As states and local communities look toward nonregulatory methods to protect natural resources, conservation easements (CEs) have become an increasingly popular tool for land conservation. CEs can permanently protect natural resources on private land while providing private landowners with tax and estate planning benefits. According to the most recent Land Trust Alliance (LTA) census report in 2015, the total land conserved by land trusts through CEs was 16,784,077 acres, a 274% increase from the 2005 census (6,113,108 acres).1 In South Carolina, approximately one million acres have been protected through private conservation easements as of 2020. The Nature Conservancy, in conjunction with the South Carolina Land Trust Network, maintains the Conserved Lands of South Carolina online dashboard for conservation areas in South Carolina, including acreage figures.2
Most CEs are conveyed in perpetuity to a nonprofit land trust and permanently limit how landowners can develop and manage their property. In the publication “Protecting Working Forests with Conservation Easements,” Janet Steele provides Land-Grant Press readers with a background and overview of land trusts and conservation easements.
Forever is a long time, and as practice and collective knowledge about CEs has accumulated over the last forty years, there is growing awareness that occasional alteration or modification of CEs may be necessary.3 Although CEs can be terminated in certain cases, the most common method for revising or adapting CEs is through amendments.
However, conservation easement amendments can pose legal and ethical challenges for landowners and land trusts. Landowners considering CEs or a CE amendment should educate themselves about these issues. The purpose of this article is to explain CE amendments. An overview is provided of legal, ethical, and organizational considerations, followed by recommendations for landowners to consider in deciding to donate, sell, or make an amendment request of CEs.
Conservation Easement Amendments: Overview and Issues
Most CEs are donated to a nonprofit land trust by a private landowner(s). However, occasionally, a landowner can sell conservation easements to a qualified agency or nonprofit through grants from a public funder such as the South Carolina Conservation Bank. In almost all cases, a conservation easement attaches to the title of the land and still applies to the property when ownership changes. This type of easement is called an “appurtenant easement.” The federal government authorizes significant income tax benefits for qualified conservation easement donations or bargain sales to encourage CE donations. Information about financial benefits and tax implications for CE donations and acquisitions is covered in the Land-Grant Press publication “Conservation Easement Tax Implication Basics” by Adam J. Kantrovich.
Beyond the legal responsibilities it assumes within the CE document, the land trust must also follow relevant laws and regulations governing nonprofit organizations or risk losing its charitable status. This gives land trusts a legal and ethical responsibility to ensure the perpetual enforcement and stewardship of the CEs they accept.
Although CEs are intended to be permanent, most CEs contain provisions allowing alteration under specific circumstances. Some CEs include discretionary approval provisions that will enable the land trust to approve, under certain conditions, activities that are otherwise restricted or not explicitly addressed by the easement.4 However, the most common method for revising or adapting CEs is through amendments.
In legal contexts, an amendment is generally defined as an alteration of a contract or agreement adopted by the consent of the contracting parties and intended to be binding upon all such parties. An amendment may involve individual provisions or a complete review of the legal agreement.5 In specific reference to CEs, an amendment provision is a clause in the original CE agreement that permits amendment under specific and defined circumstances.6 Currently, most easement amendment clauses do not require third-party approval, such as a ruling from a court of law.7
The practice of amending CEs is on the rise. In a voluntary survey of LTA member land trusts conducted in 2014, 211 of the 444 respondents reported completing a total of 1,262 amendments over their organizational lifespan. Reasons for over 75% of reported amendments fell into five broad categories: correcting errors, terminating reserved rights, adding acreage, adding new provisions, and clarifying ambiguous terms. Land trusts who completed the survey reported declining 164 amendment requests since 2006. The top reasons for declining an amendment were: the amendment would diminish the conservation purpose of the easement (60%), or the amendment would confer a private benefit impermissible by law, defined as “inurement” (28%).8
The Issues with Amendments
The increase in conservation easement amendments has brought growing awareness about the legal, ethical, and regulatory issues surrounding their use. For landowners who have benefitted from tax deductions and/or other financial incentives for their CE conveyance, amendments that significantly alter or diminish the CEs conservation values and purposes violate federal and state regulations.
