New IRS Reporting Requirements for Easement-Holding Organizations
| Posted: 2/28/2008
Preservation organizations with easement programs should be aware that Schedule A to the 2006 Form 990 Federal Tax Return for Tax Exempt Organizations includes a new provision requiring nonprofit organizations to report whether they received or held conservation easements, including easements on historic land areas or historic structures. Organizations responding in the affirmative must attach a schedule with detailed information about the easements held by the organization, which includes information about the organization's practices with respect to inspection, monitoring, and enforcement. For any easement on historic buildings or structures acquired after August 17, 2006, the organization must also report whether the easement complies with the new "special rules" provisions of the Pension Protection Act of 2006.
The text of the Schedule and the instructions are printed below. For information on the new "special rules," click here. Note that some of these reporting requirement (such as that relating to acreage under protection) appear to relate more to conservation easements that protect land, but the requirement apply to historic preservation easements nonetheless. Note also that the reporting obligation applies not only with respect to easements for which a federal tax deduction was sought by the donor, but all conservation easements held by the nonprofit organization.
In addition to the 2006 update, the IRS has recently proposed a number of changes to the 2007 Form 990 and its schedules, some of which would incorporate similar reporting obligations. The National Trust’s has provided comments on the proposed draft, which may be downloaded here.
2006 Form 990, Schedule A
Part III, Line 3c:
"Did the organization receive or hold an easement for conservation purposes, including easements to preserve open space, the environment, historic land areas or historic structures? If 'Yes,' attach a detailed statement."
2006 Form 990, Schedule A (Instructions)
Part III, Line 3c:
Conservation easements. Answer "Yes" if the organization received or held one or more conservation easements during the year. In general, an easement is an interest in the land of another. A conservation easement is an interest in the land of another for purposes that include environmental protection; the preservation of open space; or the preservation of property for historic, educational, or recreational purposes. For more information see Notice 2004-41, 2004-28 I.R.B. 31.
Attached schedule. If "Yes," the organization must attach a schedule that includes the following information.
1. The number of easements held at the beginning of the year, the acreage of these easements and the number of states where the easements are located.
2. The number of easements and the acreage of these easements that the organization received or acquired during the year.
3. The number of easements modified, sold, transferred, released, or terminated during the year and the acreage of these easements. For each easement, explain the reason for the modification, sale, transfer, release or termination. Also, identify the recipient (if any), and show if the recipient was a qualified organization (as defined in section 170(h)(3) and the related regulations at the time of transfer).
4. Show the number of easements held for each of the following categories:
a. Easements on buildings or structures;
b. Easements that encumber a golf course or portions of a golf course;
c. Easements within or adjacent to residential developments and housing subdivisions, including easements related to the development of property; and
d. Conservation easements that were acquired in a transaction described under Purchase of Real Property from Charitable Organizations in Notice 2004-41 [excerpted below] and if the organization acquired any such easements during the year.
5. The number of easements and the acreage of these easements that were monitored by physical inspection or other means during the tax year.
6. Total staff hours and a list of expenses devoted to (legal fees, portion of staff salaries, etc.) incurred for monitoring and enforcing new or existing easements during the tax year.
7. Identify all easements on buildings or structures acquired after August 17, 2006, and show if each easement meets the requirements of section 170(h)(4)(B).
Referenced Excerpt from IRS Notice 2004-41, July 12, 2004:
Purchases of Real Property from Charitable Organizations
Some taxpayers are claiming inappropriate charitable contribution deductions under § 170 for cash payments or easement transfers to charitable organizations in connection with the taxpayers' purchases of real property.
In some of these questionable cases, the charitable organization purchases the property and places a conservation easement on the property. Then, the charitable organization sells the property subject to the easement to a buyer for a price that is substantially less than the price paid by the charitable organization for the property. As part of the sale, the buyer makes a second payment, designated as a "charitable contribution," to the charitable organization. The total of the payments from the buyer to the charitable organization fully reimburses the charitable organization for the cost of the property.
In appropriate cases, the Service will treat these transactions in accordance with their substance, rather than their form. Thus, the Service may treat the total of the buyer's payments to the charitable organization as the purchase price paid by the buyer for the property.