Questions often arise as to whether some syndicated conservation easement transactions are tax avoidance schemes. Well, some of these questions will be answered in this article. We’ll see what a syndicated conservation easement is, as well as the take from the IRS.
What Is a Syndicated Conservation Easement?
A “syndicated conservation easement” is essentially an investment vehicle. In this vehicle, pre-packaged conservation easements are marketed to investors. This is often with the promise of a charitable deduction in excess of the amount invested. The investment vehicle is typically a pass-through entity, such as a limited liability company or a partnership. Individual investors put money into the pass-through entity, and the promoter uses that money to buy the land. The entity donates a conservation easement on the property to a qualified organization. This is in order to create the deduction for the investors. This is done with the intention that the deduction exceeds the contribution.
For legal and tax purposes, a “syndicated conservation easement” has a specific meaning.
A syndicate is a group formed for a common purpose. Such purposes are promoting a common interest, carrying out a specific business transaction, or organizing criminal enterprises.
An easement is an interest in someone else’s land that gives them the right to use or control the land, or an area above or below it, for a defined limited purpose. It is a recorded, perpetual, nonpossessory interest in real property. Usually, it is held by a government entity or a qualified nonprofit entity. These impose restrictions or affirmative obligations on the property’s owner or lessee to preserve or protect the property’s natural, scenic, or open-space values; ensure its availability for agricultural, forest, recreational, or open-space use; protect natural resources and habitat; maintain or enhance air or water quality; or preserve the history of the property.
IRS Outreach to Syndicated Conservation Easements Investors
The IRS published IR-2019-47 on March 19, 2019. The IRS’ 2019 “Dirty Dozen” list of tax frauds for people to avoid contained various tax evasion tactics in this notice. Syndicated conservation easements were included in the IRS’s “Dirty Dozen” list. This list detailed specific facts and circumstances about transactions in which taxpayers should avoid investing due to the way syndicators and promoters structured the transaction.
Generally, a charitable contribution deduction is not allowed unless the donor donates his or her entire interest in property to qualified charitable or not-for-profit organizations. However, the law created an exception for a “qualified conservation contribution” that meets certain legal and factual criteria. If the donor meets the criteria, the fair market value of a conservation easement contributed to certain organizations may be deducted as a charitable donation.
Prior to issue IR-2019-47, the IRS learned that some promoters and syndicators were syndicating conservation easement transactions that looked to conform with the law. In reality, however, they did not meet the specific legal and factual standards for taxpayers to claim a charitable contribution deduction.
The Internal Revenue Service (IRS) Issues a Notice of Initial Enforcement Action
The Treasury Department and the Internal Revenue Service issued Notice 2017-10 in 2017. This notice informed taxpayers and their representatives that the Treasury Department and the Internal Revenue Service had discovered that some promoters were syndicating conservation easement transactions that purported to provide investors with charitable contribution deductions in amounts equal to or exceeding two and one-half times the amount of their investment. The transactions described in the notice are referred to as “listed transactions” or “reportable transactions” by the IRS.
The IRS stated in the notice that a syndicated conservation easement transaction did not meet the legal and factual requirements for a taxpayer to claim a charitable contribution deduction for a “qualified conservation contribution.” To own real estate, promoters usually form a pass-through entity. An example is a partnership. The promoters then approach potential investors with the offer that if they invest in the partnership, they will be eligible for a charitable contribution deduction for a percentage of the qualified conservation contribution that greatly exceeds the amount of the investor’s investment. The promoters hire an appraiser to inflate the conservation easement’s value based on erroneous factual assumptions about the property’s development potential.
What is Stated in The Notice?
In the notice, the IRS stated that:
- It will challenge the purported tax benefits from certain syndicated conservation easement transactions described in the notice. Such overvalue the conservation easement charitable contribution deduction. Also,
- Persons entering into these transactions on or after January 1, 2010, must disclose and report the transaction to the IRS Office of Tax Administration. That is if they are the same as, or substantially similar to, the transaction described in the notice.
In most of these transactions, the promoters form a partnership that owns or intends to acquire real estate. For some cases, the promoters form additional tiered partnerships to give the structure and form of the transactions “legitimacy”. In reality. however, this is an attempt to obscure the true intent: to create an abusive tax shelter scheme.
When Is a Syndicated Conservation Easement Transaction Considered a Tax Avoidance Scheme by the IRS and the Department of Justice?
The US Department of Justice (DOJ), USAO, Georgia, Northern District, filed a complaint, DOJ 18-1672, on December 19, 2018. They sought to shut down promoters of conservation easement tax schemes in Georgia.
The defendants’ scheme, according to the complaint, revolved around donations of conservation easements. The easements were said to be based on willfully false appraisals that the defendants relied on. Thus, resulting in grossly overvalued tax benefits from those donations.
