September 12, 2014
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 "Taxpayer"). I apologize for the delay in responding to your appeal.
FACTS
In December 2006, the taxpayer conveyed two conservation easements on two tracts of land located in the ***** (the “County”) to the ***** (the “Donee”). Pursuant to the conveyance of the easements, the Taxpayer registered the donations with the Department for purposes of the Credit. The Taxpayer requested and was awarded Credit based on appraisals by an unrelated third party appraiser contracted by the Taxpayer. Subsequently, the Taxpayer transferred the Credit to unrelated individuals.
A review of the Taxpayer's applications raised questions about the value of the easements on which the Credit was granted. As a result, the Department commissioned appraisals from a third party appraiser. Based on these appraisals, the Credit was revalued and assessments were issued against the individuals that received the transferred Credit. The Taxpayer appeals the revaluation of the Credit, contending the easement was properly valued in its appraisal.
DETERMINATION
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. Treas. Reg. § 1.170A-1(c)(2), further states the fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the facts. In the Taxpayer's case, the issue is the correct valuation of the easement.
Virginia Code § 58.1-512.1 C provides in pertinent part:
The fair market value of any property with respect to a qualified donation shall not exceed the value for the highest and best use (i) that is consistent with existing zoning requirements; (ii) for which the property was adaptable and needed or likely to be needed in the reasonably near future in the immediate area in which the property is located; (iii) that considers factors such as, by way of illustration and not limitation, slopes, flood plains, and soil conditions of the property; and (iv) for which existing roads serving the property are sufficient to support commercial or residential development in the event that is the highest and best use proposed for the property.
Descriptions of Easements
Easements were placed on two separate tracts of property. One tract (Tract A) of approximately 103 acres wraps around a subdivision in the County. A portion of the property is heavily wooded and part of the site lies within a flood plain. Tract A has frontage on four roads and on a creek. The other tract (Tract B) consists of approximately 39 acres on the northern edge of a subdivision in the County. The site is dividable into two separate parcels of approximately seven and 33 acres each. It has frontage on three roads. It is heavily wooded and is not in a flood plain.
At the time of the donation, Tract A was zoned for agricultural residential use, and Tract B was zoned for single family residential use. The County's agricultural residential ordinance allows for limited residential development in rural areas where development is ancillary to agriculturally zoned property. The County's single family residential zoning ordinance provides for low to medium density single-family residential lots along with amenities compatible with residential use. Both Tract A and Tract B contained civil war battle trenches. The easements recognized the historical significance of the sites and required that the sites remain open land.
Appraisals
In the valuation process, the appraisers develop a supportable estimate of market value of the property appraised. This process involves collecting market evidence to support an analysis of value trends, the reactions of buyers and sellers in the marketplace, and a proper interpretation of these facts. Virginia Code § 58.1-512 requires an appraisal to meet USPAP standards in order to be considered valid. See the Guidelines for Qualified Appraisals, issued as Public Document (P.D.) 07-9 (3/12/2007).
The appraisal process typically involves three approaches in determining value: the Cost Approach, Sales Comparison Approach, and Income Capitalization Approach. A brief description of each technique follows:
The COST APPROACH: An appraisal procedure using depreciated replacement or reproduction costs of improvements, plus land value, as a basis for estimating market value. The underlying assumption is most reliable when the improvements are relatively new and are the highest and best use of the land.
The SALES COMPARISON APPROACH: An appraisal procedure using sales prices of whole properties similar to the subject property as a basis for estimating market value. The nature and condition of each sale are analyzed, making adjustments for dissimilar characteristics. The Sales Comparison Approach offers a good indication of value when reliable data exists for a sufficient quantity and quality of sales in the marketplace.
The INCOME CAPITALIZATION APPROACH: An appraisal procedure using capitalization of expected future income as a basis for estimating market value. In this approach, there is a direct relationship between the amount of income a property earns and its value. An appropriate capitalization rate is used to estimate value based on the anticipated net operating income of the property. Factors such as risk, time, interest on the capital investment, and recapture of the depreciating asset are considered in deriving an overall rate. The underlying assumption in this approach is that an informed purchaser will pay no more for the subject property than would have to be paid for another property with an income stream of comparable amount, duration, and quality. When analyzing land, the Income Capitalization approach may be presented as a discounted cash flow and is known as the Subdivision Development Approach.
