Charitable Conservation Easements Remain Under Attack—The Latest IRS Data

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Charitable Conservation Easements Remain Under Attack—The Latest IRS Data

As published by Jason B. Freeman in Forbes.

 

Last month, the Senate Finance Committee released a report on syndicated conservation easement transactions.  In its report, the committee laid out an unflattering view of the syndicated arrangements, finding that “syndicated conservation-easement transactions appear to be highly abusive tax shelters.”  This past week, the Senate Finance Committee released IRS data reflecting a “significant increase in conservation easement transactions,” and its chairman expressed concerns about what he characterized as the “serious and persistent abuse of the syndicated conservation easement program.”

The Finance Committee’s report indicates that the IRS is either auditing or planning to audit more than 80 percent of partnerships identified as vehicles for syndicated conservation easement.  Many of these audits will take place under the new BBA partnership audit regime.   The dollars at stake are significant.  Between 2010 and 2017, the IRS estimates that syndicated conservation-easement transactions led to nearly $27 billion in charitable deductions for investors.

What are Syndicated Conservation Easement Deductions? 

Subject to a few limitations, the tax laws generally allow a taxpayer to take a deduction for charitable contributions. The deduction is generally equal to the fair market value of the contributed property on the date of the contribution.

Most relevant here, section 170(h) of the Internal Revenue Code provides for a deduction related to contributions of certain conservation easements.  Technically, it allows for a deduction for a “qualified conservation contribution,” which is a contribution of a qualified real-property interest to a qualified organization for conservation purposes.  Basically, a conservation easement involves a landowner legally granting a qualified organization the right to restrict the landowner from developing the land in the future.  In turn, this grant of a conservation easement allows the landowner to take a tax deduction equal to the fair market value of the rights given up.  The regulations provide that the value of the conservation easement is equal to the value of the development rights that the landowner forfeits in perpetuity based on the land’s “highest and best use.”

IRS Enforcement Efforts

In IRS Notice 2017-10, the IRS designated syndicated conservation-easement transactions as “listed transactions,” a designation that requires their promoters and participants to affirmatively alert the IRS to their participation in the transactions.  In 2019, the IRS added syndicated conservation easements to its “Dirty Dozen” list of tax scams, further underscoring the fact that they have become an IRS priority.  Nonetheless, they do not inherently violate the tax laws.  The IRS just believes that many of them are overly aggressive and, in its eyes, abusive.

The IRS has won a string of Tax Court cases over the past few months involving conservation easement disputes—largely on technical grounds.  On the heels of those victories, the IRS rolled out a new settlement initiative aimed at disposing of many similar disputes.  Many taxpayers and tax professionals across the country, however, are waiting for the appellate courts to weigh in on those cases.

In the meantime, IRS audit efforts remain at record levels.  Reports indicate that more than 80% of top-tier pass-through partnerships connected with syndicated conservation easement transactions have been subject to audit in recent years.  That is an exceptionally high audit rate, to say the least.  And it implies that much more litigation will come.

The Senate Finance Committee

The Senate Finance Committee seems committed to ensuring that the IRS keeps its eye on conservation easements.  As it sees things, the recent IRS data indicates that despite the IRS’s efforts to designate syndicated conservation easements as “listed transactions,” the number of participants has steadily increased, with many participating in more than one deal.  Much the same, the data indicates that the total amount of deductions taken related to syndicated conservation easements has continued to increase year over year.

As Chairman Chuck Grassley describes it, “IRS [figures] show that dubious syndicated conservation easement tax shelters are a growing problem.”  Senator Grassley and Ranking Member Ron Wyden have publicly supported “[c]racking down on abusive syndicated conservation easements [and] ensuring [that the] IRS has the resources and legal tools to do its job” in this respect.  All signs indicate that the IRS sees things the same way.  See IRS Assures Congress: Aggressive Enforcement Efforts Are Ahead.

Expect to see the IRS continue to attack syndicated conservation easements.  Particularly as we enter a period of decreased tax revenues and increased fiscal obligations at the federal level, the Service will put a premium on tax enforcement, especially where it perceives political support for that effort.

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