Tax Notes

Tax Notes--The Tax Benefits of Conservation Easements


by Timothy Lindstrom

"Tax Notes" is prepared by the Taxation Section of the State Bar. Some items are of primary interest to tax practitioners; others will be useful to lawyers in general practice. Since one purpose of "Tax Notes" is to afford an exchange of tax-related ideas, problems, and experience among Michigan lawyers, readers are invited to submit material for publication. For a copy of the publication guidelines, please contact column editor Steven E. Grob, Dykema Gossett, 35th Floor, 400 Renaissance Center, Detroit, MI 48243.

One of the twigs in the bundle making up the fee simple is the potential for land development. In recent years, the value of this twig has grown so that it often makes up the primary component of the economic value of land. The consequences have been as problematic as they have been positive: the loss of some of America's best agricultural land, dramatic increases in the cost of local government as farmland gives way to residential development, the decline of the scenic quality of our land, and the displacement of many rural families unable to pay the estate taxes on the inflated value of their land.

In recent years, conservation easements have combined with federal1 tax policy to help landowners realize the development value of their land without actually developing it. The result has been a positive response to many of the problems of development, but a response that has not required public regulation or acquisition of private land. Recent changes in federal tax law have significantly increased the tax benefits associated with the donation of conservation easements.

Conservation easements are a legal tool designed to extinguish most or all of the development potential of land in the interest of conservation. The principle advantage of conservation easement over regulation or public acquisition of land is that easements are purely voluntary. Therefore, they are not subject to the legal limitations or political controversy associated with police power regulations of land. Furthermore, easements avoid the acquisition costs2 and the costs of maintenance and removal of land from local tax rolls associated with government ownership.

Conservation easements have played a role in land conservation in the United States for over 25 years. Because they are "easements in gross," they are not recognized at common law. However, many states, including Michigan, have specifically authorized conservation easements by statute. Michigan Compiled Laws (MCL) 324.2140-324.2144 authorize conservation easements. Prior to 1995, conservation easements in Michigan were authorized by the Conservation and Historic Preservation Easement Act (Act 197 of 1980).

It is estimated that over 20,000 acres of Michigan land are protected by conservation easements. Because there is no central registry of easements in Michigan, the number of acres protected by conservation easements here is not known. These easements are "held" by a number of different private, charitable organizations throughout the state (most known as "land trusts").

Compared to other states (e.g., Virginia where over 120,000 acres are subject to permanent conservation easements) the easement program in Michigan has yet to have a significant impact statewide. However, it is likely that a growing number of Michigan landowners will be interested in using conservation easements to protect the future of their land. This is because of the significant increase in federal tax benefits to the donors of conservation easements and the increase in the number of land trusts in Michigan using conservation easements as a conservation tool.

The federal tax benefits now available to individual easement donors are impressive:

  • a federal income tax deduction for the value of the easement
  • the right to subtract the value of the easement from a decedent's estate in calculating federal gift or estate taxes
  • the right to exclude 40 percent of the remainder value of land subject to the easement in calculating federal estate taxes

In addition, the elimination of development potential resulting from a conservation easement may result in a reduction in local real estate taxes as well.

The combination of these tax benefits can equal or exceed the cost (the reduction in value of land due to the imposition of an easement) of the easement itself. For an easement that reduces the value of land by 30 percent, the family of a donor in the 28 percent federal income tax bracket can realize tax benefits equal to up to 99 percent of the cost of the easement. For a donor in the 39.6 percent federal income tax bracket and the 55 percent estate tax bracket, a 30 percent easement can generate federal tax savings equal to up to 146 percent of the cost of the easement.

What is a Conservation Easement?

Conservation easements are voluntary restrictions on the use of land negotiated by the landowner and the organization chosen by the landowner to "hold" (enforce) the easement. The purpose of a conservation easement is to eliminate most or all development potential in order to protect some conservation value(s) of the property that provides a significant public benefit.

