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Exhibit C

Tax Law and Transaction Examples

Current Law

Internal Revenue Code section 170 provides for an income tax deduction for a "qualified conservation contribution." The deduction generally is based on the difference in the value of the property before and after the conservation restriction is imposed. The deduction is subject to a percentage of income limitation in the year the contribution is made, with any unused deduction being carried forward for an additional 5 years. The donor's basis in the remaining property is reduced proportionately.

Internal Revenue Code section 2031(c) provides for an estate tax exclusion for property owned by the decedent that is subject to a qualified conservation easement. Up to 40% of the value of the property can be excluded from the gross estate, subject to a maximum limitation. For 2000, the maximum exclusion is $300,000, which will increase to $400,000 in 2001, and $500,000 in 2002.

Reasons for Change

Many large landholdings are used for farming or ranching purposes. An ever increasing number of farmers and ranchers are succumbing to economic pressures to develop their property. Open spaces and other natural resources are being destroyed in the process. Due to the often marginal economics of their operations, farmers, ranchers and other landowners generally cannot benefit from additional income tax deductions, which is the only income tax incentive current law provides for the contribution of a conservation easement.

The proposed change in the law would establish an income tax credit as an inducement for the imposition of conservation easements.

The proposed change would provide a nonrefundable tax credit on funds used for the purchase of conservation easements. The tax credit would enable charitable organizations to raise funds that they would use to purchase easements from farmers and ranchers. Once the easements were purchased, financial contributors to those efforts would receive the tax credit for their capital contributions, similar to the way that low income housing currently is subsidized by tax credits. The proposed change would serve the dual purposes of conserving open space while keeping it in private ownership and providing economic relief to landowners, including especially farmers and ranchers.


The Act provides that a charity or other qualified entity controlled by a charity is eligible for the conservation credit. A charity could use the credit to offset its unrelated business income tax. Alternatively, the credit could flow through to the individual partners of a partnership and be used by them to offset their income tax liabilities. The amount of the credit is limited to the sum of (i) the costs of acquiring the conservation easements, (ii) transaction expenses of up to 2% of the purchase prices, and (iii) funds set aside to be used to enforce and monitor the easements acquired. The Act incorporates the definitions used in Code section 170(h), which remains unaffected. The estate tax provisions of section 2031(c), which apply only to contributions of conservation easements, likewise are not affected by the Act.

The Act provides that landowners who sell conservation easements would be able to allocate in full their adjusted basis in the property to which the easement relates. They would recognize a capital gain to the extent that proceeds of the sale exceeded their basis. The Act also provides for a corresponding adjustment to the basis of the remaining property.

The Act provides that purchases of conservation easements would not be subject to the passive loss rules, which would permit charities to form limited partnerships with private investors in order to raise the capital necessary to acquire the conservation easements.

The Act would be effective for taxable years beginning on or after January 1,2002.


Landowner owns property worth $10,000,000 at its highest and best use. His basis is $1,000,000. Landowner imposes a conservation easement limiting development. The property is worth only $2,000,000 subject to the conservation easement. Landowner has no taxable income in the year of donation.

Under current law, Landowner would be entitled to an income tax deduction of $8,000,000, subject to a 30% of adjusted gross income limitation. Landowner would have a total of 6 years in which to use the deduction. Unless Landowner's income increased dramatically, it is unlikely that his contribution would provide any income tax benefit.

At Landowner's death (in 2002), the property would be includible in his estate at its reduced value of $2,000,000. If Landowner's executor so elected, his estate could exclude up to 40% of that value, subject to the $500,000 ceiling. The election could save up to $250,000 in estate taxes at Landowner's death. Landowner's heirs' basis in the property would be $1,750,000, which would be relevant if the heirs were forced to sell the property to pay estate taxes.

A more likely scenario is that, instead of granting a conservation easement, Landowner would sell his property for $10,000,000, pay $1,800,000 in capital gains tax, and net $8,200,000 on the transaction. At Landowner's death, his heirs would have $8,200,000 in liquid assets to pay the $4,100,000 in estate taxes. If Landowner did not grant the easement and did not sell the property, at his death his heirs would be faced with a potential $5,000,000 estate tax liability, which could force them to sell the property (unless the requirements for special use valuation and deferred tax payment could be met).

If the Act were in effect, Landowner might instead elect to sell a conservation easement to a charity. As in the preceding example, the imposition of the easement would reduce the value of the property by $8,000,000, so presumably that would be Landowner's sales price. His basis would be applied to the sale, resulting in a $7,000,000 capital gain. Landowner would pay $1,400,000 in capital gains tax. His basis in the remaining property would be reduced to zero. Landowner would net $6,600,000 on the transaction and would retain his $2,000,000 land. As a result, Landowner would have assets of $8,600,000, or $400,000 more than if he had sold the entire property. At Landowner's death, his estate would include the reduced value of the land (i.e., $2,000,000) plus $6,600,000 in liquid assets with which to pay the estate tax. Landowner's heirs' basis in the property would be $2,000,000, but there would be no pressing need to sell it given the liquidity provided by the prior transaction.