January 16, 2018
Re: Land Preservation Tax Credits Earned Indirectly by Virginia Localities
Dear *****:
This is in response to your letter requesting guidance regarding whether a Virginia locality may indirectly earn Land Preservation Tax Credits through a nonprofit corporation created and operated by such locality.
FACTS
A Virginia locality (“the Locality”) is contemplating whether to grant a conservation easement to a qualified land trust. You previously requested guidance regarding whether a Virginia locality or its economic development authority (“EDA”) qualifies as a “taxpayer” for purposes of the Land Preservation Tax Credit and is, thereby, eligible to earn such tax credit for granting conservation easements. The Department determined in Public Document (“P.D.”) 15-215 (11/24/2015) that neither a locality nor its EDA may earn Land Preservation Tax Credits directly.
You are now requesting guidance regarding whether the Locality may earn Land Preservation Tax Credits indirectly by transferring land to a nonprofit corporation with which it has entered into “appropriate relationships, contractual and otherwise.” The nonprofit corporation would then earn Land Preservation Tax Credits by granting a conservation easement on such land to a qualified land trust.
DETERMINATION
Pursuant to Va. Code § 58.1-512 C2, contributions of less-than-fee interests in real property, may qualify for the Land Preservation Tax Credit, provided that such contribution qualifies as a charitable contribution under Internal Revenue Code (“IRC”) § 170(h).
Under IRC § 170, a taxpayer may claim a deduction for certain charitable contributions. Contributions of less-than-fee interests, including conservation easements, are generally disallowed or restricted. See IRC § 170(f)(3)(A). However, pursuant to IRC § 170(f)(3)(B), such contributions may qualify for the charitable deduction if they are a:
- Contribution of a remainder interest in a personal residence or farm;
- Contribution of an undivided portion of the taxpayer's entire interest in property; or
- A qualified conservation contribution.
Under IRC § 170(h), “qualified conservation contribution” is defined as a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes.
In addition to fulfilling the above requirements, courts have held that a taxpayer must have donative intent at the time of the contribution for it to be deductible under IRC § 170. See Commissioner v. Duberstein, 363 U.S. 278 (1960). In that case, the United States Supreme Court opined that for purposes of the income tax exclusion for gifts received, determining whether a gift has been received is dependent on the facts and circumstances and an analysis of the transferor's intent. The Court determined that a gift “proceeds from a detached and disinterested generosity” and is given out of “affection, respect, charity, or like impulses.”
No official guidance has been published regarding whether the receipt of a state tax credit in exchange for a donation of an interest in land has an impact on donative intent. However, the Internal Revenue Service has provided an analysis of this issue in a nonprecedental publication, General Counsel Memorandum (“GCM”) 201105010. In this GCM, the Internal Revenue Service determined that the receipt of a state tax credit in exchange for a donation does not appear to negate the donative intent of the donor.
In this case, the Locality may have donative intent with respect to the contribution of the conservation easement that would otherwise qualify for purposes of IRC § 170. However, the donative intent of the Locality is not at issue here. Instead, the nonprofit corporation in this arrangement is the entity that would be making the contribution and seeking to earn credits. Therefore, the relevant analysis is whether the nonprofit corporation would have donative intent with respect to this contribution.
It is unclear whether the nonprofit corporation would be considered to have formed donative intent for purposes of IRC § 170 with respect to the contribution of the conservation easement. The nature of the “appropriate relationships, contractual and otherwise” between the Locality and the nonprofit corporation has not been provided. It appears that the Locality desires that the property be subject to a conservation easement, but also wants the benefit of the credit. Since the Locality cannot obtain the credit directly, the nonprofit corporation would be an intermediary. Thus, the nonprofit corporation's proposed grant of a conservation easement would appear to be fulfilling its obligations under the “appropriate relationships, contractual and otherwise” with the Locality instead of being motivated by any donative intent of the nonprofit corporation.
Neither federal law nor the IRS have provided guidance regarding whether this or a similar tax planning arrangement would qualify as a charitable contribution under IRC § 170(h). By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., at al. v. Virginia Department of Taxation, 1 Va. Cir. 382 (1983). As such, it is incumbent upon the taxpayer to prove that they are entitled to Virginia tax incentives, including the Land Preservation Tax Credit. In this case, the contribution must definitively qualify as a charitable contribution under IRC § 170(h) for the nonprofit corporation to earn credits. Because it is uncertain whether the nonprofit corporation would meet the IRC § 170 donative intent requirement, the proposed contribution has not met this requirement.
CONCLUSION
Because the conservation easement to be granted by the nonprofit corporation would not clearly qualify as a charitable contribution under IRC § 170(h), the Department cannot rule that the nonprofit corporation is eligible to earn Land Preservation Tax Credits in the proposed transaction. The Code of Virginia provisions cited, along with other reference documents, are available online in the Laws, Rules & Decisions section of the Department of Taxation's website, located at www.tax.virginia.gov. If you have additional questions, please contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner