GIVE LIKE TRUMP
You, too, can claim a charitable deduction for promising not to develop a golf course or to preserve a historic building. Just be ready to fight the IRS.
You, too, can claim a charitable deduction for promising not to develop a golf course or to preserve a historic building. Just be ready to fight the IRS.
Last August, to prove his charitable bona fides, Donald Trump’s campaign gave the Associated Press a 94-page list of $102 million worth of donations he and his companies had made since 2010. The first entry: $63.825 million for “various conservation easements.”
We don’t know whether the charitable deductions Trump presum-
ably claimed for those easements are among the items Internal Revenue Service auditors are scrutinizing—his campaign wouldn’t comment and the presumptive Republican Presidential nominee has said he won’t release his actual tax returns until those audits are over. But chances are they’re on the IRS’ hit list.
“It’s a vain hope if donors hope they won’t get audited,” says San Francisco attorney Bill Hutton, an easement expert. Make no mistake. Deducting an easement is legal. Just last December Congress made permanent an expansion of this tax break. But the IRS views the area as rife with abuses. So even if you try to do things by the book, you could get put through the wringer.
Here’s how the tax break works. You give up development rights on land or agree to preserve a certified historic structure through a permanent easement, which is held by a land or historic trust or a government agency. An appraiser evaluates how much the easement has reduced the market value of your property, and you claim a charitable deduction for that amount.
The deduction can wipe out up to 50% of your adjusted gross income (100% if you’re a farmer or rancher). If you can’t use the whole deduction in one year, you can carry it forward, applying the unused portion to reduce taxable income for up to 15 years. Meanwhile, you still own and can enjoy or profit from the property—within the terms of the easement. If you sell, the new owner is bound by the easement.
One of the most controversial uses of conservation easements (the Obama Treasury Department wants to ban it) is for golf courses. Trump donated an easement on 11.5 acres of his Trump National Golf Club in Los Angeles in 2014. We don’t know how he valued it, but he valued 2004 and 2005
easements on the Trump National Golf Club in Bedminster, N.J. at a total of $39 million. In December a U.S. Tax Court judge agreed with the IRS that $8 million in deductions for two golf course easements (unrelated to Trump) flunked the conservation test; the IRS concluded that the chemicals the courses used injured the ecosystem. (In an earlier case the court had allowed, but reduced, a golf course easement deduction.)
Trump has used easements for more than golf courses. Last December he donated an easement on 158 acres of his personal estate in Westchester County, N.Y. And in 1995 and 2002 he donated historic building and land easements on his 20-acre Mar-a-lago property, the former Palm Beach home of Marjorie Merriweather Post that he now runs as a private beach and dining club (membership costs $100,000, plus an annual $14,000 fee).
While land easements don’t require donors to give the public any access, historic building easements do (unless all you’re donating is the facade). Mar-a-lago’s easement calls for two days a year of public visits, but when FORBES inquired about an open-house day, the answer was: “This is private property. It’s only open to members.” (The easement holder, the National Trust for Historic Preservation, says it believes the charitable events held at Mar-a-lago satisfy the public access test.)
Other billionaires, including John Malone and Ted Turner, have used easements to preserve tens of thousands of acres of open land. In 2012 hedge fund billionaire Louis Bacon donated an easement on 90,000 acres in southern Colorado to the U.S. Fish & Wildlife Service—a gift the U.S. Secretary of the Interior extolled at a press conference.
Sometimes easements are used to balance conservation and development. Hutton counseled Greg and Jeff Smith, fifth-generation California cattle ranchers who just inked an easement with the Land Conservancy of San Luis Obispo County that permanently preserves 3,255 acres of their land bordering the Los Padres National Forest for agriculture, allowing a maximum of 6 homes on it. The family also wants to put 494 homes on a separate 3,478-acre part of the ranch, while leaving 70% of that parcel as open space.
Still, it’s easy to understand the IRS’ skepticism when you consider the chutzpah of some donors and easement promoters. One of the tax agency’s first court wins came in 2006, when the U.S. Tax Court ruled against a Virginia devel- oper who built 29 of the maximum 30 allowed Mcmansions on his land and then claimed a $3.1 million deduction for donating an easement on wetlands acreage he couldn’t build on anyway.
In 2009 the court ruled the owner of a neo-Italianate building on New York’s Fifth Avenue wasn’t entitled to any of his claimed $22 million deduction for donating 10,000 of the 22,000 square feet of unused air rights above it. The easement, the court noted, didn’t preclude either demolition of the building or use of the 12,000 other square feet of development rights.
That easement was donated to the National Architectural Trust (since renamed the Trust for Architectural Easements), which, beginning in 2001, solicited and accepted hundreds of facade easements from New York and Boston historic-district property owners. In 2011, without admitting wrongdoing, the trust agreed to an injunction barring it from such abusive practices as referring donors to affiliated appraisers.
Doing things right reduces but doesn’t eliminate your chances of being audited. Stephen J. Small, a lawyer in Newton, Mass. who has written multiple books on conservation easements, says only 6 of the 100 or so deals he’s closed since 2005 have faced IRS audits. Prepare to pay a tax lawyer, a real estate lawyer and an independent appraiser. “It’s not like writing a check to your alma mater,” warns Russell Shay, director of public policy at the Land Trust Alliance, which advocates for the 1,700 local land trusts that hold easements on an estimated 15 million acres.
One reason even well-intentioned donors can end up at war with the IRS is that the agency has refused to issue model easement language. Douglas Carroll wanted to preserve 21 acres of farmland and forest near Baltimore that his grandmother bought in 1920, with just the house he grew up in and a tenant house. “I wanted to keep my children from having fights about whether to develop the land or keep it as is,” he says.
So in 2005 he donated an easement to a local land trust and the Maryland Environmental Trust, a state agency, claiming a $1.2 million charitable deduction. Maryland’s attorney general signed off on the easement’s language. Yet in April the Tax Court ruled that despite the public benefit of the easement, one clause in it didn’t precisely follow IRS regulations, making it (as the IRS contended) unworthy of any tax deduction. Already out $200,000 in legal fees, Carroll has filed a motion for reconsideration. “It’s a game that’s being played, and it’s not right,” he says.