The Internal Revenue Service and U.S. Department of the Treasury recently issued final regulations identifying certain syndicated conservation easement transactions as abusive tax transactions. These transactions are now considered “listed transactions” and must be reported to the IRS.
Various syndicated conservation easements have been included in the IRS’s “Dirty Dozen” tax schemes for many years, i.e., common scams that taxpayers may encounter, according to the IRS, particularly during filing season as they prepare their tax returns or hire someone to help with their taxes.
According to third-party reporting citing IRS Commissioner Danny Werfel, abusive syndicated conservation easement transactions are operating too often as retail tax shelters that let taxpayers buy deductions at the end of a given year.
The final regulations cover three major classes of abusive syndicated conservation easement transactions:
- Those that involve contributions occurring before Dec. 30, 2022: These transactions are subject to a 50% penalty tax if the IRS determines that the claimed deduction is not substantiated.
- Those for which a charitable contribution deduction is not automatically disallowed by Section 170(h)(7): These transactions are subject to a 20% penalty tax if the IRS determines that the claimed deduction is not substantiated.
- Those that substitute the contribution of a fee simple interest in real property for the contribution of a conservation easement: These transactions are subject to a 40% penalty tax if the IRS determines that the claimed deduction is not substantiated.
With these transactions, investors commonly acquire an interest in a partnership that owns land and then claim an inflated charitable contribution deduction based on a grossly overvalued appraisal.
The IRS has issued guidance on the reporting requirements for syndicated conservation easement transactions. Participants and material advisers must report these transactions to the IRS, including any transactions that were completed in tax years that are still open, using Forms 8886 and 8918.
The final regulations are a significant step in the IRS’s efforts to combat tax abuse.
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