Taxation, Donation, and Valuation
| Author | Jessica E. Jay |
| Pages | 363-409 |
Page 363
Chapter V: Taxation, Donation, and Valuation
Jessica E. Jay
A. Introduction
e Internal Revenue Code rewa rds landowners who donate valuable real property rights in the form of
conservation easements by recognizing a reduction in the encumbered land’s value as a charitable contribu-
tion.1 Donating real property rights to a land trust is a kin to donating a valuable painting to a museum.2
e tax benets associated with the voluntar y donation of a perpetual conservation easement may create a
tax-deductible charitable gift, provided that the easement meets certain requirements.3 e easement must
be perpet ual, a nd it must be donated or bargain-sold to a qualied conservation organization or public
agency for “exclusively for conservation purposes.”4 Internal Revenue Code Section 170(h) denes conser-
vation purposes to include: the preservation of land areas for outdoor recreation by, or the education of, the
general public; the protection of relatively natural habitats of sh, wildlife, or plants, or similar ecosystems;
the preservation of open space—including farmland and forestland—for the scenic enjoyment of the gen-
eral public, or pursuant to a clearly delineated governmental conservation policy, providing a signicant
public benet; and, the preservation of an historically important land area or a certied historic structure.5
To determine the value of an easement donation pursuant Treasury Regulations Sections 1.170A-13 and
A-14, a landowner must have his or her land appraised both at its fair market value before the conservation
easement is applied, and at its fair market value after the easement is applied (known a s “before and af ter
valuation.”6 e dierence between these two appraised values is the easement’s value for charitable dona-
tion purposes.7 If and when an easement removes value from the land, that value is reected in the after
valuation of the land’s fair market value with the conservation easement in place.8
Under the traditional tax structure of the Internal Revenue Code, without taking into account extension
of Pension Protection Act benets, a landowner is allowed to deduct an amount equal to thirty percent of
his or her adjusted gross income each year including the year of the gift for a total of six years, or until the
value of the gift has been depleted, whichever comes rst.9
By reducing the value of land subject to a conservation easement, a conservation easement not only
creates a valuable income tax deduction, it also yields valuable estate ta x benets, by restricting the va lue
Editors’ Note: We omitted most citations in the excerpted works for bre vity and reada bility. Asterisks were used to indicate delete d
portions of the tex t. And a “leaf ” icon was placed betwee n each excerpt.
1. E B K M P, T C E H 7–25 (2d ed. 2005), in J E. J, L
C E L C E (2016) (o n le wit h author, La nd Trust Alliance , & Vermont
Law Scho ol).
2. Id.
3. Id.
4. Id.
5. Id.
6. Id.
7. Id.
8. B M P, supra note 1.
9. Id.
Page 364 A Changing Landscape: The Conservation Easement Reader
to be placed on property at a landowner’s death.10 To the extent that the value of the property is reduced
through a conservation easement’s restrictions, the estate tax burden shared by the heirs of the property
also is reduced.11 Families who intend to keep inherited land in its ex isting condition may face challenges
when estate taxes are calculated and levied based on the fair market value of the highest and best economic
use of t he land.12 e resulting estate tax may be so high that a family is forced to sell its inherited land
just to pay the estate taxes owed on it.13 A conservation easement donated during the life of the landowner,
through the landowner’s will, or even after landowner’s death (and before the estate taxes are due—a “post-
mortem” election, described below), will reduce estate tax liability on the easement-restricted value of t he
land passed on to the heirs.14
Further, an additional federal estate tax exclusion is available if the easement donation qualies under
the 1997 Taxpayer Relief Act, such that forty percent of the va lue of the property remaining af ter the
grant of the easement can excluded from the value of the estate, up to a maximum cap of $500,000.15 e
most distinctive features of the Taxpayer Relief Act are that it allows the deceased landowner’s family, the
executor of the deceased landowner’s estate, or the trustee of a trust including the landowner’s land, to
grant a conservation easement on the landowner’s behalf, after the landowner’s death.16 Such post-mortem
adjustments to estates are disfavored at law, and are exceedingly rare, if not entirely prohibited, with this
one exception.17
In addition to federal tax benets, individua l states may oer income and estate tax benets for conser-
vation easement donations. Colorado, Virginia, Georgia, New Mexico, New York, Mississippi have enacted
legislation for state income tax benets and income tax credits for conservation ea sement donations.18
Further, local property ta xes may also be lowered by the placement of a conservation easement on land,
with such tax rates being based on land’s market value.19 By donating a conservation easement, therefore,
a landowner stands to benet from federal and state income tax and estate tax incentives, as well as local
property tax reductions.20
Landowners may grant perpetual conservation easements to satisfy their own personal conser vation
ethic, a nd tax benets can provide a n additional incentive for them to so do.21 It is the responsibility of
the landowner to comply with t he legal requirements related to tax deductions for easement donations,
pursuant to the Internal Revenue Code and Treasury Reg ulations, prior to entering into a perpetual con-
