Changes for Eminent Domain and Condemnation in Indiana

The U.S. Supreme Court in the Kelo case in 2005 said a local government entity New London, CT could not condemn property to convey a private benefit. But it was okay to take the property of an individual if pursuant to a carefully considered   development plan as long as the plan was not adopted to benefit a class of “identifiable individuals.”

For a long period of time, the U.S. Supreme Court has said takings are permissible even though the reason for the taking is for “public purpose” not necessarily explicitly for “public use.” Implications of the distinction between “use” and “purpose” is where a battle has been raging!

Economic development comes under “public purpose.” Developments to expand the economy of an area are everyday events across America! The Supreme Court said if the Kelo holding is not satisfactory to a state, that state’s legislature could amend its takings law accordingly.

State legislatures and administrations have reacted in different ways. What follows are some of the changes added to the law of takings in Indiana, in the 2006 session.

Indiana Changes

First of all, to answer the “Kelo concerns” while the usual “public use” projects (highways, utilities, airports, .) will come under the eminent domain procedures, the amended Indiana law says that takings for development (private to government to private or private to private) with the power of eminent domain can only be where what may be referred to as identifiable “economic blight.”

Where “blight” comes in to play may be the following situations:

• a structure that is a public nuisance;

• a structure unfit for human habitation;

• a structure that is a fire hazard or other public safety threat;

• a structure that is not fit for its intended purpose because of infrastructure deficiencies;

• a vacant or abandoned parcel in a substantially developed neighborhood in a nuisance-type condition that has not been remedied within a reasonable time after notice;

• a structure with delinquent taxes exceeding the assessed value:

• a property environmentally contaminated or

• an abandoned property.

Specifics of the Indiana law on the above points can be found at IC 32-24-4.5-7.

Among the other changes added in 2006 to Indiana law is the amount of compensation for certain takings of property. For farmland, the promise in the law for takings under the power of eminent domain the compensation must be 125 percent of the fair market value. If the taking is a residential property in which the owner lives, 150 percent of the fair market value is provided in the law.

Another significant change is the landowner who elects to enter a condemnation proceeding and gets more than offered 45 days before trial may get an extra $25,000 toward litigation expenses. That is a 10 fold increase from a similar provision in prior law.

Further, the new law adds a time limit of two years for the condemning agency to file a condemnation proceeding once the landowner rejects an offer. Otherwise, the taking agency must wait three years after the two years lapse before seeking the property for the same or substantially similar project. However, if there is a rejection of an offer from the Indiana Department of Transportation, a public utility or pipeline company, these entities have six

years rather than the two years to file a complaint. (The above is added by Indiana P.L.163-2006

along with numerous other changes in takings law.)

Tax aspects of eminent domain

Finally, beyond the 2006 changes in the Indiana takings law, keep in mind the favorable federal income tax treatment of money received from eminent domain takings. The net received is often long capital gain from real estate though the proceeds may be ordinary income. But if it

is long term capital gain, there is potentially a tax rate of no higher than 15% and as low as 5%. In addition, the proceeds could be reinvested in similar property of the taking under Internal Revenue Code (IRC) Section 1033 and defer if not permanently avoid taxation of the realized gain. In the case of a real estate taking under eminent domain powers, there are three years available after the year of obtaining the proceeds to find replacement property.

Furthermore, the landowner can have possession of the money during this replacement period. The rules of Section 1033 should not be confused with the like-kind exchange law of IRC Section 1033. Section 1033 has a much shorter time period for finding like-kind replacement property and the taxpayer (or his or her agent) may not take possession of money for the property being replaced.

In addition, the proceeds (net gain) from an eminent domain taking could be subtracted from the basis of the remaining property to avoid or defer taxable income.

Conservation Easements on Farm and Ranch Land: An Enhanced Charitable Tax Deduction

The Pension Protection Act (PPA) of 2006 included an amendment to the federal tax law greatly increasing the income tax deduction incentive for gifting a conservation easement on “farm and ranch” land.