The terms of conservation easements are entirely up to the landowner and prospective easement holder to negotiate. However, the Internal Revenue Code (IRC) establishes standards for easements, which, if met, qualify the donation of the easement for tax deductions (standards are established by IRC 170(h) and accompanying Treasury Regulations (Reg) §§ 1.170A-14, et seq.)

The protection of farm land, timber land, wetlands, or open space in general, particularly where such land is under residential or commercial development pressure and where a local government land use plan identifies the continuation of such uses as valuable to the community, are typical objectives of conservation easements. In addition, the protection of historic property, floodplains, areas providing habitat to important wildlife, and land possessing unusual beauty are also appropriate uses of easements.

Easements that are permanent, donated (rather than sold) by the landowner, and that conserve for the public benefit one or more of the foregoing characteristics of land typically qualify for the tax benefits offered by the IRC. It is also possible for an easement sold to a government agency or charitable organization for less than its fair market value (if the transaction qualifies as a "bargain sale" under IRC 170) to qualify for tax benefits.

Although easements must create a public benefit to qualify for tax deductions, this does not mean that the public gains access to the land. Unless the purpose of the easement is to conserve a feature that is meaningless without public access (such as the preservation of a beautiful view or a historic house), public access is not required.

Easements normally permit the continuation of the rural uses being enjoyed by the landowner at the time of the donation of the easement. In addition, land subject to a conservation easement may be freely sold, donated, passed on to heirs, and transferred in every normal fashion, so long as it remains subject to the restrictions of the easement. It is also possible to retain some rights to limited development of land, including limited residential construction, so long as the retention of such rights does not conflict with the conservation value of the property.

In order to qualify for a tax deduction, easements must be donated to a federal, state, or local government agency. The federal rules also allow a private, charitable organization with the ability to enforce the terms of the easement to hold deductible easements. Private easement holders, under the terms of the federal rules, need not be environmental organizations to qualify the easements they hold for tax benefits. The key is that the organization be a charitable organization qualified under IRC 501(c)(3); have the ability to enforce the easements it holds over time; and be organized, at least in part, for the conservation of the property subject to easements it holds. For example, the Colorado Cattlemens Association has formed a land trust for the purpose of protecting ranchland through the use of conservation easements.

Conservation Easements Under Michigan Law

As stated above, conservation easements are easements in gross and to be enforceable must be specifically enabled by state law, which, in Michigan, is accomplished by MLA 324.2140-324.2144. In specific, Michigan law provides that if the easement:

    . . . is granted to a governmental entity, charitable or educational association, corporation, trust, or other legal entity [it] is enforceable against the owner of the land or body of water subject to the restriction despite lack of privity of estate or contract, a lack of benefit running to particular land or a body of water, or the fact that the benefit may be assigned to another governmental entity or legal entity . . .3 (emphasis added).

The emphasized language reflects the common-law requirements for enforceability easements in gross typically lack.4

Michigan law is unusual in that it recognizes easements that restrict the use of land as well as easements that restrict the use of a body of water. (Water conservation easements raise a host of interesting tax questions beyond the scope of this article.) The purposes of conservation easements under Michigan law are to retain or maintain "the land or body of water, predominantly in its natural, scenic, or open condition, or in an agricultural, farming, open space, or forest use, or similar use or condition."5

Historic preservation easements in Michigan, while operating in the same manner and having many of the same tax benefits as conservation easements, are separately defined in the Michigan law.6 Michigan law limits the use of historic preservation easements to structures or sites that are national historic landmarks, listed on the national register of historic places or the state register of historic sites, or lie within a locally established historic district.7 However, the Michigan definition of conservation easement also provides that such an easement may extend to the protection of improvements on the land or body of water that is the object of the easement.8