Internal Revenue Code (IRC) Section 170(h) and Treasury Regulations Section 1.170A-14 apply to federal tax deductions claimed for CE donations and bargain sales. Guidance for landowners claiming federal income tax deductions for noncash contributions can be found in the IRS report “1985 EO CPE, Deductions of Contributions to IRC 501(C)(3) Organizations and Other Exempt Organizations” as well as the Land-Grant Press Kantrovich publication mentioned above.
A qualified appraisal taken within a specific period of the original CE conveyance determines the donative value associated with a CE. The landowner must report this appraisal and related documentation to the IRS to realize the federal tax deductions. Because tax benefits accrue only to the landowner, not the land trust, the landowner is typically required to cover the cost associated with obtaining the appraisal for donated conservation easements. These appraisals should be conducted by licensed appraisers who have training and experience in conservation easement evaluations. Most land trusts will provide a list of qualified conservation easement appraisers in their service region from which the landowner can choose. The South Carolina Conservation Bank website has a list of qualified conservation easement appraisers in South Carolina. The appraisal value is determined by a variety of factors in the CE, including the acreage and market value of the land placed under the conservation easement, any subsequent increase in value the landowner or close family members may incur on adjacent or nearby property, and any reserved rights the landowner retains within the CE, such as reserved development or homesites.
The primary issue for landowners is if the amendment significantly reduces the CE value initially claimed as a tax deduction. This reduction creates a scenario where a landowner has received benefits for donating an amount that was partially returned as if the landowner had donated $10,000 to a local charity, claimed that amount as a deduction on the annual tax return, then received $5,000 back from the charity at a later date.
A CE amendment creates the possibility that value will be returned to the landowner, either purposefully or inadvertently, creating the potential for fraudulent behavior. For example, if the landowner claims a $500,000 deduction on a conservation easement, but a later amendment reduces the charitable value of the CE to $300,000, the landowner has potentially defrauded the public of the deductions they already received in association with the $200,000 in regained value. Compounding the challenge is the temporal nature of land’s market value over time, making the donative gain or loss created by an amendment difficult to determine.4
The potential for fraud and complexity of determining changes in value has made the IRS more attentive to CE amendments. In 2015, the IRS issued guidance to LTA officials that charitable deductions for conservation easements containing amendment clauses may be disqualified. Around this time, the IRS also began requiring land trusts and other qualified CE holders to report amendments on its 990 federal tax return form. These actions raised concerns that landowners who had amendment clauses in their CE or received CE amendments submitted themselves to additional scrutiny and possible prosecution for violation of the IRS code.9
Additional scrutiny does not mean that a CE amendment will be prosecuted. For example, in its decision in Pine Mountain Preserve, LLLP v. Commissioner of Internal Revenue, 151 T.C. 14 (December 27, 2018), the tax court dismissed the IRS’s arguments challenging amendment clauses in conservation easements.10 In March 2020, the IRS published a memorandum stating that an amendment clause does not necessarily cause the CE to fail the 170(h) requirements. These decisions protect the inclusion of amendment clauses in CEs under certain circumstances. However, they do not protect landowners from prosecution for amendments that significantly alter or undermine the purposes or value of the original CE. “An amendment clause must be considered in the context of the deed as a whole and the surrounding facts and circumstances to determine the parties’ rights, powers, obligations, and duties. This determination requires a case-by-case analysis,” the IRS cautions.11
Additional Considerations for CE Amendments: Inurement and Impermissible Private Benefit
As 501(c)3 corporations governed by state and federal tax code for charitable organizations, land trusts also face regulatory scrutiny over CE amendments. Both state and federal law regulates transactions that pose a conflict of interest. This may be an issue if the landowner requesting a CE is a close personal associate with land trust board members or staff. Therefore, any amendment request must strictly adhere to state and federal regulations regarding conflict-of-interest transactions as well as the participating land trust’s conflict-of-interest policy.
