Qualified Conservation Easements: An Analysis of the Valuation Issues and Perpetuity Requirements

By Englebrecht, Ted D.; Dowis, Brian | The CPA Journal, August 2013 | Go to article overview

Qualified Conservation Easements: An Analysis of the Valuation Issues and Perpetuity Requirements


Englebrecht, Ted D., Dowis, Brian, The CPA Journal


Taxpayers are finding that the valuation of contributed conservation easements to qualified charitable organizations in order to receive a charitable deduction is an unclear and cumbersome area of the tax law. Even though a qualified conservation easement will qualify as a deduction under Internal Revenue Code (IRC) section 170 (f)(3)(B)(iii), many taxpayers have encountered resistance from the 1RS when claiming such contributions on their tax returns. Estate tax planning is another area impacted by conservation easements under IRC section 2031(c).

When it comes to the valuation of easements and enforceability into perpetuity, the courts are divided on the methodology that taxpayers should use. To address the current confusion, the following discussion reviews the statutory, administrative, and judicial interpretations involving the valuation of conservation easements and the enforceability of perpetuity requirements. In addition, it analyzes the important criteria involved in this debate and offers planning ideas to avoid the adverse tax ramifications that could result from incorrectly valuing or structuring conservation easements.

Statutory Rules

Under IRC section 170(h), a charitable deduction will be allowed for a contribution of a "qualified conservation easement." To be classified as such, a contribution must be a qualified real property interest given to a qualified organization exclusively for conservation purposes (IRC section 170[h][l]). A qualified real property interest could be the entire interest of the real property of the donor, a remainder interest, or a restriction on its use (IRC section 170[h][2]). A qualified organization includes "corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals" (IRC section 501[c][3]).

A conservation purpose has several definitions. Under IRC section 170(h)(4)(A), it means preserving land areas for outdoor recreation or for the education of the general public, protecting natural habitats (i.e., fish, wildlife, plants), or preserving open space attributed to the scenic enjoyment of the general public or pursuant to a clearly delineated federal, state, or local governmental conservation policy. As a result, a conservation easement yields a significant public benefit. Moreover, a conservation purpose can mean the preservation of a historically important land area or a certified historic structure (IRC section 170[h][4][A]). The phrase "exclusively for conservation purposes" means that such areas or structures must be protected in perpetuity; it also provides that no surface mining is permitted (IRC section 170[h][5]).

IRC section 2031(c) addresses the treatment of conservation easements as part of an estate. This section provides that an exclusion from the gross estate will be allowed for a conservation easement to the extent of the lesser of 1) the applicable percentage of the land with regards to the conservation easement (IRC section 2031[c][l][A]), and 2) the exclusion limitation (IRC section 2031[c][l][B]). The applicable percentage can be defined as 40%, which is reduced by two percentage points for each percentage point that the conservation easement is below 30% of the value of the land that the conservation easement encumbers (IRC section 2031 [c][2]). The following formula may be useful in determining the exclusion amount:

Conservation Easement Conservation

Value of land the - Easement

easement encumbers Percentage

Until 2002, the exclusion limitation varied by year-that is, the exclusion amounts were $100,000 in 1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and $500,000 in 2002 and thereafter (IRC section 2031[c][3]). …

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