Originally published on Forbes.com.
Way back in 2011 covering a private letter ruling that disallowed exempt status for a sketchy land trust I came up with a prescient title Conservation Easements A New Field For Villainy.
My continuing coverage earned me a phone call from some fellows who were planning to buy land, have investors come in and then make easement donations all in relatively short order. I thought it was the stupidest idea I ever heard. In order for it to work, thought I, you needed to buy the land from silly people who had no idea what their land was worth or when figuring the “before” valuation kind of, you know, fib.
Crackdown
As it turns out, syndicated conservation easements have been a thing for the last few years. Enough so that DOJ has launched a major assault on Ecovest, one of the largest operators and Senator Grassley is calling for an IRS crackdown and the IRS seems to be responding.
My general attitude towards the syndications has been negative, essentially because of that initial thought that I had. Easements are generally valued indirectly by valuing the property considering its highest and best use and then subtracting the value of the property as restricted.
That “before” value, in my view, cannot be substantially more than what the property would currently change hands for, because even though the market for real estate with development potential is an imperfect one, it is not full of stupid people.
Highest And Best Use
But somebody, who prefers to be nameless (I have taken to calling him James the Just or JJ), has been telling me I am all wrong. JJ wrote me recently:
You still don’t Understand the deduction
it’s not fair market value! Highest and best use value is not built into fair market value or last sale price.
Take care Peter. I advise studying this a lot more before writing any more articles.
Silly me.
Tax Court Takes Notice
At any rate I think JJ is getting a little attached to his position. The viability of the syndicated conservation easement industry hinges on whether the “before” valuation can be much, much higher than the property was recently acquired for. If the potential for the HBU is baked into what you paid for the property, then the easement value is some fraction of the price you have paid, not a multiple.
In TOT Holding which was decided last month Tax Court Judge Gustafson took special note that the IRS value was close to what the taxpayer had, in effect, paid
“In December 2013—days before the contribution of the easement—PES indirectly acquired a 99 percent interest in the property for $1,039,200, suggesting a 100 percent value of roughly $1.05 million. Mr. Barber’s before value ($1.128 million) corresponds roughly to this figure, and Mr. Wingard’s before value ($3.9 million) is not at all close to it.”
Partnership For Conservation
JJ strongly suggested that I reach out to Robert Ramsay of the Partnership For Conservation (P4C).
This is the statement I received from Mr. Ramsay:
At a time when we are losing more than six-thousand acres per day to development, we need more land conservation, not less. Conservation partnerships, made possible by the incentive passed and strengthened by Congress on multiple occasions, now play a crucial role in overall conservation efforts, preserving hundreds of thousands of acres of land with tremendous environmental value.
To address the instances of abuse of the current rules, the Partnership for Conservation, since its founding, has stood against these abuses and offered sensible solutions that would safeguard the integrity of valuations, while keeping the conservation incentive intact and available to all Americans.
To the extent there is concern about the currently applicable ‘highest and best use’ standard, then stakeholders and policymakers should come to the table for an open and honest conversation about alternatives that could strengthen the integrity of the conservation easement donation incentive, without targeting an entire class of land ownership or imposing a punitive retroactive tax increase on Americans who followed the law. (Emphasis added)
So it appears that Mr. Ramsay’s position that the HBU standard detached from the actual market for underdeveloped land is “currently applicable”.
A Different View
The foil to JJ that I hear from is Factual Freddy. FF says that there are more cases like TOT in the pipeline standing for the proposition that the potential of HBU is embedded in what the property will sell for and that is what should be used for the “before value”. He wrote:
“Unfortunately, the high priced marketing Firms funded by EcoVest and Partnership For Conservation, plus the really high priced and technically competent tax attorneys, all raking in massive fees, are winning the publicity battle to date. I personally feel that will not last another year. But I believe it will be borne out that they are not pristine souls saving the environment. It’s all about cold hard cash for everyone involved in Syndicated Conservation Easements. And, unfortunately this is not a good thing for the 99% of those organizations and individuals truly working within the law.”
Ancient History
There is Tax Notes article that is being cited by P4C arguing that the IRS is overreacting to syndicated easements- Valuing Conservation Easements: An Empirical Analysis of Decided Cases by Jenny L. Johnson Ware .
Ms. Ware’s article is what it says it is i.e. an empirical analysis of decided cases. Her big takeaway is:
“The data we collected, which are described and analyzed in detail later, show that abusive overvaluation is not prevalent in the decided cases ..”
She finds that in cases in which the court actually ruled on valuation roughly 80% of the claimed deductions were allowed ($74,669,396 out of $92,728,417). The implication is that this holding in these seven cases is somehow indicative of what is going on now. And it is not.
None of the cases appear to concern syndicated deals. And more significantly, Tax Court decisions can never be an indication of what is happening now. Her most recent case Pine Mountain Preserves, which was decided in 2018 concerns deductions for the years 2005, 2006 and 2007. One case concerns a 2011 deduction. The rest are all earlier.
Back in 2005 you would not find conservation easement deals offering four, five or six times cash investment, as you can now.
There Might Not Be A Need For More Rules
If the IRS shifts its focus to valuation rather than focusing on technical flaws and the principle in TOT that considers what the property might sell for now is upheld, the syndication of conservation easements for multiples of investment would fade away. Absent extraordinary circumstances the value of an easement will be a fraction, possibly a large fraction, of what is paid for the property.
People could get together and buy a piece of land, hold it for a year and then recoup some of their cost with an easement deduction, but the deduction should be less than if they had just given the whole property away or donated to a charitable entity that purchased the property.
Other Coverage
Peter Elkind has an article in ProPublica – The IRS Tried to Crack Down on Rich People Using an “Abusive” Tax Deduction. It Hasn’t Gone So Well. He did a lot more interviewing than I did and shows the landscape of the industry. It is a really good read. The only nit I would pick with him is that some of the feedback I get is that the market for the shelters is high-income people who are not yet rich. It is a subtle distinction, but one worth making.
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