Page Created:
        August 6, 2018
Last updated:
        August 6, 2018

Conservation Easements:
The 21st-Century Abusive Tax Shelter

by Jay Starkman, CPA

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In this article, Jay discusses the abuse of conservation easements.

Copyright 2018 Jay Starkman
All rights reserved.

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It began as a conservationist dream backed by generous tax benefits. From enactment over 40 years ago through the 1990s, the conservation easement (CE) tax incentive worked largely as intended. Most easements then consisted of farms and ecologically valuable properties saved from developers.

Lax standards and enforcement have led to massive abuse. The rise of CE syndicates promising up to 4-to-1 deductions has drawn ire. Also, wealthy landowners have sometimes secured inflated land appraisals with the same effect.1

The Wall Street Journal has reported that more than 15,000 investors have claimed $230 billion in deductions, far beyond previous estimates, though the actual figure is probably closer to $23 billion. 2 While attention is directed toward syndications, the 47 cases analyzed at the end of this article show that abuses are common among individual landholders, too.

BNA reports that the IRS will brief the Senate Finance Committee in June on syndicated CEs. 3 The problem is much broader than just syndications because many individual CEs are now undertaken without any real conservation intent, motivated solely by financial considerations using an overvaluation appraisal, aided by the soft “highest and best use” judicial standard, and a nominal risk of IRS scrutiny.

Although I am a sole practitioner with a very small practice, I’ve had clients bring me at least six abusive CE tax shelter proposals, and for many of them, I’ve been able to obtain the full appraisal study, which I forward to an IRS tax abuse unit (same as I did with the 1980s tax shelters). All propose 4-to-1 tax write-offs that were popular in the 1980s. I frequently receive calls from colleagues, clients, real estate agents, and wealth advisers: All have questions about the legitimacy of CEs that are marketed to them by people they trust.

The hallmark is an intentionally inflated property appraisal to maximize an income tax deduction. As a bonus, CE tax credits are available in 16 states and Puerto Rico.4 Some states allow selling these tax credits to third parties. The seller nets about 75 to 80 cents on the dollar. 5 A sophisticated industry has arisen to advise on this tax shelter, unlike the tax shelters of the 1980s, which relied on a single promoter and a dubious legal opinion.6

I. Tax History of Conservation Easements

A CE is one of the few exceptions that allows a charitable deduction for donating a partial interest in property. 7 It began in 19768 and was meant to be temporary for one year, but it was extended year after year until it was made permanent in 2015. 9 This was a relaxation of the 1969 act that prohibited tax avoidance practices whereby a charitable deduction could be obtained for a gift to charity while the donor continued to use the property. 10 The 1969 act allowed a charitable deduction when donating less than the taxpayer’s entire interest in real property only for an undivided interest to a trust or a remainder interest in a personal residence or farm.11

The current section 170(h) was largely written in 1980. The committee report declared Congress’s lofty hopes:

The committee believes that the preservation of our country’s natural resources and cultural heritage is important, and the committee recognizes that conservation easements now play an important role in preservation efforts. The committee also recognizes that it is not in the country’s best interest to restrict or prohibit the development of all land areas and existing structures. Therefore, the committee believes that provisions allowing deductions for conservation easements should be directed at the preservation of unique or otherwise significant land areas or structures. . . . In addition, the committee bill would restrict the qualifying contribution where there is no assurance that the contribution would be substantial enough to justify the allowance of a deduction.12

The report recognized the potential for overvaluation but sanctioned “the difference between the fair market value of the property involved before and after the grant of the easement,” basing this method on IRS rulings 13 with the caution, “however, the committee believes it should not be applied mechanically.” This is called the “before and after” method.

The Government Accountability Office issued a 1984 report on historic preservation tax incentives. It concluded:

These tax incentives have proven to be an effective means for stimulating such investments. And, the cost to the federal government, in terms of foregone tax revenues, apparently has been small in comparison to the amounts invested in historic rehabilitations. . . . IRS has encountered some tax administration difficulties.

After writing how the IRS audited 42 cases, disagreeing with the valuations in 41, the GAO ominously noted:

IRS data shows that taxpayers generally overvalued their conservation easement deductions by an average of about 220 percent. . . . IRS has been hesitant to devote much in the way of resources to compliance problems relating to historic rehabilitations. This is because relatively few taxpayers have claimed these special tax benefits in comparison to the millions of tax returns filed annually. 14

Most amendments to section 170(h) since 1980 expanded benefits. A few curbed abuses. The deduction was liberalized in 2006, allowing individuals to deduct the FMV of qualified conservation contributions up to 50 percent of adjusted gross income (100 percent for farmers and ranchers, including corporate farmers and ranchers) and carry over any unused deduction for 15 years.15 The easement property may continue to be used for agricultural or livestock production. 16 The donor may not retain the right to harvest timber or extract minerals. 17 Estates are also eligible for the deduction. 18 The Urban-Brookings Tax Policy Center summarized its success:

The most recently available IRS data shows that total deductions for conservation easement contributions by taxpayers tripled between 2012 and 2014 — rising from $971 million in 2012 to $1.1 billion in 2013 to $3.2 billion in 2014. But there’s reason to believe revenue losses were even higher in 2015 and 2016, which not only puts the integrity of the provision at risk — it undermines and endangers the efforts of environmental advocates.19

That $3.2 billion came from “slightly more than 3,200 returns” claiming an average $983,651 deduction.20 The Joint Committee on Taxation had estimated that making the CE provision permanent would cost $129 million over 10 years.21 The Congressional Budget Office estimated making the 2006 changes permanent would cost $1.128 billion over 10 years.22 Perhaps the estimates were correct and the discrepancies noted by the Tax Policy Center represent enormous deduction overvaluations.

