Keeping Conservation Contributions “Qualified” Under Federal Rules Jonathan Avery, MAI, CRE Avery Associates; Acton, MA Stefan Nagel, Esq., Of Counsel Law Office of Stephen J. Small, Esq., P.C. Newton, MA Phone:

What We’ll Cover Gift Acknowledgment Rules Generally “Qualified” Contributions and How They Differ from Others Qualified Appraisal Rules Qualified Appraiser Rules Form 8283 CR Entries for Form 990 1

Responsibilities of Donee (I.e. – Why Should I Care?) IRS Notice : May challenge exemption of organizations that “participate” in abusive transactions IRS Letter to Senate Finance Committee (3/30/05): “misuse of charities for charitable deductions” IRS FY 2008 Implementing Guidelines: “examination of organizations that promote overvaluations....” LTA Standards and Practices 5(B), 10(B) and 10(D) relating to accountability and appraisals Implications of recent Tax Court rulings and pending rules: all participants bear some responsibility, including appraisal review and correct substantiation Form 990 reporting rules 2

Gift Substantiation Under Federal Rules The following must be substantiated: – The donation – If a “qualified conservation contribution” (QCC), the qualification of the donation under IRC Sec. 170(h). – Qualifications of appraisal and appraiser – Valuation For this, file the following with the tax return (* = required): – Form 8283* including for conservation restrictions only a Supplemental Statement* ( See Supplemental Materials hereto) – Copy of the recorded conservation restriction* (including mortgage subordination if applicable) – “Qualified” appraisal by “qualified” appraiser (required* if > $500K) – IRC Sec. 170(f)(8) contemporaneous written acknowledgment – Copy of baseline documentation report if conservation restriction 3

Fundamental Concept: Not Every Gift of Property is a “Qualified Conservation Contribution” See IRC Sec. 170(h): Qualified Organizations -publicly supported -requisite purposes Qualified Real Property Interest: 1.Remainder Interest -reserved “estate” for term or life 2.Fee Interest with Reserved Minerals -conceptual issues 3.Conservation Easement/Restriction 4

Conservation Easement/Restriction Conservation Purposes -public recreation or education -significant natural habitat -open space for scenic enjoyment/significant public benefit -open space pursuant to clearly delineated governmental policy/significant public benefit -certified historic structure (new definition) Merely restricting development is not sufficient And satisfy all substantiation requirements that follow 5

Fundamental Concepts: How Contributions of Land Are Measured “Qualified Appraisals” involved for each: Gifts and bargain sales of real property “held” (i.e., owned) in excess of one year – Deduction is FMV based on appraisal Gifts and bargain sales of real property held one year or less and “dealer” donations - Deduction limited to lesser of FMV or basis, and appraisal needed to allocate basis for easement donations 6

Qualified Appraiser Earned an appraisal designation or has met minimum education/experience Regularly performs appraisals for $ Demonstrated experience and education in the type of property being appraised Not prohibited from practicing before the IRS for prior 3 years Known to the public as an appraiser Qualified to appraise property type – Demonstrated experience – Specialized education Must NOT be – Owner of land appraised – Donee/CR holder – Taxpayer claiming deduction – Previous broker of land appraised – Fulltime employee of or related to any of above 7

Qualified Appraisals 1 of 2 October 2006 – IRS Notice provided transitional guidance based on and codified at IRC Sec. 170(f)(11) (PPA of 2006). An Appraisal that is – Prepared in compliance with applicable Treasury Regulations, particularly 1.170A-13(c)(3)(ii) and 1.170A-14(h) – Prepared by a qualified appraiser (requisite certification and experience and/or education) in accordance with generally accepted appraisal standards such as Uniform Standards of Professional Appraisal Practice (USPAP) – Prepared not earlier than 60 days before gift or anytime after gift and prior to filing of tax return, including extensions 8

Qualified Appraisals 2 of 2 Must include required information – Specific description – Date of value & date of contribution – Any property-related agreements – Appraiser’s name, address, TIN, qualifications – Statement of purpose – federal taxes – Market value of the contribution based on determinations of “highest and best use in “before” and “after” conditions (See Supp. Materials) – Valuation method used and data considered 9

