Friday, October 1, 2021
Weekly SSRN Tax Article Review And Roundup: Roberts Reviews Building Better Conservation Easements
This week, Tracey Roberts (Cumberland; Google Scholar) reviews a new work by K. King Burnett, John D. Leshy (UC-Hastings), and Nancy A. McLaughlin (Utah), Building Better Conservation Easements for America the Beautiful, 45 Harv. Envtl. L. Rev. Online ___ (2021).
In May, the Biden Administration released a report developed by the Departments of Commerce, Interior, and Agriculture, and the Council on Environmental Quality, “Conserving and Restoring America the Beautiful,” which announced a new initiative to conserve 30 percent of the nation’s land and waters by 2030. Professors Arthur Middleton (UC Berkeley) and Justin Brashares (UC Berkeley), note in their New York Times op/ed, that additional lands twice the size of Texas will need to be conserved to achieve this goal. Given that more than half of U.S. forests and two-thirds of the species on the Endangered Species List have their primary habitat on private lands, they argue that conservation easements provide the key pathway to conservation at this scale.
Section 170(h) allows a deduction for the charitable contribution of a qualified conservation easement to a land trust or other qualifying organization. While the tax code and the Treasury Regulations contain detailed requirements that must be met before the easement becomes eligible for the Section 170 charitable deduction, numerous abuses have come to light over the past twenty years. Recent scandals include possible inflated valuations for the conservation easements for the Seven Springs estate owned by former President Trump in Bedminster, New Jersey and for the Trump National Golf Course on the Palos Verdes peninsula.
Conservation easement abuses have made the news for years, however. The Nature Conservancy was first enmeshed in scandal in the early- to mid-2000s when reporters with The Washington Post undertook a two-year investigation of the nonprofit and published a series of articles examining the conservancy's practices and finances. The conservancy had sold some of the raw land it owned at a discount to its trustees for development as homes. When the trustees subsequently transferred conservation easements to their properties to the conservancy, limiting further development, they enjoyed significant tax breaks. When the conservancy purchased environmentally sensitive lands on Martha's Vineyard, it immediately resold half of the land for the development to tech and finance tycoons (and, famously, David Letterman) to build resort-style vacation homes. Other concerning actions included permitting donors to change the terms of their easements to allow development, failing to monitor conservation easements that were subsequently developed, provding insider loans and deals, and drilling for oil on the breeding grounds of endangered species. The Washington Post articles spurred Senate Finance Committee Chairman Charles E. Grassley (R - Iowa) and ranking member Max Baucus (D – Montana) to ask for an accounting of the conservancy’s programs. In 2005, the committee issued a 200-page report with a 1,700 page appendix, detailing the organization’s problems. Nevertheless, the organization recovered from these initial scandals. As of last year, The Nature Conservancy enjoyed over $1.2 billion in revenue and other support and held over $7.87 billion in assets. While the recovery of their reputation was due, in part, to the assistance of lobbyists and marketing firms, they also changed several of their policies. After the initial scandals, the board of directors for The Nature Conservancy announced that "Moving forward, the Conservancy will continue to seek what Aldo Leopold, considered by many to be the father of the modern conservation movement, called `a state of harmony between man and nature.' And it will do so through work with a broad spectrum of partners, through experimentation and risk-taking and through strict adherence to its organizational values and best practices of nonprofit governance."
More egregious than these, however, are the abuses of syndicated conservation easements. Pro Publica’s expose, The Billion Dollar Loophole, delves into the details. Investors, seeking a tax shelter, provide a small amount of capital to syndicators to invest in lands for conservation. The syndicator purchases land, appraises the land for inflated and unsubstantiated values, and then sells it to an accommodating land trust. The tax deduction for the inflated price flows through to the investors. Professor McLaughlin has discussed syndication abuses more specifically in a separate article, Some Dirty Realities About Syndicated Conservation Easements, 167 Tax Notes 1729 (2020).
In their article, Burnett, Leshy and McLaughlin develop a plan to curtail these abuses by (i) limiting the availability of conservation easements to lands that actually have demonstrable conservation value (not golf courses), (ii) incorporating required language to uphold and protect those conservation values, including standardized terms, mandatory appraisal practices to protect against over-valuation, and protocols for monitoring and reporting violations, (iii) placing limits on post-donation modifications to conservation easements (to ensure that the land continues to be used for conservation purposes), (iv) reserving the deduction for donations to entities that have both the obligation and capacity to monitor and enforce the restrictions and conditions. They point to U.S. Department of Agriculture easement purchase programs for model terms and conditions to safeguard lands subject to conservation easements.
