Legal Analysis of the Conservation Easement Tax Credit in the Senate Version of H.R. 2419 (the 2007 Farm Bill)

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A conservation easement is a property right whereby a landowner agrees not to develop property.
Section 12204 of the Food and Energy Security Act of 2007 (H.R. 2419, as passed by the Senate)
would create a new tax credit for taxpayers who agree to protect a qualified species for a
specified amount of time under an approved plan. The proposed credit is graduated, so that
taxpayers who grant more significant restrictions on their property are able to claim a larger
credit. The intent of the proposed credit is that, in exchange for forfeiting the development right,
the landowner will receive a tax benefit, the species will gain from having its habitat protected,
and the public will have the benefit of conserved property. Providing tax incentives for
conservation is not new. Currently, taxpayers may deduct charitable donations made for
conservation purposes under Internal Revenue Code (IRC) § 170.
Some say the proposed credit will provide a needed incentive to private landowners to protect at-
risk species. Others state that the program may be too broad to enforce adequately, noting that
there have been abuses of the tax deduction provided by IRC § 170. Another point of view is that
the credit favors temporary efforts disproportionately to permanent conservation and would not
provide the public with a good value for the tax credit given. This report will review conservation
easements, generally, and discuss issues related to the proposed credit in section 12204 of H.R.
2419, as passed by the Senate, in particular. The House-passed version of H.R. 2419 does not
include the tax credit provision. The Senate has insisted on its amendment of H.R. 2419 and
requested a conference. House and Senate staff are engaged in active discussion.
The same tax credit provision is found in the Heartland, Habitat, Harvest, and Horticulture Act of
2007 (S. 2242), and similar proposals are included in the Habitat and Land Conservation Act of

2007 (S. 2223) and the Endangered Species Recovery Act of 2007 (H.R. 1422 and S. 700).

What is a Conservation Easement?.................................................................................................1
Current Tax Treatment of Donations of Conservation Easements............................................2
Proposed Endangered Species Recovery and Restoration Credit in the Senate Version of
the 2007 Farm Bill........................................................................................................................2
Qualified Habitat Protection Agreement...................................................................................3
Credit Amount...........................................................................................................................3
Allocation Limits......................................................................................................................4
Basis Reduction.........................................................................................................................5
Takings of Listed Species..........................................................................................................5
No Double Benefit....................................................................................................................5
Recapture .................................................................................................................................. 6
GAO Study................................................................................................................................6
Effective Date............................................................................................................................6
Legal Analysis of Proposed Credit..................................................................................................6
Conservation Easements In General.........................................................................................6
The 30-Year Habitat Protection Easement................................................................................7
Number of Parties.....................................................................................................................7
No Description of the Terms of the Easement...........................................................................8
Expansive Funding Increases Enforcement Duties...................................................................8
Uncertain Goals of Habitat Management..................................................................................8
The Public Benefit.....................................................................................................................8
Litigation Regarding Enforcement............................................................................................9
Conclusion ..................................................................................................................................... 10
Author Contact Information..........................................................................................................10

ection 12204 of the Food and Energy Security Act of 2007 (H.R. 2419, as passed by the
Senate) would create a new tax credit for taxpayers who agree to protect a qualified species ¹
for a specified amount of time under an approved plan. The amount of the credit would S

depend on whether the taxpayer, as part of the plan, granted a conservation easement to a federal
agency or state in order to protect the species’ habitat. Conservation easements appeal to both
landowners and those who favor environmental protection. Issues arise in balancing the amount
of protection provided with the tax credit given, in order to provide a fair public benefit in
exchange for the funds. Also, enforcement can prove difficult, in light of the expanse of the
program, the fact-specific nature of monitoring, and the number of parties that could be involved.
The House-passed version of H.R. 2419 does not include the proposed tax credit.² The Senate has
insisted on its amendment of H.R. 2419 and requested a conference. House and Senate staff are
engaged in active discussion.

