The IRS has released a notice (Notice 2017-10) describing certain “syndicated” conservation easement transactions and states that such transactions will now be “listed transactions,” a category of tax avoidance transactions which will attract more scrutiny and be more likely to be challenged by the IRS.
Federal tax law allows a tax deduction for a qualified conservation contribution, a contribution of a qualified real property interest to a qualified organization (most often an eligible charity or governmental organization) exclusively for conservation purposes. The qualified real property interest includes a restriction, granted in perpetuity, on the use that may be made of the real property. For purposes of the IRS notice and this alert, such a real property interest is referred to as a conservation easement.
In the notice, the IRS set out the facts for the types of transactions that would be treated as “listed transactions” for purposes of the anti-avoidance provisions in the tax law. The notice began by stating the Treasury Department and the IRS had become aware that some promoters were syndicating conservation easement transactions that purport to give investors a charitable contribution deduction that significantly exceeds the amount invested. This was achieved by obtaining a valuation on the property that greatly inflates the value of the conservation easement based on “unreasonable conclusions about the development potential of the property.” This might occur, for example, where the valuation was based on developing what was formerly farmland into a high-end golf resort.
The notice is limited to conservation easement transactions with these characteristics: An investor receives promotional materials (can be oral or written) that offer prospective investors in a pass-through entity the possibility of a tax deduction that equals or exceeds two and one-half times the amount of the investment. The investor purchases the interest, directly or indirectly, through one or more tiers of pass-through entities (such as partnerships or LLCs) that hold the real property. The pass-through entity contributes a conservation easement to a qualified tax-exempt entity and allocates a charitable contribution deduction to the investor who reports the conservation easement deduction on his or her tax return.
A taxpayer is required to disclose participation in certain “reportable transactions,” including tax-shelter type transactions referred to as “listed transactions,” usually by attaching an information statement to their tax returns describing the reportable transaction. There are also reporting requirements for material advisors involved with listed transactions. The IRS identifies whether a transaction is a listed transaction by identifying it in an official notice, regulation or some other form of published guidance. Regulations provide specific rules for the timing of disclosure statements which must be filed.
Per the notice, transactions of the type described which are entered into on or after January 1, 2010, are identified as “listed transactions” effective December 23, 1016. Affected taxpayers must disclose these transactions for each taxable year in which they participated in the transaction, provided that the statute of limitations had not expired on or before December 23, 2016. For most individual taxpayers who timely filed their tax returns and the statute of limitations for prior years has not been extended, this would mean that tax years 2010 through 2012 would be likely be closed and not subject to this disclosure; tax years 2013 through 2015 would be open; 2016 would not yet have been filed but would require the disclosure with the tax return. (Taxpayers should be aware that the statute of limitations may be extended without notice from the IRS from three years to six years if there is a “substantial” understatement of gross income in the tax return.)
Due Dates for Filing of Disclosure Statements
The notice provides that to disclose a transaction for a return that has already been filed, the disclosure statement must be filed within 180 days after the date when the transaction became a listed transaction. In other words, for tax returns that have already been filed reflecting participation a conservation easement transaction, the statement must be filed by June 21, 2017. For transactions required to be disclosed after December 23, 2016, and before May 1, 2017, the statement must be filed by May 1, 2017. For material advisors to the transaction, their disclosure statement must also be filed by May 1, 2017.
These new rules affect only taxpayers who have participated in one of the syndicated conservation easement transactions described and would not impact those who have made a conservation easement contribution directly. There are significant penalties that may be imposed for failure to file the required disclosure statements in addition to other penalties that may apply, including one for valuation misstatements attributable to improper appraisals. Failure to timely file the disclosure statement may also be subject to an extended statute of limitations with respect to the transaction. Therefore it is very important that affected taxpayers file the requisite disclosure statements timely and properly.
We Can Help
Elliott Davis Decosimo tax specialists have expertise guiding taxpayers through the rules for listed transactions and can assist in the preparation of the necessary disclosure statements. To learn more, contact your Elliott Davis Decosimo tax advisor for assistance.