Can a private landowner who donates a conservation easement to Arizona qualify for the federal tax deduction, given that A.R.S. § 38-511 lets the State cancel any state contract within three years?

Plain-English summary

Conservation easements are a useful but legally fragile tool. A landowner places permanent restrictions on land use to preserve open space, wildlife habitat, agricultural character, or historical features, and donates the easement to a government or qualified charity. Under federal tax law (26 U.S.C. § 170(h)), the donation can generate a substantial charitable contribution deduction, but only if the easement runs "in perpetuity." If the easement can be cancelled later, the perpetuity requirement fails and the deduction is lost.

Arizona's general conflict-of-interest statute, A.R.S. § 38-511, lets the State (or its political subdivisions or any of their departments and agencies) cancel "any contract" within three years if a person significantly involved in the contract on the State's side becomes an employee, agent, or consultant of the other party. That cancellation power, the IRS noticed, made every Arizona conservation easement potentially "conditional" rather than "perpetual," disqualifying donors from the federal deduction.

Representative Steve Montenegro asked the AG to clear up whether § 38-511 actually reaches gratuitous conservation easement deeds at all.

AG Brnovich answered no, and explained the legal fix. The opinion turns on a single threshold question: is a gratuitous conservation easement a "contract" within the meaning of § 38-511? If not, the cancellation provision doesn't apply.

Arizona's contract law (Arizona Supreme Court, following the Restatement (Second) of Contracts) defines a contract as "a bargain in which there is a manifestation of mutual assent to the exchange and a consideration." Consideration is "a performance or return promise that is bargained for in exchange for the promise of the other party" (Turken v. Gordon, 2010). A gratuitous donation, by definition, lacks consideration. The donor gives the easement; the State doesn't promise anything in return.

The opinion confines its analysis to easements that actually are gratuitous, meaning the donor receives nothing of value from the State and the State takes on no affirmative obligations. That matches the typical conservation easement donation pattern, but excludes hybrid arrangements in which the State pays for part of the value or assumes management duties. Those would be contracts subject to § 38-511.

The opinion also notes that deeds can be treated as contractual in narrow contexts (attorney's fees in deed disputes, parol evidence). It distinguishes those applications from the conflict-of-interest statute and reaffirms the long-standing Arizona rule that lack of consideration alone doesn't make a deed inoperative (In re McDonnell's Estate, 1947).

Finally, the opinion looks to the policy of the Uniform Conservation Easement Act, on which Arizona's statute is modeled. The Uniform Act explicitly aims to "fit within federal tax law requirements that the interest be 'in perpetuity' if certain tax benefits are to be derived." Arizona's version (§ 33-272(C)) makes conservation easements perpetual by default. Reading § 38-511 to swallow gratuitous easements would defeat that purpose and chill important donations.

Currency note

This opinion was issued in 2016. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

A.R.S. § 38-511(A) lets Arizona, its political subdivisions, or any of their departments or agencies cancel "any contract" within three years of execution, "without penalty or further obligation," if any person significantly involved in initiating, negotiating, securing, drafting, or creating the contract on the State's side becomes an employee, agent, or consultant of any other party to the contract during the contract's term. The provision is a powerful anti-revolving-door measure aimed at preventing officials from steering contracts to future employers.

The federal charitable contribution rule for conservation easements at 26 U.S.C. § 170(h) requires:

• A "qualified conservation contribution"
• Of a "qualified real property interest"
• To a "qualified organization"
• "Exclusively for conservation purposes"
• With a perpetual restriction on use

The IRS has long enforced the perpetuity requirement strictly. If state law gives anyone (the donor, the donee, or a third party) a route to extinguish the easement, the deduction can be denied. The Arizona § 38-511 cancellation right is exactly the kind of unilateral State termination power that creates this risk.

The opinion distinguishes between consideration that creates a contract and the substance of a deed. It cites:

• Pinetop Lakes Ass'n v. Hatch (App. 1983): an action to enforce a deed restriction "arises out of contract" for attorney's fee statute purposes.
• Valento v. Valento (App. 2010): a deed may be "treated as a contractual agreement" for parol evidence purposes.
• In re McDonnell's Estate (1947): lack of consideration alone does not invalidate a deed.

These cases recognize a deed can be contractual in some sense, but the AG draws the line carefully: § 38-511 requires a mutual exchange to apply, and a gratuitous easement has no exchange.

Common questions

Q: I want to donate a conservation easement on my ranch to Arizona Game and Fish. Will I qualify for the federal deduction?
A: Under this opinion, yes, as long as the donation is truly gratuitous (no consideration flowing back to you, no affirmative obligations on the State). § 38-511 won't apply to cancel the easement, so the perpetuity requirement holds. Confirm with your tax counsel that your specific facts qualify under § 170(h).

Q: What if the State pays me a portion of the easement value?
A: That arrangement would have consideration and would likely be a contract subject to § 38-511. Bargain sales (donation plus partial purchase) are common in the conservation field; talk to a tax attorney about how to structure them so § 38-511's cancellation right doesn't undermine the perpetuity requirement.

