Green, or Greed? A Fresh Perspective on the Valuation of Conservation Easements

Boston Univ. School of Law Research Paper No. 22-7

Tax Law Review, Volume 76, Issue 1 (2022-2023), Forthcoming

68 Pages Posted: 7 Apr 2022 Last revised: 24 May 2022

See all articles by Alan Feld

Alan Feld

Boston University - School of Law

Theodore S. Sims

Boston University School of Law

Jacob Nielsen

Boston University School of Law

Date Written: April 5, 2022

Abstract

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.

Keywords: tax law, taxation, easements, charitable giving, conservation, tax shelters, valuation

JEL Classification: K11, K34

Suggested Citation

Feld, Alan and Sims, Theodore S. and Nielsen, Jacob, Green, or Greed? A Fresh Perspective on the Valuation of Conservation Easements (April 5, 2022). Boston Univ. School of Law Research Paper No. 22-7, Tax Law Review, Volume 76, Issue 1 (2022-2023), Forthcoming, Available at SSRN: https://ssrn.com/abstract=4075225 or http://dx.doi.org/10.2139/ssrn.4075225

Alan Feld (Contact Author)

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Theodore S. Sims

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Jacob Nielsen

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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