July24 Deadline to Amend Certain Conservation Easements

Most of you know that Congress passed the Conservation Easement Integrity Act in December. Huzzah! The main purpose of the bill was to cut down on abusive syndicated conservation easement transactions by capping the charitable deduction amount claimed by non-family partnerships. But another section of the bill created a process for amending conservation easements that are in the crosshairs of an IRS campaign against termination provisions and boundary line adjustment provisions. Under the bill, the IRS has until late April to issue so-called “Safe Harbor” rules, and then donors have 90 days to amend their easements to comply with the Safe Harbor.

On Monday, April 10 the IRS issued the Safe Harbor rules in IRS Notice 2023-30. The Notice sets a deadline of July 24, 2023 for donors to execute and record an amendment to a conservation easement to fall within the Safe Harbor rules around termination and boundary line adjustments. The Safe Harbor rules apply only to these two issues, and not to any other aspects of a conservation easement.

The good news is that most recent Maine donated conservation easements probably do not run afoul of the Safe Harbor rules. On termination, if your easement follows Section 14.G of the Maine Land Conservation Attorneys Network Model Conservation Easement Boilerplate since (which has not changed since November 2018), then the easement likely follows the substance of the Safe Harbor rules. Likewise, the Boilerplate does not contain any boundary adjustment provision, although that’s not especially telling because the Boilerplate only addresses the administrative provisions of the easement and the boundary adjustment provision, where it exists, is usually located elsewhere in the document. Thus, donors and land trusts should carefully check their recent donated easements for the existence of a boundary adjustment provision. Most Maine easements I see these days do not contain such a provision, but I do occasionally see them. For example, it is sometimes found in the division section, as an exception to the general prohibition against division. Where I have seen such boundary adjustment provisions in Maine easements, most of them do not comply with the Safe Harbor sample language because they do not require court approval.

So what’s the bottom line? Who needs to know about this and consider taking action? Here’s a three-step guide:

1) Did you donate a conservation easement in 2019 or later and claim a federal income tax deduction, or did you donate in an earlier year but claim a deduction in the 2019 tax year or later? If no, kick back and relax with a leftover Cadbury Creme Egg, there’s nothing further that you need to consider with respect to the Safe Harbor rules. If yes, read on.

2) Were you a syndicated partnership, or did the deal otherwise qualify as a reportable syndicated transaction (see statute for details, but these are exceedingly rare in Maine), or is your easement deduction already being contested in federal court? If yes, you’re out of luck, this Safe Harbor opportunity is not available to you. If no, read on.

3) Are both of the following true?

a. Your easement has no boundary line adjustment provision at all, or a boundary line adjustment provision that requires court approval and is limited to bona fide boundary location disputes?

AND

b. Your easement has a termination provision that tracks Section 14.G of the Maine Land Conservation Attorneys Network Model Conservation Easement Boilerplate, or otherwise closely tracks the sample provision of IRS Notice 2023-30?

If yes, then kick back with some leftover jelly beans, because you’re probably* on steady ground, and it’s unlikely that you need to go through the Safe Harbor amendment process. If no, you might want to consider going through the Safe Harbor process, and you should check with an experienced attorney for more specific legal advice.

Land trusts are not responsible for ensuring that their donors receive a tax deduction. That said, in the interests of transparency and maintaining a sound relationship, land trusts that have accepted easements that might be suitable for the Safe Harbor amendment process might want to reach out to those donors to inform them of this opportunity.

Also stay tuned for additional guidance from the Land Trust Alliance. In particular, there is an Alliance webinar, free to Alliance members, scheduled for May 3 at 2 p.m. Details here.

*Probably, because like any good lawyer I have to reiterate that this E-Bulletin is not to be relied on for legal advice for any specific easement or situation. Moreover, if you are very risk averse and want to avoid all doubt, then you might still want to go through the Safe Harbor amendment process. Also note that donors who are mega rich (about $13 million in total assets), and might owe federal estate tax when they die, should consider whether a Safe Harbor amendment might be useful, even if the easement was donated prior to 2019, to preserve federal estate tax benefits under I.R.C. § 2031(c).

‍

Call Me Mabee: Maine Court Case Touches on Eminent Domain of Conservation Easement

A recent Maine Supreme Court decision touches on some gnarly questions around conservation easements and restrictive covenants. Most of the opinion, Mabee v. Nordic Aquafarms, Inc., 2023 ME 15 (Maine 2023), deals with who has title to an intertidal strip of land, and is not particular to land conservation. But the surrounding issues are worth a closer look by the Maine land trust community, as they are likely to surface sooner or later in other cases.

