It is no secret that the IRS has been actively looking at syndicated conservation easements in recent years. While a number of courts have issued opinions regarding the requirements for a valid conservation easement, there is little to date regarding the validity of syndicated easement deals. However, with Notice 2017-10, the IRS made certain syndicated conservation easement deals “listed transactions,” and announced that it was concerned over the manner in which these syndications worked and were marketed.
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. As evidenced by both the Notice and House and Senate Bills, the government is skeptical of transactions in which a taxpayer quickly receives a charitable contribution deduction that equals or exceeds two and a half times its investment.
While a large deduction to investment ratio is not conclusive evidence of a lack of charitable purpose or a problem with valuation, taxpayers must ensure they are complying with all requirements under case law and the regulations. Due to the complexity of case law and the existing Treasury and IRS guidance, common pitfalls include, but are not limited to: failing to meet substantiation rules, providing inadequate documentation, missing certain timelines or relying on less than perfect appraisals, violating the requirement for permanence in the donation or making a donation without a charitable purpose.
Syndicated Conservation Easement Compliance
As we indicated previously, in 2018, the Large Business and International Division of the IRS announced syndicated conservation easements as one of its new compliance campaigns. Most recently, and presumably at the request of the IRS, the Department of Justice went a step further in December 2018 and filed a request for issuance of an injunction against certain syndicators and an appraiser of conservation easements. Capitol Hill has been active as well. Identical Bills have been introduced in both the House and Senate —the Charitable Conservation Easement Program Integrity Act of 2019 (“Act”). This would limit deductions for qualified conservation contributions to two and a half times the partner’s adjusted basis in the partnership (very similar to the level of charitable deduction that triggers reporting under 2017-10). The Joint Committee on Tax estimated that this Bill would generate nearly $7 billion in additional revenue for the government, meaning there are big dollars at issue when it comes to syndicated easements.
So what’s next for syndicated conservation easement deals? Regardless of whether anything passes in Congress, it seems the IRS will continue auditing transactions from prior years. Due to the government’s heightened scrutiny, any errors, even as to mere formalities, could lead to adverse consequences. This includes not only syndicated deals, but potentially all conservation easements. Taxpayers failing to meet legal requirements 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, National Director of Tax.