Façade-easement organization loses exemption for serving private tax interests

View official IRS release (PDF)

Plain-English summary

An organization formed to preserve historic properties accepted façade easements arranged by a for-profit tax consulting firm. The IRS found that the organization performed little due diligence, relied on one appraiser, did not meaningfully monitor the properties, and accommodated transactions designed to produce large charitable deductions for investors. It also found that the organization served the private interests of the consulting firm, donors, and insiders more than incidentally. Because these activities furthered substantial nonexempt purposes and did not establish a genuine charitable conservation program, the IRS revoked the organization's section 501(c)(3) exemption. The revocation was retroactive to the organization's incorporation date because its operations materially differed from the exempt activity it had represented.

Ruling snapshot

• Question: Did an organization that accepted and held façade easements operate primarily for charitable conservation purposes rather than private tax interests?
• Outcome: Revocation
• Key authorities: IRC §§ 170(h), 501(c)(3), and 509(a)(2); Treas. Reg. §§ 1.170A-14 and 1.501(c)(3)-1; Rev. Proc. 2013-9

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce Street
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION Date: December 13, 2013
Number: 201514009 Employer Identification Number:

Release Date: 4/3/2015
Person to Contact/ID Number:

Contact Numbers:

(Phone)
UIL: 501.03-00 (Fax)

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear:

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
dated March 19, 20XX is hereby revoked and you are no longer exempt under section
501(a) of the Code effective December 21, 20XX.

The revocation of your exempt status was made for the following reasons:

IRC 501(c)(3) of the Internal Revenue Code exempts from Federal
income tax: corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes, or for the
prevention of cruelty to children or animals, no part of the net earnings of
which inures to the benefit of any private shareholder or individual...

Treasury Regulation 1.501(c)(3)-1(d)(ii) states that an organization is not
organized or operated for one or more exempt purposes unless it serves
a public rather than a private interest. Accordingly, it is necessary for an
organization to establish that it is not organized or operated for the
benefit of private interests such as designated individuals, the creator,
shareholders, or persons controlled, directly or indirectly, by such private
interests.

You engaged in substantial non-exempt activities in 20XX (and
subsequent years) and did not satisfy the operational test prescribed by
Treasury Regulations beginning with the 20XX tax year. Your activities
were primarily directed towards being a donation receptacle to facilitate
maximum tax benefits. Donors reaped inappropriate tax benefits in
connection with your façade easement program. Any tangible benefits to
the public derived from your activities are elusive at best.

You have not established that your are operated exclusively for exempt
purposes described in section 501(c)(3) of the Code. Specifically, you
have not shown that a substantial part of your activities does not serve
the private interest of your officers and other individuals.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code. You are required to file Federal income tax returns on Form
1120. Those returns should be filed with the appropriate Service Center.

Processing of income tax returns and assessment of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

If you decide to contest this determination, you may file an action for declaratory
judgment under the provisions of section 7428 of the Code in one of the following three
venues: United States Tax Court, the United States Claims Court or the District Court
of the United States for the District of Columbia. A petition or complaint in one of these
three courts must be filed before the 91st day after the date this determination was
mailed to you if you wish to seek review of our determination. Please contact the clerk
of the respective court for rules and the appropriate forms regarding filing petitions for
declaratory judgment by referring to the enclosed Publication 892. Please note the
United States Tax Court is the only one of these courts where a declaratory judgment
action can be pursued without the services of a lawyer. You may write to the court at
the following addresses:

United States Tax Court,
400 Second Street NW
Washington, D.C. 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer
Advocate assistance is not a substitute for established IRS procedures, such as the
formal Appeals process. The Taxpayer Advocate cannot reverse a legally correct tax
determination, or extend the time fixed by law you have to file a petition in a United
States court. The Taxpayer Advocate can, however see a tax matter that may not have
been resolved through normal channels gets prompt and proper handling. You can call
1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

We will notify the appropriate State Officials of this action, as required by section
6104(c) of the Internal Revenue Code.

If you have any questions in regards to this matter please contact the person whose
name and telephone number are shown in the heading of this letter.

Thank you for your cooperation.

Sincerely yours,

Nanette M. Downing
Director, EO Examinations

Enclosure:
Publication 892

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
550 Main Street, Room 6417
Cincinnati, OH 45202-3222
Date: July 11, 2013
Taxpayer Identification Number:
Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s name/ID number:

Manager’s contact number:

Response due date:

Certified Mail — Return Receipt Requested
Dear:

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action — Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren't an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

If we don't hear from you

If you don’t respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Effect of revocation status
If you receive a final revocation letter, you’ll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also
may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
     requesting technical advice. If we issue a determination letter to you based on a technical
     advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
     further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

3 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

December 31, 20XX

Issues:

Should the IRC § 501(c)(3) exempt status of the organization,

(sometimes referred to as the “Organization” or ), be revoked because
the Organization operates for a substantial non-exempt purpose and serves private, rather than
public interests, more than incidentally?

Should exempt status be revoked retroactively to December 21, 20XX?
Facts:

The Organization was incorporated in on December 21, 20XX. Per its
Articles of Incorporation, is organized to further historic preservation,
provide educational initiatives on historic preservation and to accept and hold
easements, including façade easements.

It filed a Form 1023, Application for Recognition of Exemption (Form 1023) which
was received by the IRS on January 11, 20XX. is listed as the
power of attorney and statutory agent on the Form 1023. is listed as
the president.

When Form 1023 was filed in 20XX, it listed three directors:

; , areal estate consultant from , and

, an architect from . is an attorney who represented
that he had taken a few architectural courses in college.

Per the Form 1023, represented that each of the directors would work an
average of 5 hours a week for , and would perform identical activities, such as
attending all board meetings, and assist(ing) in evaluating the appropriateness of
donations. None are compensated as employees of . The Organization does
not have dedicated office space, but shares office space with the law firm ,

, & , ( ), located in . The exemption application
stated that funds may change hands for ratable share of expenses incurred
in the office share arrangement.

The Form 1023, Part V, disclosed that has a close relationship

with the law firm, , in which is a partner, and is
an employee. An additional disclosure indicated that legal services would be

provided by the law firm , in which has an interest of less
than 35%.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Year/ Period Ended
December 31, 20XX

December 31, 20XX

Name of Taxpayer

The Form 1023 stated that it had received one donation of a façade easement as of
its filing, and that it planned to continue “to acquire similar historically significant
properties and maintaining the conversation [sic] features of the properties received.”

The Organization received a determination letter dated March 19, 20XX, granting it
exemption from income tax under section 501(a) as an organization described in
section 501(c)(3) of the Internal Revenue Code. In its determination letter, the
Organization was given an advance ruling (through December 31, 20XX) that it was
a non-private foundation pursuant to section 509(a)(2) of the Code. The effective
date of the exemption was December 21, 20XX, the date of incorporation.

