COUNTY OF ALBEMARLE
Amendment of Appendix A.1, Acquisition of Conservation Easements (ACE) Program, of the Albemarle County Code.
To approve extension of ACE application deadline to September 30 for this year, to extend all corresponding deadlines, and to set for public hearing the attached ordinance to amend County Code Appendix A.1, Acquisition of Conservation Easements Program.
Messrs. Tucker, Foley, Davis, Kamptner, Cilimberg, Benish, Goodall
LEGAL REVIEW: Yes
September 1, 2004
ACTION: X INFORMATION:
One of the powers and duties of the ACE Committee under Albemarle County Code § A.1-105 is to periodically review the program’s ordinance and recommend to the Board of Supervisors changes needed to maintain the program’s consistency with the comprehensive plan and to improve the administration, implementation and effectiveness of the program.
Parcels that are considered for the ACE program are qualified and then ranked according to the number of points they earn from the ranking criteria delineated in Albemarle County Code § A.1-108. The ACE Committee periodically reviews the ranking criteria and recommends changes.
Albemarle County Code § A.1-111 provides that an ACE easement’s purchase price is calculated by multiplying the appraised value by the applicable percentage of the appraised value set forth in the table in that section. The percentage of the appraised value assigned to a particular income range is on a sliding scale that decreases as the owner’s income range increases. For example, an owner whose income is $47,000 would be paid for 100% of the easement’s appraised value; an owner whose income is $106,000 would be paid 64% of the easement’s appraised value; an owner whose income is $196,000 would be paid 10% of the easement’s appraised value. For individuals, income is determined from the aggregate of the annual adjusted gross income of each owner of record and the members of his or her immediate family in each of the 3 most recent tax years. For entities such as corporations and partnerships, the annual adjusted gross income is based on the aggregate annual adjusted gross incomes of the shareholders, partners or other interest holders. The aggregate income approach allows ACE funding to be stretched as fully as possible, encourages higher income owners to continue to donate conservation easements (and be compensated through the federal and state tax benefits), and discourages higher income owners from avoiding the effects of the sliding scale by holding title with others, or under an entity. The ACE Committee has reviewed the rules used to determine an applicant’s income under Albemarle County Code § A.1-111, which in turn is used to determine an ACE easement’s purchase price. In certain situations, the aggregate income approach has resulted in an artificially high adjusted annual gross income, and correspondingly low easement purchase price, that not only provides little economic incentive to sell the easement under ACE, but also fails to provide the federal and state tax benefits arising from a charitable donation because of the way in which income is calculated under federal income tax laws.
Finally, the ACE program’s annual application cycle begins with an application deadline of July 1, a deadline that has proved to be problematic. The ACE regulations allow the Board to waive this and other deadlines for good cause. (Albemarle County Code § A.1-110(I)).
Goal: 2.1 – “Protect and/or preserve the County’s rural character”
Goal: 2.2 – “Protect and/or preserve the County’s natural resources”
After much discussion, the ACE Committee recommends several changes to the ACE program’s ranking criteria in Albemarle County Code § A.1-105. The proposed changes would grant more points for parcels or resources deemed worthy of protection, such as those in proximity to protected lands, Virginia scenic highways or byways, or a County entrance corridor, those containing certain archaeological or historically significant features, and those adjoining certain waterways. These proposed changes are explained in Attachment A, “Proposed Changes to Ranking Criteria,” and are set forth in Attachment B, the proposed ordinance.
Determining Purchase Price
The attached ordinance also proposes revisions to Albemarle County Code § A.1-111. These revisions would clarify the rule by which adjusted gross income is determined for single individuals, and would change the rules for determining adjusted gross income for multiple individuals and entities. Generally, the proposed rules parallel federal income tax laws as to how taxable income and losses are attributed, e.g., for individuals, whether income is attributable to an individual or to the household, and for entities, whether income is attributable to the individual interest holders or to the entity itself. The proposed rules are as follows:
Single individuals: An owner’s average annual income will continue to be the average of that individual’s federal adjusted gross income for the 3 preceding tax years. The federal adjusted gross income of a spouse or dependent child would continue to be counted as the owner’s income. This approach was intended to prevent an owner with high annual adjusted gross income from abusing the program by transferring ownership of the land to a spouse or child with significantly lower annual adjusted gross income.
· Application of the rule; comparison of rules: The income of spouses and dependent family members would continue to be aggregated to the income of the owner of record under this proposal. Thus, where both a husband’s and wife’s annual adjusted gross income is $50,000, if one spouse is the owner of record the aggregate income approach would result in an adjusted annual gross income of $100,000 and the easement purchase price would be 70% of its appraised value. Note however, that if the spouses jointly owned the parcel, the weighted income approach applicable to multiple individuals (see below) would result in an adjusted annual gross income of $50,000 and the easement purchase price would be 100% of its appraised value.
· Issues: Other than a different federal income tax filing status, should the income of a married person who is a sole owner of a parcel, but who files a joint return, be based on an aggregate income approach, if the income of the same married person, whose spouse is also an owner, is determined using a weighted income approach?
