David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: conservation easements, part one. The tax treatment of conservation easements is a divisive subject. This is an issue that's been fought in the courts and heatedly debated at tax conferences and in the pages of Tax Notes.
We understand this is a complicated matter, and in an effort to further the discussion, we're dedicating the next two episodes of Tax Notes Talk to talking to advocates on opposite sides of the issue. Part one features an interview with Robert Ramsay, the executive director of Partnership for Conservation, which goes by the name P4C. It advocates for the use of investment vehicles and conservation easement deals. Next week's episode, part two, will feature an interview with Steve Small, one of the authors of the regulations on conservation easements.
But before we get to the first interview, I'm joined by Tax Notes legal reporter Kristen Parillo for some background on the issue. Kristen, welcome back to the podcast.
Kristen Parillo: Thanks for having me, Dave.
David Stewart: Now, you've been covering the issue of conservation easements in Tax Notes. Can you tell us what they are and how they relate to the tax world?
Kristen Parillo: In a conservation easement transaction, a property owner donates a portion of the land to a qualified land trust or governmental entity. The property owner is essentially giving up the right to use or develop the land in order to protect its conservation values. And in exchange for doing that, the property owner can claim a charitable contribution deduction.
David Stewart: So, what is the controversy behind the issue and who are the players in this?
Kristen Parillo: In the last few years, the IRS has focused on syndicated conservation easement, which is where you have a promoter who puts together a group of investors, forms a partnership to buy some land, and then the partnership donates a conservation easement to a land trust. And in a lot of these cases, the partnership claims that the easement is worth many millions of dollars. So, they're able to take a huge tax deduction, and then split it up among the investors. And in the IRS's view, the promoters have to get inflated appraisals to make the deal worthwhile for the investors. So, the IRS has been ramping up their audits of these deals and denying the deductions in their entirety. So, it's become quite a controversial issue.
On one side, you have the traditional land trust groups and conservationists who say that the syndicated easement promoters are abusing the charitable contribution rules. And then on the other side, you have groups like P4C who say that letting people form a partnership to buy and donate land gives people who may not be able to afford land on their own to participate in conservation efforts.
David Stewart: Now you conducted the interviews with Robert and Steve that we'll be playing this week and next. Can you give us a brief look at the interview with Robert that we're about to hear?
Kristen Parillo: I asked Robert about P4C's opposition to the IRS's enforcement strategy against syndicated easement and legislation that would cap the size of the deduction that they can take. We also talked about an article he wrote for Tax Notes about a dirty dozen myths about syndicated easements, which has attracted a couple of letters to the editor.
David Stewart: All right. Let's go to that interview.
Kristen Parillo: Welcome to the podcast, Robert.
Robert Ramsay: Well, thanks, Kristen. I'm certainly glad to be here.
Kristen Parillo: Before we dive into the questions, can you tell our listeners a little bit about P4C and the work that you do?
Robert Ramsay: Sure. The Partnership for Conservation is a nonprofit. We're a 501(c)(6) trade organization. And our membership is representative of a wide swath of people who choose to put land into conservation easements. Everyone from land owners, to investors, to the land trust, and promoters as well. Really what we're focused on is ensuring that conservation easements remain a viable tool for conservation for all Americans. We're focused on reform. And certainly, again, ensuring that this really important tool for conservation remains viable for every American.
Kristen Parillo: What is a syndicated partnership and how does it work in the easement context?
Robert Ramsay: Why don't I first start with conservation easement is essentially when a land owner -- and that can be an individual or a group of individuals who have come together to own the land -- choose to put that land into a conservation easement, meaning they give up certain development rights in perpetuity. And Congress had the good foresight several decades ago to put into the tax code an incentive for people to have this option. Or really to incent people to choose this over development in certain parcels of land that qualify for the conservation easement.
What the IRS has labeled a syndicated conservation easement transaction is that very same thing. But instead of say an individual doing it, you have a group of unrelated individuals who come together, who choose to invest in a partnership, who then may choose to donate those rights for that conservation easement. And as a result of partnership law, those deductions then pass through to each of the partners.
Kristen Parillo: How would you respond to the critics who say people shouldn't be turning charitable contribution deductions into a profit-making venture? Do you think the tax costs of these deductions are proportional to the amount of land being conserved?
Robert Ramsay: So, two very separate questions and two good questions, Kristen. The first answer that I have is no. Since the beginning of conservation easements, different advisors, attorneys, accountants, and otherwise have made "a profit" from advising or assisting landowners for putting their land into conservation. So I view what people who work to bring investors together to choose to donate an easement as having that same opportunity.
