Victory at last: Integrity Act halts easement tax abuse

On Dec. 23, 2022, Lori Faeth, government relations director for the Land Trust Alliance, had already left Washington, D.C., to spend the holidays with family. But she wasn’t wrapping presents or putting up decorations. Instead, she was glued to C-SPAN, her computer and her phone as Congress voted on the year-end “omnibus” spending bill.

“When I heard it had passed, I’m sure our people could hear me screaming from Oregon,” says Faeth. “It was such a great day, a huge victory for conservation.”

Why? Because it included three key pages of legislation—the Charitable Conservation Easement Program Integrity Act—that represented years of persistent work by the Land Trust Alliance and its members to end abuse of the federal tax incentive for conservation easements. The Integrity Act will halt an insidious tax shelter that threatened to besmirch the public standing of all conservation easements.

With the vote finalized, Faeth jubilantly jumped on the phone, calling colleagues and partners to celebrate. “The land trust community could not have asked for a better holiday gift,” continues Faeth. “The Integrity Act represents both a Congressional vote of confidence in the work of our land trust members and a rebuke for those who abused the federal tax incentive.”

The Integrity Act’s passage may be the Alliance’s biggest and hardest fought victory to date. And, as a cautionary tale, its backstory confirms the need for ongoing vigilance over matters of conservation policy.

From the outset, nothing about the Integrity Act came easy. For nine years, the Alliance fought a hydra-headed policy battle whose plot line resembled a pulp-fiction legal thriller. Alliance member land trusts were pitted against a small group of bad actors that included investors, promoters, rogue land trusts and a syndicators association. In hundreds of land deals, the syndicators used grossly inflated property appraisals on donated conservation easements that reaped billions of dollars of tax savings for investors—and massive profit for themselves. IRS measures to rein in the syndicators’ tax shelter schemes did little to stop them. Undaunted, the syndicators ramped up their activities and even lobbied Congress to strip the IRS of its ability to require disclosures by those involved in syndicated transactions. The Alliance faced deep-pocketed opposition and was outspent at least 10 to 1 by parties seeking to defend the syndication business model.

Though the Alliance had a smaller war chest, it had a secret weapon: its land trust members.

“I cannot overstate the role that our members played in this victory,” says Andrew Bowman, president and CEO of the Alliance. “They educated their members of Congress on the benefits of private land conservation and the evils of the syndicated easement deals. They published op-eds in local papers, they invited their federal officials to visit conserved properties at home and they lobbied specifically for the Integrity Act.”

The Integrity Act’s passage — with bipartisan support in the House and Senate — shows the power of charitable private land conservation.

“We all knew that this issue had the potential to crash and burn the private land conservation world,” says Michael Polemis, chair of the Alliance’s board of directors. “Nine years later, after countless roadblocks, millions of dollars spent by our opponents, and more than a few moments of despair, we brought this across the finish line.”

While there were signs of abusive syndicated transactions before Congress passed legislation in 2015 to make the conservation easement tax incentive permanent, it seemed to proliferate once the bill was signed into law. In addition to permanently reauthorizing the incentive, the 2015 legislation included important provisions to help low- to middle-income landowners conserve their land.

Unfortunately, a small handful of bad actors saw this as an opportunity to make a fast profit by claiming billions in unwarranted tax deductions. To make the uber-lucrative easement deals possible, promoters worked with three types of players: an appraiser who would attest to a property’s wildly unfounded development potential; a land trust willing to turn a blind eye to any wrongdoing and accept the easement donation; and investors whose desire for astounding profits trumped any fear of IRS enforcement.

Each syndicated easement transaction had its own particulars. But, as detailed in a U.S. Senate Finance Committee report, they shared many of the same troubling characteristics. Generally, promoters would purchase affordable tracts of land that had shown little potential for extensive development and then solicit investors. An appraiser would estimate the site’s value as if it were a premier destination flush with mineral rights or upscale real estate cachet. Through the rose-colored glasses of an inflated easement appraisal, a moribund property that sold for $5 million could yield an appraised easement of $50 million.

Time and again, the gambit worked. The gap between the stratospheric appraisal and the land’s actual value took form as an easement that could earn some investors as much as a $10 tax deduction for every $1 spent on the property. The boom towns were fantasy but, as castles in the air, they had generated a windfall in tax savings all the same.

The syndicators argued that this was an innovative way to finance conservation, but, in fact, the practice put legitimate conservation at risk, threatening the federal tax deduction for easement donations and the goodwill of Congress and the American public. But just how wrong were these deals? To understand, it helps to know what a sound appraisal looks like. For that, the Alliance has long turned to the Appraisal Institute. AI has developed learning materials and courses for the Alliance and even a textbook on historic easements.

“There’s about 75,000 licensed appraisers nationwide,” says Bill Garber, AI’s director of government and external relations. “Of those, there’s a sliver who specialize in easements and hold the AI designation. It’s the gold standard for our industry. And a big part of the comprehensive exam that appraisers take involves defending your appraisal.”

