Family Vacation Homes: Planning With Qualified Conservation Contributions
| Citation | Vol. 14 No. 4 |
| Publication year | 2008 |
| Author | By Nancy G. Henderson, Esq. and Kristen E. Caverly, Esq. |
By Nancy G. Henderson, Esq. and Kristen E. Caverly, Esq.*
In Part I of this article, published in the Fall issue of the Quarterly, the authors discussed various options available to vacation-home owners who wish to pass property to children or other family members. This article addresses the challenges presented by a particularly Byzantine, statute-driven method: preserving vacation property through use of a qualified conservation contribution ("QCC").
In appropriate circumstances, a donor may make a QCC to a qualified charity and obtain tax benefits sufficient to prevent the forced sale of a cherished property, thereby preserving the property for the use and enjoyment of future generations. The following is the overview of the perceived abuses of QCCs and how recent negative attention from the IRS and Congress may affect the future of QCCs as a tax-planning tool.
Under general income tax principles, no income tax deduction is allowed for gifts to qualified charitable organizations of less than the donor's entire interest in the donated property. QCCs, as described in IRC section 170(h), are an exception to this general rule.
To qualify as a tax deductible QCC, the gift must be of a "qualified real property interest," it must be made to a "qualified organization," it must be exclusively for "conservation purposes," and the conservation purposes must be enforceable in perpetuity. Each of these requirements is discussed below.
A. Qualified Real Property Interest
The first requirement for a QCC is that the donor give the charity a "qualified real property interest," meaning (1) the donor's entire interest other than a qualified mineral interest, (2) a remainder interest, or (3) a restriction upon the use of the property, which restriction is granted in perpetuity.
1. Gift of the Donor's Entire Property Interest Other than a Qualified Mineral Interest
The simplest "qualified real property interest" is a gift of the donor's entire interest in real property other than a "qualified mineral interest."40 A "qualified mineral interest" is the right to the subsurface oil, gas and other minerals, including the right to access those mineral interests.41
In addition to minerals that are clearly "subsurface" in nature, a qualified mineral interest can also include the right to extract surface minerals, such as gravel.42 However, a gift of a donor's interest in real property subject to a retained mineral interest will not qualify as a QCC unless the terms of the gift specifically prohibit surface mining.43 The gift will also fail if any other method of mineral extraction is permitted that would be inconsistent with the conservation purposes of the gift, unless such extraction is localized in nature and the destructive impact is limited, can be remedied, and would not have a significant adverse impact upon the conservation purposes of the gift.44
Donors contemplating conservation gifts of this type cannot separate their interests in the subject property beyond those contemplated by the definition of a qualified mineral interest and then later take the position that a gift has been made of the donor's entire interest in the property.45 A special rule applies to mineral interests that have been separated from the property other than in anticipation of the donation. Specifically, if such interests were separated from the property after June 12, 1976, and remained separated up until the time of the gift, and if the owner or owners of such interests are neither the donor nor persons related to the donor within the meaning of IRC section 267(b) or IRC section 707(b), such separate interests should not disqualify the gift so long as surface mining on the property is completely prohibited.46 For separations that occurred on or before June 12, 1976, surface mining need not be completely prohibited, but the likelihood of its occurrence must be so remote as to be negligible.47 The regulations provide factors to take into consideration for this purpose, including, for example, the presence of data indicating the absence of mineral reserves on the property as well as the lack of commercial feasibility of a surface mining operation.48 In making this determination, the opinion of a qualified geologist can be very valuable.49
2. Gift of a Remainder Interest in Real Property
A donor who wishes to make a QCC may also donate a remainder interest in real property.50 The donor may retain an interest for life, for joint lives or for a period of years. The donor may not permit the life tenants to use the subject property in a manner that diminishes the conservation purposes of the gift.51
Where the subject of the remainder interest gift is a farm or personal residence, it will usually be more desirable for the donor to claim an income tax deduction under IRC section 170(f)(3)(B)(i), rather than a deduction under IRC section 170(h). First, to obtain a deduction under Section 170(f)(3)(B)(i), the donee need not satisfy the substantially more restrictive tests for a "qualified organization" under Section 170(h). Further, the donation need not be exclusively for conservation purposes.52 Regardless of whether a deduction is secured under Section 170(h) or Section 170(f)(3)(B)(i), however, the value of the remainder interest will be computed in the manner described in IRC section 170(f)(4), including the requirement that the value of the donee's remainder interest in any structures or other depreciable property be computed separately from the remainder
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interest in the land.53
3. A Gift of a Perpetual Conservation Restriction
The third form of qualified real property interest is a restriction granted in perpetuity with regard to the use of the donor's real property.54 Such restrictions can take the form of equitable servitudes, restrictive covenants, easements, and other restrictions on the use of real property provided under applicable state law. For purposes of the balance of this article, all such restrictions are referred to collectively as "easements" or "QCEs" (for Qualified Conservation Easement).
