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Syndicated Conservation Easement Transactions Now a “Listed Transaction”

Jan 17, 2017

The number and breadth of Treasury and IRS “listed transactions” continue to grow with the addition of certain syndicated conservation easement transactions to that infamous list, pursuant to Notice 2017-10 dated December 23, 2016.  This form of transaction has been on the government’s radar screen for some time.

A bit of background first.  The Internal Revenue Code (the “Code”) allows a deduction for a “qualified conservation contribution,” which is a contribution of a “qualified real property interest” to a qualified organization exclusively for “conservation purposes.”  A qualified real property interest includes the taxpayer’s entire interest in the property, a remainder interest, or a restriction (granted in perpetuity) on the use which may be made of the real property (i.e., a conservation easement). Conservation purposes include: (1) preserving land areas for outdoor recreation by, or the education of, the general public; (2) protecting relatively natural habitat of fish, wildlife, or plants, or similar ecosystems; (3) preserving open space (including farmland and forest land) for scenic enjoyment of the general public or under a clearly delineated federal, state, or local governmental conservation policy yielding a significant public benefit; or (4) preserving an historically important land area or certified historic structure. 

As discussed in the Notice, the Treasury and IRS had become aware that some promoters were syndicating conservation easements transactions that purported to give investors the opportunity to claim charitable contribution deductions in amounts significantly in excess of the amount invested.  In such a syndicated conservation easement transaction, a promoter offers prospective investors in a partnership or other pass-through entity the possibility of a charitable contribution deduction for the donation of a conservation easement. 

The promoters identify a pass-through entity that owns real property or 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 entities.  The promoters obtain an appraisal 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, either directly or through one or more tiers of pass-through entities, the pass-through entity donates a conservation easement encumbering the property to a tax-exempt entity. The promoter receives a fee or other consideration, which may be in the form of an interest in the pass-through entity.

The IRS indicates in the Notice that it intends to challenge the purported tax benefits of the transaction based on the overvaluation of the conservation easement, as well as on the partnership anti-abuse rule, economic substance or other rules or doctrines.  

The Listed Transaction

Specifically, the Notice describes the listed transaction (“Listed Transaction”) as follows:  An investor receives promotional materials that offer prospective investors in a pass-through entity the possibility 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.  The promotional materials may be oral or written.  The investor purchases the interest, directly or indirectly (through one or more tiers of pass-through entities), in the pass-through entity that holds real property.  The pass-through entity that holds the real property contributes a conservation easement encumbering the property to a tax-exempt entity and allocates, directly or through one or more tiers of pass-through entities, a charitable contribution deduction to the investor.  The investor then reports on his or her federal income tax return a charitable contribution deduction with respect to the conservation easement. 


Effective December 23, 2016, transactions entered into on or after January 1, 2010 that are the same as, or substantially similar to, the Listed Transaction described above, are treated as listed transactions.  As a result, persons entering into these transactions on or after January 1, 2010 must disclose the listed transaction for each taxable year in which the taxpayer participated in the transactions, provided that the period of limitations for assessment of tax has not ended on or before December 23, 2016.  The tax-exempt donee organization is not treated as a participant and does not have a reporting obligation under the Notice.  Participants who fail to do so are subject to significant penalties and may be subject to an extended period of limitations. Also, material advisors, including appraisers, have certain disclosure and recordkeeping (“list maintenance”) obligations and are subject to penalties as well.

Under the Income Tax Regulations and the instructions to Form 8886 (“Reportable Transaction Disclosure Statement”), the form which must be filed by participants in listed and other reportable transactions, the required disclosure must identify and describe the transaction in sufficient detail for the IRS to be able to understand the tax structure of the transaction and the identity of all parties to the transaction.

Form 8886 must be attached to the taxpayer’s tax return or information return, including amended returns, for each tax year in which the taxpayer participates.  In the case of the initial year filing of Form 8886, an exact copy of the form is to be sent to the IRS Office of Tax Shelter Analysis (“OTSA”) when the tax return is filed.  However, if a disclosure statement is required with respect to this listed transaction after December 23, 2016 and prior to May 1, 2017, the disclosure will be considered timely filed if filed with OTSA by May 1, 2017.  Participants must file Form 8886 with OTSA by June 21, 2017 (i.e., 180 calendar days after the conservation easement transaction became “listed”) for each such transaction entered into during a prior tax year for which the participant’s federal income tax return has already been filed.

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