Managing Conservation Easements in Perpetuity - Environmental ...

Land trusts, as tax-exempt charities,
are prohibited from engaging
in any transaction that results in
the creation of private inurement
or impermissible private benefit.
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Private Inurement and Impermissible Private Benefit
Prohibitions
Federal law prohibits tax-exempt nonprofit organizations from
dispensing their assets in ways that create impermissible private benefit
or private inurement. This prohibition means that a land trust
cannot participate in an amendment that conveys either a net financial
gain or more than incidental private benefit to any private party or
any measurable benefit at all to a board or staff member or other land
trust “insider” (other than fair compensation for services). A land trust
that does so risks losing its tax-exempt status or suffering intermediate
sanctions (fines imposed on those who approved the illegal benefits
and those who received them).
These prohibitions apply to all amendments to conservation easements,
regardless of the easement’s initial tax-deductible status, and IRS scrutiny
on these grounds is not limited by the three-year statute of limitations
that governs challenges to the deductibility of easements. In
Private Inurement and Impermissible Private Benefit
The private inurement and impermissible private benefit prohibitions are
designed to ensure that your land trust uses its charitable assets exclusively to
further public (or charitable) purposes and not private ends.Both private inurement
and impermissible private benefit may occur in many different forms,
including, for example, payment of excessive compensation, payment of excessive
rent, making inadequately secured loans or receiving less than fair market
value on the sale or exchange of a land trust property. Violation of impermissible
private benefit and private inurement rules may result in monetary penalties
and, in extreme cases, the loss of the charity’s tax-exempt status.
Private inurement. The doctrine of private inurement prohibits a tax-exempt
organization from using its assets to benefit any individual or entity that has a
close relationship to the organization, such as a director, officer, key employee,
major financial contributor or other “insider.” The issue of private inurement
often arises when an organization pays unreasonable compensation (more
than the value of the services) to an insider, but the inurement prohibition is
designed to reach any transaction through which an insider unduly benefits,
either directly or indirectly, from his or her position in an organization. The
private inurement prohibition does not prohibit transactions between a publicly
supported charitable organization and those who have a close relationship to
it. Instead, such transactions are tested against a standard of “reasonableness,”
which calls for a roughly equal exchange of benefits between the parties and
compares how similar charitable organizations, acting prudently, conduct their
affairs. Historically, the only sanction for a private inurement violation was
Managing Conservation Easements in Perpetuity