The Michigan statute recognizes easements (both conservation and historic) "...whether or not the interest is stated in the form of a restriction, easement, covenant, or condition in a deed, will, or other instrument executed by or on behalf of the owner..." of the restricted property.9 In order to be enforceable against a bona fide purchaser for value without actual notice of the easement, easements must be recorded with the register of deeds in the county where the land is located10 and, being conveyances of real estate easements, must be recorded in compliance with MCL 565.201-565.203.11

The law also provides generally for the assignment of conservation easements;12 however, in the case of historic preservation easements, assignment may only be made to a governmental or other legal entity ". . . whose purposes include the preservation or restoration of structures or sites described in section 2140(b)...."13

Because conservation easements, as easements in gross, are only enforceable if they comply with the terms of the enabling statute, care must be taken to ensure that the statutory provisions are met. Failure to do so may mean that the restriction is enforceable as a personal covenant against the grantor but not against his successors in interest. This would deny the grantor the assurance that his land would be protected in the future and it would deny him any federal tax benefits. Even though the grantor would be denied these benefits, as a personal covenant, the restriction might be enforceable against him resulting in the worst of all possible worlds.

Tax Benefits of Conservation Easements

The Income Tax Deduction

A "qualified conservation contribution" of a "qualified real property interest"14 (a conservation easement) is deductible from income for federal income tax purposes.15

Valuation Issues. The value of the easement is the difference in the value of the land with and without the easement.16 This value must be substantiated by a qualified appraisal and the appraisal must be made not more than 60 days before the date of the conveyance of the easement, nor later than the due date for the return in which the deduction is first claimed.17 Easement valuations (as a percentage of fair market value) ranging between 16 percent and 91 percent have been approved by the U.S. Tax Court.

To the extent that the donation is offset by the appreciation of other property owned by the donor because of the donation (for example a parcel overlooking the restricted parcel may increase in value because its view has been protected), the value of the easement will be offset by the increase in value in the other property.18 This is known as "enhancement" and can result in the reduction of the available deduction. In addition, if the donor receives value for the easement, either a cash payment or some other benefit such as a development approval in exchange for the easement, the deduction may not be allowed at all, or it may be reduced to reflect the value received.19 This is known as the "quid pro quo" rule. Properly constructed, it is possible to sell an easement for less than fair market value and still qualify for a deduction through the "bargain sale" rules.

Limitations on the Deduction. An individual donor of an easement is entitled to an income tax deduction of up to 30 percent of the donor's adjusted gross income.20 Any unused portion of the value of the gift may be carried forward for five years after the year of the donation.21 However, for large easements, it is possible to phase the donation in such a fashion as to maximize the tax benefits to the donor and still accomplish the donor's conservation goals (being careful not to violate the rules regarding "enhancement").

If the donor is willing to calculate the value of the easement by subtracting what would have been gain (both short and long term) had the property been sold, the deduction limit increases to 50 percent of his adjusted gross income.22 This approach is most beneficial to the donor when the basis and fair market value of the property subject to the easement are the same or nearly the same, as in the case of recently acquired property.

A corporate donor may also qualify for an income tax deduction, generally limited to 10 percent of taxable income.

Criteria for Deductibility. The IRC and Treasury Regulation provisions governing the deductibility of easements are extensive and contain a wealth of helpful examples. The following is a summary of these rules.

In order to be a "qualified conservation contribution" under the IRC, an easement must meet certain criteria. It must represent the contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes in perpetuity.23

The conservation purposes recognized as qualifying an easement for tax benefits include the preservation of land areas for outdoor recreation by, or the education of, the general public; the protection of a relatively natural habitat for fish, wildlife, or plants; the preservation of certain open space (including farmland, forest land or scenic areas); or the preservation of a historically important land area or certified historic structure.24

Many qualifying easements are "open space" easements. An easement will qualify as an open space easement if the objective of the easement is preservation of property pursuant to a "clearly delineated federal, state, or local governmental conservation policy and will yield a significant public benefit" or if the easement promotes the scenic enjoyment of the general public.25

