If you or your business donate a conservation easement to a qualified charitable organization, you may be able to claim a deduction reaching into six or seven figures. However, as shown in a new case involving a limited liability company (LLC), Savannah Shoals, LLC, Green Creek Resources, LLC, TC Memo 2024-35, 3/26/24, the claim must be supported by a valid independent appraisal. This is no time to try to skimp.
Background: The tax law authorizes a charitable deduction when an interest in real estate is donated to a qualified charity for certain specific conservation purposes. For instance, a write-off may be allowed for the preservation of land for outdoor recreation or scenic enjoyment by the general public or pursuant to a government conservation policy.
The deduction amount is based on the fair market value (FMV) of the interest on the date of donation. Caveat: This is a process best left to the experts in the field.
Notably, a donor making a noncash charitable contribution exceeding $5,000 must obtain a qualified appraisal of the property. The appraisal must be prepared by an independent appraiser by the return due date, plus any extensions, for the year of the donation. It should include a description of the property, the appraiser’s qualifications, the appraisal dates, the valuation method used and the specific basis for the valuation. If these requirements aren’t met, no deduction is allowed.
Facts of the new case: In 2007, the LLC purchased 436 acres of land in Georgia for $5.2 million, or approximately $12,000 per acre. It planned to develop a 325-lot residential community on the property marketed primarily to second-home buyers. It obtained county approvals, performed grading and began construction of roads and a gate house. Although the easement property was part of the planned community, no development occurred on it.
However, the LLC then stopped work on the development due to economic conditions relating to the 2008 recession and its inability to secure additional financing. It decided to set aside the project. At some point it defaulted on a construction loan. In 2010, the loan holder was awarded a judgment of approximately $2.1 million.
From 2013 through 2016, the LLC received multiple offers to purchase the property, ranging from $1.3 to $1.5 million, or approximately $3,000 to $3,500 per acre. It declined all offers because it deemed them to be too low.
Upon the sale of the business in 2017, the LLC donated a conservation easement over 103 acres of undeveloped land. It claimed a $23 million charitable contribution deduction for this easement donation.
Point of contention: The IRS disallowed the deduction in its entirety because it said the LLC failed to meet reporting requirements for noncash charitable deductions on two grounds.
1. It failed to attach a qualified appraisal to its return.
2. The appraisal summary attached to its return provided inconsistent information.
Good news: The Tax Court disagreed with the IRS. It found that the LLC satisfied the reporting requirements for noncash charitable deductions. Accordingly, it’s entitled to an easement deduction equal to the easement’s FMV.
Bad news: The Tax Court determined that the easement had a FMV of only $480,000. To add insult to injury, the LLC was assessed a 40% penalty for a gross valuation misstatement because the claimed deduction was more than 200% of the FMV.
The moral of the story is that you should not run risks with so much at stake. The cost of an accurate qualified appraisal from a reputable source is money well spent.
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Tags: Income Tax, Taxes