Q: What if the easement requires the State to maintain trails or perform management?
A: Affirmative obligations on the State could qualify as consideration and convert the transaction into a contract. The opinion addresses easements that don't impose those obligations. Tailor your easement language carefully.

Q: Does this opinion bind the IRS?
A: No. AG opinions are not binding on federal agencies. The IRS may still scrutinize the state-law foundation of any deduction. But this opinion gives donors and the IRS a clear AG position on Arizona law that strongly supports the perpetuity argument.

Q: What about charitable conservation easements donated to private land trusts (not to the State)?
A: § 38-511 only applies to State contracts. Private land trusts aren't covered, so the cancellation issue doesn't arise. Other federal-deduction requirements still apply.

Citations and references

Statutes and federal materials:

• A.R.S. § 38-511 (contract cancellation)
• A.R.S. §§ 33-271 to -276 (conservation easements)
• 26 U.S.C. § 170(h) (federal charitable deduction)
• 26 C.F.R. § 1.170A-14(b)(2)
• Uniform Conservation Easement Act

Cases:

• Johnson v. Earnhardt's Gilbert Dodge, Inc., 212 Ariz. 381 (2006)
• Turken v. Gordon, 223 Ariz. 342 (2010)
• Schade v. Diethrich, 158 Ariz. 1 (1988)
• Pinetop Lakes Ass'n v. Hatch, 135 Ariz. 196 (App. 1983)
• Valento v. Valento, 225 Ariz. 477 (App. 2010)
• In re McDonnell's Estate, 65 Ariz. 248 (1947)
• May v. Ellis, 208 Ariz. 229 (2004)

Earlier AG opinions:

• Ariz. Att'y Gen. Op. I98-025

Source

• Landing page: https://www.azag.gov/opinions/i16-003-r15-022
• Original PDF: https://www.azag.gov/sites/default/files/2025-06/I16-003.pdf

Original opinion text

To:

Steve B. Montenegro

Arizona House of Representatives

Questions Presented

Does Arizona's conflict of interest statute in Arizona Revised Statute ("A.R.S.") § 38‑511, apply to a private landowner's gratuitous grant by deed of a conservation easement to the State, its political subdivisions or any department or agency of either (collectively, the "State")?

Summary Answer

Arizona Revised Statute § 38-511 does not apply to a private landowner's gratuitous donation of a conservation easement, which does not impose affirmative obligations on the State or require any consideration in exchange for the donation, because such a donation does not qualify as a "contract" within the meaning of A.R.S. § 38-511.

Background

Arizona's conflict of interest statutes, A.R.S. §§ 38-501 to -511, set forth those matters presenting conflicts of interest for public officers and employees. Ariz. Att'y Gen. Op. I98-025. Under A.R.S. § 38-511(A) (the "Cancellation Provision"), the State is permitted to cancel "any contract" within three years of its execution provided certain conditions are met:

The state, its political subdivisions or any department or agency of either may, within three years after its execution, cancel any contract, without penalty or further obligation, made by the state, its political subdivisions, or any of the departments or agencies of either if any person significantly involved in initiating, negotiating, securing, drafting or creating the contract on behalf of the state, its political subdivisions or any of the departments or agencies of either is, at any time while the contract or any extension of the contract is in effect, an employee or agent of any other party to the contract in any capacity or a consultant to any other party of the contract with respect to the subject matter of the contract.

Arizona's statutes permitting and regulating conservation easements are set forth in A.R.S. §§ 33-271 to -276, which are modeled after the Uniform Conservation Easement Act. Under these statutes, a "conservation easement" is defined as "a nonpossessory interest of a holder in real property imposing limitations or affirmative obligations for conservation purposes or to preserve the historical, architectural, archaeological or cultural aspects of real property." A.R.S. § 33-271(1). This Opinion only concerns conservation easements which are gratuitous. As presented in the request for this Opinion, the conservation easements at issue do not impose any affirmative obligations on the State or require any consideration from the State in exchange for the grant of the conservation easement.

Underlying the question presented is a tax issue. The donation of a conservation easement that meets all statutory and regulatory requirements may be claimed as a federal charitable contribution deduction. E.g., 26 U.S.C. § 170(h). To qualify for this deduction, a conservation easement must (among other things) include "a restriction (granted in perpetuity) on the use which may be made of the real property." Id. § 170(h)(2)(C); 26 C.F.R. § 1.170A-14(b)(2).

As recounted in the request for this Opinion, the Internal Revenue Service has taken the position that the State's ability to cancel any contract made by the State within three years of execution applies to all conservation easements. The easement grants are therefore "conditional and not perpetual," and are disqualified from eligibility for a federal income tax deduction. This Opinion does not address the applicability of the federal charitable contribution deduction to conservation easements to the State. Rather, this Opinion analyzes the narrow issue of whether a gratuitous deed of a conservation easement to the State may be subject to the Cancellation Provision.

