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Our family just returned from a road trip. A highlight: Hiking the Cornell Botanic Gardens Cascadilla Gorge Trail. It’s a steep climb of stone steps along waterfalls that connects Cornell University to downtown Ithaca, New York.
My daughter thought it was “pretty cool for all this nature to be so close” to the campus. Conserving nature—not paving over it—is indeed pretty cool, so much so that our tax code has for decades offered an incentive to do it through “conservation easements.” In effect, a landowner swaps the right to develop land in the future for a substantial income tax deduction today.
You might imagine a rancher using a conservation easement to preserve wild and scenic land, some critical to protecting endangered plants and animals. But in recent years, the deduction has been used by owners of less deserving land, including Donald Trump, who has used them for golf courses and driving ranges. And conservation easement opportunities too often have become abusive tax shelters.
IRS has documented certain abuses of conservation easement transactions and tried to curtail them. In response, lobbyists for those engaging in these deals have urged Congress to block IRS enforcement. But in March 2019, the Senate Finance Committee launched a bipartisan investigation into a number of alleged abuses, and last week, it released the results in a damning, nearly 200-page report.
The investigation found that tax shelter promoters helped many taxpayers profit “from gaming the tax code” in ways that “deprived the federal government of billions of dollars in revenue.” The report urged “Congress, the IRS, and Department of the Treasury to take further action to preserve the integrity of the conservation-easement tax deduction.” But it is not clear if the report will result in future legislative action.
How do these scams work? There are two keys to a conservation easement: the individual contributes some property rights in exchange for a charitable deduction, and the appraisal of a property’s fair market value before and after the easement is granted. The Senate Finance Committee subpoenaed six promoters of property investment deals, who knew exactly how to turn those keys to maximize the size of the tax benefits.
With any easement, a property owner gives up some future rights of use of her land but retains ownership. Imagine a property owner has undeveloped land with a fair market value of $1 million. She then agrees to limit future development by donating the property to an organization like a non-profit land trust. With the development restrictions in place, the land’s fair market value might fall to $100,000. But she could deduct as a charitable donation the $900,000 loss in fair market value due to granting the conservation easement. If her top income tax rate is 37 percent, she can reduce her tax bill by $333,000.
But the scams take that income tax reduction to another level entirely. A promoter buys some relatively worthless land that he syndicates to investors through a partnership. He then gets a shady developer to put together a paper investment plan for the property, as well as a shady appraiser to grossly inflate its value. The partnership then agrees to donate development rights to the land as a conservation easement and claims a tax deduction for the difference between its inflated value and the original, much-lower pre-development and pre-easement purchase price.
The Senate Finance Committee viewed these “syndicated conservation easement transactions” as often the most egregious examples of abuse. Its investigation highlighted an independent attorney’s warning to a potential investor: “How do you justify paying less than $3 million for a property that an appraiser says is worth $81 million, with a conservation easement worth $78 million?”
Well, you don’t justify it. Instead, if you’re a wealthy investor taking advice from a promoter, you use that suspiciously high appraisal to shelter as much of your income as possible from taxes.
The promoters were clear about what their deals could do: Every dollar investors paid to the promoters would save two dollars of tax. One of the largest promoters, EcoVest Capital, even included a tax savings calculator in its pitch. In the aggregate, investors would shelter billions of dollars from taxes, and promoters would pocket millions of dollars in fees for organizing the deals.
Promoters have been setting up syndicated conservation easement transactions for years. Between 2010 through 2017, the IRS estimates they generated $26.8 billion in charitable contribution deductions for high-income investors, collectively lowering their federal income tax bills by an estimated $10.6 billion.
The Senate Finance Committee concludes that if “syndicated conservation-easement transactions continue to exist in the form they have over the past decade, they risk not only depriving the government of billions of dollars of revenue but also degrading the general understanding that our nation’s tax laws apply equally to us all.”
Many conservation easement transactions do follow the law’s intention: They preserve undeveloped land for use by current and future generations of taxpayers. The tax subsidy has so far conserved 27,745,552 acres of American lands, including 73 acres just a few miles from the trail we hiked in Ithaca last month. Maybe new legislation will reform the deduction and make it harder for people to cheat. It’d be pretty cool if it did.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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Jim McKnight, file/AP Photo