Various tax and land conservancy organizations are imploring the IRS to retain a carveout for donee organizations in forthcoming final regs addressing syndicated conservation easements, arguing that eliminating the carveout would only harm well-to-do taxpayers.
In Notice 2017-10, the IRS took the position that some syndicated conservation easement transactions are “listed” transactions, meaning they are reportable as abusive tax shelter transactions. In such transactions, promoters purport to give investors in a partnership or another pass-through entity the ability to claim a charitable contribution deduction that far-exceeds the invested amounts. The Sixth Circuit Court of Appeals and the U.S. Tax Court in recent litigation held that listed transactions must be identified in regs and not through supplementary guidance such as the notice.
The IRS disagreed but nonetheless begrudgingly obliged, issuing proposed regs December 7 to reflect the notice and grant it the proper authority. According to IR 2022-214, the regs were intended to “eliminate any confusion regarding the need to report these transactions and to ensure that these decisions do not disrupt the IRS’ ongoing efforts to combat abusive tax shelters throughout the nation.”
Public comments on the regs were sought through February 6, and the IRS conducted a rulemaking hearing March 1. Among feedback requested was whether the IRS should eliminate or narrow the scope of the Code Sec. 4965 (which imposes an excise tax on tax-exempt entities deemed parties involved in tax shelter transactions) carveout for qualified organizations receiving donations of syndicated conservation easements. Generally, a qualified organization includes governmental units, specified public charities, and other tax-exempt entities.
As the IRS stated in the regs’ preamble, rendering syndicated conservation easements listed transactions resulted in “tens of thousands” of listed transaction disclosures under Code Sec. 6011 and Code Sec. 6111.
“These disclosures indicate that a small number of qualified organizations facilitate abusive syndicated conservation easement transactions, sometimes for several hundreds of investors per year,” the IRS said. “Eliminating or limiting the scope of the Section 4965 carveout could deter qualified organizations from facilitating these abusive transactions” due to the treat of being subject to excise taxes.
However, National Taxpayers Union President Pete Sepp pointed out at the reg hearing that none of those who submitted written comments or participated as a speaker supported removing the carveout. “That’s a signal that there is unanimity and frankly fear in the nonprofit community that removing the carveout would be an absolute compliance disaster,” he said. “Many, many charities who have little to do or nothing to do with the information reporting requirements surrounding conservation easement transactions could find themselves in a terrible bind with few resources to be able to be in compliance.”
In written comments, the Land Trust Alliance stated that the reporting regime shouldn’t be amended because the IRS is already able to catch abusive transactions since syndicated conservation easements have been listed, noting that there are only a handful of guilty parties, by the IRS’ own admission.
Andrew Bowman of the Land Trust Alliance said during his allotted time at the hearing that donee organizations do not fit under the definition of a “material advisor” since they do not receive aid assistance or advice, and do not take fees. Doing away with the carveout, he argued, would contradict historical tax law.
“The donee organizations are not responsible for the value of donated property,” he said, adding that the Tax Code, Treasury Department regs, or IRS rules and forms “do not impose any such burden on donee organizations for the good reason that such organizations do not have the knowledge control, legal rights, or responsibility to demand information sufficient to approve an appraisal or any part of a donor-structured transaction.”
“If it isn’t broke, don’t fix it,” said Bowman.
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