Wednesday, August 16, 2017
How large is the potential for hard-to-detect and even harder-to-counter abuse when it comes to the federal income tax deduction for "qualified conservation contributions" under Internal Revenue Code section 170(h)? As Peter J. Reilly highlights at Forbes, the potential appears to be pretty large based on early responses to Notice 2017-10's addition of syndicated easements to the list of listed transactions that must be reported to the IRS. In a July 13, 2017 letter to Senator Ron Wyden, ranking member of the Senate Finance Committee, IRS Commissioner Koskinen reported that the 40 fully completed and processed reporting forms, out of 104 processed and 200 received to date, showed an aggregate charitable contribution deduction of over $217 million with preliminary calculations finding that the average deduction was nine times the amount of the investment in the transaction. Other coverage: Tax Analysts.
Such syndicated easements are only part of the conservation easement universe, but the continuing stream of federal court decisions rejecting in whole or in part deductions claimed for such easements highlight the broader issues with this deduction. For example, the U.S. Court of Appeals for the Eighth Circuit recently affirmed disallowance of a $16.4 million deduction for a failure to protect the conservation purpose in perpetuity (RP Golf v. Commissioner). Not all IRS challenges are necessarily successful, however; for example, the U.S. Court of Appeals for the Fifth Circuit recently reversed disallowance of $15.9 million in deductions, although the court remanded the case for consideration of additional reasons for disallowance asserted by the IRS (BC Ranch II, L.P. v. Commissioner).
Recent reports also highlight the broader concerns with such deductions. In May, Adam Looney of the Brookings Institute issued Charitable Contributions of Conservation Easements, listing general tax policy concerns that predated the recent surge in such contributions:
- "Donations are concentrated in transactions that seem unrelated to conservation benefits," including with respect to type of transaction, geographic area, and donee organizations.
- "A small handful of donee organizations are responsible for a disproportionate share of donations," with 25 organizations (as compared to 1,700 land trusts nationwide) receiving between 2010 and 2012 about half of all such contributions, measured by dollar value.
- "Most organizations that receive donations of easements do not report them as gifts or revenues on their public tax returns," impeding transparency, public accountability, and IRS enforcement.
- "Donations of 'partial interests' are difficult to administer," including with respect to determining the fair market value of the contribution for deduction purposes.
The report is also available through the Urban Institute & Brookings Institution Tax Policy Center.
Nancy McLaughlin (Utah) has also continued her excellent coverage of this topic. Here is the abstract for her latest article, Tax Deductible Conservation Easements and the Essential Perpetuity Requirements, Virginia Tax Review (forthcoming):
Property owners who make charitable gifts of perpetual conservation easements are eligible to claim federal charitable income tax deductions. Through this tax-incentive program the public is investing billions of dollars in easements encumbering millions of acres nationwide. In response to reports of abuse in the early 2000s, the Internal Revenue Service (Service) began auditing and litigating questionable easement donation transactions, and the resulting case law reveals significant failures to comply with the deduction’s requirements. Recently, the Service has come under fire for enforcing the deduction’s “perpetuity” requirements, which are intended to ensure that the easements will protect the subject properties’ conservation values in perpetuity and that the public’s investment in the easements will not be lost. Critics claim that the agency is improperly discouraging easement donations by denying deductions for technical foot faults, and some have called for a change to the law that would allow taxpayers to cure their failures to comply with the perpetuity requirements if they are discovered on audit.
This Article illustrates that noncompliance with the perpetuity requirements should not be viewed as technical foot faults. To the contrary, compliance is essential to the integrity of the tax-incentive program and the easements subsidized through the program. In addition, allowing taxpayers to cure failures to comply with the perpetuity requirements if they are discovered on audit would significantly increase noncompliance and abuse and, given the reliance nationwide on deductible easements to accomplish conservation goals, risk fatally undermining an entire generation of conservation efforts. This Article recommends a more prudent approach: the Treasury’s issuance of guidance that would greatly facilitate compliance with the perpetuity requirements, reduce transaction costs for taxpayers, and significantly shore up the integrity of the program.