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Advocates Alert: Form 990 Includes New Question on Conservation Easement Donations

NEW! Clarification on the new questions on conservation easements below!

On the Form 990 for tax year 2006, there is a new question on conservation easements.  Some land trusts have missed this new question due to the fact that some tax preparation software may skip over the question. Land trusts that are 501(c)(3) organizations must fill out a Form 990 and a Schedule A for Form 990 for each tax year.

Question 3c on Schedule A reads as follows:

 “Did the organization receive or hold an easement for conservation purposes, including easements to preserve open space, the environment, historic land areas or historic structures?  If “Yes”, attach a detailed statement” (our emphasis added).

This second sentence is new for Tax Year 2006! 

What is required?  The “detailed statement” is described in detail in the Instructions for Schedule A (Form 990 or 990-EZ) (available at http://www.irs.gov/pub/irs-pdf/i990sa.pdf ). The instructions are reprinted here:

Line 3c. Conservation easements.   Answer “Yes” if the organization received or held one or more conservation easements during the year. In general, an easement is an interest in the land of another. A conservation easement is an interest in the land of another for purposes that include environmental protection; the preservation of open space; or the preservation of property for historic, educational, or recreational purposes. For more information see Notice 2004-41, 2004-28 I.R.B. 31.

If “Yes,” the organization must attach a schedule that includes the following information.

1.  The number of easements held at the beginning of the year, the acreage of these easements and the number of states where the easements are located.

2.  The number of easements and the acreage of these easements that the organization received or acquired during the year.

3.  The number of easements modified, sold, transferred, released, or terminated during the year and the acreage of these easements. For each easement, explain the reason for the modification, sale, transfer, release or termination. Also, identify the recipient (if any), and show if the recipient was a qualified organization (as defined in section 170(h)(3) and the related regulations at the time of transfer).

4.  Show the number of easements held for each of the following categories:
a. Easements on buildings or structures;
b. Easements that encumber a golf course or portions of a golf course;
c. Easements within or adjacent to residential developments and housing   subdivisions, including easements related to the development of property; and
d. Conservation easements that were acquired in a transaction described under Purchase of Real Property from Charitable Organizations in Notice 2004-41 and if the organization acquired any such easements during the year.

5.  The number of easements and the acreage of these easements that were monitored by physical inspection or other means during the tax year.

6.  Total staff hours and a list of expenses devoted to (legal fees, portion of staff salaries, etc.) incurred for monitoring and enforcing new or existing easements during the tax year.

7.  Identify all easements on buildings or structures acquired after August 17, 2006, and show if each easement meets the requirements of section 170(h)(4)(B).

Questions and suggested answers about the new 2007 IRS Form 990 and its questions about conservation easements

IRS Form 990, Schedule A (Instructions)
Line 3c. Conservation easements.   Answer "Yes" if the organization received or held one or more conservation easements during the year.  In general, an easement is an interest in the land of another. A conservation easement is an interest in the land of another for purposes that include environmental protection; the preservation of open space; or the preservation of property for historic, educational, or recreational purposes. For more information see Notice 2004-41, 2004-28 I.R.B. 31.

Q: Regardless of whether a Form 8283 was issued?  That is, should I be reporting purchased as well as donated easements?

A. The IRS tells us they would like to know about conservation easements you hold, whether or not they were donated or a Form 8283 was signed.

“Year” in all this means the year reported in the Form 990 – the fiscal year on which you are reporting in the Form 990.

If "Yes," the organization must attach a schedule that includes the following information.

Q:  What “schedule” are they referring to?

A. There is no pre-printed “schedule.”  The IRS wants you to write down the answers to the following 7 questions on a piece of paper and attach it to your Form 990.

1. The number of easements held at the beginning of the year, the acreage of these easements and the number of states where the easements are located. 

Q: Are we supposed to provide a total acreage figure or the acreage for each easement?

A. The total acreage should be sufficient.
 
2.  The number of easements and the acreage of these easements that the organization received or acquired during the year.

Q: Are we supposed to provide a total acreage figure or the acreage for each easement?