"Governmental conservation policies" include local agricultural zoning or other specific local land use designations recognizing the conservation value of the land.26 To the extent that there are specific public expenditures associated with these designations, such as Michigan's real estate tax credit for agricultural operations, the conservation policy is considered stronger and more likely to support deductibility of the easement.27

In order to qualify as a "scenic easement" or a historic easement, there must be visual access by the public to those features of the property considered scenic or historic.28 Otherwise, easements qualifying as "open space" easements are not generally required to provide any public access in order to qualify for the deduction.29

To be considered a qualified organization for purposes of "holding" a conservation easement, the organization must be a local, state, or federal government agency, or be a charitable organization qualified under IRC 501(c)(3).30 The organization must be committed to protecting the conservation purposes of the easement and have the resources necessary to enforce the restrictions over time.31

Other requirements are that any existing mortgages on the property subject to the easement must be subordinated to the easement,32 that the easement may retain no rights inconsistent with the conservation purposes of the easement or that would permit the destruction of other significant conservation values of the property even though not targeted by the easement for protection,33 and that the easement may not retain any surface mining rights.34

Estate Tax Benefits

There are two estate tax benefits available to estates containing land subject to conservation easements. The first is that the effect of the easement on the fair market value of real property contained in a decedent's estate is taken into account in valuing that real property for estate tax purposes.35 In essence, this has the effect of allowing the estate to deduct the value of the easement. IRC 2055(f) also allows a formal deduction for the value of testamentary bequests of easements; however, a testamentary conveyance of an easement wastes the income tax deduction.

The second benefit was added in 1997 with the enactment of IRC 2031(c).36 It allows a decedent's executor to elect to "exclude" from the decedent's estate 40 percent of the remaining value of land subject to a qualified conservation easement after subtracting the value of the easement. For example, if land is worth $1 million prior to the easement and $700,000 after the easement, the exclusion would allow 40 percent of the remainder value of $700,000, or $280,000, to be excluded.

Unlike the other tax benefits available for conservation easements, the exclusion applies to land only, not structures.37 In order to qualify for the exclusion, the easement must meet the requirements of IRC 170(h)38 as well as the rather extensive requirements of § 2031(c).

The exclusion is available not only to the estate of the donor, but also to the estates of any of the donor's family members and descendants so long as the land remains in the family.39 Once the land passes outside of the family, the exclusion is no longer available, although the effect of the easement on the value of the land may still be taken into account for estate tax purposes. It is possible that a new easement, provided that it independently meets the requirements of § 2031(c), could revive the exclusion for a grantee who is not a member of the donor's family.

It is also important to note that the exclusion can be used in conjunction with other estate tax provisions, including the special use valuation provisions of § 2032A and the family owned business exclusion of § 2033A.

A brief summary of the more detailed provisions of this new law follows.40

Things to Which the Exclusion Does Not Apply

  • The exclusion applies to the value of land only, not structures.41
  • The exclusion does not apply to the federal gift tax. Therefore, gifting land subject to a qualified conservation easement, will lose the benefit of the exclusion for the estate.
  • The exclusion is not available for easements when the sole purpose of the easement is historic preservation.42 Because the exclusion does not apply to structures, this isn't a very important gap in the application of the exclusion. In addition, the fact that land has historic value does not mean that an easement on that land protecting other conservation values will not qualify for the exclusion.
  • The exclusion is not available for easements that have retained more than a de minimis right to conduct commercial recreational activities.43 A more detailed discussion of this provision is provided below.

Effective Date. The law is available to the estates of decedents dying after December 31, 1997. Thus, the exclusion is available for easements that were already in existence when the new law was enacted, so long as they otherwise qualify under § 2031(c).

Election Required. The exclusion must be elected by the estate within nine months of the decedent's death.44 The election is important because, in some circumstances, the exclusion may be a detriment to heirs (see the discussion of carryover basis below).

