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Increased Scrutiny of Land Trusts Brings Increased Regulations to Conservation Easements

Wellington, FL – March 15, 2007 – In light of recent controversies involving the Palm Beach Polo Equestrian Club and the Winter Equestrian Festival, there have been discussions relating to the creation of a land trust, which would preserve the show grounds and surrounding areas for future use.

Due to abuse of the tax incentives offered with land trusts and conservation easements, industry practices were put under scrutiny. In 2003, the Internal Revenue Service launched an investigation of The Nature Conservancy, which is the world’s largest environmental group, on account of questionable tax practices. Because those who donate a conservation easement can be eligible for significant tax incentives, some donors and conservation organizations were taking advantage of the requirements required in making a land donation or an easement. In turn, the government has created more stringent regulations as to what type of easements qualify for tax breaks, and the IRS is more closely monitoring land transactions.

Land Trust Basics

In the U.S., land trusts began growing in popularity after 1976. There are about 1,700 land trusts in the country, as of 2005 data, and state and local land trusts have doubled their conservation acres from 6 million to 11.9 million acres in the past five years, according to the Land Trust Alliance.

By definition, a land trust is a local, regional, or statewide nonprofit conservation organization directly involved in helping protect natural, scenic, recreational, agricultural, historic or cultural property. Land trusts work to preserve open land that is important to the communities and regions where they operate and are able to act quickly in response to conservation needs. There are four ways that land trusts acquire land: purchase, donations, secure conservation easements and work with private or government conservation organizations.

Many land trusts use easements, which are permanent deed restrictions to limit some development like subdivisions or mining, although they can permit some construction. Easements have come to be treated as a property right in itself and are often the right to use the land of another for a special purpose. A conservation easement certifies that the restrictions on the land provide a public benefit “and use of land to achieve certain conservation goals, such as the preservation of open space, wildlife habitat or agricultural land,” according to Nancy A. McLaughlin in “Questionable Conservation Easement Donations.” In turn, the original owner can apply for tax deductions because the value of the land was reduced.

Creating a Land Trust or Donating a Conversation Easement

Theoretically, forming a land trust is a simple process. The basic steps are as follows:

-Gather resources (land)

-Create a group of supporters

-Select a board of directors

-Develop a mission statement

-Apply to the IRS for nonprofit 501(c)(3) status

However, in order to receive or qualify for the tax incentives, the easement must meet special standards set forth by the IRS, or, the “Conservation Purposes Test.” The qualified conservation purposes, according to McLaughlin, are: preservation of land areas for outdoor recreation or the education of the general public; the protection of a “relatively” natural habitat of fish, wildlife or similar; preservation of an historically important area/structure, or preservation of open space, which includes farms and forests, for the scenic enjoyment that will yield significant public benefit.

One example of the type of easements that caused the IRS to investigate land trusts was the limit of building on golf course fairways. In essence, golf course owners would donate easements of the empty space between each hole – calling the fairway space “open space.”

To determine what counts as open space, the regulations are listed in the IRS Code §170. However, Steven Small, an attorney who served in the Office of Chief Counsel of the IRS, said in an article in Exchange, The Journal of the Land Trust Alliance, that landowners “need to understand that the starting point for federal tax benefits is the protection of significant conservation values…meaning protection of some significant, contiguous tract of open space, uninterrupted by roads, driveways…”

He also discusses two easements that do not meet conservation standards. “The conservation easement on a little bit of open space in the middle of a bigger development where the conservation benefits either are minimal or their “protection” only benefits those who have homes in the development.” Small adds that conservation easements on “intensively altered landscapes” stand little chance of being accepted as open space.

Legal Help

Most land trusts and organizations strongly encourage all interested donors to seek legal counsel to ensure the process of making an easement or land donation goes smoothly, in addition to receiving the tax incentives. The cost of a faulty easement or an easement that does not meet the conservation standard is huge for several reasons. In general, the donation reduces the market value of the property greatly, the easement is a permanent loss of partial autonomy of the owner’s control over the property, and the donations incur high legal, approval and accounting costs. In addition, the donation cannot be taken back by the owner if the IRS fails to approve the easement, and all tax benefits are denied, according to McLaughlin.

While land trusts have made leaps and bounds toward priceless conservation efforts, the IRS has deemed it necessary to crack down on the creation of, and the donation of, easements due to those who have taken advantage of tax incentives set forth to conserve, not to profit. And in turn, those attempting to create land trusts must duly prove their cases so as not to lose the land forever.

For more information about land trusts, the involvement with the IRS or possible tax incentives, please see the Land Trust Alliance at lta.org.

Sources

Land Trust Alliance (lta.org)

“Questionable Conservation Easement Donations,” Nancy A. McLaughlin. Probate & Property, September/October 2004.

Internal Revenue Service, Treasury, Code §170A-14.

Remarks of Steven T. Miller, Commissioner, Tax Exempt and Government Entities, International Revenue Service, Speech before the Spring Public lands Conference, March 28, 2006.

 

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