Article Archives >> Lead Stories >> June 16-30, 2005

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Senate Finance Committee Focuses
Hearing on Conservation Easements
Grassley hopes to package reform bill
before Congress goes on summer recess

The Senate Finance committee held a full hearing on June 8 focusing on perceived abuses in charitable contribution deductions claimed for gifts of conservation easements.

Although most of the witnesses testified that conservation easements are an extremely cost-effective way to protect open space and preserve natural habitats, the Committee focused on perceived abuses, primarily excessive valuations.

A good portion of the hearing dealt with The Nature Conservancy, including discussion of a new 187-page report on possible abuses in its operations prepared by the Committee staff and testimony from Conservancy President Steven J. McCormick about its steps to improve administration of its program.

In addition, the Inspector General of the Department of Interior Earl E. Devaney outlined a failed proposal within the Interior Department to use a bargain sale purchase and gift of mineral rights that would have cost taxpayers extra millions of dollars in south Florida. (Copies of prepared testimony and the Committee report are available on the Committee website.)

Committee Chairman Chuck Grassley (R-IA) said he hoped to have a draft bill available before Congress goes on summer recess in August, but acknowledged that it might not be possible to move that quickly.

Steven Miller, commissioner of the tax-exempt and governmental entities division of the IRS, said the service is now conducting 240 audits of claimed easement contributions and is considering an additional 100. Although he said it was too early to draw reliable conclusions, they were seeing instances in which it appeared there was no public benefit from the gifts and no conservation purpose being served. (See Tax Matters below.) He said that appraisals assuming possible future development value of the properties have been “particularly problematic.”

Miller said that the Service is also looking at a number of recipient charities that may be regularly engaging in questionable transactions and promoters that are trying to profit from the easements.

Other witnesses also questioned the validity of appraisals and urged various reforms in the appraisal process. Burnet R. Maybank, III, director of the South Carolina Department of Revenue and author of two books on conservation easements, complained about large deductions for easements on existing golf courses and proposed several specific reforms.

YOU NEED TO KNOW

The problem of valuation has been a constant issue for the tax code, both for the for-profit provisions and the charitable deduction provisions, since the tax code was written. There is nothing new in this area. Taxpayers will always seek the best appraisal and evaluation from their point of view. It would be tragic to eliminate the program, which has been a major tool for protection of open space and natural lands in the country, because human nature is at work.

Senator Grassley seems upset that the complicated tax rules require highly technical tax calculations from highly paid professionals to assist potential donors in making decisions. But that goes on every day in every area in which the tax code impacts economic conduct.

One major advantage of the conservation easement program, from the standpoint of enforcement, is that every transaction is flagged for the IRS by submission of the Form 8283 claiming the deduction. The IRS can deny deductions and impose penalties on taxpayers who take excessive deductions. It can hold appraisers to account and to undermine their professional standing. The IRS could create an advisory panel on valuation, like it has for art donations, to help regularize the program. There are many ways to improve the administration of the program without substantial changes in the basic criteria.

The fact that the IRS is now looking closely at the claimed deductions should give contributors more pause in making excessive claims. As we have said about most of the perceived abuses that have fueled these Congressional hearings, enforcement creates fear, and fear promotes prevention. The IRS should be given the resources to enforce the laws that exist.

Article Archives >> Lead Stories >> June 16-30, 2005