Listed Transaction #37 (Syndicated Conservation Easement Transactions)
Offering prospective investors charitable deduction of at least 2 and one-half times their investment
The IRS has issued IRS Notice 2017-10, indicating that they have identified a new listed transaction, known as a syndicated conservation easement transaction. These are ones that are promoted as providing investors with the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested.
Of course, under IRC Section 170(f)(3)(B)(iii), a deduction is allowed for a deduction of a qualified conservation contribution. This is one that is a contribution of a "qualified real property interest" (QRPI) to a qualified organization exclusively for conservation purposes. See IRC Section 170(h)(1) thorugh (5); see also Regs. Section 1.170A-14. Under IRC 170(h)(2)(C), QRPIs include a restriction, granted in perpetuity, on the use that may be made of real property. For purposes of this notice, the IRS is treating the QRPI as referring to a conservation easement only.
Promoters of these syndicated conservation easement transactions go to prospective investors in a partnership or other pass-through entity the possibility of a charitable contribution deduction for donations of a conservation easement, and by this, they identify the pass-through entity that owns real property, or they form one. Additional tiers of pass-through entities may be formed and become part of the structure.
The promotional materials then suggest that prospective investors may be entitled to a share of a charitable contribution deduction that equals or exceeds an amount that is 2 and one-half times the amount of the investor's investment. The promoters obtain an appraisal that purports to be a "qualified appraisal" under IRC 170(f)(11)(E)(i) but, in fact, it greatly inflates the value of the conservation easement based on unreasonable conclusions about the development potential of the real property. After the investor invests in the pass-through entity, the pass-through entity turns around and "donates" the conservation easement encumbering the property to a tax-exempt entity. Investors holding their interest in the pass-through entity for less than 1 year rely on the pass-through entity's holding period in the underlying real property to treat the donated conservation easement as LTCG property under IRC 170(e)(1).
The promoter receives a fee or other consideration with respect to his or her or its promotion and this may be in the form of an interest in the pass-through entity.
The IRS focus of the attack will be on the overvaluation of the conservation easement. The IRS announces that they may also challenge the purported tax benefits from the transaction, using the partnership anti-abuse rule, econonmic substance or other such rules or doctrines.
The promotional materials may be oral or written.
Donees are not treated as a party to the transaction or as a participant under 1.6011-4. Participants generally include investors, the pass-through entity and any tier) and any other person whose tax return reflects tax consequences of this transaction.
The IRS is focused on transactions entered into on or after January 1, 2010 that are the same as, or substantially similar to, this transaction. Persons entering into this transaction on or after January 1, 2010 must disclose these for each year they participated in the transactions provided the period of limitations for assessment has not ended as of December 23, 2016. Material advisors, including appraisers, who make a "tax statement" on or after January 1, 2010 with respect to transactions entered into on or after January 1, 2010, have disclosure and list maintenance obligations under IRC Sections 6111 and 6112. May 1, 2017 is a deadline for those otherwise obligated to file a disclosure statement.
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