Yesterday, the U.S. Treasury Department issued final regulations (TD 10007, RIN 1545-BQ39) that identify certain syndicated conservation easement transactions (SCE) and substantially similar transactions as “listed transactions.” These SCE transactions must be reported on Form 8886, Reportable Transaction Disclosure Statement. In addition, material advisers to any reportable transaction are required to file Form 8918, Material Advisor Disclosure Statement.
Syndicated conservation easements (SCE) have been targeted by the IRS for many years. In SCE, investors typically acquire an interest in a partnership that owns the land and then claim a charitable contribution deduction when the land is donated as a conservation easement. IRS Commissioner Danny Werfel stated that the regulations “send a clear signal on abusive syndicated conservation easement arrangements, which generate high fees for promoters and willing participants who gamed the tax system with grossly inflated appraisals,” and described SCE as often “nothing more than retail tax shelters that let taxpayers buy deductions at the end of the year.”
The regulations were issued after courts invalidated IRS Notice 2017-10, which previously identified certain SCEs as listed transactions, on the ground that the notice did not comply with the Administrative Procedure Act’s notice and comment process.
Under the regulations, if a transaction offers the possibility of a charitable contribution deduction that equals or exceeds 2.5 times of the taxpayer’s investment, the transaction is a tax avoidance transaction that must be reported. Conversely, transactions where promotional materials offer the possibility of a charitable contribution deduction of anything less than 2.5 times of a taxpayer’s investment generally are not substantially similar to listed transactions.
Taxpayers who previously filed tax returns (or amended tax returns) reflecting their participation in syndicated conservation easement transactions but did not disclose their participation as a listed transaction pursuant to Notice 2017-10 will be required to disclose those transactions if the statute of limitations for assessment of tax is still open on the effective date of the new regulations.
Some commenters on proposed regulations now adopted as final questioned why the IRS needs to identify certain SCE as listed transactions when contributions of conservation easements are already disclosed on Form 8283, which contains, among other information, the easement’s appraised value, when and how the property was acquired, the donor’s cost or adjusted basis, the amount deducted, and the date of the contribution. The IRS responded that Form 8283, which is filed as a part of a taxpayer’s tax return, does not include all the information contained on Form 8886 and, significantly, does not alert the Office of Tax Shelter Analysis to the taxpayer’s participation in an abusive transaction, nor does it trigger disclosure and other obligations of material advisors to the transaction. Despite losing numerous cases on the merits of technical attacks against SCEs, the IRS’s announcement of the regulations noted that the agency “has enjoyed significant success in the courts resulting in a number of syndicated partnerships having their grossly inflated easement valuations reduced for tax purposes to what the actual market value was at the time of the donations, with the partners claiming the inflated deduction often incurring substantial penalties.” Several of the IRS valuation wins are, or soon will be, on appeal. Requiring certain SCE’s to be reported on Form 8886 is part of the IRS’s continuing “strategic plan” to ensure compliance with the tax laws.
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