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IRS Toughens Scrutiny of Land Gifts & cash to environmental groups - conservation easements

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  • Teresa Binstock
    IRS Toughens Scrutiny of Land Gifts By Joe Stephens and David B. Ottaway Washington Post Staff Writers Thursday, July 1, 2004; Page A01
    Message 1 of 1 , Jul 1, 2004
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      IRS Toughens Scrutiny of Land Gifts
      By Joe Stephens and David B. Ottaway
      Washington Post Staff Writers
      Thursday, July 1, 2004; Page A01
      http://www.washingtonpost.com/wp-dyn/articles/A19102-2004Jun30.html

      The Internal Revenue Service announced yesterday that it is cracking
      down on improper tax deductions taken by people who give real estate and
      cash to environmental groups, warning that taxpayers could face
      penalties and charities could lose their tax-exempt status.

      The IRS is specifically targeting gifts of "conservation easements" --
      deed restrictions that limit some types of real estate development. The
      easements have become the environmental movement's key tool for
      preserving fragile ecosystems and millions of acres of open space.

      The IRS is focusing on easements that have questionable public benefit
      or have been manipulated to generate inflated deductions.

      "We've uncovered numerous instances where the tax benefits of preserving
      open spaces and historic buildings have been twisted for inappropriate
      individual benefit," IRS Commissioner Mark W. Everson said in a
      statement. "Taxpayers who want to game the system and the charities that
      assist them will be called to account."

      The IRS warned that it intends to levy penalties on charity executives
      and board members who collect or knowingly help secure improper
      deductions claimed in connection with such transactions.

      The announcement did not name individual taxpayers or charities. It
      comes as the IRS is conducting a major audit of the Arlington-based
      Nature Conservancy, the world's largest environmental organization.

      The Washington Post reported last year that the Conservancy had
      repeatedly bought land, added some development restrictions, and then
      resold the properties at reduced prices to its trustees and other
      supporters. The buyers made cash gifts to the Conservancy roughly equal
      to the difference in price, thereby qualifying for substantial tax
      deductions -- just as if they had given money to their local charity.

      The Conservancy said the sales prices were proper because the
      development restrictions reduced the market value of the tracts. In the
      wake of the news articles, however, the Conservancy announced that it
      would no longer conduct such deals with its board members and trustees.

      Sheldon Cohen, a former IRS commissioner now working as a private lawyer
      in Washington, called yesterday's announcement an unusually strong
      action. He said, "It is pretty obvious who it is aimed at."

      Conservancy spokesman James Petterson said yesterday that executives
      there were studying the IRS action.

      "The Nature Conservancy over the last decade has received several legal
      opinions reflecting other interpretations of the law," Petterson said.
      "We are reviewing what the IRS issued, assessing its impact on our
      programs and determining appropriate actions."

      In a statement yesterday, the IRS said that it "intends to disallow" and
      may assess penalties for improper tax deductions claimed for gifts of
      easements to charities. Easements that serve no conservation purpose and
      create no significant public benefit do not qualify for tax deductions,
      the agency said. Some taxpayers have claimed deductions for amounts that
      exceed the value of the restrictions placed on their land, the IRS added.

      The agency also said that in "appropriate cases" it may treat cash
      payments made to charities coincident with land deals as part of the
      purchase price -- not as tax-deductible charitable gifts.

      "The IRS may impose penalties on promoters, appraisers and other persons
      involved in these transactions," the release said. "The IRS may
      challenge the tax-exempt status of the charitable organization, based on
      the organization's operation for . . . private benefit."

      The IRS said one of the agency's top priorities now is fighting abusive
      tax-deduction schemes involving nonprofit organizations.

      The Senate Finance Committee began investigating easement transactions
      involving the Conservancy and other charities last year. Committee
      Chairman Charles E. Grassley (R-Iowa) said the investigation's findings
      so far demand "a serious rethinking" of tax laws and stronger
      enforcement by the IRS.

      "The IRS is right to subject these sweetheart deals, often to insiders,
      to hard scrutiny," Grassley said yesterday. "I'm encouraged that the IRS
      is willing to challenge the tax-exempt status of charitable
      organizations that engage in shady practices in land-donation
      transactions. Shutting down the bad actors will be a strong signal that
      'business as usual' has been put out of business.

      "Land donated for a conservation purpose should help the environment or
      create open space," he said. "All too often, these conservation
      donations appear to do very little for the environment and only help
      fill the bank accounts of donors and middlemen."

      Rand Wentworth, president of the Land Trust Alliance, called the IRS
      action "really good news for legitimate charities." The group represents
      1,260 nonprofit land banks, many of which hold conservation easements.

      "This will help restore the integrity of good land trusts," Wentworth said.

      Stephen J. Small, a former IRS lawyer and a leading expert on easements,
      said he is pleased the agency is targeting appraisers and promoters of
      improper tax deals. "In this field, this is new," he said. "I think
      that's great."

      Land trusts hold more than 12,000 conservation easements nationwide,
      though not all of them generate tax deductions for the owners. The IRS
      said it has no figures for the total value of tax deductions generated
      by easements.

      © 2004 The Washington Post Company

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