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Pension Protection Act of 2006

The Pension Protection Act of 2006, H.R. 4, was signed by the President on August 17, 2006. The primary provisions of interest to timberland owners are those increasing the tax advantages of contributions of conservation easements. There are new advantages for individual taxpayers generally, and additional advantages specifically for both corporate and individual farmers and ranchers. Before explaining the changes, here are the underlying rules for charitable contributions generally

Basic Rules for Cash Contributions to Charities - The maximum amount an individual taxpayer can deduct in a given tax year is either 30 percent or 50 percent of their "contribution base." The "contribution base" is an individual's taxable income computed without considering the charitable deduction and any net operating loss carryback. The limit is 50 percent for cash contributions to typical charitable organizations, such as churches, schools, and the United Way, so called "maximum deduction organizations." The limit is 30 percent for cash contributions to veterans, fraternal, and similar organizations. See IRS Publication 526 for details.

Basic Rules for Outright Contributions of Capital Gains Property - Capital gains property is property subject to capital gains treatment when sold. These rules would apply for example to an outright donation of timberland. The limit for a given year is 30 percent of the contribution base when capital gains property is donated to organizations that qualify for the 50 percent limit, maximum deduction organizations. The value of the donation is the fair market value of the property on the date title is transferred, as discussed in IRS Publication 561. If the taxpayer's basis in the property is used as the amount of the charitable contribution the 50 percent limit applies instead of the 30 percent limit.

Basic Rules for Contributions of Partial Interests in Property - Generally a taxpayer cannot deduct a charitable contribution of less than their entire interest in property. An exception is transfers in trust. The other exceptions are (1) a remainder interest in your personal home or farm, (2) an undivided part of your entire interest, and (3) a qualified conservation contribution. The rules for donations of partial interests are discussed in IRS Publication 561.

Basic Rules for Contributions of Qualified Conservation Easements - There is an extensive body of law defining what constitutes a "qualified conservation easement" for purposes of claiming a charitable contribution deduction. The primary issue is the fair market value of the easement considering the specific terms of the easement contract. A recent case in point is J.Turner (Tax Court Regular Decision, , TC-No. 16, CCH Dec. 56,522) full text. Assuming a fair market value acceptable to the IRS has been determined for a qualified conservation easement, the rules for contributions of capital gains property apply. This generally means that the donor's charitable contribution deduction is limited to 30 percent of their contribution base, defined above, since units of government, land trusts, and similar organizations that take such donations are maximum deduction organizations. If a donor elects to use their basis in the conservation easement, instead of its fair market value, their deduction is limited to 50 percent of their contribution base.

New Rules Under the Pension Protection Act of 2006 for Contributions of Qualified Conservation Easements

New rules apply to (1) individual taxpayers generally, and (2) qualified individual and corporate farmers and ranchers. These provisions apply only to qualified contributions in tax years beginning after December 31, 2005 and before January 1, 2008. Thus, for calendar year taxpayers the rules apply to contributions in 2006 and 2007.

Individual taxpayers generally - Under the new law the maximum charitable contribution deduction of an individual donating a qualified conservation easement is 50 percent of their contribution base, instead of 30 percent. Note that the amount of other charitable contributions is taken first, and the deduction for the conservation easement applies to the remaining amount, if any. In addition, the amount not deducible in the year of the contribution can be carried over to the following 15 years, instead of only 5 years.

Qualified individual farmers and ranchers - Under the new law the charitable deduction for a contribution by a "qualified farmer or rancher" of real property used in agriculture or livestock production is limited to 100 percent of their contribution base, instead of 30 percent. Note that the amount of other charitable contributions is taken first, and the deduction for the conservation easement applies to the remaining amount, if any. In addition, the amount not deducible in the year of the contribution can be carried over to the following 15 years, instead of only 5 years. A "qualified farmer or rancher" is an individual whose gross income from the trade or business of farming is greater than 50 percent of the taxpayer's gross income for the tax year. The term farming includes cultivation of the soil; raising agricultural or horticultural commodities and preparing commodities for market; and the planting cultivating, caring for, cutting down and preparing trees for market. Thus, timber and Christmas tree growers and processors qualify as farmers. [The new law adopts the definition of farming for special use valuation for estate tax purposes under Internal Revenue Code Sec. 2032A(e)(5)]. To qualify under the new law the provisions of the conservation easement contract must provide that the property remain available to be used in agriculture or livestock production. There is no requirement that the property continue to be so used. Note that this specific provision applies only to contributions after August 17, 2006.

Qualified corporate farmers and ranchers - A corporation that during the year of the contribution qualifies as a farmer or rancher can deduct up to 100 percent of the excess of the corporation's taxable income over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years. The contribution must be made to a maximum deduction charitable organization. The other charitable contributions of corporations are limited to 10 percent of the corporation's taxable income. To qualify as a farmer or rancher a corporation must meet the rules applicable to individuals, summarized above. In addition, the corporation's stock must not be readily tradable on an established securities market at any time during the year of the contribution, and if the contribution is made after August 17, 2006 the conservation easement contract must provide that the property remain available to be used in agriculture or livestock production. There is no requirement that the property continue to be so used.

IRS Clarifies Limitations on Qualified Conservation Contributions

The Pension Protection Act of 2006 (PPA) provided an additional tax incentive for taxpayers making qualified conservation contributions in 2006 and 2007. The term "qualified conservation contribution" is tax language for donation of a conservation easement meeting the qualifications set forth in Internal Revenue Code Section 170(h). Generally, PPA raised the limit on the amount of charitable contributions allowed from 30 percent of adjusted gross income (AGI) to 50 percent. and in the case of a qualified contribution by a qualifying farmer or rancher the limit was raised to 100 percent of AGI. In Notice 2007-50, the IRS uses a question and answer format to clarify how these limits are applied, and guidelines on who qualifies as a farmer or rancher for purposes of the 100% limit. For non-farmers or ranchers, the IRS advises that the 50% limit is applied as if the qualified conservation contribution was a cash donation, i.e. the rules applicable to cash donations, not those applicable to capital gains property, are applied. For purposes of the 100 percent limit a farmer or rancher is a taxpayer whose gross income from the trade or business of farming is greater than 50% of the taxpayer's gross income. This rules applies to the individual taxpayer, not to a corporation or partnership. Thus, the guidance on the application of the limits will help many taxpayers and qualify more of a donation for the longer 15-year carry forward of the amount not deductible in the year the donation is made. The guidance on who qualifies as a farmer or rancher may reduce the number of taxpayers meeting the 50 percent of gross income from farming requirement.

Other sources of information on the additional deduction for conservation easements include the Land Trust Alliance and The Nature Conservancy.