The Internal Revenue Code allows taxpayers to claim an income tax deduction for donating perpetual conservation easements to qualified organizations.[1] The federal government has foregone billions of dollars of tax revenue in exchange for such easements. In 2013, $1.1 billion worth of easements were claimed and deducted.[2] By 2019, that figure grew to $8.4 billion.[3]

Since the federal subsidy is structured as a tax deduction, the government does not choose the protected properties. Nor does it weigh priorities in allocating the benefits of this tax expenditure, which disproportionately flows to profitable ventures and wealthy individuals.

Some properties are bought at a low value, with donated easements claimed based on a higher, theoretical value if the site were developed, even if such an eventuality is uncertain.[4] While the Internal Revenue Service (IRS) and Department of Justice (DOJ) can enforce against “inappropriately large deductions” after the fact, or against those who do not follow easements’ requirements, such post-deduction policing can be costly and uncertain.[5]

Some donations are made through investments in “syndicated easements.”[6] Last year, DOJ won an indictment against seven individuals who orchestrated over $1.3 billion in fraudulent syndicated conservation easements.[7] The government alleges that it guaranteed investors at least a 4 to 1 tax deduction ratio.[8]This means that if their clients together invested $100,000 to buy property, an overgenerously appraised conservation easement could generate a $400,000 tax deduction resulting in a $170,000 reduction in taxes owed – a 70% return realized in a few months.[9]

The IRS and Congress have both recently acted to systematically target “abuse” of these easements, including through syndicates.[10] However, even if abuse is stamped out, fundamental problems remain with honest easements. A parcel where a conservation easement makes tax sense may offer minimal conservation benefit. Conservation may indeed be harmful, as with urban sites that, for lack of development, promote pollution and sprawl into more critical habitats.

As properties covered by these easements grow to be worth many billions of dollars, their scale begs the question of whether they are worthwhile uses of tax dollars. Irrespective of cost, as needs and values change over time, the law’s perpetual requirement may prove counterproductive for conservation groups that could put their resources to bear on more significant conservation efforts.[11]

Conservation easements are a relatively new facet of the law. As the law works out how to handle them, a broader view of their purpose is appropriate. This is true especially considering their decentralized allocation, and backing by a valuable federal subsidy.

One proposal is to switch to a tax credit system, with the federal government allocating conservation easement credits to reputable nonprofits that can weigh the cost of a tax benefit with potential environmental outcomes.[12] This approach would do a great deal to ensure federal subsidies support federal priorities on an ongoing basis.

However, affixing the perpetual requirement to specific parcels is not necessary for these donations to serve conservation purposes, and it undermines the potential effectiveness of the easements. The deduction’s inefficiency could be mitigated if the federal conservation easement included a right for the government or a qualified nonprofit to, upon showing a low environmental benefit, relinquish that easement on the particular parcel as part of a sale transaction, so long as all the revenues from such a transaction went to some higher and better conservation use. Alternatively, the government could gain a first right to purchase underlying the property at its diminished value as part of the bargain for a conservation easement.

As this space matures, the federal government should consider ways to both curtail abuse and make this program intentionally advance national objectives. Any actions in this space by the federal government should recognize that the conservation of particular lands may not align with effective environmental stewardship and the sites with the greatest environmental benefit may come with low market values that are not as desirable for a tax credit as opposed to sites with higher market values.

Rather than focusing on the conservation of sites as they are, when subsidized by tax dollars, these compacts would serve the purpose of conservation, writ large. These donations in kind could serve the highest and best conservation use available.

[1] 26 U.S.C. § 170(h); see also Federal Tax Deductibility of Conservation Easement Donations, WeConservePA, https://conservationtools.org/guides/159-tax-deductibility-of-conservation-easement-donations (last visited Mar. 27, 2023).

[2] Molly F. Sherlock, Erika K. Lunder, Cong. Rsch. Serv., The Tax Deduction for Conservation Easement Contributions 2 (Nov. 29, 2022), https://crsreports.congress.gov/product/pdf/IN/IN12054/2.

[3] Internal Revenue Serv., All Individual Returns with Noncash Charitable Contributions Reported on Form 8283, by Donation Type (last updated Feb. 27, 2023), https://www.irs.gov/statistics/soi-tax-stats-individual-noncash-charitable-contributions.

[4] Adam Looney, Charitable Contributions of Conservation Easements, Brookings Institution 17-19 (May 2017) https://www.brookings.edu/wp-content/uploads/2017/05/looney_conservationeasements.pdf.

[5] Internal Revenue Serv., Conservation Easements (last updated Jan. 6, 2023), https://www.irs.gov/charities-non-profits/conservation-easements.

[6] Adam Looney, Estimating the rising cost of a surprising tax shelter: the syndicated conservation easement, Brookings (Dec. 20, 2017) https://www.brookings.edu/blog/up-front/2017/12/20/estimating-the-rising-cost-of-a-surprising-tax-shelter-the-syndicated-conservation-easement/; see also U.S. Gov’t Accountability Off., GAO-19-491, IRS Could Better Leverage Existing Data to Identify Abusive Schemes Involving Tax-Exempt Entities 11-13 (2019) https://www.gao.gov/assets/gao-19-491.pdf.

[7] U.S. Department of Justice,  Five Tax Shelter Promoters and Two Appraisers Indicted in Conservation Easement Tax Scheme (Mar. 1, 2022) https://www.justice.gov/opa/pr/five-tax-shelter-promoters-and-two-appraisers-indicted-syndicated-conservation-easement-tax.

[8] Id.

[9] Id.

[10] 26 U.S.C. § 170(h)(7); Lorie Konish, How government spending bill may help prevent abuse of federal tax incentives for land conservation, CNBC (Dec. 28, 2022), https://www.cnbc.com/2022/12/28/spending-bill-to-prevent-abuse-of-tax-incentives-for-land-conservation.html; Syndicated Conservation Easement Transactions as Listed Transactions, 87 Fed. Reg. 75,185 (Dec. 7, 2022) (to be codified at 26 C.F.R. pt. 1); Jennifer Yachnin, IRS takes aim at conservation easement tax loophole, E&E News: Greenwire (Dec. 7, 2022) https://www.eenews.net/articles/irs-takes-aim-at-conservation-easement-tax-loophole/; Tim Shaw, Stakeholders Urge IRS to Retain Carveout in Syndicated Conservation Easement Regs, Thompson Reuters (Mar. 2, 2023) https://tax.thomsonreuters.com/news/stakeholders-urge-irs-to-retain-carveout-in-syndicated-conservation-easement-regs/.

[11] See generally Julia D. Mahoney, Perpetual Restrictions on Land and the Problem of the Future (UVA Law & Economics Research Paper No. 01-6 and UVA School of Law, Public Law Research Paper No. 01-11, December 2001) https://ssrn.com/abstract=291537.

[12] Looney, supra note 4, at 33-35.