Federal Tax Issues Latest and Greatest Jessica Jay, Rob Levin, Steve Small October 19, 2019

1. Federal Tax Issues Latest and Greatest Jessica Jay, Rob Levin, Steve Small October 19, 2019 #Rally2019

2. Agenda • Amendment Provisions (20 Minutes) • Pine Mountain Implications • Building Areas and Reserved Rights (20 Minutes) • Pine Mountain Implications • Tax Shelter Updates (10 Minutes) • State Tax Credits Update (5 Minutes) • Proceeds and Approval Provisions Update (5 Minutes) • PBBM v. Commissioner and pending Tax Court cases • Hoffman on appeal • Steve’s Be Safe List (5 Minutes) • What To Do About Recorded Easements With “Gotcha” Flaws (5 Minutes) • IRS Audit Practices (5 Minutes) • Q&A (15 Minutes) 

3. But first, a Moment of Zen… • Maybe Thoreau had it right all along. He understood and yielded to an innate desire of solitude and nature, a craving that still persists in us today. As life gets busier, teeming with technology and commitments keep piling up, something deep inside calls out for rest. It calls out for a pause. 

4. Amendment Provisions • Pine Mountain Preserve: inclusion of amendment clause in an easement cannot and should not be grounds for denying a deduction for an easement donation. • But: On appeal to 11th Circuit. • Two other federal tax cases where IRS challenges amendment clauses as non-perpetual: Sells, et al., v. Commissioner (Alliance amicus granted), Kumar, et al., v. Commissioner, (Alliance amicus granted) • Big Picture – Movement in Legal Cases 

5. Amendment Provisions • No Movement in Regulation (and none expected) • IRS Notice 2017-28 Request for Comments to 2017-2018 Priority Guidance Plan for 170(h) charitable contributions of conservation easements (Alliance Position Paper and Transmittal Letter) • Big Picture 

6. Amendment Provisions Amendment or Modification of Conservation Easement. Owner and Holder recognize that circumstances could arise which would justify modification of certain of the restrictions contained in this Conservation Easement. To this end, Holder and the legal owner or owners of this Conservation Area or, if the Conservation Area has been legally subdivided, the Owner of that portion of the Conservation Area affected by such amendment at the time of amendment shall mutually have the right, in their sole discretion, to agree to amendments to this Conservation Easement which are not inconsistent with the Conservation Purposes; provided, however, that Holder shall have no right or power to agree to any amendments hereto that would result in this Conservation Easement failing to qualify as a valid conservation agreement under "State Conservation Easement Law", as the same may be hereafter amended, or as a qualified conservation contribution under section 170(h) of the Internal Revenue Code and applicable regulations. • Pine Mountain Amendment Clause 2005, 2006, 2007 CEs 

7. Amendment Provisions • Owner/Holder recognize that circumstances may justify amendment of restrictions contained in CE • Holder/Owner mutually have right, in their sole discretion, to agree to amendments to CE • not inconsistent with the Conservation Purposes; • Holder no right or power to agree to amendments that result in CE failing to qualify as a valid conservation agreement under • "State Conservation Easement Law", or • as a qualified conservation contribution under section 170(h) of Internal Revenue Code and applicable regulations. • Pine Mountain Amendment Clause 2005, 2006, 2007 CEs 

8. Amendment Provisions • Tax Court definitively asserted that inclusion of amendment clause in an easement cannot and should not be grounds for denying a deduction for an easement donation • The Court said an amendment clause that specifically protects the conservation purposes "did not prevent that easement from satisfying the granted-in-perpetuity requirement" of the tax code. • Pine Mountain Implications 

9. Amendment Provisions • While the IRS has attempted to deny deductions based on the presence of an amendment clause, no court opinion to date has upheld that position, nor has the IRS issued any rulings prohibiting amendments • Tax court decisions have only ruled against clauses that explicitly provided for removal of land from the easement (Belk, Balsam) • Primacy of laws: most to least democratic • Federal tax treatment of CE gift with amendment clause ok per Code, Regs, and now Doctrinal Common Law • Statedefinition/direction of CE real property interest with amendment clause still ok • Broader Implications 

