Qualifications for a Conservation Easement
When a landowner donates a qualified real property interest exclusively for conservation purposes made in perpetuity, it is considered a "qualified conservation contribution." This lowers the property's value for federal tax purposes and reduces estate tax liability.
Typically, if a donor gives less than their entire interest in a property, they can't claim a charitable contribution deduction. However, there is an exception for the contribution of real property, including an easement, for conservation purposes to a charitable organization, as long as the purposes are protected forever. In some cases, the easement may no longer be practical for conservation purposes, and it might have to be removed.
If this happens, a judicial proceeding is the only way to extinguish the perpetual conservation restriction, but only if unexpected changes to the property's conditions have made it impossible or impractical to continue using the property for conservation purposes. The Treasury regulation regarding easement extinguishments is found in Section 1.170A-14(g) of the Internal Revenue Code. This Section provides guidance on the tax treatment of charitable contributions of easements and the effects of extinguishing easements that were previously donated for conservation purposes.
Of significant note, the regulations regarding the extinguishment of conservation restrictions require the donor to agree, at the time of the donation, that the gift of the perpetual conservation restriction creates a property right vested in the donee with a fair market value (“FMV”) that is at least equal to the proportionate value of the restriction in relation to the whole property's value at the time of the donation (referred to as the "proportionality requirement"). The donee's proportionate value of the property right must remain constant, and as such, the donee must be entitled to receive a portion of the proceeds from the extinguishment that is at least equal to the proportionate value of the restriction. Thus, the donee must have a right to receive the extinguishment proceeds multiplied by the following fraction: the restriction’s value at the time of the gift divided by the whole property’s value at the time of the gift.
The regulation holds that a tax deduction from a conservation easement would be blocked if the easement deed reserves for the donor the value of post-donation property improvements in its specification of how proceeds from selling the property should be divided between the donor and recipient if a judge later extinguishes the easement. The regulation spurred legal challenges from taxpayers, which made their way past U.S. Tax Court and through to the appellate courts.