II. The Abuses

Abuses generally feature inflated appraisals to boost the value of deductions and tax credits, sometimes tiny parcels with little environmental importance. The property may contain a flood plain or unusual topography that makes it uneconomical to develop, facts that the appraiser ignores, instead treating it as prime real estate. Subdividing a property into small parcels allows co-owners to claim multiple smaller deductions, reducing the odds of IRS scrutiny. Some contributors have tried activities such as oil and gas development or wind farms on conservation property or donating the adjacent golf course or beach. Unlike the 1980s, a legal opinion isn’t present, just an appraiser’s letter. CPA reports present in some offerings fail to append the Circular 230 boilerplate language that the tax advice contained in the offering cannot be relied on to avoid tax penalties.

Syndicated easement shelters are marketed by well-established and otherwise reputable real estate companies and law firms, which often have done normal real estate transactions with the investors and thus have their confidence.

Preserving a facade under new construction to obtain a CE can involve absurd efforts to create compliance for a tax deduction. I’ve witnessed a lower-floor exterior facade held together with steel beams while the interior is completely gutted and a new building rises from within. This brings more in conservation credits than does the cost of holding together and building around the old facade. Howard Roark once eloquently testified against such architectural lunacy. 23 Today, a facade easement requires the complete building “envelope,” four sides and the roof.

The president’s fiscal 2015 budget proposed to disallow CEs on golf courses and to “restrict and harmonize” (that is, disallow) historic preservation easements. The JCT analysis explained how this is a “difficult and resource intensive issue for the IRS to identify, audit, and litigate” and called valuation “highly speculative.” 24

Obtaining state tax credits can be easier than securing the federal deduction. States have little or no oversight on the tax credits or the land trusts and nonprofits charged with executing the easements. Following scandals, Colorado created the Conservation Easement Oversight Commission to review cases.25 In 17 years, Colorado spent nearly $1 billion in tax credits for 4,200 easements and currently turns down about 20 percent of appraisals for fraudulent or exaggerated valuations.26

The standard for CE valuation is the “highest and best use.” This judicial standard emerged because Congress failed to set a legislative standard. Highest and best use can be any realistic, objective potential use of the property.27 The standard requires an inquiry into whether the proposed use will, in reasonable probability, be “needed or likely to be needed in the reasonably near future” — that is, whether the market will demand the use. Regulations merely require that a conservation restriction’s FMV must “take into account . . . an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed” at the proposed level.28 The IRS has formulated more detailed criteria to satisfy the highest and best use standard 29:

  • Physically Possible. The land must be able to accommodate the size and shape of the ideal improvement: What uses of the subject site are physically possible?

  • Legally Permissible. A property use that is either currently allowed or most probably allowable under applicable laws and regulations. What uses of the subject site are permitted by zoning, deed restrictions, and government restrictions?

  • Financial Feasibility. The ability of a property to generate sufficient income to support the use for which it was designed. Among those uses that are physically possible and legally permissible, which uses will produce a net return to the owner?

  • Maximally Productive. The selected use must yield the highest value among the possible uses. Among the feasible uses, which use will produce the highest net return or the highest present worth?

“Highest and best use” is an invitation to creative appraisal that can be difficult for the IRS to challenge. For example, the IRS successfully argued that the highest and best use of farm property was agriculture, not the appraiser’s selection of gravel mining. The parties had “stipulated that, absent the conservation easements, it was likely that the necessary permits to mine gravel could be obtained.” But the Tax Court noted that “there was no unfilled demand [for gravel] . . . no unmet market, [and] no evidence [that] this was to change in the reasonably foreseeable future.” The Appeals Court upheld the decision, stating that just because the properties could be rezoned for gravel mining did not mean that gravel mining was the highest and best use.30

III. Real Examples

Many syndicators are not transparent with potential investors, providing the sizzle of a sales brochure package that excludes the full appraisal report. An examination of county records often reveals that the property has passed through one or more syndicator-owned or related entities, each time at a substantial profit. This inflates the price to unsuspecting investors.

A. Example 1

A real estate agent purchased a 30-acre riverbank strip for $25,100 — less than $1,000 per acre. It’s essential to protect riverbanks from development, but this deal is purely abusive and tax-motivated. The agent makes similar purchases in the same vicinity for 23-acre and 34-acre tracts. Two years after purchase, without any improvements, sometimes after changing hands to a related Agent B, the properties are marketed to clients of the agent. The appraiser values this land as “MIA Industrial Park Development” and assigns a value of $30,000 per acre, or $900,000, on the first 30 acres. Not mentioned in the appraiser or accountant’s report is that the county zones the property as “unique restricted vacant land” because it’s a flood plain on the banks of a river, building on it is restricted, and annual property tax is just $500.

Checking the secretary of state website for the names of the principals at these realty companies reveals multiple other potential CE ventures. These real estate agents could be seen as veritable abusive tax shelter mills.

B. Example 2

A promoter acquires 275 acres 40 miles outside Atlanta for $14,148 per acre. Two years later, he offers it to investors for $31,348 per acre. Two separate appraisers issue almost identical 100+ page reports — down to the exact page inserts, page order, and photos — claiming the highest and best use sets the value at $132,000 to $135,000 per acre. Unmentioned is that the county values the property at $8,278 per acre.