The Organization, an accrual basis taxpayer with a taxable year ending December 31,
filed its first Form 990 beginning with the year ending 12-31-20XX. On Forms
990, the following information appears:

Tax Date Directors Hours Return Returned
Year Filed per Prepared by Signed by
Week
20XX 03-06-XX 1
20XX 08-12-XX 1
.50
50
20XX 05-18-XX 1
.50
.50
20XX 06-01-XX 1
.50
.50
20XX 07-27-XX 1
.50
.50
0
0
In the year 20XX, became one of the directors of . She
was employed at , , & when she filed the Form 1023, and
is still currently an employee of the law firm. is an attorney and a

Certified Public Accountant.

The Organization accepted its first façade easement donation in the year 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

The Form 990 returns reflect the following information with respect to the façade easement
donations that it has received:

Number of Easement Fair Market Value per Facade Easements
Tax Year Donations Balance Sheet
20XX 1
20XX 1
20XX 1
20XX 1
20XX 2
By 12-31-20XX, had received six donations of façade easements for the following
properties: ,
In , donated 12-28-20XX
The in , (home office of ), donated 12-28-20XX
In , , donated 07-25-20XX
in , , donated November 20XX
in , , donated 12-14-20XX
in , donated 12-30-20XX
All of the above facade easements that were donated to were arranged by the for-profit
company .( ) , formerly known as . One of the original partners in
, , (a lawyer), was a friend of (President and a board member of
). According to ; approached him and introduced the concept of
facade easements as was involved in real estate transactions. Subsequently

decided to start the Organization.

changed its name to on or around the time of
death which occurred in 20XX. The web site states:
FROM THE WEB SITE:
WHO WE ARE
Founded in 20XX, is a strategic tax consulting firm that connects taxpayers, community

stakeholders and governmental entities to maximize the returns on their investments. We do this
through a socially responsible approach that leverages the tax policies and programs established by
federal, state and local governments.

WHAT WE DO

Although the end objectives of government tax programs are often easy to understand, the process by

which those objectives are attained can be daunting. At , we know how to structure and
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

manage the process. We are embedded from start to finish, ensuring that maximum value is obtained by
all parties.

, based in , , represents clients or investors who are interested in
obtaining a charitable contribution deduction and any tax credits (usually at the state or local
level) associated with a facade easement donation or rehabilitation of historic property. The
company specializes in syndicating tax credits.

With respect to façade easement transactions arranged by for its clients, the
investors tentatively agree to create a limited liability company (LLC) that will purchase the
property. As, some properties appear to have been purchased or owned by a partnership in
which investors purchase a partnership interest in which investors in, (LLC’s), purchased a
partnership interest. Once a property is identified, an appraisal is done. The appraisal is paid

for by the LLC or one of the investors. In the case with the donations made to , all the
appraisals were performed by the same person; from ;
located in ,

principals themselves invested in limited liability companies in order to invest in the
which is the office building where conducts business. Those
LLCs donated the façade easement in the to in 20XX. The following
summarizes the advertising provided to prospective investors by , in regards to
the

Two limited liability companies are formed to purchase 100% of the partnership
interest of the limited partnership (Partnership) owning the

Investors taking advantage of the opportunity may purchase membership
interests in Partnership in accordance with the number of investment units
purchased. Partnership contributes historic façade and development rights
easement to a qualified organization (not specified). In return, Partnership
partners [LLCs] will receive a charitable contribution deduction equal to the fair
market value of the façade and lost development rights easement. The
charitable deduction is allocated according to the partner’s interest in the
Partnership. provides services to “vest the conservation easement.” In
order to complete the rehabilitation of the building, Partnership will obtain
financing which will be non-recourse to the limited partners. The lender will
receive a security interest in the underlying real estate and its income stream
and any other required guarantees will be given by the LLCs. The mortgages on
the property must be subordinated to the historic façade and lost development
rights easement. Investors have a put option at fair market value at the end of
year 3.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

December 31, 20XX

The Organization does not require an application, such as an application for approval to
contribute an easement, from prospective donors with respect to the donation of the façade
easement. While arranging the package for investors, contacts to inquire if it is
interested in receiving the façade easement contribution. There is no indication that the board
of directors votes whether to accept or reject a proposed donation upon initial contact from

or that the Organization is regularly provided with any information concerning the prospective
easement donation prior to the closing of the transaction. However, a representative of
provides with the one-time donation fee amount, and the amount of the yearly fee. The
Organization uses the appraisal amount of the facade to determine the one time donation fee,
usually a percentage of the appraised value of the easement, as well as the yearly fee.

drafts the easement donation contract between the donor LLC and known
as the . While is permitted to make corrections and or amendments
if it believes they are needed, there are no records to show that it did so. The
also spells out the amount of the cash donation required for acceptance of the
easement donation.

If the investors are satisfied, the current owner sells the property to a partnership or LLC(s).
The LLC(s) comes into existence in escrow. The donation of the facade easements occurs in
escrow.

To facilitate the timely closing for the investors, routinely provided his
original signature, undated, on the closing documents. None of the directors of
attended the escrow closing for the façade easement transactions. employees
handle the escrow and filings. Once escrow closes, and the perfected documents are
returned to , the two active directors ( and )
notify the two inactive directors ( and ), and request their
signature on corporate resolutions agreeing to the donation.

stated that on two occasions, he viewed the facade easements prior to the
donations. On the other occasions, he relied on the appraisal reports. There is no indication
in any of files, that it had any contact with the donors prior to the donation, other than
to answer a few questions posed by third party attorneys.

During the easement donation transaction in 20XX (prior to receipt of its
determination letter), in order to facilitate project, changed the wording
on one of its letters from, “the corporation will be a qualified 501(c)(3) organization, to
“is qualified to accept historic easements”.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX
December 31, 20XX

Name of Taxpayer

According to the correspondence between and , the donation of the

store facade in took ten days between first contact and the
donation. Apparently needed to close this deal before the calendar year end,
and was still waiting on the appraisal. in order to facilitate the transaction, did
not view the facade, review an appraisal, or even ask for the upfront or yearly donation. He
signed the one page signature page on the standard Easement Agreement put together by

and express shipped it to . Section 7.8 of the easement

agreement did not contain any donation amount, only the wording that “the Grantee
intends to make a donation...”

In one case, a representative suggested that eliminate codified language
from one of standardized donation letters, in order to facilitate the donation.
provided the revised letter, and mailed it to the potential donor. The codified language
deleted, was actually language suggested by , to be included in a letter to an insurance
underwriter a year before, when was trying to package the

suggested the Organization include the following language in a letter dated 08-28-
20XX, to , CEO,

is classified as a publically supported non-profit organization and as such, is
comfortable with their [sic] ability to meet the Public Support Test based on the
donation of easements and fees associated with said easements. This determination
will entail an analysis of Section 509(a)(2) of the Internal Revenue Code that will
address whether any agents have received from “disqualified persons” as defined by
section 4946 which will in turn require the analysis of a grantor to determine if they are
properly to be labeled a “substantial contributor” as defined in section 507(d)(2).

