During the last 40 years, the conservation easement tax incentive in Section 170(h) of the Internal Revenue Code has helped conserve millions of acres of important private land and ensured that our federal and state governments do not alone shoulder the cost and responsibility of land conservation.
Unfortunately, as with many other tax benefits, the conservation easement incentive has led to some rare instances of abuse. In terms of the source and scope of abuse, there is a great deal of misinformation circulating in the media and in the halls of Congress. Here are the facts:
- The IRS issued Notice 2017-10 in 2016 imposing significant additional reporting obligations on partnership conservation easement donations – labeled syndicated conservation easement transactions (SCETs) by the IRS. Based on these taxpayer reports, the IRS informed the Senate Finance Committee that some $20 billion of deductions were claimed by taxpayers involved in SCETs over the course of seven tax years. However, the IRS has not provided information to evaluate whether the conservation easement incentive was working as intended. For example, the IRS did not provide the acreage of the land that was conserved as a result of SCETs.
- The IRS has determined to challenge SCETs during audits and in court. In many cases, deductions were disallowed based on strained technical arguments about whether standard easement deed language satisfied the requirement that an easement be perpetual – this issue affects both SCETs and individual conservation easement donations. While some have suggested that SCET donations may be overvalued, most court decisions to date have not addressed the valuation of the donated easement and several of those that do address valuation have largely agreed with taxpayers.
- A recent analysis indicates that partnership donations are a “vital conservation pillar for the country,” noting of those donations reviewed that:
- Nearly two-thirds of lands conserved through conservation partnerships have “outstanding” ecological value.
- Conservation partnership easements protect an important natural resource and have active habitat management programs.
- Currently proposed, misguided legislation will not enhance the integrity of conservation easements, but “intelligent changes” to current law would.
Opponents of conservation partnerships, are working with a handful of members of Congress and the IRS through a media campaign that exaggerates alleged abuse and distorts the role of partnerships, including by asserting that conservation partnership donations are “conservation on the margins” and using the IRS reported number to wrongly state that there was more than $20 billion of “abuse.”
These opponents have pushed for the introduction of legislation in the last few Congresses, and similar legislation is expected in the current Congress. Instead of focusing on limited instances of abuse and ensuring that appraisals accurately represent the fair market value of the easement donation, the legislation discourages conservation partnerships from making donations and would have a highly negative effect on future conservation easement donations. This type of legislation is problematic in three key ways:
- It would confiscate taxpayer money by RETROACTIVELY denying legal deductions as far back as 2016.
- Arbitrarily deny the deduction if the value of land donated by a conservation partnership is 2.5 times or greater than the partner’s adjusted basis.
- Apply this limit during the first three years after an individual becomes a partner. By contrast, there is only a one-year holding period for conservation easement donations involving all other classes of land ownership.
P4C is concerned that such legislation would erode private property rights and eliminate an important and national conservation tool. P4C has developed a comprehensive set of proposals that specifically deal with potential conservation easement abuse while preserving the important tax incentive that Congress created to encourage all landowners to consider making conservation easement donations. These proposals include:
- Enhanced appraisal standards for conservation easements. Amend the qualified appraisal rules to require that for conservation easement appraisals, there must be (1) an independent review of an appraisal; (2) independent verification of the feasibility of the “highest and best use” referenced in appraising such an easement, and (3) an independent market study for that “highest and best use.”
- Enhanced education standards for qualified appraisers of conservation easements. Amend the qualified appraisal rules to require that for conservation easement appraisals, the appraiser must have taken a course on valuing conservation easements during the 24 months before completing an appraisal.
- Enhanced visibility and transparency of conservation easement donations. Require tax- exempt conservation easement donees to report such contributions on their annual tax returns (Form 990), including the value of the deduction claimed by the donor. Donees would also be required to make available to the public annually a description of any conservation easement donations they accepted.
- Standards for IRS Appraisers. Require IRS employees and consultants performing conservation easement valuations to have relevant experience and to use the same generally accepted appraisal standards as are required for taxpayers.
- IRS to accept substantial compliance. Require IRS to publish regulations under which taxpayers that have made good faith efforts to comply with the applicable conservation easement donation rules can correct perceived technical problems for prior donations (e.g., by supplying missing information or signatures or amending problematic grant deed language).
- Have the IRS assist taxpayers making conservation easement donations. Direct IRS to release sample conservation easement grant deed language on which taxpayers can rely.