Michigan Estate Planning Blog

Charitable Deductions Require Strict Compliance with IRS Rules

If a board game has rules that are difficult to follow, then you can choose to stop playing. However, when it comes to the IRS and the massive volume of federal tax code rules, you can’t just play a different game. The rules are the rules, even if you are seeking some sort of charitable deduction from the IRS. Recently there have been a number of unfortunate stories about charitable deductions gone awry. Are you familiar with Rothman, et al. v. Commissioner? Forbes analyzed the case in an article titled “Façade Easement: No (Qualified) Appraisal, No Tax Deduction.” In Rothman, the rules in question concerned non-cash charitable donations, in this case a façade easement, and the central role of professional appraisal. Easements, quite generally, are ways of preserving types of real property from development. A façade easement, in particular, is used to protect historic city property from, well, becoming another Starbucks. The gift of such an easement to a charity – one that has preservation as its goal – is still charitable, but only when it is appraised properly. In Rothman, the easement was made, donated and even appraised. However, the donation failed because the appraisal failed the mandated standards. The appraiser did multiple things wrong by not being clearly qualified, not disclosing credentials and not correctly specifying the easement. Furthermore, the appraiser failed to identify the appraisal as one prepared for income tax purposes, and the appraisal wasn’t even made within the proper time frame. These are just a few of the poorly-followed protocols in this situation. It’s sufficient to say a very significant potential charitable deduction (i.e., $18.5 million) was lost because someone didn’t follow the rules and may have been cutting corners.

Reference: Forbes (June 14, 2012) “Façade Easement: No (Qualified) Appraisal, No Tax Deduction”

Using Easements to Preserve Posterity Property

Sometimes one of the greatest charitable gifts you can bestow is the mere promise not to do anything with, or to, what you own. Of course, this common conundrum occurs most frequently when you happen to be sitting on a piece of history. Whether the property is in the country or in the city, the challenge is the same: how to protect the property from development in perpetuity. Sometimes, however, the key is convincing the IRS of the charitable value of the property itself. If you have an asset worth this kind of consideration, and the hope to preserve it, then an “easement” may be necessary. In the city there are “façade” easements, and in the country there are “conservation” easements. Both are worthwhile means to a charitable end. Consider Peter Reilly’s recent post in Forbes, titled “Donating TriBeCa Facade Easement Is Like Renouncing Your Super Powers,” about an illustrative case in TriBeCa, Manhattan. The story highlights some possible, practical complications that may arise when the situation seems too good to be true. After all, an easement is a unique way of giving to charity and your neighborhood, but only when the IRS agrees. A practical concern, if successful in obtaining the easement with IRS approval, is in finding a charity to enforce your charitable gift and the easement of your property. Ultimately, the end result may be worth the work if you preserve your posterity property in perpetuity from development in the hands of an inevitable McDonalds or Starbucks franchisee. The charitable tax deduction can come in handy, to boot.

Reference: Forbes (May 7, 2012 “Donating TriBeCa Facade Easement Is Like Renouncing Your Super Powers