Practice 10C: Avoiding Fraudulent or Abusive Transactions
Source
About This Practice
This guidance covers Practice 10C, which has four elements:
Review, on the land trust’s own behalf, each transaction for consistency with federal state income tax deduction or credit requirements
⬤ Evaluate the Form 8283 and any appraisal to determine whether the land trust has substantial concerns about the appraised value or the appraisal
⬤ Discuss substantial concerns about the appraisal, the appraised value or other terms of the transaction with legal counsel and take appropriate action, such as
⬤ (a) documenting that the land trust has shared those concerns with the donor,
⬤ (b) seeking additional substantiation of value,
⬤ (c) withdrawing from the transaction prior to closing or
⬤ (d) refusing to sign the Form 8283
⬤ When engaging in transactions with pass-through entities of unrelated parties, particularly those offered or assembled by a third party or described as a syndication by the IRS,
⬤ (a) require a copy of the appraisal prior to closing and
⬤ (b) decline to participate in the transaction if the appraisal indicates an increase in value of more than 2.5 times the basis in the property within 36 months of the pass-through entity’s acquisition of the property, the value of the donation is $1 million or greater and the terms of the transaction do not satisfy the Land Trust Alliance Tax Shelter Advisory
⬤ Accreditation indicator element | ■ Terrafirma enrollment prerequisite | ▲ Required for both
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Review Each Transaction
Review, on the land trust’s own behalf, each transaction for consistency with federal state income tax deduction or credit requirements
Introduction
Land trusts have a special interest in trying to make sure that tax-deductible gifts of land and conservation easements meet IRS and other government requirements. Gifts of conservation easements in particular tend to be complex, are generally unfamiliar to most landowners and their advisors, and may be subject to more scrutiny by the IRS than gifts of fee interests. The land trust should educate potential land and easement donors and their counsel about the IRS requirements, providing information both verbally and in writing (see Practice 10A1). A land trust should also review every land and easement gift for which a tax deduction will be claimed against the IRS requirements in order to satisfy itself that there are no obvious errors. While the land trust does not bear legal responsibility for seeing that IRS requirements are met, it benefits the land trust and the larger land conservation community to see that they are.
Although the Internal Revenue Service (along with state tax agencies) has the ultimate authority to enforce tax rules, it cannot possibly review the thousands of conservation contributions made annually. Land trusts, on the other hand, review every conservation transaction to which they are a party and, therefore, are in a unique position to judge the quality and significance of the conservation being generated by the contributions they receive.
Valuation is central to the integrity of conservation contributions and is addressed in detail below in Practices 10C2, 10C3 and 10C4. However, proper valuation is only one of a number of important requirements for state and federal tax benefits to which land trusts should be sensitive. For example, for conservation easement contributions, land trusts need to be sure that the basic requirements of applicable tax law, such as perpetuity, prohibition of inconsistent uses, proper assignment clauses, extinguishment and division of proceeds clauses, mortgage subordination, written acknowledgements and so forth have been met.
Less objective, and fundamentally important, is ensuring that conservation easement contributions have qualified, and meaningful, conservation purposes. A land trust should scrutinize each proposed conservation easement to ensure that it will result in a significant public benefit. While it may be argued that even protecting a quarter of an acre generates a public benefit, whether such a benefit is significant is a judgment call for a land trust. Factors to be considered include not only the conservation values of the property to be protected and whether that protection fits within the scheme of the Internal Revenue Code and Treasury regulations and state tax rules, but also whether protection of those values will generate a conservation benefit to the public that is commensurate with the tax subsidy provided to the donor.
For example, a $3 million tax benefit for protection of 200 acres of dramatically scenic open space or protection of a structure having national historic significance may be entirely justified. On the other hand, protecting a five-acre backyard with a manicured lawn and no vista is likely unjustified, even though the development value extinguished may also be worth $3 million. The attitude that land trusts aren't responsible for the value of the tax benefits resulting from their easements is shortsighted and risky in an era when land conservation is under heavy scrutiny for its practices.
Land Trust Review of Easement Gifts
The land trust should ask the following questions:
Are the resources of the property worth conserving?
Are the resources sufficiently protected?
Are other specific requirements met and required provisions included?
Dealing with Questionable Easements
What if, despite the land trust’s best efforts, a landowner wants to donate an easement that the land trust believes does not meet the IRS criteria?
Easements Where No Deduction Will Be Claimed
If the donor of a conservation easement does not plan to take a federal income tax deduction, the conservation easement is not legally required to meet the IRS requirements. Of course, the easement must result in a public benefit and meet the requirements of state law. The land trust should also be sure it meets the organization’s mission, goals and criteria. And it should notify the donor, if necessary, that a gift of an easement that does not meet IRS requirements (other than the conservation purposes test) might result in a gift tax on the donor.
Even under these circumstances, some land trusts are wary of accepting an easement that does not meet the IRS criteria. Many land trusts use the IRS conservation purposes requirements as part of their project selection criteria. Using these clearly defined, nationally accepted standards can help a land trust operate a publicly defensible program. In addition, some land trusts are concerned that accepting an easement that does not meet IRS criteria may set a confusing precedent and lead to offers from other landowners of questionable easements. On the other hand, some important conservation easements may fall short of the IRS criteria. Land trusts have on occasion taken such easements. It is a matter for each land trust to decide on a case-by-case basis.
