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UT Austin Gift Planner – Nov. 12, 2008

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Welcome to The University of Texas at Austin Gift Planner, an online resource for professional advisors in the estate- and financial-planning industries. The Gift Planner provides practical information on gift-planning issues, reports new developments in charitable-giving techniques, connects you with leading professionals, and informs you about key events and resources at UT Austin.

Nov. 12, 2008
Vol. 2, No. 2

Coming events

The University of Texas at Austin Office of Gift Planning and the Texas A&M Foundation Office of Gift Planning are offering a luncheon workshop for professional advisors, “Understanding Generational Differences in Estate Planning,” presented by generations expert David Stillman.

The event qualifies for one hour of CLE credit and includes a chance to win tickets to the 2009 Texas/A&M football game.

Friday, February 13, 2009
11:30 a.m. – 2 p.m.

AT&T Executive Education & Conference Center Ballroom
UT Austin campus

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Conservation easements: as good as cash (at least until December 31, 2009)

If you have a client who is considering making a gift of land in fee to a conservation program, it may be more beneficial for that client to give a conservation easement in 2008 and 2009 in light of more favorable rules during those years.

A conservation easement is a voluntary agreement that allows a landowner to limit development or to preserve scenic, natural, or other values the land may hold while retaining private ownership of the land. By granting a conservation easement, the landowner also ensures that the property will be protected forever, regardless of who subsequently owns the land.

Prior to the Pension Protection Act of 2006, making a gift of a conservation easement entitled the donor to a charitable deduction limited to 30% of the donor’s adjusted gross income with a five-year carry-forward period to use any excess. I.R.C. § 170(b). For example, if a donor had adjusted gross income of $400,000 and the value of the conservation easement was $800,000, as determined by a qualified appraiser as described in Internal Revenue Code section 170(f)(11)(E), the donor could deduct $120,000 in the year of the contribution and could carry forward the remaining $680,000 of charitable value for the next five years. Because of the five-year limit, however, the donor would have lost $80,000 in charitable deduction value ($120,000 multiplied by five years is $600,000, or $80,000 short of the full $680,000).

The Pension Protection Act of 2006 changed this scenario for tax years 2006 and 2007. Under the Pension Protection Act, a gift of a conservation easement entitled the donor to a more favorable charitable deduction. Instead of being deductible at the appreciated property limit of 30%, the gift was deductible at the more favorable 50% adjusted gross income limitation typically applied to cash gifts, with no requirement that the charity use the real estate to further its exempt purposes. I.R.C. §§ 170(b)(1)(E), 170(e). In addition, the carry-forward period was increased from five years to 15 years. This provision has been extended for tax years 2008 and 2009 by the Food Conservation and Energy Act of 2008 (also known as the Farm Bill or H.R. 2419). Similar favorable rules apply to conservation gifts by corporate donors.

Further, under the more favorable conservation rules, qualified farmers and ranchers may deduct up to 100% of the excess of the taxpayer’s contribution base over the amount of all other allowable charitable contributions and carry forward the excess for 15 years. I.R.C. § 170(b)(1)(E)(iv)(I). To qualify as a qualified farmer or rancher, the donor must receive more than 50% of his gross income (as defined in Code section 2032A(e)(5)) from ranching or farming activity and the land must remain available for agricultural or livestock production. I.R.C. § 170(b)(1)(E)(iv)(I).

Section 170(h)(1) defines a “qualified conservation contribution” as a contribution of a qualified real-property interest to a qualified organization exclusively for conservation purposes. A qualified real-property interest is defined in section 170(h)(2) as any of the following: (1) the entire interest of the donor other than a qualified mineral interest, (2) a remainder interest, or (3) a restriction (granted in perpetuity) on the use that may be made on the real property. “Conservation purposes” are defined as “(i) the preservation of land areas for outdoor recreation by, or the education of, the general public, (ii) the protection of a relatively natural habitat of wildlife, or plants, or similar ecosystem, (iii) the preservation of certain open space (including farmland and forestland), or (iv) the reservation of a historically important land or certified historical structure.” Regs. § 1.710A-14(d)(1).

