Sept. 11 (UPI) -- An investigation by the Senate Finance Committee and a new law proposed in Congress aim to clean up the tax code for agreements with land trusts to protect that land for wildlife habitats, corridors and watersheds.
After about $20 billion in reported "abusive" tax-sheltering schemes uncovered by the IRS, private landowners still are being urged to enter so-called conservation easement agreements that come with federal tax deductions and some state tax benefits, too.
About 1 million acres of U.S. land a year is placed into a conservation land trust by private property owners, said Lori Faeth, government relations director of the Washington, D.C.-based Land Trust Alliance, an umbrella non-profit that represents more than 1,000 different land trusts.
A new study published by the Center for American Progress suggested that the United States set a goal to protect 30 percent of the remaining natural land by 2030 to avoid the worst effects of climate change and the extinction of wildlife species. Voluntary land trust gifts of private property are a "crucial part of meeting that goal," Faeth said.
About 56 million acres of land are cumulatively conserved under land trusts in the United States, about equal to the size of Minnesota, the organization said.
But in some areas of the country, a subculture of real estate tax shelter "abuses" has popped up that involves wildly inflating the valuation of parcels of land to be made into conservation easements.
"The aftermath of these bad actors is hitting the fan over the last couple of years and giving conservation easements a bad name," Faeth said.
The IRS in March 2019 listed syndicate conservation easements as among their dirty dozen tax schemes to avoid.
In December, the U.S. Department of Justice filed tax fraud charges in U.S. District Court for the Northern District of Georgia in Atlanta against five real estate and trust agents and a real estate appraiser accused of organizing, promoting and selling shares in at least 96 conservation easement investment syndicates.
According to the federal complaint, the group purchased vacant land in Alabama, Georgia, Indiana, Kentucky, North Carolina, South Carolina, Tennessee and Texas. More than 20 of the arrangements were in Georgia.
The scheme involved creating "pass-through" LLC corporations that then sold shares of the properties to investors based on highly inflated values for the land. Investors then filed conservation easement tax deductions "so that for each dollar invested the partner receives $4.25" in tax deductions," the suit said.
The IRS estimated that the schemes resulted in $2 billion in fraudulent federal tax deductions, the DOJ's complaint said.
Lawyers for the defendants have denied wrongdoing, according to documents filed in federal court.
Schemes in other states included tax credit fraud cases over a series of conservation easements sold in southeast Colorado. Around 2000, when the state began to offer tax credits (a one-to-one swap) for conservation easement losses, distressed farmland was improperly overvalued as being appropriate for gravel mining, said Colorado appraiser Kevin McCarty, who worked for six years with the IRS and state Department of Revenue to untangle some of the deals.
"It was the wild west. Everybody and his brother were doing appraisals and nobody was watching the hen house," McCarty said. "A lot of us didn't know what was going on. Even the Department of Revenue didn't know for a while."
Real estate investors were buying properties for $400 to $500 an acre and subdividing them into 40-acre tracts, sold to investors, McCarty said. When the properties were appraised at an inflated $20,000 per acre, "each of those investors would make a claim for charitable donations on federal taxes and then get an extra tax credit from the state," McCarty said.
A round of audits eventually began, and federal and state taxing bodies clawed back some of the deductions. Some state tax credits even had been sold to other investors, McCarty said.
Today, a new state land trust working group is charged with looking at potential reparations for past tax credit denials.
The Senate Finance Committee met in March to investigate complaints about conservation easement tax shelter fraud. Between 2010 and 2017, the IRS estimated that $20 billion in illegal tax deductions had been claimed by investors in syndicate conservation easement schemes. Data from the IRS showed that some investors were able to claim, on average, deductions valued at nine times the amount of their original investment.
"There are very legitimate purposes for the conservation easement provisions of the tax code," Sen. Chuck Grassley, R-Iowa and chairman of the committee, said in a statement. "But when a handful of individuals cook up a scheme to cash in at the expense of federal revenue and in violation of Congress's intent, something needs to change. There's no reason that the rest of the taxpaying American public should be left with such a raw deal."
The Land Trust Alliance supports proposed legislation in Congress to tighten the rules for conservation easement tax deductions. The Charitable Conservation Easement Program Integrity Act was introduced by Sen. Steve Daines, R-Montana, and is co-sponsored by five Democrats. The bill would limit the amounts eligible for tax deductions to 2 1/2 times a property investor's investment.
Deductions make deals work
When used correctly, the federal tax deductions make the deal work for landowners who want to enter into a conservation easement with a land trust, like Bill Gehring of Helena, Mont.
Gehring donated a portion of the easement on his 2,900-acre family ranch to the Prickly Pear Land Trust.
"I wanted to keep our ranch close to the same thing that it's always been," he told the Land Trust Alliance.
Working farm and ranch land trusts allow property owners and their descendants to continue to use the land for agricultural purposes while protecting it from being developed. Open space preserves natural habitats on large parcels like the Gehring ranch.
The arrangements can give owners who are "land rich and cash poor" a subsidy in exchange for putting land in conservation status in perpetuity, the alliance's Faeth said. Fifteen states grant state tax credits or have a special state grant program for reimbursing conservation easements.
In Gehring's case, a federal tax incentive will let him deduct 100 percent of his income going forward 15 years, until the amount of the deduction is reached.
"When you donate or partially donate a conservation easement on your land, you are losing a lot of value, so it's only fair to get compensated," Gehring said. "Most people don't do conservation easements for the money per se. But the tax relief is actually important. You just might not be able to do the deal at all without it."