Conservation Easements and the Proceeds Regulation

Abstract

This Article provides an in-depth look at Treasury Regulation section 1.170A-14(g)(6)(ii), known as the proceeds regulation. The proceeds regulation is intended to protect the public investment in conservation if a perpetual conservation easement that was the subject of a charitable deduction under Internal Revenue Code section 170(h) is later extinguished. A proper understanding of the proceeds regulation is critical because the public investment in deductible easements is significant—billions of dollars are invested in such easements annually—and the regulation has recently been subject to challenges regarding its interpretation and validity. This Article examines the history and operation of the proceeds regulation as well as possible alternatives. It explains that the proceeds regulation provides a simple and easy-to-implement rule that avoids a host of future valuation difficulties. It demonstrates that the proceeds regulation is neither irrational nor inherently unfair to donors or subsequent property owners, and that the regulation serves to temper the perverse incentive property owners may have to seek to extinguish easements. This Article concludes that the proceeds regulation provides a reasonable solution to a difficult problem: ensuring that, if a deductible easement is extinguished, the conservation purpose of the charitable contribution will nonetheless be protected in perpetuity as required by section 170(h)(5)(A).

Keywords: conservation easement, 170(h), extinguishment, protected in perpetuity, proceeds, proceeds regulation, procedural invalidity, substantive invalidity, Chevron

JEL Classification: H20, H50, K11, K34, L30, Q20, Q24