Both appraisals ignore the fact that the property contains a flood plain and a 297-foot-wide high voltage electrical transmission power line easement (every 150-ft. x 297-ft. equals one acre lost). It’s served by just a two-lane rural road. There’s no topography map in either appraisal that would show that this property needs an incredible amount of grading to make it useful. (”Project will involve the largest grading contract in Georgia’s history. Roughly 11 million cubic yards of dirt and five million cubic yards of rock will need to be moved on the North Campus alone.”) Photos reveal that the interstate highway abutting the property is built on a viaduct, rather than at ground level.

It’s been well-publicized that President Trump has made at least five easement gifts, generating more than $100 million in write-offs. He took a $39 million deduction in 2005 on his Bedminster, New Jersey, golf course. His Seven Springs estate in Westchester County, New York, and Mar-a-Lago club in Florida are under CEs. In 2014 he donated an easement on an 11.5-acre driving range in Los Angeles. These are considered consistent with appropriate easements. 31

Trump’s CEs, if they were disputed by the IRS, never reached the litigation stage. While publicity resulted from scrutiny of anything associated with his tax returns, there are many wealthy individuals who take advantage of CEs without involving syndicates. 31a

Any solution must also address the types of easements Congress intends to be eligible for a large tax benefit, not just restrict syndications.

IV. Crowding the Court Docket

The National Taxpayer Advocate 2013 Report to Congress included CEs as “Most Litigated Issue #7” and it remains “most litigated” in all subsequent annual reports. The 2013 report dealt more with technical difficulties taxpayers face in complying with the statutory requirements for a valid CE than with the abuses. The 2012 report only mentioned CE as examples of overaggressive IRS imposition of negligence penalties. The 2011 report cited a question regarding acceptance of CEs as unnecessarily burdensome for most Form 1023 filers. The 2010 report claimed that CEs are “almost impossible for the IRS to administer.”

CE cases consume a substantial portion of the Tax Court docket. It’s often a battle of competing appraisers and engineers, in which the IRS can be as unreasonable as the taxpayer, leading to wildly conflicting technical expert testimony and protracted expensive litigation. 32

As the table of cases at the end of this article shows, $342 million of claimed CEs were involved in cases decided in 2013 through 2017. The courts allowed just $44 million, (including one case allowing $24 million). Because 90 percent of docketed cases are settled before trial, the 47 cases listed may represent 470 cases docketed, or 94 per year. With over 3,200 returns claiming CEs just in 2014, the odds of an IRS challenge must be exceedingly small. Does anyone believe that 97 percent of appraisals are reasonable?

Back in 2004, IRS put abusers on notice that it “intends to disallow such deductions and may impose penalties and excise taxes” and “challenge the tax-exempt status of a charitable organization that participates in these transactions,” advising “promoters and appraisers that the Service intends to review promotions of transactions involving these improper deductions, and that the promoters and appraisers may be subject to penalties.” 33 The abuses continued to grow because only a fraction of abusers were caught.

V. Conservation Charities

A Brookings study claims that many of the largest organizations do not disclose the value of easement gifts on their tax returns or value them at zero; hence, they cannot be identified. “Were these organizations to include these easement donations at appraised value . . . [several organizations that appear to be small] would rank among the nation’s 100 largest non-hospital, non-university charitable organizations.” 34

Charities that manage CEs have banded into an umbrella organization. The Land Trust Alliance is a section 501(c)(3) entity “serving the 1,700 nonprofit land trusts with 5 million members that are conserving land in communities around the country,” according to its president, Rand Wentworth.35 The organization sets policy, standards, education, and training to support land trusts. Its 369-page CE tax guide promotes good practices. 36

Reputable major charities maintain real estate committees to evaluate properties before acceptance. Many charities accepting CE properties (remember, these are partial interests) do not have a long history or reputation. Some are startups that accept practically anything and may have connections to the tax shelter organizers. They require a cash contribution to accompany the CE, sometimes referred to as a “stewardship fee,” for operating funds. It is important to document that such cash contribution benefits the charity, not made in exchange for tax-planning or other services, lest the IRS challenge it as a nondeductible quid pro quo. 37 The IRS requires that the cash payment must be a voluntary transfer, made with charitable intent to a qualified organization, to be deductible as a charitable contribution. 38

It is impossible to determine the aggregate number of CEs, or make sense of land trust tax filings, because accounting and reporting practices vary wildly. Most report receiving noncash contributions on Form 990, “Return of Organization Exempt from Income Tax”; many do not, despite reporting an increase in CEs. Some report stewardship fees, some by a different term, others do not. CE disclosures on Form 990 Schedule D inconsistently report the number of conservation easements and acreage. Reconciling the fixed asset schedule on Schedule D with the balance sheet on Form 990 rarely reconciles with new CE acquisitions. Some record CEs as incapable of being valued and hence record value as zero, or leave the land/easement valuation sections on Schedule D blank. An occasional land trust will record a CE at the donor’s appraised value, which can agree with the noncash contribution reported elsewhere and can be a clue to excessive appraisals. They report transfers, modifications, purchase acquisitions, and sales of CEs. It is impossible to reconcile or decipher or compare organizations. 39

One land trust filed two 2016 Forms 990 with the same address; same employer identification number, indicating the same website; the same 2015 opening balances; but completely different 2016 income and balance sheet numbers using two different preparers, and similar but not identical list of officers and board members, one signed by the executive director, the other by the board chair. The latter was unauthorized and erroneous, according to the executive director. Perhaps it is significant that the IRS didn’t flag the duplicate filing. The organization was unaware of the duplicate filing before I inquired.

