Taxpayers may take a charitable income tax deduction when they place a conservation easement on their property for the benefit of a charity. The amount of the deduction is equal to the excess of the value of the land without the easement (at its highest and best use) over the value of the land with the easement. A conservation easement is a legal agreement between a landowner and a charity or governmental entity that permanently limits the uses of the land (e.g., cannot be developed) in order to protect its natural resources.

Some promoters have been conducting transactions known as “syndicated conservation easements,” in which they form a partnership, investors contribute cash for partnership interests, and the partnership then buys land and donates a conservation easement on that land to a charity. The IRS believes promoters of these syndications obtain inflated appraisals of the property (e.g., 2.5 times the purchase price) for inflated charitable deductions. In Notice 2017–10, the IRS designated these transactions as listed [tax shelter] transactions so that participants and “material advisors” (e.g., promoters, appraisers, etc.) involved with these transactions were required to disclose these transactions and would be subject to substantial penalties if they failed to do so. The notice expressly excluded the donees (e.g., charities and governmental entities) from the definition of participants and advisers.

In November 2022, the Tax Court ruled that Notice 2017-10 is invalid and the IRS has now proposed regulations to accomplish the goal of its invalidated Notice. Consistent with the Notice, the proposed regulations provide that the charitable donee will not be considered a “participant.” However, that might change. Apparently, based on the reporting received pursuant to Notice 2017-10, the IRS says it obtained information that some charities are facilitating abusive syndicated conservation easement transactions. Consequently, the IRS is considering whether charitable donees should be considered participants subject to penalties for failure to disclose. In addition, unlike the Notice, donees are not expressly excluded from the definition of material advisors. The IRS is seeking comment on both of these exclusions.

Bottom Line: Advisors for charities that regularly receive conservation easement donations should monitor the provisions of these regulations as ultimately finalized, and the charities themselves should be mindful about the source of such contributions they receive.

“Whoever said, ‘It’s not whether you win or lose that counts,’ probably lost.” – Martina Navratilova

Photo of James Duffy James Duffy

Jim is a partner in Taft’s Tax practice and practices principally in the areas of federal tax law; tax credit financing; individual, partnership and corporate tax planning; M&A; tax-exempt organizations and general commercial and corporate law.

Jim has been actively practicing in the

…

Jim is a partner in Taft’s Tax practice and practices principally in the areas of federal tax law; tax credit financing; individual, partnership and corporate tax planning; M&A; tax-exempt organizations and general commercial and corporate law.

Jim has been actively practicing in the area of the New Markets Tax Credits (NMTC) program since its inception in 2001. He has organized community development entities (CDEs) and represented CDEs, borrowers and other parties in structuring and closing numerous NMTC transactions. Jim also advises clients regarding Qualified Opportunity Zone matters.

Jim advises LLCs, partnerships, corporations and individuals in connection with the formation of new companies, mergers and acquisitions, formation of joint ventures, like-kind exchanges, ownership succession planning, and general business operations. These clients are involved in a variety of industries, including banking, venture capital, real estate, construction, consulting and investing.

Jim also advises charitable and non-charitable tax-exempt organizations, including health care entities, schools, religious and civic organizations. In addition to advising management of these organizations with respect to matters pertaining to general operation and maintenance of tax-exempt status, Jim has assisted clients in forming, restructuring and dissolving tax-exempt organizations, as well as forming donor- advised funds.

Prior to joining the firm, Jim worked at the law firm of Lewis Rice and Fingersh in St. Louis, Missouri, where he concentrated his practice in federal and state taxation. He also clerked for the Hon. Robert P. Ruwe of the U.S. Tax Court in Washington, D.C.