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Before investing time and money in a prospective project, a conservation organization may seek to minimize the potential for misunderstandings with the prospective donor for the project and make the donor’s promise to support the project a legally binding obligation.
A conservation organization may ask a donor to pledge an annual contribution or special gift with the understanding that, if the donor cannot or will not pay, the conservation organization will not press the issue. But when a conservation organization is requested by a donor to invest time and resources into a project, then the situation is different. The conservation organization may decline to become involved in the project without reasonable assurance that the donor is also committed to invest in the project.
This guide offers suggestions on ways to create a legally enforceable promise to make a gift. The desired outcome is to increase the likelihood that donors will honor their commitments without the need for litigation.
The donor may be concerned that a legally binding commitment will nullify any possibility that contribution will qualify as a charitable donation for federal income tax purposes. Gifts must be wholly voluntary to be deductible as a charitable contribution.
The guide offers suggestions on ways to preserve the voluntary nature of the donor’s investment in the project. The Model Preliminary Agreement Regarding Conservation Easement Donation that accompanies this guide demonstrates one strategy aimed at achieving this outcome. The goal is to structure the investment in the project in such a way that the donee conservation organization may, in appropriate circumstances, acknowledge donor’s investment in the conservation project as a contribution.
Acknowledgment of the gift, and whether any goods or services were received in connection with the gift, is a necessary first step that allows for the possibility of the donor claiming a deduction for federal tax purposes. It does not guaranty that outcome. Donors must consult with their tax advisors to determine the tax deductibility of any contribution, after review of all the pertinent facts and circumstances, which is a subject outside the scope of this guide.
Whether or not enforceability and tax deductibility are concerns, the conservation organization and donor may want to minimize the potential for misunderstandings before investing in a conservation project. A carefully crafted donation document can insure that there is a meeting of the minds between donor and donee as to the nature and extent of their collaboration in the proposed conservation project.
The Pennsylvania Land Trust Association has assembled a suite of guides as well as model documents and commentary to assist landowners ("Owners") and conservation organizations in structuring and documenting the terms under which gifts are proposed to be given and accepted. Users can review and download these materials at ConservationTools.org.
Donations by Will focuses on the tax and estate planning advantages of incorporating a cash or conservation easement gift in a will.
Pledges and Donation Agreements (this guidance) addresses the challenges of creating a legally enforceable obligation to make a future donation while maximizing the potential for tax-deductibility.
An Introduction to Stewardship Funding Arrangements describes the alternatives available to Owners and conservation organizations to ensure that conservation easement stewardship is adequately funded over time. Legal Considerations for Stewardship Funding Arrangements discusses the challenges of enforcing promises of present owners against future owners of conserved land.
The Model Preliminary Agreement Regarding Conservation Easement Donation and Commentary, a companion piece to this guide, evidence the terms under which a conservation easement may be donated and accepted. The intent of this model is not to put into place a binding obligation to donate the conservation easement; only an agreement as to the steps Owners and Holder will take to move toward that goal.
The Model Stewardship Funding Covenant and Commentary, a companion piece to the Stewardship Funding Arrangements guides, provide a number of alternative payment structures to fund stewardship over time and mechanisms to bind future owners of conserved land to fulfill those obligations.
”Consideration” is a legal term that means something of value received for a promise. When a person making a promise receives nothing in return, the law does not require him to keep his promise unless the court finds a legally sufficient substitute for consideration. To maximize enforceability of a promise, the donation document should include at least one, and preferably all, of the following substitutes for consideration:
Care must be taken in crafting a donation document so that the original promise of the donor retains, to the greatest degree possible, its voluntary character if donor desires to preserve the possibility of qualifying as a charitable contribution for federal tax purposes. To achieve this objective, while protecting the conservation organization’s interest in having promises that it can rely upon, the donation document should recite facts that explain why donor’s voluntary promise will induce conservation organization to take action in reliance upon it and that it is this reliance that makes the promise legally binding.
