Could good-faith purchasers keep transferred Virginia land-preservation credits after the easement value was reduced?

Plain-English summary

Good-faith purchasers could not keep the portion of transferred credits that exceeded the easement's agreed fair market value. A Virginia LLC donated a conservation easement, registered the donation, and transferred part of the resulting credit to the taxpayers. They claimed the credits on their 2008 and 2009 returns.

After examination, Virginia challenged the appraisal. The donor and Department settled on a lower easement value, and the Department assessed the transferees who had claimed credits based on the higher amount.

The statute allowed the credit only as a percentage of fair market value substantiated by a qualified appraisal. When a transfer was based on an excessive value, Va. Code § 58.1-1812 allowed assessments against the taxpayers who claimed the credits.

The purchasers argued that they acted in good faith and viewed the assessment as a penalty. The Commissioner rejected that argument: the Department could allow only the credit supported by fair market value. Any recourse for the devalued transferred credits had to be pursued against the donor-transferor. The 2008 and 2009 assessments were upheld.

Common questions

Q: Did good-faith purchase prevent assessment?
A: No.

Q: Why were the credits reduced?
A: The donor and Department agreed that the easement's fair market value was lower than the appraisal used for registration and transfer.

Q: Where did the ruling direct the buyers for recovery?
A: To pursue recourse against the transferor.

Citations and references

• Va. Code §§ 58.1-512 and 58.1-1812.
• Treas. Reg. §§ 1.170A-1(c)(2) and 1.170A-13(c)(3)(ii).

Subject

Land Preservation Tax Credit

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-190

Original ruling text

November 26, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of individual income tax assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2008 and 2009.

FACTS

In December 2008, * (VLLC) conveyed a conservation easement to a donee. Pursuant to the conveyance of the easement, VLLC registered its donation with the Department for purposes of the Land Preservation Tax Credit (the "Credit"). Subsequently, VLLC transferred a portion of the Credit to the Taxpayers based on an appraisal submitted with the registration. The Taxpayers claimed the Credit on their 2008 and 2009 Virginia individual income tax returns.

Under examination, the Department determined that the appraisal overvalued the easement. VLLC and the Department entered into a settlement agreement that reduced the value of the easement. Based on this agreement, the Department then issued assessments against all taxpayers that received the Credit from VLLC, including the Taxpayers. The Taxpayers paid the assessments and filed an appeal, contending they should not be penalized because they purchased the Credit in good faith.

DETERMINATION

Virginia Code § 58.1-512, as in effect at the time of the donation, states in pertinent part:

For taxable years beginning on or after January 1, 2000, there shall be allowed as a credit against the tax liability . . ., an amount equal to 50 percent of the fair market value of any land or interest in land located in Virginia which is conveyed for the purpose of agricultural and forestry use, open space, natural resource, and/or biodiversity conservation, or land, agricultural, watershed and/or historic preservation, as an unconditional donation in perpetuity by the landowner/taxpayer to a public or private conservation agency eligible to hold such land and interests therein for conservation or preservation purposes. For such conveyances made on or after January 1, 2007, the tax credit shall be 40 percent of the fair market value of the land or interest in land so conveyed. The fair market value of qualified donations . . . shall be substantiated by a 'qualified appraisal' prepared by a 'qualified appraiser,' as those terms are defined under applicable federal law and regulations governing charitable contributions. [Emphasis added.]

Treasury Reg. § 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.

When the Credit has been transferred based on valuation that exceeds fair market value, the Department has the authority to issue assessments against the Taxpayers claiming such Credit in accordance with Va. Code § 58.1-1812.

In this case, the Department disputed VLLC's valuation of the easement. After reviewing all the relevant documentation, the Department and VLLC agreed on a valuation that was lower than the appraised amount, resulting in assessments of tax to transferees of the Credit.

The Taxpayers assert that they purchased an amount of Credit in good faith and that the assessments amount to a penalty. As indicated above, the Department may only permit a Credit based on the fair market value of a conservation easement. When a donor and the Department agree on a valuation, Credit holders must address any resulting devaluation of the Credit with the transferors of such Credit. As such, the Taxpayers will need to pursue recourse against VLLC.

Based on the foregoing, the assessments issued to the Taxpayers for the 2008 and 2009 taxable years are upheld. The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules 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/1-5157051081.B