In Notice 2017-10, the IRS has determined that certain conservation easements are now “listed transactions” for purposes of federal tax reporting. “Syndicated” conservation easements are conservation easements donated by a pass-through entity (such as an LLC or partnership) interests in which have been sold, or syndicated, by a promoter to outside investors. Because the charitable deductions generated by conservation easements themselves cannot be sold, promoters circumvent this by selling interests in the underlying donor LLC or partnership entity and then passing the benefits of the easement through to the purchasers.
Under Internal Revenue Code section 6011, a tax-shelter type transaction must be reported to the IRS on an information statement attached to a taxpayer’s return. A “listed transaction” is a transaction that is the same as or substantially similar to one of the types of transactions that IRS has determined to be a tax avoidance transaction and identified by notice, regulation or other form of published guidance as a listed transaction. Under Notice 2017-10, the IRS has ruled that transactions which satisfy a certain fact pattern and entered into after January 1, 2010 are listed transactions. The facts which cause a syndicated conservation easement to be treated as a listed transaction are set forth in the Notice:
The promoters (i) identify a pass-through entity that owns real property, or (ii) form a pass-through entity to acquire real property. Additional tiers of pass-through entities may be formed. The promoters then syndicate ownership interests in the pass-through entity that owns the real property, or in one or more of the tiers of pass-through entities. The promoters obtain an appraisal that purports to be a qualified appraisal as defined in Code Sec. 170(f)(11)(E)(i) but that greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property.
After an investor invests in the pass-through entity, the pass-through entity donates a conservation easement encumbering the property to a tax-exempt entity. Investors who held their direct or indirect interests in the pass-through entity for one year or less may rely on the pass-through entity’s holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property under Code Sec. 170(e)(1). The promoter receives a fee or other consideration with respect to the promotion, which may be in the form of an interest in the pass-through entity.
The IRS intends to challenge the purported tax benefits from these transactions based on the overvaluation of the conservation easement. The IRS may also challenge the purported tax benefits from this transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.
Syndicated conservation easements have seen an increase in popularity, with many promoters using handpicked donee organizations staffed not with conservation professionals but CPAs and with a skeleton land management function, and often with appraisals obtained from appraisers with limited knowledge of the area in which the easement property is located. Conservation-minded landowners who wish to preserve their property should look first to local conservation organizations or reputable national conservancies prior to entertaining offers from prospective purchasers who intend to use an easement donor as an investment vehicle.