THE TRUTH: Abusive syndicated conservation transactions and the Charitable Conservation Easement Program Integrity Act
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About This Document
The Land Trust Alliance, a nonprofit founded in 1982, is the voice of the land trust community. Our membership includes 1,000 nonprofit land trusts, including The Nature Conservancy, Ducks Unlimited and local land trusts across the nation, all operating under strong national standards promulgated by the Alliance.
Unfortunately, there are a small number of bad actors profiteering off the manipulation of tax incentives intended to encourage charitable gifts of land and conservation easements. The Senate Finance Committee recently reported that these bad actors had generated $26.8 billion in unjustified tax deductions that went to high-income taxpayers from 2010-2017. The Finance Committee concluded in a report that “Congress, the IRS, and Department of the Treasury” needed to take action “to preserve the integrity of the conservation-easement tax deduction.”
And in a kicker to the report, the IRS later released data showing the abuse grew by an additional $9.2 in unwarranted deductions in 2018 – bringing the total claimed deductions by these bad actors since 2010 to $36 billion.
© 2020 Land Trust Alliance, Inc. All rights reserved.
The Land Trust Alliance, a nonprofit founded in 1982, is the voice of the land trust community. Our membership includes 1,000 nonprofit land trusts, including The Nature Conservancy, Ducks Unlimited and local land trusts across the nation, all operating under strong national standards promulgated by the Alliance.
Unfortunately, there are a small number of bad actors profiteering off the manipulation of tax incentives intended to encourage charitable gifts of land and conservation easements. The Senate Finance Committee recently reported that these bad actors had generated $26.8 billion in unjustified tax deductions that went to high-income taxpayers from 2010-2017.i The Finance Committee concluded in a report that “Congress, the IRS, and Department of the Treasury” needed to take action “to preserve the integrity of the conservation-easement tax deduction.”
And in a kicker to the report, the IRS later released data showing the abuse grew by an additional $9.2 in unwarranted deductions in 2018 – bringing the total claimed deductions by these bad actors since 2010 to $36 billion.ii
Hasn’t the IRS already taken action against these bad actors?
While the IRS has taken multiple actions intended to halt the bad actors, the abuse has both continued and intensified. As just one example, IRS Notice 2017-10 made these abusive transactions listed transactions, the IRS equivalent of the nuclear option against bad practices. That the abuse persists was what spurred Congress to introduce the bicameral and bipartisan Charitable Conservation Easement Program Integrity Act. Because if not stopped, abusive deals could jeopardize the charitable tax program and make it harder for honest Americans to conserve the places they love.
How do these abusive deals work?
Each deal is custom tailored, but there are certain common traits. As an example with round numbers, let’s say a piece of land is sold to investors for $1 million dollars in shares that cost $100,000 each. The investors then donate a conservation easement on that land and tell Uncle Sam that the easement – which, as a partial interest in the land, should be worth less than $1 million – is worth perhaps $5 million. That results in each $100,000 investor getting $500,000 in tax deductions, saving each investor as much as $187,500 in taxes. The investor has practically doubled his money, but the Treasury has just laid out $1,875,000 for a partial interest in land that was just sold in its entirety for $1 million.
That sure sounds like some funny math.
It is. When you donate to your church or your alma mater, you get a $1 dollar deduction for every $1 you donate. There is no magic to land or conservation easements on land that makes them any different. Yes, land can increase in value over time. But not overnight. And logic dictates that a part of a thing cannot be worth more than the entirety of that thing.
What are these limits I’m seeing in the Charitable Conservation Easement Program Integrity Act?
Limiting the deduction of an investor to no more than 2.5 times their investment over three years ’was intended to prevent an investor from gaining more in deductions than they paid for them. (This assumes a 40 percent income tax rate.) By instituting this limit, the legislation simply takes the profit out from what is supposed to be a charitable donation. Remember: A donation means giving up something. These abusive syndications aren’t giving anything away. They are taking – from every taxpayer who pays the taxes they owe.
How could the bad actors get away with this?
Because the IRS hasn’t invested in auditing partnership returns, because their computers couldn’t read the charitable donation tax form (Form 8283) and because they have so few appraisers on staff, the IRS simply ’wasn’t able to detect these abuses for years. And by the time they did detect them, they were overwhelmed. That’s why we need the Charitable Conservation Easement Program Integrity Act.
People campaigning against the Charitable Conservation Easement Program Integrity Act seem to have a lot of arguments against it. How do I succinctly counter those arguments?
You see those arguments not because they’re legitimate. Rather, they’re the result of an incredibly well-funded and relentless campaign from bad actors seeking to protect the massive profiteering the Charitable Conservation Easement Program Integrity Act would halt. Generally speaking, it’s better to focus your case on the good your work does for your community and how this legislation will help ensure that work continues. But a succinct recap of arguments (and counterarguments) follows to help you respond to arguments.
Argument #1
The bad actors and their lobbyists suggest that appraisals be “independently verified by a second appraiser.” The problem with that is it simply creates new problems and costs without impeding abusive deals. Abusive deals that cheat taxpayers and the government out of billions of dollars depend on hyper-inflated appraisals. Addressing the problem by mandating a second appraisal might seem to be an intuitive solution, but many of the abusive deals done to date already have two appraisals. A second appraisal would not deter the bad actors, but would significantly increase the cost for well-intentioned, charitable-minded donors, perhaps by as much as $25,000.
Argument #2
The bad actors would require that the “highest and best use of land,” be an element integral to calculating the applicable tax deduction. Requiring what is already required is not a serious proposal. This proposal would merely add a checkbox, not a protection. Establishing the “highest and best use” of real estate is already required in an appraisal for a tax deduction, by the 2006 law that required tax appraisals to follow relevant professional standards (in this case, the Uniform Standards of Professional Appraisal Practice).
Argument #3
These same bad actors would identify “qualified appraisers” as those who passed a comprehensive course in valuing conservation easements. But that’s a ploy. IRS regulations already stipulate that appraisers must have expertise and experience directly relevant to the property being appraised. (See IRS Notice 2006-96.) In any case, the issue with overblown appraisals isn’t ignorance; it’s the intentional use of inappropriate comparisons to dissimilar properties and implausible land development scenarios. This solution does nothing more than require one of the 34 unscrupulous appraisers the IRS has identified as being engaged in these abusive transactions to pass a test before he or she continues writing overblown appraisals.iii
Argument #4
They would require donees to provide the IRS a description of each received conservation easement and its appraised fair market value. But the IRS already has this information. Under current law, donors must provide to the IRS a description of any conservation easement valued at $5,000 or greater. (See the instructions for IRS Form 8283.)
Argument #5
They would require donees to provide the IRS a description of each received conservation easement and its appraised fair market value. But the IRS already has this information. Under current law, donors must provide to the IRS a description of any conservation easement valued at $5,000 or greater. (See the instructions for IRS Form 8283.)
i Senate Print 116-44, Senate Finance Committee, August 2020
