Income From Charitable Organization’s Sale of Mitigation Bank Credits is not Unrelated Business Taxable Income
The exempt purposes of the organization, as set forth in its articles of incorporation, include “protecting the natural and scenic spaces of real property, protecting natural resources, and maintaining or enhancing water and air quality.” The organization partnered with a political subdivision of a state (the Commission) regarding the protection of certain land the Commission owns within a watershed and has covenanted to protect as stream buffers. The Commission conveyed a perpetual conservation easement with respect to the land to the organization, and the organization represented to the IRS that the perpetual easement will ensure that the land is kept undeveloped and its conservation values are preserved.
To raise the funds necessary to conduct stream remediation activities and address nonpoint sources of water pollution, the organization plans to form a stream mitigation bank with the support of the Commission. By conducting stream mitigation activities the organization will generate mitigation credits that can be sold to private developers or governmental entities that have projects that may cause stream disturbances somewhere else in the watershed. Once all the mitigation credits are sold, there will be no additional proceeds from the bank, but the owner/sponsor of the bank will be responsible for the monitoring and maintenance of the restored streams for seven years after the completion of the final phase and, in the case of the organization, it is charged with management of the water resources in perpetuity.
In ruling that the organization’s stream mitigation activities are substantially related to its exempt purpose, and that the income the organization will receive from the sale of mitigation credits will not be unrelated business taxable income, the IRS noted, in part, that:
The Commission covenanted to maintain a significant part of the land as stream buffers.
The Commission assigned its conservation obligations contained in the conservation easement to the organization, requiring the organization to maintain the land in essentially pristine condition and seek Commission’s approval before making any capital improvements.
The Commission authorized the organization to negotiate the mitigation banking instrument and remediate the waterways, and delegated to the organization all responsibilities for the planning, funding, developing, and monitoring of the bank, as well as the authority to sell the credits generated by the bank.
By carrying out these activities, the organization will be fulfilling the Commission’s conservation and legal obligations and lessening the government’s (the Commission’s) burden.
A Private Letter Ruling is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s specific set of facts. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued. See Understanding IRS Guidance – A Brief Primer.
Nancy A. McLaughin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law