Easements Where a Deduction Will Be Claimed
What if the land trust believes the easement does not meet the IRS requirements and is aware that the donor does plan to take a tax deduction? Should it take the easement? This is a much harder situation for the land trust to decide. Deductibility is a legal determination to be made by donor’s counsel, not the land trust. But the land trust should guard against accepting a gift that could damage its reputation and the credibility of easements as a tool. In such circumstances, the land trust might consider the following approaches:
Renegotiate the terms
Advise the landowner that the land trust has doubts about the easement’s deductibility
Carefully deliberate, with the advice of legal counsel, whether to accept the easement.
For more detail on how to handle substantial concerns about an appraisal, the appraised value or other terms of the transaction, see 10C3 below.
Judgments about the significance of conservation resulting from contributions relative to likely tax benefits should be made by land trusts, not tax authorities. Making such judgments does not mean a land trust must have technical expertise in the law or appraisal of property, but it does mean a land trust should evaluate the property’s conservation significance in view of likely tax benefits. Land trusts are uniquely positioned to make such judgments, being generally comprised of local citizens with a concern for conservation.
A contribution may be technically compliant and properly appraised, but if the tax benefits are substantially greater than the value of the resulting conservation, the transaction frustrates the purpose of the tax incentive, and is essentially abusive. This practice calls upon land trusts to make sure that the conservation contributions they receive comply not only with the technical requirements of tax law, but meaningfully achieve conservation benefits that are commensurate with the tax subsidy provided for those contributions.
Determining Concerns about the Appraised Values
Evaluate the Form 8283 and any appraisal to determine whether the land trust has substantial concerns about the appraised value or the appraisal
Importance of this Practice
In signing the Form 8283, the land trust acknowledges receipt of the gift and agrees to notify the IRS if it disposes of the property within three years. Signing the form does not constitute an endorsement of the claimed deduction; IRS regulations specifically state: “This acknowledgment does not represent agreement with the claimed fair market value.”
While signing the Form 8283 is not a technical endorsement of the value, the public may not take such a nuanced view. The public’s view of land trusts (good or bad) is contingent on whether they believe in the integrity of conservation transactions – including the validity of a donor’s appraised value for a donation – and the land trust itself. Land trusts should have a practice of requesting a copy of the landowner’s appraisal – even if they may not always receive it. This does not mean the land trust must determine or concur with the value of the donation, but it does require land trust personnel to use their general knowledge and common sense to make a general assessment about whether the appraised value is credible.
There are a number of other good reasons why a land trust will want to know the value and have a completed copy of the appraisal and Form 8283, including:
Public relations
Helping the landowner
Public support test
Easement extinguishment
Completing the transaction file
Requirements of the Practice
Land trusts should take some responsibility for valuation of land and easement contributions. The practice does not ask land trusts to perform an appraisal or even provide a technical review of an appraisal. Land trusts are qualified to do neither. However, land trusts can and should evaluate appraisals to determine whether the land trust has substantial concerns about the appraisal or the appraisal’s valuation. This is an internal check to determine whether additional steps (described below under Practice Element 10C3) should be taken before signing Form 8283. This practice expects a land trust to go beyond the strict requirements of Form 8283 because the Standards expect land trusts to go beyond mere compliance with the law to follow the highest ethical principles.
Some land trust practitioners fear that requesting and evaluating appraisals exposes land trusts to liability in the event that values are overturned by the Internal Revenue Service or state tax agencies. However, this exposure can be minimized if a land trust provides prospective donors with the appropriate disclosures at the outset of a transaction (see Practice 10A1) and even requires prospective donors to formally acknowledge receipt of the disclosure. If the land trust is unable to obtain the appraisal from the landowner, it should document its request.
Tax rules, both state and federal, establish many requirements for the appraisal of easements for purposes of substantiating easement deductions. The Uniform Standards of Professional Appraisal Practice establish additional standards for appraisals. This practice does not expect land trusts to be responsible for compliance with all these technical and complex rules. Rather, a land trust should exercise its reasonable judgement (that is, the collective judgement of staff and board) regarding the need to take the additional steps described below under Practice Element 10C3.
Appraisal Issues
Many appraisal infirmities, while not fatal, highlight appraisers’ lack of familiarity with the Treasury Regulations. These are relatively easy to correct. Others are considered to be more serious technical flaws. Still others may relate to egregiously inflated valuations. Knowledge of these mistakes can help a land trust evaluate easement appraisals accurately.
In many cases, prospective donors will obtain appraisals before they make a final decision on a donation. Land trusts should obtain copies of appraisals when they are available. Checking an appraisal at an early stage of a project can do much to head off trouble and save time and money for everyone concerned. In fact, these early appraisals can be included as part of a land trust's initial understanding with prospective donors.
Lack of Familiarity with the Treasury Regulations
Appraisal errors that occur because of the appraiser’s lack of familiarity with the Treasury Regulations include:
Using the wrong definition of market value. Per Treasury regulation §1.170A-1(c)(2), the definition of market value 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.”
Failure to state that the appraisal was prepared for the income tax purposes of the donor.
Appraisals dated more than 60 days before the date of the contribution.
