In prior blog posts (here) and (here), we discussed IRS efforts to combat what it considers to be abusive conservation easement deductions. In Notice 2017-10 (here), the IRS warned that certain conservation easement deductions could be designed to avoid tax and had to be disclosed to the IRS. The notice said that some promoters “are syndicating conservation easement transactions that purport to give investors the opportunity to claim charitable contribution deductions in amounts that significantly exceed the amount invested.”
Notice 2017-10 added syndicated conservation easements to the category of transactions that require formal disclosure by investors and advisors to the IRS. By virtue of this listing, the IRS extended the statute of limitations for all open tax years until one year after either the taxpayer discloses it to the IRS on Form 8886 or until disclosure is made to the IRS by a material advisor in response to an IRS list-maintenance request. Additionally, the listing triggered an obligation by taxpayers who participated in a syndicated conservation easement deal in prior tax years to disclose their participation to the IRS via filing a Form 8886. Failure to timely file a Form 8886 with the Office of Tax Shelter Analysis would expose a taxpayer to potentially significant penalties equal to 75% of any tax savings, up to a statutory cap of $100,000 for natural persons and $200,000 for other entities. There is no reasonable-cause defense – it is a strict liability penalty.
The IRS recently sent information to Congress that for the year 2017 it had received 39,619 syndicated conservation easement Form 8886 disclosures from taxpayers and 6,501 Form 8918 disclosures from material advisors. These disclosures identified 552 entities and 15,238 investors who participated in syndicated conservation easements claiming deductions that could be worth as much as $230 billion. The IRS is continuing to review the information, but taxpayers who participated in syndicated conservation easement transactions should be prepared to respond to an IRS notice of examination.