The IRS recently issued Notice 2017-10 stating that it deems particular conservation easements currently being marketed to investors to be tax avoidance transactions.
While Section 170(e)(1) of the United States Tax Code permits deductions for qualified conservation contributions, the conservation easements need to contain restrictions granted in perpetuity for use that can be made of the real property.
The IRS’ concern lies with syndicated conservation easement transactions that claim to provide investors with the opportunity to make charitable contribution deductions that exceed their investment dollars. These transactions are typically offered to investors in partnerships or pass-through entities as an opportunity to make a charitable contribution deduction by donating a conservation easement.
These tax schemes begin when promotors identify a pass-through entity that owns real property or create one to acquire real property. They then form additional tiers and syndicate ownership interests by suggesting that investors may obtain a share of a charitable contribution deduction greater than or equal to 250% of their investment dollars. Moreover, the promotors will use what appears to be a qualified property value appraisal, but in actuality greatly inflates the value of the conservation easement based on imbalanced assumptions regarding the property’s development potential. After an investment is made in the pass-through entity, the entity then donates a conservation easement and reports the charitable contribution to the investors on the annual IRS form K-1 issued for tax return purposes.
The IRS stated that it plans to dispute the tax benefits from these transactions on the grounds of the overvaluation of the conservation easements, as well as the partnership anti-abuse rule and economic substance doctrine.
The bottom line is if you are asked to invest in any such tax shelter promotion, you should contact your lawyer and CPA to review the program prior to making an investment decision.