Written by Rick Buchanan
For those of you who have read Conservation Easements – the History, you know a brief history of conservation easements and should have a general feel of the background, number and scope of these programs. Now we will look into how the different aspects of easements are applied, how they are promoted and how the rules and regulations in place can be manipulated.
As we get started on this section, I think it important to realize that the conservation easement program does not generate revenue. The money expended on the program comes strictly from taxpayer generated revenues. There are some that say it saves money, but in all the reading I have done thus far on this issue I have yet to find any real data on this. What I have found is the listing of the following items that some easements may accomplish:
If you are fortunate enough to own a large tract of land (usually over 50 acres), you can derive monetary benefit from the programs listed below should you chose to forfeit certain rights in perpetuity. If you are like most people who do not own that large a parcel of land, you will still be footing the bill. It will be up to you to determine whether the benefits are worth the monetary contributions you are required to pay for them.
I simply state once again that anyone who has additional input into the information seen here is welcome to chime in. The effort here is to reveal the truth, as we always endeavor to do.
It does not take much reading on conservation easements to learn that money has driven the meteoric rise in the number and scope of conservation easements. Most citizens have no idea how much money is involved in the concept of what is known in legal terms as “negative servitude”. This legal description is derived from the requirement of the easement holder to prevent the donor (landowner) from certain actions on his own property.
Congress has authorized billions in years past to fund conservation programs and the expansion of conservation funding for use as a tax break has been growing for over five decades. What began in the 1960’s as an ill-defined federal program started to take formal shape in the 1980’s when the Treasury Department provided more clarity, listing various acceptable charitable purposes for the deduction and providing the appraisal rules for computing the amount of the deduction.
More recently, as part of the Pension Protection Act, President George W. Bush signed HR 4, which expanded the existing tax breaks dramatically for landowners. This bill nearly doubled the federal benefits for conservation easement “donors”, allowing them to deduct the value of their “gift” at the rate of 50% of their adjusted gross income (AGI) per year. Landowners who made 50% or more of their income from agriculture were able to deduct the donation at a rate of 100% of their AGI. Any amount of the donation remaining after the first year could be carried forward for fifteen additional years or until the amount of the deduction has been used up. This benefit has been renewed in similar fashion each year, ever since.
Note: More about the interesting dichotomy of conservation easements being in perpetuity while the tax breaks for them having a finite ending in our next segment.
In 2010 total federal funding for key conservation programs exceeded $1.7 billion. President Obama’s 2013 budget is requesting nearly $1.5 billion.
The Federal program is only part of the spending on easements. Here in Virginia, in the January 23rd, 2013 report from the Department of Conservation and Recreation, Director David Johnson explains the state’s contribution to the tax incentives associated with conservation easements. “As a result of legislative amendments enacted in 2006, effective January 1, 2007, the LPTC (Land Preservation Tax Credit) program was capped at $100 million per year, with donations (conservation easements) in excess of the annual cap to be rolled over to subsequent years. The amount of the tax credit cap is adjusted annually to the Consumer Price Index, increasing in 2008 to $102.3 million, in 2009 to $106.6 million, in 2010 to $106.8 million, and in 2011 the program was capped at $108.4 million. Additionally, the amount of value that can be registered for any conservation easement was limited to 40 percent of the fair market value of the qualified donation - reduced from the previously allowed 50 percent. These compromises represented a diminution in the state’s peak annual tax credit expenditures, which reached $155.9 million in tax year 2005 and $247.8 million in 2006, but still allow for an exemplary program that the state can budget for into the future.” Are you still with me?
Of course, when landowners have little income from which to gain tax benefits, another solution had to be found to get the land they own into conservation easements. The answer? Turn the tax breaks issued to these low-income, land rich owners into a commodity that can be sold on the open market to others in need of a tax break; those individuals with large incomes and without enough tax breaks to deflect their own tax bills. From the Virginia DCR site linked previously we find “Virginia allows an income tax credit for forty percent of the value of donated land or conservation easements. Taxpayers may use up to $100,000 per year for the year of sale and the ten subsequent tax years. Unused credits may be sold, allowing individuals with little or no
Virginia income tax burden to take advantage of this benefit.”