An easement is a property right. Easements were created by common law centuries ago and have
been refined by state case law.
Generally, an easement allows one property to be used to benefit another property. Often, an
easement is viewed as a property right allowing an owner of neighboring land to use adjoining
property, such as for a driveway, or beach access. However, easements can also be granted to
benefit the public more generally, such as in the case of the easement taken around Copley Square ³
in Boston, limiting the height of buildings so that historic buildings would not be overwhelmed.
As also shown by the Copley Square easement, easements do not have to grant access to tracts of
land. Less tangible property rights may be conveyed, for example, the easements for light and air
allowed in New York City, whereby one property conveys its right to light and open space above
its building to another.
Easements are more than a mere agreement between two parties. They are described as “running
with the land,” meaning they attach to the property, not to the people agreeing to them. To
accomplish this the easements must do more than grant a mere personal right to the property. For
private easements, there must be some sort of connection between the properties that creates a
reason for the easement and conveys a benefit. The agreement must have all the formality of a
deed, such as being filed, and should state that the easement runs with the land. When an
easement has been conveyed, the property that has the benefit of the easement is known as the
dominant estate. The property upon which the easement exists is known as the servient estate. In
the case of the public easements, such as is described above in the Copley Square case, the
dominant estate is held by the public as a whole. When the terms of the easement mean the
servient estate is prevented from unfettered use of the property, it is known as a negative

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easement. An affirmative easement gives the easement holder the right to use the property in a
limited way, such as the right to travel across land.
A conservation easement is a relatively new form of property compared to the long history of
easements. It is most similar to a public easement, and is a form of a negative easement because it
restricts landowners from using their property in certain ways. A conservation easement preserves
the land in the condition it is at the time of the conveyance. One could be granted for several
reasons—to preserve undeveloped property, to achieve open space goals of a community, to
maintain agricultural land, or to preserve land for the benefit of wildlife, for example. To some
extent it could be argued that the conservation easement is a hybrid of a negative easement and an
affirmative easement. As discussed earlier, it does prohibit a landowner from using their property
at will. However, it also could allow the right of access, especially in the instance of easements
provided for wildlife protection. Scientific observation or monitoring could be required in that
instance. Or an affirmative easement could occur in the case of a conservation easement that
requires public access in order to qualify for tax benefits.
Under current law, a taxpayer who donates a conservation easement to a governmental unit or ⁴
tax-exempt organization may be able to deduct the donation as a charitable contribution. The
donation must meet three requirements. First, it must be of a qualified real property interest, of
which a perpetual easement is one type. Second, the donation must be made to a qualifying
organization, such as a governmental unit or public charity. Third, it must be made exclusively for
a conservation purpose. Conservation purposes are (1) the preservation of land for outdoor
recreation by, or the education of, the general public, (2) the protection of a natural habitat of fish,
wildlife or plants, or similar ecosystems, (3) the preservation of open space for the scenic
enjoyment of the general public or pursuant to a clearly delineated governmental policy, so long
as the preservation will yield a significant public benefit, and (4) the preservation of historically
important land areas and certified historic structures.

Section 12204 of the Senate-passed version of H.R. 2419 (Food and Energy Security Act of 2007)
would create an “endangered species recovery and restoration credit” for taxpayers who agree to
protect a qualified species for a specified amount of time under an approved habitat management
plan. The credit is composed of two separate credits: (1) the habitat restoration credit for
taxpayers who agreed to a habitat management plan for qualified species’ recovery and (2) the
habitat protection easement credit for taxpayers who agreed, as part of that plan, to grant an
easement to their property in order to protect the species. Qualified species would be “any species
listed as an endangered species or threatened species under the Endangered Species Act” (ESA)