The doctrine of private inurement in federal tax law generally prohibits tax-exempt organizations such as land trusts from using their assets to benefit any individual or entity with which it has a close relationship, such as a board member, employee, donor, or other insider. This means land trusts can jeopardize their tax-exempt status for any amendment that conveys to a private party a net financial gain unless the amount is insubstantial or a necessary incidence in accomplishing a more significant public benefit. The inurement doctrine does not prohibit insiders such as past or current board members from donating a CE or requesting a subsequent amendment. Still, it does potentially bring greater IRS scrutiny to those transactions. Private inurement can also expose participants to additional financial penalties known as intermediate sanctions for excess benefit transactions. IRS scrutiny on inurement issues is not limited by the three-year statute of limitations that governs challenges to deductibility.4
In reviewing amendment requests, land trusts must also consider the doctrine of impermissible private benefit, which generally prohibits tax-exempt organizations from using their assets to benefit any individual or entity, not just insiders. However, an incidental private benefit can be an exception. An incidental qualitative benefit occurs when the benefit to the public cannot be achieved without necessarily benefitting private individuals. For example, an amendment request for the development of a public trail corridor across a conserved property may enhance that property’s value if the local real estate market favors undeveloped land adjacent to the trail system; however, the public benefit of having access to the trail corridor might not be achieved without the amendment. Quantitative private benefit is insubstantial compared to the more significant public benefit gained. The IRS permits both qualitative and quantitative private benefit in easement amendments but provides little specific guidance on what it deems “incidental.” IRS guidance regarding private benefit can be found in the IRS report “2001 EO CPE, Private Benefit Under IRC 501(c)(3)“.
Some CE amendments may be governed by state law. In some states, CEs may constitute a charitable trust, requiring judicial approval for amendments altering the administrative terms or charitable purpose of a CE.12 Many state attorney generals have been reluctant to adopt this position, but landowners should be aware of this issue. Other state statutes also may apply. An in-depth discussion of landowner considerations for conservation easement amendments, including a comprehensive list of state statutes and regulations governing CE amendments as of 2014, is available in the LTA pamphlet, “Amending Conservation Easements: Evolving Practices and Legal Principles”.
Land Trust Practices
Many land trusts have become stricter in considering and granting amendment requests in response to these issues and rising amendment requests from landowners. Land trusts that are LTA members are required to adopt policies and procedures consistent with LTA’s “Amendment Principles” (listed in the Additional Resources section below). Land trusts who voluntarily participate in LTA’s accreditation program (as of July 2021, there were 453 accredited land trusts out of approximately 1,000 overall LTA member organizations) must commit to even more stringent amendment guidelines, including periodic review by LTA accreditation staff of selected amendment transactions. A list of land trusts currently accredited in South Carolina can be found online at LTA’s Accredited Land Trust Locator website. Land trust policy for landowner amendment requests may require transaction fees or additional documentation, such as an appraisal or updated title opinion.
For most land trusts, the amendment request must result in a “net conservation gain” or “net-neutral conservation gain” to be approved. In a “net-neutral” scenario, the amendment results in no loss or detriment to the CE’s original conservation purposes or values. In the “net gain” scenario, the amendment enhances those conservation values and purposes. This “net neutral/net gain” principle is commonly resolved in an acreage substitution. For example, if a CE amendment request impacts five acres of the protected property, the land trust requires the landowner to add five acres from an adjacent property to the CE. This swap would result in a “net-neutral” amendment because the amount of land protected under the conservation easement would stay the same after the amendment, without losing the conservation purposes and values.
However, a simple acreage swap may not create a net-neutral or net-benefit scenario in some situations. Conservation values can change over time or may be different for different locations within the property. For example, requesting an amendment to swap acreage from an upland, mature hardwood forest area to a lowland pasture area would not be an acceptable swap because of the difference in habitat and ecosystem quality between the two areas; the upland area has more conservation and habitat value. In some cases, the landowner may not have additional adjacent acreage to add to the CE. Amendment requests where “net-neutral” or “net-gain” scenarios are not clear require the land trust to use its best judgment in determining what conservation values are present, relevant, or degraded in an amendment request.
