Does a water company's discounted (bargain) sale of open space land and conservation easements to the State and a nonprofit qualify for the open space land donation tax credit, and how is 'use value' measured given the land's restrictions?

Plain-English summary

A water company agreed to sell Class II and Class III land, and conservation easements over Class I land, to the State of Connecticut and a nonprofit land conservation organization — at a discounted price (a "bargain sale"). The company would keep the rights it needs to run its public water-supply business and would restrict recreational use to protect the water supply. It asked whether the discounted sale earns the corporation business tax credit for donating open space land, and how to measure the land's "use value" given all the restrictions.

DRS ruled for the credit, on two points:

1. The bargain sale qualifies. Conn. Gen. Stat. § 12-217dd(b) gives a credit equal to 50% of a "donation of open space land." The statute (§ 12-217dd(a)) defines that donation to include "the value of any discount of the sale price" in a sale of land (or an interest in land) to the state, a political subdivision, or a nonprofit land conservation organization, where the land is permanently preserved as protected open space. Because the buyers pay a Discounted Sales Price below the Market Value Sales Price, and the land is permanently dedicated to open space or recreational purposes, the sale qualifies. All three land classes are "open space land" under § 12-107b(c) (they protect natural streams and the water supply, among the listed qualifying purposes).

2. "Use value" is measured net of the restrictions. The credit is based on the land's "use value" = fair market value at its highest and best use. DRS held that "highest and best use" must reflect the "prevailing conditions" — here, the statutory restrictions on Class I/II/III land and the rights the company retains to keep supplying water (including limiting public recreation). So use value isn't the unrestricted appraised value; it's that value reduced by those prevailing conditions — which, on these facts, equals the Market Value Sales Price (already set taking the retained rights into account). The donation is then the Market Value Sales Price minus the Discounted Sales Price, and the credit is 50% of that donation.

What this means for you

Water utilities and landowners making conservation transfers

You don't have to give land away outright to earn the credit — a discounted sale (bargain sale) to the State, a subdivision, or a qualifying nonprofit land conservation organization counts, so long as the land is permanently protected as open space. The credit is 50% of the discount (measured through "use value"), not of the full property value.

Conservation organizations and their partners

Structuring a purchase below market value lets the seller claim the open space credit on the foregone value. Confirm the land meets the § 12-107b(c) open-space definition and that the deed/easement permanently dedicates it to open space or recreational purposes.

Corporate tax professionals and tax attorneys

The credit base is "use value" at highest and best use, adjusted for prevailing conditions — statutory land-use restrictions and retained business rights reduce that value. Compute the donation as Market Value Sales Price − Discounted Sales Price, then take 50% (§ 12-217dd). Where the seller retains substantial rights (as a water company does), the retained-rights adjustment materially affects the credit.

Common questions

Q: Does a discounted sale (not an outright gift) qualify for the open space land credit?
A: Yes. Section 12-217dd(a) defines a "donation of open space land" to include the value of the discount in a sale to the State, a subdivision, or a nonprofit land conservation organization, if the land is permanently preserved as protected open space.

Q: How big is the credit?
A: 50% of the donation — here, 50% of the Market Value Sales Price minus the Discounted Sales Price.

Q: What is "use value," and do the land restrictions reduce it?
A: Use value is the fair market value at the land's highest and best use, and it is measured taking prevailing conditions into account — so statutory restrictions and the company's retained water-supply rights reduce it.

