Conservation easements, like other charitable donations, are reviewed by the Internal Revenue Service. The service has found examples of overvaluations of donations and questionable practices in conservation buyer programs. Two cases are good illustrations of problems that can arise when the rules are not followed.

One involved a luxury-home builder in North Carolina who paid $10 million for a tract in the mountains, developed thirty percent of the land, and then, with the support of an appraisal, claimed a $20 million deduction for the value of preserved land. The IRS rejected the appraisal as unrealistically high – and has said it will carefully scrutinize appraisals relating to conservation easements.

Effective June 2004, all gifts valued over $500,000 must include a copy of the appraisal with the income tax return. Appraisal reports should specifically address the following issues:

• What are the local zoning and ordinances? They may affect the value of the easement.
• Does the landowner, or any related party, own other land that may be affected by the donated easement?
• What is the reasonable and feasible “best use” of the land? An appraisal cannot just assume the highest developable value of property under current zoning. The development must be an economically viable option – an option a savvy developer would be willing to pursue.

In Notice IR-2004-86, the Treasury and Internal Revenue Service clearly expressed its intent to go after promoters, appraisers, and any charitable organizations involved in abusive practices. Protect yourself and your client. Preserve land with important conservation value, but be sure you; choose a qualified appraiser and a reputable land trust; and follow the rules closely.

The second case involves The Nature Conservancy, which bought conservation land, placed an easement on it and then offered it for sale to a buyer who paid the lower, post-easement value. The buyer then made a “voluntary” contribution for the value of the easement to the Nature Conservancy and took an income tax deduction for his cash donation. The Internal Revenue Service questioned the “voluntary” aspect of the charitable contribution to the Nature Conservancy. They viewed this as a step transaction, denied the deduction for the donation, and instead, attributed it to the purchase price of the property.

This ruling does not mean that conservation buyers cannot receive tax benefits. But it demonstrates the importance of properly structuring the purchase. The conservation buyer tool is a critical one for land conservation in our region. It matches individuals with the funds -- and the ability to use the tax deductions -- with land sellers who want to see that land protected. Buyers and sellers benefit, and the public benefits as more land remains in its natural state to support our quality of life. The protected land stays on the tax rolls.

The Internal Revenue Service has used strong language to show its intent to prosecute abuses in the system. In conversations, IRS officials said they believe most deals are good deals.

For further reference see:

“Regarding Improper Deductions for Conservation Easement Donations”
IRS Notice 2004-41, 2004-28 IRB31, Doc 2004-13514, 2004 TNT 127-6
www.pgdc.com/fftc/item/?itemID=225890

Remarks of Steven Miller, Commissioner, IRS Tax Exempt & Government Entities Division In an address - Click Here to download

The Open Space Protection Collaborative provides information to promote the proper use of easements and other conservation tools. This information is not intended to be tax or legal advice; individuals should consult their own legal and financial advisers before drafting, executing or donating a conservation easement.