IRS Cracks Down on Tax Breaks Tied to Land of Rich Americans WASHINGTON, D.C. (NOVEMBER 15, 2013) BY RICHARD RUBIN BLOOMBERG (Bloomberg) Behind the glazed white terra cotta facade of the Ritz-Carlton hotel in New Orleans is a 16-year legal battle with the Internal Revenue Service. The developers of the hotel, which is housed in a former department store on the edge of the French Quarter, say their promise to preserve the century-old facade entitles them to a $7.4 million deduction. The U.S. tax agency disagrees. In this case and dozens like it, the IRS is challenging a complex and obscure tax break that benefits some of the nation’s wealthiest property owners. Without giving up land, they donate the hard-to-calculate value of a perpetual promise to leave the property undisturbed. For that, they claim a big tax deduction. “They’re overwhelmingly to high-end individuals and provide little to no benefit to the public,” said Dean Zerbe, who examined easement donations as a Republican aide on the Senate Finance Committee. “I don’t know if I could design a tax break that’s more targeted toward the millionaire set.” The conservation easement break is one of hundreds scattered throughout the tax code that members of Congress are reviewing as they consider making the most significant revisions since 1986. The lawmakers are looking for ways to curtail breaks that benefit the richest Americans to offset the revenue that would be lost through lower tax rates. Increasing Value In 2010, 2,933 U.S. taxpayers deducted $766 million in easement donations from their taxes, according to the most recent IRS data. While that’s down from a $2.2 billion peak in 2007, the conservation easement break is more valuable than ever this year because of tax-rate increases for top earners and a temporary incentive that expires on Dec. 31. The break’s bipartisan defenders include wildlife groups, conservationists and a mini-industry of appraisers, lawyers and land trusts that’s grown up around it over four decades. That coalition and the break’s relatively small size in a U.S. tax system that raised $2.8 trillion last year demonstrates how narrow interests can keep targeted provisions anchored in the code. Between 2003 and 2006, taxpayers saved an estimated $4 billion through easement donations, about 6 percent of the revenue that the U.S. government will forgo because of the mortgage interest deduction next year alone. The IRS has been litigating dozens of easement cases, challenging deductions taken by an Idaho congressman, the National Golf Club of Kansas City and the co-founder of a New York investment firm managing $1.4 billion. ‘Southern Ambience’ In the case of the Ritz-Carlton Hotel, which advertises its “traditional Southern ambience,” the developers initially said their inability to alter the historic facade of the Maison Blanche building was worth $7.4 million. The IRS said it was worth about 15 percent of that, and the lawyers and appraisers have been arguing ever since. The case is heading to a federal appeals court for the second time. It hinges on a dispute about the proper appraisal method for valuing the restriction. Congress first specifically allowed tax deductions for conservation easements in 1976 and made the rule permanent in 1980, even with concerns from the Treasury Department. After numerous court decisions and congressional changes that tightened rules for appraisers in 2006, the break is still open to golf-course developers who promise not to build houses on fairways, owners of historic townhouses who pledge not to build skyscrapers, and rural landowners who donate development rights on 20-acre backyards they don’t intend to sell. Two Appraisals In a typical transaction, a property owner receives an appraisal of the value of land if developed with houses and a second appraisal of the value with restrictions. The landowner then signs a legal document assigning the development rights to a land trust and claims a tax deduction for the difference between the two appraisals. Conservation easements are different from cash or stock donations where easy-to-value liquid assets change hands. In these cases, the benefit to the public is often far less than the amount claimed as a charitable deduction, said Daniel Halperin, a Harvard Law School professor. The IRS, even with diminishing resources and added responsibilities to implement the 2010 health-care law, is trying to curb taxpayers’ ability to take advantage of the conservation easement tax break. ‘Awkward Position’ The provision is susceptible to abuse because the definition of what qualifies as conservation can be vague and subjective. It includes preserving the “harmonious variety of shapes and textures” and “the degree of contrast and variety provided by the visual scene.” Furthermore, it’s difficult to value transactions with few, if any, comparable deals. “It’s putting the IRS in the awkward position of trying to determine what’s a conservation purpose,” said Roger Colinvaux, who analyzed the issue when he was at the nonpartisan Joint Committee on Taxation. “You don’t really know what you’re getting for your money.” The Ritz-Carlton case is an extreme example of the legal complexities and time that can be spent on a conservation easement case. It dates to 1997, three years before the hotel opened, when the developers claimed a deduction for their contribution to the Preservation Resource Center of New Orleans. The project’s originator was Stewart Juneau, a New Orleans developer who kept a hotel penthouse as his own residence. He left the ownership group—Whitehouse Hotel Limited Partnership—several years ago, said Gary Elkins, the partnership’s attorney. Upholding Penalty Juneau now runs a nonprofit African village and safari camp in central Louisiana for underprivileged children. He didn’t respond to a request for comment. The case wound its way through the IRS and the appeals process before the developers sued the agency in the U.S. Tax Court in 2003. They cited appraisals supporting the deduction. Five years later, the court rejected most of the developers’ arguments, declared the deduction worth $1.8 million and upheld a penalty for a “gross valuation misstatement.” The court last year adjusted the value to $1.9 million. The IRS’s aggressive enforcement ignores the fact the hotel’s owners have already spent more than the value of the donation restoring and maintaining the facade as required by the easement, said Elkins, of Elkins PLC in New Orleans. The agency’s approach has also curtailed donations against Congress’s intent, he said. ‘Potentially Punitive’ “No one wants the Internal Revenue Service to become their best friend and move into their house for a period of 16 years,” he said. “And so people will not utilize an incentive when the use of it is so uncertain and the consequences of the use of it have potentially punitive results.” The IRS didn’t respond to questions about its enforcement of the tax break or requests to interview officials. “These are hard to administer and very expensive to administer,” Ruth Madrigal, an attorney-adviser in the Treasury Department, said at an American Bar Association conference in May, according to a transcript provided by EO Tax Journal. “If you step back a minute and look at it from a policy perspective, how much charitable benefit are we really getting out of those easements that are put on golf courses anyway?” The tax benefit’s backers say it has helped preserve historic buildings and millions of acres of land across the country. According to the Land Trust Alliance, state and local land trusts held 8.8 million acres under easements in 2010, up from 2.3 million a decade earlier. Expansion Expires An expanded benefit for conservation easements expires on Dec. 31, and lawmakers are focusing more on a long-term change than on a routine extension. Any limits on the charitable deduction would shrink the value of this specific break. President Barack Obama has proposed limiting all deductions to the value they would have in the 28 percent bracket. That means a $1 million donation would save someone in the top bracket $280,000 instead of $396,000. “There is a real state of awareness that we may have no more than until the end of the year,” said Stephen Small, a former IRS official who is now a real estate lawyer in Massachusetts. “It’s very unlikely that the incentives are going to be extended into 2014,” he said. “When more people realize that, I think we are likely to see a flurry of easement donations.” 50% Deduction A coalition of preservationists and wildlife groups is lobbying to extend the expanded break, and they’ve largely been successful in Congress. The temporary break lets people deduct up to 50 percent of their adjusted gross income, instead of 30 percent. It allows some farmers and ranchers to deduct all of their adjusted gross income and lets donors spread their deductions over 16 years instead of having just six years to generate enough income to take the entire break. Congress last extended the deduction in January as part of an agreement to let top tax rates increase. The extension covered 2012 and 2013 and will cost the government an estimated $254 million over the next decade in forgone revenue.
Posted on: Mon, 18 Nov 2013 17:48:36 +0000