Multiple individuals, S-corporations, partnerships, limited liability companies, and trusts or estates: The proposed ordinance would change the calculation of adjusted gross income for this class of owners from an aggregate to a weighted average approach. For each of the 3 preceding tax years, the weighted average for each year would be calculated by multiplying each individual’s respective percentage interest in the parcel or entity by that person’s federal adjusted gross income. Within the past year, the Board has twice waived the aggregate income approach for this class of owners, and allowed adjusted gross income to be calculated using the weighted average approach.
The ACE Committee recommends this change because recent experience with the two waiver applications has shown that the aggregate income approach, when applied to this class of owners, has resulted in high adjusted annual gross income levels that substantially reduced the payment price for an easement. Despite a high aggregate income level, the income levels of each individual within the ownership class may be insufficient to encourage them to pursue the federal and state tax benefits available for donating a conservation easement. At the same time, however, the aggregate income approach may reduce the easement’s purchase price to such an extent that it may not be attractive for them to sell an easement.
The ACE Committee suggests that the proposed weighted average approach, whereby payment is based on the owner’s proportionate share of income, is a more equitable method for calculating income.
· Application of the rule; comparison of rules: Under the existing aggregate income approach, a family S-corporation whose eight shareholders’ aggregate income exceeds $205,001 (assume, e.g., that each shareholder’s adjusted gross income is $61,000), would have been entitled to receive only 4% of the appraised value of the easement. Assuming the easement was valued at $500,000, the purchase price of the easement would be $20,000. This purchase price may be insufficient to encourage a landowner to sell an easement. Under a weighted income approach, the eight partners’ weighted income would only be $61,000 and would entitle them to receive 94% of the appraised value, or a purchase price of $470,000. Note that if the land was owned by a C-corporation (another name for the for-profit entity commonly known as a “corporation”) that had no income but whose shareholder’s adjusted gross income was $61,000 each, under the proposed ordinance the easement’s purchase price would be 100% of the appraised value.
· Issue: Does the weighted income approach unreasonably allow higher income individuals to avoid the effects of the sliding scale used to determine the easement purchase price by owning parcels in entities such as S-corporations? Is that an acceptable result since, as examples have shown, a number of individual owners of these entities may not have the economic incentive to sell an easement under the ACE program, and would likewise not have an incentive to donate an easement? Note that in the two waivers approved by the Board, the income levels of the various owners varied greatly and these wide ranges appear to have the effect of negating the economic advantages of selling (under an aggregate income approach) or donating an easement (because the lower income individual owners would receive little federal or state tax benefits).
C-corporations and other entities: For C-corporations and other similar entities, the proposed ordinance would change the calculation of adjusted gross income from an aggregate income approach to an average income approach. This class of entities’ average annual income would be the average of the entity’s federal adjusted gross income for each of the 3 preceding tax years. Unlike the entities in the S-corporation class, this class of entities’ income and loss is attributed directly to the entity, rather than to the individual shareholders.
· Application of the rule; comparison of rules: Under the existing aggregate income approach, the average adjusted annual income of each shareholder would be aggregated and averaged for the 3 preceding tax years. This is the same approach under the existing ordinance that is applied to S-corporations and other entities. Under the proposed average income approach, the income of the corporation’s shareholders would be irrelevant, and the easement’s purchase price would be based solely on the income of the corporation itself. Although C-corporations typically have not been a popular form of ownership for land under a conservation easement, the proposed formula may make it more attractive for high income owners who wish to shield their individual income from consideration and to sell, rather than donate, a conservation easement.
· Issue: Although the income of C-corporations is attributable to the entity itself, should the ACE program look only to the income of the entity? Will such a rule encourage abuse of the program by high income landowners who desire to sell, rather than donate, a conservation easement? If the aggregate income approach is discontinued, should the weighted income approach used for S-corporations apply to C-corporations and other similar entities as well?
Adjusting Values in the Table
The ACE Committee also recommends that the income values in the table in Albemarle County Code § A.1-111 be revised to reflect the increases in the consumer price index since the ACE ordinance was adopted in 2000.
Extension of Application Deadline
The ACE Committee recommends that the July 1 application deadline be extended for the current application cycle to October 31, and that all other deadlines in the current application cycle be correspondingly extended. It has become apparent that having the application deadline fall in the summer is undesirable because many people are on vacation and the farming community is extremely busy. The Board previously approved a similar extension in September 2003. Staff will ask the ACE Committee to consider whether these dates should be permanently amended in a future ordinance amendment.
Staff recommends that the Board set the attached ordinance amendment for public hearing on October 6, 2004.
Staff recommends that the Board extend the ACE application deadline to October 31 for this year, and extend all corresponding deadlines accordingly.
Attachment “A” - Proposed Changes to Ranking Criteria
Attachment “B” - Draft Revision of ACE ordinance
Return to 10/06 exec summary