CONSERVATION CONSERVATION EASEMENTSEASEMENTS

HOW DO THE NUMBERS HOW DO THE NUMBERS WORK? FEDERAL, STATE WORK? FEDERAL, STATE AND AD VALOREM TAXESAND AD VALOREM TAXES

HAL HANLIN, ESQ.HAL HANLIN, ESQ.

I. IntroductionI. Introduction

Hal Hanlin, Esq.Hal Hanlin, Esq.

Special Tax Counsel to Richardson Plowden & Special Tax Counsel to Richardson Plowden & Robinson, P.A., in Columbia and Myrtle Robinson, P.A., in Columbia and Myrtle Beach.Beach.

Talk is for educational purposes, not to substitute Talk is for educational purposes, not to substitute for advice from your tax advisor.for advice from your tax advisor.

IRS CIRCULAR 230 DISCLOSUREIRS CIRCULAR 230 DISCLOSURE

To ensure compliance with requirements imposed To ensure compliance with requirements imposed by the IRS, please note that this document is not by the IRS, please note that this document is not intended to include tax advice, and that any U.S. intended to include tax advice, and that any U.S. federal tax advice contained in this federal tax advice contained in this communication (including any attachments) is not communication (including any attachments) is not intended or written to be used, and cannot be intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) under the Internal Revenue Code or (ii) promoting, marketing or recommending to promoting, marketing or recommending to another party any transaction or matter another party any transaction or matter addressed herein. addressed herein.

II.II. Charitable Contributions in Charitable Contributions in GeneralGeneral

Generally deductible.Generally deductible. But limitations apply, and different rules apply to But limitations apply, and different rules apply to

different types of property.different types of property. SomeSome of the same rules apply to Conservation of the same rules apply to Conservation

Easements and to other Charitable Contributions, Easements and to other Charitable Contributions, somesome are different. are different.

We have 20 minutes, so I can familiarize you with We have 20 minutes, so I can familiarize you with rules, but will not be able to go in-depth.rules, but will not be able to go in-depth.

Deductions to Public Charities are Deductions to Public Charities are generallygenerally deductible. deductible.

Allowed under section 170 of the Tax Allowed under section 170 of the Tax CodeCode

This is true, This is true, generallygenerally at both the federal at both the federal and state levels (SC has a “piggy-back” and state levels (SC has a “piggy-back” income tax system).income tax system).

It is also generally true that:It is also generally true that:

A. A deduction taken on the federal A. A deduction taken on the federal return will also be a deduction on the return will also be a deduction on the state return.state return.

B. Charities are generally either B. Charities are generally either “50% charities” or “30% charities.”“50% charities” or “30% charities.”

The “50%” and “30%” are limitations The “50%” and “30%” are limitations that refer to the donor’s Adjusted Gross that refer to the donor’s Adjusted Gross Income or “AGI.”Income or “AGI.”

Example #1:Example #1:

I have AGI of $50,000 in year 2008. I I have AGI of $50,000 in year 2008. I make a charitable contribution to a 50% make a charitable contribution to a 50% charity (generally a church, educational charity (generally a church, educational institution, non-profit medical institution, non-profit medical institution, government body, or private institution, government body, or private foundation) of $25,000.foundation) of $25,000.

I make no other charitable contributions I make no other charitable contributions in year 2008.in year 2008.

I can deduct the full $25,000 from my I can deduct the full $25,000 from my income for year 2008, lowering my income for year 2008, lowering my taxable income from $50,000 to $25,000. taxable income from $50,000 to $25,000. My income taxes are calculated based on My income taxes are calculated based on $25,000 of taxable income.$25,000 of taxable income.

Example #2: Same facts as in Example #1, but instead of making

my contribution to a 50% charity, I make a donation to a 30% charity.

Then, instead of deducting the full $25,000, which is 50% of my 2008 AGI, I can only deduct up to 30% of my AGI. The amount that I can deduct is only $15,000, not $25,000. Therefore, in 2008 the amount on which I will pay income tax is $35,000. ($50,000 - $15,000).

So, in the second example, I deducted $15,000 rather than $25,000 in 2008.

