An Update on Conservation Easements
By Kenneth H. Bridges, CPA, PFS December 2022
As discussed in previous articles I have written on the topic, Georgia has been the epicenter of the syndicated conservation easements industry, which has been in the IRS’ crosshairs for quite some time. Accordingly, we continue to provide regular updates on the topic of conservation easements.
Although the IRS has not issued a broad-based settlement offer available to all taxpayers, it has continued to issue settlement offers for specific deals. In general, for those who were not involved in promoting the investment, the offer is that you forego the deduction you took and instead take deduction for amount of the investment, compute the tax on the difference, and pay that plus accrued interest and a penalty of 10%. Those who were involved in promoting the transaction get no deduction and pay the tax, accrued interest, and a penalty of 40%.
Taxpayers have scored a few wins recently.
In October, in Champions Retreat (a case where the taxpayer appears to have had good facts and good legal representation), the Tax Court ruled that the taxpayer was entitled to a deduction of approximately $7.8 million (versus the $10.4 million the taxpayer had claimed and the $20,000 the IRS asserted). The 11th Circuit had previously ruled that the Tax Court erred in disallowing a conservation easement deduction solely because the property was a golf course.
Then, in November, in Green Valley Investors, the Tax Court ruled that the taxpayers were not subject to the penalty set forth in IRS Notice 2017-10 for failure to file Form 8886, because IRS failed to comply with the notice and comment rule of the Administrative Procedure Act when it issued the notice. Notice 2017-10 (issued in December 2016, but retroactive back to 2010) provided fairly draconian penalties (up to $100,000 for individuals and $200,000 for entities) for failure to report a syndicated conservation easement deduction on Form 8886; and the penalty applied even if the IRS never challenged the deduction itself. While the IRS has not agreed with the Tax Court ruling here, the ruling should provide some measure of comfort to those who may have inadvertently failed to file the form (which, in many cases, was not even a requirement at the time they took the deduction). Following the Tax Court’s ruling, the IRS immediately issued proposed regulations which essentially set forth the same reporting requirements.
There have been proposals in Congress for quite some time to legislatively disallow conservation easement deductions in situations where the deduction claimed exceeds 2.5 times the amount paid. Past versions of the legislation (which would have applied retroactively back to 2016) have come close to passing, but failed. The current version in Congress, which seems more likely to pass, would be prospective only.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.