On March 27, 2019, Chuck Grassley (R-Iowa) and Ron Wyden (D-Ore.) announced an investigation into potentially abusive syndicated conservation transactions.1 Senator Grassley commented on the investigation saying:
““There are very legitimate purposes for the conservation easement provisions of the tax code. But when a handful of individuals cook up a scheme to cash in at the expense of federal revenue and in violation of Congress’s intent, something needs to change. There’s no reason that the rest of the taxpaying American public should be left with such a raw deal […] This is just our first step in getting to the bottom of how these tax provisions are being abused, and it will inform what else ought to be done to fix the problem.”2
Senator Wyden added:
“Our first concern is preserving the integrity of the conservation easement program, which has helped protect critical habitat across the country. The goal of our bipartisan investigation is to ensure a few bad actors don’t threaten the program by selling off deductions based on exorbitant appraisals. The program must not be abused and used as a lucrative tax shelter for the wealthy[.]”3
Over the last 14 years or so, Senator Chuck Grassley has been one of the primary players in Congress with regard to discussion of and proposed changes to conservation easement programs, with a particular eye towards reforming the programs such that preservation and conservation may still occur but in a manner that avoids what Senator Grassley views as significant abuse of such programs.
Senator Grassley’s History with Conservation
2003 – On April 9, by a vote of 95 to 5, the Senate passed the CARE Act, which included specific provisions supported by Senator Grassley, who was then Chairman of the Senate Finance Committee, to encourage charitable contributions of land and easements for conservation purposes.4 In June, the Senate Finance Committee launches an investigation into the policies and practices of The Nature Conservancy based on a series of article published by the Washington Post, detailing its role in facilitating large charitable contribution deductions for certain insiders through its “Conservation Buyer’s Program” (“CBP”).5 In its most basic form, the CBP worked as follows: (1) the Nature Conservancy would purchase land using its own funds, (2) The Nature Conservancy would place development restrictions on the property, (3), The Nature Conservancy would sell the property subject to the restrictions to a private party, often a trustee of supporter of The Nature Conservancy, for a discounted price, and (4) sometime after the buyer purchases the property, the buyer contributes cash to The Nature Conservancy equal to the difference between the purchase price paid by The Nature Conservancy when it bought the property and the price paid by the buyer when The Nature Conservancy sold the property.6
2005 – Senator Grassley convenes a hearing on the Senate Finance Committee’s report on The Nature Conservancy and a report prepared by the Department of Interior’s Inspector General regarding the Department of Interior’s (“DOI”) proposed acquisition of mineral rights from Collier Resources Company (“Collier”).7 The Inspector General’s report indicated that the DOI was willing to facilitate tax avoidance by agreeing to accept the inflated value that Collier placed on the mineral rights in order to consummated the acquisition.8 In his opening and closing statements, Senator Grassley voiced his support for the conservation aspect of such easements but also shared his concerns over the potential for abuse of such programs. Specific issues targeted for discussion following the report were valuation (with emphasis on appraisal requirements), adequate monitoring and enforcement of easements, ensuring conservation purposes of the easements, proper reporting and limitations on modifications of easements, accreditation of land trusts, and greater transparency and reporting by land trusts.
Changes in Easement Legislation following 2005 Reports
- 2006 – The percentage of adjusted gross income which could be offset by a deduction for a conservation easement was increased from 30% to 50% (and 100% for qualified farmers, ranchers, and woodland owners) under the Pension Protection Act of 2006 .9
- From 2008-2015 – Congress continuously extended the increased percentage limits and extended carry-forward period introduced by the Pension Protection Act of 2006 .
- From 2015-Present – Congress made the enhanced percentage limits and 15-year carry-forward period permanent.10
Recent Attacks on Easements (Non-Judicial)
Around December 23, 2016, the IRS released Notice 2017-10 which caused the syndicated conservation transactions to become a “listed transaction” under IRC § 6011. This requires that both participants and material advisors report their involvement in the transactions.
In December of 2008, just a few days before Christmas, the Department of Justice left a lump of coal for a few people when it filed is Ecovest action.11 In its filing, the Department of Justice is seeking to enjoin certain parties from organizing, promoting, or selling investments in purported syndicated conservation easements. Furthermore, the Department of Justice is requesting a disgorgement of the income derived from such transactions.
