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Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

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Publication Date

Fall 2022




New York University School of Law




Charitable contributions of "conservation easements" have since 1980 allowed high-income taxpayers to shelter income from taxation through overvalued deductions. Overvaluation has increased dramatically in the past 20 years: a 2016 study of all easement decisions since 1980 reported that while overvaluation had averaged by a factor of two before 1994, it averaged by a factor of ten for decisions between 1994 and 2016. SOI data disclose that aggregate easement contributions deducted on Schedule A grew from $2.26 billion in 2015 to $6.5 billion in 2018 (the most recent year available). A recent report by supporters of conservation easements acknowledges that "neither the [IRS] nor the courts have sufficient resources to effectively police valuation abuse."

Most of the concern has been with "syndicated conservation easements" ("SCEs"), and most proposed remedies to easement overvaluation focus on SCEs. We show, however, that exactly the same traits that produce overvalued SCEs -- allowing charitable deductions based on "fair market" value, which sanctions deducting unrealized appreciation without taxing the corresponding gain, combined with the unavoidable need to value contributed easements through as manipulable a process as appraisal -- have facilitated abusive overvaluation of non-syndicated easements too. That combination can leave an easement contributor better off than if she had done anything else with the land, including selling it for its (true) fair market value. The only effective solution to easement overvaluation is to restrict the deductibility of easement contributions attributable to unrealized gain. To that end we propose limiting charitable contributions of easements granted with respect to recently acquired property initially to cost, much as Congress has previously done with other contributions of appreciated property that are vulnerable to abuse, while allowing that limitation to evolve with real estate values over time. We also propose an upfront excise on unrealized appreciation in contributed easements, to increase the salience to prospective contributors of the risks of overvaluation.

From published article:

Congress has long been aware of the general susceptibility of the appreciated property rule to abuse. 34 It has acted to cabin that vulnerability primarily (but not entirely) with palliative administrative controls and valuation penalties levied only after the fact. 35 But conservation easements are so uniquely prone to manipulation, and to exploiting the appreciated property rule beyond any reasonable limit, that those controls, even after enactment of § 170(h)(7), and even if supplemented by additional administrative requirements such as those recently proposed by Burnett, Leshy, and McLaughlin, will not prove adequate to the task.36 Any serious effort to halt excessive valuation of conservation easements will require more fundamental reform.

In Part I we outline the foundation for that claim. In Part II we explore in more detail the background to and central nature of the problem, and its manifestation in some more recent decisions. The cases we survey underscore that, despite all the criticism, the IRS has to this point been proceeding in a reasonable fashion given the tools available to it. The cases also help to highlight in greater detail the shortcomings in previously suggested administrative approaches. Part III takes up more generally the topic of reform. Parts III.A-B address proposed legislative solutions, including newly-adopted § 170(h)(7). Part III.C returns to the role of the appreciated property rule, and its implications for successful reform. We elaborate in Part III.D on the proposals we offer to expand on and buttress § 170(h)(7). We believe that, if adopted, they would lead to a more effective and comprehensive solution to the problem of overvalued conservation easements, while leaving intact the basic structure and incentives of the existing deduction, shorn of its vulnerability to overvaluation.


Updated with published article on 10/25/2023

Draft available as supplemental content

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