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Amid IRS Overreach, Congress Has A Real Opportunity to Reform Conservation Easement Legislation

This article is more than 4 years old.

In 1980, Congress enacted a law that provided land owners a tax break if they donate a conservation easement. The idea is simple: If someone owns land in some sort of environmentally sensitive area and they forswear developing that land, they can—after donating the easement to a qualified land trust—deduct the reduced value of their land from their income.

In the years since the law was passed, the amount of land protected by conservation has increased significantly. Today, it is estimated that more than 27 million acres are protected under a conservation easement.

But conservation easement donations are unpopular with the IRS, which has been taking taxpayers to court for allegedly inflating property valuations in order to claim outsize charitable deductions. However, in federal Tax Court cases where judges determined the value of a conservation easement, the courts have generally landed closer to the taxpayer-provided value, raising important questions about the agency’s approach. The solution, I argue, is for Congress to enact meaningful reform.         

Part of the problem with the debate around conservation easement donations is that there is a great deal of confusion about what it actually entails.

In order for the donor to receive the tax break, a conservation easement must be given to a qualified nonprofit. The nonprofit must essentially enforce the dictates of the easement in perpetuity. People normally gift these to environmental nonprofits such as the Nature Conservancy.

For instance, the Muirhead Farmhouse in the northwest Chicago suburbs is an historic Frank Lloyd Wright farmhouse surrounded by a few thousand acres of undeveloped land that is no longer farmed, and the flora and fauna now there has made it a crucial stopover point for migratory birds in an area almost completely bereft of other suitable feeding spots for the population. The family placed a conservation easement on their land after the death of their parents that prohibits any future development: given that the land surrounding it has been almost completely given over to suburban development, the easement effectively preserves land that would almost assuredly been developed had it been sold. By doing such a thing, the children received a tax deduction that approximately equaled the difference between the value of the land had it been sold to home developers and the value of it as farmland.

Violating the dictates of a conservation easement can trigger severe penalties--last month a California judge fined a homeowner over $500,000 when he knocked over several trees on land he held with a conservation easement.

While encouraging the preservation of environmentally sensitive areas is an important legislative priority, the tax law has proven to be problematic. It has allowed for easements to be donated for property that was highly unlikely to ever be developed, land with little conservation value, and in some situations the nonprofit entity that received the easement had a connection with the owner who got the tax break--a big no-no--or had little expertise in managing easements.

In some cases developers acquired land that appeared to be difficult or impossible to develop yet they managed to obtain a zoning variance permitting some sort of development. They then increased the value of the property for the conservation easement donations. The ostensible increase in property values was essentially illusory.

Such maneuvers have resulted in the legislation costing Congress more money than it ever thought it would while producing less protected land.  One economist estimates that forgone revenue this year from the tax break will likely exceed $3 billion in 2019.

The answer to this fix--as I have argued elsewhere--would be for Congress to re-examine the original legislation and to fix the law. Such a fix should have bipartisan appeal--both parties presumably object to a law designed to protect the environment being hijacked by the few unscrupulous developers that improperly inflate appraisals to harvest tax savings. A reformed conservation easement law that precluded such abuses would generate tax savings that would make possible other tax incentives elsewhere in the code--the sine qua non of legislators on a tax-writing committee.

However, legislation looks to be a long shot in our hyper partisan world, a fact that has frustrated Senate Finance Committee Chair Charles Grassley. (disclosure: I worked for the committee from 2005-2007, a period when Grassley was also chair).

In March, Senators Grassley and Wyden launched an investigation into the potential abuse of conservation easements. Announcing the probe, Wyden said that “Our first concern is preserving the integrity of the conservation easement program, which has helped protect critical habitat across the country. The goal of our bipartisan investigation is to ensure a few bad actors don’t threaten the program.”

As for the IRS, the agency has been going after conservation easements for years, with little success.

The agency’s results have been less than ideal: they have taken a surprisingly large amount of these to tax court with litigation that sometimes drags on for years. In just four of the thirteen largest tax easement cases that the IRS brought to tax court did it obtain a significant reduction in the value of the easement--a distressingly low success rate. In other instances, the IRS has pursued injunction actions against individuals or businesses involved in conservation easements, urging the Justice Department Tax Division to bring public lawsuits that often have the effect of convicting taxpayers in the court of public opinion.   

The agency’s low batting average in tax court as well as their increasing reliance on injunction actions begs important questions—what is the IRS getting wrong on conservation easements, and is the IRS painting with too broad a brush when it says appraisals are inflated?

The answer seems to be that the IRS views the laws on conservation easements through their own policy lens rather than accepting the tax code as written by Congress. In other words, they see the laws governing conservation easements providing too rich a tax incentive, and so they are reading into the law restrictions that they would prefer it included. They run into trouble when the courts apply the law to the letter.

These unsuccessful cases against taxpayers have consequences beyond conservation easements. Suing conservation easements and throwing IRS staff and resources at the issue when they have a low probability of success means that there will be fewer resources for the IRS to provide services to taxpayers aimed at promoting compliance.

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The solution, then, is for Congress to advance real, prospective reform. Having the IRS intuit the wishes of Congress and devote excessive resources into prosecuting easements that meet the letter of an admittedly bad law is a fourth-best non-solution to a very real problem that costs taxpayers money.

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