Form 990 should be requesting information that is consistent, comparable, reliable, verifiable, and objective. Currently, land conservation charities tax returns are not useful.

VI. Appraisers’ Issues

Publicized cases against promoters and appraisers are relatively few. The statute of limitations for the appraiser penalty case is three years from the later of the due date of the related return or the date the return was filed. Form 872 extending the time to assess tax for a return examined does not extend the appraiser penalty statute.

The Justice Department rarely prosecutes appraisers. In 2013 a federal court barred MAI-designated real estate appraiser Michael Ehrmann and his firm from preparing property appraisals for federal tax purposes. The complaint alleged that Ehrmann’s appraisals repeatedly overstated the value of CEs placed on historic properties, including the Book Cadillac Hotel in Detroit and the Powerhouse building in the Flats District of Cleveland. It was estimated that the amount of improper tax deductions attributable to his flawed appraisals could reach hundreds of millions of dollars. 40

Courts upheld an IRS administrative summons to Georgia appraiser Jim Clower for all CE appraisals he made. 41 If there are others, they are not named in press releases. Court orders are vague. 42

The IRS Office of Professional Responsibility reached a 2014 settlement with a group of appraisers in one firm, who agreed to a five-year suspension. They were accused of aiding in the understatement of federal tax liabilities by overvaluing facade easements for charitable donation purposes. 43 Unlike attorneys, CPAs, and enrolled agents, names of appraisers’ subject to OPR disciplinary sanctions never appear in the Internal Revenue Bulletin. 44

Some land trusts issue “comfort letters” promising a refund of the cash contribution and restoring title to the contributor if the anticipated favorable tax results are not achieved. In response to concerns one participant had, the National Architectural Trust sent a September 16, 2004, email stating:

The IRS notices to which you refer were prompted by recently exposed improprieties at the Nature Conservancy, the nation’s largest land conservation easement holding organization. The practice the IRS is concerned with here is when a non-profit acquires property, puts an easement on it and sells it for a reduced price plus a tax deductible charitable contribution. * * *

Thus far not a single donation made to the Trust has been disallowed by the IRS (400+ in New York City alone). 45

In 2011 the Justice Department obtained an injunction against Steven McClain and the Trust for Architectural Easements Inc. (formerly known as the National Architectural Trust). It had given inflated appraisals to taxpayers in Boston, New York City, Baltimore, and Washington to claim unwarranted charitable tax deductions for donations of facade CEs on historic buildings. Through 2008, the complaint alleged, the total value of facade easement tax deductions attributable to the trusts’ scheme exceeded $1.2 billion and the revenue lost though 2006 was $250 million.46

VII. Abuse Mitigation Efforts

Absent significant new legislation restricting CEs and increasing the IRS enforcement budget, inflated CE valuations will continue to drain the treasury. Syndication is merely a symptom of the abuse potential. Bills proposing to limit the return to 2.5 times a partner’s investment would assure continued abuses by setting a safe harbor. 47 The root cause is the lack of curbs on donations motivated purely by tax rewards and a highest and best use standard that encourages overvaluation and rewards imagination.

The IRS recently made CE donations eligible for a pre-filing agreement (PFA). The PFA will address both the issue of deductibility and the issue of valuation. It allows the taxpayer and the IRS to resolve the issues before the tax return is filed.48

The IRS now treats syndicated CEs with a write-off 2.5 times the amount of the investor’s investment as a listed transaction, requiring filing of Form 8886, “Reportable Transaction Disclosure Statement,” and Form 8918, “Material Advisor Disclosure Statement.” 49 This high limit was trashed in Forbes, which argued that the limit should be much lower. 50 The IRS commissioner wrote Congress that in six months, this new requirement disclosed $217,067,598 of aggregate contributions from just 40 disclosures and that the IRS was processing 200 Forms 8886 and 5,500 Forms 8918.51 The House Appropriations Committee initially sought to prohibit the IRS from implementing or enforcing this 2.5 times standard retroactively. 52

A CE facade deduction of more than $10,000 is not allowed without paying the IRS a $500 filing fee. It must be filed and paid separately from the return that claims the deduction.53 By law, those fees must be spent on enforcement activities related to charitable contribution deductions for historic CEs. 54 This might raise around $1 million annually.

In 2006 Congress tightened requirements for historic building facade easements, including that the donee organization “has the resources to manage and enforce the restriction and a commitment to do so.” 55

Congress repealed the 1982 Tax Equity and Fiscal Responsibility Act audit rules for tax years beginning after 2017, replacing it with a complex IRS-friendly partnership audit regime. 56 Taxpayers may elect the new regime for pre-2018 years. 57

At audit and trial, the IRS has invoked section 170(f)(8). A surprising number of CE donors fail to obtain the required contemporaneous acknowledgment for a contribution of $250 or more, thereby jeopardizing a multimillion-dollar contribution. To bolster the IRS argument, Congress repealed the exception in case of contributions reported by the donee, so donors will have a harder time claiming mitigation of the failure. 58

VIII. Structuring a Conservation Easement

A. Intent

Ideally, one should have donative intent, or a bona fide conservation intent, when making a CE. Farmers and ranchers benefit by making land CEs. It guarantees them the ability to maintain farming or grazing on the property while compensating them for not selling out to developers. An easement on an existing golf course is often tax-motivated and it can be difficult to prove a “before and after” value for claiming an easement deduction.

