By Joan Campau*
In December 2015, President Obama signed the Protecting Americans from Tax Hikes (PATH) Act, a section of which expanded and made permanent several tax deductions intended to incentivize private land conservation through conservation easements. While conservationists celebrate this milestone, there is growing concern that conservation easements are being utilized as tax shelters and that these newly expanded incentives will exacerbate the problem. The concern is well-founded.
A conservation easement is a legal agreement between a landowner and some other entity (like a land trust) that permanently limits some uses of the land (ex: development) to protect conservation values. Benefits to landowners for creating a conservation easement (besides protecting the natural and historic characteristics of their land) include the tax benefits offered by the IRS for donating easements that protect these attributes “in perpetuity.” As identified by the Land Trust Alliance (a national group representing the interests of the land trusts that hold many of the conservation easements), the income tax incentives are “one of the most powerful conservation measures in decades.”
In December of 2015, the PATH Act extended and made permanent several of the key income tax incentives available to landowners who donate a conservation easement. Specifically, it raised the deduction a donor can take from 30% to 50% of their annual income, it extended the carry-forward period for a donor to utilize that deduction from 5 to 15 years, and it allowed qualified farmers and ranchers to deduct up to 100% of their income (increased from 50%). This was intended to address the worry that many landowners with extremely valuable tracts of land but low annual income were disinclined to donate an easement over concern that they would not be able to realize the full value of the tax deduction.
Another growing concern, however, has been that conservation easements are being utilized by unscrupulous entities as tax shelters. Among conservation professionals, concern is particularly acute regarding entities that purchase large tracts of land and then donate hyper-inflated conservation easements to land trusts to receive large tax deductions.
This tax evasion has been fueled in part by some significantly overvalued land appraisals. Because there is not really a market in which conservation easements are bought and sold, the value of the easement is usually determined using the before-and-after valuation method. In this case, the value of the land when put to its “highest and best” use before the easement is compared against the diminished value of the land after the easement has been applied.
In a recent article, Professor Nancy McLaughlin of the University of Utah noted that resultant abuse of the incentives should be unsurprising: the uncertain nature of what qualifies as an acceptable appraisal method coupled with a landowner’s incentive to value the land highly before and minimally after the easement will naturally lead to valuation abuse by a small minority of dishonest landowners and appraisers.
McLaughlin notes, accurately, that without stronger regulations and protocols regarding valuation, the enhanced incentives of 2015, in addition to furthering the good purpose for which they were intended, make the utilization of conservation easements for unscrupulous purposes also more likely. Although penalties exist for those who are caught cheating, and more than 75 cases have been brought by the IRS in the last 10 years challenging deductions, the volume of conservation easements donated each year makes it impossible for the IRS to audit and prosecute every wrongdoer, and the list of abuses is growing.
A number of reforms have been proposed. The Treasury Department itself has recommended heightened requirements on donors to clearly articulate the conservation benefits anticipated by the contribution. They further suggested that land trusts and other entities accepting donated conservation easements should be responsible for ensuring proper valuation. As McLaughlin notes, Congress ignored these recommendations when making the incentives permanent.
She suggests, however, that the proposed Treasury Department reforms do not fully address the underlying problem of misaligned incentives for overvaluing land, and instead proposes her own reforms.  These include 1) an extended Statue of Limitations in which the IRS could challenge the valuation of conservation easements, 2) clearer and more streamlined donor reporting forms, 3) the creation of an Easement Advisory Panel, 4) a consolidated set of guidelines for valuing and reporting conservation easements, 5) automatic review of certain easement donations, 6) better pre-trial processes for resolving valuation disputes, 7) stiffer penalties for appraiser abuse, and 8) standardized language to be included in all easements seeking to meet the ‘in perpetuity’ requirement of the IRS.
The Land Trust Alliance has also created a series of Advisory Principles for land trusts to guard against the use of overvalued easements as tax shelters. These measures include a more diligent investigation on the part of land trusts when determining which easements to accept as a donation. The Alliance is particularly concerned with identifying and rejecting easements offered by pass-through entities designed to disproportionately distribute tax deductions derived from over-valued land among several unrelated individuals. They note that these scams are often developed by “promoters” who create and donate the easement in return for high fees. The Alliance suggests preliminary caution when approached by any pass-through entity followed by a series of questions designed to identify whether further investigation (by legal and tax professionals) into the legitimacy of the donation is warranted. Red flags include the existence of a “promoter,” the conversion of land which had only been recently purchased, and an alleged (significant) increase in the value of the land between purchase date and easement date.