Q: Do conservation easements (not just fee land) count?
A: Yes. The ruling applied the credit to Class I conservation easements as well as fee sales of Class II/III land, all permanently dedicated to open space.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-217dd (corporation business tax credit for the donation of open space land — subsection (a) defines "donation of open space land" and "use value"; subsection (b) sets the 50% credit based on use value)
• Conn. Gen. Stat. § 12-107b(c) (definition of "open space land")
• Conn. Gen. Stat. § 25-32a (definition of a "water company") and § 25-37c(a)/(b)/(c) (definitions of Class I, Class II, and Class III land)

Legislative history:

• 2000 Conn. Pub. Acts 203, § 8 (added the "use value" definition to § 12-217dd); 43 H.R. Proc., Pt. 17, 2000 Sess. (Remarks of Rep. Richard O. Belden on "reasonable highest and best use depending upon the prevailing conditions")

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2002-2

Original ruling text

Ruling 2002-2, Corporation Business Tax / Tax Credit for Donation of Open Space Land

FACTS:

Pursuant to a contract, a water company, as defined in Conn. Gen. Stat. §25-32a (hereinafter “the Company”), will sell Class II and Class III land, as defined in Conn. Gen. Stat.   §25-37c(b) and (c), and will sell conservation easements over Class I land, as defined in Conn. Gen. Stat. §25-37c(a), to the State of Connecticut (hereinafter “the State”) and a nonprofit land conservation organization (hereinafter “the Organization”).   The sales contract provides that the Company will retain rights to conduct certain activities on the land for purposes of operating its business.   These activities may only be conducted to the extent it is necessary or advisable, in the Company’s discretion, to fulfill its obligation to conduct the Company’s public utility operations.   In addition, the Company must restrict the recreational use of the property in order to protect the public water supply and the land will also be subject to certain statutory restrictions for as long as it is being used by a water company to provide water to the public.

The following agreements were made by the Company, the State and the Organization:   (a) that in reaching the appraised values the two appraisers hired by the Company and the State respectively should not take into consideration the conservation easements or the statutory restrictions on the use of the land for as long as the Company, or any other water company, continues its business of supplying water to the public; (b) that a value for the land and the conservation easements that takes into consideration the rights retained by the Company (hereinafter the “Market Value Sales Price”) should be established; and (c) that the Company will discount the price that the State and the Organization must pay for the land and conservation easements, resulting in a “Discounted Sales Price.”

ISSUES:

Whether the Company will be entitled to corporation business tax credits under Conn. Gen. Stat. §12-217dd for the discount sale of Class II and Class III land and for the discount sale of conservation easements over Class I land to the State and the Organization, where all three classes of land protect natural streams and water supply or satisfy other requirements of the statutory definition of “open space land,” and where the deeds for the Class II and Class III land will ensure that the land will be permanently dedicated to “Open Space or Recreational Purposes” and the instruments creating the conservation easements on the Class I land will be subject to such restrictions as are required to ensure that the Class I land will be permanently dedicated to “Open Space or Recreational Purposes.”

Whether, in calculating the amount of the available corporation business tax credit,  the term “use value” should take into consideration the prevailing conditions of the land, which include the statutory restrictions placed on the land because of its classification as Class I, Class II, and Class III land and the rights retained by the Company to continue to use the land as necessary to provide water to the public.

RULING:

The Company will be entitled to corporation business tax credits under Conn. Gen. Stat. §12-217dd, since the State and the Organization are paying a Discounted Sales Price for the Class II and Class III land and for the conservation easements over Class I land, where all three classes of land protect natural streams and water supply or satisfy other requirements of the statutory definition of “open space land,” and where the deeds for the Class II and Class III land will ensure that the land will be permanently dedicated to “Open Space or Recreational Purposes” and the instruments creating the conservation easements on the Class I land will be subject to such restrictions as are required to ensure that the Class I land will be permanently dedicated to “Open Space or Recreational Purposes.”

For purposes of calculating the donation of open space land credit under Conn. Gen. Stat. §12-217dd, the term “use value” means the fair market value of the land at its highest and best use taking into consideration the prevailing conditions of the land, which include the statutory restrictions placed on the land because of its classification as Class I, Class II, and Class III land and the rights retained by the Company to continue to use the land as necessary to provide water to the public.