Other items a land trust should check when evaluating appraisals include:
That the appraisal does not indicate that the appraiser’s fee was based on a percentage of the value of the property or property interest
That the appraisal includes the terms of the conservation easement or any other agreement or understanding that relates to the use, sale or other disposition of the property
That the method of valuation used to determine fair market value, such as the comparable sales approach or income approach, is described
For a complete checklist of what constitutes a qualified appraisal for income tax purposes, see Practical Pointers: Qualified Appraisal Checklist linked below.
Serious Technical Issues
Appraising the wrong property
Not valuing all interests as required by the IRS regulations
Exclusive use of the subdivision development valuation technique.
Wrongly appraising phased conservation easements
Ignoring other restrictions
Valuation Issues
Land trusts should also be alert to extreme valuation problems. Land trust practitioners are in a unique position to judge land values. They are, for the most part, local or have local or regional boards; they are people concerned and knowledgeable about land in their area. This local knowledge should be used to identify deviations from fair market value that are abusive using subjective judgment. There are no bright lines. However, when a value shows up on a Form 8283 or in an appraisal that causes a member of a land trust's staff or board to raise an eyebrow, it is time to look more closely.
Land trusts should not attempt to set thresholds for the consideration of valuations. Such standards impose unreasonable constraints on land trust personnel and require a formal knowledge of appraisal practices and values that is unfair to expect of someone who isn't an appraiser. However, examples of extreme valuation problems might include: (1) where the value of the easement or fee property appears to be greater than double the value that would have been expected based on a land trust’s ordinary experience; (2) where the percentage reduction for a conservation easement is claimed to remove 80 or 90 percent of the property’s value in an area where there is no significant development pressure; and (3) where the value shown for the conservation easement or fee interest is multiples of the basis shown on the 8283, and the basis is from a recent sale of not more than two or three years old.
Establish an Evaluation Process
Even though bright-line thresholds should be avoided in evaluating appraisals, every land trust should establish a formal process governing the evaluation of appraisals and how to respond to values subjectively identified as out of line or other substantial concerns with the appraisal.
It is most likely that an appraisal will be checked first, or only, by land trust staff. If the person’s reaction is that the value is out of line, that concern and some explanation for the concern, should be presented to someone in a supervisory position or a board member. If, once more widely considered, the concern remains, the issue may become subject to full board review. If, after this consideration, concern remains, then the land trust should follow the steps outlined under Practice Element 10C3 below.
Evaluating appraisals of contributions is challenging for all land trusts and unsettling to many. While such evaluations go beyond the strict requirements of the law, the credibility and public trust of the land trust community is at stake. If land trusts sincerely seek to avoid fraudulent or abusive conservation transactions, evaluating appraisals is a challenge they must be willing to accept.
Strategies for Reviewing Appraisals
To avoid feeling the necessity to comment on the specifics of an appraisal, land trusts can think about the appraisal in terms of a three-tier system. You can rank appraisals as follows:
- The good
The appraisal seems generally in line with the expected value of the conservation easement donation and is not missing any essential elements required by the IRS. In this circumstance, Form 8283 should be signed by the land trust without reservation.
- The (slightly) bad
The appraisal is aggressive in its conclusion of value or the appraisal does not adequately address a key element. For example, the appraisal identifies the issue of enhancement as required by the Treasury Regulations, concludes there is no enhancement value to the donor’s other nearby property, but provides no basis for this conclusion. In these circumstances, the land trust can sign Form 8283 but it should share its concerns regarding the appraisal in writing with the donor (see 10C3 below).
- The ugly
The appraisal is indefensible as to its conclusion of value in light of local land values, or the land trust believes that no gift has been made, or the gift described in the appraisal is not the gift received. For example, if a landowner grants a conservation easement in exchange for zoning approval, no gift has been made. If a recorded conservation easement reserves two additional home sites, but the appraisal values the conservation easement on the basis that the property will have only one additional home site, it is an example of appraising something other than the gift received. Any of these problems result in an appraisal that is or borders on being fraudulent, and the land trust should refuse to sign Form 8283 unless these issues are satisfactorily addressed (see 10C3 below).
A Tax Guide to Conservation Easements, 2nd ed.
Form 8283 and Appraisal Review
Qualified Appraisal Checklist
Discussing Concerns with Legal Counsel
Discuss substantial concerns about the appraisal, the appraised value or other terms of the transaction with legal counsel and take appropriate action, such as (a) documenting that the land trust has shared those concerns with the donor, (b) seeking additional substantiation of value, (c) withdrawing from the transaction prior to closing or (d) refusing to sign the Form 8283
Importance of this Practice
The Alliance and its members are committed to operating with the highest ethical principles, and the vast majority of conservation donations are made by generous landowners with true philanthropic intent. The public recognizes this intent and has generously supported private land conservation through tax incentives. However, if the public believes that land trusts or landowners are not acting in the public interest, that support and the conservation it enables will cease. Land trusts have a public duty to minimize misuse of the tax policies that have so effectively led to the voluntary protection of millions of acres of U.S. land.
Requesting a copy of the landowner’s appraisal (even if the land trust may not always receive it) helps curb misuse of tax policies. While land trusts are not appraisers, they do have an interest in helping to see that a donor’s appraisal will meet the IRS requirements and that the appraised value does not appear unreasonably high and thus likely to attract an IRS challenge or diminish public support.
