2008 MODEL CONSERVATION CREDIT ACT A companion publication to the Conservation Resource Center's 2007 Report: State Conservation Tax Credits: Impact and Analysis CONSERVATION RESOURCE CENTER Published by The Conservation Resource Center 820 Pearl Street, Suite F, Boulder, CO 80302 Conservation Resource Center staff involved in this publication includes Mike Strugar, Debra Pentz, Tina Burghardt and Roman Ginzburg Design and Production by Molly Ruttan-Moffat Copyright © 2008 The Conservation Resource Center All rights reserved. This document is the property of the Conservation Resource Center and may not be copied or utilized in whole or part without its express written consent. Cover photo: Mount Sneffels, Colorado Conservation Resource Center 2008 MODEL CONSERVATION CREDIT ACT A companion publication to Conservation Resource Center the Conservation Resource Center's Tax Credit Exchange 2007 Report: State Conservation 820 Pearl Street, Suite F Tax Credits: Impact and Analysis Boulder, CO 80302 303.544.1044 phone 303.544.1043 fax www.taxcreditexchange.com Both the 2008 Model Conservation Credit Act and the 2007 State Conservation Tax Credits: Impact and Analysis reports are available at the Conservation Resource Center's website: TaxCreditExchange.com 4 1 MODEL CONSERVATION CREDIT ACT 2 SECTION 1. SHORT TITLE 3 SECTION 2. DEFINITION SECTION 4 (1) Qualified Real Property Interest 5 (2) Qualified Conservation Purposes 6 (3) Eligible Donee 7 (4) Eligible Donor 8 (5) Qualified Appraisal 9 SECTION 3. APPLICABILITY 10 SECTION 4. SUBSTANCE 11 (a) Use 12 (b) Limits 13 (1) Maximum Value 14 (2) One Conservation Credit per donation 15 (A) Common Ownership 16 (B) Partnership Distributions 17 (3) One Conservation Credit per year 18 (c) Transfers 19 (d) Carry forward 20 (1) No refundability 21 (2) 15 year limit 22 SECTION 5. APPROVAL PROCESS 23 (a) Approval Screen 24 (1) Application Documents Required 25 (2) Conditional Approval 26 (3) Processing Time 27 (4) Tracking Number CONSERVATION RESOURCE CENTER 2007 Model Act 5 28 (5) Denial and Resubmission 29 (6) Fee 30 (b) Transfer 31 (1) Filing 32 (2) Tax-matters representative 33 (3) Donor's primary liability 34 SECTION 6. ADMINISTRATIVE 35 (a) Audit Powers 36 (1) Information 37 (2) Adjudicatory Power/State Discretion 38 (b) Approving Authority 39 (1) Creation 40 (A) Members 41 (B) Appointment 42 (2) Criteria 43 (A) Appraisal 44 (B) Conservation Values 45 (C) Documentation 46 (c) Reporting 47 (d) General Rulemaking 48 (1) Approving Authority 49 (2) Tax Authority A COMPANION PUBLICATION TO THE CRC'S 2007 REPORT: STATE CONSERVATION TAX CREDITS: IMPACT AND ANALYSIS 6 prefator y note 50 PREFATORY NOTE 51 The principal purpose of the Model Conservation Credit Act ("Act") is to serve as 52 guideline legislation. States can borrow from the Act or adapt it in full to suit their 53 individual needs and conditions for a conservation tax credit program. Please note that 54 this is an educational piece and is not intended to promote the adoption of any specific 55 legislation. In addition, any states considering adoption of legislation should consult their 56 own professionals and should not rely solely on this sample legislation. 57 The programs of the twelve states already using conservation credits ("CCs") vary 58 substantially. The State Conservation Tax Credits: Impact and Analysis Report ("Report"), 59 published by the Conservation Resource Center ("CRC") in March of 2007, assesses the 60 effectiveness of the different program features in advancing land conservation. A copy of 61 the Report can be found on CRC's website: TaxCreditExchange.com. 62 The Act is based on, and should be read in conjunction with, the Report. The Act primarily 63 implements the Report's recommendations; therefore, most of the explanatory footnotes 64 herein refer to the Report for rationale and discussion of other alternatives. All discussions 65 external to the Report are introduced by an "Additional Thoughts" label. 66 The Act utilizes a substantial credit value, select restrictions on credit transactions, 67 and transferability to create an efficient CC that provides a potent incentive for private 68 land conservation with few transaction costs. Limiting transaction costs increases the 69 value of a CC to a donor, allowing a state to provide a higher conservation incentive 70 without spending more public funds. Quality control is ensured through a coarse pre- 71 approval screen that eliminates blatantly abusive transactions. All CCs are also subject 72 to a post-return audit. 73 The Act borrows heavily from the federal income tax conservation contribution deduc- 74 tion statute, 26 U.S.C.A. §170(h). As the Report notes, using 26 U.S.C.A. §170(h) 75 offers a simplified method of setting program rules. A state benefits from the federal 76 government's experience and guidance, and it can coordinate enforcement efforts with the CONSERVATION RESOURCE CENTER prefator y note 7 77 Internal Revenue Service. Conformity, however, also subjects the state CC program to federal 78 policy and enforcement interests. The Act limits federal influence by explicitly empowering a 79 state's tax authority to interpret the application of 26 U.S.C.A. §170(h) and accompanying 80 Treasury Regulations. 