10. Amendment Provisions • While the IRS has attempted to deny deductions based on the presence of an amendment clause, no court opinion to date has upheld that position, nor has the IRS issued any rulings prohibiting amendments • Tax court decisions have only ruled against clauses that explicitly provided for removal of land from the easement (Belk, Balsam) • Primacy of laws: most to least democratic • Federal tax treatment of CE gift with amendment clause per Code, Regs, and now Doctrinal Common Law ok • Statedefinition/direction of CE real property interest with amendment clause still ok • Broader Implications 

11. IRS Dream Amendment Provision? • No boundary adjustments (except to add land) or swaps. (What about corrections?) • Appraisal by Holder’s appraiser to document lack of private inurement/benefit. • Independent third party review of impact on conservation values (except for mutual mistakes or drafting errors) • Updated Baseline required. 

12. Background to Practice Pointers for Amendment Clauses • Include clause or clauses to allow amendments consistent with the overall purposes of the easement, subject to the requirements of applicable laws. • Doing so clarifies up front for all parties the limited circumstances under which the parties may amend a conservation easement. • Amendment consistent with purposes of CE 

13. Background Practice Pointers, cont. • Land Trust Standards and Practices (2017) requires land trusts holding easements to have a written policy on amendments that articulates the principles for and limitations on amendments, consistent with the concepts embodied in the Amendment Principles (Practice 11H1). • policy on Amendment consistent with S&P 

14. Background Practice Pointers, cont. • Amendment Principles (Practice 11H1) • Clearly serve the public interest and be consistent with the land trust's mission • Comply with all applicable federal, state and local laws • Not jeopardize the land trust's tax-exempt status or status as a charitable organization under federal or state law • Not result in private inurement or confer impermissible private benefit • Be consistent with the conservation purpose(s) and intent of the easement • Be consistent with the documented intent of the grantor and any direct funding source • Have a net beneficial or neutral effect on the relevant conservation values protected by the easement • Amendment consistent with amendment principles 

15. Practice Pointers • Tax Code Section 170(h) repeated use of perpetual • Summary Judgment order 9-2016 in Sells v. Commissioner • IRS Conservation Easement Audit Techniques Guide(January 24, 2018) Restriction on use must be enforceable in perpetuity, meaning lasts forever and binds all future owners. An easement deed will fail the perpetuity requirements if it allows any amendment that could adversely affect the perpetual duration • 1. Perpetual duration of the easement and intent to protect conservation purposes in perpetuity. 

16. Practice Pointers • Recognition that change happens over the course of time to which land trust and landowner may need to respond • use sole discretion to evaluate whether • amendment is necessary and • consistent with the purposes of the easement • prohibit use of economic hardship to defeat restrictions • 2. Change Happens 

17. Practice Pointers • IRS briefs in Belk, Balsam, Sells, Kumar, and Pine Mountain • IRS requirement that a land trust must retain all decision-making control and act exclusively in the public interest • 3. nothing requires holder to amend CE 

18. Practice Pointers • Avoid "freely amend" or “not unreasonably withheld” and "Grantor and Grantee agree" • Avoid explicit Grantor rights to require any amendment • 4. Holder retains Sole discretion for all determinations 

19. Practice Pointers • Consistent with the Tax Code, Treasury Regulations, and case law • Every concept embodied in a principle should be part of the easement language somewhere in the deed • 5. Incorporate all of the Amendment Principles 

20. Practice Pointers • For additional guidance as to decision making, overall process, experts, payment, board approval, etc. • 6. Conform to policies in effect at the time of amendment 

21. Practice Pointers • IRC §170(h) and Treasury Regulations §1.170A-14 apply, requiring that the donor must grant an easement in perpetuity, and the deed must protect the conservation purpose in perpetuity. • This element often included in a separate extinguishment clause • 7. extinguishment dictated by state law; federal income tax deductions comply with the U.S. Tax Code 

