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.
PRESENTATIONS
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:
- Individuals with
large estates.
- Business entities
usingprofessional corporations to create capital for business development.
- Speculators brokering
structured deals using limited liability companies.
- 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.
FUTURE MEETINGS
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.
Chairman:
The Hon. Lee Ware
For information,
contact:
Joan Putney &
David Rosenberg
DLS Staff
Website:
http://dls.state.va.us/landconserv.htm
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