81 In drafting the Model Conservation Act, CRC referenced the drafting guidelines of the 82 National Conference of Commissioners on Uniform State Laws and the American Law Institute. 83 Neither of these organizations directly participated due to the relatively narrow scope of the 84 Act and the prolonged, three to eight year, drafting process used by the organizations. For 85 more information please contact CRC at: 303.544.1044. A COMPANION PUBLICATION TO THE CRC'S 2007 REPORT: STATE CONSERVATION TAX CREDITS: IMPACT AND ANALYSIS 8 2007 Model Act 86 SECTION 1. [SHORT TITLE] This act shall be known and may be cited as the 87 "(Conservation Credit Act of 20_ _ )". 88 SECTION 2. [DEFINITIONS] In this act:1 89 (1) Qualified real property interest means a conservation easement or a full real- 90 property interest as defined under 26 U.S.C.A. §170(h)(2) and corresponding regulations 91 in 26 C.F.R. §170A-14(b). Either interest must be in fully instate land.2 92 (2) Qualified conservation purposes mean conservation purposes as defined by 93 26 U.S.C.A. §170(h)(4) and corresponding regulations in 26 C.F.R. §170A-14(b).3 94 (3) Eligible donee means a qualified organization under 26 U.S.C.A. §170(h)(3) 95 and corresponding regulations in 26 C.F.R. §170A-14(c). Any non-governmental organization 96 must have adopted Land Trust Alliance ("LTA") Standards and Practices.4 97 (4) Eligible donor means any person or entity who, owns a qualified real property 98 interest, including individuals, corporations, trusts and estates, partners in partnerships and other 99 flow through entities, and both marriage partners.5 100 (5) Qualified appraisal means an appraisal in accordance with 26 C.F.R. §170A- 101 13(c)(4) and the Uniform Standards of Professional Appraisal Practice ("USPAP").6 1 Additional Thoughts: the Act adopts the federal definitions for key terms. Many states will have already customized the definitions for qualified real property interests and conservation purposes, defined in Section (2)(1-2) of the Act, when enacting their conservation easement enabling statutes. These state defi- nitions can be used to supplement or independently define the key terms when appropriate. 2 For a discussion of options for what type of land should be protected refer to Part II, §A of the Report. The Act allows both conservation easement and fee title donations to maximize land protection. 3 For a discussion of options for what conservation values may be protected refer to Part II, §B of the Report. 4 For a discussion of options for what types entities should be eligible to hold a donation refer to Part II, §E of the Report. Using §501(c)(3) organizations to accept conservation easement donations allows a state to save significant resources by passing on the perpetual monitoring requirements to nonprofits. 5 For a discussion of options for who should be eligible to earn a CC refer to Part II, §D of the Report. 6 Additional Thoughts: Since the value of the CC is calculated based on the appraisal value of a CE, it is imperative that appraisers follow strict guidelines to prevent abuses. As the Report notes in Part I, §B(3), experts believe that appraisal accuracy is essential for program effectiveness. CONSERVATION RESOURCE CENTER 2007 Model Act 9 102 SECTION 3. [APPLICABILITY] On or after (1/1/20_ _), an eligible donor who donates 103 a qualified real property interest for a qualified conservation purpose to an eligible donee may 104 earn a conservation credit ("CC") pursuant to Section 4(b). 105 SECTION 4. [USE, LIMITS, CARRY-FORWARD, TRANSFERS] 106 (a) An approved CC may be used to offset income tax liability as defined by (appropriate 107 section of state income tax statute).7 The CC may not be used, by amendment or otherwise, 108 against taxes owing for tax years prior to the year in which the CC was earned or acquired by 109 the taxpayer. 110 (b) A CC is limited by the following rules8: 111 (1) The value of a CC shall equal fifty percent (50%) of the fair market value of the 112 qualified real property donation calculated to exclude any short term capital gain pursuant to 113 26 U.S.C.A. §170(e)(1)(A). In no case shall the value of a CC exceed three hundred thousand 114 dollars ($300,000). 115 (2) Only one CC may be earned per a qualified real property interest donation. 116 (A) If the qualified real property interest is held in common ownership, the CC 117 shall be allocated in proportion to respective ownership shares. 118 (B) If the qualified real property interest is held by a pass-through entity, the CC 119 shall be allocated as prescribed under 26 U.S.C.A. §704(b) and corresponding regulations in 120 26 C.F.R. §1.704A-1(b)(4)(ii). 121 (3) An eligible donor may earn only one CC per income tax year. 122 (c) Any qualified donor holding a pre-approved CC may transfer it in part or in full to 123 another person or entity for use against the state income tax under (appropriate section of the 124 state income tax statute).9 In order for the transferee to apply the CC against taxes for a particu- 125 lar year, the transferee must have acquired the CC on or before the date upon which the 7 For a discussion of options for type of credits refer to Appendix C: Ft. #1 of the Report. 