These tax credits are normally sold for around $.75 on the dollar, depending on the market. In fact, there is so much money involved in these transactions that there are businesses established just to assist owners in finding buyers for their tax credits. From Wikipedia we learn “The Virginia transferable credit program is by far the largest among the States in dollar value of property conserved. By the end of 2010, $2,512,000,000 of property value had been donated as easements in Virginia for which tax credit was claimed. The qualifying easements cover over 516,000 acres (2,090 km2) of Virginia landscape.”
I would ask the reader to pause here a moment to reflect on the magnitude of the loss of state revenues this convoluted scheme, along with the other conservation tax breaks, has created.
Then, here in Fauquier County, there is yet another program using taxpayer dollars to fund conservation donations. If you review the Fauquier County 2014 Budget, starting on page 8 you will see Conservation Easement Service District Fund. The total budget of $606,872.00 shown there represents the aggregate of our projected 2014 contributions of .6% of our assessed property value which you can see as a line item on your property tax form. This amount actually represents a 50% reduction to funding for the County’s prior Purchase of Development Rights (PDR) program. It should also be noted here that this amount represents almost three times the funds allocated in FY 2014 for the operating costs of Fauquier County’s Affordable Housing budget.
As you can well imagine, with all this money available and with the intricacies of nebulous rules and regulations, it is no wonder there were many who were looking to take advantage of the situation. Since the amount of the donation is defined, in almost all cases, by a very subjective appraisal of land, there have been many cases of fraud and abuse. Here is a sampling of the bigger cases where the tax advantages of conservation easements are applied by less than honest people.
From The Hook, you can read all about what some called an “appraisal racket”, netting the owners of Biscuit Run millions of dollars in The Flip That Flopped: “Virginia is one of about a dozen states that allow certain property owners to convert an appraisal into cash. It happens via a program called conservation tax credits. The bigger the appraisal, the bigger the value of the "gift" when property is sold or encumbered by a non-profit entity. This year, Virginia will issue about $107 million in such credits– paying people to give up the right to develop their land.” The Hook also posted The Big Chill which chronicles how “At Wintergreen, a company subsidiary found an appraiser willing to claim in 2008 that the 1,422-acre peak called Crawford's Knob was worth $11.5 million. Like the owners of Biscuit Run, Wintergreen turned that valuation into several million in cash. Also like Biscuit Run, the state later cried foul.”
Of course, Virginia is not alone. A tangled web of alleged fraud and deceit was on display in Idaho. In Pesky v. U.S., the Pesky’s are charged with conservation easement fraud by using the tax breaks in an easement with The Nature Conservancy to avoid paying taxes due. They are facing a 75% penalty.
The Director of the Colorado Division of Real Estate, called the subpoena slinging Erwin Toll, is “cracking down on crooked deals with a vengeance.” Also in Colorado, the Department of Revenue battling legislators and landowners puts appraisers in the middle of another huge controversy. Then in Ohio, the DOJ v. Jefferson & Lee Appraisals rounds out this very small sampling of a very large problem. At the center of almost all of these cases are the actions of appraisers and the owners that employ them, who obviously see the tax incentives of conservation easements as ripe for the taking.
When easements were first started, private money was utilized and the land was held by private citizens or groups or purchased directly by the government in deals that were open to public scrutiny. The chances of foul play were almost non-existent. Now, as government money has become more and more involved, so has the dark underside that comes along with big money given freely and government officials anxious to please constituents and big donors. It sure gives one pause when one considers where this may end.
In the next installment, we will look into the problems of an agreement into perpetuity, discuss if the benefits of easements are weighed heavily toward the rich, if easements are actually destroying farming and farm values, the long term effects on the shrinking supply of un-eased land and are the tax breaks involved with an easement actually the establishment of just another entitlement program.
Rick Buchanan | Fauquier Free Citizen