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(16 U.S.C. §§ 1531-1544) or “any species for which a finding has been made ... that listing under
[the ESA] may be warranted.”
In order to claim the endangered species recovery and restoration credit, the taxpayer would be
required to enter into a “qualified habitat protection agreement.” This agreement would need to: ⁵
(1) include a habitat management plan agreed to by the appropriate Secretary and the taxpayer,
(2) be consistent with any applicable recovery plan approved for a qualified species under the
ESA, (3) be certified by the appropriate Secretary as contributing to the recovery of a qualified
species, and (4) require technical assistance be provided to taxpayers for carrying out their duties
under the plan.
The habitat management plan required under the agreement must identify at least one qualified
species to be protected. The plan could restore or enhance the qualified species’ habitat, or reduce
threats to the species through habitat management. The plan would need to describe the habitat’s
current condition, threats to the species that the plan was intended to reduce, management
practices to be undertaken by the taxpayer, and technical assistance to be provided to the
taxpayer. The plan would also need to provide deadlines relating to, and require monitoring of,
the undertaking of the management practices and the expected responses of the species and its
habitat.
The new credit would distinguish between qualified habitat protection agreements on the basis of
whether or not the agreement included an easement. The taxpayer could grant an easement for the
protection of a qualified species’ habitat to the Secretaries of the Interior, Commerce, Agriculture,
or Defense, or to a state. The granting of such an easement, and its length, would affect the
amount of the credit that could be claimed, as discussed below. The bill would classify
agreements into three categories:
• agreements in which the taxpayer granted an easement in perpetuity,
• agreements in which the taxpayer granted an easement for a period of at least 30
years, and
• any other agreements in which the taxpayer agreed to protect the qualified
species’ habitat for a specified period of time.
As mentioned, there are two components to the endangered species recovery and restoration
credit: the habitat restoration credit and the habitat protection easement credit. The habitat
restoration credit is based on the costs paid or incurred during the year pursuant to the habitat
management plan. The habitat protection easement credit is based on the value of any easement
granted by the taxpayer under the habitat protection agreement.

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The habitat restoration credit would equal: (1) 100% of the costs paid or incurred by the taxpayer
during the year pursuant to the habitat management plan if the habitat protection agreement
included a perpetual easement, (2) 75% of those costs if the agreement included an easement
granted for at least 30 years, and (3) 50% of those costs in all other cases. The costs for which the
credit could be claimed would be reduced by the amount of any financing provided under a
federal or state program that subsidized financing for the conservation of qualified species’
habitat. Additionally, the costs would not include those paid to comply with any federal, state, or
local requirement, other than those paid or incurred under the agreement. The taxpayers eligible
to claim the credit would be both the property owners who entered into the habitat protection
agreement and any parties who agreed to assume responsibility for the costs of its
implementation.
The habitat protection easement credit would equal: (1) the reduction in the property’s value due
to the habitat protection agreement if such agreement included an easement granted in perpetuity
(essentially the value of the easement), (2) 75% of the reduction if the agreement included an
easement granted for at least 30 years (essentially 75% of the easement’s value), and (3) zero in
all other cases. Only the property owner who granted the easement would be eligible for the
credit. The credit would be reduced by any amount the taxpayer received in connection with the
easement and would be disallowed if the taxpayer failed to provide the IRS with a qualified
appraisal of the property.
Several limitations apply to the amount that could be claimed as the credit, including the
allocation limitations discussed in the next section.
Taxpayers could claim the credit only if it had been allocated to them by the Treasury Secretary.
The bill would set a nation-wide limit on the amount that could be allocated annually and
provides for no new credit allocations after 2012. For each year from 2008 through 2012, the
Treasury Secretary, in consultation with the Secretaries of the Interior and Commerce, could
allocate $290 million for habitat protection agreements with perpetual easements, $55 million for
agreements with 30-year easements, and $35 million for all other agreements. The Treasury
Secretary would be required to establish by regulation, within 180 days of the act’s enactment and
in consultation with the Secretaries of the Interior and Commerce, a program to process
applications for the credit. Priority under the program would be given to taxpayers with
agreements:
• relating to habitats that would significantly increase the likelihood of recovering
and delisting an endangered or threatened species,
• that are cost-effective and would maximize the benefit to a qualified species per
dollar expended,
• relating to habitats of species with a federally-approved recovery plan pursuant to
ESA § 4,
• relating to habitats with the potential to contribute significantly to the
improvement of the status of a qualified species,
• relating to habitats with the potential to contribute significantly to the eradication
or control of invasive species imperiling a qualified species,