The second part of the question, I think is a little more interesting The code section 178 lays out a great deal of information and specifically articulates the types of land qualify for a conservation easement. It doesn't stipulate that there needs to be an associated cost or a certain threshold for the cost, but just that the land needs to have certain attributes in order to qualify.
The challenge that we have in this current circumstance, as we look at syndicated conservation easement transactions, is that as the IRS reports out to Congress on the activity of syndicated conservation easement transactions, rarely, if ever, are the total acres of land being shared with the public or with Congress.
You know, the other point here is that we're not talking about widgets that are manufactured and they all are identical. Each tract of land has unique qualities, characteristics, unique highest and best use values, which we may talk about later. And so it's awfully hard, from the statute as currently written, for folks to judge necessarily the value overall to the taxpayer -- the cost value proposition there. My suggestion would be that it is incredibly valuable to the general public. There are a number of state studies, which we've posted on our website, that actually go through and look at what the return on investment for the general public has been as it relates to both land conservation and specifically conservation easements. And what you'll see is from state to state to state is a wide disparity in terms of what that return on investment is. But you're talking about multiples of four to one, five to one, 10 or even 12 to one in certain states' studies. So there's an awful lot of value that's being generated to the public trust through conservation easements.
Lastly, I'll point out this fact. In the case of conservation easements, the landowner maintains the responsibility and the burden of the cost for maintaining that property. So it doesn't fall to the federal government and thus the taxpayers as is the case with public lands. So, from my perspective, from P4C's perspective, public lands, the acquisition of wonderful tracks of lands to expand state parks and national parks, you know, so on and so forth is really valuable and important. Conservation easements are really a critical tool to be coupled with that effort. So, it's hard to answer your question without, I guess, more specifics.
Kristen Parillo: P4C has strongly disagreed with the enforcement approach that the IRS has taken on this issue. Can you explain more what P4C's disagreement is and where it stems from?
Robert Ramsay: Obviously, the IRS has decided that they do not like syndicated conservation easement transactions. That doesn't mean that they are illegal, however. What we found is that the IRS from the very top -- and in other quotes we see from others that are concerned about this issue -- is that the concern lies very squarely at that valuation point. Are the valuations justifiable? Are they fair? Are they accurate?
However, what we see the IRS doing, rather than addressing valuation, rather than issuing guidance for conservation easements, which has been requested now for decades, they take an audit-and-litigate approach. And during the litigation, again, rather than focusing on the valuation question, they attack -- we would term as foot faults. We didn't fill out a particular IRS form exactly to the T. We failed to report a number. Rather than allow for substantial compliance and have that corrected, the IRS wants to disallow a conservation easement based on that. Moreover, what the IRS is doing is offering regulation on areas of the tax code where they've never offered guidance to taxpayers. So for 40 years now, people have worked, done their best to adhere to the statute in the absence of really great and robust guidance from the IRS. And so today, to see regulations being issued that result in sort of a "gotcha tactic" in Tax Court is very frustrating to taxpayers, certainly to our members.
And I think as a cautionary tale to taxpayers everywhere, if the IRS decides that they don't like what you're doing, regardless of whether it's legal or not, they may choose to come after you in just about any way that they can possibly imagine. We'd love to have the conversation around valuation. If there is a concern from the IRS or Congress that the U.S. government can't afford this, well, that's an entirely different conversation than the one that seems to be taking place right now. If certain people, or the IRS, or others are not happy with some of the conservation outcomes broadly in the conservation easement community, well let's address those conservation purposes. You know, this is a statute that though it has been reauthorized and the incentives, those tax deductions that were put in place by Congress to encourage people to choose this, have been reauthorized, made permanent, and even enhanced in recent years, the underpinning of the statute is more than 40 years old.
And we certainly know that our landscape of our country has changed rather dramatically. So it is rather frustrating from our members' perspective to do a tremendous amount of work -- due diligence. Again, in the absence of guidance from the IRS, spend lots and lots of money on attorneys to help comply with the law only to have sort of the rug yanked out from under you after the fact. That's a pretty frustrating circumstance to find oneself in.
Kristen Parillo: So it occurred to me while you were talking that there's a similar issue going on in cryptocurrency where the IRS hadn't released any guidance since 2014. And taxpayers were frustrated. Representatives were urging IRS and Treasury to put more guidance out there. So finally this past March, the IRS hosted a forum with stakeholders from the industry all in one room and each side said what they need from the IRS.
