Over the last several years, few issues have been higher on the IRS’s priority list than what have been termed “Syndicated Conservation Easements.” These tax strategies generally involve taxpayers purchasing in interest in a partnership that either owns or purchases real property over which it grants a “conservation easement” restricting some level of development on the real property. The partnership then allocates a portion of the total charitable deduction to the partners to claim on their tax return that far exceeds the partners’ initial investments.
The IRS has been actively (and successfully) attacking these partnerships, disallowing the entire donation on several fronts. In 2017, the IRS issued Notice 2017-10, requiring all participants to disclose their participation. They have audited many of the partnerships, disallowing the claimed charitable contribution deductions under several theories; and are actively litigating hundreds in the Tax Court. Special “cadres” of agents have been developed to identify potential participants and assess additional tax and exorbitant penalties. There have even been criminal indictments against those who promoted the strategy.
But the IRS was recently handed a significant blow to their enforcement efforts. Last month, the U.S. Tax Court issued a decision invalidating Notice 2017-10 because the IRS did not follow the required procedures. While this decision does not affect the underlying merits of the conservation easement deduction, it is a major win for taxpayers who failed to report their involvement in a syndicated conservation easement and are now (or will be) facing up to $100,000 penalties (and potentially worse) for their failure to timely and correctly file the required disclosure.
The IRS has intimated that it is not accepting the Tax Court’s decision and may appeal. But in a “belt and suspenders” approach, the IRS recently issued for “notice and comment” a proposed regulation mirroring Notice 2017-10. Arguably, this action provides participants another opportunity to file the required disclosure (or another opportunity for the IRS to impose the penalty if they fail again to do so). But the time to correct the failure may also be limited.
If you were a participant/partner in a syndicated conservation easement partnership, call one of the tax attorneys at Anderson & Jahde, P.C. to discuss how the Tax Court’s decision may benefit you, and how to best avoid the potentially disastrous consequences of doing nothing.