Division of Legislative Services > Legislative Record > 2005

House and Senate Finance Land Conservation Tax Credit Subcommittee

June 21, 2005

The House and Senate Finance Land Conservation Tax Credit Subcommittee held its first meeting on June 21 in Richmond in the General Assembly Building. The subcommittee members, all serving on either the House or Senate Finance Committees, are Delegates Lee Ware (chairman), Ben Cline, and Vivian Watts and Senators Walter Stosch, Emmett Hanger (vice chairman), and John Watkins. Delegate Harry Parrish and Senator John Chichester are ex-officio members.


Department of Taxation Perspective

Tax Commissioner Ken Thorson talked about the land conservation tax credit program from the perspective of the Department of Taxation, beginning with its history. The tax credit came about through the Virginia Land Conservation Incentives Act of 1999, which was first effective in 2000. The credit allowed is 50 percent of the fair market value, based on a qualified appraisal, of any interest in land conveyed in perpetuity to a public or private conservation entity. The credit was originally capped at $50,000 for tax year 2000; $75,000 for tax year 2001; and $100,000 per year for tax year 2002 and thereafter. Any unused credit may be carried forward for five years after the first year, limiting the credit to $600,000 for the original taxpayer. No transfer of the credit was provided when the original legislation was enacted.

In 2002, language was added to the statute providing that "[a]ny taxpayer holding a credit under this
article may transfer unused but otherwise allowable credit for use by another taxpayer on Virginia income tax returns." The new language was retroactively effective to January 1, 2002. According to a 2002 Attorney General's opinion, the phrase "unused but otherwise allowable credit" authorized the transfer of the total amount of the tax credit allowed by law, or 50 percent of the fair market value of the donation, which could be more than the $600,000 limit imposed on the original taxpayer donor. Therefore, because there is no limit on the value of property that may be donated, there is no limitation on the total amount of credit that may be transferred.

Since 2000, the first year that credits were available, there have been 504 requests for credits on
income tax returns equaling $241,313,114. The number of credits and credit amounts has grown from 80 in tax year 2000 to 146 in tax year 2004. A total number of 92,876 acres has been designated for conservation easements.

Any donation that exceeds the $600,000 maximum credit amount that an individual taxpayer may claim is known as a "large" donation. In 2003 and 2004, these large donations comprised 75 percent or more of the total credit value applied for on income tax returns.

With regard to transfers of credits, $165 million (77%) of the credit value for easements that were donated in 2002-2004 were transferred, most of which were sold to third parties for less than face value. Generally, credits are sold for 50-80 percent of their face value. Through May 2005, on 3291 tax returns, there have been $61.9 million in land conservation tax credits claimed, leaving $169 million in credits to be carried over or transferred in the future.

Donations of conservation easements are being made by four groups:

  1. Individuals with large estates.
  2. Business entities usingprofessional corporations to create capital for business development.
  3. Speculators brokering structured deals using limited liability companies.
  4. Real estate developers.

The Department of Taxation has lowered some credit amounts on tax returns due to incorrect and inflated appraisals of easements. The Department is currently involved in a court case regarding the valuation of an easement donation and the transfer of credits which exceeded $600,000. The federal government has also started to take a closer look at transactions involving improper deductions for conservation easements and has indicated that promoters, appraisers, and others involved in such transactions may be subject to certain penalties under the Internal Revenue Code (see IRS Notice 2004-41 [June 20, 2004]). During the 2005 Session of the General Assembly, a provision was added to Section 58.1-512 of the Code of Virginia that authorizes the Department of Taxation to disallow appraisals when the appraiser falsely or fraudulently overstates the value of the property.

Natural Resources Perspective by Secretary Tayloe Murphy

Secretary Murphy began his presentation by citing a portion of Article XI of the Constitution of
Virginia which provides that "...it shall be the policy of the Commonwealth to conserve, develop, and
utilize its natural resources, its public lands, and its historical sites and buildings." He continued by describing methods of land conservation-fee simple title and conservation easements-as well as listing the state agencies involved in land conservation. Agencies include the Department of Conservation and Recreation, the Virginia Outdoors Foundation, the Department of Forestry, the Department of Historic Resources, the Department of Agriculture and Consumer Services, and the Department of Game and Inland Fisheries.

According to Secretary Murphy, conservation easements compliment land acquisition and provide benefits to donors as well as to the Commonwealth. Conservation easements can allow donors to
preserve the family farm, attain conservation goals, maintain certain property rights, and receive financial benefits regarding estate taxes and income taxes. The Commonwealth benefits through minimal maintenance costs and, in some instances, additional state tourism. The program does have problems particularly in the overvaluation of easements and, in some cases,
quid pro quo for donations of easements. Solutions are necessary to preserve and restore integrity to the program.

Staff presentation

Mark Vucci, a senior attorney with the Division of Legislative Services, walked the subcommittee through an example of federal, as well as state and local tax preferences that a taxpayer may benefit from for donating a conservation easement. Benefits include federal and state charitable contribution deductions, the Commonwealth's land conservation tax credit, and reduced local real estate taxes (due to the loss in value of the land subject to the easement that cannot be developed).

An additional staff presentation comparing other states' conservation tax credits with Virginia's was on the agenda, however, due to lack of time it will be presented at the next meeting.


The next meeting of the subcommittee will be held in Richmond on August 29, 2005, and will include a public hearing to allow interested parties to speak concerning the conservation tax credit program and to present suggestions for improvement.

A final meeting will be held in November to decide what recommendations the subcommittee will propose to the 2006 General Assembly.

The Hon. Lee Ware

For information, contact:
Joan Putney & David Rosenberg
DLS Staff



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