Conservation Easements Circa 2013

This weekend's Wall Street Journal included an article about the inclusion, in the fiscal cliff compromise, of the generous federal tax benefit for conservation easement donors. Rachel Silverman's piece is here. 

 

The recently-passed legislation provides for a federal deduction equal to the easement's value up to 50% of adjusted gross income, with a carry forward of 15 years.

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The Journal article includes a cautionary note about the IRS's increased scrutiny of easements:

Beware that the Internal Revenue Service has been increasing the number of conservation-easement tax returns it audits, concerned with abuses in which donors have taken inflated deductions or have placed restrictions on land with little conservation value.

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At Richmond & Fishburne we have started work on 2013 easement donations (wow - there is some beautiful property in Albemarle County, and there's nothing better than getting away from this computer for a site visit to meet with a prospective easement donor).

Because of the lengthy review, revision and approval processes undertaken by the Virginia Outdoors Foundation, the Department of Forestry, and other donee organizations, it is important that easement donors start the process early in the calendar year for which they want to make their donation.

A Conservation Easement Lawsuit in Caroline County

An overhead photograph of Moss Neck Manor

Moss Neck Manor is a historic home in Caroline County, Virginia. 

Stonewall Jackson maintained his headquarters there during the winter of 1862-1863. Jackson famously refused to sleep inside, protesting that the manor house was "too luxurious for a soldier, who should sleep in a tent."

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150 years later, the Manor is in the news again.   

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Rusty Dennen at the Fredericksburg Free-Lance Star reports (here) about a lawsuit stemming from a proposed conservation easement on the Moss Neck property.

According to Dennen, Moss Neck Manor Plantation Inc., the owner of some 1,200 acres around the manor, filed suit in Caroline County Circuit Court this March.

The defendants are the Virginia Outdoors Foundation and The Conservation Fund.

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I have not read the complaint (sadly, the majority of circuit court civil filings in Virginia are not available online), but my understanding from the Star is that Moss Neck Inc. alleges that it relied on the VOF and The Conservation Fund in structuring a sale of the property based on an agreement to donate a conservation easement to the VOF. 

Moss Neck Inc. understood that the easement would contain a particular set of terms. 

The claim states that one or the other of the defendants required more stringent terms just prior to closing, causing the transaction to fall through. Moss Neck Inc. alleges fraud, conspiracy and breach of contract by the two defendants.

Dennen reports that the Virginia Attorney General's Office will defend the VOF on grounds of sovereign immunity (the VOF is a state agency) and will also argue that the VOF was not a party to any contract. The Conservation Fund will also argue that the claim is invalid.

I will definitely be curious to track this litigation.

This is a painting of Stonewall Jackson at Moss Neck Manor by artist Mort Kunstler.

And what about you?  Are you a "tent person" like General Jackson, or are you ok with sleeping in a manor house?

Virginia General Assembly: Land Preservation Credits

Earlier this week, Todd Hochrein of Virginia Conservation Credit Exchange (their website is here) sent out the following excellent summary of the status of pending legislation related to conservation easement donations and Land Preservation Credits:

Crossover was yesterday. Here is my impression of the current legislative proposals affecting the land preservation tax credits:

• HB1445 – Imposes limit of $10MM in credits per year to any taxpayer for donations recorded in Calendar Year 2012 and beyond. Passed finance sub-committee 5-0. Seems to have support. Update: This was incorporated into HB1820, but then gutted – there is no longer a per taxpayer limit.

• HB1820 – Has 3 important factors: (1) It takes any credits from prior years that have been disallowed or invalidated and rolls them into the current year cap (2) It allows the TAX Dept to commission a second appraisal for “good cause” on any applications requesting > $1MM in credits. If the second appraisal is more than 15% different, then the easement value is changed (post-recording). (3) It allows credits to sold post-mortem through an estate. If this bill could be de-coupled, I think there would be full support for items 1 and 3. Item 2 will create a level of uncertainty on the tax benefits received. Furthermore, Item 2 is problematic since it could adjust the value after the donation has been recorded (timing issue). Passed finance sub-committee 5-0. Update: Item 1 is still the same. Item 2 threshold was increased to $2.5MM. item 3 was removed (IRS complications). Passed House in block vote.