B. Donee

Work with a reputable and financially stable conservation charity to avoid a potential problem. If the donee disposes of the CE or facade easement within three years, it must file a Form 8282, “Donee Information Return,” that the IRS can match against the donor’s original Form 8283, “Noncash Charitable Contributions.” 59

C. Appraisals

Obtain realistic CE appraisals from two reputable appraisers. They should be issued close to the date easement is granted. A syndicate investor should obtain and retain copies of the full appraisal before investing. 60

D. Highest and Best Use

This judicial standard requires an inquiry into whether there is the type of market demand that creates a reasonable probability that the proposed use will be needed or likely to be needed in the reasonably near, not remote, future. It must be physically possible, legally permissible, financially feasible, and maximally productive. It’s also an invitation to err on the high side.

E. Modifications

Avoid contracts that grant the donor the ability to swap the easement property with another, change borders, or contingencies or modifications that could, even remotely, extinguish the easement. Any retained rights should be modest and allowable.

F. State Law

Confirm that state law permits a permanent easement or other restrictions. 61

G. Receipt

Obtain a contemporaneous acknowledgment of the donation under section 170(f)(8). The receipt should include the correct full legal description of the property.

IX. Solution Proposals

Negligence, overvaluation, economic substance, and preparer penalties lack sufficient deterrence because the root causes are abusive appraisers, compliant land trusts, and a slight risk of audit.

There may be some easy ways to minimize abusive cases from CEs:

  1. For a conservation or facade easement, the IRS could require that the complete appraisal be attached to the return at a much lower threshold than $500,000. 62 Syndicate investors rarely receive a copy of the full appraisal, much less know when they must attach the hundred-plus pages to their individual Forms 1040. Donors and syndicators may be more cautious when a copy of the appraisal becomes a required submission.

  2. Form 990 Schedule D could be revised to require more details on conservation donations, including values claimed by donors. That would make donees more circumspect over land donations they accept and allow the IRS to identify potentially rogue conservation organizations and their donors. Schedule D could require a dollar value reconciliation for “conservation easements modified, transferred, released, extinguished, or terminated — during the year” besides a mere single-digit number. It could include a question on how many Forms 8282 must be filed.

  3. Form 990 Schedule B could be revised to flag CEs. The FMV required on Part II could require that the organization list the valuation that will be claimed by the donor and require the donee to record the same value as an asset.

  4. For contributions to a government entity, Congress could require a donor to obtain and attach to the tax return an acknowledgment from the entity of the property’s assessed value for the year before the contribution. That might flag potential gross overvaluations.

  5. Congress could deny any deduction for “historic preservation” (architectural, facade, or similar contribution) by letting the National Register of Historic Places decide what is historic. Once listed, the “before and after” value is zero; hence, no deduction.

  6. Congress could prohibit syndication of CEs, other than a so-called pure conservation syndication. 63 Rarely does one buy into a syndicate except for the tax benefit, generally based on an overvaluation appraisal. Donative intent isn’t present and marketing materials promote only the tax benefits. At a minimum, Congress could disallow the bootstrap rule under which investors who buy into a partnership that has owned the property for more than one year can benefit from a CE donated the day after investing. 64

  7. Congress could revise the applicable valuation standard. Inaction ensconces the judicial highest and best use, a soft standard that often proves an invitation to abusively high appraisals. Congress could set the standard as “current use” (could stop syndications) or proven nearby neighborhood development. A substantial monetary penalty assessable against too-pliant appraisers could assist in enforcing any standard.

  8. Congress could expand the definition of “tax return preparer” under section 7701(a)(36) to specifically include an appraiser who signs a Form 8283. That would subject appraisers to section 6694 preparer penalties. Under Treasury regulations in place since 1977, an appraiser might be subject to penalties under section 6694 as a nonsigning tax return preparer if the appraisal is a substantial portion of the return or claim for refund and the applicable standards of care are not met. 65

  9. Congress could order another study like the one by the GAO in 1984, focusing especially on the IRS’s ability to administer CEs and historic preservation.

That nonprofit entities are not a tax revenue source was cited in the Lois Lerner scandal as one reason for a lack of resources assigned to oversee the IRS nonprofit unit. There is significant tax revenue lost for lack of oversight on nonprofit involvement in CEs, possibly approaching half the size of tax ID fraud or improper earned income tax credits.

In the 1980s, new legislation enabled the IRS to stop most abusive tax shelters. The CE abuses will require similar resolve. Failure to legislate an end to these abuses leaves honest tax practitioners to convince clients that we are more trustworthy than the reputable real estate firm they have been doing business with for over a decade who tells them their accountant lacks expertise or is too timid.

X. Conclusion

CEs serve a good social function and if one believes that the tax code should be used for such purposes other than raising revenue, it is valid and useful. Current law invites abuse because it encourages overvaluation, overwhelms IRS resources to police this weakly structured law, clogs our court system, and encourages disrespect for our tax laws.

Following are 47 unique cases decided by the courts in the past five years dealing with facades and CEs. Most are disallowed in full, though many abate penalties. These are tough cases that only the best tax lawyers undertake to defend.

Frank Agostino of Agostino & Associates PC in Hackensack, New Jersey, tries many easement cases, successfully settling 90 percent without trial. He blames faulty and fraudulent appraisals for the rash of litigation and says controversies could be significantly reduced if penalties were assessed against the appraiser — including government appraisers — when there is more than a 50 percent error in valuation. Competent appraisals, he believes, should not vary by more than 10 percent.

