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Conservation easements, a tool aimed at incentivizing private land conservation, provide a tax break for landowners when they donate land with certain environmental or historical features to a qualified trust.
If property owners forego developing the land in perpetuity, they can deduct the value of the land’s property rights from their adjusted gross income just like a charitable donation.
Conservation easements now permanently protect more than 27 million acres. They have been so successful in encouraging Americans to conserve their land that Congress voted to make the tax incentive permanent.
Unfortunately, as this tax incentive became more popular with more taxpayers, the IRS responded to the relatively infrequent instances of outright abuse by launching an all-out assault against the incentive.
To avoid directly addressing the difficult issues involved with valuing donated property — caused in part by the IRS’s own regulations — the IRS decided on a flanking attack against long-established and standard land donation language in conservation deeds.
The IRS’s approach assumes an unlikely, hypothetical series of strange events that would “undo” the conservation of the property in perpetuity. But the courts recently have accepted the IRS’s hyper-technical arguments, jeopardizing thousands of good-faith land donations.
The only check on the negative impact of these arguments is the IRS’s selective audit practices that focus on unrelated individuals pooling resources to conserve land, and which largely ignore uber wealthy families whose easement donations involve the same complex valuation techniques and conservation easement deed language.
This selective enforcement approach opens the IRS up to criticism for “playing favorites,” setting dangerous tax administration precedents and putting conservation easements at risk. There are some cases of abuse where, for example, landowners pressure appraisers to inflate the value of the donated land.
More common is a good-faith disagreement between what the IRS views as the proper low value and the opinion of the appraiser who places a higher value on the donated land. Some knowledgeable experts have raised questions about whether the IRS’s approach is proportionate to the problem, let alone effective.
In response to the IRS enforcement efforts, some industry participants have had a more measured response, stopping their involvement with conservation donations until the IRS provides clarity.
However, many of those involved with syndicated partnership easements have decided to continue with land donation deals in the face of increasing IRS pressure, taking an aggressive stance in opposition to the agency’s campaign.
This toe-to-toe fight with the IRS has only stoked the flames and even led the IRS to threaten and pursue criminal investigations.
What is most threatened by this ever-escalating conflict? The imminent and critical need to encourage conservation — not to mention congressional intent to encourage private citizens to conserve land for future generations. Most certainly, there is a better way.
Recently, the National Taxpayer Advocate released its annual report to Congress, listing conservation easements as among the “most litigated issues.” The Taxpayer Advocate wants the IRS to develop guidance for taxpayers with clear instructions of how to construct a conservation easement deed that will not be challenged on audit.
The agency should heed the Taxpayer Advocate’s call, and fast. In the near-term, the IRS also could use its rule-making authority to tighten its valuation regulations and thereby reduce the number of disputes moving forward.