By Kristen A. Parillo
April 3, 2019
Supporters and opponents of syndicated conservation easement deals agree that action is needed to address inflated appraisals, but how to resolve the problem remains a point of contention.
The Partnership for Conservation — which believes the IRS has been inappropriately targeting easement donations made through partnerships — contends that valuation abuse could be curbed by enhancing the definition of a qualified appraisal, requiring appraisers to take continuing education courses, and creating an advisory panel similar to the IRS’s art advisory panel.
But groups critical of syndicated deals, such as the Land Trust Alliance, argue that those proposed solutions are unnecessary, and that instead the IRS should do a better job of enforcing the valuation rules and policing the appraisers who abuse those rules.
The debate over how best to root out the “bad actors” who take advantage of the popular tax break for land donations has become more prominent in the wake of heightened government scrutiny.
The Senate Finance Committee announced March 27 that it is launching a bipartisan investigation into possible abuse of conservation easement provisions. The committee is focusing on syndicated conservation easement transactions, which generally involve a passthrough entity that is used to acquire property on behalf of multiple investors. A conservation easement is then created on the property, and the tax benefits of the easement are allocated among the investors.
The committee contends that some investor groups are gaming the system by obtaining “extravagantly high” appraisals of the land, which enables investors to claim conservation easement deductions that far exceed the amounts they invested in the deal.
The committee’s inquiry follows a Justice Department lawsuit filed in December 2018, which alleges that a group of defendants promoted or sold ownership interests in a conservation easement syndication scheme that “amounts to nothing more than a thinly veiled sale of grossly overvalued federal tax deductions under the guise of investing in a partnership.”
The Partnership for Conservation, a trade association, has proposed a range of solutions it says would tackle the root issue of overvaluation. The group proposes options for producing more accurate and well-substantiated qualified appraisals, boosting the educational requirements for qualified appraisers, and setting up procedures for settling valuation disputes between the IRS and taxpayers.
The Land Trust Alliance, a conservation organization that represents land trusts across the United States, contends in a fact sheet provided to Tax Notes that those proposals would do nothing to stop the abuse.
Stephen J. Small of the Law Office of Stephen J. Small Esq. PC called the Partnership for Conservation’s proposals “an admirable collection of changes” but said they are “totally unnecessary.”
“A former IRS employee in enforcement said to me years ago about inflated appraisals, ‘We don’t need any more rules. We have good rules. We just need people to follow the rules,’” Small said.
According to Small, the abuse of conservation easement deductions boils down to a group of appraisers who aren’t following the tax code’s valuation rules, as well as a lack of aggressive enforcement by the IRS.
The partnership’s proposals for creating more rules “miss the point,” Small said. “If people continue to ignore the rules, and if enforcement is less than it should be, things will be no different than they are now.”
Russ Shay, a consultant on conservation and tax policy with Land Matters LLC, called the proposals “smoke and mirrors.”
“They just distract from the heart of the matter,” Shay said. “The real question is, do we need more credentials and forms, or do we need to just say no when someone buys vacant property for $2 million, sells shares to investors a year later for $8 million, and then — a day later — gives all of those investors a big profit by telling Uncle Sam that they deserve $40 million in tax deductions for donating an easement on that land?”
Shay said that most of the syndicated conservation easement deals he has reviewed already meet the standards proposed by the Partnership for Conservation.
“The people making millions by selling tax breaks are more than willing to check more boxes on the way to the bank,” Shay said. “The expense of a second appraisal may be a barrier for the owner of a 100-year-old farm who wants to donate a conservation easement, but it’s no problem to a syndicator who plans to make millions on their deal.”
Shay, Small, and the Land Trust Alliance have expressed support for the Charitable Conservation Easement Program Integrity Act of 2019 (S. 170), a bipartisan Senate bill that would limit qualifying conservation donations used for tax deductions to transactions not exceeding two and a half times a partner’s adjusted basis.
Targeted Action Needed
Robert Ramsay, president of the Partnership for Conservation, said in a statement to Tax Notes that his group’s proposals would provide a framework to prevent abuse while preserving a critical tool in overall conservation efforts and giving taxpayers greater clarity.
Ramsay noted that both Finance Committee Chair Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., expressed concern about inflated appraisals in their March 27 investigation announcement.
The Partnership for Conservation “takes to heart their concerns and believes something needs to be done to address potential appraisal abuses,” Ramsay said, adding that the Land Trust Alliance “appears to be in denial on this, and you have to wonder why.”
“Legislative solutions should not discriminate against an important class of land ownership, but instead should focus on strengthening conservation efforts while stopping the limited instances of abuse,” Ramsay said.
“We continue to welcome those who disagree to come to the table for a thoughtful dialogue and look forward to continuing to work with lawmakers on both sides of the aisle to prevent valuation abuse and protect all Americans’ access to conservation incentives for generations to come,” Ramsay added.
National Taxpayers Union Foundation President Pete Sepp, who issued a paper in November 2018 criticizing the IRS’s efforts against conservation easements as misguided, echoed Ramsay’s concerns that more targeted solutions are needed to address valuation abuse.
Legislative proposals such as S. 170 aren’t well-calibrated, Sepp told Tax Notes. “If the problem is valuations and appraisals, why not work to improve their accuracy, rather than imposing an arbitrary limit on the amount of the deduction?” Sepp said. “That doesn’t seem to bereflecting Congress’s intent in creating the deduction in the first place.”
Creating an IRS conservation easement advisory panel similar to the agency’s art advisory panel seems like a workable proposal, Sepp said, noting that Sens. Christopher Murphy, D- Conn., and Richard Blumenthal, D-Conn., endorsed such an idea in a February 2016 letter to then-IRS Commissioner John Koskinen.