Companies Must Be Proactive on Conservation Easement Compliance

The Jan. 9 sentencing of real estate developer Jack Fisher for selling $1.4 billion in allegedly fraudulent charitable tax deductions has exposed potential abuses of conservation easements, or agreements that protect natural land resources in exchange for tax breaks. It also has triggered heightened scrutiny from the IRS.

While Fisher’s 25-year prison sentence sends a message of zero tolerance for tax fraud, questions linger on whether the collateral damage extends to legitimate conservation efforts and what lessons can be learned for future transactions.

Companies, investors, and others applying for green tax breaks can take several proactive steps to comply with the new conservation easement landscape.

Consider limitations on deductions made by pass-through entities. Experienced tax advisers and legal counsel specializing in conservation easements can guide you through the legalities, ensure compliance with Section 170(h) of the tax code and all relevant regulations and guidance, and minimize tax risks.

Section 170(h)(7), added by the SECURE 2.0 Act of 2022, includes a limitation on deductions for qualified conservation easement contributions by pass-through entities. Specifically, it provides for a restriction on deductions where the amount of a contribution exceeds 2.5 times the sum of each partner’s relevant basis in the partnership unless a specific exception applies.

These exceptions include certain contributions made outside of a three-year holding period, contributions made by certain family partnerships, and contributions to preserve certain certified historic structures. These rules apply to contributions made after Dec. 29, 2022. It is paramount to stay informed about any changes in IRS rules, regulations, or guidance regarding conservation easements.

Avoid conflicts of interests and obtain independent appraisals. Choose qualified appraisers with no conflicts of interest with the easement organization, seller, or potential investors.

Ensure they have an established reputation and track record; adhere to uniform standards of professional appraisal practice; use comparable properties with similar existing development restrictions (accounting for zoning limitations, public access rights, and other encumbrances imposed by the easement); and consider alternative valuation methods to provide a robust and defensible appraisal.

Don’t succumb to inflated valuations or pressure to accept unrealistic appraisals. In the Fisher case, appraisers directly employed by the easement organization and with ties to potential investors conducted the valuations, raising concerns about objectivity and fueling suspicions of inflated valuations.

The appraisals cherry-picked comparable properties and data that supported inflated valuations. They also failed to account for the zoning restrictions and other limitations imposed by the easement, significantly overestimating the potential for residential development on the property.

Due diligence is key. In addition to researching qualified and independent appraisers, research the easement organization thoroughly. Scrutinize their track record, financial stability, conservation expertise, and adherence to ethical practices. Look for organizations with a proven history of successful conservation projects and a commitment to transparency.

Maintain comprehensive records. This includes land surveys, appraisals, justifications of methodologies used, baseline studies, and detailed conservation plans. Document every step of the process and be prepared to present clear and comprehensive evidence to the IRS if necessary. Don’t backdate or manipulate any documents related to the transaction.

Ensure all appraisals are conducted and valuations finalized within the appropriate time frame. In Fisher, backdated documents included subscription agreements, engagement letters, payment documents, and other records such as appraisals, which were backdated to benefit investors, manipulating tax years and artificially inflating deductions.

The lessons learned from the Fisher case serve as a valuable roadmap for the future of conservation easements. They underscore the importance of understanding potential risks and implementing appropriate compliance strategies for safeguarding legitimate conservation easements.

The case is US v. Lewis, C.C.D. Ga., 21-cr-00231, sentencing 1/9/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sonya Jindal Tork is partner at Taft Law. She focuses on real estate, tax controversies and litigation, partnership tax, and charitable, estate, and asset protection planning.

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