During the donation, asked for a copy of its
“enforcement letter’, which basically provided assurances that the law firm ( )
would ensure that had the resources necessary to enforce the easement. At the
time, did not know who the donor was. asked to review a draft of the
letter, before mailed it to the donor. The Organization complied, and

suggested a few changes. One of the changes was to remove the following sentence.
“This determination will entail an analysis of Section 509(a)(2) of the Internal Revenue
Code that will address whether any agents have been received from “disqualified
persons” as defined by Section 4946 which will in turn require the analysis of a grantor
to determine if they are properly to be labeled a “substantial contributor’ as defined in
Section 507(d)(2)”. When discussing this with on 02-14-20XX, her comment
was that they just allowed to change it to a more generic form. “Instead
of saying, the man had glasses, they just said the man”.

When packaged the facade easement donation, asked for a
substantially less than usual amount for the “up front” donation fee. Based on the
formula that used for the prior easement donations, the “up front” donation should

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31, 20XX
December 31, 20XX
have been $ . Instead, settled for a flat fee of $ for the “up front”

donation amount. The two LLC grantors of this facade easement had previously
donated a facade easement with a substantially higher donation percentage for the “up
front” fee. When was asked why settled for the discounted contribution,
he replied that they did this because “ is our best referral source for deals.”

The Organization does not have any minutes indicating that it has regular meetings.
Rather, appears to “meet” approximately once a year through a unanimous
consent of directors in lieu of meeting (“Consent of Directors”) which reflects the
corporate resolutions adopted by the board. The unanimous consent of directors in lieu
of meeting is not executed simultaneously, but is dated at the top, and contains
signatures of the directors (sometimes on separate, but identical signature pages).
There are no dates by the signatures. The following is a summary of the consents in
lieu of meeting with the corresponding resolutions that were provided during the

Service’s examination of books and records:
12-22-20XX
The sole incorporator, , appoints and authorizes to execute

all necessary documents and accept donations.

12-28-20XX
Action by separate Unanimous Written Consent of All the Directors to accept the
facade easement resolution, is dated 12-28-20XX and the facade easement,
respectively. (All noted infra, these resolutions were actually signed much later than the date
listed and backdated).

12-31-20XX

’ , and are appointed Directors. is appointed
President of the corporation, is appointed Vice President, and is appointed
Secretary/Treasurer.
07-17-20XX

Action by Unanimous Written Consent of All the Directors to accept the facade
easement of the

12-31-20XX

, , and are appointed Directors.
is appointed President of the corporation, is appointed Vice President, and
is appointed Secretary/Treasurer.

12-04-20XX
Action by Unanimous Written Consent of All the Directors to accept the facade
easement of the

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

December 31, 20XX
December 31, 20XX

12-31-20XX

, , , and are appointed

Directors. is appointed President of the corporation, is appointed Vice President,

and is appointed Secretary/Treasurer.

01-01-20XX (one day later)
, and are

appointed Directors.

12-20-20XX
Action by Unanimous Written Consent of All the Directors to accept the facade
easement of the

There was no corporate resolution in the files with respect to the donation of the facade
easement that allegedly occurred 12-30-20XX.

The two active directors, and routinely back dated documents. For
example, the Consent of Directors to Accept the facade easement resolution, is dated
12-28-20XX and the Consent of Directors to Accept the facade easement is dated 12-
28-20XX. Both Consents were emailed to the directors for their signatures on 06-26-20XX.

It appears that the reason why the Consent of Directors for the easement donation was
mailed out in 20XX is because it did not previously exist. Personnel at requested
a copy of the resolution in June of 20XX. email reply was that “it doesn’t look that the
[resolution] was ever done (not every deal has requested one).”

told the revenue agent that he never met the other two directors

( ) and had had only occasional phone contact.

The revenue agent interviewed on two occasions. stated that his
duties as director just included signing documents sent to him. He spends about five
minutes a year on it, and he doesn’t consider himself involved with =. The agent
asked how he became involved with and he responded that he originally
worked for a real estate consulting firm. One of the clients of employer
was also working with . recommended him to . did
not participate in any of the negotiations, or review of any of the easements. He claimed
that he has never spoken to , and that he is only contacted when his

signature is needed.

The revenue agent interviewed on two occasions. described
his duties as reviewing the minutes (consents) and the tax return that the law firm sends
him. He has no other duties. He never participated in any of the negotiations or

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31, 20XX
December 31, 20XX
reviewed any of the easements. was introduced to through

, one of the partners at

E-mail correspondence between and the Organization indicates that the two

principal directors of the Organization had to contact in order to secure “contact

information” as to . in order to obtain their signatures.

The revenue agent was not able to locate , who served briefly as a

director in the year 20XX. |
and insist that no payments are made to by or that there is |

any remuneration from to

During the years examined, did not have a web site, nor does it currently have a web site. It
did not advertise and had no marketing materials, other than a double page pamphlet prepared
by either or on an office computer. It appears that pamphlet was not widely
distributed, but was primarily provided to prospective donors/clients of . There is no record
of the Organization making any outreach efforts in order to solicit donations of conservation
easements, including façade easements from any other sources other than . The Form
990 returns reflect no expenses for marketing or outreach. Although represented in its
Articles of Incorporation that is purposes included providing education on conservation
easements, it conducted no educational activities and made no expenditures for such activities
from its inception through the years examined.

The Organization's files with respect to each facade easement that it holds contain only scant
information and does not keep uniform records with respect to each file. With one
exception, all of the files appear to contain a document entitled “Easement Agreement,” the
legal document that actually holds the donor responsible for retaining the original facade, and
its upkeep. Not all the respective easement files containing the Easement Agreement
contained a signed copy of the applicable agreement, however.

None of the files contain a baseline study or report or (other evidence of due diligence on
the Organization's behalf) that describes the façade easement, the condition of the
property, the potential for environmental variables, etc. as in existence immediately prior to
donation. Rather, the Easement Agreement relies on the Appraisal Report as constituting
the “baseline documentation.” It appears that once asked for a baseline report, but
rebuked request. Specifically, in one of the initial donations involving the

; asked about the Baseline Documentation Report, which defines the
conservation features. In an email from of to ;

basically dismissed the Organization’s request, by stating the Baseline Documentation
is included in the appraisal, and telling |= how proud , the appraiser, is of his
work. The Organization never asked for this information again. The agent asked

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

to point out the Baseline Documentation in the appraisal. could only say it
was in the appraisals.

While most of the files contain the appraisal for the respective façade easement, the appraisal
usually only contains a description of the original architecture and a picture of the building, but
no close up pictures of the façade. None of the appraisals contain a description of the
condition of the facade. Nor is there any mention of the presence or non-presence of other
elements that may affect the facade as time goes on. For example, no mention is made if there
are problems with smog, or close to industry that emits something into the air that has and/or
might affect the facade over time.

