IRS Responds To Concerns Raised About Audits of Easement Donations
March 25, 2008
Recently the National Trust for Historic Preservation and the National Housing Rehabilitation Association (NH&RA) raised a number of issues with the Internal Revenue Service (IRS) regarding the IRS’s examination of historic preservation easement donations. On March 13, 2008 the IRS provided a written response which confirms, among other things, that easements should be valued on a case-by-case basis, and should not be assumed to have little or no value. The letter from the IRS may be downloaded here.
By way of background, based on reports received from both donors of preservation easements and easement holding organizations from around the country, the National Trust has become particularly concerned with two underlying issues related to the IRS’s examinations. The first was a perception that the IRS appeared to follow an approach (by practice, if not by policy) that would effectively assume a zero or de minimis value for historic preservation easements. The second issue related to concerns that public statements by the IRS suggested that easement donations in locally-regulated districts were per se valueless because the easements do nothing more than replicate local regulatory controls.
We recognized that the IRS has a responsibility to address specific abuses in this area; however, the National Trust believes that abusive transactions likely constitute only a small fraction of historic preservation easement donations. Throughout our discussions with the IRS we asserted that the IRS needed to clarify its position and practices regarding the examination of historic preservation easements. Clarification was necessary in order for the public to understand that easements continue to be a legitimate preservation tool in the eyes of the IRS and that easements are not assumed to have zero or de minimis value; instead, the value of an easement must be determined on a case-by-case basis through a qualified appraisal that considers the specific terms of the easement and the specific nature of restrictions imposed by local land use or similar laws.
After raising these issues, the National Trust received positives responses from the IRS. In particular, the IRS confirmed that the recent amendments to Section 170(h) of the Internal Revenue Code do in fact endorse the preservation of certified historic structures through the donation of historic preservation easements, and that while valuation of easements present many difficulties, those difficulties do not undermine the legitimacy of properly granted preservation easements. Further, the IRS stated that it “does not believe that all [preservation easements] are intrinsically of little or no value." A 2007 Office of Chief Counsel’s Memorandum also provides further clarification of the IRS’s position on easement valuation methodologies that should be helpful to the public’s understanding.
For more detailed information, the correspondence between the IRS and National Trust and NH&RA may be downloaded here.
