IRS Targets Common Conservation Easement Provisions

The Internal Revenue Service keeps inventing new arguments to deny charitable deductions for conservation easements. Although the vast majority of easement deductions don’t encounter any problem, when the IRS does scrutinize an easement it often comes up with dubious reasons to deny a deduction. The IRS’s arguments have met with varying levels of success in court, and landowners and land trusts must be more vigilant than ever in when drafting easements so as to minimize the chances of a denial. In addition to the traditional denial reasons (overvaluation, errors in filling out the Form 8283, etc.), the following are three rationales recently offered by the IRS when challenging conservation easements:

Amendment Provision – In at least three recent Tax Court cases, the IRS has made the remarkable claim that the typical amendment provision used by land trusts across the nation is too weak and jeopardizes an easement’s perpetuity. In response, the Land Trust Alliance has filed an amicus brief (of which I was a primary author) to reject these overly aggressive contentions. The cases have been stalled in the Tax Court for quite some time, although I heard at the recent Rally conference that movement is expected soon. In the meantime, I encourage land trusts and landowners to use a thoughtful and comprehensive amendment provision. For Maine-based easements, I generally recommend the one included in the Maine Land Conservation Attorneys Network model, which is specific to our Maine statute and was updated in 2017. And the good news is that because we have a conservation easement statute that requires Attorney General and court review for amendments that materially detract from the conservation values, our vulnerability to an IRS challenge on the amendment front is low.

Termination Proceeds Provision – As with the amendment provision, the IRS is assailing a common-sense phrase included in most termination proceeds provisions. The specific issue is confusing and hard to summarize in this E-Bulletin, but the crux of the matter concerns what percentage of sale or condemnation proceeds must be shared with the easement holder in the event that a conservation easement for which a deduction is claimed were to be terminated. The phrase at issue allows the landowner to keep all proceeds for the value of a property that is attributable to buildings and other improvements established after the easement was granted. Unfortunately, the IRS recently talked the Fifth Circuit Court of Appeals into denying a deduction for including such language, even though it has been included for years as a matter of basic fairness to the taxpayer. On behalf of the Land Trust Alliance and 29 other land trust organizations around the country, including Maine Coast Heritage Trust, I recently drafted an amicus brief asking the Fifth Circuit to take another look at this issue. (Please email me if you’d like a copy of the brief.) Note that the Maine model easement does include the disputed phrase – see Section 14.G.3, the parenthetical beginning with the words “Such reduction shall not include…” Thus, in the face of uncertainty in the courts, easement donors must choose between removing the disputed phrase in order to placate the IRS or keeping the phrase and risking a denial of their deduction.

Automatic Approval Provision – Finally, in Hoffman Properties II, L.P. v. Commissioner, the IRS successfully challenged a deduction because an easement contained what is known as an automatic approval provision. This is a clause stating that if the holder does not reply to a request for approval of a particular land use activity within a specified time frame, the request is automatically approved. To be fair to the IRS, I think they have a good argument here, unlike with the amendment and termination proceeds claims. Automatic approval provisions act as ticking time bombs, ready to detonate if the easement holder fails to timely reply to an approval request. As the Tax Court noted in this case, even requests that are patently inconsistent with the easement’s conservation purposes can sneak through if the holder is not paying attention, whether due to staff or volunteer changes, miscommunication, or any number of reasons. In the wake of the Hoffmandecision, land trusts and landowners must be sure to avoid default approval provisions in their conservation easements. Fortunately, the Maine modeleasement does not include such language.

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Syndication Deals Run Amok

Maine land trusts, attorneys, and accountants should be on alert for any conservation easement proposals coming their way from professional syndication promoters. These are deals that entail highly inflated appraisals aimed at delivering huge profits for promoters and investors.

Recent numbers from the IRS, which is trying to clamp down on these abusive deals, reveals the massive scope of the problem: In 2016 alone, 248 syndications claimed deductions worth $6 billion, and total deductions over several years approached $20 billion. The top 10 percent of syndicated transactions received a charitable tax deduction of $8,230 for every $1,000 invested, an absurd figure that can only result from fraudulent activity. Both the House and the Senate are looking into legislation that would block these syndications. The bill is known as the Conservation Easement Integrity Act, and the Land Trust Alliance encourages its members to advocate for passage with their Congressional representatives.

To date, we have not seen conservation easement syndication deals in Maine, but the word is that they are spreading beyond their traditional base in the southeast. Please contact me if you are aware of any such promotions in our state.