Proposed Bill Will Not End Conservation Easement Tax Abuse

Senators Grassley, Daines and Roberts have introduced a bill to “end abuse of conservation easements”. The Charitable Conservation Easement Program Integrity Act of 2020 is an update to a previously introduced bill that has been tweaked to forestall anticipated maneuvers to sidestep restrictions. This download explains the tweak, but you have to be a Subchapter K junkie to appreciate it.

Support From Land Trusts

The bill has support from the responsible section of the land trust/conservation easement community and the nature of its provision shows that. The bill would make illegal something that is already from a practical viewpoint illegal and threatens to implicitly safe harbor transactions that are merely extremely abusive rather than incredibly outrageously and likely criminally abusive.

What Is So Special About 2.5?

The provision targets flow through entities that take a charitable conservation easement deduction greater than 2.5 times the portion of what the partner paid in that is attributable to the land. That complication is apparently necessary, because clever people were creating partnerships that held land and liquid investments.

The limitation is waived if the partner has held the partnership interest and the partnership has held the property for at least three years. There is also an exception for family partnerships, which is kind of telling

The reason the number is 2.5 is that assuming you have a 40% marginal rate that would be your break-even multiple. That is the multiple that the IRS used when it identified deals as listed transactions in 2017. It is possible that the ultimate source of the 2.5 is Stephen Small, an attorney who has crusaded against abusive deals and supported the more benign deals.

The Abusive Deals

Paul Streckfus reproduced remarks delivered by John Schoenecker, Senior Investigative Counsel, Senate Finance Committee,to members of the EO Committee of the ABA’s Tax Section EO Tax Journal 2020-193 (paywall):

What we found in this investigation is that regardless of what the transactions could be made to look like they are investment vehicles in land or they are multi-option investments in which an investor can choose to develop or hold or conserve land. What the emails showed in our investigation was that investors were looking to get a tax deduction basically matching up to whatever their AGI was expected to be by the end of any given year. That’s what the promoters were selling.

The investigations that we saw and this is all in the report shows a very, very simple proposition to investors from promoters, which was this. We the promoters will give you about a 4.1 or 4.4 dollar deduction for every dollar you invest in our transaction, which will probably end up conserving the land. What that meant is when you combine average state income tax obligations with federal tax obligations, usually at that time a 39.6% marginal rate, that meant for every dollar an investor gives the promoter they will save $2 in income tax obligations.

No Need For This Bill

You really don’t need a new law to address this particular abuse. The worry is that the law would seem to bless transactions that are not so nakedly abusive. A more patient ultra-high net worth individual could wait four years and actually use the protected land to build their palatial estate. Maybe everybody could feel good that the land is still mostly protected, but the idea that the green billionaire has essentially gotten the land for free should be a little disturbing.

Granted that scenario would require sketchy appraisals, just not as sketchy as the syndicated deals, but planners would argue that if the multiple stays under 2.5 then the transaction is not abusive.

Consider A Rationed Credit

There is also the question of how well land is actually protected. Land trusts are not closely regulated as we can see from the current scandal. Yet they are in the position of handing out substantial tax benefits.

The only way to end appraisal abuse (or close to end it) might be to convert the deduction to a credit that is rationed and apportioned like the low income housing credit with qualified state agencies picking the best projects to award credits to.

Mountain Resorts And Golf Courses

It appears that developers use the deduction as a tool to make projects more feasible which is a kind of perverse effect. The easements can favor low density development and things like golf courses. What we might need more is totally wild spaces with higher density in other places, since people do need places to live.

We probably have sufficient mountain resorts and golf courses already and don’t need tax incentives to encourage them.