Syndicated Conservation Easement Transactions
September 09, 2021
By Walter Pagano
Since at least 2016, the Department of the Treasury (Treasury Department) and the IRS have been informing taxpayers and tax practitioners about their concern whether the structure and form of certain syndicated conservation easement transactions constitute bona fide charitable contribution deductions for federal income tax purposes or whether they are in reality abusive tax shelters having no bona fide business purpose other than to give investors the opportunity to claim deductions that significantly exceed the fair market value of the conservation easement.
What Is a Syndicated Conservation Easement?
A “syndicated conservation easement” has a specific meaning for legal and tax purposes.
- What does it mean to be “syndicated?” A syndicate is a group organized for a common purpose; esp., an association formed to promote a common interest, carry out a particular business transaction, or (in a negative sense) organize criminal enterprises.1
- What is an “easement?” An easement is an interest in land owned by another person, consisting of the right to use or control the land, or an area above or below it, for a specific limited purpose.2
- What is a “conservation easement?” A recorded, perpetual, nonpossessory interest in real property held by a government entity or by a qualified nonprofit entity that imposes restrictions or affirmative obligations on the property’s owner or lessee to retain or protect natural, scenic, or open-space values of real property; ensure its availability for agricultural, forest, recreational, or open-space use; protect natural resources and habitat; maintain or enhance air or water quality; or preserve the historical, architectural , archaeological, or cultural aspects of the real property.3
In general, a syndicated conservation easement consists of a group of individuals or multi-tiered entities organized as a partnership or association formed to promote a common interest in order to carry out a particular transaction. From a tax perspective, a syndicated conservation easement revolves around making donations of conservation easements to certain organizations with the intention to benefit from corresponding tax benefits resulting from those transactions.
Some syndicated conservation easement transactions have been identified by the IRS as abusive tax avoidance and tax shelter schemes that have no business purpose or economic substance.
IRS Outreach Efforts to Taxpayers Investing in Syndicated Conservation Easements
On March 19, 2019, the IRS issued IR-2019-47. This notice included several tax avoidance schemes that made the IRS’ 2019 “Dirty Dozen” list of tax scams for taxpayers to avoid. The IRS included syndicated conservation easements in the “Dirty Dozen” list and described specific facts and circumstances about transactions in which taxpayers should avoid investing based on the manner in which the syndicators and promoters structured the transaction.
Generally, although the law provides that a charitable contribution deduction is not allowed unless the donor contributes the donor’s entire interest in property to qualified charitable or not-for-profit organizations, the law carved out an exception to the general rule for a “qualified conservation contribution” that meets certain legal and factual criteria. If the donor complies with the criteria, then the donor may claim a charitable contribution deduction for the fair market value of a conservation easement donated to certain organizations.
Prior to the IRS issuing IR-2019-47, the IRS became aware that some promoters and syndicators had been syndicating conservation easement transactions that appeared to comply with the law; but in substance failed to comply with the specific legal and factual criteria for taxpayers to claim a charitable contribution deduction.
IRS Provides Notice of Its Initial Enforcement Action
In 2017, the Treasury Department and the IRS published Notice 2017-10. This notice alerted taxpayers and their representatives the Treasury Department and the IRS had become aware that some promoters were syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that equal or exceed the amount that is two and one-half times the amount of the investor’s investment. The IRS identified the transactions described in the notice as “listed transactions” or “reportable transactions”.
In the notice, the IRS described a syndicated conservation easement transaction that failed to meet the legal and factual criteria for a taxpayer to claim a charitable contribution deduction for a “qualified conservation contribution.” Generally, promoters form a pass-through entity such as a partnership to own real property. Next, promoters solicit prospective individuals to invest in the partnership with the prospect an investor may claim a charitable contribution deduction for a percentage of the qualified conservation contribution that greatly exceeds the amount of an investor’s investment. The promoters retain an appraiser to obtain an inflated appraisal of the conservation easement based on unreasonable factual assumptions about the property’s development potential.
The IRS stated in the notice that (1) it will challenge the purported tax benefits from certain syndicated conservation easement transactions described in the notice that overvalue the conservation easement charitable contribution deduction and (2) persons entering into these transactions on or after January 1, 2010, that are the same as, or substantially similar to, the transaction described in the notice must disclose and report the transaction to the IRS Office of Tax Shelter Analysis by May 1, 2017.
Generally, in such transactions the promoters form a partnership that owns real property or intends to acquire real property. In some cases, the promoters form additional tiered partnerships to add “legitimacy” to the structure and form of the transactions; but in reality, this is an attempt to make it difficult to identify the true intent: to create an abusive tax shelter scheme.
IRS Enforcement - When a Syndicated Conservation Easement Transaction Is Considered by the IRS and the Department of Justice To Be a Tax Avoidance Scheme
On December 19, 2018, the United States Department of Justice (DOJ), USAO, Georgia, Northern District, filed a complaint, DOJ 18-1672, seeking to shut down promoters of conservation easement tax scheme operating out of Georgia.4
According to the complaint, the defendants’ scheme revolved around donations of conservation easements that were based on willfully false appraisals that the defendants relied upon that resulted in corresponding tax benefits from those donations that were grossly overvalued.