servation easement.22
10. Id.
11. Id.
12. Id.
13. Id.
14. Id.
15. Id.
16. Id.
17. Id.
18. Id.
19. Id.
20. Id.
21. Id.
22. Id.
Taxation, Donation, and Valuation Page 365
B. Federal and State Favorable Taxation
1. Chari table Contributions of Real Pro pert y Reim agined, Rejected, or Renewed
i. Roger Colinvaux, The Conservation Easement Tax Expenditure: In Search of Conservation
Value, 37 COLUM. J. ENVTL. L. 1, 5–8 (2012)
Introduction
Since t he mid-t wentieth century, property owners in t he United States have been encouraged to dedi-
cate la nd for cons ervation. In many respects, the need to conserve i s great, and, by some measures, t he
push for la nd conservation has been successful. In the past several decades, there have been dramatic
increase s both in t he number of acres dedicate d to a conser vation purpose and in the number of private
land trusts. is is due in part to a feder al c onservation tax incent ive th at al lows a property owner to
take a n income tax deduc tion for placi ng an easement on hi s or her proper ty for conservation purposes
and giving the easement to the government or a private environmental organization. In exchange for
the easement, the propert y owner may claim a deduction equa l to the conservation ea sement’s value. At
the federal level, this lucrative incent ive yielded $1.22 billion in claimed deductions in 2008 and $2.18
billion in cla imed deductions in 2007. In addition, many states oer income and propert y tax incentives
to encourage land conservation.
In general, the idea behind conservation incentives is sound: if conservation of private land is to succeed,
landowners must be willing participants. Nevert heless, the federal income tax deduction for conservation
easements, though often utilized and praised, is a lso maligned. On the positive side, the incentive is cred-
ited with protecting millions of acres from development. On the negative side, the incentive is dispara ged
as dicult to administer, prone to abuse, and ill-suited to securing conser vation ends. Accordingly, in
recent years, a number of proposals have been made to reform the incentive. ere are also defenders of
the incentive. To the extent there is consensus, it is perhaps the narrow one that conservation is important,
perhaps critically so, but the current approach to encouraging conservation is imperfect.
Frequently missin g from this debate, however, is a focus on how to measure the value of conser vation.
“Conservation” is of ten descr ibed in generalities: a vague environmenta l goal or value, worth whatever
it t akes. To a certain extent, this is c ommonplace. A value, whether of conser vation or otherwise, is
cultura l, and a matter of policy, or assert ion. One either sha res the value or not. But sha ring t he value
of conservation does not, as a genera l matter, answer the question of what conservation means and how
it should be me asured.
Indeed, ever since the conser vation easement tax expenditure became a permanent xture in the Inter-
nal Revenue Code (“the Code”), t he importance of conservation has largely been taken for gra nted. But
what is the value of conservation, and, in particular, what is the value of the conservation easement tax
expenditure? What are t he benets? Do the costs of the program exceed t he benets? ese are important
questions to ask of any tax or spending progra m, and a re especially important now in light of the w ider
discussion about the value of tax expenditures. Accordingly, it is time for an assessment of the conservation
easement tax expenditure —should the program be kept, modied, or eliminated?
is Article rst undertakes to provide such an asse ssment by considering the costs a nd benets of the
program. Part I of the Article nds that, although it is feasible to assess program costs, a comparable evalu-
ation of program benets is not possible because there is no good measure for conservation benets. As
Part I reveals, conservation value is, to a certain extent, unknown and misunderstood, making it di cult
to verify the accurac y of the prevailing background assumption that the benets of the easement program
exceed the costs.
Critical ly, this background assumption can be traced to an overlooked aspect of the incentive;
namely, that the ta x benet receive d by the donor is not directly related to the c onservation value of
the contributed ea sement. As discussed in Parts I and II, this is except ional. Normal ly, in the charitable
contribution context, a direct relationship exists between the benet to the donor and the benet to
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