Applying the Private Benefit Doctrine to Farmland Conservation Easements
Gentry, Paige Madeline, Duke Law Journal
Farmland or working-land conservation easements serve two purposes. One is charitable, to protect open space from development," the other is practical, to preserve the land in productive agricultural use. These purposes, however, create a tension in the easement itself that can force the land trust that holds the easement to choose between the two purposes when the easement, meant in part to protect the farm, threatens the farm's continued viability.
Neutral-impact amendments are amendments to working-land easements that allow farmers to improve farm production or viability without harming the conservation value of the easements. Such amendments seem beneficial: a land trust can advance one of its goals of keeping agricultural land productive--without sacrificing the other goal of preserving the conservation value of the land. By approving such an amendment, however, a land trust likely violates the private benefit doctrine and risks losing its tax-exempt status. This Note argues that the IRS should explicitly decide not to apply the private benefit doctrine to neutral-impact amendments of farmland and working-land conservation easements.
Imagine this scenario: many years ago, a farmer, fearing that his lands might be turned into strip malls or housing subdivisions, decided to conserve his farmland. (1) Working with a conservation land trust, he protected his land through a conservation easement. The conservation easement allowed the farmer to continue farming the land, but it limited any future development of the land to ensure that the land would remain farmed in perpetuity. Today, the farmer is struggling--he has had a bad crop year and is worried about his income. A utility company approaches the farmer, asking to lease space inside the farmer's silo. The utility company wants to place its antennas inside the silo, removing the need to build cellular towers along nearby ridges. For both parties, this lease seems like the perfect opportunity--the farmer gains rental income and financial stability, and the utility company finds a place for its antennas while still protecting open space and scenic views.
Unfortunately, the terms of the conservation easement prohibit new development on the farm. These terms seem to prohibit the antennas, thus necessitating an amendment to the original easement. To both the land trust and the farmer, the amendment seems like a good idea. The amendment would allow the land trust to balance two different goals: the underlying conservation value of the land remains protected, and the extra income ensures that the farmer can continue the farming operation. To all sides, this arrangement seems like a no-brainer, until the parties examine tax law.
Under the private benefit doctrine, tax-exempt organizations (2) cannot confer a nonincidental benefit on private individuals or organizations. (3) A tax-exempt organization that does confer such a nonincidental benefit runs the risk of losing its federal tax-exempt status. (4) If the land trust amends its conservation easement covering the farmer's land, the IRS might find that the land trust conferred a primary private benefit to the farmer (the rental fees from the antennas inside the silo) and a secondary private benefit to the utility company (the ability to install the antennas cheaply). (5) Under this reasoning, the amendment confers a nonincidental benefit to private interests, and the land trust could lose its tax-exempt status.
Because land trusts risk losing their tax-exempt status after a single violation of the private benefit doctrine, (6) it is important for land trusts to understand how to apply the doctrine and work within it. Although on its face the private benefit doctrine seems to be simple--tax-exempt organizations cannot confer a substantial benefit to noncharitable individuals or organizations--no one, not even the Internal Revenue Service (IRS), applies it consistently. …