The IRS didn't really respond much. They just basically listened, but everyone seemed to agree after that this was a really good exercise. So I'm wondering if maybe that's something that can be done for the conservation easement issue? I mean, if that's something that might bring the temperature down and get a dialogue started?
Robert Ramsay: Kristen, I couldn't agree more that that would be a wonderful idea. And in fact, it's something that we've been asking for for quite some time. I do think that there are real pragmatic solutions to the challenges that have been presented or the issues that have been presented as it relates to valuation. And we would embrace that opportunity and show up to the meeting early and stay late.
Kristen Parillo: You recently wrote a piece in Tax Notes about the dirty dozen myths about syndicated partnerships. What are some of those myths and what prompted you to write that piece?
Robert Ramsay: Sure. What prompted me to write the article were some of the experiences that our members were sharing with me. Some of the things that I was reading in the press and some of what we saw or have seen in some of the Tax Court cases. And so it seemed to me that it was really important to sort of offer that perspective and try to answer some of those. Because when one is under an audit, it's a relatively scary endeavor. And an example of one of the myths is the conservation easement must protect significant natural habitat. Well, I've heard from members and actually field agents from the IRS, ask the question, your baseline documentation report -- which is the report that's a snapshot of what's on the land, the condition of the land at the time of the donation -- doesn't indicate that there are any threatened or endangered species. How can there be conservation values?
That's not at all what the statute says. So really it was an attempt to maybe pull the blinders back on some of the conversations that I was hearing and also put forward really a clear delineation on each of those points. And the points range from obviously conservation values, as I mentioned there, that transactions identified by the IRS and listing notice like conservation easements become illegal after the IRS identifies the transactions. We've heard that one. Well, of course listing doesn't do that. It does require additional disclosure from taxpayers to the IRS. Myth 12: the IRS's attacks are intended only to stop syndicated conservation easements. Gosh, that may be their intent. But when we look at the Tax Court cases and even some of the appeals decisions that are being handed down, they're not limited to syndicated conservation easement transactions.
In fact, one of the cases recently having to do with the proceeds clause. That language came from what had been considered really the standard bearer for easement language. And the IRS's subsequent regulations again, yank the rug out from under people's feet. So that's why it was important. Those are some of the examples. I'm certainly happy to talk more about any of those.
Kristen Parillo: Your piece ran a couple of weeks ago, and we've gotten some letters to the editor criticizing what you wrote. We'll be running those later this month. Did you expect that criticism? What would you say to your critics?
Robert Ramsay: Of course I did. This is a relatively hot topic in a sort of relatively small area of the tax code. But those people who are practitioners in the space really do fall out on one side or the other of this issue. So of course I expected the criticism.
What I say to our critics is, and you touched on it earlier, let's bring the temperature down. Let's help the IRS get back to a place to where they're focused on substantial compliance, not technical foot faults, not offering, or sort of making up interpretations of the law and then offering regulations before there's ever been any guidance on that particular aspect of the code. Let's have an earnest conversation about the appraisal valuation question and let's work to eliminate those instances of abuse.
P4C is not saying that there's no abuse. It's the tax code for God's sake. Every section of the tax code, there's going to be some limited abuse, but let's fix what the critics say the problem is rather than attack an entire class of land ownership. And when I say class, what I mean is the one legislative solution that's been put forward, basically treats two unrelated individuals or more who choose to own a piece of property together very, very differently if they want to donate a conservation easement, than it would an individual or a family, for example. And I don't think that's what Congress intended when they passed the statute so many years ago.
There are solutions to this problem. And there are pragmatic solutions that aren't as overreaching. And that's really where I think the focus needs to be. Both the taxpayer advocate and Judge Holmes in his dissent of the Oakbrook case recently really did encourage or urge the IRS to issue that guidance, including sample deed language. Judge Holmes went further and basically indicated that so much of this wouldn't be going on, had guidance been issued at any time in the past. So, I do believe that guidance from the IRS is something that everyone in the conservation easement community is thirsty for. So, possibly there's enough common ground there to start that conversation that you suggested, Kristen.
Kristen Parillo: Now, you mentioned that legislation -- it's Senate Bill 170, and I know there's a companion bill in the House -- that would limit the size of the deduction that can be taken by syndicated partnerships. Why does P4C oppose that legislation?
