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Thursday, May 9, 2019

A Conservation Program That Has Preserved 30 Million Acres of Habitat Is Being Threatened

A win-win conservation policy is under attack by the IRS and the DOJ.

Bureau of Land Management [Public domain]

It’s expensive to maintain fragile ecosystems. States are determined to take charge of preservation but have the misguided idea of bilking big companies (aka consumers) to pay for conservation via endless lawsuits. Fortunately, there’s a better way to safeguard Mother Nature at a lower cost and with less disruption to consumers and taxpayers. Under the existing tax code, landowners can donate undeveloped land to a conservation group and use the donation to reap tax benefits. This is more than theory: nearly 30 million acres of habitat have been preserved through this process.

Alleged Fraud Is Threatening the Program’s Credibility

Unfortunately, this win-win conservation policy is under attack by the Internal Revenue Service (IRS) and the Department of Justice (DOJ), which claim that significant fraud is undermining the program. While any fraud should be addressed, federal actions threaten to scare away potential land donors and appraisers, sparking a conservation crisis and threatening more lands with destruction.

Normally, donors can deduct the difference between the highest potential value of the land and the current value off of their income, creating a large incentive for landowners to leave pristine lands unbothered. But that strategy only works when the donor has enough taxable income from which to deduct.

This complicated strategy has drawn the ire of Uncle Sam and an army of pundits who claim that appraisers are rigging the system. 

Donors of modest means can “sell” their conservation easement with the help of large investment firms that can create a tiny LLC for the donor, recruit investors for the LLC, find an appraiser to assess the easement, and then spread the tax savings to the investors. All of a sudden, the donor has land investors willing to pay for a “conservation easement” tax deduction, and he/she can benefit from keeping nature intact.

This complicated strategy has drawn the ire of Uncle Sam and an army of pundits who claim that appraisers hired by investment firms are assessing these conservation properties at ridiculously high prices in order to reap as much of a deduction as possible. In a complaint filed in December of 2018, the DOJ claimed a “syndicate….made or furnished gross valuation overstatements about the valuation of conservation easements and the corresponding tax deductions.”

In order to make a determination about whether valuations were overstated, the federal government needs to find appraisers who disagree with the original valuation. But just as companies have a vested interest in increasing their tax deduction, the federal government has a vested interest in getting as many tax dollars as possible.

More Taxes, Fewer Deductions

The US Tax Court case of Cave Buttes, L.L.C. v. Commissioner (2016), for instance, dealt with dramatically different valuations of a tract of real estate. The taxpayer’s appraiser and the IRS (non-employee) appraiser disagreed over whether or not the land had legal access to a public road, leading to a $1.7 million gap in their estimates. The court sided with the taxpayer’s appraiser, finding that the IRS appraiser’s finding of no legal access wasn’t supported by the evidence. This and similar cases show that whenever there’s a gray area in land valuation, the IRS takes the road that will result in fewer deductions for taxpayers and more money for Uncle Sam.

The agency has created a nearly-foolproof way to rig the system and ensure that taxpayers’ appraisers’ estimates are thrown out. IRS “engineers” are tasked with picking apart appraisers’ independently-derived estimates, freely changing assumptions to lower conservation easement values. These IRS employees aren’t bound to the Uniform Standards of Professional Appraisal Practice, which is probably why the agency deems it necessary to hire outside appraisers who will give credence to IRS “estimates” and testify in court.

The DOJ and IRS should back off of a vital program that has preserved nearly 30 million acres of habitat.

If the IRS finds that a taxpayer’s appraiser significantly overvalued the easement, they won’t simply stop at disallowing the deduction. The agency can “make the appraiser subject to penalties of up to 125 percent of their fee plus potential disbarment from working on federal tax matters.” These shenanigans discourage appraisers from helping taxpayers value their conservation easements at a time when there’s already a nationwide shortage of appraisers.

Rather than trying to punish taxpayers and appraisers trying to increase savings and protect the environment, the DOJ and IRS should back off of a vital program that has preserved nearly 30 million acres of habitat. Taxpayers and fragile ecosystems alike deserve a break, not more federal “action” and conspiracy-mongering.

  • Ross Marchand is the director of policy for the Taxpayers Protection Alliance.