Tuesday, February 16, 2021
Nancy A. McLaughlin (Utah; Google Scholar) & Ann Taylor Schwing, Conservation Easements and Development Rights: Law and Policy, 169 Tax Notes Fed. 531 (Oct. 26, 2020):
This article examines the requirements in Internal Revenue Code § 170(h) that limit a taxpayer’s ability to grant the donee of a deductible easement the discretion to approve development on the subject property post-donation.
Congress deliberately did not rely on the status of donees as qualified organizations to ensure public benefit and minimize abuse in the section 170(h) deduction context. Instead, Congress required that deductible easements also satisfy the granted-in-perpetuity requirement, the conservation purposes test, and the multifaceted protected-in-perpetuity requirement. Each of those additional requirements is separate and distinct and must be satisfied independently of the qualified organization requirement.
Development is one of the more harmful uses that can be made of a property when considered from a conservation perspective. To qualify for the section 170(h) deduction, the development rights reserved in an easement must not be inconsistent with the conservation purposes of the donation or destructive of the specific conservation interests associated with the property, and for an open space easement, they also must not interfere with the essential scenic quality of the land or the governmental conservation policy being furthered by the donation. To assess compliance with these rules at the time of an easement’s donation, the IRS and the courts need to know not only the amount and type of development rights that the taxpayer has reserved, but also where that development may take place on the property.
It is not difficult for a donor to provide that information. Donors and donees routinely engage in the due diligence necessary to determine, at the time of an easement’s donation, where reserved development rights could be exercised without harming conservation interests or purposes. Donors and donees also use several techniques to build some flexibility into easements regarding the location of development, while at the same time allowing the IRS and the courts to verify compliance with section 170(h) requirements.
When section 170(h) was enacted in 1980, it was estimated that the deduction would reduce government revenue by $5 million annually, which amounts to $16.7 million in today’s dollars. Now, 40 years later, the annual tax expenditure is in the billions of dollars, and the deduction program ranks among the largest federal environmental and land management programs in the U.S. budget. Moreover, the voluminous case law makes clear that noncompliance and abuse are not confined to syndicated conservation easement transactions. Compliance with the requirements imposed by Congress in 1980, particularly those limiting development on the protected properties, is more critical now than ever.