Robert Ramsay: Well, what it really does is, in a manner of speaking, limits the potential value that can be claimed for the deduction, regardless of what an appraisal says. So that's a massive sea change from where we are today. If it's about limiting deductions, then A) it needs to apply to everyone and B) there are numerous other ways to approach that in the tax code. Limitation of the deduction based on a certain AGI, for example.
So, at the end of the day, the two and a half to one was not some magic number that was pulled out of the air. If you do the math based on at least the old income tax rates, what you find is that at a ratio of two and a half to one and a holding period of three years, you have artificially limited the partners' deduction to just about a dollar. A dollar in, a dollar out. And of course that's not what the value of the donation should be predicated on under the current statute. So we do have a significant problem with that.
Moreover, when you look at the landscape, or when you look across the United States, there's no two parcels of land that are identical to each other. And valuations fluctuate wildly depending on economic cycles and where in the country, you are. Obviously, Napa Valley, California, exceedingly high land evaluations. Rural South Georgia, they're going to be lower because you're talking about either timber land or agricultural land. So again, if it's about appraisals and valuations, why not take a real serious, real earnest look at how to limit that chance for abuse because it's not limited to partnerships. And the partnerships, other than having unrelated individuals buying interest in a partnership, the process for donating the easement is really almost identical.
So, we're for finding the right reforms, but what's been proposed is punitive for only one group of landowners. And the truth of the matter is we're not the only people that are opposed to this. The real kicker in the Senate bill that you mentioned is that it changes the tax law retroactively all the way back to 2016. So, that's fraught with all sorts of problems with different people in Washington, D.C. and beyond.
Kristen Parillo: There were two big court opinions issued recently in conservation easement cases. One was the Tax Court decision in, I think you mentioned it, Oakbrook Land Holdings, which was a win for the IRS. And then the very next day, the Eleventh Circuit in the Champions case vacated the Tax Court decision and handed the partnership a win in that case. What are your takeaways from those cases?
Robert Ramsay: Well, in the Champions case, it addressed one of the myths that we actually spoke about earlier very directly. The Eleventh Circuit came back and said a landscape that has been changed can still be in its relatively natural state. It can still harbor wildlife, plants, so on and so forth. And so that was demonstrated in the case.
The other part of Champions that we've found to be really fascinating was in the factual description issued by the Eleventh Circuit in their decision. They went on to say Champions was able to steer corresponding tax benefits to persons, who in anticipation of that benefit, made capital contributions, thus shoring up Champions' financial position. At least from the Eleventh Circuit's perspective, someone choosing to enter into a partnership with the expectation that they may receive a tax deduction because of a conservation easement, it's totally fine. And we've certainly heard others argue against that. So, at least two really important points we find in Champions.
In the Oakbrook case, again, that case in my mind relates to some of the frustration that we have with the IRS. These syndicated conservation easements are abusive because of evaluation or appraisal abuse. And yet here a deduction is completely disallowed because of a proceeds clause. Language in the proceeds clause was not consistent with the IRS's regulation. Rather than allow the easement to be amended, the deduction is disallowed. Well, Judge Holmes wrote a pretty scathing dissent. Again, arguing that his colleagues on the bench got it wrong. And he articulates his reasons why, and also imploring in essence, the IRS to issue guidance. Because that proceeds clause language exists in hundreds upon hundreds, if not thousands of easements around the country. And easements donated by individuals, syndicated conservation, easement transactions, the like.
Kristen Parillo: So in closing, what else do you think the tax community needs to know about syndicated partnerships and conservation easements? Where do you think we go from here?
Robert Ramsay: The truth of the matter is this: The environment in our country, on the globe, is a greater priority than it ever has been for a larger number of humans than it ever has been. In our country today, we still lose hundreds upon hundreds of thousands of acres of land to development each day. The American Farmland Trust, I was interested to see, they recently issued a report about threatened farmland. The number one threat for farmland, at least in the Southeast, is low-density residential development. So that land's converted from food producing farmland to low-density residential development. Conservation easements are used oftentimes to protect working farms and working forests.
Climate change is of critical importance. And nature's ability to sequester carbon is ensured when land is put into permanent protection, whether that's by state or federal government or conservation easements. We absolutely understand that people have issues with the way that these are being done. We understand because it's stated time and time again, that it revolves around valuation and appraisals. And we really do think that there are pragmatic, meaningful solutions to address that issue without, again, throwing the baby out with the bath water, as we like to say.