8 For a discussion of options for CC valuation and caps refer to Part II, §C of the Report. 9 For a discussion of options for maximizing the effectiveness of CCs refer to Part II of the Report. A COMPANION PUBLICATION TO THE CRC'S 2007 REPORT: STATE CONSERVATION TAX CREDITS: IMPACT AND ANALYSIS 10 2007 Model Act 126 transferee's taxes are due (without extensions) for the year in question. 127 (d) In determining any carry-forward amount, the following rules apply: 128 (1) The amount of CC used in a taxable year, when combined with all other state in- come tax credits of the user, may not exceed the user's total state tax liability for the taxable year. 129 (2) Any unused portion of CC may be carried forward up to fifteen (15) years. Any 130 unused portion of a CC shall survive the death of the individual and may be used or transferred 131 by the decedent's estate.10 132 133 SECTION 5 [APPROVAL PROCESS]11 134 (a) Before an eligible donor may use or transfer a CC, an eligible donor shall attain 135 approval from the (Approving Authority) established by Section 6(b)(1).12 Receipt of approval 136 from the (Approving Authority) signifies only the satisfaction of the screening requirements 137 pursuant to Section 6(b)(2). The approval has no probative value in another state or federal 138 administrative action, such as an audit review of the CC used. 139 (1) The eligible donor shall submit to the (Approving Authority) an application for 140 approval on a form created by the (Approving Authority) that contains information required 141 by the (Approving Authority) to assess the criteria pursuant to Section 6 (b)(2). Such documents 142 may include a draft or recorded conservation easement, a copy of a qualified appraisal, and 143 any other required information. 144 (2) An eligible donor may apply for conditional approval before a qualified real 145 property interest donation has been recorded. If conditional approval is granted, the applica- 146 tion must be resubmitted to the (Approving Authority) after the donation has been recorded for 147 the limited purpose of demonstrating conformity with the draft documents. 148 (3) The (Approving Authority) shall notify the eligible donor of its decision within (60) 10 For a discussion of options for maximizing the effectiveness of CCs refer to Part II of the Report. 11 For a discussion of options for program oversight refer to Part II, §H of the Report. 12 For a discussion of reasons for such approval, refer to Part II, §H(3) of the Report. The Act's approval process is based on the Sample Transaction Screen included as Appendix B of the Report. CONSERVATION RESOURCE CENTER 2007 Model Act 11 149 days of receiving an application or within (30) days of receiving a resubmission. 150 (4) In the event of approval, the (Approving Authority) shall issue a tracking number 151 to the donor. To use the CC, the donor or transferee shall enter the tracking number on the 152 appropriate tax forms issued by the (Tax Authority), thus indicating receipt of approval. 153 (5) The (Approving Authority) shall provide a brief statement of reasons for a decision 154 to deny approval. Once the problems identified by the (Approving Authority) have been 155 remedied, an eligible donor may resubmit the application for approval. Decisions to deny 156 approval are not subject to appeal. 157 (6) Initial applications for approval must be accompanied by a processing fee of ($500). 158 The (Approving Authority) shall receive this fee to administer the requirements of this Section. 159 (b) The following rules and procedures must be followed to transfer a CC: 160 (1) A transferor and a transferee shall notify the (Tax Authority) of a CC transfer. 161 Both parties shall provide the CC tracking number and amount transferred on the appropriate 162 tax forms, which shall be filed with the income tax return for the year in which the CC transfer is 163 made. A transferee may not use a transferred CC unless the transferor's written statement 164 verifies the amount of CC used by the transferee. 165 (2) The donor of a transferred CC shall be the tax-matters representative in all matters 166 with respect to the CC. A tax-matters representative shall be responsible for representing and 167 binding the transferees with respect to all issues affecting the CC, including, but not limited 168 to, the appraisal, notifications, correspondence from and with the (Tax Authority) and IRS, 169 audit examinations, assessments, settlement agreements, and the statute of limitations and 170 extensions thereof. Final resolutions of disputes regarding a CC between the (Tax Authority) 171 and a tax- matters representative, including administrative and judicial decisions, shall be 172 binding on transferees. 