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ABOUT THIS BOOK
Voluntary land conservation, resulting from increasingly alluring tax benefits, has significantly changed the face of land use in the United States and promises to have an even more significant influence in the future. There are more than 1,500 land trusts in the U.S. today, involving millions of acres of land that have been permanently protected by conservation easements. Most of these land trusts depend heavily upon the significant income or estate tax benefits offered by the federal tax code as an incentive for voluntary land conservation. However, only a very small percentage of land trust personnel, landowners or their advisors, or even government officials, fully understand the complexity of the requirements for these tax benefits. This is a comprehensive book on the tax benefits of the charitable contribution, or bargain sale, of a conservation easement. It provides a detailed explanation of the complex and extensive requirements of the federal tax code and related concepts, including the rules governing the operation of tax-exempt organizations such as land trusts. Clearly written, systematic in its coverage, it is intended to be of value for anyone who deals with land trust issues, including land trust staff and trustees, landowners, lawyers, accountants, government officials, and interested lay people. Structured for easy reference, A Tax Guide to Conservation Easements is designed to be used as a resource tool. Related topics are cross-referenced throughout. All principles in the book are illustrated with one or more useful examples. The tax benefits of contributing a conservation easement are unquestionably the heart of voluntary land conservation today. Knowledge of the tax law relating to land trusts and conservation easements is vital to properly establishing and managing land trusts and to insuring the tax deductibility of conservation easements. The future of voluntary land conservation is dependent on a clear understanding of tax policy. Complete, meticulous, and up to date, A Tax Guide to Conservation Easements is an essential handbook.
C. Timothy Lindstrom is an attorney who specializes in the federal tax law of conservation easements and land trusts. He serves as legal counsel to easement donors and land trusts throughout the United States. He is a frequent lecturer and writer on the topic, and has played an instrumental role in the creation of additional statutory incentives for voluntary land conservation. Lindstrom and his family have contributed conservation easements on farms in Virginia and Michigan.
"Tim Lindstrom has provided a wonderful service for anyone involved in conservation that has ever been perplexed by the federal tax code—and isn't that all of us? He uses plain language to describe conservation tax law and make it easily understandable. This book is very practical and uses examples to make complex ideas easy to grasp and apply." — Rand Wentworth, President, Land Trust Alliance
"A Tax Guide to Conservation Easements is an absolutely essential resource for anyone who deals in private land conservation transactions, including attorneys, accountants, appraisers, landowners, and land conservation professionals. The book provides a concise and accessible overview of pertinent conservation easement tax laws, regulations, and policies, and the text is replete is exceptionally helpful and pointed examples, drawn from real-world situations and from the author's years of first-hand experience in the field. A Tax Guide to Conservation Easements is among the most important publications about private land conservation available, and will remain so for many years to come." — Andy Dana, Conservation Law Associates
TABLE OF CONTENTS
A TAX GUIDE TO CONSERVATION EASEMENTS
Table of Contents
Section One: Basic Principles
Chapter One: An Overview of Voluntary Conservation Tools
Purchase of Development Rights
Transfer of Development Rights
A Caution About PDRs and TDRs
Conservation Buyer Transactions
Chapter Two: Basic Tax Law Principles
The Importance of Tax Compliance
The Relation of the United States Code and the U.S. Treasury Regulations
Tax Benefits are a ¿Privilege¿ not a ¿Right¿
The Partial Interest Rule
The Requirement for ¿Donative Intent¿
Sham Transactions and the ¿Step Transaction Doctrine¿
¿Quid Pro Quo¿ Transactions
Section Two: Regulatory Requirements for Deductible Conservation Easements
Chapter Three: Deductions are Limited to ¿Qualified Conservation Contributions¿
1. To qualify for a tax deduction a conservation easement must be a ¿qualified conservation contribution.¿ Regulations section 1.170A-14(a).
