By Shaw Sprague, Ross Bradford, and Raina Regan
Introduced in both the 115th and 116th Congress, the Charitable Conservation Easement Program Integrity Act has gained considerable support to address specific ongoing abuses in donations of preservation and conservation easements. This legislation addresses egregious syndicated conservation easement transactions which the Internal Revenue Service (IRS) described in IRS Notice 2017-10. The National Trust supports reintroducing and passage of this bill to help curb abusive transactions while ensuring that this tax incentive remains available for genuine philanthropists in the land conservation and historic preservation communities.
What are Syndicated Conservation Easement Transactions?
The Internal Revenue Code permits taxpayers to take a tax deduction for a qualified conservation contribution which is more commonly known as the donation of both conservation and preservation easements. A preservation easement is syndicated when a legal partnership, or other pass-through entity, is created and investors contribute capital to the pass-through entity, the pass-through entity donates the easement to a tax-exempt entity, and the tax deduction is allocated to the pass-through entity’s investors.
What Is the Controversy?
While most easement transactions accomplish their intended public policy objectives, some promoters have used these transactions to offer investors an opportunity to claim tax deductions in amounts that significantly exceed the amount invested. These deductions are based on appraisals that greatly inflate the value of the easement based on unreasonable conclusions about the development potential of the property. Recently, the IRS reported that the average return ratio based on filings in calendar year 2018 for these transactions was 4.92 times the investment and for the top 10% of transactions the median return ratio was 6.54 times the investment. For the 2017 tax year, the IRS identified 244 pass-through entities for examination which accounted for $6.8 billion dollars of deductions.
In 2019, the IRS listed easement syndication transactions in their annual Dirty Dozen list of tax scams to avoid. Additionally, there have been numerous reports scrutinizing these transactions in the media. In 2020, the U.S. Senate Committee of Finance released a bipartisan report detailing their investigation into the abuse of syndicated conservation easement transactions that found that both the promoters and the tax-payer investors in the examined transactions understood them as simply tax shelters. While much of the focus on these transactions appears to be aimed at conservation easements (i.e., those easements that protect land areas for recreation, natural habitat, or open space), preservation easements are subject to the same abuses.
Details of the Legislation
As described in the most recent version of this legislation, the Charitable Conservation Easement Program Integrity Act (“Act”) aims to curb abuses of syndicated conservation easement transactions by:
- denying deductions where a partner holds their interest through one or more other pass-through entities, or
- by limiting a partner’s deduction in a syndicated conservation easement transaction to 2.5 times a partner’s adjusted bases in the partnership (based on existing basis allocation rules, which do not take into account partnership level debt).
The cap will not be applied if a contribution is made at least 3 years after the date the partnership acquired the real property interest and at least 3 years after the date the partner acquired its interest in the partnership. The cap also does not apply to family partnerships where the individuals in the partnership are related to each other as described in Section 152(d)(2) of the Internal Revenue Code.
We anticipate possible revisions to the bill when it is reintroduced in the 117th Congress, and we will update this post with a link to the new legislation when available. However, based upon revisions developed in December, we anticipate the legislation will be applicable to contributions involving certified historic structures made in taxable years beginning after December 31, 2018; for all other easement transactions the Act will apply to contributions made in taxable years beginning after December 23, 2016.
National Trust’s Position on the Legislation
The National Trust supports the passage of the Charitable Conservation Easement Program Integrity Act. The Act will help the IRS to curb abusive transactions while ensuring that this tax incentive remains available for genuine supporters in the land conservation and historic preservation communities. On March 22, 2021, the National Trust joined other leaders in the conservation and preservation communities in sending a letter to federal leadership urging the passage of this legislation during this session.
The Act does not eliminate syndication as a tool available to the historic preservation community to save and protect historic resources. The Act will make it less desirable for aggressive promoters syndicating easements to engage in transactions with inflated easement valuations because it places a cap on investors’ returns and imposes the cap over a three-year holding period.
While the Act provides a clear and straightforward deterrent to abusing these transactions; however, it will not stop all abuses in this area. For example, promoters and investors may structure transactions to run out the clock on the holding period before a deduction is claimed. It is important for preservation easement-holding organizations to understand existing legislative reforms in this area. Preservation easement-holding organizations should also take proactive steps to support efforts to curb abusive easement transactions. Any abuses of preservation easements threaten to undermine the public’s confidence in preservation easement-holding organizations generally and their use of easements as important tools to protect land and historic resources. The National Trust encourages preservation easement-holding organizations to support these reforms.
Avoiding Questionable Transactions
Donations of preservation easements continue to receive scrutiny from the IRS regardless of whether they are syndicated. Preservation organizations should adopt the following best practices when accepting any donation of an easement:
- All easement transactions should be conducted using best practices informed by the Land Trust Alliance’s Standards and Practices.
- Preservation organizations should be concerned with participating in any potentially abusive or possibly fraudulent tax evasion scheme and should approach easement syndication transactions with caution.
- Preservation organizations should not assume they are a silent participant in these transactions and should be clear about their role in the transaction.
- Preservation organizations should have a written policy governing their easement transactions. This policy should include a clear explanation of how the organization will review the draft and final appraisal, along with how the organization would address concerns with the appraisal that might result in the organization taking the position that it cannot sign IRS Form 8283. Preservation organizations should disclose this policy to the donor early in the process and receive the donor’s written acknowledgement.
Read more on this legislation from the Land Trust Alliance.
Shaw Sprague is the vice president of Government Relations at the National Trust for Historic Preservation. Ross Bradford is deputy general counsel at the National Trust for Historic Preservation. Raina Regan is the director of the Easement Program at the National Trust for Historic Preservation.