• with habitat management plans that would manage multiple qualified species,
• with habitat management plans that would create adjacent or proximate habitat
for the recovery of a qualified species,
• relating to habitats for qualified species with an urgent need for protection,
• with habitat management plans that would assist in preventing the listing of a
species as endangered or threatened under the ESA or similar state law,
• with habitat management plans that could resolve conflicts between the
protection of qualified species and otherwise lawful human activities, and
• with habitat management plans that could resolve conflicts between the
protection of a qualified species and military training or other military operations.
The Treasury Secretary would also be authorized to annually allocate during that same time
period, in consultation with the Secretary of Agriculture, $5 million for agreements with perpetual
easements, $2 million for agreements with 30-year easements, and $1 million for all other
agreements.
Any amount not allocated by the Treasury Secretary would be added to the following year’s
allocation. Taxpayers could carryforward any credit unclaimed due to the allocation limitation to
the next taxable year for which an allocation was made to that taxpayer. Similarly, taxpayers
could carryforward any unused allocation to the next taxable year.
For taxpayers claiming the habitat restoration credit, any increase in the property’s basis to
account for a capital expenditure would be reduced by the amount of the credit allowed. For
taxpayers claiming the habitat protection easement credit, the property’s basis would be reduced
by the amount of basis that would be allocated to the easement under Treasury regulations.
The Treasury Secretary would be required to request that the appropriate Secretary consider
whether to authorize, under the ESA, the taking by the taxpayer of the qualified species if such
taking was incidental to either (1) the habitat’s restoration, enhancement, or management pursuant
to the plan or (2) the property’s use after the expiration of the easement or period specified in the
agreement if the use would leave the qualified species at least as well off as it was prior to the ⁶
agreement.
Any amount for which a credit was allowed could not also be deducted or used to benefit from
another credit.

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The Treasury Secretary would be required to promulgate regulations to provide for recapturing
the credit in the event that taxpayers failed to carry out their duties under the agreement and there
were no other available means to remediate the failure.
The Government Accountability Office (GAO) would be required to report to Congress on the
credit’s effectiveness and provide recommendations to improve it. An interim report would be due
within three years of the act’s enactment date, and the final report would be due within five years
of such date.
The endangered species recovery and restoration tax credit would be available in taxable years
beginning after December 31, 2007. As discussed above, the bill only allocates credits through

2012.

One limitation on conservation easements in general is that they are disfavored under common
law. The reason is that except for public easements, easements must benefit a neighboring, or
appurtenant, property. A conservation easement could be seen as benefitting only the property
itself, since it is only conserving that area. Or it could be labeled as an easement in gross, which is
an easement the use of which it is not dependent on owning a dominant estate. Easements in gross
are subject to challenge, as they can be characterized as more of a personal agreement, rather than
a true property right.
Courts look at whether easements touch and concern land, to determine whether the agreement is
more than a mere contract. There is no pat test for when an agreement touches and concerns the
land. To succeed, either the benefit or the burden of the agreement must directly affect land,
rather than an individual. An argument could be made that adjoining properties benefit from
undeveloped, preserved space next door. However, under this proposed legislation, adjoining
properties probably would not be the easement holders.
A second problem that can occur when the easement is held by someone other than a neighbor, is
that the oversight a neighbor provides is lost. Common law easements could be monitored daily ⁷
by the landowner next door. In the case of a statutorily mandated easement, the easement holder
could be thousands of miles away.

