Investors in Many Syndicated Conservation Easement Deals Must Notify the IRS
The IRS has designated certain syndicated conservation easement transactions as “listed transactions.” This will require taxpayers who have invested in such transactions to file a notice with the IRS. It will also result in reporting and list maintenance obligations for professionals (law firms, accountants, appraisers, etc.) who provided material advice on such transactions. If the required notice is not provided, severe penalties will be imposed.
Conservation easements, a tax planning technique that has gained popularity with real estate developers, have been under IRS scrutiny for over a decade. Syndicated conservation easements are those offered to prospective investors in a partnership or other pass-through entity that purport to give investors the opportunity to obtain a charitable contribution deduction for donation of the easement. The IRS just increased the heat by classifying these syndicated conservation easement deals as listed transactions. The notice required to be given to the IRS by law may result in a close examination of the reported deals; consequently, taxpayers considering going into a syndicated conservation easement transaction should be extremely cautious.
The tax code allows a charitable contribution deduction for the donation of a qualified conservation contribution (QCC) if several conditions are satisfied. A QCC can either be for an open space conservation easement or a facade easement for a certified historic structure. With an open space easement, the donor puts a perpetual deed restriction on the property which limits development. With a façade easement, alteration of the exterior is restricted. The amount of the charitable deduction that may be claimed is based on the reduction in value to the real property as a result of the development restriction, which must be documented by a qualified appraisal. The IRS claims in many syndicated conservation easement transactions that the value of the affected real property prior to the recording of the development restriction is greatly overstated, thereby artificially increasing the value of the charitable contribution. The IRS has successfully challenged the over-valuation of many QCC’s, and designating these deals as listed transactions will allow the Service to easily identify these transactions for a closer look and likely denial of the deduction.
IRS Notice 2017-10 which was released on Dec. 23, 2016, says that a conservation easement is a listed transaction where: (1) the investor receives promotional materials describing the transaction; and, (2) the amount of the charitable deduction claimed to be available to the investor is 2.5 times greater than the amount invested. The IRS Notice says that taxpayers who have invested in such a listed transaction on or after Jan. 1, 2010, must disclose the investment for tax years that are open under the statute of limitations as of Dec. 23, 2016. For most taxpayers, this means that a disclosure will need to be made for deals entered into on or after Jan. 1, 2013; however, if the investor extended the statute of limitations for the 2010, 2011, or 2012 tax years, the notice requirements may still be required for deals entered into on or after Jan. 1, 2010.
The required notice of involvement in such transactions is filed on IRS Form 8886.
In addition, Notice 2017-10 says that advisors who provide material assistance with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out the easement transaction since 2010 also are required to report the transaction to the IRS and maintain a list of investors in the deal. A material advisor in a listed transaction must file IRS Form 8918 to comply with this notice requirement.