Conservation easements as qualified conservation contributions.

• Author: Coale, III, Harwell E.

Preservation of aesthetic, environmental, historic, and recreational values on private lands is difficult to accomplish. Government entities often do not have the funding to purchase and preserve these lands in an undeveloped state. As a result, income tax incentives in return for the donation of conservation easements by private landowners often provide the most useful tool for accomplishing these preservation goals.

The Internal Revenue Code allows for income tax deductions for charitable contributions under [section] 170. One type of such charitable contribution is a conveyance of a partial property interest that qualifies under the Code as a "conservation contribution." (1)

The most common form of these contributions is a conservation easement. Generally speaking, a conservation easement is a type of negative easement that is generally unenforceable under common law due to its intangible nature, but which many state legislatures have specifically authorized by statute. (2) Due to its inherent characteristics, a conservation easement (i.e., restriction on use) is best suited to a landowner who wants to retain some limited use of the property, while ensuring the property will not be further developed in the future.

In turn, a conservation easement must meet specific requirements outlined in the Code and Treasury Regulations in order to qualify for the income tax deduction. (3) A qualified conservation contribution is defined as "a contribution of a qualified real property interest, to a qualified organization, exclusively for conservation purposes." (4) This definition presents the following four primary queries: 1) What constitutes a qualified real property interest? 2) What is a qualified organization? 3) What constitutes exclusivity? and 4) What are conservation purposes?

Qualified Real Property Interest

The Code identifies three categories of "qualified real property interests." These interests include: "(A) the entire interest of the donor other than a qualified mineral interest, (B) a remainder interest, [and] (C) a restriction (granted in perpetuity) on the use which may be made of the real property." (5)

Qualified Organization

This requirement identifies who may receive the qualified real property interest and what restrictions on alienability must be imposed on the donee. Generally, the organization must "have a commitment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions." (6) Treasury Regulations identify four classes of organizations which qualify under this definition:

1) A governmental unit described as a State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made exclusively for public purposes; (7)

2) An organization described as one which normally receives a substantial part of its support ... from a governmental unit ... or from direct or indirect contributions from the general public; (8)

3) A charitable organization described in I.R.C. [section] 501(c)(3) [i.e., tax-exempt] that meets the public support test of [section] 509(a)(2); (9) or

4) A charitable organization described in I.R.C. [section] 501(c)(3) that meets the requirements of I.R.C. [section] 509(a)(3) and is controlled by an organization [qualifying under one of the three foregoing categories]. (10)

In addition to the requirement that the grant be made to a qualified organization, it must also include certain restrictions on the transfer of the interest. Specifically, subsequent transfers can only be made to other qualified organizations and the original conservation purposes must be carried out by the grantee organization. (11) However, if surrounding conditions have changed to such an extent that it is impossible to continue the original conservation purposes, the proceeds from the transfer must be used in a manner consistent with the conservation purposes. (12)

Exclusivity

The Code states that, "[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity." (13) The Treasury Regulations further interpret this statutory provision to require that a mortgagee of the conservation property must subordinate its rights to those of the qualified organization and to limit surface mining of reserved...