Tuesday, November 1, 2005
On the surface, conservation easements seem like a pretty good idea. What could conceivably be wrong with allowing private parties to agree to preserve land in an undeveloped condition? Well, as it turns out, lots of things.
Greg Bialecki (of the abundantly-named DLA Piper Rudnick Gray Cary US LLP) and Daniel Halperin (Harvard Law School) gave a presentation at the GELPI Conference on some of the issues raised by conservation easements. They were joined for the Q&A by Jeff Pidot (Maine AG's Office), who is the author of an excellent report issued by the Lincoln Institute for Land Policy titled Reinventing Conservation Easements: A Critical Examination and Ideas for Reform.
Bialecki and Halperin's discussion focused on the tax issues surrounding conservation easements. I often tell my business organizations students that tax issues shape almost every business transaction; it turns out that tax also drives conservation easement transactions. Bialecki explained that the gift of a conservation easement allows the donor to take a charitable deduction from their tax liabilities. Combined with state legislation that ironed out some enforcement issues, this tax treatment caused the number of conservation easements in the United States to explode.
Like any other tax deduction, gifts of conservation easements are subject to abuse. A series of articles by the Washington Post exposed some questionable conservation easement transactions that created a high deduction for the donor in relation to public benefit conferred by the easement. This led to Senate and IRS investigations. It is still an open issue as to whether there are only a few abuses or whether there is a more widespread problem with conservation easements.
Halperin, who is a tax professor, elaborated on the tax policy concerns raised by conservation easements. As the Treasury Department's Deputy Assistant Secretary for Tax Policy in 1979, Halperin had raised a number of concerns about conservation easements that seem very prescient today. The core problem is that there is no assurance that the cost to the public (the tax deduction) is equivalent to the benefit to the public (the restriction on the land created by the easement). It is very difficult to value a conservation easement. One approach would be to look to the reduction in value of the land caused by the easement. Halperin, however, said that the better measure is the benefit conferred to the public, using the analogy of a used car donated to a charity. The person donating the car might place a hypothetical value on it that is significantly higher than the price that the charity actually gets for the car. The public benefit of the charitable donation, and the deduction the donor can take under current tax law, is represented by the price the charity gets for the car. Of course, this approach still presents valuation difficulties, because with donated conservation easements there is no transaction that places a value on the easement.
Halperin also discussed conservation buyer transactions, where a land trust would buy property (say for $1 million), then place a conservation easement on the property. The land trust would then sell the property to a developer for $600,000 and the developer would make a charitable donation to the land trust of $400,000. These transactions have a smell test problem. Halperin explained that developers often prefer to do the transaction this way because the deduction is done as a direct gift to charity (which is likely to get less IRS scrutiny than a typical conservation easement donation) and because the donation is often made with appreciated securities, allowing the donor to avoid paying capital gains tax. Halperin also noted that these transactions can also be structured where the developer's parents pay for the donation to the charity, amounting to a non-taxed transfer from one generation to the next. All of this amounts to a significant loss of tax revenue, though exactly how much is anyone's guess -- Halperin said that no one, at the Treasury Department or elsewhere, has any idea how much revenue is lost to conservation easement donations.
On top of the tax issues, there are a host of other potential problems with conservation easements. For example, as things stand now, there is no standard for the type of land that can be made subject to a conservation easement. Conservation easements placed on ordinary land can contribute to sprawl and can place development pressure on more ecologically-sensitive land. In most areas, there also are no mechanisms in place to coordinate conservation easements with local land use regulation and planning. Indeed, in most states, there is no oversight or tracking whatsoever of conservation easements. All of these issues together show a strong need for reform of our current conservation easement system.