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Valuing Conservation Easements: An Empirical Analysis of Decided Cases

Tax Notes
by Jenny L. Johnson Ware
July 22, 2019

Both the IRS and the Justice Department are vigorously attacking conservation easement deductions, relying on the notion that taxpayers are grossly inflating the value of the easements. Identifying syndicated conservation easement transactions as a listed transaction in Notice 2017- 10, 2017-4 IRB 544, the IRS warned that it “intends to challenge the purported tax benefits from this transaction based on overvaluation of the conservation easement.” When the IRS included syndicated conservation easements on its “Dirty Dozen” list of the worst tax scams in 2019, it again decried promoters who “obtain an inflated appraisal of the conservation easement.” Indeed, in announcing an injunction suit filed in December 2018, Richard E. Zuckerman, the Justice Department Tax Division’s principal deputy assistant attorney general, alleged that the “fraudulent conservation easement shelters” at issue were “based on willfully false valuations.”

Alleged overvaluation of conservation easements is — and must be — the central theme of the enforcement efforts undertaken by the IRS and Justice Department, because allowing taxpayers a deduction for the fair market value of their donation is precisely what Congress intended. Historically, however, the IRS has succeeded in challenging the charitable deduction largely by scrutinizing the taxpayer’s compliance with myriad technical requirements established in the regulations. Because taxpayers have learned to avoid those foot faults in documenting and reporting their donations, we are seeing an increasing number of cases in which the battle is focused solely on the value of the donated easement.

With alleged overvaluation of conservation easements so squarely in the government’s crosshairs, and with the increasing frequency with which courts are likely to address the question of value, we undertook an empirical analysis of the cases in which courts have decided the value of conservation easements. The data we collected, which are described and analyzed in detail later, show that abusive overvaluation is not prevalent in the decided cases and that the identification of a reasonably probable highest and best use (HBU) of the property before easement is critical to the outcome at trial.

Read the full piece here


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