Qualified Appraisals of Conservation Restrictions (Only) Must Also Consider: Contiguous donor and family-owned parcels Potentially enhanced property owned by a “related person”, whether contiguous or not See Treas. Reg. Sec A-14(h)(3)(i) and IRS CCA Memo (August 23, 2013) 10

Treas. Reg. Sec A-14(h)(3)(i), 4th Sentence “The amount of the deduction in the case of a charitable contribution of a perpetual conservation restriction covering a portion of the contiguous property owned by a donor and the donor’s family (as defined in section 267(c)(4)) is the difference between the fair market value of the entire contiguous parcel of the property before and after the granting of the restriction.” (Emphasis added) 11

Treas. Reg. Sec.1.170A-14(h)(3)(i), 5th Sentence “If the granting of a perpetual conservation restriction after January 14, 1986, has the effect of increasing the value of any other property owned by the donor or a related person, the amount of the deduction for the conservation contribution shall be reduced by the amount of the increase in the value of the other property, whether or not such property is contiguous.” (Emphasis added) 12

IRS CCA Memo (August 23, 2013) In addition to expected clarifications, also concluded as follows: – Apply contiguous property rule when have adjacent “disregarded” LLC or partnership of which donor or a family member (vertical) is sole member – Apply enhancement rule when adjacent LLC, partnership or corporation is NOT “disregarded” even if donor or vertical family members are sole or majority member(s) 13

Common Appraisal Problems Valuation more than 60 days prior to the date of the gift Avoid use of a % of the property value as the amount of the contribution for a CR (Key to first Scheidelman tax court ruling) Not using the before/after technique for diminution in value from donating CR Not recognizing ‘quid pro quo’ Not recognizing ‘enhancement/contiguity’ issues No purpose statement – Federal Income Tax No copy of recorded Conservation Restriction 14

Form 8283 See generally the Supplemental Handout Materials, pages To substantiate noncash gifts Filed with donor’s tax/information return Signed by appraisers and donee org. Irrespective of instructions, donee organization should only sign completed Form (more follows) 15

Form 8283 – Key Items Correct donor must be shown (note rules for “disregarded entities”) Detailed property description IRS focuses on acquisition entries Appraiser certification of experience Appraiser overvaluation penalty statement All appraisers must sign Note the limitations of the Part IV Donee acknowledgment: gift only, not FMV 16

Form 8283 Supplemental Statement for Conservation Restriction Contributions See generally the Supplemental Handout Materials, pages 3-4 Supplemental Statement (1) describe conservation values under IRC Sec. 170(h) being protected (2) valuation approach: enhancement/contiguity? (3) “quid pro quo” – approvals or contract? (4) reference baseline (to demonstrate organizational capacity) As of 2012, also need to attach copy of CR document (or detailed summary) 17

Other Gift and Value Substantiation Rules $500,000 rule for appraisal report filing Also need gift substantiation letter (!). I.R.C. Section 170(f)(8): no goods, services, products or other reciprocal payments. Must accurately state reciprocal payment IRS taking “strict compliance” position: For gift letter, see Gomez (But also see Friedman, Simmons and Crimi). For value, see Scheidelman (T.C., BUT, rev’d 2d Cir.) 18

Form 990 Schedule D CR Questions Form 990: Annual return of non-profits Triggered by responses to Core Form Parts IV and IX Schedule D questions are governance items. Those questions related to easement (CR) holdings include: (1) number held (not an estimate) and acreage (2) number held on certified historic structures (3) number amended or terminated (to address perpetuity) (4) monitoring, inspection and enforcement policies? (5) for HPEs in NR districts, all elevations protected and was there certification of donee qualification? (6) hours spent monitoring/enforcing, and expenses (7) how CRs reported: zero value asset? 19

Form 990 Schedule M Schedule M is to list all non-cash contributions if aggregate > $25K. Report all easement donations, including especially on “historic structures” (line 13). Line 14 entries are for those easements “other than those entered on line 13.” Instructions for columns c and d appear to allow for entry of “zero-value” for easements. 20

Questions? Stefan Nagel, Esq., or- Jonathan Avery