The Tax Treatment Of Conservation Easements: P4C’s View

In the first part of a two-episode series, Tax Notes legal reporter Kristen Parillo interviews Robert Ramsay, executive director of the Partnership for Conservation, about the controversy surrounding conservation easements.

Kristen Parillo: Welcome to the podcast, Robert.

Robert Ramsay: Thanks, Kristen. I’m certainly glad to be here.

Kristen Parillo: Before we dive in, can you tell us a little bit about P4C and the work you do?

Robert Ramsay: Sure. The Partnership for Conservation is a nonprofit. We’re a 501(c)(6) trade organization. Our membership is representative of a wide swath of people who choose to put land into conservation easements. Everyone from land owners, to investors, to the land trust, and promoters as well.

We’re really focused on ensuring that conservation easements remain a viable tool for conservation for all Americans.

Kristen Parillo: What is a syndicated partnership and how does it work in the easement context?

Robert Ramsay: A conservation easement is essentially when a land owner — and that can be an individual or a group of individuals who have come together to own the land — choose to put that land into a conservation easement, meaning they give up certain development rights in perpetuity. Congress had the good foresight several decades ago to put into the tax code an incentive for people to have this option. They really wanted to incent people to choose this over development in certain parcels of land that qualify for the conservation easement.

What the IRS has labeled a syndicated conservation easement transaction is that very same thing. But instead of an individual doing it, you have a group of unrelated individuals who come together, choose to invest in a partnership, and then may choose to donate those rights for that conservation easement. As a result of partnership law, those deductions then pass through to each of the partners.

Kristen Parillo: How would you respond to the critics who say people shouldn’t be turning charitable contribution deductions into a profit-making venture? Do you think the tax costs of these deductions are proportional to the amount of land being conserved?

Robert Ramsay: Since the beginning of conservation easements, different advisors, attorneys, accountants, and otherwise have made “a profit” from advising or assisting landowners for putting their land into conservation. I view people who work to bring investors together that choose to donate an easement as having that same opportunity.

Section 178 lays out a great deal of information and specifically articulates the types of land qualify for a conservation easement. It doesn’t stipulate that there needs to be an associated cost or a certain threshold for the cost; just that the land needs to have certain attributes in order to qualify.

The challenge that we have in this current circumstance as we look at syndicated conservation easement transactions, is that as the IRS reports out to Congress on the activity of syndicated conservation easement transactions, rarely, if ever, are the total acres of land being shared with the public or with Congress.

The other point here is that we’re not talking about widgets that are manufactured and are identical. Each tract of land has unique qualities and characteristics. It’s awfully hard, from the statute as currently written, for folks to judge necessarily the value overall to the taxpayer — the cost value proposition there.

My suggestion would be that it is incredibly valuable to the general public. There are a number of state studies, which we’ve posted on our website, that actually go through and look at what the return on investment for the general public has been as it relates to both land conservation and specifically conservation easements. What you’ll see from state to state is a wide disparity in terms of what that return on investment is. You’re talking about multiples of four to one, five to one, 10 or even 12 to one in certain states’ studies. There’s an awful lot of value that’s being generated to the public trust through conservation easements.

Lastly, I’ll point out this fact. In the case of conservation easements, the landowner maintains the responsibility and the burden of the cost for maintaining that property. It doesn’t fall to the federal government — and thus the taxpayers — as is the case with public lands.

From my perspective and from P4C’s perspective, the acquisition of wonderful tracks of lands to expand state parks and national parks is really valuable and important. Conservation easements are really a critical tool to be coupled with that effort. 

Kristen Parillo: P4C has strongly disagreed with the enforcement approach that the IRS has taken on this issue. Can you explain what P4C’s disagreement is and where it stems from?

Robert Ramsay: Obviously, the IRS has decided that they do not like syndicated conservation easement transactions. That doesn’t mean that they are illegal, however. What we found is that the IRS from the very top — and in other quotes we see from others that are concerned about this issue — is that the concern lies very squarely at that valuation point. Are the valuations justifiable? Are they fair? Are they accurate?

However, what we see the IRS doing, rather than addressing valuation or issuing guidance for conservation easements, which has been requested now for decades, is taking an audit-and-litigate approach. During the litigation, rather than focusing on the valuation question, they attack what we would term as foot faults. We didn’t fill out a particular IRS form exactly to the T. We failed to report a number. Rather than allow for substantial compliance and have that corrected, the IRS wants to disallow a conservation easement based on that.

Moreover, the IRS is offering regulation on areas of the tax code where they’ve never offered guidance to taxpayers. For 40 years now, people have done their best to adhere to the statute in the absence of really great and robust guidance from the IRS. Today, to see regulations being issued that result in sort of a “gotcha tactic” in the Tax Court is very frustrating to taxpayers, and certainly to our members.

I think as a cautionary tale to taxpayers everywhere, if the IRS decides that they don’t like what you’re doing, regardless of whether it’s legal or not, they may choose to come after you in just about any way that they can possibly imagine. We’d love to have the conversation around valuation. If there is a concern from the IRS or Congress that the U.S. government can’t afford this, that’s an entirely different conversation than the one that seems to be taking place right now.