Three-Year Holding Period. The land must have been owned by the donor or a member of the donor's family for at least three years prior to the decedent's death.45 However, there is no requirement for the time the easement must have been in place.

The Limitation On and Phase-In of Benefits. Section 2031(c) limits the amount that may be excluded per estate to $500,000. The limitation is phased in in $100,000 increments. In the year 2000, $300,000 may be excluded, up to $500,000 in 2002.46

Doubling the Benefits. Because the limitation of $500,000 applies per estate 47 rather than per parcel, it is possible, with a simple estate plan and where land is properly titled,48 for the estates of both a husband and wife to each qualify for a separate exclusion. This would allow a married couple to exclude $1 million in land value from their estates (in 2002).

The 30 Percent Threshold. In order to ensure that only bona fide easements qualify for the new exclusion, § 2031(c) provides that if the easement fails to reduce the value of land by at least 30 percent, then the value of the 40 percent exclusion shall be reduced by two percentage points for each percentage point by which the easement falls short of the 30 percent requirement.49 For example, if land worth $1 million before an easement is worth $800,000 after the easement (a 20 percent reduction), the exclusion available would only be 20 percent because the easement was 10 percentage points lower than the 30 percent threshold (40 percent - 2 x 20 percent - 20 percent).

While the new law does not specify when the easement is to be valued for purposes of determining compliance with the 30 percent threshold, valuation would logically occur on the date of the decedent's death (or the alternate date for valuing a decedent's estate) and be re-determined in each succeeding generation to which the exclusion is available.

Tax on Retained Development Rights. While it is possible for an easement to retain some limited rights for development and still qualify for tax benefits, § 2031(c) provides that the value of any development rights retained in the easement will not be eligible for the exclusion.50 However, the law also gives heirs nine months after the decedent's death to agree to terminate some or all such retained rights and thereby avoid the tax on those rights.51 Heirs have two years after the decedent's death to put their agreement into effect (presumably by recording an amendment to the original easement or conveying a supplemental easement). Failure to properly implement such an agreement will result in the imposition of additional tax.52

Development rights are defined in the law as any right to use the land for a commercial purpose not directly related to and supportive of the use of the land as a farm for farming purposes.53 Rights to maintain a residence for the owner's use, as well as normal farming and forestry practices, probably would not be considered retained development rights. The retained right to sell land for development or to construct houses for sale or rent probably would be considered retained development rights.

The provisions regarding retained development rights provide an opportunity for greater flexibility in the drafting of easements and an increased potential for post mortem estate planning.

Retained Rights to Commercial Recreational Use. Any easement that retains more than a de minimis right to use the land for commercial recreational use is disqualified from enjoying the exclusion provided by § 2031(c).54 This suggests that existing easements be carefully reviewed to see whether or not they will pass muster under the new provision. The official explanation of the provision55 states that retained rights to grant "hunting or fishing licenses" on the land under easement will be considered de minimis and will not violate this requirement.

The staff of the Joint Committee on Taxation has also expressed the opinion that any commercial recreational use rights retained in an easement may be cured retroactively after the death of the donor through the use of a post mortem easement (see the discussion of post mortem easements below).

Carryover Basis. Section 2031(c) provides that, to the extent of the exclusion, land shall have a "carryover basis" in the hands of heirs rather than a "stepped-up basis."56 For example, assume that after the subtraction of the value of the easement, land has a remainder value of $750,000 at the date of the easement donor's death. The exclusion allowed would be $300,000 (40 percent x $750,000). Assume also that the donor's basis in the land is $5,000. Under this rule, 40 percent of that basis must be carried over to the decedent's heirs ($2,000 in this example). That portion of the value of the land not subject to the exclusion ($450,000 in this example) would continue to receive a stepped-up basis. Thus, the total adjusted basis for this property in the hands of the heirs would be $452,000.

