Tax Law Insights

On March 27, 2019, the Senate Finance Committee launched an investigation into the abuse of syndicated conservation easement transactions.  The transactions being investigated involve promoters selling interests in tracts of land to taxpayers looking for large tax deductions.  The taxpayers get allegedly inflated appraisals of those tracts of land and grant conservation easements on that land.  The resulting charitable deductions are then split among the taxpayers.

Fourteen separate letters were sent to individuals who appear to be associated with the promotion of syndicated conservation easements.  The letters request extensive information and documents related to specific syndicated conservation transactions.  The letters are available from the United States Senate Committee on Finance Newsroom.

Senator Grassley acknowledged there are legitimate purposes for the conservation easement provisions of the Internal Revenue Code, but expressed concern that a handful of individuals were cooking up a scheme to cash in at the expense of federal revenue and in violation of Congress’s intent.

The Internal Revenue Service has been similarly concerned with syndicated conservation easement transactions and issued IRS Notice 2017-10 on December 23, 2016.  The notice identifies syndicated conservation easement transactions as listed transactions.  Pursuant to the notice, investors and material advisors are required to disclose transactions where an investor receives oral or written promotional materials that offer prospective investors the possibility of obtaining a charitable deduction that equals or exceeds an amount that is two and one-half times the investor’s investment.

The United States Department of Justice is also concerned with syndicated conservation easement transactions.  On December 18, 2018, the United States filed a complaint in the United States District Court for the Northern District of Georgia against one syndicated conservation easement promoter seeking to enjoin the promoter from organizing, promoting, or selling syndicated conservation easement transactions.

The Senate Finance Committee’s investigation may ultimately lead to legislative changes that are designed to curtail the use of syndicated conservation easement transactions.  Until a legislative change is enacted, taxpayers should anticipate the IRS will challenge the tax benefits arising from syndicated conservation easement transactions.  The IRS has stated it will challenge the transactions based on the overvaluation of the conservation easement, and may also challenge the purported tax benefits based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.