It is clear from the appraisal reports that each of the properties underlying the donated
easements were subject to local ordinances that preserved the subject property and
restricted changes to the property. With the exception of one file, there do not appear to be
Forms 8283 (Non Cash Charitable Contributions) attached to the appraisals or made a part of
the each easement file. The form is required to be signed by donees who received contributed
property. Several files, but not all contain a letter of acknowledgement to the donor, thanking
the donor for the contribution of the façade easement.

The Service has examined several LLC entities that have donated façade easements to the
Organization to determine whether improper charitable contributions deductions have been
claimed. These examinations were conducted independently from the examination of

In those cases, it was determined that the charitable contribution deduction claimed by the
façade easement donors were substantially overstated and that in particular, the appraisal
reports did not substantiate a diminution in value for the underlying property, applied improper
methodology, and that the appraisals contained substantial errors and omissions, among other
things. In those examinations of the donors, the Service determined that the value of the
easements contributed to was overstated by millions of dollars. In one of the cases, the
Service’s primary position is that the contribution of the façade easement did not meet the
substantiation requirements under section 170 and the regulations and that the appraisal is not
a “qualified appraisal” within the meaning of section 170(f)(11)(E) and Treas. Reg. § 1.170A-
13(c). The Service further concluded that the easement was not protected in perpetuity as
required by section 170(h)(2)(C) and that the easement agreement does not protect the first
position of against claims of mortgage holders as required by the Treasury Regulations.

In January 20XX, the United States Department of Justice filed a complaint in the U.S.
District Court for the against and his company.
The complaint noted that had appraised more than 90 conservation
easements for purposes of the deduction under IRC § 170(h). Shortly thereafter,

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

and his company agreed to an Agreed Order of Permanent Injunction, barring him and
the company from engaging in providing appraisals. '

With regard to monitoring and enforcement activities, there is no information showing that the
donated easements were inspected on an annual basis. There appears to be little to no
inspection activity during the earlier years of the Organization's existence. The files contain no
pictures from the inspection visits. The files do not contain any inspection reports concerning
the facade easement or the present condition of the property. The Organization does not have
a “template” form used for the inspections. When inspecting the properties with a façade
easement held by the Organization, visited the sites as an employee of ,

. His time, as an attorney, was first billed to the law firm. The travel expenses incurred in
visiting the sites were submitted to the law firm for reimbursement under an accountable plan.

controlled when the law firm bills . The accrued legal expenses do not
show up on balance sheet. Legal fees constitute the majority of the expenses on
Form 990 returns. A small miscellaneous fee is normally the only other expense on the
return. When the agent asked how much cash was available to defend the easements,
assured the agent that the Organization had $ in the bank, and the Organization had
no accounts payable. However, at the time of the examination, owed the law firm in excess
of $ in “unbilled” legal fees.

Any service or performs is considered a legal charge on the return. This
includes reviewing bank statements, reviewing easement agreements or other
documents, preparing the Form 990 returns, travel for inspections, etc. The two directors
bill the law firm to get reimbursed. Then, as lawyers in the law firm, they bill

---

‘The complaint alleges that, continually and repeatedly, appraisals, inter alia, are
unreliable due to material and substantive errors and omissions unsupported assumptions, and his failure
to comply with generally accepted professional appraisal standards; substantially overstate the fair market
value of the easements by hundreds of thousands, if not millions, of dollars; distort data and provide
misinformation or unsupported personal opinions to achieve artificially high values that are often
completely out of line with actual property values in the market area; and are riddled with problematic
methodology and conclusions that lead to substantial valuation misstatements of the resulting charitable
contribution deductions taken by his clients. The complaint, order and Department of Justice press
release are attached hereto as Exhibit 1. Similarly, the Tax Court has found appraisals to be
defective. See, e.g., Dunlap v. Commissioner, T.C. Memo. 2012-126; Friedberg v. Commissioner, T.C.
Memo. 2011-233.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

The legal expenses paid each year are summarized as follows:

Tax Year Legal Fees
per Returns
20XX .00
20XX .00
20XX .00
20XX .00
20XX .00

At the time received exempt status, it was classified as a publicly supported
organization within the meaning of section 509(a)(2) of the Code. Its advance ruling
period was through December 31, 20XX. The Organization reflects the easement
donations as contributions at their fair market value (per the appraisals). When
completing Schedule A to the Form 990, does not reflect any of the easement
donations as being received by substantial contributors. Consequently, the calculation
for the public support test shows 100% public support.

Law:

Section 501(a) of the Internal Revenue Code (“Code”) generally exempts from Federal
income taxation those organizations described in section 501(c). In order to qualify for
exemption under section 501(c)(3) an organization must satisfy four criteria: (1) it must
be organized and operated exclusively for certain specified exempt purposes, including
charitable purposes; (2) no part of its net earnings may inure to the benefit of any
private shareholder or individual; (3) no part of its activities may constitute intervention
in any political campaign on behalf of (or in opposition to) any candidate for public
office; and (4) no substantial part of the activities may consist of political or lobbying
activities. Failure to satisfy any of these requirements bars qualification under section
501(c)(3). American Campaign Academy v. Commissioner, 92 T.C. 1053, 1062 (1989)
and cases cited therein. See also Nationalist Movement v. Commissioner, 37 F.3d 216
(5th Cir. 1999), aff'g per curiam 102 T.C. 558 (1994).

The operational test focuses on how the organization is actually operated, regardless of
whether it is properly organized for tax-exempt purposes. Pursuant to the Treasury
Regulations, included in the requirements for an organization to meet the operational
test, the organization must be primarily engaged in activities which accomplish one or
more of the exempt purposes specified in section 501(c)(3)(the “primary activities” test).
Treas. Reg. § 1.501(c)(3)-1(c)(1). Additionally, the organization’s net earnings must

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -12-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

not be distributed in whole or part to the benefit of private shareholders or individuals
(the “inurement prohibition” test). Treas. Reg. § 1.501(c)(3)-1(c)(2).

A deduction may be allowed under section 170(f)(3)(B)(iii) for the value of a “qualified
conservation contribution” if the requirements of that section are met. Section 170(h)(1)
defines a “ qualified conservation contribution” as the contribution (i) of a qualified real
property interest (ii) to a qualified organization (iii) exclusively for conservation
purposes.

(i) A qualified real property interest (as relevant here) includes a restriction granted in
perpetuity on the use which may be made of the real property. Section 170(h)(2)(C).

(ii) A qualified organization (as relevant here) is defined as a public charity described in
section 501(c)(3). Section 170(h)(3).

(iii) To be exclusively for conservation purposes, the conservation purpose of such a
restriction must be protected in perpetuity. Section 170(h)(5). Further, for contributions
made after July 25, 2006, certified historic structures such as those at issue here must
meet additional requirements, including (i) restrictions preserving the entire exterior of
the building and prohibiting any change inconsistent with the historical character of the
exterior; (ii) a written agreement between the donor and donee that the donee is a
qualified organization and has the resources and commitment to manage and enforce
the restrictions; and (iii) that taxpayers claiming a deduction include several required
items, including a qualified appraisal within the meaning of section 170(f)(11)(E).
Section 170(h)(4)(B).