Because in most instances the top capital gains rate will be 20 percent, whereas the lowest estate tax rate for taxable estates is 37 percent, it will make sense to elect the exclusion if estate taxes are payable. For estates where no estate tax is due, or only minimal tax exposure exists, it will not make sense for the estate to elect the exclusion.

Geographic Limitations. The benefits of § 2031(c) are limited to land in or within a 25-mile radius of Metropolitan Statistical Area (MSA), national park, national wilderness area, or an "Urban National Forest (as designated by the Forest Service)."57 Most of southern Lower Michigan is covered by § 2031(c) due to its proximity to an MSA. The list of MSAs (basically "urbanized areas" containing at least 50,000 people plus the surrounding county or counties making up the greater metro area around the urbanized core) is continually being expanded by the U.S. Department of Commerce so that areas not now covered by § 2031(c) may be in the future.

Areas covered by this provision solely due to their proximity to a national park or wilderness area are subject to the further proviso that they may be disqualified for the exclusion if the Secretary of the Treasury determines that they are not "under significant development pressure."58

Debt-Financed Property. The amount of any outstanding debt incurred to acquire land must be subtracted from the value of the land before calculating the exclusion.59 For example, if land has a value of $700,000 after subtracting the value of an easement and it is subject to a $300,000 mortgage, the exclusion can only be applied to $400,000 ($700,000 - $300,000). The exclusion amount in this case would be $160,000. Of course, the debt is a deduction from the estate.

Property Owned by Family Partnerships, Corporations, etc. If the decedent's interest in land eligible for the exclusion is held indirectly through a partnership, corporation, etc., the estate may still enjoy the benefit of the exclusion to the extent of the decedent's ownership interest, provided that the decedent owns at least a 30 percent interest in the entity.60

Easements Donated After the Decedent's Death. The law makes both the exclusion and a deduction under § 2055(f) available for easements donated by a decedent's executor or trustee after the decedent dies, regardless of whether the decedent made any provision for such an easement during his lifetime or in his will.61 Such a "post mortem easement" puts the decedent's estate in the same position to enjoy tax benefits as though the decedent had donated the easement during his lifetime (except that there will be no income tax deduction).

This provision can be a very powerful post mortem estate planning tool in the right circumstances. However, the powers of executors (personal representatives in Michigan) and trustees are governed by state, not federal, law. Michigan's new probate code does not provide express authority for personal representatives to make charitable donations without authority in the will.62 Some states (e.g., Virginia and Colorado) have recently amended their laws to expressly authorize executors and trustees to donate conservation easements (with obvious controls to protect those with claims on the estate) in order to take advantage of this new federal tax provision.

Of course, a landowner can easily make provision in his will authorizing a post mortem easement to be donated. It is possible for such a provision to be added by holographic codicil. Under certain circumstances (where, for example, the family is unlikely to want the land developed and estate taxes are likely to be significant) such provision should be made—even if by a death-bed holograph.

The new law gives a decedent's estate just nine months to determine the desirability and feasibility of a post mortem easement, to negotiate the terms of the easement with a prospective easement holder, to draft and execute the document, and to gain its acceptance and recordation. This is a lot to undertake in nine months. For this reason, and because a post mortem easement cannot qualify for an income tax deduction where the estate desires to deduct the value of the easement under § 2055(f),63 landowning families interested in conserving their land should not defer conveyance of an easement in reliance on the new post mortem option.

A Closing Example

Suppose that Mary Smith owns a 250-acre farm valued at $5,000 per acre. Her substantial income subjects her to the top federal income tax rate of 39.6 percent. In addition to the land, she has other assets valued at over $2.5 million so that her estate will be subject to a 55 percent federal estate tax rate. The land has been in Mary's family for three generations and she wants to pass it on, intact, to her son. Mary decides to donate a permanent conservation easement on the farm to the Blue Hollow Conservancy, a qualified easement holder. The easement allows her to maintain a principle residence and dependencies on the farm, farm it, and timber it using select cut methods. The easement prohibits any commercial use (other than agriculture or forestry) or subdivision of the property. The appraiser determines that the easement reduces the value of the land from $5,000 per acre to $3,500 per acre, a 30 percent reduction.

