Uneasy Easements: The Use and Abuse of the Conservation Easement Tax Break

Posted on April 22, 2019 by Philip Tabas

Conservation easements have become the most popular approach for protecting lands, water, wildlife and historic structures in the US.  Thanks in large part to the Federal income tax deduction for gifts of permanent conservation easements enacted in 1980, over 27 million acres of private lands and the wildlife on them have been protected across the country using this conservation mechanism. A charitable gift of a conservation easement has afforded landowners a way to protect the places they cherish while providing conservation groups with a cost-effective land protection tool.

Today however, this conservation mechanism is under assault. Certain easement promoters are focused more on tax benefits than the conservation outcomes that can be achieved through conservation easements. The historically successful use of the conservation incentive by owners of environmentally significant land has led some to promote the abuse of conservation easements purely for their tax shelter value as an element of a complex financial instrument. Over the past ten years, there has been an extraordinary increase in tax deductions claimed by these investment partnerships for conservation easement donations. This activity has been brought to light by information provided by the IRS to Congress and publicized by several news publications.

Typically, tax shelter promoters have been selling interests in tracts of land to taxpayers/investors looking for large tax deductions. The promoter puts together a group of taxpayers/investors, in a legal form called a “syndication” or partnership, to buy the land, donate conservation easements and then sell or develop the underlying land later. In these arrangements, the promoter of the syndication often obtains an appraisal of the tract of land which uses unrealistic assumptions on which to base the appraised value and then grants conservation easements on that land using the inflated valuations. The resulting inflated charitable deductions are then split among the taxpayers/investors.

According to IRS data, these syndications claimed more than $20 billion in charitable deductions since 2010. In 2016 alone, 248 entities claimed $6 billion in deductions.  IRS data from 2018 show that a sampling of these transactions enabled investors to claim, on average, deductions valued at nine times the amount of their original investment. Based on the most current data available, the claimed tax value of donated conservation easements nearly tripled – from $1.1 billion to $3.2 billion – from 2013 to 2014.

Fortunately, there are efforts being undertaken to curb these practices. In December 2016, the IRS issued Notice 2017-10 wherein the IRS categorized donations from these easement syndications as “listed transactions.” This means that promoters of and participants in these transactions must report their syndication activities to the IRS or face fines. In September 2018, the IRS made abusive conservation easement tax shelters one of five new targeted compliance campaigns and in March 2019, the IRS listed syndicated conservation easements as one of its “Dirty Dozen” tax scams to avoid. In December 2018, the U.S. Department of Justice filed a civil complaint against one of the nation’s largest promoters of syndicated easement transactions for an allegedly abusive conservation easement syndication tax scheme. And, finally, in March 2019 the Senate Finance Committee Chair and Ranking Member initiated an inquiry with 14 individuals suspected of being involved in these syndication transactions. Despite the IRS and the DOJ announcing formal actions to thwart this abuse of the federal tax code, the promoters of these abusive deals continue to conduct business as usual.

A broad coalition of organizations including, among others, the Land Trust Alliance, Ducks Unlimited, The Nature Conservancy, The Trust for Public Land, The Conservation Fund, the Appraisal Institute, and the American Society of Farm Managers and Rural Appraisers is advocating for enactment of the Charitable Conservation Easement Program Integrity Act of 2019 (S. 170/H.R. 1992.) If passed, this bill would disallow charitable deductions for pass-through entities where tax benefits for donations of conservation easements are claimed when property is held for only a short time and appraisal valuations are excessive. The bill was introduced on January 18, 2019 by Senators Daines (MT- R) and Stabenow (MI-D) and on March 28, 2019 by Representatives Mike Kelly (PA-R) and Mike Thompson (CA-D).

Proponents of continued use of the syndicated approach for easement transactions argue that syndications bring needed new capital to conservation which otherwise might not be available. They suggest that the solution to abuses involves greater regulation of appraisers to produce more accurate and well-substantiated valuations and to require greater obligations on conservation organizations accepting easement donations to report to the IRS a description of each conservation easement donation they receive and the fair market value of those donations. However, under tax law requirements enacted in 2006, appraisals used to substantiate charitable contributions are already required to follow relevant professional standards known as the Uniform Standards of Professional Appraisal Practice, which require an assessment of the economically realistic highest and best use of the land. And, also under current law, donors are already required to provide to the IRS a description of any conservation easement valued at $5,000 or greater as well as a statement of the conservation purpose that the easement is designed to serve.

