Environmental land trusts: Not always a good deal

WASHINGTON, Virginia — Generally speaking, charitable deductions are a financially losing proposition: that is why a deduction is allowed as a means of supporting and encouraging charitable activity. With the top income tax rate of 39.6 percent, the very most that a contribution of $100 can generate in tax savings is $39.60. Put another way, at a minimum, the contribution of $100 will typically result in a loss of $60.40 to the donor. Charity is definitely not an activity for profit-motivated investors.

The syndication of charitable deductions resulting from conservation easement contributions has turned all of this on its head. Participants in such syndications have turned charity into a moneymaking proposition. Profits are almost immediate, and typically reflect returns of 110 percent or more. As icing on the cake, meaningful land conservation may also result. What is not to like? In its typical Grinch-like fashion, on December 23, 2016, the IRS issued Notice 2017-10, making these "for-profit easement deduction syndications" transactions that must be reported to the IRS for special scrutiny on the presumption that many constitute tax shams. The reason for this is quite simple. Let's go back to the dismal financial arithmetic of charitable giving: for every $100 contributed, the donor loses $60.40. How can this ever be profitable? It can be when you inflate the value of the contribution. The value of a conservation easement is the difference between the value of the land subject to the easement before the easement and after the easement. For example, if land, before an easement, is worth $100 and after an easement is worth $40, the easement — and the charitable deduction — is worth $60. If I buy land for $100 and I contribute a conservation easement over it that reduces its value by $60, I have lost $60 in value, but earned a $60 tax deduction that, at most, results in $23.76 in tax savings — $60 x 39.6 percent. However, if I buy land for $100, and my appraiser finds that it was really worth $1,000, and that the easement reduces its value by $600, my tax savings will be $237.60, resulting in a nearly 237 percent return on my investment in the land — and I still own the land!

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That is how for-profit syndications of conservation easement deductions work Investors must obtain an appraisal that reflects an easement value deduction that is at least 252 percent of their investment. This is because for a charitable contribution to "pay" financially, it must exceed the donor's investment by at least 252 percent. This is what is wrong with for-profit easement syndications: they require dramatically inflated appraisals of donated easements to work. Now, it is true that it is possible for investors to buy land with substantial deposits of gold, unknown to the investors or the seller at the time of the sale; or to negotiate access to a public road where no such access existed at the time of sale; or to obtain rezonings, or the extension of utilities; or to simply to find a seller clueless about the value of his or her land. However; the chance of such serendipitous circumstances occurring repeatedly in dozens of for-profit easement deduction syndications seems, to put it mildly, unlikely. One of the principal drivers of voluntary land conservation in the United States today are federal and state tax benefits for easement contributions. Repeated, dramatic abuses of these benefits, as is the case of the syndications I have reviewed, can only lead to curtailment of these benefits. While significant conservation may result from for-profit easement deduction syndications, if it is at the cost of the tax benefits that support voluntary land conservation nation-wide; it is not an end that justifies the means.