For some time now NTU has been expressing concerns over the IRS’s misguided crusade against conservation easement tax deductions -- not only because of the implications for the rights and protections of all taxpayers, but also because of the potential to harm private sector-driven environmental stewardship. A significant part of the IRS’s attack strategy is the previously untested assertion that taxpayers routinely overvalue their conservation easement deductions. The Government has made repeated allegations of inflated appraisals and overstated deductions – including in IRS Notice 2017-10, in the pending Department of Justice injunction litigation against conservation easement partnership organizers, and in the Senate Finance Committee’s ongoing investigation. Until now, taxpayer advocates have had no way to refute this overarching IRS argument. A recent July 22, 2019 Tax Notesarticle (subscription) by Chicago Attorney Jenny L. Johnson Ware remedies this.
In “Valuing Conservation Easements: An Empirical Analysis of Decided Cases,” Ware examined cases in the past ten years in which courts have decided the value of conservation easements and found that abusive overvaluation of conservation easement donations is not nearly as prevalent as the IRS would suggest.
The big picture is that the courts upheld the bulk of taxpayer-reported deductions. In the cases reviewed, taxpayers claimed $92.7 million in conservation easement deductions and the courts upheld nearly $74.7 million of those deductions – more than 80 percent of the deduction values reported by taxpayers.
The IRS consistently undervalues easement deductions in the post-audit notices it issues to taxpayers – incredibly, the Service asserted zero value in roughly two-thirds of cases. Ware’s article shows that between the taxpayer return valuation and the IRS post-audit notice valuation, the taxpayers were closer to the courts’ final rulings in nearly three-quarters of the cases.
Ware also discusses the importance for taxpayers to identify a reasonably probable highest and best use (HBU) of the property before the easement and shows that when the court agrees with the taxpayer’s HBU, the court is likely to reach a final number much closer to the taxpayer’s valuation.
It is all too easy for the IRS to make sweeping accusations that taxpayers are grossly overvaluing conservation easement donations. In most cases, since tax return information is confidential, outside observers have no way of evaluating the IRS claims. Ware has done a great service by showing that when independent judges examine taxpayer and IRS conservation easement valuations, the taxpayers are right far more often than the IRS.
Whether they claim or even know about conservation easement deductions, taxpayers have a direct interest in this issue. The harsh tactics being developed by the IRS toward this provision of the law could very well be applied to other situations. For their part, Members of Congress considering whether there should be changes to the conservation easement donation rules should view with considerable skepticism the IRS “sky is falling” position. As NTU has noted in the past, however, there are important changes to existing law that could be adopted to improve the process of providing appraisals for conservation easement donations, and Congress would be well-advised to evaluate them.