When an owner and a conservation organization desire to pursue a conservation project – whether a gift of land, money to acquire land, or a gift of a conservation easement – they need to consider what each of them intends to contribute towards the success of the project. The conservation organization will analyze and quantify its investment of time and money in the project (both short and long term) and develop potential sources of funding that investment. Likewise, owners will analyze and quantify the property rights they are willing to donate, in whole or in part; the amount of money they are willing to invest in the project; and the timing of that investment over the long term and short term. The Pennsylvania Land Trust Association has made available a Model Preliminary Agreement Regarding Conservation Easement Donation to assist in structuring the collaborative relationship between owner and conservation organization before they proceed with the conservation project. Listed below are some of the key principles incorporated into the model:
The Model Preliminary Agreement structures the conservation project as a collaboration. Neither party is obligated to move forward with the project but, if landowners decide to do so, they show their commitment by providing a notice to proceed accompanied by the initial requested contribution. That action triggers an obligation on the part of the conservation organization to proceed. The legal term that describes this triggering mechanism is a “condition”. The preference for using conditions, rather than covenants, in a donation document is to underscore the voluntary character of the owners’ participation in the project. At each decision point, owners are free to decide whether to trigger further performance by the conservation organization or not to proceed further.
A covenant is a contractual promise that obligates a party to do, or refrain from doing, a particular action. Covenants typically use terms such as “must”, “shall”, “is obligated to” or “agrees to”. A donation agreement can describe the arrangements between donor and conservation organization as a series of obligations; for example:
The above understanding between donor and conservation organization can be stated as a series of conditions -- the approach taken by the Model Preliminary Agreement. Neither party is obligated to take further steps unless the other, without any obligation to do so, takes certain actions; for example:
The Internal Revenue Service has, in the past few years, seized upon requirements for delivery of a cash payment at or prior to easement acceptance to bolster its position that the deduction should be disallowed as a "quid pro quo" transaction discussed in more detail below. The IRS position, originally supported by several Tax Court decisions, has in one case (Kaufman II) been rejected by the Tax Court on rehearing and in another (Scheidelman II) been overturned on appeal. Does this mean that pre-easement contractual obligations no longer need to be avoided? There are two answers to that question:
The donation document may provide for one or more contributions deferred into the future to make a planned gift more affordable. For an in depth discussion of a variety of ways that contributions may be deferred until after a conservation easement is accepted, see the guides to Stewardship Funding Arrangements as well as the Model Stewardship Funding Covenant and Commentary.
Donating shares of stock or other marketable securities is an attractive alternative to a cash contribution when the donor has a tax basis in the shares that is lower than current market value. Take, for example, a donor who owns $120 in stock that was originally purchased for $20 (the tax basis) and now wishes to use this asset to benefit a conservation organization:
Funding a conservation acquisition by delivery of stock in lieu of cash donations requires advance planning. The pledge or other donation document must specify:
Whether funded by delivery of stock or cash, a donation document that sets up a structure to fund a conservation acquisition needs to address whether, and under what circumstances, delivered funds may be refunded if the project does not close as anticipated.
To be recognized as a charitable contribution for federal tax purposes, donors must at a minimum demonstrate that they purposely transferred money or property to a qualifying charitable organization in excess of the value of any benefit received in return. That is the standard (the "excess value test") set by the United States Supreme Court in the 1986 American Bar Endowment (the "ABE") decision, which described the sine qua non of a charitable contribution as a transfer of money or property without adequate consideration. The excess value test was a significant departure from the previous standard: a voluntary transfer of property by the owner to another without consideration. The ABE decision adopts the view that:
Before the ABE decision, there was a line of cases holding that a contribution could be disallowed in full if the transaction was, essentially, an exchange of value. The contributor expects to receive something of value (other than a tax deduction) in return for the payment. A 1989 decision by the United States Supreme Court confirmed that the quid pro quo test continues to survive as grounds for disallowance of a charitable contribution. The ABE decision mentions the quid pro quo rule (without disapproval or qualification) but fails to explain how it works alongside the excess value test.
The following two examples illustrate how the two rules can be applied to differentiate a commercial transaction from a charitable contribution:
Issuance of an acknowledgment by the conservation organization in the first example would be inappropriate under the quid pro quo rule. It would be appropriate under the second example applying the excess value test.
