It is tax season again and for those of you that are contemplating, or already have donated your mineral property, the following information may prove valuable.
It is well known that Syndicates, LLCs, and other non-mining entities have used exaggerated mineral values in property donations to non-profit organizations, for purposes of generating large tax credits and deductions.
There are numerous tax-savings organizations/entities, some with teams of accountants, attorneys and other consultants to help “steer” the donation through the IRS.
In some cases, these organizations are legitimate, use best practices and provide sound advice, as well as hire experienced and qualified appraisers that perform qualified appraisals, in accordance with the rules and standards.
Many however do not…
In late December 2017, the IRS added Syndicated Conservation Easements to their Abusive Tax Shelters and Transactions via Listing Notice (Notice 2017-10), making it the 36th type of transaction on their list.
“This notice describes certain transactions in which some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested. The promoters identify a pass-through entity that owns real property or form a pass-through entity to acquire real property. Additional tiers of pass-through entities may be formed. The promoters then syndicate ownership interests in the pass-through entity or tiered entities that owns the real property, suggesting to prospective investors that they may be entitled to a share of a charitable contribution deduction that equals or exceeds two and one-half times the amount of the investor’s investment. The promoters obtain an inflated appraisal of the conservation easement based on unreasonable conclusions about the development potential of the real property. The entity then donates a conservation easement encumbering the property to a tax-exempt entity. Investors then claim a charitable contribution relying upon the pass-through entity’s holding period.”
To fully understand the issues, we must first understand the perspective of the appraisers and reviewers, not the donors.
In many cases, the donor and other advisors look at the donation solely from the donor’s perspective.
A valid contribution requires many steps, including a valid, qualified appraisal performed by a qualified minerals appraiser that later is approved by IRS appraisal reviewers.
Following is a listing of rules and codes related to contributions:
- U.S. Code Section 170 (Charitable, etc., contributions and gifts)
- U.S. Code Section 611 (Recordkeeping and return requirements)
- U.S. Code Section 170A-13 (Depletion)
- Federal Register 2018-15375 (*New*) (Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution)
Following are some IRS guidance documents pertinent to your tax filing:
- IRB Notice 2006-96 (Guidance regarding appraisal requirements)
- Publication 561 (Determining the Value of Donated Property)
- Publication 526 (Charitable Contributions)
- Overview of the Mining Industry
- Real Property Valuation Guidelines
- Conservation Easement Audit Techniques
A contribution, donation or conservation appraisal should be written to the same presentation level of detail that one would expect a mining company would use for development and/or sale to another mining company.
It is highly recommended that the appraiser is fully qualified on the subject matter relating to, and the nature of property being appraised.
It is possible different appraisers and appraisals would be needed for different interests. A significant contribution may require the assistance of several professionals – best to use legitimate professionals, that use best practices and provide sound advice, as well experienced and qualified appraisers that perform qualified appraisals in accordance with the rules and standards.
Frequently a real estate appraiser will be seen by the IRS trying to do a mineral appraisal, plus other interests. Often they are not experienced or qualified and this can have a serious effect on the land owners tax filing. It is best to engage a Certified Minerals Appraiser that is familiar with the nature of your scope of work.
Some other things to consider when preparing your donation mineral property for submittal are:
- Do not underestimate the IRS and assume that they are “too busy”, too bureaucratic or to understaffed to review your contribution.
- Do not assume that a “smaller donation” will fly under the radar.
- Do not assume that mineral property and related technical matters will be too complex for them to understand.
- Remember there is no such thing as a conservative value.
- There (really) is no such thing as statute of limitations for a contribution.