The normal rule for a conservation easement donated to an appropriate organization-such as an I.R.C. Section 501(c) (3) land trust-limits the deduction to 30% of a donor taxpayer’s contribution base (typically, the adjusted gross income (AGI)). (This is illustrated on page 2 of “Conservation Easements in Indiana”.) Amounts not deductible on a Schedule A in the year of the gifted conservation easement are carried forward and deducted in a similar fashion for up to five (5) years.

The 2006 amendment enhances the deduction for gifts of conservation easements. Generally, for conservation easements, the amendment permits a deduction for the charitable contribution of 50% of the contribution base minus other charitable deductions on the taxpayers Schedule A and extends the carryover period from five to fifteen (15) years.

Example: a taxpayer with an AGI of $100,000 gave a $90,000 conservation easement and $10,000 of other charitable gifts. The amendment permits $40,000 ($50,000-$10,000) of the value of the conservation easement to be deducted in the tax year of the gift. The balance ($50,000) of the conservation easement may be carried forward and deducted in up

to 15 years.

The 2006 amendment allows a “farmer or rancher” to deduct 100% of AGI. In the above example, if the taxpayer donating the conservation easement were a farmer or rancher, he or she (or they) could deduct the entire $90,000 in the tax year of the donation of the conservation easement as well as the $10,000 of other charitable gifts. And if there were a higher value conserva- tion easement the carryover period is 15 years.

To qualify as a farmer or rancher for the 100% limit, 50% of the taxpayer’s gross income must

come from the trade or business of farming according to I.R.C. Section 2032A(e)(5).

Corporations in farming and ranching that donate a conservation easement also may qualify for the 100% limit.

A further requirement is that the farm or ranch on which the conservation easement is placed remains generally available for the prior existing production activity.

However, the above 2006 amendment allows these enhanced provisions for gifted conservation easements by farmers and ranchers only for tax years beginning after August 17, 2006 and ending before January 1, 2008. (I.R.C. Sections 170(b)(1)(E) and 170(b)(2) as amended by PPA Sec. 1206.)

Prepared by Gerald A. Harrison as an amendment to ID-231, Conservation Easements in Indiana with information from the National Income Tax Workshop 2006, published by the Land Grant University Tax Education Foundation, Inc., College Station, TX., October 2006, pages 411 & 412 and the Pension Protection Act of 2006. Go online at: http://www.dol.gov/EBSA/pensionreform.html to read more about the Pension Protection Act of 2006.

Long-Term Capital Gains and Qualifying Dividends

Two of the problems or issues with family-business (closely-held) corporations may be the lack of income (dividends) from stock interests and those family members who would like to cash-in their interest. In fact, many heirs and those outside a family business have an interest but it is in some other entity, not a corporation. The dividend issue relates to a regular (Sub-chapter C) corporation while the realization of long- term capital gain may be from an interest in some other business entity (Sub-chapter S corporation, trust, limited liability partnership or limited liability company) or simply from land held with others as a tenant-in-common. From a business and estate planning perspective, hopefully, for the sake of the business, that interest is covered by a buy-sell agreement (restricted transfer arrangement).

Whether the issue is “when am I going to get a dividend” or “would someone make me an offer” so I get my share (or part of it) out of the business or land ownership arrangement, the current tax law is very helpful. The tax rates for dividends and capital gains are low by historical standards. Here are the federal income tax rates for net long term capital gains and for dividends through the year 2010:

• For taxpayers in the 10% or 15% bracket-5%

• For taxpayers in higher brackets- 15%

• Tax on un-recaptured Sec.1250 capital gain-25%

• Capital gain rate for collectibles- 28%

For most capital gains in a family business or land holding arrangement, the rate will be either five (5) percent or at the most 15 percent. The five percent rate will cover many tax payers who find themselves in the first two brackets of 10 and 15 percent, especially in the case of low to mid-income families or families with bread winners with a short income year. Thus they may welcome income be it dividend income or capital gain from assets they have in a business or land holding arrangement.

Note that a taxpayers long term capital gains and qualifying dividends are lumped together for

a given tax year to get the benefit of the reduced rates now in the federal tax law. Depending on the situation, the distributions subject to these special lowered rates may best be

in separate tax years especially if the five (5) percent rate could apply for a taxpayer in each year.