A significant penalty on appraisers for failing a valuation variance standard, together with more objective and consistent standards for CE charities, could drive out the bad actors. Placing major responsibility on appraisers at the start and charities at the end of the transaction might be the self-enforcing mechanism we need to minimize CE disputes. 

Conservation Easement Cases 2013-2018


TP Claimed

IRS Allowed

T.C. Allowed


In re Robert J. Spenlinhauer, No. 13-17191 (Bankr. D. Mass. 2017) (transferee)



Form 706 undervaluation partial summary for IRS

Partita Partners LLC v. Commissioner, No. 1:15-cv-02561 (S.D.N.Y. 2016), related to Partita Partners LLC v. United States, 216 F. Supp.3d 337 (S.D.N.Y. 2016)





Scheidelman v. Commissioner, T.C. Memo. 2013-19, aff’d, Scheidelman v. Commissioner, No. 13-2650 (CA-2, 2014)




rev’d, Scheidelman v. Commissioner, 682 F.3d 189, 192 (CA-2, 2012)/Frank Agostino

Whitehouse Hotel Ltd. Partnership v. Commissioner, 755 F.3d 236 (CA-5, 2014)




Esgar Corp. v. Commissioner, 744 F.3d 648 (CA-10, 2014)




Belk v. Commissioner, 140 T.C. 1 (2013), aff’d, Belk v. Commissioner, 774 F.3d 221 (CA-4, 2014)




golf course, TC reconsideration

Palmolive Building Investors LLC v. Commissioner, 145 T.C. 344 (2017)




facade, TEFRA, rev. by the court/Jeffrey H. Paravano; not perpetuity

Rutkoske v. Commissioner, 149 T.C. No. 6 (2017)


valuation set for trial

partial summary judgment for respondent

not qualified farmer or rancher for section 170(b)(1)(E)(iv) 100 percent base

RERI Holdings I LLC v. Commissioner, 149 T.C. No. 1 (2017)




appraisal 18 months pre-contribution; Form 8283 cost/basis blank

15 W. 17th St. LLC v. Commissioner, 147 T.C. No. 19 (2017)



respondent summary judgment denied

no section 170(f)(8)(D) regs to enforce/Frank Agostino

Carroll v. Commissioner, 146 T.C. 196 (2016)




defective easement contract

Legg v. Commissioner, 145 T.C. 344 (2015)




Chandler v. Commissioner, 142 T.C. 279 (2014)





Wachter v. Commissioner, 142 T.C. 140 (2014)




North Dakota law prohibits real property easements granted in perpetuity

Graev v. Commissioner, 140 T.C. 377 (2013), rev’d, Graev v. Commissioner, 147 T.C. No. 16 (2016), supplementing Graev v. Commissioner, 149 T.C. No. 23 (2017)




Frank Agostino

Wendell Falls Development LLC v. Commissioner, T.C. Memo. 2018-45

1,798,000 F1065; 4,818,000 F1065X



Conner v. Commissioner, T.C. Memo. 2018-6




Jones Day

Roth v. Commissioner, T.C. Memo. 2017-248


settlement 30,000


40 percent penalty upheld

Salt Point Timber LLC v. Commissioner, T.C. Memo. 2017-245




Big River Development LP v. Commissioner, T.C. Memo. 2017-166


set for trial 0

partial summary judgment for pet

facade, cotemporaneous section 170(f)(8)/ Jeffrey H. Paravano, BakerHostetler

310 Retail LLC v. Commissioner, T.C. Memo. 2017-164


set for trial 0 - $1.6 million

partial summary judgment for pet

yes, contemporaneous section 170(f)(8)(B) facade easement

Ten Twenty-Six Investors v. Commissioner, T.C. Memo. 2017-115





McGrady v. Commissioner, T.C. Memo. 2016-233




John Paul Barrie

RP Golf LLC v. Commissioner, T.C. Memo. 2016-80, aff’d, RP Golf LLC v. Commissioner, 860 F.3d 1096 (8th Cir. 2017)




golf course; also lost prior case, RP Golf LLC v. Commissioner, T.C. Memo. 2012-282

Bayne French v. Commissioner, T.C. Memo. 2016-53




no contemporaneous section 170(f)(8); (otherwise, $137,836)

Gemperle v. Commissioner, T.C. Memo. 2016-1




pro se

Atkinson v. Commissioner, T.C. Memo. 2015-236

5,223,000; 2,657,500



golf course; two parcels

Bosque Canyon Ranch v. Commissioner, T.C. Memo. 2015-130, vacated, Bosque Canyon Ranch v. Commissioner, 867 F.3d 547 (5th Cir. 2017)

8,400,000; 7,5000,000



two parcels; vacated and remanded to Tax Court

Costello v. Commissioner, T.C. Memo. 2015-87




SWF Real Estate v. Commissioner, T.C. Memo. 2015-63




William Rowe & Timothy Jacobs

Balsam Mountain Investments LLC v. Commissioner, T.C. Memo. 2015-43

no amounts mentioned

no amounts mentioned


Reisner v. Commissioner, T.C. Memo. 2014-230




facade/pro se

Zarlengo v. Commissioner, T.C. Memo. 2014-161




facade/Frank Agostino

Schmidt v. Commissioner, T.C. Memo. 2014-159




Seventeen Seventy Sherman Street v. Commissioner, T.C. Memo. 2014-124


0 or 400,000; or 2,050,000


interior/exterior facade; TEFRA/ BakerHostetler

Palmer Ranch Holdings Ltd. v. Commissioner, T.C. Memo. 2014-79, aff’d in part, remanded in part, Palmer Ranch Holdings Ltd. v. Commissioner, 812 F.3d 982 (11th Cir. 2016), remanded, Palmer Ranch Holdings Ltd. v. Commissioner, T.C. Memo. 2016-190




