Easements Under Fire

February 21, 2008

Prospective donors and preservation organizations alike should be aware that preservation easements--and particularly "façade" easements – have come under increased scrutiny by the IRS, the news media, and Congress over the past several years.   As a result of this scrutiny, Congress enacted specific reforms to the tax laws governing the donation of preservation easements in 2006 (see our legislative update here). In addition, the IRS has singled out easement donations as an area in which there has been significant taxpayer abuse, and has warned taxpayers that it will be actively auditing in this area.

Background: In June 2004, the IRS issued a public notice indicating that it would be looking closely at charitable deductions taken for conservation easement donations. Then-IRS Commissioner Mark Everson noted that the Service had uncovered "numerous instances" where the tax benefits of preserving historic buildings had been "twisted for inappropriate individual benefit," and he stated that the IRS would consider imposing penalties on promoters, appraisers, and other persons involved in improper transactions. On several occasions since then, IRS officials have reiterated concerns about abuses in this area, both with respect to the promotion and the valuation of façade easements. The IRS has specifically warned about substantial deductions being claimed by taxpayers for façade easement donations on properties already restricted by local preservation laws, in which the obligations imposed by the easement are essentially the same as those already imposed by the local preservation law.  

(The IRS’s comment about “abusive tax avoidance transactions” involving historic preservation easements is available here.)

Similar concerns have been raised about preservation easements over the past several years by the news media and by members of Congress. In December 2004, The Washington Post published a multi-part series on façade easements, raising serious questions about taxpayers who appeared to be taking inflated deductions for easement donations, and easement promoters who appeared to be encouraging such activity.  In June 2005, the Oversight Subcommittee of the House Ways and Means Committee conducted hearings to explore questionable practices in this area.  And, as noted above, in 2006 Congress passed legislative reforms targeting façade easements.  These reforms are designed to tighten the requirements for easement donations, and to make it easier for the IRS to assess penalties for taxpayers and appraisers who abuse the tax incentives available for easement donations.  See legislative update.

Donor Considerations: The National Trust for Historic Preservation strongly supports preservation easements, and we also support the tax incentives that encourage their use as a preservation tool.  At the same time, we too have been concerned about reports of abuses in this area, and we have supported reasonable legislative reforms to address these concerns.  While we believe that the package of legislative reforms passed in 2006 should help to provide greater accountability in this area, we also believe that - particularly given the high level of scrutiny being given to preservation easements - prospective donors should be aware of the following:

  • The donation of preservation easements to qualified easement-holding organizations can provide useful tax benefits to donors, but prospective donors should understand that those benefits will vary considerably, from property to property and from easement to easement. Property owners should be extremely wary of any promotion suggesting a standard formula for deductions, or implying that donors can reap significant tax benefits from easements that do not significantly reduce the value of their property.
  • The IRS’s warnings about taxpayers taking excessive donations for easements on buildings already restricted by local landmark laws should be taken seriously.  However, we think it important that the IRS (and prospective donors) should not automatically assume that easements on properties subject to local landmark laws have no value at all.  Each community’s preservation law is different (some are strong, others are little more than advisory), and the valuation implications for each easement needs to be determined on a case-by-case basis, as indicated in the Treasury Department’s own regulations.
  • Prospective easement donors - and their appraisers - should also take seriously recent statements by the IRS that it plans to look carefully at whether some taxpayers are taking appropriate deductions for easement donations.  Donors and preservation organizations will be expected to demonstrate that easements effectively protect historic properties, and donors and appraisers will be expected to fully substantiate the value of tax deductions claimed for easement donations.  Given the higher level of audit activity in this area, taxpayers would be well-advised to ensure that their appraiser has excellent credentials, and meets the new “qualified appraiser” requirements of the tax code.  Donors should also seek the services of competent legal counsel before making donations of preservation easements.
  • Prospective easement donors should also carefully consider the credentials, experience, and capability of any organization being considered to hold a preservation easement.  In addition to ensuring that the organization meets the basic IRS qualifications for serving as an easement-holding organization, prospective donors should not be hesitant to ask straightforward questions about the organization - and to seek documentation, including annual reports, form 990 tax filings, and copies of policies relating to easement acquisition and administration.  Some of the questions that prospective donors should consider asking might include:
    • How long has the organization been in operation?
    • Where is it incorporated, and is it registered as a charitable organization in the state (or states) in which it operates?  How is it funded and staffed?  
    • Does it have an active and engaged board of directors?  
    • Are funds given in connection with an easement donation primarily set aside for future stewardship, or are significant amounts used to pay for promoters, processors, or managers? 
    • What kind of a track record does it have in acquiring, administering, and enforcing easements? 
    • Does it have a broader track record in historic preservation?
    • Does it routinely protect - at a minimum - the entire exterior of a historic structure under easement and prohibit all changes that would be inconsistent with the property’s historic character?  Was this its practice even before Congress made this the new minimum standard in 2006?
    • Has the organization recently been audited by the IRS, or is it currently being audited or investigated?
    • Is the organization aware of whether other donors to the organization have been (or are currently being) audited, and if so what have been the results of those audits?
  • While concerns raised about easement abuses should not be taken lightly, we also think that it is important to recognize that preservation easements have been effectively and beneficially used by hundreds of preservation organizations and government entities across the country for decades. In many cases, easements are the only preservation protections for historic properties. Even for properties already subject to some degree of control under local landmarks laws, easements can help to strengthen the protection, and to ensure that historic properties will be protected for future generations.

 

Powered by Convio