Section 1.170A-14(c) of the Regulations provides that to be considered an eligible
donee under this section, an organization must be a qualified organization, have a
commitment to protect the conservation purposes of the donation, and have the
resources to enforce the restrictions. A conservation group organized or operated
primarily or substantially for one of the conservation purposes specified in section
170(b)(4)(A) will be considered to have the commitment required by the preceding
sentence. One of the ways to be a “qualified organization” is to be a charitable
organization described in section 501(c)(3) that meets the public support test of section
509(a)(2).

Substantial Non-Exempt Purpose

As noted above, an organization will not be regarded as operated for one or more
exempt purposes if more than an insubstantial part of its activities is not in furtherance
of an exempt purpose. Treasury regulations section 1.501(c)(3)-1(c)(1). “[T]he
presence of a single substantial nonexempt purpose precludes exempt status for the
organization, regardless of the number or importance of the exempt purposes. @
Nationalist Movement, 102 T.C. at 576, citing Better Business Bureau v. United States,

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -13-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX
December 31, 20XX

Name of Taxpayer

325 U.S. 279, 283 (1945) and other cases. In Redlands Surgical Services v.
Commissioner, 113 T.C. 47, 71 (1999), the court wrote:

Although an organization might be engaged in only a single
activity, that single activity might be directed toward multiple
purposes, both exempt and nonexempt. If the nonexempt
purpose is substantial in nature, the organization will not
satisfy the operational test.

(citations omitted).

An organization is not operated exclusively for charitable purposes, and thus will not
qualify for exemption under section 501(c)(3), if it has a single non-charitable purpose
that is substantial in nature. This is true regardless of the number or importance of the
organization’s charitable purposes. See Better Business Bureau v. United States, 326
U.S. 278 (1945); Stevens Bros. Foundation, Inc., v. Commissioner, 324 F.2d 633 (8th
Cir. 1963), aff'g 39 T.C. 93 (1962), cert. denied, 376 U.S. 969 (1964).

Organizations that facilitate tax avoidance schemes do not qualify for exemption under
section 501(a) of the Code as organizations described in section 501(c)(3). See
Church of World Peace, Inc. v. Commissioner, T.C. Memo 1994-87 (1994) , aff'd, 52
F.3d 337 (10th Cir. 1995)(The Tax Court held, and the Tenth Circuit affirmed, that the
church did not comply with the requirements of section 501(c)(3) because, by promoting
a circular flow of funds from the donors to the church and back to the donors and
facilitating improper charitable contribution deductions, the church did not operate
exclusively for exempt purposes enumerated in section 501(c)(3). See also New
Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006)(Where an organization
is actively participating in a scheme designed to facilitate tax avoidance, the
organization is not entitled to exempt status because it is furthering substantial non-
exempt purposes).

Rev. Rul. 80-278, 1980-2 C.B. 175 established a three-part test to determine whether
an organization’s activities will be considered permissible under IRC section 501(c)(3):
(1) the purpose of the organization is charitable (2) the activities are not illegal, contrary
to public policy, or in conflict with statutory restrictions; and (3) the activities are in
furtherance of the organization’s exempt purpose and are reasonably related to the
accomplishment of that purpose.

Private Benefit
A basic principle of the law of charity is that the community, rather than designated

individuals, is served. See IV A Scott, The Law of Trusts, sec. 375 (4 ed. 1989).
Thus, an exempt charitable organization must show that it benefits a charitable class

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX
December 31, 20XX

Name of Taxpayer

that is sufficiently large or indefinite so the community as a whole is benefited. In

keeping with this principle, section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides

that an organization is not organized or operated exclusively for one or more exempt

purposes unless it serves a public rather than a private interest.’ Thus, in order to meet

this requirement, it is necessary for an organization to establish that it is not organized
or operated for the benefit of private interests. |

In American Campaign Academy v. Commissioner, 92 T.C. 1053, 1065-66(1989), the
Tax Court defined prohibited “private benefits” as “an ‘advantage, profit; fruit; privilege;
gain; [or] interest.” It concluded that the term private benefit included “nonincidental
benefits conferred on disinterested persons that may serve private interests.” Id. at
1069. When an organization provides prohibited private benefit it cannot be said to be
operating exclusively for exempt purposes. Redlands Surgical Services, 113 T.C. at
74; American Campaign Academy, 92 T.C. 1065-1066. See also Old Dominion Box
Co., Inc., v. United States, 477 F.2d 340 (4th Cir. 1973), cert. denied, 413 U.S. 910
(1973). In Redlands, the court made it clear that the proscription against private benefit
encompasses not only inurement where there are benefits conferred on insiders having
a personal and private interest in the organization, but also benefits conferred on
unrelated or disinterested persons. Id. In Canada v. Commissioner, 82 T.C. 973, 980
(1984) an organization was revoked on the grounds that it was operated for a
substantial nonexempt purpose, due to substantial private benefit, and that it violated
the proscription against inurement.

An organization is not described in section 501(c)(3) if it serves a private interest more
than incidentally. See Rev. Rul. 69-545, 1965-2 C.B. 117; Rev. Rul. 78-86, 1978-1 C.B.
151; and Rev. Rul. 76-152, 1976-1 C.B. 151. If, however, the private benefit is only
incidental to the exempt purposes served, and insubstantial, it will not result in a loss of
exempt status. See, e.g., St. Louis Union AAHP Co. v. United States, 374 F.2d 427 (8th
Cir. 1967). Similarly, occasional economic benefits flowing to persons as an incidental
consequence of an organization pursuing exempt charitable purposes will not generally

---

Treasury Regulation §1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it
serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is
necessary for an organization to establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interests. We also note that the one-third support
test and the not-more-than one-third support test are designed to insure that an organization which is
excluded from private foundation status under section 509(a)(2) is responsive to the general public, rather
than to the private interests of a limited number of donors or other persons. Treas. Reg. § 509(a)-3(a)(4).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -15-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

December 31, 20XX

constitute prohibited private benefits. See Kentucky Bar Foundation v. Commissioner,
78 T.C. 921 , 926 (1982).

A private benefit is considered incidental only if it is incidental in both a qualitative and
quantitative sense. In order to be incidental in a qualitative sense, the benefit must be
a necessary concomitant of the activity which benefits the public at large, i.e., the
activity can be accomplished only by benefiting certain private individuals. To be
incidental in a quantitative sense, the private benefit must not be substantial after
considering the overall public benefit conferred by the activity. See American
Campaign Academy, 92 T.C. at 1053, citing Columbia Park & Recreation Assoc. v.
Commissioner, 88 T.C. 1, 18-21)1987), aff'd without published opinion 838 F.2d 465
(4th Cir. 1988).