TEFRA/Arent Fox; see John Montague, “Fair Market Value and Uncertainty Regarding Highest and Best Use,” Tax Notes, June 23, 2014, p. 1425

Kaufman v. Commissioner, T.C. Memo. 2014-52




facade/Frank Agostino

Mountanos v. Commissioner, T.C. Memo. 2014-38; Mountanos v. Commissioner, T.C. Memo. 2013-138, aff’d, Mountanos v. Commissioner, 651 Fed. Appx. 592 (9th Cir. 2016)




Route 231 LLC v. Commissioner, T.C. Memo. 2014-30




TEFRA ruled disguised sale

61 York Acquisition LLC v. Commissioner, T.C. Memo. 2013-266




Kostelanetz & Fink

Gorra v. Commissioner, T.C. Memo. 2013-254




architectural/Frank Agostino

Friedberg v. Commissioner, T.C. Memo. 2013-224




facade reconsideration

Mitchell v. Commissioner, T.C. Memo. 2013-204, supplementing Mitchell v. Commissioner, 138 T.C. 324 (2012)


0 or 100,000


Larry D. Harvey

Carpenter v. Commissioner, T.C. Memo. 2013-172




Larry D. Harvey

Crimi v. Commissioner, T.C. Memo. 2013-51




Frank Agostino

Pollard v. Commissioner, T.C. Memo. 2013-38




Didonato v. Commissioner, T.C. Memo. 2013-11, related to Didonato v. Commissioner, T.C. Memo. 2011-153




no contemporaneous section 170(f)(8); reconsideration

Totals excluding in re Spenlinhauer (excluding Palmer Ranch)

$341.8 million ($317.9 million)

$43.8 million ($23.8 million)




1 Richard Rubin, “IRS Scrutinizes Land-Donation Syndicates Yielding Big Tax Breaks,” The Wall Street Journal, Dec. 29, 2016; Rubin, “When a Conservation Tax Break Protects Backyards and Golf Courses,” Dow Jones Institutional News (June 1, 2017); Adam Looney, “Charitable Contributions of Conservation Easements,” Brookings Institution (May 2017); Peter Elkind, “The Billion-Dollar Loophole,” Fortune and ProPublica, Dec. 20, 2017.

2 Rubin, “Thousands of Investors Got Big Tax Breaks for Land-Rights Donations, IRS Finds,” The Wall Street Journal, Mar. 14, 2018.

4 Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Iowa, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, South Carolina, Virginia, and Wisconsin.

5 Phillip Blackman and Kirk J. Stark, “Capturing Federal Dollars With State Charitable Tax Credits,” Tax Notes, Apr. 1, 2013, p. 53.

6 Stephen J. Small, “A Modest Legislative Proposal to Shut Down Specific Tax Shelters,” Tax Notes, May 24, 2016, p. 1085.

7 Section 170(f)(3)(B), reg. section 1.170A-7, -14.

8 Tax Reform Act of 1976, P.L. 94-455, section 1906(b), adding the section 170(e)(1)(B)(iii), today section 170(f)(1)(B)(iii).

9 Consolidated Appropriations Act of 2016, P.L. 114-113, Division Q (Protecting Americans From Tax Hikes Act of 2015), section 111.

10 Before 1969, a common practice was to grant a charity free use of office space. It allowed a double deduction for donor-paid rent plus the fair rental value of the space given to the charity. Today’s FMV of donated long-term capital gain property without need to recognize gain (such as securities or conservation easement) is a form of double deduction still allowed.

11 94th Cong., 2d Sess., H.R. 10612, section 505 (1976).

12 96th Cong., 2d Sess., S. Rept. No. 96-1007, at 8-15 (1980).

13 Rev. Rul. 73-339, 1973-2 C.B. 68, and Rev. Rul. 76-376, 1976-2 C.B. 53.

14 GAO, “Information on Historic Preservation Tax Incentives,” GGD-84-47 (Mar. 29, 1984).

15 Section 170(b)(1)(E), (b)(2)(B). These are exceptions to the general five-year, 30 percent rule for contribution of appreciated long-term capital gain property. Non-farm corporations are limited to 10 percent, but still get a 15-year carryover. These expansions were enacted in the Pension Protection Act of 2006, P.L. 109-280, section 1206, under the heading, “Encouragement of Contributions of Capital Gain Real Property Made for Conservation Purposes.”

16 Notice 2007-50, 2007-1 C.B. 1430, explains a tax law change for conservation contributions such that the 50-percent-of-AGI limitation is increased to 100 percent for eligible farmers and ranchers.

17 Rev. Rul. 76-331, 1976-2 C.B. 52; Rev. Rul. 77-148, 1977-1 C.B. 63.

18 Section 2031(c), IRM section; Form 706, Schedule U.

19 Looney, “Estimating the Rising Cost of a Surprising Tax Shelter: The Syndicated Conservation Easement,” Urban-Brookings Tax Policy Center (Dec. 20, 2017).

20 Pearson Liddell and Janette Wilson, “Individual Noncash Contributions, Tax Year 2014,” IRS Statistics of Income Bulletin (Summer 2017).