Based upon the appraisal Mary is entitled to a charitable deduction from her income of $375,000 (250 x $1,500). She can deduct a portion of this gift equal to 30 percent of her annual adjusted gross income and carry the unused balance forward for five years. Assuming her income is substantial enough to allow her to use the entire deduction, the federal income tax savings realized from the gift will be approximately $148,500 ($375,000 x 39.6 percent).64

Assuming that the values don't change from the time of her donation, the easement will remove $725,000 in taxable value from her estate. This reduction is due to the subtraction from the value of the land for the value of the easement ($375,000), and from the exclusion of 40 percent of the remaining value of the land under the new provisions of § 2031(c) ($1,250,000 - $375,000 = $875,000 x 40 percent = $350,000). The federal estate tax savings which result are $398,750 (55 percent x $725,000).

Total state and federal income and estate tax savings attributable to Mrs. Smith's easement donation are $547,250 ($148,500 + $398,750). This represents 146 percent of the cost (loss of value) of the easement. For lower bracket donors, tax benefits will be less, although it can still represent a significant portion of the cost of the easement.

Conclusion

The package of tax benefits newly available for conservation easement donations can turn the conservation of family land into an effective tool for the conservation of family wealth as well.

Footnotes

1 And, in some cases state tax policy, viz the Commonwealth of Virginia which allows a state income tax deduction, income tax credit, and relief from state capital gains tax for the donation or sale of conservation easements.

2 There is the cost of the tax benefit and, where the easement is "held" by a government agency, the cost of monitoring the easement.

3 MCL 324.2140(a).

4 It is also possible to create what is in effect a conservation easement through the use of the common law concept of "appurtenant" easements. Appurtenant easements (most typically rights of way) operate to the benefit of an adjoining property. The parcel subject to the burden of the easement is known as the "servient estate" and the parcel benefited by the easement is known as the "dominant" estate. To use the appurtenant easement concept to create a conservation easement the prospective easement donor first donates a fee interest in a small parcel of land to the prospective easement "holder." This will become the dominant parcel. The parcel to be subject to the restriction adjoins the dominant parcel and the conservation easement will run to the benefit of the dominant parcel and be enforceable by its owner just as any other appurtenant easement. This is the technique used in states without the benefit of enabling legislation authorizing conservation easements in gross such as Wyoming.

5 MCL 324.2140(a).

6 MCL 324.2140(b).

7Id.

8 MCL 324.2140(a).

9 MCL 324.2140(a) and (b).

10 MCL 324.2141 and 2142.

11 MCL 324.2144(1).

12 MCL 324.2144(2).

13 MCL 324.2144(3).

14 These terms are defined in IRC 170(h) and Reg §§ 1.170A-14(a) and (b).

15 Unlike many states, Michigan does not allow a parallel deduction from state income tax.

16 Reg § 1.170A-14(h)(3)(i) provides that the value of the easement is its fair market value based upon the "comparable sales" appraisal process. However, the Reg also provides that where comparable sales are not available (and generally they are not) then the value of the easement is the difference in the value of the land with and without the easement. Detailed provisions regarding the "before and after" method of valuation are contained in Reg § 1.170A-14(3)(ii).