Background
This practice presumes that the land trust made the proper preliminary disclosures to the donor (see Practice 10A) and that the land trust reviewed Form 8283 and the related appraisal (see 10C2 above). Of course, even if a land trust did not provide the preliminary disclosures to a donor as described in Practice 10A, it should still evaluate any appraisal and take appropriate action if it has substantial concerns about the appraisal, the appraised value or other terms of the transaction.
Some land trusts have been reluctant to get involved in any discussion of the quality of the appraisal or the value determined by the donor’s appraiser. It is certainly not the land trust’s legal responsibility to do so; however, given the increased scrutiny by the IRS, it can provide a valuable service to the landowner if the land trust speaks up when there are obvious concerns about the appraisal that are readily apparent to anyone.
Most appraisers who accept assignments to value donated land or conservation easements intend to produce credible reports. However, lack of experience or a desire to satisfy a donor’s valuation goals may result in problems. Many appraisal infirmities, while not fatal, may highlight an appraiser’s lack of familiarity with the Treasury regulations or may be just an oversight. Some are minor and easy to correct. Others may be more serious technical flaws or relate to significant valuation issues. See 10C2 above for more specifics about appraisal concerns. Depending on the nature and extent of these issues, some may be resolved directly by land trust personnel with the donor without prior consultation with legal counsel.
For substantial concerns about the appraised value (such as an egregiously inflated appraisal valuation, based on a land trust’s knowledge of local real estate markets) or serious technical issues affecting the appraisal (such as the exclusive use of the subdivision valuation technique), land trusts should always consult with legal counsel for advice on how best to proceed. In these circumstances, experienced legal counsel is indispensable in guiding land trusts to take the appropriate action.
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For accreditation, a land trust needs to evaluate each transaction and take action to resolve substantial concerns with the landowner’s appraisal, appraised value (see Practice 10B) or other terms of the transaction to ensure the land trust did not knowingly participate in potentially fraudulent or abusive transactions (see 10C4 below). Its documents should show the following:
- That the land trust involved legal counsel, as appropriate
- That the land trust took appropriate action to resolve substantial concerns
Appropriate actions include steps such as documenting the land trust shared its concerns with the donor; seeking an independent substantiation of value; withdrawing from the transaction prior to closing; asking to see the landowner’s appraisal prior to closing; documenting the board’s decision to proceed with the transaction and/or with signing the Form 8283; refusing to sign the Form 8283
Substantial concerns include issues such as if the title investigation or other documentation shows the property has been held for a short period; the landowner appears to have inflated expectations for the value of the donation; the appraised valued does not appear defensible in light of the land trust’s knowledge of local land values; the appraisal appears to contain unjustified extraordinary assumptions; the appraised value is significantly in excess of the donor’s cost or adjusted basis (if recent)
- That the land trust signed the Form 8283 only when it received a gift
Take the Appropriate Action
If the land trust believes the appraised value is significantly overstated or the project does not conform in some other way with the tax law, the land trust should share its concerns with the donor and decide whether to proceed with the transaction. The danger of appearing to be a party in a transaction that unfairly benefits a private individual—or, worse, potentially perpetrates tax fraud—is a serious risk. It could jeopardize not only the credibility and tax status of the land trust, but also the credibility of donations to all land trusts.
Document that the land trust has shared those concerns with the donor
The first step is for the land trust to simply document its communications with the donor or prospective donor so that it has a written record of those communications. In general, most concerns that a land trust has should be expressed in writing. For minor issues that are easy to correct, such as oversights or mistakes (for example, citing the wrong property address, failure to include a statement that the appraisal is for income tax purposes and similar technical errors), a phone conversation with the donor or their advisors, followed by a memo to the file may suffice. For more substantive issues, and certainly those related to valuation, legal counsel should assist in drafting any communications with the donor and should review the final draft of any communication.
Write your comments very carefully and thoughtfully. Concerns should be expressed in generalities, not specifics. Providing specific, rather than general, criticism of an appraisal or other aspects of a transaction implies expertise a land trust does not have. The land trust should let the landowner know that – in the land trust’s experience –the valuation seems out of line with similar properties or easements or that the appraisal procedures do not seem to follow accepted best practices. The land trust is not acting as an appraiser in this capacity. Land trust personnel can make it clear to the landowner that, while they are not professionals in the field of appraisal, their experience in this area suggests that the information is not consistent with similar projects.
The role of the land trust should not be as an editor of the appraisal. That will create the impression that if the appraiser makes all of the changes requested by the land trust, then the land trust has approved the appraisal and therefore the appraisal should be valid and accurate. This approach exposes a land trust to significant risk if there are other failings in the appraisal that it has not identified. Your written comments should be cautionary, or direct landowners or their appraisers to an issue for them to resolve, and should include the caveat that the donor must rely on their advisors and not rely on the land trust regarding these matters and that all issues may not have been identified.
Examples of how not to comment on an appraisal would be to say: “Your appraisal has to have the question of enhancement addressed for it to be valid.” And: “We believe your comparables, particularly 2 and 3, are not relevant to your property and should be disregarded."
Rather, you might say: “Have you and your advisors reviewed under the Treasury regulations whether the appraisal needs to address the issue of enhancement?” (A land trust might even provide direction to a specific Treasury regulation or a resource for the donor’s advisors to figure out the answer to the question that the land trust has posed.) And: “We believe your value does not reflect our experience of the local market and may be too high,” or “We believe this appraisal is significantly aggressive based on our experience, and we believe that it might attract scrutiny by the IRS.”