Here’s the background on this mucky case. In 2018, Nordic Aquafarms launched plans to build a $500 million land-based salmon farm in the City of Belfast, using water piped to and from Penobscot Bay. Nordic purchased a shoreland parcel and gave it to the City for use as a park in exchange for a permanent easement for its pipe system. In response to the salmon farm threat, in 2019 Jeffrey Mabee, who owned a nearby upland parcel, claimed ownership of the intertidal zone fronting the former Nordic parcel, stemming from a 1946 deed. Mabee donated a conservation easement on the intertidal land, including where the proposed pipe was to be located. The conservation easement was originally conveyed to an organization called Upstream Watch, and was later assigned to the Friends of the Harriet L. Hartley Conservation Area. Neither organization held any other fee lands or conservation easements and both appear to have been formed expressly in opposition to the salmon farm proposal. In addition, Mabee claimed enforcement rights in a restrictive covenant included in the same 1946 deed, which limited the parcel to “residential purposes only.”

Mabee filed suit against Nordic and the City, seeking a declaratory judgment that he owned the disputed intertidal area and injunctive relief to enforce the conservation easement and the restrictive covenant. Countering Mabee’s ownership claims and conservation easement, in August 2021 the City brought an eminent domain proceeding in the intertidal land, to secure the right to place the pipe. Meanwhile, the Maine Attorney General intervened in the suit to state, seeking a declaratory judgment that if Mabee were found to have an ownership interest in the intertidal land and the conservation easement was a valid instrument, that the City is prohibited from unilaterally terminating the easement through an ordinary eminent domain process, and that court approval would be required for any termination, in accordance with Maine’s conservation easement enabling statute.

In October 2021, the trial court ruled in favor of Nordic and the City, finding that Mabee did not own any interest in the disputed intertidal area. But the Maine Supreme Court reversed in February 2023, finding that several details in the 1946 deed indicated the intent of the parties to retain the intertidal land. The Supreme Court also upheld Mabee’s enforcement of the restrictive covenant, finding that a restriction to residential uses was reasonable and furthered the original intent of the parties. Finally, the Supreme Court acknowledged the validity of the conservation easement but declined to order any injunctive relief, finding no evidence that a violation would occur in the future.

This case presents a rare instance of a conservation easement being used to ward off a specific development threat. Another unusual feature of this case is that the easement protects only intertidal land, and not any upland. In any event, in the wake of the Supreme Court’s reversal, the obstacles facing the City and Nordic have multiplied, and they will have to decide whether the project remains viable. Among other challenges, the lack of ownership means a State-issued lease is probably in jeopardy. For the latest, see this Press Herald article.

From a land conservation perspective, the City’s eminent domain action to terminate the conservation easement, and the Attorney General’s position insisting on court approval, raise interesting questions about the interplay between the state’s eminent domain law and the conservation easement enabling statute. If Nordic backs down and withdraws its application then those issues will remain unresolved. But it is significant that the Maine Attorney General has taken a formal position in a court filing that terminating a conservation easement through eminent domain requires court approval under the enabling statute, just like any other form of termination.

Peace Out: Maine Case Addresses Property Tax Exemption and Land Conservation

In January 2023, the Waldo County Superior Court issued its decision in Peace Ridge Sanctuary v. Town of Brooks. A good summary of the issues is found in this WGME story. In a nutshell, the Sanctuary (PRS) runs one of the state’s largest animal sanctuaries on a 789-acre property that it relocated to in 2016. Most of the parcels comprising the property are actively used for animal shelter activities. But a 200-acre portion is forested and primarily dedicated to land conservation. There are a variety of trails on the 200 acres, and PRS claimed that these trails are used both for its own animal-related programs (e.g., walking the dogs in custody of PRS) and by the general public. But the Town asserted, and the Court ultimately agreed, that there was “no meaningful level” of public access on the 200 acres. PRS does host over 1,000 visitors annually, but mostly for humane and environmental education programs on the developed area. It appears that the entire property was open to the public for hunting and snowmobiling under previous landowners, but PRS prohibited those activities in recent years. The Town denied property tax exemption, claiming that the shelter activities were not conducted in a charitable manner and that there was not sufficient public use of the 200 acres to provide substantial public benefit. PRS filed suit and a trial was held in May 2022.

