PA Department of Revenue Ruling that Transfer Tax Due on Conservation Easement Transfers to Municipalities Must be Overturned
In December of 2014, the Pennsylvania Department of Revenue ruled that the grant of a conservation easement by a landowner to East Rockhill Township is subject to transfer tax. It sustained a finding that $6,300.00 is due as transfer tax on this transaction. The conservation easement named East Rockhill as the grantee. (There was no conservancy grantee as there are in many such transactions.) The broad scope of this Decision would apply to all County Agricultural and Municipal Open Space Easements as well as other easements that do not include a conservancy as a grantee. Therefore, if not remedied, it can result in transfer taxes being imposed on most of the conservation easements that, up to now, have not been found subject to transfer taxes.
This is due to a glitch in the tax law that provides for exemptions from payment of transfer tax. Section 1102-C(18) of the Tax Reform Code (72 P.S. §8102-C.3 (18) excludes from the tax:
“A transfer to a conservancy which possesses a tax-exempt status pursuant to section 501 (c) (3) of the Internal Revenue Code of 1954…and has as its primary purpose preservation of land for historic, recreational, scenic, agricultural or open space opportunities….”
As political subdivisions are not “501 (c)” organizations, the Board of Appeals held that transfers of conservation easements to Townships, and by implication to the Commonwealth of Pennsylvania and its agencies, are not tax exempt transfers.
The patent absurdity of this position is clear when one considers the following:
1. The clause following the one quoted above exempts transfers from a conservancy to the Commonwealth or its political subdivisions.
2. Another section of the Code (72 P.S. §8102-C.2) exempts entirely the Commonwealth and its political subdivisions from the obligation to pay transfer tax.
As to the first item, the Appeals Board stated that as transfers directly to the Commonwealth or political subdivisions were not included in the stated exemption, such transfers are not exempt.
As to the second, the Appeals Board stated this is exemption is in favor of the Commonwealth or a political subdivision. It does not extend to parties on the other side of the transaction – which means that the Grantor of the Conservation Easement is obligated to pay the entire 2% transfer tax!
There can be no doubt that if this construction of the transfer tax law is left to stand, land owners, municipalities, counties, DCNR and other agencies of the Commonwealth will be seriously handicapped. Municipal grantees will need to determine whether to absorb the entire 2% of transfer tax as an inducement to landowners to preserve their properties, or to require grantors to give up a portion of the often discounted purchase price to the pay the transfer tax. In either case, preservation dollars – already stretched thin – will be even further impacted by this additional tax burden..
The decision of the Appeals Board is surprising in that this writer is not aware of any prior conservation easement transfers being subjected to payment of transfer tax. County agricultural conservation easements have been routinely found exempt by our Recorder of Deeds as have been substantially all municipal conservation easements.
Regardless of what occurs with respect to an appeal, a legislative solution is needed to clearly state that transfers of conservation easements to municipalities are exempt from payment of transfer tax. The Tax Reform Code must be amended to add a subsection to the list of exempt transactions stating the following: “A transfer of a conservation easement having as its purpose the preservation of open space or agriculture to the United States, the Commonwealth, or any of their instrumentalities, agencies or political subdivisions.”
All are encouraged to contact their state legislatures and call upon them to sponsor and enact the above amendment.