Tax Shelters: The IRS Issues a Listing Notice for Syndicated Conservation Easements

The Internal Revenue Code provides a deduction for a qualified conservation contribution, such as an easement or an outright donation of property for conservation purposes. See I.R.C. § 170(f)(3)(B)(iii) (providing deduction for a qualified conservation contribution). There are a variety of technical requirements in place that determine whether a particular contribution of property falls within section 170(f)(3)(B)(iii). See I.R.C. § 170(h) (describing requirements for deductible donation). The government has been fairly aggressive in pursuing litigation over the requirements for a deduction. See, e.g., Mitchell v. Comm’r, 775 F.3d 1243 (10th Cir. 2015); Carroll v. Comm’r, 146 T.C. 196 (2016).

In December, the IRS adopted a different approach, labeling a category of abusive conservation transactions as listed transactions. Notice 2017-10, 2017-4 I.R.B. 544, 2016 I.R.B. LEXIS 789 (Dec. 23, 2016). A transaction that is a listed transactions has been determined to be “a tax avoidance transaction” by the IRS. Treas. Reg. § 1.6011-4(b)(2). The issuance of Notice 2017-10 makes these transactions “reportable transactions.” Treas. Reg. § 1.6011-4(b)(1). This means taxpayers who engaged in one of these transactions must make disclosures to the IRS. See Treas. Reg. § 1.6011-4(a). Material advisers involved in the transactions are required to make disclosures and to maintain lists of participants for production to the IRS upon request. I.R.C. §§ 6111(a) (imposing reporting requirement); 6112(a) (imposing record-keeping requirement), (b) (production requirement).

Notice 2017-10 reaches a specific genre of conservation deals that have apparently been marketed on the premise that the transaction will generate a charitable deduction in excess of the amount that the taxpayers invest. Specifically, the promoters syndicate ownership interests in a pass-through entity “using promotional materials suggesting to prospective investors that an investor may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor’s investment.” Notice 2017-10, 2016 I.R.B. LEXIS 789 at *2-*3. This was accomplished through the use an appraisal “that greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property.” Id. at *3.

Any transaction entered into after January 1, 2010 that falls within those parameters is covered. Taxpayers who engaged in a transaction that is covered by Notice 2017-10 should understand several things:

  • Their disclosure obligations apply to any return previously filed for which the assessment limitations period remains open. Treas. Reg. § 1.6011-4(e)(2).
  • There are significant penalties applicable for failure to make the required disclosures. Section 6707A of the Code provides for a penalty of 75% of the tax decrease derived from the transaction, subject to a maximum of $100,000 for individuals who engage in listed transactions and a minimum penalty of $10,000. I.R.C. § 6707A.
  • The failure to comply with the disclosure requirement also extends the assessment limitations period. I.R.C. § 6501(c)(10).

Individuals who were involved in promoting these transactions are also subject to the same penalty regimen.

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