Land preservation provides estate tax benefits: section 2031(c).

• Author: Brown, Brenda J.
• Position: IRC section 2031(c

I.

INTRODUCTION

In 1997, Congress created new estate tax benefits for landowners(1) who preserve land with a conservation easement. The new benefits allow for as much as a $500,000 exclusion from estate taxes. While private citizens and their beneficiaries will benefit from reduced estate taxes, the public stands to benefit the most from the new tax provision, because it provides incentive to preserve land for future generations. The 1997 Taxpayer Relief Act(2) added Section 2031(c)(3) to the Internal Revenue Code ("I.R.C."), providing for an estate tax exclusion for landowners who preserve their land with a conservation easement. A "conservation easement is a legal agreement a property owner makes to restrict the type and amount of development that may take place on his or her property. Each easement's restrictions are tailored to the particular property and to the interests of the individual owner."(4) This article first briefly provides an overview of conservation easements and their previous tax treatment. The article then focuses on a new section of the tax code, I.R.C. [sections] 2031(c), its requirements and its administration.

II.

CONSERVATION EASEMENT OVERVIEW

"Conservation easements are private land use restrictions designed to preserve open space and other environmentally significant resources."(5) Land preservation occurs when landowners voluntarily agree to place restrictions on their land, in the form of conservation easements. Such conservation easements are then donated to a governmental agency, foundation, or I.R.C. [sections] 501(c)(3) organization.(6) Once a landowner donates the right to use the land in a certain manner, he or she has given up one of the proverbial sticks in his or her bundle of property rights. The donee organization then holds that stick in perpetuity. State statutes and the Uniform Conservation Easement Act have overcome traditional common law problems with conservation easements (e.g. ownership, enforcement, privity).(7) Because these common law impediments have been overcome, the benefits of conservation easements over traditional land preservation methods are numerous.

Several distinguishing characteristics make conservation easements improvements over traditional government land preservation. Conservation easements: (1) involve no government regulation; (2) are immune from the politics of open space legislation; (3) do not constitute a taking under the Fifth Amendment; (4) do not require fee simple purchase; (5) do not require maintenance or administration (e.g. parks); (6) are voluntary; (7) meet the needs of the private landowner; and (8) allow the landowner to retain ownership and control of the property.(8) The primary cost to the government is decreased tax revenue, from reduced income, estate, gift, or property taxes.(9)

In some circumstances, placing a conservation easement on property provides for significant tax benefits. This article focuses on the charitable income tax deduction because it provides the foundation for exclusion under I.R.C. [sections] 2031(c). The article also focuses on the estate tax provisions because it is these provisions of the tax code which have been changed to include the new I.R.C. [sections] 2031(c) exclusion. While an owner may also receive real property tax(10) and gift tax benefits(11) for having a conservation easement placed on his or her property,(12) these tax benefits will not be discussed because they are not relevant to the new I.R.C. [sections] 2031(c) estate tax exclusion.

1. Charitable Income Tax Deduction

   Beginning in 1976, Congress enacted several tax provisions which allow a taxpayer to receive a charitable income tax deduction for donating a partial interest of land.(13) These provisions culminated in regulations issued by the Treasury Department in 1994.(14) The regulations provide valuable guidance in receiving a charitable deduction for those donating conservation easements.(15) Conservation easements qualify for favorable income tax treatment if they meet the rigorous requirements of I.R.C.. [sections] 170(h).(16)

   Section 170 allows the taxpayer a deduction for any charitable contribution? Section 170(0(3) disallows a deduction for the contribution of a partial interest in property,(18) except for a "qualified conservation contribution."(19) A qualified conservation contribution is defined in I.R.C. [sections] 170(h) as a contribution: (1) of a qualified real property interest;(20) (2) to a qualified organization;(21) (3) exclusively for conservation purposes.(22) Thus, in order for a conservation easement to receive favorable tax treatment of any kind, the easement must first satisfy the requirements of I.R.C. [sections] 170(h).(23) Once the conservation easement has satisfied the requirements of I.R.C. [sections] 170(h), the landowner may receive an income tax deduction for the loss in value resulting from the restricted use.

2. Estate Tax Reductions

   When the landowner dies, estate tax is generally calculated for land based on the "property's `highest and best use'--the most profitable use at the time of the owner's death."(24) By creating a conservation easement, the "uses to which the property can be put are limited forever. This usually reduces the estate's value and thus reduces estate taxes."(25) Before I.R.C. [sections] 2031(c) was enacted, there was "no estate tax exclusion for the value of land subject to a qualified conservation easement."(26) I.R.C. [sections] 2031(c) has added a potentially valuable estate tax exclusion for qualifying donees.

   III.

   I.R.C. SECTION 2031(C)

1. Overview

   I.R.C. [sections] 2031(c) was passed as part of the Taxpayer Relief Act of 1997.(27) In enacting the law, Congress hoped that "a reduction in estate taxes for land subject to a qualified conservation easement [would] ease existing pressures to develop or sell off open spaces in order to raise funds to pay estate taxes, and [would] thereby help to preserve environmentally significant land."(28) I.R.C. [sections] 2031(c) says in short,

   [I]f you have land subject to a conservation easement that meets requirements of Section 170(h), and if you own that land when you die, and if you meet the additional requirements of this section [2031(c)], then you can exclude from your estate a percentage of the value of that land in addition to the reduction in value already attributable to the easement.(29) This important new provision provides for tax benefits which should be part of estate planning and land conservation strategies. The remainder of this article focuses on the requirements, administration and benefits of the new provision.

2. Requirements of I.R. C. [sections] 2031(c)

   If the donee is to receive an estate tax exclusion, there must be a qualified conservation easement on his or her property.(30) A qualified conservation easement is very similar to an I.R.C. [sections] 170(h) "qualified conservation contribution."(31) However, [sections] 2031(c) adds more strict requirements than I.R.C. [sections] 170(h) including: (1) the conservation easement may not be for preservation of a historical area or historical structure;(32) (2) the donee may not retain more than the right to de minimis commercial recreational use;(33) and (3) the donee may retain mineral interests only if the...