One potential snag relates to deductions for certified historic structures or so-called “façade” easements for properties in registered historic districts. A gift of a façade easement is a qualified conservation contribution if the easement creates a perpetual restriction on the use of the servient estate and is given to a qualified charity exclusively for conservation purposes. I.R.C. §§ 170(h)(1)(C), (2)(C), (4)(A)(iv). Façade easements may be used to protect a diverse array of historic buildings: commercial buildings, personal residences, and even barns. However, the entire exterior of the building “including the front, sides, rear, and height of the building” must be preserved, and any exterior change that is inconsistent with the historical character of the exterior is prohibited. Id., § 170(h)(4)(B)(i), Regs. § 1.170A-14(g)(3). The charitable deduction value for a façade easement equals the decline in value of the servient estate as a result of encumbering it with the easement. Regs. § 1.170A-14(h)(3)(i). The deduction is reduced if rehabilitation credits have been taken in any of the five years prior to the conservation easement gift. I.R.C. § 170(f)(14). Finally, payment of a $500 filing fee to the IRS for all easement donations valued at more than $10,000 is required. Instructions for Form 8283 (Rev. Dec. 2006).

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Everyday Excellence: Student develops software that can help environment

Excellence occurs every day at UT Austin. Meet Michael Ciarlegli, a fifth-year student in the Institute for Computational Engineering and Sciences (ICES). Ciarlegli taught himself computer programming to create software that has been applied to two environmental areas: conservation planning for endangered species and groundwater management in central Texas.

Michael CiarlegliIn layman’s terms, what do you do?

My research falls under the category of applied math: a combination of math, operations research, and computer science, with applications in biology and hydrology. I have developed novel direct search techniques and software to find efficient solutions to difficult optimization problems. We encounter optimization problems daily, whether it’s finding the fastest route to work, choosing the best way to invest money, or creatively multitasking to accomplish more at work or home.

The name of the software is MASTS, which stands for Modular Abstract Self-Learning Tabu Search. My software has been applied to optimization problems in two different areas: conservation planning for endangered species and groundwater management in central Texas. In each of these efforts, optimization has been critical given the complexity of the projects and the number of stakeholders involved. As a result, my software contains a lot of features that make it ideal for planners and decision support. The software enables ongoing interactive optimization, which can help planners explore and understand the problem from several different angles.

Michael CiarlegliHow did you get the idea to study this?

The first summer in graduate school, I was introduced to an optimization technique that randomly stumbled about searching for good solutions. Although this technique is popular, it strikes me as fumbling around in the dark for a light switch. Half epiphany and half frustration, I thought, “There has got to be a better way.” As luck would have it, Professor J. Wesley Barnes of the Graduate Program in Operations Research and Industrial Engineering within the Cockrell School of Engineering offers a class that studies organized strategies for optimization, called metaheuristics. This class was a perfect match for my interests, and it set me on my dissertation path.

After taking that class, I got involved in groundwater management with encouragement from fellow student Suzanne Pierce (now Dr. Pierce). She set up an amazing collaborative project between Sandia National Labs and UT, which involved several students and several dissertation projects (I always joked that her dissertation was the only that I knew of that had a staff and six figure budget … you don’t see that in math a lot!).

What sort of practical applications does your research have?

I believe that my software can really integrate scientific modeling and optimization into the planning process. I hope that the software package ConsNet will become the new standard for systematic conservation planning. It might even be adopted by international nonprofit agencies.

What do you hope to do next?

In addition to supporting the conservation planning software, I plan on extending my techniques to other types of optimization problems. Although there are lots of opportunities in academia, it also makes sense to continue this type of work as a small business.

How has being a graduate student at UT enabled your research to reach the level that it has?

The ICES program (Institute for Computational Engineering and Sciences) is the perfect incubator for interdisciplinary research. They encourage students to explore and bridge different departments and disciplines. I had a lot of freedom in choosing my courses and finding my topic.

Also, the quality and sheer size of the UT faculty guarantees that students have access to experts in every field. My advisor, Dr. Barnes, is not only familiar with tabu search (the method used in my software), he helped in its early development.

All of my committee members are pioneers in their respective fields.

Finally, the faculty at UT seems to be fairly open to collaborative projects with the community and other institutions.

What advice do you have for people entering graduate school?

Don’t be afraid to collaborate with other students on your research projects. You can usually accomplish a lot more with partners.

—Q&A by Elizabeth McKetta, December 2007

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