Guest Contributor: Listed Transactions & Conservation Easements
By: Donald M. Deans, CPA, PFS
As you may have seen in the press, IRS Notice 2017-10, issued on December 23rd, 2016, identified as “Listed Transactions” any syndicated conservation easement transaction where investors receive charitable deductions of 250 percent or more of their investment amount. Yes, most if not all private placement memorandums had this identified as a potential risk. The IRS also made the notice retroactive to investments made on or after January 1, 2010. Most importantly, please understand that the law itself has not changed.
Even though IRS Notice 2017-10 isn’t a decision about your own investment, you have work to do, with some time to prepare. Failure to do so by May 1, 2017 will result in a significant penalty – note the use of the word “will” rather than “might” or “could.”
My own view is that IRS Notice 2017-10 is a much too broad conviction of all syndicated conservation easements as being based on absurdly inflated appraisals and I expect the vast majority of appraisals will be found to be valid. While there is speculation the new administration may rescind this decision by the IRS, do not count on this happening. Be prepared!
You Are Not Alone – And, You Can’t Get Out!
If you, like me, are involved in a syndicated conservation easement investment you made in 2010 or later, you are part of a new listed transaction community. This community is made up of investors, financial advisors, attorneys, appraisers, CPAs, consultants, sponsors, broker-dealers and other stakeholders who are about to learn, for the first time for the vast majority, what the IRS means by a “listed transaction” and what you HAVE TO DO and BY WHEN to avoid a significant penalty per investment.
Now that I have your attention, DON’T PANIC! Besides some timely paperwork involving submitting a single additional form per investment, and document retention you should be doing anyway, the only audit risk that has changed is that a sponsor may have a higher risk of being audited, not that there is a higher risk that an audit will result in a negative finding. Please understand any audit would be a sponsor level audit. Speaking as a former Deloitte audit partner, an audit is simply how the IRS obtains the material to learn that a sponsor has indeed followed the regulations.
For the investor, there is a risk of a 20 percent penalty on any tax deficiency. Previously, the IRS had to prove a substantial or gross valuation overstatement.
What the IRS Means by a Listed Transaction
From the IRS instructions for filing Form 8886:
“A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These transactions are identified by notice, regulation, or other form of published guidance as a listed transaction.”
This means the IRS will give these investments an additional screening, likely raising the percentage of conservation easement donations that are audited from approximately 5 percent to something higher, though with known staffing issues at the IRS, this does not mean that 100 percent will, or even can, be audited. Somewhere in-between, though most likely to the lower end of the range.
What Investors Have To Do & By When
Investors MUST file Form 8886 identifying their participation in a reportable transaction. Your sponsor will provide you with information on how best to handle.
- Likely you will file a copy with your return and the form itself with the Office of Tax Shelter Analysis. The latter is what must be done by May 1, 2017.
- Some of the earlier investments may have already gone beyond the 3 year statute of limitations – your sponsor will advise.
- Retain supporting documents – sponsor should provide online access
- Form 8283
- Form 8886
- Watch for action by Congress or the new administration.
Material advisors must file IRS Form 8918, the Material Advisor Disclosure Form. These forms need to be submitted to the Office of Tax Shelter Analysis (OTSA), also by May 1, 2017, per the Notice.
Material advisors also have list maintenance obligations. I recommend that Sponsors provide guidance to all material advisors for each offering regarding completing Form 8918 and maintaining lists.
Per the instructions for Form 8918, you are a material advisor for a listed transaction if you:
- Provide any material aid, assistance, or advice with respect to the organizing, managing, promoting, selling, implementing, insuring, or carrying out any listed transaction, and
- You directly or indirectly receive or expect to receive gross income in excess of the threshold amount of $10,000 for a listed transaction for the material aid, assistance, or advice.
Beyond The Hyperbole – We Agree!
In reading the articles in The Wall Street Journal, Forbes, and other sources regarding IRS Notice 2017-10, it is clear that all agree with us and what we have been teaching CPAs and other advisors. The highest and best use appraisals for both before AND after the donation have to make sense. It is important that people understand the highest and best use appraisal process as defined by the IRS Audit Techniques Guide.
We all agree there have been abuses, though in contrast with what readers of these articles would assume, most abuses have occurred with individual landowners, not syndicated conservation easement offerings of well vetted sponsors. The independent broker-dealer channel has added additional due diligence to syndicated conservation easement offerings, with the majority occurring outside this channel.
It’s the same appraisal, most likely done by the same appraiser.
Whether the donation is from an individual landowner or a partnership, the value of the donation is based on the same appraisal done by a qualified appraiser who used the IRS Audit Guide. Those who argue against partnerships somehow believe that people who invest in partnerships that own land do not have the same rights as other landowners. This means that only the very wealthy among us get to receive the tax incentives reaffirmed in 2015 by Congress. I don’t think that is what Congress meant. To the contrary, I think Congress wants to find even better ways to incent private citizens to invest in conservation.
2017 & Conservation Easement Offerings
We expect there will still be syndicated conservation easement offerings from sponsors doing like or similar offerings to what they have already done and received “no change” IRS audits. These will be listed transactions if they deliver 2.5:1 or greater charitable contribution deduction to investment.
A bit ironic that those of us who are in the new listed transaction community are already absorbing the risk of investing in listed transactions, so we may have our pick of extraordinarily well vetted offerings of properties of high conservation value and development opportunities, as other investors shy away until clarity is achieved.
Next, there will be innovations as there are properties to be conserved. It should be noted that IRS Section 170(h) has not been changed.
Do your own due diligence. If you or your client does invest, be prepared for an audit, though don’t fear one.