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The legislation would allow the habitat protection easements to receive tax benefits: either a tax
credit in the amount of value the property loses by entering the easement, if a permanent
easement; or up to 75 percent of that value if a 30-year easement is entered. The 30-year ⁸
easement has a recent precedent under the Healthy Forest Restoration Act of 2003. That law
provided a tax credit of up to 75 percent to landowners who issued a 30-year easement to restore
and enhance habitat for species listed under the ESA.
A 30-year easement appears to contradict the basic distinction between an easement and a
contract. As mentioned earlier, an easement is considered a property right, not a contract. It is
presumed to last as long as the land. Based on this fundamental concept of easements, a 30-year
term is more in the nature of an agreement between parties than it is a property right. Under the
proposed provision, a property owner could enter a 30-year easement and obtain a tax credit
worth 75 percent of the value lost, and still have the full use of the property after 30 years.
Considering the enduring nature of property and of species protection, 30 years may not be a
significant time period. Other landowners would be restricting development on their property
permanently for just 25 percent more in tax credits. Some question the relative value of the
benefit to the public compared to the tax benefit received by the landowner.
One potentially problematic aspect of this legislation, in terms of its practical application, is the
number of parties that could be involved in each agreement. It is possible for three parties to be
involved: the easement holder, which would be an agency or a state; the agency that approves the
habitat management plan; and the agency that enforces the easement.
Easement holders could come from many sources. Under the bill, the easements would be held by
the Secretary of the Interior, the Secretary of Commerce, the Secretary of Agriculture, the
Secretary of Defense, or a State. Each of these agencies would need a system to keep track of
easements that they hold, and in the case of the Department of the Interior (DOI), also track the
habitat management plans they have approved. The IRS would have to track these agreements
too. These parties could each have enforcement responsibilities, as easement holders traditionally
ensure the easement is in place, and this bill implies that enforcement would be allowed by either
the IRS or the easement holder. There could be conflicts among the parties with the right to
enforce if there were disagreements as to whether the terms of the easement had been met.
The habitat management plan would be approved by either DOI or the Department of Commerce
(DOC). However, it is not clear which agency would consider whether the easement is consistent
with Section 4 of the ESA, as required by the bill. Also, the habitat management plan is referred
to as an agreement, but it is not clear whether or what enforcement rights the DOI or DOC would
have as parties to that agreement. Again, there could be a conflict between what DOI or DOC
considered a breach in the terms of that agreement, and whether the easement holder considered
the terms of the agreement broken.

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The bill would require the Treasury Secretary to request any incidental take permit for the
landowner at the time of the easement or following the easement’s cessation. The permit, which is
found under Section 10 of the ESA, is usually sought by the permittee. It is possible that this is a
method of ensuring the conservation purposes of the act are met, by restricting application to
injure or harm a protected species, even after the easement has expired. It would keep the IRS
involved in the process long after the tax credit had been claimed.
Under this bill, there are no guidelines for the terms of the easement, such as might clarify
enforcement. The easement should have an express provision allowing a right of access for
monitoring.
This bill would have significantly more authorized funds than either IRC § 170 or the Healthy
Forest Reserve Program. A total of $8 million is available to the three types of qualified habitat
protection plans, per calendar year, made by the USDA, and $380 million is available for those
issued by the DOI and DOC, annually. In contrast, the first authorized funding for the Healthy
Forest Reserve Program was for $25 million.
A list of priorities is provided for determining which applicant taxpayers should get the tax credit.
The list includes eleven items and has no hierarchy. The eleventh priority, “habitat management
plans that may resolve conflicts between the protection of a qualified species and military training
or other military operations,” does not seem to apply to private landowners that are the subject of
this bill. Yet it is given the same importance as the first-listed priority, “habitats that will
significantly increase the likelihood of recovering and delisting a species,” which is the goal of
the ESA.
Under the ESA, it is against the law to harm an endangered species, including habitat destruction
that leads to injury or death (ESA § 9; 15 U.S.C. § 1538), and some special rules may prohibit
harming threatened species. (See CFR Title 50.) This means that landowners are already ⁹
prohibited from modifying their property in a way that could harm an endangered species. In
those cases where an endangered species exists, the habitat conservation easement could be
viewed as a landowner receiving compensation for obeying the law. In the case of endangered
qualified species, the only difference between the status quo and the habitat protection easement
is the habitat management plan. On the other hand, it could be seen more in the nature of
compensation for a taking of a property right. In that case, the short-term easement is less
meaningful, as a constitutional taking is said to be a permanent restriction on the use of property.