The Superior Court held that PRS’ shelter activities were charitable and the parcels devoted to those uses qualified for exemption. But the Court took a different approach to the 200 acres of conservation land. The Court reviewed two key cases, Holbrook Island Sanctuary v. Inhabitants of the Town of Brooksville, 161 Me. 476 (1965) and Francis Small Heritage Trust, Inc. v. Town of Limington, 2014 ME 102. In Holbrook, the Law Court held that a wildlife sanctuary did not qualify for exemption because its prohibition of hunting conflicted with state wildlife management policy, which at the time emphasized hunting and had very little focus on protecting habitat or fragile species. Meanwhile, in Francis Small, the Law Court held that land trust preserves that were open to the public for a variety of recreational uses did qualify for exemption because they helped the state achieve its conservation and recreational goals and lessened the burdens of government. Thus, the Superior Court found that whether a conservation parcel qualifies for exemption is determined by whether the uses and management of the parcel further state conservation goals. The Court rejected the Town’s argument that a conservation parcel is exempt only if public access is allowed, and also rejected PRS’ argument that a conservation parcel is exempt regardless of the level of public access.

Under these facts, the Court held that the 200 acres in conservation did not qualify as exempt because PRS did not show how its use and management of the parcels furthered any state conservation goals. The Court found no evidence of any “active conservation efforts” on the parcels. And the Court pointed out that the parcels were not protected by a conservation easement or trust, and so PRS could sell them at any time and they could be developed.

I agree with part of the Court’s analysis, and disagree with other parts. I think the focus on whether a conservation parcel furthers state conservation policies is a useful framing, and is more nuanced than a simple rule that public access is always required for a conservation parcel to qualify for exemption. I think the Court’s public policy lens could be broadened to include local policies as well, such as a town’s comprehensive plan or land use ordinances, but that’s a minor quibble. Under the policy analysis, a typical land trust preserve that allows a reasonable level of public access will almost always qualify because there are plenty of state and local policies that encourage public recreational access. And if a property does not allow public access, it could still qualify for exemption if the land trust can show that it is protecting sensitive lands such as wetlands, scenic vistas, wildlife habitat, etc. in line with state laws such as the Natural Resources Protection Act or local ordinances.

Meanwhile, the Court’s insistence on “active conservation efforts” is understandable if a bit misguided. The “passive” versus “active” distinction is not especially useful in determining whether conservation goals are met, because sometimes the best way to protect sensitive habitat is to essentially do nothing and leave the land alone. That said, to the extent a land trust can prepare a management plan for a property that spells out how its uses and non-uses are furthering specific conservation objectives, that should be enough to satisfy municipalities and judges that are looking for some kind of “active” uses of the land.

My biggest bone to pick with the opinion is where it points out the lack of a conservation easement or other form of permanent protection as a reason to deny exemption. Property taxes are assessed on an annual basis, and property tax exemption is granted or revoked for a particular tax year. There is no requirement in Maine’s exemption statute that charitable uses be maintained in perpetuity in order for a parcel to enjoy exemption. For instance, a museum or a school or a nonprofit library is exempt in any given year because of the activities occurring on that property in that year, and there is no question that those institutions might change locations and the properties would then be entered back onto the tax rolls if they transition to non-charitable uses. The same should be true for land conservation parcels. Whether a land trust preserve qualifies for exemption should be determined by the uses of that property in the year under consideration, and not whether it is protected for all time. Of course, as a practical matter, a land trust preserve is protected in perpetuity because the organization would be in violation of its purpose if it decided to sell the land for development. But permanent protection should not be required as a matter of course for property tax exemption.

And yet… although I think I’m correct in terms of doctrinal analysis, it is nevertheless quite common for tax assessors and municipalities to demand that a parcel is permanently protected before granting exemption. For the past couple decades, a big impetus for land trusts to grant Declarations of Charitable Trust (or, less commonly, a conservation easement) on their preserves is to help achieve property tax exemption. It’s usually easier for land trusts to go along with these requests than to object on legal grounds. And there are other benefits from a double layer of protection, such as protection from creditors or future rogue boards.

So all in all, I think land trusts can live with the Court’s resolution of these issues in Peace Ridge Sanctuary. And keep in mind that this is a lower court opinion and thus is instructive and informative, but not binding. The Town did file a notice of appeal, but it also stated publicly in its annual report that it does not intend to pursue the appeal.

‍

‍