Did a second conservation deed create a new easement, or merely reform the original deed so the corrected Land Preservation Tax Credit application could proceed?

Subject

Reformed conservation deed preserved the original easement donation

Plain-English summary

Virginia held that the second deed reformed the original conservation easement rather than creating a new donation. It reaffirmed the gift, better stated its conservation purposes, added restrictions, and reasserted the original restrictions.

That distinction preserved the original conveyance as the relevant donation. The corrected appraisal properly compared the property's value before the original deed with its value after the restrictions stated in the reformed deed.

Result: the third application was returned to the Land Preservation Tax Credit Unit for final review and valuation, after which the credit would be issued.

What this means for you

• Draft corrective language to reaffirm and reform the original enforceable easement.
• Distinguish curing defects from making a new conservation donation.
• Use a qualified appraisal with the legally correct valuation date and before-and-after method.
• Expect the Department to review the final credit value even after resolving the deed issue.

Common questions

Q: Did the 2012 deed reset the donation date?

A: No. Virginia treated it as a reformation of the original deed.

Q: Was the credit amount finally fixed in this ruling?

A: No. The Credit Unit still had to determine the correct donation value.

Citations and references

• Va. Code § 58.1-512.
• IRC § 170(h).
• Treas. Reg. §§ 1.170A-13(c)(3)(ii) and 1.170A-14.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-120

Original ruling text

June 23, 2015

Re: § 581-1821 Application: Land Preservation Tax Credit

Dear *:

This will reply to your letter in which you contest the Department's adjustments to the Land Preservation Tax Credit (the "Credit") application submitted by * (the "Taxpayers"). I apologize for the delay in responding to your appeal.

FACTS

In December 2007, the Taxpayers conveyed and recorded a deed of easement (the "Original Deed") on a parcel of land to the * (the "County"). Pursuant to the conveyance of the easement, the Taxpayers registered their donation with the Department for purposes of the Credit. The initial application for Credit was denied on the basis that the easement did not meet the requirements for a conservation easement and the appraisal was not a qualified appraisal. The Department informed the Taxpayer that it would allow the Taxpayer to cure the defects in the Original Deed and original appraisal.

The Taxpayers submitted a second application for the Credit using the same appraisal that was attached to the initial application. This application was denied because it did not include a qualified appraisal.

The Taxpayers submitted a third application that contained another deed of easement (the "Second Deed") that was filed and recorded in November 2012. They also provided a new appraisal with the application that purportedly valued the easement as of the donation date. Based on the additional changes, the Second Deed was found to be a new easement. Under this finding, the second appraisal failed to value the new easement and the Taxpayer's application was denied

The Taxpayers appeal the Department's denial of issuing the Credit, contending that the Second Deed and second appraisal met the requirements for the donation of a conservation easement.

DETERMINATION

Credit Application

Virginia Code § 58.1-512 provides a credit for 40% of the fair market value of real property or an interest in real property donated to an eligible charitable organization or instrumentality of the Commonwealth for qualifying land conservation purposes. In order to qualify for the credit, a donation of an interest in real property must qualify as a charitable deduction under Internal Revenue Code (IRC) § 170(h).

Treasury Regulation § 1.170 et seq . governs charitable contributions. Under Treas. Reg. § 1.170A-13(c)(3)(ii), a qualified appraisal must include the appraised fair market value of the property on the date of the contribution . [Emphasis added]. Generally, the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction. See Treas. Reg. § 1.170A-14(h)(3).

Easements

The original application for Credit was denied by the Department because the Original Deed lacked certain elements required by Treas. Reg. § 1.170A-14 for conservation easements. The Second Deed corrected the defects that were in the Original Deed, but contained additional restrictions.

Because of the additional restrictions, the Department considered the Second Deed to be an entirely new easement. As a result, the value of the donation would be the difference between the value of the donation after it was devalued by the Original Deed and the value of the donation after the Second Deed was recorded. The second appraisal was, therefore, found to be invalid because it valued the easement before the Original Deed was recorded and valued the easements after value as the date of the Second Deed. The Taxpayers assert that the Second Deed was not a new easement, but merely cured the defects in the Original Deed. They further argue that the Department allowed and encouraged them to correct the Original Deed and appraisal.

In Public Document (P.D.) 05-122 (7/22/2005), the Department ruled that the Virginia Land Conservation Incentives Act of 1999 permits defective language in a conveying instrument to be corrected in certain circumstances. When the instrument still conveyed an enforceable easement and the parties intended for the document to comply with the IRS requirements, the defective language may be corrected. When an easement is reformed, a conveyance would qualify for the Credit from the date of reformation. The value of the easement, however, would be governed by the value on the date that the enforceable easement was originally conveyed, not the date that the documents were reformed in order to qualify for the Credit.

In this case, the Second Deed specifically states that the "[G]rantor wishes to reaffirm its donation of this gift, to better articulate the conservation purposes protected, and to further restrict the [donated property] so that the perpetual nature of the gift is unquestionable. All of the restrictions of the aforementioned [Original Deed] are hereby reasserted." I find the language of the Second Deed merely reforms the Original Deed and is not a new easement.

The second appraisal established the value of the donated interest by determining the value of the subject property before the recording of the Original Deed and the value of the property after the restrictions imposed by the Second Deed. As indicated above, the Second Appraisal uses the correct dates for establishing the fair market value of the donation.

CONCLUSION

Based on the facts in this case, I agree that the Taxpayer's third application merely corrected the defects of the previous applications and the Second Deed merely reformed the Original Deed for purposes of the Credit. The application will be returned to the Credit Unit for review and disposition in accordance with this determination. Once the Credit Unit has determined the correct value of the donation, the Credit will be issued.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5459835085.B