A. The total acreage should be sufficient.

3.  The number of easements modified, sold, transferred, released, or terminated during the year and the acreage of these easements. For each easement, explain the reason for the modification, sale, transfer, release or termination. Also, identify the recipient (if any), and show if the recipient was a qualified organization (as defined in section 170(h)(3) and the related regulations at the time of transfer).

Q: Do I assume correctly that “modified” means “amended” for any reason whatsoever – to include everything from corrective amendments necessitated by scrivener’s error to a major change in the term of an existing easement?

A. Yes.

4.  Show the number of easements held for each of the following categories:

Q: For the fiscal year or total? 

A. They want a total.  Remember that this form was sprung on people with very little notice, and if you cannot easily provide this information, we advise telling them that they should give an approximate answer if they can, and/or state how they may be able to get this information in the future.

a. Easements on buildings or structures;

Q: Do I correctly assume that this is a request for easements on “certified historic structures” as defined under IRC §170(h)(4)(B) – or is that covered exclusively by question 7, below?  We have easements on farms that include buildings and structures – but these are incidental and not the principal purpose behind the conservation easement.

A. We advise limiting your report to the number of “certified historic structures.”  There is special treatment of such easements in the law.

b. Easements that encumber a golf course or portions of a golf course;

c. Easements within or adjacent to residential developments and housing subdivisions, including easements related to the development of property; and

Q: What is meant by “residential developments and housing subdivisions” – one house lot next to a 500-acre conserved parcel – or what?
 
A.  We advise interpreting “residential developments and housing subdivisions” as real estate development projects, not single residences.  Given that these questions were published earlier this year with little notice, it is entirely reasonable, if you cannot easily provide this information, to provide an answer to the best of your knowledge, and state how you may be able to get better information in the future.

Q.  What is meant by “easements related to the development of property” – those on “common land” set aside as part of a planned development?  

A. Yes, those, but also easements on lands not held in common that were part of a new subdivision.  We believe what they were trying to identify easements whose creation was part of or coincident to the approval of a subdivision or development permit, or whose creation was factored into the marketing of multiple properties.  They are not seeking to find out if there is a house on the property adjacent to your easement.

d. Conservation easements that were acquired in a transaction described under Purchase of Real Property from Charitable Organizations in Notice 2004-41 and if the organization acquired any such easements during the year.

Q. What are these?

A.  The transaction referred to is a charity’s sale of the fee interest in an easement encumbered property to an individual that is conditioned on a contribution of cash by the individual, above and beyond the purchase price.  See the Notice at http://www.lta.org/publicpolicy/irs_notice_2004_41.pdf . 

5. The number of easements and the acreage of these easements that were monitored by physical inspection or other means during the tax year.

Q: Are we supposed to provide a total acreage figure or the acreage for each easement?

A. The total acreage should be sufficient.

6.  Total staff hours and a list of expenses devoted to (legal fees, portion of staff salaries, etc.) incurred for monitoring and enforcing new or existing easements during the tax year.

Q:  Do I assume correctly that this need not be broken down into an itemization for each easement but, rather, that the word “total” means just what it says – total legal fees, total staff salaries, etc.?

A. The totals should be sufficient.  We would advise noting volunteer hours as well, even if they have to be approximated.
 
7.  Identify all easements on buildings or structures acquired after August 17, 2006, and show if each easement meets the requirements of section 170(h)(4)(B).

Q.  Section 170(h)(4)(B) includes easements on “certified historic structures” which are defined to include any building, structure or land area listed in the National Register or located in a “registered historic district” and certified by the Secretary of the Interior as being of historic significance.  Although this seems directed at “façade easements,” does the inclusion of “land area” raise the question of whether conservation of historic lands needs to be reported?

A.  Please note that they ask for easements on buildings or structures ONLY.  Section 170(h)(4)(B) used to refer to both buildings and land – but Congress changed this in August, 2006!  This section now refers only to easements on buildings and structures.  See the changes to the law at http://www.lta.org/publicpolicy/law_changes.doc .

Questions? Contact us at policy@lta.org

updated 7/02/07