By Kenneth H. Bridges, CPA, PFS February 2013
Let’s assume you have a tract of land which could potentially be developed into a residential subdivision, but you don’t want to ever see the land developed, desiring for it to forever remain in its beautiful natural state. If you are willing to grant a perpetual conservation easement to a qualified organization (effectively giving up your rights to develop the property), then the tax law will reward you with a tax deduction. The amount of the deduction is the difference between the appraised value of the land assuming its highest and best use value before the granting of the conservation easement and its value after granting the conservation easement.
Provided that you carefully comply with all of the rules and have reasonable appraisals, this works quite well. But can you essentially buy a conservation easement deduction by investing in a partnership which will then allocate you a conservation easement deduction the tax benefit of which exceeds the amount of your investment? Such structured partnership arrangements have become quite popular in recent years. However, it is important to proceed with caution here and be aware that the IRS may challenge the deduction.
The IRS is well aware of the popularity of structured conservation easement arrangements. In fact, there are more than 200 cases docketed with the Tax Court involving conservation easement deductions, we are aware of a number of such partnerships which have recently been notified that their returns are under examination, and it is our understanding that all Form 8283s reflecting a deduction for a conservation easement donation are being routed to a specific group within the IRS. Also, an attorney in the IRS Office of Chief Counsel recently told participants in a webcast that “We are really going to look at conservation easement partnerships and see what we can do.”
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.