The final step in the appraisal process is the reconciliation of value indications and the final estimate of value. The appraiser considers each approach according to the quantity and quality of information available, as well as the peculiarities of the subject property, and weighs each value estimate. The result is a final conclusion of market value for the subject.
An appraiser's opinion of value is based on the property's "highest and best use." According to the Appraisal Institute's Dictionary of Real Estate Appraisal (Third Addition, 1993, p. 171), highest and best use is defined as:
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.
Taxpayer's Appraisals
The Taxpayer has submitted a separate appraisal for both Tract A and Tract B. The sales comparison approach was used with each submitted appraisal.
The appraisal valued Tract A prior to the easement at approximately $2.4 million. The appraiser valued Tract A after the easement at approximately $300,000. As a result, the total value of the Tract A's portion of the easement was appraised at approximately $2.1 million.
The appraisal valued Tract B prior to the easement at approximately $2.0 million. The appraiser valued Tract B after the easement at approximately $100,000. As such, the total value of the Tract B's portion of the easement was appraised at approximately $1.9 million.
The Taxpayer's appraisals determined that the highest and best use for both Tract A and Tract B prior to the easement would be for residential use. The appraisals determined that the highest and best use of both Tract A and B after the easement would be as open land.
Appraisal Commissioned by Department
The Department commissioned an independent third party appraisal subsequent to the Taxpayer's appeal. The appraisal valued Tract A prior to the easement at approximately $200,000. The appraiser valued Tract A after the easement at approximately $200,000. As a result, the total value of the Tract A's portion of the easement was appraised at $0.
The appraisal valued Tract B prior to the easement at approximately $100,000. The appraiser valued Tract B after the easement at approximately $100,000. As such, the total value of the Tract B's portion of the easement was appraised at $0.
The Department's appraisal determined that the highest and best use of both Tract A and Tract B prior to the easements was for open land on the basis that the right to develop the land was proffered in order to secure rezoning for residential use.
Proffers
The Department's appraisal addresses the proffers required for the rezoning of Tract A and Tract B, but the Taxpayer's appraisals do not.
Both Tract A and Tract B were part of larger parcels of land that were originally zoned in such a way that restricted the development of residential housing. In 1995, the developer proffered certain conditions to the County in order to secure the rezoning of the parcel that contained Tract A. As part of the proffer, the developer conveyed Tract A to a nonprofit preservation group in order to "protect existing historic resources." In addition, the number of buildable lots was limited to the portion of the parcel that did not include Tract A.
In 1990, the developer proffered certain conditions to the County in order to secure the rezoning of the parcel that contained Tract B. As part of the proffer, the developer agreed to protect areas of the site where historic features remained. A review of the acreage tabulation for the parcel containing Tract B indicates that the tract was set aside as a civil war park. The number of buildable lots was limited to the portion of the parcel that did not include Tract B.
Virginia Code § 58.1-512 C 3 provides that:
Any fee interest, or a less-than-fee interest, in real property that has been dedicated as open space within, or as part of, a residential subdivision or any other type of residential or commercial development; dedicated as open space in, or as part of, any real estate development plan; or dedicated for the purpose of fulfilling density requirements to obtain approvals for zoning, subdivision, site plan, or building permits shall not be a qualified donation
The Taxpayer contends that the conditions proffered to the County do not preclude residential development on either tract. Both Tract A and Tract B were set aside as open space at the time of the proffer in order to preserve civil war remains within residential subdivisions. The Taxpayer has provided no evidence to support its position that tracts were not dedicated as open space within, or as part of, a residential or commercial development. As such, the donation of the two conservation easements were not qualified donations.
In addition, under Virginia Code § 58.1-512 A, the Credit is available for donations made for taxable years beginning on or after January 1, 2000. The restrictions on developing the two tracts were put into place years before the Credit was enacted. Any donation of an interest in property made for the purpose of land preservation before January 1, 2000 would not qualify for the Credit.
CONCLUSION
The evidence provided indicates the donation did not qualify for the Credit because it dedicated as open space within, or as part of, a residential or commercial development. Further, substantially all of the value of the donation would have occurred when any rights to improve the subject property were proffered to the County prior to the enactment of the Credit. Accordingly, the Department properly valued the easements at $0.
Based on this determination, the assessments issued against the individuals claiming the Credit passed through from the Taxpayer are upheld. The Department will issue updated bills with accrued interest. The individuals must pay the outstanding balance within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rulings and Decisions section of the Department's website. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5127846669.B