By Daniel Pessar (Harvard Law School ’20)[*]
The growth of certified organic farming is booming; approximately 26,000 United States producers and businesses are now certified as organic operations and thousands of international firms have been certified as well.
US Map of USDA-NOP Certified Organic Operations Located at https://organic.ams.usda.gov/Integrity/Reports/Reports.aspx (accessed 2/3/20)
The road to getting certified by the USDA National Organic Program can be challenging; requirements include “no prohibited substances applied to [the land] for at least 3 years before the harvest of an organic crop,” specific rules for managing “soil fertility and crop nutrients,” and the absence of “genetic engineering, ionizing radiation and sewage sludge.” The time, complexity, and tools required for the transition can also be costly, especially during the three years of implementation when the farm lacks the benefit of the USDA Organic label. Of course, the overall benefits can outweigh the costs as higher prices for food products compensate for the new cost structure. And there could be long-term benefits from the organic farming practices such as reduced soil erosion and increased soil fertility. But another benefit that could be available to farmers considering the switch to organic is a tax benefit obtained by donating a conservation easement.
Conservation easements are voluntary restrictions on the use or development of property that are entered into for a conservation purpose. For example, a landowner with a property that is home to endangered birds might agree not to subdivide the property for home development in order to protect the important ecosystems. Sometimes, a governmental or non governmental organization will pay the owner for that restriction (otherwise known as an easement) in order to promote a specific conservation cause. If the owner decides to donate the easement to the government or to a qualifying non profit organization, the federal tax code and regulations allow for a tax deduction according to the value of easement donated. If the landowner’s property was worth $100 before donating the easement and after donating the easement the property was worth only $70, the landowner could qualify for a tax deduction of $30, just as if there were a qualifying donation of $30 property to charity.
The IRS and the courts have rejected attempts by taxpayers to enjoy large deductions from conservation easements that do not follow the rules. Some taxpayers have obtained appraisals indicating that the subject property was worth $200 before the easement donation (rather than $100) in order to claim a $130 deduction; others have granted a property restriction that does not quite protect the conservation value—perhaps it allows the landowner to build a new home in or around a fragile ecosystem; yet others restrict their properties after the property is already subject to a restriction, whether the landowner entered into it voluntarily or not. An easement donor in Boston, for example, saw her deduction denied because her easement did not restrict much more than the limitations already in place by the South End Landmark Commission (Kaufman v. Commissioner, T.C. Memo. 2014-52).
Winning a tax deduction by subjecting property to restrictions that match the current or planned use of the property is certainly a windfall for the beneficiaries (and worrying for taxpayers and policy makers alike). Although legal limitations on the use of property—like in Kaufman—preclude taking a deduction for a conservation easement, there are still plenty of situations in which a taxpayer can get a tax deduction even though the restrictions placed on the property were going to be followed even without the easement. Organic farming is certainly a good example of this. A conventional farmer who decides to transition to organic will have three years of work to do before the products can be sold as “organic.” And assuming the relevant conservation easement rules can be met—such as substantiating that the donation will promote a qualifying conservation purpose—the farmer can obtain a tax deduction by restricting the land to organic farming methods in perpetuity, the same restrictions required under the organic farming rules introduced above.
[*]Daniel Pessar is a third-year student at Harvard Law School. Before law school, he worked in the real estate investment industry for six years. He is the author of three books and numerous articles. He can be contacted at dpessar@jd20.law.harvard.edu.