February 2002

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Guest Commentary 

Gina Rodriquez is Sacramento editor for Spidell Publishing, Inc. Portions of this article are reprinted with permission from Spidell’s California Taxletter (www.caltax.com).

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California residents “paid” half price for $61.2 million worth of land received in 2001 from donors taking advantage of the state’s Natural Heritage Preservation credit. The tax credit law is an incentive for taxpayers to donate certain land and/or water rights to certain nonprofit organizations, conservancies or governmental agencies for preservation.

The California Wildlife Conservation Board (WCB) did not approve any tax credits for the 2000 taxable year – the first year to claim the credit – but approved $33,635,827 in tax credits for 10 donors for the 2001 taxable year for receipt of $61,156,050 worth of land and water rights. The WCB has authority to approve a maximum of $100 million in credits by the statutory sunset date of December 31, 2005. Of that amount, $66,364,173 in Natural Heritage Preservation credits was still available for approval by the WCB as of January 1, 2002. See “Summary of Approved Projects for the 2001 Taxable Year” for a complete listing of donations, which were mostly made by limited partnerships. WCB members include Michael Flores, Member, Fish and Game Commission; B. Tim Gage, Director, Department of Finance; and Robert C. Hight, Director, Department of Fish and Game.

The credit is equal to 55 percent of the fair market value of donated land or water rights, is in lieu of any other California credit or deduction for which the taxpayer may qualify, and must be claimed on Form FTB 3503, Natural Heritage Preservation Credit (R&TC Secs. 17039.1, 17053.30, 23036.1 and 23630). To claim the credit, the taxpayer must first obtain approval from the WCB.

Monetary Benefactors

This credit is particularly beneficial to individuals who donate appreciated property and may incur an alternative minimum tax (AMT) when taking a charitable deduction. Individuals who contribute appreciated property may deduct the full fair market value as an itemized deduction, but must include the difference between the basis and the fair market value of property donated to a charity as a preference item for alternative minimum tax purposes (R&TC Sec. 17062). Corporations may only deduct the adjusted basis of donated property and the deduction is limited to10 percent of the corporation’s California net income (R&TC Sec. 24357).

S corporations, partnerships and LLCs taxed as partnerships pass through the fair market value of the qualified contribution to their shareholders, partners and members in accordance with their interest in the entity as of the date of the contribution. An S corporation may claim one-third of the credit on the S corporation return and pass 100 percent through to the shareholder.

Example of Individual Donation

Dave donates land used for grazing by bighorn sheep, an endangered species in California. The fair market value of the land is $1 million and the basis is $100,000. Dave can take a $1 million charitable deduction on his California return or claim a $550,000 credit ($1 million multiplied by55 percent), assuming he received prior approval from the Wildlife Conservation Board. If Dave takes the charitable deduction, he could have an AMT liability with $900,000 ($1 million - $100,000) as a preference item. If Dave chooses to claim the credit, he is not required to make an AMT adjustment because of this transaction. He may also take a federal charitable contribution deduction of $1 million.

Example of a Corporate Donation

ABC, Inc., owns a small piece of land with old growth trees in the middle. The basis of the land is $10,000 and the fair market value is $100,000. If ABC makes a qualified donation to a city in 2002, it gets a tax deduction of $100,000 on the federal return and a credit of $55,000 ($100,000 x 55 percent) on the California return. If ABC’s California taxable income is $350,000, the California tax is $30,940. At the federal level, assume ABC is in the 34 percent bracket. Here is the tax savings for making the donation:

California                      $55,000           ($30,140 used in 2002: $30940 - $800
                                                             minimum franchise tax)
Federal                         $34,000           ($100,000 x 34%)
Total Tax Savings         $89,000          

If ABC takes the charitable deduction on its California return, the deduction is limited to $10,000 (the basis of the property), which is not a preference item.