The defendants knew that the statements they made to investors about the tax benefits were false or fraudulent. This is according to the complaint. The complaint claimed that the defendants were aware that the syndicates they promoted intended to donate a conservation easement. But then, not to engage in any ongoing business activity. The only return on investment an investor in a syndicate could expect was the tax benefit from the planned conservation easement donation. This was many times larger than the purported investment, according to the complaint. The defendants allegedly created or led others to make gross valuation overstatements about the value of conservation easements and the accompanying tax benefits. This, also, is according to the complaint.
In announcing its suit to shut down the promoters, the DOJ specifically mentioned IRS Notice 2017-10.
The Internal Revenue Service (IRS) is launching a public awareness campaign to raise awareness of Syndicated Conservation Easements.
On July 2, 2018, the IRS announced the approval of five Large Business and International (LB&I) Operating Division compliance campaigns. This was several months before the DOJ sued to shut down the promoters. Syndicated conservation easement transactions were identified as one of the five compliance campaigns by the IRS. The IRS described the syndicated conservation easement transactions described in Notice 2017-10 as a tax avoidance scheme in its announcement. “This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers. This will be done by ensuring that easement contributions meet the legal requirements for a deduction, and the fair market values are accurate”. The IRS stated in this its announcement.
The Internal Revenue Service (IRS) is stepping up its civil enforcement actions against Syndicated Conservation Easements.
In IR-2019-182, the IRS announced a significant increase in enforcement actions for syndicated conservation easement transactions on November 12, 2019. In its announcement, the IRS stated: “The IRS’s Small Business and Self-Employed Division, Large Business and International Division, and Tax Exempt and Government Entities Division are all conducting coordinated examinations”. Separately, the IRS’ Criminal Investigation Division has launched an investigation. These audits and investigations involve potentially inflated deductions worth billions of dollars, as well as hundreds of partnerships and thousands of investors.”
The IRS announced in IR-2019-213 on December 20, 2019, that it will continue to enforce conservation easement cases. This is due to the recent Tax Court decision. “On December 13, 2019, the United States Tax Court issued its first ruling on a syndicated conservation easement transaction”. The IRS claimed this in its notice. The Tax Court upheld the IRS’ determination in TOT Property Holdings, LLC v. Commissioner, Docket No. 005600-17, that all tax benefits from a syndicated conservation easement transaction should be denied. Also, the 40 percent gross valuation misstatement and negligence penalties should be applied. The Tax Court ruled that the transaction violated the legal requirements for land easement contributions. Also, the real worth of the easement donation was less than 10% of what was originally represented on the tax return. Thus, resulting in a gross valuation misrepresentation penalty.”
The IRS announced in IR-2020-152 on July 13, 2020 that the Tax Court had struck down four more abusive syndicated conservation easement transactions on July 9, 2020. It urged taxpayers to accept settlement offers in syndicated conservation easement cases that were previously made available to certain taxpayers with pending docketed Tax Court cases in IR-2020-130 on June 25, 2020.
Syndicated Conservation Easements are being pursued by the IRS as a criminal matter.
Two Atlanta, Georgia tax professionals pleaded guilty to promoting a syndicated conservation easement tax scheme involving more than $1.2 billion in fraudulent charitable deductions on December 21, 2020, according to the IRS Criminal Investigation.
The IRS Criminal Investigation announced on June 9, 2021 that a Georgia CPA had been indicted for promoting a syndicated conservation easement tax scheme that involved fraudulent charitable deductions. According to the indictment, the CPA conspired with others between 2014 and 2019 to market, promote, and also sell fraudulent tax shelter transactions in the form of syndicated conservation easement donations. Thus, allowing high-income taxpayers to buy membership interests in ostensibly real estate investment funds. According to the indictment, the funds were used to generate large fraudulent tax deductions for participants generally based on the donated value of the conservation easements, rather than for any legitimate business purpose.
The Internal Revenue Service (IRS) and the Department of Justice (DOJ) are also continuing their high-priority civil and criminal enforcement actions against abusive Syndicated Conservation Easement Transactions and Schemes.
The government’s determined and relentless efforts to identify, audit, investigate, and prosecute syndicated conservation easement abusive tax shelter schemes, their syndicators, appraisers, and the tax professionals who promote them remain unabated as a result of recent Tax Court decisions, guilty pleas, and indictments, with more expected in the near future.
In January 2021, an updated version of Publication 5464, Conservation Easement Audit Technique Guide was released. This indicated the IRS’s commitment to auditing and investigating syndicated conservation easement transactions. The eleven-page index and 117 pages of subject matter instruction for auditors and revenue agents demonstrate the breadth and scope of Publication 5464 and the IRS’s sincerity of purpose in fleshing out abusive syndicated conservation easement harmful tax shelter schemes.
Investors who continually invest in abusive tax-shelter schemes like syndicated conservation easements must accept that their deductions will be disallowed. Consequently, they will face substantial tax, penalties, and interest, as well as the possibility of criminal prosecution.