A broader story for the significance of conservation easements today relates to their connection with Environmental, Social and Corporate Governance (ESG) finance and investing. The European Commission has committed to address climate change and environmental degradation by devoting over $600 billion euro to finance the NextGenerationEU Recovery Plan and employing the EU’s seven-year budget to finance the European Green Deal. To gain access to these funds, hedge funds, banks, and corporations seek to remake their images from fossil fuel stalwarts to ESG avatars. According to Bloomberg News, The Nature Conservancy has been using previously conserved land and natural resources as the source of carbon offsets sold to JP Morgan Chase, Disney, and BlackRock to offset their emissions from their fossil fuel-laden activities. By preserving timberlands and forests under threat of harvesting and development, carbon remains sequestered rather than emitted; carbon credits or carbon offsets monetize these efforts. The problem with issuing credits for sequestration on lands that are already restricted is that there are no net emissions reductions. The trees were never subject to being cut because the land on which they grow has been set aside and preserved under previously existing conservation easements. Therefore, the carbon credits don’t actually represent additional environmental improvements. Nevertheless, BlackRock and JP Morgan Chase have claimed that their carbon credits offset emissions from their projects, making their projects eligible for special green subsidies and green financing vehicles. A portion of the funds JP Morgan Chase and BlackRock pay to The Nature Conservancy for carbon offsets are transferred to the owners of the underlying land. Aldo Leopold must be rolling over in his grave. And the one percent are making money coming and going.
Under the broad strokes of the America the Beautiful initiative, the federal government would take the role of providing support and science-based guidance to support local conservation efforts by tribes and state and local governments as well as environmental stewardship by private landowners. Tribal leaders have acknowledged the plan as an "opportunity to safeguard the environment, tribal cultural values, strengthen the Nation-to-Nation relationship, and uphold tribal sovereignty and self-determination." The plan is also bolstered by a recent survey by Robert Bonnie, Emily Pechar Diamond, and Elizabeth Rowe with the Nicholas Institute at Duke University that clarifies that rural landowners and voters prefer policies overseen by state and local governments that encourage local collaboration with communities. In addition to situating the rural / suburban divide on the environment in a distrust for the federal government, Duke University Nicholas Institute study found that rural voters respond to messages about environmental policies that emphasize moral responsibility and taking action on behalf of future generations. Congress and the Department of Treasury should take seriously their own moral responsibility and Build a Better Conservation Easement program as Burnett, Leshy and McLaughlin have advised.
Here’s the rest of this week’s SSRN Tax Roundup:
- Abiola Adebanjo, Unending VAT War under Nigeria’s Federal Constitution: Exploring the Contours of Nigeria’s Fiscal Federalism and Sociology (Oct. 1, 2021)
- T. J. Atwood (Arkansas) and Tyler Johnson (Arkansas), U.S. Multinational Corporations’ Initial Income-Shifting Response to the TCJA (Sept. 28, 2021)
- Mark J. Cowan (Boise State), Joshua Cutler (Boise State), and Ryan J. Baxter (Boise State), Strategic Surrogates or Sad Sinners: U.S. Taxation of Bartering in Digital Services, 58 American Business Law Journal (forthcoming Winter 2021)
- Wei Cui (British Columbia) and Mengying Wei (UIBE), Registered Capital and Firm Entry (Oct. 1, 2021)
- Stephen Curtis, Apple's Cost Sharing Arrangement: Frankenstein's Monster, 172 Tax Notes Federal 1217 (Aug. 23, 2021)
- Mathias Dunker (Cologne), Max Pflitsch (Cologne), and Michael Overesch (Cologne), The Effects of the U.S. Tax Reform on Investments in Low-Tax Jurisdictions – Evidence from Cross-Border M&As (Sept. 28, 2021)
- Fabio B. Gaertner (Wisconsin), Brent Glover (Carnegie Mellon), and Oliver Levine (Wisconsin), A Re-examination of Firm Size and Taxes (Sept. 24, 2021)
- Johan David Michels (Queen Mary, London), Sharon Hartung, and Christopher Millard (Queen Mary, London), Digital Assets: A Call To Action, Working Paper Series (Sept. 24, 2021)
- Kim Oosterlinck (Université Libre de Bruxelles), Ugo Panizza (IHEID), Mark Weidemaier (UNC) and Mitu Gulati (Duke), The Odious Haitian Independence Debt, CEPR Discussion Paper No. DP16413 (Sept. 27, 2021)
- Regina Ortmann (Paderborn), Dirk Simons (Mannheim), and Dennis Voeller (Mannheim), Real Effects of an international tax reform for MNEs, TRR 266 Accounting for Transparency Working Paper Series No. 64 (Sept. 28, 2021)
- Kondandaraman Sethuraman (Indian Law Institute New Delhi), "Just" Social Order, GST Law and the Jurisdiction of the Courts (Oct. 1, 2021)
- Theodore P. Seto (Loyola - Los Angeles), Modeling the Welfare Effects of Advertising: Preference-Shifting Deadweight Loss, 75 Tax Law Review (forthcoming 2022)
- Saad Siddiqui, Ally Zimmerman (Florida State), Miguel Minutti-Meza (Miami) and Andrew M. Bauer (Waterloo), Do tax experts play a monitoring role in audit engagements? (Oct. 1, 2021)
- Wei Wang (Guangxi Normal), Hua Wang (Zhongnan), and Ji (George) Wu (Massey), Mixed Ownership Reform and Corporate Tax Avoidance: Evidence of Chinese Listed Firms, 69 Pacific-Basin Finance Journal (forthcoming 2021)
- Kellen Yent, Applying Blockchain Technology to Cross-Border Tax Reporting, University College London Centre for Blockchain Technologies, Discussion Papers, No 4. Q3 2020 (Sept. 26, 2021)
- Kellen Yent, A Response to "A New Corporate Tax," (May 10, 2021)