A 2010 Tax Court decision (Scheidelman I) disallowed a deduction for the contribution of a façade easement as well as the monetary contribution that accompanied the façade easement. The portion of the opinion pertaining to the cash contribution focuses on its being required at the time of the easement donation; thus, the court reasoned, it was not voluntary. The holding of the case, however, was that the taxpayers failed to sustain their burden of proof that no benefit was received from the transaction. The summary of facts indicated that at least some of the tasks performed by the preservation organization were primarily for the benefit of the donors. What then was the basis for the disallowance? The fact that taxpayers benefitted from some services? Or the fact that the façade easement would not be accepted unless accompanied by a cash donation.
Scheidelman I was reversed (as to the cash contribution) by a June 2012 decision of the United States Court of Appeals for the Second Circuit (Scheidelman II). The court in Scheidelman II found that there was no quid pro quo because nothing of value had been transferred by the easement donee to the donor.
A 2011 Tax Court opinion (Kaufman II) found that the requirement of a cash contribution as a condition of acceptance of a façade easement did not, by itself, result in a finding that the payment was non-deductible as part of a quid pro quo transaction. Kaufman established a two-prong test: To support a finding of a quid pro quo, evidence must show, first, that the taxpayer received from the donee services of substantial value and, second, that the payment from taxpayer to donee reciprocated the donee’s undertakings. The Internal Revenue Service declined to include the cash contribution issue in its appeal of Kaufman II (Kaufman III) to the United States Court of Appeals for the First Circuit decided in 2012.
The Kaufman II test was applied to similar facts in the 2012 Dunlap case and, once again, the Tax Court found no quid pro quo for the cash donation. The services performed by the easement grantee in providing assistance with historic certification applications and mortgage subordination issues were either insignificant or were not reciprocated as they were performed without the knowledge of the taxpayers.
The cases discussed above, and Professor Hutton’s “Costs of the Easement Planning Process: Landowner Benefits and Land Trust Risks”, underscore the importance of differentiating tasks performed in the process of easement preparation based upon the primary beneficiary. The Model Preliminary Agreement, with accompanying schedule, is structured to allocate between the landowner and the conservation organization the items required to complete the grant and acceptance of the conservation easement.
If the conservation organization provides any services primarily for the benefit of the landowner, the time and expense should be recorded, as performed, in a way that captures the reasonable value of services performed for the landowner. There are several ways to proceed once an allocation of benefit has been made:
When the recipient of a conservation easement has reason to believe that it was given in connection with a business transaction, then, by application of the quid pro quo rule, neither the conservation easement, nor any cash contribution in connection with the conservation easement, should be acknowledged as a gift. Examples of circumstances where the donee should withhold acknowledgment of a gift are as follows:
Application of the quid pro quo rule can be expected to prevail in these circumstances absent evidence that a voluntary charitable contribution was made in addition to the business transaction. In that case, the donee could acknowledge a contribution to the extent of the excess value given above and beyond what was required. For example, the conservation easement granted in connection with zoning relief may extend to land beyond that required for the desired approval. Or the promise to grant the easement in the second example above may be the subject of a bargain-sale agreement, in which case it would be appropriate to acknowledge a contribution equal to the fair value of the property and any cash contribution received by purchaser/donee less the purchase price and any other goods and services tendered to the seller/donor.
If the conservation organization has a reasonable doubt about whether or not a contribution has been compelled by some other agreement or condition of approval, and the donor requests that it issue an acknowledgment of the donation for federal tax purposes, the conservation organization can require, as a condition precedent to issuance of the acknowledgment, an opinion of donor’s counsel that, after reviewing all of the pertinent documentation, counsel has concluded that, at the time of the donation, his client was not legally bound to make the contribution to the conservation organization. The opinion should be addressed to the conservation organization and should permit the conservation organization to rely upon the opinion in issuing the substantiation letter and, if applicable, signing IRC Form 8283.
Pennsylvania law is the context for this exploration of pledges and donation agreements.
Patricia L. Pregmon, attorney at law, is the primary author, and Andy Loza, the editor and contributing author.
Copyright © is held by the Pennsylvania Land Trust Association
Text may be excerpted and reproduced with acknowledgement of ConservationTools.org and the Pennsylvania Land Trust Association.