21 JCT, “Estimated Revenue Effects of H.R. 5771,” JCX-107-14R (Dec. 3, 2014).

22 H. Rept. 113-494, 113th Cong., 2d Sess. (2014).

23 Ayn Rand, The Fountainhead (1943).

25 A thorough 107-page study by Colorado State Auditor Dianne Ray disclosed serious weaknesses in the program, with suggestions for measuring effectiveness, and recommendations for curbing abuses, “Conservation Easement Tax Credit, Department of Revenue Division of Real Estate,” Colorado Office of the State Auditor (Aug. 2012); “Swindle Started in Family Affairs,” Denver Post, Sept. 16, 2012, at K4.

26 Marianne Goodland, “‘Buyer Beware’ of Property Easements,” Julesburg Advocate; Julesburg, Colo. (Feb. 2, 2017).

27 Symington v. Commissioner, 87 T.C. 892, 896-897 (1986), quoting Olson, 292 U.S. 246, 255 (1934).

28 Reg. section 1.170A-14(h)(3)(ii).

29 IRS, “Conservation Easement Audit Techniques Guide,” at 46 (rev. Jan. 24, 2018); see also ILM 201334039.

30 Esgar Corp. v. Commissioner, 744 F.3d 648 (10th Cir. 2014), aff’g T.C. Memo. 2012-35. Petitioners claimed a $2,274,500 contribution. The court allowed $99,277.

31 Richard Rubin, “Trump Donates Land for Tax Breaks,” The Wall Street Journal, Mar. 11, 2016, at A4; Peter Elkind, “The Billion-Dollar Loophole,” Fortune and ProPublica, Dec. 20, 2017.

31a Preservation and conversion of Washington’s Old Post Office into the Trump International Hotel was surely made feasible by a different tax credit conservation provision, the Section 47 Rehabilitation Credit.

32 See Crimi v. Commissioner, T.C. Memo. 2013-51; and Palmer Ranch Holdings v. Commissioner, T.C. Memo. 2014-79.

33 Notice 2004-41, 2004-1 C.B. 31.

34 Looney, supra note 1.

35 Rand Wentworth, “Land Trust Alliance President Recommends Permanent Conservation Easements,” Land Trust Alliance (Feb. 14, 2013).

36 Timothy Lindstrom, “A Tax Guide to Conservation Easements,” Land Trust Alliance (2016).

37 Wendy C. Gerzog, “Mortgages and Conservation Easements: Not a Good Mix,” Tax Notes, July 25, 2011, p. 437.

38 IRS, supra note 29, at 15 (rev. Jan. 24, 2018).

39 Accounting standards for CEs are practically nonexistent. IRS instructions cite the Financial Accounting Standard Board’s EITF 02-7, which is hardly relevant. See ASU 2018-1.

40 Department of Justice, “Ohio Federal Court Bars Appraiser of Historic-Preservation Easements” (Feb. 13, 2013); United States v. Ehrmann, 1:13-cv-00214-DAP (N.D. Ohio 2013).

41 United States v. Clower, No. 16-13039 (11th Cir. 2016), unpublished per curiam, aff’g No. 1:15-cv-02120 (N.D. Ga. 2015).

42 National taxpayer advocate, “Annual Report to Congress,” vol. 1, at 395 n.48 (2017) (“The United States petitioned to enforce a summons in 64 cases and successfully met its burden under Powell in all 64 cases.”).

45 Graev v. Commissioner, 147 T.C. No. 16 (2016).

47 H.R. 4459, S. 2436, 115th Cong. (2017).

48 IRM section 4.30.1, Rev. Proc. 2016-30, 2016-21 IRB 981, describes how to apply for a pre-filing agreement. However, few PFA applications are submitted and approved. IRS, “Pre-Filing Agreement Program.”

49 Notice 2017-10, 2017-4 IRB 544, modified by Notice 2017-29.

50 Peter J. Reilly, “New IRS Scandal — Syndication of Conservation Easement Deductions,” Forbes, July 24, 2017.

51 Letter from former commissioner John Koskinen to Sen. Ron Wyden, “Koskinen Provides Conservation Easement Disclosure Details,” The Exempt Organization Tax Review, Aug. 2017, at 153.

52 William Hoffman, “Conservation Easements Might Hide Tax Shelters, IRS Finds,” Tax Notes, July 24, 2017 p. 406; H.R. Rept. No. 115-234 on H.R. 3280, “Administrative Provisions — Internal Revenue Service,” at section 114 (July 17, 2017). The prohibition was introduced but didn’t pass beyond the House Appropriations Committee.

53 Form 8283-V; section 170(f)(13).

54 IRM section; IRM section

55 Section 170(h)(4)(B)(ii)(II).

56 Bipartisan Budget Act of 2015, P.L. 114-74, enacting sections 6221-6241.

57 Id. at section 1101(g)(4).

58 Tax Cuts and Jobs Act, P.L. 115-97, section 13705, striking section 170(f)(8)(D).

59 Form 8282 instructions.

60 Reg. section 1.170A-13(c)(4)(iv)(F) requires only that a donor provide a copy of the appraisal summary to every partner or shareholder. Reg. section 1.170A-13(c)(3)(B) requires receipt of an appraisal before the return due date. Courts give less credibility to old appraisals.

61 North Dakota may not. Wachter v. Commissioner, 142 T.C. 140 (2014).

62 Section 170(f)(11)(D).

63 Timothy Lindstrom, “4 Tax Issues for Conservation Easement Transactions,” Tax Notes, Aug. 31, 2015, p. 953.

64 Small, supra note 6.



Jay Starkman, CPA is a sole practitioner in Atlanta. A version of this article was originally published in Tax Notes on June 4, 2018.