Indeed, the Alliance has been so concerned with the rise in illegitimate tax shelters that at their annual conference this past month, the IRS was invited to speak about the need to curb conservation easement tax abuses. Karin Gross, supervisory attorney in the IRS Office of the Chief Counsel, announced at that meeting that by the end of 2016 the IRS would be issuing a notice on abusive conservation easement transactions.
Without these or other reforms, the important conservation milestone achieved in the 2015 Path Act which expanded and made permanent the income tax incentives for conservation easements will unfortunately also likely serve to exacerbate the very real problem of valuation fraud and abuse. The good name and high value of true conservation easements is on the line: Congress would do well to heed the warning signs.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
*Joan Campau is a Junior Editor on MJEAL. She can be reached at firstname.lastname@example.org
 Income Tax Incentives for Land Conservation, Land Trust Alliance, http://www.landtrustalliance.org/topics/taxes/income-tax-incentives-land-conservation (last visited Nov. 10, 2016).
 Nancy A. McLaughlin, Conservation Easements and the Valuation Conundrum, 19 Fla. Tax Rev. 225, 230-31 (2016).
 Nancy A. McLaughlin, Conservation Easements 9 (2004), http://web.law.columbia.edu/sites/default/files/microsites/attorneys-general/outline_of_relevant_laws_ag_standing_and_cases_and_controversies_final.pdf.
 Income Tax Incentives for Land Conservation, supra note 1.
 William J. Sanders et al., Obama Signs Omnibus Budget Bill that Includes $622 Million in Tax Extenders, The Nat’l L. Rev, Nov. 10, 2016, http://www.natlawreview.com/article/obama-signs-omnibus-budget-bill-includes-622-million-tax-extenders.
 Land Trust Alliance, Using the Conservation Tax Incentive (2016), http://s3.amazonaws.com/landtrustalliance.org/ConservationEasementTaxIncentiveBrochure2016.pdf.
 United States Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2016 Proposals 188-89 (2015), https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf.
 See, eg., Joe Stephens, Fairfax Case Draws Line on Easements IRS Gets ‘First Big Win’ in Push to Stem Abuse of Conservation Tool, Washington Post, June 4, 2006, https://www.washingtonpost.com/archive/politics/2006/06/04/fairfax-case-draws-line-on-easements-span-classbankheadirs-gets-first-big-win-in-push-to-stem-abuse-of-conservation-tool-span/0b75a92b-1186-487f-91d2-5d679222dd76/.
 Andrew Bowman, Tax Shelters Aren’t Charity, Land Trust Alliance: The Dirt (June 8, 2016), http://www.landtrustalliance.org/blog/tax-shelters-aren%E2%80%99t-charity.
I.R.C. § 1.170A–14(h)(3)(i).
 McLaughlin, supra note 2 at 223.
McLaughlin, supra note 2 at 227-28.
 McLaughlin, supra note 2 at 230-31.
 McLaughlin, supra note 2 at 247-48.
 McLaughlin, supra note 2 at 228.
See, eg., Nicholas Carson, Notes and Comments, Easier Easements: A New Path for Conservation Easement Deduction Valuation, 109 NW. L. Rev. 739 (2015).
 United States Department of the Treasury, supra note vii at 188.
 McLaughlin, supra note 2 at 292.
 McLaughlin, supra note 2 at 292-93.
 McLaughlin, supra note 2 at 296-305.
“Pass-through” entities are business structures in which income tax liability ‘passes-through’ the entity and rests directly on the entity owners. For a discussion of their rising prominence in the corporate world, see How Firms Avoid U.S. Tax Codes Through Pass-Through Businesses, PBS: Making Sen$e (Jan. 22, 2016 2:31 PM), http://www.pbs.org/newshour/making-sense/how-firms-avoid-u-s-tax-codes-through-pass-through-businesses/.
 Important Advisory: Tax Shelter Abuse of Conservation Donations, Land Trust Alliance (Aug. 8, 2016), http://www.landtrustalliance.org/important-advisory-tax-shelter-abuse-conservation-donations.
 Land Trust Alliance, supra note 22.
 Land Trust Alliance, supra note 22.
 Wendy Jackson, Proposed IRS Action, The Dirt (Nov. 3, 2016), http://www.landtrustalliance.org/blog/proposed-irs-action.