M Funds 2 : M Funds 2 : Reportable Transactions: captive insur...

M Funds 2 : M Funds 2 : Reportable Transactions: captive in requirement because it could permit the parties to agree to extinguish the easement without a judicial proceeding. In a recent summary judgement motion, the IRS chief counsel argued that a clause similar to (2) above “show[ed] the parties’ unambiguous intent to reserve the right to eliminate the easement through a merger of estates in the future.”[13] If an easement deed takes the approach similar to (3) above and state law provides for merger of estates, then the easement deed is similarly vulnerable to IRS scrutiny. The IRS takes this position notwithstanding the fact that the merger of estates would result with the land trust holding a greater estate — i.e., a fee simple interest — than it did prior to the merger of estates — i.e., a conservation easement restriction. One is left to question whether a contractual prohibition on the merger of estates is even enforceable under state law, and if not, whether a deed can be drafted which would be immune from IRS attack under this theory. 5. Floating Homesites Donors of conservation easements generally reserve specific development rights for the property encumbered by an easement. These reserved development rights might include the ability to build residences, barns, sheds, gazeebos, corals, clubhouses, roads, trails and various other improvements. Sometimes the location of the reserved development sites will be fixed at the time the easement is granted. However, it has also been common for donors to simply reserve development sites and determine the specific locations at a later date, so-called “floating” development sites. Reserved development sites, whether fixed or floating, are either “outparcels” or “in-parcels.” Outparcels are carved out of the property protected by the easement and are not subject to the easement’s restrictions. Comparatively, in-parcels are located within the property protected by the easement and remain encumbered by at least some of the easement’s restrictions. In-parcel and outparcel development sites are considered permissible when fixed in location — although the IRS frequently argues otherwise. However, the Tax Court in Bosque Canyon v. Commissioner of Internal Revenue[14] determined that when outparcel development sites are floating the taxpayer can change the boundaries of the easement, and therefore change what property is subject to the easement’s restrictions. This would violate the perpetuity requirement, as interpreted in Belk v. Commissioner of Internal Revenue,[15] that the easement’s restrictions must perpetually encumber a specific, defined parcel of real property. The IRS contends, based on Bosque Canyon and Belk, that any reserved development rights that are floating violate the perpetuity requirement, regardless of in-parcel or outparcel status. The IRS position is contrary to the Treasury regulations[16] and IRS guidance,[17] both of which bless floating development rights. The IRS position also contravenes the general preference of the land trust community, which prefers reserved development rights so that landowners can be on-site, active stewards of the properties encumbered by conservation easements. In BC Ranch v. Commissioner of Internal Revenue,[18] the Fifth Circuit Court of Appeals vacated and remanded the Tax Court opinion in Bosque Canyon. However, due to the Golsen Rule,[19] the IRS has largely ignored BC Ranch and continues to cite Bosque Canyon as black letter law. It is unclear if the Tax Court will let the Fifth Circuit’s opinion in BC Ranch affect the weight and reliance it places on Bosque Canyon prospectively. 6. Form 8283 Filers are required to attach IRS Form 8283, also known as an “appraisal summary,” to any tax return claiming a charitable deduction for a donation of property with a fair market value in excess of $500. There are various items the taxpayer must report on Form 8283, including but not limited to a description of the property and its condition, the appraised fair market value of the property, the date and manner of acquisition, and the donor’s basis in the property. The IRS carefully scrutinizes Forms 8283, often contending that entire deductions should be disallowed for minor omissions. For example, in RERI Holdings I v. Commissioner of Internal Revenue,[20] the IRS successfully challenged a taxpayer’s $33 million charitable deduction because the donor did not report the cost or adjusted basis of the donated property on Form 8283. The Tax Court determined that omitting the donortaxpayer's cost or adjusted basis from Form 8283 caused the donation to fail to comply with Treasury regulation section 1.170A-13(c)(4)(ii)(E) resulting in a total disallowance of the taxpayer’s charitable deduction. RERI Holdings is surprising in light of the Instructions to Form 8283 (Rev. 2014), which indicate that the cost or adjusted basis may be left blank if the taxpayer has reasonable cause for not completing the form and attaches an explanation of that reasonable cause. Moreover, the instructions to Form 8283 indicate that a taxpayer's deduction will not be disallowed for failing to complete Section B of Form 8283, if the taxpayer provides the IRS a complete Form 8283 within 90 days of an IRS request. The court's opinion does not indicate if the taxpayer attached an explanation for why the basis was not provided or subsequently provided the basis within 90 days of an IRS request. The Tax Court had previously held, in Dunlap v. Commissioner of Internal Revenue[21] and Friedberg v. Commissioner of Internal Revenue,[22] that omitting the “cost or adjusted basis” from Form 8283 is not fatal to a taxpayer’s conservation easement deduction, and the opinion in RERI Holdings does not mention — much less reject — these cases. The taxpayer in RERI Holdings donated a remainder interest in property, not a conservation easement. And while the Form 8283 substantiation requirement applies to all contributions of property in excess of $500, there are specific provisions in the instructions to Form 8283 for contributions of conservation easements, which could arguably distinguish them from RERI Holdings. Notwithstanding this distinction and the conflicting conservation easement case law, the IRS has interpreted RERI Holdings broadly and is aggressively using its reasoning to attack conservation easement contributions that fail to report the donor’s cost or adjusted basis in the contribution property. It is unclear if the Tax Court will agree with the IRS and extend the reasoning in RERI Holdings to donations of conservation easements. At the time of this writing, RERI Holdings is on appeal before 

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Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph:  (516)938-5007
Fax: (516)938-6330
www.taxaudit419.com

National Society of Accountants Speaker of The Year


The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph:  (516)938-5007
Fax: (516)938-6330
www.taxaudit419.com

National Society of Accountants Speaker of The Year


The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

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