Incentives for Conservation Easements: The Charitable Deduction or a Better Way

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INTRODUCTION

The Internal Revenue Code allows a charitable income-tax deduction for a "qualified conservation contribution," (1) known, more colloquially, as a conservation easement. To be eligible for the deduction, the easement must be "granted in perpetuity" to a "qualified organization, exclusively for conservation purposes." (2) The 1980 change in the tax law to codify this deduction is generally recognized as being the factor largely responsible for the tremendous growth in the donation of conservation easements. (3) The Land Trust Alliance, an umbrella organization for land trusts, (like other defenders of the tax deduction) has pointed to the millions of acres now protected by conservation easements as evidence of the tax-expenditure program's enormous success? What is striking, however, is that supporters make no mention of the program's cost.

This article presents a discussion of tax-policy concerns relating to the charitable deduction for conservation easement donations. The deduction is unique in a number of ways. First, since 1969, the Internal Revenue Code has generally denied the deduction for a gift of a partial property interest. (5) The conflict of interest between charity and other owners raises a concern that the charitable deduction would not reflect the ultimate charitable benefit. The deduction for conservation easements is the principal exception to this rule (6) despite the significant potential for abuse and the distinct possibility that the public benefit may be less than anticipated. Moreover, the few other exceptions are either narrower or more carefully circumscribed.

Second, since 2006, the limitation on the deduction for a qualified conservation contribution is, at least temporarily, (7) uniquely high. In contrast to the deduction for other appreciated property, which is limited to thirty percent of the so-called contribution base, (8) the deduction limit for a qualified conservation contribution is generally fifty percent of the contribution base. (9) In the case of certain contributions from persons earning more than fifty percent of their gross income from farming or ranching, the limit is increased to one hundred percent. (10) Further, instead of the normal carryover of five years for unused contributions, the carryover for these contributions is extended to fifteen years. (11) In addition, the taxable value of land for estate-tax purposes can be reduced by as much as $500,000 for up to forty percent of the value of land subject to a conservation easement, in addition to any value reduction from the effect of the easement itself. (12) These provisions are extraordinary. It is unlikely many would believe that this charitable purpose should be elevated above all others.

Although I have previously written on the charitable deduction, (13) I am not an expert on conservation easements. I have been invited to participate in this symposium, and at earlier conferences at the Lincoln Institute (14) and the Harvard Law School, (15) because reporters at the Philadelphia Inquirer. (16) discovered testimony I had delivered on behalf of the Treasury back in 1979 and 1980. (17) My testimony had raised serious concerns about allowing the charitable deduction for conservation easement contributions.

The Treasury was troubled by the possibility of overvaluation of conservation easements and the difficulty of accurately valuing such partial interests in land. The Treasury believed that the proposed legislation failed to provide a sufficiently precise definition of conservation purposes and thus did not insure that deductible contributions would be confined to those providing some benefit to the general public. The Treasury was also concerned because the proposed legislation did not guarantee that the perpetual easements would be enforced over the long term. The professional tax staffs of the Joint Committee on Taxation and the Senate Finance Committee expressed similar reservations in 2005, (18) indicating that the problems the Treasury had identified in 1979 and 1980 remain. …