa

• Maryland

• Massachusetts

128

• Mississippi

• New Mexico

• New York

• North Carolina (repealed for tax years after 2013)

• South Carolina

• Virginia

• Wisconsin (limited to farmland preservation agreements, and the farmland

must be in a farmland preservation area identified in a certified farmland

preservation plan)

• Puerto Rico

(2) The requirements for most state tax credit programs are similar to the

requirements under IRC § 170(h) for deducting the contribution of a

conservation easement. There is no uniform model, but most state programs

determine the amount of the credit based on a percentage of the FMV of the

donated easement. Generally, the programs provide for carryforward of unused

tax credits over a number of years. Some states, including Colorado, South

Carolina, Virginia, New Mexico, and Georgia have transferable tax credits.

Puerto Rico also has transferable tax credits available only to the original donor

of the easement.

(3) Transferability allows taxpayers to sell tax credits to third parties. Credit brokers

or facilitators assist taxpayers in negotiating the sales price and are generally

reimbursed for their services from the proceeds of the sale. The tax credit

purchasers then use the credits to pay their own state tax liabilities.

(4) In 2007, The Conservation Resource Center, a nonprofit conservation

organization, published a report analyzing the impact of state conservation tax

credits. According to the report, taxpayers generally receive as much as 70 to

82 percent of the face value of their state tax credits, depending on market

rates at the time of the sale.

C. Receipt of State Tax Credits

(1) Generally, a state tax credit, to the extent that it can be applied against the

original recipient's current or future state tax liability, is treated for federal

income tax purposes as a reduction or potential reduction in that taxpayer’s

state tax liability, not as a payment of cash or property to the taxpayer that is

includible in gross income under IRC § 61. See generally Maines v.

Commissioner, 144 T.C. 123, 143 (2015).

(2) For an easement donated on or before August 27, 2018, the receipt of a state

conservation easement tax credit does not reduce the amount of the taxpayer’s

federal charitable contribution deduction under IRC § 170. See Tempel v.

Commissioner, 134 T.C. 341, 351 n.17 (2011), aff’d sub nom, Esgar Corp. v.

129

Commissioner, 744 F.3d 648 (10th Cir. 2014). For those donations, the federal

tax effect to the original recipient of a state credit is normally a reduction in the

amount of state tax imposed and paid for purposes of IRC § 164. The mere fact

the state tax credit is transferable does not cause it to lose its character as a

reduction or potential reduction in liability in the hands of the taxpayer who

originally qualified for the credit. If the state tax credit is sold or exchanged,

please contact Counsel for advice on the federal tax treatment of the credit.

(3) Donations of conservation easements made after August 27, 2018, that result in

a state tax credit reduce the amount of the taxpayer’s federal charitable

contribution deduction under IRC § 170. Treas. Reg. § 1.170A-1(h)(3). Most

state credits received for donations of conservation easements made after

August 27, 2018, are considered quid pro quo benefits by the regulations.

Treas. Reg. § 1.170A-1(h)(3). As a result, the deductions for these contributions

must be reduced by the amount of the state tax credit. Treas. Reg. § 1.170A-

1(h)(3)(i). However, if the total amount of the state and local tax credits is 15%

or less of the taxpayer’s payment, or 15% or less of the FMV of the property

transferred by the taxpayer, then the state tax credit is not considered a quid

pro quo benefit and will not reduce the allowable deduction. Treas. Reg. §

1.170A-1(h)(3)(vi).

(4) While state tax credits reduce the amount of the allowable federal tax

deduction, state tax deductions do not reduce the allowed federal tax deduction

(unless the state tax deduction exceeds the amount of the taxpayer’s payment

or the FMV of the property contributed). Treas. Reg. § 1.170A-1(h)(3)(ii).

D. Sale of State Tax Credits

(1) Please contact Counsel if it is determined that during a year at issue a taxpayer

sold any state tax credits related to a conservation easement.