This communication should be the first step in addressing land trust concerns about an appraisal. Most landowners will appreciate the land trust’s review and suggestions. In many cases, the communication will generate further dialogue with the donor.
Seek additional substantiation of value
A land trust may decide that it needs to do more than merely share its concerns about an appraisal with a donor. This is an optional approach. The most reliable way for a land trust to address significant concerns about an appraisal is to obtain a review by another appraiser. Obtaining such an opinion can supplement the land trust’s internal evaluation of an appraisal and might be undertaken before any communication with a donor or prospective donor takes place.
The land trust might also recommend that the landowner consider getting a second appraisal or a review appraisal, and may want to remind the donor of overvaluation penalties.
If a land trust or landowner seeks additional substantiation of value for an easement donation, the appraiser should meet the Treasury Regulation’s criteria for a qualified appraiser [Treasury regulations §1.170A-13(c)(5)] and have knowledge of the local real estate market.
If a land trust or landowner pursues a second opinion of value, there are two alternative forms for that opinion: (1) a new appraisal of the contribution; (2) a review of the donor's appraisal. If a land trust chooses the second approach (likely to be quicker and less expensive), it should make sure that the opinion is based upon a substantive review of the determined value, including an evaluation of the methodology and comparables. A pro forma "check-the-box" review that merely confirms compliance with technical requirements of the Uniform Standards of Professional Appraisal Practice (USPAP) may not be sufficient to assess the donor's appraisal.
Obtaining a second opinion requires both time and money. It is unlikely that a donor will agree to reimburse a land trust for obtaining a second opinion. It is also unlikely that a donor who has provided an appraisal and Form 8283 toward the end of the year will be willing to wait for a second opinion. Although a land trust cannot force a donor to reimburse it for a second appraisal (unless it has a contract with the donor that requires such reimbursement), it can refuse to sign Form 8283 until it has obtained a second appraisal. A land trust will want to consult legal counsel first to understand what may happen if a second full appraisal is subpoenaed by the IRS in an audit of the taxpayer.
If a credible, complete, second opinion supports the donor's appraisal, the land trust's concerns are presumably satisfied and it can sign Form 8283. If a second opinion sustains the land trust's concerns, then the land trust should share the second opinion and its concerns with the donor or prospective donor. Once that step has been taken, and if the donor or prospective donor chooses to disregard this additional information, the land trust may elect to simply document its communications, as the practice requires, and proceed with the transaction. Or the land trust may choose to terminate a transaction that has not closed or refuse to sign Form 8283 in completed transactions. These alternatives are discussed in more detail below.
A donor has good reason to heed a land trust's concerns about its appraisal, particularly if those concerns are backed up by the opinion of another appraiser. Although it may cost a donor or prospective donor time and money to start the appraisal process over, a donor whose deduction is reduced or disallowed will be faced with possible repayment of the tax saved due to an overvaluation, as well as a penalty of as much as 40 percent of any overvaluation, plus interest on the entire amount due.
A second opinion may also disagree with a landowner's appraisal, but not find a significant overvaluation. It may even conclude that the original appraisal undervalued the donation, which is unlikely. If a second opinion finds that the donor's appraisal overvalued the donation but not significantly, what should a land trust do?
The first issue to resolve in answering such a question is: What constitutes a significant over-valuation justifying continued land trust concern? There is no bright-line test for a land trust's initial review of appraisals. However, examples of extreme valuation problems might include: (1) where the value of the easement or fee property looks to be greater than double the value that would have been expected based on your ordinary experience; (2) where the percentage reduction for a conservation easement is claimed to remove 80 or 90 percent of the property’s value in an area where there is no significant development pressure; (3) where the appraisal is based upon a subdivision analysis that has indefensible assumptions; or (4) where the value shown for the conservation easement or fee interest is multiples of the basis shown on the 8283, and the basis is from a recent sale of not more than two or three years old.
When a land trust obtains a second opinion from its own appraiser, it is prudent to define significant overvaluation by looking to the standards established by the Internal Revenue Code for overvaluation penalties.
Code §6662(e)(1)(A) provides that a substantial overvaluation is one that is 150 percent over actual value. Code §6662(h)(2)(A)(i) provides that a gross overvaluation is one that is 200 percent over actual value. A substantial overvaluation is subject to a penalty equal to 20 percent of the amount of the overvaluation; a gross overvaluation is subject to a 40 percent penalty on the amount of the overvaluation.
Withdraw from the transaction prior to closing
If a land trust has significant concerns about a donor's appraisal or other aspects of a transaction, and if the donor refuses to adequately address those concerns, the land trust can withdraw as the potential grantee prior to closing, thereby terminating the transaction. This is a drastic remedy and should only be resorted to after (1) consultation with legal counsel; (2) adequate communication of the land trust's concerns to the prospective donor (including sharing any second opinion obtained by the land trust); and (3) allowing the prospective donor a reasonable time to respond to those concerns. This course of action is, of course, only possible if the land trust received an appraisal early in the project prior to closing. See practice element 10C4 below for more information about when an appraisal must be required prior to closing.