Eligible Donations

Donations must result in the protection, in perpetuity (fee or conservation easement), of agricultural lands, rangelands, open space, wildlife habitat, oak woodlands, wetlands, waterfowl habitat, wildlife corridors, archaeological resources, and/or the lands used for park purposes.  Any water or water rights that are donated must help improve the recovery of threatened or endangered species of plants and animals. To qualify for the WCB’s consideration, the donation must meet at least one of these tests:

• The property will meet the goals of a habitat conservation plan, multispecies conservation plan, natural community conservation plan, or any other similar plan subsequently authorized by statute that is designed to benefit native species of plants, including but not limited to, protecting forests, old growth trees, or oak woodlands, and animals and development.

• The property will provide corridors or reserves for native plants and wildlife that will help improve the recovery possibilities of listed species and increase the chances that the species will recover sufficiently to be eligible to be removed from the list, or will help avoid the listing of species pursuant to the California Endangered Species Act, or protect wetlands, waterfowl habitat, or river or stream corridors, or promote the biological viability of important California species.

• The property interest is a perpetual conservation easement over agricultural land, or is a permanent contribution of agricultural land, that is threatened by development and is located in an unincorporated area certified by the secretary to be zoned for agricultural use by the county.

• The property interest is a water right, or land with an associated water right, and the contribution of the property will help improve the chances of recovery of a listed species, will reduce the likelihood that any species of fish or other aquatic organism will be listed under the California Endangered Species Act or the federal Endangered Species Act will improve the protection of listed species, or will improve the viability and health of fish species of economic importance to the state. The donee receiving the water right, or land with an associated water right, shall retain title to the water right, and ensure that the water shall be used to fulfill the purposes for which the water right or land associated with a water right is being accepted. Any contribution of a water right that includes a change in the point of diversion, place of use, or purpose of use may be made only if the proposed change will not injure any legal user of the water involved and is made in accordance with either Chapter 10 or Chapter 10.5 of Part 2 of Division 2 of the Water Code.

• The property will be used as a park or open space or will augment public access to or enjoyment of existing regional or local archaeological resources.

Partial donations, such as a bargain sale, are eligible if the landowner and qualifying agency or organization agree to a sale of property for less than its appraised FMV. The donation value is the difference between the appraised FMV and the sales price. The donor’s tax credit is 55 percent that donated value.

Eligible Donations

Local agencies such as park and open space districts, cities and counties are eligible donees of land and water. Any state department or conservancy within the California Resources Agency is considered an eligible donee, including:

• Secretary of Resources Agency

• Wildlife Conservation Board

• California Coastal Commission

• Colorado River Board of California

• Department of Fish and Game

• Department of Parks and Recreation

• Department of Conservation

• Department of Water Resources

• California Coastal Conservancy

• Santa Monica Mountains Conservancy

• Coachella Valley Mountains Conservancy

• San Gabriel and Lower Los Angeles Rivers and Mountains Conservancy

• San Joaquin Conservancy

Landowners can also donate to IRC Sec. 501(c)(3) nonprofit organizations that have land protection and conservation as one of their primary goals and missions. In addition, the nonprofit organization must be designated by a local government, special district or state department (i.e., an eligible donee) to accept property in lieu of the local government, special district or state department.

Applications

While the natural heritage preservation tax credit is designed to encourage private landowners to donate qualified properties for conservation purposes, the program is not designed to accept applications directly from private landowners. As such, landowners must coordinate the preparation of the application package with an eligible donee. If the donation complements the mission of the donee and the donee is interested in holding title (either fee or easement) to the donation, the donee should facilitate the completion of the application package and submit the application package to the WCB.

A donee or entity accepting title to the donation is responsible for completing and submitting the application package to the WCB for final review and consideration. There is no application fee, however a donee may request financial assistance from the donor to prepare the necessary documents, i.e. an appraisal that must be included in the application.

Before any application can be submitted to the WCB, a public hearing is held in the county from which the donation is made.

For information on approval, contact the regional office nearest the location of the property. You can find the phone numbers at: www.dfg.ca.gov/wcb/nhpttocandtext.htm.

Or contact the Wildlife Conservation Board office by mail, phone or facsimile at: Wildlife Conservation Board • 1807 13th Street, Suite 103 • Sacramento, CA 95814, (916) 445-8448 (voice) • (916) 323-0280 (fax).

Attached is a Summary of Approved Projects for the 2001 Taxable Year