Continued abuse of the charitable conservation easement tax deduction by syndicated easement transactions, which may have allowed some taxpayers to profit by gaming the tax code deprives the federal government of billions of dollars in revenue, distorts the fiscal impact of legitimate conservation easement gifts and adversely affects other related conservation easement programs (e.g. state tax credits for easement gifts.) If allowed to stand, these arrangements could cause lawmakers and the public to question the continued legitimacy of mainstream conservation transactions and may result in challenges to continuation of the Federal conservation easement tax benefit itself.

Conservation transactions and practices that do not always meet both the letter and the spirit of easement law must not be allowed to endanger the thousands of legitimate conservation easements and the well-intentioned, conservation-minded landowners behind them.

Enforcement vs. Education: What the Evolving Role of Forest Rangers and the Government Shutdown Might Teach Us About Environmental Management

Posted on February 12, 2019 by Edward A. Hogan

Two recent, and apparently unrelated, newspaper articles should cause us to focus upon the appropriate balance between law enforcement and education in environmental management.

The first article described a number of deliberate acts of vandalism in National Parks during the recent federal government shutdown.   In the absence of park staff, illegal off-road driving was reported in several National Parks.  In Joshua Tree National Park, delicate and ancient Joshua trees were kicked and Christmas lights strung on others.

The second article reported on a recent proposal to reclassify state civil service job titles.  While on its face it appeared routine, it has resurrected some persistent concerns with the public perception of environmental and natural resource protection. The New York State Department of Environmental Conservation (“NYSDEC”) has requested the New York State Department of Civil Services reclassify its 134 Forest Rangers into the Environmental Conservation Police Officer(“ECO”) title.  Both Forest Rangers and ECOs work within the NYSDEC Office of Public Protection:  the Forest Rangers in the Division of Forest Protection and the 330 ECOs in the Division of Law Enforcement.  Both Divisions were established in the late 19th century:  forest rangers were originally known as fire wardens and ECOs as fish and game protectors. 

While still having the traditional responsibility for prevention and suppression of wildland fires, Forest Rangers are now also charged with organizing and conducting wildland search and rescue operations.  ECOs have had their role of enforcing fish and wildlife laws expanded to include air, land and water quality violations.   Both Forest Rangers and ECOS must complete the same 26-week basic training and are sworn police officers, authorized to enforce all state laws.

While the civil service reclassification has been described as a title upgrade for the Forest Rangers, which would result in a small increase in initial salary, NYSDEC emphasized that it is not a merger of the two Divisions but, rather, a move to ensure that the Divisions are treated equally in the civil service system.  While generally supported by the environmental community, there are those who express lingering concerns with the gradual degradation of public’s attitude towards Forest Rangers and the potential impact on their effectiveness in educating the back country recreational (hiking, whitewater rafting, rock and ice climbing, etc.) community.  As retired Forest Ranger Pete Fish lamented, before becoming sworn police officers and thus always armed, their image was not so closely associated with being police officers: “We used to drive around in these red trucks.  We had a good reputation.  People would wave at us.  Everyone loved a ranger. Once we started driving around in the green trucks like the cops, there was a difference in attitude toward us from the public”.  

As attorneys dealing with the full range of environmental laws, we focus on significant policy issues.  But the most frequent encounter most citizens have with the application of environmental and natural resource laws is at the state level, with front-line staff, and in the recreational context.  Thus, the public’s perception of, and support for, environmental laws is greatly influenced by their experience in the context of recreation use of natural places, and thus their perceptions should be as important to us as they are to retired Ranger Pete Fish.

Each state (and the federal government) has a broad range of natural resource and environmental issues it addresses:  fish and game enforcement, forest fire prevention and suppression, wildland search and rescue, back country recreationalist education, and environmental quality enforcement.   How they organized and staffed these tasks has, and will be, influenced by the evolution of those programs, their historical experience and present and future needs.   

So, what is the right balance of education and enforcement in wildland recreation?  Police officers or ranger-educators?  Or both?

Are the recent incidents in the National Parks evidence that as a society we have failed in our education role and that management of wildlands are better addressed by an enforcement-based approach?