A. The Partial Interest Rule Re-Visited.
B. A ¿Qualified Organization:¿ Regulations section 1.170A-14(c)(1).
C. What is a ¿qualified real property interest?¿ IRC º170(h)(2)(c).
D. Qualified ¿conservation purposes:¿ Code section 170(h)(4); Regulations section 1.170A-14(d)
E. The conservation purposes of the contribution must be protected in perpetuity: Code section 170(h)(5)(A); Regulations section 1.170A-14(a).
2. Uses inconsistent with conservation values must be prohibited: Regulations section 1.170A-14(e)(2).
A. The Inconsistent Use Prohibition is Extensive: Regulations section 1.170A-14(e)(2).
B. Exception to the Rule: Regulations section 1.170A-14(e)(3).
C. Inconsistent Use Rules for Open-Space Easements: Regulations section 1.170A-14(d)(4)(v).
D. Dealing with Inconsistent Uses.
E. No deduction is allowed where surface mining rights are retained: Regulations section 1.170A-14(g)(4).
F. Natural Resource Inventory: Regulations section 1.170A-14(g)(5)(i).
G. Notice requirements: Regulations section 1.170A-14(g)(5)(ii).
H. Monitoring Requirements: Regulations section 1.170A-14(g)(5)(ii).
I. Enforcement and Restoration: Regulations section 1.170A-14(g)(5)(ii).
J. Extinguishment of an easement: Regulations section 1.170A-14(g)(5)(ii).
K. Division of sales proceeds in the event of termination: Regulations section 1.170A-14(g)(6)(ii).
Section Three: Income Tax Benefits
Chapter Four: Calculation of the Tax Benefit
1. The value of the easement is deductible: Code sections 170(a) and (h); Regulations section 1.170A-14(h)(3)(ii).
2. Calculating the maximum tax benefit.
3. The amount of the federal deduction is subject to an annual limitation: Code section 170(b); Regulations section 1.170A-8(a).
A. The Old Law: Code section 170(b)(1)(C)(i); Regulations section 1.170A-8(d)(1).
B. New Law: Code section 170(b)(1)(E)(i).
4. Unused portions of the deduction may be used in future years: Code sections 170(b)(1)(C)(ii) and (D)(i); Regulations section 170A-10(c)(1)(ii)
A. Old Law: Code sections 170(b)(1)(C)(ii) and (D)(i); Regulations section170A-10(c)(1)(ii).
B. New Law: Code section 170(b)(1)(E)(ii).
C. Requirements where other charitable contributions exist: Code section 170(b)(1)(E).
D. Tax Benefits Terminate at Donor¿s Death.
5. ¿Phasing¿ easement contributions to extend income tax benefits.
6. Some easement deductions are limited to ¿basis:¿ Code section 170(e)(1); Regulations section 1.170A-4(a)(1).
7. Limitation on itemized deductions: Code section 68.
8. The alternative minimum tax (AMT).
9. ¿Donative intent¿ is required.
A. Dual Purpose Contributions.
B. ¿Quid pro Quo¿ Transactions.
10. The conveyance of a conservation easement reduces the basis of the easement property: Regulations section 1.170A-14(h)(3)(iii).
