By Kristen Parillo and Fred Stokeld
July 16, 2019
A bill to stop abusive conservation easement transactions would only temporarily reduce the number of deals and associated deductions, according to a Joint Committee on Taxation estimate.
Supporters and critics of syndicated easement transactions have different takes on whether the JCT estimate gives credence to the upbeat July 11 remarks from Senate Finance Committee member Steve Daines, R-Mont., regarding his bill, the Charitable Conservation Easement Program Integrity Act (S. 170).
The JCT estimate, obtained by Tax Notes, assumes an enactment date of July 31, 2019, for the Daines bill and says it would bring in $6.6 billion in federal revenue. But there is also “uncertainty” and “variability in some key parameters” that will make additional data from the IRS and other sources critical to obtaining improved estimates, the JCT said.
“The JCT report makes clear that S. 170 would generate its revenue by imposing punitive retroactivity that targets taxpayers who followed the law in effect at the time they irrevocably donated conservation easements,” said Robert Ramsay of the Partnership for Conservation.
S. 170 “would retroactively pull the carpet out from under taxpayers who came together to conserve land in 2016, 2017, and 2018, and would require them to file amended returns,” Ramsay added.
However, Lori Faeth of the Land Trust Alliance said the estimate supports the view that Daines’s bill “goes right to the heart of the abuse of conservation donations.”
Faeth disputed the notion that the bill would punish taxpayers retroactively, noting that the bill’s December 23, 2016, effective date is tied to the day the IRS issued Notice 2017-10, 2017-4 IRB 544, which identified conservation easement syndications as a listed transaction requiring disclosure.
“That is when everybody that was engaged in these transactions was put on notice that the IRS was looking into them and was likely to pursue enforcement,” Faeth said.
Citing the estimate, Daines said his bill would generate $6.6 billion in revenue and restore integrity to the conservation easement program.
S. 170, which Daines reintroduced in January, takes aim at syndicated conservation easement transactions, which generally involve a passthrough entity that is used to acquire property on behalf of multiple investors. Critics claim that some investor groups are gaming the system by obtaining inflated appraisals of the land, enabling investors to claim conservation easement deductions that far exceed the amounts they invested in the deal.
The bill would limit qualifying conservation donations used for tax deductions to transactions not exceeding two and a half times a partner’s adjusted basis. S. 170 is effective for contributions made in tax years ending after December 23, 2016.
The JCT estimate, dated July 9, states that while the bill would be expected “to reduce the number of syndicated conservation easement transactions and the amount of associated deductions relative to our baseline projections in the near term,” the reduction would likely be a temporary result of the bill’s proposed holding period.
The estimate notes that the “disallowance rule” would apply only to the investor’s first three tax years ending after the date the investor joined the partnership. Thus, participants in syndicated conservation easement transactions would have to wait to satisfy the new holding period requirement, the JCT explained.
The requirement may deter investors who are unable to delay the realization of income, but for those who can wait it out, syndicated conservation easement transactions would remain an attractive tax avoidance mechanism, the estimate says.
“By establishing a partner-partnership relationship shortly after the date of enactment of the proposal and then delaying the syndicated conservation easement transaction until after the end of the holding period, an investor may still ultimately claim a deduction in excess of two and one-half times his or her adjusted basis,” the JCT noted.
Promoters might also set up tiered-entity structures to allow future investors to avoid the disallowance rule immediately upon making an investment, effectively getting around the holding period, according to the JCT.
The estimate notes that the disallowance rule under S. 170 would apply to the entire 2016 tax year and all subsequent years for a calendar-year taxpayer. Taxpayers who participated in syndicated deals from January 2016 to the date of the bill’s enactment generally wouldn’t be able to satisfy the holding period.
Thus, partners who claimed deductions exceeding two and a half times their adjusted basis would have to amend their returns for tax years 2016 through 2018 to reflect the disallowance, the JCT said.
Better Ways to Curb Abuse?
According to Ramsay, the JCT estimate fails to quantify the true value of permanent land conservation.
He said that several studies have shown that for each dollar invested in programs for conservation easements, taxpayers save between $4 and $12.
“Rather than targeting one class of land ownership, policymakers in Washington should focus on common-sense valuation solutions that maintain all Americans’ access to land conservation and protect against the potential for abuse,” Ramsay said.
However, Faeth said she thinks the estimate shows that the bill is a positive step in combating abuse.
“Almost $7 billion is coming out of federal coffers to these investors’ pockets,” Faeth said. “It’s egregious and needs to stop.”
The bill, along with the Finance Committee’s investigation of syndicated deals and increased enforcement by the IRS and Justice Department, underscores lawmakers’ willingness to stop the abuse, Faeth said.
As for concerns that investors will simply find ways around the bill’s holding period, Faeth said she is confident that Congress will take action if taxpayers resort to other ways to abuse the easement deduction.
Faeth strongly believes that Congress will enact the bill this year. “We were already optimistic, but now with the revenue estimate, we think that further increases the chance of this passing this year,” she said.