On September 10, the Large Business and International Division (LB&I) of the IRS announced five additional compliance campaigns. Initially announced in January 2017, LB&I’s Compliance Campaigns are designed as an issue-based approach to address areas of tax that the Service has identified as having a high risk of compliance issues. Among the items listed in this newest rounds of campaigns, taxpayers will find Syndicated Conservation Easements. All in all, the Service has currently identified 45 areas of enforcement.
A conservation easement is a donation to certain tax-exempt and government organizations of a right in real property, made by a taxpayer for a conservation purpose. When established correctly and for proper purposes, a conservation easement allows a taxpayer to take a deduction for donating an easement on real property to a qualified organization, while continuing to own and enjoy the property.
However, not all conservation easements are created equal. The IRS has been increasingly interested in conservation easements and taxpayers must be careful to meet the many requirements. Taxpayers must ensure their conservation purpose when donating an easement. Common pitfalls include, but are not limited to: failing to meet substantiation rules, relying on less than perfect appraisals, making a donation without a charitable purpose, and failing to report the sale of state tax credits.
Syndicated conservation easements are transactions in which syndicators establish a pass-through entity, or a series of pass-through entities, in which taxpayers can invest. These entities purchase, or have already purchased undeveloped real property. The syndicators commission an appraisal, which will value the land before and after placement of a conservation easement. The entity donates a conservation easement to a tax-exempt organization, passing along the deduction to the taxpayers who invested in the venture and have the property appraised. These deductions are sometimes worth more than 2.5 times the taxpayer’s investments. This is because the appraisals often grossly overstate the land’s value based on the potential for development.
These syndicated conservation easements were made a listed transaction by Notice 2017-10. However, their inclusion in LB&I’s compliance campaigns highlights the Service’s continued interest in this area. This is not to say that all conservation easements are per se abusive, but this Notice and the subsequent LB&I campaign highlights the Service’s focus when it comes to syndications.
Taxpayers considering conservation easements must exercise due diligence. Taxpayers entering into an easement that is determined to be an abusive tax shelter will be subject to stiff penalties. Taxpayers failing to meet the required formalities for their easement—including appraisal requirements—may have their deduction denied, or even worse, be subject to harsh penalties. If you have questions regarding conservation easements or other complex tax issues, please contact Steven Miller, alliantgroup, LP’s National Director of Tax, at Steven.Miller@alliantgroup.com.