11. Treatment of easement contributions by real estate developers.
A. Deductions of ¿Inventory¿ will be limited to basis.
B. Enhancement to the development.
C. ¿Quid pro Quo¿ problems.
D. New reporting requirements.
12. Corporations, partnerships, limited liability companies, and trusts.
B. Limited Liability Companies and Partnerships
C. Trusts (other than charitable remainder trusts).
13. Federal tax treatment of state tax credits for easement contributions.
A. Treatment of the original credit recipient.
B. Treatment of transferees of credits.
14. Tax treatment of expenses incurred in contributing a conservation easement.
Chapter Five: Easement Valuation
1. The ¿comparable sales¿ valuation method: Regulations section 1.170A-14(h)(3)(i).
2. The ¿before and after¿ valuation method: Regulations section 1.170A-14(h)(3).
B. The ¿Development Method¿ of determining the ¿before value¿
C. The Problem of the ¿After Value.¿
D. ¿Paired Sales¿ Analyses.
E. The Use of ¿Preliminary Appraisals.¿
F. Enhancement: Regulations section 1.170A-14(h)(3)(i).
G. Financial benefits received must be subtracted from the deduction: Regulations section 1.170A-14(h)(3)(i)
Chapter Six: Substantiation Requirements and Penalties
1. Qualified Appraisal and Appraiser: Regulations sections 170(f)(11)(E)(i) and (ii).
2. New Declaration Provision: Regulations section 1.170A-13(c)(5)(i).
3. New Penalty: Code section 6695A.
4. Date of Appraisal: Regulations section 1.170A-13(c)(3)(i)(A).
5. Form 8283: Regulations section 1.170A-13(c)(4).
6. Acknowledgement of the Contribution: Regulations section 1.170A-13(f)(2).
Section Four: Estate and Gift Tax Benefits
Chapter Seven: Basic Estate Tax Concepts
1. The Estate and Gift Tax
A. The Estate Tax
B. The Gift Tax.
3. Special Use Valuation: Code section 2032A
4. Generation-skipping Transfer Tax
Chapter Eight: Conservation Easements and Estate and Gift Taxes
1. Two Types of Conservation Easement Estate Tax Benefits
2. The Reduction in Value.
A. The effect of restrictions other than conservation easements: Regulations section 25.2703-1(a).
B. Gift and Estate Tax Deductions for Conservation Easements.
3. The Exclusion: Code section 2031(c)
A. ¿Qualified Conservation Easements: Code section 2031(c)(8)(B).
B. Extent of the exclusion: Code section 2031(c)(2).
C. The exclusion is limited to $500,000 per estate: Code section 2031(c)(3).
D. The easement must meet the requirements of Code section 170(h) to qualify for the exclusion: Code section 2031(c)(8)(B).
E. The exclusion applies to land only: Code section 2031(c)(1)(A).
F. The exclusion does not apply to the gift tax.
G. The exclusion does not apply to easements whose sole conservation purpose is historic preservation: Code section 2031(c)(8)(B).
H. The exclusion is available for the estates of decedents dying after 12/31/97.
I. Three-year holding period required: Code section 2031(c)(8)(A)(ii).
J. The exclusion may be used in conjunction with other tax benefits for easements.
K. The exclusion may be passed from one generation to the next: Code section 2031(c)(8)(C).
L. The exclusion imposes a carryover basis: Code section 1014(a)(4).
M. The exclusion must be ¿elected:¿ Code sections 2031(c)(1) and (6).
N. The easement must reduce land value by at least 30% to qualify for the full exclusion: Code section 2031(c)(2).
O. Retained development rights are not eligible for the exclusion: Code sections 2031(c)(5)(A) and (B).
P. Commercial recreational uses must be prohibited: Code section 2031(c)(8)(B).
Q. Geographic limitations on the exclusion: Code section 2031(c)(8)(i).
R. Debt-financed property: Code section 2031(c)(4).
S. Property owned by partnerships, corporations, and trusts: Code section 2031(c)(10).
T. Easements donated after the decedent¿s death (¿post-mortem¿ easements): Code sections 2031(c)(8)(A)(iii) and (C), and º2031(c)(9).
Chapter Nine: Conservation Easements and Other Estate Planning Techniques
1. Use with the Annual Gift Tax Exclusion
2. Use with the Code section 2032A Special Valuation Provisions.
3. Use with the $2 million Exclusion Amount.
4. ¿Value Replacement.¿
Chapter Ten: Other Forms of Charitable Giving and Estate Taxes
1. Charitable Remainder Trust; Code section _________
2. Contribution of a Remainder Interest
3. Other Charitable Contributions
4. The Use of Trusts
5. Note on Estate Planning
Appendix A: Internal Revenue Code provisions governing Conservation Easements
Appendix B: Income Tax Regulations for Conservation Easements
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