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- Introduction
- August 2006 Legislative Changes
- Internal Revenue Code with Legislative Changes
- October 2005 IRS Notice 2005-19
- July 2004 IRS Notice 2004-41
Introduction
This Section reviews current news and issues affecting historic preservation easements, with focus on legislation passed by Congress in August 2006 and IRS notices regarding the tax incentives in the legislation.
August 2006 Legislative Changes
Public Law 109-280 was signed into law on August 17, 2006 as the Pension Protection Act of 2006 (the “Actâ€). The sections of the Act that relate to historic preservation easements are highlighted below:
Increase of Annual Deduction Limitations and Carryover. Section 1206 of the Bill, regarding encouragement of contributions for conservation purposes, increases the donation available to use in a given year and also increases the number of years any excess may be carried over. This change provides a significant enhancement to the charitable conservation deduction.
Under the prior law, a donor of a qualified conservation contribution was entitled to a charitable contribution deduction that was generally limited (together with other charitable deductions) to 30 percent of the taxpayer’s adjusted gross income for the year in which the donation is made, with any excess carried forward for up to five additional years.
Under Section 1206 of the Act, the deduction limitation for individual taxpayers is increased from 30 percent of adjusted gross income to 50 percent of adjusted gross income. Also, the carryover period is extended from 5 years to 15 years. These modifications will be in effect only for donations made through December 31, 2007.
Easement to Cover Entire Facade. Section 1213 of the Act permits a deduction for the contribution of an easement on a building in a registered historic district only if the easement includes a restriction to preserve the “entire exterior†of the building, including the front, side, rear, and height of the building. The easement must prohibit any change to the exterior of the building inconsistent with its historical character. These provisions are effective for donations made after July 25, 2006.
Easement Holder Certification. Section 1213 of the Act requires the donor and the easement-holding organization to enter into a written agreement certifying, under penalty of perjury, that the organization is a “qualified organization†entitled to receive such donations and that the organization has the resources and commitment to manage and enforce the easement’s restrictions. This provision is effective for donations made after July 25, 2006.
New Substantiation Requirements. Effective January 1, 2007, Section 1213 of the Act requires a taxpayer claiming a donation for an easement contribution on a building in a registered historic district to include with his or her tax return a qualified appraisal, photographs of the exterior of the building, and a description of all restrictions on the development of the building (in addition to previously required documents).
Filing Fee. Effective 180 days after passage of the Act (February 13, 2007), Section 1213 requires a taxpayer to include with his or her tax return a new $500 filing fee if the charitable deduction is over $10,000.
Penalties and Appraisals. The Bill modifies penalties for misstatements of easement valuations for donors and appraisers and strengthens appraiser qualifications.
To view the entire chapter from the Act related to charitable contributions, which chapter includes the sections summarized above, please click below on "Legislation Excerpt".
Legislation Excerpt
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Internal Revenue Code with Legislative Changes
To read the text of the Internal Revenue Code section changed by the August 17, 2006 legislation, with the new changes highlighted in the text, please click below on "Changes to Internal Revenue Code August 2006"
To see a more complete text of the Internal Revenue Code and Regulations sections regarding deductions for historic preservation easements, please click on "Tax Law Library" from the menu above.
Changes to Internal Revenue Code August 2006
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October 2005 IRS Notice 2005-19
On October 27, 2005, the IRS announced a settlement initiative under which taxpayers could resolve the tax treatment of a list of 21 identified transactions. The initiative would provide participants in the program, who had until January 23, 2006 to come forward, with certain penalty relief and other features.
One of the 21 transactions was "certain abusive charitable contributions and conservation easements," including "easements with no or de minimis value." This transaction was the only one to incorporate a footnote stating that the IRS did not consider easement donations inappropriate when taxpayers "have complied with the requirements for such deductions" and that "§170 is intended to encourage charitable giving."
To view IRS Notice 2005-19, please click below. For more information, please see the IRS website at www.irs.gov.
IRS Notice 2005-19 Settlement Initiative
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July 2004 IRS Notice 2004-41
On July 12, 2004, the IRS published notice that participants in transactions that transfer an easement on real property to a charitable organization may be improperly claiming charitable contribution deductions under Section 170 of the Internal Revenue Code and that, in appropriate cases, the IRS intends to disallow such deductions and may impose penalties and excise taxes.
In the section on conservation easements, the notice states that if all requirements of Section 170 are satisfied and a deduction is allowed, the amount of the deduction may not exceed the fair market value of the contributed easement on the date of the contribution. The notice goes on to cite the requirements already set forth in the regulations under Section 170 regarding easement valuation.
To view IRS Notice 2004-41, please click below. For more information, please see the IRS website at www.irs.gov.
IRS Notice 2004-41 Conservation Easements
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