Because withdrawing from a transaction, particularly one that is well advanced, is likely to be both annoying and costly to a prospective donor, legal counsel should be consulted prior to withdrawal to ensure that the land trust is in as strong a position as possible to justify its actions and defend them if necessary.
Refuse to sign Form 8283
The option of withdrawing from a transaction prior to closing is far preferable to allowing a transaction to close and then refusing to sign Form 8283. However, if the donor does not provide the appraisal prior to recordation of the easement or property deed, preemptive termination of the transaction by a land trust isn't an alternative. In many cases, appraisals are not completed – some not even begun – prior to closing. On the other hand, many prospective donors obtain appraisals before proceeding with the final steps of a contribution. Land trusts should require, or at least request, copies of appraisals when they are available. An appraisal shared early in the acquisition process can forewarn a land trust of potential valuation problems, often well in advance of closing.
When a donor presents a land trust with an appraisal and Form 8283 after closing, it is too late to withdraw from the transaction. In such cases, the contribution is completed and is perpetual. At this point, a land trust can decide to document its communications of concern with the donor and close the file or, depending upon the gravity of its concerns with the transaction, refuse to sign Form 8283. This approach should not be elected without a very thorough examination of all of the other options and an equally thorough examination of the valuation (or other aspect of the transaction causing concern) in question. Land trusts should consult closely with legal counsel and actively involve them in such a decision and its implementation.
A strong and clear written record of land trust communications of its concerns to the donor prior to the refusal to sign is also essential. Finally, a land trust electing to refuse to sign Form 8283 should be willing and able to defend the refusal in court if necessary.
Other Concerns
A land trust may have significant concerns about other aspects of a transaction that justify one or more of the foregoing actions. Non-valuation concerns would include identifying that the contribution is not really a contribution but was required as part of a contractual arrangement or governmental regulation. In these cases, it is highly unlikely (although technically possible) that a contribution for which tax benefits are allowed has occurred. There are also cases in which the prospective donor seeks to reserve uses that the land trust believes are fundamentally inconsistent with protection of the conservation values or where no publicly significant conservation is proposed. In each of these cases a land trust may have justifiably significant concerns about the transaction.
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For accreditation, as part of the application process, a land trust board must pass a resolution agreeing to uphold high standards of ethics. The board must also review and approve each land and easement transaction (see Practice 3D) and receive sufficient and timely information prior to each meeting to make informed decisions (see Practice 3C). These steps help ensure the land trust does not knowingly participate in transactions that are potentially fraudulent or abusive (see Practice 1A).
Transactions with Pass-through Entities
When engaging in transactions with pass-through entities of unrelated parties, particularly those offered or assembled by a third party or described as a syndication by the IRS, (a) require a copy of the appraisal prior to closing and (b) decline to participate in the transaction if the appraisal indicates an increase in value of more than 2.5 times the basis in the property within 36 months of the pass-through entity’s acquisition of the property, the value of the donation is $1 million or greater and the terms of the transaction do not satisfy the Land Trust Alliance Tax Shelter Advisory
Importance of this Practice
The land trust movement is filled with good people and well-respected organizations. However, public confidence in the integrity and conservation purposes of land trusts can be shaken by the actions of good land trusts whose practices may innocently facilitate abusive or fraudulent transactions, as well as by those who knowingly facilitate abuse of the tax code for private gain.
It is easy to point to hundreds or even thousands of acres of conserved land and say that such ends justify the means. However, when the means are actual or suspected fraudulent or abusive transactions, such a view is extremely short-sighted. Such actions undermine the credibility of land trusts and the credibility of voluntary land conservation, which is dependent upon the good will of the public. If that goodwill is squandered, land trusts will experience a host of problems.
The federal tax code and regulations (and comparable state law provisions) invest land trusts with the responsibility for administering hundreds of millions of public dollars in tax incentives for voluntary land conservation. In considering this responsibility, land trusts should realize that whether a transaction is fraudulent or abusive is not a subjective matter; it is a determination that can and should be based on an objective review of the facts of a suspected transaction.
Also, land trusts that knowingly facilitate fraudulent or abusive transactions may themselves be subject to penalties up to and including revocation of their tax-exempt status.
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For accreditation, as part of the application process, a land trust board must pass a resolution agreeing to uphold high standards of ethics. The board must also review and approve each land and easement transaction (see Practice 3D) and receive sufficient and timely information prior to each meeting to make informed decisions (see Practice 3C). These steps help ensure the land trust does not knowingly participate in transactions that are potentially fraudulent or abusive (see Practice 1A).
Description of a For-profit Syndication
The conservation of land can be expensive. Sometimes individuals join together to purchase and conserve land. In these cases, the individuals jointly contribute to the purchase price and jointly share in any resulting tax benefits. These transactions are often done through the vehicle of a partnership or limited liability company and are called syndications.
Practice 10C4 is intended to help land trusts avoid participation in one particular type of syndication, those involving fraudulent or abusive tax deductions. A tax deduction syndication, for purposes of Practice 10C4, is the syndication – for profit – of the tax benefits arising from the donation of a conservation easement or land for conservation purposes. For-profit syndications are more likely than most conservation transactions to result in fraud or abuse of tax laws.
