Tax alert

IRS issues proposed regulations on syndicated conservation easements

Dec 06, 2022
Business tax Tax controversy

Executive summary: Syndicated Conservation Easements Proposed Regulations

In the wake of case law dismissing the syndicated conservation easement notice (Notice 2017-10), the IRS has issued proposed regulations identifying syndicated conservation easements as listed transactions. The proposed regulations list the four steps that must occur for a transaction to be deemed a syndicated conservation easement. The proposed regulations also contain detailed analysis on the 2.5 times rule and an anti-stuffing rule. 

Proposed regulations

The IRS and Treasury Department issued proposed regulations section 1.6011-9 (REG-106134-22) to identify syndicated conservation easements as listed transactions. The regulations identify a syndicated conservation easement transaction as one containing the following four steps, in any order:

  1. A taxpayer receives promotional materials that offer investors in a pass-through entity the possibility of being allocated a charitable contribution deduction that equals or exceeds an amount that is 2.5 times the amount of the taxpayer’s investment in the pass-through entity. Promotional material is defined as including materials described in Reg. section 301.6112-1(b)(3)(iii)(B) and any other written or oral communication provided to investors, such as marketing materials, appraisals, websites, transactional documents such as the deed of conveyance, private placement memoranda, tax opinions, operating agreements, subscription agreements, statements of the anticipated value of the conservation easement and statements of the anticipated amount of the charitable contribution deduction.
  2. The taxpayer acquires an interest directly or indirectly in the pass-through entity that owns real property.
  3. The pass-through entity that owns the real property contributes a conservation easement on the property to a qualified organization and allocates a charitable contribution deduction to the taxpayer; and
  4. The taxpayer claims a charitable contribution deduction with respect to the conservation easement on the taxpayer’s federal income tax return.

Two and one-half times rule

In applying the 2.5 times rule (from step one above), the regulations provide that if the promotional materials suggest or imply a range of possible deduction amount, the highest amount will determine whether the 2.5 times rule is met. In addition, if there are multiple pieces of promotional materials that specify different ranges of possible deductions, then the highest suggested charitable contribution deduction amount determines whether the 2.5 times rule is met. It is the responsibility of the taxpayer to prove that the promotional materials did not contain a suggestion or implication that investors might be allocated a charitable contribution deduction that equals or exceeds an amount that is 2.5 times the amount of their investment in the pass-through entity if a syndicated conservation easement transaction has otherwise taken place.

Anti-stuffing rule

The proposed regulations also include an anti-stuffing rule to prevent taxpayers from investing excess amounts in the pass-through entity to avoid meeting the 2.5 times rule. The anti-stuffing rule provides that, for purposes of determining the application of the 2.5 times rule, the amount of a taxpayer’s investment in the pass-through entity is limited to the portion of the taxpayer’s investment that is attributable to the portion of the real property on which a conservation easement is placed and that produces the charitable contribution deduction.

Washington National Tax takeaways

In conjunction with the proposed regulations the IRS also issued Announcement 2022-28. The announcement and the preamble to the proposed regulations note that the purpose for the proposed regulations is to overcome some recent court cases (see Mann Construction, Inc. v. United States, 539 F.Supp.3d 745, 763 (E.D. Mich. 2021); see also GBX Associates, LLC, v. United States, 1:22cv401 (N.D. Ohio, Nov. 14, 2022), which invalidated the notice (Notice 2017-10) that aimed to identify syndicated conservation easements as listed transactions. Those court cases held that the IRS failed to follow the Administrative Procedure Act’s (APA) notice-and-comment procedures when issuing notices to announce listed transactions. Although Treasury disagrees with the findings of these courts, it proposed regulations to “eliminate any confusion and to ensure that these decisions do not disrupt the IRS’s ongoing efforts to combat abusive tax shelters throughout the nation.”

Since the release of Notice 2017-10, the IRS has been working to enforce rules to curb tax evasion techniques used through syndicated conservation easement transactions. In the past year, the enforcement has come to a head with the cases that have cast doubt on the validity of the notice. With these proposed regulations the IRS is digging in its heels and is aiming to finally make syndicated conservation easements legitimate listed transactions.

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