The IRS Adds Conservation Easements to the List of Tax Avoidance Transactions
By Joel N. Crouch on December 27, 2016
On December 23rd the IRS issued Notice 2017-10 (here), which adds syndicated conservation easements to the category of transactions that require formal disclosure by investors and advisors to the IRS. Any taxpayer or advisor who is required to make a disclosure but fails to do so could face penalties of up to $50,000. In a prior blog post I discussed the IRS’ consideration of adding syndicated conservation easements to its catalog of listed transactions (here).
Notice 2017-10 describes the transaction at issue as one that is the same or similar to the following:
1. An investor receives oral or written 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 2.5 times the amount of the investor’s investment.
2. The investor purchases an interest, directly or indirectly (through one or more tiers of
pass-through entities), in the pass-through entity that holds the property.
3. 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.
4. The investor reports on his or her federal income tax return a charitable contribution
deduction with respect to the conservation easement.
Notice 2017-10 is effective for transactions entered into on or after January 1, 2010, that are the same or similar to the transaction described above. Persons who participated in, as well as material advisors with respect to, such transactions must disclose them to the IRS no later than June 21, 2017 for prior tax years. Participants make disclosure to the IRS by filing Form 8886 and describing the transactions in sufficient detail for the IRS to be able to understand the tax structure. This includes the who/what/where/when/why/how of the conservation easement, as well as the identity of all involved parties. Material advisors make disclosure to the IRS by filing a Form 8918 and providing comparable information. A material advisor is a person who provides material assistance or advice with respect to the organizing, managing, promoting, selling, implementing, insuring of, or carrying out of the transactions and who makes a statement that relates to a tax aspect of the transaction in exchange for fees in excess of $10,000. Anyone who is required to disclose a transaction and fails to properly do so may face potential penalties up to $50,000 under I.R.C. Section 6707A. In addition, failure to properly provide the information required by From 8886 will extend the extend the statute of limitations for the IRS to assess tax until one year after the date on which the IRS is furnished the information required to be provided on Form 8886.
The IRS will likely focus any challenge to syndicated conservation easements on what the IRS considers to be inflated valuations. However, the IRS may also challenge the tax benefits of the transactions based on partnership anti-abuse rules or the economic substance doctrine.
The time is now to visit with your clients and colleagues to make sure any required disclosures are timely made by June 21. 2017. If you have any questions about your client’s disclosure obligations, or the obligations that you or your colleagues may have, please do not hesitate to contact me at (214) 749-2456 or firstname.lastname@example.org.
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