What kind of conservation easement transactions are concerning?
The IRS has identified specific syndicated conservation easement transactions as abusive.
An abusive syndicated conservation easement transaction is where a “promoter” syndicates ownership in real estate through a partnership. Promotional materials provided by the promoter suggest a prospective investor will share in a conservation easement contribution of at least two and a half times the amount of their investment. The promoter secures an appraisal of the real estate based on its highest and best use which is typically significantly higher than if appraised for its intended use.
When the real estate is donated to a land trust or other qualified organization, individual investors in the partnership can claim a contribution deduction based upon the higher value.
The IRS has challenged the common sense of these transactions and asserts that investors claim charitable contributions that largely multiply their actual investment in the transaction. In other words, the promoter abuses the charitable contribution deduction for the benefit of the investors. Although current IRS guidance indicates that the conservation easement transaction is considered “abusive” if the contribution amount is at least two and a half times the investment amount, the IRS may change this threshold.
Typically, if a tax savings strategy appears too good to be true, it typically is. Syndicators are targeting CPA firms for new investors. Be wary of syndicators, and steer clear of clients who invest in abusive syndicated conservation easement transactions. Otherwise, risk being blamed when clients face the wrath of the IRS.The IRS is still conducting audits of taxpayers that took a charitable contribution for a conservation easement, but now the government is also looking at the promoters of the tax shelters. In 2022, the government charged seven individuals with conspiracy to defraud the United States arising out of their promotion of fraudulent tax shelters involving syndicated conservation easements. The indictment charged that the syndicated conservation easement transactions were abusive tax shelters lacking in economic substance or a business purpose.
The additional scrutiny and skepticism related to certain conservation easement transactions increases a CPA firm’s professional liability risk. Notably, CPA firms in the AICPA Professional Liability Insurance Program have faced significant claims related to advice regarding syndicated conservation easements. As a result, CPA firms previously involved in these transactions or considering providing service to individuals or businesses involved in these transactions should be extremely careful.
Contact Lance Wallach for more information
516-236-8440
Wallachinc@gmail.com