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The IRS is Considering Adding Conservation Easements to the List of Tax Avoidance Transactions

By Joel N. Crouch on November 30, 2016

Conservation easements are legitimate and very good tax planning transactions for taxpayers who wish to preserve valuable land and wildlife habitats. If the conservation easement is done properly, a taxpayer may be able to claim a substantial charitable contribution deduction pursuant to Section 170. However, due to inflated appraisals, poorly drafted documentation, improper deductions and unscrupulous promoters, the IRS is considering adding syndicated conservation easements to its catalog of “listed transactions”. The typical syndicated easement involves multiple individuals who fund land acquisition through a partnership, donate conservation easements after a short time and claim deductions on appraisal values that are three to ten times in excess of the original price.

If the IRS were to add syndicated conservation easements to the “listed transactions”, individuals who participated in the transaction would be required to submit Form 8886 “Reportable Transaction Disclosure Statement” with their tax return. This would likely increase the chances the IRS would select the tax returns for examination. Failure to file a Form 8886 when required to do so can subject a taxpayer to significant penalties and 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 recently issued Notice 2016-66 which requires disclosures by taxpayers who participated in small captive insurance arrangements by no later than January 30, 2017. See a previous blog entry discussing the disclosure requirements in Notice 2016-66 https://www.meadowscollier.com/?t=40&an=61100&format=xml&p=7664.

Given the recent IRS references to syndicated conservation easements as tax-avoidance maneuvers, it is likely the IRS will add them as listed transactions sometime in the near future. How that will impact legitimate conservation easements remains to be seen.