IRS Notice: Conservation Easements for Charitable Giving

In Notice 2017-10, the Internal Revenue Service recently issued guidance on syndicated conservation easement transactions presumed to be used as tax shelters. This addition to the “listed transactions” under Section 1.6011-4(b)(2) requires both participants and material advisors involved in such transactions to report their activity to the IRS. Failure to report involvement in such a transaction, or to correct previously filed returns, will subject individuals to penalty under Section 6707.

Conservation easements provide a tax deduction aimed at furthering the public good. Most often, conservation easements involve historical, endangered, or otherwise valuable property. The property is contributed to a charitable organization, encumbered by a right or restriction in the form of an easement. The easement guarantees to maintain or change the current use of the land, so that it is properly conserved.  However, like many tax deductions, conservation easements are susceptible to abuse by individuals seeking to shelter large investments from taxation. The Notice pertains to using conservation easements through a pass-through entity to effectuate an improper charitable tax deduction.

Notice 2017-10 describes a transaction whereby a pass-through entity solicits prospective investors for a charitable tax deduction through a conservation easement. In such a transaction, the pass-through entity holds real property that is eligible for a conservation easement. The investors purchase direct or indirect interests in the pass-through entity. In turn, the pass-through entity contributes a conservation easement encumbering the property to a tax-exempt organization. This contribution entitles the pass-through entity to a charitable tax deduction, which it allocates to the taxpayer investors. The investors then claim a deduction on their federal tax returns. Notice 2017-10 requires investors as well as the pass-through entity, and any sub-tiers thereof, to report participation in such transaction.

Ordinarily, the donor of a qualified conservation easement is properly entitled to a tax deduction. The contribution is usually made through a deed executed in favor of the charitable organization, which grants the perpetual right to use the property for purposes other than its current use. The deduction for a gift of a conservation easement, or similar restriction, is the fair market value of the restriction at the time the gift is made. Due to the conservation restriction, this is typically calculated by the decrease in the property value. However, solicitation materials described in Notice 2017-10 offer investors a charitable deduction that equals or exceeds two and a half times the original amount invested.

Written by in: Tax Shelters

Charity’s Activities Don’t Compute

PLR 201047033 involved an organization that had qualified under 501(c)(3) to provide computer materials and computer training to the poor. Upon examination of the organization’s 990 and its principal’s 1040, the IRS learned that the principal had been running a commercial business and asking his clients to make their checks payable to the organization.  The principal commingled his personal funds with the organization’s funds in one bank account.  And most of the checks written from the account were for personal expenses.  So, the organization effectively became a ”tax shelter…to conceal his personal income.” The principal claimed that there was no impropriety; rather, he received bad advice and was confused on how to properly file his and the organization’s returns.  (more…)


Charities and Life Insurance – A Growing Trend?

Life insurance has always been an important part of charitable giving.  Although there are legitimate uses, over the years the IRS has identified certain abuses regarding the use of life insurance in charitable planning.  In our practice, we have seen a recent surge in charitable planning techniques involving life insurance.  Before your charity accepts a gift of life insurance, you should consider several issues, including the following:  (1) the application of Section 170(f)(10), the so-called “charitable split-dollar rules” (which, if applicable, impose an excise tax on the charity equal to 100% of the premium payments), (2) applicable state insurable interest laws, (3) private inurement, private benefit, and excess benefit rules, (4) unrelated business income rules (and debt-financed income rules, to the extent the life insurance was acquired with borrowed funds), (5) the partial interest rules (impacting both the income and gift tax deduction of the donor), (6) I.R.C. § 4944, the jeopardizing investment rules, and I.R.C. § 4941, the self-dealing rules, where the policy owner is a private foundation or split interest trust, (7) possible re-enactment or extension of I.R.C. § 6050V (which required a charity to report its interest in certain life insurance policies – the provision expired in 2008), and (8) potential legislation in response to the Treasury’s April 2010 report on abuses involving ”charity owned life insurance” (ChOLI).  Life insurance often represents a very valuable gift to a charity and most transactions involving life insurance satisfy the rules discussed above.  However, it is important to consider these rules with respect to any gift of life insurance, especially when the gift involves more than merely naming a charity as a policy  beneficiary or a donation of an unencumbered policy to the charity.


IRS Issues Final Regulations on Prohibited Tax Shelter Transactions

The IRS has issued final Regulations under Section 4965 on excise taxes for prohibited tax shelter transactions involving tax-exempt entities and on related disclosure obligations and filing requirements.  The final Regulations may be view using the following link:

Written by in: Tax Shelters

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