In contrast to the several vandalism incidents that have occurred, there have also been hundreds of volunteers keeping the National Parks open during the government shutdown.  These volunteers were spending their time and their own money hauling out trash and keeping toilets cleaned and stocked with supplies.  Perhaps education has been successful after all.

District Court Sharpens ESA’s Teeth in Wolverine Decision

Posted on May 31, 2016 by Gregory Bibler

In an 85-page decision filled with rebuke, Defenders of Wildlife v. Sally Jewell, the U.S. District Court for the District of Montana found in April that the U.S. Fish and Wildlife Service’s decision to withdraw its proposeda listing of the wolverine as “threatened” under the Endangered Species Act was arbitrary, capricious, and contrary to the ESA’s requirement that decisions be based on the “best available science.”

The court criticized the Service for mischaracterizing scientific consensus as “substantial disagreement,” and for employing an inappropriately high standard of absolute certainty.   The court suspected the Service’s sudden loss of confidence in its listing decision resulted not from scientific diligence but, instead, from “immense political pressure” exerted by a handful of western states. 

Although the decision is replete with references to wolverine denning statistics, sophisticated snow cover assessments based on satellite imagery, and emerging climate models, the court made clear that the Service changed its decision based on policy considerations, not science. That the wolverine depends on persistent snow cover to reproduce, and “relies on snow for its existence at the most fundamental level,” the court said, was not disputed.  That climate change is occurring, and will in the future result in reduced snowpack and loss of denning habitat, within the wolverine’s U.S. range also was not disputed.  The western states, however, questioned how reliably the Service could predict either the pace or the foreseeable impacts of climate effects far into the future.  The states, and many senior staff within the Service, also questioned whether the ESA is an appropriate or workable tool to address the large-scale effects of climate change on North American ecosystems. 

Alaska, for example, linked the wolverine listing decision to what it claimed were equally flawed decisions to list the polar bear and various species of ice seals, based on what it said were dubious models and speculative future climate effects.  Idaho questioned whether the Service’s use of models and projections would eventually lead it to list every species in the U.S., based on predictions of widespread and pervasive climate impacts throughout the country.  Two of the Service’s own Regional Directors echoed the refrain, saying that demands for listing particular species based on predicted effects of climate change “will become a common source of petitioned actions and threaten the Service’s resources to address priority issues.”

The court dismissed these concerns without hesitation:  “It is the undersigned’s view that if there is one thing required of the Service under the ESA, it is to take action at the earliest possible, defensible point in time to protect against the loss of biodiversity within our reach as a nation.” 

If the Service reinstates its prior listing decision, the wolverine will join the polar bear, ringed and bearded seals, and other species listed because they rely on snow and ice “for existence at the most fundamental level.”  The policy challenges at the core of the Service’s listing decision, however, remain unresolved.  Species affected by climate change are not limited to those dependent on snow and ice.  If climate trends continue, the list of species affected will grow and grow.  The ESA can do nothing to reverse or decelerate those impacts.  The Service cannot build an ark to save every species ultimately displaced or threatened.  Any realistic hope for slowing the loss of biodiversity in the U.S. must depend, therefore, on comprehensive and lasting reforms to address the underlying causes of climate change, and not the predicted effects of climate change at the species level.

US Announces Significant Measures to Combat Illegal Wildlife Trade

Posted on February 24, 2014 by Deborah Jennings

Across the globe, populations of elephants, rhinos, tigers, and other wild animals have been decimated as poachers, organized criminal syndicates, terrorist organizations, and corrupt officials seek to capitalize on the growing demand for their ivory, horns, and carcasses. By recent estimates, there are only 3,200 tigers and less than 30,000 rhinos left in the wild, with many subspecies extinct or at the brink of extinction. Combined with a loss of up to 30,000 elephants a year out of an estimated 500,000 remaining worldwide, we may soon see the loss of these great species within the next decade.

The United States recently announced a series of measures aimed at protecting endangered and vulnerable species from the growing risk of extinction at the hands of poachers, traffickers, and consumers. On February 11, 2014, the White House released its National Strategy for Combating Wildlife Trafficking and announced a ban on the commercial trade of ivory. Once implemented, these measures could amount to the most significant efforts by the U.S. government to combat the illegal wildlife trade within the United States and abroad in over two decades.