173 (3) In the event the transferred CC is disallowed or devaluated in audit procedures, 174 the (Tax Authority) shall first make demands for payment of any additional tax, together with 175 interest and penalties, from the CC earning donor. In the event such payment demand is not 176 voluntarily satisfied within applicable time limit, the (Tax Authority) shall proceed to collection 177 against the transferees on a pro-rata basis. A COMPANION PUBLICATION TO THE CRC'S 2007 REPORT: STATE CONSERVATION TAX CREDITS: IMPACT AND ANALYSIS 12 2007 Model Act 178 SECTION 6. [ADMINISTRATIVE] 179 (a) To administer the CC program, the (Tax Authority) is authorized: 180 (1) to require additional information from an eligible donor or transferee regarding 181 the appraisal value of the easement, the amount of the CC, the validity of the CC, and other 182 relevant matters. 183 (2) to review, for good cause shown, and accept or reject, in whole or in part, all 184 aspects relating to a CC, including compliance with federal rules and regulations. In applying 185 federal rules and regulations, the (Tax Authority) shall determine whether a used CC complies 186 with the appropriate Internal Revenue Code sections and Treasury Regulations pursuant 187 to Section 2. Any positions taken by the United States Commissioner of the Internal Revenue 188 Service and/or any federal courts should be considered but are not binding on the (Tax 189 Authority).13 190 (b) The approval process pursuant to Section 5(a) shall be administered by a panel 191 created pursuant to Paragraph (1), below, that shall review applications pursuant to criteria of 192 Paragraph (2).14 193 (1) There is created (the conservation tax credit approval panel ("Approving 194 Authority")) to administer the approval program. For administrative support purposes, the 195 (Approving Authority) shall be assigned to the (Tax Authority). 196 (A) The (Approving Authority) shall consist of three members: a representative of 197 the department of revenue who is knowledgeable about appraisal valuations; a representative 198 of the state department of natural resources who is knowledgeable about conservation values; 199 and a representative of the state attorney general who is knowledgeable about the legal require- 200 ments for qualified real property interests. 201 (B) The panel members shall be appointed administratively by the directors of the 13 Additional Thoughts: By explicitly providing for state tax authority discretion over the federal require- ments, the Act partially insulates a state from the drawbacks of conformity with federal rules as discussed in Part II §(B)(1) of the Report. 14 Additional Thoughts: For ease of administration, instead of forming a panel, a state could designate a department director to make approval decisions and to set up a supporting administrating system. CONSERVATION RESOURCE CENTER 2007 Model Act 13 202 respective departments and may be changed from time to time at the pleasure of the directors. 203 (2) The (Approving Authority) shall limit approval review to the following considerations: 204 (A) Whether the appraisal appears to meet minimum USPAP standards and IRS 205 requirements for a qualified appraisal pursuant to Section 2(e), and whether its valuation does 206 not appear to be manifestly abusive. 207 (B) Whether the conservation values arguably comply with the requirements 208 pursuant to Section 2(b). 209 (C) In the case of a conservation easement donation, whether the documentation 210 required for the CC arguably complies with minimum standards for a qualified easement 211 pursuant to Section 2(a).15 212 (c) The (Tax Authority) shall issue a report every year summarizing by county the following 213 annual totals: 214 (1) Number of qualified real property interest donations approved by (Approving 215 Authority). 216 (2) Fair market value of qualified real property interest donations approved by 217 (Approving Authority). 218 (3) Value of CCs approved by the (Approving Authority) 219 (4) Value of used CCs by class (eligible donors or transferees). 220 (5) Acreage of qualified real property interests donated approved by the (Approving 221 Authority), by donee class (land trust, government, other). 222 (d) The following bodies shall have the following rulemaking power: 223 (1) The (Approving Authority) shall promulgate rules for the implementation of the 224 approval screen pursuant to Paragraph (b)(2). Such rules shall be promulgated in accordance 225 with (State's Administrative Procedures Act statute). 226 (2) The (Tax Authority) shall promulgate all other rules and regulations necessary to 227 implement and administer this Section. 15 Additional Thoughts: If a state is concerned about land fragmenting, the Approving Authority can be authorized to review whether a qualified real property donation has clearly been structured to circumvent the one Conservation Credit per donation per year limitation. A COMPANION PUBLICATION TO THE CRC'S 2007 REPORT: STATE CONSERVATION TAX CREDITS: IMPACT AND ANALYSIS 2008 MODEL CONSERVATION CREDIT ACT A companion publication to the Conservation Center's 2007 Report: State Conservation Tax Credits: Impact and Analysis CONSERVATION RESOURCE CENTER TAX CREDIT EXCHANGE 820 Pearl Street * Suite F * Boulder, CO 80302 303.544.1044 phone * 303.544.1043 fax * www.taxcreditexchange.com