1. TAX BENEFITS FROM CONSERVATION EASEMENTS (Federal and South Carolina) Cary H. Hall, Jr. Wyche, Burgess, Freeman & Parham, P.A. Greenville, SC Copyright 2007 Wyche, Burgess, Freeman & Parham, P.A. All rights reserved

2. Summary of Tax Benefits Income Tax - Deduction for value of gift, Federal and South Carolina and South Carolina - South Carolina Income Tax Credit Property Tax (South Carolina) - Assessor must take easement into account account - Agricultural classification (now repealed) repealed) Estate Tax - Conservation Easement reduces taxable value - Section 2031 Estate Tax exclusion

3. Income Tax Benefits to Mr. Donor Donor owns farm in South Carolina which has value of $2 million Donor owns farm in South Carolina which has value of $2 million Donor gives a Conservation Easement over farm which meets all the requirements for Federal and South Carolina income tax purposes Donor gives a Conservation Easement over farm which meets all the requirements for Federal and South Carolina income tax purposes Qualified appraiser states that value of farm, subject to Conservation Easement is $1 million Qualified appraiser states that value of farm, subject to Conservation Easement is $1 million Donor is entitled to $1 million income tax deduction for both Federal and South Carolina income tax purposes Donor is entitled to $1 million income tax deduction for both Federal and South Carolina income tax purposes

4. Value of Income Tax Deductions The Conservation Easement income tax deduction is claimed as an itemized deduction on Mr. Donor’s income tax return. The Conservation Easement income tax deduction is claimed as an itemized deduction on Mr. Donor’s income tax return. Donor* has 2007 adjusted gross income of $200,000. Donor* has 2007 adjusted gross income of $200,000. Without the Conservation Easement Deduction, tax liability is: Without the Conservation Easement Deduction, tax liability is: Federal Income Tax $40,500 South Carolina Tax $12,400 Total $52,900 * Married, filing jointly; standard deduction

5. Deduction Limits A.Deduction for Conservation Easement may only be used to offset a percentage of Donor’s adjusted gross income, as follows : Before 2006 – 30% of Adjusted Gross Income 2006 & 2007 – 50%, if Donor is not a farmer 100%, if Donor is a farmer 100%, if Donor is a farmer

6. Value of Income Tax Deduction in Year of Gift Before 2006 Deduction limited to 30% of 200,000 = $60,000 Tax Savings Federal Taxes reduced to $26,700 South Carolina Taxes reduced to $8,950 Tax Savings Federal $40,500 - $26,700 = $13,800 South Carolina $12,400 - $ 8,900 = $ 3,400 South Carolina $12,400 - $ 8,900 = $ 3,400 Total Savings$17,250 2006 and 2007 NonFarmer – Deduction limited to 50% of $200,000 = $100,000 Federal Tax reduced to $16,415 South Carolina reduced to $ 6,155 Tax Savings Federal $40,500 - $16,415 = $24,085 South Carolina $12,400 - $ 6,155 = $ 6,245 South Carolina $12,400 - $ 6,155 = $ 6,245 Total Savings $30,330 Farmer – Deduction limited to 100% of $200,000 = $200,000 Federal Taxes reduced to $ 0 South Carolina reduced to $ 0_$52,900 [Phase Out of Itemized Deduction Ignored]

7. Value of Income Tax Deduction in Carry Over Years Prior to 2006, Carry Forward is 5 years Initial Year 5 Year Carry Forward Total Initial Year 5 Year Carry Forward Total Value $17,250 5 x $17,250 = $86,250 $103,500 (Deduction used is $60,000 x 6 = $360,000; the rest of the $1 million deduction is lost.) 2006 & 2007 Carry Forward is 15 Years Initial Year Carry Forward Total Tax Savings Savings Benefit Initial Year Carry Forward Total Tax Savings Savings Benefit Value $30,300 9 x $30,300 = $303,000

8. SC Income Tax Credit Donor is entitled to a credit against SC Income Tax Liability equal to 25% of the federal deduction amount but not to exceed $250 per acre – and the total credit which can be claimed in any year is limited to $52,500. The credit may be sold, with the prior approval of SC Department of Revenue, but watch out for the following issues: - does the Donor recognize gain on the sale? - if the Donor claims no deduction, is Donor entitled to a credit?

