The conservation community is still reeling from the implications of a legislative proposal that would have allowed land trusts to change conservation easements.
A recent forum featuring an attorney from the IRS illustrates why: Under federal tax rules, land that has been conserved through a donated easement must be conserved in perpetuity. If an easement is changed illegally, the donor runs the risk of losing the tax deduction.
Last spring the Vermont Land Trust, the Nature Conservancy of Vermont and other groups supported a Senate bill, S.119, which would have allowed the revocation of easements and easement swaps. The Vermont Natural Resources Board and a special panel would have reviewed the changes. Easements that are purchased are not subject to IRS rules and could be amended, experts say, but an exception was not made in the proposed statute for donated easements.
Shortly after a story about the proposal appeared, the legislation was rebuffed by landowners who have donated easements to the Vermont Land Trust and other groups.
Within five days, the trust had retracted the legislation. A few weeks later, the trust announced it would end work on S.119 in the last biennium, but held open the possibility that a new bill could be proposed in the coming legislative session.
Gil Livingston, the executive director of the Vermont Land Trust, last week said his organization will not introduce a bill this session that would allow conservation easement amendments.
That decision may temporarily quell concerns about another version of S.119 coming down the pike, but critics are worried about future iterations of the proposal resurfacing.
Jeanie McIntyre, president of the Upper Valley Land Trust, who opposed the bill, which died in the House Judiciary Committee last session, says it’s only a matter of time before a similar proposal is reintroduced. The Vermont Land Trust and others are “catching their breath,” she says.
“The subject of how conservation easement modifications can occur got raised and then it was sort of dropped without resolution,” McIntyre said in an interview. “It is going to come back at a some point. I don’t know if that will be soon or five years from now.”
Because there was confusion about the IRS rules during the legislative debate on the issue, McIntyre says it was important for Vermont conservation officials to hear from Karin Gross, the lead lawyer at the IRS on conservation easement enforcement. Gross gave two talks in Vermont earlier this month, one at the Vermont Law School and another in Montpelier at the Capitol Plaza Hotel. The presentations were attended by local land trust officials, the Vermont Land Trust, the Nature Conservancy of Vermont and students from the law school. The Lintilhac Foundation paid for the cost of the seminar.
Gross explained that the special exemption under IRS rules, known as 170h, for conserved land is “very generous,” but it also comes with hard and fast rules that generally do not allow for amendments to conservation easements that have been donated.
A conservation easement is the only charitable gift an individual can donate and continue to hold ownership of the property, Gross says. Most gifts — cash, cars, art and so on — must be donated in their entirety. With donated conservation easements, only a partial interest in the property is donated, and yet the value of the donation in terms of the deduction is substantial. A taxpayer can claim a donated conservation easement deduction over a period of 15 years and make a deduction claim for up to 100 percent of adjusted gross income, Gross says. The maximum carryover for all other gifts is five years, against 50 percent of a person’s income.
“It’s a very generous tax provision because it allows landowners to continue to enjoy their property but still get a deduction, and it’s an exception to the general rule that you can’t own something and still get a deduction for giving up part of it,” Gross said.
Congress created the exemption, Gross says, because it wanted to make a significant, taxpayer-subsidized investment in land conservation. In 1980, when the provision went into effect, the total amount of deductions claimed for easements in one year was $5 million; today that figure is $2 billion per year, Gross says.
Gross said Congress also put a number of rules in place to protect the program from abuse, including two separate “in perpetuity” clauses.
“Perpetuity was a major issue in the minds of Congress when Congress enacted this very generous provision,” Gross said.
Nancy McLaughlin, a professor of law at the University of Utah, explained at the seminar that in order to be eligible for a conservation easement, the land has to be granted in perpetuity to a government entity or charitable organization exclusively for four conservation purposes enumerated in the federal code. The conservation purposes for the property must also be protected in perpetuity. The four conservation purposes approved by Congress are: protection of open space, protection of wildlife habitat, protection of historically important land or and protection of land for the recreation or education of the general public. Agriculture, which has been the focus of the land trust movement in Vermont, is not specifically cited as a conservation purpose. It would fall under the category of open space. Alternatively, the notion of keeping land “forever wild” is also insufficient reason for a federal deduction. An easement must protect a wildlife habitat.
Under IRS rules, there are two instances in which a donor can change an easement: If a donor wants to put more restrictions on a piece of land (in which case the donor is eligible for more deductions) or if there is a scrivener’s error in a deed, and the parties mutually agree on the mistake.
Other changes, such as swapping house sites, swapping one parcel of land for another, or putting up cash for an existing easement to preserve more valuable conservation land, all of which would have been acceptable under the Vermont Land Trust’s proposal under S.119, can only be conducted through a formal procedure in which the easement is first extinguished by the courts. The trust and other conservation groups have said they wanted to pursue amendments through a more expedited review process in order to protect land with higher conservation value.
Gross would not comment on the state proposal. She said in general federal law pre-empts state statutes in this case, and changing an easement to improve conservation goals is not acceptable under federal law. The IRS has an obligation to protect taxpayers’ investments in conservation easements that have already been donated. Once an easement is written into a deed, it is virtually immutable, with only a few exceptions, she said.
To the extent possible, landowners and land trusts must think ahead about all the future uses of the land and reserve rights for development at the time they create a conservation easement, Gross said.
“The government has a stake here,” Gross said. “The question is not whether conservation is served in the long run, the key question is whether the easement that has been granted has been granted in perpetuity and that’s what the statute requires.”
The value placed on easements is another issue the IRS is concerned about. The baseline value must come from surveys, aerial photos and detailed reports on the state of the land at the time of the gift.
Congress allowed for a “legal fiction,” as to what the actual value of the easement is, Gross said. The donor and the land trust or charitable organization determines what the land is worth before the easement is placed on the property and what it is worth afterward once the easement is in effect. The difference is treated as the deductible amount.
Gross said she has seen IRS enforcement cases in which a taxpayer claims to have sold an easement to a land trust for less than fair market value, even though the land trust believes it has paid 100 percent of the value.
“We’ve seen too many cases where the land trust fully pays for the conservation easement but the taxpayer comes in to the IRS and says ‘oh, I only got paid half, and I’m claiming a deduction for the difference.’ If that were true, that would be right but in a lot of cases that’s not true. The land trust should not get involved in that because it is allowing a taxpayer to take a deduction for which the taxpayer is not allowed.”
Gross said she has also seen cases where taxpayers are trying to develop property and as part of negotiations with a locality is setting aside green space in the middle of a subdivision and then tries to claim a deduction for a conservation easement. That’s another no-no, she says.
“You only can take a deduction for an easement if you actually are giving something up, and you’re not getting anything back in return,” Gross said. “If you’re negotiating a way to put an easement on a property in exchange for favorable zoning for that area then there’s no deduction.”