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There have been enforcement issues with charitable easement donations under IRC § 170
according to the Internal Revenue Service, and the IRS Commissioner testified in 2006 that the
agency “has seen abuses that compromise the policies and the public benefit that Congress ¹⁰
intended to promote.” Similar problems could surface with this credit program. For example, it
appears that determining whether an easement or underlying agreement is in compliance with the
law could require site visits, a nearly impossible task for the IRS and the other agencies that
would be involved. In addition to fact-intensive reviews, there is also the problem that some of
these easements, and their attendant habitat management plans, are intended to be enforced in
perpetuity.
Case law illustrates the complexities in enforcing conservation easements. For one thing,
compliance is based on site-specific facts. For example, to find whether a wildlife sanctuary was
serving its conservation purpose for a state tax credit, a court had to review what public access ¹¹
was available to the site. In one case under IRC § 170, easements for conserving property along
Lake Michigan were designed to preserve natural resources, including habitat for threatened
plants, while also allowing the taxpayers to build additional footpaths to the beach, construct a
boathouse, trim trees, and move plants. In determining the permissibility of the claimed
deduction, courts closely looked at the easements, with the Sixth Circuit concluding that they
were “carefully drawn to prohibit any activity or use of the encumbered property that would ¹²
undermine their stated conservation purpose.”
There may also be concern about possible overvaluation of the easements. For purposes of the
charitable contribution deduction under IRC § 170, the value of an easement is generally
determined by comparing the value of property subject to the easement with and without the ¹³
restriction. Donations are subject to substantiation and appraisal requirements. Even with these
safeguards, there have been concerns about taxpayers overvaluing easements in determining the ¹⁴
amount of the deduction, and similar concerns could be raised with the credit program.
Another enforcement issue could arise with credit recapture. Under the bill, the Treasury
Secretary is directed to promulgate regulations for recapturing the credit should taxpayers fail to
carry out their duties under the habitat protection agreement and “there are no other available
means to remediate such failure.” The recapture provision appears unusual in that it requires there
be no other means available to remedy the taxpayer’s noncompliance, rather than simply
requiring noncompliance by the taxpayer.

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¹⁴^S^ee,^e.^g^.^,^Com^mⁱ^s^s^ione^{r Mille}^{r T}^e^sti^m^ony^,^s^upr^a^f^oot^note^10.

Section 12204 of the Food and Energy Security Act of 2007 (H.R. 2419, as passed by the Senate)
would create a new tax credit for taxpayers who agreed to protect a qualified species for a
specified amount of time under an approved plan. The intent of the proposed credit is that, in
exchange for forfeiting the development right to property, the landowner will receive a tax
benefit, the habitat of endangered or threatened species will be protected, and the public will have
the benefit of conserved property and protected species. While environmentalists and landowners
appear united in wanting a method of conserving property in exchange for a tax credit, some
aspects of this proposed legislation could complicate the public benefit intended. Those factors
include an uncertain enforcement scheme in which several agencies could be involved, difficulty
in monitoring compliance due to the scope of the program and uncertain provisions allowing
access to the property, and the temporary nature of some of the protections provided.
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