As Garber explains, while no two appraisals are alike, they are expected to follow the same valid principles. Essentially, they must seek to determine the “highest and best use” for the property. Whatever that use may be, it must pass the “reasonableness test,” and hold up under IRS or tax board scrutiny if it comes to that.

“With an appraisal, the key is to tell a good story,” Garber says. “It has to be logical, make sense and be supported by market evidence. When you see outliers with wild projections—and before and after scenarios not based on marketplace realities—that’s where the story breaks down.”

By 2015, the Alliance already knew about instances of easement abuse by syndicators. This trickle of worrisome reports soon turned into a deluge. In August 2016, the Alliance issued new guidance and policies about tax shelter schemes and warned land trusts to steer clear of them. By October, the IRS had heeded the Alliance’s call for action. IRS officials announced at Rally: The National Land Conservation Conference, held in Minneapolis, that they would classify the overvalued easement deals as “listed transactions.” In other words, a tax-avoidance transaction as defined by IRS. Published on Dec. 23, 2016, IRS Notice 2017-10 required all parties to a syndicated conservation easement transaction — including investors and material advisors such as the promoters, lawyers and appraisers — submit a form alerting the service that they had participated. Notably, land trusts were not considered material advisors.

But the notice, which was intended to increase disclosure so the IRS could scrutinize potentially fraudulent transactions, did little to stop the flood.

“Every other time the IRS had listed a transaction, it stopped abuse dead in its tracks,” says Faeth. “This time, the abuse just grew. Of the $36 billion claimed in easement deductions between 2010–2018, these bad actors claimed $22 billion after the IRS warned them to stop. It shows how bold and egregious the perpetrators had become.”

As Faeth sees it, the syndicators hijacked a tool intended to help landowners—including low- and middle-income landowners—play a larger role in private conservation. The easement tax breaks were meant to offset the losses that landowners face when they willingly relinquish some of their property rights to protect land for future generations; they were never meant to equal what landowners could make by selling their land with development rights intact. Yet syndicators had done exactly that: Their supercharged rates of return cost taxpayers’ multitudes more than the land was worth.

“Donating an easement is meant to be a charitable contribution,” Faeth says. “You don’t give to any nonprofit organization as an investment scheme.”

In February 2017, the Alliance took its boldest step yet to stave off abusive syndicated transactions among its 950 members. The time for guidance and recommendations had passed. Left unchecked, the rampant growth of these abusive transactions threatened to give the land trust movement a black eye. The Alliance took a stronger stand by adding Practice 10C4 to its Land Trust Standards and Practices. It specifically included “transactions with pass through entities of unrelated parties,” which addressed commonalities of known abusive syndicated deals. The Alliance requires that all land trust members adopt the Standards as their guiding principles. As such, they could no longer remain as members of the Alliance if they accepted abusive syndicated easements going forward.

But stopping the syndicators would take more than the Alliance’s efforts to ensure its members were not participating in these deals. The overworked IRS was clearly outmatched in policing violators into compliance, and IRS cases could take years to wend through the courts. What came next was a “we’re going to need a bigger boat” moment.

“It was clear that the abuse was not stopping, so the next phase was to pursue a legislative solution,” says Robert Schwartz, the Alliance’s senior government relations manager.

A pivotal moment came in 2020, when the Senate Finance Committee, led by then Chair of the Committee Chuck Grassley (R-Iowa) and then Ranking Member Ron Wyden (D-Ore.), released a report following investigation into syndicated easement transactions. The report made it clear that the abuse was egregious, likening the deals to walking up to a vending machine, putting a dollar in and getting two dollars back. The report stated: “These types of abusive tax shelters erode the nation’s tax base and sow pessimism among all Americans about the fairness of our tax laws.

Momentum was building. The Alliance’s communications and government relations teams successfully pitched stories to business media. Bloomberg, Wall Street Journal, Forbes, CNBC and ProPublica ran stories of the “The Tax Scam that Won’t Die” or “Bad Actors Are Fattening their Wallets, Not Boosting Conservation” variety. It was a complex story, but reporters embraced its David versus Goliath contours.

By fall 2022, the stars seemed aligned for the Integrity Act’s passage when it found a place within the omnibus spending bill. In a nailbiter at year-end, the Alliance’s outgunned cause prevailed, and the Integrity Act passed.

“Our bill preserves the integrity of the conservation easement program, which plays an important role in protecting family farms, open land, wildlife habitat and recreational opportunities across Michigan and our country,” reflects Sen. Debbie Stabenow. “Republicans and Democrats came together to end this abuse and save taxpayer money.”

In the end, says Schwartz, the Alliance’s “positive approach” paid dividends. The Alliance didn’t talk about specific land deals or individuals involved in packaging and promoting the abusive transactions. Instead, the focus was on the “community-based, inclusive, voluntary and nonpartisan” values that the Alliance represents and the high ethical standards practiced by Alliance member land trusts.

“We had a movement with 950 members who made our message personal and real to legislators,” says Schwartz. “While the syndicators outspent us 10 to 1 on lobbying, we had something they didn’t have: a true coalition.”