The IRS recently issued Notice 2017-10 addressing flaws in what are known as “syndicated conservation easements.” The IRS has stressed that legitimate conservation easements (when the owner of land gets a tax deduction for donating use of the land is for a protected purpose such as wildlife or wetland preservation, grazing, historical importance, etc.) are not meant to be impacted by this Notice.
The types of easements at issue here are syndicated ones, wherein the same “players” are involved in dozens or even hundreds of similar transactions.
How do syndicated conservation easements work?
Essentially, syndicated conservation easements are, to turn a phrase, easement “mills.” They most commonly begin with a pass-through entity (like an LLC) established to purchase a particular piece of land that could have a legitimate protected use.
The example demonstrated in a recent Forbes article on this topic is quite illustrative of the principle: 10 investors each contribute $100,000 to purchase cattle grazing land in Texas. The easement promoter, working with a “friendly” real estate appraiser, submits a business plan that would turn this square mile of former cattle grazing property into an elite golf course, raising the market value of the property from $1 million to $20 million. Now it appears that each investor holds a $2 million land interest instead of their initial $100,000.
The golf course idea was theoretical, though; there was never any real intention to develop the land, and it was always going to be usable for grazing via an easement. However, since the value of the property increased exponentially with the development idea, each investor will be entitled to a $2 million charitable deduction instead of a $100,000 one once the easement is granted.
What should you do?
No taxpayer should enter into a conservation easement – or any other kind of complicated tax strategy – without first seeking advice from a qualified tax professional. If you are already involved in a conservation easement, and you are concerned about possible ramifications of past non-payment of taxes, you should contact an experienced tax attorney immediately. There may be a way to minimize the consequences of past actions, and to avoid future audit scrutiny.