While China and other southeast Asian countries represent the primary source of demand, it might be surprising to know the United States is actually considered the second largest market for wildlife products in the world. Although international trade in ivory products is generally outlawed under the Endangered Species Act, 16 U.S.C.A. §§ 1531 to 1543, which implements the 1974 Convention on International Trade in Endangered Species (CITES), these restrictions are often times evaded (legally and illegally) under exceptions for trade in “antiques” (100 years and older) and permissible domestic ivory trade.

For example, as noted by the U.S. Fish and Wildlife Service (FWS), it has been permissible under US law to:

  • Import unworked African elephant ivory (i.e., raw tusks) as part of a lawfully taken sport-hunted trophy for which appropriate CITES permits are presented
  • Import and export worked African elephant ivory that meets the requirements for an “antique” under the ESA (with CITES documentation)
  • Export ivory that qualifies as “pre-Act” under the ESA and “pre-Convention” under CITES
  • Sell within the U.S. African elephant ivory lawfully imported into the U.S. as “antique” under the ESA or before the 1989 import moratorium under the African Elephant Conservation Act (AECA).
  • Sell legally acquired African elephant ivory within the U.S. unless restricted by “use after import” limitations associated with items imported after the listing of the species under CITES or unless prohibited under state law.

Going forward, however, international and interstate trade in elephant ivory will be severely limited to primarily antiques, while intrastate sale in ivory will be generally limited to ivory imported prior to 1990 for African elephants and 1975 for Asian elephants. In all cases, the burden of proof to demonstrate that the ivory is compliant will now be on the buyer/seller.

Under the US Fish and Wildlife Service’s proposed regulatory changes, the following activities will be prohibited:

  • Commercial import of African elephant ivory
  • Export of non-antique African and Asian elephant ivory (except in exceptional circumstances as permitted under the ESA)
  • Interstate commerce (sale across state lines) of non-antique African and Asian elephant ivory (except in exceptional circumstances as permitted under the ESA)
  • Sale, including intrastate sale (sale within a state), of African and Asian elephant ivory unless the seller can demonstrate that the ivory was lawfully imported prior to listing in CITES Appendix I (1990 for African elephant; 1975 for Asian elephant) or under a CITES pre-Convention certificate or other exemption document

Imports of African elephant ivory will be limited to certain items and purposes where the ivory item will not be sold (i.e. law enforcement, scientific purposes). Imports of sport-hunted trophies of African elephants will be limited to two trophies per hunter per year.

The proposed regulatory changes will likely take place over the course of the next year, and include: (1) issuance of Director’s Order that will provide guidance to Service officers on enforcement of the existing 1989 AECA moratorium, and clarify the definition of “antique” (mid-February 2014); (2) a proposed or interim final rule to revise the 1989 AECA moratorium and create regulations under the Act in the general wildlife import/export regulations, including measures to limit sport-hunting of African elephants (June 2014); (3) a proposed or interim final rule to revise endangered species regulations to provide guidance on the statutory exemption for antiques (June 2014); (4) a proposal to revoke the ESA African elephant special rule (April 2014); and (5) finalize revisions U.S. CITES regulations, including the “use-after-import” provisions in (February 2014).

While the proposed changes severely restrict ivory sales, they nonetheless leave some room for trade, particularly in the intrastate market. Accordingly, states are also seeking to impose additional restrictions. In New York State, the largest market for illegal wildlife products in the US, Assemblyman Robert Sweeney is proposing to ban the sale of all ivory products, even those legal under federal law. Other states may be inclined to follow suit.

The National Strategy for Combating Wildlife Trafficking – while too detailed for summary here – seeks to implement three strategic priorities: (1) strengthening domestic and global enforcement; (2) reducing demand for illegally traded wildlife at home and abroad; and (3) strengthening partnerships with international partners, local communities, NGOs, private industry, and others to combat illegal wildlife poaching and trade.  Combined with measures to be adopted under the commercial ivory ban, there is increased hope for vulnerable and endangered wildlife.

These issues are front and center this month as world leaders and conservation leaders gather at the London Conference on Illegal Wildlife Trade 2014 on February 13. The conference seeks to help eradicate illegal wildlife trade and better protect the world’s most iconic species from the threat of extinction. DLA Piper attorneys have been working closely on this issue, and recently produced a ten-country report assessing gaps in domestic legislation, judicial capacity, and institutional capacity to combat wildlife trafficking. As the world reacts to this growing threat, there remains much to be done, but also new foundations for hope.

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This blog post is co-authored by Andrew Schatz.