If certain people — the IRS or others — are not happy with some of the conservation outcomes broadly in the conservation easement community, let’s address those conservation purposes. This statute and the incentives — those tax deductions that were put in place by Congress to encourage people to choose this — have been reauthorized, made permanent, and even enhanced in recent years. The underpinning of the statute is more than 40 years old.

We certainly know that our landscape of our country has changed rather dramatically. It is rather frustrating from our members’ perspective to do a tremendous amount of work in the absence of guidance from the IRS and spend lots and lots of money on attorneys to help comply with the law, only to have the rug yanked out from under you after the fact. That’s a pretty frustrating circumstance to find oneself in.

Kristen Parillo: There’s a similar issue going on in cryptocurrency where the IRS hadn’t released any guidance since 2014. Taxpayers were frustrated and representatives were urging IRS and Treasury to put out more guidance. This past March the IRS hosted a forum with stakeholders from the industry, putting everyone in one room, and allowed each side to say what they need from the IRS.

The IRS didn’t really respond. They basically listened, but everyone seemed to agree after that this was a really good exercise. I’m wondering if that’s something that can be done for the conservation easement issue. Is that something that might bring the temperature down and get a dialogue started?

Robert Ramsay: I couldn’t agree more. I think that would be a wonderful idea. In fact, it’s something that we’ve been asking for for quite some time. I think that there are real pragmatic solutions to the challenges that have been presented or the issues that have been presented as it relates to valuation. We would embrace that opportunity, and show up to the meeting early and stay late.

Kristen Parillo: You recently wrote a piece in Tax Notes about the dirty dozen myths about syndicated partnerships. What are some of those myths and what prompted you to write that piece?

Robert Ramsay: What prompted me to write the article were some of the experiences that our members were sharing with me. Some things that I was reading in the press and some was what we saw or have seen in recent Tax Court cases. It seemed to me that it was really important to offer that perspective and try to address some of those issues. When one is under an audit, it’s a relatively scary endeavor.

An example of one of the myths is that the conservation easement must protect significant natural habitat. Well, I’ve heard from members and IRS field agents ask the question: your baseline documentation report — which is the report that’s a snapshot of what’s on the land and the condition of the land at the time of the donation — doesn’t indicate that there are any threatened or endangered species. How can there be conservation values? Well, that’s not at all what the statute says.

My piece was really was an attempt to pull back the blinders on some of the conversations that I was hearing, and to also put forward really a clear delineation on each of those points. The points ranged. 

One myth was that these transactions identified by the IRS and listing notices like conservation easements become illegal after the IRS identifies the transactions. Of course, the listing doesn’t do that. It does require additional disclosure from taxpayers to the IRS.

Another one is that the IRS’s attacks are intended only to stop syndicated conservation easements. Gosh, that may be their intent. But when we look at the Tax Court cases and even some of the appeals decisions that are being handed down, they’re not limited to syndicated conservation easement transactions.

In fact, one of the cases recently having to do with the proceeds clause — that language came from what had been considered the standard bearer for easement language. The IRS’s subsequent regulations again yank the rug out from under people’s feet. That’s why it was important to write the piece.

Kristen Parillo: Your piece ran a couple of weeks ago and we’ve gotten some letters to the editor criticizing what you wrote. We’ll be running those later this month. Did you expect that criticism? What would you say to your critics?

Robert Ramsay: Of course I expected criticism. This is a relatively hot topic in a relatively small area of the tax code. People who are practitioners in the space really do fall out on one side or the other of this issue. 

What I say to our critics is: let’s bring the temperature down. Let’s help the IRS get back to a place where they’re focused on substantial compliance — not technical foot faults. Let’s have an earnest conversation about the appraisal valuation question. Let’s work to eliminate those instances of abuse.

P4C is not saying that there’s no abuse. It’s the tax code for God’s sake. In every section of the tax code there’s going to be some limited abuse, but let’s fix what the critics say the problem is rather than attack an entire class of land ownership.

When I say class, what I mean is that the one legislative solution that’s been put forward basically treats two unrelated individuals or more who choose to own a piece of property together very, very differently if they want to donate a conservation easement than it would an individual or a family, for example. I don’t think that’s what Congress intended when they passed the statute so many years ago.

There are solutions to this problem. There are pragmatic solutions that aren’t as overreaching. That’s really where I think the focus needs to be. Both the national taxpayer advocate and Judge Mark V. Holmes in his dissent of the Oakbrook case recently really did encourage or urge the IRS to issue that guidance, including sample deed language. He went further and basically indicated that so much of this wouldn’t be going on had guidance been issued at any time in the past.

I believe that guidance from the IRS is something that everyone in the conservation easement community is thirsty for. That’s possibly enough common ground to start a conversation.

Kristen Parillo: The legislation — Senate Bill 170 — would limit the size of the deduction that can be taken by syndicated partnerships. Why does P4C oppose that legislation?

