Final regs. target syndicated conservation easement transactions

The IRS issued final regulations Monday (T.D. 10007) that identify certain abusive syndicated conservation easement transactions and substantially similar ones as reportable listed transactions.

The final regulations clarify that participants and material advisers must report these transactions to the IRS, including any transactions that were completed in tax years that are still open.

“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 Werfel said in a news release (IR-2024-259). “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.”

The final regulations cover three major classes of abusive syndicated conservation easement transactions (and substantially similar transactions):

• Those that involve contributions occurring before Dec. 30, 2022;
• Those for which a charitable contribution deduction is not automatically disallowed by Sec. 170(h)(7); and
• Those that substitute the contribution of a fee simple interest in real property for the contribution of a conservation easement.

The final regulations adopt 2022’s proposed regulations (REG-106134-22) with certain revisions. For example, in response to commenters’ questions about the meaning of “substantially similar,” the final regulations provide that the 2.5 times rule as defined in Sec. 170(h)(7)(B) is a bright-line rule. This means that transactions in which the promotional materials offer investors the possibility of being allocated a charitable contribution deduction of anything less than 2.5 times a taxpayer’s investment generally are not substantially similar to the listed transaction in the final regulations.

The final regulations modify the definition of two terms in the proposed regulations. The definition of “conservation easement” is modified to provide that it is a restriction, within the meaning of Sec. 170(h)(2)(C), granted in perpetuity, on the use that may be made of the specified real property, exclusively for conservation purposes, within the meaning of Secs. 170(h)(1)(C) and (h)(4). The final regulations also modify the definition of “participant” to clarify that the class of participants includes participants in transactions that are the same as, or substantially similar to, syndicated conservation easement transactions.

Questions answered in preamble

The IRS also answered several questions asked by commenters in the preamble of the regulations without revising the proposed regulations, including whether contributions other than real property, such as artwork, are listed transactions. The IRS said these transactions are not “substantially similar” because the final regulations deal with real property, not personal property.

Commenters also asked whether transactions that do not involve a contribution by a passthrough entity (such as a transaction involving a contribution by an individual or a corporation) are “substantially similar” transactions. The IRS said no, for now, adding “these transactions likewise could be proposed to be identified as tax avoidance transactions in future guidance.”

In the courts

The IRS said court decisions have resulted in some syndicated partnerships’ having their “grossly inflated easement valuations” reduced, for tax purposes, to the actual market value at the time of the donation. In these cases, the partners claiming the inflated deduction often incurred substantial penalties, the IRS said.

Also, syndicated conservation easements have been included multiple times in the IRS’s annual list of “Dirty Dozen” tax schemes.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.