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Memo to the Senate Committee on Finance
by Stephen J. Small, Esq.
Old History and Recent History
Before I get to the remedies, I want to set the stage. Stories over the past few years by the Washington Post, a recent report from the Joint Committee on Taxation, and interest from the Senate Finance Committee have prompted me to write this memo. I hope it is useful in the current deliberations about "what to do" about conservation easements.
From 1978-1982, I was an attorney-advisor in the Office of Chief Counsel at the Internal Revenue Service in Washington, DC, and I wrote the income tax regulations on conservation easement donations. I have been in private practice since 1982, and since the late 1980s most of my practice has involved representing private landowners who don't want to see their land paved over and developed. I have worked on hundreds of conservation easements, protecting hundreds of thousands of acres of privately-owned farmland, ranchland, forestland, wildlife habitat, scenic property, and open space that helps give a community its character.
From well before 1980, when Section 170(h) of the tax code became law, until very recently, the private land conservation field was a low-key, pleasant, important, and constructive field. Starting with a relatively small number of landowners around the country who cared about their land, and a much smaller number of land trusts, the voluntary private land conservation field grew slowly, then more rapidly, but was generally free of troubles, free of "bad" appraisals, free of "bad" easements.
Here is an example of an early, and continuing, typical easement donation. The typical donor is not someone who plays fast and loose with the tax code. The typical encumbered property is not a high-end development, a golf course, or land with inconsequential conservation values. Instead, the typical donor has been like my fictional Aunt Sally, who owned a farm, loved it, and did not want to see it paved over. "Asphalt is the last crop," as a friend of mine in Virginia has said. The farm was productive, provided habitat, was visible from the local county road. Aunt Sally approached the local land trust (if there was one), they negotiated a conservation easement that would forever protect Aunt Sally's farm, and the agricultural soils, and the habitat, and the scenic view. The easement was signed and recorded, a competent appraisal was completed, and the deal was done. Because of the tax code limitation that the income tax deduction for a conservation easement donation can generally only be taken up to 30% of the donor's adjusted gross income for the year of the gift (with a five-year carryforward for any unused amount), the chances were also good that Aunt Sally simply could not use all of the income tax deduction.
I will not address here the question of whether it is the job of government (at any level) to protect open space, wildlife habitat, productive farmland and forestland and ranchland. The fact is, with some few exceptions, government (at all levels) has historically done a terrible job at protecting the open space that gives a community its character and quality of life. The zoning map on the wall has generally been worth less than the paper it is written on, because it routinely changes, from rural/agricultural, to residential, to commercial, and perhaps even to industrial. I am not saying this is a bad thing; I am simply saying that government has done a terrible job protecting open space.
And that has helped fuel the rise of private land conservation in this country, across geographic, political, social, and economic lines. My point, again, is to emphasize that typical, "mainstream", meaningful conservation easements are not just the norm but they are what is happening across this country, and as a result important land is being saved because the efforts of caring and generous landowners and donee organizations that are working hard to help.
I remember having dinner more than a decade ago with an 82-year old rancher in the southwest who thought that Barry Goldwater was a liberal. The rancher could not stand the thought of seeing "real estate developers and condominia" in the valley where he had lived since childhood, and he knew that government would not stop that inevitable "progress." The idea of a conservation easement -- making his own voluntary personal statement to protect his ranch, his part of the valley, and his quality of life -- was something that appealed to him.
I remember speaking to the Colorado Cattlemen's Association when that organization was considering setting up its own land trust (which they have now done), because many of the cattlemen had come to the conclusion that given high real estate values, real estate development, and estate taxes, many important ranches in Colorado were being sold for development and a way of life that was integral to the social and economic fabric in the State of Colorado was being threatened. The Wyoming Stockgrowers, and other similar organizations in the west, have also moved into the easement-holding business for the same reasons. If there is doubt about my contention that the perception of widespread abuse is wrong, ask the Colorado Cattlemen's Agricultural Land Trust, or the Wyoming Stockgrowers, or the Little Traverse Conservancy in Michigan, or the Iowa Natural Heritage Foundation, or the Montana Land Reliance, or the Chagrin River Land Conservancy, or Ducks Unlimited, or the Rocky Mountain Elk Foundation, or scores of other land trusts and other donee organizations around the country, for information about the wonderful easements they have accepted and the important land that has been protected.
Because of rising real estate values, because of development pressure, because of estate taxes and increasing property taxes, because beautiful land was harder to find and harder to keep, and because the word was getting out about the effectiveness of conservation easements, the land trust business went through an incredible growth period in the 1990s.
What happened by the end of that decade is that while all the good sound honest transactions by people who love their land were continuing, a very small number of sharks began to circle and had an impact on this quiet little field way beyond their actual numbers. Keep in mind that this is a field that for more than twenty years was remarkably free from abuse. Of course there were mistakes, and of course there were misunderstandings, but the errors were small in number and minor in scope. But probably beginning in the late 1990s, and continuing through 2000 and the following years, "bad" deals started to turn up, "bad" appraisals started to surface. As a participant in a round-table discussion about conservation easements a few years ago said, "This just shows you that when any tax code provision is around long enough, some greedy people will find a way to abuse it."
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