Tax Court Rules Against These Syndicated Conservation Easements
Syndicated conservation easements promise large charitable deductions to investors. The deductions are based on tax rules that allow taxpayers to deduct contributions of appreciated property to charity at full value without paying tax on the gain.
In these deals, organizers donate a “conservation easement” to a charity – keeping title, but promising to never develop the property.
It seems like every week the Tax Court rules against one of these syndications – see here, here, here, and here.
Yet according to IRS Commissioner Charles Rettig, these deals seem to just keep rolling. Tax Notes reports that the Commissioner provided that information in a letter to Senate Finance Chair Charles Grassley.
Why take the risk? The Commissioner offers a clue.
From the Tax Notes report: Rettig provided details on average return ratios, which are calculated by dividing the total amount of contribution deductions by the total amount of investments. The return ratio for 2018 was 4.87 based on the 9,212 Forms 8886 that provided both the contribution deduction and investment amounts, Rettig said.
After removing outliers, the ratio was 4.92. The average return ratio for the top 10 percent of covered transactions was 9.45. For 2017, the return ratio was 4.70 after removing outliers, and the average return ratio for the top 10 percent was 8.23. The IRS knows about these deals because these are reportable transactions.
Investors in the deals are required to file Form 8886, which is a Reportable Transaction Disclosure Statement. While those involved in putting the deals together are required to file Form 8918, which is a Material Advisor Disclosure Statement.
The penalties for not filing these forms are stiff. The IRS challenges these on various grounds. The IRS has won court challenges based on the details of the easement. It must really be permanent; on technical issues involved in reporting the transaction and on valuations.
The tax law requires careful reporting of appreciated property contributions, and they do cut careless filers little slack.
Bottom line: Because of these reporting requirements, the IRS knows about conservation easement syndications. The Commissioner doesn’t like them, so examiners target them. Investments made only for tax reasons are inherently risky, so be careful out there.