QCEs are particularly attractive to donors because, in many instances, the donor's current use of the property can remain unchanged. In some cases, the donor can even continue to develop the property.55 However, no deduction will be permitted if the retained use is either inconsistent with the conservation purposes of the gift or would have a detrimental effect upon other significant conservation interests. For example, a gift of an easement restricting a property to agriculture use for flood control purposes will not be a QCC if such use will involve the application of pesticides that are harmful to a significant natural ecosystem.56 On the other hand, a QCC will not fail simply because the advancement of the intended conservation interests of the gift will by necessity have a detrimental impact upon other important conservation interests. For example, the excavation of a historically important archaeological site in accordance with established archaeological practices could have a negative impact upon the scenic beauty of the property without disqualifying the gift as a QCC.57
B. Qualified Organizations
The second requirement for a QCC is that the donee organization must be a "qualified organization." Qualified organizations are a narrow subset of the organizations that otherwise benefit from tax deductible charitable contributions. Qualified organizations are limited to governmental units, public charities described in either IRC section 170(b)(1)(A)(vi)58 or IRC section 509(a)(2),59 and IRC section 509(a)(3) supporting organizations controlled by one or more of public charities described in Section 170(b)(1)(A)(vi) or 509(a)(2). A private foundation, including a private operating foundation, can never be the donee of a QCC. To be a qualified organization, the donee of a QCC must also be committed to protecting the conservation purposes of the donation. A donee will be deemed to satisfy this requirement if its tax-exempt purposes are consistent with the conservation purposes contemplated by Section 170(h). Even if the donee is so committed, the donee must also have the actual resources to enforce the restrictions imposed under the donative instrument.60 The donee need not have an actual reserve for such enforcement actions, however.61
In addition to the requirement that the initial donee of a QCC be a qualified organization, the instrument of conveyance must address the possibility of a subsequent transfer of the easement. Specifically, as a condition of the gift, the relevant documentation must specify that any subsequent transferee of the easement must, at the time of the subsequent transfer, satisfy all of the requirements for a qualified organization, and the transferee must be required to carry out the original conservation purposes of the gift.62
C. Exclusively Conservation Purposes
To be a QCC, a gift of a qualified real property interest must be made exclusively for conservation purposes. Exclusivity does not prohibit incidental benefits to the donor, however, which will be disregarded.63 Qualifying conservation purposes include the following:
(i) preserving land areas for outdoor recreation by, or the education of, the general public;
(ii) protecting a relatively natural habitat for fish, wildlife, plants or a similar ecosystem;
(iii) preserving open space (including farmland and forest land) where such preservation is for the scenic enjoyment of the general public and will yield a significant public benefit;64
(iv) preserving open space (including farmland and forest land) pursuant to a clearly delineated federal, state, or local government conservation policy that will yield a significant public benefit; and
(v) preserving a historically important land area or certified historic structure.
1. Preserving Land Areas for Public...
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