By Kenneth H. Bridges, CPA, PFS February 2017
Let’s assume you have a tract of land which could potentially be developed into a residential subdivision, but you don’t want to ever see the land developed, desiring for it to forever remain in its beautiful natural state. If you are willing to grant a perpetual conservation easement to a qualified organization (effectively giving up your rights to develop the property), then the tax law will reward you with a tax deduction. The amount of the deduction is the difference between the appraised value of the land assuming its highest and best use value before the granting of the conservation easement and its value after granting the conservation easement.
Provided that you carefully comply with all of the rules and have reasonable appraisals, this works quite well. But can you essentially buy a conservation easement deduction by investing in a partnership which will then allocate you a conservation easement deduction, the tax benefit of which exceeds the amount of your investment? Such structured partnership arrangements have become quite popular in recent years, and the IRS has been scrutinizing these arrangements.
On December 23, 2016, the IRS issued Notice 2017-10 identifying syndicated conservation easement deals which provide a 2.5 to 1 or greater write-off as “tax avoidance transactions” and making such “listed transactions” for purposes of the required disclosure rules. 2.5 to 1 (tax deduction to investment ratio) is the point at which an investor in the highest Federal ordinary income tax rate bracket begins to break even on the transaction.
The gist of the rules is that if a taxpayer participates in a “listed transaction” they have to disclose such to the IRS on a Form 8886. For an individual, the penalty for failure to do so (in addition to any other understatement penalties which may apply) is the lesser of 75% of the tax savings from the transaction or $100,000. For entities, the penalty can be up to $200,000.
Disclosure is required for any transaction entered into after January 1, 2010. So taxpayers who have participated in a conservation easement deal in past years will need to go back and file the disclosure statement now, unless the statute of limitations for assessment has run for that tax year. In general, the statute of limitations expires three years after you file a return. But there are a number of exceptions to this general rule, including the possibility that the tax matters partner has agreed with the IRS to extend the statute (very common in IRS examinations).
The disclosure rules apply not only to investor participants, but also any “material advisor” to the transaction.
There is, of course, a new sheriff in town (President Donald Trump) who is not known to be very friendly towards the IRS, so it is possible that the IRS may soften its position with respect to conservation easement transactions. However, the bottom line here is that if you have participated in a syndicated conservation easement transaction in the past seven years, you should contact your tax advisor to discuss next steps.
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.