The hallmark of a for-profit syndication is that the primary goal of the transaction is generating a profit to investors through the allocation of tax benefits resulting from conservation easement or land donations. An essential feature of such a transaction is that the donor is a pass-through entity. Pass-through entities typically take the form of limited liability companies and, less typically, partnerships and limited partnerships. Such entities allow charitable deductions to pass through to their members or partners, which allow one donation deduction to be allocated among a number of different taxpayers.
In a typical for-profit syndication, a pass-through entity owns land and sells memberships in the entity to investors. After a sufficient number of investors have joined (the number varies from transaction to transaction), the entity contributes a conservation easement and allocates the resulting deduction among the investors according to the amount of their investment. There is nothing inherently abusive or fraudulent about such a syndication. In fact, syndications in which the primary purpose is land conservation and in which investors do not expect a positive return from tax benefits alone can result in important conservation.
What distinguishes for-profit syndications in general from conservation syndications is the deliberate strategy of generating net profits to investors entirely from the allocation of tax benefits. Keep in mind that a donor can never recover the value of a donation from resulting tax benefits alone because income tax benefits are never more than a percentage of the value of the donation. For-profit syndications deal with this fact by relying upon inflated appraisals of donations. These appraisals claim a value that is many times more than the amount actually paid by investors for their interests in the entity making the donation.
In order for an investor to realize a positive return on their investment from tax benefits alone, it is necessary that the appraised value of the donation exceed the amount of the investment by at least 2.5 times (250 percent), the break-even line if the investor’s tax rate is 40 percent. The fact that the value of the donation must exceed the value of the investment by at least 250 percent (really by much more in order for investors to realize a significant profit) makes it likely that the appraisal of the donation is unjustifiably inflated. This is what makes for-profit syndications prone to abuse or fraud. Of course, unjustifiably inflated appraisals are not limited to for-profit syndications; they are just more likely in such syndications.
For-profit Syndications Classified as Listed Transactions
In December 2016, the Internal Revenue Service issued Notice 2017-10, making for-profit syndications "listed transactions" and requiring participants in, and material advisors to, such transactions to file disclosures of their involvement.
By the terms of the Notice and a subsequent notice (Notice 2017-29), the IRS has ruled that the donee of a conservation easement resulting from a for-profit syndication is neither a participant in, nor a material advisor to, the syndication and has no obligation to file a disclosure.
Therefore, land trusts have no responsibility for filing disclosures with the IRS with respect to any form of participation in a for-profit syndication. This fact does not relieve land trusts of the need to avoid participating in abusive or fraudulent transactions involving for-profit syndications.
On November 9, 2022, the United States Tax Court in Green Valley Investors, LLC v. Commissioner 59 T.C. No. 5 set aside Notice 2017-10 opining that the IRS had not complied with the Administrative Procedure Act in issuing this Notice. This case can be appealed so all references to the Notice in this resource remain until any possible higher court actions have concluded.
Pass-through Entities: Know the People Involved
Practice 10C4 focuses on transactions involving pass-through entities. Pass-through entities include sole proprietorships, partnerships, LLCs and S corporations. For purposes of this practice, sole proprietorships consisting by definition of only one person are not included in this definition and, therefore, cannot be syndicated.
If the donor entity has only one member, and if that member is a person, there can be no allocation and, therefore, no syndication. However, if there is only one member, but that member is itself a pass-through entity, the potential for a syndication exists, so inquiries about the membership of the member that is a pass-through entity will be necessary.
A syndication of any sort is not possible without the donor’s ability to allocate tax benefits resulting from a donation. Whether a prospective donor is a pass-through entity will be evident to a land trust early in the transaction, assuming that the land trust obtains a title report (see Practice 9F). The Land Trust Alliance’s Tax Shelter Advisory asks land trusts to require prospective donors to disclose whether the donation will be made by a pass-through entity at the outset of any transaction.
Although it is easy to determine if a prospective donor is a pass-through entity, it is not as easy to determine the membership of the entity. Such information is typically not public and is likely to only be available from a representative of the entity who has no obligation to disclose it. Nevertheless, it is important to learn the make-up of the entity to properly judge whether the proposed donation is part of a for-profit syndication. Once again, the Advisory asks land trusts to require a pass-through entity to reveal the make-up of its membership at the outset of any transaction. If a prospective donor refuses to share information with a land trust about its membership, the best course for the land trust is to decline to proceed with the transaction.
Much difficulty and dissention can be avoided in the earliest part of the potential conservation proposal if the land trust immediately insists on meeting and talking with all the people involved in any entity that will be involved in the transaction. Tactfully inquire early about the individual people’s history with the land and value expectations. If the history is short and value expectations are high, use caution and additional care. Land Trust Standards and Practices does not require land trust to determine the correct value of a donation, but it does ask that land trusts generally assess whether the claimed value is credible before signing Form 8283. Read the appraisal and ask commonsense questions based on the land trust’s general knowledge of land values in its region. Diplomatically avoid transactions with individuals with unrealistic value expectations or those whose sole purpose is to obtain a tax benefit.
If the donor entity shares the information requested about its membership and the members are all related parties (a family) or if there is only one member that is a living person, then a land trust can proceed with the transaction as with any other donation. Of course, the land trust must still avoid fraud, abuse and improper appraisals; these are obligations of a land trust in all transactions. On the other hand, if the disclosure reveals unrelated members or another entity as a member, the land trust should act cautiously, increase its scrutiny of the transaction and involve external land trust legal counsel (not a board or staff member) early in the process. Keep in mind that merely because the transaction will result in the syndication (allocation) of tax benefits does not necessarily mean that it is abusive or fraudulent. However, it does necessitate further investigation before continuing to participate in the transaction.