Conservation Easement Program Integrity Act(s)
There have been several runs in both the Senate and House of Representatives pushing a version “Conservation Easement Program Integrity Act” with little changes from proposal to proposal. Most recently, Congressman Mike Thompson(D-CA) and Mike Kelly (R-PA) pitched another in the House of Representatives for this year. 12 This being on the heels of Senator Daine’s bi-partisan re-proposal of last year’s Senate Bill.13 The two most recent Daines-bills seem to be mostly mirror image.
The Conservation Easement Program Integrity Act was initially pitched as a 5-year holding period requirement for taking deductions in excess of 2.5 times the investment. Currently, the proposal would require a 3-year holding period before a taxpayer is able to enjoy a deduction on any value in excess of one’s investment. Each version of the proposed legislation has had an exception for certain family partnerships.14The target of such proposed legislation is easy to identify, syndicated conservation easements. Of particular importance and a worthwhile note, the 2.5 multiple came historically back in the 2016 year when the Notice 2017-10 was released. At the time, the top marginal income tax rate was 39.6% (almost 40%). 2.5 times 40% is 100%. So, in getting a deduction in excess of 2.5, the taxpayer would receive more in tax offset than the acquisition value of the contributed property. Following Senator Grassley’s inquiries to the identified parties, the Conservation Easement Program Integrity Act, with bi-partisan support yet again, may finally gain some traction.
Senator Grassley Lights a Fire
Well, Senator Grassley seems to be less than happy with progress of curbing what he considers to be the abuse of the conservation easement deduction. Based on information received by the Brookings Institution, on March 27, 2019, Senator Grassley along with Ranking Member Ron Wyden sent out a flurry of letters to many parties inquiring into and requesting significant information with respect to several syndicated conservation easement transactions. The questions asked by Senator Grassley included much information that would be in Form 8886 (Reportable Transaction Disclosure) and Form 8918 (Material Advisor Disclosure).
For a list of the questions, see the letter to Robert McCullough here.
It is refreshing to see the alleged issues being addressed by Congress instead of aggressive auditing by the IRS, court intervention, or, as we saw recently, saber rattling by the Department of Justice. Instead of a piecemeal approach, and in light of some tough words in Summa Holdings v. Comm’r in 2016, an investigation followed by statutory reform is likely the appropriate mechanism for change, should any change be necessary. Looking at the trajectory of Congress (and Senator Grassley) over the last (at least) 14 years, Congress is very interested in maintaining the opportunities for conservation. If Congress believes syndicated conservation easement transactions have been used abusively, it will be interesting to see what Congress proposes beyond the Conservation Easement Program Integrity Act. Senator Grassley has a strong history of support for the conservation program, but seems to have an equal concern that such a well-intended provision is not abused.
The takeaway here, at least from the words of the members of Congress involved, is that conservation is an appreciated and valued program and Congress wants to ensure is not abused. To avoid any potential abuse, Congress intends to investigate some of the believed-to-be largest actors they are aware of currently and find out if and how the program is being abused. From there, based on Senator Grassley’s and Wyden’s comments, legislative changes could follow.
- Id. (emphasis added)
- Id. (emphasis added)
- Staff of S. Comm. on Finance, 109th Cong., Executive Summary of Finance Committee Report on The Nature Conservancy 1 (2005) (available at https://www.finance.senate.gov/imo/media/doc/tnccontents.pdf)
- Staff of S. Comm. on Finance, 109th Cong., Finance Committee Report on The Nature Conservancy pt. 2, at 11 (2005) (available at https://www.finance.senate.gov/imo/media/doc/tncPart%20Two_final.pdf).
- The Tax Code and Land Conservation: Report on Investigations and Proposals for Reform: Hearing before S. Comm. on Finance, 109th Cong. 1 (2005) (statement of Sen. Charles Grassley, Chairman, S. Comm. on Finance) (https://www.finance.senate.gov/imo/media/doc/40617.pdf).
- The Tax Code and Land Conservation: Report on Investigations and Proposals for Reform: Hearing before S. Comm. on Finance, 109th Cong. 9-11 (2005) (statement of Earl E. Devaney, Inspector General, U.S. Department of Interior) (https://www.finance.senate.gov/imo/media/doc/40617.pdf).
- Pub. L. No. 109–280, § 1206, 120 Stat 780.
- Consolidated Appropriations Act of 2016, PL 114-113, § 111(a), 129 Stat 2242.
- H.R. _______ (116th Congress) and H.R. 4459 (115th Congress)
- See S. 170 (116th Congress) and S. 2436 (115th Congress)
- See S.170 § 2(a)(7)(B) referencing partnerships held by individuals who are related within the meaning of IRC § 152(d)(2).