Virginia Land Conservation: Letter to Gov. Tim KaineJune 23, 2006 The Honorable Timothy M. Kaine Re: Senate Bill 5019 and House Bill 5019 Dear Governor Kaine: In my capacity as a Certified Public Accountant, I regularly advise clients on issues related to donations of land and conservation easements under federal and Virginia tax law, and educate other advisors on the issues involved in conservation easements and historic preservation and rehabilitation. The legislative changes proposed by Senate Bill 5019 and House Bill 5019 to Virginia's land conservation program contain provisions that are, in some cases, more restrictive than current federal legislation or are difficult to enforce as written. The following is an analysis of the changes that materially alter the current program. 1. The proposed legislation would reduce the tax credit to 40 percent of the appraised property value and implement an individual property cap of $750,000 for those properties not located in the Chesapeake Bay watershed or Eastern Shore seaside. An overall annual credit allowance would be implemented at $50 million for 2007 and $75 million for each successive year on a first come, first serve basis. Based on information from the Virginia Department of Taxation, as of April 2006, since the inception of the tax credit program, 163,677 acres of conservation property generated $380,353,924 in tax credits. This equates to $2,323.81 in tax credits per acre of land preserved in perpetuity. Based on this per acre value, the caps represented above would protect 21,516 acres in 2007 and 32,275 acres in the successive years at historic values from 2000 through 2005. These values do not take into account future increases in land market value. 3. The current law requires an unconditional donation in perpetuity in Code of Virginia Sec. 58.1-512 (A), (C)(2) and (4). However, the proposed legislation would amend (C)(2) to allow a non-perpetual conveyance of a fee interest in real property to qualify without correcting the requirement in paragraphs (A) and old (C)(4) [renamed (C)(5)]. Definitions of qualified easements in IRC Section 170(h) and the underlying regulations 1.170A-14 address this issue. 4. Requirements for the Department of Taxation to establish guidelines for qualified donations and appraisal standards, and for the Virginia Department of Conservation and Recreation to establish objective criteria for qualified donations, will establish a consistent set of standards for conservation in Virginia. Because the legislation requires the standards incorporate Internal Revenue Code Sec. 170(h), the need to incorporate the first paragraph of 58.1-512(C)(3) is not necessary unless the legislative intent is to de-link from the federal rules and make a more restrictive requirement than under federal tax law. IRC Sec. 170(h) and the related regulations include language that devalues a donation that enhances other property with common ownership. If a developer donates an easement as a condition of rezoning, IRC Sec. 170(h) and the corresponding regulations disallow a deduction. If a developer donates an easement that enhances the value of other property the qualified appraisal must address the change in valuation to the enhanced property and reduce the value of the donation. These issues will be incorporated in the appraisal standards established by the Department of Taxation because they are inherent in IRC Sec. 170(h) and the related regulations. The language in 58.1-512(C)(3) paragraph 1 is also property-specific, not taxpayer-specific. While more documentation is available as a public record in zoning proceedings than under the issues addressed in Item #2, unless development rights are given up by a restrictive deed of easement as part of a zoning application, property owners retain the right to request further density development approval in the future. 5. Language changing the longevity and transferability of the tax credits has positive and negative impacts. By extending the life of the tax credits, the original donor will be able to use more credits against their tax liability, rather than transferring the credits to other parties at a reduced value. However, limiting all transfers to just one occurrence and charging a fee for all transfers would materially impact small donations rather than large donations. In some situations, the donor will gift the tax credits to other family members to keep the full value within one family unit. Under the proposed legislation, these transfers would require a filing fee equal to the lesser of 1 percent or $5000. These gifts did not generate any cash, yet the donor must pay a fee to transfer the credits, which might be construed as an additional gift for federal gift tax purposes, thereby impacting the value of the family gift. Also, the changes to the legislation make transfers from pass-through entities potentially subject to a transfer fee without cash being available to pay the fee, and the language is unclear whether a transfer from a pass-through entity to the owners constitutes the one transfer allowed. One alternative to the proposed legislation would be to only assess the fee on transfers for consideration (sales) and leave transfers from pass-through entities and gifts by the original creator of the tax credits exempt from the fee and the one transfer rule. 6. Under the proposed legislation 58.1-513(B), all governmental and nonprofit entities would be ineligible to transfer the tax credits. Many of the nonprofits in Virginia are not conservation organizations. If they receive land as a gift or bequest, their governing board has a fiduciary duty to manage that asset in a responsible fiscal manner. While an organization may wish to protect the property for conservation purposes, making the decision to devalue the property without receiving the ability to convert the tax credits to cash would not comply with their fiduciary duties. 8. Introduction of Code of Va. Sec. 58.1-512.1(B) regarding the review or appeal process with the tax commissioner or courts of the Commonwealth contains some language that seems in conflict with conservation goals. In the last paragraph, item d) states that the property owner must prove that existing roads serving the property were sufficient to support commercial or residential development. This requirement de-links the state law from the IRC Section 170(h). In situations where rezoning is necessary for a developer to commence a building project, the zoning locality must address access requirements in the zoning application and any necessary proffers from the developer. These costs are addressed in the federal tax code regulations related to a qualified appraisal valuation and will be incorporated in the regulations from the Department of Taxation. The ability of a landowner to obtain an opinion on the existing road conditions from either the zoning locality or the Virginia Department of Transportation without a zoning application is not likely. Most localities will not address a zoning issue on property that will be dedicated, which makes obtaining an opinion from a zoning authority for items a) through d) unlikely as substantiation to support the taxpayer's burden of proof. Current review and appeals rights allow a presentation of facts and circumstances by the taxpayers without assigning a burden of proof responsibility to ensure a fair and impartial process. Please let me know if you need any further information on any of the issues raised in this analysis. The Virginia Society of CPAs (VSCPA) is pleased to offer assistance in the establishment of reasonable and enforceable public policy. Sincerely, Rebecca E. McCoy, CPA LAST UPDATED 6/23/2006
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