9. Property Tax Benefits from Conservation Easement Gift SC law requires Tax Assessors to take the easement into account in determining property tax value. SC Code Section 27-8-70 Mr. Donor therefore should see a 50% reduction in the assessed value of farm, for property tax purposes. Formerly, all property subject to a conservation easement was classified as “agricultural” and therefore subject to 4% assessment ratio rather than 6%. Current law provides that property subject to a conservation easement is classified as agricultural only if it meets the statutory requirements (land used for growth of timber or other agricultural products).

10. Estate Tax Benefits from Conservation Easement Gift The Conservation Easement reduces the estate tax value of the property. The Conservation Easement reduces the estate tax value of the property. Section 2031(c) Exclusion Up to 40% of the value of land subject to a qualified conservation easement may be excluded from the taxable estate, subject to a $500,000 limitation

11. Section 2031(c) Exclusion The 40% exclusion percentage is reduced if the value of the conservation easement is less than 30% of the value of the property. The exclusion is not available for property subject to acquisition indebtedness. The exclusion does not apply to the value of any development rights retained by the Donor. To be a “qualified conservation easement” the land must have been owned by decedent at least 3 years and conservation easement can permit only de minimis commercial recreational use.

12. Combined Tax Savings from Gift of a Conservation Easement Assume: Real Estate has value of $1 million. Conservation Easement reduces value of real estate to $500,000, so the “value” of the easement is $500,000 Federal & South Carolina Income Tax Savings $30,300 x 5 years $151,500 South Carolina Tax Credit$ 52,500 Federal Estate Tax Savings 45% x $500,000 - $225,000 Plus §2031(c) exclusion 45% x $200,000 - $ 90,000 Plus §2031(c) exclusion 45% x $200,000 - $ 90,000 Total Savings$519,000

13. Conservation Easements ACTUAL CASES Cedar Rock Limited Partnership In 1987, eleven individuals formed this partnership to acquire a tract of 535 acres of undeveloped land in northern Greenville County, adjoining Jones Gap Park. In 1987, eleven individuals formed this partnership to acquire a tract of 535 acres of undeveloped land in northern Greenville County, adjoining Jones Gap Park. In 1993, the partnership granted a conservation easement to The Nature Conservancy over 485 acres of this tract. On the 50 acres retained by the Partnership outside of the easement area, approximately 35 house sites were platted. Each of the eleven partners took a lot. A request for a Private Letter Ruling was submitted to the IRS, which ruled that the easement was a “qualified conservation easement” because 1) it resulted in significant protection of wildlife habitat 2) it contributes to the ecological viability of Jones Gap Park

14. FAIRVIEW FARMS In 2000, Madelon Wallace and Herbert (Bud) Myers organized an effort to acquire the 1,200 acre property known as Fairview Farms and restrict it in order to preserve its scenic and historic character. Twelve individuals contributed capital for this effort, through a limited liability company called “Greenspace of Fairview”. In 2001, a conservation easement was imposed on the entire 1,200 acre tract, permitting eight residential tracts and several “agricultural” tracts but preserving the great majority of the property as open greenspace. Upstate Forever holds the easement. The Internal Revenue Service ruled that the easement was a “qualified conservation contribution” because 1) Open space was preserved for the scenic enjoyment of the public 2) Significant wildlife and plant life habitation was preserved 3) A revolutionary war battlefield was protected

15. THE GLASS CASE Glass v. Commissioner of Internal Revenue 124 T.C. 258; affirmed 471 F3d 698 (2006) IRS challenged the deductibility of conservation easement gift over a tract consisting of approximately 400 feet of lakeshore on Lake Michigan. The taxpayer prevailed. However, the taxpayer prevailed only because of uncontested testimony that the tract was a nesting site for eagles and thus was a “significant” wildlife habitat. The taxpayer clearly would have lost on the issue of open space; the Court would not have ruled that a significant public benefit from scenic preservation resulted from the easement.

16. THE TURNER CASE James D. and Beverly Turner v. Commissioner of Internal Revenue, 126 T.C. 16 (2006) 126 T.C. 16 (2006) IRS challenged deductibility of Conservation Easement gift. Easement imposed on 29 acres near Mount Vernon, Va., near the George Washington “grist mill”. - Donor retained right to build 30 residences Held: Preservation of open space requirement – not met; the “view” was not protected. Historic preservation requirement not met; nothing historic was protected.