Donating a piece of land or an elegant building front to charity to get a big write-off boomed as a tax strategy in recent years, and then blew up at the Internal Revenue Service.
A steady stream of tough audits has followed. Landowners and city dwellers with historic homes are caught up in the scrutiny, and tax advisers are trying to find the best way to help them win against the government.
Anyone facing an audit cannot sit back and wait, advisers said. They need to find out right away what the IRS agent's specific concerns are and act quickly to defuse them. And anyone thinking about making this kind of donation has to understand exactly what is required.
Land donations are known as conservation easements; when a building front is being given away, the strategy is known as a facade easement. The owner donates the property to a qualifying charitable organization — say, a government agency or historic trust — and takes a one-time income tax deduction. In return, he gives up the right to develop or alter the property.
The donation is made in perpetuity, so that anyone who buys the land or building must comply with the agreement to preserve it.
The IRS is reviewing the arrangement "with a fine-tooth comb," Judith Edington, counsel in the tax department at the Boston office of the law firm Sullivan & Worcester LLP, said.
Each audit "is somewhat unique because land is unique," Charles M. Ruchelman, an attorney in the Washington office of Caplin & Drysdale, said. The reviews, because of their scrutiny of all the facts, require an adviser to take an objective look at each client's case, he said.
A lot of attention is paid to the actual value of the land or facade, and whether the deduction reflects that value.
A good appraisal is critical for the taxpayer, but will not be the silver bullet in every case.
Bryan Skarlatos, a partner at the New York law firm Kostelanetz & Fink, said IRS agents have been "vigorously challenging every aspect of these transactions." In his view, this seems "contrary to congressional intent" in approving laws allowing such deductions.
A series of Washington Post articles in 2003 led to investigations by the IRS and the Senate Finance Committee. The paper reported on abuses, including luxury home builders in North Carolina who paid $10 million for a tract in the mountains, developed a third of the land, then took a $20 million deduction.
The newspaper also detailed how hundreds of affluent Washingtonians donated historic facades on their homes in affluent neighborhoods in Capitol Hill, Dupont Circle and Georgetown to a nonprofit preservation trust and reaped a windfall in write-offs.