In Church by Mail, Inc. v. Commissioner, 765 F.2d 1387 (9th Cir. 1985), aff'g T.C. 1984-
349, Church by Mail sent out sermons in numerous mailings. This required a great deal
of printing services. Twentieth Century Advertising Agency provided the printing and
mailing. Twentieth Century was controlled by the same ministers. It also employed
family members. The services were provided under two contracts. The contracts were
signed by the two ministers for both Church by Mail and Twentieth Century. Church by
Mail business comprised two-thirds of the business of Twentieth Century. In deciding
for the government, the Court made the following statement: "There is ample evidence
in the record to support the Tax Court's finding that the Church was operated for the
substantial non-exempt purpose of providing a market for Twentieth's services."

“Where a for-profit organization benefits substantially from the manner in which the
activities of a related [exempt] organization are carried on, the latter organization is not
operated exclusively for exempt purposes within the meaning of section 501(c)(3), even
if it furthers other exempt purposes.” International Postgraduate Medical Foundation v.
Commissioner, T.C. Memo. 1989-36.

In Est of Hawaii v. Commissioner, 71 T.C. 1067 (1979), several for-profit est
organizations exerted significant indirect control over Est of Hawaii, a nonprofit entity,
through contractual arrangements. The Tax Court concluded that the for-profits were
able to use the nonprofit as an "instrument" to further their for-profit purposes. Neither
the fact that the for-profits lacked structural control over the organization nor the fact
that amounts paid to the for-profit organizations under the contracts were reasonable
affected the court's conclusion that Est of Hawaii did not qualify as an organization
described in section 501(c)(3) of the Code.

Conservation as a Charitable Purpose

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -16-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX
December 31, 20XX

Name of Taxpayer

Section 501(c)(3) of the Internal Revenue Code provides exemption from Federal
income tax for organizations that are organized and operated exclusively for
educational, scientific, charitable or other exempt purposes. The protection of the
environment by promoting a conservation purpose as defined in section 170(h)(4) of the
Code is deemed to be a charitable purpose.

As relevant here, section 170(h)(4)(A) includes in the definition of “conservation
purpose” the preservation of a certified historic structure. A “certified historic structure”
is defined in section 170(h)(4)(C) as either 1) a building, structure, or land area which is
listed in the National Register; or 2) any building which is located in a registered historic
district and is certified by the Secretary of the Interior as being of historic significance to
the district.

The Tax Court in 1982 East, LLC v. Commissioner, T.C. Memo. 2011-84, involving tax
year 2004 and property in NYC, explicitly found that local law, rather than the rights
provided to the conservation organization under the deed of easement, preserved the
subject property. Therefore, the easement did not preserve a certified historic structure
pursuant to IRC § 170(h)(4)(A)(iv).

In Herman v. Commissioner, T.C. Memo. 2009-205, the Tax Court held that the
contribution of a conservation easement regarding the unused air rights over a certified
historic structure (apartment building) did not preserve the certified historic structure (or
historically important land area) where the easement itself did not prevent the historic
structure from being altered or demolished.

In Rev. Rul. 67-292, 1967-2 C.B. 184, the Service held that an organization formed for
the purpose of purchasing and maintaining a large tract of forest land to be reserved as.
a sanctuary for wild birds and animals and to be open to the public for educational
purposes qualified as exempt under section 501(c)(3).

In Rev. Rul. 70-186, 1970-1 C.B. 128, the Service concluded that an organization
formed to preserve a lake as a public recreational facility and to improve the condition
of the water in the lake to enhance its recreational features furthered a charitable
purpose.

In Rev. Rul. 76-204, 1976-1 C.B. 152, the Service considered an organization formed
by scientists, conservationists, and other community representatives for the purpose of
preserving the environment. It accomplished this purpose by acquiring and maintaining
ecologically significant undeveloped land such as swamps, marshes, forests,
wilderness tracts and other natural areas. The organization worked closely with
Federal, state, and local governmental agencies to identify ecologically significant land.
The organization accomplished its conservation purpose by either maintaining the land
itself or through a transfer to a governmental agency. The Service concluded that the

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

organization was enhancing the accomplishment of an express national policy of
conserving the nation’s unique natural resources and, in this sense, was advancing
education and science and benefiting the public in “a manner that the law regards as
charitable”.

In Rev. Rul. 78-384, 1978-2 C.B. 174, however, exemption was denied a nonprofit
organization that owned farmland and restricted its use to farming or other uses the
organization deemed ecologically suitable, but which did not operate for the purpose of
preserving “ecologically significant” land and did not otherwise establish that its self-
imposed restriction on the land resulted in any direct or significant public benefit.

Charitable Contribution Deductions

Section 170(f)(3)(B)(iii) permits a deduction for the value of a qualified conservation if
certain requirements are met. Section 170(h)(1) and Treas. Reg. § 1.170A-14(a)
provide that a qualified conservation contribution is a contribution of a qualified real
property interest to a qualified organization exclusively for conservation purposes.
Section 170(h)(2) defines a qualified real property interest of the donor other than a
mineral interest; a remainder interest; and a restriction on the use which may be made
of the real property. Section 170(h)(5) requires the conservation purpose to be
protected in perpetuity. Under Treas. Reg. § 1.170A-14(g)(1) a restriction granted in
perpetuity on the use of the property must be based on legally enforceable restrictions
that will prevent uses of the retained interest in the property that are inconsistent with
the conservation purpose of the contribution.

Under section 170(h)(3) the term qualified organization includes most governmental
entities and certain section 501(c)(3) public charities. Treas. Reg. § 1.170A-14(c) sets
forth additional requirements that an organization must meet before a charitable
contribution deduction is permitted for a conservation easement. This part of the
regulation requires an organization to have a commitment to protect the conservation
purposes of the donation and have the resources to enforce the restrictions.

Section 170(h)(4)(A)(iv) includes the preservation of a certified historic structure as a
conservation purpose. Section 170(h)(4)(C) provides that a property will be certified as
a historic structure if it is listed on the National Register or is located in a registered
historic district and is certified by the by the Secretary of the Interior as being of historic
significance to the district.

Treas. Reg. § 1.170A-14(g)(2) provides that “no deduction will be permitted under this
section for an interest in property which is subject to a mortgage unless the mortgagee
subordinates its rights in the property to the right of the qualified organization to enforce
the conservation purposes of the gift in perpetuity.”

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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

Treas. Reg. § 1.170A-14(g)(5), to prevent potential impairment to the conservation
purpose of the easement, contemplates that the donor will provide the qualified
organization sufficient documentation to establish the condition of the restricted
property. The documentation is designed to protect the conservation purpose in
perpetuity where the owners continued use of the underlying property could impair the
conservation purpose. The regulation also requires a donor to give the qualified
organization the right to; (1) monitor the property for the purpose of determining
whether property owner is complying with the conservation easement’s restrictions and
(2) enforce the conservation restrictions by appropriate legal action.