22. Practice Pointers • Possibly include separate clause to set forth limits of use or include in amendment clause • Make approvals revocable in sole discretion based on consistency with conservation purposes or other CE standard • S&P Practice 11F2 requires written procedures to guide decision-making if using discretionary approvals or if CEs contain such clauses • 8. Contemplate Approval, waiver, discretion and consent provisions in context of AMENDMENT 

23. Building Areas and Reserved Rights • Pine Mountain Implications 

24. Pine Mountain 2005 CE • 559 acres, three noncontiguous parcels • 502 acres, 50 acres, 7 acres • 10 one-acre Building Areas clustered around artificial lake in interior of easement area • Building Area adjustment provision w/ holder approval • Size of Building Areas could not increase • Holder approval based on no adverse effect on conservation purposes 

25. Pine Mountain 2005 CE Reserved Rights • One residence and accessory structures (inside BA) • One 5,000 sq. ft. barn (w/ residential unit for caretaker) w/in 1,000 feet of each BA • One boat storage building and pier outside BA • 10 acres could be cleared outside of each BA for barn, riding stables, riding rings • Per building area 

26. Pine Mountain 2005 CE Reserved Rights • 2 scenic overlooks • 3 acres in aggregate, one could include guest bedroom • Ponds, septic systems, roads, trails, hunting stands, wells and water pipelines • All of above subject to Holder’s approval based on conservation purposes standard • Unlimited division. • (Not associated w/ building areas) 

27. Pine Mountain 2006 CE  • 499 acres, 8 noncontiguous parcels • 6 Building Areas • Not sited, to be approved by Holder based on conservation purposes standard

28. Pine Mountain 2006 CE Permitted Rights  • Similar to 2005 CE, but… • Water tower and underground water pipeline also permitted. • No scenic overlooks, riding rings, boat storage buildings, piers, or ponds permitted

29. Pine Mountain 2007 CE  No Building Areas. Many fewer permitted rights than 2005 and 2006 CE’s.

30. Pine Mountain Majority Opinion  • 2007 CE qualified for a deduction • 2005 CE did not qualify because: • Adjustment provision fell within scope of Belk. Rejection of 5th Circuit’s opinion in B.C. Ranch, II. • Too many permitted rights. • Dissent disagreed on both points.

31. Pine Mountain Majority Opinion  • 2006 CE did not qualify because: • No initial siting of Building Areas, so fell within scope of Belk.

32. Pine Mountain Majority Opinion  • Other aspects of holding: • Rejected distinction between changes to the exterior geographic boundaries of the easement’s protected property (as in Belk and Balsam Mountain) and changes to the interior boundaries (as in Bosque Canyon) • Permitted rights were so extensive that there was no substantive distinction between an excluded building area and an included building area. Dissent disagreed.

33. What’s Next for Pine Mountain Preserve?  Landowner appealed to 11th Circuit on building area adjustment provision and reserved rights. IRS appealed on valuation. IRS did not appeal on amendment provision. Land Trust Alliance submitted amicus brieffocused on 2005 CE.

34. Pointers Highlights  • Avoid any specific boundary adjustment, building area relocation or land substitution provision in your conservation easements. • Climate change adjustment provision? • Avoid inconsistent or excessive permitted structures. • Consider slightly larger or multiple small building areas to add flexibility. • Cluster building areas regardless of exclusion or inclusion in the easement. • Assess the additional risk from partially floating included building areas.