Analysis

No Arizona court has determined whether the Cancellation Provision in A.R.S. § 38‑511(A) applies to a gratuitous deed of a conservation easement to the State. "Our task in interpreting the meaning of a statute is to fulfill the intent of the legislature that wrote it." State v. Williams, 175 Ariz. 98, 100 (1993). "In determining the legislature's intent, we initially look to the language of the statute itself." Bilke v. State, 206 Ariz. 462, 464, ¶ 11 (2003). If the statute's language is clear, we apply it "unless application of the plain meaning would lead to impossible or absurd results." Id. The threshold question concerning the applicability of the Cancellation Provision to a gratuitous deed of a conservative easement to the State is whether such a grant qualifies as a "contract" within the meaning of the statute. If such a donation is not a "contract," then the Cancellation Provision has no applicability.

The Arizona Supreme Court, adopting the approach taken in the Restatement (Second) of Contracts, has defined a contract as "a bargain in which there is a manifestation of mutual assent to the exchange and a consideration." Johnson v. Earnhardt's Gilbert Dodge, Inc., 212 Ariz. 381, 384, ¶ 10 (2006) (quoting Restatement (Second) of Contracts § 17(1) (1981)). "The term 'consideration' has a settled meaning in contract law. It is a performance or return promise that is bargained for in exchange for the promise of the other party." Turken v. Gordon, 223 Ariz. 342, 349, ¶ 31 (2010) (citing Restatement (Second) of Contracts § 71) (internal quotations and alterations omitted). "In other words, consideration is what one party to a contract obligates itself to do (or to forbear from doing) in return for the promise of the other contracting party." Id.

Here, the gratuitous deed of a conservation easement, which does not impose any affirmative obligations on the State or require any consideration from the State in exchange for the grant of the conservation easement, is not a "contract" within the meaning of the Cancellation Provision. Such a donation is not a contract because, as the issue has been presented, it lacks one of the two requisites for the formation of a contract, namely, consideration. See Schade v. Diethrich, 158 Ariz. 1, 8 (1988) (stating that the two requisites for the making of a contract are "a bargain, consisting of promises exchanged, and consideration").

In concluding that gratuitous conservation easements are not a "contract" subject to the Cancellation Provision, this Opinion notes that a deed may be considered contractual in other contexts, for example, when determining whether an action "arises out of contract" for purposes of awarding attorneys' fees, see Pinetop Lakes Ass'n v. Hatch, 135 Ariz. 196, 198 (App. 1983) (an action to enforce mutual restrictive covenant in a deed "arises out of contract" pursuant to A.R.S. § 12–341.01), or considering whether parole evidence is admissible, Valento v. Valento, 225 Ariz. 477, 483, ¶ 22 (App. 2010) ("a deed may be treated as a contractual agreement" for purposes of the parole evidence rule). This Opinion also does not affect the long standing rule in Arizona that the lack of consideration does not, by itself, render a deed inoperative. See In re McDonnell's Estate, 65 Ariz. 248, 251 (1947) ("[W]e hold that want of consideration by itself is not enough to make [a deed] inoperative."). Rather, it addresses the narrow issue presented by the request and concludes that a gratuitous deed of a conservation easement is not a contract subject to cancellation under A.R.S. § 38-511(A).

This interpretation, that the Cancellation Provision does not apply to a gratuitous deed of a conservation easement, is consistent with the purpose of Arizona's conservation easement statutes. As set forth in its prefatory notes, the Uniform Conservation Easement Act (the "Uniform Act") "maximizes the freedom of the creators of the transaction to impose restrictions on the use of land and improvements in order to protect them, and it allows a similar latitude to impose affirmative duties for the same purposes." Uniform Act, Refs & Annos. In furtherance of this objective, the Uniform Act enables "the structuring of transactions so as to achieve tax benefits which may be available under the Internal Revenue Code." Id. Accordingly, Arizona's conservation easement statutes expressly provide (consistent with the Uniform Act) that "a conservation easement is unlimited in duration unless the instrument creating it otherwise provides." A.R.S. § 33-272(C) (emphasis added). This language was specifically included, not only to provide parties latitude consistent with the preservation purposes of the Uniform Act, but also to enable parties "to fit within federal tax law requirements that the interest be 'in perpetuity' if certain tax benefits are to be derived." Uniform Act § 2, cmt.

But, if every conservation easement, even if gratuitously granted, is considered a "contract" subject to cancellation under A.R.S. § 38-511(A), then no conservation easement deeded to the State (including its political subdivisions or any department or agency of either) would ever qualify for tax deductions under the requirements of federal tax law as interpreted by the Internal Revenue Service. Such an outcome would thwart an express objective of the Uniform Act to enable parties "to fit within federal tax law requirements," potentially chilling important donations of conservation easements for the public good.

Conclusion

Arizona Revised Statue § 38-511 does not apply to a private landowner's gratuitous donation of a conservation easement, which does not impose affirmative obligations on the State or require any consideration in exchange for the donation, because such a donation does not qualify as a "contract" within the meaning of A.R.S. § 38-511.

Mark Brnovich

Attorney General

When "a statute is based on a uniform act, we assume that the legislature intended to adopt the construction placed on the act by its drafters, and commentary to such a uniform act is highly persuasive." May v. Ellis, 208 Ariz. 229, 232 ¶ 12 (2004) (internal quotations and alterations deleted).