Appraisals of CE amendments are relatively rare. However, in cases where an amendment may potentially enhance the property’s value, the land trust may require an appraisal or an appraiser’s analysis or obtain these items themselves. If the appraisal indicates no gain, the appraisal documents that fact against claims of private benefit or inurement; if the appraisal indicates gain, it provides a basis to negotiate amendment terms to offset the financial gain or deny the amendment proposal. In cases where the CE amendment enhances the conservation benefits of a donated conservation easement, such as an amendment request that extinguishes reserved rights within the original CE or otherwise enhances the conservation restrictions on a property, the landowner will need to obtain an appraisal of the amended easement to claim an additional income tax deduction for the amendment.4
Some land trusts may require a service fee for processing amendment requests. In best practices, the land trust will attempt to fashion an amendment agreement within the constraints of applicable law and in conformity with the original CE grantor’s documented intent. Amendment agreements must also be able to meet and pass the scrutiny of the land trust’s donors, the public, the IRS, the state attorney general, and any other entity that has influence over its tax-exempt status.4
Summary of Considerations for Landowners
As landowners consider donating or selling a CE, they should consider the following recommendations regarding amendment provisions:
- Ask the land trust to include an amendment clause in your draft CE and make sure it follows current IRS guidance.
- Ask the land trust representative to share the organization’s current amendment policy with you.
- Review the amendment request procedure with your land trust representative and ask about any relevant fees the land trust might charge for future amendment requests.
- Ask a qualified legal consultant about relevant state guidelines or regulations regarding future CE amendments. As in any legal transaction, a landowner is strongly encouraged to obtain independent legal counsel in a CE conveyance, outside of the counsel available from your land trust representative. As with appraisers, some land trusts maintain lists of attorneys with experience representing conservation easement donors; or ask your land trust representative to connect you with other conservation easement donors who have used legal consul. If an experienced conservation easement attorney cannot be found in your area, seek one with experience in real estate law and contracts, or consider reaching out to land trusts and/or conservation easement donors from other parts of your state for references.
Landowners considering amendments who have already conveyed a CE or who have acquired or inherited land with a CE placed on it should follow these recommendations:
- Obtain a copy of the CE and review any amendment provisions it contains with the land trust representative. If you cannot find a copy of the CE, ask your land trust for one. They are obligated to provide one to you.
- Inform your land trust you are considering an amendment request and ask them to provide you with their amendment policy and procedure. If conflict of interest is a concern, ask to see the land trust’s conflict of interest policy. Be sure to ask about any relevant fees or documents that may be required to make and process an amendment request.
- Be prepared to negotiate different proposals with your land trust for a net conservation neutral or net conservation gain scenario in your amendment.
- Consider obtaining a qualified appraisal or appraiser’s analysis of your amended easement if you are concerned about the potential for tax fraud. In some cases, your land trust may require that you obtain an appraisal. If you plan to apply for additional tax benefits for an amendment that additionally restricts the development rights on your property, an appraisal or appraisal update may also be required; consult with a qualified tax consultant in this case. Ask your land trust to provide you with a list of appraisers who have experience appraising CEs.
Change is inevitable, and even CEs that promise to protect land and natural resources in perpetuity occasionally require some adaptation. CE amendments are on the rise, but because of the potential fraud and regulatory issues associated with them, many land trusts are becoming more regulated in processing, reviewing, and granting amendment requests. Landowners seeking a CE amendment should be aware of potential legal issues and seek independent legal counsel, review the land trust’s amendment policy and procedure with their land trust representative, and be prepared to negotiate a “net neutral” or “net gain” proposal regarding impacts to the property’s conservation values.
- 2015 National Land Trust Census Report. Washington (DC): Land Trust Alliance; 2016 Nov [accessed 2021 Aug 2]. http://s3.amazonaws.com/landtrustalliance.org/2015NationalLandTrustCensusReport.pdf. Although the Land Trust Alliance normally publishes a census every five years, the 2020 census was delayed due to Covid-19.
- Information on South Carolina conserved land was provided courtesy of The Nature Conservancy of South Carolina, the Conserved Lands Database steering committee, and the South Carolina Land Trust Network.
- Rissman AR, Owley J, Shaw MR, Thompson B. Adapting conservation easements to climate change. Conservation Letters. 2015 [accessed 2021 Jul 28];8(1):68–76. https://doi.org/10.1111/conl.12099.