• SB979 – Lowers the DCR review threshold to $500k in credits from $1MM in credits. I don’t think this is an issue that needs to be changed. No vote yet. Update: This has been gutted.

• SB1087 – This is interesting – it requires brokers or other transfer agents to be licensed if transferring credits to non-individual taxpayers. It requires licensed agents to use standards established by the tax department to review proposals for transferring credits. Fees, penalties and levies may be imposed for unclear reasons. This is the stuff that gives gov’t a bad name. No vote yet. Update: This has been incorporated into SB1232, but effectively gutted.

• SB1088 – Provides a tax refund to easement donors for 90% of the face value of credits, up to $100,000 face value. Remaining 10% is placed in a PDR grant fund. This would accelerate the cost of the program to the state (and remove lots of credits from the market), but provide quick liquidity to easement donors. It is written so that you would have to request the refund prior to selling any credits. No vote yet. Update: This bill has been tabled indefinitely.

• SB1232 – Deeds Bill - Basically the senate version of 1820. Update: The bill has been simplified. Says the tax commissioner can notify the donor that a second appraisal is warranted within 30 days of the application. No $ threshold or any other changes.

Conservation Easements in US Tax Court: Simmons v. Commissioner

Logan Circle in Washington, DC

In Simmons v. Commissioner of Internal Revenue Service, the US Tax Court held (1) that the taxpayer was entitled to the charitable donation deduction for two conservation easement donations but (2) reduced the value of the donations.

Simmons was decided on September 15, 2009, and you can read the full opinion by Judge Goeke here.

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Dorothy Jean Simmons donated historic preservation easements on two properties that she owned in Washington, DC (one in Logan Circle and the other on Vermont Avenue). Such easements are often referred to as "façade easements," because the deed restrictions focus on retaining the existing façade of the building.

Ms. Simmons's appraiser valued the Logan Circle easement donation at $162,500 and the Vermont Avenue donation at $93,000.

The IRS challenged the donations on several grounds:

1. First, the IRS argued that no charitable purposes described in IRC Section 170(h) were served by the easements, because the deeds permitted the easement donee (the L'Enfant Trust) to consent to future changes to the buildings' façades notwithstanding the deed restrictions.
   


2. Second, the IRS argued that the deeds of easement did not satisfy the subordination requirements of the Treasury Regulations (both properties were mortgaged; as we tell our easement-considering clients: if your property is subject to a mortgage/deed of trust, then contact your lender early in the process in order to make them aware of the contemplated easement and to obtain their package of subordination requirements!).
   


3. Third, the IRS argued that Ms. Simmons's appraisals were not "qualified appraisals" for purposes of Treasury Regulation 1.170A(13)(c)(3).
   


4. Fourth, the IRS argued that Ms. Simmons did not obtain the required "contemporaneous written acknowledgment" from the donee, L'Enfant Trust.

The Tax Court rejected each of the IRS's contentions and, in doing so, essentially followed a "substantial compliance" framework in evaluating the donations (and reporting thereof).

The adoption of a substantial compliance framework distinguishes Simmons from several earlier cases (not surprisingly, the decision is being hailed in the land trust community). The opinion means that clearer guidance awaits a future easement decision by a higher court.

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Taking the above-arguments in order, the Simmons Court reasoned as follows:

1. With respect to "conservation purposes": the Court stated that Treasury Regulation 1.170A-14(d)(5) expressly permits an easement donation to satisfy the "conservation purposes" test even if future development is allowed, so long as that development is subject to local, state and federal laws and regulations (and Ms. Simmons's deeds provided that future alterations were subject to such laws and regulations). Unfortunately, the Court does not delve into this issue other than to reference the terms of the deed, thus the opinion does not provide a great deal of guidance on "closer calls" that could arise with respect to the conservation purpose requirement in other easements.
   


2. With respect to subordination requirements: the Court said that the requirements were met because both easement deeds contained paragraphs with specific references to the mortgages. Interestingly, the Court made this finding notwithstanding the IRS's contention that the deeds did not themselves contain subordination language. Without reviewing the Simmons deeds, it is difficult to know the basis for the IRS's argument (was the word "subordinate" omitted? Did the banks' trustees not sign?) and why the Court found it wanting.
   


