The IRS is increasing enforcement actions for syndicated conservation easement transactions including more coordinated examinations across IRS divisions and more criminal investigations. The goals of these audits may uncover billions of dollars of potentially inflated charitable contribution deductions for qualified conservation easements made through partnerships and limited liability companies (LLCs).
What is a Deductible Conservation Easement?
A charitable deduction is allowed for the contribution of a real property interest to a qualified charitable organization exclusively for conservation purposes as a qualified conservation contribution (QCC). A real property interest includes a conservation easement granted in perpetuity on the use of real property. In most cases, the goal of a land conservation easement is to preserve land, natural habitats, open spaces, and historically important land areas. Sometimes, an easement might be written to preserve a specific feature, such as the façade of a building in a registered historic district.
What are Syndicated Conservation Easements?
A QCCs annual deduction is limited to 50% of the taxpayer’s adjusted gross income (100% if the taxpayer is a qualified farmer or rancher). Any excess may be carried forward 15 years, but subject to the same limit in the carryover years.
Instead of losing any portion of the charitable deduction, however, a taxpayer may transfer the underlying real property to a syndicate such as a partnership or LLC. The conservation easement is then made by the entity, entitling it to the charitable deduction.
A typical syndication arrangement sells interests in the partnership or LLC to third parties. The operating agreement of the partnership or LLC generally allocates its income entirely to the taxpayer who owned the property. But it also allocates its deductions, including any QCC deduction, to the other partners or members. Thus, the syndication is used to “sell” the taxpayer’s QCC deduction.
How Syndicated Easements Can Be Abused
The IRS is concerned about abuses of syndicated conservation easements. Examples of abuse can include things such as:
- excessive charitable deductions based on inflated property valuations and appraisals;
- failing to preserve the property under the easement;
- the easement holder permits modifications to and violations of the terms of the easement; and
- claiming a deduction for a façade preservation easement when the taxpayer was already prohibited under local zoning ordinances from altering the façade.
In Notice 2017-10, the IRS identifies syndicated conservation easements and substantially similar transactions as “listed transactions” that must be disclosed on a taxpayer’s return, as well as by material advisors. The guidance specifically covers transactions where investors in passthrough entities are offered charitable contribution deductions worth at least two and a half times their investment.
The IRS also included syndicated conservation easements on its 2019 “Dirty Dozen” list of tax scams to avoid. In addition to grossly overstating the value of the easement donated to charity, these transactions often failed to comply with the basic requirements for claiming a charitable deduction for a donated conservation easement.
Increased IRS Enforcement Actions
In November 2019, the IRS announced that it is increasing enforcement actions against abusive syndicated conservation easements with more audits and investigations. In fact, the increase in enforcement in a priority compliance area for the IRS with pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions.
Remedies for Taxpayers in Easement Syndications
Taxpayers currently not in litigation who are involved in easement syndications may be able to avoid penalties if they quickly file amended returns or an administrative adjustment request to reverse improper charitable deductions. The IRS encourages taxpayers to immediately consult an independent, competent tax advisor to consider their best available options.