Posted on April 22, 2019 by Philip Tabas
Conservation easements have become the most popular approach for protecting lands, water, wildlife and historic structures in the US. Thanks in large part to the Federal income tax deduction for gifts of permanent conservation easements enacted in 1980, over 27 million acres of private lands and the wildlife on them have been protected across the country using this conservation mechanism. A charitable gift of a conservation easement has afforded landowners a way to protect the places they cherish while providing conservation groups with a cost-effective land protection tool.
Today however, this conservation mechanism is under assault. Certain easement promoters are focused more on tax benefits than the conservation outcomes that can be achieved through conservation easements. The historically successful use of the conservation incentive by owners of environmentally significant land has led some to promote the abuse of conservation easements purely for their tax shelter value as an element of a complex financial instrument. Over the past ten years, there has been an extraordinary increase in tax deductions claimed by these investment partnerships for conservation easement donations. This activity has been brought to light by information provided by the IRS to Congress and publicized by several news publications.
Typically, tax shelter promoters have been selling interests in tracts of land to taxpayers/investors looking for large tax deductions. The promoter puts together a group of taxpayers/investors, in a legal form called a “syndication” or partnership, to buy the land, donate conservation easements and then sell or develop the underlying land later. In these arrangements, the promoter of the syndication often obtains an appraisal of the tract of land which uses unrealistic assumptions on which to base the appraised value and then grants conservation easements on that land using the inflated valuations. The resulting inflated charitable deductions are then split among the taxpayers/investors.
According to IRS data, these syndications claimed more than $20 billion in charitable deductions since 2010. In 2016 alone, 248 entities claimed $6 billion in deductions. IRS data from 2018 show that a sampling of these transactions enabled investors to claim, on average, deductions valued at nine times the amount of their original investment. Based on the most current data available, the claimed tax value of donated conservation easements nearly tripled – from $1.1 billion to $3.2 billion – from 2013 to 2014.
Fortunately, there are efforts being undertaken to curb these practices. In December 2016, the IRS issued Notice 2017-10 wherein the IRS categorized donations from these easement syndications as “listed transactions.” This means that promoters of and participants in these transactions must report their syndication activities to the IRS or face fines. In September 2018, the IRS made abusive conservation easement tax shelters one of five new targeted compliance campaigns and in March 2019, the IRS listed syndicated conservation easements as one of its “Dirty Dozen” tax scams to avoid. In December 2018, the U.S. Department of Justice filed a civil complaint against one of the nation’s largest promoters of syndicated easement transactions for an allegedly abusive conservation easement syndication tax scheme. And, finally, in March 2019 the Senate Finance Committee Chair and Ranking Member initiated an inquiry with 14 individuals suspected of being involved in these syndication transactions. Despite the IRS and the DOJ announcing formal actions to thwart this abuse of the federal tax code, the promoters of these abusive deals continue to conduct business as usual.
A broad coalition of organizations including, among others, the Land Trust Alliance, Ducks Unlimited, The Nature Conservancy, The Trust for Public Land, The Conservation Fund, the Appraisal Institute, and the American Society of Farm Managers and Rural Appraisers is advocating for enactment of the Charitable Conservation Easement Program Integrity Act of 2019 (S. 170/H.R. 1992.) If passed, this bill would disallow charitable deductions for pass-through entities where tax benefits for donations of conservation easements are claimed when property is held for only a short time and appraisal valuations are excessive. The bill was introduced on January 18, 2019 by Senators Daines (MT- R) and Stabenow (MI-D) and on March 28, 2019 by Representatives Mike Kelly (PA-R) and Mike Thompson (CA-D).
Proponents of continued use of the syndicated approach for easement transactions argue that syndications bring needed new capital to conservation which otherwise might not be available. They suggest that the solution to abuses involves greater regulation of appraisers to produce more accurate and well-substantiated valuations and to require greater obligations on conservation organizations accepting easement donations to report to the IRS a description of each conservation easement donation they receive and the fair market value of those donations. However, under tax law requirements enacted in 2006, appraisals used to substantiate charitable contributions are already required to follow relevant professional standards known as the Uniform Standards of Professional Appraisal Practice, which require an assessment of the economically realistic highest and best use of the land. And, also under current law, donors are already required to provide to the IRS a description of any conservation easement valued at $5,000 or greater as well as a statement of the conservation purpose that the easement is designed to serve.
Continued abuse of the charitable conservation easement tax deduction by syndicated easement transactions, which may have allowed some taxpayers to profit by gaming the tax code deprives the federal government of billions of dollars in revenue, distorts the fiscal impact of legitimate conservation easement gifts and adversely affects other related conservation easement programs (e.g. state tax credits for easement gifts.) If allowed to stand, these arrangements could cause lawmakers and the public to question the continued legitimacy of mainstream conservation transactions and may result in challenges to continuation of the Federal conservation easement tax benefit itself.
Conservation transactions and practices that do not always meet both the letter and the spirit of easement law must not be allowed to endanger the thousands of legitimate conservation easements and the well-intentioned, conservation-minded landowners behind them.
Tags: conservation easement, land use, legislation, wildlife, natural resources, taxes