Conservation Easements Update: ProPublica Story, Articles on Valuation and Enforcement
Conservation easements also continue to attract academic interest, with two recent articles of note. Alan Feld, Theodore S. Sims (both Boston University), and Jacob Nielsen (now at Ropes & Gray) have posted Green, or Greed? A Fresh Perspective on the Valuation of Conservation Easements, Tax Law Review (forthcoming). Here is the abstract:
Charitable contributions of “conservation easements” have since 1980 allowed high-income taxpayers to shelter income from taxation through overvalued deductions. Overvaluation has increased dramatically in the past 20 years: a 2016 study of all easement decisions since 1980 reported that while overvaluation had averaged by a factor of two before 1994, it averaged by a factor of ten for decisions between 1994 and 2016. SOI data disclose that aggregate easement contributions deducted on Schedule A grew from $2.26 billion in 2015 to $6.5 billion in 2018 (the most recent year available). A recent report by supporters of conservation easements acknowledges that “neither the [IRS] nor the courts have sufficient resources to effectively police valuation abuse.”
Most of the concern has been with “syndicated conservation easements” (“SCEs”), and most proposed remedies to easement overvaluation focus on SCEs. We show, however, that exactly the same traits that produce overvalued SCEs — allowing charitable deductions based on “fair market” value, which sanctions deducting unrealized appreciation without taxing the corresponding gain, combined with the unavoidable need to value contributed easements through as manipulable a process as appraisal — have facilitated abusive overvaluation of non-syndicated easements too. That combination can leave an easement contributor better off than if she had done anything else with the land, including selling it for its (true) fair market value. The only effective solution to easement overvaluation is to restrict the deductibility of easement contributions attributable to unrealized gain. To that end we propose limiting charitable contributions of easements granted with respect to recently acquired property initially to cost, much as Congress has previously done with other contributions of appreciated property that are vulnerable to abuse, while allowing that limitation to evolve with real estate values over time. We also propose an upfront excise on unrealized appreciation in contributed easements, to increase the salience to prospective contributors of the risks of overvaluation.
In addition, Jimmy Godin has published A Sand County Tax Shelter: Syndicated Conservation Easements and Their Toll on the American Taxpayer, 2022 Utah Law Review 213 (2022). Here is the abstract:
The conservation easement is a powerful tool for conserving private land in the United States and beyond. Among the many incentives for encouraging conservation easement donations are tax deductions, which largely depend on the conservation value of the donated land. But groups of wealthy taxpayers, accountants, attorneys, and appraisers are manipulating the conservation easement tax framework and receiving large tax deductions for conservation easements that are practically worthless in a conservation sense—transactions known as ‘syndicated conservation easements.’ Syndicated conservation easements have generated substantial controversy, in part because they cost American taxpayers billions of tax dollars annually. While the Internal Revenue Service, the United States Department of Justice, members of Congress, and conservation groups are attempting to crack down on syndicated conservation easements, their efforts to curb the practice remain ineffective. This Note first examines the conservation easement tax framework and considers the ways in which it enables syndicated conservation easements. Next, this Note describes the measures taken against syndicated conservation easements and analyzes how such measures have fallen short. Finally, this Note contemplates more effective ways to uncover syndicated conservation easements and curb such transactions entirely. Specifically, the Internal Revenue Service must streamline its auditing efforts to focus on appraisals, while the United States Department of Justice must impose harsher penalties on those involved in syndicated conservation easements. Similarly, Congress must create a more effective system for appraisal oversight and should enact legislation that alters the existing tax framework in a way that disincentivizes wealthy taxpayers from engaging in syndicated conservation easements altogether. Lastly, individual conservation groups must work together to create a more uniform set of standards and practices for conservation easement donation, while state legislators should strive to create uniformity in state conservation easement tax law.
Lloyd Mayer