Wednesday, March 15, 2017
In December 2016, the IRS issued Notice 2017-10, which states that the Treasury and the IRS are aware that promoters are syndicating conservation easement donation transactions through partnerships or other pass-through entities, and these transactions purport to give investors the opportunity to obtain charitable deductions in amounts that significantly exceed the amounts invested.
These transactions generally take the following form: investors invest in a pass-through entity that owns real property, the pass-through entity then donates a conservation easement to a tax-exempt entity and the resulting charitable deduction is allocated to the investors, and the investors rely on the pass-through entity's holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property under IRC § 170(e)(1). The promoters of these transactions greatly inflate the value of the deductions that are allocated to the investors by obtaining appraisals that greatly inflate the value of the conservation easements based on unreasonable conclusions about the development potential of the underlying property.
The Notice identities the following transactions (or those substantially similar thereto) as "listed" (tax avoidance) transactions: if an investor received oral or written promotional materials that offered prospective investors in a pass-through entity the possibility of a deduction that equals or exceeds two and one-half times the investor’s investment. Participants and material advisors, including appraisers, involved in these transactions since January 2010 may be required to disclose pertinent facts about the transactions to the IRS by May 1, 2017, and may be subject to significant penalties for failing to do so.
The Notice further provides that the IRS intends to challenge the purported tax benefits from these transactions based on the overvaluation of the conservation easements and the partnership anti-abuse rule, economic substance, and other rules or doctrines.
For purposes of the Notice, tax-exempt organizations accepting conservation easements are not treated as parties to or participants in these transactions. However, if an organization was involved in setting up such a transaction, it may be deemed to have acted as a promoter or material advisor and should consult with its legal advisors regarding its potential obligations under the Notice.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law