According to the complaint, defendants knew, or had reason to know, that the statements they made to investors regarding the tax benefits were false or fraudulent. In this regard, the complaint alleged that defendants knew the syndicates that they promoted planned to donate a conservation easement but otherwise did not plan to engage in any ongoing business activity. The complaint also alleged that the only return on investment an investor could anticipate in a syndicate was the tax benefit from the planned conservation easement donation, which was many times larger than the purported investment. The complaint further alleged that the defendants made or furnished gross valuation overstatements about the valuation of conservation easements and the corresponding tax deductions, or caused others to do so.
The DOJ specifically referred to IRS Notice 2017-10 in announcing its suit to shut down the promoters.
IRS Campaigns To Inform Taxpayers About Syndicated Conservation Easements
Several months before DOJ sued to shut down the promoters, on July 2, 2018, the IRS announced the approval of five Large Business and International (LB&I) Operating Division compliance campaigns. The IRS identified among the five compliance campaigns syndicated conservation easement transactions. In its announcement, the IRS characterized syndicated conservation easement transactions described in Notice 2017-10 as a tax avoidance scheme. The IRS stated in its announcement “this campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate.”
IRS Increases Civil Enforcement Action on Syndicated Conservation Easements
- On November 12, 2019, the IRS announced in IR-2019-182 a significant increase in enforcement actions for syndicated conservation easement transactions. The IRS stated in its announcement “Coordinated examinations are being conducted across IRS in the Small Business and Self-Employed Division, Large Business and International Division and Tax Exempt and Government Entities Division. Separately, investigations have been initiated by the IRS’ Criminal Investigation Division. These audits and investigations cover billions of dollars of potentially inflated deductions as well as hundreds of partnerships and thousands of investors.”
- On December 20, 2019, the IRS announced in IR-2019-213 it continues enforcement efforts in conservation easement cases following latest Tax Court decision. The IRS stated in its announcement “On December 13, 2019, the U.S. Tax Court entered its first decision on a syndicated conservation easement transaction. In TOT Property Holdings, LLC v. Commissioner, Docket No. 005600-17, the Tax Court sustained in its entirety the IRS’ determination that all tax benefits from a syndicated conservation easement transaction should be denied and that the 40% gross valuation misstatement and negligence penalties applied. The Tax Court found that the transaction failed the legal requirements applicable to donations of land easements and, in imposing the gross valuation misstatement penalty, found that the actual value of the easement donation was less than 10 percent of what was originally reported on the tax return.”
- On July 13, 2020, the IRS announced in IR-2020-152 that the Tax Court on July 9, 2020 struck down four more abusive syndicated conservation easement transactions and called on taxpayers to accept settlement offers in syndicated conservation easement cases that were previously made available on June 25, 2020 in IR-2020-130 to certain taxpayers with pending docketed Tax Court cases.
IRS Pursues Criminal Enforcement Action on Syndicated Conservation Easements
- On December 21, 2020, IRS Criminal Investigation announced two Atlanta, Georgia tax professionals pleaded guilty to promoting syndicated conservation easement tax scheme involving more than $1.2 billion in fraudulent charitable deductions.
- On June 9, 2021, IRS Criminal Investigation announced a Georgia CPA was indicted for promoting syndicated conservation easement tax scheme involving fraudulent charitable deductions. According to the indictment, between 2014 and 2019, the CPA conspired with others to market, promote, and sell fraudulent tax shelter transactions in the form of syndicated conservation easement donations that enabled high-income taxpayers to purchase membership interests in purported real estate investment funds. According to the indictment, the funds served no legitimate business purpose, but instead were used to generate large fraudulent tax deductions to participants based on the donated value of the conservation easements.
IRS and DOJ Continue High Priority Civil and Criminal Enforcement Actions Against Abusive Syndicated Conservation Easement Transactions and Schemes
As a result of the recent Tax Court decisions, guilty pleas and indictments with more expected in the near future, the government’s determined and relentless efforts to identify, audit, investigate and prosecute syndicated conservation easement abusive tax shelter schemes, their syndicators, appraisers and the tax professionals who promote them remain unabated.
The IRS’ high priority to continue auditing and investigating syndicated conservation easement transactions is evidenced by publishing in January 2021 its revised Publication 5464, Conservation Easement Audit Technique Guide. The breadth and scope of Publication 5464 and the IRS’s seriousness of purpose to flesh out abusive syndicated conservation easement abusive tax shelter schemes is evident by reviewing its eleven-page index and its 117 pages of subject matter guidance for auditors and revenue agents.
Investors who continue to invest in syndicated conservation easement abusive tax shelter schemes and transactions need to come to terms with the fact that their charitable contributions deductions will be disallowed and they will incur substantial tax, penalties and interest and, perhaps in some cases, face potential criminal prosecution.
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