The Internal Revenue Service (IRS) has moved to put a yield sign in front of anyone wanting to invest in a syndicated conservation easement to gain a charitable tax deduction and, in this regard, has issued a Notice which retroactively applies to transactions entered into on or after January 1, 2010. The Notice states that the described type of transactions, or any substantially similar to it, will be considered as listed transactions and thereby treated as a tax shelter subject to all the related notice filing requirements. The described type of transactions include those where an investor receives (oral or written) promotional materials that offer prospective investors in a pass-through entity the possibility of a charitable contribution deduction that equals or exceeds two and a half (2 1/2) times the amount of the investor’s investment.
As listed transactions, investors/taxpayers involved in these transactions since January 1, 2010, must properly disclose these transactions by timely filing IRS Forms 8886, and all promoters, as broadly defined and including not only the actual promoters but also the real estate appraisers, the tax professionals who were involved in the sale of these investments to their clients, and any other material advisor, must also disclose these transactions by the timely filing of IRS Forms 8918 and must create and maintain the required involved persons listing. The initial filing deadline for transactions for 2010 and the years thereafter is May 1, 2017! Failure to properly file the required IRS Forms on a timely basis are subject to significant penalties. See, IRS Notice 2017-10 at https://www.irs.gov/pub/irs-drop/n-17-10.pdf.
What does this mean? First, the need exists to review if you or one of your clients has been involved with any such transactions, and if so, there is an immediate need to determine the filing and record keeping requirements. It should be noted that these filing requirements affect any conservation easement done since 2010. In actuality, it would seem that these rules may only apply to those within the statute of limitations. At first blush, this may mean only the past three tax years, but because these conservation easements are passed through from pass-through tax entities, such as limited partnerships and LLCs, their statute of limitations may end up being longer than initially expected under what is referred to as the TEFRA partnership rules. Since significant penalties may apply, serious attention is needed to ensure that all proper filings are made on a timely basis. Communications should be taking place with both the tax counsel of the conservation easement promoter and your own tax counsel.
Second, as for future conservation easements, the legitimate ones still make sense, however, those structured in an aggressive manner are at serious risk of an IRS challenge and generating serious tax liabilities, penalties, and interest for their investors. Think of a piece of real estate purchased or being held that has reasonably low development value. Instead of developing it, a transaction is structured with the help of a very aggressive real estate/business appraiser to take the position that the value of the real estate’s highest and best use is hugely exaggerated and merely its development rights are worth multiples of what the entire property is actually worth on today’s real estate market. The real estate is contributed to a pass-through entity (e.g., a limited partnership, LLLP, or LLC) to which multiple investors (who desire a significant charitable income tax deduction to reduce their personal income taxes) make contributions to purchase ownership interests in the entity with very specific rights as to any charitable conservation easement deductions that the entity may become entitled if and when the entity contributes its development rights in its real estate to a conservation charity. So, as a result of the aggressive valuation of the development rights in the real estate, the investors will effectively receive a significant charitable conservation income tax deduction of normally many multiples of what they have invested. The IRS is basically saying not to do this anymore on an aggressive basis unless you are a serious risk taker. On the other hand, if the conservation is structured to be conservative in nature along with following all the technical tax requirements, the conservation contribution and related transactions should still pass IRS muster, whether or not it is subject to the listed transaction status.
If you have questions about conservation easements, please contact us at (678) 720‑0750 or firstname.lastname@example.org to schedule a consultation.