Syndicated conservation easements (SCEs) have been on the IRS’s annual Dirty Dozen list multiple times. For over five years, the IRS has tried to implement regulations requiring SCEs to be disclosed as a reportable transaction, and on Oct. 7, 2024, the IRS issued Treasury Regulation § 1.6011-9 “Syndicated Conservation Easement Listed Transactions” which imposes heightened reporting obligations for such transactions on both the taxpayer and advisors.
What is a Syndicated Conservation Easement?
Generally, an SCE is a transaction in which investors first acquire an interest in a pass-through entity that owns or acquires land, subsequently the pass-through entity donates a conservation easement encumbering the land in perpetuity for a charitable deduction, and then each of the pass-through entity’s investors claim a proportionate corresponding charitable contribution deduction which exceeds 2.5 times the investor’s basis.
Which Syndicated Conservation Easements are Reportable Transactions?
Transactions that involve each of the steps below regardless of the order, or are substantially similar, are deemed SCEs.
1. Investor receives promotional materials that offer the investor the possibility of being allocated a charitable contribution deduction that is equal to or more than 2.5 times its initial investment in a pass-through entity;
2. Investor becomes a member or partner of the pass-through entity;
3. The pass-through entity donates a conservation easement which encumbers the land in perpetuity; and
4. Investor claims a charitable contribution deduction for the conservation easement on their individual tax return.
What are promotional materials?
Promotional materials are broadly defined and will be broadly interpreted to include any written or oral communications provided to investors. Specific examples of promotional materials include marketing materials, appraisals, websites, deeds, tax opinions, tax returns, operating agreements and statements of anticipated value of the conservation easement.
What are the Reporting Requirements?
On Form 8886, pass-through entities are required to disclose information about the SCE transaction, including the total amount of the charitable deduction, the pass-through entity’s basis in the conservation easement, contact information for anyone who promoted/solicitated investors (and the fees paid to each person), and certain identifying information regarding each person involved in the transaction (e.g. purchaser, lender, seller, broker, etc.).
On Form 8918, material advisors are required to describe all the relevant facts about the SCE including, the nature of the expected tax treatment, the expected tax benefits, economic/business purposes of the transaction, the steps of the transactions, etc. A person is treated as a material advisor if: (1) the person provides material aid, assistance, or advice that relates to a tax aspect of a transaction that causes the transaction to be a reportable SCE, and (2) the person directly or indirectly receives payments over $10,000 for such tax advice. Under the rule, attorneys, tax accountants, and appraisers will all likely need to file Form 8918 for each SCE transaction they are involved in.
When are these Reporting Requirements Effective?
This final regulation became effective on Oct. 8, 2024. For material advisors, the final regulation only applies to tax statements or tax advice offered on or after Oct. 8, 2024.
Are Conservation Easements Now Prohibited?
This final regulation does not prohibit conservation easements. However, pass-through entities must be mindful of these transactions because they face strict scrutiny from the IRS, especially now that some SCEs must be directly reported to the IRS. Pass-through entities in the process of completing SCEs or considering future SCEs should confer with legal counsel to ensure proper compliance and documentation is met regarding this final regulation and the entire SCE process.
If you have any questions about the reporting obligations related to SCEs, please contact Ross Keogh at RKeogh@parsonsbehle.com and Emma Dugenske at EDugenske@parsonsbehle.com.