And then finally, if you're an American taxpayer and you have followed the law, but it is a part of the law that the IRS doesn't necessarily like, then I think you should take notice. Because if they can disallow a deduction based on a technical foot fault or again, based on regulations that are promulgated and having never issued any guidance over a 50-year history, then it's pretty clear that when folks at the IRS latch onto an idea they're willing to do just about anything to get what they consider to be the win. And that scares me as an American citizen, for sure.
Kristen Parillo: Well, thanks for talking with us, Robert. Quite an interesting issue, and I'm sure we will keep hearing more about it.
Robert Ramsay: I am sure that you are right, Kristen. And again, I really appreciate the opportunity. Thanks for the questions. And certainly thanks for the conversation.
David Stewart: And now coming attractions. Each week, we highlight new and interesting commentary from our magazines. Joining me now from her home is Content and Acquisitions Manager Faye McCray. Faye, what will you have for us?
Faye McCray: Thank you, Dave. In Tax Notes Federal, Francois Chadwick proposes a framework for developing administrable OECD pillar 1 rules that promote a consensus solution by addressing the risk of uncertainty for taxpayers. Charlotte Crane questions the rationale supplied in Notice 2020-32, which denies deductions for expenditures that taxpayers make out of proceeds from Paycheck Protection Program loans. In Tax Notes State, Martin Eisenstein, Jamie Szal, and Michael Carey consider two thorny state income tax issues for providers of AI. On the Opinions page, Nana Ama Sarfo looks at how some emergency tax responses to the COVID-19 pandemic could have long-lasting benefits. And now for a closer look at what's new and noteworthy in our magazines, here is Tax Notes Executive Editor for Commentary Jasper Smith.
Jasper Smith: Thanks, Faye. I'm here with Larissa Neumann with Fenwick & West LLP to discuss her recently published article in Tax Notes International on developments in international tax. Larissa is joining us by phone. Welcome, Larissa.
Larissa Neumann: Thank you.
Jasper Smith: So, some of our readers may recognize that you contribute to a regular column for Tax Notes International. Can you give us a quick overview of that column and how you got involved?
Larissa Neumann: The column has a long history. Jim Fuller has been writing this column every month for over 30 years. A few years ago, Jim invited me to be a coauthor. Our column comes out the beginning of each month and it covers recent U.S. international tax developments, including statutory changes, new regulations, IRS guidance, cases, and rulings. It also covers important foreign tax developments that can affect U.S. multinationals. The idea for the column is that it covers everything that you need to know about what happened in international tax in the previous month.
Jasper Smith: And as we mentioned at the outset, we're excited to hear more about this month's installment. So can you tell us a little bit about that?
Larissa Neumann: Yeah. This month we're covering the IRS's new transfer pricing FAQ guidance, which has some very helpful insights about best practices and common mistakes. Strong transfer pricing documentation can decrease your chance of audit selection. And then even if you are selected, it can speed up the resolution process. So as we discussed in our column, transfer pricing documentation, it should tell a story about the company and about the industry. And it should be easy to read and understand. You're not going to win points with the IRS by making it more complex than is necessary.
This month, we also cover the final debt equity 385 regulations; two foreign tax credit process units, one on currency translation and the other on substantiation. And we also cover case law developments, including the government's brief in opposition to the Supreme Court review of the Ninth Circuit decision in Altera. In their brief, the government tries to dissuade writ by labeling the issue a factual disagreement, which it's not. They assert that Altera conflates the arm's length standard with a comparability analysis. The government asserts that it has not abandoned the arm's length standard and that the cost sharing regulations implement the statutory commensurate with income provision to produce an arm's length result without the use of comparable. This is a multibillion dollar issue impacting many companies and could fundamentally change the legal operation of the arm's length standard in all transfer pricing, not just cost sharing.
Jasper Smith: Well, it sounds like as usual, there is a lot going on in international tax and I'm sure our audience is looking forward to reading your analysis in the article. Can you tell us how they can contact you if they want to reach out directly?
Larissa Neumann: The best place to find me is our law firm website, which is fenwick.com. I'm also on LinkedIn. And my email is L, as in Larissa, LNeumann, N-E-U-M-A-N-N, @fenwick.com.
Jasper Smith: Well, you can read Larissa's article online at taxnotes.com. And be sure to subscribe to our Tax Analysts YouTube channel for what's new and noteworthy in Tax Notes. That's Tax Analysts with an s at the end. Back to you, Dave.
David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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