Robert Ramsay: What it really does is, in a manner of speaking, limit the potential value that can be claimed for the deduction, regardless of what an appraisal says. That’s a massive sea change from where we are today. If it’s about limiting deductions, then A) it needs to apply to everyone and B) there are numerous other ways to approach that in the tax code. Limitation of the deduction based on a certain adjusted gross income, for example.

At the end of the day, the two and a half to one was not some magic number that was pulled out of the air. If you do the math based on at least the old income tax rates, what you find is that at a ratio of two and a half to one and a holding period of three years, you have artificially limited the partners’ deduction to just about a dollar. A dollar in, a dollar out. Of course that’s not what the value of the donation should be predicated on under the current statute. We do have a significant problem with that.

Moreover, when you look at the landscape, or when you look across the United States, there’s no two parcels of land that are identical to each other. Valuations fluctuate wildly depending on economic cycles and where in the country you are. Napa Valley, California, has exceedingly high land evaluations. Rural South Georgia is going to be lower because you’re talking about either timber land or agricultural land.

Again, if it’s about appraisals and valuations, why not take a real serious and earnest look at how to limit that chance for abuse? It’s not limited to partnerships. For the partnerships, other than having unrelated individuals buying interest in a partnership, the process for donating the easement is really almost identical.

We’re for finding the right reforms, but what’s been proposed is punitive for only one group of landowners. The truth of the matter is we’re not the only people that are opposed to this. The real kicker in the Senate bill that you mentioned is that it changes the tax law retroactively all the way back to 2016. That’s fraught with all sorts of problems with different people in Washington, D.C. and beyond.

Kristen Parillo: There were two big court opinions issued recently in conservation easement cases. One was the Tax Court decision in Oakbrook Land Holdings, which was a win for the IRS. Then the very next day, the Eleventh Circuit in the Champions case vacated the Tax Court decision and handed the partnership a win in that case. What are your takeaways from those cases?

Robert Ramsay: In the Champions case, it addressed one of the myths that we actually spoke about earlier very directly. The Eleventh Circuit came back and said a landscape that has been changed can still be in its relatively natural state. It can still harbor wildlife and plants. That was demonstrated in the case.

The other part of Champions that we’ve found to be really fascinating was in the factual description issued by the Eleventh Circuit in their decision. They went on to say Champions was able to steer corresponding tax benefits to persons, who in anticipation of that benefit, made capital contributions, thus shoring up Champions’ financial position.

At least from the Eleventh Circuit’s perspective, someone choosing to enter into a partnership with the expectation that they may receive a tax deduction because of a conservation easement, it’s totally fine. We’ve certainly heard others argue against that. 

In the Oakbrook case, in my mind, it relates to some of the frustration that we have with the IRS. These syndicated conservation easements are abusive because of evaluation or appraisal abuse. Yet here a deduction is completely disallowed because of a proceeds clause. Language in the proceeds clause was not consistent with the IRS’s regulation. Rather than allow the easement to be amended, the deduction is disallowed. Holmes wrote a pretty scathing dissent arguing that his colleagues on the bench got it wrong. He articulates his reasons why, and also imploring in essence the IRS to issue guidance. Because that proceeds clause language exists in hundreds upon hundreds, if not thousands of easements around the country. Easements donated by individuals, syndicated conservation, easement transactions and the like.

Kristen Parillo: In closing, what else do you think the tax community needs to know about syndicated partnerships and conservation easements? Where do you think we go from here?

Robert Ramsay: The truth of the matter is this: The environment in our country and on the globe is a greater priority than it ever has been for a larger number of humans than it ever has been. In our country today, we still lose hundreds upon hundreds of thousands of acres of land to development each day.

I was interested to see that the American Farmland Trust recently issued a report about threatened farmland. The number one threat for farmland, at least in the Southeast, is low-density residential development. That land’s converted from food-producing farmland to low-density residential development. Conservation easements are used oftentimes to protect working farms and working forests.

Climate change is of critical importance. Nature’s ability to sequester carbon is ensured when land is put into permanent protection, whether that’s by state or federal government or conservation easements. We absolutely understand that people have issues with the way that these are being done. We understand because it’s stated time and time again, that it revolves around valuation and appraisals. We really do think that there are pragmatic, meaningful solutions to address that issue without throwing the baby out with the bath water, as we like to say.

Finally, if you’re an American taxpayer and you have followed the law, but it is a part of the law that the IRS doesn’t necessarily like, then I think you should take notice. Because if they can disallow a deduction based on a technical foot fault or based on regulations that are promulgated and having never issued any guidance over a 50-year history, then it’s pretty clear that when folks at the IRS latch onto an idea they’re willing to do just about anything to get what they consider to be the win. That scares me as an American citizen, for sure.

Kristen Parillo: Thanks for talking with us, Robert. Quite an interesting issue, and I’m sure we will keep hearing more about it.

Robert Ramsay: I am sure that you are right, Kristen. Again, I really appreciate the opportunity.