3. With respect to whether the appraisals were "qualified appraisals": the Court held that they were -- even though they did not, for instance, include a statement that they were prepared for income tax purposes and did not include the dates of the donations. In the discussion of the "qualified appraisal" question, the Court is most clearly adopting a "substantial" (rather than "strict") standard of compliance.
   


4. With respect to the "contemporaneous written acknowledgment": the Court held that the deed of easement itself satisfies the acknoweldgment requirement. This is a particularly interesting holding because it rejects the IRS position that prior case law supports a standard of strict compliance with the contemporaneous written acknowledgement requirement.

In the second part of its holding, the Simmons Court reduced the value of the claimed donations -- more on that analysis in a future post.

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The Simmons decision is certain to receive significant attention in light of the IRS's continuing scrutiny of conservation easement donations. Notwithstanding the Court's opinion -- and until additional opinions provide further clarity -- we believe that taxpayers are well-served to assume that the IRS (and the courts) will insist on strict, rather than substantial, compliance with Code and Treasury Regulation requirements.

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Though most of our conservation easement work focuses on open space easements in Albemarle and surrounding counties, Richmond & Fishburne has also represented clients in connection with several historic preservation easements in central Virginia.

Virginia's Largest Conservation Easement

Governor Kaine's office issued a press release today (you can link to it here) announcing that the City of Roanoke has donated to the Virginia Outdoors Foundation and the Western Virginia Land Trust a 11,363 acre easement on City-owned property.

The easement is on Carvins Cove Natural Reserve, which is the property surrounding Carvins Cove Reservoir and which is located partially in Roanoke County and partially in Botetourt County. The picture above, from the Virginia Outdoors Foundation website, shows a portion of Carvins Cove.

The Governor is justifiably pumped-up about the easement:

“The latest easement is the culmination of a decade and a half of efforts by the local land preservation leaders, state agencies, and local elected officials ... It exemplifies the spirit of partnership that makes Virginia’s land conservation program so successful, and is a testament to the foresight of Roanoke’s citizens to protect this critical resource for generations to come.”

Virginia Land Preservation Credit - Change in the Law for 2009 and 2010

In an earlier post we cited the Virginia General Assembly's consideration of SB 986, which reduces the maximum amount of the Land Preservation Credit that an individual can use, in 2009 and 2010, from $100,000 to $50,000.

The bill has passed and been signed by Governor Kaine; you can read, here, the text of amended Section 58.1-212 of the Code of Virginia.

The lower limit of $50,000 is retroactive to January 1, 2009. Taxpayers affected by the new limit are granted an additional two-years of carry-forward (12 years, rather than 10) under the language of the new law.

The Piedmont Environmental Council -- A Resource for Landowners

The Piedmont Environmental Council, or PEC, is a valuable resource for property owners who are considering donating a conservation easement.

The PEC's website is located here.

Focusing its work on the City of Charlottesville and the Counties of Albemarle, Clarke, Culpeper, Fauquier, Greene, Loudoun, Madison, Orange, and Rappahannock, the PEC defines its mission as "safeguarding the landscapes, communities and heritage of the Piedmont by involving citizens in related public policy and land conservation."

One of several areas of focus for the PEC is to educate the public about land conservation and preservation efforts. A number of staff members (their contact information is listed here) are available to discuss conservation -- including easements -- and to answer questions.

Recently the PEC posted a series of annual updates about conservation efforts in central Virginia, including updates for Albemarle, Greene, Madison and Orange Counties:

• "Approximately 3,000 Acres Conserved in Albemarle County in 2008" - click here for the report
• "193 Acres Conserved in Greene County for 2008" - click here
• "584 Acres Conserved in Madison County for 2008" - click here
• "2,474 Acres Conserved in Orange County for 2008" - click here

We recommend that anyone considering a conservation easement donation gather as much information as possible and talk through the ramifications of an easement with their tax advisor and their attorney. For those in central Virginia, the PEC is a great place to start this information-gathering process.

Possible Changes to Land Preservation Credit

Governor Kaine has proposed reducing the cap on individual use of the credits from $100,000 per taxpayer per year to $50,000 per year for tax years 2009 and 2010. The proposed reduction is currently being considered by the General Assembly.

In light of the budget shortfall facing the state, some in the land preservation community are relieved that there are not more dramatic reductions being proposed to Virginia's innovative Land Preservation Credit program. You can track the bill's legislative progress at Richmond Sunlight's website.