- Owley J, Cheever F, Rissman AR, Shaw MR, Thompson Jr BH, Weeks WW. Climate change challenges for land conservation: Rethinking conservation easements, strategies, and tools. Denver Law Review. 2017 [accessed 2021 Jul 28];95,727–779. https://heinonline.org/HOL/P?h=hein.journals/denlr95&i=751.
- Amending conservation easements: Evolving practices and legal principles. 2nd ed. Washington (DC): Land Trust Alliance; 2017. http://s3.amazonaws.com/landtrustalliance.org/AmendingConservationEasements-2nd-Edition.pdf.
- Law J. A dictionary of law. Oxford, England: Oxford University Press; 2018.
- Byers E, Ponte K. The conservation easement handbook. 2nd ed. Washington (DC): Land Trust Alliance and The Trust for Public Land; 2005.
- McLaughlin NA, Machlis B. Amending and terminating perpetual conservation easements. Probate & Property. 2009 July/August [accessed 2021 Jul 27], 52–56. https://heinonline.org/HOL/P?h=hein.journals/probpro23&i=262.
- Results of Land Trust Alliance research and survey on easement modification and termination. Washington (DC): Land Trust Alliance; 2014 [accessed 2021 Jul 29]. https://s3.amazonaws.com/landtrustalliance.org/publication/files/ResearchResults.pdf.
- Fogarty MG. Navigating IRS challenges to conservation easements. The Florida Bar Journal. 2016 [accessed 2021 Jul 25];90(7):52–58. https://www.floridabar.org/the-florida-bar-journal/navigating-irs-challenges-to-conservation-easements/.
- Tax court upholds amendment clauses but continues attack on floating homesites in conservation easements. 2019 Jan 19 [accessed 2021 Jul 31]. https://www.jdsupra.com/legalnews/tax-court-upholds-amendment-clauses-but-84307/.
- Moriarity J. Section 170(h) and conservation easement deed amendment clauses. Internal Revenue Service Memorandum, No. AM 2020-001. 2020 Mar 27 [accessed 2021 Jul 30]. https://www.irs.gov/pub/foia/am-2020-001.pdf.
- Hamilton, JD. Understanding the debate about conservation easement amendments. Saving Land Magazine. Winter 2014 [accessed 2021 Jul 27]. https://www.landtrustalliance.org/news/understanding-debate-about-conservation-easement-amendments.
IRS Safe Harbor Amendment Clause Example
In March 2020, the IRS Office of Chief Counsel published a memorandum containing the following safe harbor amendment clause compliant with the perpetuity requirements of IRS Section 170(h) for inclusion in CE deeds.11 The following sample provision was published with the caveat that the inquiry must be compliant with the CE deed as a whole and the surrounding facts and circumstances.
“Grantee and Grantor may amend this Easement to enhance the Property’s conservation values or add real property subject to restrictions set forth in this deed to the restricted party by an amended deed of easement, provided that no amendment shall (i) affect this Easement’s perpetual duration, (ii) permit development, improvements, or uses prohibited by this Easement on its effective date, (iii) conflict with or be contrary to or inconsistent with the conservation purposes of this Easement, (iv) reduce the protection of the conservation values, (v) affect the qualification of this Easement as a “qualified conservation contribution” or ‘interest in land,” (vi) affect the status of Grantee as a “qualified organization” or “eligible donee,” or (vii) create an impermissible private benefit or private inurement in violation of federal tax law. No amendment shall be effective unless documented in a notarized writing executed by Grantee and Grantor and recorded in the Clerk’s Office of the Circuit Court of [County, State].”
Land Trust Alliance Amendment Principles*
A conservation easement amendment should conform to all the following amendment principles:
- Clearly serve the public interest and be consistent with the land trust’s mission.
- Comply with all applicable federal, state, and local laws.
- Not jeopardize the land trust’s tax-exempt status or status as a charitable organization under federal or state law.
- Not result in private inurement or confer impermissible private benefit.
- Be consistent with the easement’s conservation purpose(s) and intent.
- Be consistent with the documented intent of the grantor and any direct funding source.
- Have a net beneficial or neutral effect on the relevant conservation values the easement protects.
*From Amending Conservation Easements: Evolving Practices and Legal Principles. 2nd ed (2017). Washington (DC): Land Trust Alliance.