Under Treas. Reg. § 1.170A-14(h)(3)(i), the value of a the contribution of a perpetual
conservation restriction on a given property is its fair market value as of the date of the
contribution, as determined by an appraisal performed by a qualified appraiser. The
regulation also provides:

If there is a substantial record of sales of easements comparable to the
donated easement (such as pursuant to a governmental program), the
fair market value of the donated easement is based on the sales price of
such comparable easements. If no substantial record of market-place
sales is available to use as a meaningful or valid comparison, as general
rule (but not necessarily in all cases) the fair market value of a perpetual
conservation restriction is equal to the difference between the fair market
value of the property it encumbers before granting the restriction and the
fair market value of the encumbered property after granting the
restriction.

If, as a result of the contribution of a perpetual conservation restriction,
the donor or a related person receives, or can reasonably expect to
receive, financial or economic benefits that are greater than those that
will inure to the general public from the transfer, no deduction is
allowable under this section.

In addition, Treas. Reg. § 1.170A-14(h)(3) provides that easement’s fair market value
must take into account “how immediate or remote the likelihood is that the property ,
absent the restriction, would in fact be developed, as well as any effect from zoning,
conservation, or historic preservation laws that already restrict the property’s potential
highest and best use.” The regulation goes on to provide “there may be instances
where the grant of a conservation restriction may have no material effect on the value
of the property,” in which case “no deduction would be allowable.”

Section 1.170A-14(a) of the Income Tax Regulations provides rules concerning
“qualified conservation contributions”. A deduction under section 170 is generally not

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

December 31, 20XX

allowed for a charitable contribution of any interest in property that consists of less than
the donor's entire interest in the property other than certain transfers in trust (see
§1.170A-6 relating to charitable contributions in trust and §1.170A-7 relating to
contributions not in trust of partial interests in property). However, a deduction may be
allowed under section 170(f)(3)(B)(iii) for the value of a qualified conservation
contribution if the requirements of this section are met. A qualified conservation
contribution is the contribution of a qualified real property interest to a qualified
organization exclusively for conservation purposes. To be eligible for a deduction under
this section, the conservation purpose must be protected in perpetuity. See §1.170A-
14(b)(2) and §1.170A-14(g).

Effective Date of Revocation

Section 12.01 of Rev. Proc. 2013-9, 2013-2 I.R.B. 255 provides that the revocation of a
determination letter recognizing exemption may be retroactive if there has been a
change in the applicable law, the organization omitted or misstated a material fact, or
operated in a manner materially different from that originally represented. Further,
subsection 1 of that section states that where there is a material change, inconsistent
with exemption, in the character, the purpose, or the method of operation of an
organization, revocation will ordinarily take effect as of the date of such material
change.

Discussion

no longer qualifies as an organization described in section 501(c)(3) and its
exemption from taxation under section 501(a) should be revoked because:

(1) has furthered a substantial nonexempt purpose by facilitating improper charitable
contribution deductions.

It is well settled that an organization is not entitled to exemption if it has a single
substantial nonexempt purpose. Better Business Bureau v. United States, supra:, Airlie
Foundation, Inc. v. United States, 92-2 USTC ¶ 50,462 (D.D.C. 1992). In determining
whether, for purposes of the operational test, has a substantial non exempt purpose
the critical inquiry is on the actual purposes advanced by its activities. Redlands
Surgical Services v. Commissioner, supra;, American Campaign Academy v.
Commissioner, supra. Cases involving hidden nonexempt purposes have concentrated
on the manner in which an organization conducted its activities. See, e.g., Living Faith,
Inc. v. Commissioner, 956 F.2d 365 (7th Cir. 1991); Nonprofit Insurance Alliance of
California v. United States, 94-2 USTC ¶ 50,593 (Fed. Cl. 1994).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

played an integral role in facilitating grossly overstated tax deductions for limited liability
companies who invested in historic properties, investment deals that were planned, marketed
and executed by . By being the vehicle for accepting façade easement donations, only
from clients/donors, never questioning the fact that each and every donation package
had been appraised by the same appraiser selected by , was a willing participant in
facilitating grossly overstated charitable contribution deductions in connection with its facade
easement program. Like the New Dynamics case, activities consist of helping its donors
avoid taxes by claiming grossly overstated deductions. Additionally, had an economic
incentive for itself in facilitating façade easements and because its fees depended on the
appraisal amounts, it benefitted from high valuations.* Thus, furthered a substantial non-
exempt purpose and is not an organization described in section 501(c)(3).

The activities of are distinguishable from those conducted by the organizations
described in Rev. Rul. 68-14, 66-358, and 70-186 since the activities conducted by
primarily served the private interests of its donors, a group that does not constitute a
charitable class. The benefit conferred by to its donors is more than incidental from
both a qualitative and quantitative sense. See American Campaign Academy v.
Commissioner, supra. By operating for the benefit of its donors, furthered a
substantial non-exempt purpose. See Old Dominion Box Co., Inc., v. United States,
supra.

(2) operated primarily for private interests, rather than for public purposes in
that its activities substantially benefitted the donors and the for-profit entity

In determining whether an organization qualifies or continues to qualify for exemption
under section 501(c)(3), we must examine the activities conducted by the organization
and determine whether such activities benefit the public, private interests, or both. In
the case of an organization that benefits both public and private interests, the
organization must establish that it is operated primarily for public interests and that any
private benefit is incidental in both a qualitative and quantitative sense. See section
1.501(c)(3)-1(d)(1)(ii) of the Regulations. See also American Campaign Academy v.
Commissioner, supra.

records show that the organization’s activities were primarily directed towards
being a donation receptacle to facilitate maximum tax benefits for customers,
donors. The Service believes that all the donors reaped inappropriate tax benefits in
connection with façade easement program. Any tangible benefits to the public
derived from activities are elusive at best, especially when substantially all of

---

• Accord, Kaufman v. Commissioner, 687 F.3d 21 (1st Cir. 2012).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -21-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended

December 31, 20XX
December 31, 20XX

easements are subject to preservation laws regulating the maintenance, repairs, and/or
restoration of the facades.

Although did not directly “control” , nearly all of its directors had a close
association with ( who founded after learning about conservation
easements from his friend, principal who was actively involved in real
estate deals) and and , both of whom came to the board through
. Records show that Board of Directors performed virtually no oversight with
respect to activities but simply yielded to every request made by

structured each transaction and accommodated , including rushing to accept
facade easement donations at the end of the year in order to facilitate last minute tax
strategies for clients. The Organization, when rebuffed by , did not require
the donors to provide baseline studies with respect to the façade easements; moreover,
it did no due diligence of its own. so dominated operations that it abused
the tax-exempt status of to serve its own interests and the private interests of
clients and donors at the expense of the general public. In Est of Hawaii, the Tax
Court concluded that for-profit corporations were able to use the nonprofit as an
"instrument" to further their for-profit purposes. Like the for-profit organizations in Est of
Hawaii, uses as an "instrument" to further its for-profit tax consulting purposes
which are designed to maximize the return on its clients’ investments and achieve tax
savings. Like the est organizations described in EST of Hawaii, substantially
benefits from existence by using to further its business objectives and those of
its clients. This causes a private benefit to be served. See also Church by Mail and
International Postgraduate Medical Foundation, supra.

