Land Preservation Provides Estate Tax Benefits: Section 2031(c)

Abstract

I. INTRODUCTION In 1997, Congress created new estate tax benefits for landowners(1) who preserve land with a easement. The new benefits allow for as much as a $500,000 exclusion from estate taxes. While private citizens and their beneficiaries will benefit from reduced estate taxes, the public stands to benefit the most from the new tax provision, because it provides incentive to preserve land for future generations. The 1997 Taxpayer Relief Act(2) added Section 2031(c)(3) to the Internal Revenue Code (I.R.C.), providing for an estate tax exclusion for landowners who preserve their land with a easement. A conservation easement is a legal agreement a property owner makes to restrict the type and amount of development that may take place on his or her property. Each easement's restrictions are tailored to the particular property and to the interests of the individual owner.(4) This article first briefly provides an overview of easements and their previous tax treatment. The article then focuses on a new section of the tax code, I.R.C. [sections] 2031(c), its requirements and its administration. II. CONSERVATION EASEMENT OVERVIEW easements are private land use restrictions designed to preserve open space and other environmentally significant resources.(5) Land preservation occurs when landowners voluntarily agree to place restrictions on their land, in the form of easements. Such easements are then donated to a governmental agency, foundation, or I.R.C. [sections] 501(c)(3) organization.(6) Once a landowner donates the right to use the land in a certain manner, he or she has given up one of the proverbial sticks in his or her bundle of property rights. The donee organization then holds that stick in perpetuity. State statutes and the Uniform Conservation Easement Act have overcome traditional common law problems with easements (e.g. ownership, enforcement, privity).(7) Because these common law impediments have been overcome, the benefits of easements over traditional land preservation methods are numerous. Several distinguishing characteristics make easements improvements over traditional government land preservation. Conservation easements: (1) involve no government regulation; (2) are immune from the politics of open space legislation; (3) do not constitute a taking under the Fifth Amendment; (4) do not require fee simple purchase; (5) do not require maintenance or administration (e.g. parks); (6) are voluntary; (7) meet the needs of the private landowner; and (8) allow the landowner to retain ownership and control of the property.(8) The primary cost to the government is decreased tax revenue, from reduced income, estate, gift, or property taxes.(9) In some circumstances, placing a easement on property provides for significant tax benefits. This article focuses on the charitable income tax deduction because it provides the foundation for exclusion under I.R.C. [sections] 2031(c). The article also focuses on the estate tax provisions because it is these provisions of the tax code which have been changed to include the new I.R.C. [sections] 2031(c) exclusion. While an owner may also receive real property tax(10) and gift tax benefits(11) for having a easement placed on his or her property,(12) these tax benefits will not be discussed because they are not relevant to the new I.R.C. [sections] 2031(c) estate tax exclusion. A. Charitable Income Tax Deduction Beginning in 1976, Congress enacted several tax provisions which allow a taxpayer to receive a charitable income tax deduction for donating a partial interest of land.(13) These provisions culminated in regulations issued by the Treasury Department in 1994.(14) The regulations provide valuable guidance in receiving a charitable deduction for those donating easements. …