17 Reg § 1.170A-13(c)(3)(i)(A).

18 Reg § 1.170A-14(h)(3)(ii).

19 Id.

20 IRC 170(b)(1)(C)(i).

21 IRC 170(B)(1)(C)(ii).

22 IRC 170(B)(1)(C)(iii).

23 Reg § 1.170A-14(a).

24 Reg § 1.170A-14(d).

25 Reg § 1.170A-14(d)(4).

26 Reg § 1.170A-14(d)(4)(iii).

27 Id.

28 Reg § § 1.170A-14(d)(4)(ii)(B) and 1.170A-14(d)(5)(iv).

29 Reg § 1.170A-14(d)(4)(iii)(C).

30 Reg § 1.170A-14(c)(1).

31 Id.

32 Reg § 1.170A-14(g)(2). While the author has not had experience with this requirement in Michigan, in Virginia, which has extensive amounts of land under easement, it has not been a problem, either with commercial lenders or with the Federal Land Bank.

33 Reg § 1.170A-14(e).

34 Reg § 1.170A-14(g)(4). Note that where such rights have been retained but where actual mining is "so remote as to be negligible" a deduction will be allowed. Reg § 1.170A-14(g)(4)(ii).

35 Although this benefit has been utilized by decedents' estates for years, there is no formal provision in the IRC for it. It is simply an intrinsic part of the valuation process: where an easement has, in perpetuity, extinguished certain rights to the use of the real property, those rights no longer exist to be valued for inclusion in the estate.

36 This section was added to the IRC by a provision of the Taxpayer Relief Act of 1997, known as the American Farm and Ranch Protection Act of 1997, sponsored by the late Senator John H. Chafee (R-RI).

37 IRC 2031(c)(1)(A).

38 IRC 2031(c)(8)(B).

39 IRC 2031(c)(8)(C).

40 As of this writing there are no regulations, court decisions, or IRS rulings pertaining to § 2031(c).

41 IRC 2031(c)(1)(A).

42 IRC 2031(c)(8)(B).

43 Id.

44 IRC 2031(c)(6).

45 IRC 2031(c)(8)(A)(ii).

46 IRC 2031(c)(3).

47 IRC 2031(c)(1).

48 Either as tenants in common or independently to each spouse so that it will pass to the estate of each decedent rather than to the surviving spouse.

49 IRC 2031(c)(2).

50 IRC 2031(c)(5)(A).

51 IRC 2031(c)(5)(B).

52 IRC 2031(c)(5)(C).

53 IRC 2031(c)(5)(D).

54 IRC 2031(c)(8)(B).

55 The "General Explanation of Tax Legislation Enacted in 1997" by the Joint Committee on Taxation.

56 IRC 1014(a).

57 IRC 2031(c)(8)(A)(i). A provision in the 1999 tax bill, passed by Congress but vetoed, would have expanded coverage from 25 miles to 50 miles, a significant increase in the extent of the coverage of § 2031(c).

58 IRC 2031(c)(8)(A)(i)(II). There are no standards established for this determination.

59 IRC 2031(c)(4)(A).

60 IRC 2031(c)(10).

61 IRC 2031(c)(8)(C) and (9).

62 See MCL 700.3711 and 700.3715. While subsection (h) of § 700.3715 does authorize a personal representative to dedicate land for public use, this subsection deals expressly with the authority of a representative to subdivide land in the estate, therefore it is doubtful that dedication of land other than in the context of subdividing land is authorized.

63 IRC 2031(c)(9) will not allow the estate to deduct the value of a post mortem easement under § 2055(f) where a charitable deduction under § 170 has been claimed.

64 This does not consider the impact of the limitation on the amount of itemized deductions (including charitable deductions). Mary could choose to implement a "value replacement" program to replace the value lost in the easement donation by investing this income tax savings in insurance, stocks or bonds and transferring those assets to an inter vivos trust for the benefit of her son. The result could be a substantial increase in the value of assets passing to her son over what would have been the case had the easement never been donated.



Timothy Lindstrom
Timothy Lindstrom led a seven-year effort to amend the federal tax code to increase the tax incentives for the donation of conservation easements which culminated in the enactment of 26 USC 203 l(c) described in this article. Mr. Lindstrom recently moved to Michigan from Virginia. His specialty is conservation easement law and zoning and planning law.


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