The IRS Is Trying to Take Away Any Hope of A Green Future
Conservation Easements and why we can’t let them end
Taxation as a power of the government is in no way a new concept, from its founding, it has always been known to Americans that the government has the power to tax its citizens in order to carry out the other duties thereof. Federalist 33. Hamilton understood that in order for the government to do its job for the people it would need money, and what better way to get it than to require taxes as necessary and proper? Fast-forward to the 1920s and we see the first form of the Internal Revenue Code that we know today, though quite different from the form we know, it provided the same basic principles of gross income versus taxable income found in the modern version.
The concept of taxable income is a tricky one to most people, even though it defines how much tax is owed by each taxpayer within the United States. The difference between what you make in income versus your taxable income lies in your deductions. Deductions are items that are subtracted from the taxpayer’s gross income (i.e. your salary), with the sum resulting in their taxable income, which is then used for purposes of determining their “tax bracket”. As the tax court has said before, “Taxpayers have the legal right to decrease taxes, or avoid them altogether, by means which the law permits. The question is whether what was done, apart from the tax motive, was the thing which the law intended.” Maxwell v. Comm’r Hi Life Products, Inc. v. Comm’r, 95 T.C. 107 (1990) (emphasis added).
“Tax deductions” are common in everyday discussions, yet few people truly understand what they are or how they operate. Tax deductions are considered matters of “legislative grace” and are allowed only to the extent that there is a clear provision for them within the tax code. Interstate Transit Lines v. Comm’r, 319 U.S. 590, 593 (1943); INDOPCO, Inc. v. C.I.R., 503 U.S. 79 (1992). There are many forms that deductions can take, with varying regulations regarding the manner in which they may be taken and who may use them. One deduction in particular is that of the charitable deduction enumerated in the tax code at section 170. Section 170 was first introduced in 1956 as a measure to incentivize the donation to medical research organizations. The list of what qualified as a qualified donee continued to grow, adding sections which defined qualified contributions as well.
One such addition in 1964 was a qualified conservation contribution. Under this provision of the Code, a taxpayer may donate their development interest in a piece of property to a qualified organization in perpetuity (read, forever and ever), resulting in a charitable deduction for the amount that the transferred right is valued at by a qualified appraiser. This provision was wildly celebrated as a dream come true for conservation activists across the country, as well as landowners who needed to reduce their taxable income.
This deduction allowance in the Code has done well over the decades, preserving millions of acres of land for habitats to flourish and preserving lands for the scenic enjoyment of the public, as can be seen in this graph provided by the National Conservation Easement Database (NCED):
One noticeable aspect of the graph, though, is the sharp decline in recent years, going from 215,867 acres preserved in 2016 to 3,347 acres in 2017 as reported by the NCED. This sharp decline is likely attributable to the scare tactics imposed in recent years by the IRS to ward off taxpayers from limiting their tax liability using valid law they happen to not like.
In late 2016, the IRS released Notice 2017–10, which notified the public that transactions of this sort would be considered “Listed Transactions” by the Service, alongside abusive schemes like the once popular “Son of Boss” tactic that took advantage of the silence of the Code, the antithesis of what easements are — a strict following of an enumerated deduction alongside established tax principles. The Notice has led to an onslaught of litigation from the IRS’s predatory auditing practices around this issue.
So why do we allow them to take such an aggressive position? The basic tenant that the tax court abides by in this hot area of tax law is the theory that “deductions are a matter of legislative grace” citing INDOPCO. The issue has yet to be truly litigated, though. You see, this piece of the opinion, while accurate, needs to be distinguished in a few ways.
First, INDOPCO was a case where the parties were arguing whether a business had to depreciate an expense or whether they could take the whole amount as a deduction. The question wasn’t whether the taxpayer could take the deduction but when. This seems to fly in the face of the position this quote is used for in the easement context where the IRS takes the position that no deduction should even be allowed. Clearly in the case of distinguishing between depreciating an expense versus deducting an entire amount, the Court would have to note in its dicta that the ability to take the full amount is legislative grace. Notably, the IRS seems to forget about the beginning of the sentence that this theory hangs its hat on which states, “In exploring the relationship between deductions and capital expenditures, this Court has noted the ‘familiar rule’ that ‘an income tax deduction is a matter of legislative grace. . .’.”
Second, there seems to be a disregard for the rest of this very same paragraph in the fight for conservation deductions. This section states as the ultimate conclusion that,
“For these reasons, deductions are strictly construed and allowed only ‘as there is a clear provision therefor.’” INDOPCO at 84 (citing New Colonial Ice Co. v. Helvering, 292 U.S. at 440; Deputy v. Du Pont, 308 U.S. at 493).
So, one would think that this would be an easy issue to litigate, right? The Supreme Court has stated multiple times that deductions are allowed if “there is a clear provision therefor.” Which would logically lead to a conclusion that the enumeration of the deduction in 26 USC § 170(h), as well as the step-by-step instructions regarding its implementation within the regulations, would be enough for taxpayers to be able to take advantage of these deductions in peace. However, as we can see by the aggressive positions taken in disallowances by the IRS this is not the case.
This then begs the question of why? Why is this enumeration of the deduction allowance not enough for the IRS? The answer could lie in the basic tenets of the Service itself. Its job and its function for the country is to collect the taxes levied by the legislative branch, as its duty of the Executive’s executory authority. This would follow then that the IRS would dislike when individuals are given a grand opportunity to avoid the collection efforts — even in part — of the IRS. Fundamentally, the avoidance of the payment of taxes plays against the IRS’s duty of collecting them.
However, this is not reason enough to overtly overrule legislative process. The duty of the executive is to enforce the legislation that is in effect, while the judiciary interprets the law. This is the basic system of checks and balances that our country holds so dear. Issues arise, though, when branches overreach. In the case of conservation easements, the regulatory powers being exercised by the IRS and the way it is using these regulations it creates seems like quite the leap for what is supposed to be no more than the acting body for what the legislation intends. These actions by the IRS create and enforce the rules as they see fit, without public comment, and without the legislative process engrained into American society.
The founding fathers and the systems of America past had foresight enough to recognize that the branches needed to hold each other accountable. This is why the system we have today functions as it does. We simply cannot sit idly by while administrative agencies create and enforce their own policies on a whim. Furthermore, one of the only ways to make sure we accomplish this is through smart and efficient litigation. By taking these points to the courts, and actually litigating them, we have the ability to make these arguments before the ultimate judges (pun intended) of the conservation easements’ fates. But, on the other hand, if we continue to litigate these points that the IRS brings up, without touching on the ultimate issue, we will surely see the death of one of the most prolific pieces of conservation legislation that the legal system has to offer, as well as one of the most effective tax planning devices available to anyone.
As the Tax Court has said time and time again, “The question is whether what was done, apart from the tax motive, was the thing which the law intended. . .” and here, I do not see how it can be more clear that apart from the tax motive, land is being conserved all across this country, providing fresher air, scenic beauty, and preserving history. We can’t sit idly by as they take the most effective conservation tool we have.
