Conservation Easements: Saving Our Green Spaces or Illegal Tax Shelters?

A property owner who donates an easement of his or her property to a charitable organization for conservation or historical purposes is permitted to take a charitable deduction for the value of that donated property easement. The statutory requirements are set forth in Internal Revenue Code §170(h). There are many conservation easements that are fulfilling the intent of the legislation and conserving green space throughout the United States. However, as with any good thing, there are those who are taking advantage of inflated charitable deductions with illegal reductions in tax liability.

Congress has initiated renewed efforts to crack down on those abusing the conservation easement charitable deductions allowed to taxpayers. The Senate Finance Committee issued a press release on March 28, 2019, announcing the launch of a bipartisan investigation into possible abuses of conservation easement transactions.

Conservation easements come in many forms, and start with a taxpayer’s ownership interest in real property. A conservation easement on that property is then donated to a 501(c)(3) public charity. This is all legal so far. However, the problems arise when the appraisal of the value of the easement transferred is inflated, and/or the easement is not truly a perpetual transfer of a property interest. If the tax benefits greatly exceed the value of the property, it is most certainly too good to be true.

The essential requirements for a valid conservation easement charitable deduction include the following:

  1. The taxpayer’s ownership interest in real property, subject to a deed signed by the donor, transferring a partial, but perpetual, interest in the property to a §501(c)(3) or a §170(c) public charity.
  2. The charitable organization must accept the donation by sending the donor a contemporaneous writing confirming said donation.
  3. The purpose of the easement donation must be for one or more of the following reasons:
    1. Preservation of land areas for outdoor recreation by, or the education of, the general public;
    2. Protection of a relatively natural habitat of fish, wildlife, or plants or similar ecosystem;
    3. Preservation of open space (including farm land and forest land); and/or
    4. Preservation of a historically important land area or a certified historic structure.
  4. A baseline study must be obtained, typically from a biologist, botanist, or historian. This is for the purpose of substantiating the conservation value of the property.
  5. A qualified appraisal must be obtained for any donations over $5,000.
  6. Internal Revenue Service Form 8283 must be filed with the donor’s tax return in the year of the donation. All information and signatures requested on Form 8283 must be provided.

Conservation easements are sometimes structured through an investment partnership or an LLC taxed as a partnership, which purchases real property through use of its partners’ investments. Many times these syndicated partnerships are marketed with the tax benefits used as incentives, i.e., it is the primary reason for the potential partners to make the investment. The IRS and Senate Finance Committee appear to be focusing on syndicated partnerships and their use of appraisals which have overvalued the property’s easement. These types of abuses are relatively easy for the IRS to identify. Syndicated partnerships also lend themselves to substantial penalties on both the promoters and the investors.

A charitable deduction claimed for any conservation easement valued over $5,000 must comply with the documentation requirements outlined above, or risk disallowance by the IRS. The IRS updated its lengthy “Conservation Easement Audit Techniques Guide” in 2018, which provides the red flags, beginning on page 53, that the IRS will be looking for in deciding which taxpayers to audit for purposes of verifying the legitimacy of the conservation easement. The IRS will focus on:

  1. Incomplete or missing information such as an inadequate description of the property or missing acquisition date or adjusted basis in the property;
  2. Missing appraiser or donee signatures;
  3. Inconsistent dates when compared to the appraisal or other attached documents;
  4. A short time period between the acquisition of the property and the donation date;
  5. High valuation of the easement as compared to the adjusted basis of the underlying property, in light of the holding period and the market conditions for the relevant market;
  6. High valuation of the easement in light of the total acreage of the underlying land; and
  7. Use of an appraiser who does not generally perform appraisals where the easement is located.

The penalties imposed by the IRS on taxpayers who are found to have overstated the value of the easement contribution are substantial. Depending upon the degree of overstatement, the penalty will be either 20 percent or 40 percent of the amount of the underpayment.[1] Generally there is no abatement of these penalties even if the donor relied upon professional advice and took the deductions in good faith.

In summary, the donor of a conservation easement to a charitable organization should be familiar with the requirements for claiming the deduction, and ensure that Form 8283 and all required attachments are correct and fully completed. Also, if the valuation looks too good to be true then it most likely will be a red flag and not withstand an IRS audit.

This summary is not intended to contain legal advice or to be an exhaustive review. If you have any questions about conservation easements, please contact Nancy Ortmeyer Kuhn at Jackson & Campbell, P.C.

[1] Internal Revenue Code §6662