The Advisory requires that land trusts dealing with pass-through entities of unrelated parties ask the donor entity to certify in writing:
Whether a promoter or third party played a role in facilitating the proposed contribution or otherwise promoted, organized or secured the transaction.
Whether the promoter has produced or disseminated any promotional materials about the transaction, oral or written, including an advertisement, solicitation, prospectus, offering memorandum or similar document, presentation or communication. Ask the donor to provide a copy of the promotional materials. (This information may reveal that the transaction is likely a listed transaction under the Notice because of the potential return on investment that is asserted [often measured in federal tax deductions possibly available to investors] or because the promotional materials disclose that the transaction may qualify as a listed transaction. Such a disclosure means that the transaction is a prohibited tax shelter transaction for purposes of Practice 10C4 and the Advisory.)
The date the donor entity acquired the property to be conserved.
The original purchase price or basis of the property to be conserved
Whether the donor entity intends to claim a federal tax deduction based on the donation of a conservation easement or land. (The donation of a conservation easement or land is often listed as one of a number of options for how the donor entity might use aggregated investor funds [for example, often described as the “Conservation Option” or “Green Option”], which would be sufficient evidence of such intent).
Whether the donor entity’s expectations for value of the land or easement to be donated compared to the purchase price approach or exceed an increase in value of more than 2.5 times the basis in the property.
Whether the appraisal reveals a value that meets or exceeds the thresholds stated in Practice 10C4 or the Notice, regardless of any justifications in the appraisal or elsewhere in the transaction documentation.
Require a Copy of the Appraisal Prior to Closing
If a prospective donor is a pass-through entity whose members are entirely or partially unrelated, or is another entity, land trusts need to obtain a copy of the appraisal of the proposed donation prior to closing. As discussed in an earlier section, inflated appraisals reporting values for donations that are at least 250 percent greater than investments are essential to generate profits to investors in such syndications.
Although it is typical for individual donors to obtain appraisals only after the donation has been made, that is never the case with for-profit syndications. The reason for this unusual pattern is that such syndications are promoted based upon anticipated returns to investors from tax benefits. The amount of such tax benefits cannot be determined without an appraisal of the proposed donation. If a land trust decides to accept a donation resulting from a syndication, it must insist on obtaining a copy of the appraisal prior to accepting the donation. This should be a pre-condition to proceeding with any donation involving a syndication and should be included in a written agreement with the prospective donor at the earliest possible point in the transaction.
If the prospective donor refuses to provide such an appraisal, the land trust should decline to participate further in the transaction. Because possessing an appraisal prior to closing is a hallmark of for-profit syndication, land trusts should insist on being provided a copy. Note that in some cases, it may be necessary for a land trust to be named as an authorized recipient of the appraisal. However, the donor who has contracted for the appraisal is in a position to grant that authorization.
Obtaining a copy of the appraisal prior to accepting the donation is essential if the land trust wants to avoid the prospect of having to refuse to sign Form 8283 for a donation that has already been accepted. Refusing to sign Form 8283 after a donation has been accepted increases the risks of adverse results for the land trust.
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For accreditation, a land trust must evaluate the appraisal and the Form 8283 for each donated conservation property or easement (see Practices 10B and Practice Elements 10C2 and 10C3 above). A land trust must not participate in a transaction with a pass-through entity of unrelated parties when (a) the appraisal indicates an increase in value of more than 2.5 times the basis in the property within 36 months of the pass-through entity’s acquisition of the property and (b) the value of the donation was greater than $1 million. A land trust must report on the list of conservation projects it submits with its application if any transaction it completed since 2016 meets these criteria.
Decline to Participate if…
Decline to participate in the transaction if the appraisal indicates an increase in value of more than 2.5 times the basis in the property within 36 months of the pass-through entity’s acquisition of the property, the value of the donation is $1 million or greater and the terms of the transaction do not satisfy the Land Trust Alliance Tax Shelter Advisory.
There are a number of questions a land trust should ask in any transaction involving a syndication. It is essential for a land trust to ask these questions as early in the process as possible and definitely before it accepts the donation.
Has there been an increase in value of the property of more than 2.5 times the basis in the property?
Did the 250 percent (or more) increase over basis occur within 36 months of the pass-through entity’s acquisition of the property?
Is the value of the donation $1 million or greater?
Do the terms of the transaction otherwise satisfy the requirements of the Advisory?
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For accreditation, a land trust must follow the version of the Tax Shelter Advisory in place at the time of the transaction. It must document that it conducted the comprehensive due diligence and analysis of transactions with pass-through entities of unrelated parties (particularly those offered or assembled by a third party) outlined in the Advisory before closing to determine if a transaction meets the terms of the Advisory or is otherwise potentially fraudulent or abusive.
A Tax Guide to Conservation Easements, 3rd edition
Do You Need to Use the Tax Shelter Advisory?
Land Trust Alliance Tax Shelter Advisory
The Syndication of Conservation Easement Tax Deductions
Summer 2015
Form 8283, Noncash Charitable Contributions
IRS Notice 2017-10
IRS Notice 2017-29
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