
The Treasury Department and the IRS released final regulations on Sept. 7 identifying certain syndicated conservation easement (SCE) transactions as "listed transactions" or abusive tax transactions that should be reported to the agency.
This listed transaction regulation is part of the agency’s varied and successful approach to protecting the integrity of the tax system.
These final regulations cover three main classes of abusive syndicated conservation easement transactions as well as substantially similar transactions: those that involve contributions that occurred before Dec. 30, 2022; those for which a charitable contribution deduction is not automatically disallowed by section 170(h)(7) and those that substitute the contribution of a fee simple interest in real property for the contribution of a conservation easement.
Syndicated conservation easements have been included in the IRS’s annual Dirty Dozen tax schemes list for many years.
“These regulations send a clear signal on abusive syndicated conservation easement arrangements, which generate high fees for promoters and willing participants who gamed the tax system with grossly inflated appraisals,” IRS Commissioner Danny Werfe noted. “As the Senate Finance Committee has shown in its review, abusive syndicated conservation easement transactions are operating too often as nothing more than retail tax shelters that let taxpayers buy deductions at the end of any given year.”
In these transactions, investors usually acquire an interest in a partnership that owns the land, after which they claim an inflated charitable contribution deduction based on a grossly overvalued appraisal. In the future, participants and material advisors will need to report their participation in these transactions using Forms 8886 and 8918.
Previously, the IRS identified certain SCE transactions as listed transactions in Notice 2017-10. These final regulations, consistent with Notice 2017-10, also identify certain SCE transactions as listed transactions. Issuing these final regulations clarifies that participants and material advisors are required to report these transactions, including any completed in taxable years that are still open.
Additionally, the IRS said that it has had much success in court, leading to several syndicated partnerships having their grossly inflated easement valuations reduced for tax purposes to what the actual market value was at the time of the donation. The partners also claimed the inflated deduction often incurred substantial penalties.
The agency's strategic plan ensures that partnerships, other pass-through entities, and their owners comply with the tax law.
The final regulations are effective on Oct. 8 upon publication in the Federal Register.