TAX ALERT | December 06, 2022
Authored by RSM US LLP
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.
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:
- 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.
- The taxpayer acquires an interest directly or indirectly in the pass-through entity that owns real property.
- 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
- 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.
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.
This article was written by Alexandra O. Mitchell, Trina Pinneau and originally appeared on 2022-12-06.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
LaPorte is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how LaPorte can assist you, please call 713.548.2034.