What about the other $10,000? Do I get a deduction for that? Yes, but in year 2009, not year 2008, assuming that I have at least $30,000 in 2009 income.

Notice that in both examples 1 and 2, Notice that in both examples 1 and 2, I ended up with the same amount I ended up with the same amount deducted as a result of my charitable deducted as a result of my charitable contribution ($25,000), but the timing contribution ($25,000), but the timing was different.was different.

In example #1, I took the entire In example #1, I took the entire deduction in year 2008.deduction in year 2008.

In example #2, I took $15,000 of the In example #2, I took $15,000 of the deduction in year 2008, and took deduction in year 2008, and took $10,000 of the deduction in year 2009.$10,000 of the deduction in year 2009.

How long can I carry the deduction forward if I can’t use it all in year 2008, as in example #2?

Generally the deduction can be carried forward for a maximum of five years in addition the year of contribution, under current law.

In example #2, I could take deductions in years 2008, 2009, 2010, 2011, 2012 and 2013 if necessary to fully utilize my charitable deduction.

Do the examples above apply to my federal Do the examples above apply to my federal income tax return? Or to my SC income tax income tax return? Or to my SC income tax return? Or to both?return? Or to both?

Generally, the examples apply to both. South Generally, the examples apply to both. South Carolina has a piggy-back income tax system. Carolina has a piggy-back income tax system. In order to calculate your SC income tax, you In order to calculate your SC income tax, you must first calculate your federal income tax. must first calculate your federal income tax. There are a few differences for various SC There are a few differences for various SC credits, and other items. credits, and other items.

Notably in our context, federal tax Notably in our context, federal tax statutes do not exclude deductions statutes do not exclude deductions for placing golf courses under for placing golf courses under conservation easements.conservation easements.

South Carolina law, however, South Carolina law, however, prohibits tax benefits (deductions prohibits tax benefits (deductions and credits) for golf course and credits) for golf course conservation easements.conservation easements.

Example #3:Example #3: My income has been $500,000 per year, and I My income has been $500,000 per year, and I

donate a conservation easement valued at donate a conservation easement valued at $3,000,000 in year 2008. I get to deduct $3,000,000 in year 2008. I get to deduct $1,000,000 for year 2008, don’t I?$1,000,000 for year 2008, don’t I?

No. The percentage limitation is based on No. The percentage limitation is based on my income, not on the size of the my income, not on the size of the contributioncontribution. At best, in this example I could . At best, in this example I could deduct $166,667 for year 2008. But because of deduct $166,667 for year 2008. But because of the AMT and other factors, I might not be able the AMT and other factors, I might not be able to deduct the full amount. My accountant and I to deduct the full amount. My accountant and I will have to calculate some scenarios to see how will have to calculate some scenarios to see how this will work.this will work.

What about ad valorem taxes? Do I What about ad valorem taxes? Do I receive any benefit there as a result of receive any benefit there as a result of contributing a conservation easement?contributing a conservation easement?

Yes. Per SC Code Section 27-8-70, Yes. Per SC Code Section 27-8-70, property subject to a conservation property subject to a conservation easement must be assessed taking the easement must be assessed taking the easement into consideration. And, per easement into consideration. And, per Code Section 12-43-232, if the property Code Section 12-43-232, if the property is suitable for agricultural use, it must is suitable for agricultural use, it must be assessed at agricultural value.be assessed at agricultural value.

Do any other tax benefits flow to property Do any other tax benefits flow to property owners as a result of imposing a conservation owners as a result of imposing a conservation easement on property in South Carolina?easement on property in South Carolina?

Yes. South Carolina provides a tax credit of Yes. South Carolina provides a tax credit of up to $250 per acre, up to $50,500 taken in up to $250 per acre, up to $50,500 taken in any particular year, for qualified conservation any particular year, for qualified conservation contributions, per SC Code Section 12-6-contributions, per SC Code Section 12-6-3515. Notice that this is better than a 3515. Notice that this is better than a deduction, it is an actual deduction, it is an actual creditcredit. Also, South . Also, South Carolina conservation credits, unlike those in Carolina conservation credits, unlike those in NC and some other states, can be bought, NC and some other states, can be bought, sold, and even devised by will.sold, and even devised by will.

