Charitable Contributions Of Conservation Easements And Purchases Of Real Property From Charitable Organizations

IRS ISSUES WARNING AGAINST UNAUTHORIZED DEDUCTIONS REGARDING PROPERTY TRANSFERS

The Service issued a notice warning against improper charitable deductions by taxpayers when taxpayers make†payments or easement transfers to exempt organizations in connection with a taxpayer's purchase of property†from the exempt organization. In Notice 2004-41, the Service announced that it "intends to disallow†[certain] deductions and may impose penalties and excise taxes" connected with these transfers. Additionally,†the Service acknowledged that it will be reviewing the origin of these transactions, and may subject the†promoters and appraisers to penalty taxes.

CONTRIBUTIONS OF CONSERVATION EASEMENTS

Ordinarily, charitable contribution deductions are permissible only if the taxpayer conveys his or her entire interest†in the property. However, the Internal Revenue Code ("Code") provides an exception for qualified conservation†contributions.1 This includes conservation easement contributions, granted in perpetuity, of real property with a†restriction on its use.

To ensure that a taxpayer is not making an improper charitable contribution deduction of conservation easements,†the taxpayer must restrict the future land use to the protection of a natural habitat for fish, wildlife, plants, or similar†ecosystems, or for the preservation of open space. Further, the open space restriction must be for the scenic†enjoyment of the general public or pursuant to a clearly delineated governmental conservation policy, and the public†benefit of the open space must be significant, or the deduction will be disallowed.

In addition, a taxpayer must substantiate a contribution of $250 or more in order to properly claim the charitable†contribution deduction. To substantiate a contribution, the taxpayer must obtain from the charitable organization a†statement that includes (1) a description of any return benefit provided by the charitable organization, and (2) a good†faith estimate of the return benefit's fair market value.†A taxpayer will be allowed a charitable deduction for the contribution of a conservation easement if he or she†complies with these requirements; however, the deduction may not exceed the fair market value of the property

contributed (reduced by the fair market value of consideration received by the taxpayer). Furthermore, no deduction†will be allowed if the donor (or related person) can expect to receive financial or economic benefits greater than...

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