DISCUSSION:

Conn. Gen. Stat. §12-107b(c) defines “open space land” as:

any area of land, including forest land, land designated as wetland under section 22a-30 and not excluding farm land, the preservation or restriction of the use of which would  (1) maintain and enhance the conservation of natural or scenic resources, (2) protect natural streams or water supply, (3) promote conservation of soils, wetlands, beaches or tidal marshes, (4) enhance the value to the public of abutting or neighboring parks, forests, wildlife preserves, nature reservations or sanctuaries or other open spaces, (5) enhance public recreation opportunities, (6) preserve historic sites or (7) promote orderly urban or suburban development. . . .

Under this definition all three classes of land qualify as open space land, because the land protects natural streams and water supply or satisfies other requirements of the statutory definition of open space land.

Conn. Gen. Stat. §12-217dd(b) provides a credit against the corporation business tax in an amount equal to 50% of any “donation of open space land.”  A “donation of open space land” is defined Conn. Gen. Stat. §12-217dd(a) as:

the value of any land conveyed without financial consideration, or the value of any discount of the sale price in any sale of land or interest in land , to the state, a political subdivision of the state or to any nonprofit land conservation organization where such land is to be permanently preserved as protected open space

(Emphasis added.)

The Discounted Sales Price that will be paid by the State and the Organization to the Company will be less than the Market Value Sales Price and thus the sales will qualify as a donation of open space land.  Additionally, pursuant to the terms of the contract, the deeds for the Class II and Class III land will ensure that the property will be permanently dedicated to “Open Space or Recreational Purposes,” and the conservation easements relating to the Class I land will be subject to the restrictions required to ensure that the Class I land will be permanently dedicated to “Open Space or Recreational Purposes.”  Accordingly, the Company is entitled to a corporation business tax credit under Conn. Gen. Stat. §12-217dd for the discounted sale of open space land and conservation easements.

The remaining issue to be addressed is the calculation of the corporation business tax credit.  Conn. Gen. Stat. §12-217dd(b) provides that in calculating the credit the amount of the donation shall be based upon the “use value” of the donated open space land.  “Use value” is defined in the statute as “the fair market value of land at its highest and best use, as determined by a certified real estate appraiser.”  The legislative history of 2000 Conn. Pub. Acts 203, §8, which added the definition of “use value” to Conn. Gen. Stat. §12-217dd, indicates that the intent of the definition was to compensate the owner of the land for parting with the value of the land for development purposes.  However, in discussing the proposal to amend the statute to include the definition of “use value,” Rep. Richard O. Belden explained “that what we’re really. . .  talking about here is reasonable highest [and] best use depending upon the prevailing conditions.”  43 H.R. Proc., Pt. 17, 2000 Sess., pp. 5622-3.

Here, the Company is not granting a fee simple interest in the Class I land, but only conservation easements. Also, the statutory restrictions place limitations on the use of the land, and pursuant to the contract the Company will continue to be able to use the Class I and Class II land as necessary to conduct its business, which includes the right to limit the public’s recreational use of the land to the extent that such use may impair the Company’s ability to conduct its business of supplying potable water to the public.  In light of these facts, the “use value” of the land is not the appraised value of the land at its highest and best use, but is that value reduced by the “prevailing conditions” which, under these facts, include the statutory restrictions on the three classes of land and the rights that are being retained by the Company.

Accordingly, for purposes of calculating the donation of open space land credit, the Company will be entitled to receive a corporation business tax credit equal to the value of the real estate at its highest and best use, reduced by the value of the prevailing conditions, which include the statutory restrictions on the use of the land and the rights retained by the Company.  In this case, that amount is the Market Value Sales Price.  The Discounted Sales Price paid by the State and the Organization to the Company will then be subtracted from the Market Value Sales Price to determine the value of the donation.  The value of the donation will be multiplied by 50% in order to determine the amount of the tax credit that is available to the Company.

LEGAL DIVISION

MARCH 26, 2002