35. Excluded vs. Included  Excluded - where the building area is not part of the defined protected property and is completely unencumbered by any of the easement’s terms Included - where the building area is part of the easement’s defined protected property and remains subject to some of the easement’s terms

36. Building Area Options 

37. Building Areas – To Exclude or Include?  • Benefits of Excluding • Less stewardship responsibility for holder, less hassle for landowner. • Easier for landowner to get mortgage on excluded area. • IRS doesn’t get distracted by reserved rights in Building Area. • Benefits of Including • Holder maintains some control over area (e.g., no division) • Makes more sense if interior Building Area • Easier to adjust later on (??) • Maybe not after Pine Mountain

38. Building Area Hypothetical 

39. Abusive Tax Shelters • Scope of the Problem: In the most current data available, approximately $20 billion in tax deductions were claimed from 2010 to 2016. • In 2016 alone, $6 billion in apparently unwarranted charitable deductions was claimed by participants from just 248 conservation transactions. 

40. Tax Shelter Ad 

41. Real (Not Made Up) Syndication Example • PROMOTER/SPONSOR BUYS 4,500 ACRES FOR $3,000 AN ACRE. • 4,500 ACRES IS CUT UP INTO A NUMBER OF SMALLER PARCELS • EACH SMALLER PARCEL IS TRANSFERRED TO A NEW LLC • INTERESTS IN THE NEW LLCS ARE SOLD TO TAX-SHELTER BUYERS BASED ON AN ASSUMED “INVESTMENT VALUE” OF $80,000 AN ACRE 

42. Real (Not Made Up) Syndication Example Continued • EACH NEW LLC CONVEYS A CONSERVATION EASEMENT TO EASEMENT HOLDER AFTER “VOTE” BY INVESTOR LLC. • APPRAISER VALUES EACH EASEMENT BASED ON AN ASSUMED VALUE OF $400,000 AN ACRE. • INITIAL COST TO PROMOTERS $13.5 MILLION • AMOUNT RAISED FROM “INVESTORS” $280 MILLION • TOTAL INCOME TAX DEDUCTIONS $1.4 BILLION 

43. IRS Notice 2017-10 • Requires reporting a transaction as a Listed Transaction (which requires filing a separate form with the IRS identifying what you are doing) if a transaction meets the following requirements: • Oral or written promotional material; • Investors; • Promised federal tax deduction that is at least 250% of the investor’s investment; and • A contribution and resulting deduction 

44. IRS Stepped Up Enforcement • September 2018 announcement – New IRS Large Business and International Division campaign targeting syndicated conservation easement transactions. 

45. DOJ Enforcement Action • Filed December 2018 in N.D. Georgia against 5 individuals and one entity. • Since 2009, Defendants allegedly promoted at least 96 conservation easement syndicates that have resulted in over $2 billion of federal tax deductions. • Complaint: https://www.justice.gov/opa/press-release/file/1121451/download 

46. Senate Finance Committee Investigation • Launched March 27, 2019. • 14 individuals served with detailed questions about transactions. • Only one overlap with DOJ suit defendants. • April 30 response deadline. • No hearing date yet. • Committee staff reviewing documents. 

47. Land Trust Alliance Advisory • Detailed guidance on meeting Standards and Practices 10C4, which prohibits Alliance land trust members from engaging in abusive transactions. • https://www.landtrustalliance.org/node/590 

48. Charitable Conservation Easement Program Integrity Act • Senate Bill S. 170 and House Bill H.R. 1992 • Bicameral and bipartisan legislation • Legislative language is complicated, relies on cross-referencing sections of the tax code partnership taxation provisions. • Summary: • Invest in a tax shelter • If holding period is less than 3 years and deduction you receive is greater than 250% of investment, then the deduction will be limited to 250%. • Exceptions: • Easement donations by family partnerships, • The rule is very carefully drafted to target syndicated conservation easement deduction tax shelters. 

49. Final point for today on syndications • Note prior transaction: sponsors purchased property, raised $280 million from tax shelter investors. Where did that money go? • From an SEC filing for another tax shelter syndication: • Total offering amount: $4,600,000 • Total “fees”: $1,436,000 

50. State and Local Taxes (SALT) Regulation • Tax Cuts and Jobs Act of 2017 caps individual deduction to $10,000 for SALT • Response to work around tax credits • Final regulations effective August 11, 2019, but • Apply to contributions made after August 27, 2018 