Are conservation organizations Are conservation organizations typically 50% charities or 30% typically 50% charities or 30% charities?charities?

Under current law, conservation Under current law, conservation organizations are typically 30% organizations are typically 30% charities.charities.

Weren’t the tax benefits for Weren’t the tax benefits for conservation contributions better last conservation contributions better last year? Is there a chance that we will year? Is there a chance that we will return to the better tax treatment of return to the better tax treatment of conservation contributions?conservation contributions?

Yes, the tax benefits were better in Yes, the tax benefits were better in years 2006 and 2007 than they are years 2006 and 2007 than they are currently, in two general respects: the currently, in two general respects: the percentage limitation and the number percentage limitation and the number of years for which carry-forwards could of years for which carry-forwards could be used.be used.

In years 2006 and 2007, conservation In years 2006 and 2007, conservation contributions generally qualified for a contributions generally qualified for a 50% deduction rather than a 30% 50% deduction rather than a 30% deduction.deduction.

Also in years 2006 and 2007, deductions Also in years 2006 and 2007, deductions could be carried forward for a maximum could be carried forward for a maximum of 15 years, rather than the maximum of of 15 years, rather than the maximum of 5 years that generally applies to 5 years that generally applies to charitable deductions.charitable deductions.

Bills have been introduced in Bills have been introduced in Congress to make the tax benefits Congress to make the tax benefits that applied in years 2006 and 2007 that applied in years 2006 and 2007 permanent, but we have no way of permanent, but we have no way of knowing whether those will pass. knowing whether those will pass.

But the changes do have some But the changes do have some support from both Republicans and support from both Republicans and Democrats.Democrats.

III. Charitable Contributions of III. Charitable Contributions of Conservation Easements.Conservation Easements.

Do charitable contributions of conservation Do charitable contributions of conservation easements work like other charitable easements work like other charitable contributions? Or are there differences?contributions? Or are there differences?

There are differences, but many of the same There are differences, but many of the same rules apply. rules apply.

A special subsection of the Tax code, 170(h), A special subsection of the Tax code, 170(h), applies to conservation easements.applies to conservation easements.

Generally, a charitable deduction can not be Generally, a charitable deduction can not be taken as a result of a donation of less than a taken as a result of a donation of less than a person’s entire interest in property. person’s entire interest in property.

Conservation contributions, including Conservation contributions, including conservation easements, constitute an conservation easements, constitute an exception to this general rule. exception to this general rule.

In order to qualify for a tax deduction as a In order to qualify for a tax deduction as a conservation contribution, the donation conservation contribution, the donation must meet several requirements.must meet several requirements.

Per reg. 26 C.F.R. 1.170A-14(a), the contribution Per reg. 26 C.F.R. 1.170A-14(a), the contribution must: must:

Constitute a Qualified Real Property Interest. Constitute a Qualified Real Property Interest.

Must be made to a Qualified Organization.Must be made to a Qualified Organization.

Must be made for “exclusively” for a Conservation Must be made for “exclusively” for a Conservation Purpose. Purpose.

Further, the conservation interest must be enforceable in perpetuity, and there must be “donative intent,” i.e., no “quid pro quo” is involved.

The land contributed or placed under easement must be considered “capital property” under other sections of the tax code to generate the tax benefits discussed, meaning that:

A. Property that constitutes the holder’s stock in trade or inventory will not qualify (developers take note); and

B. The property must have been held for at least one year at the time of contribution.

IV. ConclusionIV. Conclusion

Generally, federal and state income Generally, federal and state income tax deductions are available for tax deductions are available for qualified conservation contributions, qualified conservation contributions, including conservation easements.including conservation easements.

The donor will also generally be The donor will also generally be eligible for a South Carolina income eligible for a South Carolina income tax credit on property contributed in tax credit on property contributed in South Carolina.South Carolina.

The South Carolina Income Tax The South Carolina Income Tax Credit is transferable. (But the Credit is transferable. (But the federal and state deductions are federal and state deductions are not).not).

If the donor wishes to retain the fee If the donor wishes to retain the fee simple interest in a property placed simple interest in a property placed under easement, then the donor will under easement, then the donor will be eligible for lower property taxes. be eligible for lower property taxes.