March 21, 2017
Authored by: Keith Kehrer
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.