That was created and operated to benefit and its clients is also demonstrated
by the fact that never made any effort to obtain façade easements from sources
other than ; was not just best source of referrals of donations, it
was its only source. The Organization’s so-called “marketing materials” were distributed
solely to prospective donors/ clients of . The Organization conducted no
outreach or educational activities which could have been a source for obtaining
donations of façade easements from donors other than clients. It never
solicited easements; rather it served solely an acceptance vehicle for

structured real estate transactions whereby donors could also gain conservation
easement donations. Principals of who were investors in the

personally benefited from existence as they took deductions for a charitable
contribution with respect to the façade easement that was donated to . The Service
has determined that particular facade easement was not a qualified conservation
contribution because there was no qualified appraisal and that the conservation
purposes of the property were not protected in perpetuity and alternatively, the
easement was substantially overvalued.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -22-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX
December 31, 20XX

Name of Taxpayer

The examination of shows that its operations serve private, rather than public
interests within the meaning of section 1.501(c)(3)-1(d)(1)(ii) of the Regulations.
Accordingly, we have determined that is not operated exclusively for exempt
purposes.

(3) did not engage primarily in exempt activities such as those that
accomplish charitable conservation purposes.

has not engaged primarily in activities that accomplish charitable or other exempt
purposes described in section 501(c)(3). Thus, is not operated exclusively for
exempt purposes within the meaning of section 501(c)(3) and Treas. Reg. §
1.501(c)(3)-1(c)(1) and, as such, fails to qualify for exemption under section 501(c)(3).

While may be organized for a charitable purpose, the preservation of historic
properties, it is not operated for one within the meaning of section 501(c)(3). The
Organization’s primary activity is the operation of a facade easement donation program.
The Organization has few to no policies or procedures in place to ensure that it furthers
a conservation purpose under section 501(c)(3) when in accepts an easement and
holds easements. As a general rule, prior to accepting an easement donation, no one
from inspects the property, takes photographs or provides with a written report
detailing the condition of the property. does not require a donor to provide a
baseline study detailing the property’s condition at the time of the donation and how the
easement donated will serve a conservation purpose under section 501(c)(3). None of
the directors have any significant experience in fields related to conservation.
Moreover, as discussed below, does not have policies for inspecting the property
and monitoring the property once the property is donated.

An organization is eligible to accept tax deductible façade easement donations on
qualifying historic properties if it is a qualifying organization under section 170(h)(3).
See I.R.C. § 170(h)(1) and (4)(A). However, the easements accepted did not
provide any additional significant conservation restrictions on the underlying properties
than those that already existed under local laws. The properties for which the —_ holds
easements are already subject to strict local ordinances. The deed of easement utilized
by the imposes no additional restrictions on property owners. Research shows that
properties already subject to strict local preservation laws would suffer little or no loss in
value when subject to an easement that imposes no additional restrictions on the
property owner.

The Tax Court in1982 East, LLC v. Commissioner, T.C. Memo. 2011-84, involving tax
year 2004 and property in NYC, explicitly found that local law, rather than the rights
provided to the conservation organization under the deed of easement, preserved the
subject property. Therefore, the easement did not preserve a certified historic structure
pursuant to IRC § 170(h)(4)(A)(iv).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -23-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

December 31, 20XX
December 31, 20XX

Name of Taxpayer

Further, it does not appear that directors reviewed (or engaged those
experienced with conservation issues to review) any of the easement agreements with
a critical eye. As noted, in at least one of the agreements, the document allows

to permit changes to the façade that are not in compliance with the conservation
purpose because there are no consequences should fail to fulfill its rights and
obligations under the document and the easement agreement contains no provisions
that would bind a successor in interest to to the conservation purpose in perpetuity.
Similarly, did not appear to raise any objections to the language pertaining to
subordination such that rights on extinguishment of the easement are not
protected.

Finally, an organization with a conservation purpose is required to monitor the
underlying properties to ensure that the easement restrictions are complied with and
take action to enforce them when the underlying property owners are not complying
with the restrictions. The Organization cannot demonstrate that it has a significant
monitoring and enforcement program. Simply put, the did not operate in a manner
that accomplished a charitable conservation purpose as contemplated by sections
170(h) and 501(c)(3).

The Organization has represented that monitoring and enforcing the historic
preservation easements is its primary exempt activity. The claims that its
maintenance of the stewardship fund demonstrates that engages in significant
easement monitoring activities and activities to cure easement restriction defaults.
However, devoted minimal time to these activities, and the facts show that the
also failed to monitor the properties in any meaningful manner to see if the property
owners were complying with the terms of the easements.

To establish that it operates exclusively for conservation purposes under section
501(c)(3), an organization must do more than merely accept and hold easements for
which donors are claiming charitable contribution deductions under section 170(h). The
organization must establish that any accepted easements serve a conservation
purpose. The organization must also operate as an effective steward to ensure that
the easement continues to further a conservation purpose. The easement is a set of
legal rights. It can serve conservation purposes only if enforced where necessary. The
need for enforcement can be determined only through monitoring. The extent of an
organization’s due diligence and monitoring activities, combined with its capacity for
and commitment to enforcement when necessary becomes highly significant in
determining whether accepting and holding easements actually furthers a conservation
purpose. See Treas. Reg. §1.501(c)(3)-1(c)(1) (noting that an organization qualified for
exemption under section 501(c)(3) “only if it engages primarily in one or more purposes
specified in section 501(c)(3)”); see also Christian Manner International Inc. v.
Commissioner, 71 T.C. 661, 668 (1979); cf Treas. Reg. Section 1.170A-14(c)(1) (to be
an eligible donee of a conservation easement, an organization must have a

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -24-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended

December 31, 20XX
December 31, 20XX

commitment to protect the conservation purposes of the donation, and the resources to
enforce the restrictions).

To pass the operational test an organization must show that it primarily engages in
activities that accomplish its exempt purpose. The facts and records show that the
was more concerned with accommodating
, its customers/donors than it was with
advancing a conservation purpose. Accordingly, the
has not shown that it engages
primarily in activities that accomplish a charitable purpose.

should be revoked retroactively to 20XX.

Beginning from
incorporation date in 20XX,
and its clients, benefitted more
than incidentally from the entity's arrangement with
. The Service has determined
that engaged in substantial non-exempt activities in 20XX and did not satisfy the
operational test prescribed by Treasury Regulations beginning with the 20XX tax year.
Therefore, exempt status should be retroactively revoked effective December 21,
20XX, in accordance with Rev. Proc. 2013-09, supra.

Taxpayer’s Position:

Unknown at this time.

CONCLUSIONS:

The Service has determined that the
no longer qualifies for exemption from Federal
income tax under section 501(a) of the Code as an organization described in section
501(c)(3). The Service also determined that the
engaged in substantial non-exempt
activities in 20XX (and subsequent years) and did not satisfy the operational test
prescribed by Treasury Regulations beginning with the 20XX tax year. Accordingly, the
Service proposes revocation of the
exempt status effective December 21, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -25-